Ladies and gentlemen, thank you for standing by, and welcome to TAL Education Group’s Second 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. I would now like to hand the conference over to your first speaker, Ms. Echo Yan, IR Director of TAL Education Group. Thank you. Please go ahead.

Thanks, operator. Thank you all for joining us today for TAL Education Group's second 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 second quarter revenue growth was based on stable demand in the cities we currently cover and a contribution from our Online courses. Revenue growth in the second quarter was 53.5% year-over-year in U.S. dollar and to US$699.8 million, and 57.1% in RMB terms. Student enrollments increased by 120.2% year-over-year, mostly driven by the growth in the Online enrollments, as well as Xueersi Peiyou Small Class. GAAP income from operations increased by 18.4% to US$80.9 million in the second quarter. Non-GAAP income from operations grew by 23.8% to US$99 million. 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 second quarter. After that, I will update you on our business strategy and execution and discuss our business outlook.

Thanks Rong. The healthy pace of Xueersi School [ph] second quarter revenue growth was driven by the demand for the various education services in the cities we currently cover. Let me review the business by different revenue stream. Small Class, which consists of Xueersi Peiyou Small Class, Firstleap, Mobby and some other educational programs and services accounted for 79.6% of total net revenue compared to 80.9% in the second quarter last year. Xueersi Peiyou Small Class which remains our core business, represented 70.5% of total net revenue compared to 72.6% in the same year ago period. The lower revenue contribution from Xueersi Peiyou was mostly due to the faster growth of online process. Net revenue from Xueersi Peiyou Small Class was up by 49.1% in US dollar terms and 48.1% in RMB terms, while the enrollment increased by 72.7% year-over-year. This growth rate reflects the healthy growth in both Peiyou Offline and Online Class. Currently, we offer Xueersi Peiyou Online courses and their additional services tailored to students -- in the major cities of our network. Xueersi Peiyou Online offers regular and short-term courses and other promotion courses. Including contribution from Peiyou Online in both the second quarter for fiscal 2018 and 2019, the Peiyou Offline Small Classes revenue increased by 47.3% in US dollars terms and 44.9% in RMB terms, while enrollments increased by 36.6% year-over-year. In the second fiscal quarter, Peiyou Online accounted for 4.7% of total Xueersi Peiyou Small Class revenue and 29.3% of total Xueersi Peiyou Small Class enrollments. In the same quarter of fiscal year 2018, Revenue and enrollments from Peiyou Online were at 2.9% and 10.9% respectively of total Xueersi Peiyou Small Class business. Xueersi Peiyou Small Class revenue from top five cities; Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing grew by 42.7% year-over-year in US…

Thank you, Echo. As you know our strategy focus in the coming years is online business development and increased market penetration. Currently we are aware [ph] [Indiscernible] our ten investments during this fiscal year in technology, operating models, marketing and other investments needed to be achieve its goal of growing our Online business. With our investment in the online content development technology marketing we aim to further improve our online product quality, widen our geography presence and make our bring back to normal. 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. Over the long term, TAL Education Fee transpired its strategy to be a technology driven through the -- that relies on smart its smart education solutions, open [Indiscernible] business, competence, our ready programs as well as curriculum based after-school children. And furthering the public and private schools all over the country, TAL is deeply committed to explore a new model of future education through strength in technology. TAL Smart Education Solution will have to t optimize and promote innovation in traditional teaching implement the national confident strategy requirements and provide essential education studies through AI [ph] and other technologies. TAL’s Open [Indiscernible] TAL will continuously provide small and medium size education institutions in China, which is over often called education strategist, which allows more students to share high quality tutoring with us through certain technology. TAL lease, the confidence arranged educations that are of very critical importance on one hand, our innovative brands including Mobby and Firstleap broadened the parent’s option. On the other hand, our curriculum based content spread such as Xueersi Peiyou and xueersi.com will offer more and more diverse metrics as not regular classes, such as programming and coding…

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Natalie Wu from CIBC. Please ask your question

Hi, good evening thanks for taking my questions. I have two questions here. First is regarding with the teacher license. Just wondering how much does that teacher licensing exam taking cost – class schedule arrangement will affect your next quarter guidance? And would that requirement affect your expansion plan next year? That’s the first question. Second one is about your online investment and margin. So you mentioned that the sales and marketing spike last quarter mainly due to your online promotion. So it would be great if you can share with us your spending purchase for online next year and how should we see your margin at a good level for both this year and fiscal year of 2020? Thank you.

Thank you, Natalie. The first question about Teacher license. I think because we have approved teacher license as the worry [ph] had grown in the past few years. So in this industry the percentage of our teachers have license is higher than the industry average. And based on the government’s policy, this year most of – almost all of but most of our teachers who don’t have license they have registered their exams in November which will happen after one or two weeks. So, we will continue to follow companies, government policies to make sure all our teachers can be -- and we don’t see material impact on teacher license in the short and specifically for the next quarter and our budgets in the longer term that depending on the execution of the government policy. Based on what I know today, I can’t make any judgments. So if we see some maturing impacts, we’ll let you know as soon as possible. And it’s also too early to talk about next year’s expansion plan and we need to balance not only one part of teacher license but also need to balance the demand of the city and our online progress and some other kind of metrics to decide. Maybe after we finish our whole year past next quarter we may have to – that will be the right time to talk about that. The second question on fall off of my margins and it’s expanding for the next year. I think in the first case, set as well we have told the -- two quarters ago, actually summer is a very pleasant time for us to do Online marketing, you’re probably going to see in Q2 our certain marketing has spend more than $150 million compared to the previous years and…

Thanks, Rong. But with regard to my first question I saw your next quarter’s guidance was partially affected by class schedule change relates to with teacher licensing, exams taking, so we look some kind of the schedule of your classes in major cities. And we find that this one class less in the autumn [ph] quarter, which will be – we saw will be transferred into the fiscal – the fourth quarter of fiscal year 2019. So just wondering what kind of the impact does these kind of the item create? And with regard to my second question, just very quick follow-up, do you still maintain with the prior guidance of these margins? I saw you said that you will see 1.5% year on year down in terms of the op margin this year, right? So just wondering if the message is still being confident?

The first question about the teacher license, again, I think we’re looking to risk business, actually we’re looking to the operation in much longer way, not only one single quarter. Yes, you’re right? We can see teachers entering the teacher’s exam which would happen early November. So teachers who apply for exams they need go to get – exams. While this is only the shift from Q3 and Q4, so our status [ph] we don’t see that any material impact to my full-year numbers. My full-year number for the top line guidance we made no change in the range of 30% to 50% close to higher. And the second thing is about the – remind again your second question?

Margin guidance.

Exactly, margin guidance, based on what we can see today, we don’t have any material changes. We will look very closely into every item of our kind of cost structures. Based on what we see in Q1 and Q3 you probably can quickly figure out, in Q1 we grow our gross margin more than five points, Q2, grew more than 6.6 points, and in Q3 we always continue to see -- we – the revenue or the percentage of rental in total revenue actually also decline compared to last year. So we can continue to see some leverage from the rental from [Indiscernible] but at the same time we maintain the level of the IT investment and marketing investment. So based on what we see today we don’t see any material changes in our -- this year margin guidance.

Okay. Thank you.

Thank you, Natalie.

Thank you. Our next question comes from Thomas Chong from Credit Suisse. Please ask your question.

Hi. Rong and Echo, thank you for taking my questions. I basically have two questions. The first one is about our capacity expansion. How should we think about the regulatory uncertainties which may affect our capacity expansion in the second half? And my second question is about the margin outlook. Should we expect – how should we think about our Q3? Or how should we think about our longer term margin in particular how should we think about our online margin for the next couple of years? Thank you.

Thank you, Thomas. So first question about the capacity expansions; last year we grow our capacity by around 31%. This year based on what we can see, also this impacted by the uncertainty from the policy, I think that expansion will be lower than 30%. And this is we purposely taken initiatives to control the pace of offline and incentives. And while at the same time, we continue to enter new cities through dual-teaching models. Last year we enter around first new cities through dual-teaching models. This year we enter one in Q1 and the other several new cities are well on trial [ph], so you probably can see that by the end of Q3, where we’ll continue to add more new cities with dual-teaching models. The numbers were similar, a plus/minus to the numbers what we see last year. So we continue to grow, but we wish to pay initiative to be more pace and more control. And secondly, you asked about the margin guidance for the Q3 and the long-term and specific for online margin guidance. I think for the margin what we can see actually is Q3 we need to -- offer a topline perspective. For the top line probably we can see our guidance now and here I need to bring them down a little bit. For Offline that is impacted by some of the card [ph] shifting from Q3 and Q4, that’s only scheduling issues and which will benefit my Q4 growth. But especially in Q3, yes, they have some kind of impact over there. And for Online, same as I mentioned just now we continue to grow 180% plus and minus in Q1 and Q2, and Q3 and Q4 almost the same range. And for the margin, what we can see for Q3 basically…

Rong, I may ask a quick follow-up is about, for this quarter could you give us some color about the online margin if there’s any color on that? Thank you.

Do to mean, Q2 or Q3?

Q2 and Q3, is there any color on that?

In Q2, same as where, say, in the last quarter earning call, we have some leverage from offline, you probably can see that gross margin increased more than 6.6% and about their operating margin, actually its decline around 20 plus/minus [ph]. So this decline of the margins because of the online, and in online we’re spending some online marketing to acquire new customers there. And looking into Q3 and the revenue growth still quite healthy and the spending of online marketing is much lower than Q2, so we can see for the Q3 – the Xueersi Online School will be more healthy than before. But again today it’s not the timing to talk about the online margin, but it’s a timing to talk about whether we can leverage it online perhaps with certain more people. Thank you, Thomas.

Thank you.

Hello, operator.

Thank you. Our next question comes from Mark Li from Citi. Please ask the question.

Hi, management. Thanks for taking question. I want to ask – I see the differ revenue grow about 20% year-on-year in this quarter, which is a bit slow. It seems some gap with the revenue guidance around 32%. I want to know, what is the key reason for the difference in the differ revenue and revenue guidance? And also I want know about for the regulation of normal than three months of getting the fees and impact to our one-on-one business in terms of cash flow in accounting wise? Thank you.

Thank you, Mark. The first question about differ revenue which is around 20% year-over-year growth, someone may ask this questions right before the call. And I have to remind all of you guys again, starting from last quarter we have a top – the new U.S. GAAP policy called the Contract of Customers Topic 606, was that a policy on March 1, 2018. This policy represent the estimate amount of tuition classes that maybe refunding in the new future if the students withdraw from a cost of any remaining classes. Right after the adopt of this new accounting policy, which starting from last quarter we need to take certain percentage to estimate the refund rate from the students and this will deduct from the differ revenue. They are moving from the deferred revenue to other items is only – but last year Q1 and Q2 that deferred revenue numbers, that based on old policy, so the number is bigger than what we see this year. If we pull everything apple-to-apple and we pull all the numbers back to deferred revenue actually the deferred revenue gross is well ahead and pretty much on track. And the second question you asked about our guidance on Q3. I think, yes, in the first place offline, offline which is pretty much on track, but we shift certain low single digit percentage of revenue from Q3 and Q4 because of current issues, so which make Q3 lose a little bit lower, but that will benefit my Q4 to mean, my Q4 grows better. Online as I said, in the past its almost same gross rate, same range of gross rate as always in Q1 and Q2, this quite healthy. So that’s like guidance from my Q3. In Q4 there’s a little bit maybe better than…

Thank you, Rong. Thank you.

Thank you. Our next question comes from Edwin Chen from UBS. Please ask the question.

Hey, Rong and hey, Echo. Couple of questions, one to follow-up on capacity, we understand that this year given the policy uncertainty capacity expansion slow down, but what about the next year – when do we expect so that we kind of resume the capacity expansion back to 30% target? Two, is on the margins, could you update us on the offline margins in the Q2 and potentially offline margin outlook for Q3 and Q4. And three, your third quarter revenue guidance, 30 something percent and you said, online we’ve grew by 80%, so that implied offline was very low at around 20, maybe even below 20%. So I was wondering what’s the reason behind that other then the teachers exams impact, it looks like that number was very conservative? Thank you.

Thank you, Edwin. The first question about capacity, I think right before I answer you the number of capacity expansion maybe this year or next year, I think we need to think about that. When we’re moving to phase of this kind of the new market today, the regulation is more than before, and we have seen actually the new parents and the new students has back to adopt the online approach much better than before. So we need to think about that. We need ask one question. So what’s the right gross strategy in the coming two to three years? Is the right strategy for us to do to continue to grow the offline -- expand the offline learning centers more and more, fast than faster and hire more teachers to do with that, or when you think about that maybe it’s a time – it’s a right time to develop or change or transform our growth drivers to more online, so that’s a right question we need to ask ourselves. And we – I know the first quarter to dealing with the policy issues which starting from almost two years ago. So – but our decision is not only because of the policy, but more because of our opinion or our understanding of the new growth driver in the coming few years. We just only believe online, especially the live broadcasting platform with high direction between the teachers and students. That’s the right model to go. And I also believe for the dual-teaching models which can carry of the some [ph] conference in old model which is also a -- to be most callable [ph] in Chinese geography. So when believe -- strongly believe technology driven dual-teaching models such as dual-teaching modeling and Online Life models that is…

Thank you.

Thank you. Our next question comes from Leon Chik from JPMorgan, Hong Kong. Please ask your question.

Hi, Rong. I just want to ask question on, you mentioned your online and your live is about the same now, both 2.5 million. Do you have any statistics on how many online students would migrate to offline and vice versa? Or they’re totally different markets? Thanks.

Thank you, Leon. One correction, its almost 2.4 million, not 2.5. I think we’re moving to the student base in offline and online. Today our online also cover a top tier cities. I think most of our online students still coming from the places we have just opened learning centers. But if we deep dive to the cities actually we can see and online users I think we can see some kind of synergies between online and offline, for example, when we go to one city in Yangzhou there are first, open other -- learning centers in Yangzhou city actually in the first most of the students coming to apply, actually they are coming from Xueersi Online School. And we also sit the other direction as some of the students they studied in my offline, but maybe for example, in the summer or winter their parents have no time to send their kids to my school every day, so they decided to tell online approach. So we see this kind of synergies, but the percentage of this kind students showing to each other actually still a small percentage. Most of the students actually they lie [ph] with approach which is some partly dependent from the other approach. And in the long run our online definitely will going to even deeper to the lower level cities and Tier-3 or Tier-4 cities in the long run definitely that space we’ll recall. So we probably can see is, we continue to be some beneficial in the cities where offline centers which is also can help, contribute to first wave of students in my online, but long run we believe online is the other market, online is much bigger than what we can do in offline. And online will be kind of maybe more…

Thanks.

Thank you. Our next question comes from Lucy Yu from Bank of America Merrill Lynch. Please ask your question.

Hi, Rong. It’s about you online business, you just mentioned that most of the online business – online students do come in from the cities where you have offline learning centers. Have you figured out the way to attract students from those cities that you have not been penetrating any strategy over there? Thank you.

Thank you, Lucy. Well we’re running online frankly speaking we face a lot of big changes in the business. The first one is the online approach. What I can say, I think its live broadcasting learning approach is commutatively different from the other online mentioned in the past, which is pro recording content. So we effect one change from being as we change that from pre-recording to live. So, when we do this kind of changes, definitely our first priorities may show up, the top 40 cities which will have prevalence we can make you more popular. And you know in China the tier 1 cities, and tier 2 cities they definitely have some much bigger influence to the other cities compared to the lower level cities. So that’s our key priority for this year and we hope to see the progress out in check. And today, we are also thinking about what is the right approach to target the tier 3 or tier 4 cities in the longer term. I can’t say we think we are ready. What I can say is we are in the process to make things work in the low tier cities. I can’t say what ideal models to tier 3 and tier 4 cities. For example, it’s the newer model that it’s the right model to work, I have no idea. So what we can see is we need to pilot, we need to use different ways to do this. For example, in tier 1 and tier 2 cities, the online marketing is a very efficient way to acquire new students, but when you go to tier 3 and tier 4 cities maybe not, maybe setting a low new incentive rev [ph] there is always up to attract new students. So we need to pilot different approach where you have separate teams focus on this that tier 3 and tier 4 cities that place is the place that we need to go in search of studies, while we continue on this and we will let you guys know if we are making some material progress. Thank you Lucy.

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