Educational technology company Gaotu (NYSE: GOTU) seems to be entering a new stage of development.
With the release of its third quarter report for 2024, Gaotu's quarterly revenue exceeded 1 billion yuan (RMB) continuously in the second and third quarters of this year. This is the first time since the release of the "double reduction" policy in July 2021 that Gaotu's revenue has exceeded 1 billion yuan for two consecutive quarters. Gaotu also predicts that it will continue to "exceed 1 billion yuan" in the fourth quarter, and the growth rate will increase.
However, at the same time, Gaotu suffered huge losses for two consecutive quarters, with net losses expanding by 8.6 times and 7.2 times year-on-year.
This seriously deviates from the overall situation of the education industry. In the past two quarters, major education listed companies have turned losses into profits and achieved profitable growth. In the industry, Gaotu was the first to call for profitable growth, but "got up early and rushed to a late gathering".
Gaotu stated at the third quarter 2024 financial report conference that it expects to not turn losses around by 2025, but will only significantly reduce them.
The huge losses are due to business not meeting expectations, and more importantly, Gaotu's tactics have become slightly aggressive, with a structural change in its business model: rapid expansion from online education to offline education, and exploration of more diversified product models from focusing on online live streaming classes.
Taking advantage of the recent establishment ceremony of Beijing Gaotu Public Welfare Foundation, Chen Xiangdong, founder, chairman and CEO of Gaotu, and other executives were interviewed by the media.
Whether it is expanding offline or developing education services for college students and adults, Gaotu is increasingly seen by many as resembling Chen Xiangdong's former employer, New Oriental.
Gaotu is not benchmarking New Oriental because it is already very large, "Chen Xiangdong told 21st Century Business Herald reporters." Gaotu is not doing business to imitate anyone, our starting point for doing business is the needs of our customers
I believe that any company that only imitates others' products will never become a big or respected company. A company must learn the latest practices in the industry, but it must have its own uniqueness, "said Chen Xiangdong.
So, what is the uniqueness of Gaotu?
Significant increase in market share
Recently, Gaotu released its third quarter report for 2024. In the third quarter, Gaotu's revenue was 1.21 billion yuan, a year-on-year increase of 53.1%; The net loss was 470 million yuan, compared to 57.66 million yuan in the same period last year, a significant increase of 717.3% year-on-year.
This is the second consecutive quarter in which Gaotu's revenue has exceeded 1 billion yuan. Last quarter, Gaotu's revenue was 1.01 billion yuan, a year-on-year increase of 43.6%; Net loss of 430 million yuan, an increase of 864.9% year-on-year.
The financial report can be described as mixed. Fortunately, the revenue has repeatedly reached new highs and will continue to reach new highs. Gaotu expects to generate revenue of 1.29 billion to 1.31 billion yuan in the fourth quarter, a year-on-year increase of 69.2% to 71.9%.
The high-speed growth is mainly due to effective estimation and response to strong market demand. More than 75% of Gaotu's revenue comes from K12 non disciplinary training business and traditional learning service business. In the third quarter, the revenue and cash income of non disciplinary training business both increased by over three digits year-on-year, especially the cash income of new students in this sector increased by over 200% year-on-year.
It is precisely due to the excellent "new customer acquisition" performance during the summer vacation in the third quarter that Gaotu rarely disclosed a "significant increase in market share" at this quarter's financial report conference.
The revenue contribution of education services for college students and adults is less than 20%, which is relatively small but the growth rate is not low. In the third quarter, college education services, study abroad education, and consulting services all achieved double-digit growth.
But what shocked the outside world even more was the worrying side, which was the huge losses. Gaotu has suffered losses for five consecutive quarters, with a cumulative net loss exceeding 1.09 billion yuan.
The reason for the loss is high costs and expenses. In the past two quarters, the sum of operating costs and marketing expenses alone has exceeded revenue. Especially for marketing expenses, the sales expense ratio (marketing expenses/revenue ratio) for the second and third quarters were 82.7% and 73.3%, respectively.
Where did the money go? Firstly, the marketing expenses are definitely high. Secondly, we have also increased our offline expansion. Thirdly, we have also attempted innovation in new businesses, "Chen Xiangdong responded.
Especially in the third quarter, due to the large scale of costs and expenses, the net outflow of operating cash flow exceeded 700 million yuan.
However, the third quarter financial report will disclose that due to the fact that the fourth quarter is not the peak of K12 business's "new customer acquisition", marketing expenses will be reduced. In addition, major university and adult education businesses have also achieved positive cash flow, showing positive signs.
Chen Xiangdong responded to the net cash outflow situation to 21st Century Business Herald reporters, saying, "The investment expansion in the second and third quarters was indeed relatively fast, and we also made many new business innovations, which will involve expenses. We have reviewed and adjusted, and such large-scale cash inflows and outflows should not occur in the future
According to a research report by Bank of Communications International, it is expected that Gaotu will accelerate the adjustment of its advertising strategy and reduce marketing expenses by 2025. After adjustment, the operating loss will significantly narrow to 320 million yuan compared to 2024, and the marketing expense ratio will drop to 44%. The First Shanghai Securities Research Report stated that it is expected that Gaotu's adjusted net loss will significantly narrow to 210 million yuan in 2025 and achieve profitability as early as 2026.
Actively expanding with significant initial investment
At the recent establishment ceremony of the Beijing Gaotu Public Welfare Foundation, Chen Xiangdong introduced that Gaotu has seven business segments: improving the quality and literacy of children and adolescents, providing comprehensive planning and guidance for high school students, planning and adult learning for college students, international education, study tours, Gaotu books, and cultural live streaming.
Chen Xiangdong introduced, "In 2024, we did a lot of things, such as increasing our offline layout, accelerating the iteration and refresh of online business, and truly placing international study abroad application services in a more important strategic position. These are all things we did in 2024, and we will gradually have results in the next two to three years
According to reports, Gaotu has 22 offline schools and its offline business covers more than 20 cities. The offline layout can be described as a great leap forward.
The First Shanghai Securities Research Report stated that Gaotu is actively expanding its offline teaching network and currently has nearly 150 teaching points nationwide. However, due to the significant initial investment brought about by the active expansion, the new network still needs to climb, which will put short-term pressure on the company's profit side. It is expected that the adjusted net loss in 2024 will be 1.11 billion yuan.
The so-called advanced investment should only be implemented in 2024, and in 2025, it will develop cautiously and in a balanced manner. Our principle is to balance expansion and efficiency under the premise of profitable growth, "said Chen Xiangdong.
In the online education industry, Gaotu pioneered the live streaming large class mode around 2016, which can support thousands of students attending classes simultaneously. This innovative model quickly translates into economic benefits. From 2017 to 2019, Gaotu's C-end business revenue was 20 million yuan, 600 million yuan, and 3.3 billion yuan respectively, achieving exponential growth.
But now, why is Gaotu stepping out of its comfort zone and expanding into different modes such as offline classes and one-on-one online and offline?
Chen Xiangdong told the 21st Century Business Herald reporter, "Our starting point for doing business is what customers' needs are. Some customers just want to go online and offline classes. Secondly, some of our employees want to live in go home and also want to teach at the same time. If we can meet the needs of students and parents, we can also solve the problems of our employees. I think it is really a good thing."
Gaotu currently also provides college and adult education services such as postgraduate entrance examination, financial and accounting examination, civil service examination, medical examination, IELTS and TOEFL, with a wide range of course types.
Gaotu co-founder Luo Bin told 21st Century Business Herald reporters, "Gaotu has both platform genes and self operated genes, and can provide rich educational products. This is what sets Gaotu apart from other companies
We are now doing offline youth literacy business, which is not easy and requires a lot of investment. It may take effect next year. We are also gradually doing online and offline study abroad business. If we haven't made any money in the past two or three years, we may still lose money next year, but we may make money the year after, "said Chen Xiangdong.
In his view, these new businesses are like seeds that have grown into seedlings, even though the seedlings are still fragile.
But even if it appears to be thriving, one must always be vigilant about the balance between business investment and growth. This is because the college student and adult education markets are composed of a wide variety of segmented markets, each of which is not large in scale, but there are distinctions between each segmented market. For companies that simultaneously carry out these segmented businesses, they need to invest separately, making it difficult to share costs. This means that even if one achieves first place in a certain niche market, their single point of return may not be cost-effective compared to the investment in all businesses.
This can explain why New Oriental has been deeply cultivating the college education market for a long time, but has focused on the tracks of postgraduate entrance examination, professional upgrading, language, etc., and has not blindly expanded into various qualification examination markets.
In addition, the risk resistance ability of segmented markets is weak, and subtle changes in external factors such as policies can have a volatile impact on business.
For example, a person in the postgraduate entrance examination industry told 21st Century Business Herald reporters that in 2024, some top institutions in the MBA postgraduate training market will face setbacks because some universities will no longer organize interviews before the initial exam, resulting in a disappearance of training needs during the interview process. For training institutions, this is a critical issue that endangers cash flow.
Gaotu's third quarter financial report also revealed that from the overall operational performance in 2024, Gaotu found two deviations from the expectations set at the beginning of this year. Firstly, due to the demand for certification, the revenue of psychological counseling and training services for college students and adults is lower than the forecast at the beginning of the year; Secondly, some innovations in traditional education services have not fully exceeded expectations.
The income did not meet expectations, but a significant amount of costs may have been invested, which could affect overall performance between a decrease and an increase.
According to a research report by Bank of Communications International, it is expected that the overall revenue growth rate of Gaotu will exceed 25% by 2025, but the year-on-year decline in college students and adult education services will be about 10%. This may lead to further adjustments in related business and organizational structure.
How to make strategic choices
For the current hot education business in the market, Gaotu's strategic choice reflects uniqueness.
For example, in the hot education intelligent hardware market, Gaotu did not follow suit. In fact, in 2022, Gaotu has successively launched educational hardware such as companion learning machines, translation pens, word cards, and learning machines. But currently there is no further exploration.
Regarding the hardware business, Chen Xiangdong emphasized, "Every company has strategic choices, but we have not chosen hardware. We have already done enough business, and educational hardware is not our advantage. Of course, we cannot rule out the possibility of doing it in the future
Luo Bin added: Currently, educational hardware is not our independent business line, nor is it the direction of Gaotu. He believes that independent educational hardware is difficult to achieve closed-loop learning delivery. Gaotu's philosophy is that the teaching process is the core, and at the same time, guidance, supervision, and accompaniment are provided on the periphery of teaching. At present, Gaotu retains very little educational hardware, which forms a set of learning solutions together with the main lecturer, second lecturer, AI Q&A and other links.
After becoming popular in Dongfang Zhenxuan, Gaotu followed up on live streaming sales business and gained a wave of traffic dividends after the Dong Yuhui essay incident. But Gaotu Jiapin's business has never been integrated into the system of listed companies and has now become dormant.
Chen Xiangdong reflected, "If we are doing live streaming, in a sense, I think it has no future; if we are doing agricultural product supply chain, this thing may have a future. Live streaming is just a marketing method, good quality and good cost-effectiveness are fundamental. In this matter, if Gaotu does not delve deep into it, it is actually a flash in the pan
But currently, Gaotu is still trying cultural live streaming services, including Chen Xiangdong's personal IP. For the overall business, live streaming may be a channel revolution, and Chen Xiangdong has always advocated that any great channel revolution means a great business opportunity.
The rise of Gaotu is, in a sense, due to seizing the dividend of WeChat traffic and rapidly expanding its user base by building a WeChat private domain traffic pool, becoming the first profitable K12 online education company.
After the rise of short videos, Gaotu has also entered the early stage. In 2019, it has accumulated about 10 million fans on Kwai and Tiktok platforms. But later on, due to the online education marketing war, everyone went to invest in traffic, and Gaotu neither monetized the private domain short video traffic nor continued to do so, "Chen Xiangdong said.
Short video platforms will still be a user traffic pool for a long time to come, but at least for now, Gaotu's cultural live streaming is not yet successful, and an efficient customer acquisition model has not yet been formed. For six consecutive quarters, Gaotu's marketing expenses have continued to increase month on month.
Now, the node has arrived. If Gaotu starts to reduce its marketing expenses from the fourth quarter of 2024, the new offline business layout and the return to old cultural live streaming will be officially tested: whether it can serve as a traffic entry point and drive Gaotu's growth.