TAL Education Group (TAL) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to First Quarter FY2021 TAL Education Group Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, there will be a Q&A session. Today’s conference call is being recorded. I would now like to hand the call over to your first speaker today, Ms. 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 2021 earnings conference call. The earnings release was distributed earlier today. And you may find a copy on the Company’s IR website also with the newswires. During this call, you will hear from; 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. Compared to the situations one quarter ago. We have been encouraged by the progress that the government and people in China had made to keep the COVID-19 under control. We are still saddened by the strains that this pandemic has put on public and personal life and ongoing challenges in many other countries. At TAL, during the first fiscal quarter. We continue to operate within the possibility in the restraints of the organization you off with operational adjustments in case since February. We are managed to mitigate the negative impact on our offline business after the first quarter. By the growth in student enrollments in online causes and related to revenue. Net revenue growth in the first quarter was 35.2% year-over-year in US dollar terms to US$910.7 million and 41.5% in R&D terms. Total normal price loans and causes student enrollments increased by 72.1% year-over-year, mostly driven by the online enrollment as well as trust pays more class. GAAP income from operations was US$35.5 million a year-on-year decrease of 26.8% for US$48.5 million. Non-GAAP operating income of US $68.8 million decreased by 7.8% for US$24.6 million in a same year ago period. 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. Then Echo Yan, our IR Director will reveal our first quarter financials. After that I'll update you on our bidding strategy and discuss our business for next quarter. Linda, please.

Thanks you. I will review the various strategy of our children meeting for the first quarter. Let me start with small class and other business which consist of Xueersi Peiyou small class, Firstleap, Mobby and some other education programs and services. These accounted for 68% of total net revenue compared to 77% in the fourth quarter last fiscal year. The revenue growth rate was 21% in U.S dollar terms and 27% in RMB terms. Xueersi Peiyou small class which remain our stable core business so presented 60% of total revenue in the first quarter compared to 67% in the same year ago period, the lower revenue contribution from Xueersi Peiyou was mostly due to the faster growth of dotcom online courses, which accounted for 25% of total revenue in the culture compared to 15% in the same period last year. Net revenue for Xueersi Peiyou small class was up by 22% in U.S dollar terms and 28% in RMB terms where our normal price long-term cost enrollment increased by 43% year over year. In the fourth quarter, almost all of Peiyou business continued to be delivered by online platform due to impact of the COVID-19 outbreak. In Q1 normal price long-term Xueersi Peiyou small class AIP decrease by 13% in RMD terms and 17% in U.S terms year-over-year. The decline was mainly due to the mix change of more lower tier cities coverage as well as the courthouse offered to online small class customers who had to move from offline to online during the COVID 19 outbreak period. Our first quarter performance reflected stable growth of small class business across our cities, in our geographic network. Xueersi Peiyou small class revenue from the top five cities, which are Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing increased the by 18% year over year in U.S dollar terms and accounted for 56% of Xueersi Peiyou small class business. Revenue generated from thesis other than the top five grew by 27% in U.S dollar terms, the other cities accounted for 44% of Xueersi Peiyou small class business. Next I would like to discuss our Zhikang Online business, this business sector achieved year over year revenue growth of 5% U.S and a 10% RMB terms. Zhikang Online accounted for approximately 6% of total revenue in the fourth quarter fiscal year 2021, compared to 8%, in the same year ago period. In this quarter normal price long-term Zhikang Online classes ASP was almost flattish in RMB term and decreased by 3% in US dollar terms year over year. Now, let me update you on our current expansion strategy. We briefly slowed down our offline capacity growth plan in order to better deal with COVID-19 near-term impact. During the past month, except in a few cities, the situation in China has been continuously improving. Alongside the progress we have cautiously improved offline capacity expansion plan to cover the cities and areas which were already in our fiscal year 2021 annual headline. Before the COVID-19 outbreaks last year. Human rights of this year and foreseeable future, we will continue to pursue a healthy and sustainable Learning Center network expansion by following government guidelines and market demands. In Q1, we added ms 65 Learning Centers, we opened 78 new Peiyou small class learning centers and FIVE one-on-one centers and closed 13 Peiyou small class learning centers for first week multi centers and one one-on-one center. During this quarter, we added 685 to Peiyou small class classrooms. We entered 20 new cities, which accounted for one new Peiyou small class Learning Center each. The new cities [indiscernible]. As of May 2020, we have 936 Learning Centers in 90 cities, of which 89 China cities and 1 class is Peiyou learning center in the United States, among the total 936 Learning Centers 713 were Peiyou small class and international education centers, 91 were newly merged with deep and multi small class and 132, were to count one-on-one. And for Q2 of fiscal year 2021, and two now, with the gradual work redemption in different cities, and ongoing digital workplace practice, as well as the continued observation of COVID-19 impact. We have conditionally rented and 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 reflects our current expectation, which is subject to change. Moving now to our online business, fourth quarter revenue for xueersi.com grew by 123% in US dollar terms year-over-year and 133% in RMB terms, while our normal price long-term policies enrollments grew by 143% year-over-year to approximately 1.28 million. Online contributed 25% of total revenue, and 43% of the total normal price long-term enrollments this quarter, compared to 15% of total revenue, and 31% of total normal price long-term causes enrolment in the year ago period respectively. The accelerated growth in online business was supported by the current circumstances that drive the secular demand for online education, as well as sales and marketing efforts and retention of the previous quarters. In addition, in Q1, normal price long-term online course ASP decreased by 9% in RMB terms and 13% in US dollar terms year-over-year, mainly due to the mix change of our diversified online course offerings. With that, I will now turn the call over to Echo Yan for the update on 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 2021. Gross margin increased by 27.6% to US$481.1 million from US$377 million in the senior goal period. Gross margin for the first quarter decrease to 52.8% as compared to 56% for the same period of last year. Sales and marketing expenses increased by 41% to US$219.1 million from US$155.4 million in the first quarter of fiscal year 2020. Non-GAAP selling marketing expenses, which included share-based compensation expenses increased by 39.6% to US$211.2 million from US$151.4 million in the senior goal period. The year-on-year increase of selling and marketing expenses in the first quarter of fiscal year 2021 was primarily a result for more marketing promotion activities to strengthen our customer base and brand, as well as higher compensation to sales and marketing stuff to support more programs and the service offering. Other income was US$42.1 million for the first quarter of fiscal year 2021, compared to our other expenses of US$31.3 million in the same year ago period. Impairment loss on long-term investment was US$2.3 million for the first quarter of fiscal year 2021, compared to US$50.6 million for the first quarter of fiscal year 2020. Impairment loss on long-term investments was mainly due to declines in the value of long-term investment in several universities. Income tax expenses was US$22 million in the first quarter of fiscal year 2021, compared to US$2.8 million of income tax benefits in the first quarter of fiscal year 2020. Net income attributable to TAL was US$81.7 million in the first quarter of fiscal year 2021, compared to net loss attribute to TAL of US$16.2 million in the first quarter of fiscal year 2020. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses was US$$114.9 million, compared to non-GAAP net income attributable to TAL of US$9.9 million in the same period of the prior year. From the balance sheet as of May 31, 2020, the company had US$2,323.8 million of cash and cash equivalents and US$590.6 million of short term investments, compared to US$1876.9 million of cash and cash equivalents and the 345.4 million of short term investments as of February29, 2020. As of May 31, 2020 the company’s deferred revenue balance was US$1495.4 million, compared to US$968.4 million as of May 31, 2019, representing a year-over-year increase of 54.4%. Deferred revenue primarily consisted of the tuition classes, the ones of sure to Peiyou small classes and online courses through www.xueersi.com as well as deferred revenue related to other business. A final point, concerns a repurchase program that the Board of Directors had authorized on April 28, 2020. By May 31, 2020, the company had repurchased 185,000 ADS so a total of about US$10 million. Company management also bought back 36,000 ADS in this period. 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. Firstly, I would like to say that we are most grateful for the recent government progress in stopping the spread of COVID-19 in China, and intends to concerning efforts of our teachers, technology staff, or all our employees, and the trust and cooperation from our customers and partners. We have been able to offer our children's services online and deliver some free online courses and technology service in support of our education continuity. Secondly, I would like to emphasize that to achieve the long-term success of our business requires a strong foundation and this is more important than just pure apple [indiscernible] we will end to offer the best possible quality of goods and services really understand and adjust the needs of our students and satisfy the parents in demonstrations at different times. Based on this principle our market share again, and profitability optimizations have to go hand-in-hand with our serious ambition for long-term quality service. Last but not least, given the situation China continues to improve by all government policies and regulations regarding the protection of the National Public Health. We are always treated the health and the safety of our students and employees that is our first priority and operate our business based on that priority. All-in-all, as one reflected in players with a long track record in education, technology and service will remain fully confident in our future development and education market options in China. Let me turn finally to our outlook based on our current estimates, total net revenue for the second quarter of fiscal year 2021 is expected to be between $1077.6 million and $1105 million representing an increase of 18% to 21% on a year over year basis. If not taking into consideration of potential change in exchange rates between RMB and U.S dollar, the projected revenue gross rate is expected to be in a range of 20% to 23% for the second quarter of fiscal year 2021. That concludes my prepared remarks. Operator we are now ready to take questions.

[Operator Instructions] Your first question comes from the line of Natalie Wu from CICC. Please ask your question.

Hi, good evening, Rong, Linda and Echo thanks for taking my question, just wondering for your next quarter guidance 20% to 23% year-on-year in RMB terms how does that imply the goals of offline Peiyou and online xueersi.com respectively. And how should we think about the margin going forward. Also in the long run how should we think about the online business module profile as well as the competitive landscape? Just curious if there are any change of your thoughts on long-term prospects for online business given the dynamics in latest December month. Thank you.

Thank you, Natalie. I think in the first place we need to correct our own numbers, Q1 we grow our revenue in 41.5% in RMB terms and in Q2 our guidance 20% to 23% and here we need to take something into consideration to actually cost of [indiscernible] where revenue spent actually shift from Q2 to Q1, so Q1 numbers loose that in the real numbers where Q2 lose a little bit smaller. I think one of the best way to look at our numbers is combined the Q1 and Q2 together, I think, which is also quite similar for our other counterparts in this industry. So if we are combining together, our first half revenue gross will exceed around 40%. And secondly I think if we go deeper to different segments, we need to watch our numbers one by one. In the first pace for the Peiyou small class business care, we need to be very careful. Peiyou small class means our transition will be offline being some models. In last quarter the cost of COVID-19 outbreak. So most offline lending actually is delivered through our online platform. So, for this kind of Peiyou small class business I think we have experienced and we are continuing to experience less than challenge and extent pressures other companies in this industry. We need to wait what is going on COVID-19 operate. We are very happy to see coming into this quarter with the government efforts. So, we are under control. And we have seen most, most of our new cities actually they have stopped operate. Graduates, by some help through the normal time we have in the previous years. We don't have any kind of the virus is before actually the recovery is still slower and we are in the pretty much straight way in the situation so we are happy to see we have gradually come back to normal, but this kind of recovery needs to be very cautious. Because in anytime we need to improve safety and health of the teachers and the students as the first priority. And we are also abide by all government policies and regulations to reopen our past schools graduates. And in general, here is based on what we can see today if the pandemic will not be getting worse in China in the second half then probably we can say, looking based on information we have today, the second half growth will be fascinating in the first half. And secondary we also need to talk about something is about the Peiyou Life business. Peiyou life it our online offerings affiliated to the Peiyou small class this business this year is continuous group hardware. Last year if you guys can still remember Peiyou life has grow more than I think in triple digit gross, and this year in Q1, they are also over launch growth. And based on number working today in Q2 they will maintain the similar trends. And in the subspace, the online school which is also our 25% revenue for this quarter and consumer growth 143% enrollments in July and 133% in revenues in July. And based on the numbers we have today, they are also pretty much on track to achieve around triple digit growth in the second quarter plus or minus in more range. So, in general, I think our growth for our Xueersi Peiyou small class, and Xueersi Peiyou Life and Xueersi Peiyou Online School is pretty much on share as we slowly say. And we go down to the bottom line, I think, same as before, it is a little difficult to give clear guidance about what the format will be. We have some colors or the Russians can draw attention. Especially we encourage your guys to get into the habit as possible in our opinions in approximately the status. Number one, they Peiyou small class look same as while they just now, where we are happy to see everything is under control more than 90% of the city is actually based statue resumed that is rapidly, not let's say as we did before, it will have been last quarter. So this will take some time the whole recovery, will take some time. If we don't see any kind of sign of the virus, again, saying we will probably going to see the station we will be getting second half. The challenge and the pressure is still there. Especially you can see there we also, we also entered a new cities, continue cities in [indiscernible] in Q1 and this kind of their profit process for Q2 was for Xueersi Peiyou small class will still be there. And secondly about the one-on-one I think even today, our Q1, we have the normal price long-term enrollments in Q1, for online school 1.28 million, and which means 143%, year-over-year growth in online study. By year end 1.28 million divided by the market potential of the total case of numbers in China, actually, that is still a very immature numbers. So we still believe there is a huge potential or maybe kind of the market opportunity ahead of us. So for online there is still of market share gain. So way to achieve market shares in the online space we need to invest at least in following areas are not limited to the following areas. Number one, we need to continue to invest in technology. Frankly speaking, I think two years ago, when we just opened our Xueersi online school life business. We don't imagine Sunday, we will support millions of students at the same time doing a live learning how to travel. But today, that is what happens every day. And the normal growth of online school still more healthy and more high. So this kind of challenges on the technical platform will be even bigger than before. So we need to maintain our investment and even increase a little bit more in our investment technology studies to make sure our technical platform can be very highly competitive in this market. Second city we need to also invest in the teachers and the teacher assistance. Because under today's model, we still need teacher assistance to support the students to have a better learning experiences. So the online learning sometimes it is not simple in moving from offline to online, actually, that is a brand new learning model. So besides the worry to teachers we need to have, we also need to build a very strong teacher assistant team to support him. So here, even during the COVID-19 period, we continue to progress to higher, more efficient systems for online team. Today, the number is much higher than before now, and we get ready for the high traffic and in summer. And in a surplus, we also need to invest the necessary sales and marketing dollars to make sure we can achieve more students in the coming summer. And I think that is the wrong in this strategy, I think in the past two years, so we have a lot of lessons. We are always balanced on one owner possible student we can teach with the efficiency we offer over the efficiency and efficacy of this investments. So we have a system ready to evaluate our AI by different channels. And we will need to change our address due to the different channels performance real time. So, this kind of the necessary sales and marketing investments is also important to hire us to make more people know us and try to attract more people to try our products and we will use our high quality products to improve a conversion rate and finally, make sure the lifetime value of work. So all-in-all, we need to consume imagine online space, the technology space in the future of studies in the sales and marketing studies. This kind of investment will also give us some kind of precious especially in Q2. And again I think I think we are running this business for a long time. And today learn education is much more different than what we are maybe five years ago, five years ago when we are first doing a lot of things in the online space., in a good show model space maybe there is not that many [indiscernible] them for us. But today the competition is always there. And we are probably going to see some of the private companies get a lot of money and so we are still need to maintain our competitive in this to make sure we are ahead on the whole industry. But again if only peak the top five online players in this area, we calculate their numbers together actually still this kind of online student divided by the total numbers in case of our population that is still a small quantity. I think we still have a lot of much potentials we can go. Today is too early to talk about how we had some decisions, we need to do more is actually we are doing to ourselves to make sure how we can improve our operating efficiency to maintain a healthy level of our investment and balance our cost drivers posting online beautiful models and Peiyou Life insurance on school to deliver a well paced growth and to deliver our healthy and sustainable growth in the long run. Thank you.

Got it. Very clear. Thank you, Rong Luo.

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

Hi, Rong Luo. Congratulations on the results. I want to ask a few more on the online because I remember last year you mentioned, you mostly focused in the process of online strategy, and it seems like for all the shares online growth has been stronger than what we expected in recent quarters. So looking back for the online some of promotion, using what we make right, this as a promotion and looking ahead for the second half of it, and into the upcoming quarter? What do you focus on the strategy as for this year compared to last year? I just want to hear bit more? Thank you.

Thank you, Mark. I think if you recap some numbers. And last year, our Xueersi online school revenue growth is around 86% to 87%, close to around 90% last year. And this year Q1 grow by 133%, and Q2 we are pretty much on track to around the triple digit growth plus minus in this range. So, I think part of the reason is because of their market change, in the past few months its most of China students are forced to stay at home and pay their own offers. So which a salary flow online popularities through the students and teachers. So, we are one of the leading players in education player, we also got some benefit from there. So if you guys can do into some other online players in this market actually that is quite common and not new for us, but also for the whole industry. So with these the marking environment is a very important reason we need to be very honest for that. Secondly, I think right after running the beans for a few years, especially for the online for the few years. I think we have training improve our competitiveness upload products. And when sometimes on avocation is now kind of the magic, actually they require a lot of the digital operations and efforts. So that is now simply stay were just moving students for offline and online, we are just moving them from classroom to screen, everything okay that is not a case. Actually we need to read that a lot of process. We need to restructure the way hallway peruse the students to rest in our platform, hallway widen to pilot class and hallway can make sure online interactions is better than offline measure students feel actually they are learning in a classroom even that is virtual online. So we also need to restructure the way, hallway can train our teacher assistance, hallway assistance our students and their parents to measure the inherently students to gain touch with offers and get along with them much longer time. So a lot of business over there. So we continue to invest our energy and our investments and technology studies which help us measure our assistance and other process can be improved to taking off, to deal with this kind of fast growing enrollments. And, I think that is something I think we are out. We have [indiscernible] doing that in the past, maybe three or five years, and we were continuing to do that in the foreseeable future, because the only way you invest in technology only way to invest in a platform only way invest in the product that is the only way we can serve more students. And that is also the only way we can serve in an affordable way, which is just maybe more important you are bringing to see there our ASP offerings. Blended offerings is also decreasing because it is not because the way you reduce the price, that is because we tried to offer more online products and more affordable price products to the students. So the continuing investment in a technology and on a platform product is something we continue to do that. I can't think we are being right or wrong, but that is something we need to do. And we are also, I think, in today's online education, the teacher assistance, Laurie, right critical, and we need to have enough teachers and teacher assistance to support students. So, which is also a lot of efforts now. Front speaking if you need to hire South students teacher assistance that is not easy. So when you to make sure our system work effectively, so we can hire new students and train students to measure and they can deliver a high quality service to a parent and the students to make sure teaching quality it can be secure. As we continuously improving operational efficiency and making sure we can optimize different detail operating process is massive shock we continue to make efforts in every quarter and every year. So, looking into summer, what we can say is actually what I discussed today is Q1 results most of the numbers actually, it is the spring numbers. So the Q2 numbers for some numbers will be displayed in next quarter. But in general, we can see that we are pretty much on track with other growth targets outlook there. And for the summer, I think we don't have anything special. We need to drive attention, but we are continually. We need to make sure, we put a product quality as the first priority, we need to make sure on our offerings can see the what student's needs. And that people will feel satisfied about our product offerings, they feel they pay the money and the money is worth the efforts they pay. So, all of this is a detail work, we don't have any metrics or we don't have any shortcuts to create success, there is not that much kind of secret. All we need to do is hands down to everything our details as best as soon as possible and continue to improve. On the other side, so we need to be as open we see a lot of school counterparty in this industry. And we learn a lot from them not only in the marketing, branding, product design and a lot of places. So, we are very happy to see we are lucky in this industry. We have more counterparts who are also devote their energies and time in this industry. And they have a lot of great new creations and new creative features which we can learn from them. So, that is something we continue to, we will do in a future years. So, all-in-all, we don't have any metrics. What we need to do is start talking that much has done to our job harder and harder than before. Thank you Mark.

Next question please.

Your next question comes from the line of DS Kim from JP Morgan. Please ask your question.

Hi, everyone. Good evening. Thanks for taking my questions, and congrats on the good results. First, I have two questions if I may. First on margin, today I checked why gross margins this quarter went down 300 plus despite your contribution from circle nine, i.e. optimizing was a big positive surprise. So, just trying to understand why Q2 margin was lower versus the mix and wondering whether this is because of a big chop in slow margin segment or else, and I have one small follow up after this. Thank you.

Thank you for question. I think for the gross margin. For Q1, it is a little bit decline is because when we are moving this period Peiyou small class students from offline to online, which is quite successful, most of our students actually moved there and one thing we need to draw is actually in a second quarter when we try to retain the students from sprains into some of them, actually, the retention is quite good, even a little bit higher than last year. So, the efforts work, when we are moving the students from offline to online, actually, we provide some kind of price coupons to them. So, which we will deduct a little bit in revenues. So, which will make the gross margins of appeals more, a little bit lower than before? And I think that is the most important reason that we have full of gross margins, why they a little bit different. And can I clarify your second question it is about OP margins?

Yes, I think you are right, he kindly explained all that. Thank you. And, if I may follow up on other point. This is more medium term, but how are we going to balance Peiyou offline and Peiyou online, given now, the lines between the two are a little bit blurred since COVID, so are we in the future, thinking of matching online price to terrible fine, essentially deflate replacing, Peiyou offline with the life or are we going to keep two segments completely separate or complimentary to each other and try to serve a different group of students. And that is all and thank you gin for taking my question.

First speaking, I think the best answer for this question should be go to parents. Because actually, our different drivers, of course models, actually the fundamental drivers to then actually needs from this market, needs for the parents and needs for the students. And I think the past several months is after COVID-19 outbreak, I think that it is a special time. That is the first time for all of us. So it is very special, and maybe it is very unique. So we can't just use the three months or four months experience to decide what will we need to do in the coming three or five years. So we carefully evaluate and observe what is happening in the past three or four months especially I've seen some more students they choose the online offering. We need to make sure is there a temporary phenomena or that is forever phenomenon. Today, it is too early to make a judgment call. And in the second is I think today same as slowly running a company before it is very good, the shorts to smart class and short the online things as they are running separately, because the Peiyou small class business they cover city-by-city [indiscernible], we covered the other 20 new cities. So the total number is around 90 cities, not zero including one in the U.S.. So the Peiyou Life is highly connected to the Peiyou small classes, to the Peiyou Life complimentary service to them. So they will focus on how to provide the better to offline students. Especially, they will provide more localized content to them. And that is our progress for the Peiyou Life offerings. So they are part of the Peiyou small class. [indiscernible] online schools, since its beginning is a breath strategy. We want to use these offers to cover the majority of the whole market. So they will pay attention to the general conference and general features and the general subjects. So we prefer they can cover more students especially how to serve low cured city students in run. So based on what we have today, we are still encouraging appeals from a fast English on school to run into own directions and to try to penetrate and try to attract different parents, because parents needs are different. Now 100% of the parents, they lack offerings. But also, if now 100% of students, all the parents, they like only offerings, So we need to make sure we can have that diversify offerings to wake in support for the needs of the students. And again, today, no matters offline and online. Our overall number of students as well as more than market share is maybe low-single-digit. So it is too early to say we need to combine them together or we need to do something else. We really need to do is focus on our strategy and continue our current executions working hand-in-hand to measure we can deliver quality growth in the long run. Thank you.

Thank you. that is very clear.

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

Hi good evening Thank you for taking the questions My question is about your online business. So can you give us roughly number, how much of students now is for lower cities for online learning? And I think previously, you mentioned that you are doing some trial of different business models in lower cities to see which are the best models. So, can you share some color, some observation with us and the company is thinking about the future strategy in lower cities? Thank you.

Thank you, Sheng Zhong. I think it is always a very important questions how it impact to the local tier cities. And in last year, for [indiscernible] we have around 20 plus students coming from low tier cities. Now this year, the situation has a little bit change, especially right after the outbreak of the COVID-19. And we are running some free class promotions and classes to the students all over China. And we are also optimize our products to try to assemble students for low tier cities. So what we can see is actually for the new students, and especially for the promotion students, more and more of them are coming from low tier cities. I think even today, I don't have a perfect answer to say hey, that is best strategy to penetrate the low tier cities, we don't have the shortcut yet. But we are happy to see that is with our continued involvement of our progress and we are seeing way more students actually are coming from the low tier cities and coming in the past few months. And this trend will continue in the coming few quarters. Again, I want to say is actually the students who live in the low tier cities, compared to the students who live in the big cities, they understand, they have same demand, they have the same needs, and they have the same ambition try to be more competitive, they want to learn better and they want to have better life. So what we need to do is when we go into the low tier cities, we need to find [indiscernible] to how to make our offerings more affordable, but the teaching quality should always be the same. So we need to treat it using the product quality as high priority when we go in there. We need to make sure we teach very hard. So we will continue our current offering now and we will evaluate other data and especially in the low tier city student status to consider workflow products to fit their needs. So all-in-all what I can say is we are good to see more and more students of our platform, online platform. Actually, they coming from local geographies, and this trend will continue in the coming two quarters. Thank you, Sheng Zhong.

Thank you.

Your next question comes from the line of Felix Liu of UBS. Please asked your question.

Thanks for taking my question and congratulations on this Q1. My question is on the progressive side, I see your deferred revenues are 1.5 billion. Well, the guidance for the next quarter is, I think, a little bit below that. So could you help us understand the different tiers I think the government doesn't really allow prepayment for too long side.

Yes, thank you for your question. The differed revenue growth was impacted by our factor growth of all our business as well as consolidation of newly acquired online one-on-one English tutoring providers. The consolidation stack from may the first of this year, and hopefully answer your question. Thank you.

Okay. Thank you very much and just as follow up on that. What is the timeline for recognizing this increase differ revenue from consolidation what is the typical period to portfolio recognize.

I think, this acquisitions happen in the Q1 mid-fiscal year, but to give them more kind color about this actually because they have higher numbers in the governance studies with net revenue because that is depending on their contention one-on-one. So actually revenues are paying out the [indiscernible] is immaterial.

Thank you very much.

Your next question comes from the line of Alex Xie with Credit Suisse. Please ask your question.

Hi, thank you for taking my question. So actually would like to ask about your thoughts about, the online small class model. I think in the last quarter you provided the online small class model to millions of students and goods retention rate has its destinations. So in the future, I'm are you going to keep some online small class offerings in your previously large class dominated Peiyou Life and did you see demand or do you have plan to do online small class in the hot cities say to attract the strongly cities as a way to penetrate into low tier cities to see the potential in that. Thank you.

.: A lot of cities come back to normal we are also seeing a lot of students and the parents, they are coming back to offline schools now. So, I think what wherever decision we will may need to depending on the parent's satisfaction rates rather they will continue offers in the longer term, today with this preliminary positive sign or results [indiscernible] only two to three months, it is too early to judge or is too early to draw the conclusion. So we will continue to run our business in this way and we will also resume our offline business in the cities is come back to normal. So, we will leave more time for the parents and the students. And we are based on the feedback of the market. We are based on the feedback of the customers to make the decisions. Our strategy is to always evolve based on this kind of new dynamics in the market. Thank you.

Got it. Thanks.

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

Thank you. I got two questions. First is one the expansion strategy. I think that you had enter more new cities this quarter populated becomes delayed from the previous quarters. Going forward, it was a strategy of offline expansion. Would that be largely concentrated in new cities like what we have done or more of that will be existing cities. Because as we mentioned, penetrating to new cities will dilute or at least pressure on margins in the near term. So whether we will continue to do that, or scale back new cities a little bit and focus more on margins. So, that is question number one. Number two is on the revenue forecast of around 20%. Have you mentioned that the xueersi.com is likely to grow as triple digit in the following quarter, as well as the Peiyou Life will also grow at triple digits, it looks like the rest of the business it will be under huge pressure, then we will achieve or we will arrive at 20% otherwise it will be much higher than that. So, could you please help us to understand better of your revenue forecast? Thank you.

Okay, I think for the geographic expansion, actually, we are pretty much on track our plans last year and this plan has been stopped a little bit by the last several months since the COVID-19 operate. Today, we gradually resume back to our pace. But again, we will be very cautious about that. We need to spend still more time to look into what will happen of this kind of pandemic in China in the coming from few months. In Q1 we had enter 20 new cities, and we have at been around to 65 new learning centers. In Q2 by the end of today we have rented around 10, new learning centers. So, I think this is higher depending on what happened as far as in the coming month is based on what we see today. If everything still were under control, we will be more positive about that. And around your question about the new cities or the current cities. First taking, I think we are going to maintain our similar pace to enter new cities. Last year, if I remember correctly, we have entered around 15 new cities. And the year before last year it was around 13 to 14 plus minus. So, this year in Q1 and it changes. So, that is pretty much on share. We continue to answer the sizable number of the new cities every year. And we also continue to optimize our current stages efficiencies and based on the different KPIs especially the system for summarizing or other KPIs to decide if the annual incentive. I think we run in our to our new network expansion strategies pretty much thing is already in the past, but considering we have COVID-19 here, so in the most quarters will be more cautious than before. And by in the long run, we will still try to enter more new cities more they can see in the past. The revenue forecast, I think I have talked about in the beginning, but I can recap a little bit. In the first page, I don't suggest you guys only look into one single quarter numbers, because actually, because of scheduling issues with some benefits in Q1, so mainly Q1 numbers better than before and we have some kind of boxing Q2. So if we combine the two languages together for the first half. Our groceries more than 30% plus. So and particularly and yes, you are right. So we have healthy growth in the Peiyou Life, healthy growth in online school. We have some challenges, or some crashes of the small Peiyou small class business. That is because if you go back to - our Q1 typically is March, April and May our Q2 is typically June, July, August. When the students they and the parent decided to rush for Q2 classes and some different classes actually that time should be around April and May. So if you can still recap the stories in April and May, I think at that time, a lot of parents and even a whole facility are still a little bit worry about the virus and a lot of people have pay on the decision yet. So I think Q2 is a challenge cultures and growth rate also were under pressure. I think we have mixed workload now. And if our thinking getting better and better, probably the second half of it that is saying first half for [indiscernible]. Thank you.

Thank you.

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