Youdao, Inc.

Good day, and welcome to YoDAO First Quarter 2020 Earnings Conference Con webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Pei Du, Investor Relations Director of YoDAO. Please go ahead.

Thank you, Mike. Please note, the discussion today will contain forward-looking statements relating to future performance of the company, and I intended to qualify for the safe harbor from liabilities as established by the US Private Securities Delegation Reform Act. Such statements are not guaranteed of the future performance and are subject to certain risks and uncertainties, assumptions, and other factors. Some of these risks are beyond the company's control and cause actual results to differ materially from those mentioned in today's press release and the discussion. A general discussion of the risk factors that could affect your DAO's business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including our annual report filed on Form 20-F. The company doesn't undertake any obligation to update this forward-looking statement, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. The definition of non-GAAP financial measures and the Reconciliation of Gap to Non-Gap Financial Results. Please see the 2020 First Quarter Financial Results News Release issued earlier today. As a reminder, this conference is being recorded. Besides, a webcast replay of this conference call will be available on UDOT's corporate website at ir.udot.com. Joining us today on the call from UDOT's Senior Management is Dr. Feng Zhou, our Chief Executive Officer. Mr. Lei Jin. VP of operations, Mr. Peng Fu, our VP of strategy and capital markets, Mr. Wen Li, our VP of finance. I will now turn the call over to Dr. Zhou to reveal some of our recent highlights on strategic direction.

Thank you, Dupay, and thank you all for participating in today's call. Before we begin, I would like to remind everyone that our phone numbers are based on the I'd like to begin by offering my deepest sympathy to all the families affected by the coronavirus. We have been altered as a society by the global pandemic. As Chinese cities have gradually reopened, we continue to take steps to ensure the safety of our staff and students. Our free online courses ran through January through February, and we are proud to have been able to swiftly change course to prioritize relief efforts. and provide support to those cities that were hardest hit, as well as our broader community. As an online service company, our operations were less impacted than some other businesses. We closed the first quarter with strong financial and operating results. Growth from our core online learning business accelerated. Online courses generated growth billing of RMB 519 million, up 287% year-over-year, and up 50% quarter-over-quarter, stronger than the 211% year-over-year growth in Q4 of 2019. Growth margins from our learning services segment also rose to 52% in the first quarter of 2020 as we continued to benefit from economy of scale. This is a large step up from 30% in Q4 2019 and 17% in Q1 2019. Our intelligent learning devices also grew rapidly despite the virus' impact during January and February. Revenue from devices reached RMB 53 million, up 189% year-over-year. Operating cash flow was nearly RMB 50 million for this quarter, marking Q1 as our first quarter of positive cash operating cash flow since operating at third scale. Longer term, we are seeing improving cash change, but do expect to see some seasonal fluctuation. Looking at our business segment, for online courses, gross billings from K-12 courses reached RMB 192 million, and adult courses were at RMB 254 million. up 330% and 300% year-over-year respectively. The growth came mainly from continuous innovation in course content and products. Let me highlight two areas of significant progress for you. First, we released new versions of junior high school math and high school English courses. In particular, the math course features localized content delivered by both our instructors and teaching assistants. The courses quickly became popular, joining the ranks of junior high school Chinese and physics courses, which have been best-selling courses since last year. Second, more and more courses feature real-time, AI-driven interactions during and after the live course. For example, in our new elementary math courses, students alternate between listening to instructions and practicing using our live stream personalized exercises. It is an important upgrade to the industry standard new teacher large class format, which we call interactive large class model. As for content in new adult courses, we introduced English recitation camp. In Chinese, that's and English oral training courses. which are being taught by two relatively new instructors. These two popular courses are already profitable in Q1, partly because they gain a significant number of users from our dictionary and other apps. These users are interested in learning the language and overseas culture and lifestyle, which are offered by these courses. This shows that as we serve our users through more and more apps and with courses in different ways, synergy within our business segments continue to grow. In line with our growth goals and to support our increasing enrollment, we grew our educator team to 164 instructors and 865 teaching assistants during the first quarter. We have also improved their training, quality control, and incentive programs. More recently, we also began our brand campaign for UDOT premium courses. In mid-April, we partnered with the renowned Chinese women's volleyball coach, Lan Ping, to be our brand spokesperson. Initial feedback has been positive. Our partnership with Lan Ping is set to span multiple quarters, and we look forward to a fruitful relationship. Let's turn to another segment, our intelligent learning device. In Q1, revenue from our intelligent learning devices reached RMB $53 million, up 189% year-over-year. The increase was primarily driven by sales of our Utah Dictionary Pen 2, which has become known among students and parents as an indispensable and fun device for learning. Online distribution was strong in Q1. Offline distribution was negatively impacted by the closures caused by the coronavirus in January and February. By March, offline distribution had returned to previous levels We plan to launch new devices later this year to support students' learning needs. In terms of our app, we introduced a major version of our dictionary app, bringing our more functionalities, like document translation, to the front page. We also launched AI Essay Assessment, AI , a feature that automatically grades and offers suggestions for improving English essays submitted by the users. This feature leverages our proprietary AI technology and uses state-of-the-art transformer architecture and transfer learning techniques. We also made progress with our organic traffic conversion, with our conversion rate from this channel increasing by 5% year-over-year. As a result, K-12 gross billings from organic traffic grew to 36% year-over-year during the first quarter. Also, since the pandemic, Chinese University MOOC has provided teaching tools and teaching infrastructure throughout China, helping 60,000 instructors at 1,200 universities to facilitate over 120,000 courses. As one of the most commonly used learning platforms for college students, Chinese University MOOC had over 40 million registered users and approximately 14 million daily active users at its peak during the first quarter. At the end of April, we released the overseas version of Chinese University MOOC and received positive feedback from the Chinese Ministry of Education. Now for our online marketing sector. Our advertising revenues were RMB 99 million in the first quarter, up 10% COE, and 1% quarter-on-quarter. In the coming period, we expect the advertising sector to continue to face macro challenges and to manage these fluctuations with flexibility. 2020 is no doubt a very unique year for all of us. For the education industry, it may well be a pivotal year where online education adoption and product innovation become greatly accelerated. We believe Yodal is well positioned to capture this opportunity. We are confident that we have a strong pipeline of courses and products for the rest of the year. Our teams are hard at work to get them ready for the summer and fall semester. We cannot wait to have more students and parents to try them. With that overview, I will now turn the call over to Supong to review our financial results. We will then open the call up for questions. Supong.

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from our 2021st quarter. We encourage you to read through our last release issue earlier today for further details. We started the year off on a strong note with healthy gains across many of our primary financial metrics. Our business scaled rapidly. On a year-over-year basis, we grew our revenue, gross feeling, deferred revenue, gross margin, and we had positive operating cash flow for the period. For the first quarter, total net revenue were RMB 541.4 million. For U.S. dollar, 76.5 million. This represents an increase of 139.8% from the first quarter of 2019. If we look at this growth by segment, net revenue from our learning services and products were 226.4% year-over-year to RMB 442.1 million. or US dollar, 62.4 million. We attribute this growth to strong growth in case of paid student enrollment and gross billing for paid student enrollment of UDOT premium courses on a year-over-year basis. Net revenue for online marketing services will earn me 99.3 million, or US dollar, 14 million, up nearly 10% compared to the same period of 2019. For the first quarter of 2020, our total gross profit greatly improved reaching RMB 235.7 million, or US dollar 33.3 million, compared with RMB 52.9 million for the first quarter of 2019. The margin for learning services and products improved to the 48.7% for the first quarter of 2020, up from the 18.5% for the first quarter of 2019. The large-margin growth was primarily attributable to effects of economics of scale and further optimization of our business and the faculty compensation structure. Gross margin for online marketing services was 20.5% for the first quarter of 2020, compared with the 30.8% for the first quarter of 2019. The decrease was mainly the result of more revenue generated from the advertisement through the third-party internet properties and the international market, which carry lower gross margin. For the first quarter, total operating expense were RMB $411.7 million, or US dollar $58.1 million, compared with RMB $131.9 million for the same period last year. We continue to invest in technology, building acquisition, and acquiring new talent features to support our growing business over the long term. In tandem with this investment, we are increasing our top line and structuring our model to become more efficient and recognize economics of scale. With that in mind, sales and marketing expense for the first quarter were RMB $299.2 million compared with RMB $64 million in the first quarter of 2019. Research and development expense for the first quarter were RMB $84.1 million compared with RMB $64.9 million in the first quarter of 2019. Our operating loss margin was 32.5% in the first quarter of 2020. compared with 35% for the same period of last year. For the first quarter of 2020, our net loss attributable to ordinary shareholders was RMB 169.4 million for U.S. dollars, 23.9 million, compared with our loss of RMB 102 million for the same period of last year. Non-GAAP net loss attributable to ordinary shareholders for the first quarter was RMB 161.9 million for U.S. dollars, 22.9 million, compared with the loss of RMB $101.2 million for the comparable period last year. Basic and diluted net loss per ADF for the first quarter was RMB $1.52 for US dollar 0.21. Non-guide basic diluted net loss per ADF for the first quarter was RMB $1.45 for US dollar 0.2. Our net cash generated from the operating activity for the first quarter was RMB 49.7 million, or US dollar, 7 million. Looking at our balance sheet, as of March 31st, 2020, our contract liability, which mainly consists of our default revenue for our online courses, were RMB 603 million, or US dollar, 85.2 million, compared with RMB 456.8 million as of December 31st, 2019. At the end of the period, our cash, cash equivalent, time deposit, and short-term investment totaled R&D 1.7 billion for U.S. dollar 236.8 million. Again, we are focused on meeting our long-term objectives. We will continue to prudently manage our costs and strike a balance between top-end growth and expense. This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Paul Peter, please go ahead.

Hey, thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then one on a touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If any time a question has been addressed and you'd like to withdraw your question, please press star then two. For the benefit of all participants on today's call, If you wish to ask your question to management in Chinese, please immediately repeat your question in English. Again, at a star, then one to ask a question. At this time, we'll just pause momentarily to assemble our roster. And the first question we have will come from Shengzong of Morgan Stanley. Please go ahead.

Hi, management. Thank you for taking my question. And congratulations on the strong growth spending growth and growth margin improvement. We also see that the self-marketing spending also increased a lot. Like you said, you're doing a brand campaign. So may I ask your plan for the summer on the summer promotion, and especially this summer holiday could be shorter than usual. So what's the plan for K-12 students students' acquisition for summer. And my second question is, can you give more color about your young children's progress? You develop a lot of good interactive courses and APPs. So on this part of business, what's your target and future plan? Thank you.

Thank you, Zhongshan. Regarding the summer, so obviously we're working, the teams are working hard on this right now. So we have a different marketing budget for the summer campaign. So as we talked about before, so summer is the right time to acquire users. Yeah, these users, when they enter our campaign, service through the summer, they normally have higher lifetime values. Last year was the first time we did a summer customer acquisition campaign. This year, we have more experience, so we will likely allocate more budget for that. We believe we will have a better, more successful campaign. With that said, As we talked about, we always look at the unit economy of our business very carefully. Essentially, we allocate a large budget. Then we operate on a week-to-week basis, looking at the results, the ROIs, and adjust the plan accordingly. So we have been doing a lot of preparation for the summer. So for example, you look at our teaching assistant numbers. They've grown, and they're still growing. And on top of last year's three cities, Xi'an, Nanjing, and Guangzhou as our teaching assistant operating centers, We added centers in Xinxiang and Zhengzhou. So right now we have five teaching assistance centers across the country. And you talked about shorter than usual summers. Currently we believe that there will be limited impact of this change because The parents and students, if you look at them right now, they are still very engaged in their learning. And so without major changes to their behavior, I believe the summer, there could be changes, but the impact will be limited. We will have five waves of summer courses from the July to end of August. That's the current plan. Another thing is that if we compare online courses to offline, there will be more flexibility for changes for online companies. We think we have more flexibility there. That's for the first question. The second one is about young children's programs. We call them STEAM courses. So for these courses, we think they represent a very promising segment. And one progress we can report here is that in Q1, there are three courses that we believe the first stage of accounting investment has been completed. So these are Kids Programming, You Dao Plan Zu Jing, and You Dao Internet. Shao Bian Cheng, Le Du He, You Dao Fu Xuan. So for these teams, they have completed their current state of content investments. So they're complete. And the numbers, we look at them, they're pretty good. And they have also hired more operations staff. So the teams are ready, too. So basically, we think they're ready to scale their business. Yeah, I think that's for the young children's programs. Thank you.

Next, we have Mark. I'm sorry, ma'am. Thank you. Next, we have Mark Lee of Citi.

Hi, management. Congratulations on the results. I hear you're sharing about the content development and the student interaction class progress. May I know, for this course transformation, what is your plan for the teacher and teaching assistant numbers? What's your plan for, let's say, later this year because of these course developments? Thank you.

Thank you, Mark. I believe you are asking about the interactive large class content model we talked about. So we think these are very important and promising improvements to the product model, which we think is going to be more and more important this year and going forward because many players in the market have been successful in scaling up the business. And now when users, when parents look at our products, what they are looking for is that do these products offer differentiation? Do they offer ways for my kids to be engaged in their learning? Do they offer superior learning results? And the numbers, when we look at them, they show us that when we add interactions to these courses, we have more engaged students, we have better teaching results. And these contents, they are produced and they work in tandem with our teaching staff. So the teaching staff is due at the center position here. So we will hire more more teachers, instructors this year and compare that we will have even more teaching assistants to be hired this year as we scale up the business. So the instructors, the teachers, their number doesn't really correlate with the number of students we have, but the teaching assistants, they scale mostly linearly with the number of students. So we're looking to hire more instructors and more teaching assistants. And the scale of growth for the number of teaching assistants will be larger than the instructors. And of course, we will look at how to improve operating efficiency here. So we believe that will be a strength of our team because we will be very good at using technology, using different ways to use the IT systems to improve the efficiency. Yeah, I hope that answers your question. Yes, thank you.

Next, we have Alexei of Credit Suisse. Alex, your line might be muted.

Sorry. Hi, Benjamin. Thank you for taking my questions, and congratulations on very strong results. My first question will be about the GP margin. The GP margin improvement in learning services segment is really impressive, and would you please show a bit more color on the GP margin of your K-12 courses? I think it should be even higher than the learning census, and how much of your learning census GP margin improvement is from the teaching staff compensation structure change percentage of the revenue. And secondly, I would like to ask about adult premium courses. I think that in this quarter, Both student enrollment and AST grew significantly quarter over quarter. Do you think this is mainly due to the traffic surge post-COVID-19, or how do you look at the outlook? Is it sustaining momentum? Thank you.

Regarding GP margin, I will give some general remarks, and Wayne will give you details. So overall, the learning service gross margin is 52%. And currently, we do not give out separate numbers for K-12. As you can see, it's growth. Going forward, because we're improving on the economy scale, as we talk about, some of our instructors' new contracts came into effect on January 1st this year. That's the two drivers. On both fronts, we're looking more. So we expect to achieve a kind of industry standard margin level over time. And, of course, in the short term, they may fluctuate. So, Wayne? Thank you, Dr. Zhou.

I'd like to give more details. We expect our GP margin of our learning service to be further improved this year. following points. First, the benefits of non-small skills continue to expand. Our learning services revenue increased sharply this quarter, and we expect the online large-class education format will be more widely adopted, which will add our ability to skills. Second, we continue to optimize our compensation structures. More instructors are rewarded by performance bonus with expected lower revenue share ratio accepted for our top performance and sharing model, along with our increased revenue. Finally, we continue to improve our operation efficiency. For example, we are optimizing the payment cost of learning materials as well, which also results in cost savings. However, as mentioned by Dr. Zhou, on a short-term basis, the gross margin will fluctuate with certain seasonal factors. For example, sometimes there's more for the coming season. But at that time, the revenue does not step in our income statement. Wish it is helpful, Alan.

Yeah, regarding the second question about ASP and also future trains. So ASP for premium costs is due by 1.58%, actually from 627 yuan to 1,600. 18 yuan this quarter, year over year. First quarter last year to this quarter. And actually, K-12 ASP is relatively flat. Actually, down a little bit. The adult forces ASP grew about 450 to 2,000. So there we have a So mainly we're seeing a couple of things here. So the mix change is the reason for the adult courses. As we go from a more kind of college English prep, English test prep courses to more kind of courses tailored to working, working users. So these new courses have higher ASP. And quarter over quarter, K-12 ASP also grew. And so going forward, the whole quarter obviously has benefited from the traffic resulting from the coronavirus. And on the other hand, we are also seeing that as we have more comprehensive cost offerings and our quality and also service level become higher. So it's driven by both factors. And the coronavirus effect, we think it will still be there for a couple of quarters, but maybe in a lower significance. The other part, obviously, we will keep working on better, higher quality, better service. So we think overall it's still a lot of tailwind for the business. I hope that answers your question.

Yes, very helpful. Thank you.

Next we have Thomas Chong with Jefferies.

Hi, good morning. Thanks, management, for taking my questions. I have a question regarding the trend in the operating expenses. How should we think about market expenses as a percentage of revenue in the coming quarters? And with that, can you comment about our trend in terms of the operating cash flow as well as the timing to profitability? Thank you. Okay, I'll take the first question about the marketing, and then Wayne will talk about the operating cash flow.

And thank you for the Chinese question. In terms of marketing expense, we always look at the business from the perspective of long-term growth. When we look at it in this way, the conclusion for us is that we have much better prospects business fundamentals now. We have better conversion, better retention, better signing up rates. So the team did their work. So that's the drivers for the first quarter's results. And when we look at that and when we look at the market, the users, the parents, they are very interested in online courses this year. So that's why we said that we have allocated a relatively large budget for the summer because we believe this year is the right time to acquire more users and to set up for next year's and later growth. So we do expect the marketing expense to go up. However, as we said, we are... very much focused on the unit economics. So here, we will make sure that the marketing dollars that we spend, they correspond to goods and good unit economics. And they are well spent, essentially. So I hope that answers your question. And Ray? Okay. In terms of operating cash flow,

As the fundamentals of our business keep improving, the growth ceiling grows at 30, and there is more economy out there. We have achieved positive operating cash flow in the first quarter, and we expect the operating cash flow will improve over time along with our fundamentals, though there may be some seasonal fluctuation in the short term. Long-term fundamentals are our focus, and our financial performance will reflect the fundamental improvement over time. In the first quarter, we achieved positive operating cash flow due to the following factors. First, strong gross billing performance. Second, higher gross margin due to the economic upskill and executive compensation structure optimization. Third, more efficiency cash flow management on our receivables and payables. Again, looking forward, our downtime improvement on our cash flow will continue with some short-term saturation. For the profitability timeline, we do not provide the detailed qualitative guidance for profitability. as usual. We expect the projection to be unchecked, and we would like to add more color on this. You can see our business fundamentals have improved across the board. The revenue increased quickly, the margin improved, just mentioned, and we have the increasing economic . We believe it is a good time now to invest more in our R&D and marketing to serve more users' learning needs and accelerate our stability. As we see more people planning to change the online learning solutions, we will continue to invest to ensure our products are appreciated, especially in terms of applying AI technology to enhance student learning and experience. This is my answer.

Thank you. Next, we have Yuzhong Gao of CICC.

Hey, management. Thanks for the opportunity. Congrats on the positive open cash flow. So my first question is on the competition. So I wonder what is our view on the current competitive landscape? And maybe what are some of the strategies that we have to kind of set us apart from other players in this space? And the second question is on your curriculum development. So we have seen you guys really have put a lot of focus to your education content and teaching technology. So could you maybe share with us some of the latest progress you have made and your future plan? I would define it. I'd like to hear about the management team's views on the entire industry competition. And then in the future, what are our strategic thoughts on whether we can make a distinction with our peers? And the second question is about our teaching. We do see that we have spent a lot of time on teaching, including investing in AI technology. Are there any data-related things or some results that you can share with us?

Thank you. Yeah, thank you. This is Zhou Feng. I will take the question. So obviously, I'm talking about competitive landscape. I cannot comment on specific competitors. So I will talk about the general trend. So I think 2020 is shaping up to be a key year. Yeah, so more consumers are looking for courses. And I think we are lucky that we are ready, essentially. So in terms of content, teaching personnel, service capacities. So this is one of the key things here that a couple of players already, we already, so we think these players will be better in their competition. So among the players, I think one One point, I think talking about differentiation, one point that we talked about last year I think reflects our vision best. That is we believe that the online courses will provide equal or better experiences than offline. So I think that's a really important thing here. Whoever who can realize that will have an advantage. So we believe delivering the best experience, best results, best learning results is the key. And we are working really hard on this. So let me give you two examples. So first is top notch instructors. So we have a system to pick them and also build courses around them. For example, our junior high school Chinese course by . Everyone loves the course. We picked the instructor. He has a lot of potential, and we built the course around him. We iterated over and over by getting user feedback. That's the way we work. So we have successfully been able to turn out multiple courses through this model. So we have logic English, we have middle school, high school physics, and now in Q1 we have successful math class for junior high school. So this is how we work. Obviously, another point, in addition to instructors It's the tech. It's tech innovation. We talked about interactive large class format or model. This is a new word right now. So we believe that it's going to be important. Essentially, I think we've hired many, many different things. And this interactive large class format, of course, we think it's going to be important because One of the major challenges for students for online courses, it's basically a meme on the net now. The parents watch the course and the students, they don't listen to it. They don't pay attention. And we think by adding real-time interaction, real-time AI-driven interaction to live courses, it's a major change from... On a similar scale as adding live video to it and also adding a teaching assistant to it, they all improve the class. And by adding interaction to it, it's another level of improvement to that. Obviously, we also talked about AI English Assay Assessment, AI's OMP Guide. For anyone who's listening, English essays will know this is really important. Of course, everyone will have, apart from products, from experience, everyone will have good marketing, efficient sales, and lead conversion. We've made a lot of progress on that, and we think we will be strong in terms of these areas. But we think the strongest part for us is the product, the instructors, and how do we combine tech and best content. Yeah, I hope that answers your first question. The second question is regarding curriculum and teaching, curriculum development. Yeah, so I think, yeah, we already talked some about that. Maybe... Maybe talk a little bit more is how we iterate the courses, what we call that , course iteration system. So this is a way to, After we get the instructors, this is the approach we take to finally reach a good course. So we use a lot of quantitative evaluation of different teaching methods. And we get other teachers, our upbringing staff, and also students to listen to the to the courses and provide feedback. So normally it's after three to six months that we can reach good quality levels for each particular course. So we've already done a lot of this, and we're good at it. I hope that answers the question. Thank you.

Thank you. Very helpful, Dr. Zhou.

And next we have Benny Wong of HSBC.

Hi, good morning, Manchin. Thank you for taking my question here. I just want to understand in terms of, remember earlier we talked about having our own, like the Yodal organic app and then direct the traffic to the online courses. Just want to see what is the percentage we are seeing here. And then in terms of the retention rates of, from these users, any updates would be helpful. And speaking of that, in terms of our user acquisition strategy this year, and if we look at our other online peers, they have been using very innovative ways to create a community effect to drive growing new users. So can we just get an understanding in terms of how much percentage of our users are new users, old users, And is that rising in an update on our user acquisition?

Thank you. And for your first question about our organic users conversions, we think if you see our earnings release, we also mentioned about a number of the case during organic traffic is about 226% over a year. and compared with the first quarter of 2019. So I think that shows a strong trend of organic conversions for our K-student enrollment in the last year. And we expect the trend to keep going well, and we expect to convert students from organic traffic. We still have a very deep pool of our number of MAU, our dictionary apps, as well as translators apps. So for the retention rate for our organic users, we didn't really break down about what's really the retention rate of organic conversions. But if you see that, I think that's all the users. They do have our branding image in their mind. Before they use our closest products, they are our users, our app users. They are using our app. to looking for the help for the learning. So we do have the better understanding about our product quality as well as our high quality services. So that's the first question. For the second one, we think that's a related question, I think. We have over 100 million message users to our apps. So we think we always have a very pretty unique way to grow our business with education products is that we also can always convert our users from organic users to our education products. And indeed, as Dr. mentioned in previous questions, we will also invest in the market for our new users and as well as recruit the talent teachers in the futures. We expect we can get, we always can be balanced how we grow We always have a choice, and we have flexibility to how much we allocate for the marketing because we do have a very deep user school from our app. So I hope that answers your question. Thank you.

And next we have Jesse Hsu. Oh, sorry, man. Thank you. Next we have Jesse Hsu of Nomura.

Hi, good morning, management. Thank you for taking my question. And congratulations for a very strong quarter. My question is regarding industry outlook. So just wondering what do you think of the industry outlook in three to five years? Do you expect the average size of an online large class to become larger? Or should we expect more diversified and innovative product offerings? Appreciate a lot if you could share some of your thoughts on this. and what is your co-responding strategy? Thank you.

Yeah, this is Chofeng. So we still think the industry is at a very early stage, and obviously we have pretty low penetration. If you look at online in terms of the total online plus offline, tutoring industry. So we have a pretty long, long way ahead of that. And with that said, obviously we talked again and again about the importance of differentiation because as parents get to know and students get to know better and better about online courses, they will naturally ask questions about What's unique about your course? And that's why we've been focused on that from day one. And our recent quarter has obviously benefited from investment in this area. And if you look at the whole category, I think it's – useful to recognize it as a content-driven industry. It's content-driven. It's not a completely tech-driven or platform-based kind of business. We're looking at some brand effect, but we don't have a lot of network effect in this industry. So with that said, I think we will have – we don't need to kind of worry about kind of space to be different, to be differentiated. So the leading players, I believe it's a lot of opportunity to differentiate. So maybe like a little bit like automotive use. So you can have innovations – for many years, maybe since 1950 to 2000. A lot of innovation in cars. Everybody has different sizes, different features, and people really like them. So we think for horses, we are looking at such a market. So it's not a winner-take-all. You have to be different. You have to invest in your teaching resources, investing in technology, and that's what we plan to do. As previous questions, we talked about the interactive large class model we are introducing this quarter, and previously we talked about the small paying, using those in the both during the live course and also after the course as homework. And so we think that's the, I hope that answers your question.

Very helpful. Thank you.

And that will conclude the question and answer session. I would now like to turn the conference call back over to management for any additional or closing comments.

Thank you once again for joining us today.

If you have any further questions, please feel free to contact us at your dial directly or reach out to CDG in any of the regions. Have a good day. Thank you.

And we thank you. Thank you. And we thank you all for your participation in today's conference call. Again, the call has now ended. At this time, you may disconnect your lines. Thank you. Take care. Have a great day, everyone.