Ladies and gentlemen, thank you for standing by, and welcome to the GSX Techedu Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded on Thursday, the 22nd of August of 2019. I would now like to hand the conference over to your first speaker today, Mr. Tip Fleming from Christensen. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. GSX' earnings release was distributed earlier today and is available on the company's IR website. On the call with me today are Mr. Larry Chen, GSX' Founder, Chairman and Chief Executive Officer; and Ms. Shannon Shen, Chief Financial Officer. Larry will give a general overview and then Shannon will discuss the financials. Shannon will be available to answer your questions during the Q&A session that follows. Before we begin, I'd like to remind you that this conference call contains forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and related to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict, and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the SEC. The company does not undertake any obligation to update any forward-looking statement except as required under applicable law. It is now my pleasure to introduce Larry. Larry, please go ahead.

Thank you all for joining us for our second quarter earnings call and our first call as a public company. We are pleased to report another profitable quarter of growth, with net revenues of RMB 353.7 million, a 413.4% increase on a year-over-year basis. The strong growth was propelled by robust performance across all of our business lines. Our K-12 courses, the cornerstone of our company, continued its rapid expansion, which speaks to the popularity of our services and the tremendous potential of this industry. According to Frost & Sullivan, the K-12 student population is expected to reach 241 million by 2023. 45% of these students are expected to attend online after-school tutoring courses, which is up from just 9.5% in 2018. As the industry leader, we are confident that we are uniquely positioned to reap the benefits of this fast-growing market. Amid a sea of industries in China currently with a strong macroeconomic headwind, online after-school tutoring is one of the few islands enjoying strongly favorable condition, including governmental policies. The recently announced opinions on regulated online after-school tutoring allowed for greater operational flexibility for online service providers compared with their off-line counterparts. This not only gave the parents and students more room to make personal choices, but we think it also will strengthen the competitive advantage of industry leaders such as ourselves. We relentlessly pursue the high end of quality with our course offerings. This remains the overarching focus of our growth strategy, which has been reinforced by our intense brand recognition as an NYSE-listed public company. Delivering results-oriented, high-quality education to our students will continue to be at the heart of everything we do and will serve as a key to deepening our economic moat for sustained, profitable growth. Now I will hand the call over to Shannon, our CFO, to walk you guys through the details of our financial and operating results.

Thanks, Larry, and thank you, everyone, for joining the call. I will now walk you through our operating and financial results. Please note that all financial data I talk about will be presented in RMB terms. We entered 2019 with robust growth in the first quarter, and I am pleased to report that with our continued momentum across all our key operating metrics, which drove the strong financial performance during the second quarter. We are still laser focused on online, live, large class, which we believe is the most effective and scalable model to disseminate the scarce, high-quality teaching resources in China to aspiring students all over the country. Net revenues in the second quarter jumped 413% from the same period of 2018. Our gross billings, which is the metric we pay close attention to, increased by 462% year-over-year to CNY 599.4 million, up from CNY 106.6 million in the same period of 2018. Total enrollment, which refers to the enrollment are paying more -- paying more than RMB 9.9, reached a historical high, hitting the number of 592,000, 3.5x that of the same period of 2018. Period enrollments, which refers to enrollments for regular classes, increased to 363,000 from 94,000 in the second quarter. The across-the-board growth was primarily driven by the continued expansion of our K-12 after-school tutoring business, and to a lesser extent, our foreign language, professional and interest courses. Now let's break down our revenue stream. Net revenue from our K-12 courses increased by 463.7% to CNY 270.3 million and accounted for 76.4% of net revenues, increasing from 69.6% in the same period of 2018. This revenue growth was primarily driven by increase in paid course enrollments and K-12 students tuition fees. Our standard tuition fees for our K-12 courses increased an average of over 20%…

[Operator Instructions] Our first question today comes from Alex Yu with Crédit Suisse. Alexander Yu;Credit Suisse;Analyst: So I have 3 questions to ask. First one, I'd like to ask about our customer acquisition channels. How much of our new student enrollments were from external channels? And how much from our organic channels? And for external channels, what are major channels that we used and our expectations for the customer acquisition costs in the second half? On the second aspect, I would like to ask about our revenue and also enrollment breakdown between the primary, middle school and high school departments. And what strategies do we have to do better in the primary school segment? And the third aspect I would like to ask about is the contribution from low-tier cities versus Tier 1 and 2 cities. What are the major provinces or cities that contributes revenue of us?

Thanks, Alex. Your first question is about the customer acquisition. So actually, most of the new student enrollments we have acquired are through traffic acquisition. And the main channels we are using is basically the same as other online education companies, such as WeChat, like WeChat Official Accounts, WeChat Moments, news feed ad, and also with TikTok, Toutiao and Baidu. And also we are exploring new channels as well. And so talking about like the second half year's sales and also the marketing expenses budget. So it's -- this is worth noting that, also there is some seasonality increase for our business. Like in summer campaign, summer campaign usually starts in May, and it lasts through May until the end of August. So when we talk about the sales and marketing strategies in the second half, so we are talking about like the activities we are taking in the summer. And like I just mentioned in my prepared remarks, like the sales and marketing expenses we are... [Technical Difficulty]

Okay. You may continue.

Also let me recap with our marketing strategy. So let me talk about marketing strategy. Within our organization, there is a phrase we use frequently. We call it effective growth. So we don't usually see marketing as a expense. We actually see it as an investment. So one of our major advantage is our high efficiency at our customer acquisition. The student -- the customer acquisition efforts while -- like the value chain is very long. So it's less from the traffic acquisition at the beginning and then it's the free promotion class we provide. And also follow that is the sales products that we have a really strong sales force that can help convert the parents from a promotion class to a regular class. So since the value is really chain, that company needs to be equally capable on each of the links that to make the whole sales chain more efficient. And so we have been trained our staff in the past 2 to 3 years that they -- we train them to use money wisely because we haven't raised any money since like in 2 -- since 4 years ago. Then -- so then for example, if we can be 5% better growth in the space than others, then maybe we can deliver an acquisition efficiency twice or even several times as high as our peers. So we actually -- and we believe we developed a really efficient technology to closely monitor our customer acquisition process, so they calculated ROI closely that the system we developed is very efficient. By doing the peak season of our traffic distribution, they can monitor the traffic on hourly basis. So we monitor our links and the barcode we send out through all our sales channels. And we can obviously mine…

The next question today comes from Gregory Zhao with Barclays.

A very strong quarter, and congratulation on the IPO. So this is your first earning call after the IPO. So I want to ask 3 questions, if I may. The first one is about the big picture of the industry. So we know the market has very huge opportunities considering the potential of the user base and addressable market. So is there any way you can help us to quantify where the market opportunity, such as the potential to penetration rate and ARPU upside? So this is my first question. The second one is I want to understand the competitive landscape and your user acquisition strategy. So we heard your competitor also very aggressively are expanding into the online space even they have some traditional some lapsed issue in the off-line. And we know they invest a lot in online acquisition. So just want to know your thoughts on that front, how to compete with them. And also how do you differentiate your course content from your peers? The last one is a quick follow-up on the higher-tier city and lower-tier city questions. So you just reported very impressive penetration rate in the lower-tier city. As your courses are given online, so I assume that the prices across all the different tier cities should be the same. I just want to confirm that.

Thanks, Greg. And yes. Your first question is about the quantitative market opportunity. So K-12 is actually a tremendous market. Like it's children-level market has a huge opportunity. Like for instance, in 2018, the online market penetration rate was only 9.5%. So in 5 years, it will reach to 45.5% based on Frost & Sullivan's report. So -- but we are in the industry. Actually, we do see the penetration rate is much more higher than what then, like the outsider has observed. So let's just do a quick math. For instance, it's like a trillion-level market, then in 5 years, 60% is online, then within the online business, probably 60% is for large-class business. Then that already gave you like a 300 million market. It's really huge. Then let me talk about online live large class. It has a higher entry barrier than other like players because like all the technology infrastructures, you need to have like the live broadcasting technology, the big data and the AI technology. And also you need to have a large group of people to serve such a large group of students. So that entry barrier that kind of like decides, like the top players will have a higher market kind of concentration rate. So let's say, if the top 3 players hold that 50% of the market share, then that already gives you like an annual revenue of -- net revenue of about CNY 20 billion. So that's a really huge market opportunity for us and for like other players right now. And the deep thinking behind why we are doing the online tutoring in large-class format is that think about like what's the real demand from the students and the parents? They are always searching for the best teachers. And if they…

The next question today comes from Jeffrey Chan with CLSA.

I have three questions. The first one, it's just a recap. Can management help me to recap a bit on the gross billings per paid course enrollment by category, which means by K-12 and by the interest and foreign language course? And my second question is, what is the subject exposure now? Is it math still accounting for the highest proportion? And how about English and Chinese? And my last question is, is there any specific strategy for management in recruiting new instructors given the higher competition landscape?

Sorry, Jeffrey. Can you repeat your last question?

My last question was, is there any like specific strategy in recruiting new instructors given the higher competition landscape?

Okay. So your first question is about the average spending for enrollments. So I also want to remind you that, that also has a seasonality. For instance, yes, in the second quarter, like a lot of students that are registering for like summer class and for part of the fall class, then some of the spend, it leads down to what we called entrance-grade level, like the first grade in elementary or the first grade in middle school, the price of the class is lower. It's basically only 90 -- CNY 49,000 per enrollment. So that way, we kind of like track down the average spending per enrollment. But if we talk about -- if we move the scenario to the first quarter, then in the first quarter, students are enrolling for a spring semester. Usually, the average class price, the ASP is higher. So that gives you a higher average spending per enrollment. So that's -- if we compare quarter-over-quarter, the average spending per enrollment doesn't change a lot. This kind of like write-offs the impact on the ASP increase. It's about CNY 1,500. And your second question is about the subject exposure. Yes. So in this quarter, math, K-12, English and Chinese combined contributed around like 80% of our paid course enrollment of our K-12 courses. Math do contributes the highest proportion. It's around -- it's about 30%. But we did really good job on English and Chinese as well. These 2 subjects contributed about 40% as well. So that's another advantage we have that it has -- we have. Our revenue distribution on these 3 major subjects are kind of like very, very new ones. So that -- which means we have great, good teachers that are evenly distributed on those subjects, which allows the students to…

Yes. This is very helpful and congratulations on the outstanding results.

Thanks.

The next question today comes from Sheng Zhong with Morgan Stanley.

I just have one question about the teachers. So until now in the K-12 segment, how many instructors and tutors do you have? And for your top teachers, what's the current student-teacher ratio? And because it's -- continues to increase. So when you monitor this along with the ratio increase, do you see any change in the key metrics that you see, sales conversion rate, retention rate? And also how much potential room do you see can improve the student-teacher ratio?

Thanks, Zhong Sheng. So your first question is about the number of our tutors and the instructors. So by the end of the first quarter, we have 169 instructors. And by the end of the second quarter, that number adds up to less than 200. And by the end of the first quarter, we have 552 tutors. And by the end of the second quarter, the number adds up to around -- over -- slightly over -- [ less than 1,000 ]. So our organization actually grows really quick. So that's the privilege we can enjoy because we have a really strong management team that Larry used to manage over 30,000 employees. So it's kind of like we are going into his comfort zone that when our organization became a really large one, that he knows exactly how to train up these tutors that they can provide a better service to our parents and to our students. So your second question is about the teachers and student ratio. So we have 2 ratios. One ratio is for instructors and student ratio and the other ratio is the tutor and student ratio. So for the instructor and student ratio, I've just mentioned that the average enrollment per class during my prepared remarks. And we did pay close attention to the class scale. We monitor class scale at 600, 800, 1,000, 1,200 just to keep a close attention to -- when the class scale becomes larger, wider, the -- like the ongoing KPIs will become worse. So we closely monitor a lot of ongoing KPIs, such as class attendance, class completion rate, homework submission rate, homework correction rate. And from our observation, the ongoing KPIs is largely depend on the teachers' teaching quality. Sometimes, the teacher is quite capable, even though his…

Yes. And I want to follow up, please, the teachers' student-teacher ratio. So the top teachers is very good resources. So do you think there are still how much room to increase the top teachers' student-teacher ratio?

So for the top teachers, there is a thing I also need to remind you. So I think that is another question that a lot of people they may pay attention to our sales concentration rate, that our top teachers may contributed over 40% of the revenue in 2018 as well as in the first quarter in 2019. So there's a reason for the concentration because like in 2018, even though by the end of the year, we have 163 instructors on hand, only half of them are in their full capacity because we provide longer than 6 months of training to those teachers. And there is a [ parameter ] for K-12 business is that when -- that needs time for instructors to grow the scale of his class -- his or her class. So because like there's -- for instance, if a teacher joins us in 2018 that, by the end of today, he already experienced the 4 or 5 times of retention period. And for a new teacher, he doesn't really have that time to grow his class scale. And for our top teachers, like I just said, we are closely monitoring their ongoing KPIs. And we also wanted to create a really healthy environment for those teachers that they are teaching the class scale that they are -- they can handle and they are feeling good about it. So right now, we do see our top teachers like they are teaching a class scale at around like low single digit of 1,000, like 2,000 or even like 1,200 students in the same class. And we will closely monitoring all the KPIs to see whether we can put their number up.

The next question today comes from Carson Lo with Nomura.

So congrats on the strong quarter. So I just have a few questions. First, to follow up about the teacher-student ratio. So based on the current KPI monitoring, so how -- yes, I just want to follow up on how -- what is the ceiling for the top teachers -- teacher-student ratio for the top teachers based on your monitoring? So to determine the room for the maximum students in the same class. And the second question is about the -- more about cross-selling. So I want to see for a cohort of users, then how many subjects do they normally apply in our platform?

Okay. So for the setting of the scale of the instructors, theoretically there's no limits for the class because our live broadcasting technology now supports 100,000 students in the same classroom without a significant latency. And in reality, we did host a class with a -- of students of over 26,000. And still, it's -- without any significant latency. But for the -- another reason or another parameter we are evaluating this optimized scale of the class is like the instructor and the tutor group as well as the content development team, also together with the technology team and the sales team is a group, which means like the instructors need to work closely with his group to make the class or to make the learning experience better. And when the group grow really quick or grow into a large group, the communication efficiency might be lower, which means sometimes like there's the optimal scale of these classes. And again, we are closely monitoring like all the ongoing KPIs. And right now, we did see for those top teachers, probably 1,000, 2,000, they are -- like they are in really good shape to handle that scale of class. And also for cross-selling, cross-selling did see different parameters across high school sector, elementary school sector and middle school sector. For instance, from each -- for elementary schools, they only learn 3 subjects at school. So -- and there -- sometimes, the parent won't be that brutal to them to have them like learn all the 3 subjects. They may just focus on the weakest one. So like for high school sector, they learn like 6 subjects at high school. And basically, they have no time to do leisures or holidays like all of their time are concentrated on all the tasks and study. So they tend to have a higher cross-selling rate. So that's kind of like a different across all the sectors. And that may subject to change whenever the enrollments' distributions across all of the school segments had to change. So usually, I mean right now, we did a really good job on cross-selling, like I just said, because we have good teachers evenly distributed on different subjects. So we will continue to encourage our students to register for different subjects with our platform.

So can I follow up quickly on the -- for example, on the high school students? So now, at this moment, on average, how many subjects were normalized with students users registered on our platform?

That also like show seasonalities like usually, that number tends to be high in the first quarter. Because if we take the scenario of the whole school year, like the school year usually starts in summer. And that when it comes to next year's first quarter, it comes to the end of the school year, so which means probably the students stays with the platform with longer time, then that's the time they're trying to do taking more courses because they have built a really trustworthy relationship with our platform. And the number in summer or in fall semester tends to be low because that's usually the time that students are newly registered and they are probably not familiar with the platform. So they tend to just try 1 subject, and they will be expanding in the subsequential semesters.

This concludes our question-and-answer session. I would like to turn the conference back over to Tip Fleming for any closing remarks.

Okay. Thank you, operator. Thank you, everyone, for joining the call today. If you have any further questions, please don't hesitate to contact us or the company directly. Thank you very much.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.