Ladies and gentlemen, thank you for standing by, and welcome to Sunlands' Second Quarter 2018 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host today, Yingying Liu, Sunlands' Investor Relations Director. Please go ahead.

Hello, everyone, and thank you for joining Sunlands' Second Quarter 2018 Conference Call. On the call, our CEO, Tongbo Liu, will give you an update on our operational performance this quarter and update you on our strategic initiatives going forward; our CFO, Steven Li, will give an overview of our financial performance in Q2 and guidance for Q3, 2018. Following their prepared remarks, we will move into the Q&A session. Before I hand over to management, I would like to remind you of Sunlands' Safe Harbor statements in relation to today's call. Except for the historical information contained herein, the matters discussed in this conference call are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore, you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from those containing any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission. With that, I will now turn the call over to our Chief Executive Officer, Tongbo Liu.

Thank you, Yingying, and hello, everyone. And welcome to Sunlands' Quarter 2, 2018 Earnings Call. I am pleased to share that in the second quarter, we achieved a healthy revenue growth. Our net revenues increased by 134%, mainly driven by the growth in new student enrollments as students continued to realize the effectiveness of our mobile and online tutoring offerings. As we noted last quarter, Sunlands' teaching philosophy is centered around helping students to learn as efficiently as possible. And our highly scalable one-to-many streaming model allows us to continually invest in developing better technology and content that improves learning efficiency. Before Steven takes you through the financials, I will share some of the progress we have made in our content and courses, technologies and services as well as in our sales and marketing activities, and how these initiatives have improved outcomes for both our students and the company. Over the past year, we have invested significant resources in improving the depth and quality of our content. This can be seen in the number of knowledge points that we teach our students, which have increased from 123,000 at the beginning of the year to more than 275,000 today. By more than doubling knowledge points, we are offering students access to more content that is designed to help them improve their understanding of topics and increase pass rates. Leveraging cutting-edge technology is another core part of our strategy. And in early 2018, we introduced the personalized AI-driven study programs to accelerate the learning process and improve student test outcomes. The AI software, which was developed in-house, uses machine learning and natural language processing technology to analyze student behavior and their understanding of specific courses. Based on this analysis, Sunlands' AI software is able to provide tailor-made learning solutions that are designed…

Okay. Thank you, Tongbo. Hello, everyone, thanks for joining us. We are pleased to have exceeded our revenue projections, reflecting the strong demand for online STE tutoring. As mentioned, we have made significant investments in our platform on the front and back ends to secure the long-term growth of the Company. Let me walk you through some of the key financial results for the second quarter of 2018. All comparisons are year-over-year and all numbers are in RMB. In Q2, our net revenues increased by 134% to RMB 481.8 million from RMB 205.8 million in the second quarter of 2017. The increase was mainly driven by the growth in new student enrollments. The increase in new student enrollments was driven primarily by our continuous improvement to the quality of our online content offerings, technology platform as well as the increase in sales, branding and marketing efforts. Our cost of revenues increased by 230% from RMB 26.8 million in the second quarter of 2017 to RMB 88.5 million in the second quarter of 2018. The increase was primarily due to the increase in compensation for our faculty members, which mainly included teachers and mentors as we continue to retain our existing faculty members and attract new faculty members. Gross profit increased by 119% to RMB 393 million from RMB 179 million in the second quarter of 2017. Operating expenses were RMB 688.3 million, representing a 118% increase from RMB 314 million in the second quarter of 2017. Of these, sales and marketing expenses increased by 105% to RMB 580 million (sic) [ RMB 581 ] from RMB 282 million in the second quarter of 2017. The increase was mainly due to increase in our sales and marketing compensation and spending on branding and marketing activities, including investments in broadening our search…

[Operator Instructions] The first question today comes from Timothy Zhao with Goldman Sachs.

I have two questions. So first one is that you mentioned that you are going to -- in the second quarter, there are some new initiative on sales and marketing. And I was wondering when do you see that benefit coming into your financials? I understand that, from the second quarter, the sales and marketing institute increased year-on-year and is pretty significant as part of the operating expense. And the second question is more on the revenue guidance. Can you help me understand more on like what is the basis for this guidance because I feel that it is a little bit more conservative from a deferred revenue perspective?

Okay. The -- this -- I -- your question -- I didn't hear your question very clearly, but -- so the first question, let me make sure I understand fully your questions. The first question is related to the sales and marketing expense and the new initiatives the Company has taken during the second quarter and what is the impact of those new initiatives to the sales and marketing expense, right?

Yes. And what is -- like what -- when will be the benefit actually kick in into your financials?

Okay. Okay. Okay. Regarding your first question, actually, as our CEO mentioned, we have already mentioned this during our Q1 earnings call. We are doing those free trial classes in the second quarter. And those free trial classes, based on the current feedback, is very encouraging both in terms of average revenue, average gross billing is, I believe, 15% higher compared to the students without trial classes. And the conversion rate is a little bit higher and the refund rate is much, much lower. So those are the current results, which are very positive. But however, for the short term, because right now, we convert a lot of traffic into free trial classes, so in the short term that may impact our overall conversion rate for the Company. And we expect this trend will continue for several quarters before we can see the positive results on a much larger scale. Regarding your second question, the outlook, the revenue guidance for Q3, basically, we calculate our estimates for Q3 revenue based on the gross billings from previous quarters and our estimated gross billings for Q3. Yes, so that's how we come up with a guidance of RMB 500 million to RMB 520 million.

Can I have a follow-up question on the revenue side, because I noticed that for gross billings per enrollment, the Q2 number is actually declining like year-over-year or quarter-over-quarter? And you mentioned that in Q3, you are planning to launch some new courses and address the pricing, right, on like in which direction the pricing will be addressed?

For Q3, we are going to introduce some -- we actually -- we have already introduced some of the new courses. Like for example, the -- our CEO mentioned during his script that we introduced an AI-powered package, and which is much more effective for a student to study. So that we will charge a higher price. And we'll also introduce some course packages with, for example, insurance feature in the package. And those packages with the insurance, we will also charge a higher price to the students. So those new course packages will increase our price points for Q3 and going forward.

The next question comes from Alex Xie with Crédit Suisse.

So my first question is about your operational changes after the negative publicity and government reactions you made, and what are the key changes that you made? And what are the feedbacks from the students and the government? And my second question is about the gross billings strength. I believe that the management has provided revenue guidance. Can we have some more color on the gross billings outlook?

Okay. Regarding the first question, the negative publicity that occurred in May, that is actually -- there were a couple of reasons why we started to take those new initiatives in order to provide better user experience to our students like free trial classes, like a live assertive sales approach to students. So as we mentioned earlier, those new initiatives will show effects over time, but in the short term, that may impact our gross billings and conversion rate, but based on the feedback we have gathered so far, the response from the free trial classes are very positive. And as for the guidance for gross billings, since we only provide the guidance in terms of net revenues, yes, so I don't think we can have a forecast on the gross billings, sorry.

May I have one follow-up, that is about what are the government responses to Sunlands' reactions and new initiatives? Are they still checking the malpractices of some sales team or they are already satisfied with the current regulation?

Yes. We have already -- right now, we are in 100% compliance with the government regulations. So all those new initiatives is -- the initiative taken by the Company so that we can provide better user experience for the students, not because of the government. Now there is no -- any other government regulation violations.

[Operator Instructions] The next question comes from Shan Yuan with CVC Capital.

So I actually heard a lot about the free trial. You mentioned about that you're quite positive about that it's an initiative you actually take after the -- like the scandal after May. So I'm quite curious about the conversion rate you mentioned as earlier? This is my first question. And my second question is actually about the stock price recently, the fluctuations. Do you have any comments on that?

Okay. I'll answer the first question. And the conversion rates that students have taken the trial classes has doubled the conversion rates that the students didn't take the trial classes. And we're happy about that. And what I'm more happy about that is that the refund rate that the students who take the trial classes is about the half the refund rate that of students who didn't take the trial classes, because if we do the trial classes continually, that we will wake up more potential students to know the STE and take STE examinations. That is one benefit. And secondly is that this can improve our effectiveness and efficiently (sic) [ efficiency ] of our sales force. As I mentioned before, the sales team that they spent about half the time at a student who has already taken the trial classes than who did not take the trial classes.

Yes. And this is Steven, the CFO of the Company. Regarding your second question, the recent fluctuations of our share price, I think the share price is depending on a lot of different factors like, for example, the macro-economy, the macro-environment of the capital market or people's understanding of our business, since we are doing a STE tutoring business, which is brand new to a lot of our investors. Yes, so in short, I think, there are lot of potential factors, but as a company, I don't think we are in a position to comment on our share price. Well, there is probably one more thing we can add, there is recent regulations and policy change regarding the education sector in China. Even though that actually minimally impact the free trial business, which is -- actually this is a very positive to the adult education sector, but some of the investors, they don't have a clear understanding of those new policy change. So that factor may also possibly impact our share price as well. Yes, so there are a lot of factors. We really can't comment too much on our share price.

Sure. Sure. And I think you missed out Crédit Suisse second question about gross billing, which I'm also curious about? Well, also I want -- actually, do you -- can you give us figure about conversion rates you mentioned earlier? You only mentioned that it's like doubled.

Yes, well, I actually answered the second question from Crédit Suisse. We only give guidance on net revenue. We don't give guidance in terms of gross billings. Yes, so, well, as for the conversion rate, our -- the normal conversion rate without trial classes can range from 2% to 5%. It depends on different channels and different factors, yes, but overall, that's the kind of a rough idea.

Well, so which means that for the free trial courses, you actually can have like 4% to 10% conversion rates, right, which means double the normal conversion rate?

Yes.

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

Once again, thank you, everyone, for joining today's call. We look forward to speaking to you again soon.

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