Ladies and gentlemen, thank you for standing by, and welcome to the Gaotu Techedu Incorporated Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. All participants will be in the listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions.

[Operator Instructions] Please note this event is being recorded on Tuesday, March 08, 2022. I would now like to hand the conference over to your first speaker today, Ms. Sherry Liu, IR Manager of GOTU. Thank you. Please go ahead..

Thank you very much operator. Good evening everyone and thank you for joining us on our fourth quarter and full year 2021 earnings conference call. GOTU's fourth quarter earnings release was distributed earlier and is available on the company's IR website at ir.gotu.cn. On the call with me are Mr.

Larry Chen, GOTU's Founder, Chairman and Chief Executive Officer; and Ms. Shannon Shen, GOTU's 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 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 expectations and the 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 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 GOTU's IR website. It is now my pleasure to introduce Larry. Larry, please go ahead..

Thank you, Sherry. Good evening and good morning to you all. Thank you for joining us on our fourth quarter and full year 2021 earnings conference call. Before I start, I would like to remind everyone that all financial information that I mention later is based in RMB unless otherwise noted.

In the fourth quarter of 2021, our revenue was RMB1.3 billion representing a 14.3 point quarter-over-quarter increase, which brought our revenues for the full year of 2021 to RMB6.6 billion. Our gross billings of this quarter also showed 233.7% quarter-over-quarter increased to RMB1 billion.

During this quarter, net revenues and gross billings from our comprehensive tutoring services, which consists of our business other than K-12 academic subject tutoring services were RMB149.1 million and RMB234.8 million respectively, representing a decent increase in size compared with previous quarters and demonstrate that we are on the right track of gradually shifting our emphasis to business other than K-12 academic subject tutoring services.

It's especially worth noting that after we restructured our business in the third quarter. In the fourth quarter, we achieved considerable profitability in both GAAP and non-GAAP terms as well as positive net of reaching cash flow.

Our net profit was RMB285.9 million and our non-GAAP net profit was RMB324.4 million, which gave us a record high non-GAAP net profit margin of 25.5%. Our net operating cash flow – cash inflow was RMB245.8 million.

All of these indicate that the business restructuring and organizational adjustments we performed in the last quarter delivered significant results confirming that we drove the right strategic direction, which proved effectively in a short period of time. In the meantime, we maintained a strong cash position.

As of December 31, 2021, our cash and cash equivalents, restricted cash, and short-term wealth management investments totaled approximately RMB3.7 billion. Going forward we will continue to focus on online vocational education, professional education and digital products.

We will continue to focus on high operational efficiency as we have always emphasized. We will continue to focus on the effective growth of our business and we will continue to focus on the personal development of our team. Next, I will elaborate on these four points and briefly cover our progress in the quarter.

First in the fourth quarter we further expanded our vocational and the professional education course offerings to better meet the broad range of demand of our existing and the potential students. In November last year, we repositioned ourselves as a learner-centric lifelong learning and service platform, which is our new coverage vision statement.

We now offer a relatively comprehensive range of vocational and professional education categories, including not only children for recruitment and qualification examinations and preparation for a college-level academic exam, but also vocational skills, training, capability improvement, professional counseling, comprehensive training and others covering most types of training courses that cater to a variety of needs of learners of various age groups; educational backgrounds and life and work experience.

In addition to benefiting society by developing more talent, our course offerings also have learners enrich their lives, a multi-category platform both reinforce the branding that we build up in the K-12 space in the vocational and the professional education sector and reimpose the cross setting, upsetting and retention risk.

We honor that the demand for vocational and professional education in China is enormous and is growing rapidly. And we are confident that by leveraging the insights and resources that our operations, products, research and development and tutors have accumulated in the online K-12 business, which have given us a strong competitive advantage.

We will achieve significant growth in the vocational education sector. Second, we have always emphasized the importance of a high operational efficiency since the founding of our company. We have been determined to build a highly efficient, organized and unified team. Our greatest asset is our team, which is also the core engine of our business growth.

After our restructuring in the fourth quarter, our gross margin was 69.7% higher than that of previous two quarters. Our operating margin also reached our record high levels, both our solid testament to the high operational efficiency of our team. Third, we will continue to focus on the effective growth of our business.

We do not pursue meaningless sized expansion. Rather we put a priority on maintaining healthy, stable and sustainable growth before introducing a new cost offering. We carefully analyze a unit economic and profit models.

Before launching a new product, we put ourselves into the shoes of the lender to ensure that we can provide the best quality, the best service and the best user experience to our customers. Finally, we continue to invest heavily in our employees by providing them with ongoing training.

We regularly arrange core competency trainings, including leadership, operations and organizational skills for our business leaders as a part of our efforts to develop [indiscernible] dependantsfor our business.

At the same time, we continue to offer highly competitive compensation by industry standards and continue to maintain high standards for the recruitment, training, ranking and the performance evaluation of our tutors and employees.

Looking back, 2021 was undeniably an eventful year as we went through large scale strategic and organizational adjustments in the wake of our regulatory policy change in the industry. However, within a short period of time, we completed our restructuring and ended the year with a strong quarterly profit.

Looking ahead into 2022, we will continue to comply with government policies, continue to cherish the goal to spread putting our heart into it and trying our effects and continue to leverage the deep roots of our experience in the online education industry and the hard work of our excellent team to bring superior vocational and professional education courses, superior digital products and a better learning experience to more customers to fulfill our recovery mission of making learning better.

Now I will pass the call over to our CFO, Shannon, to walk you through our financial and operational details..

Thank you, Larry, and thank you all for joining our call today. I will now walk you through our operating and financial performance for the fourth quarter and for the full year of 2021. Please note that our financial data I mention later is in RMB terms unless otherwise noted.

We closed fiscal year 2021 with a strong fourth quarter with considerable GAAP and non-GAAP net profit and positive net operating cash flow.

Following the restructuring, which was completed in the third quarter, our new businesses achieved rapid and healthy growth Both gross billings and net revenues generated from our comprehensive tutoring services showed quarter-over-quarter increases, which reflects our promote and business restructuring, strong organizations, solid talent pool, and deep industry experience.

In the future, we will continue to explore new business and remain dedicated to refining our product and services with the goal of offering superior quality courses and services that exceed our students’ expectations. By the end of 2021, we terminated all after-school tutoring services to students from kindergarten through ninth grade.

We would like to send all of our teachers and other related staff for the hard work that they devoted to course delivery and their corporation with the transition. We would like to give our best wishes to them.

And we hope that they will cherish the public welfare nature of education and continue to devote themselves to providing excellent courses and services in the nonprofit institution. Our current strategic focus is on non-degree based vocational and professional education.

According to official data released by the Chinese Ministry of Education, as well as an independent third party, the market size for [indiscernible] based vocational education in China in terms of revenue will be RMB 250.7 billion in 2022. By 2026 it will range RMB 344.5 billion representing a CAGR of 8.3% from 2022 to 2026.

Combined with the demand for some degree-based vocational education for college students, such as preparation for graduate school entrance examinations and the college English test and degree-based vocational education market has substantial hidden opportunities.

Whether the competitive job market means that there is a huge demand for transferable job skills. And everyone whether college students, new graduates, those are in the workforce, or simply students trying to improve their skills, it's looking for reliable and high-quality courses to satisfy various learning needs.

We will personally study user demand, design products that will satisfy the learning needs of most users and offer constructive accountant to create an internet metric of learning tools, promoting the Gaotu brand in the vocational and professional education sector through word-of-mouth referrals.

Now I will share with you our opening data in more detail. Since we terminated afterschool tutoring services for students in compulsory education in the fourth quarter of 2021, and in senior high school in the first quarter of 2022.

I will put the focus on sharing more information about our comprehensive tutoring services, which is our business other than K12 afterschool tutoring services. And present some of our financials on quarter-over-quarter basis to better provide color on the performance of our new strategic focus.

Please note that retroactive adjustments to historical data have also been made to provide a consistent basis of comparison for the financial results. In the fourth quarter, our net revenues increased 40.3% quarter-over-quarter to RMB1.3 billion.

Net revenues contributed by our comprehensive tutoring services increased by 1.4% quarter-over-quarter to RMB149.1 million. Gross billings, the leading indicator for future financial performance increased 233.7% quarter-over-quarter to RMB1 billion.

Gross billings contributed by our comprehensive tutoring services increased by 72.8% quarter-over-quarter to RMB234.8 million. They have shown quarter-over-quarter increase for two consecutive quarters since the second quarter of 2021 up to the fourth quarter.

This shows that we are gradually shifting our strategic focus to business other than K12 after-school children related services. Moving over to our selected financial metrics summary, our cost of revenues decreased by 45.9% quarter-over-quarter and 37.3% year-over-year to RMB386.7 million.

The decrease was mainly due to a decrease in compensation for instructors and tutors as a result of the restructuring in the last quarter, as well as decreases in learning material costs and rental advances. Our gross profit increased 122.1% quarter-over-quarter to RMB887.6 million, which give us a growth profit margin of 69.7%.

Non-GAAP growth profit, which excludes share-based compensation increased 107.9% quarter-over-quarter to RMB908.2, which give us a non-GAAP gross profit margins of 71.3%. The increase was primarily due to decrease of cost of revenue explained earlier.

Operating expenses decreased by 57.5% quarter-over-quarter and 72.5% year-over-year to RMB629.3 million. To break down the operating expenses, selling expenses decreased by 54.9%, quarter-over-quarter, and 79.3% year-over-year to RMB373 million in the fourth quarter.

This was primarily due to a decrease in marketing expenses as a result of the impact of government policies as previously disclosed. And a decrease in the compensation for sales and marketing staff as a result of the restructuring completed in the last quarter.

The selling expenses margin decreases to a record low 29.3%, a sharp decrease compared to previous quarters. At the same time, we are also exploring new customer acquisition strategies, including utilizing livestream e-commerce and short radio platforms.

A multi-channel customer acquisition model could reduce the risk of over dependence on one single means. On the other hand, we will constantly improve our user conversion courses.

Additionally, we will continue to expand our courses offerings to establish our branding in the vocational education sector, and gradually become relying more on customer acquisitions through word-of-mouth referrals. And in this way, lower our customer acquisition cost and the selling expenses margin to pursue sustainable growth.

Research and development expenses decreased by 62.8% quarter-over-quarter and 54.5% year-over-year to RMB125 million. The decrease was primarily due to a decrease in the compensation for research and development staff, as a result of the restructuring completed in the last quarter.

General and administrative expenses decrease by 41.8% quarter-over-quarter and 55.9% year-over-year to RMB95.9 million. The decrease was primarily due to a decrease in the compensation for G&A stuff as a result of the restructuring completed in the last quarter.

With that our income from operations for the first quarter of 2021 was RMB258.3 million, compared with loss from operations of RMB696.1 million in the first quarter of 2020. Our operating margin this quarter reached a record high 20.3%. The sharp increase in op.

margin was primarily due to a decrease in conversation for staff as a result of the restructuring in the third quarter of 2021, as well as decrease in other operating related expenses. Our net profit was RMB285.9 million compared with the net loss of RMB627 million in the fourth quarter of 2020.

Non-GAAP net profit was RMB324.4 million compared is the non-GAAP net loss of RMB554.4 million in the fourth quarter of 2020. It is worth mentioning that our net profit margin and non-GAAP net profit margin, both reached its record high level of 22.4% and 25.5% respectively. Additionally, our net operating cash inflow was RMB245.8 million.

Turning into our balance sheet results. As of December 31, 2021, we have RMB897.1 million cash, cash equivalents currents and restricted cash. And approximately RMB2.8 billion short term investment, which add up to be approximately RMB3.7 billion, sufficient to support our current operating scale and our explorations into new business.

As for our full year results net revenues for 2021 decreased 7.9% year-over-year to RMB6.6 billion. The decrease was mainly due to the session of K-9 academic subject tutoring services, as a result of the impact of government policies. Net revenues from our comprehensive tutoring services were RMB551.1 million.

Gross billings decreased 42.4% year-over-year to RMB5.2 billion. Gross billings from our comprehensive tutoring service was RMB669.7 million. Net loss of 2022 was RMB3.1 billion compared with net loss of RMB1.4 billion in 2020. Non-GAAP net loss of 2021 was RMB2.8, compared with non-GAAP net loss of RMB1.2 billion in 2020.

Considering the uncertainty in the government policies [indiscernible] to our financial conditions, we will now provide the next quarter’s performance guidance for now. This concludes my prepared remarks. Operator, we are now ready for questions. Thank you everyone..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Li with Citi. Please go ahead..

Hey, hi Larry, Shannon and management. Thank you very much for the presentation.

May I ask firstly we understand we terminate the high school tutoring by end of February? How much impact do we expect from this termination? And also could you share a bit more on the key metrics for the vocational and professional education segment such as a margin et cetera? Thank you..

Thanks Mark. So for the high school business termination, we have made an announcement in our February 16th because we are a company registered in Beijing so that we follow local government instruction that the high school policy should – exactly the same with the double deduction policy and the exact impact will be disclosed in our Q1 results.

But in terms of all the restructuring we have completed a business and organizational restructuring in the third quarter and have settled the majority of the payment and expenses. The following termination for the high school business is more natural and are fully prepared. We do not expect to incur additional meaningful payment going forward.

And currently we have a strong cash balance sufficient to support our current business skill. So then – and our current cash balance also supported our flourishing into the new businesses.

And as for more details about the op margin for the vocational education, so there are many categories in the vocational education sector and different category has different characteristics. And the model for cost deliveries are quite different as well, that all results in inconsistency in the level of profit margin.

So our profit margin is also affected by the percent that each category takes up in terms of total revenue. So which means it is now not very stable. So as we are still in the early stage in exploring and inviting stage of our new businesses, we're not able to provide a precise expectation on the profit margin for our vocational businesses.

But there's one thing for sure that we will insist on our operating strategy, which is always to run our business in a effective way. So we will not sacrifice the profitability just for the skill expansion. We will review providing guidance as soon as our business has entered available stage. Hope that address your questions. Thanks..

Thank you..

The next question comes from DS Kim with J. P. Morgan. Please go ahead..

Hi, good evening. Hi Mr. Chen. Hi Shannon. Thanks for taking my question, and by the way congrats on the record hypothesis and the margin this quarter.

I have two quick question on the PATH 4 similar to what Mark just mentioned, but if we think not about the, one of restructuring costs, but in terms of the recurring OpEx runway, operating expense runway from second quarter of this year, how shall we think about it for the rest of the year.

i.e., shall we back OpEx run to be similar to the 4Q that we recorded were maybe down by half or even 80% as a proportionate with the revenue site. What shall we expect on the operating expense – operating expense? That's the first question. Second question if I may, is related to our non-K12 business.

I'm not asking for the guidance per se, but say for 2022 or 2023 next year.

How much of the revenue can we expect roughly, very ballpark figure like up 100% from current rate or 200% any sense of size would be appreciated? And if possible, how will that revenue be made up of a different segment, i.e., vocational and professional education versus digital product versus any new businesses like e-commerce and whatnot? Thank you..

Thanks for your questions. So to address your first question about the OpEx, so because we are running an online education business. So the cost structure for us is very straightforward. It consists of the cost of goods sell, sales and marketing expenses, G&A expenses and R&D expenses.

So in the past, it was always be sales and marketing expenses contributed the most in the OpEx and facing the fierce combination in the past we're kind of like the same with other education companies. Sometimes the sales and marketing expenses contribute like 80% or even 90% over the revenue.

But like going forward especially facing that market professional and vocational education, we are exploring more channels to acquire customers. So – and also going forward we will pursue the effective growth. So ideally we hope that like the expensive level will go back to like the year of 2019 for us.

So to leverage the economy of scale, we still wish our R&D and G&A expenses to be under like 20% of total revenue, which provide us or is enough room to acquire new customer, as well as exploring new product.

But as I just mentioned, everything is still in a very early stage and we still see that like in a PayPal business we have accumulated extensive experience in our cost delivering and refining our product development process. We also have developed a refining R&D platform. So like all the legacies we get from the past will take us to the future.

And also for our business, we still face a certain level of uncertainties. And we do see like in the sub-segment like some of the leading players that have been performing very well.

So that all shows the market has a huge potential, but for us especially the experiencing like all the policy changes and fierce combination in the past it become more clear for us is that we will focus on ourselves and focus on the development of our management team and our employees, and to provide the best product to our customers.

At the same time, keep improving our operating efficiencies. I hope in the near future we can – we can get a healthy and sustainable growth as well as a profitable growth.

And you also mentioned like any color on the future growth, so we will put priorities on maintaining the effective growth, while achieving our positive net profit, given our current operating scale and market size.

We think it is a possible for us to achieve like high double digits or even triple digits revenue growth regarding our new strategic focus. The key is to constantly refine our products to better satisfy user's needs. And also we will provide revenue guidance as long as the policy and the external environment, it stable.

That's like we always do in the past. Thanks..

Thank you so much, Shannon. That's really helpful. If I may follow-up on that earlier part, my question was more about like, after the exit of K12 including high school, how about R&D and G&A fixed coast would look like? For instance fourth quarter, those are about a little over RMB200 million in fourth quarter. Our non-K12 revenue was RMB150 million.

So just wanting to balance that after the exit of K12, shall we have a meaningful step down in a fixed cost further or we would rather focus on, as you mentioned product driven growth opportunity rather than focusing too much on the remaining fixed cost? And that's all my questions. Thank you again for your answer..

Yes. So yes, the question makes a lot of sense. So like for us when running a business we are always trying to find a balance. So we did get legacies and experiences in the past, and that all helped us to grow in the past. And also like all the talents we had in other system we have built up and also assist us to success in the future.

So when we consider the further investment in R&D and G&A, the G&A skill we also need to consider like the top line skill like we can acquire from the market.

And also like we always mentioned, like probably at the first stage we will still maintain a certain level of investment in R&D to support to keep refining our teaching product then going forward at the revenue grow regularly.

We believe the percentage of R&D and G&A expenses can become lower, which we call it the economy of scale that also provide us with the profitability..

Thank you. That makes a lot of sense..

Yes. How fast we can get there, but still we need to maintain a level of investment, especially in the R&D expenses..

Thank you very much..

This concludes our question and answer session. I would like to turn the conference back over to Sherry Liu for closing remarks..

Thank you very much 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 ir.gaotu.cn directly. Please feel free to subscribe to our news alert or quarterly investor newsletter on the company's IR website.

Thank you very much again for your time. Have a great night..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..