Ladies and gentlemen, thank you for standing by, and welcome to the TAL Education Group Second Fiscal Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker for today, Ms. Echo Yan. Thank you. Please go ahead ma'am.

Thanks, operator. Thank you all for joining us today for TAL Education Group's second fiscal quarter 2020 earnings conference call. The earnings release was distributed earlier today and you may find a copy on the company's IR website or through the newswires. During this call, you will hear from the Chief Financial Officer, Mr. Rong Luo; Linda Huo, Vice President of Finance; and myself, IR of TAL. Following the prepared remarks, Mr. Luo and Ms. Huo will be available to answer your questions. Before we continue, please note that the discussions today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC. Also, our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. I would like now to turn the call over to Mr. Rong Luo. Rong, please.

Thank you, Echo. Good evening, good morning to you all. Thank you for joining us today on this earnings call. Our second quarter revenue performance was based on the robust and healthy growth of our overall small class business in the cities we currently cover and the continued scaling up of our online courses. Net revenue growth in the second quarter was 33.8% year-over-year in U.S. dollar terms to US$ 936.6 million and 38.7% in RMB terms. Total normal priced long-term course student enrollments increased by 54.5% year-over-year, most driven by positive growth in online enrollments, as well as the Xueersi Peiyou small class. GAAP income from operations decreased by 13.5% to US$69.9 million in the second quarter. Non-GAAP income from operations was almost flat to US$98.8 million. The rising operating expenses incurred in Q2 was mainly due to increased sales and marketing spending, research and development spending in our online initiatives. I will now turn the call over to Linda Huo, our Vice President of Financial. She will give you an update on our operational progress in the second quarter. Next, Echo Yan, our IR Director will review the second quarter financials. After that, I will update you on our key strategy execution and discuss our business outlook next quarter. Linda please.

Thanks Jul. Fiscal second quarter revenue was based on solid growth momentum in the various education services of our total business. Let me review the business by different revenue streams. Let me start with small class and other business which consist of Xueersi Peiyou small class, First Leap, Mobby, and some other educational programs and services. These accounted for 76% of total net revenue compared to 81% in the second quarter last year. The revenue growth rate was 25% in U.S. dollar terms and was 30% in RMB terms. Xueersi Peiyou small class, which remains our stable core business represented 63% of total net revenue compared to 70% 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 16% of total revenue in the quarter compared to 12% in the same period last year. Net revenue from Xueersi Peiyou small class was up by 20% in U.S. dollar terms and 24% in RMB terms, while our normal priced long-term class enrollments increased by 27% year-over-year. This growth rate reflects the solid growth of both Xueersi Peiyou offline and online class. Peiyou offline small class revenue increased to a healthy rate of 12% in U.S. dollar terms and 16% in RMB terms, while offline normal priced long-term class enrollments increased by 12% year-over-year. With Peiyou online, as you know, we offer the online courses with localized accountants as a complementary service to Peiyou offline in more and more major cities of our network. Peiyou online offers regular and short-term courses and other promotion courses. In the second quarter of fiscal year 2020, which is this fiscal year, Peiyou online accounted for approximately 11% of total Xueersi Peiyou small class revenue and a 20% of…

Thanks Linda. Let me now go through some key financial points for the second quarter of physical year 2020. The breakdown of ASP for the various businesses is as follows. Normal priced long-term Xueersi Peiyou Small Class ASP decreased by 3% in RMB and 6% in U.S. dollars year-over-year. Peiyou offline normal price long-term courses ASP increased by a low single-digit percentage in RMB terms year-over-year. Normal priced long-term Zhikang one-on-one courses ASP increased by 10% in RMB and increased by 5% in U.S. dollar terms year-over-year. Normal priced long-term online courses ASP decreased by 10% in RMB and 13% in U.S. dollar terms year-over-year mainly due to the mix change of a larger proportion of high school enrollments. High school long-term online courses ASP is relatively lower than overall average long-term courses ASP. Gross profit increased by 39.9% to US$517.8 million from US$370.2 million in the same year ago period. Gross margin for the second quarter improved to 55.3%, as compared to 52.9% for the same period of last year. Selling and marketing expenses increased by 73.5% to US$263.3 million from US$151.7 million in the second quarter of fiscal year 2019. Non-GAAP selling and marketing expenses which excluded share based compensation expenses increased by 73.4% to US$258.9 million from US$149.3 million in the same year ago period. The increase of selling and marketing expenses in the second quarter of fiscal year 2020 was primarily a result of more marketing promotion activity to expand our customer base and the brand enhancement, as well as a rise in the compensation to sales and marketing staff to support a great number of programs and the services offering compared to the same period in the last year. Operating income decreased by 13.5% year-over-year to US$69.9 million. Non-GAAP operating income decreased by 0.2% to…

Thank you, Echo. In this physical year we are in the midst of the further transitioning our business model to a multi-pro educational service model. This diversified model includes our offline learning center and geography network, online business, and various other education programs and projects, such as our smart education solutions and open platform business. I would like to update you on each of these models. Our core Peiyou small class business remains healthy and stable. In Q2, we have entered into another 12 new cities and including the one new cities we are entering in Q1 we have covered 13 new cities in the first half of fiscal year 2020. Till now, Peiyou offline has around 13,000 classrooms in a network of nearly 70 cities in China. Together with the fast growth of Peiyou online and our ongoing efforts to improve our operational efficiency, the profitability of Peiyou was slightly improved in Q2 as well. Looking ahead, we expect the gross momentum of Peiyou small class to continue as we further develop our offline network at a reasonable speed and scale the business. We keep seeking to operate and scale our Peiyou business by leveraging our offline and online advantages and resources, and as always with long-term sustainability in mind. Our online business is a high growth early stage business, which also faced intense competition and ever changing market dynamics. As one of the pioneers in this sector, we are very confident about the huge potential on education. We strongly recognize the social value and the market opportunities of online education, hence our ongoing explorations and development in this area. As an education provider and service provider, we will never just go after a high revenue growth speed only, but more importantly, the fast growth rate should be achieved…

Thank you. Ladies and gentlemen we'll now begin the question-and-answer session. [Operator Instructions] We have our first question coming from the line of Alex Xie of Credit Suisse. Please go ahead. Mr. Alex Xie, your line is open now.

Sure, sure. So, hi management. Thank you for taking my questions and congratulations on very strong set of results. So, I would like to ask about our strategy for this Peiyou business. We have already introduced, I think Peiyou online to more and more cities and now in this quarter, it seems that we are also accelerating a little bit for the small class -- number of small classrooms. So what are our expectations for the full year or future of capacity expansion and what are our strategy to better integrate online and offline of Peiyou business? Thank you.

Thanks, Alex. Yes, that's a very good question. I think right before we answer these questions, we need to go back to see what happened in the past two years. And especially last year through our earning call, we have highlighted rest of the policy and to history. And I think, which definitely has impacted our operations in the past maybe six quarters. With the new policies - a lot of new policies impact in place, the regulation become more stricter, much stricter than before. The pressure of being compliance is also getting better, getting bigger than before. And on the other side, internally frankly speaking, if you can go back to see our past maybe five years growth in several years, we grew very fast more than 50%, even 80% capacity growth. So I think the policies very good timing for us to review our business models and be more cautious. So in the past last few years you're probably can see that we made a lot of efforts, how to improve our product experiences, how to improve our whole systems operating efficiency, and how to improve our status - healthy status. We have different KPIs, how to make sure our operation can be more compliant than before, which takes us a bit some time. And as a result, you probably can see that we slowed down the offline revenue growth in the past, maybe six quarters. And at the same time, we also spent a lot of efforts to develop the Peiyou online strategy and the Peiyou online products. And that is not only newly addition of the new product, but it's also kind of a much experience to change the learning process and the learning experience for our students. So after several quarters, we today - we…

Thank you. Very helpful.

Thank you. Our next question is from the line of Yuzhong Gao of CICC. Please go ahead.

Hey, [indiscernible]. Thanks for the opportunity. Congrats on the solid results. So our question focused on your online business. [Indiscernible]. So clearly, we have seen an intensified competition in the past summer. And then, there seems to be a deceleration this quarter. So could you maybe share your thoughts on the latest competitive landscape and over online revenue growth trajectory in both the near-term and the long-term, as well as this margin outlook? Thank you.

Okay. I think this just online school business is growing on track in the Q1 and Q2, as in Q1 the growth, the revenue growth 122%, enrollment growth 121%. In Q2, they grew 94% revenue and 154% in enrollments. I think now it's right timing for us to go back to see what happened in the past two quarters. In the very beginning, as I mentioned in last earnings call, actually, we are now fully prepared for this work. So we are a little bit behind than the other players in this market. The good thing is their team quickly [ph] and we improved a lot especially in operation strategies. Two, we did a lot of adjustments and efforts. So we're trying to catch up and the final result [indiscernible], but we also want to give you more color about that. In the strong perspective [ph] I think how to reduce the cost to acquire one new customer, actually is always a tough challenge to us. And we are now a company who is well experienced in marketing and sales and we have some know how last year, but this year have more players coming into the battlefield actually, we have more lessons to learn. We are a little bit behind the beginning by we'll finally catch up. So, but this is a very good and kind of their turnover, which gives the team so much confidence, they could do even better than today. On the other side, we're also a little bit lucky is because education is a worry kind of operation-intensive industry, and they have, when the Chinese students trying to rush online classes, that's not over, that's only the beginning. So in the coming maybe few tons the - whole teaching system and management system, we will…

Thank you. Our next question is from the line of Mark Li of Citi. Please go ahead.

Hi, management. Congratulations on the very strong results. I want to ask for our next quarter, I think the revenue guidance is around 5% ahead of the consensus expectation. So can we know what is that bigger factor to bid for online or offline and also I would appreciate any color on the selling and marketing expenditure color for the future quarters? Thank you.

Thank you, Mark. In the first place, I actually have no idea way the consensus for the online or offline revenue growth separately. So in our company's perspective, we all - we only give revenue guidance in a group level. I think something, if we compare quarter-over-quarter in Q3 compared to Q2, I think Q2 will grow around 38% and Q3 our guidance is 45% to 48%. I think most of the big - the biggest difference coming from the Peiyou small class business, we are seeing their growth rate is in Q3 is higher than Q2. We are also seeing that Peiyou online is also fast growing. And in the first one or two quarters, actually they are close to 200% revenue growth and we can foresee this high growth will continue in the coming quarters. Xueersi online school is also growing in - is growing on track as we expected. But considering their high growth in the first quarter and second quarters, so we don't see any huge differences quarter-over-quarter. And their most important kind of contributor are coming from the Peiyou [indiscernible]. Well the sales and marketing, I think you probably can see that, in summer we're running our online campaign, and in Q3 in short-term, we're also running online promotion campaigns for the fall. And compared to last year, the same quarter, same [indiscernible] last year, actually we don't run that much. So this quarter's sales and marketing both online in Q3 is higher than the same quarter last year. So, which will give us some kind of pressures in margins perspective in Q3. And, but if we pull everything in one year's view, you probably can see that that this year the online will be loss making position, but will be slightly loss making positions, but we don't foresee any huge loss over there. And since we still have one quarters to go, especially the Q4, so based on why not today, we don't see any huge surprise we need to keep, update you guys. And running our online business is not easy or maybe nothing is easy with aiming very high target. So we will make sure both online and offline growth can be in a healthy and sustainable way. That's our key priority. Thanks Mark.

Thank you.

Thank you. Our next question is from the line of Sheng Zhong of Morgan Stanley. Please go ahead.

Thank you for taking my question. Well, as you mentioned a lot about regulation at the beginning of this call, so can you give us some more update on the regulation now, and whether it will impact your offline and online both going forward? And secondly, I want to ask - have a followup on the online business, can you give us some breakdown on the online students from Tier 1, Tier 2 cities and lower tier cities? So and then what's your strategy to go to lower tier cities? Thank you.

Okay, Sheng Zhong. I think for the regulations, the offline regulations is almost in place for more than one year. So frankly speaking, our company has experienced tough time part of being all these kind of new policy and regulations now. So I can't say today that's perfect, buy compared to one or two years ago, we are making better than before. And for the online regulations, I will leave it to Linda to give you more information about that because of the government just launched a new policy two weeks ago.

Yes. On September 30, together with other two related departments, China Ministry of Education issued a document regarding important general guidance of hastily developed online education industry in China. The document continuously illustrated and provided the policy level of the support to China online education next step and long-term development. As one of the leading online education pioneers, we are very happy to see and even welcome the online education regulations as always. And we will do our best to support and work with the whole industry and the government to keep improving the online education products, technologies, and services. And we believe that with the government support, technology development and industry efforts, the online education will benefit more and more students, especially the kids who are based in lower tier geographic areas. And finally, I'd like to emphasize again that we welcome and fully support all these regulations and policies, which we have improved the level of the centers and services of the industry and further strengthen the overall industry environment.

Yes and you asked the second question about our strategy on the low tier market for the online offering, I think that is one of the best questions. And I have to say by the end of today I think the enrollment coming from lower tier cities actually are or the enrollments coming from the places we don’t have Xueersi networks actually I think the contribution is still below 20%. And Peiyou, leading because we are online offerings can be accepted actually which is more popular in the high tier – in the Tier 1, Tier 2 because that is the place we are here. We have a huge presence, we have brand names, we have everything and the students and the student parents in the Tier 1 places they have, they have still a lot of online offerings before. So it's much easier for them to buy these offers. And they also know our name, so some have those kind of low hanging fruit. So that's part of the reason why in the past we focused on a lot of things over here. And if in the profitability study may be most profits also coming from the top cities based on our experience in being in the Peiyou in the Peiyou offline business network. And by looking forward definitely, we need to find a very effective way how to penetrate in the Tier 3 and Tier 4 even much lower tier cities now. I can’t say I find a perfect way. I know in the past few months if some of our investors give us very cool suggestions and we'll also pilot some of their suggestions in some selected cities. Based on small pilots we run today some of that is making progress, some of that doesn't work. So…

Thank you very much.

Thank you. Next in line is Alex Liu of China Renaissance. Please go ahead.

Hi, thanks. Thanks a lot Luo and Echo for also for giving us this opportunity. Just on a really high level, we noticed a lot of new players coming into the market for online business. Whether this means just want to hear your thoughts on this, whether this means the entry barrier of the tutoring business is lowered than confirmed before, simply because we have the online model right now? And if this is the case, should we think about going forward the company in general will be conducting user acquisition every single years going forward? Thank you.

Okay, thank you for the question. I think in the first place let’s compare the numbers. For the offline education companies in China I think more than 0.5 million more or less, while the online players in this market you probably know a lot of them, it is below 100. So 0.5 million compared to 100 we're probably going to see actually the couple of competition low entry barrier actually is quite different from before. In the second place, if we're only simply running the online model through a live broadcasting and the recording combined model, which means the model itself has very low entry barriers. So online education doesn't mean we use the Internet or we use the technologies to move the offline classrooms to online and that's it, that maybe not the case. I think that's a huge kind of revolution not only impact the classroom, but also impact the whole learning process. For example, how the students do the pre-studies and how the students they can answer their questions, how students finished their homework, and how the students can based on the statistics of data through their learnings and then find a right way to do so. So I think the problem for online today is the only model today, we need to continue to invest and continue to develop to make sure the online model itself has more kind of entry barriers compared to the other one. And we are sure that will happen, because if you do the interviews to the students, you probably can see that most students and their parents they're willing or they are eager to know more information, what they have from themselves and find the most effective way. They can spend – fewer time or less time, but they have…

Thank you.

Hello, operator.

Hi Annie?

Hello?

Yes please?

Yes, we have opened the line of Lucy Yu of Bank of America. Please go ahead.

Thank you Luo, thank you Echo, I've got two questions. Firstly, could you please share with us about like conversion rate and the retention rate for the summer online promotional cost and a normal cost, that's the first question? And secondly, on the third quarter guidance, Luo you mentioned that Peiyou small class will accelerate. How much of that is attributable to class scheduling shift? Because I recall last year’s third quarter some teacher takes one day off to sit on the exams, so actually part of the revenue in the third quarter was shifted. So any low base impact if we're excluding that impact, will Peiyou small class still accelerating? Thank you.

Yes, in the first place, thank you so much for your wonderful memory. I think this year, compared to last year, yes, we have one vacant advantages because last year they have to take exams. So, I think one way is around 3% to 5% of the total revenue for this fiscal year. If we are compelled to look total revenue growth you probably can see that in Q2 the Peiyou revenue growth is around 23% to 25%, but even we pay this through 5% off from Q3, the Q3 Peiyou growth is still higher, are significant than Q2, so that is the case, what we want to show today. And your first question about the conversion rate and the retention rate, I think conversion rate you expect to be above the online conversion rates, What I can say is the online conversion rates this year compared to last year is of similar level. The retention rate of online, just online [indiscernible] is low single digit improvement, compared to last year. So that's the kind of the big information we can share with your guys.

Thank you.

Thank you. Our next question is from the line of Felix Liu of UBS. Please go ahead.

Hi Rong Luo, Linda, and Echo, congratulations on the very strong results. I just want to come back to the summer promotion. Our summer marketing investment increased a lot. So I just want to ask how do you think about the efficiency, say on a scale of 1 to 10, how do you rate your summer promotion campaign? And coming into the next quarter, if we compare on a Q-on-Q basis, how will the Q3 and Q4 marketing dollar or marketing budget be? Thank you.

Thank you for your questions. I think it's we feel happy to see the team has tailored challenges and it goes through the challenges. You'll probably know that in the year beginnings we have staff off [ph] change. So the team needed to take some time to seeing the new way and then you change their old behavior and to a new behavior which is focused more on product in the students. So, but during this time some of us some of our players actually they do a lot of things and they have a while two monthly time come back to us. So we feel very good is, the team actually quickly react and go through the challenges, even we're not being perfect, but the team is very good. And on the other side is I think we don't see our conversation rate have such huge differences compared to last year and sometimes compelled to our peers, sometimes our conversation rate is even lower especially in the beginning of summer. So, we need to, but the key reason is not because we invest too much money, the key reason is because when you invest in the front, you need to have a lot of things ready, especially in a supply chain perspective. So we need to have a variable way to improve the efficiency of our operation impact. So owing to allocation businesses it is best is not, they actually come back a lot of big [indiscernible] in a friend [indiscernible]. So if the shifting happens again, I think we have a chance and if we can have more time to be fully prepared, I think we have more chance to do a better job than before. But even in today's case, we [indiscernible] the team has been making…

Thank you. I'm very glad to hear the progress and good luck on the second half. Thank you.

Thank you for your questions. Thank you.

Thank you. Ladies and gentleman, this concludes our Q&A session and our conference call for today. Thank you for participating. You may all disconnect.