Ladies and gentlemen, thank you for standing by, and welcome to TAL Education Group’s First Fiscal Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, July 26, 2018. I would like to hand the conference over to your first speaker today, Ms. Echo Yan. Thank you. Please go ahead.

Thank you all for joining us today for TAL Education Group's first fiscal quarter 2019 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. Following the prepared remarks, Mr. Luo 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 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.

Thank you, Echo. Good evening and good morning to you all. Thank you for joining us today on this earnings call. Our first quarter revenue growth was driven by stable demand in the cities we currently cover and a contribution from our Online courses. Revenue growth in the first quarter was 71.1% in US dollar and to US$550.6 million, and 57.1% in RMB terms. Student enrollments increased by 88.7% year-over-year, mostly driven by the growth in the Online enrollments, as well as Peiyou Small Class. GAAP income from operations increased by 160.3% to US$75 million in the first quarter. Non-GAAP income from operations grew by 127.8% to US$90 million. We will continue to maintain a certain level of investment in content development, technology, and marketing activities especially for ongoing improvement of our Online product quality, geographical penetration, and bring our earnings. Looking ahead, we will remain committed to a healthy and sustainable overall business development as always. I will now turn the call over to Echo Yan, our IR Director, she will give you an update on our operational progress in the first quarter. After that, I will update you on our business strategy execution and discuss our business outlook.

Thanks Rong. The solid first quarter revenue growth was based on the performance of different business lives, in the cities we currently cover. Let me review the business by different revenue streams. Small Class, which consists of Xueersi Peiyou Small Class, Firstleap, Mobby and some other educational programs and services accounted for 80.7% of total net revenue almost unchanged from the first quarter last year. Xueersi Peiyou Small Class which remains our core business, represented 71.4% of total revenue almost unchanged from 71% in the same period of the prior year. Net revenue from Xueersi Peiyou Small Class was up by 72% in US dollar terms and 58% in RMB terms, while enrollment increased by 87%. This growth rate reflects the healthy growth in both Peiyou Offline and Online Class. By now, we offer Xueersi Peiyou Online courses most of which are tailored to offline students incremental needs. In major cities of our network, Xueersi Peiyou Online currently offers regular and short-term courses and other promotion courses. Excluding contribution from Peiyou Online in both the first quarter of fiscal 2018 and 2019, the Peiyou Offline Small Class revenue increased by 66.7% in US dollars terms and 53.1% in RMB terms, while enrollments increased by 34.4%. In Q1 fiscal year 2019, Peiyou Online accounted for 3.1% of total Xueersi Peiyou Small Class revenue and 28.1% of total Xueersi Peiyou Small Class enrollments. Revenue and enrollments from Peiyou Online were minimal in Q1 fiscal year 2018. Xueersi Peiyou Small Class revenue from top five cities; Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing grew by 68.4% in US dollar terms year-over-year and accounted for 60% of Xueersi Peiyou Small Class business. Revenue generated from cities other than the top five grew by 77.7% in US dollar terms and the other cities accounted for the remaining…

Thank you, Echo. [Indiscernible], we continue to make efforts to advanced education through strength and technology. We continue to pursue a healthy growth in Peiyou Small Class and other offline tutoring services and further expand our learning center networks at pace. As you know, our strategy focus in coming years is Online being development and increasing market penetration. In fiscal 2019, we will continue to invest in technology, operating models, marketing and personnel for online market share gains, so that we can turn opportunity into TAL’s overall business. Let me now move to outlook for the next quarter. Based on our current estimates, total net revenues for the second quarter of fiscal year 2019 are expected to be between US$647.2 million and US$660.8 million, representing an increase of 42% to 45% on a year-over-year basis. If not including the impact from the recent depreciation of RMB against US dollar, the projected revenue growth rate is expected to be in the range of 40% to 43% for the second quarter of fiscal year 2019. These estimates reflect our current expectation, which is subject to change. So that concludes my prepared remarks. Operator, we’re now ready to take questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Tallan Zhou from Deutsche Bank. Please ask your question.

Hi, Rong and Echo. I want to ask about the revenue guidance for the second quarter. It seems like growth slows down a bit and in particular reason that EU can elaborate like mix of Online and Offline in the second quarter? And how does the margin looks like in the second quarter? On top of that, if I may also ask about your full-year guidance on the revenue and margin as well? Thanks.

Thank you, Tallan. Specific in second quarter, I would try to give aspirations in Online and Offline [indiscernible] for Peiyou Small Class of Offline business. Actually, I think in the past few quarters in every Investor Conference, we have made it clear and we want to draw your attention again on the policy uncertainty. In the past few quarters, we have seen the government has released more policies to regulate this total market. All our policies are covered the whole industry. I think this will not only shorten impact of the Offline business, maybe in the future several quarters because of the uncertainty of the policies, maybe we will have some – maybe even bigger impact in the long run. So even we say that before, today we still want to draw your attention a little bit that essentially we need to care about that. As a Company, we fully understand. Now it’s a very important timing that we are in the midst of the ongoing allocation reforms and regulations. All of these policies are further improving our standard and the ecosystem of the whole industry. So we are fully cooperating with the government directions, and we need to make adjustments to our business operations accordingly. The reform policy that is in the overall will be positive for a quality and the diversity of the offline school tutoring services. But in short-term perspective maybe in the long-term perspective, again we would like to draw investor attentions on which we need to care about that. So we practically follow the government, regulations and total adjustments by ourselves. So our Offline growth will be slow a little bit. And on the other side, we need to point, actually our Offline is getting bigger and bigger, so to grow higher base, we need…

Thank you.

Your next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question.

Hi, Rong and Echo. Thank you for taking my questions. I have two questions. My first question is about our Online Enrollments and broadcast revenue for Peiyou Online. Can you share about what’s your KPI for this year and also next couple of years? And my second question is about the summer promotion program. What’s your KPI in terms of the retention rate and Online Enrollments if that any? Thank you.

Thank you, Thomas. For the Peiyou Online Enrollments, actually Peiyou Online is one pilot of our Peiyou Small Class business. Our key focus – we’ll try to provide some online offerings to our offline students, which is quite, differ from Xueersi Online School. Xueersi Online School is a separate department, who is providing the Online services to those students allover the countries and most of – they’re not our Offline students. And our key KPI to Xueersi Peiyou Online, I think still the quality we can deliver to their students and the retention rate for the students who enroll a Peiyou Online this semester to next semesters. Peiyou Online actually, I think we start to roll all these programs started from the last year, which is fiscal year 2018. But Q1 the number is very minimal immaterial and starting from Q2 the numbers has be a little bit bigger than before and this number has fast growing in the past few quarters. But again I think Peiyou Online, even for the Peiyou Offline students, they still need some time to adapted to this kind of new offerings. We are making a little bit progress by compel to when allowing to this well business. I think the key for us is now allowing to their enrollments or revenues, the keys rather we can really provide values and services to the students who enroll in this program and they feel that’s valuable to them. So by the end of Q1, we have also makes clear Peiyou Online revenue is only 3.1% of total Peiyou Small Class revenue, which is below 5% threshold. And looking forward, we continue to focus on a quality we can deliver and we focus on how satisfied the parents and students are. And the second question about the KPI for the summer promotions. I think for summer promotions, we will meant actually, we have Offline summer promotions, which is lower and less than what we have last year, while Online promotions that’s really first year we try to do some online marketing to get more market share. And on the key KPI for this promotion, I think it’s – a thing it’s – I think as I mentioned just now is the retention rate of the students who can return from the summer to fall. I think that’s the very important indicator and targets, because the high retention remains our offerings is where accepted by the consumers and the students. And the lower retention remains our offerings not grew. So based on information we have today – we are pretty much on trailing this program, but since on the beginning of the Summer Class, so we still have several more tonnes to go. I think please stay tuned by the end of Q2, I will give you more colors about that. So the retention rates let key KPI for last two – when we probably evaluate the Online Summer Promotions effect. Thank you, Thomas.

Thank you.

Our next question comes from the line of Natalie Wu from CICC. Please ask your question.

Hi. Good evening, management. Thanks for taking my question. First of all, can management update us about the capacity expansion plan for Offline Small Classes in this fiscal year, and what’s the paces we should expecting? And secondly, if I remember correctly, like two quarters ago, you said that a late Chinese New Year issue sort of like impact our fourth quarter revenue. And I saw the major part of the last courses in the fourth quarter would be realized in August quarter. So can management update us the percentage of the impact that would be like realized in the August quarter? Thank you.

Thank you, Natalie. I think for the capacity, in the first quarter we added 36 – net of 36 learning centers, which for the Xueersi Peiyou Small Class is more than 800 classrooms. Compared to Q1 fiscal year 2018 the numbers is much lower. In Q2, currently based on what we can see today will be at around net of 5 to 10 new learning centers. How much we will add in the coming Q3 and Q4? I think we need some time to evaluate their policy uncertainties. And so far I can’t give you exact numbers, but all I can say is Q1, actually we add a majority of the classrooms where we want to add in the first half, and in second half, we will evaluate our policy uncertainty, the new conditions or maybe new regulation policy may happen across different cities, and there were made decisions to go. I think as a common standpoint when the policies had some uncertainties right over there, we don’t want to rush for topline revenue growth and then continue to adding so many classrooms. I think that’s now the right strategy to go. So we want to be more cautious and focus on our execution today, improving last years performance and [indiscernible] of our classrooms to make our overall business more clarity. I think that’s something we want to drive. And yes, second question, there is several – impact has been considered in our Q2 guidance. Again for the Q2 guidance, we considering all of the impacts, especially we are considering policy uncertainties, and we practically made changes – to make sure we consider a little bit topline, but whole company still in healthy growth. Our guidance over 43% to 45% is based on what we can see today. Thank you, Natalie.

Thanks. Actually I have a very quick follow-up if I may about the 5 to 10 learning centers you are planning to add in the second quarter. Is that we can just laid that to 100 to 200 classrooms, is that right?

I think around 200 classrooms, because our learning center is getting big and bigger than before, so in general around 200 classrooms.

Got it. Thank you.

Thank you, Natalie.

Our next question comes from the line of Jon Wong from Macquarie. Please ask your question.

Hi. This is Wendy Huang from Macquarie. First, I just want to clarify your previous comment on the capacity expansion. You first mentioned that for the second quarter you were only at 5 to 10 new learning centers, and also you are actually evaluating how many you are going to add for the second half. On the other hand you are saying that you were maintaining your 35% to 40% capacity expansion target for this year. But if you are maintaining this 35% to 40% capacity target for the full-year, that makes you really need to add, I think at least 800 classrooms this quarter for the second half. That seems a lot. So I first want to reconcile this comment. Thank you.

Thank you, Wendy. That’s a good question. Let me recap a little bit of our business model. So actually every time, we added a new learning center. It doesn’t mean the learning center can come to use right away because we need some time to do renovations and we need some time to ask the government for the license to open the school. And when you want to get a license, you need to pass a lot of checks. For example, there are fire security check and some other conditions which follow the regulations. And considering the China parents today, we care more and more about the environmental production. So even you finish your renovations, you need some time for them to do. While all operation is done over there, so we can fill our classrooms right away we need some time, several quarters to bring some of the classes and try to increase their fulfillment rates send us to other learning centers in several quarters time. So actually we are always adding the classrooms, where we added this year, I think most of which will contribute more meaningful contributions next year. So if we talk about the revenue guidance of this year, actually we need to go back to see the capacity was added last year. Let me recap a little bit, two years ago, we added the capacity a lot. And last year, we added a capacity around 30% and this year by the end of Q1, we added around 18%. So we are still running the company in a healthy pace. We still need to weigh for to see what will happen and especially the policy uncertainties to decide how much will be added in the second half. So that’s the general answers to your questions.

Sure. And also regarding the 10 learning centers that you closed down this quarter, you mentioned some of them were due to the regulatory issue. Was that due to the government approval license issues and if this is the overhand, how many learning centers existing operation right now that potentially you actually see through the [indiscernible] enrollment closed down in the future?

Thank you so much. I think we closed 10 learning centers this year, only because of the regulations. That is because we are renting from military related company. I think basically on the China policy few quarters ago, China doesn’t allow any military services that provide this kind of commercials. So we follow the risk policies always periodically for the new centers we can rent and we will move our shift from that centers to Dalian. So again, I think today we are under – we are doing a lot of self check about all the learning centers we can rent, and if soften they don’t need the requirement of regulations where we will periodically move for alternative locations and to – move to the new place. And so far I think still a small number of – small percentages of numbers we have – we will let you actually know every quarters when we report how much we closed. We don’t expect there will be number. And the other, Dalian actually softens because the contract expire, so we move to the other bigger place because of the new contract. Because today we have more than – today we have more than 630 learning centers now. So 10 of them – that’s maybe a very small number. Continually, we will continue to running our center operation guidelines to make sure all of our places can need the requirement of the governments. If something happen in some learning centers, they will tell to me that we well perhaps move for alternative learning centers to move forward.

Sure. And one final housekeeping, what online revenue forecasting declining the second quarter guidance and also do you have any Online Enrollment target for the upcoming summer promotion that’s all? Thank you.

Thank you, Wendy. At Online revenue in Q1, we grow more than 200%, which is not for summer revenue now. And in Q2, Online growth will continue to perform and deliver some contributions to the overall business. And we don’t have for specific target to say, how many enrollments we need to heat, but compared to the volume numbers, actually we care more to retention numbers – retention rate. We care more is rather when we provide services and product to the students and the families relative –maybe they study for few weeks. They feel happy about us. They want to stay with us. So the retention rate, I think that sensing way – to do very carefully. And on the other side is again I need to draw an attention on Online. Online actually that is very – are being small [indiscernible] to be more scalable allover the country in the longer-term. And but frankly speaking we are not a company good marketing in the past. So this summer is the first time for us to running the large scale Online marketing and Online promotion activities. So we as team is running our office in very causes way. So we will give you more color by the end of Q2. Thank you so much for the questions.

Thank you, Rong Luo.

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

Hi, Rong Luo. I got two questions. One is on the Peiyou Online. You have seen the students offline as to adapting to the Online education, but once they have adapt to such format and Online becomes more prevailing study format for them. We would that got an cannibalization to our Offline Enrollments? And what is your expectation on Offline Enrollment in the rest of 2019 and maybe in the medium-term? Secondly, is on the margins, the first quarter margin is very good, which is up 4% driven by the ASP hike and utilization rate improvement. So for the rest of the year, will such offline margin expansion to be continue, and of course in the next quarter, it will impacted by summer promotion. But assuming of that summer promotion impact that 4% margin improvement, is it a likely margin expansion for the rest of the quarter by – in terms of Offline business? Thank you.

Thank you, Lucy. For the Peiyou Online actually today is we give this Peiyou Online offerings, especially the shopping class to the offline students to let them get into use this new type off services. And so far we don’t see maybe a material number of students who are moving from Offline, Online. So based on what we can see today is Online and Offline based one plus one kind of the mapping. So we are seeing is, more and more offline students they adapt to the Peiyou Online offering, because for offline, every week we only have one sections for a students. So – but when we have seven days. So some students they choose to Peiyou Online, a home during the weekdays. And on the other side, since we have introduced the IPS system that Intelligent Practice System into our Offline classrooms. So we have some way to collected that data especially in the learning process data, offline students during the sessions, not only in our classrooms, but also the forecasted they do some price value, after correct they do some homework. We are also decided to rollout this kind of IPS series in the future. So when we have all office data in our mind, so our Peiyou Offline shopping class can be more specific and tailor-made to have offline students to finish some of their notch points they have difficulty, so far we did not see that much of material cannibalization. And secondly about the margin, Q1 I need to give more colors for that. Q1 margin, yes we are making some progress in offline because we slowdown there a little bit in the offline growth, so which you can see Q3 margin perspective over five points higher and for the OpEx because we start to invest in online marketing a little bit, but the lead time for that will be in the second quarter. So in Q1, we still can see we have a very positive margin leverage in Q1. The same of what we told us before is Q2 is the preseason for us to do the investment of the online marketing, so the Q2 margins were going down. I think in the full-year perspective for offline because we control a pace of the capacity expansions and we control a pace of the Offline business. So we probably can see in the whole year, the Offline can continue to deliver the positive margin expansions, but that depending on we don’t see any further policy uncertainties. And secondly, is for the Online, this last year Online is profitable, this year Online will be loss making provision which we will – even drop down a level after overall companies margin. So for the full-year, we still guide our margin for the full-year will be slightly decline a little bit. Thank you, Lucy.

All right. Thank you.

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

Hi. I have a follow-up question about the regulation. So we still see the strong growth in first quarter and we add 36 learning centers in the first quarter, but in the second quarter, it turns to more conservative. So just want to understand what the key change happened on the regulation impact did management seek? And do you think there will be some regulation on the Online business as well? Thank you.

Thank you for the question. I think for the regulations today, we see some changes on the impact in two perspectives. The first one is with the regulation policies being more and more straight, so actually which give us more challenges in operation and continued to expanding the networks. And we even don’t know what future policy will be, but the trend of the policy is definitely – we’re obvious the government will release more and more policies, and more and more detailed policies to regulate their whole market. Compared to the few years ago, actually there are [indiscernible] regulations of that industry will create some challenges in operation perspective for all industry and also including us. Secondly, we’re also seeing in some of the cities, the new policy has also somehow impact the parents wellness to sending their kids to the tutoring companies. We can say that it’s a very majority phenomenon today, but we have seen that happens in several cities. So we as a Company, we don’t want to over promise or maybe too optimistic about the market we are facing today. So we will like to fully disclose the potential risk we have seen driven by the policy uncertainty and we also want to make sure our Company can be fully prepared for the worst cases. Secondly, I think the regulations for the Online, in the first place, we don’t see any – material regulations policies how to regulate Online in the whole country perspective. Also we are really seeing some of the discussions is ongoing and you’ll probably also see that for news channels in China and some policy just under discussions. For example, they are thinking about rather they need to keep license for the Online educations. I think all of which Online regulations is still under the discussion and we are only company we seen that, we are not all. So we can now estimates what the government will do, while the duration is the regulations we have the online education to be more Xueersi. The regulations can held Online players, Online education players to be more discipline. So where as the company is just follow there and where kind and follow the government regulations requirements if they have in the future. And even be further coming also we operate our Online business in a very discipline way and again I think the policy is now shorten issue to say one quarter there will be done that’s not the right case. I think there were not only impacts their one specific quarter, but we are also impact in the future several quarters. So I think that is sometime of their potential risk driven by the policy uncertainty we need to disclose tool [indiscernible] and all investors from the company perspective. Thank you, Sheng Zhong.

Thank you. End of Q&A

There are no further questions at this time. I would like to hand the conference back to today’s presenters. Please continue.

Okay. Thank you so much guys to joining our earning calls. We as a Company, our mission is to advance education through science and technology. So we will maintain our level of investments in this carrier. And we as a Company, I also thank you so much for your support and attention on our Company. We will continue to give you guys more colors and more information by the end of Q2 of all promotions, which you have asked just now. So please stay tuned. Thank you so much guys. Thank you.

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