GSX Techedu Price Drops Despite Revenue Growth

China's online education platform, GSX Techedu (GSX: NYSE), has released its third-quarter earnings. Strong revenue growth has been sustained for six consecutive quarters amid fierce competition – but low costs are hard to maintain.

The company reported unaudited net revenues of CNY 557 million (USD 79.57 million), an increase of 461.5% compared with CNY 99.24 million (USD 14.18 million) from the same period last year. After a stiff competition during the summer break, the revenues surged mainly because of increases in both the number of paying students and tuition fees for K-12 classes. As of September, GSX had reached revenues of CNY 1,180 million (USD 168.57 million).

Despite the revenue gains, loss from operations increased to CNY 10.815 million, compared with the income from operations of CNY 0.1 million in the same period of 2018. Sales and marketing costs were CNY 330 million, jumping from CNY 31 million in the same period last year. It indicates the growing cost of customer acquisition amid competition in Chinese K-12 education.

The financial report shows that the major drivers behind the growing marketing costs are user base expansion, brand promotion and increasing sales and marketing staff. Shen Nan (沈楠), CFO of GSX Techedu, said at the analyst meetings that the seasonal factors that affect the operating profit of online education are different from those of offline. 

Specifically, the offline market sees the highest margin during summer and winter breaks, because classroom utilization is high. However, for online education companies, especially in the large-class education format (different from 1:1 personalized tutoring), the second quarter and the third quarter often require the largest marketing investment. During the fourth quarter, all courses return to normal prices, and the user base accumulated in the previous quarter also drives up the class enrollment. There are fewer promotions in the fourth quarter.

GSX Techedu adopts a live teaching and dual-teacher mode, allowing a relatively low marginal cost and high-profit margins. For online live-streaming classes, the marginal cost is almost the same for class sizes 100 and 1,000 students. Dual-teacher mode permits a well-known teacher to work as the lecturer and another teacher as the tutor. It also helps to decrease costs and maintain good user experience. 

However, most online education platforms are adopting these approaches and the business model is easy to replicate. Chinese education giant New Oriental used to focus more on higher education, but it has gradually moved into the K-12 market, launching live streaming online courses with dual teachers. Besides, the Chinese K-12 online tutoring platform Yuanfudao (猿辅导) also shut down its one-on-one education business at the beginning of the year. 

The quality of courses and teachers is the key to educational businesses. The best 10 teachers contributed to 34.6% of the total revenues, declining 12% year-on-year, as released during the earning call. According to its prospectus, GSX Techedu had 169 lecturers and 522 tutors as of May. The student-teacher ratio of GSX, about 400 students per tutor, is higher than that of TAL and New Oriental, where the average is 60 - 120 students per tutor. Going forward, securing good teachers will be an ongoing challenge for GSX.