Ladies and gentlemen, thank you for standing by and welcome to the GSX Techedu Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded on Tuesday, the 5th of November of 2019. I would now like to hand the conference over to your first speaker today, Ms. Sandy Qin, IR Senior Manager of GSX. 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 Investor Relations 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. Following the prepared remarks, Larry and Shannon will be available to answer your questions during the Q&A session that follows. Before we begin, I would 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 relate 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, and 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, Sandy, and thank you all for joining us for our third quarter earnings call. GSX had another great quarter with good -- with exponential growth, demonstrating our superior teaching quality and excellent learning results. We [delivered] speed, efficiency and effectiveness to gain insurmountable competitive advantage. We are fully committed to productivity improvements and take sustained massive action immediately. We make every major effort to invest in all areas of content development and technology. We will continue to invest strategically and smartly in our customer acquisition and R&D in 2019 and 2020. We are determined to achieve a steep but shorter learning curve. All that we have been doing contribute to even greater engagement with our students and parents. We are proud to see our net operating cash flow for the third quarter to reach approximately RMB 287.8 million. Our cash and cash equivalents and the short-term investments and the long-term investments to reach more than RMB 2.1 billion. Our non-GAAP net income reached to RMB 20.1 million. And we will continue to have our -- and we will reinforce on our strategy to reap financial reward. This quarter, I have several thoughts to share with you guys. The first point I want to say is that GSX only does the one thing; GSX is laser-focused on the online live large-class education. To perfectly fulfill this sole task, we have smoothly integrated all functions, including traffic acquisition; sales and marketing; instructors and tutors; live broadcasting; content development; and data analysis et cetera. For any outperforming company, there are always several key factors, or remotely several key factors to determine effectiveness and efficiency and build a competitive advantage and economic mode. The outperforming company has always been in pursuit of the better performance in each factor. If each loop of…

Thanks, Larry, and thank you, everyone, for joining the call. I will now walk you through our operating and financial results, and end with how we build out the coming quarters. Please note that all financial data I talk about will be presented in RMB terms. I am pleased to report that we saw continued momentum across all of our key operating metrics which drove strong financial performance during the third quarter. The top line far beat our guidance. Moreover, we managed to deliver our sixth consecutive quarter of non-GAAP profitability in a highly competitive market thanks to our successful summer campaign and effective growth strategy focus. The third quarter net revenue increased 462% from the same period of 2018. Since 2018 Q4, we have maintained over 4x [growth] for 4 consecutive quarters, thanks to solid accumulation in both education experience and technology resource in the past years. Our gross billings in non-GAAP metric that drives revenues increased by 420% year-over-year to RMB 818 million, mainly due to increasing student enrolments that were driven by our outstanding summer promotion efforts. Total enrolments which were driven by our -- which refers to enrolments to courses priced above RMB 9.9 hit a record high of 820,000, which was 3.4x that of the same period of 2018. Paid enrolments, which refers to enrolments priced above RMB 99, increased to 538,000 or 3.7x that of the same period of 2018. Please note that during the summer, we provided 3 different types of promotion classes. First is RMB 49 entrance level classes. The second is RMB 9 promotion classes. And the third is classes totally for free, within which only RMB 49 classes were counted as part of total enrolments. This year, we have achieved a significant number of the enrolments into our summer promotional…

[Operator Instructions] The first question is from the line of Alex Yu with Credit Suisse.

Congratulations on very strong results. I have 3 questions. Firstly, what is your view on the outlook of customer acquisition cost in 2020 and then amidst intensified competition in this industry? And secondly, what is the trend of the contribution of top 10 teachers in your platform? And how is your progress in terms of introducing new teachers to your platform? Thirdly, in the primary school segment, I believe you're investing more after IPO. What's the progress in the primary school segment in terms of enrolment and revenue contribution?

Your first question is about customer acquisition cost. So customer acquisition cost will increase steadily, but for us -- for GSX, we believe we can have a relatively lower customer acquisition cost, thanks to our strong operating efficiency and organizational capability. So in the past, especially after the IPO, we saw quite a few articles started to talking about our marketing process and tried to figure out why we can maintain our customer acquisition cost at such a low level, but actually, they chose it, there's no secret ingredients. So although we are an online education company and technology is the foundation, but in essence it's still education and education itself is all about connections, it's all about intimacy, it's all about love. So holding that philosophy, we always believe that as long as we can provide a very good service to every parents and students, we can treat them well, then we can provide each class with a higher quality and we can address their concerns on timely basis and give them answers to their questions to their satisfactory, then they will stay with us as long as possible, then that can be a considerable amount of time and the revenue contributed by them will far exceeding the customer acquisition cost. So looking back to the past 9 months, from the non-GAAP perspective, our total sales and marketing expenses was around RMB 595 million. If the number is divided by the RMB 1.09 million paid cost enrolments that basically give us a number of around RMB 545 million. That's the weighted average customer acquisition cost and we can see the number is fairly low especially considering like the coming Q4 will be the largest retention season, then we do see the weighted average customer acquisition cost to further decline.…

The next question is from the line of Gregory Zhao with Barclays.

Congratulation to the strong quarter. I also have 3 questions. The first one is about online-offline competition. So just wanted to understand how you think about the online-offline K-12 tutoring markets current competition and considering your fast growth, how many of the students or what percentage of the new enrolments do you think were taken from offline? So my second question is about the margin. So you reported strong gross billings and deferred revenue in this quarter. So assuming most of the gross billing and deferred revenue would be booked in the next couple of quarters, how shall we think about the contribution to your operating margins in Q4 and Q1 next year, especially considering the marketing campaign slowing down? And the last one, also want to understand a little bit more about your teacher recruitment and teachers' compensation structure. So we know the space is quite competitive, especially in the past summer, so given the high quality of your content and the teacher quality, so we wouldn't be surprised if the competitors want to undermine some of your top-ranking teachers, so want to understand your strategy to cope with competition. And how do you compensate your teachers to satisfy their demand?

Thanks, Greg. As for online versus offline competition for K-12, what I want to share is just as follows. Number one; online education market grows much faster than offline education market. As you know, in the past 9 months GSX net revenues increased 448.7% year-over-year, which is unimaginable for the offline peers. Number two is you know many online education companies had finished successful IPO; many private online education companies had finished the financing from the fees. And also policies from the government come to encourage the online education development. All these just forms a good habit for the students and the students and the parents are willing to take online courses more and more. And all those help leverage the online market to grow much faster. Number three is the essence of the education is about lab. The best teachers know how to allow the students and how to engage students to know what is the lab and how to lab. And that's the reason why we need the best instructors or the best teachers. Therefore, online -- offline education companies, one teacher just teaches 20 students in one class and he or she may teach 5 different classes in one time. So let's say he or she can teach 100 students in a certain period. But for online education companies, an instructor can teach 200 or 300 students at same time. This will say, does one handle the time efficiency or than the offline model. And our mission is that technology makes education better. And by leveraging technology, we -- and we can just increase the efficiency and effectiveness of our service. Number four is with our successful IPO, more and more top teachers from the offline institutions join us. And we believe that in the next few years more and more outstanding teachers will come to compete for being top instructors of the online live broadcast of tutoring institutions. Number five is what is the [Indiscernible] unchanged? We believe that the [Indiscernible] unchanged for education is it should have the best instructors; the most qualified tutors; the best learning result; the best learning experience; and the best engagement. And you know just as an online education company, we deliver speed, efficiency and effectiveness and we leverage technology and we can duplicate the best practice manufacture. All those guarantee the result.

Right. Adding to Larry's point, so the reason we do the large-class, the performance thinking before -- behind that is all about the highest teaching quality. We believe that leveraging the technology online can validate all the best teaching quality that has the exposure to more parents and students, then that will also help with the fairness of education because online is more flexible -- the online learning is more flexible, more affordable to a lot of parents and students. And actually, things around us move quickly because we are facing all the parents and students on daily basis. We can feel that how much they impress the online education because actually the class itself is very entertaining and frankly speaking the product is still at the early stage. We believe with the development of technology, the online learning experience can be very close to the -- even for offline, like small classes. And that's why we do see online education has a promising future. And your second question is about our guidance on Q4's OP margin and 2020. So for Q4, we expect the OP margin to be around 20% and that is the highest among the year. So as we have been communicating in last quarter and as Larry just mentioned, so the seasonality of OP margin for online education company is completely different from offline. So for offline, usually the summer season and the winter season will -- the OP margin will be the highest because during that time, the utilization rate of the classroom will be higher. But for online, especially for large-class, in Q3 and Q2, these are the seasons we invest in heavily in sales and the marketing expenses. When it comes to Q4, all the classes will be regular priced classes, and leveraging…

The next question is from the line of Jeffrey Chan with CLSA.

Congratulations on a very strong start in Q3. I have 2 questions to ask. The first one is we see that the interest income in quarter 3 is around RMB 3.3 million and how do you see about the full year of the interest income? And my second question is what is the city exposure now, like how many percent of enrolment in each tier of cities? And any change in coming quarters? Do we see a higher penetration rates in the coming few quarters?

Thanks, Jeffrey. First question about interest income. Yes, this quarter that interest income is around RMB 3.3 million in R&D terms. Compared to the cash-related assets, it's already RMB 2.1 billion. That number is fairly low, but it's all about accounting treatment. So we purchased some of the short-term investment as well as the long-term investment, all wealth management assets. Before they expire all the unrealized P&Ls are recorded in OCI other than P&L. So they will recognize -- they will be recognized as interest income when they expire. So that's why we see the interest income in this quarter is low, but in the future, they will all be realized in the P&L. And the second question is about the enrolment distribution in geography, right?

Yes.

So this quarter still our 4Q enrolments contributed by first-tier cities -- new first-tier cities and second-tier cities were around 48% and the lower tier cities contributed around 52%. So compared to previous quarter, the lower tier cities contribution increased 1%. So we do see our penetration rate in the third-tier and fourth-tier cities grow quickly. That means we have better compensation advantage in these tier cities. But one thing I want to put a little color on is like in the past quarter Beijing actually become the largest enrolment contribution city and so that means we are generally accepted or well-accepted by key opinion leaders even in the higher-tier cities. With talking to a few of the parents in Beijing and Shanghai, actually they were very sophisticated and very familiar with the curriculum. They take a lot of notes and make comparisons between us and some offline institutions and even some compare us with other online institutions. And from their very detailed notes, they kind of like integrate a lot of advantage we have. For instance, the high teaching quality experiences the teachers, then that's the reason they choose that. So in the future, we are very confident that these geography-wise enrolments can grow healthily and very -- in a sustainable way. End of Q&A

In the interests of time, we will now conclude our question-and-answer. I would now like to turn the conference back over to Ms. Sandy Qin for any closing comments. Thank you.

Okay. Thank you, operator, and 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.

The conference is now concluded. Thank you for attending today's presentation.