Executive Summary / Key Takeaways

• AI-Driven Transformation: Gaotu Techedu is undergoing a profound AI-driven transformation, integrating artificial intelligence across its teaching models, product development, and operational processes, exemplified by its "Always AI" strategy and the innovative tri-teacher model. This technological differentiation is a core competitive advantage, enhancing personalized learning and operational efficiency.
• Robust Financial Momentum: The company has demonstrated strong financial performance, with Q2 2025 revenue increasing by 37.6% year-over-year to nearly RMB 1.4 billion and gross billings up 36.2% to approximately RMB 2.3 billion. This growth is coupled with significant improvements in profitability, as non-GAAP net loss narrowed by 50.5% year-over-year.
• Diversified Growth Engines: Gaotu's strategic expansion into non-academic tutoring, traditional learning services, and college/adult education, including a growing offline presence, is yielding substantial results. Non-academic tutoring services have achieved three-digit net revenue growth for five consecutive quarters, becoming a key growth driver.
• Optimized Efficiency and Shareholder Value: AI integration has led to measurable efficiency gains, including a 38.6% increase in selling expenses ROI in Q2 2025 and reduced operating expenses as a percentage of net revenue. The company's robust cash position and ongoing share repurchase programs underscore management's confidence in long-term value creation.
• Positive Outlook and Raised Expectations: Management has raised its full-year 2025 revenue expectations, projecting over 40% year-over-year growth for the first nine months, significantly surpassing its initial 30% target. This optimistic outlook is supported by strong summer enrollment, improved retention rates, and continued operational leverage from AI.

Gaotu Techedu: Forging a New Path with AI and Diversification

Gaotu Techedu Inc. (NYSE:GOTU), a prominent technology-driven education company based in Beijing, China, has strategically repositioned itself as a leader in lifelong learning through AI-powered solutions. Since its rebranding from GSX Techedu Inc. in June 2021, Gaotu has embarked on a transformative journey, leveraging its digital-native foundation to innovate across a comprehensive portfolio of learning services, educational content, and digitalized products. The company's overarching strategy is deeply user-centric, aiming to provide personalized, adaptive, and high-quality learning experiences across various age groups, from primary school students to adults, through a blend of online and increasingly effective offline channels.

The education industry in China, while resilient, has faced evolving market dynamics, including subdued economic growth and cautious consumer spending. In response, Gaotu has strategically focused on diversifying its offerings beyond traditional academic tutoring to include non-academic services, college and adult education, and overseas study programs. This strategic pivot, coupled with a relentless pursuit of technological advancement, particularly in artificial intelligence, forms the bedrock of Gaotu's competitive positioning and future growth trajectory.

Technological Edge: The "Always AI" Strategy

At the core of Gaotu's competitive differentiation is its "Always AI" strategy, a comprehensive initiative to embed artificial intelligence across every facet of its operations. This commitment to AI is not merely incremental; it represents a fundamental reshaping of how education is delivered and managed. The company believes that AI-driven solutions can make personalized, adaptive learning scalable, allowing every learner to enjoy a more efficient, individualized, and high-quality learning experience.

A prime example of this innovation is the evolution from a dual-teacher model to an advanced tri-teacher model, integrating instructors, tutors, and AI companions. In this model, AI offers data-driven feedback and pedagogical insights to instructors, enhancing teaching precision and course quality. For tutors, AI tracks individual student progress and pinpoints knowledge gaps, increasing their efficiency and enabling more professional personalized learning solutions. Furthermore, AI accelerates the analysis of learning pathways for curriculum developers, optimizing course design and content innovation.

The tangible benefits of this technological integration are already evident. In certain user acquisition scenarios, Gaotu's intelligent content service system has dramatically reduced response time and elevated efficiency by nine-fold, leveraging insights into user needs and generating dynamic content. AI-assisted engines are boosting teacher grading efficiency by over 50%. In study planning, a DeepSeek-powered cross-selection model provides students with tailored, data-driven decision-making support. This technological penetration extends to core aspects, including research and development and curriculum design, creating a precise, intelligent, and personalized educational service loop.

Gaotu's R&D initiatives also include novel products like the Gaotu Reading App, The Legend of Gao Xiaotu, and Maodo Love Learning, all designed to spark interest and boost engagement. The AI flash learning model, using advanced algorithms to break down knowledge into granular units, enables scenario-based, bite-sized, and interactive learning, improving efficiency and flexibility. These innovations contribute directly to Gaotu's competitive moat by enhancing user experience, improving learning outcomes, and driving operational efficiencies that can lead to better margins and market positioning. The company's collaboration with top universities and leading pilots for joint AI laboratory development further underscores its commitment to pioneering innovations that balance technological advancement with practical implementation.

Dynamic Growth Across Diversified Segments

Gaotu Techedu's strategic diversification and operational refinements have fueled robust growth across its key business segments. The company's "Learning Services" segment, contributing over 95% of net revenues, is a testament to this success.

Non-Academic Tutoring Services (New Initiatives) have emerged as a significant growth engine. In the second quarter of 2025, gross billings for this segment increased by over 100% year-over-year, with net revenues recording three-digit growth and contributing nearly 40% of total revenues. This marks the fifth consecutive quarter of three-digit net revenue achievement for these services. The first quarter of 2025 also saw gross billings jump nearly 90% year-over-year, with new enrollment gross billings surging by more than triple digits, and the segment achieving profitability. Programming courses within this category boast a retention rate exceeding 90%, reflecting strong synergy between value proposition and user trust.

Traditional Learning Services continue to maintain a leading position in the online education sector. In Q2 2025, net revenues for this segment increased by 12.1% year-over-year, contributing to nearly 25% growth in total revenues for 2025. The referral rate for this segment surged by 75% compared to a year ago, indicating strong brand recognition and user satisfaction. Gaotu's self-developed book series has been adopted by schools across multiple provinces in China, highlighting strong demand and expanding brand presence. The company's success in admitting 267 students from its class of 2025 to the top two universities in China, marking five consecutive years of growth, further underscores the competitiveness of its academic offerings.

The Educational Services for College Students and Adults segment is also demonstrating strong momentum. In Q2 2025, this segment contributed over 10% of total revenues, with its loss from operations significantly narrowing year-over-year and operating cash flow turning positive. The cost base increased by more than 50% year-over-year, while operating cash flow grew over 4x. The Gaotu Jing Center, a flagship offline service platform for college students, reached full enrollment capacity within just three months of its launch, affirming the regional brand influence and business model viability. The AI-powered English learning program, "Learn Spoken English with Daniel Wu," became profitable shortly after its Q1 2025 launch, serving as an endorsement for integrating content innovation with AI technology.

Financial Performance and Operational Efficiency

Gaotu Techedu's recent financial performance reflects a compelling narrative of growth, efficiency gains, and a clear path towards sustained profitability.

In the second quarter of 2025, the company reported net revenues of nearly RMB 1.4 billion, a 37.6% increase year-over-year, exceeding the upper end of its guidance by 5.4%. Gross billings grew by 36.2% to approximately RMB 2.3 billion, outpacing the previous quarter's growth rate by 14.4 percentage points. This top-line expansion was accompanied by significant improvements in profitability, with non-GAAP net loss narrowed by 50.5% year-over-year. Loss from operations and net loss also narrowed by 48.9% and 49.7%, respectively, reflecting continued gains in operational efficiency and outstanding resource allocation.

The company's gross margin stood at 66% in Q2 2025, with a year-over-year decrease primarily attributed to changes in product mix. Crucially, operating expenses as a percentage of net revenue were reduced by 31.6 percentage points compared to the same period last year, a direct result of leveraging AI and other cutting-edge technologies. Selling expenses decreased by 1.7% year-over-year, while the selling expenses ROI increased by 38.6%, reaching its highest level over the past four years. General and administrative (G&A) and research and development (R&D) expenses also decreased year-over-year for the second consecutive quarter as a percentage of net revenues, with the ratio falling by 8.0 percentage points, demonstrating effective and growing economies of scale.

Gaotu's liquidity position remains robust. As of June 30, 2025, the company held over RMB 3.8 billion in cash, cash equivalents, restricted cash, and short-term and long-term investments.

Net operating cash inflow reached RMB 588.8 million in Q2 2025, an increase of RMB 202.6 million from the prior year. This strong cash generation, coupled with a deferred revenue balance of approximately RMB 2.2 billion (up 38.9% year-over-year), provides a solid foundation for future growth and strategic investments. The company's commitment to shareholder returns is evident through its share repurchase program, with nearly RMB 557 million allocated to repurchase approximately 25 million ADS as of August 25, 2025.

Competitive Landscape and Strategic Positioning

Gaotu Techedu operates within a dynamic and competitive education landscape in China, facing both direct and indirect rivals. Key direct competitors include established players like New Oriental Education & Technology Group Inc. (EDU) and TAL Education Group (TAL), as well as other online education providers such as 17 Education & Technology Group Inc. (YQ).

Gaotu's competitive advantage is increasingly rooted in its agility and deep integration of AI technology, which allows for rapid innovation and personalized learning at scale. While EDU and TAL benefit from strong brand recognition, extensive physical learning centers, and diversified portfolios, Gaotu's digital-first approach and advanced AI tools, such as its tri-teacher model and AI flash learning, offer greater accessibility and scalability, particularly in online segments. This technological focus can lead to stronger operational efficiency in user engagement and faster innovation cycles compared to competitors with more traditional or hybrid models. For instance, Gaotu's intelligent content service system's nine-fold reduction in response time and AI-assisted grading efficiency of over 50% directly translate into a more efficient and personalized learning experience, which can enhance customer loyalty and retention rates, surpassing industry averages.

Compared to EDU's hybrid model, Gaotu's technology-driven approach may provide greater capital efficiency in digital delivery, potentially improving pricing power and market share in online segments. Against TAL, Gaotu's emphasis on proprietary technology for interactive learning could enable faster innovation and better personalization, though TAL's extensive content library and network remain formidable. While YQ focuses on affordable online learning, Gaotu's comprehensive suite of AI-powered tools for both academic and professional learning positions it strongly in premium segments, offering a more robust and differentiated value proposition.

Gaotu's strategy of expanding and diversifying customer acquisition channels, including self-operated channels, private traffic activation, and content-driven strategies, aims to reduce exposure to external volatility and mitigate market risks. This decentralized approach, combined with a focus on localizing curricula and expanding offline presence, such as the successful Gaotu Jing Center, strengthens its brand influence and addresses diverse learning needs.

Outlook and Risks

Gaotu Techedu's management has expressed strong confidence in the company's future trajectory, driven by its diversified educational product portfolio, rapidly evolving AI technology capabilities, solid financial foundation, and cohesive team. For the third quarter of 2025, total net revenues are expected to be between RMB 1.5 billion and RMB 1.578 billion, representing an increase of 28.9% to 30.6% on a year-over-year basis.

Given the strong performance in the first half of 2025 and the robust Q3 guidance, management has raised its full-year 2025 revenue expectations. The company initially targeted around 30% year-over-year revenue growth for 2025, but now anticipates year-over-year revenue growth for the first nine months to exceed 40%, significantly surpassing the initial goal. This optimism is underpinned by improved teaching quality, continuously rising retention rates for new students, and a 38.6% increase in selling expenses ROI in Q2 2025. Management projects that profitability for each quarter in 2025 will improve significantly compared to the prior year, ultimately driving the overall fulfillment of annual bottom-line targets.

Despite the positive outlook, investors should consider several risks. The education business exhibits distinct seasonality, with gross billings varying across quarters due to new enrollment and retention cycles, which can affect revenue recognition. The company also operates within a regulatory environment that can impact business segments, as seen with adjustments in the psychological consulting segment in 2024. Furthermore, a subdued economic growth environment and cautious consumer spending could influence demand for educational services. While AI integration offers significant advantages, the company must also address data privacy and ethics concerns to ensure long-term trust and adherence to regulations. The rapid evolution of AI technology itself presents a challenge, requiring continuous investment and adaptation to maintain a competitive edge.

Conclusion

Gaotu Techedu Inc. is charting a compelling course in China's education sector, driven by a strategic embrace of artificial intelligence and a diversified service portfolio. The company's "Always AI" strategy, manifested in innovations like the tri-teacher model and AI flash learning, is not merely a technological upgrade but a fundamental shift towards scalable, personalized, and efficient learning experiences. This technological differentiation, coupled with strong growth in non-academic and adult education segments, is translating into robust financial performance, marked by accelerating revenue growth, narrowing losses, and healthy cash flow generation.

While the competitive landscape remains intense, Gaotu's focus on technological leadership, operational efficiency, and a user-centric approach positions it favorably against both traditional and digital rivals. The company's proactive management of market dynamics, including strategic investments in offline expansion and a commitment to shareholder returns through buyback programs, underscores a confident long-term vision. With raised revenue expectations for 2025 and a clear roadmap for sustained profitability, Gaotu Techedu presents a compelling investment thesis for those seeking exposure to a technologically advanced and strategically agile player in the evolving education industry.