Hello, ladies and gentlemen. Thank you for standing by for China Online Education Group's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded.

[Operator Instructions] I will now turn the call over to your host, Ms. Judy Piao, Investor Relations for the Company. Please go ahead, Judy..

Hello, everyone, and welcome to the 2018 fourth quarter and full year quarter earnings conference call of China Online Education Group, also known as 51Talk. The Company's results were issued via newswire services earlier today and are posted online.

You can download the earnings press release and sign up for the company's distribution list by visiting the IR section of its website at ir.51talk.com. Mr. Jack Huang, our Chief Executive Officer; and Mr. Min Xu, our Chief Financial Officer will begin with some prepared remarks. Following the prepared remarks, Mr.

Liming Zhang, our Chief Operating Officer, will also join the call for our Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.

As such, the Company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the Company's Form 20-F and other public filings as filed with the U.S. Securities and Exchange Commission.

The Company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that 51Talk's earnings press release and this conference call includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures.

51Talk's press release contains a reconciliation of unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our CEO, Jack Huang. Please go ahead..

Okay. Hello everyone, thank you for joining us for our quarterly earnings conference call. 2018 was a year of strategic positioning and healthy build for us. We continued to grow and refocused our efforts on our core offering in the K-12 market and further strength our 51Talk brand.

We ended the year on a strong note with record high Q4 gross billing of RMB503 million representing a 27.9% year-over-year growth. Our core K-12 mass-market one-on-one offering continue to grow at 63% year-over-year in the fourth quarter. Our growth was driven by our continued penetration in non-tier-one cities.

During this quarter, we also successfully gained even stronger footholds in our target market of non-tier-one cities which accounted for 69.7% of our K-12 mass-market one-on-one gross billings. With the solid growth we achieved in the mass market, we plan to make our offering more assessable to our target market in 2019.

There remains great unmet demand for high-quality live online English courses in China particularly in non-tier-one cities. In February of this year we engaged China's hugely popular Super Student' Junkai Wang, from the hit boy band TF Boys, as our new brand spokesperson.

With a massive presence among the K-12 demographic, Junkai will work with 51Talk to increase the accessibility of high-quality English education for students in China. In addition, we are taking our products and services to best suit our target demographics which will help us expand into more cities where we see growing demand.

Access to our large base of foreign teachers in the Philippines remains a key part of our offering. We currently have over 18,000 teachers in the Philippines. We are dedicated to providing our teachers with more training and improving our service offerings to help our student thrive.

We are involving with advances in technology and bringing more interactive course elements to our students which we believe will improve learning outcomes and effectiveness. We continue to closely monitor the online education regulation that are under review by our government.

As forerunners in the online education industry, we remain optimistic that new regulations will finally benefit the online education industry in the long-term.

In 2019, we will continue to dedicate resource to increasing the accessibility of our product offerings, improving our exposure and strengthening the quality of our offerings and services while balancing between growth billings growth and GAAP profitability. With that, I will now turn the call to our CFO, Xu Min..

Thank you, Jack. Hello everyone. Let me give you an overview of our financial results. We’re pleased with our progress in 2018. We concluded the year with total annual net revenues of RMB1.1 billion and gross billing of RMB1.7 billion led by our focus on our core K-12 mass-market one-on-one offering in non-tier-one cities.

Compared with 2017, we improved our gross margins by one percentage point to 64% and narrowed our net loss by RMB164 million. As Jack discussed, we have a healthy fourth quarter achieving year-over-year growth in gross billings and net revenues beating the top end of our guidance.

As we move through 2019, our strategic growth initiatives are aimed continue to build on the success. We plan to expand our business and reach new students in underserved markets while maintaining a prudent investment strategy.

So gross billings for the fourth quarter of 2018 were RMB503.2 million a 27.9% increase from RMB393.4 million for same quarter last year. If we look at the breakdown of our gross billings, you’ll find gross billings from our K-12 mass-market one-on-one offering increase 63.0% year-over-year to RMB365.7 million.

Gross billings from our K-12 small class offering increased 127% year-over-year to RMB60.6 million. Gross billings from our adult offering decreased 28.9% year-over-year to RMB55.0 million and gross billings from our K-12 American Academy one-on-one offering declined 66.3% year-over-year to RMB21.9 million.

Net revenues for the fourth quarter of 2018 were RMB298.1 million a 14.4% increase from RMB260.6 million for the same quarter last year. The increase was primarily attributed to an increase in the number of active students and partially offset by a decrease in average revenue per active student.

The number of active students in the fourth quarter of 2018 was approximately 213,900, a 22.1% increase from approximately 175,200 for the same quarter in the prior year. Net revenues from our one-on-one offerings for the fourth quarter of 2018 were RMB266.5 million, a 6.6% increase from RMB250 million for the same quarter in 2017.

Net revenues from our small class offerings for the fourth quarter of 2018 were RMB31.6 million. This compares with just RMB10.6 million for the same quarter in 2017 noting that this program was launched in July 2017.

Cost of revenues for the fourth quarter of 2018, was RMB111.8 million, a 14.1% increase from RMB98.0 million for the same quarter in the prior year. The increase was primarily driven by an increase in total service fees paid to teachers, mainly due to an increased number of paid lessons.

Gross profit for the fourth quarter of 2018, was RMB186.3 million, a 14.5% increase from RMB162.6 million for the same quarter in the prior year. Gross margin for the fourth quarter of 2018, was 62.5% compared with 62.4% for the same quarter in 2017.

Gross margin for one-on-one offerings for the fourth quarter of 2018, was 66.6% compared with 67.6% for the same quarter in the prior year. The decrease was mainly attributed to a lower revenue percentage from the higher margin adult offering.

Gross margin from our small class offering for the fourth quarter of 2018, was 27.9%, this compares with a negative gross margin of 59.2% for the same quarter in 2017. Total operating expenses for fourth quarter of 2018, were RMB315.2 million, a 0.1% decrease from RMB315.5 million for the same quarter last year.

Sales and marketing expenses for the fourth quarter of 2018, were RMB212.1 million, an 11.5% increase from RMB190.2 million for the same quarter in the prior year.

The increase was mainly due to higher branding and marketing expenses partially offset by RMB18.8 million net effect of the capitalization and amortization of certain sales and marketing expenses under new accounting standard adopted since January 1, 2018, as discussed in our press release.

Excluding share based compensation expenses, non-GAAP sales and marketing expenses for the fourth quarter of 2018, were RMB210.6 million, an 11.4% increase from RMB189.0 million for the same quarter last year. During the second-half of 2018, we made investments to support our future growth as our business continues to expand.

Specifically, as Jack mentioned, we opened two new offices in the fourth quarter and added sales and services personnel in these offices. These important investments are designed to increase our exposure and further penetrate non-tier-one cities, supporting our long-term growth objectives.

As our new sales and services operations come up to speed in the coming quarters, we expect to see sales efficiency improvements with these new offices. Product development expenses for the fourth quarter of 2018, were RMB42.6 million, a 29.5% decrease from RMB60.4 million for the same quarter in 2017.

The decrease was primarily due to a decrease in the number of personnel. Excluding share based compensation expenses, non-GAAP product development expenses for the fourth quarter were RMB40.7 million, a 29.9% decrease from RMB58.1 million for the same quarter in the prior year.

General and administrative expenses for the fourth quarter of 2018 were RMB60.5 million, a 6.8% decrease from RMB64.9 million for the same quarter last year. Excluding share based compensation expenses, non-GAAP G&A expenses for the fourth quarter were RMB56.4 million, a 7.6% decrease from RMB61.0 million for the same quarter last year.

Loss from operations for the fourth quarter was RMB129.0 million, compared with RMB152.9 million for the same quarter last year. Non-GAAP loss from operations for the fourth quarter was RMB121.4 million, compared with non-GAAP loss from operations of RMB145.5 million for the same quarter in 2017.

Net loss for the fourth quarter of 2018, was RMB140 million compared with net loss of RMB159.7 million for the same quarter in the prior year. Non-GAAP net loss for the fourth quarter was RMB132.4 million compared with net loss of RMB152.2 million for the same quarter last year.

Basic and diluted net loss per ADS attributable to ordinary shareholders for the fourth quarter was RMB6.9 compared with net loss of RMB7.95 for the same quarter in 2017. Each ADS represents 15 Class A ordinary shares.

Non-GAAP basic and diluted net loss per ADS for the fourth quarter was RMB6.45 compared with diluted net loss per ADS of RMB7.5 for the same quarter last year. As of December 31, 2018, we have a total cash, cash equivalents, time deposits and short term investments of RMB712.1 million compared with RMB623.4 million as of December 31, 2017.

Our deferred revenues both current and non-current were RMB1.7 billion as of December 31, 2018, compared with RMB1.2 billion as of December 31, 2017. Cash flow from operations for the fourth quarter was historical high at RMB67.3 million. For more of our 2018, full year financial results please refer to our earnings press release for further details.

For the first quarter of 2019, we currently expect net revenues to be between RMB300 million and RMB305 million, which would represent an increase of approximately 14.3% to 16.2% from RMB262.6 million for the same quarter last year.

And the total gross billings to be between RMB425 million to RMB435 million, which would represent an increase of approximately 19.6% to 22.4% from RMB355.3 million for the same quarter last year.

Gross billings for one-on-one business are expected to be between RMB411 million to RMB421 million, which would represent an increase of approximately 29.1% to 32.2% from RMB318.4 million for the same quarter last year.

Gross billings for our small class business are expected to be approximately RMB14 million, which would represent a decrease of approximately 62.1% from [36.9%] RMB for the same quarter last year. This is due to product offering restructuring which led to a stronger seasonality.

We expect the gross margin of our one-on-one business to improve slightly in 2019, through the optimization our product mix and operation efficiencies. The above outlook is based on current market conditions and reflects our preliminary estimates of the market and operating conditions and the customer demand, which are all subject to change.

This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead..

[Operator Instructions] The first question comes from Roger Parodi of Silverhorn. Please go ahead. Mr. Parodi, your line is open. Please go ahead with your question..

Congratulations for the outstanding quarter and I have the following three questions. The first question is I have, you showed very good growth in the one-on-one class offering in Q4 maybe you can elaborate what factors were leading to that.

Second question is the small class offering in your guidance shows that it will decrease fast maybe you can explain more what is your strategy for the Hawo small class offering.

The third question is for the guidance as well for Q1, can you explain what are the factors that are influenced in your guidance for the one-on-one class offering, these are my three questions?.

So first of all we did see very strong growth for our core product K-12 mass-market one-on-one, it was growing at 63% year-over-year. And we do see the stress from two areas very similar to the previous quarters.

One, is that we're doing very well in non-tier cities and the gross billing, the new gross billings from the non-tier-one city is close to 70% of our total core product gross billing. And second area is that we continue to do very well in our referral business the percentage of our referral business is right now at 67% of our new gross billings.

So those are mostly the two key areas that’s helping us to achieve very strong growth for the Q4. And for your second question for the small class our guidance it is actually a decline from the Q1 in 2018. And the main reason is that we totally restructured of our product offering. So we're seeing much stronger seasonalities this year.

However, if you look back you can see that in the second half of 2018 its already demonstrating a very strong seasonalities. We will typically see very strong Q2 and Q4 and we will see relatively weak Q1 and Q3.

And when we just get started at totally different product offering mix and so that - you are still seeing pretty nice growth and gross billing in Q1. So that’s because - now going forward you’re going to see much stronger seasonality very similar to our Q1, 2019 and Q3, 2018. And for your third question.

[Foreign Language] So just to translate what Jack just said, so in terms of a strategy for our Hawo small class business, in 2019 we believe our Hawo number one is still on early stage and it is still - we're still in period that we are testing our products. And so in 2019, we'll put less emphasis on the gross billing gross.

Instead we'll put a lot more effort in improving the product quality and improving operation efficiencies. In 2018, the Hawo team did a great job, grow the Hawo business to a stage that - now we are a much bigger business and we're leading the industry, so we can afford to slow down a little bit just to improve our operations.

We don't have to continue to grow - and at the same time we will control the cost and we will try to reduce the loss. And so - and also let me move on to the third question. And so, if you look at our guidance for 2019 first quarter, you'll see that our one-on-one business gross billing you will see a small decline.

So again, I would say - let me repeat this, this is due to the seasonality. So, in terms of gross billing, you would typically see a weaker Q1, and then you'll see a stronger Q2, Q3, Q4. And Q4 is typically the strongest season for the gross billing. And if you are familiar with China's shopping holidays, you'll know both 11/11 and 12/12 are in Q4.

So, you will see very strong gross billing in Q4. And you will also understand in Q1 typically we have a very long, happy spring festival break. And no one is going to study.

And if you compare the first quarter of 2019 with first quarter of 2018, you'll actually see, we do expect the decline, the sequential decline for this year will be better than what was in 2018. So hope this answers your question, Roger..

[Operator Instructions] As there are no further questions now, I'd like to turn the call back over to the Company, for closing remarks..

Thank you once again for joining us today. If you have further questions, please feel free to contact 51Talk's Investor Relations through the contact information provided on our website at ir.51talks.com of the Piacente Group Investor Relations. This concludes the conference call. You may now disconnect your line. Thank you..

Again, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect..