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GSX Techedu Inc. (GOTU -1.06%)
Q1 2021 Earnings Call
May 26, 2021, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the GSX Techedu Inc. first-quarter 2021 earnings conference call. [Operator instructions] Please note this event is being recorded on Wednesday, May 26, 2021. I would now like to hand the conference over to your first speaker today, Ms.
Sandy Qin, IR director of Gaotu. Thank you. Please go ahead.
Sandy Qin -- Investor Relations Director
Thank you, Operator. Hello, everyone, and thank you for joining us today. Gaotu's earnings release was distributed earlier and is available on the company's IR website at ir.gaotu.cn. On the call with me today are Mr.
Larry Chen, Gaotu's founder, chairman, and chief executive officer; and Ms. Shannon Shen, chief financial officer. Larry will give a general overview and then Shannon will discuss the financials. Following the prepared remarks, Larry and Shannon will be available to answer your questions.
I will translate for Larry. Before we begin, I would like to remind you that this conference call contains 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 expectations and current market and operating conditions and related events that 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.
Further information regarding these and other risks, uncertainties, or factors is included in the company's filings with the SEC. The company does not undertake any obligation to update any forward-looking statements, except as required in the 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 new Investor Relations website.
Today, we officially launched our new website at ir.gaotu.cn. The old website will no longer be used with the new one. It is now my pleasure to introduce Larry. Larry, please go ahead.
Larry Chen -- Founder, Chairman, and Chief Executive Officer
Thank you, Sandy. Good evening and good morning to you all. Thank you for joining us today on our first-quarter 2021 earnings conference call. In the first quarter, to further improve our service quality, we've further lowered our student-per-tutor ratio to just over 100 for our promotional courses.
Costs related to our promotional-course tutors rose to -- accounted for 20% of our quarterly revenue, up by 5 percentage points sequentially. That combined with miscellaneous expenses totaled RMB 503 million. Additionally, this quarter we spent RMB 352 million on branding activities. Excluding these factors, our traffic acquisition costs were RMB 1.37 billion.
While first-time users contributed a majority of the RMB 1.18 billion in gross premium, which implied that on a lifetime-value basis, we are still profitable. Recently, all of our school segments, including primary, junior, and senior high schools have returned to profitability on a lifetime-value basis and we have witnessed rebounding trends in our conversion, class retention, and student reactivation rates. Last year-end, we've implemented some cost-control measures and activity stayed away from the cash-burning wars for the winter semester student recruitment period. At the same time, we continuously upgraded our products, enhanced our education quality and services, and adjusted our operations to improve our long-term service quality and customer satisfaction.
We have always believed that the core of online education is education, rather than online. Extensive traffic growth no longer works for this industry, while every player had to compete by defining operations. As a company that prioritizes efficiency, we have decided to turn to the power of education and a quality-driven growth. So, in that, we could return to a possible -- profitable growth in the upcoming months.
We will adhere to our long-term philosophy, adhere to our focus on continually improving efficiency and quality, adhere to our highest priority of satisfying each student and the parents we serve, and adhere to extensive investments in our technology and education quality. A major priority for our investment has been on technology and education quality. In the first quarter, our investments in research and development reached a historical high of RMB 365 million. Over the past year, we have recruited a dozen technology experts at the director level or above to enhance our technology across learning scenarios, teaching content, and education services.
We believe these investments will bring us tremendous leverage in terms of bolstering our education quality over the term. In addition, premium instructors are one of the most important strategic resources for an education company. So, we have been also expanding our investments in our tutors and education quality. Since the beginning of this year, we have raised the base compensation for each of our over 1,500 tutors by RMB 500 per month.
We have also established our RMB 5,000 annual travel bond for each of our instructors, tutors, and of course, development professionals so that we can have a better work-life balance. Our core strength has always been our instructors, and this quarter, we ramped up our efforts to recruit and develop tentative instructors at the local level. Moreover, we continue to increase our spending to train tutors and have them improve their academic knowledge and tutoring capabilities through routine subject training and lecturing contexts. Education is one of the biggest factors that affect a person's well-being.
It's a social responsibility and in the end, is about enlightening one life with another life. In the first quarter, third-tier cities and below contributed to 59% of our K-12 enrollments. During the pandemic last year, we donated RMB 20 million worth of winter semester regular price for courses to Wuhan. We also funded a charity project to support poor families in Sujiang, [Inaudible], and is a level behind the children in Shenyang, City of Liaoning by donating numerous courses.
In addition, we established the painters of the stay the scholarship in Shaanxi province and have provided approximately RMB 50 million worth of regular-priced courses to more than 220 outstanding students from eight local high schools. The social impact of online education is significant, profound, and essential to society. We will uphold our original aspiration and the belief about education, shoulder our responsibility in events and social progress, and promoting equal access to education, and dedicate ourselves to bringing quality education resources to more and more families. Now, I will pass the call over to our CFO, Shannon, to walk you through our financial and operational details.
Shannon Shen -- Chief Financial Officer
Thanks, Larry, and thank you, everyone, for joining the call. Now, I will walk you through our operating and financial results for the past quarter and conclude with our outlook for the coming quarter. Please note, our financial data is in RMB terms. Since the second half of last year, we have continued to focus on building up our brand.
Last September, we integrated up our K-12 businesses in the Gaotu brand. This April, we've further integrated up our services in the Gaotu brand, including Gaotu K12 for our K-12 business and Gaotu Professional for our foreign language professional admission and other services. We believe that by bringing off our services into just one brand, Gaotu, we will be able to strengthen the recognition of our company in the market. Over the past few months, we continued to strengthen our investment in improving the quality of teaching services, developing localized teaching, expanding our teaching product portfolio, and upgrading research and development to secure our long-term competitive strength.
The logic of burning cash for traffic and scale doesn't work. With that, we will focus our strategy on caring for our students, continually improving our education quality, and developing more personalized and engaging teaching products. Going forward, we will maintain our focus on our healthy growth and pay more attention on metrics, including product healthiness, cash flow, and overall profitability. For the K-12 spring retention period that just finished, our performance exceeded our expectations.
In the first quarter of 2021, our net revenues increased 50% year over year to 1.9 billion and net revenues from our K-12 courses increased by 62% year over year. This was driven by the continued growth in our student numbers, thanks to our enhanced education quality and brand recognition. Our gross billings were 1.18 trillion. The year-over-year decreases was due to a few factors.
On the one hand, the base last year was quite high due to the COVID-19 pandemic period, where a lot of students signed up for our courses. On the other hand, this winter, we actually adjusted our operations. Paid enrollments, which refer to enrollments priced at or above CNY 99, decreased 0.9% year over year to 767,000. Consistent with the seasonality shown in the first quarter of last year, our enrollment this quarter was still mostly first-time users.
Breaking down our net revenues by business line. For Gaotu K12, net revenues increased by 62% year over year to 1.8 billion and accounted for 94% of group's net revenues. I'd like to highlight our junior high school segment, which actually had a particularly strong quarter. Revenue grew by as high as 118% year over year, thanks to our good quality instructors, a competitive advantage that we have [Inaudible].
For this winter and spring courses products, our interactive scenario design tower over 98% of the curriculum so that our courses are both interesting and effective. Gross billings contributed by Gaotu K12 was 1 billion. Paid course enrollments for Gaotu K12 reached 632,000. Average enrollments per class were 2,300 in the first quarter in 2021 compared with 2,600 in the first quarter last year.
Quarter over quarter, the numbers look flat slightly because we have a wide range of class levels and localized classes to cater to various students' needs. Meanwhile, new instructors are giving courses and gradually growing their class from a smaller size to bigger later. Net revenues from Gaotu Professional grew to 123 million and accounted for 6% of group net revenues. Gross billings contributed by Gaotu Professional were 181 million.
Paid course enrollments for Gaotu Professional hit 135,000. Among the finance-related classes performed well, with its paid enrollments growing 70% year over year. Our cost of revenues increased by 102% year over year to 572 million. The year-over-year growth was mainly due to increases in compensation for instructors and tutors, learning materials, and rental costs, etc.
GAAP gross profit margin decreased to 71%, down from 78% in the same period of 2020. Non-GAAP gross profit margin, which excludes share-based compensation, decreased to 72%, down from 79% in the same period of 2020. The decrease was primarily due to an increase in the number of instructors and tutors to enhance our service level and the personalized experience as well as an increase in compensation for such staff. To better localize our services, we recruited and trained over 50 experienced instructors and content development professionals with local experiences.
This summer, we will launch localized courses for junior and senior high school students in Beijing, Jiangsu, Zhejiang, Hunan, Shanxi, Shandong, etc., and recruit students on provincial levels. In terms of tutoring, we further optimized the quality of our services and fine-tuned our services for pre-class tutoring infotech groups of 30 students each. At the same time, students can be classified according to whether they are first-time users, whether they live on campus, and their relative learning level. Therefore, we can better manage our classes and make sure the student's experience is even better.
Selling expenses increased to about 2.3 billion. Within that, expenses for traffic acquisition were approximately 1.37 billion. Expenses for branding activities were approximately 352 million. And the remaining expenses cover labor, servers, etc.
R&D expenses increased by 267% year over year to 365 million. The increase was primarily due to an increase in the number of course professionals and technology development personnel, as well as an increase in compensation for such staff. We expanded our investments to recruit R&D talent as we look to enhance our overall education quality, especially across learning scenarios, teaching content, and education services. Firstly, based on the massive amount of data that we collect from our courses through in-class quizzes, periodic exams, homework correction, and QA sessions, we can provide instant feedback to our instructors to help them upgrade the pace, difficulty, and content of their courses.
Secondly, with low-latency 5G networks and AI and VR technology, we aim to create a real-time interactive classroom to provide our students with an immersive learning experience. We believe with steady investments in technology will benefit our company and will be something we can leverage from many years to come. G&A expenses increased by 231% to 280 million, mainly due to an increase in G&A headcount and related compensation. G&A net loss was 1,426 million compared with net income of 148 million in the first quarter of 2020.
The loss was mainly due to the continued increase in investments in our brand, instructors, research, and technology, which are all essential to the long-term competitiveness of our business. As of March 31, 2021, we had 2.9 billion of cash and cash equivalents, 2.4 billion of short-term investments, and 527 million of long-term investments. Those summed up to be 5.9 billion. As of March 31, 2021, our deferred revenue balance was 1.9 billion.
Deferred revenue primarily consists of tuition that is collected in yuan. Net operating cash flow for the first quarter of 2021 was 2.1 billion. The outflow was primarily due to higher branding activity expenses related to improving our market share and brand awareness and an increase in compensation, which includes the annual bonus for 2020. The cash outflow to -- pushes long-term assets, totaled 197 million, including around 101 million for Zhengzhou property.
Before I provide our business outlook, please allow me to update, to ensure our growth is substantial and healthy on our own unit economic level and ensure our advertisement are in full compliance with regulations. In the second quarter, we gradually reduced and later completely terminated the traffic acquisition of these performance channels. Meanwhile, we've also stopped engaging new branding contracts, taking into consideration the possible impact of all these short-term operation adjustments on self-lead. We estimate our net revenue for the second quarter of 2021 to be between 2.14 billion and 2.16 billion, representing an increase of 30% to 31% on a year-over-year basis.
That concludes my prepared remarks. Operator, we are now ready to take questions. Thanks.
Questions & Answers:
Operator
We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Mark Li of Citi. Please go ahead.
Mark Li -- Citi -- Analyst
Hi, Larry. Hi, management. Thanks for that presentation. This is Mark Li from Citi.
May I ask given the recent update in our regulation from governments, what do we see is the potential impact on our operations for the rest of the quarters over for the next year? Could you share a bit more color? And also, my second question is for our advertising ROI. Could just share a little bit more color on the ROI in Q1 and what do we see going forward? Thank you.
Shannon Shen -- Chief Financial Officer
Thanks, Mark. For your first question about the regulation impact. So we have been following the openings on regulating all these Gaotu institutions in 2018, and further openings on regulating our office -- institute -- our online office guru institutions issued in 2019, in the past year. And recently, the government has issued regulator guidance on several aspects of online education, including, first, prepaid tuition fee management.
May 21, four departments in Beijing jointly release a guideline listing out specific requirement on the tuition fee collecting in advance, including tuition fee coverage period, advance tuition fee collection timing, and tuition fee monitoring. They provided very detailed guidelines. And second, about advertisement. All companies should follow the law of advertising and the law of -- against -- on fire compensation.
The department also provided a list about what our company should now do in commercials. It's a very detailed list. Also, regulators provided guidelines on teaching accountant course format, courses scheduling, teacher qualifications, homework and student rest timing, etc. So to better implement these regulations, we have proactively activated a cost department compliance team within the company.
This team consists of all senior management teams and we have organized several rounds of meetings, initiate rounds of study on the new regulations. We've taken down noncompliant advertisement and adjusted our homework procedures and adjusted the class schedule to meet the requirement from all of those regulators. And with regard to the instructor qualifications, except for the paper, the certificate of the teacher's qualifications, we also [Inaudible] the teaching qualifications online and from other channels. So on May 21, the same day was the prepaid tuition fee management rule.
The Central Commission of Comprehensively Deepening Reforms launched its 19th meeting. They eventually also approved the opening on reducing burden from homework and after-school training for compulsory education students. That is called [Inaudible]. So we haven't received the specific accountant yet.
Once the opening is published, we will immediately take measures to comply in all levels. So after-school tutoring a -- is part of the education industry, and education especially for K-12 education should focus on the social impact and core values. The regulations provided timely and clearly directions for the industry. We will proactively embrace the policy and take solid actions and closely monitor the following executions.
We believe only when all the companies comply with the government policy at the highest level, the whole industry can achieve a lasting, healthy, and sustainable development.
Larry Chen -- Founder, Chairman, and Chief Executive Officer
[Foreign language]
Sandy Qin -- Investor Relations Director
I want to add several more points. So first point, the demand for premium education, for customized education from students and parents is eternal, always exist. Secondly, the benefits brought by online education at very affordable price will provide a secure for equal access to education. And the third point, the online education is able to collect data with all assets from the students, so it's easier for online education to provide more customized solutions for each student.
So in short, me, personally, I am very optimistic about the future of online education and I believe that as long as we view education with our true hearts, with our consciousness, then I believe this sector will have a very long time and sustainable development.
Shannon Shen -- Chief Financial Officer
And your second question is about the ROI in Q1. So the Q -- the ROI in Q1 is actually lower than normal. And if you can recall, during our last earnings call, we mentioned that we would like to spend less of our customer acquisition budget on traffic acquisition from social platforms and invest more on innovation channels such as livestreaming platforms, [Inaudible], etc. and even offline channels.
Still one of the reasons like our observation is -- and it's actually the traffic acquisition on social platforms actually drags down the ROI level. So this quarter, we gradually reduced the spending. And now, we have completely stopped traffic acquisition on social platforms. So we expect students to come from other channels in the future.
For instance, through our passive branding activities, promotional courses, and free courses. We have accumulated a fairly large student pool. Gaotu K12 brand has improved the brand awareness and the reputation over the past quarters. So which we -- we expect it can grow up the organic traffic that flow to our app and the website.
Second, as for word-of-mouth referrals. We are ramping up our explorations such as adding key referral campaign or providing more coupon or benefits to encourage these referrals. In the future, we will focus more on education accountants to help our students and parents to actually resolve their questions in order to increase trust and our visibility of our brand. We are also starting in localized student recruitment.
We will provide a more differentiated personal lines of services and content to further attract the students to join us. Thanks, Mark.
Mark Li -- Citi -- Analyst
Thank you.
Operator
The next question is from the DS Kim of J.P. Morgan. Please go ahead.
DS Kim -- J.P. Morgan -- Analyst
Hi. Good evening, Mr. Chen and Shannon. Thanks for taking my question.
Well, can I check why and how we saw such a drastic deterioration in building and in enrollment this quarter? I mean, it's particularly surprising because as sales and marketing as you mentioned went up quite a lot to be twice of gross. This quarter wasn't even hurt materially by the regulatory pressure yet. And following question is for the second-quarter guidance. Could you break down the growth in first half of second quarter versus second half to gauge the impact from the change in marketing that you just mentioned, say, like -- and do you think that this termination in traffic costs is temporary or more lingering change, say, into some of the promotional trends? Thank you.
Larry Chen -- Founder, Chairman, and Chief Executive Officer
[Foreign language]
Sandy Qin -- Investor Relations Director
OK. So I will break down the reasons for several points. Firstly, the net revenues of Q1 and Q2 of this year, on a very large level, relies on how much we spent in the second half of 2020, especially last Q4. And also, the gross billings of the first quarter of 202, part of it is also relying on December of last year, how much sales and marketing we spent.
And as you can see last Q4, our gross marketing margin is relatively low. And last December, we actually implemented some cost control on the sales and marketing spending. And that is why if we look in all the FX with Q1, the gross margin goes down slightly.
Larry Chen -- Founder, Chairman, and Chief Executive Officer
[Foreign language]
Sandy Qin -- Investor Relations Director
So I guess the second reason is in the first quarter, within all our sales and marketing channels, the capex, acquisition of some performance channel do account for a pretty high proportion. And because of this year's market competition, the customer acquisition cost of the performance channels this quarter is up by several times compared to the same period of last year, which somehow also caused the change in available selling.
Larry Chen -- Founder, Chairman, and Chief Executive Officer
[Foreign language]
Sandy Qin -- Investor Relations Director
Thirdly, this Q1, for the first time, we started a scout lending activities spending. We believe our spending for these planning activities for this quarter might not produce an immediate significant impact. However, in the long term, it will become an investment in assets. Fourthly, for the first quarter, our R&D expenses also have reached a historical high.
We believe that it will also create long-term leverage. Lastly, for the first quarter, we also extended our recruitment and training for instructors and tutors. Those will also create value for our long term.
Larry Chen -- Founder, Chairman, and Chief Executive Officer
[Foreign language]
Sandy Qin -- Investor Relations Director
Lastly, in March, we very significantly reduced our spending on this traffic acquisition and performance channels. And at this moment, we have completely stopped our spending in traffic acquisitions from the performance channel. On the one hand, we want to be in full compliance and resolution. On the other hand, we really want to return to the essence of education, return to quality building growth. We believe in the next several months, we will see some benefits.
Larry Chen -- Founder, Chairman, and Chief Executive Officer
[Foreign language]
Sandy Qin -- Investor Relations Director
Internally, we are not satisfied with our operating efficiency in the first quarter. Internally, we have done a very comprehensive review and legal action. As of today, with our current size, current brand recognition, and the ways our gathering of so many talents, I believe, in the following days, we will be able to review whatever we have learned, whatever we have observed, and whatever we have absorbed into our operations and it will bring us better efficiency and impact.
Larry Chen -- Founder, Chairman, and Chief Executive Officer
[Foreign language]
Sandy Qin -- Investor Relations Director
As for the sales and marketing budget for the second quarter, there's nothing to do that also relates to the student recruitment size for the spring and summer semester in the second quarter. And it also will affect the revenues of Q3 and Q4. Based on the data we have collected so far, we see operating efficiencies in the second quarter have improved significantly, especially for conversion rate and retention rate. We see some significant positive movement.
So we are positive about the future. And I believe, we definitely want to return to our original goals about the operation and we hope sometimes, in quite a few years, we will see profitable growth.
DS Kim -- J.P. Morgan -- Analyst
Thank you very much, Mr. Chen. Very helpful.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Sandy Qin for closing remarks.
Sandy Qin -- Investor Relations Director
OK. 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, or contact us via email at [email protected] directly. The old email address will continue to be available.
Please feel free to subscribe to our news alert or the quarterly newsletters on the company IR website. Thank you very much.
Operator
[Operator signoff]
Duration: 41 minutes
Call participants:
Sandy Qin -- Investor Relations Director
Larry Chen -- Founder, Chairman, and Chief Executive Officer
Shannon Shen -- Chief Financial Officer
Mark Li -- Citi -- Analyst
DS Kim -- J.P. Morgan -- Analyst
