Gaotu Techedu Inc. (NYSE:GOTU) Q1 2022 Earnings Conference Call June 6, 2022 8:00 AM ET
Company Participants
Sherry Liu – Manager of IR
Larry Chen – Founder, Chairman and CEO
Shannon Shen – CFO
Conference Call Participants
Mark Li – Citi
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Gaotu Techedu Inc. First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note today’s event is being recorded on Monday, June 6, 2022. I would now like to hand the conference over to your first speaker today, Ms. Sherry Liu, IR Manager of Gaotu. Thank you and please go ahead.
Sherry Liu
Thank you very much, operator. Good evening, everyone, and thank you for joining us on our first quarter 2022 earnings conference call. Gaotu’s first quarter earnings release was published earlier today and is available on the company’s IR website at ir.gaotu.cn. On the call with me tonight are Mr. Larry Chen, Gaotu’s Founder, Chairman, and Chief Executive Officer; and Ms. Shannon Shen, Gaotu’s Chief Financial Officer. Larry will give a general business overview for the quarter and then Shannon will discuss the financials. Following their prepared remarks, Larry and Shannon will be available for the Q&A session.
I will translate for Larry. Before we begin, I’d like to remind you that this conference call will contain forward-looking statements as defined in the U.S. Private Securities 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 known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company’s control and may cause the company’s actual results, performance or achievements to differ materially from those contained in any forward-looking statements.
Further information regarding these and other risks is included in the company’s filings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a live and archived webcast of this conference call will be available on Gaotu’s IR website.
It is now my pleasure to introduce Larry. Larry, please go ahead.
Larry Chen
Thank you, Sherry. Good evening, and good morning everyone. Thank you for joining us on our 2022 first quarter earnings conference call on this special day, which happened to be Gaotu’s third year listing anniversary. Before I start, I would like to remind everyone that all financial information that I mention later is based on RMB unless otherwise noted.
In the first quarter of 2022, our business continued to maintain a healthy and sustainable development and we can remain profitable for two consecutive quarters since we began our business restructuring. In this quarter, our net revenues were RMB724.6 million, and our gross billings were RMB318.1 million to present the basis of comparison. If we only look at our comparable businesses, which are professional education for college students and adult, vocational education, STEAM education and digital educational products. The net revenues of our comparable business sales increased over 200% year-over-year and their gross billings increased approximately 42% year-over-year.
Moreover, gross billings of comparable businesses have shown quarter-over-quarter growth for three consecutive quarters. Our gross margin this quarter was 70.6% slightly higher than that of the same period of last year. Our net income and non-GAAP net income were RMB53.7 million and RMB92.5 million, respectively, indicating that we have achieved effective growth. Furthermore, our capital positive — our capital position remains strong. As of March 31, 2025 — and ’22, we had a total of approximately RMB3.2 million — sorry, RMB3.2 billion in terms of cash, cash equivalents, restricted cash and short-term investments on our balance sheet.
Since we initiated our business restructuring and organizational adjustments in the third quarter of last year, our operations have been centered upon three key effects, focusing on the core businesses, enhancing product quality and improving operational efficiency. I will now briefly talk about our progress during the quarter on each of these three points. First, in terms of focusing on our core businesses, we will continue to concentrate on online education, and we will continue to develop and invest in our four core businesses, which are professional education for college students and adults, vocational education, STEAM education and digital educational products.
During this quarter, the skill of our professional and vocational education services further increased compared with that of the last quarter. Net revenues realized approximately 82% quarter-over-quarter growth and its gross billings secured approximately 85% quarter-over-quarter growth. Our STEAM education service has also made solid progress, especially in program in tutoring businesses which grew over 10x year-over-year in terms of gross billings.
Through the gradual development of our new businesses, we will continue to expand our product portfolio across various categories. We will also expand our advantages in the high school tutoring services to other businesses continue to offer 15 students upgraded and modified courses that satisfy related government policies, fulfill the diverse and multidimensional learning demand of students and to build a true [indiscernible] and service platform.
Second, in terms of enhancing our product quality, we believe that now is the best time to accumulate know-how, service our regional aspiration to educate and return to the fundamental essence of education. We remain rigid on our principle that quality is the core of education. As such, we will continue to uphold our pursuit of delivering exceptional education quality. We will continue to invest in teaching the store sales offer the best education content and products, and we will continue to invest in technology to provide more user-friendly and personalized products.
Meanwhile, we continue to maintain our standard of hiring the best instructors in the industry and offering very competitive packages. In the quarter, research and development expenses accounted for 17% of our total revenue, returning to a relatively high proportion as reflecting our emphasis on the importance of R&D and online education.
Because our new businesses are still in their early development stage, adequate R&D investment is essential, but we will gradually reduce and strictly control our R&D and other operating costs to be within a specific range as we execute our strategy of effective growth and constantly evaluate the development of our business. At the same time, we have sufficient cash reserves to support our investment in R&D. Going forward, we will uphold our principles of good teachers are fundamental and our corporate value of the customer first, continuously refine our product quality based on a long-term view and strive to provide the best educational services in the industry to students, and that creates the most value for our customers. By firmly focused on customer value proposition and the firmly investing in the capabilities to deliver value, we believe we will generate sustainable and high-quality revenue growth.
Third, in terms of improving our operational efficiency, we continue to revamp our on-site operations and management to strengthen organizational and operational efficiency. After a profitable last quarter, we continue to profit with 12.8% non-GAAP and income margin in this quarter, indicating that we have achieved healthy and sustainable growth. Our sales and marketing costs also significantly decreased. As end margin this quarter decreased 79 percentage points compared with that of the same period of last year, while the SM efficiency has notably improved. This is solid proof that our multi-channel customer acquisition method is highly effective even in this changing external environment.
To further improve efficiency, we will continue to work towards optimizing our business processes and resources education to enhance productivity. We have never once changed our confidence in China’s massive education market and our determination on delivering the highest quality education to students.
China’s economic development has brought about performed transformation and upgrade in various industries, which have created a demand for new skill sets and thus presented more opportunities and possibilities. We will closely monitor and follow the ongoing trends in the Chinese labor market, continue to cultivate the education industry while guided by the field and the training needs required by the country’s future. Activity showed our social responsibility as an education company and utilize technology to deliver high-quality education thereby delivering real value and promoting the long-term growth of the Chinese education industry. Through the ups and down, we will be celebrating Gaotu’s Eighth anniversary next week.
It might be easy to do a business for one year or maybe even three years, but it’s hard to run the companies that have sustained for over 10 years and only a selected few companies can become long lasting organization. Success belongs to the optimistic feel who dare to transform, who are eager to innovate, who have faced and who persevered through opportunities regardless of how the strong environment change. We will stay tuned to our original aspiration to education and our love to education. We firmly believe that as long as we slow down and process while accumulating ticket variances and activities, we will be able to create a world of our own in the field of education.
Lastly, we would like to take this opportunity to deeply thank all medical staff for their dedication and hard work in the past days, mainly overcomes the pandemic and all stay safe and healthy. Thank you very much. Now I will pass this call over to our CFO, Shannon, and walk you through our financial and operational details.
Shannon Shen
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 2022. Please note that all the financial data that I mentioned later is based on RMB unless otherwise noted.
Following our strategy of effective growth, we are pleased to be able to continue to profit in this challenging environment with a net income margin of 7.4% and a non-GAAP net income margin of 12.8% and during this quarter. As most of our new businesses are still in the earliest [indiscernible], we will compare our financial performance on a quarter-over-quarter basis. Alongside with year-over-year comparisons to better present the development of our new strategic businesses.
Our focus this year remains on core businesses. Professional education for college students and adults, vocational education, STEAM education and digital education products. On April 20, 2022, China’s top legislature passed the mandate vocational education law of the People’s Republic of China as the 34 section of the 13th National People’s Congress.
The law has taken effect in May 1, 2022. It has confirmed for the first time that vocational education is of equal importance as general education, and it advocates for a high republic acceptance of vocational education. We believe that under the strong support of government policy, vocational education will have a better future with higher market demand. We sincerely hope that by providing the best service and the best education quality. We will be able to establish Gaotu as a reputable brand in the vocational and professional education market.
Now I will go through our key financials in more detail. In the first quarter of 2022, our net revenues decreased 43.1% quarter-over-quarter and 62.7% year-over-year to RMB724.6 million. To provide a consistent basis of comparison, if we exclude these businesses and look at our comparable businesses, which are professional education, vocational education, STEAM education, and digital educational products.
Our net revenues increased over 200%, both year-over-year and quarter-over-quarter basis, representing a significant increase in scale. Gross billings this quarter decreased 68.4% quarter-over-quarter and 73.1% year-over-year to RMB318.1 million. Gross billings of our comparable businesses increased of approximately 42% year-over-year and approximately 60% quarter-over-quarter. We will continuously monitor regulatory policy updates and [indiscernible] adjust our service accordingly.
In the meantime, we will continue to offer policy preliminary services to high school students and college students. Further, our cost of revenue this quarter decreased 62.7% year-over-year to RMB212.9 million. Our current level of cost of revenue is proportionate to our net revenue. And in the future, we will continue to improve our operational efficiency and effectively reduce and limit our cost to resume a specific range.
Our gross profit decreased 62.6% year-over-year to RMB511.7 million, which will add a gross profit margin of 70.6% higher than that of the same period of last year and also higher than that of last quarter. Non-GAAP gross profit was RMB530 million and non-GAAP gross profit margin was 73.1%. Operating expenses decreased by 83.1% year-over-year to RMB486.4 million. To break down the operating expenses, selling expenses decreased by 87.6% year-over-year to RMB284.2 million.
The selling expense margin was 39.2%, a sharp decrease compared to that of the same period of last year. Since our restructuring last year, we have been actively exploring new customer acquisition strategies, including utilizing livestream e-commerce and short radio platform. Additionally, we will continue to extend our courses offerings to build a learning platform across multiple categories to activate our branding in the vocational and professional education sectors and gradually become more reliant on customer acquisitions through foremost referral. And in this way, lower our customization costs and the selling expenses margin to pursue sustainable growth.
Research and development expenses decreased by 66.2% year-over-year to RMB123.3 million. Investment in R&D is crucial, especially for us, since we are at the early exploration stage of our new businesses. We will determine our budget for investment for different business lines according to its development and our evaluation of the market. To guarantee the quality of education we provide and to be able to offer products that exceed users’ expectations. We are also bringing highly experienced and outstanding research and teaching staff in the vocational and professional education industry to our company to improve our curriculum design. Meanwhile, we will adjust the R&D employee sector to continuously enhance return on investment and realized R&D efficiency improvement.
General and administrative expenses decreased by 63.7% year-over-year to RMB78.9 million. With that, our net income from operations for the first quarter of 2022 was RMB25.3 million compared with loss from operations of RMB1.5 billion in the same period of last year. We have always adhered to the strategy of the effective growth when we expand new businesses.
By optimizing unit economics before running the operations at scale, we were able to achieve profit for two consecutive quarters. Our net income was RMB53.7 million compared with the net loss of RMB1.4 billion in the fourth quarter of 2021. Non-GAAP net income was RMB92.5 million. Our net income margin and non-GAAP net income margin rate, 7.4% and 20.8%. We are pleased to be able to continue to achieve effective growth this quarter. Additionally, our net operating cash flow was RMB481.3 million, representing a significant improvement compared with that of the same period of last year.
Turning to our balance sheet. As of March 31, 2022, we had RMB979.8 million cash, cash equivalent and restricted cash and RMB2.2 billion short-term investments, which totaled approximately RMB3.2 billion or enough to support our current operating scale and our explorations into new businesses. Further, as of March 31, 2022, our deferred revenue balance was RMB599.7 million, which primarily consists of [indiscernible].
Before I provide our business outlook for the next quarter, please allow me to remind everyone that this contains forward-looking statements, which involve risks and uncertainties, which are beyond our control and could cause the actual results to differ materially from our predictions. Based on our current estimates, total net revenue for the second quarter of 2022, are expected to be between RMB438 million and RMB458 million, representing a decrease of 79% to 80% on a year-over-year basis. We are also expecting to see net operating cash flow turning positive next quarter.
This concludes my prepared remarks. Operator, we are now ready for the Q&A session. Thank you, everyone.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Mark Li with Citi. Please go ahead.
Mark Li
Hi, management. Thank you for this presentation. This is Mark Li from Citi. May I ask a question on your Q2 guidance. I noticed your Q2 guidance of RMB438 million to RMB468 million revenue. May I know a rough breakdown for the revenue, especially for the four core segments that we may sustain going forward? Thank you.
Shannon Shen
Thanks, Mark. So regarding the second quarter guidance, we haven’t provided the details and break down that into the four core session. And as everyone has been noticed that on our earnings release, we have combined other business, and we didn’t kind of like separate them into like the four different segments. And because majority of our new businesses are still at early stage, and we want the business to become more stable before we can provide a process guidance and separate them into different segments. So right now, we will recommend you to look at the company as a whole and see how the revenue is trending.
Mark Li
Got it. May I follow-up quickly, if could you just maybe comment on the momentum for these four segments, let’s say, into the Q2. Any qualitative comment could be helpful?
Shannon Shen
Yes. So this is kind of like our second quarter after the transformation of our new business, and we are still making gratifying progresses. Although we have higher expectations of ourselves. And as I mentioned earlier, the revenue of our new businesses, if we make an apple-to-apple comparison, has exceeded 200% growth, both on a year-over-year basis and a quarter-over-quarter basis. And also the gross billing has increased by more than 60% year-over-year, laying the foundation for our future development.
While maintaining the high growth, we have also managed to profit retain a non-GAAP margin of 12.8%, that proves that we have the ability to balance the rapid growth and profitability. So in terms of various of categories, like our team education of finance-related examination training or division examination training and like the preparations we provide for post-graduate college entrance exams. These have all achieved considerable growth from previous quarter end. We also foresee these sectors to grow over high double-digit percent on a quarter-over-quarter basis. And we believe these businesses will continue to become our growth engines in the future, Mark.
Mark Li
Got it. Very helpful. Thank you.
Shannon Shen
Thanks.
Operator
And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Sherry Liu for any closing remarks.
Sherry Liu
Thank you, operator, and thank you everyone for joining the call today. If you have any further questions, please don’t hesitate to contact the company’s Investor Relations department via e-mail at ir.gaotu.cn directly. You’re also welcome to subscribe to our news alert and quarterly investor news letters on the company’s IR website. Thank you very much again for your time. Have a great night.
Shannon Shen
Thanks.
Operator
Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day or evening. Thank you.
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