NaaS Technology Inc. Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to RISE Education Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. Please be advised that today's conference is being recorded. I’d 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 third quarter 2020 earnings conference call. Today, you will hear from Ms. Lihong Wang, Chairwoman 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 today. Despite the tough environment caused by the COVID-19 pandemic in the first nine months of 2020, we have faced our challenges head-on with stride, and we are very pleased with the company's accelerated recovery in the third quarter. Overall, as of today's date, our operations have generally returned to pre-pandemic norms, including all of RISE's self-owned learning centers reopening by the end of September. We have received very positive feedback from parents who were keen for their children to return to regular classrooms as soon as offline classes were allowed to resume in cities nationwide. Our financial and operational performance has seen encouraging results with quarterly revenue nearly doubling from the prior quarter. Disciplined cost management and a well-planned marketing strategy has kept expenses well under control and helped the company turn profitable in the third quarter, fueled by strong growth momentum. I will begin my remarks from slide 3. When COVID-19 hit us and our industry in early 2020, we put in tremendous efforts, which allowed us to navigate the business through unprecedented risks and uncertainties to turn hard times into an opportunity for change. The pandemic drove us to ramp up our online capability in a short period of time, laying a solid foundation to transition our core business into the online merge offline or OMO model. Let's move on to our financial and operational highlights for the third quarter on slide four. Revenue was RMB320 million in the third quarter, up 94% from the prior quarter. Adjusted EBITDA and net income attributed to RISE both returned to positive territory, achieving RMB58 million and RMB28 million, respectively. Total number of new students enrolled for RISE regular courses reached 8,328 in the third quarter, more than double the second quarter's number. As of the end of September, we directly operated 90 learning centers nationwide compared with 88 in June 2020. Despite adverse times, our franchisee partners opened another nine centers in the third quarter, bringing the total number of franchised learning centers to 406 at the end of September compared with 397 at the end of June 2020. Here, I wanted to point out that the number of students in class slightly decreased in the third quarter due to several factors. First, there were two to three months during the pandemic when the number of new students enrolled declined sharply. When our online and offline courses resumed, the natural loss of students, including those who chose not to renew and those who claimed refunds, rose substantially over a very short period of time, resulting in the outflow of students outpacing the inflow. Secondly, online learning has certain fundamental disadvantages compared to offline classroom teaching. This is especially true for younger students who are used to classroom teaching and physical interaction with teachers and their peers, which also results in the loss of some existing students. Given that Beijing and Shijiazhuang only resumed offline courses from September, we may continue to see a decline in renewal rates well into the fourth quarter. Thirdly, the number of our current teaching and non-teaching staff was not sufficient to keep up with the demand as we focused more resources on accelerating the enrollment of new students and commencing new classes over the months. We believe that with the strong momentum of new students enrolling, as well as an improvement in renewal rates and fewer refunds, our total number of students in classes will be relatively stable and return to upward trends next year. However, the correlated financial and operational metrics in the fourth quarter may still be adversely impacted. Now, on slide five, all authorized self-owned learning centers resumed offline operations by the end of September as local governments eased restrictions. Facing the top revenue contributor for the company, Shijiazhuang was the last two remaining cities to obtain approval to reopen in mid-September. While these disruptions continue to impact our third-quarter financial results, we still managed to double our revenue compared with the previous year's quarter. Revenue generated from the educational program returned to approximately 90% of the level we delivered in the same period last year. By integrating learning via the OMO model, the vast majority of our students enjoyed the flexibility of migrating from online classes back to offline learning centers in a relatively short period of time. In the third quarter, our students attended online, offline, and OMO courses at different locations. This proved that we have the capability to manage complex situations and support learning under different scenarios. Now on to Slide 6. As you know, the pace of new student enrollments for our regular courses picked up strong momentum during the second quarter. In the third quarter, this strong enrollment momentum continued as we reopened all of our self-owned learning centers. New student enrollment increased by 122.1% quarter-over-quarter, showing strong demand for our educational service post-pandemic and at the beginning of the new academic term in September 2020. This strong momentum carried on into the fourth quarter, as we recorded a much stronger October in terms of new students enrolled compared with last year. Effective measures we have taken previously, such as diversifying our marketing channels and adopting innovative marketing tools, once again proved effective in maximizing returns and controlling customer acquisition costs. We managed to further reduce customer acquisition costs, down 18% compared with the previous quarter. Through the successful implementation of our multichannel acquisition strategy, our conversion rate increased by more than 310 bps compared with the previous quarter. Sales leads from offline channels as a percentage of total leads increased, while customer acquisition costs of offline channels were significantly lower compared with the previous quarter as well as the same period last year. Additionally, we managed to keep online customer acquisition costs well under control despite intensified competition among online marketing campaigns during the summer. As shown on Slide 7, the franchisee business has also recovered well. Franchise learning centers increased to 406 by the end of the third quarter. Revenue recognized also nearly doubled compared to the previous quarter. Our franchise network saw faster-growing enrollment and high cost participation once offline classes resumed. Franchisees are an important growth engine for RISE and will continue to help us enhance their operations and upgrade their capabilities to deliver OMO courses. The cross-disciplinary products will also be rolled out in our franchisee network going forward. Now let's turn to Slide 8. Despite the negative impact on our operations since the beginning of the year, we have regained profitability in the third quarter. Gross margin has been restored to pre-pandemic levels and operating margin and net profit margins were both back in positive territory. There were three main factors that contributed to these solid returns. The first is our OMO strategy, which we have already discussed. The second was the intensive uptake of our digital capabilities. And the third factor was the quick adoption of strategic measures to improve cost efficiency, optimize resources in various ways, and streamline operations. Moving on to Slide 9. In the third quarter, the team maintained strong momentum in accelerating our digital transformation and the adoption of our online initiatives across the business. A strategic partnership with Gymboree granted us enhanced online access, as we outperformed peers in various rankings for customer preference and transaction volumes, both online and offline. We were also widely accredited and acknowledged by authoritative bodies for our innovative efforts when we won the 2020 Ram Charan Award for Enterprises Of The Year in Digital Transformation, awarded by the prestigious Harvard Business Review. Turning to Slide 10. As the industry continues to evolve, we are well-positioned to capture any untapped demand and opportunities. RISE's core competency lies in our strong branding, unique curriculum, and 13 years of experience and results delivered in the education space. These factors form the foundation of our OMO model. At the same time, we started to roll out new subjects like mass logic thinking and dual-teacher online English small classes. These online classes target existing students and enroll new students through various marketing channels. Looking ahead, we expect the adverse impact of COVID-19 on our business to linger for a longer period, and we still see challenges ahead. However, we remain very optimistic about the direction of our company as we have seen a strong recovery and are excited about the long-term growth opportunities. As a unique OMO educational provider, our brand, proven curriculum, and widely acknowledged teaching experience, together with our diversified marketing channels, extensive nationwide network, and robust online infrastructure, have equipped us to fully capture both online and offline demands in the educational space, contributing to a viable business model that will deliver profitable and sustainable growth going forward. I will conclude here and would like to invite our CFO, Jiandong Lu, to talk about our third quarter financials. Thank you.

Thank you, Lihong. Let me now go through our financial results for the third quarter of 2020. Before I begin, please note that all numbers stated are in RMB. As expressed by our CEO, Wang, we have been very encouraged by the strong performance and the recovery of the business in the third quarter, as all of our learning centers had reopened by the end of September. Our teams tackled daily challenges and responded to the pandemic with a clear strategy and executed the seamless transition that gave us the flexibility of shifting between offline and online courses as circumstances required. Turning to Slide 11. Total revenues for the third quarter were RMB320 million, an increase of 94% quarter-over-quarter and a decrease of 22.2% year-over-year. Revenues from educational programs were RMB293.6 million, an increase of 93.9% quarter-over-quarter and a decrease of 12.3% year-over-year. The quarter-over-quarter increase in revenues from educational programs was primarily due to the resumption of the company's offline operations and the offer of accelerated lessons to more than 35,000 students for them to catch up on our academic curriculum during the summer holiday. Our self-owned learning centers located in Shanghai, Guangzhou, Shenzhen, and Wuxi opened by June 2020, followed by Beijing and Shijiazhuang by the end of September 2020. The year-over-year decrease in revenues from educational programs was primarily due to the continued suspension of offline operations of the Beijing and Shijiazhuang learning centers for more than two-thirds of the quarter, as a result of the second wave of the COVID-19 pandemic outbreak in Beijing in June. Franchise revenue increased by 95.9% quarter-over-quarter and decreased by 44.3% year-over-year to RMB25.3 million. The quarter-over-quarter increase in franchise revenues was mainly due to the growth in recurring franchise revenues as a result of the gradual reopening of franchise learning centers. The year-over-year decrease in franchise revenue was primarily due to the decline in recurring franchise revenues due to the outbreak of COVID-19. Our revenues increased by 90.3% quarter-over-quarter and decreased by 96.4% year-over-year to RMB1.1 million. Cost of revenues increased by 15.1% quarter-over-quarter to RMB162.9 million and decreased by 17% year-over-year. The quarter-over-quarter increase was primarily due to personnel costs associated with the increase in the total number of teaching hours, as our offline learning centers gradually resumed full operations nationwide, an increase in textbooks and teaching material supplies, as well as the end of rental cost concessions. The year-over-year decrease was primarily due to a decline in direct costs associated with the company's study tour services and the cost of learning materials, and the decline in teachers' compensation as a result of the reduced teacher headcount and teaching hours. Non-GAAP cost of revenues for the quarter increased by 15.5% quarter-over-quarter and decreased by 17.4% year-over-year to RMB158.9 million. Gross profit for the quarter was RMB157.1 million, an increase of 571.4% compared with gross profit of RMB23.4 million for the preceding quarter. Our gross profit for the quarter decreased by RMB57.8 million year-over-year from RMB214.9 million. Turning to Slide 12. Selling and marketing expenses increased by 78.7% quarter-over-quarter and decreased by 8.8% year-over-year to RMB75.9 million. The quarter-over-quarter increase was primarily attributable to increases in marketing expenses and advertisements associated with increased student enrollment. The year-over-year decrease was primarily due to personnel optimization efforts and disciplined investment in online and offline marketing activities. Non-GAAP selling and marketing expenses for the quarter increased by 81.2% quarter-over-quarter and decreased by 8.8% year-over-year to RMB74.7 million. General and administrative expenses increased by 12.7% quarter-over-quarter and decreased by 6.1% year-over-year to RMB61.8 million. The quarter-over-quarter increase was primarily attributable to increased recruiting fees and office expenses and the end of rental concessions. The year-over-year decrease was primarily due to our continuous efforts in personnel optimization and controlling administrative expenses. Non-GAAP G&A expenses for the quarter increased by 10.5% quarter-over-quarter and decreased by 4.2% year-over-year to RMB59.2 million. Operating income for the quarter was RMB19.4 million compared with an operating loss of RMB73.9 million for the preceding quarter and our operating income of RMB65.8 million for the same period of the prior year. Non-GAAP operating income for the quarter was RMB27.1 million compared with non-GAAP operating loss of RMB67.5 million for the preceding quarter and a non-GAAP operating income of RMB74.9 million for the same period of the prior year. Adjusted EBITDA income was RMB57.8 million compared with adjusted EBITDA loss of RMB44.5 million for the preceding quarter and adjusted EBITDA of RMB88.9 million for the third quarter of 2019. Please turn to Slide 13. Net income attributable to RISE for the quarter was RMB28 million compared with a net loss of RMB58 million in the preceding quarter and net income of RMB39.4 million for the third quarter of 2019. Non-GAAP net income attributable to RISE for the third quarter was RMB35.7 million compared with non-GAAP net loss attributable to RISE of RMB51.6 million for the preceding quarter and a non-GAAP net income attributable to RISE of RMB48.5 million for the third quarter of 2019. Basic and diluted net income attributable to RISE per ADS for the quarter was RMB0.50 and RMB0.49, respectively. Basic and diluted non-GAAP net income attributable to RISE per ADS was RMB0.63 for the quarter of 2019. With respect to our cash flow performance, net cash inflow from operating activities for the quarter was RMB103.2 million compared with net cash outflow of RMB118.1 million for the preceding quarter and net cash inflow of RMB10 million for the same period of the prior year. The quarter-over-quarter increase in cash flow was primarily due to the resumption of offline student enrollment. The year-over-year increase was mainly due to the impact of the change in the tuition fee collection schedule in 2019. As of September 30, 2020, the company had cash and cash equivalents and restricted cash of RMB774.6 million compared with RMB1,022.8 million as of December 31, 2019. As of September 30, 2020, total deferred revenue and customer advances were RMB712.7 million, a decrease of 5.7% from RMB766 million as of December 31, 2019. The decrease was primarily the result of revenue recognized from our courses and services being larger than the tuition fees collected from new and renewed students during the quarter. Deferred revenue and customer advances were made up of upfront tuition payments from students and the initial franchise fees from RISE franchisees. Now let's look at our business outlook on slide 14. We expect the impact of COVID-19 to remain for a longer period. However, we are confident in our ability to navigate through these challenging times, thanks to our highly experienced management team, effective and dynamic teaching staff, and a fully dedicated support team. We have navigated through the hardest times in the last nine months and have demonstrated our resilience and ability to mitigate risks and any potential resurgence of COVID-19 during the winter season. As a result of growing demand for our services, we have accelerated the pace of hiring and training our teachers. With more qualified teachers in place, we aim to accelerate the pace of opening classes for new students enrolled in order to shorten their waiting time. In addition, by implementing our OMO strategy, we are able to optimize cost scheduling. As a result, classroom capacity will be increased significantly, so we can offer more classes in each learning center to accommodate more students. Meanwhile, we are hard at work providing our teachers with quality training to improve our teacher retention rate and further upgrade teaching quality. All these measures are aimed at improving parent satisfaction rates and ultimately, further improving our student renewal rates and retention rates. With all factors mentioned above, let me give you the financial guidance for quarter four. We expect our revenue in the last quarter of 2020 to be in the range of RMB355 million to RMB365 million. The forecast reflects RISE's current and preliminary review, which is subject to substantial uncertainty. With that, I would now like to hand the call over to the operator, so we can begin the Q&A session. Thank you very much.

Thank you very much. We will now begin the question-and-answer session. Our first question comes from Sheng Zhong from Morgan Stanley. Your line is now open.

Hey, good morning. So I have two questions. The first one is, it looks like your business is continuously recovering. So, can you please share with us what’s your initial outlook for next year? And also, can you give us some growth plans for next year? And the second question is about the students' acquisition channels or the new filing enrollment percentage from different channels, including your internal word-of-mouth from online and offline? Thank you.

Hi, Sheng Zhong, thank you for your question. Regarding next year's outlook and potential growth rate, we are very optimistic. As mentioned in the presentation, all operations have returned to normal. We have enhanced our capabilities through acquisition channels and improved online core delivery, with strong enrollment numbers. We are hiring additional teaching and sales personnel to meet this demand. For next year, we are in the midst of budget discussions; however, I believe the growth rate will be quite high. Ideally, we aim for our educational program to nearly match the 2019 figures, which would suggest a growth rate of 30%, 40%, or even higher. As for the second question regarding student acquisition channels, I can provide a high-level overview, and Jiandong can offer more details. We have significantly boosted word-of-mouth marketing. The strong momentum reflects two main factors: the demand for offline classrooms is robust, and our offline network is effective at capturing this demand. In the second and third quarters, we initiated collaborations with various institutions, particularly early education centers like Gymboree and LYC Kid. Recently, as you've noticed, another institution known as Hyosung has shut down, allowing us to acquire their students, especially in cities like Beijing and Shanghai during the second quarter. These collaborations have generated a substantial influx of students, and the acquisition costs for this channel are manageable since we can establish terms to acquire students below a certain threshold. I believe Jiandong can provide more details on the breakdown between online and offline acquisition. Jiandong, please go ahead.

Okay. All right. Hi Sheng. As a matter of fact, when we started reopening our offline learning centers, we saw very quick pickup in student enrollments offline as a percentage of total students enrolled for the whole month. The percentage from the offline channel has been growing steadily, almost 1% every month, starting from June up to the October numbers. So as of now, to give you an average number, the offline acquisition still accounts for more than 65% compared to the same period of the prior quarter. This is one number I can share with you. The other metrics that we look at to determine our strong momentum in enrollment is the significant increase in our conversion rate, which has been increasing steadily since June, almost by 1% from June until October. This increase in conversion rate helps us to reduce the acquisition cost for each student. Additionally, our offline acquisition cost is significantly lower compared to the same period last year, indicating that many mid-sized offline operators are currently facing cash issues and have gone bankrupt. The competition appears to have decreased significantly compared to last year. This is a very promising phenomenon we have witnessed. At the same time, we have also seen decreases in our acquisition costs from the online channels, which demonstrate our ability to manage our investments in acquiring students online effectively. Unlike other institutions, which tend to pour funds merely to acquire students or offer free trial classes that do not contribute to profitability, we have been more strategic.

Yes. Sheng, just to add to that point: even though our acquisition cost online reduced a little bit compared to quarter 2, when you look back at last year, it’s clear that the online acquisition costs have increased significantly. I think you’ve probably observed this at other education companies as well. However, as Jiandong mentioned, we are utilizing our offline channels effectively, and that is a very low-cost method of acquisition. Therefore, our blended cost of acquisition is definitely well under control.

Thank you very much. Our next question comes from Howard Yang at Crédit Suisse. Howard, you can go ahead.

Thank you for taking my questions and congratulations on a solid quarter after 2019. So I got two questions. The first question in terms of enrollment: I would like to get a little bit more details on the third quarter enrollments, especially since you mentioned that Beijing and Shijiazhuang only resumed operations at the end of September. So, does that mean these two cities contributed nearly no enrollment in the third quarter? Do new student enrollments in other cities see strong momentum compared to last year? As for the fourth quarter, how are we currently seeing enrollment stages in these two cities after they reopened? The second question is also a follow-up on the acquisition cost. You mentioned that the offline acquisition cost was lower year-on-year, and that the share of offline is actually increasing this year. Can you provide quantified numbers regarding the blended CAC in the third quarter? I remember in the last quarter you mentioned the blended CAC was flat year-on-year?

Okay. Yes. Howard, nice to meet you online. So I will answer the first question first and then on the second, I can answer briefly and Jiandong can give you the breakdown. For enrollment, in fact, even during the COVID-19 pandemic when offline centers were closed, we actively engaged online to acquire students, such as setting up online demos. Therefore, student acquisition never really stopped. But you can imagine the effectiveness of those online student acquisition efforts was low. Therefore, you are correct: when Shijiazhuang and Beijing offline centers were closed, the ability to enroll new students was not as strong as we would like. However, for the third quarter, you can see that student enrollment in other cities like Shanghai and others were actually very strong compared to last year; we are in positive territory. For Shijiazhuang, for example, we actually see more than 30%, 40% growth year-over-year. For Beijing and Shijiazhuang, even with the majority of the quarter, the centers were closed, we were still able to acquire new students, but slightly lower than last year because Beijing is our biggest contributor. So, when Beijing still was not fully recovered, our overall third-quarter enrollment was still down from last year. However, in October, now that all learning centers are open, we are seeing very strong momentum nationwide. So every city from Beijing to Shanghai and Guangzhou to Shijiazhuang has shown a more than 40% growth in enrollment year-over-year in October. You know that October is not usually a high season, as September was. So, we are encouraged to see these numbers and, for the fourth quarter, we expect to have much stronger enrollment compared to last year. We have taken measures to catch up on student enrollment and significantly increase our market share while many other suppliers are still under pressure. Regarding student acquisition costs, I don’t know whether we disclosed that granularity, but for the offline cost, we’ve actually seen a major decline quarter-over-quarter, approximately around 20% to 30% decline for offline acquisition. I think this contributes positively to our ongoing higher growth in enrollment.

Okay. I remember last quarter, we shared estimate figures with investors and analysts regarding acquisition costs. For that quarter it was around RMB5,000 per student. For this current quarter, it’s actually lower, as we have controlled it below RMB4,500 as the blended average acquisition cost. As Lihong mentioned, to give you a little bit more color on offline acquisition costs last year the same period, the offline acquisition costs were above RMB1,000, but this year it's at least 25% to 30% lower than last year's RMB1,000. This indicates that our offline network for marketing and enrolling new students is a very effective channel that provides lower costs, and is highly productive.

And I wanted to add to that point: in fact, this reduction was achieved as we increased the number of sales personnel on the ground. Now we are putting more sales personnel in each school to capture the strong demand we see. So, hopefully, as I mentioned, in the fourth quarter, you’ll see a higher growth rate year-over-year. Thus, for the six months together, Q3 and Q4 we aim for a much stronger year in 2020.

Thank you. Your next question comes from the line of Hung-Yeh Kyaw. Hung-Yeh, your line is now open.

Hi. Thanks. First, congratulations on your good performance in the third quarter? I have two questions. First, do you have any plans to open new learning centers next year or next quarter? What's the expected number of the sales jobs on learning centers and the franchise, respectively? The second question is, I would like to learn more about the OMO model and how did it improve the utility? Thanks.

Okay. For school openings, let me provide some guidance on that, and then I'll delve into that further.

Okay. In the third quarter, we opened two new learning centers, and in the fourth quarter, we plan to open two more. As you know, the pandemic has pushed us to suspend our expansion plans for 2020. Initially, early in the year, we planned to open a total of 15 centers, and the backlog of 11 will actually be rescheduled to next year. So, for the 2020 year plan regarding the CapEx in opening new learning centers, it’s going to be in high double digits, definitely above 15, but it really depends on location; if we can find good locations, we will definitely open new centers. Therefore, the pace of our growth opening new learning centers is somewhat dictated by whether we can find optimal locations.

Right. Just to supplement to that, we see very strong growth in cities like Shenzhen, Guangzhou, and Shanghai. It reminds me of the situation in Beijing in 2015-2016. As I mentioned earlier, for example, third quarter enrollment in Shenzhen increased nearly 40% year-over-year. We actually did not open new schools. For us, we definitely want to capture the strong market demand in those cities; therefore, next year, we'll catch up on school openings. However, we need to ensure we have trained enough qualified teachers, salespeople, and managers so that we can effectively manage those schools. Regarding the franchisee side, our long-term plan is to open 30 to 50 schools every year for the next couple of years, mainly focused on tier one to tier three cities, which have good affordability and capable franchisees.

Thank you.

Regarding the OMO model, I think last quarter's earnings release, I mentioned briefly that OMO has selected components. The first component is to reduce the class time from 50 minutes to 40 minutes. This adjustment has already started in the first half of September. The new students coming to K1 to K3 have already adopted this new schedule. This adjustment alone has helped increase utilization from 100 to 138, which is a 38% increase in classroom utilization. The second component of OMO is to move the weekday classes above S2 to online. This adjustment will make it more convenient for students attending school on weekdays. This, of course, will increase the classroom capacity by 4%. The reason this percentage is small is that the majority of our students are actually below S1, so S2 accounts for only a small portion of our student body. The third component of OMO is the online classes; we previously split them into three groups where every group is one versus six, and now we are upgrading our technology to target splits into two. So, every class will now be one to eight or one to ten online. This adjustment will also increase the online class time for the students and reduce the burden on teachers, who previously had to teach three times. Thus, all these measures combined will increase our classroom utilization by nearly 60%. Of course, this needs to be gradually implemented. As I mentioned, we just started with new students moving from 50 to 40 minutes. In December, we will try to adopt that for existing students, and online classes will enlarge the number of students once the technology is ready. The last step is longer-term: reducing total class hours, which will be next year's plan. I hope that was clear.

Thank you.

Thank you very much. Your next question comes from Wong at UTI Securities. You can go ahead.

Thank you. Good morning, management. My question is about the OMO model. Could you provide more details about it from the student perspective? Are there different products for students to choose from, whether online or offline? I would like to understand what the product looks like. Is there a single product that combines both online and offline elements, or are they completely separate offerings? Additionally, are the teaching teams for offline classes distinct, or is there just one team? Also, how are the teachers for offline courses organized? I’m interested in the specifics. Furthermore, what are the company's future plans for the OMO model? What can we expect it to look like moving forward? That’s my question.

Yes. Yes. I think everyone now talks about OMO; however, the implementation can be different. It really depends on how you organize it and what the purpose is in offering an online-merge-offline teaching and learning experience. For RISE, I suggest that first, we have adopted this OMO model for our regular courses, and second, we do offer pure online classes. These two lines are different. But when it comes to the OMO model for the regular courses, our approach is to integrate the online and offline components. Essentially, we are teaching one course using both online and offline elements strategically. For example, RISE curriculum is highly interactive and is organized with project-based learning. Therefore, our offline classes are small group sessions with many activities that require offline interaction. We believe this interactive teacher-student learning experience really differentiates us and focuses on more than just knowledge transfer or lecturing; it also helps our students learn how to communicate, collaborate in teams, and perform certain leadership functions within a group. Therefore, when we think about the OMO model, we use online resources primarily for knowledge transfer or theory-based topics. For example, in language learning, grammar lessons can be effectively taught online, while comprehensive reading and speaking practice require physical interaction. Thus, we provide a mix of online learning for knowledge transfer along with interactive offline sessions for practical learning. So, we see the OMO model as one integrated course—offering different components tailored to the strengths and advantages of both online and offline formats.

Thank you. That’s very clear.

Thank you so much. And your last question comes from the line of Howard Yang from Credit Suisse. Howard, your line is now open.

Hey. I got another question to quickly follow-up. You just mentioned that some small players like Yoshi have exited the market. So, I just want to understand a little bit about the current growth in enrollment: how much of this growth do you think is driven by the exit of smaller players from the market, and how much is driven by your more efficient marketing approach? Thank you.

Howard, that’s a good question. I would say after the pandemic, the market has definitely become more dynamic. On one hand, we see many companies actively offering online classes, including AI-driven formats, like Banma, for example. On the other hand, we have noticed the challenges faced by offline centers. As you’ve seen, for instance, Disney English exited the market, and some of our competitors went under, which indicates a significant shift in the landscape. Nonetheless, it affirms a couple of things: the underlying demand remains very strong, both online and offline. English is a major subject that many people want to pursue. You can see others like Wonderslate, for example, acquiring Moly-Drop—which specializes in English—because English subjects have a much bigger addressable market than other subjects. This also leads to the observation that, if a company wants to grow, it must enhance the user experience through effective curriculum design that yields results. Going forth, companies must aim to not only acquire students with high acquisition costs but also focus consistently on improving retention and renewal rates; otherwise, their business models will not remain sustainable. Regarding consolidation or related changes, what we are observing is that people are naturally expecting expansion or cross-disciplinary offerings. As I mentioned, this is a natural approach to dilute costs and enhance the time value of students. Consolidation among educational institutes is also starting to occur, though it’s not easy. Organizational and cultural mismatches can complicate integrations, especially when differing courses and pedagogical methods come into play. Carefully managed acquisition strategies are crucial for these changes to succeed. For RISE, as I mentioned earlier, one natural approach is to extend into cross-disciplinary studies, taking advantage of our existing student base for cross-selling opportunities. We also have established a strong offline network, paired with our online infrastructure. We will utilize both to broaden our current curriculum and course offerings. The next step would include making certain investments or acquisitions to expand our capabilities but approaching any acquisition with caution to ensure it is truly beneficial. So, in the short term, yes, we expect consolidation, which will demand skillful execution, but I believe RISE is well-equipped to do so when the time is right.

Thank you so much. And that does conclude our conference for today. Thank you all for participating. You may now disconnect.