Q1 2020 TAL Education Group Earnings Call

Jul 25, 2019 PM UTC 查看原文
TAL - TAL Education Group
Q1 2020 TAL Education Group Earnings Call
Jul 25, 2019 / 12:00PM GMT 

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

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Conference Call Participants
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   *  Alex Xie
      Crédit Suisse AG, Research Division - Analyst
   *  Lucy Yu
      BofA Merrill Lynch, Research Division - Research Analyst
   *  Mark Li
      Citigroup Inc, Research Division - Director
   *  Sheng Zhong
      Morgan Stanley, Research Division - Associate
   *  Yuzhong Gao
      China International Capital Corporation Limited, Research Division - Analyst

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Presentation
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Operator   [1]
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 Thank you for standing by, and welcome to the TAL Education Group First Fiscal Quarter 2020 Earnings Conference Call. (Operator Instructions)

 I must advise you that this conference is being recorded today, Thursday, 25th of July, 2019.

 I would now like to hand the conference over to your first speaker today, Mr. Echo Yan, IR Director of TAL. 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 First Fiscal Quarter 2020 Earnings Conference Call. The earnings release was distributed earlier today, and you may find a copy on the company's 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 earnings call. Our first 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. Revenue growth in the first quarter was 27.6% year-over-year in U.S. dollar terms to USD 702.8 million and 36.3% in RMB terms.

 Total student enrollments of normal price long-term courses increased by 40.6% year-over-year, mostly driven by both the growth in online enrollments as well as Peiyou small class. GAAP income from operations decreased by 23.6% to USD 57.3 million in the first quarter. Non-GAAP income from operations decreased by 7.3% to USD 83.4 million. The decrease was mainly due to the increase in sales and marketing and IT investment in our online business as well as other initiatives. 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 first quarter. Next, Echo Yan, our IR Director will review the first quarter financials. After that I will update you our -- on our new 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 first 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 78% of total revenue compared to 83% in the fourth quarter last year. The revenue growth rate was 20% in U.S. dollar terms and 28% in RMB terms. Xueersi Peiyou small class, which remains our core business, represented 64% of total net revenue compared to 71% 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 15% of total revenue in the quarter compared to 9% in the same period last year. As we announced on the previous earnings call, from this quarter onwards, we only disclose the enrollment and ASP performance of normal priced long-term courses for our business. Net revenue from Xueersi Peiyou small class was up by 14% in U.S. dollar terms and 22% in RMB terms. Online normal priced long-term courses enrollments increased by 21% year-over-year. This growth rate reflects the stable growth in both Xueersi Peiyou offline/online class. Peiyou offline small class revenue increased by 10% in U.S. dollar terms and 17% in RMB terms, where offline normal priced long-term courses enrollments increased by 13% year-over-year.

 With Peiyou online, as you know, we offer the online courses as a complementary service to Peiyou offline in major cities of our network. Peiyou online offers regular and short-term courses and other promotion courses. In the first fiscal quarter, net revenue from Peiyou online was up by 148% in U.S. dollar terms and 165% in RMB terms, where normal priced long-term course enrollments increased by 184% year-over-year.

 Peiyou online accounted for approximately 7% of total Xueersi Peiyou small class revenue and 10% of total normal priced long-term Xueersi Peiyou small class enrollments. In the same year ago period, the first fiscal quarter of fiscal year 2019, Peiyou online accounted for 3% of total Xueersi Peiyou small class business and 4% of total normal priced long-term Xueersi Peiyou small class enrollments.

 Growth in small class business remains widely distributed across the cities we currently cover. Xueersi Peiyou small class revenue from top 5 cities, which are Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, grew by 11% 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 19% 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 enrollments from our earlier classroom expansion as well as our ongoing efforts to improve operational efficiency.

 We continue to enrich our cost offerings, with a growing number of offline/online courses in curricular and extracurricular subjects. Chinese and English courses are well on the way to become mainstream courses in our curriculum and continue to grow at a steady pace. By the end of May 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 healthy pace in the first quarter of fiscal year 2020. 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 segment had a solid first quarter and achieved year-over-year revenue growth of 21% in U.S. dollar terms and 29% in RMB terms. Zhikang one-on-one accounted for 8% of total revenue, similar percentage as in the first quarter of fiscal year 2019. Let me update you on our capacity expansion. As always, we pursue well paced offline capacity growth, and at the same time, invest in new technology and online business to continue to improve overall operational efficiency and closely follow all the standards and regulations.

 We added a net 49 learning centers, of which, 35 were Peiyou small class learning centers; 2 Mobby learning centers; 1 Firstleap center; and 11 one-on-one centers.

 During the quarter, we added 746 Peiyou small class classrooms. Meanwhile, we continue to enter new cities at pace according to plan. In the first quarter, we entered into one new location, Langfang, with the dual-teacher small class learning center, further expanding our geographic coverage. Overall, by the end of May, we had 725 learning centers in 57 cities across China, of which, 514 were Peiyou small class, 17 were Mobby small class, 82 were Firstleap small class, and 112 were Zhikang one-on-one.

 Looking to Q2, till now, we have rented approximately 8 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. First quarter revenue from xueersi.com grew by 108% in U.S. dollar terms year-over-year and 122% in RMB terms, while normal priced long-term courses enrollments grew by 121% year-over-year to over 500,000. Online contributed 15% of total revenues and 31% of total normal priced long-term enrollments this quarter compared to 9% of total revenue and 19% of total normal priced long-term courses enrollments in the same year ago period, respectively.

 The rapid growth in online business was supported by a dedicated sales and marketing efforts, retention of the previous quarters, as well as the rising demand for online education.

 With that, I will now turn the call over to Echo Yan, for the update on the first fiscal quarter financial results. Echo, please.

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 Echo Yan,  TAL Education Group - Head of IR   [5]
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 Thanks, Linda. Let me now go through some key financial points for the first quarter of fiscal year 2020. The breakdown of ASP for the various businesses is as follows. Normal price long-term Xueersi Peiyou small class ASP increased by 0.8% in RMB and decreased by 5.6% in U.S. dollar terms year-over-year. Peiyou offline normal price long-term courses ASP increased by a low single-digit percentage in RMB terms year-over-year.

 Normal price long-term Zhikang one-on-one courses ASP increased by 3.7% in RMB terms and decreased by 3% in U.S. dollar terms year-over-year. Normal price long-term online courses ASP increased by 7.8% in RMB and increased by 0.9% in U.S. dollar terms year-over-year. Gross profit increased by 33.3% to USD 385.9 million from USD 289.6 million in the same year ago period. Gross margin for the first quarter improved to 54.9% as compared to 52.6% for the same period of last year. Operating income decreased by 23.6% year-over-year to USD 57.3 million. Non-GAAP operating income decreased by 7.3% to USD 83.4 million.

 Net loss attributable to TAL was USD 7.3 million compared to net income attributable to TAL of USD 66.8 million in the first quarter of fiscal year 2019. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses, decreased by 77% to USD 18.8 million from USD 81.8 million in the first quarter of fiscal year 2019.

 Basic and diluted net loss per ADS were both USD 0.01 in the first quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were both USD 0.03. From the balance sheet, as of May 31, 2019, the company had USD 1,912.2 million of cash, cash equivalents and short-term investments compared to USD 1,515.6 million of cash, cash equivalents and short-term investments as of February 28, 2019.

 The company's deferred revenue balance was USD 968.4 million compared to USD 1,328.5 million as of May 31, 2018, representing a year-over-year decrease of 27.1%, mainly due to the change of tuition fees collection schedule to meet certain regulatory requirements. Now I will hand the call back to Mr. Luo to briefly update you on our strategy execution and provide the business outlook for the next quarter. Rong, please.

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 Rong Luo,  TAL Education Group - CFO   [6]
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 Thank you, Echo. We have started fiscal year 2020 with a strong commitment to further transition our base model to a multi-pronged educational service model. This diversified model includes our offline learning center and geography network, online business and various of other education programs and projects, such as our smart education solutions and open-platform business. I would like to give you some brief on each business models as below. Our core offline business remains a very healthy and stable business for our innovative efforts in all fields of education. Our strategy remains the same as before. We we will keep seeking the opportunity to improve our operational efficiency and further enrich our curriculum and competence-oriented subjects. At the same time, we continue to pursue well-paced capacity expansion with small class and dual-teacher models to meet demand in more geographical areas. Our online business continuously faces intense competition and change in market dynamics. TAL has pioneered online tutoring, and we have strong confidence in the online education development. We will maintain or enlarge, if necessary, a certain level of investment to strengthen all of our online business advantages such as industry know-how, education, technology, content, brand awareness and et cetera. All these efforts will not just allow us to penetrate a larger addressable market and also establish an onine education network across China.

 More importantly, our investment also let us optimize the cost structure and overcome the traditional limits to promote good education resources and ideas to more families with affordable pricing and easy online access. TAL's smart education solution is the product we have developed for the cooperation with the schools, which I mentioned to you earlier on our Q2 earnings call. This set of solutions will help to optimize and promote innovation in traditional teaching, implement the national core competence structure strategy requirements and provide essential education resources through AI and other technologies. Till the end of Q1 fiscal 2020, we have cooperated with a few hundred public schools after 2 years of development. TAL's open platform aims to empowering the whole education sector. It gives small and medium-sized education companies in China access to our core education resources. The open platform allows us -- allows more students to share high quality tutoring results through science and technology. Till the end of Q1 fiscal 2020, our open platforms already has provided various level of services to hundreds of education companies national-wide. As you all know, TAL's mission is to advance education through science and technology. TAL continuously strives to integrate technology with education, promote innovation and lead development within overall industry. We provide quality products and services in order to create value for customers and bring long-term returns for both our customers and shareholders. TAL's mission is to become a reputable education company.

 These new initiatives, online, smart education solutions and open-platform business, are still in their early stage of development. They currently have limited contributions to our business scaling and require a certain degree of investment in terms of technology, customer development and brand awareness etc. However, they are growing very fast and bringing us new exciting opportunities and the markets to address. On an ongoing basis, and as always, we have placed customer satisfaction first and this continues to be our key concern. Our diversified and quality product portfolios and services needs to create real value to our students and parents. We will follow the government that directions in education reforms, standardizations and regulation. Where needed, we will adjust our business operations accordingly. All these policies are aimed at elevating the standards and improving the entire education -- the whole industry, which is the long-term benefit of peer customers and shareholders alike.

 Turning now to our business outlook. Based on our current estimate, total net revenue for the second quarter of fiscal year 2020 are expected to be between USD 895.7 million to USD 916.7 million, representing an increase of 28% to 31% on a year-over-year basis. If not taking into consideration the impact of potential change in exchange rate between RMB and U.S. dollars. The projected revenue growth is expected to be in the range of 32% to 35% for the second quarter of fiscal year 2020. This estimate reflects company's current expectation, which is subject to change. That concludes my prepared remarks. Operator, we are now ready to take your questions.

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Questions and Answers
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Operator   [1]
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 [Operator Instruction] Your first question comes from the line of Sheng Zhong from Morgan Stanley.

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 Sheng Zhong,  Morgan Stanley, Research Division - Associate   [2]
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 So can you please give some more color on the first -- on the first quarter's margin? And secondly, company actually opened more learning center -- offline learning centers in the first quarter and also, you have more promotion in the first quarter for online business. So could you please share with us about the company's strategy in the -- in this full year, online and offline? And how to look at the full year growth in the margin?

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 Rong Luo,  TAL Education Group - CFO   [3]
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 Thank you, Sheng Zhong. In the first place let me try to recap some big numbers for Q1 in top line perspective. In Q1, on the top line, the small class grew around 28%. The Peiyou Live, which is Xueersi online is -- has grew about 165%. The Xueersi online school grew about 122%. All of these numbers actually exactly match what we mentioned to the street last quarter, I think it is also a direction of our company strategy this year. Let me try to walk through that one by one.

 The small class offline business, we call -- which is Xueersi Peiyou, our key business in the past 10 years, even more. So I think that our strategy today is what is very clear. We wish this segment can maintain the healthy growth in the coming, maybe 3 or 5 years. What does healthy means? The healthy means they grow within the ways we can accept. We don't ask for crazy growth from Xueersi Peiyou perspective, we wish the growth can be stable and very healthy. So you'll probably can see that in Q1, the 17% to 18% plus/minus for the total small class business. And at the same time, we wish they could improve their margins quarter-over-quarter, year-over-year. Last year, the small class offline doing a very good job, delivering much higher margin than before. And this year, we see the trend has continued, which can partially improve by around 2.3% year-over-year improvement in our gross margin. And again, coming to Q1, we start to add in more learning centers. Q1 for the whole company, we have added net 49 new learning centers, while 35 of the Peiyou are -- Peiyou small class learning centers. We're pursuing the healthy and organic development of our offline business, along with stable top line growth rate and ongoing operational efficiency as well as the profit improvements. So that's our key strategies for our kind of small class offline business. You probably can see the similar trend in the coming few quarters. And the second driver we need to mention is the -- we call Peiyou Live, the Xueersi online -- Xueersi Zaixian, which is a very complementary offline models to our Peiyou offline students with more localized contents. The enrollment of Peiyou online increased very fast in the past few quarters. And -- because they are quite complementary to the Peiyou offline, so there is a very limited customer acquisition cost of this business models. The development of Peiyou online will be further benefiting our overall Peiyou profit. And coming to this quarter, we have more than 30 cities, which has the Peiyou live -- Peiyou online offering now, which is much better than what we had last year. And this year, the Peiyou online took around 7% of the total Peiyou revenue. Well, last year, the same quarter is only 3%. So we are confident to see that Peiyou online will continue to be a very important drivers, boasting the enrollment revenue and the profits for our Peiyou business. We are also very happy to see where we are willing to deploy these offerings to more cities to cover more students in the future. And the third driver is also a very important drivers. I think we have mentioned about that so many times, which is Xueersi online school. Xueersi online school is our major online education product. I think last year, in the whole fiscal year 2019, they have grown around 187% in RMB terms the revenue growth. And this year, on top of this very base, we're also very happy to see the Xueersi online school in Q1 delivered a growth of 122%. And for the whole year, we are also confident that this Xueersi online school business will deliver a triple-digit growth, same as what we did last year.

 I would like to spend a little bit more about the Xueersi online perspective. I think starting from 3 or 4 years ago, we have a lot of arguments in this industry, whether online is very important way or maybe a feasible way to help companies to be more scalable and get more market share. And considering a lot of challenges coming from the parents and the student acceptance and all of that. I think with the market and whole industry come into today, this has become a kind of the industry consensus, online is the future of this whole industry. When we are only running offline models in this country, we probably have maybe close to 0.5 million competitors across the different provinces. But when we're moving this battle into the online stage, similar competitors -- the number of competitor is much less. And on the other side, we also see online, so very important, or maybe the only way, to help us to provide affordable solution to serve more and more people as fast as possible, as many as possible. The online is very important offering to help us to help more people and provide equal education opportunity to serve more students, no matter they are in Beijing, Shanghai or they are the less developed provinces. So we have seen all kind of these services has helped students a lot and that's also beneficial, not only in the economy perspective, but also in the social benefit perspective. And last year, you -- I think we probably still remember the story last year. Last year is the first year is for us doing -- run -- a lot of promotions in summer, and we have more than 1 million students studying in our online platform last summer. And last year, the most important lesson actually is coming from the challenge in the supply chain. Last year, we do the investment in the marketing perspective. We attract a lot of people coming in. But we have some challenges to provide enough -- the teacher assistant support to them. So in the last year's, last -- starting from last year, Q4, actually, we do a lot of preparations, both in Q4 and this year, Q1. We need to strengthen our capability in supply chain perspective. We need to have enough and qualified teacher assistant to support students who are studying online. We need to hire the people, we need to train the people, we need to make sure they are well-prepared for upcoming summers. So this year, we are -- we continue to invest in online, not only in the marketing perspective, but also, we reinforce our investment to -- in R&D perspective, both in the technology and the team perspective. So based on the number of today, we are seeing our strategy in online is growing pretty much on track. We have started to see our growth rate, even last year, the number is huge, but our growth will still be in triple-digit growth. And with -- we in -- with our -- a lot of preparations in the supply chain we also -- we're happy to see for our normal price enrollment, the retention rate, actually, is very stable and even slightly better than last year. And now -- last week of July, where probably we have 1 or 2 terms summer promotion class has finished their class. And we also -- we are also very happy to see the retention rate of this kind of promotion classes also pretty much on track. And we do have 3 or 4 terms to come, maybe late July and in August. So the team will work very closely to make sure the conversion rate will be on target. So when we come into today's kind of the competitive landscape, I think compared to last year, July, where we feel the company in much kind of stable and less risk situation. Last year, July, we faced a lot of regulations and uncertainties. We are first company to select to do all to the street. But coming today, I think our all of our 3 drivers are running quite stable. The offline drivers, the Peiyou Live, Peiyou online drivers, the Xueersi online drivers. So the key for this quarter, actually, we will go to whether our summer promotions conversion rate can keep our target. And we still have a few weeks to work. And so I can't say we have the perfect numbers, but the whole team will work very closely to make sure we deliver the numbers. So please stay tuned, maybe next earning calls, when we have all the numbers in our hand, we can -- we will be more than happy to show you guys the progress of what we have today.

 And Xueersi online is a very important way for us to be scalable and penetrate more market. So in the future, we continue in our strategies to maintain a healthy growth in offline, grow more aggressively in the Peiyou Live and continue to the investments in the Xueersi online school to make sure they could be #1 brand in the online education space. And lastly, our slogan for the Xueersi online school actually is very, very important (foreign language) I don't know how to translate in English. But we wish -- that's our target, and that's our strategy for my -- online this year. So when we consider that -- let me try to give you more colors about your question about the guidance for the full year and the growth and the margins. I think frankly speaking, we are a company, we look for long-term values to our students. So actually, we care less about for the quarter-over-quarter fluctuations. But we still have something to say is in the full year perspective, we don't have any intention to change our full year guidance, which is around 3 -- 30% to 40% top line revenue growth. We -- the Q1 we grew around 36%, Q2 our guidance the highest end is 35%. And when we can see more numbers, especially Xueersi online school numbers, they convert from a promotion class to the normal price class. We probably can see some good surprise coming from Q3 and Q4. So the balance of the full year, we don't have any intention to change our full year guidance. We are pretty much on track over there. And in the margin perspective, I think for Q2, I think the summer promotion -- marketing we start to do with kind of advertisements, starting from April. So you probably can see that in April and May, which is the 2 months in the Q1, and July and -- and June and July, which are 2 months in Q2. So you probably can see the impact. So considering we do a lot of promotions right over there, so the Q2 margins will have some pressures, same as what we said before. But full year today, we don't have any intention to change full year guidance. I think the key to decide a full year trend will be by the end of the summer promotions, depending on the conversion rate and the retention rate after the promotion class. Today, we have no -- a very clearly -- numbers to share with you guys, but when we have more numbers and more kind of trackings and we'll have more students to finish their class and they retent to the next quarter, we probably have the -- more colors to share with you guys. But in general, we believe the company is still on the right track. We grow pretty much on track as what we planned in the year beginning. So we will continue to execute our strategy and deliver a healthy growth, both top line and bottom line to the street. Thank you so much, Sheng Zhong.

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 Sheng Zhong,  Morgan Stanley, Research Division - Associate   [4]
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 And also very glad to know that all the strategy and implementation are well on track. So just want to double check with you about the triple-digit growth of offline -- of online business is about revenue?

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 Rong Luo,  TAL Education Group - CFO   [5]
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 Yes. Both. Revenue, enrollment, both.

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Operator   [6]
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 Your next question comes from the line of Yuzhong Gao from CICC.

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 Yuzhong Gao,  China International Capital Corporation Limited, Research Division - Analyst   [7]
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 So it's on the online Xueersi online business. So we seems to notice a shift of strategy for your online promotion. So before May, we seems to be rather conservative in online promotion. But after June, we seems to have stepped up the investment. And so far we have noticed the conversion rate may not reach our expectation. So if we go back to 6 months earlier and decide again what kind of investment strategy should we choose, and also, could we have some comment on the trend for student acquisition costs and our retention conversion rate? Are they still balancing each other that even if the short-term cost may rise a little bit that we are still confident in the long-term business profitability?

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 Rong Luo,  TAL Education Group - CFO   [8]
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 I think before I answer these questions let me try to recap what we did last year. Last year, I think we made huge progress in the online perspective. The first year we see 1 million students in online, in last year Q2. But actually last year we also have a lot of things that we are not doing quite well especially in product perspective. So by the end of last year, we decided to change the team a little bit. So we wish our online strategy can not only be driven by their marketing but need to be driven by the products.

 So if we go back to 6 months earlier, all I can say is, yes, we made some mistakes at that time. For example, we probably need to start the promotions maybe earlier. So we need to be close watch what's happening in this market, especially some competitor which were doing quite well at that time. So we are a little bit behind at that time, we have to say that.

 But the good thing is the whole team reacted very quickly. So we made the plan and we changed our products and we developed a lot of good things at that time. So the team's execution capability is very good. So we are very happy to see after a few weeks, we catch up and even we made -- we even took the leading positions in online education path now. And the customer acquisition cost is very dynamic. Sometimes it's higher because of the competition and sometimes it's much lower. But if we put all the people together and lifetime value perspective, based on what we see today, we are still quite advantaged and we are very competitive in this market.

 And the conversion rate, actually as what I said just now, is -- we see the conversion rate is improving term-over-term. So we still have few terms to come, which is the most important terms to come maybe in late July and in August. So we'll close watch what happen at that time and the whole team after the first -- or second terms, kind of the training, so the team become more and more capable. So we believe the team can do a much better job term-over-term in coming few weeks.

 And the final numbers after summer term promotion results, I will disclose the -- I will talk about that in the next quarter earnings call. But again, we -- everyone is in this market and everything is transparent. What we did and what the other people did, they are transparent to each other. We need to continue to be very humble and we need to be very careful to look into this online battles.

 I have something to share with you guys. When you're looking to this kind of online competitions, there are 3 things you need to be -- you need to pay attention to. Number one, whether the team is a very strong team with good operating experiences and has a very good understanding of online education. The team is -- our group team can fight each other or the team is a very weak team who always lose. So that's a very important one, looking to the team who is the best team all over the country.

 Secondly, we need to be very careful about as when you invest in the online marketing. If you don't pay attention to the real teaching quality, if you don't make students satisfied, if you don't persuade the parents to say you have very good products, that's nothing. How much money you invest on a marketing sometimes doesn't equal to how many students you can convert in the future. Education is a very important process, highly interactive. The investment on marketing can only attract people to try your products. But whether they will stay, depending on the teaching quality you can deliver. And all of this is a very operational and product-driven challenges, which we, as a team, in the past 15 years, we have some kind of advantages over there, especially for education perspective.

 In the third place, we need to be very careful about the creative products. We need to make the products very different and kind of progressively even week-over-week.

 Here I want to mention, we are very happy to see a lot of new companies coming into this battlefield. And we're also very happy to see a lot of -- some companies doing a very good job in the product perspective, sometimes even better than us. So we learn from them and they learn from us. And all these very-leading companies in online education side will push the whole market and the whole industry to next level.

 We, as one of player in this market, we're happy to see all kinds of competition happening in this market. And at the same time, we believe when the top players continue to evolve, the consolidation of the online will be much easier. So again, thank you so much for your questions. We will continue to do our online strategies. And the whole team today, what we are doing is pretty much on track. So I will disclose and talk about that in next quarter earnings call. Thank you.

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Operator   [9]
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 Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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 Rong Luo,  TAL Education Group - CFO   [10]
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 (foreign language)

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 Echo Yan,  TAL Education Group - Head of IR   [11]
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 (foreign language)

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Operator   [12]
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 Presenters?

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 Echo Yan,  TAL Education Group - Head of IR   [13]
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 Please, we shouldn't finish our line. We should continue our call, please.

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Operator   [14]
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 So our next question comes from the line of Alex Xie from Crédit Suisse.

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 Alex Xie,  Crédit Suisse AG, Research Division - Analyst   [15]
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 So I would like to ask about our strategy for offline Peiyou business. So in this quarter, the normal price enrollment, I think, grew by 13%. I think, I mean, this is kind of behind market expectations. So what is the reason for the significant slowdown in offline normal price enrollments? And are we still committed to our plan to accelerate our offline capacity expansion and also offline -- the enrollment growth rates in FY '20?

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 Rong Luo,  TAL Education Group - CFO   [16]
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 Yes. Thank you for questions. Yes. I think we need to be professional to answer your questions. When someone ask me questions about how many classrooms you are adding, how many capacity we will try to expand in the whole year, sometimes I think -- this question remains the old traditional growth models. We need how many classroom, how many seats, how many teachers, with all the ratios.

 But today, I think if you go into the speiyou.com you probably can see that. We have transformed the business model from a purely traditional classroom-based teaching models to offline merge online models, which means today, for example, we're adding -- last year, we're adding around 13% of the total classrooms, but actually we have entered more than 12 cities last year, which is 3 or 4x as what we did in the traditional model 3 or 4 years ago. And this year, we will continue our approach. We will continue to enter more than 10 new cities across the year.

 While we don't want to compete how many classroom we are adding because today the model has been a little bit different. The offline learning centers can be a very good demo to prove who we are and can be a very good way to attract the students coming in, and we try to promote our online offerings. So we wish, in the future, our Peiyou offline models can convert to online merge offline model, which has proved to be successful in the past few quarters. And we continue to be very careful about whether we will add so many classrooms in the short term. Our key strategy on Peiyou will be still as stable and healthy growth.

 The Peiyou team have their own reasons and pace to develop the business. But what's more importantly is they need to think about how to leverage the power of technology and leverage the branding and leverage the physical learning center presence to develop the both online and offline business.

 And by the end of this quarter, we have entered 57 cities. We will continue this approach in the coming, maybe, few quarters. So in Q1, we have added 35 Peiyou learning centers. Q2, we'll continue to add some of that. Above this trend, we'll continue, as our kind of strategy efforts, how to incorporate the online technologies into the offline models.

 So when you look into our numbers and our models, sometimes it's not good enough to only counting the number of classroom, but also need to consider the kind of the synergies between online and offline. And we need to have some close look into the combinations of Peiyou offline and the Peiyou Live products. So this is our overall strategy for the offline. We don't ask for crazy numbers or maybe very aggressive growth rate in the classroom numbers. We ask for a good balance to provide high-quality products to the students, not only offline, but also through the Peiyou Live, the online approach.

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 Alex Xie,  Crédit Suisse AG, Research Division - Analyst   [17]
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 Sure, sure. May I have a follow-up? So how do we view the difference between Peiyou online and xueersi.com? Are we seeing sort of competition between the two?

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 Rong Luo,  TAL Education Group - CFO   [18]
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 Yes, that's a very good question. I think the Xueersi online, which is totally independent from all of any kind of the Peiyou offline business, that's a purely independent platform. I think they can share some content development, technology, live broadcast system with Peiyou. But in general, in operation perspective, they are highly independent.

 So their target is try to cover as many students, national in -- across the country. So which -- they are trying to target -- kind of the breadth market, more cities, more provinces, more geographies. And they've tried to target kind of -- their level of difficulty is a little bit lower than the Peiyou business. They try to cover the majority of the market across the country, the breadth strategy.

 While the Peiyou Live actually is kind of the depth strategy. They need to go in deep. They need to provide more localized contents to all the students across the cities. Because we have a lot of physical learnings centers in 57 cities, so we have the team ready over there to develop some very localized contents special for the city. The Peiyou Live will leverage all these efforts and advantages to provide the depth strategies, so to provide a depth product to students.

 So in general, the Xueersi online school is the breadth strategy and while the Peiyou Live is the depth strategy. They are a little bit different. Based on the numbers, what we see today, and based on the students, what we see today, we don't see a meaningful kind of overlap between the Peiyou Live, and Xueersi online school. Both online drivers grow quite well, triple digit growth. And we don't see they overlap that much. Thank you.

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Operator   [19]
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 Your next question comes from the line of Mark Li from Citi.

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 Mark Li,  Citigroup Inc, Research Division - Director   [20]
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 May I ask a question for this quarter's enrollment? I understand we exclude the short-term enrollment. But do we have any color on -- if we add the -- add back the short term and promotional enrollment, what is the, roughly, growth for enrollment, to make it more comparable in the previous quarters?

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 Rong Luo,  TAL Education Group - CFO   [21]
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 Yes. In the first place, let me -- I'll try to explain why we want to use the normal price enrollment starting from this quarter, same as what I said last quarter. And the reason is if you use the Q4 number as a benchmark, my Q4 enrollments, you probably can see that for the total Peiyou enrollments 30%, around 30% of the total Peiyou enrollment last Q4, actually they are promotion enrollments.

 While the Peiyou online in last Q4, around 65% of the enrollments are from the short term and promotion costs. And we're looking to last Q4, Xueersi online enrollments, around 42% of the Xueersi online enrollments are from the short term and promotion courses. Because when we go into the online-driven models, some kind of the pilot class or maybe experienced class, demo class to the students to let them get used to the online approach and attract them in is a very popular way. If we continue to count all this kind of the short-term promotion enrollments into our enrollment calculations, we are afraid, sometimes, the numbers will be very misleading and very confusing to the street. So we, as a company, we always want to be conservative. We wish to disclose the kind of the meaningful enrollment numbers to all of the investors, that's why starting from this quarter, we'll only disclose the normal price enrollments.

 And the growth rate perspective, because in Q1, and especially in Q2, we're running a lot of promotions, if we count into all these kind of promotions into our promotion enrollment into our enrollment definition, the growth rate will be much higher. But we believe that kind of too high growth rate sometimes is misleading. So I strongly recommend all of you guys still look into our normal price enrollments growth, which make more sense than the promotion enrollment. Thank you, Mark.

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 Mark Li,  Citigroup Inc, Research Division - Director   [22]
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 May I have a quick follow-up? Also for the revenue guidance, I think we have 2 quarters of a bit of soft revenue guidance. So could you give more color on the quarter? Because I guess I might be surprised to see online promotion still yet to kick in for next quarter's revenue.

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 Rong Luo,  TAL Education Group - CFO   [23]
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 Yes. Yes, that's also very good question. In the first place, in the full year perspective, we maintain our revenue growth around 30% to 40%. Last year, we grew our revenue by around 50%. When the base is bigger and bigger, actually the growth rate 30% to 40% is also a good number to hit.

 Secondly, I think someone may be curious about the Q2 revenue guidance. I think we talked about the promotions. When you're looking to our promotions, we have 2 types of promotion today. The first one is the 9 RMB -- and then -- for maybe 1 or 2 courses. And the second one is 49 RMB. So we have 2 products. So this -- so when we have a lot of enrollment coming from these 2 promotions products, enrollment numbers will be huge. But at the same time, the revenue is kind of very minimal. So only when the students, they finish their class in Q2, and they retain in Q3 and Q4, you probably can see a much positive, maybe better numbers in the Q3 and Q4 numbers when they retain. When they are still doing their class -- promotion class in Q2, there is no reason we can see a huge revenue growth in Q2. When they convert or retain from the summer term to the fourth term, you probably can see that the revenue growth will be more meaningful in Q3 and Q4. So that's kind of -- we need to make sure that logic is very clear.

 So Q2, when you look into our Q2 revenue guidance, I think that's very similar to the trend as what we see in Q1. In Q1, the small class offline growth is maybe below 30% on maybe plus or minus, while Peiyou Live grew more than 150%, and Xueersi online grew more than 100%. That's pretty much the situations for Q2.

 In Q3 and Q4, let's wait for the conversion rates and retention rate of summer promotions by the end of this quarter. So we probably can talk about that in next quarter earnings call.

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Operator   [24]
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 Your next question comes from the line of Lucy Yu from Bank of America.

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 Lucy Yu,  BofA Merrill Lynch, Research Division - Research Analyst   [25]
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 I got 2 questions here. Firstly, it's also related to our offline enrollment. Because we have already expanded at teens level over the past 4 quarters in terms of capacity and we can see that the normal price enrollment growth is also moderating to teens level. So similar to our capacity growth. So going forward, should we expect that the normal price enrollment growth to be largely in line with our capacity growth? That's the first question. And the second one is regarding the margin for the first quarter has contracted by like 450 basis points. Can we have more color on online versus offline margin trend? Yes, that's my question.

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 Rong Luo,  TAL Education Group - CFO   [26]
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 Yes. Thanks so much for your questions. I think for the offline, the capacity and enrollment, I think if we are only running a model, the traditional model 3 or 4 years ago, we'll purely grow our revenue through adding more classrooms, adding more seats, then the capacity growth and the offline revenue growth will be highly kind of connected.

 And coming to today, because we control the growth rate of offline a little bit and we slowed down a little bit last year of the number of class rooms added last year, and in Q1 we're adding around 35 net small class -- centers, but I think with -- we have more efforts to move the business models from the purely offline models to the online merge offline models. The connectivity between the capacity growth and Peiyou revenue growth may be a little bit different. So we have more drivers coming from online. And so, probably, you can see the variance will be bigger than before.

 And your question about our online and offline margin trend. I think for offline, it's pretty much there. They will continue to -- we will continue to grow our offline margins, both gross margins and operation margins year-over-year. And the online -- the online margins, actually, we don't foresee that we have a huge or big loss this year. We're still -- because we can still see our online offerings can have a lot of students whose lifetime value is very promising. So we don't foresee a huge or big loss to the online perspective.

 But one thing I need to draw your attention is because the online grew more than 100%, so the percentage of online has increased so much. For example in Q1, last year Q1 is only 9%. This year, it's 15%. When the online percentage is higher and higher, even they don't have a huge or big loss over from online, but because the percentage is bigger, the mix has changed, which can also have some kind of pressure to our overall company's profitabilities.

 So a way we'll balance our drivers in offline and our investment in online to try to make sure and deliver a relatively stable margin in the group level. So I think that's pretty much why -- answers your questions. Thank you so much.

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Operator   [27]
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 Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.




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