Ladies and gentlemen, thank you for standing by, and welcome to the GSX Techedu Inc. First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] Please note, this event is being recorded on Wednesday, May 6th, 2020. 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 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 statements, except as required in the 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 first quarter 2020 earnings call. First and foremost, on behalf of GSX Techedu, I would like to extend our sincere condolences to the students, parents, and the families affected by the COVID-19 outbreak. I would like to send our utmost gratitude and respect to the medical staff, teachers, public officials, and people from all industries who have united in the fight against the epidemic and kept our society running during the global health crisis. For the first quarter of 2020, we have achieved another period of solid and rapid growth, including the seventh consecutive quarter of GAAP profitability and the eighth consecutive quarter of non-GAAP profitability. During the pandemic, I'm proud to say that we have shouldered our social responsibility and tried our best to contribute within the scope of our capabilities as a young company. Firstly, during the COVID-19 period, we have donated RMB20 million worth of courses to students in Wuhan. Those courses didn't contribute any revenues, but they share the same instructors, tutors, technologies, operations across courses, and learning experiences with our regular winter semester courses. Secondly, we took 49 of our best teachers and launched free courses covering all subjects and all grades. We invested in promoting and attracting traffic to those free courses. Our proprietary live broadcasting technology, which had been functioning well for over five years, strongly supported the smooth delivery of the free courses. Meanwhile, to host the massive number of the new students and ensure the high-quality delivery of the courses, we have deployed three independent live broadcasting support systems, upgraded our service setting by three times, boosted our server capability by three times, and increased our bandwidth capabilities by four times, et…

Thanks Larry and thank you everyone for joining the call. The first quarter of 2020 is unusual. During which period, we witnessed a public health crisis, radical changes in all industries, and a profound evolution that the Internet brought to our lives and the unprecedented volatility across the capital market. Living through this period, we could review ourselves better to quickly adapt to external changes and firmly remain focused on our values. Now, I will walk you through our operations and financial results, as well as, provide guidelines for the next quarter. Please be reminded that all the financial data mentioned are in RMB terms unless otherwise noted. Despite the severe challenges brought by the COVID-19, we have achieved a remarkable result in the first quarter. Net revenue increased by 382% year-over-year to RMB1.298 billion. This is our sixth consecutive quarter with revenue growth more than 350%. Our K-12 revenue growth rose 400% and 48% -- 448% year-over-year. In fact, our K-12 revenue growth has exceeded 400% each quarter since we went public. During the pandemic, we had offered free classes for nearly three weeks, which has intercepted our routine enrollment recruitment process for regular courses. Nevertheless, we still have achieved RMB1.374 billion in gross billings, a 358% growth year-over-year. Our GAAP net income, RMB148 million and non-GAAP net income, RMB191 million are both over four times high as the same period last year and approached the historical high. This is our eighth consecutive quarter that we achieved non-GAAP profitability. In the past first quarter, a majority of our enrollments were first-time students to our platform. We have recorded paid enrollments of 774,000. Paid enrollments rose by 307% year-over-year. Moreover, the paid enrollments contributed by the first-time students surged significantly compared with the fourth quarter of 2019 when recurring students…

We'll now begin the question-and-answer session. [Operator instructions] The first question is from Alex Xie from Credit Suisse. Please go ahead.

Hi management. Thank you for taking my questions and congratulations on very strong set of results. My first question is about our sales and marketing spending. I think since the start of this year, we have observed much more branding campaign by all the online education companies. So, I would like to know what's the percentage of brand spending in GSX sales and marketing expenses and what's the plan for the future? This is my first question. Secondly, I would like to ask about the referral of existing customers for new customers. Is there any related motivation mechanism or data to share with us, such as the referral rates? And then thirdly, I think you -- management has mentioned the tutors are one of the most important segment of our services and you have increased the compensation for the tutors. I read some news that you plan to hire more than 10,000 tutors for this year. Would you please comment on that plan? And what's your expected retention of your existing tutors? Thank you.

[Foreign language]

Thanks for your questions. So, the sales and marketing expense is related to our gross billings and the gross billings will be recognized as revenue in the next three to six months. Sales and marketing, as I just mentioned, is over seven7 times of the same period of last year. But we also observed the gross billings has increased a lot year-over-year, too. In the first quarter, our gross billings has achieved RMB1.37 billion. And as we heard from the capital market, actually, this is among the highest of all the online live large-class education courses providers. Especially for K-12 students, they will bring us more gross billings and revenues in Q2 and Q3. So our belief has always been that, of course, we serve every students to their satisfaction. We serve every parent to their satisfaction. That sense is to build a great brand awareness. And we believe -- and it's just because we stick to this belief and strategy, and that is how we are able to achieve the numbers you see today. Even though we -- this quarter, we provided free courses and we donated some regular courses, those efforts actually weighted down our gross billings and increased more costs and expenses, but we are still seeing our net profit growing very fast.

[Foreign language]

So, after COVID-19 broke out, many parents choose to stay at home. This provides a great opportunity for us and we are very glad to see that in the first quarter, our sales and marketing brought us really remarkable performance. In the first quarter, when you check the paid enrollment, actually a majority of them are first-time users. And we believe this value will brought us security for the revenues of Q2 and Q3, and help us achieve an ideal performance in the following quarters.

[Foreign language]

As we are accumulating more and more students at GSX and as we are raising our brand awareness more and more, we do notice a lot of the new enrollments come from word-of-mouth referrals. But as of now, we cannot publicize this data because -- we cannot disclose this data because the market, there is not a unified manner of calculating it.

[Foreign language]

And as for the thing you mentioned that we plan to recruit 10,000 tutors, we make this plan based on our current part growing fee. In Q1, as you can see, actually, our revenue and gross billings are still growing near to 400% year-over-year. And we believe only the best service and the better results, if we want to provide them, we -- it's necessary for us to attract the most suitable and best-performing tutors. So, that's why we are executing this plan as we planned. And I like your way of mentioning the retention rate of tutors because when we are doing education industry, in a sense, it adapt to growth of humans. And there are two types of people we care: one is the growth of students; the other is the growth of our tutors. And the key metrics we are valuing for the growth of students is still retention rates. For tutors, that's the same, also the retention rate. And we are proud to say that our retention rate of tutors is actually leading the sector.

[Foreign language]

So, many -- since the capital market and many investors, they care -- ask a lot of questions about customer acquisitions and the competitive landscape this year, so I want to add something. So, we noticed -- we can observe that a lot of the big names that also entered online education sector this year. And when we review these market conditions, we believe a common great opinion is it's a little late to enter at this time.

[Foreign language]

So, when we compare this first quarter with last year, why we are so confident to expand our investments in customer acquisitions? That decision is based on two reasons; number one, because of the COVID-19 outbreak, we precisely figure out that a lot of students and parents; they are staying at home during Q1. And we observed that a lot of our operational metrics are reaching a historical high, such as the students attention in class rate and their way of completing the courses, and the homework submission rate and their feedback rate, and net promoting scores, all of those metrics has a reach historical high. And we grab this because there is the opportunities to increase our customer acquisition. And based on this, we noticed that for Q1, after the new students, the first-time users, they join our platform to study, this April is actually the most important month, the first important month for us to do the retention for this year. And because we monitored a lot of the operational metrics has been performing well, we are very confident that then in April that we will achieve a great retention rate and based on that that's why we increased our sales and marketing spend.

[Foreign language]

The second reason that we have confidence in expanding our sales margin was because ever since last year, we have been continually upgrading our organizational capabilities and trying to retool and train our talent and professionals. We have trained and stored a lot of really great tutors, and those actually brought us back rewards in the first quarter. If we look at the first quarter of last year 2019, we have a limited size of tutors and that does not support a very large-scale of sales and marketing investments because that will bring a waste of money. But this year, because we have a really strong supply chain and talent, professionals already there to support this large scale of sales and marketing, that's why we make the decision. And right now, the sell-side consensus about our full-year revenue is around RMB6 billion. And based on our revenue of Q1 and our guidance of Q2, actually in the first half of this year, we can already reach around RMB2.8 billion or more. So, for the first quarter, the first-time users that has come to our courses, actually lay the solid foundation for our revenue growth, not only in the first half of the year, but also in the second half this year. Thank you.

The next question comes from Maggie Zheng from Haitong International. Please go ahead.

Thank you management for taking my questions. I have two questions. The first question is regarding the rescheduling courses in second quarter and third quarter actually [Indiscernible] postponed by one month, so which may allow for more time in the second quarter, but also a shortened summer holiday. So, will we have additional courses, say, in June? And also, how will we stay doing courses for the summer? And the second question is regarding the student breakdown. We know now, the primary student is now contributing the largest portion of our enrollments. And could you share with us the enrollment and revenue breakdown for primary, secondary, and high school, as well as, the margin difference between the three segments? Thank you.

Thanks Maggie. For your first question, we are glad to see that basically, all provinces have announced the schedule for kids to go back to school and everything is getting back to normal in China right now. And as of now, we can see that Gaotu has been delayed to July and it's most likely Genshuixue will follow the schedule. So as such, we have been adjusting our course schedule in the first half. For instance, courses for high school, in the past, we scheduled two times of classes for high school students, especially for the 12th grade and now we can adjust it to one classes each week to better adjust the pace they are having back at school. And also, we can add in some more short-term courses to kind of like elevating their knowledge level before they take the test. And also, we will take out actions to cater the students to their preference. And also like we have noticed that the summer break is squeezed to around six weeks based on like all the schedules we saw. It started in the middle of July and ended in the -- by the end of August. And so, which means -- but the good thing is all the uncertainty has been removed and the clarity is very high. And it's always like, for online education company, we have more flexibilities and we will adjust our courses offering according to the specific market conditions. For instance, most likely, probably, we will be hosting more students at the same time. Then, it's an also challenge for online education company because that's a big test for us about our organizational capability and our supply chain, our capability to provide a really good service during such a short time. But still, with all the flexibility we have, we still think we can grab this opportunity, and keep attracting the students and help them migrating from off-line to online. Thanks. And your second question is about our primary, middle, high school segments. So, as I just mentioned in the prepared remarks, in the first quarter, revenue growth for primary school was still far above the overall growth rate for other segments. Because we always believe primary school is a key segment and it has the largest student base, lower penetration rate, longer customer life, and broader market potential. So, the parents for this generation are more open to online education as well. This is why we always see primary school segment has a more strategic significance for our branding. And this quarter, this is the first time that gross billing from primary school sector actually ranked the top across all of our K-12 sectors. And also the concurrent students who are starting with us, the number has far exceeding other segment as well. So, going forward, we will continue to improve our course development, instructor recruitment, and training for primary school segment. Thanks.

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

Good evening. Congratulations on the very strong quarter and big guidance. My first question is mainly on the teacher and teaching assistants side. I understand that you are a lot more prepared this time to capture the increased traffic from COVID-19 in your marketing activities. So, could you just share with us the updated teacher and teaching assistant headcount? And secondly, on -- I think on the teacher regulation side, could you give an update about the licensing requirement for teachers and teaching assistants? Thirdly, I think I noticed that the ASP of your courses increased quite a lot in this quarter, which is impressive. Could you help us understand the ASP trend going forward? Thank you.

Thanks Felix. I may not have enough time to address all your questions. So I just -- I probably, I will take the first one. So, the teachers and tutors headcount, so as of now, we have already -- we have like our employee number exceed 10,000. And actually, during the period of COVID-19, that actually provides us a lot of opportunities to recruit talents that we cannot imagine in the past. One is because our company has become larger and more attractive. The other is because like the good opportunity -- working positions or opportunities in the market is very limited. So, that's why we kind of like grab the golden period to recruit a lot more talent that we really like and we really feel proud of. And for teachers and tutors, as we just mentioned, we actually raised the compensation for tutors. Investors may have concerns about the gross profit margin and if we raise the compensation level for tutors, whether that will lower the GP margin. But actually for long run, invest in people is always the best strategy. And from our observation, after we raised the compensation to our tutors, we basically we can get all the top tutors. And even though for teachers, they used to teach one-on-one or they used to teach small classes, they're all join us as tutors. And that's why that provided our students with a better learning experience. And in the long run, they will help with a higher retention rate. So, that's the strategy we have always to attract the best talent. And sorry that our prepared remarks today took a longer time because we want to share everything we think you may have questions or interest in the future even though you just saw our earnings and…

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

Thank you, operator. 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 set to our new alert on the company's 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.