TAL Education Group (TAL) Q1 2020 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the TAL Education Group First Fiscal Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] 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.

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 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, good morning to you all. Thank you for joining us today on this earnings call. Our first quarter revenue performance was based on the healthy growth of small class business in the cities we currently cover and the scaling up of our online courses. Revenue growth in the first quarter was 27.6% year-over-year in U.S. dollar terms to US$ 702.8 million and 36.3% in RMB terms. Total Student Enrollments of normal priced long-term course increased by 40.6% year-over-year, mostly driven by positive growth in online enrollments, as well as Xueersi Peiyou small class. Cash income from operations decreased by 23.6% to US$57.3 million in the first quarter. Non-GAAP income from operations decreased by 7.3% to US$ 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 Huo, 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 on our new business strategy execution and discuss business outlook. Linda, please.

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. This 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 causes for our business. Net revenue from Xueersi Peiyou small class was up by 14% in U.S. dollar terms and 22% in RMB terms, while normal priced long-term courses enrollments increased by 21% year-over-year. This growth rate reflects the stable growth in both Xueersi Peiyou offline and 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 fourth 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 cost 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 five cities, which are based in 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. Revenue generated from cities other than the top five, 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 is as well as our ongoing efforts to improve operational efficiency. We continue to enrich our cost offerings, with a growing number of offline and online courses in curricular and actual curricular 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 both in the fourth quarter of fiscal year 2019. Let me update you on our capacity expansion. As always, we pursue well pace 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 mobile learning centers; one Firstleap Center and 11 were online 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 fourth quarter, we entered into one new location, long form, with the DOT Tramal 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 class, 17 were mobile small class, 82 were Firstleap small class, and 112 were Chongqing. Looking to 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 causes 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 classes 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.

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 and 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, the 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 plan, the 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 US$385.9 million from US$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 US$57.3 million. Non-GAAP operating income decreased by 7.3% to US$83.4 million. Net loss attributable to TAL was US$7.3 million, compared to net income attributable to TAL of US$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 US$18.8 million from US$81.8 million in the first quarter of fiscal year 2019. Basic and diluted net loss per ADS were both US$0.01 in the first quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses were both US$0.03. From the balance sheet, as of May 31, 2019, the company had US$1,912.2 million of cash, cash equivalents and short-term investments compared to US$1,515.6 million of cash, cash equivalents and short-term investments as of February 28, 2019. The company's deferred revenue balance was US$968.4 million compared to US$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 requirement. 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.

Thank you, Echo. We have started fiscal year 2020 with a strong commitment to further transition our base model to a multi-pro 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'd rather give you some brief on each business models as below. Our core offline, if thing remains a very healthy and stable basis for our innovative efforts in all fields of education. Our strategy remains listing as before. We will keep seeking the opportunity to improve our operational efficiency, and further enrich our Kirkland and competences are into 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 facing intense competition and changing market dynamics. Peiyou had currently online tutoring, and we have strong confidence on 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, bring awareness and et cetera. All these efforts will not just allow us to penetrate a large adjustable market and also establish an owner education network across China. More importantly, our investment also let us optimize the cost structure and overcome the traditional limits to promote school education, resources and ideas to more families with affordable pricing and easy online assess. Peiyou’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. Through the end of Q1 fiscal 2020, we have core operating with a few hundred public schools after 2 years of development. Peiyou's open platform tends to empowering the whole education sector. It gives small and medium-sized education companies in China assess to our core education resources. The open platform allow us -- allows more students to share high quality tutoring results to through science and technology. Through 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, Peiyou's mission is to advance education through science and technology. Peiyou continuously strive to integrate technology with education, promote innovation and redevelopment within overall industry. We provide quality products and services in order to create value for customers and brand long-term returns for both our customers and shareholders. Peiyou’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 linked contributions to our business scaling and require a certain degree of investment in terms of technology, customer development and bring awareness in structure. However, they are growing very fast and bringing us new insight opportunities in the market to adjust. On an ongoing basis, and as always, we have placed customer inspection first. And this continues to be our key concern. Our diversified and core product portfolios and services needs to create real balance 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, improving the entire education industry, which is the long-term benefit of peer customers and shareholders alike. Turning now to our business outlook. Based on our current estimates, total net revenue for the second quarter of fiscal year 2020 are expected to be between US$895.7 million to US$916.7 million, representing an increase of 28% to 31% on a year-over-year basis. It's now 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 started to change. That concludes my prepared remarks. Operator, we are now ready to take your questions.

Thank you. [Operator Instructions] Your first question comes from the line of Sheng Hong from Morgan Stanley. Please ask your question.

Thank you for taking my question. So can you just give some more color on the first -- on the first quarter's margin? And secondly, company actually open for learning center -- offline learning center in the first quarter and also, you have a more promotion in the first quarter for online business. So could you please share with us about the company's strategy in this full year on online and offline? And how to look at the full year growth in the margin. Thank you.

Thank you, Sheng Zhong. In the first baseline, we try to recap some big numbers for Q1 got excited. In Q1, our topline the small class grew around 28%, the Peiyou Life, which is Xueersi Online has grow up 165%. The Xueersi Online School grew up 122%. All office numbers actually exactly match what we mentioned to last quarter, I think which is also the direction of our company strategy this year. Let me try to walk through that one by one. The small class offline business, which [indiscernible] in the past 10 years, even more. So I think their strategy today is what we're very clear. We wish this segment can maintain the healthy growth in the coming, maybe 3 or 5 years. What has healthy means? The healthy means they grow within the ways we can assess. We don't ask for crazy growth from short pay package. We wish the growth can be stable and very healthy. So you probably can see that in Q1, the 8% plus/minus for a 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 a much higher margin than before. And this year, we see the trend has continued, which can partially improved by around 2.3% year-over-year improvement in our gross margin. And again, coming to Q1, we're up to adding more incentives. Q1 for the whole company, we have adding around 49 Netland incentives, while 35 of the Peiyou -- Peiyou are more capital incentives. 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 that we call Peiyou Life, the [indiscernible], which is a very complementary offline models to our Peiyou offline students with more localized contents. The new model Peiyou online increased very fast in the past few quarters. And because they are quite complementary to appear offline, so there is a very limited customer acquisition comes off business models. The development of Peiyou online will be further benefiting our overall payout profit. And coming to this quarter, we have more than 30 cities, which has the Peiyou, like Peiyou online offering now, which is much better than what we have last year. And this year, the Peiyou online took around 7% after the total Peiyou revenue. Well, last year, I think quarter is only 3%. So we are confident to see that Peiyou online will continue to be a very important drivers, boosting the enrollment revenue and the profits for our Peiyou business. And 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 driver is also a very important drivers. I think we have mentioned about that so many times, which is just online school. Just online school is our major online education product. I think last year, the whole fiscal year 2019, they have grown around 187% in RMB terms revenue growth. And this year, on top of this very fee base, we're also very happy to see the Xueersi online school in Q1 delivered across 122%. And for the whole year, we are also confident this shows online school business, we will deliver a triple digit growth, same as what we did last year. I would like to spend a little bit more time about the Xueersi online studies. I think, starting from three or four years ago, we have a lot of arguments in this industry, whether online is very important way or maybe a feasible way to have companies to be more scalable and get more market share, and considering a lot of challenges coming from the parents, student acceptance and all of that. I think when in the market and knowing that should come into today, this has become a kind of industry consensus, online for the future of this whole industry. Where we are only running offline models in this country, we’ll probably have maybe close to 0.5 million competitors across the different provinces. But when we're moving this battle into the online stage, a similar competitors. The number of competitors are much less. And on the other side, we also see online, so very important or made 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 have more people and provide a equal education opportunity to serve more students, no matter they are in Beijing, Shanghai or, they are in the less developed top provinces. So we have seen all kind of -- these services has held 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're probably still remember the story last year. Last year is the first year of class. We run a lot of promotions in summer, and we have more than million students starting in our own capital of last summer. And last year, the most important lesson actually is coming from challenging the supply chain. Last year, we – through the investment in their marketing study, which a lot of people coming in, but we have some challenges to provide enough the teacher assistant support today. So, in the last year's, last -- starting from last year Q4, actually we do a lot of preparations, both in Q4 this year, Q1. We need to strengthen our capability in the pricing perspective. We need to have enough and qualify the teacher assistance to support students who are studying online. We need to hire the people, we need to train the people, we need to make sure that they are well-prepared for the upcoming summers. So this year, we are -- we continue to invest in online, not only in the marketing study, but also, we reinforced our investment to R&D study, both in the technology and the team respect. 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 our -- a lot of provisions in the supply chain, we're also very 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 one or two 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 three or four terms to come, maybe late July and August. So, the team worked very closely to make sure the conversion rate will be on target. So where we come in 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 the first company to slightly out sort of, but coming today, I think our all plus three drivers are running quite stable, the off-line drivers, the Peiyou Life, Peiyou Online drivers that shows online drivers. So the key for this quarter actually, we will go to whether our summer promotions conversion rate can keep our packet, and we still have a few ways to work. And so I can -- I can't say we have appropriate numbers, but the whole team will work very closely to measure we deliver numbers. So please stay tuned, maybe next earning calls, where we have all the numbers in our hand, we will be more than happy to show you guys the progress what we have today. And Just Online is a very important way for us to be scalable and penetrate market. So in the future, we're continuing our strategies to maintain a healthy growth in offline, grow more aggressively in the Peiyou Life and continue to the investments in the Xueersi online school to make sure that they could be number one brand in the online application space. And lastly, our slogan for Xueersi online school actually is very, very important that [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.

Thank you very much.

So when we consider that -- let me try to give you more colors about your question about the guidance for the full year the growth in the margins. I think, first speaking, we are a company; we look for long-term values to students. So actually, we care less about for the quarter-over-quarter preparations. But we still have something to say as in a full year perspective, we don't have any intention to change our full year guidance, which is around 30% to 40% top line revenue growth. We -- the Q1 will grow around 36% due to our guidance today as high as 35%. And when we can see more numbers, especially Xueersi online school number, they can work 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 path on with there. And the margin study, I think, for Q2, I think the summer promotion, marketing will start to do this kind of tough advertisements, starting from April. So, you're probably going to see that in April and May, which are two months in Q1, and July and -- June and July, which are two months in Q2. So you're probably going to see the impact. So considering we do a lot of promotions over there, so the Q2 margins will have some pressures, same as what we did before. But clearly today, we don't have any intention to change our full year guidance. I think the key to decide a full year trend will be by the end of -- their summer promotions, depending on the conversion rate and retention rate after the promotion class. Today, we have no -- a very clearly numbers to share with you guys. Where we have numbers and more kind of tuck-ins, and we'll have more skills that we finished their craft, and they retain to the next quarter have their more colors to show with you guys. But in general, we believe the company is still on the right chart. We grow away growth proves much on as what we planned in the year beginning. So, we'll continue to do our strategy and deliver a healthy growth, both topline and bottom-line. Thank you so much, Sheng Zhong.

Thank you very much. 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 -- online business is about revenue?

Yes. Both revenue enrollment, both.

Thank you.

Thank you, Sheng Zhong.

Thank you. Your next question comes from the line of [indiscernible] from CICC. Please ask your question.

Hey, Rong, Linda, Echo. Thanks for the opportunity. So, it's on the online shares -- online business. So, we see 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 seem 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 six months earlier and decide, again, what kind of investment strategy should we choose? And also, could we have some comment on the trend for us during 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 our long-term business profitability. Thanks.

Thank you. I think people answer which questions land in treasured cover with last year. Last year, I think we made huge progress in the online study. The first year, where you can see 1 million students online in last year Q2. But actually, last year, we also have a lot of things. We're not in high, especially in product status. So, by the end of last year, we decided to change the team it a little bit. So, we wish our online strategy can not only driven by the marketing but need driven by the products. So, if we go back to six months earlier, what I can say is, yes, we made some mistakes at that time. For example, we probably need to stellar promotion, maybe earlier. So, we need to be close watch what's happening in this market, especially if some competitor wishes to impact where at that time. So, we're a little bit behind I would have to say that. But the good thing is the hulking very quickly. So, we made the plan and we change our process, and we've 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 even pay the leading position in on education partner and their 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 state-based on what we see today, we are still -- I wanted to and we have very competitive in this market. And the conversion rate, actually, [indiscernible] just now is where you see the conversion rate is improving turn over turn, we still have few turns to come which is the most turn to come maybe in late July and in August. So, we're close what happened at that time and hulking after the first -- the second, turns, kind of the training, so that can become more and more capable. So, we believe the team can do a much better job turn over turn in coming few weeks. And the final numbers after summer term promotion results, I will disclose that -- I'll talk about that in the next quarter earnings call. But again, we -- everyone, adding this market, everything is transparent. What the other people see are transparent each others. We need to continue to be very humble, and we need to be very careful to do into this online battles. I have something to share with you guys. We are doing to this kind of online competitions. There are three things you need to be -- you need to pay attention to. Number one, whether the team is a very strong team with core operating experiences and has a very understanding online education. The team is -- our group team can find each other all the team is a very weak team, who always lose. So, that's a very important one, looking, who is in the best team all over the country. Secondly, we need to be very careful about as we are you invest in online marketing. If you don't pay attention to the real teaching quality, if you don't mail a student satisfied, if you don't persuades the parents, say you're 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, a highly interactive. The investment on marketing can only attract people to try to 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 studies. In a sub place, we need to be very careful about the creative products. We need to make 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 study, sometimes even better than us. So we learn from them and they learn from us, and all of this a very leading companies in the online education side, will push the whole market and whole industry to next level, we as one-off players in this market. We're happy to see all kinds of competition happening in this market. And at the same time, we believe we're in the top players continue to evolve their consolidation of online will be much easier. So again, thank you so much for your questions. We will continue to 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 the next quarter earnings call. Thank you.

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

[Foreign Language]

Hello, hello, presenters?

We shouldn't finish online. We should continue our call please.

I see. Sure ma’am. So our next question comes from the line of Alex Sierre from Credit Suisse. Your line is open.

Hi, management. Thank you for taking my questions. So I would like to ask about our strategy for offline Peiyou business. So in this quarter, the normal price enrollments, 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 lower price enrollments? And are we still committed to our plan to accelerate our offline capacity expansion and also offline enrollment growth rates in FY 2020? Thank you.

Yes. Thank you for question. Yes. I think we need to be professional to answer your questions. And when some asked me questions about how many costs you added? How many capacity you were try to expand in the whole year? Some are asking real question it means, old traditional growth models. We need to complement classroom, how many seats, how many teachers with older ratios. But today, I think if you go into the Peiyou.com, you probably can see that. We have transformed the base model from a purely traditional classroom based teaching models, two of offline merge online models, which means today, for example, we're adding -- last year, we're adding around 13% of total classrooms, but actually, we have entered more than 12 cities last year, which is three or four times as well as the traditional model three or four 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 of their classes we were adding because today their model has been a little bit different. The offline learning centers can be a very good demo to proof we are and can be a very good way to try to students coming in, and we try to promote them the online offerings. So we wish in the future, our Peiyou offline models can convert to around online or offline model, which has proved to be success in the past few quarters. And we continue to be very careful about, whether we will adding so many classrooms in a short-term. Our Xueersi Peiyou will be still as stable and healthy growth. The Peiyou team had their own recent and page debate business. But what's more importantly is they need to think about how to leverage the power of technology and leverage the bringing, leverage and incentive presence to develop 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 four quarters. So in Q1, we have added 35 learning centers. Q2 will continue to have some of that. Above this trend, we'll continue as our kind of strategic efforts, how to incorporate the online technologies into offline models. So when you look into our numbers and other models, sometimes is not good enough to only counting the number of classroom, but also need to consider their kind of the synergies become offline online, and we need to have some close look into the combinations of Peiyou offline and Peiyou Life products. So this is our strategy for the offline. We don't ask for creating numbers or maybe very aggressive growth rate in the classroom numbers. Well as for a good balance to provide high-quality products to the students. Not only offline, but also through a Peiyou Life approach.

Sure, sure. Thank you. May have a follow-up. So how do we view the difference between Peiyou online and xueersi.com? Are we seeing a sort of competition between the two?

Yes, that's a very good question. I think the Peiyou online, which is totally independent from all of any kind of the Peiyou offline business. That's a purely independent platform. I think taking share some content element, technology like broadcaster with Peiyou. But in general, operational independent, they are highly dependent. So their targets try to cover as many students, national in -- across the country. So we wish, they are trying to target their kind of the press 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. Well Peiyou Life actually is kind of the tax strategy. They need to go in deep. They need to prove more localized content, tools, students across the cities because we have a lot of fiscal and incentives in 57 cities. So we have the team revenue over there to develop a one-way lookalike content special policy. The Peiyou Life will leverage all his efforts and wants to provide their best strategies, so to provide a depth product to these total students. So in general, a short one and scope is a best strategy and while the Peiyou Life, Peiyou online is the best strategy. They are a little bit different. Based on the numbers where we sit today and based on the students, what we sit today, we don't see a meaningful kind of overlap between the Peiyou Life and school; both online drivers go quite in double digit growth. We don't see that all at a much. Thank you.

Your next question comes from the line of Mark Li from Citi. Your line is open. Please ask your question.

Hi management. 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?

Yes. In the first place, let me -- I'll try to explain, why we want to use the normal price and enrollment starting from this quarter. I think that's what we had set 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 enrollment, 30%, around 30% of the total Peiyou enrollment last Q4. Actually, they are promotional enrollments. While at Peiyou Online, in last Q4, around 65% of the enrollments are from a short-term and promotion costs. And we're looking to last Q4, show also online enrollments, around 42% of the Xueersi enrollments are from the shorter and promotion costs because when we go into online driven models, some kind of the pilot class or maybe experience democrat’s total students to let them get used to online approach and to try is a very popular way. If we continue to come off this kind of shorten and promotion enrollments into our enrollment calculations, we are afraid, sometimes, the numbers will be very misleading and very confusing to industry. So we as a company we'll always want to be conservative. We wish to disclose the kind of the meaningful enrollment numbers to all offering matters. That's why starting from this quarter, we 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 come into all these kind of promotions into our promotion enrollment into our enrollment definition, the gross rate will be much higher, but we believe that kind of too high growth is sometimes misleading. So, I strongly recommend all of you guys still in our normal price enrollment growth, which make more sense than the promotion enrollment. Thank you, Mark.

Thanks. May I have a quick follow-up is also, for the revenue guidance, I think we have two quarters of soft revenue guidance. So could you give more color on the quarter? Because I guess, I might be surprised to see online promotion, Peiyou to kick in for next quarter's revenue? Thanks.

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 as well as the growth rate, 30% to 40% is also a good number to hit. Secondly, I think someone may be curious about Q2 revenue guidance. I think we talk about all of the promotions. When you're looking to our promotions, we have two types of promotion today. The first one is the 9 IND and then for maybe 1 or 2 courses and the second one is 49 IND. So we have two products. So this -- so when we have a lot of enrollment coming from these 2 promotion products, that new enrollment numbers will be huge. But at the same time, the revenue is kind of very minimal. So only when students they finished their class in Q2 and they return in Q3 in the full term, Q3 and Q4, you probably can see the much positive and maybe better numbers in the Q3 and Q4 numbers when they return. 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 this convert, maybe return from the summer term to the fall 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 lock is very clear. So Q2, we are alluding to our total revenue guidance, I think that's very similar Q2, Q3, what we see in Q1. In Q1, there's more offline growth are maybe below 30% on the part, while Peiyou Life grew more than 150%, in short online grow more than 100%. That's pretty much the situation for Q2. And Q3 and Q4 let's wait for the commercial rate and retention of summer promotions by the end of this quarter. So we're probably can talk about that in next quarter earnings call.

Thank you.

Your next question comes from the line of Lucy Yu from Bank of America. Please ask your question.

I got two questions here. Firstly, it's also related to our offline enrollment. Because we have already explained at business level over the past 4 quarters in terms of capacity and we can see that normal price enrollment growth is also moderating to business 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 off-line margin trend? Yes, that does my question. Thank you.

Yes. Thanks so much for your questions. I think for the offline, the capacity and enrollments, I think if we are only running the model that condition the 3 or 4 years ago, we purely grow our revenue through adding more classrooms, adding more seats then the capacity growth in the offline revenue growth will be highly kind of connected. And coming to today, because we control the low growth rate of offline a little bit, and we slow down a little bit last year after a number of customers added every year. And in Q1, we're adding around 35 net small class -- centers. I think with -- we have more efforts to move the base models from purely off-line models to online much offline models. The connectivity between the connections between the capacity growth and payout revenue growth may be a little bit different. So we have more drivers coming from online. And so probably, you can see that balance will be bigger than before. And your question about our online and offline margin churn, I think for offline is 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 where 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 well promising. So we don't foresee a huge a bit loss to my online strategy. 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 online percentage is higher and higher, even they don't have a huge bill loss over from online. But because there percentage is bigger, the mix has changed, which can also have some kind of pressure to our overall companies of profitability’s. So way we will balance our drivers in offline and our investment in online to try to measure we can deliver a relatively stable margin in a proper level. So I think that's pretty much why I can answer your questions. Thank you so much.

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