Ladies and gentlemen, good day and thank you for standing by. Welcome to TAL Education Group's Fiscal 2025 Second Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] Please be informed that today's conference is being recorded. I'd now like to hand the conference over to Ms. Fang Liu [ph], Investor Relations Director. Thank you. Please go ahead.

Thank you all for joining us today for TAL Education Group's second quarter fiscal year 2025 earnings conference call. The earnings release was distributed earlier today and you may find a copy on the company's IR website or through the newswires. During this call, you will hear from Mr. Alex Peng, President and Chief Financial Officer; and Mr. Jackson Ding, Deputy Chief Financial Officer. Following the prepared remarks, Mr. Peng and Mr. Ding will be available to answer your questions. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the United States 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 our 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 and this call include 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 to turn the call over to Ms. Alex Peng. Alex, please go ahead.

Thank you, Fang. I’d also like to thank all of you for participating in today's conference call. In this call, we'll discuss our financial performance and business progress for the second quarter of fiscal year 2025. We will also review some key business results. Afterwards, I'll provide a brief update on our business strategy outlook. In the past fiscal quarter, we consistently refined our services and experiences for users, generating societal value through our dedication to customer experience. At the same time, our business is experiencing sustained growth not just by building our teams or opening new learning centers, but through a broader, ongoing development that reflects our long-term vision. Our focus on innovation, user engagement, and service excellence has resulted in sustained user value creation through our various products and services. In alignment with our strategic objectives, our core businesses have maintained their course of operations. Next, let's talk about our performance for the second quarter of fiscal year 2025. Throughout this quarter, we continue to enhance our core businesses while actively exploring new growth opportunities. While exploring and investing in additional opportunities and long-term strategic capabilities, we also maintained a focus on operational efficiency and sustainability. We continuously adjust our resource allocation to ensure a balanced approach between growth and operational efficiency. Our learning services continue to develop steadily, empowering learners through our off-line and online enrichment learning programs. This progress reflects our commitment to high quality service and expansion of our operational capacity. We continue to take a dynamic approach in managing our learning center expansion plan, evaluating several factors such as market demand in each area, user acceptance of our products, our operating capability, and efficiency. So, in line with our strategic objectives, our online enrichment learning business remain on track. We continue to innovate in…

Thank you, Alex. I am pleased to share with you some details about the progress we made in the fiscal second quarter across all core business lines. Please note that all financial data for the quarter are unaudited. I’ll start with our learning services and others business, which includes a broad range of learning programs for our customers. Learning services continued its development momentum in the second quarter of fiscal year 2025. Revenue increased year-over-year propelled by advancements across multiple product lines. The largest revenue contributor in this business line remains Peiyou’s small class offerings, which maintained their upward trajectory. Peiyou’s growth was primarily driven by enrollment growth supported by the expansion of our operating capacity. We carefully assessed both user demand and our operational capacity. We struck a balance that allowed us to meet the growing demand during the summer vacation period while managing teaching quality, business sustainability and operational efficiency. Key efficiency indicators such as retention rate remained relatively stable quarter-over-quarter. For our online enrichment learning business, we remain focused on adapting to evolving market landscape and user needs through consistent innovation. By introducing new products and interactive formats, we create value for our learners and deliver learning efficacy and experience [ph]. Based on user feedback and market insights, we continue to invest in strengthening our online product capabilities as well as operational and marketing strategies. This allows us to expand our current operations while building a solid foundation for long-term competitiveness. Next, our content solutions business. Its revenue continued to grow this quarter. Thanks to our efforts to optimize products, enhance user experiences, and strengthen our sales channels. We believe our learning devices are companions for at home self-learning, which is why we closely monitor user feedback and experience. As a result, amid rising sales and an…

Thanks Jackson. I would like to share our outlook for the upcoming quarter. The fiscal third quarter is generally not a peak season for enrichment learning demand, and we may experience fluctuation in our business performance due to seasonal factors. Nevertheless, we remain dedicated to driving healthy and sustainable long-term growth across all our business lines. First of all, we'll continue refining our various learning programs to deliver high quality learning services to a growing user base. We're committed to ongoing investments in learning services to ensure that our users receive quality learning experiences both online and in person. Next, we'll remain focused on technological innovation, consistently launching high quality smart devices that enhance personalized learning experiences. We target to iterate the functionality of our learning devices by harnessing AI technologies. We'll keep introducing an updated content and smart tools. Together, these efforts will provide a more intelligent and practical learning companion for our users self directed learning at home. Meanwhile, we'll also remain focused on managing our sales channels and optimizing our marketing strategies. As a company dedicated to learning we'll continue operating and managing our core business lines while exploring new initiatives and seizing new opportunities to keep up with our customers ever evolving needs. We'll explore and design differentiated products and services. Our business model, combined with our brand strength and operational efficiency, positions us to seize market opportunities and deliver enduring value for our customers and shareholders. So that concludes my prepared remarks. Operator, I think we're now ready to open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Felix Liu from UBS. Please ask your question, Felix. Felix, your line is open. Please ask your question.

Hello, can you hear me, okay. Hi. Sorry, I was on mute. Thank you, management, for taking my question and congratulations on the strong results. My question is on your learning service business. Could you share more color on the growth momentum and the operating leverage, sorry, operating efficiency of the business? And what is your outlook for learning service from here? Thank you.

Thanks Felix. This is Alex. Let me take on that question first and I may call on Jackson to add some additional insights. Really, when we look at the last few quarters, we've seen continued growth momentum for our enrichment learning business. We've been seeing increasing demand for enrichment learning as this new generation of parents start to develop their own parental and educational philosophies. I think in earlier calls we had called out that this is something that we were envisioning and now I think we're seeing more and more of confirmation. This new generation of parents have developed more focus on their kids well rounded whole person development in addition to academic performance. Although we're still, and I think this data is not easy to come by in terms of how fast the enrichment learning market overall is growing. We really observed more activities and user increase for enrichment learning on the ground, which I think really is indicating growing customer interest. So in tandem with the market growth of enrichment learning, our learning services business has been experiencing continued progress. We've been aiming to help our learners with their holistic development experience by providing interactive, engaging learning experience. We have observed that learners in these type of enrichment programs, they really exhibit continued growth in terms of their interest. They stay engaged and they also learn very effectively. I think Jackson can talk more specifically about the growth momentum and operating efficiency that you had asked.

Thank you, Alex. And thank you, Felix. Let's maybe limit the conversation to Peiyou small class enrichment learning first; which as you may know is our largest business within our learning services. There are some other businesses within our learning services category, but some of them are at a different stage of their life cycle and exhibit slightly different trends, and to the extent you have more questions on other business lines, feel free to follow up. So, like Alex said, we have seen growth in Peiyou enrichment in parallel with user interest growth. The overall market development has been an important contributing factor of our business growth. And if we shift lenses a bit to look away from the market and just look at ourselves, we believe the key growth drivers, amongst others are one, the quality of our services and two, our capability to recruit and train lecturers. For service quality we have been focused on and will continue to focus on standardized lecturing approach, while providing an interactive and student centric learning experience. For lecturer recruiting and training we pride ourselves in training most of our lecturers in-house to ensure consistent service quality. Now, as long as these growth drivers continue to prevail, including what we talked about earlier, market demand or service quality and our capability to recruit and train lecturers, we expect growth in this business line to continue. However, in the next few years we do expect Peiyou enrichment's long-term growth rate to gradually taper off as we're coming off higher base numbers than a couple of years ago. Felix, I think you also asked about operating efficiency. We always aim to maintain a consistent level of efficiency through balancing our operating capacity with the market demand we observe. We measure several efficiency indicators such as utilization rate, refund rate and retention rate. Currently, our operating metrics are at a level that we believe would sustain our viable business model and we aspire to maintain our current level of efficiency. In the future, we will prudently manage our learning center network. We will balance growth and efficiency as we think about how to manage our learning center network. I hope that answers your question, Felix.

Thank you. Our next question comes from the line of DS Kim from J. P. Morgan. Please ask your question, DS.

Hi Alex. Hi Jackson. Good evening and congrats on such a strong bid. Thank you for a great trade. I think you should be great for discussion as well. I have a question on learning devices if, okay. Our channel checks indicate that device sales had really strong momentum over summer, which I think might be the reason why GP margin contracted a bit this quarter. But anyway, my question is can I ask a) is a learning device segment profitable on cash or even accounting basis? That's the first question. And b) what's our strategy to enhance profitability here? Say, have you thought about monetizing additional revenue streams like value added services and whatnot to utilize? I think already quite fast at a big install base and user base and I may have a follow up after this? Thank you.

Hey DS, this is Alex. Thanks a lot for that thoughtful question. Look, AI learning devices, they're really relatively new, a new business for us, right? If you recall, I think our first learning tablet came to market in February 2023, which is really just a little bit over a year-and-a-half ago. But while new we're really excited about the opportunity to provide further accessibility to high quality learning content and experiences for a wider range of customers through these learning devices. We track where our devices have been sold to and we really see that some of our devices have been sold into areas where we never built learning centers before. So these AI powered devices really present us an opportunity to serve customers without the limitation of our physical footprint and I think really to expand availability of these high quality content and learning experiences to a much wider segment, to many more students out there. So with that goal in mind, we recently launched a new device in the lower ASP territory. We talked a little bit about this earlier it's called Xbook [ph]. So in addition to high quality learning content, this product also has more daily practice functions. So they serve a learner's learning needs as well as practice needs which are really important that they go in tandem. And we've been receiving positive feedback on this new product. So our learning device business is currently loss making. The major cost items are primarily product, research and development, selling expenses and bill of materials. We are really investing strongly into R&D to create quality product experiences for our users. And I like to add research and development here is not limited to R&D on hardware and software or AI functions, but also in the content…

It did, and thanks so much for the insight and great answers. I'll go back to the queue and thank you again and congrats.

Thank you.

Thank you. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead Tim.

Great. Hi Alex. Hi Jackson. Congrats on the very strong quarterly result and thank you for taking my question. My question is regarding your sales and marketing expenses, which I noticed that year-on-year growth for this quarter is around 60%. I would say, I think a big portion within the sales and marketing expenses could be related to your learning devices or content solutions business. Just wondering, how do you think about the competitive landscape for these devices for this year, and has the sales and marketing expenses per device increased this year, and how do you think about the trend going forward? Thank you.

Thanks, Tim. This is Alex again. Let me take this on. So I like to unpack this a few different levels. First, I think we are confident in our learning devices products. We continue to innovate in response to the evolving competitive landscape and changing user demands in the sector. Our goal is really to motivate learners on their self-learning journeys by leveraging the smart features and all the resources integrated into our devices. And I think our user value really has been reflected in our positive user feedback and healthy user engagement metrics. At the same time, obviously we've witnessed full stack players either entering this market or investing more into this market. So what do I mean by full stack? I mean players who have experience and assets in hardware, software and AI, in content and in learning solutions. With the entrance of these full stack players, this will likely result in creating enhanced user experience in this industry, which I think is really a good thing for the customers. This might also lead to broader customer awareness of this product category and its inherent value in the learning journey, which we believe could benefit the entire industry and also the customers. So really to net it out, learning device is one of our strategic priorities. We're excited about its business prospect and we'll make our effort to keep up with, and in some instances really to lead the industry's innovations. I think in our industry, competition really exists on multiple levels. There's going to be competition on a product level, competing for talent and competing for customers. As a company that takes pride in our product and service quality, we really invest heavily in product research and development. And as for competition for talent, we aim to attract multidisciplinary talent by leveraging our expertise in the learning industry and our technology know-how. As for the competition for customers, I think really, as we discussed earlier, ultimately it's beneficial both to the users and to the development of the industry. I do admit, I think it does impact sales and marketing in some occasions. So we believe the key is to lead in product competency while exploring efficient ways to communicate with our customers, especially given that this is an emerging category. Right? We'll focus on building sales and marketing capabilities both within existing channels and building new channels. In some of the channels we've witnessed and I think this is not hard to anticipate that sales marketing re-increase. But while they also could stable, and they do stable, they do stay stable in other channels. So this has to do with market mechanisms, with specific channels. We closely monitor the efficiency across the sales channels as we build out our go-to-market capabilities. So Tim, I hope that answers your question.

Yes, that's quite helpful. Thank you.

Thank you. Our next question comes from a line of Alice Cai from Citi. Please go ahead, Alice.

Good evening management team. Thanks for picking up my questions and congrats on the robust results. Could you share your upcoming investment plans in AI, particularly in the learning device sector? Would love to hear more about your AI product domains and AI scale needed, investment scale needed? Thanks.

Thanks, Alice. This is Alex again. So before we go into product roadmap and the investment plan, maybe let me share with you how we look at the market landscape for AI in vertical domains and more specifically AI in our industry. By the way, I spent a week in the U.S. in Silicon Valley talking to AI players and AI players in education. And I think a trend that many people across the world in this industry is observing is that the capability of the foundation models have continued to improve and they improve at a pace that might have surprised many of us. So this presents exciting opportunities actually for vertical players like us. We think that lighting this tailwind, vertical players, including us, will focus on, if not already focusing on, probably two things primarily. The first is leveraging the wealth of data that's particular to an industry to train vertical models. And I think, by the way, the recent trend toward reinforcement learning is really interesting in this regard. So that's the first one, the data. And the second is developing applications that leverage the powerful capabilities of foundation models as well as vertical models. One of the keys to success to us as a vertical player in the AI space is really to possess a breadth of structured and unstructured data suitable and relevant to the AI era. Some of our historical investments into prior generations of AI technologies have really benefited us with a great treasure trove of data that we sit on today. As for developing AI powered applications, I think we have an abundance of experience in developing learning applications powered by technology. And we understand the complexity of such endeavors. And really this complexity is coming from years of experience. We…

Thanks. It is very helpful.

Thank you. Our next question comes from the line of Liping ZHAO from CICC. Please ask your question, Liping.

Hi, Alex. Hi, Jackson. Thanks for taking my question. So my question is about your xueersi.com business. Could you please elaborate the UE [ph] of xueersi.com and how should we think about long-term growth outlook of that business? Thank you.

Liping, thanks for the question. This is Jackson. Let me take this one. First, I would like to share with you some of our thoughts on xueersi.com and the online learning industry in general. If we look back at a few years ago, the online learning industry went through a phase where some industry participants were heavily focused on customer acquisition. We do not think that’s a sustainable approach. In the online learning space, the market is evolving and we’re seeing user needs changing. For example, we see more and more demand for enrichment learning programs and for student centric learning, particularly demand for science and technology emerging. There is also transformation on the supply side in terms of what industry participants are providing. We observed varied product formats catering different user needs. Now, in the market, there’s more than just large class one-way [ph] lecturing offerings. The market is also supplemented with prerecorded classes, experimental toolkits, and et cetera. We’re really excited about this opportunity to provide science and technology immersion to a broad range of audience. For example, our science and experiment program guides learners to master complex science concepts through observing various scientific phenomena in daily life, conducting hands-on experiments, and connecting experiment results with science concepts for a deeper understanding. This program is designed to develop learning scientific learners scientific curiosity, innovative mindset, and problem solving capabilities. We have observed that learners enrolled in this program exhibit continued interest. They stay engaged and they also learn effectively. Liping, you asked about growth outlook and growth drivers. In this market, we believe our current main growth driver is our product quality. We continued to innovate in response to the evolving landscape and changing user behaviors in the online learning sectors. Over the recent years, we have introduced…

Thanks, Jackson. That’s helpful. Thank you.

Thank you. We have now reached the end of the question-and-answer session. Thank you all very much for your questions. I’ll now turn the conference back to the management team for closing comments.

So thanks again for joining us today and we look forward to talking to you next quarter. Bye-bye.

Thank you very much for your participation in today’s conference. This does conclude the program. You may now disconnect.