Gaotu Techedu’s (GOTU) CEO Larry Chen on This fall 2021 Outcomes – Earnings Name Transcript

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Gaotu Techedu Inc. (NYSE:GOTU) This fall 2021 Earnings Convention Name March 8, 2022 8:00 AM ET

Firm Members

Sherry Liu – IR Supervisor

Larry Chen – Founder, Chairman and Chief Government Officer

Shannon Shen – Chief Monetary Officer

Convention Name Members

Mark Li – Citi

DS Kim – J. P. Morgan

Operator

Girls and gents, thanks for standing by, and welcome to the Gaotu Techedu Integrated Fourth Quarter and Fiscal Yr 2021 Earnings Convention Name. All individuals can be within the listen-only mode. [Operator instructions] After immediately’s presentation, there can be a possibility to ask questions. [Operator Instructions] Please notice this occasion is being recorded on Tuesday, March 08, 2022.

I might now like handy the convention over to your first speaker immediately, Ms. Sherry Liu, IR Supervisor of GOTU. Thanks. Please go forward.

Sherry Liu

Thanks very a lot operator. Good night everybody and thanks for becoming a member of us on our fourth quarter and full 12 months 2021 earnings convention name. GOTU’s fourth quarter earnings launch was distributed earlier and is accessible on the corporate’s IR web site at ir.gotu.cn. On the decision with me are Mr. Larry Chen, GOTU’s Founder, Chairman and Chief Government Officer; and Ms. Shannon Shen, GOTU’s Chief Monetary Officer. Larry will give a common overview after which Shannon will focus on the financials. Following the ready remarks, Larry and Shannon can be out there to reply your questions.

I’ll translate for Larry. Earlier than we start, I wish to remind you that this convention name will comprise forward-looking statements as outlined within the U.S. Personal Securities Litigation Reform Act of 1995. These forward-looking statements are primarily based upon administration’s present expectations and the present market and working circumstances, and associated occasions that contain identified or unknown dangers, uncertainties, and different elements, all of that are tough to foretell and lots of of that are past the corporate’s management and should trigger the corporate’s precise outcomes, efficiency or achievements to vary materially.

Additional info relating to these and different dangers, uncertainties or elements is included within the firm’s filings with the SEC. The corporate doesn’t undertake any obligation to replace any forward-looking statements, besides as required underneath relevant regulation. As a reminder, this convention is being recorded. As well as, a reside and archived webcast of this convention name can be out there on GOTU’s IR web site.

It’s now my pleasure to introduce Larry. Larry, please go forward.

Larry Chen

Thanks, Sherry. Good night and good morning to you all. Thanks for becoming a member of us on our fourth quarter and full 12 months 2021 earnings convention name. Earlier than I begin, I wish to remind everybody that every one monetary info that I point out later relies in RMB except in any other case famous. Within the fourth quarter of 2021, our income was RMB1.3 billion representing a 14.3 level quarter-over-quarter enhance, which introduced our revenues for the complete 12 months of 2021 to RMB6.6 billion. Our gross billings of this quarter additionally confirmed 233.7% quarter-over-quarter elevated to RMB1 billion. Throughout this quarter, web revenues and gross billings from our complete tutoring companies, which consists of our enterprise aside from Okay-12 tutorial topic tutoring companies have been RMB149.1 million and RMB234.8 million respectively, representing a good enhance in dimension in contrast with earlier quarters and show that we’re heading in the right direction of progressively shifting our emphasis to enterprise aside from Okay-12 tutorial topic tutoring companies. It is particularly price noting that after we restructured our enterprise within the third quarter. Within the fourth quarter, we achieved appreciable profitability in each GAAP and non-GAAP phrases in addition to constructive web of reaching money stream.

Our web revenue was RMB285.9 million and our non-GAAP web revenue was RMB324.4 million, which gave us a file excessive non-GAAP web revenue margin of 25.5%. Our web working money stream – money influx was RMB245.8 million. All of those point out that the enterprise restructuring and organizational changes we carried out within the final quarter delivered vital outcomes confirming that we drove the proper strategic route, which proved successfully in a brief time frame. Within the meantime, we maintained a robust money place. As of December 31, 2021, our money and money equivalents, restricted money, and short-term wealth administration investments totaled roughly RMB3.7 billion.

Going ahead we are going to proceed to give attention to on-line vocational schooling, skilled schooling and digital merchandise. We’ll proceed to give attention to excessive operational effectivity as we now have at all times emphasised. We’ll proceed to give attention to the efficient progress of our enterprise and we are going to proceed to give attention to the non-public growth of our crew. Subsequent, I’ll elaborate on these 4 factors and briefly cowl our progress within the quarter. First within the fourth quarter we additional expanded our vocational and the skilled schooling course choices to raised meet the broad vary of demand of our present and the potential college students.

In November final 12 months, we repositioned ourselves as a learner-centric lifelong studying and repair platform, which is our new protection imaginative and prescient assertion. We now supply a comparatively complete vary of vocational {and professional} schooling classes, together with not solely kids for recruitment and qualification examinations and preparation for a college-level tutorial examination, but additionally vocational expertise, coaching, functionality enchancment, skilled counseling, complete coaching and others overlaying most sorts of coaching programs that cater to a wide range of wants of learners of varied age teams; academic backgrounds and life and work expertise. Along with benefiting society by growing extra expertise, our course choices even have learners enrich their lives, a multi-category platform each reinforce the branding that we construct up within the Okay-12 area within the vocational and the skilled schooling sector and reimpose the cross setting, upsetting and retention danger.

We honor that the demand for vocational {and professional} schooling in China is big and is rising quickly. And we’re assured that by leveraging the insights and assets that our operations, merchandise, analysis and growth and tutors have collected within the on-line Okay-12 enterprise, which have given us a robust aggressive benefit. We’ll obtain vital progress within the vocational schooling sector.

Second, we now have at all times emphasised the significance of a excessive operational effectivity for the reason that founding of our firm. We have now been decided to construct a extremely environment friendly, organized and unified crew. Our best asset is our crew, which can also be the core engine of our enterprise progress. After our restructuring within the fourth quarter, our gross margin was 69.7% increased than that of earlier two quarters. Our working margin additionally reached our file excessive ranges, each our stable testomony to the excessive operational effectivity of our crew.

Third, we are going to proceed to give attention to the efficient progress of our enterprise. We don’t pursue meaningless sized enlargement. Reasonably we put a precedence on sustaining wholesome, steady and sustainable progress earlier than introducing a brand new price providing. We rigorously analyze a unit financial and revenue fashions. Earlier than launching a brand new product, we put ourselves into the footwear of the lender to make sure that we will present the very best quality, the most effective service and the most effective consumer expertise to our prospects.

Lastly, we proceed to take a position closely in our staff by offering them with ongoing coaching. We recurrently prepare core competency trainings, together with management, operations and organizational expertise for our enterprise leaders as part of our efforts to develop [indiscernible] dependantsfor our enterprise. On the similar time, we proceed to supply extremely aggressive compensation by trade requirements and proceed to take care of excessive requirements for the recruitment, coaching, rating and the efficiency analysis of our tutors and staff.

Wanting again, 2021 was undeniably an eventful 12 months as we went via giant scale strategic and organizational changes within the wake of our regulatory coverage change within the trade. Nonetheless, inside a brief time frame, we accomplished our restructuring and ended the 12 months with a robust quarterly revenue. Wanting forward into 2022, we are going to proceed to adjust to authorities insurance policies, proceed to cherish the purpose to unfold placing our coronary heart into it and attempting our results and proceed to leverage the deep roots of our expertise within the on-line schooling trade and the arduous work of our wonderful crew to deliver superior vocational {and professional} schooling programs, superior digital merchandise and a greater studying expertise to extra prospects to meet our restoration mission of constructing studying higher.

Now I’ll cross the decision over to our CFO, Shannon, to stroll you thru our monetary and operational particulars.

Shannon Shen

Thanks, Larry, and thanks all for becoming a member of our name immediately. I’ll now stroll you thru our working and monetary efficiency for the fourth quarter and for the complete 12 months of 2021. Please notice that our monetary knowledge I point out later is in RMB phrases except in any other case famous. We closed fiscal 12 months 2021 with a robust fourth quarter with appreciable GAAP and non-GAAP web revenue and constructive web working money stream. Following the restructuring, which was accomplished within the third quarter, our new companies achieved fast and wholesome progress

Each gross billings and web revenues generated from our complete tutoring companies confirmed quarter-over-quarter will increase, which displays our promote and enterprise restructuring, sturdy organizations, stable expertise pool, and deep trade expertise.

Sooner or later, we are going to proceed to discover new enterprise and stay devoted to refining our product and companies with the purpose of providing superior high quality programs and companies that exceed our college students’ expectations.

By the top of 2021, we terminated all after-school tutoring companies to college students from kindergarten via ninth grade. We wish to ship all of our academics and different associated workers for the arduous work that they dedicated to course supply and their company with the transition. We wish to give our greatest needs to them. And we hope that they are going to cherish the general public welfare nature of schooling and proceed to commit themselves to offering wonderful programs and companies within the nonprofit establishment.

Our present strategic focus is on non-degree primarily based vocational {and professional} schooling. In response to official knowledge launched by the Chinese language Ministry of Schooling, in addition to an unbiased third occasion, the market dimension for [indiscernible] primarily based vocational schooling in China when it comes to income can be RMB 250.7 billion in 2022. By 2026 it’s going to vary RMB 344.5 billion representing a CAGR of 8.3% from 2022 to 2026.

Mixed with the demand for some degree-based vocational schooling for faculty college students, similar to preparation for graduate faculty entrance examinations and the faculty English check and degree-based vocational schooling market has substantial hidden alternatives.

Whether or not the aggressive job market means that there’s a big demand for transferable job expertise. And everybody whether or not school college students, new graduates, these are within the workforce, or just college students attempting to enhance their expertise, it is searching for dependable and high-quality programs to fulfill varied studying wants.

We’ll personally research consumer demand, design merchandise that may fulfill the educational wants of most customers and supply constructive accountant to create an web metric of studying instruments, selling the Gaotu model within the vocational {and professional} schooling sector via word-of-mouth referrals.

Now I’ll share with you our opening knowledge in additional element. Since we terminated afterschool tutoring companies for college kids in obligatory schooling within the fourth quarter of 2021, and in senior highschool within the first quarter of 2022. I’ll put the give attention to sharing extra details about our complete tutoring companies, which is our enterprise aside from K12 afterschool tutoring companies. And current a few of our financials on quarter-over-quarter foundation to raised present shade on the efficiency of our new strategic focus. Please notice that retroactive changes to historic knowledge have additionally been made to offer a constant foundation of comparability for the monetary outcomes.

Within the fourth quarter, our web revenues elevated 40.3% quarter-over-quarter to RMB1.3 billion.

Web revenues contributed by our complete tutoring companies elevated by 1.4% quarter-over-quarter to RMB149.1 million.

Gross billings, the main indicator for future monetary efficiency elevated 233.7% quarter-over-quarter to RMB1 billion. Gross billings contributed by our complete tutoring companies elevated by 72.8% quarter-over-quarter to RMB234.8 million. They’ve proven quarter-over-quarter enhance for 2 consecutive quarters for the reason that second quarter of 2021 as much as the fourth quarter. This reveals that we’re progressively shifting our strategic focus to enterprise aside from K12 after-school kids associated companies.

Transferring over to our chosen monetary metrics abstract, our price of revenues decreased by 45.9% quarter-over-quarter and 37.3% year-over-year to RMB386.7 million. The lower was primarily attributable to a lower in compensation for instructors and tutors because of the restructuring within the final quarter, in addition to decreases in studying materials prices and rental advances.

Our gross revenue elevated 122.1% quarter-over-quarter to RMB887.6 million, which give us a progress revenue margin of 69.7%.

Non-GAAP progress revenue, which excludes share-based compensation elevated 107.9% quarter-over-quarter to RMB908.2, which give us a non-GAAP gross revenue margins of 71.3%. The rise was primarily attributable to lower of price of income defined earlier.

Working bills decreased by 57.5% quarter-over-quarter and 72.5% year-over-year to RMB629.3 million.

To interrupt down the working bills, promoting bills decreased by 54.9%, quarter-over-quarter, and 79.3% year-over-year to RMB373 million within the fourth quarter. This was primarily attributable to a lower in advertising bills because of the influence of presidency insurance policies as beforehand disclosed. And a lower within the compensation for gross sales and advertising workers because of the restructuring accomplished within the final quarter.

The promoting bills margin decreases to a file low 29.3%, a pointy lower in comparison with earlier quarters. On the similar time, we’re additionally exploring new buyer acquisition methods, together with using livestream e-commerce and brief radio platforms.

A multi-channel buyer acquisition mannequin might cut back the danger of over dependence on one single means. Alternatively, we are going to continuously enhance our consumer conversion programs. Moreover, we are going to proceed to develop our programs choices to ascertain our branding within the vocational schooling sector, and progressively turn out to be relying extra on buyer acquisitions via word-of-mouth referrals. And on this approach, decrease our buyer acquisition price and the promoting bills margin to pursue sustainable progress.

Analysis and growth bills decreased by 62.8% quarter-over-quarter and 54.5% year-over-year to RMB125 million. The lower was primarily attributable to a lower within the compensation for analysis and growth workers, because of the restructuring accomplished within the final quarter.

Normal and administrative bills lower by 41.8% quarter-over-quarter and 55.9% year-over-year to RMB95.9 million. The lower was primarily attributable to a lower within the compensation for G&A stuff because of the restructuring accomplished within the final quarter.

With that our earnings from operations for the primary quarter of 2021 was RMB258.3 million, in contrast with loss from operations of RMB696.1 million within the first quarter of 2020.

Our working margin this quarter reached a file excessive 20.3%. The sharp enhance in op. margin was primarily attributable to a lower in dialog for employees because of the restructuring within the third quarter of 2021, in addition to lower in different working associated bills.

Our web revenue was RMB285.9 million in contrast with the web lack of RMB627 million within the fourth quarter of 2020.

Non-GAAP web revenue was RMB324.4 million in contrast is the non-GAAP web lack of RMB554.4 million within the fourth quarter of 2020. It’s price mentioning that our web revenue margin and non-GAAP web revenue margin, each reached its file excessive degree of twenty-two.4% and 25.5% respectively.

Moreover, our web working money influx was RMB245.8 million.

Turning into our stability sheet outcomes. As of December 31, 2021, we now have RMB897.1 million money, money equivalents currents and restricted money. And roughly RMB2.8 billion brief time period funding, which add as much as be roughly RMB3.7 billion, ample to help our present working scale and our explorations into new enterprise.

As for our full 12 months outcomes web revenues for 2021 decreased 7.9% year-over-year to RMB6.6 billion. The lower was primarily because of the session of Okay-9 tutorial topic tutoring companies, because of the influence of presidency insurance policies.

Web revenues from our complete tutoring companies have been RMB551.1 million.

Gross billings decreased 42.4% year-over-year to RMB5.2 billion. Gross billings from our complete tutoring service was RMB669.7 million.

Web lack of 2022 was RMB3.1 billion in contrast with web lack of RMB1.4 billion in 2020.

Non-GAAP web lack of 2021 was RMB2.8, in contrast with non-GAAP web lack of RMB1.2 billion in 2020.

Contemplating the uncertainty within the authorities insurance policies [indiscernible] to our monetary circumstances, we are going to now present the subsequent quarter’s efficiency steering for now.

This concludes my ready remarks. Operator, we at the moment are prepared for questions. Thanks everybody.

Query-and-Reply Session

Operator

We’ll now start the question-and-answer session. [Operator Instructions] The primary query comes from Mark Li with Citi. Please go forward.

Mark Li

Hey, hello Larry, Shannon and administration. Thanks very a lot for the presentation. Might I ask firstly we perceive we terminate the highschool tutoring by finish of February? How a lot influence will we count on from this termination? And likewise might you share a bit extra on the important thing metrics for the vocational {and professional} schooling phase similar to a margin et cetera? Thanks.

Shannon Shen

Thanks Mark. So for the highschool enterprise termination, we now have made an announcement in our February sixteenth as a result of we’re an organization registered in Beijing in order that we observe native authorities instruction that the highschool coverage ought to – precisely the identical with the double deduction coverage and the precise influence can be disclosed in our Q1 outcomes. However when it comes to all of the restructuring we now have accomplished a enterprise and organizational restructuring within the third quarter and have settled the vast majority of the cost and bills. The next termination for the highschool enterprise is extra pure and are absolutely ready. We don’t count on to incur further significant cost going ahead. And at present we now have a robust money stability ample to help our present enterprise talent. So then – and our present money stability additionally supported our flourishing into the brand new companies.

And as for extra particulars in regards to the op margin for the vocational schooling, so there are a lot of classes within the vocational schooling sector and totally different class has totally different traits. And the mannequin for price deliveries are fairly totally different as nicely, that every one ends in inconsistency within the degree of revenue margin. So our revenue margin can also be affected by the % that every class takes up when it comes to complete income. So which suggests it’s not very steady. In order we’re nonetheless within the early stage in exploring and welcoming stage of our new companies, we’re not in a position to present a exact expectation on the revenue margin for our vocational companies. However there’s one factor for positive that we’ll insist on our working technique, which is at all times to run our enterprise in a efficient approach. So we won’t sacrifice the profitability only for the talent enlargement. We’ll assessment offering steering as quickly as our enterprise has entered out there stage.

Hope that deal with your questions. Thanks.

Mark Li

Thanks.

Operator

The subsequent query comes from DS Kim with J. P. Morgan. Please go forward.

DS Kim

Hello, good night. Hello Mr. Chen. Hello Shannon. Thanks for taking my query, and by the best way congrats on the file speculation and the margin this quarter. I’ve two fast query on the PATH 4 much like what Mark simply talked about, but when we expect not in regards to the, one in every of restructuring prices, however when it comes to the recurring OpEx runway, working expense runway from second quarter of this 12 months, how we could give it some thought for the remainder of the 12 months. i.e., we could again OpEx run to be much like the 4Q that we recorded have been perhaps down by half and even 80% as a proportionate with the income web site. What we could count on on the working expense – working expense? That is the primary query.

Second query if I’ll, is said to our non-K12 enterprise. I am not asking for the steering per se, however say for 2022 or 2023 subsequent 12 months. How a lot of the income can we count on roughly, very ballpark determine like up 100% from present charge or 200% any sense of dimension could be appreciated? And if attainable, how will that income be made up of a distinct phase, i.e., vocational {and professional} schooling versus digital product versus any new companies like e-commerce and whatnot? Thanks.

Shannon Shen

Thanks on your questions. So to handle your first query in regards to the OpEx, so as a result of we’re working a web-based schooling enterprise. So the fee construction for us could be very simple. It consists of the price of items promote, gross sales and advertising bills, G&A bills and R&D bills. So up to now, it was at all times be gross sales and advertising bills contributed probably the most within the OpEx and dealing with the fierce mixture up to now we’re sort of like the identical with different schooling firms. Generally the gross sales and advertising bills contribute like 80% and even 90% over the income. However like going ahead particularly dealing with that market skilled and vocational schooling, we’re exploring extra channels to accumulate prospects. So – and in addition going ahead we are going to pursue the efficient progress.

So ideally we hope that just like the costly degree will return to love the 12 months of 2019 for us. So to leverage the financial system of scale, we nonetheless want our R&D and G&A bills to be underneath like 20% of complete income, which offer us or is sufficient room to accumulate new buyer, in addition to exploring new product. However as I simply talked about, the whole lot continues to be in a really early stage and we nonetheless see that like in a PayPal enterprise we now have collected in depth expertise in our price delivering and refining our product growth course of. We even have developed a refining R&D platform. So like all of the legacies we get from the previous will take us to the longer term.

And likewise for our enterprise, we nonetheless face a sure degree of uncertainties. And we do see like within the sub-segment like among the main gamers which have been performing very nicely. So that every one reveals the market has an enormous potential, however for us particularly the experiencing like all of the coverage adjustments and fierce mixture up to now it turn out to be extra clear for us is that we’ll give attention to ourselves and give attention to the event of our administration crew and our staff, and to offer the most effective product to our prospects.

On the similar time, maintain bettering our working efficiencies. I hope within the close to future we will – we will get a wholesome and sustainable progress in addition to a worthwhile progress. And also you additionally talked about like all shade on the longer term progress, so we are going to put priorities on sustaining the efficient progress, whereas attaining our constructive web revenue, given our present working scale and market dimension. We expect it’s a attainable for us to attain like excessive double digits and even triple digits income progress relating to our new strategic focus. The secret’s to continuously refine our merchandise to raised fulfill consumer’s wants. And likewise we are going to present income steering so long as the coverage and the exterior setting, it steady. That is like we at all times do up to now. Thanks.

DS Kim

Thanks a lot, Shannon. That is actually useful. If I’ll follow-up on that earlier half, my query was extra about like, after the exit of K12 together with highschool, how about R&D and G&A set coast would appear like? As an illustration fourth quarter, these are about a bit of over RMB200 million in fourth quarter. Our non-K12 income was RMB150 million. So simply desirous to stability that after the exit of K12, shall we now have a significant step down in a hard and fast price additional or we might relatively give attention to, as you talked about product pushed progress alternative relatively than focusing an excessive amount of on the remaining fastened price? And that is all my questions. Thanks once more on your reply.

Shannon Shen

Sure. So sure, the query makes numerous sense. So like for us when working a enterprise we’re at all times looking for a stability. So we did get legacies and experiences up to now, and that every one helped us to develop up to now. And likewise like all the skills we had in different system we now have constructed up and in addition help us to success sooner or later. So once we contemplate the additional funding in R&D and G&A, the G&A talent we additionally want to contemplate like the highest line talent like we will purchase from the market. And likewise like we at all times talked about, like in all probability on the first stage we are going to nonetheless keep a sure degree of funding in R&D to help to maintain refining our instructing product then going ahead on the income develop recurrently. We imagine the proportion of R&D and G&A bills can turn out to be decrease, which we name it the financial system of scale that additionally present us with the profitability.

DS Kim

Thanks. That makes numerous sense.

Shannon Shen

Sure. How briskly we will get there, however nonetheless we have to keep a degree of funding, particularly within the R&D bills.

DS Kim

Thanks very a lot.

Operator

This concludes our query and reply session. I wish to flip the convention again over to Sherry Liu for closing remarks.

Sherry Liu

Thanks very a lot operator, and thanks everybody for becoming a member of the decision immediately. If in case you have any additional questions, please do not hesitate to contact the corporate or contact us through electronic mail at ir.gaotu.cn instantly. Please be happy to subscribe to our information alert or quarterly investor publication on the corporate’s IR web site.

Thanks very a lot once more on your time. Have an excellent night time.

Operator

The convention has now concluded. Thanks for attending immediately’s presentation. You might now disconnect.



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