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Embattled education startup GSX posts staggering Q1 growth amid fraud allegations and trade secrets lawsuit

Written by Wency Chen Published on 

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The company posted a 382% YoY increase in net revenue and a 336.6% YoY growth in net income.

Online tutoring service provider GXS Techedu (NYSE: GSX) reported on Wednesday hyper-growth in both net revenues and net income for the first quarter of 2020, while affected from a raft of fraud allegations from short-sellers and a trade secrets theft lawsuit from rival education company VIPKid.

Following financial intelligence firms Grizzly Research and Citron Research, local venture capital Scorpio also released a report critical of the company on Wednesday, questioning its sales performance and product quality. Following the report, GXS Techedu’s stock closed down 1.74% at USD 38.99 as of market close on Wednesday.

According to its first-quarter earnings, the scandal-hit company booked RMB 1.3 billion (USD 182 million) in net revenue in the past quarter, representing a 382% increase year-on-year (YoY), driven by the growth of paid enrollments in K-12 courses. Paid enrollments grew by 307% YoY to 774,000 clients, most from first-time customers, as the coronavirus pandemic made online classes and tutoring the norm. The company’s net income increased 336.6% (YoY) to RMB 148 million (USD 21 million) from RMB 33.9 million (USD 4.78 million).

“Since the outbreak of COVID-19, we have donated RMB 20 million worth of regular winter semester courses to Wuhan residents, delivered free courses of all subjects and all grades to tens of millions of students nationwide, and through our Weishi platform, assisted over 134,000 educational institutions and professionals to transfer offline courses to online,” said Larry Xiangdong Chen, GSX’s founder and CEO.

Meanwhile, the Beijing-based company’s operating expenses were up 538% YoY to RMB 922.4 million (USD 130 million), as a result of higher marketing expenses, free course promotions, and an increase in compensation for talent, according to GSX.

The firm’s earnings report comes during a time of significant controversy for the edtech company. Earlier in April, Citron Research issued a report claiming that GSX Techedu overstated its revenue by 70%, calling it “the most blatant Chinese stock fraud since 2011,” referring to the Chinese reverse takeover boom and bust that occurred nearly a decade ago, which saw more than 50 US listed Chinese companies delisted or halted from trading between 2011 and 2012 after they were found to be violating US securities laws.

The same month, another online education platform, VIPKid, sued GSX for trade secrets theft. As part of the ongoing lawsuit, VIPKid alleges that GSX asked two VIPKid’s employees to steal customer information before switching to GSX, and is now seeking compensation of RMB 800 million (USD 113 million), KrASIA reported.

In the earnings call, the company responded to the fraud accusations, indicating that “Data fabrication doesn’t exist,” according to the company’s chief financial officer Shannon Shen. “We don’t report fake data. All numbers are also provided to accounting and are verified,” she added.

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