Ladies and gentlemen, thank you for standing by and welcome to the TAL Education Group Fourth Fiscal Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. I will now hand the conference over to your first speaker, Ms. Echo Yan. Thank you. Please go ahead.

Thanks, operator. Thank you all for joining us today for TAL Education Group’s fourth fiscal quarter and fiscal year 2019 earnings conference call. The earnings release was distributed earlier today and you may find a copy on the company IR website or through the newswires. During this call, you will hear from Chief Financial Officer, Mr. Rong Luo; Linda Huo, Vice President of Finance; and myself, IR of TAL. Following the prepared remarks, Mr. Luo and Ms. Huo 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.

Thank you, Echo. Good evening and good morning to you all. Thank you for joining us today on this earnings call. Our fourth quarter revenue performance was based on healthy growth of small class business in the cities we currently cover and the scaling of our online courses. Net revenue growth in the fourth quarter was 44.1% year-over-year in U.S. dollar terms to $726.6 million and 52.2% in RMB terms. Student enrollment increased by 71.2% year-over-year mostly driven by the growth in online enrollments as well as Xueersi Peiyou small class. GAAP income from operations increased by 71.5% to $114.7 million in the fourth quarter, non-GAAP income from operations grew by 72.4% to $137 million. I will now turn the call over to Linda Huo, our Vice President of Finance. She will give you an update on our operational progress in the fourth quarter. Following that, Echo Yan, our IR Director, will briefly discuss the full fiscal year highlights and review fourth quarter financials. After that, I will update you on our business strategy execution and discuss our business outlook. Linda, please.

Thanks, Rong. Fiscal fourth quarter revenue was based on steady growth momentum in the various education services of our tutoring business. Let me review the business by different revenue streams. Let me start with small class and other business, which consists of Xueersi Peiyou small class, Firstleap, Mobby and some other education programs and services. These accounted for 76% of total net revenue compared to 83% in the fourth quarter last year. The revenue growth rate was 32% in U.S. dollar terms and 39% in RMB terms. Xueersi Peiyou Small Class, which remains our core business, represented 66% of total net revenue compared to 73% in the same year ago period. The lower revenue contribution from Xueersi Peiyou was mostly due to the faster growth of xueersi.com online courses, which accounted for 17% of total revenue in the quarter compared to 8% in the same period last year. Net revenue from Xueersi Peiyou Small Class was up by 29% in U.S. dollar terms and 37% in RMB terms, while enrollments increased by 45% year-over-year. This growth rate reflects the stable growth in both Peiyou offline/online class. Currently, we offer Xueersi Peiyou to our online courses with a complementary service tailored to students’ needs in major cities of our network. Xueersi Peiyou online offers regular and short-term courses and other promotion courses. Excluding revenue contribution from Xueersi Peiyou online in both the fourth quarters of fiscal year 2018 and 2019, Xueersi Peiyou online small class revenue increased by 25% in U.S. dollar terms and 32% in RMB terms, while our enrollments increased by 18% year-over-year. In addition, excluding Peiyou offline promotion and short-term courses in this quarter, Peiyou offline normal priced courses revenue increased by 33% in RMB terms, while enrollments increased by 21% year-over-year. In the fourth fiscal quarter, Peiyou…

Thanks, Linda. Let me first briefly recap fiscal year 2019. For fiscal year 2019, TAL reported net revenue of $2,536.0 million representing a 49.4% increase from $1,715.0 million in fiscal year 2018. The increase was mainly driven by an increase in total student enrollment. Cost of revenues increased by 32.0% to $1,164.5 million from $882.3 million in the fiscal year 2018. The increase in cost of revenues was mainly due to an increase in teacher compensation and rental costs. Non-GAAP cost of revenues, which excluded share-based compensation expenses, increased by 32% to $1,136.7 million from $882 million in fiscal year 2018. Gross profit increased by 68% to $1,398.5 million from $832.7 million in fiscal year 2018, income from operations increased by 63.7% to $341.6 million from $208.6 million in fiscal year 2018. Non-GAAP income from operations, which excluded share-based compensation expenses, increased by 63.8% to $418.9 million from $255.8 million in fiscal year 2018. Net income attributable to TAL increased by 85.1% to $367.2 million from $198.4 million in fiscal year 2018. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses increased by 81% to $444.5 million from $245.6 million in fiscal year 2018. Let me now go through some other key financial points for the fourth quarter of fiscal year 2019. The breakdown of ASP for the various business is as follows. Xueersi Peiyou Small Class ASP decreased by 5% in RMB and 11% in U.S. dollar terms year-over-year. Excluding the impact from Peiyou online and the promotion and short-term Peiyou offline courses, Peiyou offline normal priced course ASP increased by a high single-digit percentage in RMB terms year-over-year. Zhikang one-on-one ASPs increased by 2% in U.S. dollar terms and 8% in RMB year-over-year. Online courses ASP increased by 17% in U.S. dollar terms and 23% in…

Thank you, Echo. This winter has also reflected solid online business growth, healthy development of our offline business as well as the ongoing efforts we have made in the transition from only running one base model to multiple-pronged education service model, including online and other diversified education programs and the projects during the fiscal year 2019. As mentioned before, the education industry, including after-school tutoring market is currently in the midst of ongoing education reforms, standardizations and regulation. We have followed the government directions and where needed, we are continuing to adjust our business operations accordingly. All of its policies are aimed to further improving our standards and ecosystem of the entire industry. KLS is a technology driven education company and our mission is to advance education through science and technology. In the past year and as always we have been doing our best to leverage our advantages to enrich our course offerings, gradually at and optimize more education models, see opportunities to reduce the cost, innovate teaching methods and skills in each sector. All of these joint efforts have made us capable enough to adapt our market changes, meet evolving customer needs and meanwhile explore the flexibility to gradually enlarge our geographical coverage with the right product portfolio and affordable pricing. Going forward, we will continue to pursue healthy and sustainable growth in our learning center and geography networks. We will continue to invest in new technology and in new business models to combine growth, always improve the efficiencies in the long-term. Turning now to our business outlook, based on the company’s current estimates, total net revenues for the fiscal quarter of fiscal year 2020 are expected to be between $699.3 million and $710.3 million, representing an increase of 27% to 29% on a year-over-year basis. If not taking into considerations of the impact of potential change in exchange rate between RMB and the U.S. dollar, the projected revenue growth rate is expected to be in the range of 33% to 35% for the first quarter of fiscal year 2020. These estimates reflect the company’s current expectation, which is subject to change. That concludes my prepared remarks. Operator, we are now ready to take questions.

Thank you. [Operator Instructions] Our first question comes from the line of Tallan Zhou from Deutsche Bank. Please ask your question.

Hi, management. Thanks for taking my questions. I just wanted to ask the fourth quarter numbers seemed to be quite strong while the first quarter guidance seems to be a little bit soft. I just wanted to see any particular reason what has happened over the 3 months period? Thanks.

Thanks, Tallan. For the fourth quarter revenue, which is better than what we guided before, it was mainly due to the better than expected performance of our major business lines. Xueersi.com, Xueersi Peiyou and some other business sectors revenue all increased faster than expected. Besides that, compared with Q4 of previous year, Q4 of fiscal year 2019 was also benefiting from the course scheduling. It benefited from the seasonal impact of a fall winter term and early spring semester as well as shifting courses due to teacher exams in November of 2018 which we had guided earlier. For the Q4 margin, our non-GAAP op margin increased by 3.1% and the gross margin increased by 6.8% year-over-year and our non-GAAP op margin for the whole fiscal year of 2019 increased by 1.4%. Gross margin increased by 6% year-over-year. The improvement was due to several factors. Fortunately, our overall efforts of improving operational efficiency and facilities utilizations have continued to achieve some good results in Q4. Plus, as you can see, we have been slowing down our capacity expansion in Q4 and also in the year, fiscal year 2019 either due to the policy impact, our own effort to control the expansion rate to pursue overall sustainable development of our online business. The healthy offline business will give us more leverage to further support our online business and other newly initiated projects and programs to respond to market trends and meet diversified needs. And secondly, our online business performed well too in this quarter. Revenue from xueersi.com increased by more than 200%, which leads to better gross margin due to cost of structure efficiency improvement. And thirdly, comparing with Q4 of fiscal year 2018, Xueersi Peiyou revenue this quarter was positively impacted by cost scheduling, so the revenue recognized in Q4 of…

Thank you, Tallan. Some complementaries, I think Q1 is actually we need to put the net impact into our considerations, but this is one-time event and that will lead to next quarter. Thank you, Tallan.

Thank you, management. Thank you.

Thank you. Our next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.

Hi, thank you for taking my questions. Firstly, I want to ask what the margin outlook for the first quarter? And secondly, I want to answer more – understand more about your online strategy. We noticed that there are a lot of new online courses in the website, including short-term courses and also a lot of course upgrades. And the overlay rate of regular price cost in this summer is also higher. So, could you please talk about the thinking about online business strategy and what the proper expectation in this year? Thank you.

Thank you, Sheng Zhong. I think the first quarter margin situations in general as I said before we don’t give very clear guidance about that, but I think Linda has mentioned just now that considering it’s getting easier, that will both impact our top line and bottom line. And secondly, I think your questions maybe more about our online strategies, especially for online school in the coming years. I try to really answer your questions from four different dimensions. In the first one product, last year, we probably can see that very good test of very first year we start to boost our online business. The revenue growth and the enrollment growth are both triple digit, which looks good. But in the reality, actually, the product is [indiscernible]. We don’t make good enough progress in the product perspective. So, I think that’s why even in previous quarters, so back to focus alone product itself. For example, we should not only have a product and cost [indiscernible], but we also need to leverage the power of technology to make sure some process can be automatically entered. Parent then can reduce the cost structure, which enable us to provide a cost that’s even lower cost and lower prices. And the product today is also, have some kind of limitations because we still need a teaching system to provide support. So, we wish we can deliver our products, even a light cost, a light owner cost to support more people. So, the product portfolio itself must develop and must continue to even morph maybe even faster than what we did last year. Secondly is operating model. Last year, you probably can see we grow online around 100%, plus/minus, of which lead to we have hired a lot of new teacher, teacher assistants and…

Thank you very much, and I’m looking forward to the strategy execution.

Thank you.

Thank you. Our next question comes from line of Natalie Wu from CICC. Please ask the question.

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

Thank you. I think the first question, that’s a very interest topic. And by the end of today, I think most of our online students still coming from [indiscernible] will have fiscal presence, which means tier 1, tier 2 cities. And if we’re moving to the gross numbers, city by city, actually we are very happy to see both online and offline maintain a very healthy growth in the both the revenue and the enrollment status. So, I can’t say there is no cannibalization, but we can say is we don’t see material impact from there and secondly, about your question from capacity expansion, right?

That’s right.

For capacity expansion okay. So, I think right before I answer your question about asking, we need to recap some numbers. In fourth quarter, our Peiyou small class offline normal price class, the enrollment increased by 21%. The just online school increased by 146%. If we’re looking to the full-year number, these two numbers become over 30% and 188%. And we’ll also recap the other numbers. I think starting from the year 2012 to the year 2017, and on average, we enter around 2 to 4 new cities every year. And in the year 2018 and 2019, we have entered 26 cities through dual-teacher models. I think when the business in different stage of development, and we need to evaluate we need to use different metrics of KPI to evaluate their performance. In the past few quarters, especially in the path few months, we have very clearly seen the online technology and online education has much bigger potential than what we expected. And the growth rate for the online sector is much faster than offline, with numbers not only good in my company, but also good in the other companies in areas like [indiscernible] and some other companies. And online has a very important new market space for the older education providers. And secondly, you also start to go into the dual-teacher models which we have start pilots 3 years ago. What things dual-teacher model’s classroom, or even in the executive send offline classroom, even in the classroom [indiscernible], but they have been changed through our technologies now. We use [indiscernible] to capture a lot of informations to do analysis. And we also use the intelligent teaching system and the intelligent class assistant to provide epiphanies teaching facilities. We also leverage the mobile devices to integrate both in the classroom…

Thank you. Very helpful. Very quick follow up. How many cities have already use Xueersi Peiyou online model? And how many cities do you plan to use this model to enter this year? Thank you very much.

You mean how many cities are plan to enter Xueersi online model or dual-teacher model, the numbers?

Using the Peiyou online model.

Okay. Peiyou Life is a, complementary services of the Peiyou offline models. So, in theory, older Peiyou offline [indiscernible], they have chance to be equate our way of Peiyou Life services. We will try our best to try to cover more cities as much as possible, with the consideration of we need to make sure the quality and the bandwidth are going to support that. And inside information for the dual-teacher model, you should ask how many new cities we want to enter dual-teacher models. I think 2 years ago we entered around 12. Last year it’s around 14. So, this year maybe 7 numbers, in that range. Thank you.

Okay thank you very much.

Thank you. Our next question comes from the line of Mariana Kou from CLSA. Please ask your question.

Hi thank you management for taking my question I think my question is more on the mix of the given channels and how should we think about the margins at the group level. Because I think for FY 2019, we are putting more graded offline growth, capacity growth, and so we actually reported pretty nice margin expansion. But looking into the next year, you continue to have pretty color outpaced offline capacity growth, but a very strong online expansion. How should we try and think about the good level margin? Thank you.

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

Thank you, Rong Luo.

Thank you.

Thank you. Our next question comes from the line of Alex Sierre from Credit Suisse. Please ask the question.

Hi management. Thank you for taking my questions. So, my first question is also about online strategy. So as many have mentioned, currently most students of online still come from cities where there are Peiyou learning centers. So, what are initiatives, or do we have any plans to ramp up in those cities without a Peiyou offline presence for the online business? And second question is about summer promotion in this year. We heard from the market that some competitors are doing some changes. So, are we going to make some changes, for example, in pricing of promotion courses?

Thank you so much for questions. I think for online strategies, and I think as well as I just now where you try to improve the strategy and improve the operating model is marketing and technology investments. And we have a lot of lessons learned last year, even we have loose numbers. But from management’s perspective, we still have challenges. And we see we need to try to resolve if we want to be more scalable in the long run to support more and more people. And it’s good for us to know the challenges compared to last year. And the whole team is working on this. We feel quite confident about that. And the summer promotions, I think the summer promotions for the online promotions, yes, you are right. We start to see a lot of online companies; they are doing some promotions, not only the traditional offline education company, but also some new online companies. And the competition, the online perspective, it’s much more fierce than last year. You will also need to get prepared for that. But on the other side of education is also our unique industry, which is quite different from ecommerce industry. The purely promotions and the purely marketing dollars cannot automatically lead to a better number. So, we have a lot of operating data, as I mentioned, at every operating stage. So as the whole company, the product quality has first priority, and we try to automatically improve our process to hereafter support their students and the parents better. And the market’s very dynamic. Even maybe every day we can see something different. But we as a company who has support millions of online users last year, and we also we will be very humble to see what’s happening in this market and to reinforce our team’s execution to make sure that we can fully prepare for any challenges in the future. Thank you.

Maybe just one, thank you very much, it’s very helpful. Maybe just one follow-up, do we think we have some synergies between the sort of special synergies between the cities where there are Peiyou offline centers, and at the same time they can promote our online enrollment in certain cities?

I think because our Xueersi online business, [indiscernible] for us online will push us over there. So, they have almost similar brand. So, in the places we have fiscal incentive, definitely we can beneficial from there. But on the other side, you also are going to see is because when we’re supporting more online users, we start to see our [indiscernible] in some cities even we don’t have presences also improving. So, I can’t say we find a perfect way to target that kind of market, but the whole team will continue to work very hard to make sure we can penetrate the opportunities that are relevant there. And in the tier 1 and tier 2 cities today, we support close to million online users, which give us a lot of lessons learned. When we go into low-tier cities, all of its lessons can be beneficial to us.

Got it. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Christine Cho from Goldman Sachs. Please ask the question.

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

Let me answer the first question. Our deferred revenue was affected both by the new imperative Topic 606, and we made refined reclassification. And also, by the schedule change in tuition fee collection. So, if we took into consideration both the refined reclassification and the schedule change in tuition fee collection and make an apple-to-apple comparison, the deferred revenue is the end of first quarter of fiscal year 2019 would increase by more than 30% year over year. And once we have circled a full year, we may start to make apple-to-apple comparison of year-over-year deferred revenue balance.

Yes. So, there is apple-to-apple comparison deferred growth more than 50% [indiscernible]. And your second question about our customer acquisition cost, I think when we’re going to learn acquisition costs, we need to put them into two ways. The first way is we have some enrollments coming from operating channels. The parents know us and know our name and trust our brand, so they come to our own just online [indiscernible]. So, we don’t need to pay that much in the printing channels. And we also doubly encourage the parents’ referrals. So, our current so we try to leverage our mass marketing and the branding and the reputations to make sure we can attract more students from the branding channels. And we also invest in the third-party channels, like WeChat Live, Baidu and some other channels. So for that type of channels, we need to be very careful about how much we invest over there and for their leads, we have go from that kind of channels, we need to make sure our operation process can be much more accurate than before, not only attracting to see us, but also let them rest and convert into pilot class, convert into regular class. We have a lot of operation details we need to improve over there. So in the long run, we will maintain lifetime values [indiscernible] every new customers that we have acquired every quarter. And so far we feel good about our numbers, but this market is very dynamic. It’s fast-changing. We also see our competitors do a lot of things there. So we will make sure we keep as open about any changes in this market and we will act quickly. Thank you.

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