Gaotu Techedu Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the GSX Techedu Inc. second quarter 2020 earnings conference call. Please note, this event is being recorded on September 2, 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. GSX's 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. 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. You are also welcome to subscribe to our quarterly revenue letters 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. First, we are pleased to see that the country has continued to flatten the curve of new COVID-19 cases over the last few months. Against this backdrop, we made a concerted effort to deliver another robust quarter. Net revenues hit a record high supported by our focused strategy and notable organizational capabilities. The numbers say it all. Our net revenues and gross billings once again both maintained over four times year-over-year growth. Our K-12 net revenues, in particular, have been growing more than fivefold year over year for over 10 consecutive quarters, which has further solidified our position among the top-tier players in the education sector. We are thrilled to report that growth in paid course enrollment has accelerated to 332% year over year from 259% in the prior year. Not only did we maintain our high-speed growth, but we also remained profitable for the eighth consecutive quarter and non-GAAP profitable for the ninth consecutive quarter. Moreover, we generated net operating cash inflow of 528 million, which was 2.7 times that of the second quarter last year, thanks to the exceptional retention for the spring semester. We plan to execute a profitable growth strategy for the whole year, and we will make efforts to prioritize investments in high ROI traffic acquisition channels, focus on the online live large-class education business model, and continually enhance our organizational capabilities. I would like to emphasize that this year is very special. It's a year that even the two most important national school exams in China, Gaokao and Zhongkao, were delayed due to the pandemic. This year, the students and parents further recognize and accept the effectiveness, efficiency, and convenience of online education. This year, the regular sector landscape is about to settle down, and each online education company strives for its market position. In the second quarter, our sales and marketing expenses were 613% higher than last year, but translated into 2.4 billion gross billing for us. I would also like to remind everyone that a certain number of enrollments in the second quarter last year were from our CNY 49 promotional courses. This year, as we mainly focused on the lower CNY 9 promotional courses, which theoretically have a lower excess threshold and conversion rate than the CNY 49 courses, we were still able to record an acceleration in paid course enrollments, which speaks to the remarkable conversion, competitive, and operational efficiency of our team. Moreover, the paid course enrollments that we attracted in the second quarter laid a solid foundation for net revenue growth in the third and fourth quarters, which can be seen in our deferred revenues, which is nearly 2 billion. The soaring gross billings and net revenues this year will, along with the retention from our enrollment, in turn drive up our growth in 2021, performing a positive flywheel effect. The first order ROI already reflects our outstanding operating efficiency and organizational capabilities. Considering the fact that the new customers will stay on our platform for more semesters, the lifetime value they bring will multiply the first order return on investment multiple times. In short, the more new enrollments we are able to recruit and then retain, the higher value we will bring in the future. Last but not least, in the face of enormous market opportunities, we target full-year profitability as part of this, we are laser-focused on deploying our customer acquisition resources based on ROI. Our ultimate goal is to serve students and parents to their satisfaction, which is the core of our decision-making process. In the long run, we will constantly invest in talent, technology, content, services, branding, and our culture, all with an eye on maintaining the values that we hold. Through these investments, we aim to redefine the online live large-class format in a way that delivers the quality of a large class, the learning experience of a small class, and the feeling and effects of one-on-one tutoring. Over the past six years, we have broken many records, accomplished multiple breakthroughs, and surpassed many expectations. However, we will still maintain our pragmatic values and a humble, down-to-earth attitude as we continue to build the organizational capabilities of our team and improve the operational efficiency of our company. Joining hands with the major players in our sector, we will spare no effort to contribute to the equality and fairness of education within our society. 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. Recently, as the new academic year begins, students of all grades are coming back to school. In the past half year, many parents and students have enjoyed first-hand benefits of online education. We are proud to announce that many students of GSX achieved outstanding results in Gaokao and Zhongkao. Our Gaokao candidates ranked Top 50 and some even ranked the Top 5 in provinces including Fujian, Xinjiang, Heilongjiang, Hunan, Ningxia, and elsewhere. Dozens of our Zhongkao candidates achieved full marks in certain subjects. The achievements of these students testify to our exceptional teaching quality, effectiveness in improving teaching efficiency, and value in promoting educational equality. Going forward, we will continue to improve our teaching and service quality, expand our investments in technology, and improve learning efficiency. 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 mentioned will be in RMB terms unless otherwise noted. For the second quarter of 2020, we continued to deliver outstanding results. Net revenues increased by 367% year over year to 1,650 million. This is our seventh consecutive quarter with net revenue growth of more than 350%. Net revenues from our online K-12 business grew by 412% year over year, maintaining above 400% for over 10 consecutive quarters. We achieved 2,401 million in gross billings, up by 301% year over year, which is a new record high in our history. The growth in gross billings was mainly due to overall excellent student retention and new student recruitment. At present, we have set up regional operation centers in 14 cities outside of Beijing. We increased our recruitment and training of high-quality tutors to meet the enrollment demands of summer vacations. We are committed to providing a better and more customized learning experience for parents and students. In the second quarter, we recorded paid course enrollments of 1,567,000, which was up by 332% year over year. The increase in first-time users was primarily driven by our effective investments in sales and marketing efforts, and the increase in retention was driven by our high teaching quality and the optimized service that we provided. Specifically, our spring retention outperformed our expectations. The retention rate of primary and middle school students saw high single-digit growth year over year. This also helped us surpass the milestone of 1.5 million paid enrollments in a single quarter. Now, let's break down our operations and financials by business lines. Net revenues from our K-12 courses, mainly offered through two brands, Gaotu Ketang and Genshuixue, increased by 412% year over year to 1,385 million and accounted for 84% of net revenues. Net revenues from our K-12 segment once again increased by over 400% year over year, and we expect the proportion of K-12 revenue will continue to expand as our main source of revenues. Within the K-12 segment, I want to highlight our primary school business. The growth rate of our primary school segment has been leading all K-12 segments, and the net revenues from primary school classes have increased by more than 500% for five consecutive quarters. This achievement demonstrates the remarkable progress we have made in focusing on our primary school business and also the continuous improvement in the awareness of our company among primary school parents and students. Gross billings contributed by K-12 courses rose by 336% year over year to 2,196 million. Paid course enrollments for our K-12 courses increased by 366% year over year to 1,496 thousand. The average selling price for K-12 paid course enrollment was 1,468 compared with 1,572 in the same period last year. The price was mainly dragged down by some short-term courses, which were newly added after Gaokao was delayed this year. Last summer vacation, we offered three customer acquisition promotional courses simultaneously: the CNY 49 courses, the CNY 9 courses, and the free courses. This year, in order to synchronize our conversion capabilities with the traffic acquisition pace, we focused more on the CNY 9 courses and the free courses and no longer provide the CNY 49 courses. We will continue to disclose paid course enrollments, which is one of the most meaningful operational metrics. The average enrollments per class were consistent with the prior quarter and remained at approximately 2,000 in the second quarter of 2020. Net revenues from our foreign language, professional, and interest courses were up by 238% year over year to 260 million and accounted for 16% of net revenues. Gross billings contributed by foreign language, professional, and interest courses were up by 137% year over year to 202 million. Paid course enrollments for our foreign language, professional, and interest courses increased by 69% year over year to 71,000. GAAP gross profit margin increased by around 700 basis points year over year to 78%. Non-GAAP gross profit margin, which excludes share-based compensation, increased by around 600 basis points year over year to 79%. Selling expenses increased to 1,205 million in the second quarter of 2020. Within that, expenses for branding activities were approximately 35 million. Expenses for traffic acquisition were approximately 920 million, and the remaining expenses cover labor, servers, brand rights, etc. We strategically front-loaded investments of more than 200 million in traffic acquisition for the promotional courses recruitment for the third quarter, which generated no gross billings in the second quarter. Even after removing the gross billings contributed by retention, the return on investment of pure first-time user acquisition is still around two. Based on this, if we consider the lifetime value as a result of high student retention, the return on investment could be three or even higher. The firm demand triggered by COVID-19 and the apparent deepened understanding of online courses makes the 2020 summer vacation a prime time to attract customers. We decisively increased our investments in traffic acquisition to achieve a leading position in the industry and gain first-mover advantages. Research and development expenses increased by 240% year over year to 140 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. Going forward, we will continue to expand investments in R&D to further upgrade operating efficiency, which should bring additional leverage. General and administrative expenses increased to 106 million from 26 million in the second quarter of 2019. The increase was mainly due to an increase in the number of G&A personnel and an increase in related compensation. The fees we paid in the second quarter for independent reviews also contributed to the increase in administrative expenses. Interest income and realized gains from investments this quarter from cash, cash equivalents, short-term and long-term investments increased by 505% to 24 million from 4 million in the second quarter of 2019. The increase was primarily due to an increase of cash, cash equivalents, and short-term investments and a realization of gains due to the redemptions of short-term and long-term wealth management investments during the quarter. Other income increased to 88 million from 91,000 in the second quarter of 2019. The increase was primarily due to the value-added tax exemption offered by the government and was partially offset by the related cost during the COVID-19 outbreak, which amounted to 89 million. GAAP net income was 19 million. Non-GAAP net income increased by 133% year over year to 73 million in the second quarter from 31 million a year ago. As of June 30, 2020, we had 225 million of cash and cash equivalents, 2,144 million of short-term investments, and 572 million of long-term investments, totaling 2,942 million that compared with 2,736 million as of December 31, 2019. The decrease of long-term investments is mainly due to the partial redemption of our offshore wealth management in May 2020. Our accrued expenses and other current liabilities balance was 698 million, increasing from 229 million. This increase was mainly the result of the consideration of purchasing the Zhengzhou property, as well as the increase of salary and welfare payables. Our deferred revenue balance was 1.961 billion. Deferred revenue primarily consists of tuition collected in advance. Our non-current other payables totaled 64 million, which were payables to purchase the Zhengzhou properties. Net operating cash inflow for the second quarter of 2020 was 528 million, a 172% increase from 194 million in the second quarter of 2019. This figure included the 158 million tax paid to the state tax bureau during this quarter. Our capex totaled 98 million this quarter, including 22 million installment for the Zhengzhou properties and 76 million for office space renovation funds and other fixed assets. In addition, we repurchased approximately 1.1 million ADS for approximately USD 40 million, representing an average cost of $35.1 per ADS. On the premise that the operating cash flow continues to be positive, we believe the share repurchase plan helped to improve shareholder value and shows the long-term confidence of our company's management. With that, I will now provide our business outlook. Our net revenue for the third quarter is projected to be between 1.936 billion and 1.966 billion, representing an increase of 247.6% to 253% on a year-over-year basis. These estimates reflect our current expectations, which are subject to change.

First question comes from Gregory Zhao of Barclays. Please go ahead.

Hi. Thank you. Good evening. Thanks for taking my question. Congratulations on a strong quarter. So, the first question is still about the market competition. We noticed that your peer companies have been very aggressively marketing since early this year, especially several private companies. They also announced some new fundraising. So, would you please help us understand the current competitive landscape of the China online tutoring market? And any updates on the summer promotion will be helpful. And the second one is about our sales and marketing expense. Based on my calculation, I can see that sales marketing per enrollment sequentially decreased in the second quarter, showing some improvement in the marketing ROI. So, are there any particular reasons? And how shall we think about the trend in Q3 and the second half?

Thanks, Greg. As to the competitive landscape, I have the following views. Firstly, online education is still in its early stage. So, a considerable amount of capital is flowing into the sector, which is helping to further accelerate its development. Secondly, customer acquisition costs increased significantly this summer compared to last year. At this moment, we can see the biggest private players have raised new rounds of funding in hundreds of millions of U.S. dollars, and in some cases, possibly up to USD 2 billion. According to third-party data, the Top 10 players in the market have spent an aggregate amount of over RMB 10 billion on traffic acquisition and branding activities in summer just in July and August. Thirdly, the online education value chain is pretty long. So, just to focus on the essence, focus on quality, focus on operational efficiencies, we believe that just mostly focusing on revenues and size is not a sustainable way to achieve long-term success. Recently, we have seen many companies promote how large their student size is or the gross billing sizes are, but very few mentioned their incurred costs and expenses. For an online education company, it isn't profitable when small; it will likely be overburdened when scaled up. According to some market views, some players that aggressively expand their student sizes and gross billings might see annual losses of over RMB 7 billion. Our core strategy is always to focus squarely on the online live large-class business model and target profitable growth for the whole year. We will continue to enhance our organizational capabilities and make high ROI decisions, and we believe that time will tell who the winners are in this space. Fourthly, we always remind ourselves that we should concentrate on what really matters over the long term, which is customers. We will always focus on our customers and not the competitors. We believe, as always, that if we serve each customer well, funding will come naturally. This is one of the reasons why we were able to achieve 528 million in net operating cash flow and also the reason we were in a position to buy back shares of the company in May. Last but not least, this summer, Genshuixue and Gaotu Ketang both delivered solid results. Therefore, we firmly believe that we will achieve our full-year revenue target.

Hello, Greg, I'm going to take your second question. So, about the sales and marketing expense per enrollment decreased in this quarter. Firstly, let's recap what happened in the first quarter of 2020. In the first quarter, as we mentioned on our Q1 earnings call, the majority of the enrollments were coming from first-time users. For first-time users, we usually need to pay more attention and spend more energy to convert them to sign up for our paid course enrollments. So, in the first quarter, if we divided the sales and marketing expenses by the paid enrollments, we basically had a customer acquisition cost of around RMB 970. The second quarter is usually one of the largest retention seasons in the year. Especially in April and May, students in the spring semester will be signing up for the next semester in summer. That’s why a proportion of gross billings and enrollments actually came from existing students. For our existing students, the customer acquisition cost is essentially zero. Cross-selling, retention, and word-of-mouth referrals are key to our continued customer acquisition cost. The key is to provide the best service to the students and to achieve excellent cross-selling, retention, and word-of-mouth referrals. Only leverage like that can contribute to our long-term success because we have some enrollments coming from existing students, which further lowered the weighted average customer acquisition cost in our second quarter. In terms of seasonality, the first and third quarters typically have a higher proportion of first-time users, while the second and fourth quarters are the biggest retention seasons. Therefore, we anticipate the customer acquisition cost to be significantly lower in the second and fourth quarters. This year, we foresee that the weighted average customer acquisition cost will be further lower in the fourth quarter. So, I hope this addresses your question. Thanks.

Thank you very much.

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

Hi, management. Thanks for taking my questions, and congratulations on the very strong set of results. I have two questions. Firstly, I think the management has discussed the SEC investigation request and your own internal review. Would you please share more color on the progress of that investigation and your internal review? Particularly, I think, for Larry, you have experienced all these things in another great education company, New Oriental, back in 2012. What's your experience from that, and are you confident in this time? Secondly, I would like to ask about the attending enrollments in the summer semester and autumn semester. Do you have any target or color to share? I think you disclosed that in the spring semester your attending enrollments exceeded 1 million. So, these are my questions.

Thanks, Alex. About the SEC investigation, in the past quarter, we have received at least 12 short-seller reports. We have caught public eye because of this unique experience. At this stage, we are unable to disclose too many details of the investigation. But we want to share some of our feelings. After being targeted by short sellers, we have been continuously harassed. We keep receiving phone calls and emails, and some of them keep sending malicious tweets and kind of attacking us all the time. Whenever there is negative news from other companies, even if it is completely unrelated to us, we are linked to that bad image. As a company, we need an authority that everyone can trust to prove the integrity of our company, and we no longer want to be in that position anymore. The investigation team is actually the best judge everyone can trust. Unlike some investors may have predicted, to some extent, we actually welcome the investigation, and we have faith and expectations about the outcomes. The investigation process is indeed stressful, intense, and costly. But going through these procedures, we highly respect the professionalism of the investigation team. We think all parties should perform their duties. The independent committee is taking care of the interests of all investors. Our audit committee is responsible for improving corporate governance. Our lawyers and forensic accountants are carrying out the whole investigation process, and our obligation as the management team is to fully cooperate and properly disclose this matter according to the advice of our legal counsel. We hope to establish a completely transparent communication mechanism. Therefore, our team has a 24-hour rule, which means that we should try to give feedback within 24 hours for any information needs raised by the investigation team. We hope that the market knows what's going on with us. We are ready to take potential short-term pressure in exchange for a long-term trustworthy relationship. We believe that the voluntary disclosure of this investigation shows the strong confidence of our management team and highlights the high level of our corporate governance.

Thanks.

Thank you, Alex. I will speak in Chinese to better express my emotions. When we established our company, we took significant steps to ensure strong governance and transparency.

Excuse me, I'm sorry, could you please move the speakerphone? I cannot hear you. This is the operator.

Thank you. So, Alex, I will speak in Chinese so I can better express my emotions. When we established the company, we already defined the culture and foundation of this firm. So, when a great firm is always questioned and doubted about faking data, we feel a lot of anger internally. As early as the beginning of May, we tried to figure out if there are any institutions we can find to do interviews with our students. We recorded to prove ourselves, but it's not very doable. So I recalled what we did in reaction to these short-seller attacks when I was back at New Oriental. We started to communicate with the auditing committee. I can't tell you the specific date for now, but our auditing committee used the same internal inspection method as what we did at New Oriental. After some time, the SEC investigation started. To be frank, when the SEC started the investigation of us, we felt very happy and pleased. Just as Shannon has mentioned, the investigations from SEC and from our auditing committee are the best ways to prove a company's integrity. So, we welcome that. Also, as Shannon mentioned, we have a 24-hour rule. We try to be open and transparent, we try to provide data, deliver and resolve the questions very fast. You know we have experienced over 10 targeted attacks. A lot of things are still ongoing. At this stage, we haven't disclosed more. We need some more time, and we believe time will tell.

Thanks, Alex. I'm going to address your second question. So, about the summer and fall concurrent students, so it is always a golden time for acquiring new students every summer vacation. Due to the pandemic, online education has gradually gained more acceptance among parents with good learning results and ease. Therefore, this summer was an unprecedentedly good time for customer acquisition. When we planned for this summer, we did not only plan for the second half of the year but also created strategies for next year. We strategically invested in branding and traffic acquisition. Firstly, about the branding, we started our branding campaign for the first time this quarter. We cooperated with some TV shows and a self-produced TV show. The show has finished its broadcasting, and based on its audience rating conducted by CMS 59, it ranked No. 1 among two major networks running. The show has heartwarming topics closely related to online education. When we execute branding campaigns, we choose our partners and programs carefully. We monitor the synergy between branding and how it further lowers our customer acquisition costs. Secondly, I want to highlight that we have adopted multiple channels to acquire traffic and have been exploring innovative ways. Last year, many online education companies were using the CNY 49 model to recruit new students. We were probably the only company that used the CNY 9 promotional class model. We are confident because the CNY 9 class model allows us a lower cost on traffic acquired, possibly just at half or even lower than CNY 49 course costs. We are confident in our teaching quality and tutor service, and we believe that conversion rates will not drop significantly. We did an excellent job with our summer campaign and will continue to refine our promotional classes. We see that this summer's campaign might present a relatively shortened timeline because the delays of Gaokao and Zhongkao mean we've reduced one round of classes. Our main goal for the summer is to recruit more students for the fourth semester, and we do expect a significant jump in full semester concurrent students, but recruitment is still ongoing. We may communicate that number when recruitment is completed. Thanks.

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

Hi, Larry, Shannon, and management. Thank you so much, and congrats on the results. I want to ask for Q3, I think we still have pretty strong revenue growth momentum. How about on the margin front? I think you mentioned we may enjoy lower customer acquisition costs. At the same time, I see that peers are also heating up in the second half of the summer. Any color or strategies for margin or selling and marketing management could be appreciated? Also, I want to ask about the previously mentioned lower price classes for various regions. How is the progress for that, and how will this help with your multi-year expansion? Any color on this side as well?

Thanks, Mark. For the margin, in the short term, our margin can be influenced by a few layers. Firstly, gross profit margin. Our GP margin will stabilize with class sizes as we gradually fix them. It will likely fluctuate, but overall, GP margin will be stable within 1% or 2% fluctuations. Secondly, let’s look at operating profit margin. We will still generate operating leverage from our R&D and G&A expenses as our net revenue continues to expand. The most significant driver for our operating profit margin change will be seasonal fluctuation on sales and marketing expenses. The SM shows distinct seasonality; for instance, our Q2 non-GAAP margin was around negative 6%. The main reason for the loss was our advanced traffic acquisition in the summer semester in Q2. The sales leads we acquired at the end of May until June amount to more than 200 million, which were meant for promotional classes scheduled in July and August. This means the money we spent in Q2, where there were no gross billings matched, will be recognized in Q3 and Q4. If we move this 200 million from Q2 to Q3, we would have over 100 million in gross profit margin from a non-GAAP perspective, leading to over 7% positive operating margins. From a yearly perspective, this moving of sales and marketing costs between quarters is not critical; it simply reflects our strategy to enjoy first-mover advantage. Our operating profit will be released mainly in Q1 and Q4, with lower margins in Q2 and Q3 due to seasonality. As for promotional classes, as I mentioned, last year we offered CNY 49, CNY 9, and free courses. We found through testing that the CNY 9 class is our best model for this year, offering lower traffic acquisition costs—around half or even lower compared to the CNY 49 class costs. With our strong organizational capabilities, we can still maintain a relatively high conversion rate, resulting in lower customer acquisition costs and high ROI. For enrollments, we have over 50% of our paid enrollments coming from lower-tier cities, a trend that has continued for five consecutive quarters. This makes sense; parents in lower-tier cities have a higher acceptance of online education, actively seeking the best teaching resources. We believe this highlights the value of online education.

Thanks, Shannon. I just want to quickly ask. Last quarter, we mentioned we will launch more local live tailor-made classes. Any updates on that front?

Yes. We have established around 14 operating centers outside Beijing that can better cover more customized and localized curriculum. This is an ongoing effort, and based on the technology and data we have, we can design a more one-on-one level curriculum alongside more personalized courses that we can offer to local students, helping them achieve better outcomes in their tests.

And we have a question from Mengqi Zheng of Haitong. Please go ahead.

Thanks for taking my question, and congratulations on your impressive results. Two questions. First is regarding your continued expansion of operational centers across China, and currently, you have 13 operation centers. May I ask the number of teachers and tutors at this moment?

Thanks, Mengqi. Currently, we have over 10,000 tutors serving our students during the summer campaign. We will continue to recruit the best tutors to provide the best service to our students.

And my second question relates to the star teachers. May I know the contribution from the top 10 teachers this quarter?

This quarter, the net revenue contributed from our top 10 instructors was 34%. Since our IPO, the contribution of our top 10 instructors has been gradually declining every six months. The slight increase in the second quarter versus the first quarter was mainly because after the spring courses and in early June, only some instructors who teach foreign language and other professional courses contributed to net revenue. We expect that after the summer vacation, with many new instructors starting formally, the contribution from our top 10 instructors will continue to decline. Our instructor structure has improved, and course development systems are enhancing over time, so we do not consider the concentration of our top instructors in net revenue a major risk in the future.

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

Thank you, management, for taking my question, and congratulations on the good results. I have two questions. One is on the sales and marketing side. I know we recently launched branding advertising this quarter. Can management share the early effectiveness of this strategy? Also, we know that some of our competitors are using more OMO strategies to tackle the online market. Is it a strategy we might consider in the future, given our history with New Oriental? My second question is about tax. I notice we have quite a big tax benefit this quarter. Can management help us understand the reason behind this?

Thanks. This is the first time we tried our branding advertising on a larger scale. We were careful in selecting our partners and programs. We collaborated with established TV shows that have stable audiences and reputations. Although these may not be the newest or most attractive programs, they provide us with a solid audience base. We also carefully monitor how these branding efforts impact our customer acquisition costs. Regarding the OMO strategy from other companies, we have mentioned in past quarters that our focused strategy is a reason for our success. Given the significant market opportunities, we prefer a concentrated approach to improve results. For now, we will focus on the online large-class business model while enhancing our organizational capabilities. Finally, about our tax benefits this quarter, we recorded around RMB 68 million in tax benefits. This is mainly due to new rules on share-based compensation pushdown policy implemented in Beijing. Last year, the income tax expenses were based on best estimates but were not actionable. After improved communication with local tax administrations this quarter, we successfully reclaimed tax deductions during the annual tax filing. Based on accounting standards, a change that results in recognition or change in measurement of a tax position in prior periods should be recognized separately in the period the change occurs.

This tax benefit will continue for the rest of the year, and for next year, we should return to normal. What sort of reasonable tax rate should we assume going forward on a mid- to long-term basis?

That’s a good question. From the VAT side, the COVID-19 situation allowed us to enjoy VAT exemptions throughout the year, which is why you see that income in the other income section related to K-12 after-school tutoring businesses. Regarding income tax, we use the annual effective tax rate because we have a variety of entities in China with different levels of tax benefits. Currently, the effective tax rate for this year will be around 12% to 15%.

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

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 the company IR website. Thank you very much.

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