Hello, ladies and gentlemen. Thank you for standing by for China Online Education Group's Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. I will now turn the call over to your host, Mrs. [indiscernible], Investor Relations for the company. Please go ahead, Ni.

Hello, everyone, and welcome to the Fourth Quarter 2021 Earnings Conference Call of China Online Education Group, also known as 51Talk. The company's results were issued by our newswire services earlier today and are posted online. You can download the earnings press release and standards for the company's distribution list by visiting the IR section of our website at ir.51talk.com. Mr. Jack Huang, our Chief Executive Officer; and Mr. Min Xu, our Chief Financial Officer; will begin with some prepared remarks. Following the prepared remarks, Mr. Liming Zhang, our Chief Operating Officer, will also join the call for our Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the company's Form 20-F and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law. Please also note that 51Talk's earnings press release and this conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. 51Talk's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our CEO, Jack Huang. Please go ahead.

Okay. Thank you. Hello, everyone. Thank you for joining our conference call. In response to the changes in the government regulations related to after-school tutoring, we have taken measures to restructure our [ business ] so that the company's 2022 strategy will keenly focus on overseas business. In the fourth quarter, overseas business net gross billings have reached USD 2.9 million, more than triple Q3 net gross billings. As the overseas business momentum continue to build, we have extended our product offerings to students in more than 50 countries and regions outside Mainland China. We have been able to leverage our strengths for high-quality teacher resources, interactive curriculum and advanced technology platform to quickly establish our presence in the new markets. We will stick with our proven business model, which balances growth with profitability and was proven in Mainland China market. We are excited in exploring opportunities in overseas markets, which allow our Filipino teachers to help more students in the world to be able to talk to the world. In order to comply with applicable laws and regulations and allow our listing company to focus on the overseas business, I have sent a proposal to our Board to acquire the company's Mainland China business. Meanwhile, I will continue to lead our listing company as the Chairman of the Board and the CEO to drive the growth from the overseas markets, and the Board has formed a special committee to evaluate my proposal. With that, I will now turn the call to our CFO, Min Xu.

Thank you, Jack. Hello, everyone. We concluded 2021 with RMB [ 2.2 billion ] revenue, a 5.5% increase from last year. Non-GAAP net income for 2021 was RMB 133 million, representing a non-GAAP net margin of 6.1%. We have streamlined our operations to meet our smaller scale. As a result, the fourth quarter operating expenses were RMB 321 million, representing [ a 30% ] decrease from the second quarter. Net revenues for Q3 and Q4 of 2021 were RMB 574 million and RMB 413 million, respectively, representing a sequential decline of 1% and 28%. The number of active students with attended lesson consumption in Q4 was 299,000, a 20% sequential decline from 376,000 for Q3. Gross margin for Q3 and Q4 was 73.5% and 78.6%, respectively. Total non-GAAP operating expenses as a percentage of net revenue was 63% in Q3 and 77% in Q4. Non-GAAP sales and marketing expenses for Q3 were RMB 191 million, down 39% sequentially. Non-GAAP sales and marketing expenses for Q4 were RMB 235 million, among which RMB 124 million were due to deferred sales and marketing expenses write-off. Excluding the write-off, Q4 non-GAAP sales and marketing expenses would have been RMB 111 million, down 42% sequentially. Non-GAAP product development expenses for Q3 were RMB 39 million, down 38% sequentially. Non-GAAP product development expenses for Q4 were RMB 16 million, down 60% sequentially. Non-GAAP G&A expenses for Q3 were RMB 101 million, among which RMB 51 million was restructuring costs. Excluding restructuring costs, Q3 G&A expenses would have been RMB 50 million, down 34% sequentially. Non-GAAP G&A expenses for Q4 were RMB 67 million, among which RMB 22 million was restructuring costs. Excluding the restructuring costs, Q4 G&A expenses would have been RMB 45 million, down 10% sequentially. Q3 impairment loss of RMB 31.8 million was…

[Operator Instructions] And we will take the first question from Long Lin from The Benchmark Company.

Hello, Long. We cannot hear you. You might be muted.

Sorry. Can you hear me now?

Yes.

So my question is about your overseas business. Just want to get a sense of the growth potential for the overseas expansion. And where do you see your key markets and how conduct is these markets for your services?

So I'll take this question. Jack, you want to take this question?

[Foreign Language]

[Interpreted] okay. Yes. Thank you for the question. So we are very positive on the potential of our overseas market. We've done a lot of work, and we see this market size is huge. And in addition, the overseas market is actually very similar to Chinese market, and we look at the global market. In 2022, our focus will be in Southeast Asia. And these countries are actually very, very similar to China in terms of English education demand, especially K-12 English education demand. So there's another very crucial fact is that the COVID-19 continued to drive the demand for online education in Southeast Asia, very similar to what was happening in China in 2020. And we see the penetration of online education increased dramatically. And we started our overseas business in Q3 2021. And already, we were able to achieve USD 2.9 million gross billing in Q4, which more than tripled the gross billing in Q3. And we also gave the guidance for Q1, which represents a more than 50% sequential increase. And we see online English education to be probably the largest segment in terms of our online language learning, and we see very limited competition in these target markets in Southeast Asia. This also gives us a lot of confidence that we can quickly drive our overseas market. And also, our business model has been well proven in the Chinese market in the past few years. We were able to achieve very balanced sustainable growth in the past few years. And with that expertise and know-how, we believe we can transfer that knowledge to overseas market and to be one of the leading brands in terms of online English education. Yes. I hope this answers your question.

Okay. So just a follow-up. So for your key markets, what are the competition regulation risk like in those markets? And -- like how do you -- also how do you -- for your business -- how do you build your brand in those markets?

So I'll take the first question. I'll let Jack take the second part. So, so far, we have not yet identified any regulatory risk in the markets where we're active. Right now, we have paying students sector from more than 50 countries and regions outside Mainland China. So this kind of a geographic diversification also helps to mitigate the impact from any potential regulatory risk in any specific region. So Jack, can you talk about the brand building?

[Foreign Language]

[Interpreted] Yes, in terms of branding, we always believe that the good product and good service is actually the key driver for a good reputation. Luckily, we have already tested our product and service in Chinese market for the past decade. And we have the most interactive curriculum that needs our customers' demand. And our curriculum is also designed according to the European standard, the CFR. And with this kind of a very advanced technology platform, interactive curriculum as well as high-quality service, we have been very successful in China in the past decade. And we believe that in terms of custom demand in English learning as a second language, the demand is very similar in Southeast Asia markets versus in China. And so we're very confident that as we continue to improve our product service and we will have an advantage in those markets. And the second part of the brand building is actually localization, and we understand it is very important to do a good localization job in our key market and we are putting resources on this and try to drive our branding in our initial key markets.

Okay. So my second question is about the cost structure for the difference for the international business compared with China business. So can management also provide an outlook for the company's gross profitability this year? Also, you just mentioned about localization, which is a key part of your overseas business. How will that impact your cost going forward?

Sure. I'll take the question. So actually, if you look at in terms of business model, the steady-state cost structure of overseas business is very similar to our current business in Mainland China. So we believe the gross margins are both above 70%. And also, the target ratio as a percentage of gross billing is also 50% for sales and marketing and below 10% for G&A and R&D. Obviously, we need to reach a certain scale to reach that kind of cost structure target. So if we can grow at a moderate pace, we're likely that we can achieve positive cash flow in 2023 and positive gross spending contribution in 2024. So localization actually, there are many Chinese companies are going overseas. And the one lucky thing for us is that we do not make major localization work on our core product, which is part of teaching English and we do not need to make major work on curriculum nor technology platform. The only localization work we need to do is the sales and marketing part. So any customer interfacing -- interfaces that related to sales and marketing, we need to do that. And the -- in terms of core product curriculum and [indiscernible], there are some localization work, but it is very light. So we do not expect this to change our target for the research and development expense ratio.

[Foreign Language]

[Interpreted] Yes. So I just want to add one more point is that English learning is our core product. And we're actually having good advantage is that we have more than 30,000 Filipino teachers. And the Filipino teachers is the reason that we have very good -- students have very good learning experience. And also, we can achieve very good margin -- and so in terms of -- because of our advantages in the teacher resources, and also because these Filipino teachers, we are actually more international than many other Chinese companies. And that's the reason why we are able to make good progress in terms of the transition and to quickly move our strategy and the focus from domestic business to overseas market.

[Operator Instructions] We will now take the next question from [ Boris Suvorov ] from Bova.

My question is about distribution of assets and liabilities between Mainland China and non-Mainland China students. I see that as of last report, it is about [ 151 million ] in current assets in U.S. dollars. What percentage of those current assets are for Mainland China?

I'll take this question. Yes. So I'll take this question. So right now, there's no clear cut of liability and assets between the Mainland China part and overseas market part. So this -- once the Board has made evaluation and in terms of the value of both business and we still need to split the overhead. So however, there's one principle we will look at in terms of splitting these 2 [indiscernible] that we will always make sure the overseas business, we have positive net equities, which means, in principle, we will keep more cash than the gross billings or deferred revenues from the overseas students. And in terms of domestic business, as I mentioned earlier, that there always has been a huge gap between the advances from students versus the cash. And so after that, we believe, once we split these 2 businesses, our domestic business, we'll keep that way. However, going forward, all these advances from students will be consumed and turn into profit. So this is why we are confident that by splitting domestic business and overseas business, we allow a very clean balance sheet for overseas business, allow it to grow on its own trajectory. And at the same time, our -- we can -- for domestic business, we can focus on our students to make sure all these lesson credits will be consumed, and our students will learn and improve.

And as a follow-up, similar question. If the company will be split in non-Mainland China and Mainland China, what about product development expense and general and admin, in terms of staffing, do you see any deduction of costs -- splits of cost between 2 companies or [ most ] of engineers and general and admin staff [indiscernible] non-Mainland China company?

Yes. Yes. So we will split our staff in terms of G&A and R&D. And so obviously, anything related to a public company will stay with the public company. And most of the patent and IP will go to the public company. And we believe like -- right now, we have a very, very small G&A and R&D team. So roughly, it will be probably 50-50. Half of the staff will stay with the domestic business and half of the staff will stay with the public company focusing on overseas market.

There are no further questions at the moment. [Operator Instructions] And we have a follow-up question from Long Lin from The Benchmark Company.

Yes, I have a follow-up on your overseas business. So I just wanted to see, does the company need any additional capital to fund the overseas expansion?

I'll take this question. Currently, we do not need additional capital to fund overseas business growth. So the cash balance on our overseas bank accounts are sufficient to drive our growth by the time we turn cash flow positive, which I said earlier, we believe this could happen in 2023.

And we have no further questions. So I would like to turn the call back to the company for closing remarks. Mrs. [indiscernible], please go ahead.

Thank you once again for joining us today. If you have further questions, please feel free to contact 51Talk's Investor Relations through the contact information provided on our website.

Thank you, everyone.

This concludes this conference call. You may now disconnect your lines. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]