Q4 2019 TAL Education Group Earnings Call

Apr 25, 2019 PM UTC 查看原文
TAL - TAL Education Group
Q4 2019 TAL Education Group Earnings Call
Apr 25, 2019 / 12:00PM GMT 

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Corporate Participants
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   *  Echo Yan
      TAL Education Group - Head of IR
   *  Rong Luo
      TAL Education Group - CFO
   *  Linda He
      TAL Education Group - VP of Finance

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Conference Call Participants
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   *  Christine Cho
      Goldman Sachs - Research Division
   *  Mariana Kou
      CLSA Limited, Research Division - Head of China Education and HK Consumer
   *  Alex Xie
      Credit Suisse - Analyst
   *  Sheng Zhong
      Morgan Stanley, Research Division - Associate
   *  Tallan Zhou
      Deutsche Bank AG, Research Division - Research Analyst
   *  Yuzhong Gao
      CICC, Research Division - Analyst

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Presentation
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Operator   [1]
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 Ladies and gentlemen, thank you for standing by, and welcome to the TAL Education Group Fourth Fiscal Quarter and Fiscal Year 2019 Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today.

 I'll now hand the conference over to your first speaker, Ms. Echo Yan. Thank you. Please go ahead.

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 Echo Yan,  TAL Education Group - Head of IR   [2]
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 Thanks, operator. Thank you all for joining us today for TAL Education Group's Fourth Fiscal Quarter and Fiscal Year 2019 Earnings Conference Call. The earnings release was distributed earlier today, and you may find a copy on the company IR website or through the newswires.

 During this call, you will hear from Chief Financial Officer, Mr. Rong Luo; Linda He, Vice President of Finance; and myself, IR of TAL. Following the prepared remarks, Mr. Luo and Ms. He will be available to answer your questions.

 Before we continue, please note that the discussions today 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 are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC.

 Also, our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures.

 I would like now to turn the call over to Mr. Rong Luo. Rong, please.

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 Rong Luo,  TAL Education Group - CFO   [3]
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 Thank you, Echo. Good evening and good morning to you all. Thank you for joining us today on this earning call.

 Our fourth quarter revenue performance was based on healthy growth of small class business in the cities we currently cover and the scaling of our online courses. Net revenue growth in the fourth quarter was 44.1% year over year in U.S. dollar term to USD $726.6 million and 52.2% in RMB terms.

 Student enrollment increased by 71.2% year over year, mostly driven by the growth in online enrollments of Xueersi Peiyou small class.

 GAAP income from operations increased by 71.5% to USD 114.7 million in the fourth quarter. Non-GAAP income from operations grew by 72.4% to USD 137.0 million.

 I will now turn the call over to Linda He, our Vice President of Finance. She will give you an update on our operational progress in the fourth quarter. Following that, Echo Yan, our IR Director, will briefly discuss the full fiscal year highlights and review fourth quarter financials. After that, I will update you on our business strategy execution and discuss our business outlook. Linda, please.

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 Linda He,  TAL Education Group - VP of Finance   [4]
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 Thanks, Rong. Fiscal fourth quarter revenue was based on steady growth momentum in the various education services of our tutoring business. Let me review the business by different revenue streams.

 Let me start with small class and other business, which consists of Xueersi Peiyou small class, Firstleap, Mobby and some other education programs and services. These accounted for 76% of total net revenue, compared to 83% in the fourth quarter last year. The revenue growth rate was 32% in U.S. dollar terms and 39% in RMB terms.

 Xueersi Peiyou small class, which remains our core business, represented 66% of total net revenue compared to 73% in the same year-ago period. The lower revenue contribution from Xueersi Peiyou was mostly due to the faster growth of xueersi.com online courses, which accounted for 17% of total revenue in the quarter compared to 8% in the same period last year.

 Net revenue from Xueersi Peiyou small class was up by 29% in U.S. dollar terms and 37% in RMB terms, while enrollment increased by 45% year over year. This growth rate reflects the stable growth in both Peiyou offline/online class. Currently, we offer Xueersi Peiyou online courses with a complementary service tailored to students' needs in major cities of our network. Xueersi Peiyou online offers regular and short-term courses and other promotion courses.

 Excluding revenue contribution from Xueersi Peiyou online in both the fourth quarters of fiscal year 2018 and 2019, the Peiyou offline small class revenue increased by 25% in U.S. dollar terms and 32% in RMB terms, while enrollments increased by 18% year over year. In addition, excluding Peiyou offline promotion and short-term courses in this quarter, Peiyou offline normal priced courses revenue increased by 33% in RMB terms, while enrollments increased by 21% year over year.

 In the fourth fiscal quarter, Peiyou online accounted for approximately 7% of total Xueersi Peiyou small class revenue and 34% of total Xueersi Peiyou small class enrollments. In the same quarter of fiscal year 2018, revenue and enrollments from Peiyou online were 3% and 19%, respectively, of total Xueersi Peiyou small class business.

 Xueersi Peiyou small class revenue from top 5 cities, which is Beijing, Shanghai, Guangdong, Shenzhen and Nanjing, grew by 26% year over year in U.S. dollar terms and accounted for 58% of Xueersi Peiyou small class business. Revenue generated from cities other than the top 5 grew by 34% in U.S. dollar terms, and the other cities accounted for the remaining 42% of the Xueersi Peiyou small class business. This growth momentum is supported by broad market demand across all cities, incremental ramp-up of enrollment from our earlier classroom expansion, as well as our ongoing operational efficiency improvement.

 We continue to expand our offline and online course offerings in both curricular and extracurricular subjects. As before, Chinese and English courses keep growing at a steady pace. By the end of February 2019, we have offered Xueersi Peiyou Chinese classes in 19 cities and English classes in 24 cities. Furthermore, Firstleap, Mobby, and a few other education programs' revenue and enrollments all grew at a solid pace in the fourth quarter of fiscal year 2019. We expect that these diversified courses will gradually contribute more to our overall business.

 Next, I'd like to briefly discuss our Zhikang one-on-one business. This business had a steady fourth quarter and achieved year-over-year revenue growth of 22% in U.S. dollar terms and 28% in RMB terms. Zhikang one-on-one accounted for 7% of total revenue compared to 8% in the fourth quarter of fiscal year 2018.

 Let me update you on our capacity expansion. As you know, we are pacing our offline capacity growth as we continue to invest in new technology and online business to keep improving our overall operational efficiency and ensure we are following the new standards and regulations that are currently being implemented. We added a net 10 learning centers of which 7 were Peiyou small class learning centers, 3 Firstleap centers, 1 one-on-one center, and 1 net closure of Mobby learning center to seek the opportunity of sharing learning center space with the Firstleap learning center. During the quarter, we added 235 Peiyou small class classrooms.

 During the quarter, we entered into 2 new cities with the dual-teacher small class learning center in each city, further expanding our geographic coverage. The new cities are Tangshan and Hong Kong. By the end of February, we had 676 learning centers in 56 cities across China of which 479 were Peiyou small class, 15 were Mobby small class, 81 were Firstleap small class, and 101 were Zhikang one-on-one. Looking to Q1 till now, we have rented approximately 20 Peiyou small class learning centers, and we expect to add a few more and close down some learning centers based on standard operations. These estimates reflect our current expectation, which is subject to change.

 Moving now to our online business. Fourth quarter revenue from xueersi.com grew by 187% in U.S. dollar terms year over year and 204% in RMB terms, while enrollments grew by 146% year over year to over 1.7 million. Online contributed 17% of total revenues and 39% of the total enrollments this quarter, compared to 8% of total revenue and 27% of total enrollments in the same year-ago period, respectively. The rapid scaling of online courses was mainly driven by sales and the marketing online customer acquisition efforts for the winter term promotion, retentions of the previous quarters as well as the ongoing momentum in demand for online education.

 In the fourth fiscal quarter, short-term and promotion online courses accounted for 42% of xueersi.com enrollments and 3% of xueersi.com revenue. In the same quarter of fiscal year 2018, short-term and promotion online courses accounted for 47% of xueersi.com enrollments and 6% of xueersi.com revenue, respectively.

 On a final note, I'd like to inform you that starting from fiscal year 2020, we will only disclose the operating metrics of normal priced long-term courses for both small class and other business and for online.

 With that, I will now turn the call over to Echo Yan for the fiscal year highlights and the fourth quarter financial update. Echo, please.

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 Echo Yan,  TAL Education Group - Head of IR   [5]
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 Thanks, Linda. Let me first briefly recap fiscal year 2019. For fiscal year 2019, TAL reported net revenue of [USD 2,563.0 million,] (corrected by company after the call) representing a 49.4% increase from USD1,715.0 million in fiscal year 2018. The increase was mainly driven by an increase in total student enrollment.

 Cost of revenues increased by 32.0% to USD 1,164.5 million from USD 882.3 million in the fiscal year 2018. The increase in cost of revenues was mainly due to an increase in teacher compensation and rental costs. Non-GAAP cost of revenues, which excluded share-based compensation expenses, increased by 32.0% to [USD 1,163.7 million] (corrected by company after the call) from USD 882.0 million in fiscal year 2018.

 Gross profit increased by 68.0% to USD 1,398.5 million from USD 832.7 million in fiscal year 2018.

 Income from operations increased by 63.7% to USD 341.6 million from USD 208.6 million in fiscal year 2018. Non-GAAP income from operations, which excluded share-based compensation expenses, increased by 63.8% to USD 418.9 million from USD 255.8 million in fiscal year 2018.

 Net income attributable to TAL increased by 85.1% to USD 367.2 million from USD 198.4 million in fiscal year 2018. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses, increased by 81.0% to USD 444.5 million from USD 245.6 million in fiscal year 2018.

 Let me now go through some other key financial points for the fourth quarter of fiscal year 2019. The breakdown of ASP for the various business is as follows. Xueersi Peiyou small class ASP decreased by 5% in RMB and 11% in U.S. dollar terms year over year. Excluding the impact from Peiyou online and the promotion and short-term Peiyou offline courses, Peiyou offline normal priced course ASP increased by a high-single digit percentage in RMB terms year over year.

 Zhikang one-on-one ASP increased by 2% in U.S. dollar terms and 8% in RMB year over year.

 Online courses ASP increased by 17% in U.S. dollar terms and 23% in RMB year over year during the fourth quarter, partially due to the product mix change.

 Cost of revenue increased by 24.1% to USD 306.2 million from USD 246.7 million in the same year-ago period. The increase in cost of revenue was mainly due to an increase in teacher compensation and rental costs. Non-GAAP costs of revenues, which excluded share-based compensation expenses, increased by 24.1% to USD 306.0 million from USD 246.6 million in the same year-ago period.

 Gross profit increased by 63.3% to USD 420.4 million from USD 257.4 million in the same year-ago period. Gross margin for the fourth quarter was 57.9% as compared to 51.1% for the same period of last year.

 Selling and marketing expenses increased by 73.8% to USD 136.2 million from USD 78.3 million in the same year-ago period. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 72.5% to USD 132.9 million from USD 77.0 million in the same year-ago period. The increase of selling and marketing expenses in the fourth quarter was primarily a result of more marketing promotion activities to expand our customer base and brand enhancement, as well as a year-over-year rise in the compensation to sales and marketing staff to support a greater number of programs and service offerings.

 Operating income increased by 71.5% year over year to USD 114.7 million. Non-GAAP operating income increased by 72.4% to USD 137.0 million.

 Other income was USD 24.7 million in the fourth quarter of fiscal year 2019, mainly due to gains from the fair value change of an equity security with readily determinable fair value and remeasuring the fair value of the previously held equity interests during a business combination achieved in stages.

 Income tax expenses was USD 33.2 million in the fourth quarter, compared to USD 8.7 million in the same year-ago period.

 Basic and diluted net income per ADS were both USD 0.17 in the fourth quarter. Non-GAAP basic and the non-GAAP diluted net income per ADS, which excluded share-based compensation expenses, were USD 0.21 and USD 0.20, respectively.

 From the balance sheet, as of February 28, 2019, we had a total of USD 1,515.6 million in cash, cash equivalents and short-term investments, compared to USD 1,498.9 million as of February 28, 2018.

 Capital expenditures for the fourth quarter of fiscal year 2019 were USD 209.1 million, an increase of USD 178.3 million from USD 30.8 million in the fourth quarter of fiscal year 2018. The increase was mainly due to the purchase of land use rights, leasehold improvements and the purchase of servers, computers, software systems and other hardware for the Company's teaching facilities and the mobile network research and development.

 As of February 28, 2019, the Company's deferred revenue balance was USD 436.1 million, compared to USD 842.3 million as of February 28, 2018, representing a year-over-year decrease of 48.2% mainly due to the change of tuition fee collection schedule to meet certain regulation requirements and adoption of Revenue from Contracts with Customers, the Topic 606, beginning on March 1, 2018.

 Now I will hand the call back to Mr. Luo to briefly update you on our strategy execution and provide the business outlook of the next quarter. Rong, please.

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 Rong Luo,  TAL Education Group - CFO   [6]
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 Thank you, Echo. These business results reflect solid online business growth, healthy development of our offline business, as well as the ongoing efforts we have made in the transition from only running one business model to multiple-pronged education service model, including online and other diversified education programs and the projects during the fiscal year 2019.

 As mentioned before, the education industry, including afterschool tutoring market, is currently in the midst of ongoing education reforms, standardizations and regulation. We have followed the government directions, and where needed, we'll continue to adjust our business operations accordingly. All these policies are aimed to further improving our standards and ecosystem of the entire industry.

 TAL is a technology-driven education company, and our mission is to advance education through science and technology. In the past year, and as always, we have been doing our best to leverage our advantages to enrich our course offerings, gradually add and optimize more education models. See opportunities to reduce the cost, innovate teaching methods and skills etc. All these joint efforts have made us capable enough to adapt to market changes, meet evolving customer needs, and meanwhile explore the flexibility to gradually enlarge our geographical coverage with the right product portfolio and affordable pricing.

 Going forward, we will continue to pursue a healthy and sustainable growth in our learning center and geography networks. We will continue to invest in new technology and in new business models to combine growth with improved efficiencies in the long term.

 Turning now to our business outlook. Based on the Company's current estimates, total net revenues for the fiscal quarter of fiscal year 2020 are expected to be between USD 699.3 million and USD 710.3 million, representing an increase of 27% to 29% on a year-over-year basis. If not taking into consideration of the impact of potential change in exchange rate between RMB and the U.S. dollar, the projected revenue growth rate is expected to be in the range of 33% to 35% for the first quarter of fiscal year 2020. These estimates reflect the Company's current expectation, which is subject to change.

 That concludes my prepared remarks. Operator, we are now ready to take questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions). Our first question comes from the line of Tallan Zhou from Deutsche Bank.

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 Tallan Zhou,  Deutsche Bank AG, Research Division - Research Analyst   [2]
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 I just wanted to ask, the fourth quarter numbers seemed to be quite strong while the first quarter guidance seems to be a little bit soft. I just wanted to see any particular reason what has happened over the 3 months period. Thanks.

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 Linda He,  TAL Education Group - VP of Finance   [3]
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 For the fourth quarter revenue, which is better than what we guided before, it was mainly due to the better than expected performance of our major business lines. Xueersi.com, Xueersi Peiyou and some other business sectors' revenue all increased faster than expected.

 Besides that, compared with Q4 of previous year, Q4 fiscal year 2019 was also benefitting from the course scheduling. It benefitted from the seasonal impact of a full winter term and early spring semester, as well as a shifting courses due to teacher exams in November of 2018, as we had guided earlier.

 For the Q4 margin, our non-GAAP OP margin increased by 3.1%, and the gross margin increased by 6.8% year over year. And our non-GAAP OP margin for the whole fiscal year of 2019 increased by 1.4%. Gross margin increased by 6% year over year. The improvement was due to several factors. Firstly, our overall efforts of improving operational efficiency and facilities utilizations have continued to achieve some good results in Q4. Plus, as you can see, we have been slowing down our capacity expansion in Q4 and also in the year, fiscal year 2019, either due to the policy impact, or our own effort to control the expansion rate to pursue overall sustainable development of our online business. The healthy offline business will give us more leverage to further support our online business and other newly initiated projects and programs to respond to market trends and meet diversified needs. And secondly, our online business performed well, too, in this quarter. Revenue from xueersi.com increased by more than 200%, which leads to better gross margin due to cost of structure efficiency improvement. And thirdly, comparing with Q4 of fiscal year 2018, Xueersi Peiyou revenue this quarter was positively impacted by courses scheduling, so the revenue recognized in Q4 of fiscal year 2019 was higher than expected. Also, all these factors jointly contributed to a stronger than expected profitability in Q4 of fiscal year 2019. And we have been paying close attention to keep improving our Peiyou business overall operational efficiencies, especially the retention rate, classroom utilization rate, classroom fulfillment rate as well as staff utilization. Meanwhile, we also keep making efforts to diversify our Peiyou class offerings with a paced and healthy offline capacity expansion speed. We also make ongoing efforts to make our operational progress more and more data-based, transparent and visualized. We are also seeking out opportunities to integrate online and offline products and activities, especially keep develop and leverage the advantages of xueersi.com and Xueersi Peiyou online. It is still in its early stage to explore the right products, which can better suit the customers' needs with continued technology and data innovation. Online and offline are not replacing each other, but complementary with each other. We entered into 12 new cities in fiscal year 2018 and 14 new cities in fiscal year 2019. We entered these 26 cities purely by the offline dual-teacher model, which is a new offline model, but based on education and online teaching technology and data development. Our online business still maintains a triple-digit percentage top line growth. Other operational indicators, such as the retention rate, are very healthy. So for the purpose to successfully achieve the implementation of our strategy, we must consider and deal with all the market dynamics and uncertainties as well as potential impacts led by the competitions. One day success is not the eventual success, there are new challenges every quarter. And we need to be humble and modest, forever focused on a diversified and qualified product portfolio and services, create real value to our students and parents.

 And for the Q1 guidance of the revenue, there is something related to the scheduling staff. The working day adjustment for Qingming and the coming May 1st Labor Day's holiday has some impact to our Q1 course scheduling. So some of the courses have been delayed to the next quarter. That's led to revenue will not be recognized in Q1, which actually will also impact our Q1 margins. I think that answers your question. Thank you.

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 Rong Luo,  TAL Education Group - CFO   [4]
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 Thank you, Tallan. Some complementaries. I think Q1 is actually we need to put our seasonality impact into our considerations, but this is one-time event, and that will lead to next quarter. Thank you, Tallan.

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Operator   [5]
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 Our next question comes from the line of Sheng Zhong from Morgan Stanley.

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 Sheng Zhong,  Morgan Stanley, Research Division - Associate   [6]
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 Firstly, I want to ask what the margin outlook for the first quarter. And secondly, want to answer more -- understand more about your online strategy. We noticed that there are a lot of new online courses in the website, including short-term courses, and also a lot of course upgrade. And the overlay rate of regular price cost in this summer is also higher. So, could you please talk about the thinking about online business strategy and what the proper expectation in this year? Thank you.

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 Rong Luo,  TAL Education Group - CFO   [7]
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 I think the first quarter margin situation, in general as I said before, we don't give very clear guidance about that. But I think Linda has mentioned just now that considering the scheduling issues, they were both impacted top line and bottom line. And secondly, I think your question's maybe more about our online strategies, especially Xueersi online school in the coming year. I try to really answer your questions from 4 different dimensions. In the first one, product. Last year, you probably can see that it's the very first year we start to boost our online business. The revenue growth and the enrollment growth are both triple digit, which looks good. But in the reality, actually, in product perspective, we don't make good enough progress in the product perspective. So I think that's why even in previous quarters, so we started to focus a lot on product itself. For example, we should not only have a product cost student a few thousand RMB, but we also need to leverage the power of technology to make sure the service process can be automatic and transparent and can reduce the cost structure, which enable us to provide a course in even lower cost and lower prices. And the product today is also have some kind of limitations because we still need a teaching system to provide support. So we wish we can develop some other products, even a light class, a light online courses to support more people. So the product portfolio itself must develop and must continue to evolve maybe even faster than what we did last year.

 Secondly is operating model. Last year, you probably can see we grow online around 100%, plus/minus, of which lead to we have hired a lot of new teacher, teacher assistants and technical people into our team. Our very rapid growth sometimes means the management challenge will be much more difficult than before. So we need to spend some time to make sure we can optimize our operating models to make sure we can manage a fast-growing business, especially in the people and organizational perspective. And at the same time, some of the process today is still manual process in the whole learning circle. So we also need to make sure we can leverage our IT developments to make process automatic and try to improve the efficiency in a much bigger way. So the whole overall operating model also needs to be evolved.

 And in the third places, we're also continuing to focus on the research and development. Even in the past, we made maybe more or less progress in the technology perspective, and we have launched some of the new online products in the past few quarters. But compared to the potentials that technology can leverage, actually we still have a lot of space we can go. For example, how we can reinforce our research and development to analyze the students' behavior more intelligently. How can we leverage the students' data to assess the students in a more diversified way. How we can integrate that information from the images, videos, voices, writings and something else, all of this data to automatically recommend maybe a much better learning path to the students. How we can leverage our internet platform to provide high-quality and a matched content and services and some kind of low cost to serve as many as possible students. I think all of these areas will have a lot of spaces we need to develop and that also require a significant number of investment in IT perspective, same as what we did before.

 And in the fourth part, and we also need to optimize our way of the sales and marketing methods. Last year was the first year we used our marketing channel to attract online customers. And from a number perspective, we're making some progress, but also we have a lot of lessons learned in the marketing channels. In the first place, no matter how much marketing dollars we spend, the key for success still need to come back to the competitiveness of the services and the products. And if we're purely relying on their online marketing dollar investment, in the short term we can get the numbers, but in the long run that will destroy our organization and products' competitiveness, because sometimes if we call in too much on a very short term, which will impact our focus on quality. So we need to be very careful. It's we need to prove the product quality as the first priority, and we need to make sure our product can meet the needs from the parents and students and make them happy.

 And secondly is if we look into our marketing strategy, the marketing dollar, we spend marketing dollar to attract the customers, I think that's a very complicated process. In the first beginning, we need to make sure our product can touch more people. But right after that, we need to attract them to register our accounts. And after the registrations, we need to persuade some of them, maybe as much as possible, to join our pilot classes. And we want to convert students who experience our pilot classes to our regular classes. So there are a lot of operating details over there. So we not only need to do our job better and better in the customer touch phase, but we also need to improve the whole process in operating perspective.

 In the third place, I think, about the marketing strategy, I think the market is open and transparent. Especially this year we see a lot of our counterparts in this company and some other online education companies, they also focus a lot in this area. And we also see some company has invest a lot of marketing dollars in both online and offline channels. So we need to continue to watch our -- some other counterparties in these areas, what are they doing, where they are doing good, where are they doing bad. And we need to learn from each other and to be humble to try to deliver our healthy growth. So all in all, I think the online business deliver a very healthy and very good number last year. And looking forward to this year, we still feel very confident, but we still need to try to improve product, operating model, research and development and marketing perspective. Thank you, Zhong Sheng.

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 Sheng Zhong,  Morgan Stanley, Research Division - Associate   [8]
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 Thank you very much, and I'm looking forward to the strategy execution.

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Operator   [9]
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 Our next question comes from line of Natalie Wu from CICC.

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 Yuzhong Gao,  CICC, Research Division - Analyst   [10]
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 This is Yuzhong on behalf of Natalie. We have 2 questions. So the first one is we have observed strong growth from both Peiyou online as well as xueersi.com. I wonder if you have observed any -- for those two businesses are getting bigger and bigger. So I wonder if you have observed any cannibalization between the two businesses. So that's the first question. And second is can you provide some color around your offline capacity expansion target in fiscal year 2020. Thanks.

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 Rong Luo,  TAL Education Group - CFO   [11]
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 I think the first question, that's a very interest topic. And by the end of today, I think most of our online students still coming from the cities we have fiscal presence, which means tier 1, tier 2 cities. And if look into the growth numbers city by city, actually we are very happy to see both online and offline maintain a very healthy growth in the both the revenue and the enrollment perspective. So I can't say there is no cannibalization, but we can say is we don't see material impact from there. And secondly, about your question from capacity expansion, right?

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 Yuzhong Gao,  CICC, Research Division - Analyst   [12]
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 That's right.

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 Rong Luo,  TAL Education Group - CFO   [13]
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 For capacity expansion -- okay. So I think right before I answer your question about capacity, we need to recap some numbers. In fourth quarter, our Peiyou small class offline normal price class, the enrollment increased by 21%. The Xueersi online school increased by 146%. If we're looking into the full-year number, these two numbers become over 30% and 188%. And we'll also recap the other numbers. I think starting from the year 2012 to the year 2017, and on average, we enter around 2 to 4 new cities every year. And in the year 2018 and 2019, we have entered 26 cities through dual-teacher models. I think when the business in different stage of development, and we need to evaluate -- we need to use different metrics of KPI to evaluate their performance. In the past few quarters, especially in the path few months, we have very clearly seen the online technology and online education has much bigger potential than what we expected. And the growth rate for the online sector is much faster than offline. These numbers are not only good in my company, but also good in the other companies in areas like Zuoyebang, Yuantiku and some other companies. And online has a very important new market space for all the education providers.

 And secondly, you also start to go into the dual-teacher models which we have start pilots 3 years ago. We have seen in the dual-teacher model's classroom, or even in the exactly the same offline classroom, even the classroom is the same, but they have been changed through our technologies now. We use our AI technology to capture a lot of information to do analysis. And we also use the intelligent teaching system and the intelligent class assistant to provide teaching services. We also leverage the mobile devices to integrate both in the classroom and in the families. I think all of these new technology and new device, they have provide new opportunities for the whole industry; not only for us. But we are one of the leaders in this area. We strongly believe that technology can change a lot of things. So if the dual-teacher model and online education become more important in growing your top line, we need to be very careful about our definition of capacity. We're not only looking into the classroom numbers, the city numbers for the offline model. So we'll also need to look into the capacity of the online spaces.

 What is the bottleneck for us to support more people through online education platform? What is the technical challenges for us to providing the massive online content services to more people? And what is the future trend in technology perspective in the education part? So as a company, again, we still will try to pursue the healthy growth. And we care more about quality of the growth than the number of the growth. And we also believe that technology and the data-driven systems can also give more transparency and more visibility, and in the end more scalability for our business growth in the longer term. So in short, we will be very careful about the capacity growth in offline, but we also focus even more important for our online capabilities. And last year, we grow our capacity by around 10%-plus. I think around 13%, so 1 - 3. This year, we're almost in the similar level, but this will change based on the new development of online and dual-teacher models. So we'll keep you guys posted every quarter if we make any progress in that part. Thank you.

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 Yuzhong Gao,  CICC, Research Division - Analyst   [14]
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 Thank you. Very helpful. Very quick follow up. How many cities have already use Xueersi Peiyou online model? And how many cities do you plan to use this model to enter this year? Thank you very much.

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 Rong Luo,  TAL Education Group - CFO   [15]
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 You mean how many cities I plan to enter through online model or dual-teacher model or other the numbers?

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 Yuzhong Gao,  CICC, Research Division - Analyst   [16]
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 Using the Peiyou online model.

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 Rong Luo,  TAL Education Group - CFO   [17]
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 Okay. Peiyou Live is a complementary services of the Peiyou offline models. So in theory, all the Peiyou offline learning centers, they have chance to be equipped with Peiyou Live services. We will try our best to try to cover more cities as much as possible, with the consideration of we need to make sure the quality and the bandwidth are good enough to support that. And as for information for the dual-teacher model, you should ask how many new cities we want to enter through dual-teacher models. I think 2 years ago we entered around 12. Last year it's around 14. So this year maybe similar numbers, in that range. Thank you.

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Operator   [18]
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 Our next question comes from the line of Mariana Kou from CLSA.

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 Mariana Kou,  CLSA Limited, Research Division - Head of China Education and HK Consumer   [19]
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 I think my question is more on the mix of different channels and how should we think about the margins at the group level. Because I think for FY 2019, we are putting more graded offline growth, capacity growth, and so we actually reported pretty nice margin expansion. But looking into the next year, you continue to have pretty outpaced offline capacity growth, but a very strong online expansion. How should we try and think about the group level margin? Thank you.

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 Rong Luo,  TAL Education Group - CFO   [20]
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 Okay. I think you asked very good questions. When we evaluate our good level margins, we balance both online and offline. We don't want to separate out. They are not isolated. Actually, they are linked together. So if we look to last year for the whole year, we grew our non-GAAP OP margin by around 1.6 points. And we use our leverage, the margin leverage from offline to compensate some of the challenges in online perspective. And looking into this year, I think the general directions are almost quite similar. Of course, we have some good news and some challenges in the margin perspective. On one side, we are also continuing to see, we continue to improve our operation efficiencies in the Peiyou class, in the Peiyou small class business. And we're also happy to see our Peiyou Live is also making progress on top of the offline growth. And Xueersi online school is also making good progress in the topline perspective. But it's a little bit difficult for us to predict their margin situations for the online part is because today still only April of this year, we are right in the beginning of the summer term, which is the most important time, the big time for the whole year. And we need to keep eyes open to other competitors in this industry, look into what their reactions, what their plans and what their promotions and all of that. And we keep our eyes open if anything important will follow. So it's a little bit difficult to give you exact numbers what kind of margins will we deliver in a full-year perspective. But in general, if we want to deliver our online growth again, more high growth again, that will bring some of the challenge in the total group levels margin. But we will balance our online and offline segments to make sure the group level will deliver a kind of stable performance year over year. And so for the margin, detailed guidance about the margin, we still cannot give a very exact numbers, but we will keep you guys posted about any kind of progress, including good news and challenges quarter over quarter.

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Operator   [21]
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 Our next question comes from the line of Alex Xie from Credit Suisse.

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 Alex Xie,  Credit Suisse - Analyst   [22]
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 My first question is also about online strategy. So as management have mentioned, currently most students of online still come from cities where there are Peiyou learning centers. So what are initiatives, or do we have any plans to ramp up in those cities without a Peiyou offline presence for the online business? And second question is about summer promotion in this year. We heard from the market that some competitors are doing some changes. So are we going to make some changes, for example, in pricing of promotion courses?

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 Rong Luo,  TAL Education Group - CFO   [23]
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 I think for online strategies, and same as what I said just now, we will try to improve the strategy in products, the operating model, marketing and technology investments. And we have a lot of lessons learned last year, even we have loose numbers. But from management's perspective, we still have challenges. And we see we need to try to resolve if we want to be more scalable in the long run to support more and more people. And it's good for us to know the challenges compared to last year. And the whole team is working on this. We feel quite confident about that.

 And the summer promotions, I think the summer promotions for the online promotions, yes, you are right. We start to see a lot of online companies, they are doing some promotions. Not only the traditional offline education company, but also some new online companies. And the competition in online perspective, it's much more fierce than last year. You will also need to get prepared for that. But on the other side, the education is also our unique industry, which is quite different from ecommerce industry. The purely promotions and the purely marketing dollars cannot automatically lead to a better number. So we have a lot of operating details, as I mentioned, at every operating stage. So as the whole company, the product quality has first priority, and we try to automatically improve our process to hereafter support their students and the parents better. And the market's very dynamic. Even maybe every day we can see something different. But we as a company who has support millions of online users last year, and we also we will be very humble to see what's happening in this market and to reinforce our team's execution to make sure that we can fully prepare for any challenges in the future. Thank you.

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 Alex Xie,  Credit Suisse - Analyst   [24]
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 Maybe just one. Thank you very much. It's very helpful. Maybe just one follow up. Do we think we have some synergies between the -- sort of special synergies between the cities where there are Peiyou offline centers, and at the same time they can promote our online enrollment in certain cities?

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 Rong Luo,  TAL Education Group - CFO   [25]
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 I think because our Xueersi online business, the brand name is Xueersi online. We put Xueersi over there. So they have almost similar brand. So in the places we have physical learning center, definitely we can benefit from there. But on the other side, you also are going to see is because when we're supporting more online users, we start to see our brand awareness in some cities even we don't have presences also improving. So I can't say we find a perfect way to target that kind of market, but the whole team will continue to work very hard to make sure we can penetrate the opportunities right over there. And in the tier 1 and tier 2 cities today, we support close to million online users, which give us a lot of lessons learned. When we go into low-tier cities, all of these lessons can be beneficial to us.

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Operator   [26]
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 Our next question comes from the line of Christine Cho from Goldman Sachs.

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 Christine Cho,  Goldman Sachs - Research Division   [27]
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 I have 3 quick questions. So firstly, I see that the deferred revenue was down close to 50%. And if you take kind of a like-for-like growth, if assuming no impact from the new regulatory requirements, how would the growth look like? And then secondly, I think we saw that the user acquisition cost was up only 6%, and seems pretty good. And how -- we would like to understand how this was achieved and whether this would be sustainable. Thank you.

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 Linda He,  TAL Education Group - VP of Finance   [28]
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 Let me answer the first question. Our deferred revenue was affected both by the new accounting policy Topic 606, and we made refund reclassification. And also by the schedule change in tuition fee collection. So if we took into consideration both the refund reclassification and the schedule change in tuition fee collection and make an apple-to-apple comparison, the deferred revenue at the end of first quarter of fiscal year 2019 would increase by more than 30% year over year. And once we have circled a full year, we may start to make apple-to-apple comparison of year-over-year deferred revenue balance.

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 Rong Luo,  TAL Education Group - CFO   [29]
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 Yes. So there is -- apple-to-apple comparison deferred growth more than 30%, 3-0. And your second question about our customer acquisition cost, I think when we look into the acquisition costs, we need to put them into two ways. The first way is we have some enrollments coming from branding channels. The parents know us and know our name and trust our brand, so they come to our Xueersi online school automatically. So we don't need to pay that much in the branding channels. And we also doubly encourage the parents' referrals. So our current -- so we try to leverage our word-of-mouth marketing and the branding and the reputations to make sure we can attract more students from branding channels. And we also invest in the third party channels, like Wechat, like Baidu and some other channels. So for that type of channels, we need to be very careful about how much we invest over there, and for their leads, we have got from that kind of channels, we need to make sure our operation process can be much more accurate than before. Not only attract them to see us, but also let them register and convert into pilot class, convert into regular class. We have a lot of operation details we need to improve over there. So in the long run, we will maintain lifetime values perspective to look into every new customer we acquire every quarter. And so far, we feel good about our numbers. But this market is very dynamic. It's fast-changing, and we also see our competitors do a lot of things there. So we're going to make sure we keep as open about any changes in this market and we will react quickly. Thank you.

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Operator   [30]
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 Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.




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