Ladies and gentlemen, thank you for standing by, and welcome to the Gaotu Techedu Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. All participants will be in 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, February 28, 2023. I would now like to hand the conference over to your first speaker today, Ms. Sherry Liu, IR Manager of Gaotu. Thank you. Please go ahead..

Thank you very much, operator. Good evening, everyone. Thank you very much for joining us on Gaotu's fourth quarter and fiscal year 2022 earnings conference call. Gaotu's earnings release the fourth quarter and the full fiscal year was published earlier today and is available on the company's IR website at ir.gaotu.cn.

Joining the call with me tonight from Gaotu's senior management is Ms. Shannon Shen, Gaotu's Chief Financial Officer. Shannon will first read the prepared remarks on behalf of Larry Chen, Gaotu's Founder, Chairman and Chief Executive Officer, and then Shannon will discuss the financials in more detail.

Following the prepared remarks, Shannon will be available for the Q&A session. Before we begin, I'd like to remind you that this conference call will contain forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based upon management's current beliefs and expectations as well as the current market and operating conditions, and they involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control and may cause the company's actual results, performance or achievements to differ materially from those contained in any forward-looking statements.

Further information regarding these and other risks is included in the company's public filings with the US SEC. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. During today's call, management will also discuss certain non-GAAP measures for comparison purposes only.

For a definition of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please refer to our fourth quarter and fiscal year 2022 earnings release published earlier today. 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 Shannon, who will provide this quarter's general business highlights on behalf of Larry. Shannon, please..

learning services, and educational content and digitalized learning products.

Learning services are comprised of educational services for college students and adults, non-academic tutoring services and other traditional learning services, whereas educational content and digitalized learning products primarily are supportive smart learning tools that serve as supplements to learning services.

I will now elaborate on the progress we have made in each of these business lines during the quarter. First, learning services accounted for over 90% of net revenues in the quarter. Breaking it down, close to 60% of revenues came from non-academic tutoring courses and other traditional tutoring courses.

Our non-academic student services consist of intelligent, creatively-presented courses modules that includes school [indiscernible] holistic progress by improving students' overall learning capabilities, nurturing their comprehensive development, working their interest and passion and motivating them to be continuously inquisitive.

[Paid course] (ph) enrollments for our non-academic courses in the fourth quarter achieved triple digit quarter-over-quarter growth. We constantly upgrade and refine the curriculum design of our non-academic tutoring courses with the intention of improving students' integrated development, which led to higher retention rate during the quarter.

In December last year, the government has published clear policy guidelines. Going forward, we will constantly improve our retention rates and customer satisfaction by engineering courses products that exceed the expectations of students and parents, while ensuring compliance.

Non-academic tutoring and other traditional courses exhibit a salient seasonality.

For online businesses, such as ourselves, the second and fourth quarter are normally course retention seasons, during which gross billings are mostly contributed by existing students renewing their courses, and typically accounts for a higher percentage of annual gross billings than the first and third quarters.

As our businesses continued to gain traction and our retention rates rebounded, gross billings from our non-academic tutoring services increased roughly 90% quarter-over-quarter, creating a strong foundation for the future revenue growth.

Aside from the above mentioned, the other crucial component to learning services is educational services for college students and adults, which nearly doubled in revenue compared to the same period of last year, constituting more than 30% of revenues for the quarter.

Our core business focus for this sector includes postgraduate entrance exam prep services, financial certificate prep services, civil services exam prep services and overseas-related services.

Among these [indiscernible], the postgraduate entrance exam of private business recorded a quarter-over-quarter revenue increase of roughly 23% and celebrated its first profitable quarter.

Lastly, the remainder of our less than 10% revenues came from educational content and digital life learning products, which mainly include intelligent learning products for students, such as smart textbooks and learning apps. These complementary products are designed as supplements to our course products to fulfill students' various learning needs.

Next, I will present our financials in detailed numbers. Our cost of revenues this quarter was RMB159.3 million. Our gross profit increased 7.5% quarter-over-quarter to RMB470.3 million. Gross profit margin was 74.7%, representing a 504-basis point increase year-over-year and a 255-basis point increase quarter-over-quarter.

Non-GAAP gross profit increased 7.9% quarter-over-quarter to RMB473.9 million and non-GAAP gross profit margin was 75.3%. The increase in gross profit margin was largely due to higher course delivery efficiency. Operating expenses decreased 23.2% year-over-year and 4.6% quarter-over-quarter to RMB483.6 million. Breaking it down.

Selling expenses decreased 22.3% year-over-year and 14% quarter-over-quarter to RMB289.8 million, accounting for 46% of net revenues, which was 9.5 percentage points lower than in the third quarter. The quarter-over-quarter decrease in selling expenses can be explained by two factors.

First, in terms of customer acquisition, we are constantly seeking out more innovative cost-effective channels with better conversion rates to precisely target high-intense customers with strong willingness to pay.

On one hand, we have set up our own [matrix] (ph) accounts on short video platforms to attract high-quality users with premium content creation, while continuously performing [customer-made] (ph) activation and retention of private traffic. Some of our courses have achieved breakthroughs on live-streaming platform.

For instance, one of our English instructors has ranked among the Top 5 of the Douyin virtual life product channel or [indiscernible] for multi times.

On the other hand, we have been exploring more offline channels, offering more tailored trail courses to better serve students in local regions and cities and targeting prospective students with high granularity.

At the same time, after over a year of providing consistently high-standard services and the superior quality courses content, we are gradually extrapolating our brand and reputation among college students and adults. We have significantly reduced selling expenses through greater reliance on word-of-mouth referrals.

Looking ahead, we will continue to enhance our conversion rate and improve our selling expenses ROI through focusing on college students as our target customer base to drive sustainable long-term growth.

Second, from a seasonality standpoint, the fourth quarter is now the most efficient season for new student enrollments from non-academic tutoring service and other traditional services. As such, we allocated lower marketing expenses during the quarter considering operational efficiency.

Moving on, research and development expenses decreased 10.9% year-over-year to RMB111.4 million, accounting for 17.7% of net revenues. If we exclude the negative effects of some one-off expenses, R&D expenses remained flat with moderate quarter-over-quarter declines.

General and administrative expenses decreased 14.1% year-over-year to RMB82.4 million, accounting for 13.1% of revenues. The sequential slight increase in G&A expenses were the combined effects of unrealized exchange losses due to large and expected exchange rate fluctuations and some one-off expenses.

Loss from operations for the quarter was RMB13.2 million. Non-GAAP income from operations was RMB3.5 million. Non-GAAP operating margin was 0.6%. For total other income, its sequential increase, to a large extent, was due to gains from wealth management instruments and value-added tax-related benefits.

Further, due to greater possibilities for future profitability, we also recognized an appropriate amount of income tax benefit resulting from deferred tax assets. During the quarter, net income was RMB70.6 million. Non-GAAP net income was RMB87.4 million. Our net operating cash inflow was RMB476.7 million.

Moving on to our full fiscal year results in 2022. Our loss from operations was RMB118.1 million. Non-GAAP income from operations was RMB4.6 million. Net income for the year was RMB13.2 million. Non-GAAP net income was RMB135.8 million. Our net operating cash inflow was RMB54.5 million. Turning to our balance sheet.

As of December 31, 2022, we had RMB819.9 million in cash, cash equivalents and restricted cash and RMB2.9 billion in short-term investments, totaling approximately RMB3.7 billion.

As of December 31, 2022, our deferred revenue balance was RMB969.3 million, which primarily consists of tuition received in advance, and a large proportion of [bids] (ph) will be recognized as revenues within one to two quarters.

Additionally, our Founder, Chairman and CEO, Larry Chen, has increased his shareholding by an aggregate of 3.6 million ADS in 2022, highlighting management's firm confidence in the future development of our company.

Before I provide our business outlook for the next quarter, please allow me to remind everyone that this contains forward-looking statements, which involve risks and uncertainties, which are beyond our control and could cause the actual results to differ materially from our predictions.

Based on our current estimates, total net revenues for the first quarter of 2023 are expected to be between RMB686 million and RMB706 million, representing a decrease of 5.3% to 2.6% on a year-over-year basis. This concludes my prepared remarks. Operator, we are now ready for the QA section. Thanks to everyone for listening..

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from [indiscernible]. Please go ahead..

Okay, thanks. First, today congratulations on astounding financial results on Q4 and the whole fiscal year. Thanks for taking my question. I have two questions for management.

The first one is how will the product structure be adjusted in the next fiscal year? And my second question is, what are the quarter-on-quarter changes in spring enrollments of each courses? And what are the changes compared with the same period on last spring semester? Thanks..

Thanks for your questions.

So, first, for the product structure, for the revenue structure, we foresee it to maintain sustainable in the first quarter in 2023, which means the learning services will still be the largest revenue contributor that it will contribute over 90% of the revenues, and the remainder of the 10% will contributed by the digital products.

And within the 90% of the learning services revenues, we foresee the learning services from college students and adult business to contribute around 30% of the total revenues. And the rest will contributed by our non-academic tutoring services and other traditional learning services.

And for your second question, like the quarter-over-quarter enrollments in the spring semester, because our business is fairly different between 2023 and 2022 -- if we can recall that in the first quarter in 2022, we announced a public release that we kind of like seized our tutoring services for high school section.

And like in the first quarter in 2023, some of the traditional learning services will be picked up again. So, the enrollments is not that comparable between these two quarters. But going forward, we will be providing more specific instructions on the enrollments if the business develop in a more stable stage. Thanks..

Okay. Thank you..

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

Thank you, operator, and thank you everyone for joining the call today. If you have any further questions, please don't hesitate to contact our Investor Relations Department or our management via e-mail at ir@gaotu.cn directly. You're also welcome to subscribe to our news alert on the company's IR website.

You're also cordially invited to join Larry's live-streaming section on Douyin right now. Thank you very much again for your time. Have a great night..

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