TAL Education Group (TAL) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the TAL Education Group Second Fiscal Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Ms. Echo Yan. Thank you. Please go ahead ma'am.

Thanks, operator. Thank you all for joining us today for TAL Education Group's second 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 the 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 second quarter revenue performance was based on the robust and healthy growth of our overall small class business in the cities we currently cover and the continued scaling up of our online courses. Net revenue growth in the second quarter was 33.8% year-over-year in U.S. dollar terms to US$ 936.6 million and 38.7% in RMB terms. Total normal priced long-term course student enrollments increased by 54.5% year-over-year, most driven by positive growth in online enrollments, as well as the Xueersi Peiyou small class. GAAP income from operations decreased by 13.5% to US$69.9 million in the second quarter. Non-GAAP income from operations was almost flat to US$98.8 million. The rising operating expenses incurred in Q2 was mainly due to increased sales and marketing spending, research and development spending in our online initiatives. I will now turn the call over to Linda Huo, our Vice President of Financial. She will give you an update on our operational progress in the second quarter. Next, Echo Yan, our IR Director will review the second quarter financials. After that, I will update you on our key strategy execution and discuss our business outlook next quarter. Linda please.

Thanks Jul. Fiscal second quarter revenue was based on solid growth momentum in the various education services of our total business. Let me review the business by different revenue streams. Let me start with small class and other business which consist of Xueersi Peiyou small class, First Leap, Mobby, and some other educational programs and services. These accounted for 76% of total net revenue compared to 81% in the second quarter last year. The revenue growth rate was 25% in U.S. dollar terms and was 30% in RMB terms. Xueersi Peiyou small class, which remains our stable core business represented 63% of total net revenue compared to 70% 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 16% of total revenue in the quarter compared to 12% in the same period last year. Net revenue from Xueersi Peiyou small class was up by 20% in U.S. dollar terms and 24% in RMB terms, while our normal priced long-term class enrollments increased by 27% year-over-year. This growth rate reflects the solid growth of both Xueersi Peiyou offline and online class. Peiyou offline small class revenue increased to a healthy rate of 12% in U.S. dollar terms and 16% in RMB terms, while offline normal priced long-term class enrollments increased by 12% year-over-year. With Peiyou online, as you know, we offer the online courses with localized accountants as a complementary service to Peiyou offline in more and more major cities of our network. Peiyou online offers regular and short-term courses and other promotion courses. In the second quarter of fiscal year 2020, which is this fiscal year, Peiyou online accounted for approximately 11% of total Xueersi Peiyou small class revenue and a 20% of total Xueersi Peiyou normal priced long-term small class enrollments. In the second quarter of fiscal year 2019, which is last fiscal year, revenue and the normal price long term enrollments from Peiyou online were 12% [ph] and 9% respectively of total Xueersi Peiyou small class business. We continue to enjoy a stable growth performance across the board of the cities we currently cover. Xueersi Peiyou's small class revenue from the top 5 cities, which are Beijing, Shanghai, Guangdong, Shenzhen and Nanjing, grew by 15% year-over-year in U.S. dollar terms and accounted for 54% of Xueersi Peiyou's small class business. Revenue generated from cities other than the top 5, grew by 26% in U.S. dollar terms and the other cities accounted for the remaining 46% of the Xueersi Peiyou small class business. The drivers of this widely spread growth are solid market demand across our cities, incremental ramp up of enrollments from our earlier classroom expansion, as well as our ongoing efforts to improve operational efficiency. We continue to enrich our course offering with the growing number of offline and online courses in curricular and extracurricular subjects. As always, we believe that the quality [indiscernible] and relevance of content are at the basis of our business. We have professionally expanded our curriculum with Chinese and English courses. At the end of August 2019, we have offered Xueersi Peiyou Chinese classes in 25 cities and English classes in 29 cities. Furthermore, First Leap, Mobby and a few other education programs all grew at a steady pace, both in revenues and enrollments in the second fiscal quarter. We expect that these diversified courses will greatly contribute more to our business. Next, I would like to briefly discuss our Zhikang one-on-one business. This business sector had a strong second quarter and achieved year-over-year revenue growth of 40% in U.S. dollar terms and 46% in RMB terms. Zhikang one-on-one accounted for approximately 8% of total revenue, compared to 7% in the second quarter of fiscal-year 2019. Let me update you on our capacity expansion. As always, we pursue well paced offline capacity growth. At the same time, we invest in new technology and online business to further improve our overall operational efficiency and closely follow all the standards and regulations. We added a net 30 learning centers of which 24 were Peiyou small class learning centers, four First Leap centers, and two one one-on-one centers. During the quarter we added 300 Peiyou small class classrooms. Meanwhile, we continue to enter new cities according to our strategic and operational planning. In the second quarter we entered into 12 new locations with DOT small class learning center in each. Our geographic coverage currently amounts to 69 cities across China. The new cities are [Inaudible]. Overall, by the end of August we have 758 learning centers in these 69 cities of which 538 were Peiyou small class, 17 were Mobby small class, 86 were First Leap small class, 114 were Zhikang one-on-one and 3 were Xueersi International. As for the third quarter, until now, we have rented approximately 11 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. Second quarter revenue from xueersi.com grew by 88% in U.S. dollar terms year-over-year and 94% in RMB terms while normal price long-term courses enrollments grew by 134% year-over-year to about 1.4 million. Online contributed 16% of total revenues and 40% of total normal price long-term enrollments this quarter compared to 12% of total revenue and 26% of total normal price long-term course enrollments in the same year ago period expectedly. The rapid growth in online business was supported by a dedicated sales and marketing efforts, retention of the previous quarters, as well as the growing demand for online education. With that, I will now turn the call over to Echo Yan for the update and second fiscal quarter financial results. Echo please.

Thanks Linda. Let me now go through some key financial points for the second quarter of physical year 2020. The breakdown of ASP for the various businesses is as follows. Normal priced long-term Xueersi Peiyou Small Class ASP decreased by 3% in RMB and 6% in U.S. dollars 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 priced long-term Zhikang one-on-one courses ASP increased by 10% in RMB and increased by 5% in U.S. dollar terms year-over-year. Normal priced long-term online courses ASP decreased by 10% in RMB and 13% in U.S. dollar terms year-over-year mainly due to the mix change of a larger proportion of high school enrollments. High school long-term online courses ASP is relatively lower than overall average long-term courses ASP. Gross profit increased by 39.9% to US$517.8 million from US$370.2 million in the same year ago period. Gross margin for the second quarter improved to 55.3%, as compared to 52.9% for the same period of last year. Selling and marketing expenses increased by 73.5% to US$263.3 million from US$151.7 million in the second quarter of fiscal year 2019. Non-GAAP selling and marketing expenses which excluded share based compensation expenses increased by 73.4% to US$258.9 million from US$149.3 million in the same year ago period. The increase of selling and marketing expenses in the second quarter of fiscal year 2020 was primarily a result of more marketing promotion activity to expand our customer base and the brand enhancement, as well as a rise in the compensation to sales and marketing staff to support a great number of programs and the services offering compared to the same period in the last year. Operating income decreased by 13.5% year-over-year to US$69.9 million. Non-GAAP operating income decreased by 0.2% to US$98.8 million. Other expense was US$55.6 million for the second quarter of fiscal year 2020 mainly related to loss from fair value change of an equity security with readily determinable fair value. Impairment loss on long-term investments was US$54.2 million for the second quarter of fiscal year 2020 compared to nil for the same period in the prior year. impairment loss on long-term investments was mainly due to other than temporary declines in the value of long-term investments in several USPs [ph]. Income tax benefit was US$8.1 million in the second quarter of fiscal year 2020 compared to US$15.5 million of income tax expenses in the second quarter of fiscal year 2019. Net loss attributable to TAL was US$14.4 million in the second quarter of fiscal year 2020, compared to net income contributable to TAL of US$77 million in the first quarter of fiscal year 2019. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses, decreased by 84.8% to US$14.5 million from US$95.1 million in the same year ago period. Basic and diluted net income per ADS were both US$0.02 in the second quarter of fiscal year 2020. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses were both US$0.02. From the balance sheet, as of August 31, 2019, the company had US$1,542.3 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. As of August 31, 2019, our deferred revenue balance was US$497.6 million compared to US$859.8 million as of August 31, 2018, representing a year-over-year decrease of 42.8% mainly due to the change of tuition fees collection schedule to meet certain regulatory requirements. Now, I will hand the call back to Mr. Luo to briefly update you on our strategy execution and to provide the business outlook for the next quarter. Luo, please.

Thank you, Echo. In this physical year we are in the midst of the further transitioning our business model to a multi-pro educational service model. This diversified model includes our offline learning center and geography network, online business, and various other education programs and projects, such as our smart education solutions and open platform business. I would like to update you on each of these models. Our core Peiyou small class business remains healthy and stable. In Q2, we have entered into another 12 new cities and including the one new cities we are entering in Q1 we have covered 13 new cities in the first half of fiscal year 2020. Till now, Peiyou offline has around 13,000 classrooms in a network of nearly 70 cities in China. Together with the fast growth of Peiyou online and our ongoing efforts to improve our operational efficiency, the profitability of Peiyou was slightly improved in Q2 as well. Looking ahead, we expect the gross momentum of Peiyou small class to continue as we further develop our offline network at a reasonable speed and scale the business. We keep seeking to operate and scale our Peiyou business by leveraging our offline and online advantages and resources, and as always with long-term sustainability in mind. Our online business is a high growth early stage business, which also faced intense competition and ever changing market dynamics. As one of the pioneers in this sector, we are very confident about the huge potential on education. We strongly recognize the social value and the market opportunities of online education, hence our ongoing explorations and development in this area. As an education provider and service provider, we will never just go after a high revenue growth speed only, but more importantly, the fast growth rate should be achieved in a healthy and sustainable way. We will spare no efforts to forever pursue a superior online business model that brings the students and the parents lasting satisfactory experiences and learning outcomes. We will continuously invest to innovate our products, technology and operational efficiency with full attention to the necessary details. Now a brief update on Smart Education Solutions, an open platform business. Through the end of Q2 fiscal 2020, mainly in the lower-tier cities and the geographical areas, we have co-operated with a growing number of public schools with our Smart Education Solutions. We also work with less than 2000 small and medium sized education institutions through different service levels in our open platform business, both Smart Education Solutions and open platform business are still small scale and in an early development stage, but as we mentioned before, by leveraging our vast educational resources in these ways, we continue to seek diversified development opportunities and contribute to the overall education sectors innovation and optimizations. As we gradually reach more and more lower cities and more and more lower tier local areas, a larger portion of our young people will have more options to enjoying equal and improved educational resources with easy access and at affordable costs. Turning finally to our business outlook, based on our current estimates, total net revenues for the third quarter of fiscal year 2020 are expected to between US$862.6 million and US$843.8 million, representing an increase of 41% to 44% or on a year-over-year basis. If not taking into consideration the impact of potential change in exchange rate between RMB and U.S. dollar, the projected revenue growth rate is expected to be in the range of 45% to 48% for the third quarter of fiscal year 2020. That concludes my prepared remarks. Operator, we are now ready to take questions.

Thank you. Ladies and gentlemen we'll now begin the question-and-answer session. [Operator Instructions] We have our first question coming from the line of Alex Xie of Credit Suisse. Please go ahead. Mr. Alex Xie, your line is open now.

Sure, sure. So, hi management. Thank you for taking my questions and congratulations on very strong set of results. So, I would like to ask about our strategy for this Peiyou business. We have already introduced, I think Peiyou online to more and more cities and now in this quarter, it seems that we are also accelerating a little bit for the small class -- number of small classrooms. So what are our expectations for the full year or future of capacity expansion and what are our strategy to better integrate online and offline of Peiyou business? Thank you.

Thanks, Alex. Yes, that's a very good question. I think right before we answer these questions, we need to go back to see what happened in the past two years. And especially last year through our earning call, we have highlighted rest of the policy and to history. And I think, which definitely has impacted our operations in the past maybe six quarters. With the new policies - a lot of new policies impact in place, the regulation become more stricter, much stricter than before. The pressure of being compliance is also getting better, getting bigger than before. And on the other side, internally frankly speaking, if you can go back to see our past maybe five years growth in several years, we grew very fast more than 50%, even 80% capacity growth. So I think the policies very good timing for us to review our business models and be more cautious. So in the past last few years you're probably can see that we made a lot of efforts, how to improve our product experiences, how to improve our whole systems operating efficiency, and how to improve our status - healthy status. We have different KPIs, how to make sure our operation can be more compliant than before, which takes us a bit some time. And as a result, you probably can see that we slowed down the offline revenue growth in the past, maybe six quarters. And at the same time, we also spent a lot of efforts to develop the Peiyou online strategy and the Peiyou online products. And that is not only newly addition of the new product, but it's also kind of a much experience to change the learning process and the learning experience for our students. So after several quarters, we today - we made a little bit progress in offline business studies, so not only including the curriculums, the products, the students and kind of interactions. We probably can see that all of these efforts paid off and where it seems our KPIs is also improving. For example, your probably can sit down in our seats fulfillment rate, our retention rate and our refund rate, all of that has some - single-digit improvement, which is a very good indicator showing we have managed our business, improved the products and made things work even better. So starting from almost last year, sorry, last quarter we decided to gradually sell a little bit of the offline learning centers expansion pace. And all of this, you probably can also see that in this quarter we added 12 new cities, all of them use the dual-teacher models. That is based on all of our kind of development and investment in the past on online technology and made us easier to be scalable to more cities in a much bigger way. So, looking forward, I think in the coming few quarters, we continue to be very cautious with the improvement in our management efficiencies and all and our Peiyou online kind of new technologies, and all of that, we will gradually a strategy - sell a little bit in the offline expansion pace and which is a very good way for us to contribute to the whole company's total revenue and profitability. For a Peiyou online, kind of some special numbers I need to draw your attention. I think in Q2, we grew our Peiyou revenue by 192% and in Q1 it grew around 165%, the percentage - the revenue percentage of Peiyou online versus total Peiyou revenue is around 11% versus the last year's only 5%. In the enrollment, there are 20% versus last year it is only 9%. So looking forward, we will continue to sell a little bit to adding more than intended so more classrooms into our networks where we use our Peiyou online technology to empower more offline students to give them much experiences. You probably can see in Q3 and Q4 where we have more than incentives added to the network and which is very important change because we spent one or two years to do a lot of kind of products, new renovations and now we decided to accelerate a little bit. But it doesn't mean we can go back to the high growth stage as what you can see in the pass throughout 5 years. So, we will still be very cautious when we improve the policy as first priority to mention our all offline incentives can be more compliance and we will be very careful about our curriculums and we will also be very careful about how to use our online technologies to empower offline students. So that's the general strategy for us. And by when - even where you see how we're adding the new learning centers, the contribution will not come out very soon. You take them around several quarters to come into effect. So maybe next year in the spring or next year summer will be the best thing to do that. So that's the general strategy for us to -- about the Peiyou business both online and offline. Thank you, Alex.

Thank you. Very helpful.

Thank you. Our next question is from the line of Yuzhong Gao of CICC. Please go ahead.

Hey, [indiscernible]. Thanks for the opportunity. Congrats on the solid results. So our question focused on your online business. [Indiscernible]. So clearly, we have seen an intensified competition in the past summer. And then, there seems to be a deceleration this quarter. So could you maybe share your thoughts on the latest competitive landscape and over online revenue growth trajectory in both the near-term and the long-term, as well as this margin outlook? Thank you.

Okay. I think this just online school business is growing on track in the Q1 and Q2, as in Q1 the growth, the revenue growth 122%, enrollment growth 121%. In Q2, they grew 94% revenue and 154% in enrollments. I think now it's right timing for us to go back to see what happened in the past two quarters. In the very beginning, as I mentioned in last earnings call, actually, we are now fully prepared for this work. So we are a little bit behind than the other players in this market. The good thing is their team quickly [ph] and we improved a lot especially in operation strategies. Two, we did a lot of adjustments and efforts. So we're trying to catch up and the final result [indiscernible], but we also want to give you more color about that. In the strong perspective [ph] I think how to reduce the cost to acquire one new customer, actually is always a tough challenge to us. And we are now a company who is well experienced in marketing and sales and we have some know how last year, but this year have more players coming into the battlefield actually, we have more lessons to learn. We are a little bit behind the beginning by we'll finally catch up. So, but this is a very good and kind of their turnover, which gives the team so much confidence, they could do even better than today. On the other side, we're also a little bit lucky is because education is a worry kind of operation-intensive industry, and they have, when the Chinese students trying to rush online classes, that's not over, that's only the beginning. So in the coming maybe few tons the - whole teaching system and management system, we will work, where you need to make sure that students feel happy and feel they learnt something and they feel satisfactory about that result of the learning and then they would decide to do, they will to retain or not. So this requires a lot of efforts on the operation strategies. We are a little bit lucky because we are ad running in this models in the past, maybe more than 10 years as education company. So we have the knowhow better than the other people, but we will face this kind of the huge award of the students, actually we also have a lot of details we need to improve. In the last few weeks, our Senior Management and our CEO is also to be the teacher assistance in some certain class. So during the whole of this practice, we will also figure out a lot of challenges and a lot of details progress in our system. So, even if only number of studies only in enrollment studies in [indiscernible], but still we have a lump a big potential, we can improve. And on the other side is, I think as education provider and service providers, we will never just go after a high revenue growth or we will never only go after for crazy revenue growth. And same as what we run of offline business, more importantly, the growth rate must be achieved in a healthy and sustainable way. So we are seeking more and more market share as early as possible in online education area, but this doesn't mean we will loss our money to do this. So looking forward to online, we still strongly believe that is the model and that is the new technology can change the landscape of this market. On the other side is our ways, these two quarters experiences, especially in the summer, and we have a lot of lessons learns and we need to be more balanced and we need to improve the operational efficiency, and looking forward, we will continue to leverage the online offer to attract more students, get more market share, have more enrollments. And at the same time, we'll continue to in fit [ph] the product quality and our product experiences and satisfaction from students and the parents as the key for everything, especially in education sectors. So, looking into - looking to the coming quarters of online, where you probably can see our enrollment growth has continued to be quite healthy and our revenue growth maybe a little bit lower than the enrollment growth in the coming quarter, is because the contribution, the mix, the more enrollments today - we have higher mix from the students in senior high school compared to last year. Well, it's in a high school their students ASP is lower than the primary school students. All of these numbers is only one quarter's numbers. I think if we talk about online, we need to be at least build these sectors in three years' time. So we still strongly believe in these potentials, and we will continue to improve our investments in the research and development side, in the technology side and product side to make sure we have much more product portfolios to offer students, we can have much more optimized cost structure products to serve more people. So that's our key strategy looking forward.

Thank you. Our next question is from the line of Mark Li of Citi. Please go ahead.

Hi, management. Congratulations on the very strong results. I want to ask for our next quarter, I think the revenue guidance is around 5% ahead of the consensus expectation. So can we know what is that bigger factor to bid for online or offline and also I would appreciate any color on the selling and marketing expenditure color for the future quarters? Thank you.

Thank you, Mark. In the first place, I actually have no idea way the consensus for the online or offline revenue growth separately. So in our company's perspective, we all - we only give revenue guidance in a group level. I think something, if we compare quarter-over-quarter in Q3 compared to Q2, I think Q2 will grow around 38% and Q3 our guidance is 45% to 48%. I think most of the big - the biggest difference coming from the Peiyou small class business, we are seeing their growth rate is in Q3 is higher than Q2. We are also seeing that Peiyou online is also fast growing. And in the first one or two quarters, actually they are close to 200% revenue growth and we can foresee this high growth will continue in the coming quarters. Xueersi online school is also growing in - is growing on track as we expected. But considering their high growth in the first quarter and second quarters, so we don't see any huge differences quarter-over-quarter. And their most important kind of contributor are coming from the Peiyou [indiscernible]. Well the sales and marketing, I think you probably can see that, in summer we're running our online campaign, and in Q3 in short-term, we're also running online promotion campaigns for the fall. And compared to last year, the same quarter, same [indiscernible] last year, actually we don't run that much. So this quarter's sales and marketing both online in Q3 is higher than the same quarter last year. So, which will give us some kind of pressures in margins perspective in Q3. And, but if we pull everything in one year's view, you probably can see that that this year the online will be loss making position, but will be slightly loss making positions, but we don't foresee any huge loss over there. And since we still have one quarters to go, especially the Q4, so based on why not today, we don't see any huge surprise we need to keep, update you guys. And running our online business is not easy or maybe nothing is easy with aiming very high target. So we will make sure both online and offline growth can be in a healthy and sustainable way. That's our key priority. Thanks Mark.

Thank you.

Thank you. Our next question is from the line of Sheng Zhong of Morgan Stanley. Please go ahead.

Thank you for taking my question. Well, as you mentioned a lot about regulation at the beginning of this call, so can you give us some more update on the regulation now, and whether it will impact your offline and online both going forward? And secondly, I want to ask - have a followup on the online business, can you give us some breakdown on the online students from Tier 1, Tier 2 cities and lower tier cities? So and then what's your strategy to go to lower tier cities? Thank you.

Okay, Sheng Zhong. I think for the regulations, the offline regulations is almost in place for more than one year. So frankly speaking, our company has experienced tough time part of being all these kind of new policy and regulations now. So I can't say today that's perfect, buy compared to one or two years ago, we are making better than before. And for the online regulations, I will leave it to Linda to give you more information about that because of the government just launched a new policy two weeks ago.

Yes. On September 30, together with other two related departments, China Ministry of Education issued a document regarding important general guidance of hastily developed online education industry in China. The document continuously illustrated and provided the policy level of the support to China online education next step and long-term development. As one of the leading online education pioneers, we are very happy to see and even welcome the online education regulations as always. And we will do our best to support and work with the whole industry and the government to keep improving the online education products, technologies, and services. And we believe that with the government support, technology development and industry efforts, the online education will benefit more and more students, especially the kids who are based in lower tier geographic areas. And finally, I'd like to emphasize again that we welcome and fully support all these regulations and policies, which we have improved the level of the centers and services of the industry and further strengthen the overall industry environment.

Yes and you asked the second question about our strategy on the low tier market for the online offering, I think that is one of the best questions. And I have to say by the end of today I think the enrollment coming from lower tier cities actually are or the enrollments coming from the places we don’t have Xueersi networks actually I think the contribution is still below 20%. And Peiyou, leading because we are online offerings can be accepted actually which is more popular in the high tier – in the Tier 1, Tier 2 because that is the place we are here. We have a huge presence, we have brand names, we have everything and the students and the student parents in the Tier 1 places they have, they have still a lot of online offerings before. So it's much easier for them to buy these offers. And they also know our name, so some have those kind of low hanging fruit. So that's part of the reason why in the past we focused on a lot of things over here. And if in the profitability study may be most profits also coming from the top cities based on our experience in being in the Peiyou in the Peiyou offline business network. And by looking forward definitely, we need to find a very effective way how to penetrate in the Tier 3 and Tier 4 even much lower tier cities now. I can’t say I find a perfect way. I know in the past few months if some of our investors give us very cool suggestions and we'll also pilot some of their suggestions in some selected cities. Based on small pilots we run today some of that is making progress, some of that doesn't work. So this has become a very important topic for us, how we can penetrate the low-tier cities in the coming two years. We can’t rely on the same way of doing online marketing to penetrate the low-tier cities. So we'll need much creative and innovative ways to do so. I don't have perfect answers now, we are still doing a lot of pilot now, but what we can say is in a Tier 1 and Tier 2, in the top cities, which we have presence and we're making good progress now and we will continue to re-enhance our competitive advantages. For the low tier geographies, we don't want to hurry to reach a conclusion. Sometimes the hurry conclusion means a mistake. So we continue to try – with even our senior managements we have all spent a lot of time over there. We are also very open to see ways to improve in other industry in other sectors. We're also very open to hear all investors and all their friends, who have some new ideas, please feel to let us know. We will figure out the best way to do that and both we can balance in the cost of new customer acquisition and the profitability of the lifetime value. So we will keep you guys posted if we're making any more progress. Thank you.

Thank you very much.

Thank you. Next in line is Alex Liu of China Renaissance. Please go ahead.

Hi, thanks. Thanks a lot Luo and Echo for also for giving us this opportunity. Just on a really high level, we noticed a lot of new players coming into the market for online business. Whether this means just want to hear your thoughts on this, whether this means the entry barrier of the tutoring business is lowered than confirmed before, simply because we have the online model right now? And if this is the case, should we think about going forward the company in general will be conducting user acquisition every single years going forward? Thank you.

Okay, thank you for the question. I think in the first place let’s compare the numbers. For the offline education companies in China I think more than 0.5 million more or less, while the online players in this market you probably know a lot of them, it is below 100. So 0.5 million compared to 100 we're probably going to see actually the couple of competition low entry barrier actually is quite different from before. In the second place, if we're only simply running the online model through a live broadcasting and the recording combined model, which means the model itself has very low entry barriers. So online education doesn't mean we use the Internet or we use the technologies to move the offline classrooms to online and that's it, that maybe not the case. I think that's a huge kind of revolution not only impact the classroom, but also impact the whole learning process. For example, how the students do the pre-studies and how the students they can answer their questions, how students finished their homework, and how the students can based on the statistics of data through their learnings and then find a right way to do so. So I think the problem for online today is the only model today, we need to continue to invest and continue to develop to make sure the online model itself has more kind of entry barriers compared to the other one. And we are sure that will happen, because if you do the interviews to the students, you probably can see that most students and their parents they're willing or they are eager to know more information, what they have from themselves and find the most effective way. They can spend – fewer time or less time, but they have much bigger outcome. This will lead to kind of the intelligent learning in the future, which has a lot of kind of – both technical and operational kind of challenges online. So if we are sitting here, we do nothing, we don't do investments and we just use to be so called okay to go models to try to replicate the whole country, I think that's definitely, that’s not the right thing to do. The competition will be even more fierce, because you guys are not making progress. So we are worried – we are fully aware of the challenges, but not only from a competition, but also from the students and teachers and parents. Based on their data we know – most of the online product today even they are okay to use, but they are not perfect. So we need to continuously invest in R&D study to make the products even more better. And I think competition, again we don't believe the competition today is the most important problem to us, because the online penetration rate versus the total students even today is very low, even the online growth is faster while the penetration rate is quite low. So what we need to struggle with actually is it’s the gradually the market is being mature gradually. If you look into the primary school and the middle school and in the high school, you probably can see that. I think the penetration rates of the primary school may be higher than the penetration rates in the middle school and less in the high schools. When a student, especially the iPad generation students, when they grow up from the primary school to middle school, from middle school to senior high, the penetration rate will be higher and higher. And on the other side is, we don't think the online education is a winner case of [ph] market. We believe if other players doing a lot of good things in the end across the market probably we can see multiple players play in these markets. In a student value the multiple players can offer you guys the best experiences and much competitive – and at a much affordable price. I think that's true, very few students and their parents. And so today, we view most of the progress within ourselves first, most challenges and most in the space we made because I would say it’s just not because of the competition. So we will make sure all of our leaders and all of our people can be highly connected to the students, help the students and be in there – teachers be their friends to know what is their pinpoints. I think that is the direction we have to go, how we can use our investment technology to relieve their problems and improve their efficiency, I think that's the direction to go. Thank you.

Thank you.

Hello, operator.

Hi Annie?

Hello?

Yes please?

Yes, we have opened the line of Lucy Yu of Bank of America. Please go ahead.

Thank you Luo, thank you Echo, I've got two questions. Firstly, could you please share with us about like conversion rate and the retention rate for the summer online promotional cost and a normal cost, that's the first question? And secondly, on the third quarter guidance, Luo you mentioned that Peiyou small class will accelerate. How much of that is attributable to class scheduling shift? Because I recall last year’s third quarter some teacher takes one day off to sit on the exams, so actually part of the revenue in the third quarter was shifted. So any low base impact if we're excluding that impact, will Peiyou small class still accelerating? Thank you.

Yes, in the first place, thank you so much for your wonderful memory. I think this year, compared to last year, yes, we have one vacant advantages because last year they have to take exams. So, I think one way is around 3% to 5% of the total revenue for this fiscal year. If we are compelled to look total revenue growth you probably can see that in Q2 the Peiyou revenue growth is around 23% to 25%, but even we pay this through 5% off from Q3, the Q3 Peiyou growth is still higher, are significant than Q2, so that is the case, what we want to show today. And your first question about the conversion rate and the retention rate, I think conversion rate you expect to be above the online conversion rates, What I can say is the online conversion rates this year compared to last year is of similar level. The retention rate of online, just online [indiscernible] is low single digit improvement, compared to last year. So that's the kind of the big information we can share with your guys.

Thank you.

Thank you. Our next question is from the line of Felix Liu of UBS. Please go ahead.

Hi Rong Luo, Linda, and Echo, congratulations on the very strong results. I just want to come back to the summer promotion. Our summer marketing investment increased a lot. So I just want to ask how do you think about the efficiency, say on a scale of 1 to 10, how do you rate your summer promotion campaign? And coming into the next quarter, if we compare on a Q-on-Q basis, how will the Q3 and Q4 marketing dollar or marketing budget be? Thank you.

Thank you for your questions. I think it's we feel happy to see the team has tailored challenges and it goes through the challenges. You'll probably know that in the year beginnings we have staff off [ph] change. So the team needed to take some time to seeing the new way and then you change their old behavior and to a new behavior which is focused more on product in the students. So, but during this time some of us some of our players actually they do a lot of things and they have a while two monthly time come back to us. So we feel very good is, the team actually quickly react and go through the challenges, even we're not being perfect, but the team is very good. And on the other side is I think we don't see our conversation rate have such huge differences compared to last year and sometimes compelled to our peers, sometimes our conversation rate is even lower especially in the beginning of summer. So, we need to, but the key reason is not because we invest too much money, the key reason is because when you invest in the front, you need to have a lot of things ready, especially in a supply chain perspective. So we need to have a variable way to improve the efficiency of our operation impact. So owing to allocation businesses it is best is not, they actually come back a lot of big [indiscernible] in a friend [indiscernible]. So if the shifting happens again, I think we have a chance and if we can have more time to be fully prepared, I think we have more chance to do a better job than before. But even in today's case, we [indiscernible] the team has been making a lot of progress compared to last year. And looking forward to Q3 and Q4, I think Q3 - I think most of you guys probably have seen that in which the moments where you invest certain money of their marketing dollars to attract new students, normal price students for online school and which gives some pressures in closer margin for the short-term, but would be beneficial in the long run. And Q4 will also reserve a certain level of marking dollars and prepare for that, we need to be evaluating or we need to look into our competition and start other market dynamics to decide whether we were spending or not. So we have made everything ready, but we haven't made the final decision here. And we will probably let you guys know in the next quarter earnings call. But again, we don't think promotions marketing money is the only way to grow the business. The key of growing our business still go back to the product, go back to the operation efficiency, go back to doing a lot of detail, I mean it works. We need to be much closer to the students than before and we need to make sure the whole team can be however, quickly much quickly than before. So, this we have a lot of lessons learned from summer and from fall. So we are happy the team is a fast learner, so we will continue to make things better and better, even not perfect, but we will try our best. Thank you.

Thank you. I'm very glad to hear the progress and good luck on the second half. Thank you.

Thank you for your questions. Thank you.

Thank you. Ladies and gentleman, this concludes our Q&A session and our conference call for today. Thank you for participating. You may all disconnect.