Ladies and gentlemen, thank you for standing by, and welcome to the Gaotu Techedu Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be a question and answer session. [Operator Instructions]. Please note that today's event is being recorded. I would now like to turn the conference over to your first speaker today Ms. [Katherine Chen] Head of Investor Relations. Please go ahead, Katherine.

Thank you, operator. Good evening, everyone. Thank you for joining Gaotu's second quarter 2023 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 well as through PR Newswire Services. Joining the call with me tonight from Gaotu's 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 business highlights for the quarter, and then afterwards, Shannon will discuss our financial performance in more detail. Following their prepared remarks, we will open the floor to questions from analysts. Before we begin, I would like to remind you that this conference call will contain forward-looking statements made under the safe harbor provision of the U.S. Private Security 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 these 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 purposes only. For a definition of non-GAAP financial measures and reconciliations 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, Larry. Larry, please.

Thank you, Katherine. Good evening and good morning, everyone. Thank you for joining us on Gaotu's second quarter 2023 earnings conference call. I would like to take this opportunity to express my gratitude to all of you for your interest in and support for Gaotu and the education industry. Before I start, I would like to remind everyone that all financial figures discussed today are quoted in RMB unless stated otherwise. During the second quarter of 2023, we continued to execute our effective growth strategy. We grew gross billings substantially on both an annual and sequential basis, while also recording our third consecutive quarter of profitability and generating a sizable positive net operating cash flow. Our net revenue grew 30.7% year-over-year to RMB703.1 million, and our gross billings reached RMB882.3 million up by 63.7% quarter-over-quarter and 44.2% year-over-year. Thanks to ongoing improvements in our organizational and operational efficiency, which delivered a triple-digit year-over-year increase in both income from operations and net income. Our non-GAAP net income margin for the quarter reached to 9% and we generated a positive net operating cash flow of RMB288.5 million. Backed by ample cash reserves, we have been steadily ramping up our investments in talents, continuously refining our educational content and services, and persistently improving teaching quality and learning efficiency through artificial intelligence, technological innovation, and organizational upgrades. These efforts have strengthened our competitive edge in terms of content-driven customer acquisition and teaching quality, creating a flywheel effect. As the flywheel started to turn, our customer acquisition experience ongoing improvements in efficiency, and operating leverage began to grow, resulting in increasing clarity for our growth trajectory. Our focus remains on two major business lines, learning services and educational content and digitalized learning products. Learning services continue to serve as the core pillar of our business…

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 2023. Please note that all financial figures discussed today are quoted in RMB terms unlike otherwise stated. During the second quarter of 2023, our business continued to grow in a healthy manner, achieving profitability while maintaining robust top-line growth momentum. Our net revenues increased by 30.7% year-over-year to more than RMB703.1 million. Our gross billings, a leading indicator of net revenues, increased considerably by 44.2% year-over-year and 63.7% quarter-over-quarter to RMB882.3 million, laying a solid foundation for future revenue growth. Additionally, as net revenues continued to scale, the impact of operating leverage became more evident. During the quarter, operating expenses as percentage of revenue decreased by roughly 14 percentage points year-over-year and nine percentage points compared to the full-year figure for 2022. Furthermore, key profit metrics improved significantly compared to the same period last year due to greater operating leverage, together with our ongoing efforts to streamline operations and boost efficiency. Our net income experienced triple-digit year-over-year growth, and net income margin improved by approximately 17 percentage points to 8% on an annual basis. Non-GAAP net income increased to RMB63.2 million, with a non-GAAP net income margin of 9%, marking our third consecutive quarter of positive outcomes. Apart from sustaining profitable growth, it is worth mentioning that during this quarter, we also generated a sizable positive net operating cash flow of $288.5 million. Our solid financial performance stands as the ultimate testament to our resilient business model, strong organizational cohesion, and continuous endeavors in customer acquisition and operational efficiency. In terms of gross billings, which is a leading indicator of revenue, we attained a 44.2% year-over-year increase in this measure. To align…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Yiwen Zhang with China Renaissance. Please go ahead.

Thanks for taking my question. So my question is actually about Q3 revenue guidelines. If you look at on Q2 basis, its roughly through by a mid-single digit. Such growth rate if compared with normal seasonality, it seems a bit softer. So it would be great if you can work out through more details on what is driving that? Thank you.

Yes. Thanks Yiwen for joining us. And I do believe this question is fairly representative. We have provided revenue guidance for the upcoming third quarter ranging between RMB728 million to RMB748 million in RMB terms indicating a year-over-year growth of 20.1% and 23.4%. The guidance we provided has factored in two reasons. Firstly, there is a strategic shift in focus within the learning services for college students and adults. The strategy has involved from scale expansion to a sequential emphasis on profitability. So, under this strategic direction we have gradually adjusted and phased out some unprofitable operation units in this segment. So, it is anticipated that the revenue from this segment will remain relatively flat in Q3 as compared to the same period of last year. And in last year in Q3, learning services for college students and adults actually contributed to over 30% of our overall revenue, which has somewhat influenced our revenue growth rate for the third quarter of 2023. However, if we exclusively examine the income growth of the [K12] related business for the next coming quarter, it is feasible to achieve a fairly reasonable middle double-digit year-over-year growth. And secondly, during the summer we introduced some lower-priced courses to boost enrollment, especially in some entrance level of K12 students, which has also moderately influenced the revenue during the quarter. But this enrollments will contribute more revenue in the fourth quarter this year. So, and as for the whole year -- yes, I think, I hope this address your question, Yiwen?

Yes, sure. That's very clear. Thank you.

Thanks.

The next question comes from Crystal Lee with CMS. Please go ahead.

Thanks management and congratulations on a strong results. Could you give us some color on your enrollment growth during the summer season? And what's your marketing strategy going forward? Thank you.

Thanks Crystal for your question. Yes. So, for the enrollment growth, based on the situation during the summer vacation we have indeed observed some different patterns compared to prior years. So, on one hand, there has been a concentrated search in students' learning needs. And the overall timing in the summer has leaned towards consistency resulting in a tighter operational schedule, which is quite different from the vacations influenced by COVID. And on the other hand, this summer, parents has allocated a substantial amount of time for their children to travel and to go out. So this factor also led to a more concentrated study period. And based on these factors, like, we will be able to manage our organization to fit the parents' demand and the student's time schedule and be able to provide enough capacity to provide learning services they need. But if we look at the summer vacation operations as a management team, we could always have done better. And this year, when we do some reflections, we always feel like there are a few aspects that we can improve in the future. For instance, we were a bit conservative in the early stage of the teacher recruitment. Facing the boosting demand in summer, early recruitment can reserve sufficient time for teachers to train up and therefore guarantee the service capacity and quality. So, maybe in the future, we intend to take a more proactive approach to the scalable recruitment and training of our teachers. And so, if we look at the bright side, we still see there is a huge potential in the education space for us to grow. So, in summary, the performance during the summer vacation is basically aligned with our expectations and we will be able to see the enrollment started to grow in a more scalable rate, and the performance is basically within our expectation. But like, going forward, we will refine our operations and achieve a better output income. And in terms of the marketing strategy, as we mentioned in our prepared remarks, we were be able to exploring some more innovative channels, like live streaming channels and short video platforms. Also, channels with more proprietary content and more like on the ground side that we can host some events back in the school and to talk to the students in a more face-to-face basis. This way, we can have a more clear picture of our students and customers. And therefore, we will be able to acquire new leads and students in a lower cost. So, that's why we can recognize that in this quarter, and compared to the same period of last year, we can see our sales and marketing ROI has improved almost 20%. And we will keep exploring channels like this and keep to lower the customer acquisition cost and to build up the competitive advantage in all the channels we build up. And I hope that addresses your questions, Crystal?

Thank you. That's very helpful.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Catherine Chen for any closing remarks.

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 ir.gaotu.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.

Thank you.

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