TAL Education Group (TAL) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the TAL Education Group Third Fiscal Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 25 of January, 2018. I'd now like to hand the conference over to your first speaker today, Ms. Mei Li. Thank you, and please go ahead.

Thank you all for joining us today for TAL Education Group's third fiscal quarter 2018 earnings conference call. The third fiscal quarter 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. Following his prepared remarks, Mr. Luo 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 the 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 now like to turn the call over to Mr. Rong Luo.

Thank you, Mei. And good evening and good morning to you all, and thank you for joining us on this earnings call. I'm pleased that we managed to maintain our strong growth momentum in the third fiscal quarter 2018. Our top line growth continued to be driven by high demand in all cities and the fast ramp up of our online courses. Topline growth in the quarter was 66.3% year-over-year in dollar terms to US$433.3 million. In RMB terms, net revenue grew by 62.7% year-over-year. Enrolments increased by 85% year-over-year. GAAP income from operations increased by 102.1% to US$44.6 million in the third quarter and non-GAAP income from operations increased by 82.6% to US$56.8 million. As expected, during the third quarter we are gaining leverage from both the new classrooms as well as new teachers added in the previous quarters gradually [coming] to full use. We are happy to see the pressure on the year-over-year comparison of the gross margin reduce compared to that of the second quarter of the fiscal year. Non-GAAP operating margin was up by 120 basis points year-over-year in the quarter. Now Mei will give an update on our operational progress in the third quarter. After that I will update you on our ongoing [technology], which is guided by our long-term strategy vision of advancing education through science and technology.

The robust revenue growth in the third quarter was from all business lines in all cities. Small Class which consists of Xueersi Peiyou Small Class, Firstleap, Mobby and some educational programs and services accounted for 82.8% of total net revenue compared to 84.7% in the third quarter last year. Peiyou Small Class which remains our core business represented 72.9% of total revenue compared to 74.9% in the same year ago period. This lower revenue contribution from the Small Class was mainly due to the faster growth of online course business, which accounted for 17.8% in the quarter. Net revenue for Peiyou Small Class was up by 62.4%, while enrolment increased by 91.7%. In order to help our existing Peiyou students to learn based on varied individual attitude in each city we encouraged them to take additional [Peiyou] online course that allowed them to easily take more subjects and bringing in force the learning process in a flexible manner. Peiyou offline Small Class continued to run healthily. At the same time, we are very happy to see the significant involvement and contribution from Peiyou online after the summer term. We will continue to roll this out into more cities. Xueersi Peiyou Small Class revenue generated from cities other than top 5; Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing, grew by approximately 60%. Cities other than the top 5 accounted for 39% of the Peiyou Small Class business, almost unchanged from the same quarter last year. Revenue from top five cities grew by 62% year-over-year, faster than the other cities mainly because of the contribution from Peiyou online course. We have achieved a triple digit year-over-year renminbi revenue growth in nine of the 27 cities that we have entered by the third quarter of fiscal year 2017, including Shijiazhuang, Changsha, Qingdao, Luoyang, Nanjing, Ningbo, Hefei, Wuxi and Fuzhou. The revenue growth across all cities was driven by incremental ramp up of enrolments from our early classroom expansion. Enrolments from Chinese classes and the English classes grew faster than the other subjects as a result of our continued efforts to roll out these courses. In the short term, they accounted for over 20% of enrolments from Peiyou Small Class, and as of the winter term we started to teach Chinese classes in 13 cities, and English classes in 20 cities. We will continue to expand subjects in more cities and make our business more diversified. We would like to remind you of the impact of Chinese New Year on our course scheduling in the fourth quarter. Last year, we had approximately two classes [indiscernible] booked in the third quarter of fiscal 2017 because of the early timing of Chinese new year at that time. In contrast, our next spring term course will start from March 2018 in the first fiscal quarter because the Chinese New Year is coming late this year. Since we recognized revenue proportionately after we deliver each class, no revenue from spring term course will be booked in the fourth quarter. At the same time, the negative impact from the late start of the spring term will be somewhat offset by the smaller portion of revenue shifted from Q3 to Q4 due to the late start of the recent fall term. Again, this is a [class of] issue arising from seasonality, and is expected to benefit revenue growth of the second quarter of fiscal 2019, in which the spring term will end. Later we will give the revenue guidance for the fourth quarter. For Zhikang one-on-one business we had a healthy third quarter and achieved year-over-year revenue growth of 51.4% in US dollars. One-on-one including the overseas consulting business accounted for 8.1% of total revenue compared to 8.9% in the third quarter of fiscal 2017. Turning to our capacity expansion, in the third quarter we slowed it down as planned, and added 16 new learning centers and closed down 12 learning centers, adding a net four learning centers. During the quarter, we added 68 Peiyou Small Class classrooms on top of the 2021 we had added in the first half of the fiscal year, making the number of Small Class classrooms increased by 47% compared to the number by end of November 2016. We added most of the Small Class classrooms in Beijing, Guangzhou, Nanjing, Suzhou, Luoyang, Nanchang, Ningbo and Hefei. Following the [indiscernible] room renovation and the necessary air cleaning, those classrooms will gradually come into use in the later [indiscernible] approximately by the summer term. Meanwhile, we continue to expand into new cities at a pace. In the third quarter, we entered two new cities, Shaoxing and Yangzhou. During the quarter, we added a net of five Small Class learning centers and two Firstleap Small Class learning centers. We closed a net of three one-on-one learning centers as part of our extended performance review. By the end of November we had 579 learning centers in 38 cities across China, of which 1214 were Peiyou Small Class, 8 were Mobby Small Class, and 60 were Firstleap Small Class, and 97 were Zhikang one-on-one. Looking to Q4, we will maintain well paced capacity expansion with estimated additions of 10 to 15 Peiyou Small Class learning centers. Moving now to our online business, third quarter revenue from xueersi.com grew by 175% year-over-year. The growth momentum of online continues to be very strong due to the success of live broadcasting. Online contributed 7.8% of total revenue this quarter compared to 4.7% in the same year ago period due to the fast growth of online live course. As a first mover in going live online on xueersi.com, we are highly confident about the long-term opportunities to live broadcasting. Finally, on the revenue side of our business line, other revenue is mostly from the online advertising business and represents 1.4% of total revenue in the third quarter compared to 1.7% in the third quarter of fiscal year 2017. Let me now go through some key financial points for the third quarter of fiscal year 2018. In the third fiscal quarter, Small Class ASP decreased by 15.3% in US dollars year-over-year. The decrease was mainly caused by significant enrolment contribution from Peiyou online, of which the prices approximately 40% lower than Peiyou offline classes. Meanwhile, ASP of Peiyou normal offline Small Class increased by high single digit percentage in the third quarter. Zhikang one-on-one ASP in US dollars increased by 12.1% because of normal price increases mostly started from the fourth quarter last fiscal year. Online course ASP increased by 61.7% in US dollars in the third quarter driven by the class extension of the online live class. Cost of revenues increased by 67.7% to US$221.1 million from US$131.9 million in the same quarter one year ago. 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 67.6% to US$221.0 million from US$131.8 million in the same year ago period. In the third fiscal quarter, gross profit was US$212.2 million compared from US$128.7 million in the same year ago period. Gross margin for the third quarter was 49% as compared to 49.4% for the same period of last year. Operating income increased by 102.1% to US$44.6 million. Non-GAAP operating income increased by 82.6% year-over-year to US$56.8 million. Other income was US$5.4 million for the third quarter of the fiscal year 2018 compared to other expenses of US$0.7 million in the third quarter of fiscal year 2017. Other income in the third quarter of fiscal year 2018 was mainly due to gains from the disposal of investments. Impairment loss on long-term investments was US$1.5 million in the third quarter of fiscal year 2018, compared to US$3.8 million in the third quarter of fiscal year 2017. Impairment loss on long-term investments was mainly due to the other-than-temporary declines in the value of long-term investments in several investees. Income tax expense was US$11.4 million in the third quarter of fiscal year 2018, compared to US$3.1 million in the third quarter of fiscal year 2017. The increase was mainly due to increase in income before provision for income tax and loss from equity method investments. Basic and diluted net income per ADS were US$0.08 and US$0.07, respectively in the third quarter of fiscal year 2018. Non-GAAP basic and non-GAAP diluted net income per ADS, were US$0.10 and US$0.09, respectively. From the balance sheet, as of November 30, 2017, we had US$1,126.6 million of cash and cash equivalents and US$184.3 million of short-term investments, compared to US$470.2 million of cash and cash equivalents and US$229.5 million of short-term investments as of February 28, 2017. Capital expenditures for the third fiscal quarter were US$28.3 million, representing an increase of US$11.2 million from US$17.1 million in the same year ago period. The increase was mainly due to 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 November 30, 2017, the Company's deferred revenue balance was US$1,074.9 million, compared to US$679.9 million as of November 30, 2016, representing an increase of 58.1%. Deferred revenue primarily consisted of the tuition collected in advance for the fall semester, winter semester and the spring semester of Small Class, as well as the deferred revenue related to other businesses. Now I will hand the call back to Mr. Luo to highlight our recent progress in exploring science and technology and the business outlook of the next quarter.

Thank you, Mei. Now I would like to give you an update on our progress on the technological investment. As our long-standing track record shows TAL has been deeply committed to exploring the possibilities of technology-based education reform. We will continue to run pilots in AI and other cutting-edge areas of our tech to create innovative ways to better serve our customers. As part of our continuing investments in the new technology we have upgraded on our Xueersi Intelligent Practice System, IPS, to Xueersi Cloud-based learning platform. That was launched last week. The new platform has upgraded the functions, contents and system architectures of the current IPS. This makes the learning personalized and customized and gives our students access to both online and offline experiences creating a complete [course] of learnings. We recently announced a long-term equity investment from agreeing to purchase a total of $US500 million of the newly issued class A common shares of TAL. The transaction has been completed in January, and we will use the net proceeds of the offering for general corporate purpose, including funding our plans to create the innovative applications of smart technologies in education context, and to build a revolutionary new models of learnings. Following these transactions, [indiscernible] taking into account its existing holding, approximately 5% of [indiscernible] outstanding shares. Let me now move to our outlook for the next quarter. Due to the timing of the Chinese New Year, in the fourth quarter of fiscal year 2017 we will recognize approximately around 10% of spring term revenue, zero incurred in the first quarter. After netting out the 2% fall term revenue shifted to the first quarter due to the late start of the quarter this fiscal year, based on our current estimates, total net revenues from the first quarter of fiscal year 2018 is expected to be between US$474.5 million and US$480.8 million; representing an increase of 50% to 52% on a year-over-year basis. These cut off issue arising from less tonality will impact both top-line and margins. These estimates will refer our current expectations which is subject to change. That concludes my prepared remarks. Operator we are now ready to take questions.

Thank you. [Operator Instruction] Your first question comes from the line of Alex Liu of Daiwa. Please ask your question.

Yes. Thanks, Luo Rong and Li Mei. I really appreciate your support. First, how many of the classrooms do we have this quarter and for the small class enrollment does it include both the online and offline right and what's the growth looks like for the offline courses for the small class segment? And my second question is on capacity. I think given our capacity growth continues to decelerate this quarter, should we expect some kind of a cyclical acceleration for capacity in the coming year or simply the capacity will be more or less stabilized at certain level in the coming one year? Thanks.

Thank you, Alex. Your first question about how many classrooms were added for the Peiyou Small Class is actually this quarter is our 68 "six-eight" classrooms compared to the 2021 we are adding in the first half of fiscal year. I think as why I had mentioned in the previous call, actually starting from Q2 is that you hold a little bit in the capacity expansion and we need some time to digest low capacities who have adding in the previous four quarters. So, we sure are continuing Q3. And looking forward to Q4, actually we stepped to a so to a little bit in Q4. Our clear online's we probably will add around 10 to 15 new learning centers in the Peiyou Small Class business. So, for the full year, maybe we're adding around more than 30% in capacity studies. And because in the past few quarters, we made some progress to increase the seat for from a raise by in our classrooms quarter-over-quarter by considering that we are adding a lot in the past. So, in a year-over-year commercial study, we are even today we are still below. So, we have the cleanup potential even we only add a little be in Q3 by which we will still continue to give us a very strong space or asked to deliver Xueersi growth next year. And you're also asking about online and offline revenue growth. So, let me clarify it. Actually, and the off or the online means the Xueersi online school which is growing quite well. Last quarter it grows around 144% and this quarter they grow around 175% and we foresee they will continue this growth very strong growth momentum in the coming year. And offline's also very stable. I think their net revenue from the Peiyou Small Class segment that was up by 62.4% this quarter. And looking forward, we are quite confident offline business will continue to be where Xueersi and why it's sustainable and why it's stable. And on your capacity for the next year, I think as we have mentioned in the past, we as a company we definitely will like to manage the Xueersi growth. So, we think, ideal range for us should be around 30% or 50%. And last year we added along I think around 80%. This year we come to a little bit in the pace of around 30%. So, looking forward to a low future we will go back to the right range of 30% to 50% in capacity study. Besides more classroom numbers we have added, actually we need to pay more attention to how we could leverage these spaces to give the quality services to the student, how to increase the Xueersi KPIs of our oral business to make sure we are running Xueersi on track. So, we care more about quality and we care less about the speed of expansion now. So, looking forward we'll go back to managing Xueersi growth. Thank you, Alex.

Thank you.

Your next question comes from the line of Sheng Zhong of Morgan Stanley. Please ask your question.

Hi, Luo Rong and Li Mei, good evening. And thank you for taking my question. So, I have a big follow-up about class expansion. So, can you give more color on the capacity on how much percent will be like the two-teacher model among them and also by the way can you give some more updates on the how is the two-teacher model like what the retention rate and what your expectation for the duty training into next year? And second question is about the online business. Can we give more guidance on the online business revenue and involvement outlook for next year and also do we how just want to understand how what the effort we'll company make to on the online business including the technology investment and also do we have any significant promotions on these online business? Thank you.

. : And this year, I think the contribution from the two-teacher models still mean below 5%. And but we are confident next year especially I think maybe last and next year summer we are probably going to see a much better number at that time. And on for the online, I think this year online, that delivered very fantastic results. I think the whole year the revenue goes with more than 140% and this quarter is 175%. And looking forward to next year on way foresee at least they can key their gross momentum to be more than 100% in revenue growth perspective. But when we talk about the online, we need to keep in mind, the most important play for online actually is we need to get more market share. Online is a unique business, very different from the Xueersi Peiyou offline business. The online they have different targets and they have different structures. And we want to get more market share, we have three things we need to be work out. The first one is we need to continue to invest in technology. So, on one side we could hire more people, more teacher assistants and more sales people to set up our online products. But because we strongly believe that technologies are the only game changes in education market. So, the same amount if we have to invest on having more people and more staff, we prefer to spend in technology and plan for. So, we can try to reduce the workload of every single people, we can maximize the people's efficiencies which can focus to improve the overall probabilities and efficiencies of the whole piece models. The second thing we need to invest actually is marketing both online and offline. I think maybe some of you have saw our offline advertisements in some selected cities in the past, I thing should be in January. And the reason is because Xueersi online school actually in nature they have the much bigger and wider marquee potentials. And we have a lot of wide space markets we never touched before. Even in the big cities we have a lot of sub areas and some of the places we don’t have the presence at all and we have secured places over there. But Xueersi online school also needs some right way to convey our messages to the customers. So, we have to try some online and offline marketing's, especially in online studies. Of course we'll balance the return on investments in the market started to make sure we don’t lose money. And the third thing we need to be very careful is about the operation models. When the online business is growing so fast 175%, looking size is also increasing. Even we are seeing the revenue per headcount is increasing. We still need to be very careful how we can design the course structures to manage a much bigger size in the people studies. So, the operation model, how we can upgrade maybe evolve the new operation model to cover more, that is something we need to be very careful. Even we are the first company meanwhile for the first company in these industries which we try the online school, I think five years ago but we still need to be very careful. There is nothing easy. So, looking forward, in general we are still quite confident about that. We will also be very careful on the executions. Thanks Sheng Zhong.

Thank you.

The next question comes from the line of Natalie Wu of CICC. Please ask your question.

Hi, good evening, Rong Luo and Mei. Thanks for taking my question. Two questions. First on Peiyou online courses. Just wondering how many units front of Peiyou online courses, Rong, coming from offline Peiyou's Small Class students this quarter in how many cities does TAL pay you online courses cover currently. And what's the target of that this calendar year. And also what's the teachers leverage sharing percentage for the business if want to get the rough bidding of the margin prospectus in numbers then. Second wise on the R&D expenses, I noticed that you have set up the TAL during the lab today, and also you mentioned that you will grow your R&D team from current 4000 to 10000 in next three years including patented AI team. Just wondering can you still can show your original R&D budget to the 5% of the revenue scope for that? Thank you.

Thank you, Natalie. I'll tell the first one the classes about the Peiyou online. Actually which is part of our peers we're running before we call head-to-head at the time. So, we combine a high gain towards Peiyou to then changing and then to the Peiyou online. So, actually the Peiyou Online is quite different from the Xueersi online school. Xueersi online's we supply unique and quite dependents from the Xueersi Peiyou. While they appear online, we are highly connected into the Peiyou offline classes. I'll show one example is, for example; we went to our classrooms in Beijing. In the classrooms the teachers use the iPad to our peers to collect a lot of data's from the students. And when we analyze this, all the data's, we mainly figure some important knowledge and points. We have certain percentage of student they have challenges. So, we quickly open the kind of the shortened class through online to teach them. So, we've begun a very efficient way to give complementary services to the students who have challenges or who have something they need to overcome from the offline piece. So, these become a good way for us to increase the values per customer. In nature, we still wage to levy these offers to service, this is much better. Especially in margin perspective, because we don’t have any customer acquisition cost for Peiyou online and the online is quite similar to the Xueersi online school, actually we don’t have that many teachers for that. So, when everything is on track that will be kind of beneficial to our total margins. And again, Xueersi online will only try that for two quarters. The first quarter is in summer and in the fall is the second quarter. So, we probably we need more time and more time to see what you will be in the future. We personally believe the online will be a very good add-on of our services to the students that can create a wide space market for us. Let's stay tuned for maybe the next quarter and next year to see what the further result will be. It's positive but we still need to take more times. The second question about the R&D side, yes we are very happy to see we have set color, brought in science lab today. And when we talk about the R&D, actually we need to go back to the 10, five, or six years ago, we all are one or all for the first companies in the industries to try the online school. At that time that was priority contents. And two to three years ago we also invest in technologies to transfer the pre-recording on a school to the live learning school. Another thing I will try are the high tier models. We also leverage all the learnings and our knowledge that we get from online and we start to establish the duties of models maybe two years ago. So, we continue the investment way more over the year. And last year we tried some new technology studies including the facial recognition technologies and the wake technologies. And this will become a continuous effort in our companies because our mission try to want allocations to certain technology. And about how much money we spent on these, actually we have a very good discipline is every year we spend the similar percentage of our revenue on the R&D side. And for some special projects we'll have some special funding but in general the percentage of revenue spending R&D are quite similar. Thank you, Natalie.

Thank you. Congratulations on a solid quarter.

Thank you.

Your next question comes from the line of Mariana Kou of CLSA. Please ask your question.

Hi, Rong Luo and Mei. Thank you for taking my question. Congratulations for the results. My first question is actually on the margins and how should we think about longer term, I know we're talking about capacity of about 30% to 50% growth in on an annual basis longer term. Should we expect some kind of margin operating last ratio still or how should we think about it given that now online is quite strong for you. And then you just can you talk about the Peiyou online as well. That seems to be quite good for margins even though the customer acquisition cost is quite minimal. And my second question is just broadly on technology, I think we talked quite a lot about the technology investments and how we're trying to incorporate more technology infused learning experience. Could you just share a bit more color on managements view on whether we will going forward think about more M&A or more self-development or just for the partnership and especially in light of the recent cut a long term investment, we got the 500 million. Thank you.

Thank you, Mariana. The margin question, okay thank you for the margin question. I suppose that should be the first question I should be answering. And last quarter we are guiding the three is we have some challenges in margins especially in the second half and the whole year debt is we also well slightly decline in the margin by our own maybe low single-digits last quarter. And coming to this year, we see some positive news coming from our Q3 performance, a one size we start to see low capacities you have adding in the previous quarters now gradually trying to use. The capacity your attrition rates is improving quarter-over-quarter, even continue to last year they asked to be low about quarter-over-quarter is improving. The second reason is because we also see our newly added, our newly acquired business actually the Shunshun is the big season for then which I had mentioned last quarter so many times. And so, right till big season and Q3 and Q4 compared to Q2, they will be much better than that. And we also see some leverage coming through and the other one thing is and Xueersi online school business. So, in general, finally we get a very good result, actually what I was speaking in the last quarter earning call. And looking forward to Q4, we also have to mention because of later analysis we talk about the three two three times in the prepared remarks already. This we will shift around two weeks of our revenues from Q4 to next year Q2, which is a lot of money. So, this shifts will impact my both topline and bottom-line. So in Q4, our bottom-line our margins will decline. And for the whole year, we continue our guidance to the three last quarter is around our OP margin will be declining by around 1% to 2%. So, we don’t change our views, that's still arranged will be for this year. And looking forward to next year and the situation had changed a lot. In the first phase, let me walk through the segments one-by-one. For the Xueersi Peiyou business next year, definitely we need to manage them back to healthy pace. So, we will require the Xueersi Peiyou business to improving in their KPIs to deliver a healthy growth. And by the Xueersi online school, actually they have some marquee show again. If we spend more time to advertise into the population or the demographics of China, actually we can see there is a huge opportunities for the younger age students, they're moving from offline to online. Now, they are more in more, catching more and more familiar to the online solutions now, which is also proved by our online data's. So, in this study of next year for online, that is the marquee show again. So, we need to invest in technology in marketing channel, in operating model and all of that to try to get more market share in all of these studies. And so, in general I think that's your margin. I probably I can give you much clear colors in next quarter earning call when we finish our Q4. By diversional thinking, diversional perspective, I think we are still feel confident upon next year we could maintain our margins at least flat. And wait list final numbers will be deliver, I'll probably I will give you more colors and more information on what visibilities in Q4 earning call. And your question about the technology side, whether we do the M&A are way you mess more are really hostile element. What I can say is actually that cannot sometimes is vertical to buy from anyone. And so in general, when we want to aim cyber tuition you know sometimes is a very vertical market. So, the big players they even don’t have that much time to do the specific R&D or the tuition. So, we have to rely on ourselves a lot. So, that's part of the reason why we feel worried big thing on IT and product studies and we will continue to add more people to letting to develop a new technology and new system. For example, a lighter do tuition models and at Xueersi online school. All the solutions actually isn’t there. And by the same time, it solves the technologies to which if the current edge technologies and that things are very good, we are now reluctant to buy them. And in a way are very happy to see if staff load, good teams they have very good potential and they are waiting to be part of that, where more than where can they to let them join our big family. But in general, we need to focus our in-house development first. As we are as looking into the new possibilities in the whole industry. Thank you, Mariana.

Thank you.

Your next question comes from the line of Ivy Luo of Macquarie. You may ask your question.

Hi Luo, hi Mei, thank you for taking my question. My first question is a follow-up on our online segment. So, just on a other centers we know the margin increment this quarter is from both utilization and our online business that's going really fast. So, what's the margin like for our online and online segment and we'll also mentioned that we're going to do some marketing and promotion today market share on online space. Do you have a budget in terms of the marketing dollar or R&D that we're going to spend in to grow our online business? And also want to understand what's the how much of the online business is purely for our say top five cities. That's my first question.

Thank you, Ivy. Let me take the notes first. Okay, your first question was about on our margins. The Xueersi online school, they are profitable this year and like I can say it's a meaningful profitable this year. But looking into the next year we have to stay lower, online is a market share gain. So, in duration of the study, we are willing to spend more money on the online perspective in technology, in marketing, in new operating models. So, we don’t want to increase the margin for all the next year and we're willing to pay more money for online to try their best to win more market shares. Of course, we will not let them to lose that much money but compared to the other segments, we will keep more liabilities to online. While offline, there is Xueersi Peiyou there's more classes. This year we suffer a little bit in because we have added a lot of classrooms in the year beginning. We fully believe next year that Xueersi offline will go back to normal, while we stood back to our Xueersi and check. So, in that perspective, we could see some possibility to get some margin improvements from that mainstream business. So, overall our company we are still we're quite confident about margin for next year. And about your question about the how much of my online customers coming from the top five cities. Why that phase, because online actually they don’t have any barriers in geographic perspectives. So, online today cover much bigger geography coverage thing offline. We don’t see a very high numbers as a high as the Xueersi offline schools to show out in the online school revenue. And looking forward to next year, actually we wage the online came not only manage share little here around the procedures. They also have some possibilities to penetrate more space step by step. So, we don’t hurry to harvest the market overnight. We need some patience, we need to let the thing to continue to tweak their models to mature and fight the right channels to managing what students and continue to improving the teaching quality, continue to improving the efficiencies of the operating models. For example, let our teacher assistants can cover more students at a sent time. So, we should have a lot of things we can do and we care less about how many people coming from certain cities in our own ambience way, what we want to cover is a mass marquees. So well, probably I can give you more colors maybe next quarter to see you know online studies because we pilot them marking channels plus online and offline in generally. So, we need some time to analyze the results. Thank you, Ivy. What is your second question?

Like I said, are your promotion on -- I think you mentioned that we are doing this winter promotion as well. So, that can give me some color on the later winter promotion. And also a housekeeping question on like I understand our online revenue through a 170% this quarter, how about the online enrollment number. I'm sorry if I do have that number previously, thank you.

Okay. This have spared me for I think the online enrollment is around 21% of my total enrollment and the online enrollment growth is around 74% 75%. And on about the promotions, actually for the offline beginners we don’t have that many promotions. And we benchmark some of our competitors' performance and their plans. We probably can see next year will layout possibly there will be a lot of promotions from our competence. But we as a company, again we still believe the teaching quality is the only criteria is for the parents when they make decisions. And the teaching quality is the only guarantee to the students when they pay and come to our school, they invest their time and money on us. So, we wish that's the only good things we can show them as a return. So, looking forward to both in the winter and then next year, we don’t have any mass playing on promotion studies. We will continue to be very cautious about the promotions. And for the online school, actually online school promotion will be different issues. Because online is a total different experience for the students. So, sometimes we're running some pilot classes, for example, around maybe one two classes we only charge them around 50 and the in online we persuade into trial online first and then we convert into our regular classes. So, for online when we wanted to whether -- when we want to get more market share we will continue with approach but offline we will be very cautious, we don’t have any plans to make a much bigger promotions next year. We will be very cautious and we will continue to improve the teaching quality as the first priority.

Thank you. Thanks, Rong Lou.

Thank you, Ivy.

Your next question comes from the line of Fan Liu of Goldman Sachs. Please ask your question.

Hi Rong Luo. I may -- so, I have two quick questions. So, the first question is about your acquired menus, including the 1st May, then the Shunshun. Would you mind to and show with that more cover how maybe the operating metrics or the financials numbers, talk with liberty for this two. And also the second question is about our R&D based quarter. So, basically I think the operating leverage mainly come from this line. Would you mind to share with us any comment on that? Thank you.

Thank you, Liu Fan. Firstly, ensure us in deepest relations. For the firstly, I can go run in our and the revenue growth is quite healthy as to as the online margins. So, for the students as you have mentioned last quarter because they need to pay for some of the cost they have done last year. So, Q2 is a bit loss to then, Q3 is still loss making precision but compared to Q2, it's much better. So, currently we're running some of the optimizations in the Shunshun. Again, the key purpose for all of this is in the first place we need to focus on our customer first. If in some places we cannot provide the best quality services, so wage we now hurry to increase the size of the things over there. So, we need to always prove the customers as first priority. Secondly, I think similar as our resource is heavy, we are preferred to be being stronger than to being bigger. So, we want to focus a little bit on the key cities and on the very important these lines. For example, the major cities and the very important in these lines like the U.S. lands, the U.K. lands to make sure we can deliver a very robust and strong these models before we want to we go to any bigger. So, we are fully believe the team for Shunshun and the team from firstly we'll continue to perform quite weird, and next year we probably can see some prices cost of prices coming from them. Secondly, about R&D expenses, currently we don’t have any unusual R&D investments in the past quarters and we will maintain the similar percentage of revenue to invest in R&D. And this year, we focus a lot on the AI and brand sense, which may now deliver some real results while shorten that's very important and very critical for us is to establish the new allocation models in three of them. If we can recap what happened three years ago, on which ones investing online. We're guessing lastly in the live broadcasting platform and which was investing in the two tuition models. Some people may say that's unnecessary. The final result is if we don’t do any investment at that time, coming to today I'm still offline company. So, we will balance the efficiency and the profitability of the invest mass and the and we will continue our focus in this area because our mission is to advance education through science and technologies. Thank you, Liu Fan.

Your next question comes from the line of Thomas Chong of Credit Suisse. You may ask your question.

Hi, Luo Rong and Mei. Thanks for taking my question. I have two quick questions. The first one is about regulatory update. Should we see more regulations in coming years? And my second question is about the guidance. And lets please you talk about the OS impact and most importantly in R&D terms. Thank you.

Okay, Thomas. The first question about the regulations. I think among all education companies, we are the only companies who have talked about there for five quarters about there already. And so, again in the first place we can all the regulations and the policies released from the governments and we 100% follow the government requirements to continually improve our operations. Last year, the Congress has approved the new law and today this year there's still time for different problems they need to carry out the new laws into the world due to your policies. We start to see a lot of problems like Beijing, Shanghai, Tianjin; a lot of places they have come out their results. And all of these policies actually the durations is very clear is we need to make sure we have some, where they try to increase the policy requirements on the tutoring companies. Because today the marquee of tutoring companies actually it’s a worry from antique. Some of them even worries more. So, sometimes they will lead to some potential risk, maybe in safety risk, maybe in dollar kind of risk. So, I think with the new policies coming out to try to regular this marquee and raise the bar for this marquee. We as the leading player, we will touch the where can all regulations and try our best to sync to the new models. And special fee for short subscribers actually in a way we deal with this users from five quarters ago, so we have set our specialty organizations, specialty patent soliciting our own these efforts. And today our teams work with working very closely with the different province and city level governments to carry out all their new policies which have been launched maybe in the past few months. And we don’t see that is the way we personally see that is a good opportunity for us to increase our operations and maybe potentially we have to increase the consolidations be of this marquees for the top players. And your second question about the guidance on Q4, especially in R&D, I think our guidance on the dollar terms is a 50% to 52% and we feel we consider around 7% to 8% in the currency depreciation perspective. And looking forward, I think next year and their potential should be -- potentially that should be some kind of the currency depreciations over there but I think we as a company sometimes we don’t care about the currencies. We need to be worried straightforward to our steps, that's voice of our real growth. And looking into the next real five years, we are still quite confident overall company will deliver in the topline revenue growth in the range of 30% to 50% in no matter what currency perspective. So, we will continue to carry out our way to manage a healthy growth. And yes, that’s it. Thank you so much for your question.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, you may all disconnect.