Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Fiscal Year 2021 TAL Education Group Earnings conference call. At this time, all participants are in a listen-only mode. After the managements' prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I would now like to turn 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 third 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 or through the newswires. During this call, you will hear from Mr. Rong Luo, Chief Financial Officer; 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 Security 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. In the third quarter, China's public health situations and economy continue to recover. We are pleased to see that our tutoring business as well as a capacity expansion progress in all cities has delivered on track performance. During this fiscal quarter, we further executed on our off-line and online strategy, which remain on track. Our learning center network expansion resume at pace after a brief lockdown in the second quarter. A quick overview of the key metrics is as follows: net revenue growth in the third quarter was 35% year-over-year in U.S. dollar terms to $1.1 billion and 28% in RMB terms. Total normal priced long-term courses student enrollment increased by 46.5% year-over-year, mostly driven by online as well Xueersi Peiyou small class enrollments. GAAP loss from operations was $127.4 million compared to income from operations of $69.4 million in the third quarter last fiscal year. Non-GAAP operating loss was $73.4 million compared to non-GAAP operating income of $99.6 million in the same year ago period. I will now turn the call over to Linda, our Vice President of Finance. Should give you an update on our operational progress in the third quarter, next Echo Yan, our IR Director, will review the third quarter financials. After that, I'll update you on our business strategy and discuss our business outlook. Linda, please.

Thank you. I will review the various revenue streams of our tutoring business for the third quarter. Let me start with small class and other business, which consists of Xueersi Peiyou small class, Firstleap, Mobby and some other education programs and services. These accounted for 66% of total net revenue compared to 75% in the third quarter last fiscal year. The revenue growth rate was 20% in U.S. dollar terms and 13% in R&D terms. Xueersi Peiyou small class, which remains our stable core business, represented 57% of total net revenue in the third quarter compared to 63% 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 28% of total revenue in the quarter compared to 19% in the same period last year. Net revenue from Xueersi Peiyou small class was up by 21% in U.S. dollar terms and 15% in RMB terms, while our normal price long-term cost enrollments increased by 18% year-over-year. Our key operational metrics of Peiyou, such as retention rates, fulfillment REIT and job up rate remains once more very stable. In the third quarter, normal price long-term Xueersi Peiyou small class ASP was flattish in U.S. dollar terms and decreased by 5% in RMB terms year-over-year. The decline was mainly due to the mix change of Peiyou online and off-line business and more lower-tier cities coverage. Our third quarter performance in the various tiers of cities reflected the ongoing normalization trend after the earlier COVID-19 disruption. Xueersi Peiyou small class revenue from the top five cities, which are Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, increased by 19% year-over-year in U.S. dollar terms, and accounted for 56% of Xueersi Peiyou small class business. Revenue generated from cities other…

Thanks, Linda. Let me now go through some key financial points for the third quarter of fiscal year 2021. Gross profit increased by 29.2% to $603.6 million from $467.2 million in the same year ago period. Gross margin for the third quarter decreased to 53.9% compared to 56.4% for the same period of last year. Selling and marketing expenses increased by 120.3% to $420.7 million from $190.9 million in the third quarter of fiscal year 2020. Non-GAAP selling and marketing expenses which excluded share-based compensation expenses, increased by 118% to $406.4 million from $186.4 million in the same year ago period, the year-over-year increase of selling and marketing expenses in the third quarter of fiscal year 2021 was primarily a result of more marketing promotion activities to strengthen our customer base and brands as well as higher compensation to sales and marketing staff to support more programs and service offerings. Other income was $45.5 million for the third quarter of fiscal year 2021 compared to other expense of $3.7 million in the third quarter of fiscal year 2020. Other income in the third quarter of fiscal year 2021 was primarily due to the value-added tax and social security expense exemption offered by the government during the COVID-19 outbreak. Impairment loss on long-term investments was $11.5 million for the third quarter of fiscal year 2021 compared to $46.4 million for the third quarter of fiscal year 2020. Impairment loss on long-term investments was mainly due to decline in the value of long-term investments in several investees. Income tax benefit was $13.9 million in the third quarter of fiscal year 2021 compared to $16.6 million of income tax expenses in the same period of last year. Net loss attributable to P&L was $43.6 million in the third quarter of fiscal year 2021 compared to net income attributable to TAL of $19.6 million in the third quarter of fiscal year 2020. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses, was $10.4 million compared to non-GAAP net income attributable to TAL of $49.7 million in the third quarter of fiscal year 2020. From the balance sheet, as of November 30, 2020, the Company had $4,233.2 million of cash and cash equivalents and $864.8 million of short-term investments compared to $1,873.9 million of cash and cash equivalents and $345.4 million of short-term investments as of February 29, 2020. The Company's deferred revenue balance was $1,957.1 million compared to $1,251.2 million as of November 30, 2019, representing a year-over-year increase of 57.7%, which was mainly contributed but tuition collected in one of the former winter master and part of Spring Master of Xueersi Peiyou small classes and online courses through www.xueersi.com. Now, I will hand the call back to Mr. Luo to briefly update you on our strategy execution and provide the business outlook of the next quarter. Rong, please.

Thank you, Echo. Despite the unprecedented challenges this year, our business has managed and delivered 30% revenue growth year-to-date on par with our long-term growth spallation. Our investment strategies for the long-term remains unchanged regardless of the COVID-9 challenges and the growth in the competitive pressures. We aim to remain the top brand in quality education services through our long-term sustainable growth strategy. Innovative technology-based education, a comprehensive and cutting-edge product portfolios and with a strong and proven operational foundation, as China continued to recover from the pandemic, we have resumed expansions, our learning center networks and geographic coverage in Q3. We expand both our learning center coverage in the cities enter into more lower low-tier cities. We have seen that our off-line presence and localize content together have a clear advantage of more precisely meeting our customers' demand in different locations. And support us in building both offline and online brand and reputation in all cities that we have covered. So we have continuously developed and roll out more Peiyou education products to further build out our comprehensive OmO model. With this, we can better serve our customers by offering them more flexibility and efficiency. As always, we will conduct business in line with all relevant government policies and regulations, including those that regard national public health. Our off-line and online operations remains ready to deal with any public has contingencies brain needed. In this time of rapid sense and technology development and COVID-19 impact, online education, with its easy access and affordable price has been pervasively affective, and China's online market opportunity is attractive, yet the competition landscape is intensive. There are simply no shortcuts in building a sustainable big business, and I would like to reiterate that we have -- we will consistently pursue our long-term strategy regardless of what kind of the short challenges we are facing. To the end, we will keep investing technology teachers and marketing and make every efforts to build all on online services with top-quality content and customer experiences. We firmly believe that as education player, education, our long-term accomplishment is defined only by the quality of our products, services and technology, instead of purely marketing. Let me turn finally to our business outlook. Based on our current estimates, total net revenue for the first quarter of fiscal year 2021 is expected to be between $1.17 billion and $1.2 billion, representing an increase of 37% to 40% year-over-year basis. That concludes my prepared remarks. Operator, we are not ready to take questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Mark Li from Citi. Please ask your question.

Hi management. Thanks for the presentation. May I ask for your next quarter's guidance, how much have you baked in the latest impact from the unfortunate off-line tutoring lockdown in Beijing area? And how are we handling the Beijing latest policy?

Thank you, Mark. I think it's very important to recap the guidance and Q3 results again, because sometimes, if we only do into one quarter, sometimes it's misleading. For Q3, we have some numbers need to draw attention because I'm sure what we talk about in this grid, sometimes it's too long, and you guys don't capture that. Q3, our Peiyou small class business grows 21% compared to previous quarters is recovering. And here, one thing we need to mention is actually the Peiyou life growth. The Peiyou life revenue growth in the U.S. dollar terms this quarter is 148%. 148%. And second, I think our Xueersi online school growth in Q3 is 102% in U.S. dollar terms. And it has been around 28% of total revenue for the whole company. And more importantly, I think starting from maybe last quarter, the enrollment from Xueersi online school has already surpassed 50%of the total enrollments in the Company. And the third point, we need to recap the number is actually, if we consider Peiyou life together with us online schools online, which means the online total revenue, the growth in the third quarter is 114.2% -- 114.2%. And and they have been around 41% of the Company revenue and 64%of the total enrollments. So with all of these numbers in Q3, we go into next year -- next quarter Q4 I think current guidance, we have somethingto let you guys know. Number one, we all know it's very unfortunate to see we have seen some cases in Beijing and maybe in some other cities. And Beijing is a big city with more than 20 million populations. Today, we have seen around the tens of their confirmed cases there. And we 100% respect the government and follow the government requirements to take…

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

I would like to ask two questions about Peiyou, firstly for the Peiyou off-line business. Could you please share with us the reason for the sort of relatively slower growth compared with off-line peers? And when should we expect the acceleration after your more proactive extension of learning centers what will be your target for the CapEx expansion in the next fiscal year? And secondly, for Peiyou online, congratulations on the very strong results, is quite impressive for the 148% growth? And then how should we think about our OmO strategy in the next year? And what about the growth targets for next year?

Thank you, Alex. In the first place, I think when we're running our business in this market, the only one we need to compare ourselves. A different company will choose different strategies while a different company will have different maybe belief away as a company who promote education through sensor technology. We fully believe the online technology inherit us to reinforce our capability to serve the students and make our business more scalable. So if we go back to talk about the Peiyou revenue growth, I think seeing us now just now, number one, the off-line is recovering so we will carefully to expand our new learning centers. Most of them still will be added in the current existing big cities. And some of them, we will go to in the new cities. You probably can see that in the last three quarters, we have entered around 31 new cities. But at the same time, I think most of the new classrooms we add actually is still in the current cities. So we need to balance all of them. And on the other side, I think as why I talked about it in last quarter, in the past few months, it's very important timing for the Company because we figure out actually the online merchant off-line models, some classes off-line, some classes online is already being buying by the parents and the students. So we need to leverage all of these efforts. So we'll continue to roll out the Peiyou life to more geography, more saves and more grades. And we also try to evolve the Peiyou ão life models maybe from big class, maybe to small class and even more than that. So we believe this kind of online or off-line strategy will help us to cover the cities…

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

My question is about the online education transom acquisition cuts. Now we see from the market that the cap is going up very quickly. So wondering, what is xueersi.com's economic model now considering different customer acquisition channels, and with that, with the Company's plan, sales and marketing plan for next year?

Thank you, Zhong Sheng. I think when most people talk about online education, the first thing -- first question kind of their mind is customer acquisition costs. Sometimes this kind of thinking will oversimplify the complexity of online education models. I think in our perspective, number one, online education is still education. They have a lot of advantages in online. For example, they can get rid of the constraints of the time on the education, but they are still education. So I personally, I agree with some of the opinions from the articles recently published in the news channels. Education, actually, we need to follow their over rules, we need to pull the quality services, how to teach the students better, how to make sure they're all kind is better as a first priority. We are now running a business like such as e-commerce, like e-commerce, they can promote their business very quickly by locations, acquire customers is only the first step of the loan process. Right after that, we have a lot of things we need to do. In the end, whether you can teach the students where, whether you can maximum their outcome from their limited time that will tell the differences. So to make sure we can do that, I think we will continue the investment, I think, in maybe four areas. Number one is the content development. Our Peiyou life is providing the localized content. But on the other side, the Xueersi online school is also trying to provide more tailor-made contents and services to the students. We try to understand the students more, and we're mapping the right level of difficulty. The right progress and the reversion of the products to the students, which require more investment over there; and for example, if in custom…

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

So just a follow-up on the previous comment. You mentioned that you are investing in content development, especially on the Xueersi online school to do more tailor-made content. It sounds like it is moving closer towards the product or content of our Peiyou side of business is there any opportunity to build more synergy between the two business lines, maybe in terms of content and even in terms of tuck in acquisition? And my second question is that I recall you previously mentioned you still want to keep the level of IPO investment and protect the number one position of Xueersi online school. But I think you sounded more balanced on the comment on sales and marketing. So I just want to double check whether we still intend to invest enough to keep our number one position?

Thank you, Felix. I think both our Peiyou small class business and Xueersi online school business still -- both of them are running under the branding off-shores. So we have a lot of synergies between these two business teams. Number one is the content. I think, of course, we are not perfect. We have a long way to go to be perfect. But we have starting -- I think from a starting point, we have tried to leverage the contents not only for one business, but also can be beneficial to other businesses. So we don't want to build maybe the content gain in the gain or we do a lot of rapidly cars. So we leverage the content demand we have in Peiyou and made some -- and we try to share the investments throughout there. So this kind of synergy in the content space, especially in the localized quantum perspective, that will have our first online school business in the future. Because sometimes doing localized content is very -- that takes some time. You need to know maybe more than 100 cities. What's happening right over there? And what is their special requirement on studies and why is maybe the features in that city and all of that? So that takes some time to build a network. So we have the Peiyou small class over there, and we can leverage the beneficials. Second, I think the students, the student data is also very important areas we have synergies. Because today, we have seen more and more clearly, actually, the students can move from online and off-line. We have seen, maybe, for example, in Shanghai, some students, they started in Xueersi online school in the beginning, and then they moved to the Xueersi Peiyou live, the localized online class…

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

Perhaps to continue on the similar vein, our big picture strategy for online. Are we becoming more aggressive, trying to diversify our traffic sources, given rising channel cost from those waiting and go in and all that? I noticed that we are pushing [indiscernible] at more aggressively recently and wondering how we think about growing in proprietary traffic here? Or as you just mentioned, you'd rather focus more on synergy between offline channel and online rather than developing our own [indiscernible].

Thank you. That's a very good question. As number one, we are investing some money to do the pipeline, which is true for the parents can help their students if they have some difficulty in the homework. That is the major natural parents' needs in a family. That is not a so-called traffic pool for the K-12 online business. So that's a separate definition. I know some of the companies may say this kind of the tools can be a traffic pool for the K-12 students in the online school par. I think based on what we see in this industry, maybe that's not the case. The original intention for us, we want to leverage this kind of tool to make the work of parents easier. So when they have some difficulty, they can use a tool to make their life easier. So that becomes part of the mix in the family education side. So we have millions of students in my platform. We make -- we need to help them reduce their burdens in this area. So that's our key attention to do that. And we don't believe that is a very kind of becoming a so-called traffic pool and convert students from Peiyou to the Xueersi online school, that's not the case for us today. And secondly is, yes, you're right. I think the branding channel or maybe the students and parents who buy our branding or maybe who study our platform today. As a very important source for us to acquire more new customers because the branding channel, I think for education companies, branding obviously has to level of the minings. Number one is branding awareness, how many people know you. I think awareness sometimes can be delivered through maybe advertisements. But the second level of the branding actually is how good you bring is the reputation of your brand I think for education, the only way to gain reputation is make sure you deliver the good quality services and you teach students were and which takes some time so when we want to make sure our branding channel is bigger than before, I think the first thing we need to do is now to marketing. The first thing we need to do is invest in content teachers and technology, make sure the students they bid our offers, they like our platforms and they feel happy our platforms and they made progress in our platforms. So, only when they are being told and have making progress as the only way the branding will come. So here, we will invest more energies and times ever here. Well you serve your students much better and then the branding will become much better. And more and more people will come to your platform directly because of your brand. So, that is the circle we're strongly believed.

Your next question comes from the line of Alex Liu of China Renaissance. Please ask your question.

I noticed TAL entered 11 new cities this quarter. Most of these cities are actually Tier 2 or Tier 3 cities. So would the business ramp up strategy is different in these cities from our existing seats in terms of speed of the ramp-up, scale of the off-line capacity as well as the mix of the Peiyou online and off-line business eventually?

Thank you, Alex. I think when we go into low-tier cities, I think in general, we will still maintain our practice in the past over maybe 17 years. With first enter the new cities may be only in single grade, single subject. And we teach students where and we try to gain the reputations in the local cities. And right after that, we will try to promote our Peiyou life offerings on top of that. So because the maybe lesson learned in the past few quarters, we merged both online and offline in the Beijing, Shanghai, we have a lot of kind of experiences. So we are more confident that maybe when we can make our reputations of branding established in the low-tier cities. It may be faster for us to promote maybe the life offerings. But today, all the 31 new cities we enter, we don't need to hurry to promote life offerings. We still stick to our own approach step-by-step, build the strong reputations there look, I think the longer time you invest in the city and the better reputations you have built, maybe bigger potential you will get coming from that place. So we don't have to do anything. We still remain calm and patient in the lower tier cities. And of course, thanks to the PLIF offerings, some mass easier. So we will -- also based on what students need to make necessary changes when we offer them different types of products rate there.

Sorry, just a very quick follow-up because I think a few years ago, we were previously targeting about, I think, 70 to 80 cities where we think makes sense probably for offline operations. But right now, we're already at 100 cities. So just wondering how many cities will the Company eventually enter with off-line presence?

Yes. I think that's a very good question. I think several years ago, when I first became service companies that a poster, I think we can only enter around 30 to 35 cities at that time. That's considering the traditional off-line operating models. If the more we enter, they will sacrifice in the profits and margins. And then I think that since that's changed, especially the technology has evolved very quickly. So waste, the empowerment of the technologies, we gradually develop the traditional models. And now we develop the new comprehensive OmO model. We leverage both on the off-line advantages. So which means the Company -- the business models will be more flexible and scalable. So we also made more confident to penetrate more cities. Today, we have around 102 cities, 101 in China and the other one -- the only one in the U.S. and maybe looking forward, we still have possibilities. Maybe we can enter maybe the other 100 new cities in the longer term. But that will not happen in one or two years. That will happen in a onetime.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines.