Gaotu Techedu Inc. (GOTU) Q3 2020 Earnings Report, Transcript and Summary

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 a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded on November 20, 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 IRwebsite. 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 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. 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 Relations website at gsx.investorroom.com. You are also welcomed 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 RMB 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, ever driving 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 customer 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 full-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 starts 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 labor-intensive and talent-intensive industry and the leading companies have to manage and serve a huge number of employees. Excellent organizational capabilities will be the key driver for a player to achieve long-term success and be the ultimate winner. In terms of business model, we chose to focus on the online live load class format in the past, and we will continue to focus on it in the future. We recently integrated our key trial business and our Gaotu Ketang brand. Gaotu Ketang fully combines and streamlines our instructors and tutor 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 should dream. 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 Genshuixue brand will focus on providing post-secondary education training classes such as CET graduate school automation exam and various professional qualification exams. Some investors may wonder what do we think about AI interaction courses? From what we've witnessed, the adoption of artificial intelligence in online education is still only at the forward stage. The application of AI in the preschool market and the synergies created by AI between the pre-K and 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 various other requirements and personalized demand 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 RMB200 million. However, no matter how technology and AI develops, frankly speaking, I believe, is 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 mention 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 RMB 1,970 million. For the first time, our revenue reached just shy of RMB 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 large class 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 RMB 2,100 million in gross billings, up by 137% year-over-year. The growth in gross billings 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 demand 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 adds that 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 Gaotu 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 for K-12 paid course enrollment 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 [indiscernible] selling price for 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 enrollments 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 sites during the summer vacation. Throughout this summer, our student structure has grown sustainable with the student of non-graduate grade significantly increased, which lays a solid foundation for our future retention. Net revenues from our foreign language, professional and interested courses offered under our Genshuixue 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 interested courses were up by 135% year-over-year to 300 million. Paid course enrollments for our foreign language, professional and interested courses increased by 79% year-over-year to 1,000 and 10,000. [ph] Gross profit margin increased by around 260 basis points year-over-year to 74%. Non-GAAP gross profit margin, which excludes share-based compensation, increased by around 260 basis point 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, servers, bandwidth et cetera. 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 earnings call, resulted in better 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. 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 and exploded 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 this summer, we significantly increased the size of non-graduate grade students [indiscernible] students. This structure will benefit our future retention and greatly help propel our subsequential 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 264% to 18 million [ph] 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 serve and expenses to support our rapid growth of students and daily operation activities. Furthermore, the installment 24 million was paid for our Zhengzhou property purchase. And we also had 99 million in capital expenditures during the period. With that, I will now provide our business outlook. Our net revenues from – 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. Thanks.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Gregory Zhao of Barclays. Please go ahead.

Hi, Chen, Shen, Sandy, thanks for taking my question. So my question is still about the market as a competitive landscape, right? So we noticed some private companies, they raised a lot of money in the past six months and a lot of the investment has been spent in marketing and user acquisition. So just want to understand GSX' plans 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 your student enrollments in September quarter, and we saw the sequential trend of the enrollments is a bit different from the past years? Thank you.

[Foreign Language] Thank you, Greg. When people talk about online education, we say they are the top core 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. So if we look at market data, in the third quarter, just look at online live large class. In terms of revenue, we actually ranked the top among the top number four – top four players. And we know that summer is always a critical moment for new enrollment recruitment across the whole year. So we did strategically expand our investments. During this summer, our sales and marketing spending increased much more compared to the same period last year, but we have to look at pay attention to the market changes. Through some third-party data, we have heard that there are some players, their summer sales and marketing study exceeded RMB 4.5 billion. And in terms of ROI, it's very probable, we are still the highest. According to current market conditions and the foundings of each player, we believe, in the year 2021, this competition is still gone up this year. And I – we believe that the peer 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 we look at in the long-term, the industry position will become more clear after the competition and companies with low operational efficiency will accelerate their cash burning speed. And only the companies with higher operating efficiency will become the final owner. So we think the route has never changed, when we look at each of the sectors in the TMT business. So – but we've got a lot of questions about like how to evaluate, which company has the highest operating efficiency. So from our perspective, we think there are a couple aspects we can testify. So first, financial results is always the most straightforward way to look at the company's operating efficiency. Since 2017, we have found basically the list of money, but gain 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 has the confidence – we still have confidence that we have a very competitive operating margin. And if – we are not only – probably 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 you look at it in a whole year's perspective. And the second way to testify in company's organizational capability is the team and the organizations. So from our organization point of view, we have always been building and solidifying an exceptional and scalable 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 both being in the dark place, but now our core management team has led the company voluntarily, except for health reason or turn back to families. And not to mention of them went to our – went to other companies in the industry. So when the company grows really fast, scalable and a group of people really like the company and willing to contribute their energy and their time to the whole – 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 trend, and we need to do better. We need to be good on each of the value chain a couple of times. But the more – the larger our skills are the more significantly realize the importance of this perception. For instance, some companies may be particularly good at serving students long-term and normal price of courses, but a little late at new student recruitment. Well, other companies may have advantage on traffic acquisition or traffic tools, but it's difficult 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 commentation. And we believe when they are doing the rightful things, the results will turn favorable to us. So we don't have to extensively face on the external expectations. And in terms of a lot of companies, both from public sector and private sector, has – 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 USD 500 million or USD 800 million. That's basically 15x or 20x higher than us. But when time comes to the end of 2019, we have grown our cash balance to RMB 2.7 billion. 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 we 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 are 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 intense compensation. And with Q4 coming, we are embracing the biggest retention season in the whole year. And we expect to receive a billion 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 reduce a little bit compared to the beginning of the year. That's mainly because when we grow really fast, we paid installed 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 have strong confidence, but that reflects our organizational capability. And as Larry just mentioned, we believe investors or the markets, they always like companies has the highest operating efficiency. So hope that address your questions. Thanks, Greg.

Okay, thank u very cuch

Thanks, Greg.

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

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

Okay, thanks Mark. So, our gross margin, last quarter, if we look at the gross margin on a year-over-year basis is in an increasing trend, but a slightly decreased our quarter-over-quarter trend. So that's – the reason is basically because of the seasonality. So we may become – like when our student base become very large, so the seasonality will show a 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 incurs day-to-day costs such as infrastructures, networks, fixed labor costs and also like to provide a better learning experience and service to our students, especially for the promotional classic students. We recruit tutors upfront for about a month to provide training to them and have the web full perform all the tutoring to the students. So that all caused our salary paid to tutors increased a little bit. And also, in the summer, because I just mentioned like – because of the entrance exams for both college and high school was a little bit late, that helped some concentration of us when we send learning materials to students. And so that 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 gross margin will get recovered in Q4. Because in Q4, that's a full season that we provide courses to our students and also like the learning distribution will be more even. Thanks.

Okay. Thank you.

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

Thank you for taking my question. I notice on there is a quarter-on-quarter decline in the K-12 paid enrollments even though that we have increased selling our marketing efforts, can you explain that? Is it because there were conversion rates or is it because the – some of the student base was shrinked in this quarter?

Thanks, Maggie. So this is also due to the seasonality. So student enrollment and gross billings for K-12 business actually shows distinct seasonality. Typically, most retentions happened in the second quarter and the fourth quarter, while most new student recruitments happened in the first and in the third quarter. So during the third quarter, when majority of the paid enrollments are first-time users, we spent selling and marketing expenses to attract them. So this compares to the second quarter when most paid enrollments come from retention and do not cause too much – too many extra dollars. As such, the third quarter typically shows enrollments, but rising selling and marketing expenses. Same trend from the second quarter goes with the fourth quarter. So we may expect most paid enrollments will come from retention. And if we compare the quarter-over-quarter changes and they only look at the first-time users of paying 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. If we can all recall that, in the last quarter in 2019, we have around 1.1 million of enrollment. That's a great portion that actually came from retention. But when the time comes through the first quarter in 2020, we see a slight decrease in the paid course enrollments. That's also because of 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, I'd say, 1 million or 2 million, then the students, they do retention activities at the same time. In the single quarter, they will contribute over 100 million enrollments. And when they only do new recruitments, that needs a lot of efforts to convince students one by one. So that 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 paid enrollment number and gross billings will be higher in the second quarter and the fourth quarter, that's all because of seasonality. Thanks.

Thank you.

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

Good evening, management, and thank you for taking my question. I hear – I very much agree what you mentioned during the earnings release that you will focus on LTV-based approach towards selling I am very much during the earnings release that you will focus on 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 that – of the average student? My second question is on ROI. I understand definitely you're outperforming the industry peers, 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. So the market for primary school is still the largest in K-12 sector. 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. So – 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, develop our teaching talent. So in the past quarter and recently, we have – there are 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 course 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 they 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, we continuously upgrade our live streaming technology to ensure a smooth learning experience. And also, we had a top-notch visual design team to improve our teaching materials in order to enhance the interaction experience. So with all the improvements we made, we see significant improvement on our primary schools retention rate, even though in the just retention period end in the fall, we do see like the retention rate from our primary school sectors increased both on a year-over-year basis and a quarter-over-quarter basis. And it is leading all factors. 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. And right now, it's already become the top one in our company. So that all shows our strategy on our primary school sector worked 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 sectors – 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 has the potential to LTV. So what we need to do is remain focused on the value on the lifetime or not just on just one or two single quarter. As long as we can help them stay for a longer time that we can bear a slightly lower ROI in the first place. Thanks.

Thank you very much.

The next question comes from D. S. Kim of JPMorgan. Please go ahead.

Hi good evening. Hi Mr. Chen, hi Shannon. Thanks a lot for taking my questions. I have two. First about just a follow-up on your – just the older question and your point. May I confirm and check if we can still generate unit economics on the newly acquired student [indiscernible] excluding the retained and existing student ID. 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 does that unit economics changes the student during summer and those that we acquire now given changes in customer acquisition good? That's the first question. My second question, if I may, is regarding high level strategy products for Mr. Chen. Would you consider developing ways to grow a larger organic traffic in the medium term, say, through homework helping add like some of our top tier group where some kind of platforms as we did in the past just to prepare for an unlikely [indiscernible] case scenario where third-party channel becomes way too expensively 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 have acquired [indiscernible] 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 value discussed in the sector. So that's whether the new students can generate a positive UE because you may gather the news from a lot of companies that say maybe the new students, the 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, they just gave up the summer semester because, as I just mentioned earlier, this summer vacation is a lot shorter compared to prior years. And actually, the pace of the summer curriculum is a little bit mass 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 we put students for the full semester. But from our experience and point of view, the longer students stay with us, the higher the retention rate it is. So when we think about the question, we are taking the client's viewpoint – the client's view more. So that's why we insist on recruiting students from summer and have them to stay as to complete both the summer semester and the post 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 better results in the full examination. And we do see this working out when we relate to 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 app. So Larry to the question. Xiangdong Chen - GSX Techedu Inc

[Foreign Language] 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 regular enrollment. The second factor is gross profit margin. And this metric relates closely to company’s average selling prices and operating efficiencies. So many companies they care about one sector that if they do not also pay attention to the prices and operating efficiencies, their calculation of LTV will defer. The third factor is retention rates. Retention rate is so important. It defines LIBOR depth. And every player will calculate their retention rate. So in short, only if we integrate all the three elements that will combine to a lever region effect, we will bring us higher LTE and bring the players’ long-term competitive advantages. [Foreign Language] As for organic traffic, I think many players, they are 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 has to match their operating efficiency. We are still exploring and are reserving. Yes.

Thank you so much for the insights and all answers.

Thanks.

And your next question – I’m sorry go ahead.

Your third question was about the potential acquisition you just mentioned like you saw news that we kind of like takeover two of other online schools. Is that your question?

But I read an article, new article, it said at GSX has acquired online arm of [indiscernible] another listed company a couple of weeks ago. Maybe that was a misinformation, but just wanted to clarify if that was the case, and if we did an invention [indiscernible] in the new U.S. ticker. [Indiscernible]

[Foreign Language] The team has similar business model operations compared to us. And we have communications and ultimate results still depends better communications. If we have any – reached any decisions, we will have public announcements. Not a [indiscernible] group, just pushing online schools.

Thank you, sir. Thank you, sir.

Thanks, because like for pushing online like for the whole team – the founder and the management team may have a very deep experience in education industry. And they also have some innovative ways to like acquire new students. That's something we always the handle like learn from, but like – and also, we are open to all possible co-operations and communications to all kinds of parties. As of now, we don't really have a clear plan about like the potential things that you just mentioned. Then if something substantially happened, we will make an announcement. Thanks.

The next question comes from Tian Hou of T.H. Capital. Please go ahead.

Hi Larry, Shannon and Sandy two questions is 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 average size of the class in Q3? Those are the two questions. Thank you.

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

Yes, Shannon. Thank you.

Your next question comes from Alex Xie of Credit Suisse. Please go ahead.

Hi thank you for taking my questions. So I'll ask in Chinese first and then translate myself. [Foreign Language] So my first question is about organization capabilities. So you always mentioned that this will be your main advantage and main challenges ahead. So elaborate on different aspects of your organization capabilities and what's the change post your organization structure upgrade? And the second question is about your view on the future changes of your product and services. For example, with the services to each customer become more intensified, that will become more intense, and whether the product portfolio become more diversified? Thank you.

[Foreign Language] 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 capability, is the key competitive a core advantage of our firm. [Foreign Language] So GSX, in the first three years that we started the company, we have struggled through some starts at that moment. And as a result, the people, the of GSX, we have like the sense of presence, we have high standards. We have the self-criticism, and we always review ourselves always through this passing down time [indiscernible]. [Foreign Language] On the street, people always say the staff of GSX, they look very aspirant. I think it's mainly meaning that our people, we are curious, we are serious, we are always strict, and we always have the aspiration to win the battle. And we actually have embedded all of these values into our daily lives. And those can be figured out in how we recruit talent, how we encourage people and how we kick out people. [Foreign Language] Since the September of this year, Genshuixue and Gaotu Ketang, these two K12 brands have integrated into new Gaotu Ketang. And through this new Gaotu Ketang brand, we have larger density of human resources, we have upgraded our talent in technology, in products, in instructors and also in our management team. I believe [indiscernible] more time. We will see Gaotu Ketang with more competitive and more effective efficient stuff. [Foreign Language] 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 students, and this is a guarantee secure for our future education quality. [Foreign Language] And when we mentioned online education, another key word – a key word is online. And what the online education wants to resolve is, how can we improve the engagements between us and students, improve the interactions frequency and improve the intimacy between students and us. We want to help our students 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 education results of one-on-one tutoring services. [Foreign Language] 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.

Got it. Very helpful. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Sandy Qin 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 a company IR website at gsx.investorroom.com. Thank you very much.

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