On August 27, Gaotu reported a decent quarterly performance: revenue of 1.67 billion yuan, up 20.2% year-over-year, with cash income reaching a historic high of 2.69 billion yuan, and net loss narrowing by 37.1%. Management attributed the improvement in expense ratio to AI, and provided guidance for double-digit growth in the next quarter.
The market was unimpressed. The stock price closed at $1.88 the day after the earnings report, with a market capitalization of around $440 million. Five years ago, the company's stock price was $149, with a market capitalization of $37.8 billion.
A company with annual revenue of over 6.1 billion yuan and nearly 4 billion yuan in cash on hand is now worth only $450 million. This contrast is the starting point for understanding Huohuo. What investors are discounting is clearly not the income statement, but what lies behind it.
Financial reports have two sides
Looking solely at the second quarter, the numbers are indeed impressive. However, when taking a longer view, the picture becomes less stable. Going back one quarter, Gaotu's first-quarter net profit was only 34.51 million yuan, a year-on-year decline of 72.2%; in 2025, despite a 35% increase in revenue, the company still recorded a net loss of 323 million yuan. The fluctuation in profitability between quarters has become the norm, with sales expenses being the axis around which this fluctuation occurs.
In the second quarter, Gaotu's sales expenses were 913 million yuan, accounting for 54.7% of revenue. This is not a high point, but rather a level after a decline: in 2021, this figure once reached 78.2%. A more intuitive calculation is that of the approximately 196 million yuan increase in revenue year-over-year in the first quarter, about 135 million yuan was offset by the simultaneous increase in sales expenses, with nearly 70% of new revenue being spent on marketing efforts.
In the same year, sales expenses of 3.289 billion yuan were five times the R&D expenditure of 630 million yuan. Management's "All with AI" is real, and the 7.9 percentage point year-on-year decline in the expense ratio is also real. But the underlying engine of this growth machine remains advertising spend.
Cash flow is also telling two different stories. In the first quarter, there was a net outflow of 828 million yuan in operating cash, while in the second quarter, there was a net inflow of 861 million yuan, a difference of nearly 1.7 billion yuan.
This is a seasonal characteristic of the education and training industry's "pay first, learn later" model, where the positive performance in Q2 is attributed to the pace of summer pre-payments being accounted for. Under this structure, single-quarter financial reports are easily misleading: bulls cite Q2, while bears cite Q1, with both sides able to find data to support their views.
Compliance's two ledgers
The compliance issues of Gaotu should be viewed from two different perspectives.
The first chapter of accounting in the capital market has basically come to a close. From 2020 to 2021, when it was still known as Genshuixue, Gaotu was short-sold by about 15 to 16 rounds by hedge funds including Greywolf, Citron, Muddy Waters, and Scorpion Capital, with accusations focusing on overstating revenue, transferring costs to affiliated parties, and robotic users.
The company subsequently refuted the allegations, and three layers of clearance emerged: an independent investigation commissioned by the board of directors found no evidence of significant adverse impact on historical financial reports, Deloitte continued to issue standard unqualified opinions, and the SEC terminated its investigation in a letter dated October 2022. The most serious accusations made by the short sellers were never confirmed at the regulatory or auditing level. The remaining legacy is two class-action lawsuits, one of which was settled without admission of wrongdoing for $9.5 million, and the other remains unresolved.
A second set of records is still being accumulated at the business site, and all of them are ironclad evidence. In 2021, GaoTuo was fined 262,100 yuan for having an actor play the role of an "English teacher with 40 years of experience", and 500,000 yuan for fabricating a reference price. Its Chengdu subsidiary was also fined 2 million yuan for making guaranteed promises in the style of "17 students with perfect scores". Incidentally, it is worth clarifying a often-misunderstood fact: the 2.5 million yuan fine, the maximum penalty, was imposed on Zuoyebang and Yuanfudao, not GaoTuo.
After 2024, the nature of the penalties changed. A Jinan subsidiary was fined twice within two years for operating without a license, a Tianjin subsidiary was fined for organizing subject training without a license, and in June 2026, the "Gaotu High School" App was reported by the Ministry of Public Security for collecting personal information without users' consent. The most severe penalty occurred in October 2025: the Haidian District "Double Reduction" task force reported that Gaotu's wholly-owned subsidiary had organized offline subject training in violation of regulations outside its registered address, and ordered it to refund fees, dismantle facilities, and transfer the case for prosecution.
This is a rare case of a leading institution openly violating regulations in Beijing since the "double reduction" policy. The numbers on the consumer side are more intuitive: complaints about Huatu on the Hei Mao platform increased from over 100 in early 2021 to 6,225 by the end of 2024, with core keywords being "no refund" and "false advertising". In the era of short selling, the debate was about whether to believe financial reports, but now the question is whether boundaries are being respected.
Quality education, what kind of education
After the "double reduction" policy, Gaotu has placed its bets on "quality education" for the K12 sector, a term that requires a closer examination.
In Gaotuu's product lineup, "Thinking" is taught by Yang Yi, a strong contestant in the most powerful brain competition, "Brainpower" is based on new concept English textbooks, "Humanities" teaches reading and writing while explicitly improving Chinese language problem-solving skills, and "Science" is based on in-school knowledge of physics, chemistry, biology, and geography, with additional courses on Go and programming. The regular price for these courses is around 3,500 to 3,680 yuan per semester.
Growth is real. This business grew 150% in 2024 and 90% in 2025, and by the second quarter of this year, it accounted for over 40% of the company's revenue, with a programming renewal rate of over 90% according to the company's data. The strategy is localized teaching and research, customizing content based on differences in textbook versions and exam formats in each province. The value of this strategy is best described by GaoTuu's own marketing language: directly corresponding to in-school exam points and regional question types, making it more effective in improving scores.
The problem also lies here. The 2021 Beijing Municipal People's Congress's "double reduction" research report mentioned a method of evasion: mathematics is renamed as "thinking expansion", and Chinese language is renamed as "humanistic quality".
Image source: Gaotu APP
The Ministry of Education's 2023 measures on penalties for off-campus tutoring explicitly classify subject-based training conducted under the guise of "thinking training" or "quality development" as a form of "disguised" violation. Against Gaotu's course structure, the similarities are hard to ignore. On Black Cat Complaints, parents who purchased through "Gaotu Suyang" were in fact buying fourth-grade Chinese and math courses. The Haidian notice penalized precisely this kind of offline subject-based training.
It's worth noting that regulators have yet to formally recognize Gaotuo's online liberal arts courses as a disguised form of academic training, leaving room for debate. However, whether the underlying demand in this sector is for liberal arts education or improved test scores, and how much of the expected market growth from 31 billion to 150 billion yuan is simply a rebranding of academic needs, remains a matter of interpretation.
The Grey Area Dividend: How Long Can It Last
Beyond quality education, Gaotu's true core business is high school tutoring. Academic tutoring for high school students accounts for more than 45% of revenue and is already profitable. The company operates in the most delicate gray area of the double reduction policy: the regulation says high school tutoring should be governed "by reference" to the rules for compulsory education, yet the detailed implementation rules have never been issued.
In 2022, Beijing directly suspended Gaotu's high school winter vacation courses, but the business quietly restarted in 2023, and the 2024 draft of the off-campus training management regulations simply deleted the relevant descriptions of high schools. With only around 2,000 remaining profitable high school subject licenses nationwide, the scarcity itself is a bonus. Every slight relaxation of policy leads to a corresponding realization of this bonus; conversely, this is also Gaotu's biggest single-point risk.
Another grey area is being exploited in the adult education business. Test preparation courses for graduate school and civil service exams have maintained double-digit growth, while adult tutoring institutions have not yet been included in the pre-paid fee regulation pilot program, allowing the "pay the full year's fee upfront, no refunds after completion" model to persist due to a regulatory loophole.
Gaotuo's refund disputes are concentrated in adult courses, and the "Central State-owned Enterprise Emergency Rescue Plan" public opinion in July this year brought this issue to the forefront. At the same time, the company has built a closed intensive training Dream Center in Zhengzhou and Wuhan, with the Zhengzhou Phase III project planning an investment of 2 billion yuan.
The same month it embarked on an asset-heavy expansion, the CFO of seven and a half years resigned without a successor in place. Chen Xiangdong, who holds 51.3% of the shares and controls 90.6% of the voting rights, is now driving the company towards the full-year profitability he has promised for 2026.
With five threads intertwined, Huatu's transformation leaves three unanswered questions. After the focus of compliance shifts from the capital market to the actual business operations, is the boundary risk converging or expanding? Can the industry's 90% supply-side clearance offset the long-term decline in demand due to the birth population dropping to 7.92 million? And the most straightforward one: when investment recedes, can the renewal rate and word-of-mouth sustain the foundational course business that already accounts for 40% of revenue?
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