Rise Education Cayman Ltd (REDU) Q3 2020 Results - Earnings Call

Rise Education Cayman Ltd (NASDAQ:REDU) Q3 2020 Earnings Conference Call November 12, 2020 8:00 PM ET

Company Participants

Karen Gu - Investor Relations

Lihong Wang - Chairwoman & Chief Executive Officer

Jiandong Lu - Chief Financial Officer

Conference Call Participants

Sheng Zhong - Morgan Stanley

Howard Yang - Credit Suisse

Operator

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. [Operator Instructions] 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.

Karen Gu

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.

Lihong Wang

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 date, our operations have generally returned back to pre-pandemic norm, including all of RISE self-owned learning centers reopening by the end of September. We have received a very positive feedback from parents who were keen for their children to return to regular classrooms as soon as off-line 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 puts expenses well under control and help 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 top 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 RMB 28million, 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 new 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 a number of factors. First, there were two to three months during the pandemic when the number of new students enrolled declined sharply. And when our online and offline course resumed, the natural loss of students, including those who choose 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 aged 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 the off-line courses from September, we may continue to see a decline in renewal rate well into the fourth quarter.

Thirdly, the number of our current teaching and non-teaching staff were not sufficient to keep up 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 in road as well as an improvement in renewal rate and less 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 ease restriction. Facing the top revenue contributor for company and Shijiazhuang were 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 educational program returned to approximately 90% of the level we delivered in the same period of 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 have 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 our new students enrollments for our regular courses picked up strong momentum during the second quarter. And in the third quarter, this strong enrollment momentum continued as we reopened all of our self-learned learning center.

New student enrollment increased by 122.1% quarter-over-quarter, showing the strong demand for our educational service, post-pandemic and at the beginning of the new academic term in September 2020. This strong momentum steadily continued 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 to maximize returns and control 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 off-line channels were significantly lower compared with the previous quarter as well as the same period of last year. Additionally, we managed to keep online customer acquisition costs well under control despite intensified competition among online marketing campaigns in 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 of the revenue of the previous quarter. Our franchise network saw faster-growing enrollment and high cost participation, once offline class is resumed.

Franchisees are an important growth engine for RISE, and will continue to help them 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 in our operations since the beginning of the year, we have regained profitability in the third quarter. Gross margin has been restored to pre-pandemic level and operating margin and net profit margins were both back to – 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 kept up strong momentum in accelerating our digital transformation and 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 core competency lay in our strong branding, unique curriculum and 13 years of experience and results delivered in the education space. They 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 will 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 our longer time, 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 the 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.

Jiandong Lu

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 give us the flexibility of shifting between offline and online courses as circumstances required.

Turning to Slide 11. Total revenues for the third quarter was RMB320 million, an increase of 94% quarter-over-quarter and a decrease of 22.2% year-over-year. Revenues from educational program was RMB293.6 million, an increase of 93.9% quarter-over-quarter, 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 our academic curriculum during the summer holiday.

Our self-owned learning centers located in Shanghai, Guangzhou, Shenzhen and Wuxi were 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 continued suspension of off-line 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% year-over-year -- quarter-over-quarter and decreased by 44.3% year-over-year to RMB 25.3 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 as a result of the outbreak of COVID-19. Our revenues increased by 90.3% quarter-over-quarter and decreased by 96.4% year-over-year to RMB 1.1 million.

Cost of revenues increased by 15.1% quarter-over-quarter to RMB 162.9 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 resume the full operations nationwide, an increase in textbooks and teaching material supply as well as the end of rental cost concession.

The year-over-year decrease was primarily due to a decline in direct cost, associated with the company's study tour services and 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 RMB 158.9 million. Gross profit for the quarter was RMB 157.1 million, an increase of 571.4%, compared with gross profit of RMB 23.4 million for the preceding quarter. Our gross profit for the quarter decreased by RMB 57.8 million year-over-year from RMB 214.9 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 RMB 75.9 million. The quarter-over-quarter increase was primarily attributable to increase in the marketing expenses and advertisement associated with increased student enrollment.

The year-over-year decrease was primarily due to personnel optimization efforts and disciplined investment in online and off-line 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 RMB 74.7 million.

General and administrative expenses increased by 12.7% quarter-over-quarter and decreased by 6.1% year-over-year to RMB 61.8 million. The quarter-over-quarter increase was primarily attributable to the increased recruiting fees and office expenses and the end of rental concession. 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 RMB 59.2 million. Operating income for the quarter was RMB 19.4 million compared with an operating loss of RMB 73.9 million for the preceding quarter, and our operating income of RMB 65.8 million for the same period of the prior year.

Non-GAAP operating income for the quarter was RMB 27.1 million compared with non-GAAP operating loss of RMB 67.5 million for the preceding quarter. And a non-GAAP operating income of RMB 74.9 million for the same period of the prior year. Adjusted EBITDA income was RMB 57.8 million compared with adjusted EBITDA loss of RMB 44.5 million for the preceding quarter and adjusted EBITDA of RMB 88.9 million for the third quarter of 2019.

Please turn to Slide 13. Net income attributable to RISE for the quarter was RMB 28 million compared with net loss of RMB 58 million, in the preceding quarter and net income of RMB 39.4 million for the third quarter of 2019. Non-GAAP net income attributable to RISE for the third quarter was RMB 35.7 million compared with non-GAAP net loss attributable to rise of RMB 51.6 million for the preceding quarter. And a non-GAAP net income attributable to RISE of RMB 48.5 million for the third quarter of 2019.

Basic and diluted net income attributable to RISE per ADS for the quarter was RMB 0.50 and RMB 0.49, respectively. Basis and diluted non-GAAP net income attributable to RISE per ADS was RMB 0.63 for the quarter of 2019. With respect to our cash flow performance, net cash inflow from operating activities for the quarter was RMB 103.2 million compared with net cash outflow of RMB 118.1 million for the preceding quarter. And net cash inflow of RMB 10 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 RMB 774.6 million compared with RMB 1,022.8 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 for our courses and services being larger than the tuition fees collected from new students 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 page -- 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 increased the hardest of 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 are aiming to accelerate the pace of the operating 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. And as a result, classroom capacity will be increased significantly, so that 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’s retention rate and to further upgrade teaching quality. All these measures are aimed to improve parent satisfaction rate. And ultimately, to further improve 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 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.

Question-and-Answer Session

Operator

Thank you so much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Sheng Zhong from Morgan Stanley. Your line is now open.

Sheng Zhong

Hey good morning. So I have two questions. The first one is, it looks at that your business is continuous recovery. So can you please share us what’s your initial outlook for next year? And also, can you give us some gross plan for the next year?

And second question is the students acquisition channel or the new filing enrollment percentage from different channels, like including the -- your internal word-of-mouth from online and offline? Thank you.

Lihong Wang

Hi, Sheng Zhong, thank you for the question. So the first one -- next year's outlook and potential the growth rate, we are actually very optimistic about next year. As we mentioned in the presentation, all the operations are actually back to norm. We've added capabilities from acquisition channel to online core delivery with the enrollment also is very strong. We already added teaching and salesperson to capture that demand.

So, next year, my -- we were still undergoing our budget discussion, however, I think the growth rate will be very high. Hopefully, we can -- the educational program can almost match the number of 2019. So, you can imagine the growth rate will be in 30%, 40%, if not higher. So, that's the first question.

The second question is in terms of acquisition channels -- student acquisition channel, I can give a high level of description and Jiandong can talk more about it. In fact, we increased the word-of-mouth. I do think the strong momentum reflects two things; one is demand to coming back to offline classroom is very strong. Second is our offline network is very valuable to capture the demand very effectively.

In second quarter and third quarter, we started what we call the cooperations with other institutes, especially early education institutes like Gymboree, like LYC Kid. And recently, you all noticed that another institute called Hyosung went down, but we actually acquired their students pretty precisely in Beijing and Shanghai and some other cities in second quarter for the other -- for this type of cooperation gave us a very strong inflow of students. And the acquisition cost for this channel is very easy to control because we can set up terms to acquire the student below certain threshold.

So, I think Jiandong has the split between the online and offline acquisition protected. And Jiandong, you can elaborate further.

Jiandong Lu

Okay. All right. Hi Sheng. As a matter of fact, when starting to reopen our offline learning centers, we do see the very quick pickup of the students enrolled offline as a percentage of the total students enrolled for the whole month. And the percentage from the offline channel actually grow very steadily, almost by 1% every single month, starting from June up to actually October numbers.

So as of now to give you an average number, the offline acquisition still account for actually more than 65% as 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 our very strong momentum in enrollment is actually our conversion rate and increased very steadily since June, almost 1% increase in conversion rate from June until October. So that's a very significant number. The increase in the conversion rate will help us to reduce the acquisition cost for each student.

And other thing we actually find is our offline acquisition cost is significantly lower compared to the same period of last year, which tells as Lihong mentioned, after COVID-19 and some -- many all medium-sized offline operators actually have cash issues and went into bankruptcy. And the competition actually seems to be released quite briefly compared to last year. So that's a very promising phenomenon we have witnessed.

So – and at the same time, we have also seen the decrease in our acquisition costs from the online channels, which demonstrate our abilities to actually learn how to do the marketing online and also reflects our very well-managed investment acquiring students online, unlike other institutions, which are actually pouring their fund just in order to apply students, offer the classes free of charge for multiple lessons for trial, and -- which doesn't generate -- which doesn't contribute profit to the company just for acquiring the volume or the sake of the acquiring volume.

Lihong Wang

Yes. Sheng, just to add that, even though our acquisition cost online reduced a little bit vis-à-vis quarter 2. But if you compare with last year, definitely the online acquisition cost increased pretty significantly. I think you definitely can observe that from other education company as well.

However, as Jiandong mentioned, we utilize our offline channels really effectively, and that is a very low-cost channel, so blended cost of acquisition for us definitely is very well under control.

Sheng Zhong

Thanks very much. That’s very helpful.

Operator

Thank you so much. [Operator Instructions] And our next question comes from the line of Howard Yang from Crédit Suisse. Howard, your line is now open.

Howard Yang

Thank you for taking my questions and congratulations on a solid quarter after 2019. So I got two questions. And I think the first question in terms of the enrollment. I would like to get a little bit details on the third quarter enrollments, especially we mentioned Beijing and Shijazhuang only resumed operations in end of September. So, if that means that these two cities have actually contributed nearly no contributions in the third quarters. And does that mean that the new student enrollment in other cities are actually seeing strong momentum compared to last year?

And at the same time, in terms of the fourth quarter after the reopening of the Shanghai – of the Beijing and Shijazhuang, how are we going to see the current stages of the enrollment in these two cities? And I think secondly, also a follow-up on the acquisition cost. We mentioned that actually, the offline acquisition cost was lower year-on-year, and the share of offline is actually increasing this year. And the blend basis is under control. So could we have any like quantified numbers of the blended CAC in the third quarter? Because I remember in last quarter, you mentioned the blended CAC was actually flat year-on-year?

Lihong Wang

Okay. Yes. Howard, nice to meet you online. So I will answer the first question first. And then the second one, I can ask – answer briefly and then Jiandong give you breakdown. For enrollment, in fact, even during COVID-19 pandemic when offline centers were closed, we actually engaged actively online to do online student acquisition, to set up online demo. So the student acquisition never really stopped. But you can imagine the effectiveness of those online student acquisition is low.

Therefore, you're right, when Shijazhuang, Beijing offline centers closed, the ability to enroll new students is not as strong as we like. However, for the third quarter, you can see that the student enrollment in other cities, Shanghai, Shijazhuang and those are actually very strong compared with last year. It's all in positive territory.

Shijazhuang, for example, we actually see more than 30%, 40% growth year-over-year. And for Beijing and Shijazhuang, even with a majority of the quarter, the centers closed, we're still are able to acquire new students, but slightly lower than last year because Beijing is the biggest contributor. So when Beijing still not fully recovered. Our third quarter enrollment altogether, is still down from last year.

However, in October, all the learning centers are opened. We actually see very strong momentum nationwide. So every city from Beijing to Shanghai, Guangzhou, Shijazhuang, all the enrollments in 2020 October aggregate the SOX, we see more than 40% of enrollment growth year-over-year.

You know that October is not a high season, September was. So we actually are very encouraged to see this number. And we believe the fourth quarter, overall, will have a much stronger enrollment vis-à-vis last year. This is also a measure that we've take into catch up on student enrollment to really increase our market share when other suppliers are actually under weather. So as Jiandong mentioned, strong demand, a fewer providers to compete and so that's the overall enrollment.

On student acquisition costs, I think -- I don't know whether we disclosed in such detail, but for the offline cost, we actually see a major decline quarter-over-quarter. It's about like a 20%, 30% decline for the offline. I think this really contribute to higher conversion rate. And Jiandong, you can give more information to Howard?

Jiandong Lu

Okay. I remember last quarter, we actually share with our investors and also analysts the estimate number for the acquisition cost. For that quarter, it's actually around 5,000 per student. And for this quarter, it's actually lower, which is actually -- we control it actually below 4,500 blended average acquisition cost.

As Lihong mentioned, I can give you a little bit more color on offline acquisition costs. Last year, the same period, offline acquisition costs are actually above 1,000. But this year, it's at least 25% to 30% lower than 1,000 last year. So which tells our offline network, actually, for marketing and enrolling new students a very effective channel and lower cost and very productive.

Lihong Wang

And I wanted to add to that point. In fact, this has been down when we actually sort of -- sales people on the ground. And now we try to increase sales person per school to capture the strong demand. So, hopefully, as I mentioned, the fourth quarter, you'll see a higher growth year-over-year. And so for the six months together, Q3, Q4, we definitely will have a stronger year in 2020.

Howard Yang

Thank you. That’s pretty clear.

Operator

Thank you so much. [Operator Instructions] And your next question comes from the line of Hung-Yeh Kyaw [ph] from [indiscernible]. Hung-Yeh, your line is now open.

Unidentified Analyst

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

Lihong Wang

Okay. For school opening, do you mind you give guidance to home [ph], and then I'll talk about that little more further.

Jiandong Lu

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, pandemics actually basically stop us from suspending our expansion plan for 2020. Initially, early in the year, we plan to open a total of 15 and so the backlog of the 11 will actually be rescheduled to the next year.

So for the 2020 year plan for CapEx in opening new learning centers, it's going to be in high double digits, definitely above 15, so what do -- it really depends on the location. If we can find the good location, we'll definitely will open. So the pace is actually somewhat dictated by whether we can find an optimal decision to open our learning centers. But the plan is definitely high double digits.

Lihong Wang

Right. Just to supplement on that, we see very strong growth in cities like Shenzhen, Guangzhou, and Shanghai. It reminds me the time of 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.

So for us, we definitely think we want to capture the strong market demand in those cities, therefore, next year, we'll catch up on school opening. We do feel -- we -- one thing we need to do is to train enough qualified teachers and salesperson and manager, so that we can really manage those schools well.

On the franchisee side, in -- 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 has good affordability and capable franchisees. So that's number one.

On the OMO model, I think last quarter's earnings release, I mentioned briefly, for OMO, there are actually a couple of components. The first component is to reduce the cost time from 50 minutes to 40 minutes. This adjustment has already started in the first half of September. The new student's coming to K1 to K3 already adopted this new schedule. This alone, of course, will actually help the cost utilization from 100 to 138. So that's 38% of increase of custom utilization.

The second component of the OMO is to move the week day classes above S2 to online. So this one will make the students more convenient when they have schools during the weekdays. And this, of course, will also increase the classroom by 4%. The reason this percentage is small because the majority of our students are actually below S1. So S2, it's only a small portion of the students.

The third component for the OMO is to -- for the online classes, we used to split into three groups so every group is one versus six. And now we actually upgrade our technology target to split the classes into two. So, every class will be one to eight or one to 10 online. So, this alone will actually can increase the online class time for the students and then reduce the teachers' burden to teach three time, so all these measures, together, should be able to increase the classroom utilization by nearly 60%.

Of course, this needs to be gradually implemented. So, we just started, as I mentioned, the new students moved from 50 minute to 40 minute. And then from December, we'll try to adopt that to existing students and then online with the technology ready will enlarge the online class number of students. I think the last step is to reduce the total cost hours. That's a longer-term -- that's next year's plan. I hope it's clear.

Unidentified Analyst

Thank you.

Lihong Wang

I think by moving this to OMO, we'll also be able to open the classes more faster because online, we actually have coring teachers those are part-time teachers. And for the full-time teachers, we already have -- they then more capacity to teach new classes, therefore, help us to recognized revenue faster. So, we wanted to speed up from enrollment to opening new classes.

Unidentified Analyst

Thank you.

Operator

Thank you so much. And your next question comes from the line of [Indiscernible] Wong from UTI Securities. Your line is now open.

Unidentified Analyst

Thank you. Good morning management. My question is also about the OMO model. And so please describe more details about the OMO model, for example, from the student point of view -- from the student side, are there different products concerning about online or offline for the students to choose. Like -- I'd like to know what's the product look like.

And maybe in one product, there are some online part and offline parts or just different products? And also from the complaint side, are the running teams for offline separated? Or they are just one team and also for the teachers, and are the teachers for offline courses separated. So, I'd like to know about the details.

And also, another question is that what is the company's future plan for the OMO model? What will it be like in the future? So that's my question.

Lihong Wang

Yes. Yes. I think everyone now talk about OMO. However, I think it can be all different. It depends on how you organize it. And what's the purpose to offer online merge with offline teaching and learning experience. For RISE, I would say, first, we have this OMO model adopted for our regular courses.

And second, we do offer pure online classes. These two lines are different. But come to OMO model for the regular courses, our approach is online and offline are integrated. This is one course we are teaching, its just we splitted online and offline for different components.

For example, RISE curriculum is highly interactive. It is organized with project-based learning. Therefore, offline is a small group classes with a lot of activities that you need to conduct offline. We do feel this interactive teacher and learning experience really differentiated and focus on not only knowledge transfer or teaching, lecturing, but help our students to know how to communicate, how to collaborate in the team and how to perform a certain leadership functions within the group.

Therefore, when we think about OMO model, we wanted to use the online portion only for knowledge transfer or the focus a texts, for example, language – in the language learning, you have grammar that you can actually easily move online to learn. And in some rating comprehension and also speaking, right, the language you need to practice. Therefore, for the online component, we – for the higher grade, we offer foreign teachers so our students can have the exposure to learn how to speak in authentic language environment and how to practice those grammar and then learn spelling, for example. So this is very tax-driven, can be pretty effectively online.

But for the organized activities, we prefer to do it offline. Even though we are trying to create interactive technologies online so that the pandemic somehow hit certain region or classes, again, we can actually improve the online learning experience going forward than what we had today. So this is – the OMO model is one course. It's integrated. It's just offer different component adjusted to the advantage of online or offline.

Then as you mentioned, the teacher already talked about that a little bit when I answer the question from [indiscernible]. For the Chinese teachers, right now, we actually -- there are employees of RISE. And they -- that's -- they conduct mostly offline, but they have the capability to do online classes as well. And we added foreign teachers, mostly part-time teachers for the online pieces. So the way I already mentioned that we also offer pure online classes.

As of today, mass logic thinking and dual-teacher online English, small classes are purely online. And going forward, we'll continue that effort to offer online classes just for the convenience of our students who wants to have multiple subjects. So that's one way to enlarge the student base. Also the other way to extend our lifetime value for existing students increased ARPU as well. That's a separate…

Unidentified Analyst

Thank you. That’s very clear.

Operator

Thank you so much. And your next question comes from the line of [indiscernible]. Your line is now open.

Unidentified Analyst

Thank you for taking my question. Could management share more information about the market dynamics of child English learning? You just mentioned that one of your competitors went bankruptcy recently. So how do you evaluate the market consolidation opportunity going forward? What's the management plan to cope with the change? And also, how will you capture the opportunity here? Thank you.

Lihong Wang

Thank you. That's a very good question. I would say after the pandemic, the market definitely become more dynamic. On one hand, we see people very actively offer online classes, including AI-driven classes, like Banma [ph], for example.

On the other hand, we see difficulties running offline centers as you see, for example, Disney English exited market. Some of our competitors went under, so I do think the market continues to evolve.

However, it proved a couple of things. One is the underlying demand is still very strong, both online and offline. And English definitely is major subjects that all people wanted to get into. So you do see other people like Wonderslate [ph], for example, acquired Moly-Drop [ph], which is English subject, because English subjects has much bigger addressable market than other subjects. That's the first thing first.

The second thing, I do feel the -- if you wanted to grow, you need to improve user experience to really offer a curriculum that can yield results. So going forward, the companies not only need to spend money to acquire students, it also needs to focus very much on the so-called the whole journey of the learning otherwise, the higher -- very high acquisition costs without a high retention rate and renewal rate, I think that, that business model will not be able to sustain.

The third thing is that you mentioned the consolidation or certain other changes, I do feel, number one, people are very natural in terms of subject -- expecting expansion or cross disciplinary offering. As I mentioned, this is a natural way to dilute the customer acquisition cost and extend the improved time value -- student time value.

The other thing, of course, could be consolidation among educational institutes. I think on that front, it's started. However, it's not easy to do. With the organizational issues and culture, social issues, even the curriculum may be a different kind of learning purpose. For example, if it's test prep plus the so-called the skill base, it will be very difficult to combine.

Therefore, I think the combination or consolidation will happen. However, you need to be skilled for making that happen, make that work. And for RISE, I think, as I mentioned, the first natural way is to extend into cross-disciplinary, taking advantage of the existing student base for the cross-selling.

The second is I do feel we already built a strong offline network. We also have the online infrastructure. We should utilize both networks to expand beyond the current course and curriculum.

Then the next thing is to make certain investment or acquisition to expand our capabilities. However, I think the target -- we've seen quite a number of targets. But I would be cautious to make that move. I hope it's accretive rather than just bringing the students, but also dig a hole for yourself.

So, I -- my answer -- short-term answer is, yes, it will consolidate. And it's a skill for -- it require a lot of skills and careful execution. But I think RISE would be able to do that when we are ready.

Unidentified Analyst

Okay. Thank you.

Operator

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

Howard Yang

Hey. I got another question to quickly follow-up. So, for -- you just mentioned that some small players like Yoshi has actually in the market. So, I just want to understand a little bit the current growth in enrollment. What do -- how much do you think is driven by the -- some smaller players exit the market? And how much is driven by our -- like more efficient marketing approach. Thank you.

Lihong Wang

Howard, it’s a good question. I would say both. One is proactively we are actually setting up, as I mentioned, the cooperation with companies like Gymboree and NYC kid [ph]. We also reach out to Disney English and New Show [ph] to offer the same kind of program that we can have their students transfer to us and absorb a portion of the prepaid tuition, this will be our acquisition costs.

However, this also helped the other education company to recognize revenue, reduce their contingent liability, which is prepared to RISE. So this is a win-win approach for us. We control our acquisition costs. We have a precise target students and the other firm can actually reduce their liability or recognize new revenue.

The other thing, of course, as you mentioned, we increased the word-of-mouth channel. And for example, in Beijing, like, for the trade. So all these actually help us to capture larger market share. Therefore, as Jiandong mentioned, one is, we do have a lower cost, the portion of lower cost channels increased. The second is, the conversion rate actually improved. So both contribute to better customer acquisition cost.

I also think the so-called Tubi channel is something that we're going to really expand going forward. And to manage the Tubi channel, we actually have our team -- very experienced team coming from other industries. I think education industry, in some way, never really paid enough attention to this Tubi channel.

One event I can elaborate a little bit. During the last week of October, we target hospital staff, we had a promotion using so-called private traffic. In the very few days time, we had more than 1,500 -- the hospital staff or parents coming into our community, and we actually can convert that. I sent a promoter and I -- just myself, actually got like 200 leads into this community. So I think we can do this much, much more in the future, to have a better approach on student acquisition and control the cost.

Howard Yang

Thank you. That’s pretty helpful.

Operator

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