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0:03 Hello, ladies and gentlemen, thank you for standing by for China Online Education Group's Second Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. 0:16 I will now turn the call over to your host, Ms.

Ni Yan [ph], Investor Relations for the company. Please go ahead..

0:25 Hello, everyone and welcome to the second quarter twenty twenty one 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 the sign up for the company's distribution list by visiting the IR section of our website at ir.51Talk.com. 0:55 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. 1:16 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 nineteen ninety five.

Forward-looking statements involve inherent risks and uncertainties. 1:37 As such, the company's results may be materially different from the views expressed today. Further information regarding this 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 the applicable law.

2:12 Please also note that 51Talk's earnings press release and its conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. 51Talk's press release contain a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

2:39 I will now turn the call over to our CEO, Jack Huang. Please go ahead..

2:45 Okay. Hello, everyone and thank you for joining our conference call. We achieved another strong quarter as second quarter net revenue reached RMB five hundred and seventy nine point eight million, primarily it’s driven by thirty five point seven percent year-over-year increase in the number of active students.

3:15 On July twenty four, twenty twenty one, relevant Chinese authorities issued the Opinions on further alleviating the burden of homework and after-school tutoring for students in Compulsory Education, which contains high-level policy directive about requirements and restrictions related to online and offline after school tutoring services.

3:46 Aligned with the Opinion's directive and the requirement 51Talk launched brand new, All-round Proficiency Courses in small class format for children and teenagers led by Chinese teachers. Meanwhile, we plan to grow our overseas business by offering one-on-one classes for international K-12 and adult student users taught by foreign teachers.

4:19 Where there are new challenges, there will also be new opportunities. In keeping with the revised framework and regulations for our industry, we will continue to innovate our course offerings and explore the growth opportunities. 4:37 With that, I will now turn the call to our CFO, Min Xu..

4:42 Thank you, Jeff. Hello, everyone. We recorded a seventeen point five percent year-over-year of net revenue and a twenty seven million RMB net loss in the second quarter. Under new regulations, the company has taken actions to adapt to the latest operating environment and will take measures to improve operating efficiency.

5:05 Looking ahead, we have confidence in continuing to create value for our students and teachers while confirming to applicable laws and regulations. 5:16 I will now provide a brief overview of our second quarter financial results.

Net revenues for the second quarter was five hundred eighty million RMB, a seventeen point five percent increase from four hundred and ninety four million RMB for the same quarter last year.

The number of active students in the second quarter was four hundred four thousand, a thirty five point seven percent increase from two hundred ninety eight thousand for the same quarter last year. 5:44 Gross margin for the second quarter was seventy two point seven percent compared with seventy point nine percent for the second quarter last year.

The increase was mainly attributable to the decrease of cost per lesson, partially offset by decrease of the revenue per lesson. One-on-one gross margin for the second quarter was seventy three percent and a small class gross [Technical Difficulty].

8:39 Please go ahead..

8:40 Hello. Apologize for the technical difficulties here. So I'll just repeat my part. We recorded a seventeen point five percent year-over-year increase of net revenue and a twenty seven million RMB net loss in the second quarter.

Under the new regulations, the company has taken actions to adapt to the latest operating environment and it will take measures to improve operating efficiencies. 9:13 Looking ahead, we have confidence in continuing to create value for our students and the teachers, while conforming to the applicable laws and regulations.

9:24 So net revenues for the second quarter was five hundred and eighty million RMB, a seventeen point five percent increase from four hundred ninety four million RMB for the same quarter last year.

The number of active students in the second quarter was four hundred four thousand, a thirty five point seven percent increase from two hundred and ninety eight thousand for the same quarter last year.

9:50 Gross margin for the second quarter was seventy two point seven percent compared with seventy point nine percent for the second quarter last year. The increase was mainly attributable to the decrease of cost per lesson, partially offset by decrease of the revenue per lesson.

One-on-one gross margin for the second quarter was seventy three percent and small class gross margin was sixty four point three percent. 10:16 Total operating expenses for the second quarter were four hundred and sixty one million RMB up thirty eight point seven percent year-over-year.

Sales and marketing expenses for the second quarter were three hundred sixteen million RMB, fifty seven point four percent of gross billing for the second quarter.

Excluding SBC, non-GAAP sales and marketing expenses for the second quarter were three hundred and thirteen million RMB, representing fifty seven percent of gross billings for the second quarter. 10:52 Product development expenses for the second quarter were sixty five million RMB, a sixty eight point four percent increase year-over-year.

Excluding SBC, non-GAAP product development expenses for the second quarter were sixty three point four million RMB, a seventy one point five percent increase for the same period last year. 11:13 G&A expenses for the second quarter were eighty million RMB, a forty eight point seven percent increase from the same quarter last year.

Excluding SBC, non-GAAP G&A expenses for the second quarter was seventy five million RMB, a forty six point six percent increase from the same period last year. Other income for the second quarter was five point six million RMB of super deduction credit.

11:40 Operating loss for the second quarter was thirty four million RMB compared with operating income of twenty seven million RMB for the same quarter last year. Non-GAAP operating loss for the second quarter was twenty five million RMB compared with non-GAAP operating income of thirty four million RMB a year ago.

12:01 Net loss for the second quarter was twenty seven million RMB compared with net income of thirty three million RMB last year. Non-GAAP net loss for the second quarter was eighteen million RMB compared with non-GAAP net income of forty million RMB for the same quarter last year.

12:20 Income tax expense for the second quarter was two point nine million RMB. Basic and diluted EPS for the second quarter was negative one point two four RMB compared with basic EPS of one point five five RMB and a diluted EPS of one point four four RMB for the same quarter last year. Each ADS represents fifteen Class A ordinary shares.

12:44 Non-GAAP basic and diluted EPS for the second quarter was negative zero point eight two RMB compared with non-GAAP EPS of one point eight seven RMB and diluted EPS of one point seven five RMB for the same quarter last year.

13:03 Gross billings for the second quarter were five hundred fifty million RMB and eighteen point seven percent year-over-year decrease. This is mainly driven by the decrease of our package size, partially offset by the increase in paying students.

13:24 As of June thirty, twenty twenty one, the company had total cash, cash equivalent, time deposits and short-term investments up one point six four million -- one point six four billion RMB compared with one point seven three billion RMB, as of December thirty one, twenty twenty.

Advances from students were two point seven billion RMB as of June thirty, twenty twenty first, compared with two point seven two billion RMB as of December thirty one, twenty twenty.

13:59 So for our outlook, for the third quarter of twenty twenty one, the company currently expects net revenues to be between five hundred and fifteen million RMB and five hundred fifty five million RMB, which represent an increase of approximately two point one percent to three point one percent from five hundred thirty nine million RMB for the same quarter last year.

14:26 The above outlook is based on current market conditions and reflects the company's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. 14:40 This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead..

14:48 Thank you. [Operator Instructions] We seem to have no questions over the phones at this time. [Operator Instructions] As we seem to have no questions over the phone, I'd like to turn the call back over to company for any additional or closing remarks..

16:17 Thank you, once again for joining us today. Okay. Thank you, once again for joining us today. If you have further questions, please feel free to contact 51Talk’s Investor Relations with the contact information provided on our website or The Piacente’s Investor Relations. Thank you..

16:40 Apologies for the interruption, we do now actually have a question over the phone from Vincent Yu of Needham & Company. Please go ahead..

16:49 Hi, management. [Foreign Language] 17:07 Thanks, management for taking my question. Sorry and apologize for the connection issues earlier. So the question is that the operations strategy facing the regulation in terms of the foreign teachers and the other regulations in terms of academic changing? Yes. So for -- and thank you very much..

18:03 [Foreign Language] 19:50 Okay. So first of all, thank you for the question. So everything the new regulation is out and [indiscernible], we quickly take -- took a lot of actions to, number one, to be compliant to the regulation. We stopped selling the one-on-one lesson taught by Filipino teachers to our Chinese students.

And so instead, we launched a new course, we called [indiscernible] so it's actually All-around Proficiency Courses, which is kind of not only -- so, first of all, it’s taught by Chinese teachers. Second is, it uses -- taught both English language and Chinese language. 20:41 And so not only we teach the language.

We also teach a lot of other capabilities, including the creativities, public performance, public speaking, social capability, critical thinking and empathy. So this is a non-academic course that really can provide a lot of value to our existing students and new students.

So it is – so our new [indiscernible] All-around Proficiency Course will be our flagship product for our Chinese students. 21:26 So in addition, we also have -- we already have a -- quite a number of overseas students. And so, we will continue to offer our existing one-on-one mass market taught by our Filipino teachers to our overseas students.

And we believe there's a great potential for that market. And also, we were like, we were quite strong in about learning market and we will continue to invest in this market and we will try to grow in this sector too. So these are kind of our strategy after the new regulation is out. 22:20 Hope this answers your question. Thanks..

22:25 Yes. Very clear.

Just a follow-up in terms of the teachers phase [Foreign Language] 22:48 So for the future classes, they’re all taught will be -- taught by the Chinese domestic teachers, right? Just not a temporary phase, but for like forever, or it will be translated into the domestic teacher group?.

23:17 Correct. For the most foreseeable future in China, we will only use Chinese teacher to teach our [indiscernible]. Of course, yes. It's correct..

23:33 Got it. Thank you..

23:39 Thank you, Vince..

23:43 We have no further questions. I'd like to turn the call back to the company for closing remarks. Ms. Ni Yan (ph), please go ahead..

23:56 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 or Piacente Group Investor Relations..

24:14 This concludes this conference call. You may now disconnect your lines. Thank you for joining..