BEIJING, Gaotu Techedu Inc. (“Gaotu” or the “Company”), a technology-driven education company and online large-class tutoring service provider in China, today announced its unaudited financial results for the third quarter ended September 30, 2021.
In July 2021, the General Office of the CPC Central Committee and the General Office of the State Council of the PRC published the “Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education.” Later in August 2021, the Beijing Municipal Committee of the Communist Party of China and the Beijing Municipality Government jointly issued the “Beijing Municipality’s Measures to Further Reduce the Burden of Homework and After-School Tutoring on Students in ++++Compulsory Education in Beijing,” and promulgated the related implementation rules, regulations and measures (collectively, the “New Regulations”).
In compliance with the New Regulations, the Company has stopped offering tutoring services related to academic subjects to students from kindergarten through grade nine (“K-9 Services”) by the end of 2021, which had a substantial adverse impact on the Company’s business and results of operations for the fiscal year ended December 31, 2021 and the subsequent periods. The Company will cease offering tutoring services related to academic subjects to students in senior high schools before the end of February 2022, which will have a substantial adverse impact on the Company’s revenues for 2022 and subsequent periods.
The Company will leverage the resources and knowhow accumulated through its past K-12 academic subject tutoring services, and turn its focus on its professional education service, vocational education service and digital products.
Larry Xiangdong Chen, the Company’s founder, Chairman and CEO, commented, “During the third quarter of 2021, we proactively, decisively, and swiftly restructured our business and organization in accordance with the New Regulations. Leaning on the insights and knowledge we accumulated in the online non-K12 education sector over the past 6 years, and leaning on our commitment to fully complying with government policies and undertaking proactive reforms, we reconvened and united all employees through our strong corporate culture of solidarity, to collaborate towards the common goal of business transformation and quickly pivoted our focus to vocational education, professional education, and digital education products.”
“In the third quarter, we maintained a healthy cash balance and have begun to see a fresh and promising start in our non-K12 business. Going forward, we will continue to increase our investments in technology and product innovation, continue to provide reliable products and services to our students, continue to invest in corporate social responsibilities, and remain fully dedicated to the innovation and development of China’s education. “
Shannon Shen, CFO of the Company, added, “Following the introduction of the New Regulations related to the after-school tutoring sector, we promptly turned our focus to non-K12 business. Adjustment has been implemented to our organizational structure, which is more conductive to our business innovation strategy. The improved structure is expected to serve as a solid foundation for exploring new opportunities and for long-term development. Additionally, payments in association with the termination of after-school tutoring business, including expenses for severance costs, summer tuition refunds and lease cancellation, etc., have largely been settled before the end of the third quarter of 2021.”
“As of the end of the third quarter, our cash, cash equivalents, restricted cash and short-term wealth management investments totaled RMB3.5 billion, which is sufficient to support both our current operating scale and the exploration into new businesses. We expect to achieve profitability and positive operating cash flow as early as the fourth quarter of 2021. Going forward, we will remain committed to delivering healthy and sustainable long-term growth.”
Third Quarter 2021 Highlights[1]
Net revenues was RMB1,114.9 million, compared with net revenue of RMB1,965.8 million in the same period of 2020.
– Net revenues of online K-12 courses was RMB993.2 million, compared with net revenue of online K-12 courses of RMB1,757.2 million in the same period of 2020. Gross billings[2] was RMB301.6 million, compared with gross billings of RMB2,086.2 million in the same period of 2020.
– Gross billings of online K-12 courses was RMB198.8 million, compared with gross billings of online K-12 courses of RMB1,793.5 million in the same period of 2020. Paid course enrollments[3] was 86 thousand, compared with paid course enrollments of 1,256 thousand in the same period of 2020.
– Paid course enrollments of online K-12 courses was 46 thousand, compared with paid course enrollments of online K-12 courses of 1,147 thousand in the same period of 2020. Net loss was RMB1,044.6 million, compared with net loss of RMB932.5 million in the same period of 2020. Non-GAAP net loss was RMB989.3 million, compared with non-GAAP net loss of RMB863.6 million in the same period of 2020. Deferred revenue was RMB1,360.3 million, compared with RMB2,733.7 million as of December 31, 2020.
[1] For a reconciliation of non-GAAP numbers, please see the table captioned “Reconciliations of non-GAAP measures to the most comparable GAAP measures” at the end of this press release. Non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss) exclude share-based compensation expenses.
[2] Gross billings is a non-GAAP financial measure, which is defined as the total amount of cash received for the sale of course offerings in such period, net of the total amount of refunds in such period. See “About Non-GAAP Financial Measures” and “Reconciliations of non-GAAP measures to the most comparable GAAP measures” elsewhere in this press release.
[3] Paid course enrollments for a certain period refer to the cumulative number of paid courses enrolled in and paid for by our students, including multiple paid courses enrolled in and paid for by the same student. Paid courses refer to our courses that are charged not less than RMB99.0 per course in fees.
Gross Profit and Gross Margin
Gross profit was RMB399.7 million, compared with gross profit of RMB1,463.5 million in the third quarter of 2020. Gross profit margin decreased to 35.9% from 74.4% in the same period of 2020. The decrease was attributable to the decrease of net revenues and the severance costs for the reduction in staffing recognized in the third quarter of 2021, as a result of the impact of the New Regulations.
Non-GAAP gross profit was RMB436.9 million, compared with non-GAAP gross profit of RMB1,481.4 million in the same period of 2020. Non-GAAP gross profit margin decreased to 39.2% from 75.4% in the same period of 2020.
Operating Expenses
Operating expenses were RMB1,481.1 million, which were decreased from RMB2,453.7 million in the third quarter of 2020.
Selling expenses decreased to RMB826.4 million from RMB2,055.8 million in the third quarter of 2020. The decrease was primarily due to decreases in brand advertisement and promotional course expenses, which were partially offset by an increase in salaries and welfare for sales and marketing personnel, which was primarily resulted from severance costs for the reduction of sales and marketing personnel in the third quarter of 2021 due to the impact of the New Regulations.
Research and development expenses increased by 52.6% to RMB336.3 million, from RMB220.4 million in the third quarter of 2020. The increase was primarily due to an increase in salaries and welfare for research and development personnel, which was primarily resulted from severance costs for the reduction of research and development personnel in the third quarter of 2021 due to the impact of the New Regulations.
General and administrative expenses decreased to RMB164.7 million from RMB177.4 million in the third quarter of 2020. The expenses included severance costs for the reduction of general and administrative personnel in the third quarter of 2021 due to the impact of the New Regulations.
Impairment loss on long-lived assets and disposal loss on assets was RMB28.6 million and RMB125.0 million respectively for the third quarter of 2021, compared with nil and nil for the same period of 2020. As a result of the changes in the regulatory environment of the online education industry and the restructuring of our business and organization, the Company disposed some assets and performed an impairment assessment on long-lived assets, and recognized the disposal loss and impairment loss in the third quarter of 2021.
Loss from Operations
Loss from operations was RMB1,081.3 million, compared with the loss from operations of RMB990.1 million in the third quarter of 2020. The increase was primarily due to the decrease of net revenue and the severance costs for the reduction of our personnel in the third quarter of 2021 due to the impact of the New Regulations.
Non-GAAP loss from operations was RMB1,026.0 million, compared with non-GAAP loss from operations of RMB921.2 million in the third quarter of 2020.
Interest Income and Realized Gains from Investment
Interest income and realized gains from investments, on aggregate, was RMB35.0 million, compared with RMB18.4 million in the third quarter of 2020. Interest income and realized gains from investments was primarily the interest income and realization of gains generated from cash, cash equivalents and short-term wealth management investments.
Cash and Cash Equivalents, Restricted Cash, Short-term Investments and Long-term Investments
As of September 30, 2021, the Company had cash and cash equivalents, restricted cash and short-term investments of RMB3,454.4 million in the aggregate, compared with a total of RMB8,217.2 million of cash and cash equivalents, short-term investments and long-term investments as of December 31, 2020. Restricted cash mainly represented the upfront tuition fee in the government custodian account, and will be released as the courses are being delivered.
Deferred Revenue
As of September 30, 2021, the Company’s deferred revenue balance was RMB1,360.3 million, compared with RMB2,733.7 million as of December 31, 2020. Deferred revenue primarily consisted of tuition collected in advance. The decrease was primarily attributable to the decrease in paid course enrollments in the third quarter of 2021 due to the cessation of K-9 service as a result of the impact of the New Regulations.
Other Payables
As of September 30, 2021, other payables in non-current liabilities totaled RMB26.6 million, all of which were payables related to the purchase of the Zhengzhou properties.
About Gaotu Techedu Inc.
Gaotu is a technology-driven education company and online large-class tutoring service provider in China. The Company offers vocational education, professional education and digital products. Gaotu adopts an online live large-class format to deliver its courses, which the Company believes is the most effective and scalable model to disseminate scarce high-quality teaching resources to aspiring students in China. Big data analytics permeates every aspect of the Company’s business and facilitates the application of the latest technology to improve teaching delivery, student learning experience, and operational efficiency.
About Non-GAAP Financial Measures
The Company uses gross billings, non-GAAP gross profit, non-GAAP income (loss) from operations and non-GAAP net income (loss), each a non-GAAP financial measure, in evaluating its operating results and for financial and operational decision-making purposes.
The Company defines gross billings for a specific period as the total amount of cash received for the sale of course offerings in such period, net of the total amount of refunds in such period. The Company’s management uses gross billings as a performance measurement because the Company generally bills its students for the entire course fee at the time of sale of its course offerings and recognizes revenue proportionally as the classes are delivered over usually no more than 60 classes for K-12 courses. For some courses, the Company continues to provide students with 12 months to 36 months access to the pre-recorded audio-video courses after the online live courses are delivered. The Company believes that gross billings provides valuable insight into the sales of its course packages and the performance of its business. As gross billings have material limitations as an analytical metrics and may not be calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies.
Non-GAAP gross profit, non-GAAP income (loss) from operations and non-GAAP net income (loss) exclude share-based compensation expenses, and such adjustment excludes the impact on income tax. The Company believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance and liquidity by excluding share-based expenses that may not be indicative of its operating performance from a cash perspective. The Company believes that both management and investors benefit from these non-GAAP financial measures in assessing its performance and when planning and forecasting future periods. These non-GAAP financial measures also facilitate management’s internal comparisons to the Company’s historical performance. A limitation of using non-GAAP measures is that these non-GAAP measures exclude share-based compensation charges that have been and will continue to be for the foreseeable future a significant recurring expense in the Company’s business.
The presentation of these non-GAAP financial measures is not intended to be considered in isolation from or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the table captioned “Reconciliations of non-GAAP measures to the most comparable GAAP measures” set forth at the end of this release.
The accompanying tables have more details on the reconciliations between GAAP financial measures that are most directly comparable to non-GAAP financial measures.
Exchange Rate
The Company’s business is primarily conducted in China and the significant majority of revenues generated are denominated in Renminbi (“RMB”). This announcement contains currency conversions of RMB amounts into U.S. dollars (“USD”) solely for the convenience of the reader. Unless otherwise noted, all translations from RMB to USD are made at a rate of RMB6.4434 to USD1.0000, the effective noon buying rate for September 30, 2021 as set forth in the H.10 statistical release of the Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into USD at that rate on September 30, 2021, or at any other rate.
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