Gaotu Techedu Inc.

Ladies and gentlemen, thank you for standing by and welcome to the GSX TechEdU, Inc. Third Quarter 2020 Earnings Conference Call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded on November 20th, 2020. I would now like to hand the conference over to your first speaker today, Ms. Sandy Chin, 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 IR 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. 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 in current market and operating conditions and relates 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 FTC. The company does not undertake any obligation to update any forward-looking statements except as required in their applicable law. As a reminder, this conference is being recorded. In addition, a live and archived webcast of this conference call will be available on GSX Investor Violations website at gsx.investorroom.com. You are also welcome to subscribe to our quarterly investor newsletters through the same website. It is now my pleasure to introduce Larry. Larry, please go ahead.

Thank you, Sandy. Good evening and good morning to you all. Thank you for joining us today on this earnings call. We have achieved another robust quarter with net revenues hitting an all-time high of R&D 1.97 billion, which is 3.5 times that of the same quarter of last year. We are also pleased to report that our student structure has grown healthier, with net revenue from our primary school became the largest contributor. These outstanding results speak to our continuous focus of providing the highest quality services to students and parents, our consistent training to frontline employees, and our unwavering efforts to improve the operational efficiencies and organizational capabilities. In the face of increasingly fierce competition and ever-rising customer acquisition costs, we remain committed to pursuing effective traffic acquisition through high ROI channels. sticking to efficient sales and marketing spending, and to executing an effective growth strategy based on consumer lifetime value. This summer, we have achieved the highest operating efficiency in the sector, and we believe we will continue to be so on a four-year basis in 2020. In the meantime, we continue to invest extensively in our teaching staff, product design, content development, and technology innovation raise overall compensation for our tutors and attract more top-tier talents. While it does put pressure on our gross profit and net income over the short term, we view all of this spending as an important investment in our long-term future. Online education is a labor-intensive and talent-intensive industry, and leading companies have to manage and serve a huge number of employees. Excellent organizational capabilities will be the key driver for players to achieve long-term success and be the ultimate winner. In terms of business model, we chose to focus on the online live class format in the past, and we'll continue to focus on it in the future. We recently integrated our K-12 business and our GoToKetong brand. GoToKetong fully combines and streamlines our instructors and tutors teams, service standards, products, and technologies. Our goal is to deliver the quality of a large class, the learning experience of a small class, and the feeling and educational results of one-on-one tutoring. We believe this integration further demonstrates our dedication to our focused strategy, opens a new chapter of operational efficiency enhancement, and better positions us to capture the enormous opportunities ahead during our coming era of fast consolidation for the online education industry. So far, the integration has exceeded our expectations. The class completion rates and the conversion rates are showing significant improvements. Our brand will focus on providing post-secondary education training courses, such as the CET, graduate school admission exam, and various professional qualification exams. Some investors may wonder what we think about AI interaction courses. From what we've witnessed, the adoption of artificial intelligence in online education is still only at the buzzword stage. The application of AI in the preschool market and the synergies created by AI between the pre-K and the K-12 markets are still in need of further observation and discussion. Of course, with the advancement of technology, we can solve some of the basic needs of students through systems and AI, then the requirements and personalized demands will be better matched by technology. Hence, as you may see, we have been constantly making efforts to increase our investment in research and technology with the third quarter's R&D expenses totaling R&D 200 million. However, no matter how technology and AI develops, frankly speaking, I believe the ultimate key to genuinely earn the trust of clients and truly bring meaningful learning results to students is to always try to win over their hearts to impress and bring warmth to our students, to ignite their interest in learning, to help them cultivate great learning habits and to shape their personalities through our sincere and distinguished services. Regardless of the intense competition today, we still see vast potential in the online education industry. and are fully prepared to explore all possibilities based on the solid foundation that we have built over the past years. We are looking forward to generating more value for our shareholders and sharing the future of online education with you. Now, I will pass the call over to our CFO, Shannon, to walk you through our financial and operational details.

Thanks, Larry, and thank you, everyone, for joining the call. Now I will walk you through our operating and financial results and provide guidance for the next quarter. Please be reminded that all the financial data that I mentioned will be in RMB terms unless otherwise noted. For the third quarter of 2020, we continued to deliver solid results. Net revenues increased by 253% year-over-year to $1,970 million. For the first time, our revenue reached just shy of $2 billion in one quarter, which nears how much we generated from the entire year last year. This helps us rank as one of the top players in the online live broadcast industry. This is our eighth consecutive quarter with year-over-year net revenue growth of more than 250%. Net revenues from our online K-12 business grew by 283% year-over-year, which is the 11th consecutive quarter that we have been above 250%. We recorded $2,100 million in gross billings, up by 137% year-over-year. The growth in gross buildings was mainly due to our solid recruitment of new students, despite the tough competition. Because of the pandemic, both college and high school entrance exams were delayed, and the timing of the summer holidays in different provinces and cities varied. As a result, The summer vacation in 2020 was shorter than in prior years, which also affected us by reducing one term of our curriculum. Even though the situation was quite challenging, we were able to attract a satisfactory number of new paid course enrollments. At present, we have set up regional operation centers in 15 cities outside of Beijing. We increased our recruitment and training of high quality tutors to meet enrollment demands during the summer vacation. We are committed to constantly providing better and more customized learning experience for parents and students. In the third quarter, we recorded paid course enrollments of 1,260,000, which was up by 134% year over year. The number of student enrollments in both regular-priced courses and promotional courses continues to set new records, which has led to a huge increase in our brand awareness. The increase in first-time users was primarily driven by our effective investments in sales and marketing efforts. Now, let's break down our operations and financials by business line. Net revenues from our K-12 courses increased by 283% year-over-year to $1,800 million and accounted for 89% of net revenues. We expect the proportion of K-12 revenue will continue to expand as our main source of revenues. Going forward, all K-12 related service will be solely provided by Kaotou Ketang brand. Within the K-12 business, our primary school segment continues to grow at a very high speed, which made it the largest contributor in terms of net revenues. This achievement validates our strategy of prioritizing the primary school market and demonstrates the effective and consistent execution of our corporate strategy. Gross billings contributed by K-12 courses rose by 141% year-over-year to $1,800 million. Paid course enrollments for our K-12 courses increased by 141% year-over-year to $1,150,000. The average selling price per K-12 paid course enrollments was around 1,600 compared with around 1,500 in the last quarter and around 1,600 in the same quarter last year. The quarter-over-quarter increase in the average selling price per K-12 paid course enrollment was mainly due to seasonal factors. The year-over-year ASP remains stable, which is what we promised at the beginning of the year because we wanted to constantly provide fair access to high-quality education resources across the country. We have always tried to hire the best instructors and the best tutors in the industry so that our students receive the highest quality instruction. Average enrollment per class rose to 2,800 compared with 2,000 in the second quarter of 2020. and 1,400 in the same period of 2019. The significant year-over-year and quarter-over-quarter improvements demonstrate the rapid increase of our enrollment size during the summer vacation. Throughout this summer, our student structure has grown sustainable, with the students of non-graduate grade significantly increased, which lays solid foundation for our future retention. Net revenues from our foreign language professional and interest courses offered under our FinTech Asia brand were up by 125% year-over-year to $200 million and accounted for 10% of net revenues. Gross billings contributed by foreign language professional and interest courses were up by 135% year-over-year to $300 million. Paid course enrollments for our foreign language professional and interest courses increased by 79% year-over-year to $1,010,000. Gross profit margin increased by around 250 basis points year-over-year to 74%. Non-GAAP gross profit margin which excludes share-based compensation, increased by around 260 basis points year-over-year to 75%. Selling expenses increased to $2,100 million in the third quarter of 2020. Within that, expenses for traffic acquisition were approximately $1.5 billion. Expenses for branding activities were approximately 58 million, and the remaining expenses cover labor, service, bandwidth, etc. There was a certain time mismatch between our gross billings and the traffic acquisition expense due to our front-loaded traffic acquisition. In the third quarter, we strategically front-loaded investments of around 200 million in traffic acquisition for the promotional courses recruitment for the fourth quarter. which generated no gross billings in the third quarter. This spending, offset by the other round of $200 million that we front-loaded in the second quarter, as mentioned in our prior earning call, resulted in bear change in the actual traffic acquisition cost for this quarter. Excluding the cost of brand promotion, our return on investment for pure first-time user acquisition was around $1.3 million. From various channels' feedback, our ROI was still ahead of the industry. We have greatly improved our student structure on several dimensions. Firstly, paid enrollments from lower tier cities increased to 57% in this quarter, signaling our penetration into lower tier cities further improved. due to really successful execution of our customer acquisition strategy in those regions. Lower tier cities proposed a large unexplored market, and our higher growth of paid enrollments in lower tier cities proves our potential. Secondly, back in the spring semester, a proportion of those enrollments were from short-term or graduate grade courses. Throughout the summer, We significantly increased the size of non-graduate grade students, aka, retainable students. This structure will benefit our future retention and greatly help propel our subsequent overall growth. Going forward, we will take advantage of our strength in operational efficiency and continue to invest in traffic acquisition. Research and development expenses increased by 286% year-over-year to $200 million. This rise was primarily due to an increase in the number of content professionals and technology development personnel, as well as an increase in compensation for such staff. Our constant investments on research and development is important for our ability to further drive operational efficiency in the future. General and administrative expenses increased to $200 million from $24 million in the third quarter of 2019. The increase in general and administrative expenses was mainly due to an increase in the number of general and administrative personnel. An increase in compensation paid to general and administrative staff and an increase in fees for the ongoing investigation. Interest income and realized gains from investments this quarter from cash, cash equivalents, short-term and long-term investments increased by 254% to $18 million from $5 million in the third quarter of 2019. This increase was primarily due to an increase of cash cash equivalents and short-term wealth management investments, as well as the realization of gains generated from short-term and long-term wealth management investments during the quarter. As of September 30, 2020, we have cash and cash equivalents, short-term investments, and long-term investments of $2,100 million in aggregate. compared with a total of $2,700 million of cash and cash equivalents, short-term investments and long-term investments as of December 31, 2019. Net operating cash outflow for the third quarter of 2020 was $608 million. The outflow was primarily due to higher marketing expenses paid to improve our market share and brand awareness, An increase in compensation for fast-growing staff and an increase in service expenses to support our rapid growth of students and daily operation activities. Furthermore, an installment of $24 million was paid for our Zhengzhou property purchase, and we also had $99 million in capital expenditures during this period. With that, I will now provide our business outlook. Our net revenues for the fourth quarter are projected to be between $2,076 million and $2,116 million, representing an increase by 122% to 126% on a year-over-year basis. These estimates reflect our current expectations, which are subject to change. Thanks, Operator. We are now okay to take questions. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. The first question today comes from Gregory Zhao of Barclays. Please go ahead.

Hi, Chen-Lao Xu, Shannon, and Sandy. Thanks for taking my question. So my question is still about the market and the competitive landscape. So we noted some private companies that raised a lot of money in the past six months, and a lot of the investment has been spent in marketing and yield acquisition. So just want to understand, GSX plan and strategy in response to the competition, and how long do you think this kind of competition will last? And also, how shall we think about the market competition, the impact to our student enrollments in September quarter? And we saw the sequential trend of the enrollments is a bit different from the past years. Thank you.

Thank you. Thank you, Greg. When people talk about online education, we say they are the top four companies.

And we have seen that in the past several months, There is big changes in the market conditions, and there are some private companies raising a lot of funds.

那我们通过这个市场的数据,在今年的第三季度,我们从这个在线直播大班客的维度来看的话,我们的收入已经是头部四家公司的第一名。 We all know that the summer holiday is a very critical month in a year. It is a strategic investment period. So in this year's summer holiday, our investment in market spending increased a lot compared to last year. But we need to look at the changes in the market. Through the third-party data, So if we look at market data, in the third quarter, just look at online live large quads,

In terms of revenue, we actually rank the top among the top four players. And we know that summer is always the critical moment for new enrollment recruitment across the whole year. So we did strategically extend our investment. During the summer, our sales and marketing spending increased much more compared to the same period last year. But we have to pay attention to the market changes. Through some third-party data, we have heard that there are some players, their summer sales and marketing spending exceeded 4.5 billion RMB. And in terms of ROI, it's very probable we are still the highest.

根据目前的市场的竞争情况以及各家的融资的情况, We think that the competition in 2021 is still relatively fierce. I think this competition will be at a peak in 2022. Our strategy is always focused on our customers, focused on our efficiency, focused on the continuous improvement of our internal indicators. According to current market conditions and the fundings of each player, we believe in the year 2021, this competition is still going to be fierce.

And we believe that the field competition might reach a turning point by the year 2022. So our strategy is always focusing on our customers, focusing on the efficiency, and focusing on the continuous improvement of intrinsic metrics. We believe that as far as we become the company with the highest operating efficiency, the capital will always support us, favor us.

Thanks, Greg. And adding to Larry's point, in the short term, the fierce competition seems to bring pressure to a company. However, if you look at it in the long term, the industry position will become more clear after the competition. And companies with a low operational efficiency will accelerate their cash burning speed. And only the companies with a higher operating efficiency will become the final owner. So we think the rules have never changed when we look at each of the sectors in a TMT business. But we got a lot of questions about how to evaluate which company has the highest operating efficiency. So from our perspective, we think there are a couple of aspects we can testify. So first, financial results is always the most straightforward way to look at a company's operating efficiency. Since 2017, we have found basically the least money, but getting a fairly fast growth speed across the sector. And also, although we have a single quarter of net loss, but if we look at across the whole year, we still have has the confidence, we still have the confidence that we have a very competitive operating margin. And if we are not the only, probably we will be one of the very few companies that we still have a, we will still highly probable to have a positive operating cash flow if looked at in a whole year's perspective. And the second way to testify in companies' organizational capability is the opportunity the team and the organization. So from our organization point of view, we have always been building and solidifying an exceptional and stable senior management team and middle level management team. This team is a diversified, young and changing embracing team and has a very high sense of identity of our corporate culture. We all know GSX has been through a lot of things this year and the pandemic, and also we were attacked by a lot of short sellers and we'll be in the dark place. But now our co-management team has left the company voluntarily, except for the health reason or turn back to families. And not to mention, none of them went to other companies in the industry. So when a company grows really fast, a stayable and a group of people really like the company and willing to contribute their energy and their time to contribute the whole career to the company will be the most valuable asset for us. And so we have emphasized a lot of times that The online education has a really long service chain, and they need to do better. We need to be good on each of the value chains a couple times. But the larger our skills are, the more significantly we realize the importance of this perception. For instance, some companies may be particularly good at serving students in a long-term and normal price of courses. but a little bit weak at new student recruitment. While other companies may have advantage on traffic acquisition or traffic tools, but face difficulties to serve their students in long-term courses. So for us, we remain focused on improving our own organizational capabilities, and we strive for 3% to 5% better on each link of the long value chain. So that's our way to face the compensation. And we believe when they are doing the rightful things, the results will turn favorable to us. So we don't have to extensively fix on the external expectations. And in terms of a lot of companies, both from public sector and private sector, do some financing activities, So first, let's look at our cash balance from a historical point of view. So here by cash balance, it represents a combination of cash and cash equivalents, short-term investments and long-term investments in this call. So our cash balance by the end of 2018 was only around $236 million. And by that time, we do heard the news that other private companies has raised tens of millions of USD dollars or even 500 or 800 million USD dollars. That's basically 15 times or 20 times higher than us. But when times come to the end of 2019, we have grown our cash balance to 2.7 billion RMB yuan. With that, full year operating cash flow contributed $1.7 billion. And with 2019 Q4, the single quarter contributed around $700 million operating cash flow. So from this point of view, our cash accumulation has been very abundant. And second, if you look at operating cash flow for this year, for the first nine months, We are in a position of cash operating cash net outflow for around RMB 33 million in RMB terms. But that includes our payment to our independent review. If we remove the payment to the lawyers and the accountants from this pool because this is not a routine expenses, we still have a positive operating cash flow for the first nine months. despite such an intense competition. And with Q4 coming, we are embracing the biggest retention season in the whole year, and we expect to receive billions level of cash from retention activity. And this enrollment contributed by retention basically has no investment in sales and marketing activities. So still at this point, we hold a positive view on our operating cash position across the whole year. And our cash balance still reduced a little bit compared to the beginning of the year. That's mainly because when we grow really fast, we paid install payments to our Zhengzhou property purchase. And also we are opening about 15 operating centers in other cities. then that needs some payment on decorations and rentals at the first place. And also we execute our share repurchase plan in the second quarter. So in terms of our operating cash flow, we still hold strong confidence that that reflects our organizational capability. And as Larry just mentioned, we believe investors or the markets, they always like companies that have the highest operating efficiencies. So I hope that addresses your question. Thanks. Bye.

Okay. Thank you very much.

The next question comes from Mark Lee of Citi. Please go ahead.

Hi, management. Thank you for taking my question. I want to ask for this quarter's gross margin. I think we have a three to four point decline here. which seems to be a quarter-on-quarter. So it seems to be a bit softer compared to Q2 and the last year trends. But I think our ASP and the scale also are doing well. So may I know what is the reason for the growth margin and also what would we think about the trend going forward? Thank you.

Okay, thanks, Mark. So yes, our growth margin this quarter, if you look at the growth margin on a year-over-year basis, it's an increasing trend. But it slightly decreased our quarter-over-quarter trend. So the reason is basically because of the seasonality. So when our season base becomes very large, so the seasonality will show its distinction. So in the third quarter, we provided a large number of promotional classes with limited contribution to revenue. However, in the third quarter, it still encouraged day-to-day costs, such as infrastructure networks, fixed labor costs, and also to provide a better learning experience and service to our students, especially for promotional classes students. We recruit tutors upfront for about a month to provide training to them and have them prep for performing all the tutoring to the students. So that all cost our salary paid to tutors increased a little bit. And also, in the summer, because I just mentioned the light, because of the entrance exam for both college and high school was a little bit late, that caused some concentration on us when we send learning materials to students. And so you can see the learning materials cost, a proportion of revenue increased a little bit as well. So that's the reason why we see our gross margin has a quarter-over-quarter decline. But we do foresee the growth margin will get recovered in Q4. Because in Q4, that's a full season that we provide courses to our students, and also the learning materials distribution will be more even. Thanks.

Okay, thank you.

The next question comes from Maggie Zhang of Haitong International. Please go ahead. Thank you for taking my question.

I noticed that there is a quarter-on-quarter decline in the K-12 paid enrollments, even though that we have increased selling and marketing efforts. Can you explain that?

Is it because there were conversion rates, or is it because the student base was shrank in this quarter?

Thanks, Maggie. So this is also due to the seasonality. So paid enrollment and gross billing for K-12 business actually shows distinct seasonality. Typically, most retentions happen in the second quarter and the fourth quarter, while most new student recruitments happen in the first and in the third quarter. So during the third quarter, when majority of the paid enrollments are first-time users, We spend selling and marketing expenses to attract them. So this compares to the second quarter when most paid enrollments come from retention and do not cost too many extra dollars. As such, the third quarter typically shows dipped enrollments but rising selling and marketing expenses. A same trend from the second quarter goes with the fourth quarter. So when they expect most paid enrollments will come from retention. And if we compare the quarter over quarter changes, and we only look at the first time users of paid enrollments grow, if we compare our Q2 to Q3, actually the quarter over quarter growth rate was in the range between 55% to 60%. So that's actually an apple to apple comparison. And we do recall that this trend actually happened in our Q1 in 2020. We can all recall that in the last quarter in 2019, we have around 1.1 million of enrollments. That's a great portion that actually came from retention. But when the time comes to the first quarter in 2020, we see a slight decrease in the paid course enrollments. That's also because the seasonality I mentioned. So going forward, we foresee that in the fourth quarter, the paid course enrollment will increase significantly. Then probably in the first quarter in 2021, that will show a decrease as well. That's all because if we think about, if we have a really larger student base, let's say it's one million or two million, then students, they do retention activities at the same time. In a single quarter, they will contribute over 100 million enrollments. And when they only do new recruitment, that needs a lot of effort to convince students one by one. So that's usually, and going forward, we will see a quarter over quarter decrease on the paid enrollment and gross billing perspective for the first quarter and the third quarter. And the enrollment number and the growth billions will be higher in the second quarter and the fourth quarter. That's all because of seasonality. Thanks.

Thank you.

The next question comes from Felix Liu of UBS. Please go ahead.

Good evening, management. Thank you very much for taking my question. I very much agree with what you mentioned during the earning release that you will focus on a LTV-based approach towards selling and marketing. So could you sort of briefly elaborate on that? And just I'm wondering how long does a student typically stay with your platform and what is the lifetime value of the average student? My second question is on ROI. I understand definitely you're outperforming the industry peers, but compared with the previous period, your ROI is declining. So are you working on any strategies to potentially improving the ROI compared with the previous periods? Thank you.

Thanks, Felix. Thanks for the question. The market for primary school is still the largest within T12 sectors. So this is a market we need to put a lot of energy. And the best strategy is always to serve parents and students to their best satisfaction. And that's how we can have them stay on the platform a little bit longer or even a lot longer so we can improve the lifetime value of primary students. And only in this way we may achieve further strategic advancement over the long term. Specifically, we have enhanced our primary school segment from a few aspects. First, for the teaching quality, we continue to focus on recruiting and develop our teaching talents. So in the past quarter and recently, we have quite a few top tier teachers who are loved by parents and holding strong credibility has joined us as instructors. And with them, we have also comprehensively upgraded our primary school curriculum to provide both learning capability-oriented and result-driven courses system to students and parents. And second, from the service end, we paid great attention to the tutor we recruited to serve the primary school sector. And we provide trainings to them like education psychology to enable them to better serve our students and to know the young generation of parents very well. And third, from our Internet product, they continuously upgrade our live streaming technology to ensure a smooth learning experience. And also, we hired a top-notch visual design team to improve our teaching materials in order to enhance the interaction experience. So with all that improvements we made, we see significant improvement on our primary school's retention rate. Even though in just the retention period and in the fall, we do see the retention rate from our primary school sector increased significantly. both on year-over-year basis and quarter-over-quarter basis. And it is leading all sectors. So, like, you may all know that in the past, like, the retention rate from our primary school sector was a little bit lower than high school and middle school. Then right now it's already become the top one in our company. So that all shows our strategy on our primary school sector works very well. And also that can partially address your second question about the ROI for the sector. So when we put a lot of energy on the primary school sector, so actually primary school sector has a lower level of ROI compared to middle school and high school. So when primary school started to become a major revenue contributor, that we do see ROI was a little bit lower than the past quarter. But as I just mentioned, so the primary school students have the potential largest LTV. So what we need to do is we must focus on the value on the lifetime or not just on just one or two single quarter. As long as we can have them stay for a longer time, that we can bear a slightly lower ROI in the first place. Thanks.

Thank you. Thank you very much.

The next question comes from T.S. Kim of J.P. Morgan. Please go ahead.

Hi. Good evening. Hi, Mr. Chen. Hi, Shannon. Thanks a lot for taking my question. I have two. First of all, just to follow up on all your questions and your point, may I confirm and check if we can still generate positive unit economics from the newly acquired student only, excluding the retained and existing student, i.e., and if so, what's the lifetime, the length of the student that you assume in that assumption? That's my first question. And if possible, to follow up, how did that unit economics change it the student acquired during summer and those that we acquire now, given changes in customer acquisition code. That's the first question. My second question, if I may, is regarding high-level strategy, perhaps for Mr. Chen. Would you consider developing ways to grow and nurture organic traffic in the medium term? through homework helping ads like some of our peers in the Taqeer group, or some kind of platforms as we did in the past, just to prepare for an unlikely bear case scenario where third-party channel becomes way too expensive to even engage. So to have a backup plan of organic pool, would you consider that over the medium term? And by the way, I also noticed that we've acquired Tutsin's online business recently, And if possible, could you elaborate a bit as to why and rationale? That's it for me, and thank you very much.

Thanks, Mr. Kim. So your first question is about, I think that's a really good question because that's something that is widely discussed in the sector. So that's whether the new students can generate a positive EE because you may get the news from a lot of companies that are saying maybe the new students' retention rate is slightly lower than the existing students. So that's why when we think about how to retain a new student in the platform for a longer time, so that's one thing we did very importantly in the summer. So in the summer, we witnessed quite a few companies leave. They just gave up the summer semester because, as I just mentioned earlier, this summer vacation is a lot shorter compared to prior years. Actually, the pace of the summer curriculum is a little bit less because the different provinces open summer semesters at different times. So then they do see a lot of, like quite a few other players, they just gave up the summer semester, then directly recruit students for the fall semester. But from our experience and point of view, the longer the students stay with us, the higher the retention rate it is. So when we think about the question, we are taking the class view more. That's why we insist on recruiting students from summer and have them to stay with us to complete both the summer semester and the fall semester. Because if you look at the whole curriculum, that's more systematic. Only the students that go through the summer curriculum, they can get a better result in the fall examinations. And we do see this working out when they do the fall semester retention. that the students, they do have a higher level of loyalty that they stay with us. So that's why we do see, like, our strategy in the summer actually works. So then your second question is about the organic traffic, like homework apps. So, I mean, you can ask that question.

Yes, I think that usually when we talk about LTV, I think there are three very important elements. Ah, ah, ah, ah, ah. The third important factor is the fee rate. The fee rate usually determines the life and death rate. So all companies will calculate the fee rate. So I want to add about LTV.

When we talk about LTV, there are three important elements. Firstly, customer acquisition cost, which means the cost we spend to bring one traffic to a regular practice course enrollment. The second factor is growth profit margin. And this metric relates closely to a company's average selling prices and operating efficiencies. So many companies, they care about One factor that if they do not also pay attention to the prices and operating efficiencies, their calculation of ILPV will differ. The third factor is retention rate. Retention rate is so important, it defines live or death, and every player will calculate their retention rate. So in short, only if we integrate all the three elements That will combine to an leverage effect, will bring us a higher LTV, and bring the players long-term competitive advantages.

Regarding organic traffic, I think every company is doing similar products. Regarding the effect of home-based products, it depends on a company's After organic traffic, I think

And many players, they're doing similar explorations as for what this product will look like. It depends on in which stage, in a specific stage, what method this company use will bring them the best customer traffic. And this methodology has to match the stages of their development, has to match the specific features of the organization, and ultimately has to match their operating efficiency. We are still exploring and observing. Yeah.

Thank you so much for the insights and all the answers.

Thanks. The next question... Sorry. I'm sorry. Go ahead. Your third question... What about the potential acquisition you just mentioned, like you saw news that we kind of like take over two of other online schools? Is that your question?

I read an article, news article, that said GSX has acquired online arm of cuisine another listed company a couple weeks ago maybe that was a misinformation but just wanted to clarify if that was the case and if if we did any rational pushing the new u.s ticker uh

Tim has similar business model operations compared to us, and we have communications.

An alternate result still depends on further communications. If we reach any decisions, we will have public announcements.

Not a Puxin group, just Puxin online school.

Thank you, sir. Thank you, sir.

Thanks. Because for Puxin online, for the whole team, the founder and the management team, they have a very deep experience in the education industry. And they also have some innovative ways to acquire new students. That's something we always be humble that we want to learn from. And also, we are open to all possible corporations and communications to all kinds of parties. But as of now, we don't really have a clear plan about the potential things that you just mentioned. then if something substantially happened, we will make an announcement. Thanks.

The next question comes from Tian Hao of TH Capital. Please go ahead.

Hi, Larry, Shanna, and Sandy. Two questions. It's pretty basic. One is for your elementary, middle school, and high school, What is the enrollment composition as well as the revenue composition? That's number one. Number two, what is the average size of the class in Q3? That's a true question. Thank you.

Thanks. Thanks. So for your first question, because we just mentioned primary school is the biggest revenue contributor this quarter, And because the ASP in primary school is a little bit lower than junior high and high school, which basically means the enrollment contributed even more compared to high school and middle high school. And your second question about the average size of class. So in the third quarter, our average size of the instructor class has reached up to 2,800. Hope that address your question. Thanks.

Yes, Sena, thank you.

The next question comes from Alex Shai of Credit Suisse. Please go ahead.

Hi, thank you for taking my questions. So I'll ask in Chinese first and translate by myself. Thank you, Mr. Guan, for giving me the opportunity. I have two questions. The first question is that I would like to ask Mr. Guan to share with us the organizational capability that you have been talking about, which is the greatest advantage and challenge. Can you tell us specifically from, for example, the ability of the employees, their work experience, and the organizational structure, in particular, to describe some of the advantages and challenges in these aspects? And especially in the case of Quick Family Marks, Mr. Guan mentioned an upgrade in the organizational structure, and there have been some changes in this regard. My first question is about the organization capabilities. So, I always mention that this will be your main advantage and main challenges ahead. So, we'll elaborate on different aspects of your organization capabilities and what to change post your organization structure upgrades. And the second question is about your view on the future changes of your products and services. For example, will the services to each customer become more intensified, will they become more intense, and will the product portfolio become more diversified? Thank you.

Thank you, Alex. Everyone knows that Genshin Impact is a purely online education company. At the same time, it is also a We are a completely independent online education company, so we can expand our data to analyze and interpret it. Through our data, I think everyone will better understand the online education industry. We have always believed that organizational capability is the key to a company's success.

Thank you, Alex. So as you know that GSX, we are a pure online player and we are an independent online education company. Every data metric of our operations, our financials, you can read it into details. And through every data of our company, you can better understand the online education sector. The organizational capabilities is the key competitive strength

a core advantage of our firm.

So GSX In the first three years that we started the company, we have struggled through some darkest moments. And as a result, the people, the staff of GSX, we have like the sense of crisis, we have high standards, we have the self-criticism, and we always review ourselves, all these serious testing down to our bones.

I think all of this is actually internalized in our daily lives. It is reflected in how we recruit people, how we motivate people,

In this, on the street, people always say the staff of GSX, they look very affluent. I think it's mainly meaning that our people, we are curious, we are serious, we are altruistic, And we always have the aspiration to win the battle. And we actually have embedded all of these values into our daily life. And those can be figured out in how we recruit talent, how we encourage people, and how we kick out people.

今年的九月份我们把根据学的K12业务和高度课堂的K12业务融合成了一个新的高度课堂。 After the integration of the new high-tech classroom, I think our talent density will be greater. Then, the technical talent, product talent, individual talent, especially cadres, will be fully improved. I believe that after a while, we will see a more aggressive, more efficient K12 brand, high-tech classroom, in front of the public.

Since the September of this year, Ganshui Xue and Gaotu Ketong, these two Keto brands have integrated into new Baotu Ketong. And through this new Gaotu Ketong brand, we have a larger diversity of human resources. We have upgraded our talents in technology, in products, in instructors, and also in our management teams. I believe Give us a little more time, we will see 高徒课堂 with more competitive and more effective, efficient stuff.

另外就是我们在说到教育的时候,我想核心不仅是教,而且最重要是育。 最重要的是要有最多的、最好的、最有责任心的、最有爱的老师。 In addition, when we mention education, the core is not only about teaching, but also about cultivating and training.

So we are always looking for the most responsible, the highest quality tutors. As of now, we have recruited near to 15,000 tutors, and this is a guarantee, a secure for our future education qualities.

说到这个在线教育的时候,还有一个核心关键词是在线。 我想在线要去解决的是如何提升这个engagement, 如何能够使得互动亲密,如何使得学生有更多的喜欢,相信。 And when we mention online education, another key word is online.

What the online education wants to resolve is how can we improve the engagement between us and the students improve the interaction frequency and improve the intimacy between students and us. We want to help our students to like us, to believe the education and they have more motivations. They want to change. They want to improve. This actually closely matches our belief that we want to bring the courses that have the quality of large classes, the learning experiences of small classes, and the feelings and educational results of one-on-one tutoring services.

Lastly, about the future product mix,

The core is always we want to meet the demand of customers, and we are currently developing programming courses. Whenever we do some innovative explorations, we try to match it with our current capabilities and our organizational capabilities. Thank you.

That is very helpful. Thank you very much.

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

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. Please feel free to subscribe to our news alert on the company IR website at gsx.investorroom.com. Thank you very much.

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