The expansion of offline learning centers and the exploration of the 'AI + education' model seem to have led Gotu (GOTU.US) and TAL Education (TAL.US), both listed on the US stock market, down a similar path in the Q2 financial report.

Finance and Economics APP learned that on August 27th, pre-market trading in the United States, Gotu released its second-quarter performance for the 2024 fiscal year. The financial report shows that Gotu's Q2 revenue was 1.01 billion yuan, a year-on-year increase of 43.6%; however, although Gotu increased its revenue during the period, it did not increase its profit, and the net loss for the period reached 0.43 billion yuan, compared to a net profit of 56.16 million yuan in the same period last year, resulting in a loss from a profit.

Disappointing paper-based profit data directly triggered turmoil in the secondary market. On August 27th and 28th, Gotu's stock price fell sharply by 18.87% and 18.43% respectively, with a cumulative decline of 33.8% over the two days, and the stock price hit a low of $2.64, directly giving back all the gains since early November last year, with a total trading volume of 21.8421 million shares over the two days, marking a new high since March this year, reflecting the market's negative sentiment. Fortunately, on August 29th, Gotu's decline stopped, rebounding to close up by 17.78%, and the stock price also climbed to over $3 in the following days of trading, ending this 'mid-term performance farce'.

Increased upfront investment resulted in losses.

In fact, aside from the data showing a loss from a profit, other key financial data for Gotu in Q2 still showed a praiseworthy performance.

The financial report shows that in the Q2 quarter, while Gotu's revenue increased by 43.6% year-on-year, it also had a cash inflow of 1.654 billion yuan, an 87.4% year-on-year increase; the net cash flow from operating activities for the period was 0.386 billion yuan, a 33.8% year-on-year increase. It is evident that its cash receipts during the period were good, and it still maintained positive cash flow, which is in stark contrast to its loss-making performance.

From the business perspective, in terms of different businesses, during the reporting period, Gaotu's K12 business revenue accounted for over 75%, with a year-on-year growth rate of nearly 55%. Among them, the revenue and collection of non-subject tutoring in K9 increased by over 100% year-on-year, and the collection from new students increased by over 200% year-on-year. The revenue of K9 business accounted for over 20% for the first time. At the same time, the revenue from Gaotu's adult and college student business accounted for less than 20%, with a year-on-year growth rate of nearly 10%.

The above data confirms the growth of the company's operating revenue and cash revenue in the current period, which ultimately leads to its loss. The main reason may be that since last year, Gaotu, which started online, has accelerated its offline expansion. As CFO Shen Nan mentioned in the Q4 quarterly financial report meeting last year, "Offline operation development is a long process, from user cultivation to word-of-mouth recommendation, it requires continuous investment." This year's Q2 happens to be a peak period of Gaotu's offline expansion.

According to the financial report data, Gaotu's total operating expenses in the current period reached 1.161 billion yuan, a significant increase of 144.2% compared to the same period last year, when it was 0.475 billion yuan. Among them, the company's sales expenses increased from 0.324 billion yuan in the same period last year to 0.835 billion yuan; research and development expenses increased from 98.4 million yuan to 0.162 billion yuan; and management expenses increased from 52.94 million yuan to 0.164 billion yuan. The company explained that this was mainly due to an increase in the number of employees and an increase in market promotion expenses.

After further analysis, investors can see that during the reporting period, Gaotu's sales expense ratio reached 82.7%, with a year-on-year increase of 36.6%. Based on the reasons explained by the company's previous sales expense growth, combined with the current period's accelerated offline expansion, it can be analyzed that the reason for the increase in sales expenses is that the company needs to hire short-term teachers and increase market expenses during the peak season of offline and online operations. The research and development expense ratio is 16.1%, with a year-on-year increase of 2.1%, and remains stable on a month-on-month basis. The management expense ratio is 16.2%, with a year-on-year increase of 8.7%, mainly due to the company's offline and online expansion and the recruitment of management personnel.

The growth of expenses is also confirmed in the company's cost data. During the reporting period, the company's main business costs were 0.313 billion yuan, an increase of 70% compared to the same period last year, when it was 0.184 billion yuan. This was mainly due to the increase in the number of main lecturers and second lecturers, as well as the increase in textbook costs.

It is worth mentioning that as of June 30, 2024, Gaotu's deferred revenue was 1.6 billion yuan, a year-on-year increase of 71.5%. The inclusion of large unconfirmed income generated by expanded market marketing in the prepaid accounts receivable is also one of the reasons for Gaotu's turn to loss.

The implementation of "AI+ education" is still a long way off.

The reason why Gaotu and TAL Education may follow the same path after the 'dual reduction' is that both have announced exploration into the direction of 'AI + education' when the learning service business accounts for the main source of revenue.

Taking TAL Education's latest 2025 Q1 financial report as an example, TAL Education achieved a net income of $0.414 billion, with the learning service business being its main source of income. Data shows that as of the end of Q1 in 25 fiscal year, TAL Education's deferred income balance was $0.642 billion, a 50% increase from the previous year's $0.428 billion. It's easy to see that TAL Education's current revenue still mainly comes from offline quality education, and the main source of revenue is the deferred income from confirmed learning service business.

Currently, both Gaotu and TAL Education have similar core revenue structures, with the learning service business as the main driver, and both are accelerating the exploration of 'AI + education' in new businesses. The difference lies in the progress, where there is a considerable gap between the two.

Taking TAL Education as an example, the 25 fiscal year Q1 financial report mentioned the company's continued efforts in hardware, technology, and content. In hardware, TAL Education's children's growth brand Mobie launched a new Mobie Enlightenment Machine, Xueersi Learning Machine released the 2024 Classic Edition, and Xueersi Learning Machine upgraded the intelligent assistant 'Xiao Si'; In terms of technology, Xueersi's 'Nine Chapters Anytime Q&A' interactive Q&A tool is open for free use, and Xueersi participated in the World Artificial Intelligence Conference with the Nine Chapters Large Model and Learning Machine; In terms of content, Xueersi upgraded new content around the new curriculum standards and cooperated with the British DK publishing house to launch the popular science book 'Encyclopedia in the Textbook'.

It's clear that within 3 years after the 'dual reduction', TAL Education has deeply explored the hardware, technology, and content aspects in the 'AI + education' field, and has already launched products. In comparison, although Gaotu executives had indicated a substantial investment in 'AI + education' last June, a year later, Gaotu CFO Shen Nan, at the financial report meeting, stated that AI is already widely used in many aspects of Gaotu's business, mainly focused on reducing costs and increasing efficiency internally.

The company also stated that most of these products are currently provided to existing students, rather than being promoted to new students. 'Because we want to continue refining these products, ensuring that they can create incremental value for students before they are pushed to the market,' Shen Nan said. 'But at the moment, we hope to be more conservative in our investment in this area. Currently, we only use it to improve internal efficiency at this stage.'

In other words, Gaotu's current exploration of 'AI + education' has not yet reached the stage of product landing and contributing revenue to the company, which presents a significant gap compared to TAL Education.

In fact, this year, the reason Gaotu's stock price has surged to the high point of $8.44 is not only due to the company's performance exceeding market expectations, but also the important support of the 'AI + education' expectations. But now it seems that Gaotu's 'AI + education' business is far from creating profits, and after the speculative concept, the market's expectations for Gaotu have inevitably declined.