Earnings Call: Q3 2021

Jan 21, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter Fiscal Year 2021 TAL Education Group Earnings Conference Call. At this time, all participants are in a listen only mode. After the management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I would now like to turn the call over to your first speaker today, Ms. Eko Yan, IR Director of TAL. Thank you. Please go ahead. Thanks, operator. Thank you all for joining us today for TAL Education Group's 3rd fiscal quarter 2021 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 newswares. During this call, you will hear from Mr. Rong Luo, Chief Financial Officer Li Ba He, Vice President of Finance and myself, IR of TL. Following the prepared remarks, Mr. Luo and Ms. He will be available to answer your questions. Before we continue, please note that the discussions today will contain forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in 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. Rongshi? Thank you, Echo. Good evening and good morning to you all. Thank you for joining us today on this earnings call. In the Q3, China's public health situations and economy continued to recover. We are pleased to see that our tutoring business as well as the capacity expansion progress in all cities have delivered on track performance. During this fiscal quarter, we further executed on our offline and online strategy, which remain on track. Our learning center network expansions resume at pace after a brief slowdown in the Q2. A quick overview of the key metrics is as follows. Net revenue growth in the Q3 was 35% year over year in U. S. Dollar terms to US1.1 billion dollars and 28% in unbi trends. Total normal price long term courses student enrollment increased by 46.5 percent year over year, mostly driven by online as well as Xueersi Peiyou small class enrollments. GAAP loss from operations was $127,400,000 compared to income from operations of US69.4 million dollars in the Q3 last fiscal year. Non GAAP operating loss was US73.4 million compared to non GAAP operating income of US99.6 million dollars in the same year ago period. I will now turn the call over to Lin Nao Xi, our Vice President of Finance. She will give you an update on our operational progress in the Q3. Neste Ekoye, our IR Director, will review the Q3 financials. After that, I will update you on our business strategy and discuss our business outlook. Linda, please. Thank you. I will review the various revenue streams of our tutoring business for the Q3. Let me start with small class and other business, which consists of Xueersi Peiyou Small Class, First Leap, Mobi and some other education programs and services. These accounted for 66% of total net revenue compared to 75% in the Q3 last fiscal year. The revenue growth rate was 20% in US dollar terms and 13% in RMB terms. Xueersi Peiyou Small Class, which remains our stable core business, represented 57% of total net revenue in the 3rd quarter compared to 63% 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 28% of total revenue in the quarter compared to 19% in the same period last year. Net revenue from Xueersi Peiyou Small Class was up by 21% in U. S. Dollar terms and 15% in R and D terms, while our normal price long term cost enrollments increased by 18% year over year. Our key operational metrics of Heiyou, such as retention rate, fulfillment rate and job operate, remained once more very stable. In the Q3, normal priced long term Xueersi Peiyou Small Class ASP was flattish in U. S. Dollar terms and decreased by 5% in RMB terms year over year. The decline was mainly due to the mix change of Peiyou online and offline business and more lower tier cities coverage. Our 3rd concert performance in the various tiers of cities reflected the ongoing normalization trend after the earlier COVID-nineteen disruption. Xueersi Peiyou small class revenue from the top 5 cities, which are Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, increased by 19% year over year in US dollar terms and accounted for 56% of Xueersi Peiyou Small Class Business. Revenue generated from cities other than the top 5 grew by 24% in U. S. Dollar terms. The other cities accounted for 44% of Xueersi Peiyou Small Class Business. Next, I'd like to discuss our Zhikang 1 on 1 business. This business sector achieved year over year revenue growth of 14% in U. S. Dollar terms and 8% in RMB terms. Zhikang 1 on 1 accounted for approximately 5% of total revenue in the Q3 of fiscal year 2021 compared to 6% in the same year ago period. In the 3rd quarter, normal priced long term Zhukan 1 on 1 courses ASP increased by 13% in U. S. Dollar terms and 7% in RMB terms year over year. The increase was mainly due to regular increase of tuition fees in several cities in this fiscal year. Now let me update you on our key capacity expansion strategy. Following a temporary slowdown in our expansion drive during the Q2 due to COVID-nineteen, We resumed the pace of geographic coverage expansion as planned for this fiscal year. After our entry into 21 new cities in the first half of the fiscal year, we added 11 new cities in the 3rd quarter and surpassed the 100 cities mark to reach a total of 102 cities. These 11 new cities are Zhejiang, Yulin, Huizhou, Ganzhou, Zhejiang, and Maoming. Similarly, we reaccelerated the widening of our learning center network in the Q3 based on a healthy and sustainable approach and by following government guidelines and market demand. In Q3, we added 64 new learning centers on a net basis to a total of 990 learning centers. We opened 59 new Peiyou Small Class Learning Centers and closed 6 Peiyou Small Class Learning Centers. We closed 4 Moby and Forest Leaf Centers, and we opened 6 1 on 1 centers and closed 1 1 on 1 center. During the quarter, we added 637 Peiyou small class classrooms. In all, by the end of November 2020, we had 990 learning centers in 102 cities, of which 101 cities in China and 1 Xueersi Peiyou learning center in the United States. Among the total 990 learning centers, 769 were Peiyou Small Class and International Education Centers, 87 were the merged 4 Sleep and Moby Small Class, and 134 were Jikang 1 on 1. As for Q4 of fiscal year 2021 until now, we have conditionally rented 31 Peiyou small class learning centers. As always, we expect to add a few more and close down some learning centers based on standard operations. We will continue to closely monitor the developments with regards to COVID-nineteen. These estimates reflect our current expectations, which is subject to change. Turning now to our online business. 3rd quarter revenue from xueersi.com grew by 100 and percent in U. S. Dollar terms year over year and 92% in RMB terms, while nonoperaselong term courses enrollments grew by 92% year over year to over 1,700,000 dollars Online contributed 28% of total revenue and 50% of total normal priced long term enrollments this quarter compared to 19% of total revenue and 38% of total normal price long term cost enrollments in the same year ago period, respectively. The growth in online business was supported by increasing demand of online education as well as sales and marketing efforts and retentions of the previous quarters. In addition, in Q3, normal priced long term online course ASP was almost flattish in U. S. Dollar terms and decreased by 6% in RMB terms year over year, mainly due to the mix change of our diversified online course offerings. With that, I will now turn the call over to echo Yan for the update on 3rd fiscal quarter financial results. Echo, please? Thanks, Linda. Let me now go through some key financial points for the Q3 of fiscal year 2021. Gross profit increased by 29.2 percent to US6.6 million dollars from US467.2 million dollars in the same year ago period. Gross margin for the 3rd quarter decreased to 53.9 percent as compared to 56.4% for the same period of last year. Selling and marketing expenses increased by 120.3 percent to US420.7 million dollars from US190.9 million dollars in the Q3 of fiscal year 2020. Non GAAP selling and marketing expenses, which excluded share based compensation expenses, increased by 118% to $406,400,000 from 186 $400,000 in the same year ago period. The year over year increase of selling and marketing expenses in the Q3 of fiscal year 2021 was primarily a result of more marketing promotion activities to strengthen our customer base and brand as well as higher compensation to sales and marketing staff to support more programs and the service offerings. Other income was US45.5 million dollars for the Q3 of fiscal year 2021 compared to other expense of $3,700,000 in the Q3 of fiscal year 2020. Other income in the Q3 of fiscal year 2021 was primarily due to the value added tax and the social security expense exemption offered by the government during the COVID-nineteen outbreak. Impairment loss on long term investments was US11.5 million dollars for the Q3 of fiscal year 2021 compared to US46 $400,000 for the Q3 of fiscal year 2020. Impairment loss on long term investments was mainly due to declines in the value of long term investments in several investees. Income tax benefit was US13.9 million dollars in the Q3 of fiscal year 2021 compared to US16.6 million dollars of income tax expenses in the same period of last year. Net loss attributable to P and L was $43,600,000 in the Q3 of fiscal year 2021 compared to net income attributable to TAL of US19.6 million dollars in the Q3 of fiscal year 2020. New GAAP net income attributable to TAL, which excluded the share based compensation expenses, was US10.4 million dollars compared to non GAAP net income attributable to PL of US49.7 million dollars in the Q3 of fiscal year 2020. From the balance sheet, as of November 30, 2020, the company had 4,000 $233,200,000 of cash and cash equivalents and US864.8 million dollars of short term investments compared to US18 US1873.9 million dollars of cash and cash equivalents and three $45,400,000 of short term investment as of February 29, 2020. The company's deferred revenue balance was US1957.1 million dollars compared to US1251.2 million dollars as of November 30, 2019, representing a year over year increase of 57.7%, which was mainly contributed by the tuition collected in advance of the fall semester, winter semester and the part of spring semester of Xueersi Peiyou small classes and online courses through www.suresi.com. Now I will hand the call back to Mr. Luo to briefly update you on our strategy execution and provide the business outlook of the next quarter. Rong, please. Thank you, Echo. Despite the unprecedented challenges this year, our business has managed and delivered 30% revenue growth year to date, on track with our long term growth position. Our investment strategies for the long term remains unchanged, regardless of the COVID-nineteen challenges and the growth in the competitive pressures. We aim to remain the top brand in quality education services through our long term sustainable growth strategy, innovative technology based education, a comprehensive and cutting edge product portfolios and with a strong and proven operational foundation. As China continued to recover from the pandemic, we have resumed the expansion of our learning center networks and geography coverage in Q3. We expand both our learning center coverage in the big cities and enter into more lower low tier cities. We have seen that our offline presence and localized content together have clear advantage of more precisely meeting our customers' demand in different locations and support us in building both offline and online brand and reputation in all cities that we have covered. Thus, we have continuously developed and enrolled our more Peiyou education products to further build out our comprehensive OMO model. With this, we can better serve our customers by offering them more flexibility and efficiency. As always, we will conduct our business in line with all relevant government policies and regulations, including those that regard national public health. Our offline and online operations remain ready to deal with any public health contingencies when needed. In this channel of rapid science and technology developments and COVID-nineteen pandemic impact, online education with its easy access and affordable price now has been pervasively affected. China's online market opportunity is attractive, yet the competition landscape is intensive. There are simply no shortcuts in building a sustainable business. And I would like to reiterate that we have we will consistently pursue our long term strategy regardless of what kind of the short term challenges we are facing. To the end, we will keep investing in technology, teachers and marketing and make our efforts to build all around online services with top quality content and customer experiences. We firmly believe that as an education player, education is education. Our long term accomplishment is defined only by the quality of our products, services and technology instead of purely marketing. Let me turn finally to our business outlook. Based on our current estimates, total net revenue for the Q1 of fiscal year 2021 is expected to be between US1.17 billion dollars and US1.2 billion dollars representing an increase of 37% to 40 percent on a year over year basis. That concludes my prepared remarks. Operator, we are now ready to take questions. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Mark Lee from Citi. Please ask your question. Hi, management. Thanks for the presentation. May I ask for your next quarter's guidance, how much have you baked in the latest impact from the unfortunate offline tutoring lockdown in Beijing area? And how are we handling this Beijing latest policy? Thank you. Thank you, Mark. I think it's very important to recap the guidance and Q3 results again, because sometimes we only look into 1 quarter, sometimes it's misleading. For Q3, we have some numbers need to draw your attention because I'm sure what we talk about in the screen sometimes is too long and you guys don't catch that. Q3, our Peiyou small class business grows 21%. Compared to previous quarters, it's recovering. And here, one thing we need to mention is actually the Peiyou Live growth. The Peiyou Live revenue growth in the U. S. Dollar terms this quarter is 148%. And second, I think our Xueers online school growth in Q3 is 102% in U. S. Dollar terms and it has been around 28% of total revenue for the whole company. And more importantly, I think starting from maybe last quarter, the enrollments from Xueersi Online School has already surpassed 50% of the total enrollments in the company. And the 3rd point, we need to recap the number is actually if we consider Peiyou Life together with Xueersi online school as online, which means the online total revenue, the growth in Q3 is 114.2 percent, 114.2 percent. And there have been around 41% of the company revenue and 60 4% of the total enrollments. So with all of these numbers in Q3, we're going to next year next quarter Q4. I think current guidance we have something to let you guys know. Number 1, we all know it's very unfortunate to see, we have seen some cases in Beijing and maybe in some other big cities. And the Beijing is a big city with more than 20,000,000 population. Today, we have seen around maybe tens of the confirmed cases right over there. And we 100% respect the government and follow the government requirements to take some reactions to make sure we always fuel the students' health in first priority. But the things have changed. If we can still remember last year, I think still is the earning call, maybe almost similar time in last year. January, actually, we are worried that shocked to us at that time. We don't know what's the right way to do. So we moved from offline to online kind of in chaos last year. But coming to this year with the 1 year experience dealing with this kind of new challenges And we're also very happy to see the government has effective control a lot of situations in most cases in China. So, we are more well prepared than last year. And our visibility to provide more offerings or maybe kind of more facilities to the students and the parents is also improving. I think part of the numbers like Xueersi Peiyou Life growth numbers and Xueersi Online's growth numbers in Q3 or maybe in the past rolling 12 months can demonstrate actually this company has managed how to use the online technology to deal with all of these contingencies. So we are more than confident than last year to say we can deal with all of these challenges where we are. Specific in Beijing, we have followed the government requirements and moved all of our offline classes online. During this transition, we're also happy to see both the parents and the students acceptance rates also much better than last year. And last year, we pulled the students in 1st priority and we sacrificed a little bit in the price and some other stuff. This year, we have to see the things is getting better now. And online continue to be a very good way to as complementary to the students and we believe we don't see any major or maybe materials impact coming from this kind of move from offline to online this month in Beijing. And my Q4 guidance, I think I probably can talk about more about it. I think some key directions are almost similar as we will see in Q3. Number 1, the Peiyou revenue is still recovering and we can see that the Peiyou revenue growth even we're taking out the low base last year and the Peiyou's revenue growth in Q4 still faster than Q3 is continue to do recovery. And secondly, I think the shows online school growth and the revenue growth in Q4 is also pretty much on track. But here I have one thing to draw your attention, if you guys can still remember last year the spring festival for China is around January 24, while this year the time of spring festival is February 11, which means last year if we consider Q4 numbers, actually they have around one weekend of the spring term will fall in the last year Q4. But this year because the late timing of the spring festival, which means we will let one weekend from spring terms into Q4, which means we will let around 10% of revenue lending less in Q4. That's kind of timing differences due to the time of spring festival, which happens especially when the spring festival this year is much later than last year. So, this is around 10% scheduling means maybe if we can translate that back to the Jazz online store revenue growth will be around 20 points to 30 points in the growth rate perspective. If we translate them into the company, overall level of revenue of growth will be around 8% to 10%, so 8% to 10 points. So if we want to have apple to apple comparisons, all of the numbers need to be put back to the situations. And so I think Q1 and we also need to be fully prepared maybe something what's happened in Beijing will also happen within other cities. So we will continue to leverage in the past 1 year we have a lot of experiences and know how, how to use the online technologies to have the students and the parents for them to get quality services, not only offline, but also online. So we'll continue to do so. And the whole team and the whole both the Xueers Peiyou team and the Xueers Ownership team, they are also fully prepared for that. We have 1 year experiences in the past 12 months, so we will get ready for that. And again, we fully believe with our government's very strong executions, we will control these kind of situations very quickly. And one example probably in Beijing, you can see that a lot of test drivers they have already got a vaccine. So we believe this year definitely will better than last year and next year maybe will be better than this year. And we still will continue to in our growth strategy in our growth strategy and make necessary changes where needed. But in general, we're still quite confident about our growth in the Q4 in the coming 1 year. Thank you, Mark. Sure. Thank you, Laurent. Your next question comes from the line of Alex Hsu of Bernstein. Please ask your question. Hi, management. Thank you for taking my questions. I would like to ask 2 questions about Peiyou. Firstly, for the Peiyou offline business, would you please share with us the reason for the first slightly bit slower growth compared with the offline peers? And when should we expect the acceleration after your more proactive expansion of landing centers? What will be your target for the CapEx expansion in the next fiscal year? And secondly, for Peiyou online, congratulations on the very strong results. It's quite impressive for the 148% growth. And then how should we think about the O and M strategy in the next year? And what about the growth targets, say, for next year? Thank you. Thank you, Alex. In the first place, I think when we're running our business in this market, the only one we need to compare is ourselves. Different company will choose different strategies, while a different company will have different maybe belief. We as a company who promote education through sensor technology, we fully believe the online technology can help us to reinforce our capability to serve the students and make our business more scalable. So, if we go back to talk about the Peiyou revenue growth, I think same as why I said just now. Number 1, the offline is recovering. So we will carefully to expand our new learning centers. Most of them still will be added in the current existing big cities and some of them will go to add them in the new cities. You can see that in last three quarters we have entered around 31 new cities. But at the same time, I think most of the new classrooms we added is still in the current cities. So we need to balance all of that. And on the other side, I think as White talked about in the last quarter, in the past few months, it's very important timing for the company because we figure out actually the online merchant offline models, some classes offline, some classes online is already be buying by the parents and the students. So we need to leverage all of these efforts. So we continue to roll out Peiyou Life to more geography, more studies and more grades. And we also try to evolve the Peiyou Life models maybe from big class, maybe to small class and even more than that. So we believe this kind of online, offline strategy will help us to cover the cities much deeper than what we can do before. It will be much maybe we can penetrate more markets and then if I only use the traditional offline models. So that is the philosophy we believe in. And all the numbers in the top tier cities where we have stronger PayOLIFE offerings, they have proved by the numbers. So I think the OMO going forward, even in this quarter, we see some kind of the new cases in Beijing or maybe Shanghai. But we still believe if we put all the things in the longer term, maybe in 1 year or 2 years, 3 years' time, we still believe that OMO will be very effective strategy. On one side, we need to make a smaller learning centers closer to the parents and the cooler to the living communities. And in the second place, we will continue to draw on more peer offerings to serve more students and provide them more individual kind of services like that. So, all of this combined together with our local contents, local teachers, local students and local services, we can leverage their time and improve their efficiencies much better. So, what happened this quarter will not change our long term growth strategies. And what we need to do today is actually make sure during this transition time, we take care of the students and parents very carefully. We need to collect more data from the parents and the students in their behaviors and figure out the best way to them. So, if we look into next year, I think we don't change our outlook in the long run. We still believe the whole company in the long run throughout in the 3 years' time can still maintain in the revenue growth around 30% to 50%. And the strategy are the same and direction is also very clear. What we need to do is make sure the executions is right on track. Thank you, Alex. Got it. Very helpful. Thank you. Your next question comes from the line of Sheng Zhong of Morgan Stanley. Please ask your question. Hi. Thank you for taking my question. My question is about the online education's customer acquisition cost. Now we see from the market that the CAC is going up very quickly. So wondering what is shares.com's economic model now considering different customer acquisition channels? And with that, what the company's sales marketing plan for next year? Thank you very much. Thank you, Zhongxian. I think when most people talk about online education, their first question is kind to their mind is customer acquisition costs. Sometimes this kind of thinking will oversimplify the complexity of online education models. I think in our perspective, number 1, online education is still education. They have a lot of advantages in online. For example, they can get rid of constraints of the time on relocation, but they are still education. So I personally, I agree with some of the opinions from the articles recently published in the news channels. Education, actually, we need to follow their own rules. We need to pull the quality services, how to teach the students better, how to make sure their outcome is better as first priority. We are now running a business like such as e commerce like e commerce, they can promote their business very quickly by educations, acquire customers is only the first step of the loan process. Right after that, we have a lot of things we need to do. In the end, whether you can teach your students where, whether you can maximum their outcome from their limited time, that will tell the differences. So to make sure we can do that, I think we will continue the investment I think in maybe 4 areas. Number 1 is the content developments. Our pure life is providing the localized contents. But on the other side, the short term online school is also trying to provide more tailor made content and services to the students. We try to understand the students more and we're mapping the right level of difficulty, the right progress and the right version of the products to the students, which require more investment over there. And if for example, if in cartoon perspective, previously, all the contents will be the 2 d products, but in the future, it will be 3 d products. So all of these necessary investments in contents will be our first priority. Secondly, the technology needs to be more and more important. I think because today we are serving more and more students in our platform, we are serving millions of the normal price long term enrollments together with the other maybe millions of their maybe promotion enrollment students here, we offer them affordable price, which means the more students coming in, but we need to make sure no matter how much they pay, they deserve very quality technology solutions. So, we need to continue to invest over here to make sure we have a much stable platform, we can do more, make interruptions and our broadcasting quality and all of that will be continued to be improved. I think all of that technology investments are very important. Number 3 is we need to continue investing in teachers and teacher assistants. I think online education, they have a lot of advantages, but still is one way of education. And right before we have the AI products maybe throughout 5 years later, today's product still is a people intensive products. For the people intensive products, the service is very important. So we need to make sure we do right training to the teachers and teacher assistants. We give them good compensation to make sure and we also encourage all of the teachers and teacher assistants to serve the students well. I think all the necessary investments in the teacher and the teacher assistants are very necessary. One last point, the marketing is also very important. In French speaking, we are an offline company. Sometimes people ask me, investors ask me, hey, compared to the other counterparts, what's your strength and what's your weakness? In general, I think our company will be stronger in the teaching. We teach the students, we use the right content to serve the students, we make sure they can have more kind of all kinds come from us. But in marketing side, in the front end, actually compared to other companies who are waiting to grow a lot of money, actually we are way below. So we are catching on a little bit, but still in our philosophy, we strongly believe the investment in content, technology and teachers will match us in the long run. And the necessary investment in marketing maybe is very important, but we need to make sure we need to balance all the returns and investments in this perspective. We cannot sacrifice the lifetime values only for marketing. So we need to have a good balance, be more healthy and control the investments, the level of investments to make sure that the ROI work. I think the CAC in general, yes, is increasing, but we need to separate them in 2 parts. The online education company can always acquire customers through 2 kind of channels. Number 1 as the non branding channels, for example, WeChat, maybe Douyin and other platforms. In these platforms, the CAC is increasing definitely. They will have some maybe fluctuations from time to time in different quarters, but in general that's increasing. So what we need to do is actually make sure our investments in that channels is in a balanced view, both heresy and considering both heresy and market share. But on the other side is the branding channels and we prefer to invest more money on our branding channels. We prefer to invest more money to our current students and parents encourage them to refer the other parents into our platform. If you ask me, we have maybe $100 where you want to put the money, We are more than we're going to put the monies in our teachers and the parents and the students more than the purely marketing. So, I think in the long run, we're always managing the companies in a more balanced view and we need to pull the managing healthy growth in front of the purely numbers. And the coming maybe 1 or 2 quarters sometimes also have a lot of changes, because for example, the cases in Beijing, if they are going back to their offline, maybe they are doing good online. So we have no idea. So, we need to we as a company, we need to be have more flexible and we can manage a different kind of surprises on the situation or challenges in front of us. By the end, no matter where we are, both our offline applications, our online applications will always prove the MagicHealth growth and the students and the parents in first priority instead of purely marketing. Thank you, Zhongxian. Thank you. Your next question comes from the line of Felix Liu of UBS. Please ask your question. Hello, good evening, management. Thank you very much for taking my question. So just a follow-up on the previous comment. You mentioned that you are investing in content development, especially on the short online school side to do more tailor made content. It sounds like it is moving closer towards the product or content of our Peiyou side of business? Is there any opportunity to build more synergy between the two business lines, maybe in terms of content and even in terms of customer acquisition? And my second question is that, I recall you previously mentioned you still want to keep the level of tip of investment and protect the number one position of pure online school. But I think you sounded more balanced on the comment on sales and marketing. So I just want to double check whether we still intend to invest enough to keep our number one position? Thank you. Thank you, Felix. I think both our Peiyou small class business and Xueersi Online School business still both of them are running under the branding of Xueersi. So we have a lot of synergies between these 2 business teams. Number 1 is the contents. I think, of course, we are not perfect. We have a long way to go to be perfect. But we have starting I think from a starting point, we have tried to leverage the contents not only for one business, but also can be beneficial to other businesses. So we don't want to build maybe the content again and again or may do a lot of keywords. So we're leveraging the content demand we have in Peiyou and made some and we try to share the investments right over there. So this kind of synergy in the context, especially in a localized context perspective, that will help our first online school business in the future. Because sometimes doing localized content is very that takes some time. You'll need to know maybe more than 100 cities what's happening right over there and what is their special requirements in the context of study and what is maybe the features in that city and all of that. So that takes some time to build a network. So we have the Peiyou small class network over there and we can leverage the beneficials. 2nd, I think the students the student data is also a very important areas we have synergies. Because today, we have seen more and more clearly the students can move from online and offline. So we have seen maybe for example in Shanghai, some students, they're starting in the short online in the beginning and then they move to the insurance, the Peiyou Life, the localized online class platform. And some of it they also moved to the shows offline. And we're also seeing the other directions is happening in our platforms. I think no matter just offline pure life or just online school actually they have different products to the students. The students can choose based on their own conditions. Some students may prefer the quality, some students may prefer maybe the convenience. So I think with all of these kind of the rich product offerings, we can serve the students and the parents much better. And we also have a lot of synergies in the technology perspective, especially when I think you guys can still remember how Peiyou Life come up. I think the Peiyou Smart Class in the past is purely offline business. But today, around 22% of their revenue come from PayOLIFE now. And that's because PayOLIFE is leveraging a lot of technologies from the short term online school and they have some even more synergies in the future. And for the online, I think online is a very important market opportunity because online offer us an opportunity to leverage the high quality services to waste affordable price to serve more students. You probably can see that if we combine online and offline together, the ASP is decreasing quarter over quarter because we have more and more contribution coming from online. Online today is around 41%. So online, they offer us a new way to be more scalable in the newly emerging markets. So what we need to do is we wish we can leverage all of our advantages to be leaders in their market. But to be leaders in their market doesn't mean we will maybe burn all the monies to be number 1. So we always need to deliver or manage healthy growth. So we still stick to our plan to become a very important, maybe leading platforms, online platform to serve the students. But we care more about the quality of the services and we care more rather the parents and the students are satisfied with our products. So, we and we also believe online education is still education. If we can continue to deliver our high quality students, the parents will buy in. So same as what we see in the retention rate in our platform, our retention of online is also maybe one of highest in this industry. So which is very important metrics to say whether your services really meet their needs. So looking forward, we continue to be leading in this space, but we will invest more in our product, contents and the teachers. And we wish we can leverage our advantages both in the Payo small class and some other areas to make sure we can be more successful in the future. Thank you, Figgs. Thank you. Thank you very much. Your next question comes from the line of B. S. Kim of JPMorgan. Please ask your question. Hi, Rong. Hi, everyone. Thanks for taking my question. Perhaps to continue on the similar vein, our big picture strategy for online, Are we becoming more aggressive trying to diversify our traffic sources given rising channel cost from those Weixin and Douyin and all that. I noticed that we are pushing tpipai more aggressively recently synergy between offline channel and online rather than developing our own homegrown apps? Thank you. That's a very good question. As a number 1, we are investing some money to do the TPAEPI which is 2 for the parents can help their students if they have some difficulty in the homework. That is the natural parents' needs in the family. That is now our so called traffic pool for the K-twelve online business. So that's separate definition. I know some of the companies may say this kind of the tools can be a traffic pool for the K-twelve students in the online school part. I think based on what we see in this industry, maybe that's not the case. The original intention for us, we want to leverage this kind of tool to make the work of our parents easier. So when they have some difficulty, they can use a tool to make their life easier. So that become part of the needs in the family education side. So we have millions of students in my platform, we need to make them we need to have them reduce their burdens in this area. So that's our key attention to do that. And we don't believe that it's very kind of that becoming a so called traffic pool and convert students from there to the short online school, that's not the case for us today. And secondly, yes, you are right. I think the branding channel or maybe the students and parents who buy our branding or maybe who start in our platform today is a very important source for us to acquire more new customers. Because the branding channel, I think for education companies, the branding obviously has 2 level of the meanings. Number 1 is branding awareness. How many people know you? I think awareness sometimes can be delivered through maybe advertisements. But on the second level of the branding actually is how good your brand is, the reputation of your brand. I think for education, the only way to gain reputation is make sure you deliver the good quality services and you serve the teaching students where, at which takes some time. So, when we want to make sure our branding channel is bigger than before, I think the first thing we need to do is now do marketing. The first thing we need to do is invest in content, teachers and technology. Make sure the students, they buy our offers, they like our platforms and they feel happy in our platforms and they make progress in our platforms. So when only when they are being taught and have making progress, that's the only way the branding will come. So here we will invest more energies and times right over here. We will serve your students much better and then the branding will become much better. And more and more people will come to your platform directly because of your brand. So that is the circle we strongly pay. Thank you so much. That's very insightful and thank you again. Thank you. Your next question comes from the line of Alex Liu of China Renaissance. Please ask your question. I noticed TAO entered 11 new cities this quarter and most of these cities are actually Tier 2 or Tier 3 cities. So how would the business ramp up strategy is different in these cities from our existing cities in terms of speed of the ramp up, scale of the offline capacity as far as the mix of the Peiyou online and offline business eventually? Thank you. Thank you, Alex. I think when we go into these low tier cities, I think in general, we'll still maintain our practice in the past over maybe 17 years. We'll first enter the new cities maybe only in single grade, single sergeant and we teach the students where and we try to gain their reputations in the local cities. And right after that, we will try to promote our Payover Live offerings on top of that. So because maybe lesson learned in the past few quarters, we merged both online, offline in the big city like Beijing Shanghai, we have a lot of kind of experiences. So we are more confident that maybe when we can make our reputations of branding established in the low tier cities, it may be faster for us to promote maybe the field like offerings. But today, all the 31 new cities we enter, we don't need to hurry to promote the live offerings. We still stick to our own approach step by step, build the strong reputations there. I think the longer time you invest in the city and the better reputations you have built, maybe bigger potential you will get coming from that place. So we don't hurry to do anything. We still remain calm and patience in the luxury cities. And of course, since to the pure life offerings, some submission is easier. So we will also based on the students' needs to make necessary changes when we offer them different types of products over there. Thank you, Alex. Thank you. Sorry, just a very quick follow-up because I think few years ago, we were previously targeting about, I think, 7 or 70 to 80 cities where we think made sense probably for offline operations. But right now, we're already at 100 cities. So just wondering how many cities will the company eventually enter with offline presence? Yes. I think that's a very good question. I think several years ago, when I first became CFO, these companies at that time toll free, I think we can only enter around 30 to 35 cities at that time. That's considering the traditional offline operating models. If the mall will enter, they will sacrifice in the profits and margins. And then I think the things have changed, especially the technology has evolved very quickly. So with the empowerment of the technologies, we gradually developed the duty show models and now we developed the new comprehensive only mode models. We leverage both on our offline advantages. So which means the company the base model will be more flexible and scalable. So we also remain more confident to penetrate more cities. Today, we have around 102 cities, 101 in China and the other one, the only one in the U. S. And maybe looking forward, we still have possibilities and maybe we enter maybe the other 100 new cities in the longer term. But that will not happen in 1 or 2 years. That will happen in the longer term.