Ladies and gentlemen, thank you for standing by, and welcome to the Gaotu Techedu Second Quarter 2024 Earnings Conference Call. All participants will be in a 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 second quarter 2024 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 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 provisions of the U.S. 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 this 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 purpose only. For a definition of non-GAAP financial measures and reconciliation 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.

Good evening and good morning, everyone. Thank you for joining us on Gaotu's second quarter of fiscal year 2024 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. We achieved encouraging results in the second quarter with net revenues increasing 43.6% year-over-year to RMB1.0 billion, reflecting strong accelerating growth momentum. Our gross billings grew by a substantial 87.4% year-over-year to RMB1.7 billion, which not only exceeded market expectations, but also underscored our growth potential in the education sector. Thanks to our long-term investments in diversified and proprietary channels, we maintained industry-leading customer acquisition efficiency, while serving robust market demand. During the quarter, our net operating cash inflow reached RMB386.2 million. Our cash reserves remained strong, totaling RMB4.1 billion in cash, cash equivalents, restricted cash and short-term and long-term investments, which is RMB361.3 million higher than at the same point in time last year. This ongoing improvement in our operational efficiency is a result of our consistent focus on business health and commitment to our educational aspirations. As of June 30, 2024, our deferred revenue reached RMB1.6 billion, representing a 71.5% increase from the same point in time last year, ensuring robust support for our continued growth in the second half of the year. I will now provide an update on the progress we have achieved in the quarter. We've consistently recognized that learning services and teaching quality form the bedrock of our core competencies. Over the past few months, we have significantly enhanced learning experience and outcomes for students through the continuous optimization and refinement of course content alongside the strategic strengthening…

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 2024. We kicked off the year with robust growth and successfully carried this momentum into the second quarter, further scaling our operations, while delivering results that exceeded our expectations in both revenues and gross billings. Specifically, net revenues grew 43.6% year-over-year to RMB1.0 billion, outpacing the growth rate we set in the first quarter by approximately 10 percentage points. Gross billings for the first half of the year increased 67.7% to RMB2.4 billion, laying a solid foundation for further revenue growth in the second half of the year. These results reflect our ongoing efforts to boost operational efficiency, address market demand, and enhance teaching quality. Moving forward, we will maintain our focus on core education business, expand our product offerings, attract top talent, and refine operations to capitalize on market opportunities and drive long-term sustainable growth. Before diving into the results this quarter, I would like to first address the seasonality and the [volatility] (ph) inherent in our online education business. To effectively manage the summer surge in demand, we strategically planned and allocated resources ahead of time, particularly for teacher recruitment, team training, and customer acquisition channels. Since there is typical a three to six months lag between these investments and revenue recognition, we recommend using the ratio of gross billings to market expenditure as a key metric to more accurately [gauge] (ph) customer acquisition efficiency for our online business. During the quarter, we dynamically adjusted our investments in marketing activities and customer acquisition channels, which led to better-than-expected gross billings, while ensuring acquisition efficiency, thereby successfully delivering on our goal of effective growth. Additionally, since our fiscal quarter…

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Alice Cai with Citibank. Please go ahead.

Good evening, Larry and Shannon. I have a question about the offline expansion, because we've noticed the increase of losses, probably related to offline expansion, I guess. Could you please share some insights on the progress of offline expansion? For instance, how many cities have you entered? How many learning centers have you opened so far? And how is the student enrollment in the city? Any color will be appreciated. Thank you.

Thanks, Alice. You were asking about our offline business expansion progress and the numbers of learning centers, right? And we are very glad to share the progress we have made on our offline business. Relying on the brand recognition and the industry influence of our Founder, Larry, a highly efficient and professional team was rapidly assembled in the first half in 2024, providing a strong foundation for our offline operations. And therefore, the expansion of learning centers, both in terms of city coverage and the number of learning centers, has significantly exceeded our expectations at the beginning of the year. At the same time, the business is progressing steadily and rapidly with notable achievements across a lot of tasks. And on the journey of exploring our offline business, we found several key parts where offline and online business can work synergistically. Firstly, in teacher recruitment, we have a strong capability in recruiting top-tier talent from prestigious domestic universities like Beijing, Fuzhou, and also other top-notch universities. And our headquarters recruitment team have been able to across these institutions combined with the abilities to share excellent teaching resources to our offline operations, provides critical faculty support for our offline operations in their early stage, which is very important for an offline learning center. This will greatly enhance the quality of our offline education, offering students superior educational resources, because we all know that teacher is the most successful factors of all offline learning centers. And secondly, in terms of educational products and content, the meticulously refined online teaching materials, particularly those overlapping with offline education, such as [indiscernible], can be shared. This could significantly increase the efficiency of our offline education product process. This is only conservative resources, but also ensure that offline teaching is supported by high-quality content. And also…

Thank you, Shannon.

The next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.

Great. Thank you, management, for taking my question. I think in your prepared remarks, you mentioned about the AI. So, my question is regarding the AI empowerment in education. Just wondering what is management view and what is your strategy in this field for different business segments? And how much potential operating efficiency gains do you think AI will bring to your business? Thank you.

Yeah. Thanks, Timothy. This is a very good question and the whole management team pay a lot of attention in the most recent update on the artificial intelligence. So, with the rapid development of AI technology and the continuous evolution and development of AI firms in various industries recently, we have a more profound and clear understanding of the application of artificial intelligence. And Larry personally visited the United States and personally met a couple of entrepreneurs in the Silicon Valley to get the most recent knowledge about artificial intelligence. So, currently, AI has been widely used in quite a few aspects of our business and the current applications are mainly focused on internal cost reduction and efficiency improvement. Firstly, in the field of teaching product design and research and development, artificial intelligence can help our designers improve efficiencies very well by automatic corrections of the students' homework and AI oral language practice that the students can talk to the app or the programs on their WeChat and to do the all the daily oral practice. And also the design of more interactive AI teaching products are used to assist all of our tutors and our teachers to provide more personalized learning of our existing students. But currently, majority of our product were provided to our existing students instead of promoting them to the new students, because we want them to be polished and we want to make sure they can create incremental value to our students before we promote them to the market. And secondly, in the link of Internet product research and development, AI has significantly improved the efficiency in front-end research and development, including our internal instant message system and also other internal efficiency tools, we all applied AI technology to improve our office efficiency. Finally, to -- like in other operational links such as constructions of customer service and automatic responses, AI is also playing an important role in reducing cost and improve efficiency in different links. So, we believe in the future as the technology develops, artificial intelligence can create huge value to our company. But right now, we want the investment in this field to be more conservative. And right now, we only use it to improve our internal efficiency at this stage. Thanks, Timothy.

Thank you, Shannon.

The next question comes from [Summer Chan] (ph) with CLSA. Please go ahead.

Thank you for taking my question and congratulations on a strong quarter. My question is that we -- sorry, can you hear me? My question is that we see the guidance that quarter three will be a faster growth quarter. So, can you share more color about the revenue growth breakdown for quarter three, like, say, online or offline, and in fact, business segment? Thank you.

Thanks, Summer. We wouldn't be able to hear clearly, but I guess you were asking about the revenue guidance for the next quarter. Yeah, I do think the guidance should be diving into the numbers deeply. So, as of now, our gross billings in the first half of the year is approximately RMB2.4 billion, with a year-over-year growth rate of about 67.7% and the deferred revenue balance increased over 30% year-over-year. That all indicated a higher revenue growth rate in the third quarter, right? And the upper limit of revenue guidance we provided in the earnings release is RMB1.208 billion with a year-over-year growth rate of 53%. It appears that the growth rate of gross billings is much higher than that of revenue. There are mainly two reasons for this. And first, the class schedule in September, which is the last month in Q3, has one less weekend compared to 2023, which negatively impacts the year-over-year growth rate by approximately 5 percentage points and the related revenue will be recognized in Q4. And secondly, we conducted some special price class operations for entrance-level grade during the summer course, seizing the precious strategic window to increase the student scale. For these students, the main contribution in Q3 is gross billings instead of revenues, and the revenue contribution will be present in Q4. We could continuously predict the revenue growth rate in Q4 by referring to our Q3 gross billings growth rate together with Q1 and Q2 gross billings. This is also the typical seasonality of the online large live class business model. The combined effect of these reasons causes our revenue guidance to fall within the currently indicated range. And I think your second part of your question indicate the breakdown of our offline revenues contribution and online revenues contribution. So, as of this year, the offline revenues contribution is not significant enough to be disclosed separately. So, majority of the contribution of revenue and gross billings were contributed by our online business. Thanks, Summer. Hope that addresses your question.

It's very clear. Thank you.

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

Thanks management for taking my question. So, I see you have exceptional new enrollment in this summer reflected by the -- your gross billings growth. And could you elaborate more on the main driver behind this? And how about the retention of these new enrollments? And my second question regarding your marketing strategy going forward. Thank you.

Sure. Thanks a lot. Right, actually, Q2 is a critical quarter for our business for every year because there were two significant events happening in the second quarter. The first is the retention happen usually at the end of April or in the early part of May. Then, because in the past few years, we keep investing in our teachers' recruitment and training and we keep polishing our educational product, so that -- I just mentioned in my prepared remarks, we do see our retention rate keep increasing, especially for our newly joined students. And that's something we really have confidence in our future business. And the second important part is the preparation for the summer campaign or -- usually started in the middle May. And this summer, the education market has shown a vibrant landscape, and we've felt the strong demand firsthand. And to ensure we can fully meet the diverse learning needs of students and parents during the summer, we proactively plan operations to better seize this valuable opportunity. First, in terms of our teacher recruitment training, we understand that excellent teachers are the key to the success of our summer operation. Outstandingly, teachers and tutors can provide high-quality educational services, greatly enhancing the learning experience. Therefore, we initiated the recruitment of tutor early on this year, followed by comprehensive and systematic training immediately after they join us. Most teachers began their training four to six weeks in advance, focusing on professional skills, teaching masters and improving their communication skills and training up them to be more familiar with our educational products. This thorough preparation allowed them to approach their summer teaching assignments with greater passion and professionalism. And secondly, and also to address your second question, in terms of our customer acquisition channels, we've been characterized by…

Thanks, Shannon. That's very helpful.

This concludes our question-and-answer session. I would like to turn the conference back over to Catherine 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. Thanks.

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