Ladies and gentlemen, thank you for standing by and welcome to the GSX Techedu Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded on Tuesday, the 18th of February of 2020. I would 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 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 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. Good evening and good morning to you all. Thank you all for joining us for our fourth quarter and fiscal year 2019 earnings call. As I mentioned during our last earnings call, operating cash flow is essential indicator to measure the standard [ph] performance of online education companies. Actually, it’s also a key metric to measure the performance throughout the entire year. In the fourth quarter, our net operating cash flow reached RMB739 million which is almost five times compared to the same period of last year. For the full year 2019, our net operating cash flow has reached RMB1.29 billion over five times compared to last year. As of December 31, 2019 we have combined cash balance of RMB2.74 billion including cash, short term investment and the long term wealth management products. In December, we repurchased around 627,000 ADI’s equivalent to RMB87 million U.S. Excluding the impact of stock repurchases, our cash balance were RMB2.83 billion that made --that marked a significantly increase from RMB236 million at the beginning of 2019. With -- our business is continuing could generate ample cash. Our net operating cash flow continues to be positive. As such, despite the event many meds for the final stretch say that we do another photo offering while market sentiment is bullish. We have no plans to do so. We firmly believe that by nature, education companies through the not burden of cash to grow to scale but should spare no effort in serving every student and the parent to their satisfaction. Investors often ask us, what on earth are GSX competitive advantages? My answer is always focus. As you all know, what makes GSX stand out? It is our focus on online live large classes. In the past year, I consistently underlined the importance…

Thanks, Larry, and thank you, everyone, for joining the call. First and foremost, I'd like to share some updates on the evolving situation with the Coronavirus outbreak in China, and how we have been adapting our business to this new environment. Our hearts are with those who suffered. We appreciate that the work many companies are doing so keep the country running. With that in mind, as a significant player in the online education industry, we've really rolled out the initiative to support students during the time. Our K-12 brands, Genshuixue and the Gaotu Ketang have donated RMB20 million worth of regular priced courses, with fully devoted tutors providing not just study services, but also emotional support. Our Weishi team has opened its live broadcasting system to offline education institutions, and public schools for free, assisting them, moving courses from offline to online. Over 80,000 new accounts were opened during the outbreak. Our Chengxi team is providing free training to help offline institutions transit to online courses, serving over 6000 offline institutions. We also have launched free courses staffed with our best instructors, on national wide platforms like Xuexiqiangguo, Xinhua News, Xinhua Net, Yangshipin, People.cn, and media apps including [Indiscernible] to ensure a seamless delivery of high quality education. Right after the Coronavirus broke out; we reacted instantly with an action plan, and our team working for days and nights to successfully secure the seamless delivery of our education services. The whole company was well organised. We also operated an R&D centre in Wuhan together with a small tutor group whose health and safety are what we care about the most now. Some of these tutors volunteered to serve the donated courses for Wuhan. What they and their students experience through all this difficult times would bring their hearts together.…

Yes, thank you.[Operator Instructions] And the first question comes from Mark Li with Citi.

Hi, Larry, Shannon and Sandy congratulations on the very strong results. I have two questions. One is, you mentioned some of our measures for the unfortunate Coronavirus incidents. May I know a bit more say -- any color on line traffic, recently we see. And how is our system, and R&D to take the peak traffic from their users? And how about our strategy for the future retention rate etcetera? And also, I want to know you mentioned our focus on cash flow not cash burning. So how is our strategy for the upcoming the spring semester online competition? Any color on this? Thank you.

Thank you, Mark. This outbreak will significantly affect the Chinese economy. We are very concerned and are closely monitoring the evolving situation. There is a theme that's important events will change people's behaviour, and that the behaviour change will further reshape people’s habit. Now we are seeing a lot of teaching and renewed activities happening online. This will incredibly cause the people habits to taking online courses. There were around 200 million primary and secondary school student in China. Let's assume with the cost to transit one student from offline to online running is around [Indiscernible]. We multiply that and get the total cost of RMB200 billion. At the same time, there were nearly 20 million teachers from primary and secondary schools as well as after-school tutoring institutions. Let’s assumes the cost to train and transit one tutor online is RMB200 [ph] we multiply that and get RMB40 billion. In short, the situation today, we save nearly RMB240 billion in promotional expenses for the sector and significantly as a standard rate is a popularity of online courses. Right after the Coronavirus broke out, we instantly took actions and thanks to our strong organizational capabilities, we have launched the three live classes on – platform and we have attracted nearly 15 million enrollments. However, in our view the number of users doesn’t equal to the number of customers. It can be fast to attract the users, but it takes much longer time to accumulate loyal customers. The typical conversion process were three live classes is, a user enrols in three live classes, then he decides whether or in order to enrol in the low priced promotional courses. Since this process has one more step then converting from RMB9 live courses directly, we seeing as a conversion rates is definitely much, much lower. And also, many, we ask on what about the competitive landscape. We always believe in our focused strategy. Our focus is always on the one team, always on the customers. Instead of competitors, we all firmly believe that as long as we serve our students and the parents to their satisfaction as within the organization, we collaborate effectively and efficiently. Tomorrow will always better than today.

And also adding to Larry's point, the registrations with us with us are vitally spread on multiple channels such as [Indiscernible] and desktop, tablet, WeChat and iOS. And actually iOS terminals accounted for the list of all those channels. Only about a middle single-digit or near or low single-digit. Especially for our paid course enrollments, we calculated the data based on our data on February the 10th. So, parents are less willing to pay for courses to iOS largely because the in-app purchase policy that the parents need to pay additional charges around 30%, so the parent don't want to take the burden. And also like Larry, always say, like we believe that users do not equal to customers. Customer has a higher loyalty and users may leave us quickly. So very likely, we are in the education industry and retention is the only thing that matters. Thanks Mark.

Thank you, Larry and Shen. And congratulations again.

Thank you.

Thanks.

Thank you. And the next question comes from Christine Cho with Goldman Sachs.

Hello. Yes, congratulations, Larry, Shen and Sandy for excellent good quarter. I have two quick questions. One, you mentioned that you kind of see more competitive backdrop. Can you just elaborate a little bit more on your customer acquisition strategy going forward? And secondly, I think we saw a pretty good progress on the non-K12 side as well. And I know, Shen, you shared some details during the remarks. Can you just share with us some comments on how we should look at the going forward outlook for this business as well? Thank you.

Thanks, Christine. Yes, as we mentioned during our last call, for the first three quarters of 2019, basically the weighted average customer acquisition cost for paid course enrollments was around RMB545. And we also mentioned that, Q4 was usually the largest retention season and we expect the number to be further decline in Q4. So, for Q4 alone our CAC for each paid enrollments was around RMB400 and it drives down the weighted average customer acquisition cost for the entire year to be around RMB470, which shows higher retention can lead to a lower customer acquisition cost. And we don't really differ from our peers in customer acquisition channels. We all rely on sales and marketing also primary [ph] platform that may distribution all those traffics. In 2019, we acquired students from four types of courses. We have three courses; promotional courses priced at around RMB9 and we also provided entry-level courses priced at RMB49 and regular twice above RMB99 which we usually refer to Guangzhou. In the past year, we have been disclosing the paid enrollments for courses priced at RMB49 and above RMB99, but now we've disclosed enrollments for RMB9 and for free. We do list because the market is still in a very early stage, which makes it difficult to get which professional courses are the most effective one. We don't want the information we deliver to be inconsistent. So, if counting all the enrollments together our sales and marketing efficiency is actually really high. And please keep in mind that our sales and marketing spending is driving a topline increase of over 400% especially for K-12 business. Our gross billing was increased over 400% from five consecutive quarters, I mean, in terms of the gross billings. So our company is actually very unique. If you look…

Thank you. And the next question comes from Gregory Zhao with Barclays.

Hello, Larry, Shen and Sandy. Congratulations over strong quarter. Thanks for taking my question and best wishes during the special period. I have two questions. The first one, with a very healthy margin expansion in both gross margin and operating margin. Can you help us understand the reasons behind? And how shall we think about the leverage from teachers compensation and sales and marketing expense fee? So based on this, how shall we think about the Q1 and 2020 profit outlook? Whether any changes in the current competitive environment? The second question is about your lock up so considering the upcoming to lock up expiration to management team or the pre IPO investors think about setting the shares. And has company have any plan to restructure the shareholder structure? Thank you.

Thanks, Greg. So your first question about the margin guidance. So, yes, we can see like our GP margin increased like on quarter-over-quarter basis, that's all contributes to, like because we're in a large class business model that our -- like the -- the fixed compensation of our instructors and tutors can be fully diluted when the class just grow bigger. And we do see like our gross margin is increasing in the five [ph] consecutive quarters in the past year. So going forward like we always provide the most competitive compensation to our instructors and our tutors that they can be really happy when they work with us. And if they're happy the students will be satisfied. So that's our philosophy. Always provide the most competitive compensation across the whole space. And in terms of the OP margins, so there's an apparent seasonality if you look at our margins. Let's recap the trend in 2019. So for full year last year our non-GAAP OP margin respectively 17.3%, 8.8%, 1.3% and 24.4%. So the margin in Q2 and Q3 will be lower due to massive -- due the investment in the summer promotions. So the margin of Q4 will be the highest amount year as we saw our Q4 results. So in 2020, we won't be giving guidance on margins. Instead we prefer to give an absolute value range for the profit forecast, just like what we did in 2019. When we projected the full year revenue of RMB1.8 billion, in fact, at the IPO the actual results surpassed the guidance by 17% and reached RMB2.11 billion actually. And the same with gross billings, for which we projected range between RMB2.5 billion and RMB6 billion. But actually we reached RMB3.3 billion, exceeding the guidance by around RMB700 million. So as…

Thank you.

Thank you. And then next question comes from Felix Liu with UBS.

Hello. Good evening, Larry, Shen and Sandy. And first of all, congratulations on the strong results. So some questions on the margin side. One, I think the GP margin certainly is very impressive. And you mentioned that, its mainly come from better economies of scale. So could you maybe breakdown into what part of the operating leverage are we having? Is it on the instructors compensation? Or is it on other cost items? And secondly, on the sales and marketing side, just a follow-up question on the -- from the previous attendees. I think, winter quarter to my understanding is probably a relatively low season in terms of selling and marketing compared with Q3. But we still see a increase in absolute amount. So could you sort of elaborate and see if any changes in selling and marketing spending? And how we should think about it in the next year? Thank you.

Right. So, for the GP margin side, so majority of the cost of goods belong to compensations we provide to our current tutors, and they do see the proportion of the instructors keep declining in the past four quarters. And actually the compensation we paid to tutors is in the increasing trend. So that's why we really see that the leverage we have and thanks to the business model. And like going forward in the future -- because we always want to provide the best service to our students, which means, like tutors also takes the important role that because they are doing the daily communications. They are doing emotional support and they are the person who talks to the students on daily basis. So we really like -- we take tutors. We wanted them to be respectful. So, right now, like the tutors compensation is slightly higher than the compensation to pay to instructors right now. Then going forward with you, we want to pay incremental compensation to them as well. And also, the second question is about the market spending. So, as I just mentioned, like to support a topline growth like in 400%, we really see like the market spending right now is at -- it's not expense. It is an investment actually. Because like the way -- like the financial model is always -- we always record 30% [ph] unit alone, because that's the time we've actually spend the money we acquired traffic. Then -- but, like the revenue is actually recognized in the following three months or four months. So that's why there is mismatch. When we are supporting a 400% increase that the investment right now is very essential. And the other way to look at the spending strategy on sales and marketing is always to look at ROI. As we mentioned during our last call, so the way we see whether it's worth spending, its whether we can find the best unit economics, whether we can still be profitable -- I mean, on the cash side on the first order. So if we are confident now to do so, we will keep investing in sales and marketing. But at the same time we also need to consider to our supply capabilities. Because like, our philosophy is always effective growth that we don't burn money. We always take the traffic. We can't directly have a confidence that we can serve them to their best satisfaction. So that's our strategy.

Thank you. Very clear. And also on the supply side, I just want to follow-up. I'm not sure if we have the latest tutor and instructor headcount that's available to share?

Yes. We believe that number will also be disclosed in our 20-F filing later on.

Okay, sure. Thank you. Thank you very much.

Thank you.

Thank you. And the next question comes from Mengqi Zheng [ph] with Haitong International.

Hello. [Indiscernible] from Haitong International. My first question will be the contribution of high school segment by enrollment and revenue in the fourth quarter? And if there is any different in gross profit and OP margin between high school segment and other segments? The reason I ask this question is because there is likely to be a delay on our [Indiscernible] high school entrance examination -- university entrance examination this year. So, there might be a shorter-term -- shorter semester for the Gaotu So are you doing anything to capture the demand? And my second question will be for your first quarter guidance, that's very encouraging. And how much of the guidance comes from the join registration for both the winter season and spring season? Thank you.

Thanks Maggie. For your first question, as I just mentioned on my prepared remarks, our primary school revenue increased significantly. The increase in rate was 893% and our total revenue increasing grade was 413%. So that basically can give you a picture like our primary sector revenue is chasing high school really hard. So, and we always see like primary school is the key sector that the primary school segment has a larger student base, low penetration rate, longer lifetime, and broader market potentials. And their parents are in a younger generation and are more open to online education. So that's why we do see like premise who has a higher strategic significant for our branding. We always prioritize our primary school as a strategic focus. And in Q4, like -- we do see the revenue from primary school is increasing a lot. And actually our concurrent students who are actually taking less in the number from primary school has already pass the high school. So we do see that provides a huge potential for our future business to grow. And for your second question about our Q1 guidance. So, we feel like really sorry for what's happening right now and like the virus breakout really has a huge impact on the after-school tutoring business. So, right now, we don't really have the conclusion why, when -- why does the Gaotu will be delayed. But we are closely following like all the guidance provided by the MOE and other local education related governments. And actually like our Q1 guidance is made on our best estimates as of now that they have take a comprehensive consideration of the potential delays in the primary and secondary school opening. And we always like -- we are fully respect and support the government's move…

Thank you.

Thank you. And the next question comes from Alex Xie with Credit Suisse.

Hi, management. Thank you for taking my questions. And congratulations on very strong results. My first question is about our retention of teachers. I think, one of the key advantages of our business model is to have the best-in-class instructors and tutors. And as I do have some confidence in our strategy to keep our top teachers. I want to ask, what will be the component of the compensation in terms of share based compensation or long-term incentives to keep them. And secondly, I think in this industry the loss of tutors particularly for the newly class who just received trainings has become an issue. What is our expected retention rates for our tutors? And how is our tutors compensation higher, say, how much is compensation higher than peers? Thank you.

Thanks Alex. In terms of the retention of our instructors, we do had really high retention rate in terms of our instructors. So, for -- so instructors who is taking a class larger than 1000 enrollments since 2017 now list of kind of instructors has left us. So you can say that voluntarily. So we can say that our instructor retention rate was 100% by that mean. The key is like, first, we always provide the most competitive compensation to them. And the good time, we see its like you know instructors usually they are very conservative group. So at the beginning of their career with us, they are less willing to take share incentives, but right now, like a lot of instructors they just came to us and voluntarily started to see whether they can have a longer term of -- they can be part of the share incentive plan and have a long term incentive. So that's a really good stand. And secondly, as we always mentioned, doing online business, so tutor, instructors, they are very good. But they are also just part of the team. So they are good enough, but their team needs to be equally good to support the teacher, because their compensation is also highly rely on like the sales force, can you recruit how many students to them. And like the tutors can provide the best quality of service to their students so they can have a higher retention rate. So the whole team just work together to a better performance. And the structure of our instructors compensation is fixed part of the compensation plus performance based compensation usually linked to number of enrollments in their class, as well as the share-based compensation. So these are the three important to their compensation package. And also like the training and recruiting to new tutors. So as a technology company, we did had a really solid foundation. As we mentioned during our IPO, we actually -- we collect for live broadcasting team, the second month after our incorporation. Right now, we've provided online training to our tutors through our [Indiscernible] as well as our live broadcasting system. So -- and also we have closely -- we have close conversations with all of our staff during the coronavirus outbreak. And actually, there's one thing maybe beneficial to online education industry especially for top players as us is like there were around 8.7 million new graduates list here, but a lot of industries are much affected by the thing we are experiencing now. So, we are actually has more opportunities to choose, those are really good. Has really good professional background candidates with us. So that's why we see one of the biggest benefit we have right now. Thanks.

Thank you.

Thank you. And this concludes our question and answer session. I would like to turn the conference back to Nan Shen for any closing comments.

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. Feel free to subscribe to our newsletter on the company IR website at gsx.investorroom.com. Thank you very much.

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