Gaotu Techedu Inc. (GOTU) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the GSX Techedu Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded on Tuesday, the 5th of November of 2019. I would now like to hand the conference over to your first speaker today, Ms. Sandy Qin, 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 Investor Relations 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 during the Q&A session that follows. 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 and current market and operating conditions and relate 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 SEC. The company does not undertake any obligation to update any forward-looking statement except as required under applicable law. It is now my pleasure to introduce Larry. Larry, please go ahead.

Thank you, Sandy, and thank you all for joining us for our third quarter earnings call. GSX had another great quarter with good -- with exponential growth, demonstrating our superior teaching quality and excellent learning results. We [delivered] speed, efficiency and effectiveness to gain insurmountable competitive advantage. We are fully committed to productivity improvements and take sustained massive action immediately. We make every major effort to invest in all areas of content development and technology. We will continue to invest strategically and smartly in our customer acquisition and R&D in 2019 and 2020. We are determined to achieve a steep but shorter learning curve. All that we have been doing contribute to even greater engagement with our students and parents. We are proud to see our net operating cash flow for the third quarter to reach approximately RMB 287.8 million. Our cash and cash equivalents and the short-term investments and the long-term investments to reach more than RMB 2.1 billion. Our non-GAAP net income reached to RMB 20.1 million. And we will continue to have our -- and we will reinforce on our strategy to reap financial reward. This quarter, I have several thoughts to share with you guys. The first point I want to say is that GSX only does the one thing; GSX is laser-focused on the online live large-class education. To perfectly fulfill this sole task, we have smoothly integrated all functions, including traffic acquisition; sales and marketing; instructors and tutors; live broadcasting; content development; and data analysis et cetera. For any outperforming company, there are always several key factors, or remotely several key factors to determine effectiveness and efficiency and build a competitive advantage and economic mode. The outperforming company has always been in pursuit of the better performance in each factor. If each loop of this value chain outperforms the industry average by 3%, the exponential effect will drive our overall performance to beat the industry average by 19%. There you guys might ask what if others follow. Let's say a newcomer just call this each loop. But he can only do each loop 90% as well as the leader. Then the 6 loops combined together can cause this performance to be only, say if it is 3% as good as the leaders. GSX is just like a 5-year-old child. We stay humble, we stay focused, we stay foolish, we stay hungry, and we stay dedicated to our commitment as just on the one. The second point I want to reiterate the importance of operating cash flow. If you want to measure the operation efficiency of an online live broadcast education company, especially for the summer quarter. We believe that outreaching cash flow is one of the key indicators. Many ventures keep a close eye on this summer's promotional world. They monitor the customer acquisition cost, conversion rates and ROI. And they ask about the enrolments for entrance classes, regular classes and the retention rates. But please keep in mind, not every company discloses comprehensive data set, nor are their calculation method compatible. As such we believe operating cash flow really reveals the true performance of each company for the summer quarter. Over the past 3 years, we prioritized effective growth. We featured profitable growth. We gauged each dollar of investment to make sure it first makes the sense in terms of unit economics. And that's why even made a fierce competition over the summer, we were still able to achieve a quarterly net operating cash flow of RMB 287.8 million. The third thing I want to point out that online K-12 providers usually see the highest gross billings and operating profit during school breaks and that is between June and August as well as between December and February. But online education providers are totally favorite for online K-12 courses providers. They usually report low or even negative operating margin for the period that overlap with the school breaks, especially Q2 and Q3, lasting from April to September. But the flip side is they tend to report higher operating margins during the Q4 and Q1 since those periods overlap where the more of the school year. The reason is that they generally incur heavy sales and marketing investments from late May to August as by that time they need to attract enrolments for their summer entrance and the promotional courses. For GSX, the summer sales and the marketing expenses then pay off in the upcoming quarters as we see a spike in gross billings in Q3, and then higher revenue in Q4. I also want to add that because the 4 enrolments carry over, in Q4 we usually see a big quarter for retention and that will turn into higher gross billings in Q4 and higher revenue in Q1 in 2020. We will continue to invest heavily in the best instructors. We will constantly invest heavily in content development and differentiated cross offering. We will keep investing heavily in proprietary technologies. Thanks to our 5 years accumulation in technologies, we have stood out in live broadcasting, database analysis, artificial intelligence and internal operating system at 4 instructors contributing for the same and content development; we have been endeavoring to recruit the best parents. We have been dedicated to choose the most trustworthy partners. We have been swearing to deliver the most effective learning experience to students and the parents. That is our culture and value. Our success has always been all about customer success. Now I will hand the call over to Shannon, our CFO to walk you guys through the details of our financial and operating result.

Thanks, Larry, and thank you, everyone, for joining the call. I will now walk you through our operating and financial results, and end with how we build out the coming quarters. Please note that all financial data I talk about will be presented in RMB terms. I am pleased to report that we saw continued momentum across all of our key operating metrics which drove strong financial performance during the third quarter. The top line far beat our guidance. Moreover, we managed to deliver our sixth consecutive quarter of non-GAAP profitability in a highly competitive market thanks to our successful summer campaign and effective growth strategy focus. The third quarter net revenue increased 462% from the same period of 2018. Since 2018 Q4, we have maintained over 4x [growth] for 4 consecutive quarters, thanks to solid accumulation in both education experience and technology resource in the past years. Our gross billings in non-GAAP metric that drives revenues increased by 420% year-over-year to RMB 818 million, mainly due to increasing student enrolments that were driven by our outstanding summer promotion efforts. Total enrolments which were driven by our -- which refers to enrolments to courses priced above RMB 9.9 hit a record high of 820,000, which was 3.4x that of the same period of 2018. Paid enrolments, which refers to enrolments priced above RMB 99, increased to 538,000 or 3.7x that of the same period of 2018. Please note that during the summer, we provided 3 different types of promotion classes. First is RMB 49 entrance level classes. The second is RMB 9 promotion classes. And the third is classes totally for free, within which only RMB 49 classes were counted as part of total enrolments. This year, we have achieved a significant number of the enrolments into our summer promotional courses. We set our sights on becoming the market leader given the current high-speed and healthy growth. Now let's break down our revenue streams by business lines. Net revenue from our K-12 courses increased by 526% year-over-year to RMB 459 million and accounted for 82% of net revenues. The net revenue contribution from K-12 courses has increased for 5 consecutive quarters and will continue to be our main source of revenue going forward. The revenue increase was primarily driven by increase in paid course enrolments and the K-12 students' tuition fees. Gross billings contributed by K-12 courses rose by 470% year-over-year to RMB 745 million. Paid course enrolments for K-12 after-school tutoring business increased by 368% year-over-year to 477,000, growing at a much higher speed compared to other segments. This demonstrates our superior teaching quality is being recognized by both parents and students. Average enrolments per class further increased from 1,200 in the second quarter in 2019 to around 1,400 in the third quarter. ASP also increased year-over-year, partially contributed by new types of courses development, such as critical thinking. Net revenue from our foreign language, professional and interest courses were up by 390% to RMB 91 million and accounted for 16% of net revenues. This significant year-over-year increase was primarily because we constantly optimized our course catalog and promoted highly qualified teachers, all of which helped to increase paid course enrolments as well as the ASP. Gross billings contributed by foreign language, professional and interest courses were up by 304% year-over-year to RMB 124 million. Paid course enrolments for our foreign language, professional and interest course increased by 191% year-over-year to 51,000. Leveraging our know-how with online live large-class education, we will further expand into this large industry segment. We did an impressive job in the summer campaign and saw our conversion rate and word of mouth referrals keep improving. As a result, our core business has grown rapidly. They've also benefited from the strong and rising demand for online education. At the same time, we've managed to achieve and retain profitable growth by improving our ability to control costs and operating expenses. Our cost of revenues increased by 317% year-over-year to RMB 157 million, up from RMB 38 million in the third quarter of 2018. The rise was primarily due to our increased recruitment of teaching staff, including both instructors and tutors as we expand our business operations to support the rapid growth. We expect our cost of revenues to increase in absolute amounts in the foreseeable future as we serve more students and offer more courses. But the propulsion of instructors' compensation will decrease due to the economics of scale. Therefore, we do see an upside for our gross margin going forward. Non-GAAP gross margin, which includes share-based compensation, increased to 73%, up from 62% in the same period of 2018. We are able to pay our teachers incremental compensation while still enjoying greater operating leverage. The competitive compensation that we provide, a byproduct of our scalable business model, ensures that we can effectively execute when teaching larger class and also improves instructors' retention, which of course also benefits our students in the end. Before we turn to the sales and the marketing expenses, I want to reiterate the seasonality of online K-12 business. We had always followed our own pace and that help us outperform. As I highlighted last quarter, summer marketing campaign requires heavily investments in sales and marketing expenses. Also, the actual revenue benefits will not surface until the next quarter. As a result, this quarter's operating margin was lower compared to the full fiscal year's margins. Yet due to the jump in enrolments we saw from the summer promotion, we're positive that the fourth quarter will be quite strong in both top and bottom lines. So the entire year will reward us with a continued high-speed growth compared to last year. Selling expenses increased to RMB 330 million, up from RMB 31 million in the third quarter of 2018. The increase was primarily a result of more marketing expenses, especially for the summer campaign to attract new students and expand market share and for brand enhancement. Research and development expenses increased by 186% year-over-year to RMB 57 million. We constantly work on ways to apply the latest technology to improve the learning experience. For example, we added emanations and interactive designs into our live stream courses to increase the engagement of students. We've also updated our course materials to stay abreast of the latest educational trends in their respective subjects. As mentioned the last quarter, given that our revenue growth rate still outpaced our R&D expending, we believe we can still expand our operating leverage despite the incremental investment in research and development. G&A expenses increased by 123% to RMB 24 million, mainly due to a increase in G&A head count and a increase in related compensation. Non-GAAP income from operations, which excludes share-based compensation, increased to RMB 7 million from RMB 0.4 million in the same period of 2018. Non-GAAP net income increased to RMB 20 million in the third quarter. Thanks to our strong organizational capability and operational efficiency, we have been profitable for consecutive 6 quarters since the second quarter of 2018 from a non-GAAP perspective. We are one of the few, if not only, leading players in the market that have achieved sustained profitability. In the future, we will continue to execute our pricing strategy, well-proven market strategy and provide students with the best-in-class learning experience. Net operating cash flow for the third quarter of 2019 was approximately RMB 288 million, up 380% year-over-year from net operating cash flow of RMB 60 million for the same quarter of last year. This demonstrates our strong organizational capability in balancing investment and returns this summer. Now let's take a look at our key financials on the balance sheet. As of September 30, 2019, we had RMB 32 million of cash and cash equivalents and around RMB 1 billion of short-term investments. The decrease of the balance on June 30, 2019, was primarily due to the purchase of a medium-term note from Citibank classified as long-term investments of RMB 1 billion during the 3 months to end September 30, 2019. We are highly confident that in our operating cash flow, therefore, invest in assets that have a higher return and with low risk. As of September 30, 2019, our deferred revenue balance was RMB 778 million. Deferred revenue primarily consists of the tuition collected in advance. With that, I will now provide our business outlook. Based on our current estimate, net revenue from the fourth quarter of 2019 expected to be between RMB 806 million and RMB 826 million, representing a projected increase of 343% to 354% over year-over-year basis. This estimate reflects the company's current expectations, which are subject to change. Going forward, we will continue to increase our investment in teaching training, technology development and our ongoing marketing efforts. We believe our continued investment in marketing and a steadily improving organizational efficiency will help us achieve far higher than industry average growth this year and the next year. That concludes my prepared remarks. Operator, we are now ready to take questions. Thanks.

[Operator Instructions] The first question is from the line of Alex Yu with Credit Suisse.

Congratulations on very strong results. I have 3 questions. Firstly, what is your view on the outlook of customer acquisition cost in 2020 and then amidst intensified competition in this industry? And secondly, what is the trend of the contribution of top 10 teachers in your platform? And how is your progress in terms of introducing new teachers to your platform? Thirdly, in the primary school segment, I believe you're investing more after IPO. What's the progress in the primary school segment in terms of enrolment and revenue contribution?

Your first question is about customer acquisition cost. So customer acquisition cost will increase steadily, but for us -- for GSX, we believe we can have a relatively lower customer acquisition cost, thanks to our strong operating efficiency and organizational capability. So in the past, especially after the IPO, we saw quite a few articles started to talking about our marketing process and tried to figure out why we can maintain our customer acquisition cost at such a low level, but actually, they chose it, there's no secret ingredients. So although we are an online education company and technology is the foundation, but in essence it's still education and education itself is all about connections, it's all about intimacy, it's all about love. So holding that philosophy, we always believe that as long as we can provide a very good service to every parents and students, we can treat them well, then we can provide each class with a higher quality and we can address their concerns on timely basis and give them answers to their questions to their satisfactory, then they will stay with us as long as possible, then that can be a considerable amount of time and the revenue contributed by them will far exceeding the customer acquisition cost. So looking back to the past 9 months, from the non-GAAP perspective, our total sales and marketing expenses was around RMB 595 million. If the number is divided by the RMB 1.09 million paid cost enrolments that basically give us a number of around RMB 545 million. That's the weighted average customer acquisition cost and we can see the number is fairly low especially considering like the coming Q4 will be the largest retention season, then we do see the weighted average customer acquisition cost to further decline. So this low customer acquisition cost is contributed by a combination of high sales conversion rate, a high retention rate, a high-cost selling rate as well as a high word of mouth referral rate. So for us to maintain the cost to such a low level require us to not only be efficient on the overall operations, but also we need to put advertises and always put advertises on improve our teaching quality and to provide -- to elevate the service quality. So -- but thanks to our past experience, we have been practicing all these kind of activities and emotions things since we started this business in 2016. So we are quite confident that even in the future and when the compensation is intensifying, we can still keep our customer acquisition cost at the low end of the spectrum across the whole industry. And your second question is about the top 10 instructors' concentration. So in Q3, the top 10 teacher contributed about 34.6% of our total revenue. This number is decreased 1,200 basis point from 2018. So on our prospectus, we disclosed in 2018 and the first quarter in 2019 top 10 teacher basically contributed around 46% to 47% of our total revenue. So basically there's a story behind this number. By the end of 2018, although on the prospectus we disclosed we have 163 instructors, but you know when they grow very fast, we recruit quite a few teachers in the second half in 2018 and all those teachers are still under the training process because we respect to the bottom line that all the teachers need to be trained sufficiently before they can deliver a sophisticated class. So actually in 2018, there are only around like 50 of K-12 teachers are under full capacity. So which means by the time nearly 20% of the teacher contributed over 40% of the net revenue? So we still see that structure is fairly healthy. Then coming to this year and as we always communicated with the market since our IPO, then they have trained enough good teachers and they become more sophisticated to handle a lot of that. And with the new -- of this new academic year, they started to teach our class with a lot of site. So that's why we see this number fail a lot. And they do see in the future this can be further lower. And what's more, when they look at the details of these top 10 teachers, only 7 of them were related -- were teaching K-12 classes and probably 7 teachers, they are evenly distributed on subjects and grades. So which means they're not rely heavily on one teacher on one subject. So we don't see that as a huge operational risk. And also with our sophisticated teacher training system and with more qualified teachers getting onboard, we do see like in the future the [Indiscernible] of the teaching faculty will be more healthy and sustainable. So your third question is about the development of our primary school sector. So in general other sectors grew quickly in the past quarter and especially for primary school, they grow the fastest. In past Q3, the revenue growth rate for primary school was over 800%, and which means it's basically 9x as that the same time of last year. So right now the revenue contributed by primary school is catching up very quickly and getting close to the high school segment. So in the future, we do see primary school is our future focus. It's not only because there are 6 grades and it has lot of population and a lot of student base, but also we wanted to plant the brand image at an early stage. Even though at this time quite a few of the students, even though they were part of the promotion classes and they haven't sent out result because they may have some offline classes they need to finish, but they believe as long as our class is entertaining enough, informative enough and the quality is very good, they will come back eventually. And in the past summer we have upgraded our curriculum and courses for primary school. We embedded all the interactive designs in the cost delivering. So we do receive very positive feedback from parents and students and several parents -- some parents even told us that their kids are -- like they like their class so much that they don't even want to go to the restroom until the class is over. So they do see the satisfaction from this sector continue to rise -- continue rising, so we are quite confident that in the future across all the segments that our revenue growth will be more healthy and sustainable. Hope that addressed your question. Thanks.

The next question is from the line of Gregory Zhao with Barclays.

Congratulation to the strong quarter. I also have 3 questions. The first one is about online-offline competition. So just wanted to understand how you think about the online-offline K-12 tutoring markets current competition and considering your fast growth, how many of the students or what percentage of the new enrolments do you think were taken from offline? So my second question is about the margin. So you reported strong gross billings and deferred revenue in this quarter. So assuming most of the gross billing and deferred revenue would be booked in the next couple of quarters, how shall we think about the contribution to your operating margins in Q4 and Q1 next year, especially considering the marketing campaign slowing down? And the last one, also want to understand a little bit more about your teacher recruitment and teachers' compensation structure. So we know the space is quite competitive, especially in the past summer, so given the high quality of your content and the teacher quality, so we wouldn't be surprised if the competitors want to undermine some of your top-ranking teachers, so want to understand your strategy to cope with competition. And how do you compensate your teachers to satisfy their demand?

Thanks, Greg. As for online versus offline competition for K-12, what I want to share is just as follows. Number one; online education market grows much faster than offline education market. As you know, in the past 9 months GSX net revenues increased 448.7% year-over-year, which is unimaginable for the offline peers. Number two is you know many online education companies had finished successful IPO; many private online education companies had finished the financing from the fees. And also policies from the government come to encourage the online education development. All these just forms a good habit for the students and the students and the parents are willing to take online courses more and more. And all those help leverage the online market to grow much faster. Number three is the essence of the education is about lab. The best teachers know how to allow the students and how to engage students to know what is the lab and how to lab. And that's the reason why we need the best instructors or the best teachers. Therefore, online -- offline education companies, one teacher just teaches 20 students in one class and he or she may teach 5 different classes in one time. So let's say he or she can teach 100 students in a certain period. But for online education companies, an instructor can teach 200 or 300 students at same time. This will say, does one handle the time efficiency or than the offline model. And our mission is that technology makes education better. And by leveraging technology, we -- and we can just increase the efficiency and effectiveness of our service. Number four is with our successful IPO, more and more top teachers from the offline institutions join us. And we believe that in the next few years more and more outstanding teachers will come to compete for being top instructors of the online live broadcast of tutoring institutions. Number five is what is the [Indiscernible] unchanged? We believe that the [Indiscernible] unchanged for education is it should have the best instructors; the most qualified tutors; the best learning result; the best learning experience; and the best engagement. And you know just as an online education company, we deliver speed, efficiency and effectiveness and we leverage technology and we can duplicate the best practice manufacture. All those guarantee the result.

Right. Adding to Larry's point, so the reason we do the large-class, the performance thinking before -- behind that is all about the highest teaching quality. We believe that leveraging the technology online can validate all the best teaching quality that has the exposure to more parents and students, then that will also help with the fairness of education because online is more flexible -- the online learning is more flexible, more affordable to a lot of parents and students. And actually, things around us move quickly because we are facing all the parents and students on daily basis. We can feel that how much they impress the online education because actually the class itself is very entertaining and frankly speaking the product is still at the early stage. We believe with the development of technology, the online learning experience can be very close to the -- even for offline, like small classes. And that's why we do see online education has a promising future. And your second question is about our guidance on Q4's OP margin and 2020. So for Q4, we expect the OP margin to be around 20% and that is the highest among the year. So as we have been communicating in last quarter and as Larry just mentioned, so the seasonality of OP margin for online education company is completely different from offline. So for offline, usually the summer season and the winter season will -- the OP margin will be the highest because during that time, the utilization rate of the classroom will be higher. But for online, especially for large-class, in Q3 and Q2, these are the seasons we invest in heavily in sales and the marketing expenses. When it comes to Q4, all the classes will be regular priced classes, and leveraging the very solid foundation student base in Q2 or in Q3, they do see a boost in the concurrent enrolments in Q4. And usually, in the fourth quarter, the marketing activity will be less intense. So we do have the confidence that in Q4 the OP margin will be around 20%. And going forward to fiscal year 2020, we expect the OP margin to be largely in line with 2019. Although we will still make improvements, let me go to Larry's notion, this year's best performance should be next year's lowest standard and that's our operating philosophy. So the key factor to impact the OP margin will be our investment in our sales and the marketing expenses. So look at our financial structure. The GP margin in Q3 from the non-GAAP perspective, it was up to 72.8%. And going to Q4, we still see there's a room to increase that number because we still see the economics of scale in a large-class format. And we still enjoy the operating leverage on R&D expenses and the G&A expenses as well because our revenue grow at like 400%. So that means we have a larger room to invest in sales and marketing. Look back -- take a step back and look at the Q3 numbers. Our gross billings in Q3 were around RMB 880 million and the non-GAAP sales and marketing expenses was around RMB 330 million. So that does a quick math which basically gives us the ROI at around 2.68%. That's a fairly large number that give us the confidence that we should invest in sales and marketing today than tomorrow. So that's still we have confidence in our Q4 margin and even going forward in 2020. So your next question. Your next question is about teacher's recruitment and compensation structure. So the compensation structure for our instructors consists of 3 part; the base salary; the performance-based salary; and also we provide a share-based compensation to our instructors. And we -- our operating philosophy is to provide the highest compensation to our staff, especially for those employees that faces our customers on daily basis. It's not only about our instructors; it's also about our tutors, our salespeople. We want to provide the highest compensation to them. That's all based on our high operating efficiency. And so we do see like the compensation we provided to our instructor is very competitive and attractive compared to other players in the space. Frankly speaking, after our IPO basically not only the top 10, probably the top 30% of our instructors have been approached by other players. But now our sophisticated teachers have met even like when they were -- even like at things like 2018, the key reason is that not only because the compensation we provided to them, but also their passion in education and they fit in the culture we provided and created. So for the instructors, it's very important for them to feel that they -- I mean even though they are very good, but talking about the online education, the service churn is quite long. It's from the traffic distribution, and -- but it also needs to have a sales conversion process and like the tutoring process and the retention process. So the instructor and the whole team work together to make a team. Then in -- within our company, the instructors, they all feel very comfortable and they enjoy working with their current team. That's another key reason they don't want to leave. And also as a public company, all of our data are very transparent. Other instructors, they compare our data to like maybe other companies and we are the only -- probably not only, but very few companies that can be profitable at this scale. And they do see we are in a fast-growing class, that they do have confidence in our company. So that's the reason they don't leave. So even though like in the future when their compensation is intensifying, we feel we are quite confident with the retention of our instructors. Also, we do have the ability and which is also the biggest breakthrough for us this year is like we improved our teachers' training system. Now they provide a sophisticated and systematic training to our teachers that they can make sure like the recruitment and training to our teachers that can match the expansion of our business. Hope that addressed all questions.

The next question is from the line of Jeffrey Chan with CLSA.

Congratulations on a very strong start in Q3. I have 2 questions to ask. The first one is we see that the interest income in quarter 3 is around RMB 3.3 million and how do you see about the full year of the interest income? And my second question is what is the city exposure now, like how many percent of enrolment in each tier of cities? And any change in coming quarters? Do we see a higher penetration rates in the coming few quarters?

Thanks, Jeffrey. First question about interest income. Yes, this quarter that interest income is around RMB 3.3 million in R&D terms. Compared to the cash-related assets, it's already RMB 2.1 billion. That number is fairly low, but it's all about accounting treatment. So we purchased some of the short-term investment as well as the long-term investment, all wealth management assets. Before they expire all the unrealized P&Ls are recorded in OCI other than P&L. So they will recognize -- they will be recognized as interest income when they expire. So that's why we see the interest income in this quarter is low, but in the future, they will all be realized in the P&L. And the second question is about the enrolment distribution in geography, right?

Yes.

So this quarter still our 4Q enrolments contributed by first-tier cities -- new first-tier cities and second-tier cities were around 48% and the lower tier cities contributed around 52%. So compared to previous quarter, the lower tier cities contribution increased 1%. So we do see our penetration rate in the third-tier and fourth-tier cities grow quickly. That means we have better compensation advantage in these tier cities. But one thing I want to put a little color on is like in the past quarter Beijing actually become the largest enrolment contribution city and so that means we are generally accepted or well-accepted by key opinion leaders even in the higher-tier cities. With talking to a few of the parents in Beijing and Shanghai, actually they were very sophisticated and very familiar with the curriculum. They take a lot of notes and make comparisons between us and some offline institutions and even some compare us with other online institutions. And from their very detailed notes, they kind of like integrate a lot of advantage we have. For instance, the high teaching quality experiences the teachers, then that's the reason they choose that. So in the future, we are very confident that these geography-wise enrolments can grow healthily and very -- in a sustainable way. End of Q&A

In the interests of time, we will now conclude our question-and-answer. I would now like to turn the conference back over to Ms. Sandy Qin for any closing comments. Thank you.

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. Thank you very much.

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