Production｜Miaotou APP
Author｜Ding Ping
Head picture｜Visual China
For online education platforms, when the price war is raging, the pursuit of profit has become a luxury, and living is the immediate goal. Therefore, cash flow is more important than profit.
On March 5, 2021, GSX (NYSE: GSX) announced its unaudited financial reports for the fourth quarter of fiscal year 2020 and the full year of fiscal year 2020. According to the report, GSX achieved 2.211 billion yuan in operating income in the fourth quarter, a year-on-year increase of 136.5%; the net loss attributable to the parent was 627 million yuan. At the same time, GSX achieved an operating income of 7.125 billion yuan in fiscal year 2020, an increase of 236.9% year-on-year; a net loss of 1.392.9 billion yuan attributable to the parent.
The trend of GSX’s high growth continues, but at the expense of profits, it is not favored by investment banks. On January 28, 2021, Goldman Sachs downgraded GSX’s stock rating, downgrading GSX’s rating from neutral to sell. On February 1, JP Morgan Chase also downgraded GSX’s stock rating from neutral to underweight. In the above two trading days, GSX closed down 26.59% and 8.14% respectively.
Can the future high growth trend continue? Why are there net losses attributable to the parent for two consecutive quarters? Can it turn losses? Is it still worth looking forward to? Miaotou finds out by studying financial reports with whom.
high performance certainty
With the intensified competition in the online education market and the increase in revenue base, the growth rate of GSX’s single-quarter operating income has gradually slowed down, and it will drop to 136.47% in Q4 of 2020, but it still maintains a high growth trend. This is mainly driven by the growth of K12 business.
(Data source: company announcement)
From the perspective of revenue, GSX is expected to lead the market, and GSX’s operating income in the second quarter of 2020Slightly higher than good future online income (Xueersi Online School). In the third quarter, the online revenue of Good Future (as of August 31) was 1.968 billion yuan, basically the same as GSX (as of September 30) 1.966 billion yuan.
(1) Revenue composition
The main business of GSX has three parts: (1) K12 online tutoring; (2) foreign languages, vocational exams and interest courses; (3) other services (currently mainly 2B business schools and micro teachers). The K12 business is GSX’s main source of revenue. On October 9, 2020, GSX announced that all its K12 businesses (primary and secondary education business) will be integrated into Gaotu classrooms. Prior to this, GSX had two major brands involved in the K12 business, namely Gaotu Classroom and GSX.
GSX was established in June 2014. It started its O2O business. After platform subsidies were reduced, it extended to 2B business, positioning Taobao or Ctrip in the field of “online education”. The monetization method is to collect membership fees from platform teachers and institutions, Traffic charges.
In August 2017, the 2B business was split. After Baijiayun and Tianxiao were operated independently, the 2B business gradually shrank, and its revenue contribution ratio fell from 71.43% in 2017 to 1.42% in 2019.
In July 2017, GSX launched its K12 business, and its focus gradually shifted to K12 online large class courses. The revenue contribution ratio of this business continued to increase, reaching 86.73% in the first three quarters of 2020, becoming the absolute revenue growth engine of GSX.
(Data source: company announcement)
(2) High growth is expected to continue
Teaching and training institutions generally collect tuition fees in advance, but the income cannot be recognized in the current period and can only be included in the deferred income. Only when the course is over or in accordance with the contract, the income can be recognized at a certain level. Therefore, there is a certain lag in GSX’s operating income and deferred income.However, the scale of deferred income can reflect the performance of the next quarter.
The deferred income at the beginning of the quarter plus cash income, minus the income and value-added tax recognized in the quarter, is the deferred income at the end of the quarter.
As of the end of the quarter, GSX’s deferred revenue was 2.734 billion yuan, most of which will be recognized as revenue in the next quarter, and GSX’s growth in the next quarter is still guaranteed.
(Data source: company announcement)
The trend of GSX’s high growth is expected to continue, but at the expense of profits.
Sacrificing profits for growth
Uncontrolled sales expenses have become the shackles of the profitability of online education platforms.
The online education industry adopts an asset-light operation model, with a relatively high gross profit margin, generally above 60%. The online education industry is a high-margin industry, and the business logic of most online education platforms is fluent. But most online education platforms are stuck in the quagmire of continuous losses, which means that the profit model of the entire industry has not run through.
According to a research by China Merchants Securities, the conversion rate of online education—the ratio of low-price to regular-price conversion, averages 15%-30% in summer to autumn; retention rate—the percentage of regular-priced users renewing classes, on average, is 50% -80%. The conversion rate and retention rate are both at a low level. Therefore, the huge investment in marketing expenses in the early stage of online education, and the low conversion rate and retention rate in the later stage have caused losses to become the norm in the industry.
In 2018 and 2019, GSX’s sales gross profit margin can cover the current period expense ratio and achieve operating profitability. Lower customer acquisition costs free up certain profit margins for GSX. In the early days, GSX relied on WeChat community operations and other methods for accurate advertising, and the cost of customer acquisition was relatively low. According to QuestMobAccording to ile data, the cost of acquiring customers for online education platforms in 2019 is more than 1,000 yuan, while the cost of acquiring customers for the same period is only a few hundred yuan.
However, since 2020, online education has benefited from the epidemic, and there has been explosive growth. The massive influx of capital has gradually raised the customer acquisition cost of the industry. The market has entered a highly competitive stage, superimposed on the WeChat private domain. The decline of traffic dividends and GSX also joined the price war, leading to high customer acquisition costs.
Due to the continuous increase in customer acquisition costs of GSX, since 2019, GSX’s sales expenses have not linearly driven user and revenue growth.
(Data source: company announcement)
Uncontrolled sales expenses gradually dragged down GSX’s profitability. In the fourth quarter of 2020, GSX’s efforts to expand its user base and increase its brand awareness led to further out-of-control sales expenses: sales expenses increased from 442 million yuan in the same period last year to 1.7988 billion yuan, and the sales expense ratio increased from 47.27% to 81.34%, which is serious Squeezed the profit margin of GSX.
(Data source: company announcement)
In this quarter, GSX’s operating expense ratio reached 103.61%, which means that operating expenses cannot be covered by the scale of revenue, and operating profits are inevitable for losses. Learn from whom to lose business 6.At 96.1 billion yuan, there have been operating losses for three consecutive quarters.
Following 8 quarters of continuous profitability, GSX has experienced two consecutive net losses attributable to its parent, with a net loss of 627 million yuan attributable to its parent in the quarter. The scale of losses in the current two quarters is much higher than the sum of the net profit attributable to the parent in the past eight quarters.
(Data source: company announcement)
Miaotou believes that with the continuous large-scale influx of capital, the price war in the online education industry will not end in a short period of time. GSX will invest more market expenses in exchange for market size, for a long time to come Over time, losses will become the norm for GSX.
Cash flow is more important than profit
However, for online education, cash flow is more important than profitability, and financing is the main line and driving force of the entire business model.
Although GSX is in a state of substantial losses, it has not affected its performance in the capital market.
On January 13, 2021, GSX’s stock price rose sharply. As of the close, the stock price rose 15.78%. On the 27th, GSX’s share price reached a new high, closing up 35.98%, and its total market value reached 34.25 billion U.S. dollars (approximately 220.56 billion yuan). It rose to 146.15 U.S. dollars in intraday, a record high. The main reason for this wave of stock price rise logic is that the massive influx of capital has boosted market confidence.
On December 7, 2020, GSX said that it will raise US$870 million by issuing additional Class A common stocks to increase its cash reserves to deal with more intense price wars. On December 29th, Chen Xiangdong, founder, chairman and CEO of GSX, said at the same time that the $870 million fixed-increasing financing had all been put in place, and he was aiming for the upcoming winter vacation.
The epidemic has catalyzed the surge in demand for online education, capital has flooded into the market, the price war has further escalated, and customer success has been achievedThe price rises, has given birth to the vicious circle of “financing-burning money-pushing up customer acquisition costs-loss-financing” in online education. The hero is based on the strength of funds, and those who lack funds will be out.
In 2020, GSX’s parent company’s net loss was 1.39 billion yuan, resulting in a net operating cash inflow of only 603.3 million yuan during the reporting period, a year-on-year decrease of 681.8 million yuan.
In order to increase its cash reserves and ease the pressure on cash flow, GSX raised US$870 million by issuing additional Class A common stocks on December 7, 2020. This also shows that capital favors GSX.
Miaotou believes that for online education platforms, the pursuit of profit is a luxury, and survival has become the goal of the moment, but the prerequisite for survival is sufficient cash flow to burn money and win customers.
But in the short term, it depends on the flow rate, and the long-term depends on the quality. Acquiring customers is only the first step, and user conversion and retention are the key to sustainable development.
From the perspective of the operating model of the online education industry, online education has three core links-customer acquisition, conversion, and retention, that is, a large amount of marketing expenses need to be invested in the early stage to acquire users, including outdoor advertising and APP advertising. Purchase search, etc.; in the later stage, focus on the conversion of low-priced users to regular-priced users, and finally retain customers through platform products and services, thereby forming a closed loop of monetization.
Due to the low threshold of the online industry, the intensified homogenization competition, the high cost of acquiring customers, and the long chain of the education industry, the conversion and retention are low.
So for GSX, increasing sales expenses in exchange for user growth is only the first step. After acquiring customers, how to improve user conversion rate and retention rate is the key to future profitability. The user conversion rate and retention rate depend on the comprehensive operational capabilities and product capabilities of the online education platform.
But in the homogeneous competition, burning money for growth can only be a short-term strategy. How to provide differentiated products to retain users is the core of profitability. This is also the biggest problem facing the entire online education industry.