Ladies and gentlemen, thank you for standing by, and welcome to the Gaotu Techedu Incorporated Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. All participants will be in the 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, March 08, 2022. I would now like to hand the conference over to your first speaker today, Ms. Sherry Liu, IR Manager of GOTU. Thank you. Please go ahead.

Thank you very much operator. Good evening everyone and thank you for joining us on our fourth quarter and full year 2021 earnings conference call. GOTU's fourth quarter earnings release was distributed earlier and is available on the company's IR website at ir.gotu.cn. On the call with me are Mr. Larry Chen, GOTU's Founder, Chairman and Chief Executive Officer; and Ms. Shannon Shen, GOTU's Chief Financial Officer. Larry will give a general overview and then Shannon will discuss the financials. Following the prepared remarks, Larry and Shannon will be available to answer your questions. I will translate for Larry. Before we begin, I would 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 expectations and the current market and operating conditions, and related events that 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. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the SEC. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a live and archived webcast of this conference call will be available on GOTU's IR website. It is now my pleasure to introduce Larry. Larry, please go ahead.

Thank you, Sherry. Good evening and good morning to you all. Thank you for joining us on our fourth quarter and full year 2021 earnings conference call. Before I start, I would like to remind everyone that all financial information that I mention later is based in RMB unless otherwise noted. In the fourth quarter of 2021, our revenue was RMB1.3 billion representing a 14.3 point quarter-over-quarter increase, which brought our revenues for the full year of 2021 to RMB6.6 billion. Our gross billings of this quarter also showed 233.7% quarter-over-quarter increased to RMB1 billion. During this quarter, net revenues and gross billings from our comprehensive tutoring services, which consists of our business other than K-12 academic subject tutoring services were RMB149.1 million and RMB234.8 million respectively, representing a decent increase in size compared with previous quarters and demonstrate that we are on the right track of gradually shifting our emphasis to business other than K-12 academic subject tutoring services. It's especially worth noting that after we restructured our business in the third quarter. In the fourth quarter, we achieved considerable profitability in both GAAP and non-GAAP terms as well as positive net of reaching cash flow. Our net profit was RMB285.9 million and our non-GAAP net profit was RMB324.4 million, which gave us a record high non-GAAP net profit margin of 25.5%. Our net operating cash flow – cash inflow was RMB245.8 million. All of these indicate that the business restructuring and organizational adjustments we performed in the last quarter delivered significant results confirming that we drove the right strategic direction, which proved effectively in a short period of time. In the meantime, we maintained a strong cash position. As of December 31, 2021, our cash and cash equivalents, restricted cash, and short-term wealth management investments totaled approximately RMB3.7…

Thank you, Larry, and thank you all for joining our call today. I will now walk you through our operating and financial performance for the fourth quarter and for the full year of 2021. Please note that our financial data I mention later is in RMB terms unless otherwise noted. We closed fiscal year 2021 with a strong fourth quarter with considerable GAAP and non-GAAP net profit and positive net operating cash flow. Following the restructuring, which was completed in the third quarter, our new businesses achieved rapid and healthy growth Both gross billings and net revenues generated from our comprehensive tutoring services showed quarter-over-quarter increases, which reflects our promote and business restructuring, strong organizations, solid talent pool, and deep industry experience. In the future, we will continue to explore new business and remain dedicated to refining our product and services with the goal of offering superior quality courses and services that exceed our students’ expectations. By the end of 2021, we terminated all after-school tutoring services to students from kindergarten through ninth grade. We would like to send all of our teachers and other related staff for the hard work that they devoted to course delivery and their corporation with the transition. We would like to give our best wishes to them. And we hope that they will cherish the public welfare nature of education and continue to devote themselves to providing excellent courses and services in the nonprofit institution. Our current strategic focus is on non-degree based vocational and professional education. According to official data released by the Chinese Ministry of Education, as well as an independent third party, the market size for [indiscernible] based vocational education in China in terms of revenue will be RMB 250.7 billion in 2022. By 2026 it will range RMB 344.5 billion…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Li with Citi. Please go ahead.

Hey, hi Larry, Shannon and management. Thank you very much for the presentation. May I ask firstly we understand we terminate the high school tutoring by end of February? How much impact do we expect from this termination? And also could you share a bit more on the key metrics for the vocational and professional education segment such as a margin et cetera? Thank you.

Thanks Mark. So for the high school business termination, we have made an announcement in our February 16th because we are a company registered in Beijing so that we follow local government instruction that the high school policy should – exactly the same with the double deduction policy and the exact impact will be disclosed in our Q1 results. But in terms of all the restructuring we have completed a business and organizational restructuring in the third quarter and have settled the majority of the payment and expenses. The following termination for the high school business is more natural and are fully prepared. We do not expect to incur additional meaningful payment going forward. And currently we have a strong cash balance sufficient to support our current business skill. So then – and our current cash balance also supported our flourishing into the new businesses. And as for more details about the op margin for the vocational education, so there are many categories in the vocational education sector and different category has different characteristics. And the model for cost deliveries are quite different as well, that all results in inconsistency in the level of profit margin. So our profit margin is also affected by the percent that each category takes up in terms of total revenue. So which means it is now not very stable. So as we are still in the early stage in exploring and inviting stage of our new businesses, we're not able to provide a precise expectation on the profit margin for our vocational businesses. But there's one thing for sure that we will insist on our operating strategy, which is always to run our business in a effective way. So we will not sacrifice the profitability just for the skill expansion. We will review providing guidance as soon as our business has entered available stage. Hope that address your questions. Thanks.

Thank you.

The next question comes from DS Kim with J. P. Morgan. Please go ahead.

Hi, good evening. Hi Mr. Chen. Hi Shannon. Thanks for taking my question, and by the way congrats on the record hypothesis and the margin this quarter. I have two quick question on the PATH 4 similar to what Mark just mentioned, but if we think not about the, one of restructuring costs, but in terms of the recurring OpEx runway, operating expense runway from second quarter of this year, how shall we think about it for the rest of the year. i.e., shall we back OpEx run to be similar to the 4Q that we recorded were maybe down by half or even 80% as a proportionate with the revenue site. What shall we expect on the operating expense – operating expense? That's the first question. Second question if I may, is related to our non-K12 business. I'm not asking for the guidance per se, but say for 2022 or 2023 next year. How much of the revenue can we expect roughly, very ballpark figure like up 100% from current rate or 200% any sense of size would be appreciated? And if possible, how will that revenue be made up of a different segment, i.e., vocational and professional education versus digital product versus any new businesses like e-commerce and whatnot? Thank you.

Thanks for your questions. So to address your first question about the OpEx, so because we are running an online education business. So the cost structure for us is very straightforward. It consists of the cost of goods sell, sales and marketing expenses, G&A expenses and R&D expenses. So in the past, it was always be sales and marketing expenses contributed the most in the OpEx and facing the fierce combination in the past we're kind of like the same with other education companies. Sometimes the sales and marketing expenses contribute like 80% or even 90% over the revenue. But like going forward especially facing that market professional and vocational education, we are exploring more channels to acquire customers. So – and also going forward we will pursue the effective growth. So ideally we hope that like the expensive level will go back to like the year of 2019 for us. So to leverage the economy of scale, we still wish our R&D and G&A expenses to be under like 20% of total revenue, which provide us or is enough room to acquire new customer, as well as exploring new product. But as I just mentioned, everything is still in a very early stage and we still see that like in a PayPal business we have accumulated extensive experience in our cost delivering and refining our product development process. We also have developed a refining R&D platform. So like all the legacies we get from the past will take us to the future. And also for our business, we still face a certain level of uncertainties. And we do see like in the sub-segment like some of the leading players that have been performing very well. So that all shows the market has a huge potential, but for us especially the experiencing like all the policy changes and fierce combination in the past it become more clear for us is that we will focus on ourselves and focus on the development of our management team and our employees, and to provide the best product to our customers. At the same time, keep improving our operating efficiencies. I hope in the near future we can – we can get a healthy and sustainable growth as well as a profitable growth. And you also mentioned like any color on the future growth, so we will put priorities on maintaining the effective growth, while achieving our positive net profit, given our current operating scale and market size. We think it is a possible for us to achieve like high double digits or even triple digits revenue growth regarding our new strategic focus. The key is to constantly refine our products to better satisfy user's needs. And also we will provide revenue guidance as long as the policy and the external environment, it stable. That's like we always do in the past. Thanks.

Thank you so much, Shannon. That's really helpful. If I may follow-up on that earlier part, my question was more about like, after the exit of K12 including high school, how about R&D and G&A fixed coast would look like? For instance fourth quarter, those are about a little over RMB200 million in fourth quarter. Our non-K12 revenue was RMB150 million. So just wanting to balance that after the exit of K12, shall we have a meaningful step down in a fixed cost further or we would rather focus on, as you mentioned product driven growth opportunity rather than focusing too much on the remaining fixed cost? And that's all my questions. Thank you again for your answer.

Yes. So yes, the question makes a lot of sense. So like for us when running a business we are always trying to find a balance. So we did get legacies and experiences in the past, and that all helped us to grow in the past. And also like all the talents we had in other system we have built up and also assist us to success in the future. So when we consider the further investment in R&D and G&A, the G&A skill we also need to consider like the top line skill like we can acquire from the market. And also like we always mentioned, like probably at the first stage we will still maintain a certain level of investment in R&D to support to keep refining our teaching product then going forward at the revenue grow regularly. We believe the percentage of R&D and G&A expenses can become lower, which we call it the economy of scale that also provide us with the profitability.

Thank you. That makes a lot of sense.

Yes. How fast we can get there, but still we need to maintain a level of investment, especially in the R&D expenses.

Thank you very much.

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

Thank you very much operator, and thank you everyone for joining the call today. If you have any further questions, please don't hesitate to contact the company or contact us via email at ir.gaotu.cn directly. Please feel free to subscribe to our news alert or quarterly investor newsletter on the company's IR website. Thank you very much again for your time. Have a great night.

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