Gaotu Techedu Inc (GOTU) 2025 Q1 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by and welcome for the Gaotu Techedu first quarter 2025 earnings conference call (Operator Instructions)

I would now like to turn the conference over to your first speaker today, Ms. Catherine Chen, Head of Investor Relations. Please go ahead, Catherine.

Thank you, operator. Good evening, everyone. Thank you for joining Gaotu's first quarter 2025 earnings conference call. My name is Catherine, and I'll help host the earnings call today. Gaotu's earnings release for the quarter was distributed earlier and it's available on the company's IR website at ir.gaotu.cn as well as through PRNewswire services.

Joining the call with me tonight from Gaotu to Senior Management is Mr. Larry Chen, Gaotu's Founder, Chairman and Chief Executive Officer; and Ms. Shannon Shen, Gaotu's Chief Financial Officer. Larry will first provide the business highlights for the quarter and then afterwards, Shannon will discuss our financial performance in more detail. Following their prepared remarks, we'll open the floor.

The question Before we begin, I'd like to remind you that this call will contain forward-looking statements made under the provision of the US Private Security Litigation Reform Act of 1995.

These forward-looking statements are based upon management's current beliefs and expectations as well as the current market and operating conditions and they involve no unknown, uncertainty, and other factors, all of which are difficult to predict and many of which are beyond the company's control, and they cause the company's actual results, performance, or achievement to differ materially from those contained in any.

Further information regarding this and other risks is included in the public filing with the SEC. The company does not undertake any obligation to update any forward-looking statements except as required under applicable law.

During today's call, management will also discuss certain non-GAAP measures for comparison purpose only. For a definition of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please refer to our third quarter earnings release published earlier today. As a reminder, this conference is being recorded.

In addition, a live and archive webcast of the conference call will be available on Gaotu's IR website. It is now my pleasure to introduce our Founder, Chairman and Chief Executive Officer Larry. Larry, please.

Good evening and good morning, everyone. Thank you for joining us on Gaotu's first quarter of fiscal year 2025 earnings conference call. I would like to take this opportunity to express my gratitude to each of you for your interest in and the support of Gaotu.

Before I start, I would like to remind everyone that all financial figures discussed today are quoted in R&B unless stated otherwise. Over the past year, we have consistently executed on our strategic priorities, providing meaningful progress across product innovation, organizational development, technological advancement, and operational excellence.

These efforts have fuelled a transformative business expansion while also comprehensively enhancing our organizational capabilities.

As we entered the 2025, we sustained our robust growth momentum, delivering results that surpassed market expectations across revenue, profitability, user growth, and organizational efficiency.

Notably, our substantial profit realization represents the culture's most significant milestone that teaching the effectiveness of our efforts to enhance regional leverage and improve cost efficiency. In the first quarter of 2025, our revenue increased by about 58% year over year to nearly RMB 1.5 billion exceeding the upper end of items.

Of reaching profit rate of RMB 34.8 million with a net income of RMB 124.0 million on a non-gap basis. Net income reached RMB 137.3 million with a net margin of 9.2%. These financial results not only reflect strong top line momentum but also underscore our disciplined approach to high quality growth and the marginal improvement. In addition, we consistently prioritize the shareholder returns and remain committed to creating long term value for our shareholders.

European quarter, we allocated approximately RMB 136 million to our share repurchase program. Under the current buyback plan, the accumulated the total amount of stock buyback has reached the RMB 460 million.

The cumulative number of ADIs repurchased represents 9.0% of our total outstanding shares as of March 31, 2025, serving as an effective lever to enhance shareholder returns.

As of the same day, we had the cash and the cash equivalent, the cash and the short term and long-term investments totalling about RMB 3.5 billion and in our future strategic initiatives and the sustainable growth.

These robust financial achievements are the direct outcome of the strategic investments and the transformative initiatives we have pursued over the past three years.

Particularly last year, the investment in products, users, and offline businesses are now becoming key engines driving revenue growth, of operational efficiency and profitability. By embedding AI deeply into our educational products and services, we are accelerating the formation of a technology and power the value loop in education.

This has led to tangible advancements in user experience and learning outcomes laying a solid foundation for the company's future growth and profitability.

Next, I would like to share our strategic progress and the key highlights this quarter from four dimensions. First, we remain deeply user-centric, driving both the scale and the values through continuous product innovation.

Our traditional learning services continue to grow steadily with strong performance in both student enrolment and the users satisfaction.

On this foundation we have broadened our offerings to address diverse user needs from online and offline academic tutoring services to break through in personalized learning solutions for high school students. As well as expanded the services for college students and the study abroad consulting and the test prep.

Didn't to be closely aligned with the users genuine needs these new products are steadily amplifying our network effects and economies of scale as they evolve into a replicable growth model that effectively elevates our brand awareness and the market benefit.

Second, we are fully levering our core advantages as a digital native education company, continuously advancing the widespread application and innovation of AI technology across multiple aspects.

On the part of the friend we capitalize on the appeal of our star instructors and successfully launched the learn spoken English with Danny Wu program, a groundbreaking upgrade that reimagined the learning experience by seamlessly integrating flagship instructor IP with AI technology.

By combining the magnetic influence of renowned instructors with AI, the interactive capabilities, we deliver the highly immersive and personalized learning experience that greatly boosted the learner motivation and engagement.

On the service side, we have leveraged our outstanding tutors, the best practices to train our AI models and develop our intelligent diagnostic functions.

This feature helps tutors identify students' learning gaps and generate the personalized learning reports, enhancing services efficiency and the precision while enabling the scalable replication of high quality learning services.

The tool has already demonstrated the tangible impacts in real world learning settings, paving the way for cross domain and the multi-grid expansion in operations, we are encouraging AI to empower refine the user traffic operations, sharpen segmentation, and implement pair strategies.

By matching the optimal operating models to the characteristic of each user segment, we are improving both the traffic value and the workflow productivity.

The broad adoption of AI technology has also a federated workflow optimization across departments, further enhancing internal management efficiency and amplifying operational leverage.

At the strategic level, we continue to medically advance our AI transformation initiatives. We have deepened our forward routine positioning and the decision-making capabilities in the AI field, initiating joint AI laboratory development and collaboration with top universities and the leading tenants.

Through these partnerships, we are pioneering break through innovations that are balanced technological advancement with practical implementation across diverse operational applications.

We aim to drive educational innovation through AI, building a more intelligent, personalized, and scalable educational ecosystem that delivers the premium learning experience for users while creating sustainable growth and enduring value for the company.

Third, we continue to invest in building long-term competitiveness by enhancing organizational efficiency and the strengthening our talent pipeline. Outstanding teachers are at the core of our educational age.

We are committed to advancing talent acquisition, professional development, and incentive mechanisms while taking an equal emphasis on teaching excellence and the service orientation.

While leveraging AI tools, we continuously enhance employee satisfaction and reduce repetitive work while allowing teachers to fully convey the human charge and care that are essential to education.

We truly believe that a warm, well-structured the teaching force is a bedrock for delivering consistent educational quality and elevating user satisfaction.

4, we remain dedicated to social responsibility while enhancing shareholder value over the long run. Rewarding shareholders has always been a central part of our development strategy.

Building on our previous buyback plan, our board and the directors, they approved a new share repurchase program of up to USD100 million over the next three years, effective upon completion of the current program.

Moving forward, we will continue to optimize our capital structure and enhance shareholder returns while ensuring adequate funding and the strategic execution. Today's Gaotu to stands as the result of a sustained reinvestments, continuous deportations and unwavering commitment.

Throughout this journey, we have navigated the market cycles and made pivotal strategic choices, always guided by our fundamental belief in the value of education and our dedication to future innovation.

Looking ahead, we are confident that while sustaining profitable growth. We possess the resources and the capabilities to invest in the future, push boundaries, and unleash innovation.

Thank you very much, everyone, this is the end of my prepared remarks. Now, I will pass the call over to our CFO Shannon Shen to walk you through the course of financial and operational details.

Thank you, Larry, and thank you everyone for joining our call today. I will now walk you through our operating and financial performance for the first quarter of fiscal year 2025.

We started the year strongly with a high-quality performance in the first quarter, achieving profitable at scale while maintaining robust growth momentum. Revenue maintained its rapid growth trajectory, making the third consecutive quarter with year over year growth exceeding 50% and the core business has demonstrated a stronger growth momentum.

Through strategic enhancement of customer value, efficient task management, and refined operational improvements, we have fully unleashed our operational leverage, providing robust support for continued profit growth.

Our operating margin and net income margin rose by 10.5% and 9.6% points on an annual basis. Further affirming the continuous improvement of our profit quality.

Meanwhile, deferred revenue amounted to over RMB 1.4 billion, representing a year over year increase of 44.0%, offering a solid foundation for sustained revenue growth in the subsequent quarters. Driven by dynamic evolution of customer needs, we have strategically invested in improving product quality, expanding our user base, and delivering more personalized and diversified learning solutions in prior years.

With the effective execution of these strategies, our revenue structure has become more growth oriented and sustainable.

Notably, our portfolio of non-academic children services, which generated a superior customer lifetime value, has emerged as a significant growth engine alongside our traditional learning services. Next, let me walk you through the progress we made during this quarter.

Working services contributed over 95% of net revenues. Breaking it down, more than 85% of total revenues came from non-academic tuition services and our traditional learning services representing over 80% year over year growth.

Combined grows ratings from these two segments increased by approximately 40% year over year. Our new initiatives focused on online and offline academic tutoring services delivered exceptional growth this quarter.

Growth fillings in this segment jumped nearly 90% year over year, with grows feelings from new enrolments surging by more than triple digits. Net revenues grew at a triple digit rate in over a year, accounting for over 35% of total revenues.

This business has achieved triple digit growth in both revenue and gross billings from new enrolments for 44 consecutive quarters. Importantly, as enrolment expanded and educational product quality improved, this segment achieved profitability.

We remain focused on users' needs, continually refining curricula with actionable educational insights while optimizing both our course delivery and service responsiveness.

Take our programming courses as an example where we achieved a retention rate exceeding 90%, a compelling testament to the strong synergy between our value proposition and user trust. Our traditional learning services maintain healthy growth, with revenue growing over 35% year over year.

With the steady increase in student enrolments, our diverse offerings have increasingly met the needs of different user groups. Fostering a positive word of mouth referral that has established a solid groundwork for sustained growth.

Particularly, the proportion of new enrolments acquired through referrals and private channels increased markedly this quarter, further strengthening brand recognition and market penetration.

This progress also highlights our dedicated efforts and accomplishments in driving user expansion and creating long-term value.

The other crucial component of our learning services is educational services for college students and adults. This segment contributed 10% of total revenues this quarter, and it's met operating cash inflow increased by over 84 year over year.

These results speak volumes about the success of our strategic recalibration and resource optimization.

Specifically, educational services for college students recorded high double digit year over year growth in both revenue and gross bills.

By equipping tutors with AI tools, we have substantially improved response timeless and students' engagement quality, resulting in steady improvements in user satisfaction and reinforcing our market leadership in the online learning services for college student sector.

Additionally, our AI Power English learning program, Learn spoken English with Daniel Wu has already become profitable within a short time following its launch, serving as another endorsement for the commercial viability of integrating content innovation with AI technology and providing a cooler model for future initiatives.

The education business exhibits distinct seasonality closely coupled with users' learning behaviour. Consequently, the god's feelings varies across different quarters, cross generally consist of two main components, new enrolments and retentions.

In the first quarter of 2025, grass feelings are primarily driven by new enrolments, whereas in the fourth quarter of prior year, retention contributed significantly more than new enrolments.

Although the quarter on quarter graphs saving figures showed a decline in absolute terms, the comparable amount for new enrolments reflects a healthy growth trend, both quarter and the year on year on an acceptable basis.

This solid performance also laid a strong foundation for growth in retention in the second quarter. From an operational leverage perspective, our general and administrative expenses combined with research and development expenses remain stable in this quarter.

Well, ensuring critical investments in AI, educational products, innovation, and core technology infrastructure. We are continuously leveraging AI tools to drive efficiencies.

This allows us to eliminate low value, repetitive tasks, enhance employee satisfaction, and relocate time and resources toward more creative work.

Looking ahead, we expect sustained revenue growth in subsequent quarters, projecting that GNA and R&D expenses will remain relatively stable, thereby enhancing the positive impact of operating leverage on our margin profile and overall financial performance.

I will now present our financials in more detail. Our cost of revenue this quarter was RMB452.5 million.

Gaotu's profit increased 54.1% year over year to over RMB1.0 billion with a gas margin of 69.7%. The year over year decrease in gross margin was primarily due to changes in our product mix.

Total operating expenses during the quarter increased 33.5% year over year to RMB1.0 billion, breaking it down. Selling expenses increased 40.1% year over year this quarter to RMB709.4 million.

Accounting for 47.5% of net revenues. Research and development expenses decrease 0.8% year over year to approximately RMB150.4 million, accounting for 10.1% of net revenues.

General and administrative expenses increased 53.3% year over year to RMB145.9 million, accounting for 9.8% of net revenue. Income from operations was RMB34.8 million and opening margin was 2.3%. Non-GAAP income from operations was RMB48.1 million.

And non-GAAP opening margin was 3.2%. That income was RMB124.0 million and net income margin was 8.3%. non-GAAP net income was RMB137.3 million and non-gap net income margin was 9.2%. Our net operating cash outflow was RMB477.2 million.

Now turning to our balance sheet as of March 31, 2025, we held over RMB1.0 billion in cash equivalents, and restricted cash along with more than RMB1.4 billion in short-term investments and RMB995.9 million in long-term investments.

This comes to a total of about RMB3.5 billion as of March 31, 2025, our deferred revenue balance was over RMB1.4 billion, primarily consists of tuition received in advance as of May 14, 2025, we have repurchased an aggregate of around RMB22.3 million ADS from approximately RMB460 million in RMB.

Today, our board of directors also approved a new share repurchase program of up to RMB100 million US dollars for a period of 36 months, which will take effect upon the completion of the existing one.

The new repurchase program is based on management's long-term confidence in the company's stable operations, profit growth, and sustained healthy operating cash flow. We will continue to execute the share buybacks according to the board of directors guidance to create a long term value for our shareholders.

Before I provide our business outlook for the next quarter, please allow me to remind everyone that this contains forward-looking statements which include risks and uncertainties that are beyond our control and could cause the actual results to differ materially from our predictions.

Based on our current estimates, total net revenues for the second quarter of 2025 are expected to be between RMB1,200million and RMB98 million and RMB1,318 million, representing an increase of 28.5% to 3.5% on a year over year basis.

This conclude my prepared remarks. Operator, we are now ready for the Q&A section. Thank you everyone for listening.

(Operator Instructions) For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English for the sake of clarity and order, please ask one question at a time. Management will respond and then feel free to follow up with your next question.

Crystal Li, CMS.

Okay, thanks for taking my questions and congratulations on the very strong results. We saw you achieved a very solid margin in the first quarter. May we know more about the drivers behind this margin extension and, could you give us some color on your full year guidance? Thank you.

Sorry, we ran into some [technical issues] and thanks Crystal for your question. And let me rephrase your question and first it's like the margin proportion of the first quarter. And the second question was the guidance for the whole year, is that right?

Yes, that's correct. Thank you.

Yeah, thanks, Crystal. So before discussing the annual guidance, it's necessary to first explain the seasonality and it helps to better understand the underlying data and build up more confidence in ours. Business. So education business has distinct seasonality from the perspective of gross billings.

The first and the third quarters are peak new enrolment registration seasons with gross billings mainly from new students and at the same time, the second and fourth quarters are supported by both new enrolments and retentions.

So, gross bearings in the second and fourth quarters are significantly higher than those in the first and third quarters and also affected by like spring festival and other holidays, the course schedule in individual quarters may be reduced or increased by one or two sessions which in return affects the revenue recognition.

So it is highly recommended to analyst the revenue growth rate by the first and the second half of the year respectively instead of just looking into one single quarter. Taking the first half of 2025 as an example, our revenue in the first quarter was approximately RMB1.5 billion, and the upper end of the revenue guidance for the second quarter is RMB1.3 billion.

Taken together, this represents a 44% year on year increase compared to the first half of last year, especially considering that the college students and adult business is still in adjusting cycle and it shows a decrease year over year on revenue side.

This means that the growth rate for our non-academic tutoring business and the traditional business is at a high double-digit level which is far exceed the industry average, and in terms of the profits, the first and fourth quarters are key stages for concentrated profitable release of profitability release which is closely related to the revenue recognition and the new enrolment recruitment cycles.

And regarding our gross billings in the first quarter, I also want to add more color. The like we had RMB2.16 billion gross billings generated in Q4 2024 last year. Retentions accounted for a considerable proportion of these RMB2.16 billion.

If we make apple to Apple comparison. Both the quarter on quarter and year on year growth rate from crossing perspective in Q1 2025 are remarkable. Based on the high base retention in Q4 2024, there will be a relatively concentrated refund period before the start of classes in Q1 this year, which offsets part of the gross billing growth rate in the first quarter.

Also decreasing college students and adults partially impact the increase rate as well, while core business remains strong. When all these factors are considered, our growth bids performance in the first quarter is very strong, with core business still growing at nearly 40% and even higher before we found.

So it is also important to emphasize that. The improvement in our teaching quality is consistent. The application of AI technology has enabled us to do better in terms of the timeliness, accuracy, personalized and more diversified educational products. So our retention rate, especially for the new student retention rate and refund rate, are continuously improving.

So looking at the whole year, our user base has reached a new level which will support the achievement of our growth targets for 2025, and the layout of our offline business over the past years will also begin to bear fruit and become an important part of the growth engine.

Our product innovation and customer acquisition development in the academic business have formed a good reputation and have a strong word of mouth referrals, the growth rate has exceeded 100% for four consecutive quarters in the past, so this momentum will also continue.

We will achieve an industry leading growth rate in 2025 and in terms of the profit guidance, we are continuously improving profit quality in several aspects. The first is the continuous improvement in the quality of teaching products and services, leading to the sustained improvement of key metrics such as retention rate and conversion rate, etc.

The second is the construction of high-quality pro customer acquisition channels to optimize customer acquisition efficiency. And the third is to make full use of investments in AI technology to improve operational efficiency, strengthen operating leverage, and enhance employee satisfaction and this also partially address your question about the proportion of the profitability in the first quarter.

So the margin in the first quarter also contributed by the higher customer acquisition efficiency as well as the operating leverage. So we expect that the profitability of each quarter in 2025 will improve significantly compared with the same period last year and ultimately drive the overall fulfilment of the annual bottom line targets.

Thanks, Crystal.

Thank you. That's very clear.

Elsie Sheng, CLSA.

Thank you, management. Thank you for taking my question and congratulations on the strong growth momentum and also the profitability. I have a question related to the sector demand side. So, we know that we are now facing a largely weak macro and, but we also know that education is not to be more or resilience, but I would also be interested to check that do you observe any changes on the side, compared to like, maybe one year ago, and is there any changes on the parent preference in terms of like the course format or like the course content, etc. Thank you.

Thanks, Elsie. This is a really good question because like, we are a customer-oriented company and we always, focus on the demand from our customers and indeed we have. Observed several changes in students and parents along with the change of microeconomics, their parents' expectations, their shift in education concepts, and also the techno technological involvements. So first, the demand for children's comprehensive development has been continuously increasing.

Beyond traditional academic performance, parents are gradually increasing investments in their children's all-round growing, including like critical thinking, problem solving abilities, responsibility, teamwork, and like especially their physical and mental health.

Gaotu who has keenly captured this trend and continues to actively promote high quality content through multi scenarios coverage of like online and offline channels, we create immersive learning experience for students to cultivate their creativity, collaboration and critic thinking, etc.

And also our non-academic training gradually becoming a core driver of business growth, and these all drive derive from the change of the demand from our customers. From an operational metric perspective, the retention rate of non-academic children has continued to rise, particularly in our like coding business when the rate exceeded 90% in the first quarter as I just mentioned in my prepared remarks.

Second, parents and students have shown increasing acceptance of technology-driven educational solutions, further promoting us to accelerate the deep integration of AI technology with teaching scenarios, and we saw that in a lot of social medias that parents started to prepare some small sessions for their children by those AI tools.

Also innovated us about our new initiatives in our educational product and also empowered by AI we have significantly improved the timeliness of teachers' responses and the quality of integrations with students enhancing their satisfaction and now like the time we respond to the students spontaneous. Request is much more than before.

So, the demand for more personalized education among students and parents has gradually increased. We saw some demand rising in some one-on-one session, etc. Because it's more personalized and more diver diversified. However, we also observed that parents.

Pursue and recognition of high-quality education resources remain constant, which means particularly for excellent teachers and premium teaching content visa, the sense and always something always not changing for the parents and the students, and they are all what we are constantly building for.

Thanks, Elsie.

Thank you, it's very clear.

Eunice Liu, Goldman Sachs.

Good evening, Larry and Shannon. Thanks for taking my question and congrats on the results. My question is on the operating cash flow. I noticed that the operating cash flow this quarter was negative and was more than twice as level for the first quarter last year. So, could management elaborate on the reason behind? Thank you.

Thanks. This is also a very good question, and thanks for diving into these details. And so regarding the increase in operating cash outflow in the fourth quarter compared to the same period of last year, so this is primarily due to the payment of 2024 annual bonuses and incremental labour cost in the first quarter as our business scale, the number of our teachers has correspondingly increased as well.

But like the cash we invested in employees in the first quarter we leverage and contribute larger cash inflow in the following quarters and based on our efficiency improvements and profit enhancements, we expect the operating cash.

Inflow of 2025 to be at least 3 times that of the full year of 2024.

This implies that we will be having a net opening cash inflow of over USD100 million this year. This is also the source of confidence for the board and management to additionally approve. With an extra USD100 million shares repurchase plan today.

So we thank shareholders and investors for the long-term support, and we will continue to create a greater value for shareholders. So leveraging the positive cash flow we expected to generate this year, we will do a better job on this task. Thanks.

Oh thank you, it's very helpful.

As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

Operator, thank you everyone for joining the support today. Have any further questions, please don't hesitate to contact our investor relations department or us via email at ir@gaotu.cn directly You are also welcome to supply to our news alert on the IR's website. Thank you very much again for your time. Have a great night.

This concludes today's conference call. You may now disconnect your line. Thank you.