Ladies and gentlemen, thank you for standing by, and welcome to the RISE Education Third Quarter 2019 Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Mei Li. Thank you. Please go ahead.

Thank you, Operator. Hello, everyone, and welcome to RISE Education's Third Quarter 2019 Earnings Conference Call. Today, you will hear from Mr. Sun Yiding, CEO, who will give an overview of the company's strategy and recent developments; followed by Ms. Lu Jiandong, CFO and COO, who will go over our financial results in more detail. Before we proceed, I would like to remind you that today's discussion may contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause our results to materially differ from those in the forward-looking statements, please refer to our Form 20-F filed with the SEC on April 19, 2019. We do not assume any obligation to update any forward-looking statements, except as required under applicable law. At this point, I'd like to turn the call over to Mr. Sun Yiding. Please go ahead.

Thank you, everyone, for joining us today. I will read through Mr. Sun's prepared remarks for him in English. I'm delighted to report a solid quarter of growth across our businesses. In face of the challenges posed by the regulatory environment and macroeconomic headwinds, revenues for the quarter increased by 18.4% year-over-year to CNY 411.1 million. Adjusted EBITDA increased by 37.1% year-over-year to CNY 88.9 million, and adjusted EBITDA margin expanded by 290 basis points to 21.6% from 18.7% for the same period of last year. Before I review our performance, I'd like to remind you that starting from this quarter, all of our operational and financial results includes Shijiazhuang operations, which have been consolidated since July 1. Total student enrollments are composed of enrollments of new students and retention of existing students. During this quarter, we scored a solid total student enrollment growth of 15% year-over-year and even stronger enrollments of new students of 19% year-over-year for regular courses at our self-owned learning centers. Due to the change in tuition collection schedule, we are going to begin disclosing student enrollment in the cities where we have been collecting the tuition every 3 months since December 2018 separately from the cities where we continue collecting full course tuition. During the third quarter, total student enrollments for our regular courses, including Rise Start and Rise On, were 14,700, an increase of 15% year-over-year. Of this, 6,492 students were from cities where the tuition is collected every 3 months. 6,782 students were from cities where the full course tuition is collected. And 1,426 students were from our newly consolidated Shijiazhuang learning center. Student enrollment from other Rise courses during the quarter were 1,175. Regulations mandating 3-month tuition payments and calculation of full-day classes have had an adverse impact on our total student…

Hello, everyone. Now I would like to go through our financial highlights for the third quarter of 2019. Before I begin, please note that all numbers stated are in RMB. Total revenues during the quarter increased by 18.4% year-over-year to CNY 411.1 million, driven primarily by a 20.2% year-over-year increase in revenues from our educational programs to CNY 333.3 million. The increase in revenues from our educational programs was primarily attributable to an increase in the number of students in class for our regular courses operated by self-owned learning centers and an increase in prices for our regular courses since the beginning of year 2019. The number of our self-owned learning centers increased to 87 as of September 30, 2019, from 70 as of September 30 of last year. We added 205 classrooms as of September 30, 2019, as compared to the same period of last year. Franchise revenues increased by 27.4% year-over-year to CNY 45.4 million during the quarter, primarily driven through an increase in the initial franchise fees and recurring franchise fees associated with an increase in the number of franchised learning centers from 273 as of September 30, 2018, to 364 as of September 30, 2019. Our revenues for this quarter -- other revenues for this quarter decreased by 5.8% year-over-year to CNY 32.5 million. Cost of revenues for this quarter increased by 19.8% year-over-year to CNY 196.3 million. Non-GAAP cost of revenues for the quarter increased by 20.3% year-over-year to CNY 192.4 million. The increase was primarily due to personnel costs associated with an increase in teachers' headcount, total teaching hours and teacher compensation at our self-owned learning centers and an increase in rental costs associated with the expansion of our operations. Gross profit increased by 17.1% year-over-year to CNY 214.9 million, while gross margin was…

[Operator Instructions]. Your first question, I mean, is from Alex Xie from Crédit Suisse.

So I have two questions. Firstly, I noticed that our guidance for the fourth quarter revenue, to be frank, was a little bit lower than my previous forecast. And I think it showed -- it indicates a slowdown even from this quarter. I would like to know whether this is still an impact of regulation. And what is the outlook going forward? Are we still expecting sales over 20% -- recovering to over 20% in the future? And secondly, I noticed that in this quarter, we have quite some meaningful operating leverage in terms of OpEx, selling and marketing expenses. And would you please share the reason for that and the trend of customer acquisition costs?

Thank you, Alex. I will translate our CEO's answer for the first question. The macroeconomic headwinds have an active impact to the whole education impact -- to the whole education market. For RISE, we believe that the regulations will benefit the whole junior English learning market and RISE in the long term, and we remain very positive. But in the short term, the involvement of regulations such as the collection schedule for the restriction of the 3-month tuition payment policy did generate some negative impact to our business, which is higher than our expectation at the beginning of the year. For example, in Beijing, we are required to cancel the full-day courses -- the full-day classes. At the same time, we humbly recommended to the parents to take the replacement classes such as the half-day classes. But due to the stop -- due to we stopped offering the full day classes anymore, the replacement of the half-day classes, we -- the actual revenue were -- our actual revenue were reduced by approximately CNY 20 million. And also we -- in Beijing, according to the government requirement, we will change our collection schedule from December 2018 and the refund rate and -- the refund rate is higher than our early expectation and the rollover rate is lower than our early expectation, which leads to the decline of our -- the reduction of our actual revenue of approximately CNY 30 million than our annual budget expectation. We gradually -- the impact of those regulations gradually show. But the company is very -- is actively launching a lot of the initiatives in order to counteract the situation, and we try hard to improve the retention rate. The detailed measures includes such as we try to shortening the waiting period for the students before…

Okay. Alex, let me answer your second question on G&A and also -- selling and marketing expenses and G&A. We're very, very happy to see that the initiatives we launched early in the year with regard to marketing and sales started to show a very, very positive outcome. What we have done is to try to leverage, make best use of our offline learning center network, try to acquire more students from offline than the more expensive channels online. I can share with you the statistics. So early in the year, acquisition from offline accounts for approximately 60% of our total student enrollment. As of third quarter, we managed to increase the offline the student acquisition to close to 65%. So we'll continue the efforts in this regard. At the same time, when we launched our Rise+ platform, which helped to increase the communications with the parents and that helps to improve the parents' satisfaction and the word-of-mouth referrals, which is even a cheaper way of acquiring students, started to contribute more of our total offline student acquisition. Roughly, close to 30% of our offline student enrollments are actually from the word-of-mouth of -- parents' referrals. So it's also a good proof of our improvement in our services to the parents and also a reflection of the parents' satisfaction with our overall teaching quality. The other thing we have focused on is to improve the conversion rate. I'm very happy to tell you that the third quarter conversion rate overall had increased by more than 30%. This is the result of an overall package offered to our sales -- selling staff. One, we actually increased their salaries starting from June. Also, we have restructured the incentive structure that better motivates the course consultants and the salespeople to do a better…

Your next question is from Felix Liu from UBS.

My first question is a follow-up on the margin. So with the good cost control in the third quarter, is there any update to our full year EBITDA margin target? Second question is on the tax rate. I think that we paid around 40% of our pretax income as tax, which is higher than last year and a lot higher than the peers. May I know any particular reason behind this? And my third question is on the share-based compensation, which increased as a percentage of revenue. May I know any particular reasons behind this? And how should we forecast this going forward?

Thank you, Felix. Let me answer your questions. On margin, for the full year, we expect it will remain the same, as we shared with the market early this year. So it will remain unchanged. On the tax rate, currently, we are still -- for the income tax, we still pay 25% income tax. We are trying to get -- the high-technology preferential tax treatment efforts is still ongoing, in progress, so we don't have a definite deadline when the government will grant that approval. So we're still working hard trying to obtain the approval from the government on the tax treatment. And the other reason for higher effective tax rate is because of the different tax rate jurisdictions. And that actually increased our tax rate by 1% this year -- this quarter -- this year, yes, this year. And also because of outside basis difference on the investment in the space, this is quite technical. So when we actually make a payment to Hong Kong, we need to actually withhold VAT tax. And also, we need to withhold the dividends. Even though we don't pay dividends, we still need to withhold the dividend tax. So all this combined increased our effective tax rate for this year. So I think that's my explanation for the tax rate. On share-based compensation, this year is relatively higher compared to last year. It's because in April, we have actually launched the second part of our stock option program to our management as well as the key employees. So once it's launched, a part of the options becomes immediately vested after April 1. So that actually has a pretty significant impact on our expenses actually in the second quarter. In the third quarter, it becomes normalized. If you need a -- I think starting from -- if we normalize the SBC expenses going forward, projecting for next year, roughly -- based on the current performance-based and as well as the years of working experience based option vesting schedule, we would estimate for each quarter, it's probably 4 million to 5 million.

Your next question is from Alex Liu from China Renaissance.

Just on the remark of CEO basically on the online business, he noted some parents are not really -- the acceptance was not really as high as the management previously anticipated. So just wondering whether there is any color that the management can share on that point, whether this is due to a format issue for the class or whether there's something other that we can have.

The Can-Talk is our online 101 service, the standalone service. We started to test this online product from end of 2017. So right now, it's over one year's time. Based on our observation, this class is targeted to aged 4 to aged 6 students. While the students are at that age, they pay much more attention to the personal touch, like we mentioned that nothing can replace the teacher's ability to engage with the students directly in the classroom. So for this reason, the pure online courses is not what they want the most. So probably when they grow older, we can offer more online -- they will take more online courses. Also, if you look at the online competitors, the online education organizations in the market, I think most of their students are above age 7. So our students does not overlap with most of those online players. The second is if you look at the economics of this 101 business, we use foreign teachers. Also, even though we don't have a lot of student acquisition costs because we don't open this product to the students outside of RISE, but still it's very difficult to make a profit. So from this point of view, we probably will not offer this in the long term. And the third reason is we mentioned that we have a long-term strategy that is to integrate our current product -- our existing product with the online offering. We have been trying harder for a long time. So going forward, we will have more supplemental online offering into our existing classes that we have expertise to do exercises at their homes after class. And for example, we are testing the AI technology and online small class product using native English teachers online right now in some -- in selected learning centers. And I think the most -- when we decide what direction to go, the most important thing is the demand -- the actual demand of our parents, their feedback, their experience.

Your next question is from Chongguang from CITIC Securities.

I noticed that your retention rate is much lower than the past several quarters. Could you please explain this? And do you have guidance for the next quarters?

First, let me explain the retention rate of 69%. We use this retention -- how do we calculate this retention rate? We use the number of students who are registered for the next course divided by the number of students who completed the current courses to get the retention rate. The impact -- the reason why the retention rate was a little bit lower in this quarter is -- I think it's primarily due to the regulatory impact in Beijing because Beijing contribute a material student enrollment in our business and Beijing adopted the new tuition collection schedule from December 2018. After we adopted the new collection schedule, our salespeople and our teachers have very limited time to prepare for the renewal and the retention of the students after each session before we have -- our standard, of course, is 9 months or 10 months. But right now, every 3 months, we have to get prepared for the rollover. So it's really a challenge for all of ourselves in the learning centers. And because we just adopted the new schedule from end of 2018, so material -- we can see material student retention from the third quarter. It's just we just see material retention in the third quarter. So gradually, we will have a more accurate number. But right now, we already see a turnover. We already see very a positive change on the retention, on the rollover rates. So internally, we're tracking closely, and we are finding any opportunity to further improve the retention and rollover in Beijing. We remain very positive in this retention rate going forward.

We don't have any other questions as of the moment.

We can conclude. Yes, we can conclude.

Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.