TAL Education Group (TAL) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to First Quarter FY 2021 TAL Education Group Earnings Conference Call.

(Operator Instructions) 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 First Fiscal Quarter 2021 Earnings Conference Call.

The earnings release was distributed earlier today, and you may find a copy on the company IR website or through the newswires.

During this call, you will hear from Chief Financial Officer, Mr. Rong Luo; Linda He, Vice President of Finance; and myself, IR of TAL.

Following the prepared remarks, Mr. Luo and Ms. He 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 the 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 the certain non-GAAP financial measures.

Please refer to our earnings release, which contains the 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, 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 situation 1 quarter ago, we have been encouraged by the progress that the government and people in China have collectively 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 continued to operate within the possibility and the restraints as the overall situation evolved.

With operational adjustments in place since February, we managed to mitigate the negative impact of our off-line business after the first quarter by the growth in student enrollments in online courses and related revenues.

Net revenue growth in the first quarter was 35.2% year-over-year in U.S. dollar terms to USD 910.7 million and 41.5% in RMB terms.

Total normal priced long-term course student enrollments increased by 72.1% year-over-year, mostly driven by the online enrollments as well as Xueersi Peiyou small class.

GAAP income from operations was USD 35.5 million, a year-on-year decrease of 26.8% from USD 48.5 million.

Non-GAAP operating income of USD 68.8 million decreased by 7.8% from USD 74.6 million in the same year-ago period.

I will now turn the call over to Linda He, our Vice President of Finance.

She will give you an update on our operational progress in the first quarter.

Next, Echo Yan, our IR Director, will review the first quarter financials.

After that, I will update you on our business strategy and discuss our business outlook for next quarter.

Linda, please.

Thanks, Rong.

I will review the various revenue streams of our tutoring business for the first 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 68% of total net revenue compared to 77% in the first 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 remains our stable core business, represented 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 xueersi.com online courses, which accounted for 25% of total revenue in the quarter compared to 15% in the same period last year.

Net revenue from Xueersi Peiyou small class was up by 22% in U.S. dollar terms and 28% in RMB terms, while our normal priced long-term course enrollments increased by 43% year-over-year.

In the first 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 ASP decreased by 13% in RMB terms and 17% in U.S. dollar terms year-over-year.

Their decline was mainly due to the mix change of more lower-tier cities coverage as well as the coupons offered to online small class customers who had to move from off-line to online during the COVID-19 outbreak period.

Our first quarter performance reflected stable growth of small class business across all cities in our geographic network.

Xueersi Peiyou small class revenue from the top 5 cities, which are Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, increased by 18% year-over-year in U.S. dollar terms and accounted for 56% of Xueersi Peiyou small class business.

Revenue generated from cities other than the top 5 grew by 27% in U.S. dollar terms.

The other cities accounted for 44% of the Xueersi Peiyou small class business.

Next, I'd like to discuss our Zhikang one-on-one business.

This business sector achieved year-over-year revenue growth of 5% in U.S. dollar terms and 10% in RMB terms.

Zhikang one-on-one accounted for approximately 6% of total revenue in the first quarter of fiscal year 2021 compared to 8% in the same year-ago period.

In this quarter, normal-priced long-term Zhikang one-on-one courses ASP was almost flattish in RMB terms and decreased by 3% in U.S. dollar terms year-over-year.

Now let me update you on our current capacity expansion strategy.

We briefly slowed down our off-line capacity growth plan in order to better deal with the COVID-19 near-term impact.

During the past months, except in a few cities, the situation in China has been continuously improving.

Alongside this progress, we have cautiously resumed our off-line capacity expansion plan to cover the cities and areas which were already in our fiscal year '21 annual pipeline before the COVID-19 outbreak last year.

In the rest of this year and foreseeable future, we will continue to pursue healthy and sustainable learning center network expansion by following government guidelines and market demand.

In Q1, we added a net 65 learning centers.

We opened 78 new Peiyou small class learning centers and 5 one-on-one centers and closed 13 Peiyou small class learning centers, 4 Firstleap-Mobby centers, and 1 one-on-one center.

During this quarter, we added 685 Peiyou small class classrooms.

We entered 20 new cities, which accounted for one new Peiyou small class learning center each.

The new cities are Yueyang, Changade, Hengyang, Zhuzhou, Xiangtan, Zhanjiang, Zhuhai, Jiangmen, Shantou, Xiangyang, Yichang, Mianyang, Deyang, Wuhu, Liuzhou, Zunyi, Baotou, Xining, Baoji and Baoding.

In all, by the end of May 2020, we had 936 learning centers in 90 cities, of which 89 China cities and 1 Xueersi 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 emerged Firstleap and Mobby small class, and 132 were Zhikang one-on-one.

As for Q2 of fiscal year 2021 until now, with the gradual work resumption in different cities and ongoing digital workplace practice as well as the continued observation of COVID-19 impact, we had conditionally rented 10 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 expectations, which is subject to change.

Moving now to our online business.

First quarter revenue from xueersi.com grew by 123% in U.S. dollar terms year-over-year and 133% in RMB terms, while normal-priced long-term courses enrollments grew by 143% year-over-year to approximately $1.28 million.

Online contributed 25% of total revenue and 43% of the total normal-priced long-term enrollments this quarter compared to 15% of total revenue and 31% of total normal-priced long-term courses enrollments in the same 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 retentions of the previous quarters.

In addition, in Q1, normal-priced long-term online course ASP decreased by 9% in RMB terms and 13% in U.S. 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 USD 481.1 million from USD 377 million in the same year-ago period.

Gross margin for the first quarter decreased to 52.8% as compared to 56% for the same period of last year.

Selling and marketing expenses increased by 41% to USD 219.1 million from USD 155.4 million in the first quarter of fiscal year 2020.

Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 39.6% to USD 211.2 million from USD 151.4 million in the same year-ago period.

The year-on-year increase of selling and marketing expenses the first quarter of fiscal year 2021 was primarily a result from more marketing promotion activities to strengthen our customer base and brand as well as higher compensation to sales and marketing staff to support more programs and service offerings.

Other income was USD 42.1 million for the first quarter of fiscal year 2021 compared to other expenses of USD 31.3 million in the same year-ago period.

Impairment loss on long-term investments was USD 2.3 million for the first quarter of fiscal year 2021 compared to USD 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 investments in several investees.

Income tax expenses was USD 22 million in the first quarter of fiscal year 2021 compared to USD 2.8 million of income tax benefit in the first quarter of fiscal year 2020.

Net income attributable to TAL was USD 81.7 million in the first quarter of fiscal year 2021 compared to net loss attributable to TAL of USD 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 USD 114.9 million.

Compared to non-GAAP net income attributable to TAL of USD 9.9 million in the same period of the prior year.

From the balance sheet, as of May 31, 2020, the company had USD 2,323.8 million of cash and cash equivalents and USD 590.6 million of short-term investments compared to USD 1,873.9 million of cash and cash equivalents and $345.4 million of short-term investments as of February 29, 2020.

As of May 31, 2020, the company's deferred revenue balance was USD 1,495.4 million compared to USD 968.4 million as of May 31, 2019, representing a year-over-year increase of 54.4%.

Deferred revenue primarily consisted of the tuition collected in advance of Xueersi Peiyou small classes and online courses through www.xueersi.com as well as deferred revenue related to other business.

A final point concerns the share repurchase program that Board of Directors had authorized on April 28, 2020.

By May 31, 2020, the company had repurchased 185,000 ADS for a total of about USD 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 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-led progress in stopping the spread of COVID-19 in China.

And thanks to the concerted efforts of our teachers, technology staff, all other employees and the trust and cooperation from our customers and partners, we have been able to offer our tutoring services online and deliver some free online courses and technology services in support of the overall 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 near-term size of the business.

We will aim to offer the best possible quality of goods and services to really understand and adjust the needs of our students and satisfy the parents in different situations and at different times.

Based on this principle, our market share gain and profitability optimizations have to go hand-in-hand with our serious ambition for long-term quality success.

Last but not least, even as the situation in China continues to improve, we will abide by all government policies and regulations regarding the protection of the national public health.

We will always treat the health and the safety of our students and employees as our first priority and operate our business based on that priority.

All in all, as one of the leading players with a long-track record in education technology and service, we remain fully confident in our future development and education market opportunity in China.

Let me turn finally to our business outlook.

Based on our current estimates, total net revenue for the second quarter of fiscal year 2021 is expected to be between USD 1,077.6 million and USD 1,105 million, representing an increase of 18% to 21% on a year-over-year basis.

If not taking into consideration of the impact of potential change in the exchange rates between RMB and the U.S. dollar, the projected revenue growth rate is expected to be in the 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.

Just wondering for your next quarter guidance, 20% to 23% year-on-year in RMB terms.

How does that imply the growth of off-line 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 margin profile as well as the competitive landscape?

Just curious if any change of your thoughts on longer-term prospects for online business given the dynamics in latest several months?

Thank you, Natalie.

I think in the first place, we need to clarify on the numbers.

Q1, we grew our revenue in 41.5% in RMB terms.

In Q2, our guidance is 20% to 23%.

And here, we need to take something into consideration.

It's actually because of the scheduling issues, we have reset revenue, actually, the shift from Q2 to Q1.

So Q1 number looks better than the real numbers, while Q2 looks a little bit smaller.

If we -- I think one of the best way to look at our numbers is combine the Q1 and Q2 together.

I think which is also quite similar for our other counterparts in this industry.

So if we combine them together, our first half revenue growth will exceed around 30%, 3-0 plus.

And secondly, I think if we go deeper to our different segments, we need to work through some numbers one by one.

In the first place, for the Peiyou small class business, here, we need to be very careful.

Peiyou small class means our transitionally off-line business models.

In last quarter because of COVID-19 outbreak, so most -- all of these off-line learning actually is delivered through our online platform.

So for this kind of Peiyou small class business, I think we have experienced, and we are continue to experience the same challenge and same pressures same as other companies in this industry.

We need to wait for what's going on of the COVID-19 outbreak.

We are very happy to see coming into this quarter with the government efforts, so we can put -- we are under control, and we have seen most our new cities, actually, they have started operating gradually.

But compared to the normal time we have in the previous years, where we don't have any kind of virus issue before, actually, the recovery is still slower.

And we are in the same industry, heading in the situation, so we are happy to see we are gradually come back to normal.

But this kind of recovery need to be very cautious.

Because in any time, we need to put the safety and health of the teachers and students as a first priority.

And we also abide by all government policies and regulations to reopen our schools gradually.

And in general, if -- based on what we can see today, if the pandemic will not be getting worse in China in the second half, then we probably we can say, looking -- based on the information we have today, the second half growth will be better than the first half for the Peiyou small class business.

And secondly, we also need to talk about something.

It's about the Peiyou live business.

Peiyou live is online offerings affiliated to the Peiyou small class.

This business this year is continuing to grow quite well.

Last year, if you guys can still remember that Peiyou live grew more than, I think, triple-digit growth.

And this year, in Q1, they are also over 100% growth.

And based on number of what we can see today, in Q2, they will maintain a similar trend.

And in the third place, the Xueersi online school, which is also our 25% of revenue for this quarter and continue to grow 140 -- 143% enrollments in Q1, and 133% in revenues in Q1.

And based on the numbers we have today, they're also pretty much on track to achieve around triple-digit growth in the second quarter, plus/minus in a small range.

So in general, I think our growth for our Xueersi Peiyou small class and the Xueersi Peiyou live and the Xueersi online school is pretty much on track with what we say in last quarter.

And if we go down to the bottom line, I think same as before, it's a little bit difficult to give clearly guidance about what the bottom line will be.

We have some colors or directions can draw attention.

Especially, we encourage you guys to pay attention to the headwinds possible in our business in the profitability perspective.

Number one, the Peiyou small classes, same as what I said just now, we are very happy to see everything is under control.

More than 90% of the cities, actually, they start to resume the business gradually, not the same as what we did before, but better than what we had in last quarter.

So this will take some time, the whole recovery will take some time.

If we don't see any kind of unexpected kind of the virus outbreak again, then we will probably going to see the situation will be getting better in the second half.

But specifically for our Q2, the challenge and the pressure is still there.

Especially, you can see that we also entered some new cities, 20 new cities in Q1, and this kind of profit pressures for Q2 for the Xueersi Peiyou small class business will still be there.

And second thing about the online.

I think that even today, our Q1, we have the normal price long-term enrollments in Q1 for online school is around 1.28 million, and which means 143% year-over-year growth in enrollments studies.

But even 1.28 million divided by the big market potential of the total numbers, total K-12 numbers in China, actually, that's still very immaterial numbers.

So we still believe there is a huge potential or maybe kind of the market opportunity ahead of us.

So for online, there's still a market share gain.

So to achieve more market shares in the online space.

We need to invest at least in the following areas, but not limited to the following areas.

Number one, we need to continue to invest in technology.

Frankly speaking, I think a few years ago, when we just opened our Peiyou live -- Xueersi online school live business, we don't imagine someday, we will support millions of students at the same time through the live learning platform.

But today, that is what's happening every day.

And the enrollment growth of the Xueersi online school is still very healthy and very high.

So these 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 in technology perspective to make sure our technical platform can be very highly competitive in this market.

Secondly, we need to also invest in the teachers and the teacher assistants.

Because under today's model, we still need teacher assistants to support the students to have better learning experiences.

So the online learning sometimes is not simply moving a student from off-line to online.

Actually, that's brand new learning models.

So besides the very good master teachers we need to have, we also need to build a very strong teacher assistant team to support them.

So here, even during the COVID-19 periods, we continue to progress -- to hire more teacher assistants for our online team.

Today, the number is much highly than before now, and we get ready for the high traffic coming in the summer.

And in the third place, we also need to invest the necessary sales and marketing dollars to make sure we can achieve more students, new students in the coming summer.

And I think what's wrong in this strategy, I think, in the past 2 years, so we have a lot of lessons learned.

We will always balance on what -- on the possible students we can touch versus the efficiency rate of -- over efficiency and efficacy of these kind of investments.

So we have a system ready to evaluate ROI by different channels, and we need to change or adjust due to the different channels' performance real time.

So these kind of the necessary sales and marketing investments is also important to help 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 the conversion rate and finally make sure that lifetime value work.

So all in all, we need to continue investing in the online space, in technology space, in the teacher perspective and in the sales and marketing perspective.

This kind of investment will also give us some kind of pressures, especially in Q2.

And again, I think we are running this business for a long time.

And today, the situation is much more difficult -- sorry, much more different than what we are maybe 5 years ago.

5 years ago, when we were first doing a lot of things in the online space, in the dual-teacher model space, maybe there is not that many followers that would try to learn from us.

But today, the competition is always there.

And we probably see some of the private companies get a lot of money.

And so we are still need to maintain our competitiveness to make sure we're well ahead of the whole industry.

But again, even we pick the top 5 online players in this area, we calculate their numbers together, actually, still this kind of online students divided by the total numbers in K-12 population, that's still a small percentage.

I think we still have a lot of market potentials we can go.

Today, it's too early to talk about head-to-head competitions.

What we need to do more is actually we're looking into ourselves to make sure that we can improve our operating efficiency to maintain the healthy level of ROI investment and balance our growth drivers, both in online and dual-teacher models and Peiyou live and Xueersi online school to deliver a well-paced growth and to deliver a healthy and sustainable growth in the long run.

Thank you, Natalie.

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

I want to ask a bit more on the online.

Because I remember, last year, you mentioned you mostly focused in the products for online in the strategy.

And it seems like for all the Xueersi online growth has been stronger than what we expected in recent quarters.

So looking back for the online summer promotion, do you think what we make right in this summer promotion?

And looking ahead for the second part of it and maybe for the upcoming quarter, what do you focus on the strategy for this year compared to last year?

I just want to hear a bit more.

Thank you, Mark.

I think if we recap some numbers, last year, our Xueersi online school revenue growth is around 86% to 87%, close to around 90%, 9-0, last year.

And this year Q1, we grew by 133%.

And Q2, we're pretty much on track to around triple-digit growth, plus/minus, in a small range.

So I think part of the reason is because of the market change.

In the past few months, most of China's students are forced to stay at home and take the online offers, so which accelerate the online popularities to the students and the teachers.

So we -- as one of the leading players in the online education player, we also got some benefit from there.

So if you guys can look into some other online players in this market, actually, that is quite common, not only for us, but also for the whole industry.

So this -- I think the market environment is a very important reason.

We need to be very honest about that.

Secondly, I think right after we're running the business for a few years, especially for the online for the few years, I think we have tried to improve our competitiveness of the products.

And sometimes the online education is not kind of a magic.

Actually, they require a lot of the detailed operations and efforts.

So that's not simply say, we're just moving the students from off-line to online, we're just moving them from classroom to a screen, then everything okay.

That's not the case.

Actually, we need to redesign a lot of process.

We need to restructure the way how we touch the students, how we persuade the students to register in our platform, how we invite them to try our pilot class and how we can make sure that online interactions is better than off-line to make sure the students feel, actually, they are learning in a very interesting classroom, even that it's virtually online.

So we also need to restructure the way how we can train our teacher assistants, how each assistants interacts with students and their parents to make sure they can effectively help the students to get in touch with the online offerings and get along with them in a much longer time.

So we have a lot of details right there.

So we'll continually invest our energy and our investments in the technology perspective, which help us to make sure our assistants and our process can be improved to taking out -- to deal with this kind of fast-growing enrollments.

And I think that's something -- I think we have -- we are doing that in the past, maybe 3 or 5 years, and we'll continue to do that in the foreseeable future.

Because only we invest in technology, only we invest in the platform, only we invest in the products, that's the only way we can serve more students.

And that's also the only way we can serve more students in an affordable way, which is maybe more important.

You probably see that our ASP of our offerings, blending offerings is also decreasing because that is not because we reduced the price.

That's because we try to offer more online products and more affordable-priced products to the students.

So the continued investment in the technology and in all the platform in the products is something we continue to do there.

I can't say we're doing right or wrong, but that's something we need to do.

And we also -- I think in today's online education, the teacher assistants very, very critical, and we need to have enough teachers and teacher assistants to support students.

So which is also a lot of efforts now.

Frankly speaking, if you need to hire thousands of students as the teacher assistants, that's not easy.

So we need to make sure our whole system work effectively, so we can hire enough students and train the students to make sure they can deliver the high-quality services to a student, to the parents and the students to make sure that the teaching quality can be secured.

I think continue to improving the operating efficiency and make sure we can optimize the different detailed operating process is a must-do job.

We continue to make efforts every quarter and every year.

So -- and looking into summer, what we can say is, actually, what I disclosed today is the Q1 results.

Most of the numbers actually is the spring term numbers.

So the Q2 numbers, for summer numbers will be disclosed in next quarter.

But in general, we can see that we're pretty much on track with our growth targets over there.

And for the summer, I think we don't have anything special we need to draw attention.

But continually, we need to make sure we put product quality as the first priority.

We need to make sure our online offerings can fit students' 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 detailed works.

We don't have any magics.

We don't have any shortcuts to create success.

There is not that much kind of secret.

What we need to do is hands down, do everything, every details as best -- as good as possible and continually improve.

On the other side, we need to keep our eyes open.

We see a lot of good counterparts in this industry, and we learn a lot from them, not only in the marketing, branding, product design and a lot of spaces.

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 new creations, new creative features, which we can learn from them.

So that's something we continue to -- will do in the future years.

So all in all, we don't have any magics.

What we need to do is stopping talking how much has done, but do our job harder than before.

Thank you, Mark.

Our next question comes from the line of D.S. Kim with JPMorgan.

First, I have two questions, if I may.

First, on margin.

May I check why gross margin this quarter went down 300 bps despite bigger contribution from Xueersi online?

i.e., OP margin was a big positive surprise, so just trying to understand why GP margin was lower versus the mix.

And wondering whether this is because of a big drop in small class margin segment or something else.

And I have one small follow-up after this.

Thank you for your question.

I think for the gross margin for Q1 is a little bit decline is because when we're moving the student, the Peiyou small class students from off-line to online, which is quite successful, most of our students actually move there.

And one thing we need to draw attention is actually in the second quarter, when we tried to retain the students from spring term to summer term, actually, the retention rate is quite good.

It's even a little bit higher than last year.

So these efforts work.

But when we're moving the student from off-line to online, actually, we would provide some kind of price coupons to them, so which will deduct a little bit in revenue, so -- which will make the gross margins of the Peiyou small class a little bit lower than before.

And I think that's the most important reasons we have for the gross margins, why they are a little bit different.

And can I clarify your second question is about OP margin?

No, I think you already kindly explained all that.

And if I may follow up on other points.

This is more medium term.

But how are we going to balance Peiyou off-line and Peiyou live, given now the lines between the 2 are a little bit blurred since COVID?

So are we in the future thinking of matching online price to that of off-line, essentially replacing Peiyou off-line with the live?

Or are we going to keep 2 segments completely separate or complementary to each other and try to serve different group of students?

And that's all.

Yes.

Frankly speaking, I think the best answer to this question should be go to ask the parents.

Because actually, our different drivers of growth models -- actually the fundamental drivers to this -- to them actually is the need from this market, the need from the parents and need from the students.

And I think the past several months since after the COVID-19 outbreak, I think that is a special time.

That is the first time for all of us.

So it's very special and maybe it's very unique.

So we can't just use the 3 months or 4 months experience to decide what we need to do in the coming 3 or 5 years.

So we carefully evaluate and observe what's happening in the past 3 or 4 months, especially we are seeing some -- more students, they choose the online offering.

But we need to make sure, is that a temporary phenomenon?

Or that is a forever phenomenon?

Today, it's too early to make a judgment call.

And -- but -- and secondly, I think today, same as what we run in the company before is very good.

The Xueersi Peiyou small class and Xueersi online business, actually, they're running separately.

Because the Peiyou small class business, they are covered city by city, you probably can see that in Q1 when we covered the other 20 new cities.

So the total number is around 90 cities, about 9-0, including 1 in the U.S.

So the Peiyou live is highly connected to the Peiyou small class business.

The Peiyou live is a complementary service to them so they will focus on how to provide the better services to the off-line students.

Especially, they will provide more localized contents to them.

And that's our purpose for the Peiyou live offerings.

So this is part of the Peiyou small class.

With Xueersi online school, since its beginning, it's a bright strategy.

We want to use these offers to cover the majority of the whole markets.

So they will pay attention to the general contents and general features and the general subjects.

So we prefer they can cover more students, especially how to serve the low-tier city students in the long run.

So based on what we have today, we still encourage the Peiyou small class and the Xueersi online school to run in their own directions and to try to penetrate and try to attract different parents.

Because the parents, their needs are different.

Not 100% of the parents, they like off-line offering.

But also, not 100% of students, or the parents, they like online offerings.

So we need to make sure we can have that diversified offerings so we can support different needs of the students.

And again, today, no matter it's off-line and online, our overall number of students actually is very small.

The market share is maybe low single digit.

So it's too early to say.

We need to combine them together or we need to do something else.

What we need to do is focus on our strategy and continue our current executions, working harder and harder to make sure we can deliver quality growth in the long run.

Thank you.

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

My question is about your online business.

So can you give us roughly number, how much of students now is from lower-tier cities for online learning?

And I think previously, you mentioned that you are doing some trial of different business models in lower-tier cities to see which are the best models.

So can you share some color -- some observation with us and the company thinking about the future strategy in lower-tier cities?

Thank you, Zhong Sheng.

I think this is always a very important question, how we can penetrate the low-tier cities.

And in last year, if you guys can still remember, I think last year for our Xueersi online school enrollments, we have around 20% of students coming from the low-tier cities.

But this year, the situation has a little bit changed, especially right after the outbreak of the COVID-19, and we're running some free class promotions and classes to the students all over China.

And we also optimized our products to try to attract more students from low-tier cities.

So what we can see is actually then 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's the best strategy to penetrate the low-tier cities.

We don't have the shortcut yet.

But we're happy to see that it's with our continued evolvement of our products and we are seeing more and more students, actually, they are coming from the low-tier cities in the coming -- in the past few months.

And this trend will continue in the coming few quarters.

But again, what I want to say is actually, the students who live in the low-tier cities compared with students who live in the big cities, they are the same.

They have the 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 a better life.

So what we need to do is when we go into the low-tier cities, we need to find a very important way to how to make our offerings more affordable, but the teaching quality should always be the same.

So we need to treat the teaching -- the product quality as high priority when we're going there.

We need to make sure what we teach can really help them.

So we will continue our current offering now, and we will evaluate our data and especially the low-tier city students' data to continue work for the products to fit their needs.

So all in all, what I can say is we are good to see more and more students in our online platform, actually, they're coming from low-tier geographies.

And this trend will continue in the coming few quarters.

Thank you, Zhong Sheng.

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

My question is on the deferred revenue side.

I see your deferred revenue is around $1.5 billion, while the guidance for the next quarter is, I think, a little bit below that.

So could you help us understand the difference here?

Because I think the government doesn't really allow prepayment for too long, right?

Yes.

Thank you for your question.

Deferred revenue growth is impacted by our faster growth of online business as well as the consolidation of newly acquired online one-on-one English tutoring service provider.

The consolidation started from May 1 this year.

I hope this answer your questions.

Thank you.

Okay.

And just a follow-up on that.

How -- what is the time line for recognizing this increased deferred revenue from consolidation?

What is the typical period to fully recognize this?

I think these acquisitions happened in the Q1 of this fiscal year.

But I need to give more color about that, actually, because they have higher numbers in the revenue perspective.

But it's going to the net revenue because that's depending on their consumptions one by one.

So actually, the revenues to our P&L, the net revenue perspective is immaterial.

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

So I 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 got good retention rates, as you just mentioned.

So in the future, are you going to keep some online small class offerings in your previously large class-dominated Peiyou live?

And do you see in mind or do you have plan to do online small class in hub cities, say, to attract the surrounding cities as a way to, say, penetrate into some low-tier cities?

Do you sort of see the potential in that?

Thank you, Alex.

I think last quarter, we moved for the students.

We delivered the Peiyou small class through the online platform.

Actually, that is we have to do that because of the COVID-19.

So we are good to see the retention rate is pretty much okay.

And -- but we also see some challenges from that model.

So I think today, it's too early to say whether we will do some significant kind of strategy changes in the Peiyou small class because that's only 3 or 4 months.

With a lot of cities come back to normal, we are also seeing a lot of students and parents, they are coming back to our off-line schools now.

So I think whatever decision we will make need to -- depending on the parents' satisfaction rates and whether they will continue with offers in the longer term.

Today, we see some preliminary positive signs or results, but the time is only 2 to 3 months.

It's too early to judge or it's too early to draw a conclusion.

So we'll continue to run our business in this way.

And we will also resume our off-line business in the cities is coming back to normal.

So we will need more time, a little more time to the parents and the students.

And we'll base on the feedback of the market, we'll base on the feedback of the customers to make the decisions.

Our strategies always evolve based on this kind of new dynamics in the market.

Thank you.

Our next question comes from the line of Lucy Yu of Bank of America.

I've got two questions.

First is on the expansion strategy.

I've seen that you've entered more new cities this quarter.

Possibly, there could be some them delay from the previous quarters.

Going forward, what's the strategy of off-line expansion?

Will that be largely concentrated in new cities like what we have done?

Or more of that will be existing cities?

Because as you mentioned, penetrating to new cities will dilute or at least pressure our 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's question number one.

Number two is on the revenue forecast of around 20%.

As you mentioned that xueersi.com is likely to grow at triple digits in the following quarter as well as the Peiyou live will also grow at triple digits.

It looks like the rest of the business will be under huge pressure, then we will achieve -- 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?

Okay.

I think for the geographic expansion, actually, we're pretty much on track with our plans last year.

And this plan has been stopped a little bit by the last several months since the COVID-19 outbreak.

Today, we gradually resume back to our pace.

But again, we will be very cautious about that.

We need to spend -- a few more time to looking to what will happen after this kind of pandemic in China in the coming few months.

In Q1, we have entered 20 new cities.

And we have added around 65 new learning centers.

In Q2, by the end of the day, we have rented around only 10 new learning centers.

So I think this is highly depending on what's happening after the virus in the coming few months.

Based on what we see today, if everything is still well under control, we probably can see we'll be more positive about that.

And around--your question about the new cities, our current cities, frankly speaking, I think we will 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 is around 13 to 14 plus/minus.

So this year, in Q1, we entered 20, so that's pretty much on track.

We continue to enter the sizable number of the new cities every year.

And we also continue to optimize our current cities' efficiencies.

And based on their different KPIs, especially the fulfillments rates and all other KPIs, to decided to add new learning centers.

I think we're running our -- doing our new network expansion strategy is pretty much the same as what we did in the past.

But considering we have COVID-19 right over here, so in the most recent quarters, we will be more cautious than before.

But the long run, we will still try to enter more new cities as what we can see in the past.

On the revenue forecast, I think I have talked about it in the beginning, but I can recap a little bit.

In the first place, I don't suggest you guys only looking to one single quarter numbers because actually, because of the scheduling issues, we have some benefits in Q1 to make the Q1 numbers better than before, and we have some kind of loss in Q2.

So if we combine the Q1 and Q2 together, sort of whole first half, our growth rate is more than 30% plus.

So specifically, and yes, you are right.

So we have healthy growth in the Peiyou live.

Healthy growth in the Xueersi online school, but some challenges in -- or some pressures of the Xueersi small -- Xueersi Peiyou class business.

That's because if you go back to -- our Q1 typically is March, April and May.

Our Q2 is typically June, July and August.

And when the students they -- and the parents, they decided to register my Q2 classes, the summer term 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 society are still a little bit worried about the virus.

And a lot of people hesitate or maybe they don't make the decision yet.

So I think Q2 is a challenged quarter, and the growth rates also were under pressure.

I think we have made it very clear now.

And if everything can getting better and better, probably second half will be better than first half for the off-line perspective.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for participating.

You may now all disconnect.