GSX Techedu Inc. (GSX) Q1 2022 Earnings Call Transcript

GSX Techedu Inc. (GSX)
Q1 2022 Earnings Call
Jun 06, 2022, 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 Gaotu Techedu Inc. first quarter 2022 earnings conference call. [Operator instructions] Please note, today's event is being recorded on Monday, June 6th, 2022. I would now like to hand the conference over to your first speaker today, Ms.

Sherry Liu, IR manager to Gaotu. Thank you, and please go ahead.

Sherry Liu -- Investor Relations Manager

Thank you very much, operator. Good evening, everyone, and thank you for joining us on our first quarter 2020 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 founder, chairman, and chief executive officer; and Ms. Shannon Shen, data's chief financial officer. Larry will give a general business overview for the quarter, and then Ms. Shannon will discuss the financial.

Following their remarks, Larry and Shannon will be available for the Q&A session. I will translate for Larry. Before I 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.

Forward-looking statements are based upon management's current beliefs and expectations as well as the current market and operating conditions as 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 -- Founder, Chairman, and Chief Executive Officer

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 mentioned 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 have remained profitable for two consecutive quarters since we began our business restructuring. In this quarter, our net revenues were RMB 724.6 million, and our gross billings were RMB 318.1 million, to present the basis of comparison. If we only look at our comparable businesses, which are professional education for college students and adults, vocational education, STEAM education, and digital educational products.

The net revenues of our compatible 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 RMB 53.7 million and RMB 92.5 million, respectively, indicating that we have achieved effective growth. Furthermore, our capital positive -- our capital position remains strong. As of March 31st, 2025 -- and '22, we had a total of approximately RMB 3.2 million -- sorry, RMB 3.2 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 assets.

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 applications, and we will continue to develop and invest in our four core businesses, which are vocational 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 last quarter.

Its net revenue 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 a program in tutoring businesses, which grew over 10 times year over year in terms of gross billing. 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 existing students upgraded and modified courses that satisfy related government policy fulfill the diverse and multidimensional learning demand of students, and to be used a true learner-centric lifelong learning and service platform.

Second, in terms of enhancing our product quality, we believe that now is the best time to accumulate know-how challenge 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 and reflecting our emphasis on the importance of R&D in 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 focusing on customer value proposition and 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 toward 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 set 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 downs, 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 find companies that have sustained for over 10 years, and only a selected few companies can become long-lasting organizations. Success belongs to the optimistic who feel prepared to transform, who are eager to innovate, who have faith, and who persevere through the challenges regardless of how the strongly the environment changes. We will stay true to our original aspiration to education and that our love to education.

We firmly believe that as long as we slow down and process while accumulating ticket variances and educate, 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. May we overcome the pandemic experience 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 -- Chief Financial Officer

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 their early development phases, 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 20th, 2022, China's top legislature passed the mandate vocational decision law of the People's Republic of China at the 31st session of the 13th National People's Congress. The law has taken effect in May 1st, 2022. It has confirmed for the first time that vocational education is of equal importance as general education, and it allocates for a higher public 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 add 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 RMB 724.6 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. Stock bearings this quarter decreased 68.4% quarter over quarter and 73.1% year over year to RMB 318.1 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 for [Inaudible] adjust our service accordingly.

In the meantime, we will continue to offer policy committed services to high school students and college students. Further, our cost of revenue this quarter decreased 62.7% year over year to RMB 212.9 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 RMB 511.7 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 RMB 530 million and non-GAAP gross profit margin was 73.1%. Operating expenses decreased by 83.1% year over year to RMB 486.4 million. To break down the operating expenses, selling expenses decreased by 87.6% year over year to RMB 284.2 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 expand our course offerings to build a learning platform across multiple categories to activate our branding, new vocational and professional education sectors and gradually become more reliant on customer acquisitions through foremost referrals. 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 RMB 123.3 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 factor to continuously enhance return on investment and realized R&D efficiency improvement. General and administrative expenses decreased by 63.7% year over year to RMB 78.9 million. With that, our net income from operations for the first quarter of 2022 was RMB 25.3 million compared with loss from operations of RMB 1.5 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 sizable profit for two consecutive quarters. Our net income was RMB 53.7 million, compared with the net loss of RMB 1.4 billion in the first quarter of 2021. Non-GAAP net income was RMB 92.5 million.

Our net income margin and non-GAAP net income margin rate, 7.4% and 28%. We are pleased to be able to continue to achieve effective growth this quarter. Additionally, our net operating cash flow was RMB 481.3 million, representing a significant improvement compared with that of the same period of last year. Turning to our balance sheet.

As of March 31st, 2022, we had RMB 979.8 million cash, cash equivalent and restricted cash, and RMB 2.2 billion short-term investments, which totaled approximately RMB 3.2 billion or enough to support our current operating scale and our explorations into new businesses. Further, as of March 31st, 2022, our deferred revenue balance was RMB 599.7 million, which primarily consists of tuition fee loan. 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 projections. Based on our current estimates, total net revenue for the second quarter of 2022, are expected to be between RMB 438 million and RMB 458 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.

Questions & Answers:

Operator

Thank you. [Operator instructions] Today's first question comes from Mark Li with Citi. Please go ahead.

Mark Li -- Citi -- Analyst

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 RMB 438 million to RMB 468 million. revenue. May I know a rough breakdown for the revenue, especially for the four core segments that we may bring going forward? Thank you.

Shannon Shen -- Chief Financial Officer

Thanks, Mark. So regarding the second quarter guidance, we haven't provided the details and break down that into the four core sections. And as everyone has noticed that on our earnings release, we have combined other business, and we didn't kind of like separate them into the four core 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 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 -- Citi -- Analyst

Got it. My 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 would be helpful.

Shannon Shen -- Chief Financial Officer

Yes. So this is kind of like our second quarter after the transformation of our new business, and we are still making gratifying progress, 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 categories, like our STEAM education of finance-related examination training or civil servant 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 -- Citi -- Analyst

Got it. Very helpful. Thank you.

Shannon Shen -- Chief Financial Officer

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 -- Investor Relations Manager

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 email at ir.gaotu.cn directly. You're also welcome to subscribe to our newsletter and quarterly investor newsletters on the company's IR website. Thank you very much again for your time.

Have a great night.

Shannon Shen -- Chief Financial Officer

Thanks.

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Sherry Liu -- Investor Relations Manager

Larry Chen -- Founder, Chairman, and Chief Executive Officer

Shannon Shen -- Chief Financial Officer

Mark Li -- Citi -- Analyst

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