Good day. And welcome to Gaotu Techedu Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Catherine Chen, Head of Investor Relations. Please go ahead.

Thank you, operator. Good evening, everyone. Thank you for joining Gaotu's fourth quarter and fiscal year 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 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 the 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'd like to remind you that this conference call will contain forward-looking statements made under the Safe Harbor provision of the US 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 these and other risks is included in the company's public filings with the US SEC. The company does not undertake any obligation to update any forward-looking statement 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 fourth quarter and fiscal year 2023 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.

Good evening and good morning, everyone. Thank you for joining us on call to the fourth quarter and the fiscal year 2023 earnings conference call. I would like to take this opportunity to express my gratitude to all of you for your interest and support of Gaotu. Before I start, I would like to remind everyone that all financial figures discussed today are quoted in RMB, unless stated otherwise. During the past quarter, we continued to bolster our core financial strengths, while simultaneously pushing the boundaries of new initiatives. We observed a notable uptick in demand for high quality educational products and learning services. And we remained focused on tracing this demand by enhancing our product offerings and the channels across key business lines, including non-academic tutoring services, traditional learning services and educational services for college students and adults. Investing in emerging technologies such as artificial intelligence allows us to acquire a more profound and holistic insight into the fundamental needs of users and students, enabling us to provide precise and personalized offerings and services, thereby elevating user experiences and improving learning outcomes. Our deep industry insights, exceptional organizational capabilities and well-established HR recruitment and training systems have provided a robust foundation for the sustainable development of our business. Now, I'm pleased to report our results for the fourth quarter of the year and the share our expectations for future business endeavors. Our net revenues increased 20.9% year-over-year to RMB 761 million, exceeding our expectations. Our gross billings grew 28.1% year-over-year to approximately RMB 1.3 billion, indicating an accelerating growth trend compared to the prior quarter, and we expect this growth momentum of our business to continue. In the fourth quarter, our cash flow from operating activities was RMB 491.5 and our net operating cash inflow in the full year…

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 fourth quarter and fiscal year 2023. During the quarter, our business entered a healthy phase of rapid and sustainable expansion. We witnessed accelerated growth in the gross billings of our core business lines, while our new initiatives also demonstrated promising growth potential. In the fourth quarter, net revenues increased by 20.9% year-over-year to RMB 761 million, topping the upper end of our guidance by 10.6 percentage points. The better-than-expected performance was driven by the surge in gross billings, which increased by 28.1% year-over-year to approximately RMB 1.3 billion. Benefiting from ongoing improvements in operational efficiency, our net operating cash inflow reached RMB 491.5 million, while cash, cash equivalents, restricted cash, withdrawable cash balance on third-party payment platforms, as well as short and long term investments exceeded RMB 4 billion, laying solid groundwork for the long term growth of our business. Next, I will walk you through the progress we have made during the quarter. Learning services contributed over 95% of net revenues. Breaking it down, more than 70% of total revenues came from non-academic tutoring services and other traditional learning services, representing over 35% year-over-year growth, and solidifying the segment's role as a key driver of our business. Our new initiative is centered around non-academic tutoring. Over the past few quarters, we have been diligently designing and developing educational products tailored to students learning needs. By sparkling students' interest in learning, we aim to enhance their fundamental critical thinking skills and learning abilities, while fostering healthy study habits and self-motivation. Our course offerings undergo constant iteration and refinement and have shown to be popular and satisfied with our students. Underpinned by a combination of top…

[Operator Instructions]. The first question comes from Timothy Zhao with Goldman Sachs.

Congratulations on the very strong results. I have two questions. One is about the student acquisition, especially for the upcoming or the ongoing winter vacation. Can management share some color on the customer acquisition progress and also the related customer acquisition cost? Secondly, in your prepared remarks, you mentioned comprehensive channels to acquire customers, including the short form videos, live streaming and offline avenues. I think, specifically, on offline, could you share some color on your plan [indiscernible] in terms of the number of learning centers or any color on your projected revenue or profit contribution? That will be very helpful.

First, we're very happy to share the most recent updates for our winter vacation performance. And in terms of the customer acquisition cost, let's revisit the winter vacation performance from both supply and demand perspectives. So starting with the supply side, the current operating environment imposes relatively high requirements on institutions' capability of deliver high quality products, including the ability of continually refining the curriculums, like faculty reserves and the cash positions and also very important to meet all compliance standards. Therefore, the supply of high quality courses in the winter actually is very limited. On the demand side, we have perceived a strong demand from the students. So the scarcity of supply, coupled with strong demand, presents an excellent growth opportunity. And also, we were fully prepared for the winter peak season. And therefore, our winter vacation gross billings has maintained quite a high year-over-year growth rate. If we exclude the cash collection from retentions in the same period of last year, we do an apples-to-apples comparison, we foresee a high end of high-double-digit year-over-year growth for our traditional learning services and non-academic tutoring services. Actually, quite impressive. Behind all this fast growth is our highly efficient customer acquisitions. So, we deployed 30 new channels, especially for the short video, live streaming platforms, as well as our new exploration to some offline channels. Both these channels had really high requirement on the operations, especially for the collaboration between the front end and the back end. We need to have the ability to target the process – to precisely targeting our customers and fulfill their needs in a very short of time. Then also, that needs our back-end team, which means our tutors, to further facilitate these [indiscernible] students timely and meet their learning demands. So based on our observation,…

The next question comes from the line of Alice Cai with Citibank.

Firstly, congratulations on the company's strong performance in 4Q. And I have two sections regarding the guidance provided. And the first one, regarding the guidance for Q1, which seems slightly conservative, could the management team share your perspective on this? Do you consider the guidance to be on the cautious side? And second, could you please share with us about a general idea of the guidance for the full year 2024?

Let me take your second question first, so we can give the audience a whole picture of our applying for the full year of 2024. So, looking into 2024, the growth in the education space typically initiated from expansion of gross billings. And if we look at our Q4 results, in the fourth quarter of 2023, our gross billings reached approximately RMB 1.3 billion, making the highest single quarter level in the past three years. This metric indicates that our business is only healthy and rising trajectory of growth. And furthermore, we have been able to effectively extend the trend of accelerating growth into the first quarter of 2024. And let's dive into each part of our learning services. We observe that revenue growth, especially in non-academic tutoring, continues to accelerate, given its sound unit economic model. The demand for non-academic tutoring is substantial. With clear compliance and governance guidance in place, our business grows initiates with new enrollments, and subsequently generates incremental revenues through retention and course expansions. So we have confidence in our operational capabilities and the reputation we have established among students and parents. Therefore, we anticipate triple-digit year-over-year growth in our academic tutoring sections, while also our traditional learning services, which is basically a high school business, continue to maintain a leading edge in the online space. We will leverage our existing competitive advantages to further deepen this moat. We anticipate that the growth rate of our traditional business will far exceed that of 2023. And regarding learning services we provided for college students and adults, we are glad to see it rebound in Q4 2023. We always prioritize margin improvements over revenue expansion in this sector and ascertain the profitability at a unit economics level and then focus on achieving the effective growth as our primary strategy. So based on all those considerations, we are willing to elevate our targets and goals for both gross billings and revenue growth in 2024 and have confidence in overall growth prospects for the whole year. Secondly, in terms of those growth and efficiency, our explorations of diverse customer acquisition channels have effectively lowered customer acquisition costs. From high quality content generating on short video, live streaming platforms and to extending into offline customer acquisition paths, our unwavering commitment to creating customer value serves as drivers for our sustainable growth. And in terms of the guidance for the first quarter, in the first quarter, we are still in a phase of adjusting the revenue structure. And we have the confidence that, in the more near future, like in the second quarter of 2024, we will see an accelerated growth rate for both of our gross billings and revenues. That basically addresses your questions.

The next question comes from Crystal Li with CMS.

Congratulations on those strong results. I just noticed that your gross profit margins narrowed slightly in this quarter compared to last quarter and last year. Could you please share the reason behind this? And could you give us more color on your margin outlook going forward?

It's a very good observation. So, we observed a 4.7 percentage point decrease in GP margin on a year-over-year basis. This year-over-year decrease in GP margin was due to a few reasons. Firstly, in terms of our revenue contributor, to meet diverse user needs, actually, we have constructed a product matrix, which primarily focused on online large live classes, complemented by one-on-one classes, smart textbooks and offline small classes. So, among these, online large live classes posted the highest level of GP margins. As our business expands, the proportion of revenue generated from our one-on-one classes, smart books and offline small classes is gradually increasing, altering the revenue mix and substantially impacting the GP margin level. And secondly, in preparation for the peak season during the winter vacation, we have proactively reserved a proportion of teachers and tutors. These teachers and tutors have not yet reached their full capacity levels in the fourth quarter, thus affecting gross profit margins as well. But as always, we always need a period for our new teachers and tutors to gradually adopt our learning methodologies and provide sufficient training period for our teachers and tutors, so they can better serve our students. So we do see these investments as valuable. So looking forward, in the middle term, our margins are expected to improve. And also in the long run, our gross profit margin will depend on the future revenue structure. Hope that address your question.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Ms. 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.

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