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Operator: Hello, ladies and gentlemen, thank you for standing by, and welcome to the Gaotu Techedu First Quarter 2025 Earnings Conference Call. At this time all participants will be in listen-only mode. [Operator Instructions] Today’s conference call is being recorded. I would now like to turn the conference over to your first speaker today, Ms. Catherine Chen, Head of Investor Relations. Please go ahead, Catherine.

Catherine Chen: Thank you, operator. Good evening, everyone. Thank you for joining Gaotu’s first quarter and 2025 earnings conference call. My name is Catherine and I’ll help host the earnings call today. Gaotu’s earnings release for the quarter was distributed earlier and is available on the company’s IR website at ir.gaotu.cn, as well as through PR newswire services. Joining the call with me tonight from Gaotu senior management is Mr. Larry Chen, Gaotu’s Founder, Chairman and Chief Executive Officer, and Ms. Shannon Shen, Gaotu’s Chief Financial Officer. Larry will first provide the business highlights for the quarter, and then afterwards, Shannon will discuss our financial performance in more detail. Following their prepared remarks, we’ll open the floor to questions from analysts.

Before we begin, I like to remind you that this conference call will contain forward-looking statements made under the Safe Harbor provisions of 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 this and other risks is included in the company’s public 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. During today’s call, management will also discuss certain non-GAAP measures for comparison purpose only. For a definition of non-GAAP financial measures and reconciliation of GAAP to non-GAAP financial results, please refer to our first quarter 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 live on Gaotu’s IR website. It is now my pleasure to introduce our Founder, Chairman and Chief Executive Officer, Larry. Larry, please.

Larry Chen: Good evening, and good morning, everyone. Thank you for joining us on Gaotu’s first quarter of fiscal year 2025 earnings conference call. I would like to take this opportunity to express my gratitude to each of you for your interest in and support of Gaotu. Before I start, I would like to remind everyone that all financial figures discussed today are quoted in RMB, less stated otherwise. Over the past year, we have consistently executed on our strategic priorities, providing meaningful progress across product innovation, organizational development, technological advancement, and operational excellence. These efforts have built a transformative business expansion, while also comprehensively enhancing our organizational capabilities.

As we entered 2025, we sustained our robust growth momentum, delivering results that surpassed market expectations across revenue, profitability, user growth, and organizational efficiency. Notably, our substantial profit realization represents the culture’s most significant milestone, validating the effectiveness of our efforts to enhance of regional leverage and improve cost efficiency. In the first quarter of 2025, our revenue increased by about 58% year-over- year to nearly 1.5 billion exceeding the upper end of items. Operating profit reached 34.8 million with a net income of 124.0 million. On a non-GAAP basis, net income reached 137.3 million with the net margin of 9.2%. These financial results not only reflect strong top-line momentum, but also underscore our disciplined approach to high-quality growth and marginal improvement.

In addition, we consistently prioritize the shareholder returns and remain committed to creating long-term value for our shareholders. During the quarter, we educated approximately 136 million to our share repurchase program under the current buyback plan, the accumulated total amount of stock buybacks has reached 460 million. The pure mutative number of ADS we purchased represents 9.0% of our total outstanding shares as of March 31st, 2025, serving as an effective level to enhance shareholder returns. As of the same date, we had the cash and cash equivalent, fixed cash and the short-term and long-term investment, totaling about 3.5 billion, underpinning our future strategic initiatives and sustainable growth. These robust financial achievements are the direct outcome of the strategic investments and the transformative initiatives we have pursued over the past three years, particularly last year.

The investment in products, users, and offline businesses are now becoming key engines, driving revenue growth, operational efficiency, and profitability. By embedding AI deeply into our educational products and linear services, we are accelerating the formation of a technology-empowered value loop in education. This has led to tangible advancements in user experience and learning outcomes, laying a solid foundation for the company’s field growth and profitability. Next, I would like to share our strategic progress and the key highlights this quarter from four dimensions. First, we remain deeply user-centric, driving both the scale and values through continuous product innovation. Our traditional lending services continue continued growth steadily with strong performance in both student enrollment and user satisfaction.

Really, on this foundation, we have broadened our offerings to address diverse user needs from online and offline academic tutoring services to breakthrough in personalized learning solutions for high school students, as well as expand the services for college students and study abroad consulting and test prep. Now these to being closely aligned with users’ genuine needs with new products are steadily amplifying our net worth effects and economies of scale as they evolve into a replicable growth model that effectively elevates our brand awareness and the market penetration. Second, we are fully leveraging our core advantages as a digital native education company, continuously advancing the wider brand application and innovation of AI technology across multiple aspects.

On the product brand, we capitalize on the appeal of our star instructors and successfully launched the Learn Spoken English with [indiscernible] program, a ground booking upgrade that reimagined the learning experience by seamlessly integrating flagship instructor IP with AI technology. By combining the magnetic influence of renowned instructors with AI instructive capabilities, we deliver the highly immersive and personalized learning experience that greatly boosted gender motivation and engagement. On the service side, we have leveraged our outstanding tutors’ best practices to train our AI models and develop our intended diagnostic function. This feature helps tutors identify student learning gaps and generate personalized learning reports, enhancing service efficiency and precision while enabling the scalable replication of high-quality learning services.

The tool has already demonstrated a tangible impacts in real world learning settings. Paving the way for cross-domain and multi-grade expansion. In operations, we are harnessing AI to empower, refine the user traffic operations, sharpen segmentation, and implement payers’ strategies. By matching the optimal operating models to the characteristics of each user segment, we are improving both traffic value and workforce productivity. The broad adoption of AI technology has also considered workflow optimization across departments, further enhancing internal management efficiency and amplifying operational leverage. At the strategic level, we continue to medically advance our AI transformation initiative. We have deepened our forward-looking positioning and decision-making capabilities in the AI field, initiating joint AI, laboratory development, and collaboration with top universities and leading pilots.

Through these partnerships, we are pioneering a bridge through innovations that balance technological advancement with practical implementation across diverse operational applications. We aim to drive educational innovations through AI, building a more intelligent, personalized, and scalable educational ecosystem that delivers the premium learning experience for users while creating sustainable growth and enduring value for the company. Third, we continue to invest in building long-term competitiveness by enhancing organizational efficiency and strengthening our talent pipeline. Outstanding teachers are at the core of our educational edge. We are committed to advancing talent acquisition, professional development, and incentive mechanisms while taking an equal emphasis on teaching excellence and service orientation.

While leveraging AI tools, we continuously enhance employee satisfaction and reduce repetitive work, while allowing teachers to fully convey the human touch and care that are essential to execute. We truly believe that a warm, well-structured teaching force is a bedrock for delivery and consistent educational quality, and elevating user satisfaction. Fourth, we remain dedicated to social responsibility while enhancing shareholder value over the long run. Rewarding shareholders has always been a central part of our developmental strategy. Building on our previous buyback plan, our Board and the Directors today approved a new share repurchase program of up to US$100 million over the next three years, effective upon completion of the current program.

Moving forward, we will continue to optimize our capital structure and enhance shareholder returns while ensuring educate funding and the strategic today’s Gaotu as the result of sustained investment, continuous depositions, and unwavering commitment. Throughout this journey, we have navigated the market cycles and made pivotal strategic choices, always guided by our fundamental belief in the value of education and our dedication to future innovation. Looking ahead, we are confident that while sustaining profitable growth, we possess the resources and capabilities to invest in the future, push boundaries, and unleash innovations. Thank you very much, everyone. This is the end of my prepared remarks. Now I will pass the call over to our CFO, Shannon to walk you through the quarter’s financial and operational details.

Shannon Shen: 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 fiscal year 2025. We started the year strongly with a high-quality performance in the first quarter, achieving profitable at scale while maintaining robust growth momentum. Revenue maintained its rapid growth trajectory, making the third consecutive quarter with year-over-year growth exceeding 50%, and the core business has demonstrated a stronger growth momentum. Through strategic enhancement of customer value, efficient task management, and refined operational improvements, we have fully unleashed our operational leverage, providing robust support for continued profit growth.

Our operating margin and net income margin rose by 10.5 and 9.6 percentage points on an annual basis, further affirming the continuous improvement of our profit quality. Meanwhile, deferred revenue amounted to over 1.4 billion, representing a year-over-year increase of 4.0%, offering a solid foundation for sustained revenue growth in the subsequent quarters. Driven by the dynamic evolution of customer needs, we have strategically invested in improving product quality, expanding our user base, and delivering more personalized and diversified learning solutions in prior years. With effective execution of these strategies, our revenue structure has become more growth-oriented and sustainable. Notably, our portfolio of non-academic children services, which generated superior customer lifetime value, has emerged as a significant growth engine alongside our traditional learning services.

Next, let me walk you through the progress we made during this quarter. Learning services contributed over 95% of net revenues. Breaking it down, more than 85% of total revenues came from net academic tutoring services and our traditional learning services, representing over 80% year-over-year growth. Combined, gross earnings from these two segments increased by approximately 30% year-over-year. Our new initiatives focused on online and offline academic tutoring services delivered exceptional growth this quarter, cross-fillings in this segment jumped nearly 90% year-over-year with cross-fillings from new enrollments surging by more than triple-digits. Net revenues grew at a triple-digit rate year-over-year, accounting for over 35% of total revenues.

This business has achieved triple-digit growth in both revenue and gross billing from new enrollments for four consecutive quarters. Importantly, as enrollments expanded and educational product quality improved, this segment achieved profitability. We remain focused on users’ needs, continue refining curricula with actionable educational insights, while optimizing both our course delivery and service responsiveness. We take our programming courses as an example, where we achieved a retention rate exceeding 90%, a compelling testament to the strong synergy between our value proposition and user trust. Our traditional learning services maintain healthy growth with revenue growing over 35% year-over-year, with the steady increase in student developments.

Our diverse offerings have increasingly mapped the needs of different user groups, offering a positive word of mouth referral that has established a solid groundwork for sustained growth, particularly the proportion of new enrollments acquired through referrals and private channels, increased markedly this quarter, further strengthening brand recognition and market penetration. This progress also highlights our dedicated efforts and accomplishments in driving user expansion and creating long-term value. The other crucial component of our learning services is educational services for college students and adults. Each segment contributed 10% of total revenues this quarter, and it’s net operating cash inflow increased by over 84 year-over-year.

These results speak volumes about the success of our strategic recalibration and resource optimization. Specifically, educational services for college students recorded high double-digit year-over-year growth in both revenue and gross billings. By equipping tutors with AI tools, we have substantially improved response timeless and students’ engagement quality, resulting in daily improvements in user satisfaction, and reinforcing our market leadership in the online learning services for college student sector. Additionally, our AI-power English learning program, learn both English with Daniel Wu, has already become profitable within a short time following its launch, serving as another endorsement for the commercial viability of integrity, content innovation with AI technology, and providing a proven model for future initiatives.

The education business exhibits distinct seasonality, closely coupled with users’ learning behavior. Consequently, the gross billings varies across different quarters. Gross billings generally consist of two main components, new enrollments and retentions. In the first quarter of 2025, gross billings are primarily driven by new enrollments, whereas in the fourth quarter of prior year, retentions contributed significantly more than new enrollments. Although the quarter-on-quarter gross billing figures showed a decline in absolute terms, the comparable amount for new enrollments reflect a healthy growth trend, both quarter-on-quarter and year-on-year on an apples-to-apples basis. This solid performance also laid a strong foundation for growth in retentions in the second quarter.

From an operational leverage perspective, our general and administrative expenses combined with research and development expenses remain stable in this quarter. While ensuring critical investments in AI, educational products, innovation, and core technology infrastructure, we are continuously leveraging AI tools to drive efficiencies. This allows us to eliminate low-value, repetitive tasks, enhance employee satisfaction, and reallocate time and resources toward more creative work. Looking ahead, we expect sustained revenue growth in subsequent quarters, projecting that G&A and R&D expenses will remain relatively scalable, thereby enhancing the positive impact of operating leverage on our margin profile and overall financial performance. I will now present our financials in more detail.

Our cost of revenue this quarter was 452.5 million. Gross profit increased 64.1% year-over-year to over 1.0 billion with a gross margin of 69.7%. The year-over-year decrease in gross margin was primarily due to changes in our product mix. Total operating expenses during the quarter increased 33.5% year-over-year to 1.0 billion. Breaking it down, selling expenses increased 40.1% year-over-year, this quarter to 709.4 million, accounting for 47.5% of net revenues. Research and development expenses decreased 0.8% year-over-year to approximately 150.4 million, accounting for 10.1% of net revenues. General and administrative expenses increased 53.3% year-over-year to 145.9 million, accounting for 9.8% of net revenue. Income from operations was 34.8 million, and operating margin was 2.3%.

Non-GAAP income from operations was 48.1 million, and non-GAAP operating margin was 3.2%. Net income was 124.0 million, and net income margin was 8.3%. GAAP net income. Non-GAAP net income was 137.3 million, and non-GAAP net income margin was 9.2%. Our net operating cash outflow was 477.2 million. Now turning to our balance sheet, as of March 31st, 2025, we held over 1.0 billion in cash, cash equivalence, and restricted cash, along with more than 1.4 billion in short-term investments and 995.9 million in long-term investments. This comes to a total of about 3.5 billion. As of March 31st, 2025, our default revenue balance was over 1.4 billion, primarily consists of tuition received year advance. As of May, 14th, 2025, we have repurchased an aggregate of around 22.3 million ADS for approximately RMB 460 million.

Today, our Board of Directors also approved a new share repurchase program of up to US$100 million for a period of 36 months, which will take effect upon the completion of the existing ones. The new repurchase program is based on management’s long-term confidence in the company’s stable operations, profit growth, and sustained healthy operating cash flow. We’ll continue to execute share buybacks according to the Board of Directors’ guidance to create a long-term value for our shareholders. Before I provide our business outlook for the next quarter, please allow me to remind everyone that this contains forward-looking statements, which include risks and uncertainties that 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 second quarter of 2025 are expected to be between 1,298 million and 1,380 million, representing an increase of 28.5% to 3.5% on a year-over-year basis. This concludes my prepared remarks. Operator, we are now ready for the Q&A section. Thank you, everyone, for listening.

Operator: [Operator Instructions] For the benefit of all participants on today’s call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. For the sake of clarity and order, please ask one question at a time. Management will respond and then feel free to follow up with your next question. Our first question comes from Crystal Li from CMS.

Crystal Li : Thanks, management for taking my questions, and congratulations on the very strong results. We saw you achieve a very solid margin in the first quarter. May we know more about the drivers behind this margin extension, and could you give us some color on your full-year guidance? Thank you.

Operator: Pardon me, ladies and gentlemen, it appears we have lost the connection to our speakers. Please stand by while we reconnect. We thank you for your patience. Pardon me, everybody. We are now rejoined with the speakers. You may now go ahead.

Shannon Shen: Sorry. We ran into some technical issues, and, thanks, Crystal for your question, and let me rephrase your question. And first is like the margin proportion of the first quarter. And the second question was the guidance for the whole year. Is that right?

Crystal Li: Yes, that’s correct. Thank you.

Shannon Shen: Yeah, yeah. Thanks. Thanks, Crystal. Also, before discussing the annual guidance, it’s necessary to first explain the seasonality and it helps to better understand the underlying data and build up more confidence in our business. So education business has distinct seasonality from the perspective of growth billings, the first and the third quarter at peak new enrollments registration seasons with cross billings mainly from new students. And at the same time, the second and fourth quarters are supported by both new enrollments and retentions. So cross-billings in the second and fourth quarters are significantly higher than those in the first and third quarter, and also affected by like spring festival and other holidays.

The course schedule individual quarters may be reduced or increased by one or two sessions, which in return affects the revenue recognition. So it is highly recommended to analysis the revenue growth rate by the first and the second half of the year respectively, instead of just looking into one single quarter. Taking the first half of 2025 as an example, our revenue in the first quarter was approximately 1.5 billion. And the upper end of the revenue guidance for the second quarter is 1.3 billion. Taken together, this represents a 44% year-on-year increase compared to the first half of last year, especially considering that the college students and the adult business it’s still in the adjusting cycle, and it shows a decrease year-over-year on revenue side.

This means that the growth rate for our non-academic tutoring business and the traditional business is at a high double-digit level, which far exceeds the industry average. And in terms of the profits, the first and fourth quarters are key stages for concentrated profitable release — of profitability release, which is closely related to the revenue recognition and the new enrollment recruitment cycles. And regarding our gross savings in the first quarter, I also want to add more color. Like we had 2.16 billion gross savings generated in Q4 2024 last year. Retentions accounted for a considerable propulsion of these 2.16 billion. If we make apple-to-apple comparison, both the quarter-on-quarter and year-on-year growth rate from costing perspective in Q1 2025 are remarkable.

Based on the high base retention in Q4 2024, there will be a relatively concentrated rebound period before the start of classes in Q1 this year, which offsets part of the growth billings growth rate in the first quarter. Also, a decrease in college students and adults partially impact the increase rate as well. While core business remains strong. When all these factors are considered, our gross billing performance in the first quarter is very strong, with core business still growing at nearly 40% and even higher before rebound. So, it is also important to emphasize that the improvement in our teaching quality is consistent. The application of AI technology has enabled us to do better in terms of the timeliness, accuracy, personalized and more diversified educational products.

So, our retention rate, especially for the new student retention rate, and refund rate are continuously improving. So looking at the whole year, our user base has reached a new level, which will support the achievement of our growth targets for 2025, and the layout of our offline business over the past years will also begin to bear fruit and become an important part of the growth engine. Our product innovation and customer acquisition development in the academic business have formed a good reputation and have a strong award of most referrals. The growth rate has exceeded 100% for four consecutive quarters in the past. So this momentum will also continue, we’ll achieve an industry-leading growth rate in 2025. And in terms of the profit guidance, we are continuously improving profit quality in several aspects.

The first is the continuous improvement in the quality of teaching products and the services, leading to the sustained improvement of key metrics such as retention rate and conversion rate, et cetera. The second is the construction of high-quality product customer acquisition channels to optimize customer acquisition efficiency. And the third is to make full use of investments in AI technology to improve operational efficiency, strengthen operating leverage, and enhance our employee satisfaction, and this also partially address your question about the proportion of the profitability in the first quarter. So the margin in the first quarter also contributed by the higher customer acquisition efficiency as well as the operating leverage. So we expect that the profitability of each quarter in 2025 will improve significantly compared with the same period last year, and ultimately drive the overall fulfillment of the annual bottom line targets.

Thanks, Crystal.

Crystal Li: Thank you. That’s very clear.

Operator: The next question comes from Elsie Chang from CLSA. Please go ahead.

Elsie Chang: Thank you, management. Thank you for taking my question, and congratulations on the strong growth momentum and also the profitability. I have a question related to the sector demand side. So we know that we are now facing a relatively weak cycle, and but we also know that education demand, large more resilience. But I would also be interested to check that do you observe any changes on the human side, compared to like maybe, one year ago? And is there any changes on the parents’ preference in terms of like the course format or like the course content, et cetera? Thank you.

Shannon Shen: Thanks, Elsie. This is a really good question, because like, we are a customer oriented company and we always focus on the demand from our customers, and indeed we have observed several changes in students and parents along with the change of macroeconomics, parents’ expectations, their achieved in education concepts and also the technological involvements. So, first, the demand for children’s comprehensive development has been continuously increasing beyond traditional academic performance. Parents are gradually increasing investments in their children’s all-around growings, including like critical thinking, problem solving abilities, responsibility, teamwork, and like especially their physical and mental health.

Gaotu has keenly captured this trend and continues to actively promote high-quality content through multi-scenario coverage of like online and offline channels. We create immersive learning experience for students to cultivate their creativity, collaboration, and critical thinking, et cetera, and also our non-academic training gradually becoming a core driver of business growth. And these all drive from the change of the demand from our customer. From an operational metrics perspective, the retention rate of non-academic tutoring has continued to rise, particularly in our like coding business when the rate exceeded 90% in the first quarter, as I just mentioned in my prepared remarks. Second, parents and students have shown increasing acceptance of technology-driven educational solutions, further promoting us to accelerate the deep integration of AI technology with teaching scenarios, and we saw like in a lot of social medias, that parents started to prepare some small sessions for their children by those AI tools.

We also innovated us about our new initiatives in our educational product, and also empowered by AI, we have significantly improved the timeliness of teachers’ responses and the quality of integrations with students in enhancing their satisfaction, and now, like the time we respond to the student’s spontaneous request is much more short than before. Third, the demand for more personalized education among students and parents has gradually increased. We saw some demand rising in some one-on-one session, et cetera, because it’s more personalized and more diversified. However, we also observe that parents’ pursuit and recognition of high-quality education resources remain constant, which means, particularly for excellent teachers and premium teaching content with the sense and always something always not changing for the parents and the students, and they’re all what we are constantly building for.

Thanks Elsie. Thank you. It’s very clear.

Operator: The next question comes from Eunice Liu from Goldman Sachs.

Eunice Liu: Good evening, Larry, and Shannon. Thanks for taking my question and congrats on further results. My question is on the operating cash flow. I noticed that the operating cash flow this quarter was negative and was more than twice its level for the first quarter last year. So could management elaborate on the reason behind? Thank you.

Shannon Shen : Thanks. This is also a very good question, and thanks for diving into these details. And so regarding the increase in operating cash outflow in the first quarter compared to the same period of last year, so, this is primarily due to the payment of 2024 annual bonuses and incremental labor costs in the first quarter. As our business scale, the number of our teachers has correspondingly increased as well. But like the cash we invested in employees in the first quarter, we’ll leverage and contribute larger cash inflow in the following quarters. And based on our efficiency improvements and profit enhancements, we expect the operating cash inflow of 2025 to be at least 3x that of the full-year of 2024 lease implies that we will be having a net operating cash inflow of over US$100 million this year.

This is also the source of confidence for the board and management to additionally approve an extra US$100 million share repurchase plan today. So we sent shareholders and investors for the long-term support, and we will continue to create greater value for shareholders. So, leveraging the positive cash flow we expect to generate this year, we’ll do a better job on this task. Thanks.

Operator: As there are no further questions now I’d like to turn the call back over to the company for closing remarks.

Catherine Chen: Operator, thank you everyone for joining the conference today. If you have any further questions, please don’t hesitate to contact our investor relations department or our management via email. At ir@gaotu.cn directly. You are also welcome to subscribe to our news alert on the company IR website. Thank you very much again for your time. Have a great time.

Operator: This concludes today’s conference call. You may now disconnect your line. Thank you.