Gaotu(GOTU) - 2023 Q3 - Quarterly Report

Financial Highlights Gaotu achieved significant year-over-year growth in Q2 and H1 2023, with substantial increases in net revenues, gross billings, and a strong turnaround to profitability Second Quarter 2023 Performance In the second quarter of 2023, Gaotu achieved significant year-over-year growth across key financial metrics. Net revenues increased by 30.7%, and gross billings grew by 44.2%. The company successfully turned from a loss to a profit, with operating income reaching RMB 43.3 million and net income reaching RMB 56.2 million, marking substantial turnarounds from the same period in 2022. Net operating cash inflow also saw a robust increase of 207.6% Key Financial Metrics - Q2 2023 | Financial Metric | Q2 2022 (RMB) | Q2 2023 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Net Revenues | 537.8 million | 703.1 million | +30.7% | | Gross Billings | 611.7 million | 882.3 million | +44.2% | | Income from Operations | (60.5 million) | 43.3 million | +171.6% | | Net Income | (49.8 million) | 56.2 million | +212.8% | | Net Operating Cash Inflow | 93.8 million | 288.5 million | +207.6% | First Half 2023 Performance For the first six months of 2023, Gaotu demonstrated strong performance with an 11.7% increase in net revenues and a 52.9% surge in gross billings. Profitability improved dramatically, with operating income reaching RMB 138.5 million, a 492.9% year-over-year increase. Net income for the period was RMB 170.0 million, a significant rise from RMB 3.9 million in the first half of 2022 Key Financial Metrics - H1 2023 | Financial Metric | H1 2022 (RMB) | H1 2023 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Net Revenues | 1,262.4 million | 1,410.4 million | +11.7% | | Gross Billings | 929.8 million | 1,421.3 million | +52.9% | | Income from Operations | (35.2 million) | 138.5 million | +492.9% | | Net Income | 3.9 million | 170.0 million | +4,249.3% | Management Commentary Management highlights the success of the "effective growth" strategy, leading to profitability, improved operational efficiency, and continued investment in talent and AI CEO's Remarks The CEO, Larry Xiangdong Chen, highlighted the success of the "effective growth" strategy, which led to substantial growth in gross billings and the third consecutive quarter of profitability. He emphasized the company's commitment to investing in talent, refining educational content through AI, and improving teaching quality, which has created a flywheel effect for customer acquisition and strengthened their competitive edge - The company achieved its third consecutive quarter of profitability and generated a significant positive net operating cash flow of RMB 288.5 million[6] - Gaotu is ramping up investments in talent, educational content, and AI technology to improve teaching quality and learning efficiency[6] - The company's mission of "making learning better" and its commitment to technological innovation and educational quality remain unchanged[7] CFO's Remarks The CFO, Shannon Shen, noted that the business achieved profitability with robust top-line growth, demonstrating increasing operating leverage. She pointed out that operating expenses as a percentage of revenue decreased by about 14 percentage points year-over-year, and the net income margin improved to 8.0%. The CFO attributed the strong performance to a resilient business model and continuous improvements in customer acquisition and operational efficiency - Net revenues grew 30.7% YoY to RMB 703.1 million, and gross billings increased 44.2% YoY to RMB 882.3 million[8] - Operating expenses as a percentage of revenue decreased by approximately 14 percentage points compared to Q2 2022[8] - The company has enhanced its autonomy over customer acquisition by exploring more proprietary channels[8] Detailed Financial Analysis (Q2 2023) A detailed analysis of Q2 2023 reveals robust revenue growth, improved gross margins, controlled operating expenses, and a significant return to net income and positive operating cash flow Revenue and Gross Profit Net revenues for Q2 2023 increased by 30.7% to RMB 703.1 million, driven by strong growth in gross billings from improved customer acquisition. Cost of revenues rose by 15.3% due to higher labor and material costs. Consequently, gross profit grew by 37.3% to RMB 518.7 million, with the gross profit margin improving to 73.8% from 70.2% in the prior year - Net revenues increased by 30.7% YoY to RMB 703.1 million, mainly due to the large growth of gross billings[10] - Cost of revenues increased by 15.3% to RMB 184.4 million, primarily due to higher labor costs for instructors and tutors[11] Gross Profit and Margin | Metric | Q2 2022 (RMB) | Q2 2023 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Gross Profit | 377.8 million | 518.7 million | +37.3% | | Gross Margin | 70.2% | 73.8% | +3.6 p.p. | | Non-GAAP Gross Profit | 396.4 million | 522.3 million | +31.8% | | Non-GAAP Gross Margin | 73.7% | 74.3% | +0.6 p.p. | Operating Expenses Total operating expenses for Q2 2023 increased by 8.5% to RMB 475.4 million. This was primarily driven by a rise in selling expenses for marketing and branding activities. However, both research and development expenses and general and administrative expenses saw year-over-year decreases Operating Expenses Breakdown | Expense Category | Q2 2022 (RMB) | Q2 2023 (RMB) | | :--- | :--- | :--- | | Selling Expenses | 269.0 million | 324.1 million | | Research and Development | 103.9 million | 98.4 million | | General and Administrative | 65.4 million | 52.9 million | | Total Operating Expenses | 438.3 million | 475.4 million | Profitability The company achieved a significant turnaround in profitability in Q2 2023, reporting an income from operations of RMB 43.3 million compared to a loss of RMB 60.5 million in Q2 2022. Net income was RMB 56.2 million, a reversal from a net loss of RMB 49.8 million in the prior-year period. Basic and diluted net income per ADS were both RMB 0.21 Profitability Metrics | Profitability Metric | Q2 2022 (RMB) | Q2 2023 (RMB) | | :--- | :--- | :--- | | Income from Operations | (60.5 million) | 43.3 million | | Non-GAAP Income from Operations | (10.0 million) | 50.3 million | | Net Income | (49.8 million) | 56.2 million | | Non-GAAP Net Income | 0.6 million | 63.2 million | - Basic and diluted net income per ADS were both RMB 0.21 in Q2 2023[19] Financial Position and Cash Flow Gaotu generated a strong net operating cash inflow of RMB 288.5 million in Q2 2023, a substantial increase from the previous year, primarily due to higher gross billings. The company maintained a robust financial position with a total of RMB 3,742.1 million in cash, cash equivalents, restricted cash, and investments as of June 30, 2023 - Net operating cash inflow in Q2 2023 was RMB 288.5 million, primarily due to the increase of gross billings[19] - As of June 30, 2023, the company held a total of RMB 3,742.1 million in cash, cash equivalents, restricted cash, short-term and long-term investments[19] Business Outlook The company provides positive guidance for Q3 2023, forecasting continued strong year-over-year revenue growth Third Quarter 2023 Guidance The company provided a positive outlook for the third quarter of 2023, forecasting continued strong year-over-year revenue growth - For the third quarter of 2023, total net revenues are expected to be between RMB 728 million and RMB 748 million[20] - This forecast represents a year-over-year increase of 20.1% to 23.4%[20] Consolidated Financial Statements The consolidated financial statements show an improved financial position with increased assets and equity, strong Q2 profitability, and transparent reconciliation of non-GAAP measures Consolidated Balance Sheets As of June 30, 2023, Gaotu's total assets stood at RMB 5,032.0 million, a slight increase from RMB 4,876.2 million at the end of 2022. Total liabilities decreased to RMB 1,671.5 million, while total shareholders' equity grew to RMB 3,360.5 million, indicating an improved financial position Consolidated Balance Sheet Summary | Balance Sheet Item (in thousands RMB) | Dec 31, 2022 | June 30, 2023 | | :--- | :--- | :--- | | Cash, Cash Equivalents & Investments | 3,743,775 | 3,742,100 | | Total Current Assets | 4,166,477 | 4,237,774 | | Total Assets | 4,876,175 | 5,032,044 | | Total Current Liabilities | 1,609,222 | 1,416,200 | | Total Liabilities | 1,780,346 | 1,671,511 | | Total Shareholders' Equity | 3,095,829 | 3,360,533 | Consolidated Statements of Operations The consolidated statements of operations detail the company's financial performance for the three and six-month periods ending June 30, 2023. For the second quarter, the company reported net revenues of RMB 703.1 million and a net income of RMB 56.2 million, a significant improvement from the net loss of RMB 49.8 million in the same period of 2022 Consolidated Statements of Operations Summary | P&L Item (Q2, in thousands RMB) | 2022 | 2023 | | :--- | :--- | :--- | | Net Revenues | 537,799 | 703,094 | | Gross Profit | 377,795 | 518,714 | | (Loss)/Income from Operations | (60,493) | 43,311 | | Net (Loss)/Income | (49,809) | 56,161 | Reconciliation of GAAP to Non-GAAP Measures This section provides a reconciliation of GAAP to non-GAAP financial measures by excluding share-based compensation expenses. For Q2 2023, share-based compensation of RMB 7.0 million was added back to GAAP operating income and net income to arrive at their respective non-GAAP figures GAAP to Non-GAAP Reconciliation - Q2 2023 | Q2 2023 Reconciliation (in thousands RMB) | GAAP Figure | Share-based Compensation | Non-GAAP Figure | | :--- | :--- | :--- | :--- | | Gross Profit | 518,714 | 3,585 | 522,299 | | Income from Operations | 43,311 | 6,998 | 50,309 | | Net Income | 56,161 | 6,998 | 63,159 |