Galto TechEdu reports strong Q2 performance with 37.6% revenue growth and 50.5% reduction in net loss, driven by AI-focused innovations and improved operational efficiency.

OPERATOR - (00:01:46)

Hello ladies and gentlemen. Thank you for standing by and welcome to the GAL2 TechEdu Inc. Second quarter 2025 earnings conference call. At this time, all participants are in listen only mode. After management's remarks, there will be a question and answer session. 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 - Head of Investor Relations - (00:02:19)

Thank you. Good evening everyone. Thank you for joining Gaotu second quarter 2025 earnings conference call. My name is Kathleen and I'll help post the earnings call today. Gaotun'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 Newsware 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'd like to remind you that this conference call will contain forward looking statements made under the safe harbor provision of the US Private Security Litigation Reform act of 1995. This forward looking statement 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 achievement 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 filing 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 purpose only. For a definition of non GAAP financial measures and representation of GAAP to non GAAP financial results, please refer to our second 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 available on Gaotu's IR website. It is now my pleasure to introduce our Founder, Chairman and Chief Executive Officer Larry Larry, please.

Larry Chen - Founder, Chairman, and Chief Executive Officer - (00:04:55)

Good evening and good morning everyone. Thank you for joining us on Gaotu's second 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 that all financial figures discussed today are quoted ermb.net stated otherwise. Over the past quarter we maintained solid growth momentum in our core business while harnessing the power of AI to enhance our service models, foster product innovation and strengthen our organizational capabilities. Together, these efforts are shaping a clear growth trajectory and sustainable competitive advantages. Upholding our user centric approach, we consistently upgraded our educational products, improved teaching quality and refined service delivery. Our strategic prioritization and efficient resource education have significantly increased per capita productivity. As we progress through 2025, we are steadily elevating our scale of reaching efficiency and user satisfaction, underscoring the resilience and discipline the execution driving our business high quality growth. In the second quarter our revenue increased by 37.6% year over year to nearly 1.4 billion, with gross variants up by 36.2% to approximately 2.3 billion. Thanks to our refined operational execution and improved organizational efficiency, we measured our net loss by 50.5% year over year. On a non GAAP basis, we achieved a net operating cash inflow of 588.8 million this quarter, an increase of 202.6 million from the same period last year. These results reflect our ability to sustain solid growth momentum while strengthening our regional quality and sharpening our competitive edge. Now I'd like to elaborate on this culture's operating highlights on four fronts. First and foremost, we are deepening our investment in AI advancing our all with AI Always AI strategy to upgrade both our teaching models and technology infrastructure. These efforts aim to empower personalized learning at scale and create long term value. Innovation is part of our DNA and has been a core growth driver since day one, propelling our consistent exploration and the development of emerging technologies, particularly forward looking AI initiatives. We believe AI driven education solutions can make personalized adaptive learning scalable allowing every learner to enjoy a more efficient, individualized and high quality learning experience. Guided by this strategic vision, we have reshaped our previous dual teacher model into an advanced tri teacher model integrating instructors, tutors and AI companions. This new model deeply embeds AI throughout the teaching and course content development process, transforming how education is delivered. For instructors, AI offers data driven feedback and paint God co insight to enhance teaching precedent and course quality. For tutors, AI tracks individual student progress and pinpoint knowledge gaps, increasing tutors efficiency and enabling them to deliver more professional personalized learning solutions. For curriculum developers, AI accelerates analysis of learning pathways, optimizing course design and content innovation we continue to increase our investment in AI centering technological innovation at our engine fostered by a strong, talent based and robust ecosystem. More specifically, we will further advance AI innovations in educational use cases, cultivate cross disciplinary teams between both education and AI experts and integrate our content, data and partner resources to create a highly efficient, effective and sustainable AI empowered learning paradigm. This strategy we also lay the groundwork for high quality long term growth and reinforce our commitment to delivering lasting value while preparing additional innovation. We are also embedding AI technology across our entire corporate operations and management processes as our core engine for boosting organizational productivity. By streamlining procedures and unlocking data driven insights, we are maximizing operational efficiency and enhancing strategic decision making. Furthermore, AI empowers every GOTO employee to transcend boundaries, fostering both professional growth and personal fulfillment. Together, we are building long term market advantages and a more dynamic organization positioned for sustainable growth. Second, with our user centric approach firmly in mind, we continue to explore new products and develop innovative models to meet a wide range of learning scenarios and individual needs. We have successfully introduced a series of novel products such as the Gauss Reading App, the Legend of Gao Xiaotou and Mao Love Learning, all designed to spark interest in learning, enhance the learning experience and boost student engagement through ongoing exploration, exploration and market validation. We continually strive to find the optimal product market fit driving expansion across our business. We also launched our AI Flash Learning model which uses advanced algorithms to break down knowledge into granular units connected by dynamic knowledge graphics. This approach enables scenario based bite size and interactive learning that measurably improves efficiency and creates more flexible personalized learning experiences. Third, we remain laser focused on building a lifelong learning services platform that is accessible and enjoyable. Our comprehensive product portfolio spans non academic tutoring services, traditional learning services, educational services for college students and adults, and overseas study programs both online and offline. We also offer students a selection of large class, small class and one on one sessions for maximum flexibility. Our broad user coverage and robust product matrix comprehensively address diverse learning needs, strengthening got to the brand awareness and reputation through word of mouth referrals while also driving cross category conversions. By consistently amplifying user engagement and long term educational value, we are steadily building an enduring competitive moat in the education industry. Fourth, we remain committed to fulfilling our social responsibilities, aligning long term shareholder value with broader societal impact to enhance shareholder returns. As of August 25, 2025, we have allocated a total of nearly 557 million to repurchase approximately 25 million ADS a strong testament to our persistent focus on and long term confidence in creating shareholder value. Moreover, through the GAO2 foundation, we have partnered with top tier universities to establish Career Dream Basis for college students, a one stop career support system encompassing curated internship opportunities, employment grants, career mentorship programs and professional development workshops. This end to end career accelerator not only empowers young talents but also demonstrates our commitment to creating both commercial and social value. With a focus on healthy growth at the heart of everything we do, I remain confident in Gaotu's future trajectory. Our diverse educational product portfolio, rapidly evolving AI technology capabilities, solid financial foundation and highly cohesive and effective team position us for continued innovation and success. Our goal is to deliver a best in class learning experience to our users while creating long term shareholder value and advancing both our social impact and commercial success. Thank you very much everyone. This concludes my prepared remarks. I will now pass the call over to our CFO Shannon to walk you through this quarter's financial and operational details.

Shannon Shen - Chief Financial Officer - (00:16:19)

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 second quarter of fiscal year 2025. In this quarter we remained focused on advancing our healthy growth strategy, creating solid high quality growth momentum. Net revenues reach nearly 1.4 billion, exceeding the upper end of our guidance by 5.4%. Gas billings grew by 36.2% year over year, outpacing last quarter's growth rate by 14.4 percentage points. In addition to our top line growth. Loss from operations and net loss narrowed by 48.0% and 49.7% respectively, reflecting continued gains in operational efficiency and outstanding resource allocation. Deferred revenue increased by 38.9% year over year to about 2.2 billion, providing a solid foundation for sustained future growth. We maintain our ample cash position with cash cash equivalents, restricted cash and short term and long term Investments totaling over 3.8 billion as of June 30, 2025. Excluding the impact of share buybacks, our cash position increased by 135.6 million compared. To a year ago. Supported by consistent investments in enhancing user experience, course and service quality and organizational capabilities. The profitability and operational quality of our operations. Core established business continued to strengthen. In our ongoing efforts to boost operating leverage and efficiency. AI and other cutting edge technologies are. Increasingly playing a crucial role in the refinement of operations, reducing operating expenses as. A percentage of Net revenue by 31.6 percentage points compared to the same period last year. To capitalize on the peak student demand during the summer period. We typically allocate key resources such as teacher recruitment, team training and customer acquisition channels, while in allowance there will be approximately three to six month gap between marketing investment and revenue recognition. We recommend using the ratio of gross billings to margin investment as a more accurate indicator of customer acquisition efficiency for the online business. This quarter we not only effectively captured and converted high sediment demand to drive gross billing growth, but also achieved a. 1.7% year over year reduction in selling. Expenses and an increase of 38.6% in selling expenses. ROI resulting in ROI reaching its highest level. Over the past four years. Simultaneously, GNA expenses and R and D expenses decreased year over year for the second consecutive quarter. As a percentage of net revenues, the ratio fell by 8.0 percentage points year over year this quarter, reflecting effective and growing economies of scale. Through process optimization and data driven decision. Making, we have further enhanced group overhead efficiency, laying a strong groundwork for sustained profitability improvements going forward. Next, an overview of this quarter's progress by business Segment Learning services contributed over 95% of net revenues. Breaking it down over 85% of total revenues came from the academic tutoring services and the other traditional learning services, representing an increase of 50% year over year. Combined, gross savings from these two segments grew by over 40% year over year. Our new initiatives focused on academic tutoring services in both online and offline sightings delivered strong growth this quarter. Gross billings were up by over 100% year over year, while net revenues from this segment recorded three digit growth, contributing nearly 40% of total revenues. This also marked the fifth consecutive quarter. Of this three digit achievement. By further optimizing operational processes and teaching services quality, we boosted student retention rate for the spring semester with new enrollment student retention rate in a climbing trend year over year. In addition, we actively expanded into emerging traffic platforms and introduced innovative products to optimize our customer acquisition mechanisms, enhancing acquisition efficiency. Our traditional learning services maintained its healthy. Growth trajectory, while the early timing of. The Spring Festival led to a year over year decline in the number of. Class sessions delivered this quarter. Higher enrollment resulted in a 12.1% year. Over year increase in net revenues for the quarter, contributing to nearly 25% growth in total revenues for the first half of 2025. We remain focused on localizing our curriculum to better align course content and services, a strategy that has already been validated by positive outcomes from user acquisition through service delivery. Building on this early success, we plan. To duplicate this model across multiple cities and regions. According to primary statistics, the number of students from Gaotu's class of 2025 admitted to the top two universities in China reached 267, marking five consecutive years of growth. To date, 1,118 Gaotu students have been. Admitted to the top two leading universities. A strong testament to our competitiveness across educational products, teaching quality and learning services. Additionally, our referral rate for the second quarter surged by 75% compared to a year ago. The other crucial component of our learning services is educational services for college students and adults. In the second quarter, this segment contributed over 10% of total revenues. Loss from operations from this segment significantly narrowed year over year, with operating cash flow turning positive, demonstrating our strong strategic execution, effective resource planning, and increasing team productivity. Cost base from educational services for college students increased by more than 50% year over year, with operating cash flow growing over four times. On top of ongoing improvements in our online products quality and operating efficiency, we steadily expanded our offline product portfolio and our online merge offline modules to cover a wider range of learning scenarios and needs. It is worth noting that Gaotu J Center, our flagship offline service platform for college students, reach full enrollment capacity within just three months of its launch, affirming both our regional brand influence and. This business model's commercial viability. I will now present our financials in more detail. Our cost of revenue this quarter was 472.8 million. Gross profit increased 31.6% year over year to 916.5 million, with a gross margin of 66.0%. The year over year decrease in gross. Margin was primarily due to changes in our product mix. Total operating expenses during the quarter decreased 0.2% year over year to approximately 1.2 billion. Breaking it down Selling expenses decreased 1.7% year over year this quarter to 828.9 million, accounting for 59.1% of net revenues. Research and development expenses decreased 8.6% year over year to approximately 148.2 million, accounting. For 10.7% of net revenues. General and administrative expenses increased 15.7% year over year to approximately 189.3 million, accounting for 13.6% of net revenues. Loss from operations was 241.9 million and operating loss margin was 17.4%. Net GAAP loss from operations was 232.7 million. I'm sorry, I'm a bit under the. Weather today, so I might need to. Drink water from time to time. Sorry for the inconvenience. I will continue and then GAAP operating. Net loss margin was 16.7%. Net loss was 217.1 million N. Net loss margin was 15.5%, NAND GAAP net loss was 206.8 million and NGAAP net. Loss margin was 14.9%. Our net operating cash inflow was 588.8 million. Now turning to our balance sheet, as of June 30, 2025, we held 841.4 million in cash, cash equivalents and restricted cash along with 2.6 billion in short term investments and 387.5 million in long term investments. This comes to a total of over 3.8 billion. As of June 30, 2025, our default revenue balance was around 2.2 billion, primarily. Consisting of tuition received in the loans. As of August 25, 2025, they repurchased an aggregate of around 25 million ADS on the open market for approximately 557 million in RMB. 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 from the third quarter of 2025. Are expected to be between 1,528 million and 1,578 million, representing an increase of 28.9% to 3.6% on a year over year basis. This concludes my prepared remarks. Operator, we are now ready for the QA section. Thank you everyone for listening. Thank you.

OPERATOR - (00:28:51)

We will now begin the question and Answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two 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. At this time, we will pause momentarily to assemble our roster. The first question comes from Elsie Sheng with clsa. Please go ahead.

Elsie Sheng - Analyst - (00:29:53)

Thank you Management for taking my question and also congratulation on continuing to deliver strong growth. I have a question on the Offline Center Development because although right now the offline is a relatively small portion of our revenue, but it's potential room, there is potential room to grow in the future. So I would like to know our latest update especially on the offline business and do you have any like operating matrix or indicator to share like the ramp up and the future growth target? Thank you.

Larry Chen - Founder, Chairman, and Chief Executive Officer - (00:30:37)

Thanks Elsie for your question and for. interest in our new offline initiatives. Our offline business is experiencing strong momentum. And has quickly become a new growth engine for us. In the second quarter, offline learning center. Revenue grew by more than 20% on. A year over year basis and has. Already contributed over 5% of gross savings this quarter. So then the reason behind that is first on the customer side we are. Leveraging the unique advantage of in person. Interaction to build a deeper trust with students and parents in a more direct way. So by precisely matching localized and personalized learning needs and fostering high frequency engagement. We are significantly strengthening our customer loyalty. And secondly from the educational product perspective. Leveraging the meticulously refined online content. There's no need for the offline learning centers to build up the content from scratch. So the offline learning centers are able. To extend vertically on localization and personalization. Speed up iteration and improve their content quality quickly. And third on brand awareness and headquarter support. Go to had a strong brand recognition. Enhances customer trust and attracts high quality talent. We have the ability to provide critical. Faculty support for our online operations in their early stages. We are also integrating some online private. Traffic with offline channels to meet diverse. Student needs and it's also a sound. Support for offline business to grow at the beginning stage. In addition, headquarters has been able to invest in digital infrastructure to improve the quality and efficiency of our offline operations. So we already saw the trend that. In certain cities, especially for those cities and regions we already entered after two. To three years operations, we are seeing a virtuous cycle. If we have strong teaching and high. Quality infrastructure and content there, they all. Drive positive word of mouth referrals and are able to lead into a steady improving retention rates. And that's one of the reasons in the second quarter the growth things in our offline new initiative grow so fast. So the last and foremost a highly efficient and professional team was assembled in the past two years, providing a strong. Foundation for the advancement of our offline operations. Leaders in each city are highly sophisticated, senior in experience, they are innovative and proactive. This gives us strong confidence in the. scalability and sustainability of our business. So the cities they already entered and the learning centers were already opened. Like all the numbers have been cited. In the past quarter. Overall our offline business is continuously validating. This business model and at the same time, its development enriches our product mix. That enables us to serve increasingly diverse learning needs of our students. So that basically means if students have. A demand of online learning, they can choose our online services. And if a student wanted more personalized. Or a person in person interaction, they. Can also choose an offline learning. So it kind of like unleashes our product metrics. So we look forward to the future. That our offline business will bring more students and more customer satisfaction to the group. Thanks Elsie. Hope that address your question.

Elsie Sheng - Analyst - (00:34:38)

Yeah, it's very clear and congratulations again.

Larry Chen - Founder, Chairman, and Chief Executive Officer - (00:34:41)

Thank you.

OPERATOR - (00:34:46)

Your next question comes from Crystal Lee with cms. Please go ahead.

Crystal Lee - Analyst - (00:34:54)

Okay, thanks. Thanks. Larry, Shannon and Catherine, congratulations on this strong result. I have two questions here. One is for the summer enrollment, could you share more color on that and maybe the industry insights? And my second question is how should. We look at the full year growth.

Larry Chen - Founder, Chairman, and Chief Executive Officer - (00:35:15)

Outlook given your strong first half and third quarter guidance? Thank you. Thanks Crystal. Yeah, and summer is very important for. The whole academical year. So as the summer enrollment season draws to a close and it is almost. Closed by the end of this month, we are very glad to share that our overall performance has successfully exceeded expectations and probably you can tell from the. Guidance they provided for the next quarter. So the biggest contributor is the improvement of teaching quality. The retention rate, a core indicator that. Directly reflects customer regulation and product satisfaction. Delivered an outstanding performance this summer as I just mentioned in my prepared remarks. So compared to both our own historical levels and the industry average, retention has been continuously improved. And what surprises us more is that. We saw the new feeding retention rate keep improving. That also help with our customer acquisition efficiencies. So from the perspective of operational efficiency. Specifically, our ROI in the second quarter improved from 1.99 in the same period last year to 2.775 this year. This means an increase of 38.6% reflecting. A significant setup in efficiency. And as I just mentioned in my prepared remarks that the absolute number of our source marketing expenses actually decreased on. Year over year basis. But our costly billings still shows over 36% year over year increase. So that's suggesting the positive trend will continue. And we also have the confidence in Q3 that our ROI for sales marketing. Will further improve on year over year basis. So beyond the refinement of teaching quality, ROI gains also reflect our multiple prolonged. Efforts on customer acquisition, ongoing solutions of diversified channels, our long term investment in referrals and private traffic, and also systematic. Enhancement of organizational capabilities. But both of the efforts are inseparable from the deep empowerment of our AI technology. Our AI strategy is crystal clear as. Larry just mentioned, Always AI and always AI with the patient focused on the value chain of the whole customer journey. So on the student side we are. Able to build up a three teacher. Model adding to the dual teacher model. We have a leading instructor, we have. A supporting tutor and also we have an AI instructor. The three combined guider can deliver comprehensive full cycle learning support. And on the teacher support side AI takes on repetitive tasks freeing our teachers from those repetitive tasks and they can focus more on their core educational value like sparking curiosity and shaping characters of students. So this in turn continuously enhance our. Teachers professional well being and personal satisfaction. Actually in the summer and in the. Peak season we can actually reduce the. Working hours in the peak season. That's a big step. And on the operational side AI is optimizing efficiency across the entire value chain. This includes faster customer service response through AI assistant interactions like automatic Q and a more precise user profiling for targeted operations and intelligent optimizing of operational processes. And all these initiatives not only drive cost reduction and efficiency gains, but also provide a solid technology foundation for sustainable business growth. And leveraging all the efforts we are. Able to lay a solid foundation for the whole use growth. We set an initial goal at the. Beginning of this year to target around 30% year over year revenue growth. And if they look at the total. Numbers we have got together, our total revenue growth rate for the first half of this year stood at around 47.3% and the upper limit of the Q3 revenue guidance we just provided is 36%. From this perspective, our year over year. Revenue growth for the first nine months will exceed 40%, a figure that significantly surpassed the upper limit we have set up for the full year goal at the beginning of the year. Therefore, we will also accordingly raise our expectations for the full-year revenues. I hope that addresses your question.

Crystal Lee - Analyst - (00:40:37)

Crystal. Thanks. Very clear.

OPERATOR - (00:40:46)

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

Catherine Chen - Head of Investor Relations - (00:40:56)

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 email at Iraoutu CN directly. You are also welcome to subscribe to. Our News Alert on the Company's IR website. Thank you very much again for your time. Have a great night.

OPERATOR - (00:41:23)

This concludes today's conference call. You may disconnect your line. Thank you.