Ladies and gentlemen, thank you for standing by, and welcome to RISE Education's Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your first speaker today, Ms. Karen Gu. Thank you. Please go ahead.

Thank you, Operator. Hello, everyone, and welcome to RISE Education's Second Quarter 2020 Earnings Conference Call. Today, you will hear from Ms. Lihong Wang, Chairman and CEO; and Ms. Jiandong Lu, CFO. Ms. Wang will go over recent business updates, operations and the company's long-term strategy. Ms. Lu will go over the financial results for the quarter. Both will be available to take your questions in the Q&A session that follows. Before we proceed, I'd like to remind you that today's discussion may contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to materially differ from those in the forward-looking statements, please refer to our Form 20-F filed with the SEC on April 17, 2020. We do not assume any obligation to update any forward-looking statements, except as required under applicable laws. Throughout today's call, Ms. Wang and Ms. Lu will be referring to the earnings presentation that has been uploaded to our IR website as a supplement to today's call. Now I'd like to turn the call over to Ms. Lihong Wang. Please go ahead.

Thank you, Karen. Hello, everyone. Thank you for joining our earnings call. The first half of 2020 has been, in many ways, one of the most challenging periods we've faced as a business. As we emerge from the tough operating environment caused by COVID-19, we are pleased to report significantly improved results today. Our ability to swiftly transition our regular courses to the online model underpin our performance. Although the majority of the RISE self-owned learning centers were still closed throughout most of the second quarter, our financial and operational performance has shown very positive signs of healthy and encouraging recovery and progress. I will begin my remarks from Slide 3. In Q1, we moved aggressively to transition our services online, control costs and preserve liquidity. During the second quarter, we migrated all of our off-line courses online so our students could resume learning. This also allowed us to recognize revenue. We significantly improved our online marketing and conversion capabilities, which resulted in a growing trend of new student enrollment throughout the quarter. At the same time, we also invested in upgrading our team and digital capabilities to be able to operate both online and off-line, which will eventually allow us to transition the business into our long-term online-merge-offline, or OMO, model. Let's move on to our financial and operational highlights for the quarter on Slide 4. Revenue was RMB 165 million in the second quarter, up 51% from the preceding quarter and comfortably topping our guidance of RMB 135 million to RMB 145 million. Both adjusted EBITDA loss and net income loss narrowed significantly sequentially. Momentum in new student enrollment brought the total number of new students enrolled for RISE regular courses during the quarter to 3,749, more than double the first quarter number. As of June, we directly…

Thank you, Lihong. Let me now go through our financial results for the second quarter of 2020. Before I begin, please note that all numbers stated are in RMB. As expressed by our Chairwoman Lihong, we are indeed very excited to see a very strong and encouraging recovery of our business in the second quarter. And we are also very pleased to see that our momentum continued into the second quarter of -- the second half of 2020. We are proud of how we responded to the crisis by rapidly upgrading our digital capabilities as we executed a smooth transition from off-line to online in April and then from online to off-line in June. Such accomplishment has made us more confident than ever in our ability to successfully transform our business into an OMO model. Turning to Slide 12. Total revenues for the second quarter of 2020 increased by 51.4% quarter-over-quarter and decreased by 55.1% year-over-year to RMB 165 million. Revenues from educational programs increased by 48.5% quarter-over-quarter and decreased by 53.7% year-over-year to RMB 151.5 million. The quarter-over-quarter increase in revenues from educational programs was primarily due to most of our off-line regular course students resuming their studies online starting late April 2020. In addition, our online small group classes continue to contribute to revenue in the quarter. Our self-owned learning centers located in Shanghai, Guangzhou, Shenzhen and Wuxi have reopened starting in June 2020 at a pace regulated by the government. Therefore, their contribution to revenue was rather small this given -- this quarter given the limited period of off-line operation in these regions during the quarter. Therefore, revenue recognized during the quarter is predominantly from online delivery of our services. This year-over-year decrease in revenues from educational programs was primarily due to the temporary closure of our…

[Operator Instructions]. The first question we have is from the line of Sheng Zhong from Morgan Stanley.

Congratulations on the well-improved financials and operation. So my first question is kind of high level one. As Lihong said that the young children English learning market is very dynamic now. I think there are some big institutions bankrupt and exit the market. While at the same time, we see a lot of competition from the interactive apps for the young children. So what is the management's view on this dynamic and how this will impact your off-line expansion in the -- given -- in the off-line expansion in the rest of this year given the off-line is already resumed operation and maybe the long-term plan for your off-line and franchise development? This is the first one. And second one is you have a pretty impressive improvement on the OpEx, sales and marketing and G&A. So wondering now, do you see the trend of customer acquisition cost? And with -- also with the off-line operation restart, do you expect more sales and marketing going forward in next quarter and -- in the third and fourth quarter?

Thank you, Zhong Sheng. I will answer the first question, and then the second question, I'll answer together with Jiandong. You're right. I do think that the market is quite dynamic now with some, I would say, entities that exit the market. We also see remaining players are improving in terms of the methods that they operate. At the same time, we also feel as an attractive market, there are new entrants. So for some new entrants, they rely on the so-called AI courses through app. And I do think this is a sort of a replacement of what we call the Disney-like [Foreign Language] type of learning. The -- I would say it's not really educational product per se. I'm sure they will improve continuously to achieve some educational goals. So right now, what I can see is their customer base are somewhat different from our off-line customer base. The evidence is one that we do see very strong growth in terms of number of inquiries into our off-line learning centers. In fact, for Shenzhen and Shijiazhuang, for example, even at June, the new student enrollment already surpassed what they had in same period of 2019. And in July, we actually see Shanghai adding into that list to actually surpass the enrollment number vis-à-vis 2019. So there is a very strong momentum in most of the cities that we operate. That's number one. Number two, even for RISE, we have our online offerings through dual-teacher small group classes, and we are developing AI-related courses as well but mostly as -- attract traffic. Therefore, later on we can convert them into more learning-related programs like the dual-class small group classes or the off-line regular courses. So I think the market definitely is still expanding and growing, and there's a different market segmentation. People sometimes subscribe to more than one program. They think the off-line deliver different learning experience, and then online, they have supplement to off-line. So yes, it is dynamic, but we do see our market growing both off-line and online. So on the OpEx, as you can see that for the second quarter, we actually control our customer acquisition costs really well. Part of the reason is that we have the off-line network so that we can generate referrals and help the customer acquisition. In fact, the CAC number this quarter compared with same time of last year basically is flat. And for third quarter and fourth quarter, sales and marketing costs or expenses will definitely go up because we do think with the off-line practice resumed nationwide, we have a very strong demand. Therefore, we also wanted to improve the new student enrollment significantly. So on the absolute number, it will be quite significantly improved -- increased. But at the CAC level, we hope that we can still control at a reasonable level. And Jiandong, you can supplement.

Okay. Just to supplement a little bit to Lihong's remarks on client acquisition cost. If you look at our financials, our marketing expenses remained flat compared to the first quarter, while our new student enrollments actually doubled compared to the first quarter. So that is attributable to a number of measures taken, as factored in Lihong's speech. We expanded our marketing channels. We have entered into partnership with Gymboree and earning -- early age schools, which contributed roughly 12% to 13% of our new student enrollment in the second quarter. So this is what we say is kind of off-line channels. The percentage of students acquired from off-line channels actually increased compared to the same quarter of last year. That helps to reduce our overall acquisition costs in total. And so -- and also going forward, we are going to continue to invest in marketing for the purpose of significantly increase our student enrollment. At the same time, we are going to further increase our classroom utilization. Lihong has mentioned that we will make the best use of the technology and also our online platform and to transition into OMO, which will free up some physical classroom utilization -- or capacity so that we can accommodate more students. And of course, at the same time, that will give us a big pressure to acquire more students from the market, and that's why we want to continue our reinvestment in marketing. Your question on our off-line network expansion. On one hand, we want to leverage our OMO model in order to make sure we increase our classroom capacity as well as the utilization and optimal capital expenditure. But at the same time, we plan to open 3 more new learning centers in the second half of 2020, which we think off-line network of learning centers is a huge asset to RISE, which significantly differentiate us from all the other educational institutions. And also, thinking about our students age group, primarily 3 to 6, 8 -- at the age of 3 to 6 and parents actually prefer off-line teaching more to the online teaching. So we'll continue our capital expenditures in the off-line network buildup. I wish I answered your question.

Yes. That's very clear. And can you also add some color on your franchise development plan given this current situation?

Yes. As I mentioned, our franchise network actually remains strong and healthy. We even add three more franchisees and also opened 11 new centers in the second quarter. Overall, they also see very strong recovery once they open their off-line centers. New students enrollment almost double every month, system-wide. And at the same time, as we mentioned, we empower them with more courses online and trainings for their teachers online. So with the academic research, they're able to swiftly switch online and continue the online education. Going forward, as I mentioned, we have a new business line -- or new courses adding to the system, for example, the online -- STEAM and online dual-teacher small group classes. Those we can have the franchisees as our sales partner so that they can actually acquire students and then we, from the headquarter, to deliver those courses online. So in some way, they will become our partners both off-line and online. I think that will help them to mitigate some of the market impact you mentioned, for example, the other AI new entrants. At the same time, they can expand their market beyond physical location. I feel that we can utilize the franchisee partner to get to the lower-tier cities without opening more stores. And this so-called network -- off-line network and the online network will make franchisees closer to the whole family. And I do think that can be a unique advantage for RISE to expand our market, get to the lower-tier cities and also develop our online capabilities altogether.

[Operator Instructions]. There are no further questions from the participants. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.

Thank you.

Thank you.