Ladies and gentlemen, thank you for standing by, and welcome to the RISE Education First Quarter 2020 Earnings Call conference. Please be advised that today's conference is being recorded. I now like to hand the conference over to your first speaker today, Ms. Mei Li. Thank you. Please go ahead.

Thank you, Operator. Hello, everyone, and welcome to RISE Education First Quarter 2020 Earnings Conference Call. Today, you will hear from Ms. Lihong Wang, Chairman and CEO; and Ms. Jiandong Lu, CFO. Ms. Wang will go over recent business updates, operations and the company's long-term strategy, Ms. Lu will go over the financial results of the quarter. Both will be available to take your questions in the Q&A section that follows. 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 results to materially differ from those in the forward-looking statements, please refer to our Form 20-F filed with the SEC on April 17, 2020. We do not assume any obligation to update any forward-looking statements, except as required under applicable law. Throughout today's call, Ms. Wang and Mr. Lu will be referring to the earnings presentation that has been uploaded to our IR website as a supplement to today's call. Now I'd like to turn the call over to Ms. Lihong Wang. Lihong, please go ahead.

Thank you, Mei. Hello, everyone. Thank you for joining our earnings call. I'd like to begin by expressing our deepest sympathy to everyone across the globe that has been impacted by the COVID-19 pandemic. We sincerely hope that the situation improves quickly and allow everyone to return to work safely. I'd like to begin my remarks on Slide 3. The outbreak of COVID-19 [indiscernible] January 2020 had a significant and material adverse impact on our operations during the quarter. In accordance with government regulations to contain the outbreak, RISE learning centers were temporarily closed starting on January 19, 2020, and all our self-owned learning centers remain close as of today. This has adversely impacted our ability to generate cash and GAAP revenue from regular courses and limited our ability to make - to market our services and acquire students through our learning center network. While we have resumed online operations, the extent of the disruption on offline operations and the related impact on our financial and operational results and outlook depend on COVID-19's further development as the global pandemic. Before going to details, I, however, would like to make 3 key points regarding our business. Number one, we have ample liquidity to make this extended period of uncertainty. As of March 31, 2020, we had of RMB 925.1 million in cash, cash equivalents and restricted cash. Number two, we now can run our business smoothly both online and offline. With resuming regular courses online, we achieved close to 90% participation rate, meaning most of our students are learning online with their teachers from offline learning centers before the pandemic. Number three, we are transforming into an online merging offline model. We also expanded our classes beyond English. So the OMO model, which is developing as we speak. Turning to Slide…

Thank you, Lihong. Let me now go through the financial results for the first quarter of 2020. Before I begin, please note that all numbers stated here are in RMB. As Lihong mentioned earlier, COVID-19 caused huge disruption to our business. As an online education company, we rely heavily on our offline learning center network to offer services and market our products to students. Starting in late January, we temporarily closed all our learning centers in compliance with government regulations to contain COVID-19. All our self-owned learning centers remain closed as of today. The temporary closure of our offline learning centers has inhibited our ability to offer offline classes and market our products to prospective students. This has adversely impacted our ability to generate cash and recognize revenue. Our learning centers were in operation for only 18 days in January and were closed throughout the remainder of the first quarter of 2020, which significantly and materially impacted our financial performance for the quarter. Total revenues during the quarter, decreased by 67.5% year-over-year to CNY109 million. The decrease in revenues was driven primarily by a 64.7% year-over-year decrease in revenues from our educational programs to CNY102 million. Starting this quarter, revenues from educational programs will include revenues generated by Can-Talk, which more accurately reflects our focus and long-term strategy going forward. Revenues from educational programs in previous years have been adjusted to make some comparative. Revenue from regular courses, namely Rise Start and Rise On was CNY74.4 million, the result of 18 days of offline operations in January. Revenues from other RISE courses, including Rise Up, Can-Talk and short-term online small group courses, and courses offered by The Edge were CNY27.6 million. Franchised revenues decreased by 84% year-over-year to CNY6.1 million during the quarter, primarily due to a decline in recurring…

[Operator Instructions]. Your first question today comes from the line of Sheng Zhong from Morgan Stanley.

Thank you for taking my question and very impressed with cost savings. My question is on the digital and online strategy. It seems like that you accelerated this online movement. So wondering what the positioning of the online path in your overall business? And any - and can you share with us the plan to - on the operation of online including the student acquisition? Is it mainly from existing students or are you targeting more broadly? And related with online student acquisition, my second question is the sales and marketing spending in second quarter and maybe the full year. So given the offline in gradual resumption, so what's the plan for the summer season sales marketing spending and longer term? Because we see a smaller spending in marketing in first quarter, but also the new student enrollment also lower. But I understand it's also because of the coronavirus. But going forward, what's the plan?

Yes. Sheng, thank you for the question. I will ask the strategy of the online business or the OMO business - OMO model. And then Jiandong, you can talk about the sales and marketing plan. Sheng, as I mentioned, now we are able to offer classes both online and offline smoothly. Going forward, the thinking is, one, we will modify our offline classes to be online class/offline combination. The proportion of online will be around 25% to 30%. On a higher grade from S1 to S6, we will have 30% to 40% online. And then for the younger age K1, K2, most of the classes will still be offline. And to supplement these classes, we will offer what we call targeted enhancement classes, which are purely online with a combination of foreign and Chinese teachers. So this is the OMO model. At the same time, as I mentioned, the online small group classes was actually pretty successful. Then we upgraded to a dual-teacher model, so one Chinese teacher, one foreign teacher. Foreign teachers mainly to teach students regarding knowledge and also the so-called the listening and speaking part of the language training. And the Chinese teacher will be more focused on how to complete a project, so-called the inquirer-based learning online. And this class has started to sell May 8. The first bunch, we target existing students. At the same time, we will roll out to prospect students as well. This is a lower, so-called, ASP and shorter term on pure online classes which we think will continue. So this student segment is different from our existing offline students or the future OMO model students, so this target a little bit lower spending preference and pure online students.

Okay. Sheng, it's Jiandong. Let me address your question on sales and marketing. So for the first quarter of 2020, our sales and marketing expenses in total is about 43 million. So half of that will be the personnel costs related to sales and marketing and then half related to the market branding and also marketing expenses. Since the culture of our offline network, offline learning centers closed, we started to try the new media marketing channels, and we watch very closely on the investment in the new channels and try to maximize kind of the return on investment in the new channels as well. At the same time, because we just started marketing online, and it's a period for us to actually accumulate experiences, in the [indiscernible] media marketing. Looking for the whole year, basically, when business resume in the second quarter - second half of this year, and we try to actually invest more in marketing in order to increase our total student enrollment. Having said that, we'll still watch very carefully on the acquisition cost per student, and we'll try to maintain the percentage of the investment in sales and marketing, in line with our total - in line with the cost and marketing expenses as a percentage of revenue in 2019. So throughout the year 2020.

Our next question today comes the line of Alex Xie from Credit Suisse.

My first question is about second quarter guidance. So would you please give us a breakdown of your second quarter guidance? What are the assumptions for regular costs? What is the portion from the new, upgraded new online class and what's the expectation for offline resumption contribution? Secondly, I would like to ask about your head count in terms of teachers. I think in this quarter, you achieved quite significant cost reduction in G&A and sales and marketing, but there's a decrease in personnel costs in COGS is lower, so can you share your thoughts on that? And thirdly, I think there is still a long-term loan with CTBC, have you talked with the bank? Is there any chance for the bank at both the early repayment, or is there a risk?

Yes. Alex, thank you very much for the questions. So I'll ask Jiandong to answer the first one, the second quarter revenue guidance and the composition, then I'll talk about headcount. And the CTBC loan back to Jiandong. Maybe you answer the first and third - the third question.

Okay. Thank you, Alex. On the guidance, since our offline regular course students already resumed their study online, starting from the 20th of April. And as Lihong explained, the participation rate is around 90 - more than 90% for senior age group and around 88% for the junior age group and much higher than our originally expected. So majority of the revenue for the second quarter will be from the resumption of the studies for our offline students online. So on the normal business environment, our offline revenue per month is more than CNY100 million. So you can do the math. 90% of the students resume their classes online. And another factor you have to consider is when we move the students online, they only consume half of their class hours as compared to their offline class hours. So this offline regular classes online will contribute roughly like 80% of our revenue in the second quarter. And we continue to harvest from our online small group classes. As Lihong mentioned, we had a cash revenue of about CNY38 million recognized in the first quarter. And only about half of that, less than half of that has been recognized in the first quarter. So the online small group classes will continue to contribute roughly CNY20 million in the second quarter. And also because our franchise revenues will increase, because the franchised learning centers already started operations, which covered roughly about a hundred - already 15,000 students. So we do see the increase in the recurring revenues recognized in the second half - second quarter of 2020 for our franchise revenues. But we didn't take into account the fact that some of our own learn - our own self-owned learning centers, maybe doing business probably in the second half of the second quarter. So that's going to be another addition, however, in our guidance, we didn't take that into consideration. Is that clear to you, Alex?

Yes.

Okay. So your question on the financing. We did start a conversation with our lender, the CTBC and share with them the impact of our business from the COVID-19 and what happened to our cash burn in the second quarter and likely to be in the first quarter and likely to be in the second quarter and the situation. And so basically, our lender has already verbally granted approvals to waive our covenants compliance. At the same time, they are going to - in terms of the principal repayment, which is about CNY19.25 million due in September 2020, that's going to be divided in two installments. CNY9.25 million will be paid in September, and the balance will be postponed to the first quarter of 2021. So with ample cash in the bank, cash balance in the bank, we don't see any liquidity issues. And we are pretty - very confident that we will sustain given the uncertainty environment.

Yes. So overall, I think the second quarter guidance is very conservative because we cannot predict when the self-owned learning centers will open. But very likely, you see that covenant issue guidance for kindergartens to open in early June, both in Shanghai and Beijing. So we do believe that will be the next one to resume operations. In terms of the head count, in fact, the number we disclosed by the end of March, in some way, is only about - sorry, just [indiscernible].

[Indiscernible].

Yes. The number of head counts continue to decrease along the way. In March, we disclosed the number around 37,000. And in fact, even within that, around 400 are furlough long, which is underutilized or unutilized. By the end of April, the total head count already reduced to 34,000. And so this is a 15% down from beginning of the year. The government actually did not allow enterprises to lay off people in February. So we started in March, and we continue to optimize personnel compositions. We do mostly keep high productivity sales person and teachers, but we also optimize who are not productive. Right now, the teacher head count and the sales force head count are slightly down, but we do think it is the opportunity that we can later on add on better, more qualified people to have the growth in the second half of the year.

Sorry, Alex, let me just correct one number. I think Lihong was mistaken in quoting the head count numbers. By the end of March, in 2020, our total head count is 3,700.

Yes, 3,700, yes. Yes. it's not 37,000.

As of early May, the head count is about 3,400.

That's right.

[Operator Instructions]. I think that we have no further questions on the line today. And I'd like to conclude today's conference call. We thank you all for your participation. You may now disconnect.