Hello, ladies and gentlemen, thank you for standing by for China Online Education Group's First Quarter 2022 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms. [Neon], Investor Relations for the company. Please go ahead, Ni..

Hello, everyone, and welcome to the first quarter 2022 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 our 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 their prepared remarks, there will be a 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 this and other risks and uncertainties is included in the company's Form 20-F and other public filings as well as 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. Please also note that 51Talk's earnings press release and this 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. I will now turn the call over to our CEO, Jack Huang. Please go ahead..

Okay. Thank you. Hello, everyone. Thank you for joining our conference call today. In order to comply with the government policies in China and to better focus on our overseas business, we worked very hard to restructure our business in the past few quarters. And on March 24, we proposed to spin off our Mainland China business.

I'm very glad to report that for today, we reached a definitive agreement to spin-off our Mainland China business and expect to close the transaction on June 30. Upon the closing of the spin-off transaction, 100% of the company's revenues will be derived from overseas markets.

And the company expects to shift from a negative net assets position to a positive net assets position. As of March 31, our shareholders' deficit was about US$137 million. If we had completed the spin-off transaction on our reference date of April 30, our overseas business equity would have been a positive US$12.8 million.

This would have been US$150 million improvement in terms of equity. Going forward, the listed company will have 100% focus on our overseas business. With the rapid growth of our overseas business, we beat our Q1 gross billing guidance. Our Q1 net gross billings have reached US$5.3 million, representing a 79.9% sequential growth.

In the first quarter, the number of our paying students reached 6,500 and the number of our active students with attended lesson consumption reached 9,300 with students from more than 50 countries and regions outside of Mainland China.

In addition, our overseas business achieved its first positive monthly operating cash flow in this March, within only 8 months since we launched our overseas business. Revenues from overseas business in the first quarter was US$1.9 million, with gross margin of 78%.

The rapid growth proved that the strong demand and the business model in overseas markets are very much similar to that in Mainland China. And we are confident that overseas business will achieve sustainable growth similar to what we had accomplished in Mainland China. With that, I will turn the call over to Min Xu, our CFO..

Thank you, Jack. Hello, everyone. Our overseas business growth momentum continued into Q1 2022 as Q1 gross billings reached $5.3 million, exceeding the top end of our guidance of $4.6 million.

We will continue on our pathway of sustained balanced growth and execute our strategy that bring to overseas students' strong value proposition for learning English. Now let me walk you through our first quarter 2022 financial details. Net revenues for Q1 were $9.5 million, representing a decline of 89.7% from the same quarter last year.

Net revenues for the company's overseas business and the Mainland China business were $1.9 million and $7.6 million, respectively. Gross margin for the first quarter was negative 14%. Gross margin for the company's overseas business and the Mainland China business were 77.9% and negative 36.7%, respectively.

We did not recognize $48 million noncompliant lesson consumptions as revenues for our China Mainland business, but we still recorded the corresponding cost of revenue of $9.1 million. Q1 operating expenses were $20.6 million, a 59% sequential decrease from $50.2 million for last quarter.

Q1 sales and marketing expense were $7.1 million, down 81% sequentially. Sales and marketing expenses for overseas business and Mainland China business were $2.0 million and $5.1 million, respectively. Q1 product development expenses were $2.0 million, down 16% sequentially.

Product development expenses for overseas business and Mainland China business were $1.1 million and $0.9 million, respectively. Q1 G&A expenses were $11.5 million. Among which, $2.9 million were VAT related to noncompliant lesson consumptions, $2.8 million were accrued VAT and related penalty and $0.8 million were severance costs.

Excluding these onetime items from Mainland China business, Q1 G&A expenses would have been $5.0 million, down 27% sequentially. G&A expenses for overseas business were $1.9 million. Q1 operating loss was $21.7 million, where overseas operating loss was $3.5 million and Mainland China operating loss was $18.2 million. Q1 net loss was $21.2 million.

Net loss for overseas business and the Mainland China business were $3.4 million and $17.7 million, respectively. Q1 GAAP and non-GAAP EPS were negative $0.95 and negative $0.94, respectively. The company's total cash, cash equivalents, time deposits, short-term investments and restricted cash were $126 million at the end of first quarter.

And among which, $7.7 million were restricted cash, which was advances from students under government supervision. Advances from students were $216.6 million at the end of the first quarter. Among which, $6.1 million were for overseas business and $210.5 million were for Mainland China business.

The gap between advances from students and cash balances has decreased from $119 million in Q4 to $90 million in Q1. Looking forward to the second quarter of 2022, we currently expect net gross billing of overseas business to be between $7.2 million and $7.5 million, representing sequential growth between 36.1% to 41.8%.

We estimate the costs related to the spin-off transaction to be less than $1 million. And excluding the costs related to the transaction, we expect Q2 operating cash flow to be slightly positive.

The above outlook is based on current market conditions and reflects the company's current and preliminary estimate of 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..

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..

Thank you. This concludes this conference call. You may now disconnect your lines. Thank you..