Earnings Call: Q2 2021

Oct 22, 2020

Earnings release

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Fiscal Year 2021 TAL Education Group Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the call over to your first speaker today, Ms. Echo Yan, IR Director of TAL. Thank you. Please go ahead. Thanks, operator. Thank you all for joining us today for TL Education Group's 2nd 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 newswares. During this call, you will hear from Chief Financial Officer, Mr. Rong Luo Linda Ke, Vice President of Finance and myself, IR of TAL. 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 the public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC. Also, our earnings release in this call includes discussions of certain non GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non GAAP measures to the most directly comparable GAAP measures. I would like now to turn the call over to Mr. Rong Luo, Rong Fei. Thank you, Echo. Good evening and good morning to you all. Thank you for joining us today on this earnings call. We continue to see a positive recovery in China's public health situation and economy in the 2nd fiscal quarter. In the education sector, schools were able to reopen and start the school year on September 1, following the gradual resumption of the offline teaching and tutoring during the summer months. At TAL, during the 2nd fiscal quarter, we continue to execute on our online and offline strategy, which remains on track. More and more of our offline learning centers could reopen and currently all of our learning centers in China are back in business at certain level. The 2nd fiscal quarter financial results reflect the extended impact of the earlier COVID-nineteen outbreak. Net revenue growth in the 2nd quarter was 20.8% year over year in the U. S. Dollar terms to US1103.3 million dollars 21.6 percent in RMB terms. Total normal price long term courses student enrollments increased by 65% year over year, mostly driven by online enrollments as well as Xueers' Peiyou Small Class. GAAP loss from operations was US49.1 million dollars compared to income from operations of US60.8 million dollars in the Q2 last fiscal year. Non GAAP loss from operations was $11,800,000 compared to non GAAP income from operations of US89 point $7,000,000 in the same period of the prior year. I will now turn the call over to Linda He, our Vice President of Finance. She will give you update on our operational progress in the 2nd fiscal quarter. Next, Echo Yan, our IR Director will review the 2nd quarter financials. After that, I will update you on our business outlook and on our business strategy and discuss our business outlook. Linda, please. Thanks, Zhu. I will review the various revenue streams of our Q2 business for the Q2. Let me start with small class and other business, which consists of Xueersi Peiyou Small Class, Firstbeat, Mobby and some other education programs and services. These accounted for 67% of total net revenue compared to 75% in the Q2 last fiscal year. The revenue growth rate was 8% in both U. S. Dollar and rme terms. Xueersi Peiyou Small Class, which remains our stable core business, represented 57% of total net revenue in the 2nd quarter compared to 65% in the same year ago period. The lower revenue contribution from Xueers' Peiyou was mostly due to the faster growth of xueersi.com online courses, which accounted for 26% of total revenue in the quarter compared to 17% in the same period last year. Net revenue from Xueersi Peiyou Small Class was up by 7% in both U. S. Dollar and RMB terms, while our normal priced long term cost enrollments increased by 31% year over year. In the Q2, normal price long term geospeiyou small class ASP decreased by 19% in U. S. Dollar terms and 18% in RMB terms year over year. The decline was mainly due to the mix change of Peiyou online and offline business promotions as well as regular promotions. Our Q2 performance in the various tiers of cities reflects the relative larger impact from COVID-nineteen on the top tier cities versus the lower tier cities in our geographic network. Xueersi Peiyou Small Class revenue from the top 5 cities, which are Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, increased by 3% year over year in U. S. Dollar terms and accounted for 52% of the US2KU Small Class Business. Revenue generated from cities other than the top 5 grew by 11% in U. S. Dollar terms. The other cities accounted for 48% of the Xueersi Peiyou Small Class Business. Next, and let's discuss our Zhikang 1 on 1 Business. This business sector achieved year over year revenue growth of 6% in both U. S. Dollar terms and RMB terms. Zhikang 1 on 1 accounted for approximately 7% of total revenue in the Q2 of fiscal year 2021 compared to 8% in the same year ago period. In this quarter, normal price long term Zhukan 1 on 1 cost ASP increased by 4% in both RMB and U. S. Dollar terms year over year. Now let me update you on our current capacity expansion strategy. Following our entry into 20 new cities in the Q1, we added 1 more city, Xianyang, in the 2nd quarter. Year to date, we are well on track with the planned offline capacity expansion speed. In line with our long standing approach, we will continue to pursue healthy and sustainable learning center network expansion by following government guidelines and market demand. In Q2, on a net basis, the number of learning centers was unchanged from Q1 at 936 in total. We opened 22 new Peiyou Small Class Learning Centers and closed 19 Peiyou Small Class Learning Centers. We also closed a net of 3 Zhukan 1 on 1 Learning Centers. During the quarter, we added 25 Peiyou Small Class classrooms. In all, by the end of August 2020, we had 936 learning centers in 91 cities, of which 90 cities in China and 1 Huazu Peiyou Learning Center in the United States. Among the total 936 learning centers, 716 were Peiyou Small Class and International Education Centers, 91 were the merged Firstleaf and Mobi Small Class, and 129 were on 1. As for Q3 of fiscal year 2021 until now, we have conditionally rented 14 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 development with regards to COVID-nineteen. These estimates reflect our current expectations, which is subject to change. Turning now to our online business. 2nd quarter revenue from yoress.com grew by 80 7% in U. S. Dollar terms year over year and 88% in RMB terms, while normal priced long term course enrollments grew by 116% year over year to over $2,900,000 Online contributed 26% of total revenue and 52% of total normal priced long term enrollments this quarter compared to 17% of total revenue and 40% of total normal price long term cost enrollments in the same year ago period respectively. The growth in online business was supported by the structural growth trend in online education as well as sales and marketing efforts and retention of the previous quarters. In addition, in Q2, normal price long term online course ASP decreased by 1% in both U. S. Dollar and RMB terms year over year. With that, everyone now turn the call over to Echo Yan for the update on second fiscal quarter financial results. Echo, please. Thanks, Linda. Let me now go through some key financial points for the Q2 of fiscal year 2021. Gross profit increased by 14.3 percent to US581.2 million dollars from US508.7 million dollars in the same year ago period. Gross margin for the 2nd quarter decreased to 52.7 percent as compared to 55.7% for the same period of last year. Selling and marketing expenses increased by 44.3% to US379.8 million dollars from US263.3 million dollars in the Q2 of fiscal year 2020. Non GAAP selling and marketing expenses, which excluded share based compensation expenses, increased by 43% to US370.3 million dollars from US258.9 million dollars in the same year ago period. The year on year increase of selling and marketing expenses in the Q2 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 service offerings. Other income was US45.3 million dollars for the Q2 of fiscal year 2021 was primarily due to the value added tax and the social security expenses exemption offered by the government during the COVID-nineteen outbreak. Other expenses was US55.6 million dollars in the Q2 of fiscal year 2020, mainly related to loss from the fair value change of an equity security with readily determinable fair value. Impairment loss on long term investments was $4,600,000 for the Q2 of fiscal year 2021 compared to US54.2 million dollars for the Q2 of fiscal year 2020. Impairment loss on long term investments was mainly due to a decline in the value of long term investments in several investees. Income tax expenses was US2.4 million dollars in the Q2 of fiscal year 2021 compared to $8,100,000 of income tax benefits in the Q2 of fiscal year 2020. Net income attributable to TAL was US15 $1,000,000 in the Q2 of fiscal year 2021 compared to net loss attributable to TAL of $23,500,000 in the Q2 of fiscal year 2020. Non GAAP net income attributable to PLL, which excluded share based compensation expenses, was US52.3 million dollars compared to non GAAP net income attributable to TAL of US5.3 million dollars in the Q2 of fiscal year 2020. From the balance sheet, as of August 31, 2020, the company had US2206.1 million dollars of cash and cash equivalents and $580,800,000 of short term investments compared to US1873.9 million dollars of cash and cash equivalents and $345,400,000 of short term investment as of February 29, 2020. As of August 31, 2020, the company's deferred revenue balance was US1172.5 million dollars compared to US497.6 million dollars as of August 31, 2019, representing a year over year increase of 135.6%, which was mainly contributed by the tuition collected in the 1 of part of the 4th master of Xueersi Peiyou Small Class and online courses through www.xueersi.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. Our business has very stood up to the unprecedented pressures of COVID-nineteen operating in the first half of this fiscal year and delivered a 30% revenue growth in R and D terms. We demonstrated our ability to provide quality education services to our customers even in these unexpected circumstance. This underscores the resilience of our loan payer vision and strategy, our comprehensive and competitive product portfolio as well as our capabilities in technology and operations. Today, along with the encouraging progress in trends resumption of their activities and liabilities in own words of life, our offline business is already in the process of gradual recovery. We will continue to pursue our offline development strategy to further expand our capacity at pace. We will cover more low tier cities and further intensify our coverage in existing cities based on demand. And meanwhile, we will keep following all relevant government policies and regulations regarding the National Public Health and remain well prepared to deal with any public health contingencies in the coming period as always. As for online, under the current competition landscape, we made no fundamental change to KAO's current execution and long term strategies. We will keep working on enlarging our online market share by continuing investment in technology, teacher supply chain and marketing and consistent hardware of building all around online services with superior customer experiences. We firmly believe that as an education player, our long term success is defined by the quality of our products, service technology. Let me turn finally to our business outlook. Based on the current estimates, total net revenue for the Q3 of fiscal year 2021 is expected to be between US1061.1 million dollars and US1094.3 million dollars representing an increase of 28% to 32% on a year over year basis. These estimates reflect the company's current expectations, which is starting to change. That concludes my prepared remarks. Operator, we are now ready to take questions. Please. Thank you. The first question comes from the line of Alex Xie of Credit Suisse. Please go ahead. Hi, management. Thank you for taking my questions. So I'd like to ask about your thoughts on the growth expectations and strategies. In offline, we have seen that in last quarter, you didn't really spend much. So what's your plan for catastrophe expansion in the future? And in online, since the competitive landscape just I think worsened due to more financing of the pilot players, what will be your strategy going forward? Thank you. Thank you, Alex. I think it's a very good question. Right before we talk about some numbers, some certain numbers in this quarter and next quarter, we would like to take this opportunity to walk through our business logic and strategies as a whole to give you some information as to why what we are doing and why we are doing. I think if you guys can remember, I think 6 years ago, even earlier, we are a traditional offline tutoring company. We hired high quality teachers. We run a lot of learning centers. We build our classrooms. We feed students in, and we do a lot of stuff like that. So under that operational models, I think in the past year, for example, between 2014 to 2018, we have entered the cities from 16 to 42. So that is kind of the traditional models we are running today, which is also quite common to see in offline tutoring markets. But coming to the year 2018, I think around 2 years ago, if you guys can still remember, we as the first one in this industry, we invented or developed the online the new online education models. So we introduced the online live platform into our products. So we build dual teacher online models in this sector. I think that's the first time for this industry we can separate the learning and the practice. We can separate the role of master teachers and assistant teachers. The master teachers can teach a lot of students at the same time, while the assistant teachers taking care of helping them in online environment. So this kind of dual teacher online class models has grown very fast. I think 3 years ago, we only have tens of thousands enrollments, but coming to today last quarter, we have 2,900,000 enrollments. I think the revenue contribution of this model 2 years ago is only around 8% and 4 years ago is below 3%. Today, it's now 26%. If I consider the Peiyou online is part of the online, adding these two numbers together, last quarter we have already reached almost 40% of revenue, 40 coming from the online model now and around 70% coming from the online model now. So this model has a lot of advantages and we have seen they provide us a lot of capabilities to consolidate this market. If we say in the traditional offline models, we have a lot of competitors or maybe counterparts in different cities. We are running the company for 70 years, but today we are always still below 5% of their market share. But coming to the online model, we have the chance to see some situations may similar to the server market. So maybe in the future, the top players will be consolidated into maybe top 3 or top 4. So this kind of consolidation opportunity that is never seen before in this industry. So definitely in this sector, we definitely will keep our investment in technology, in teacher supply chain, as well as marketing to make sure we can maintain our leading positions over here. But on the other side, this model is not a perfect model to resolve all the problems. Education in the end now a simple game of marketing. That is again that is the key to playing education is we need to focus to providing the high quality service to students. We need to put students in the first priority. We need to not only taking care of the efficiency of the marketing, but also taking care of the effectiveness of the students. So, if when we run into this model, we can see currently the online model today, the one master teacher, they're teaching a lot of students, but it's a little bit difficult for the students to ask questions, because one versus so many asking questions making this all kind of difficult. So which means maybe this model is more kind of useful to train the students in middle level or maybe relatively easier contents. It's a little bit difficult to talk about their very difficult questions under these models. And one thing we also see there is if today, I think not only us also some quantified, you guys probably have seen they have raised the funds from the market. I think more or less this model today, we have been struggling in the new customer acquisition costs, which is very kind of challenging to all of us. We as a player who invented this model and our strongly believe is online compared to the traditional offline. Steel is a very revolutionary product and we believe that can help us to get more market share, much higher than what we can expect in the past. So we need to be very objective on these models. They have some pros and cons. We need to leverage our branding, our content we have developed and some other advantages we have to try to reduce the operating cost for the online model. So if we benchmark the case in several markets, I think maybe in the end only the top guys can have most of the revenues, most of the profits. So we definitely will continue our investment over here to make sure we are the leading players even in the coming few years. And I think because of the pandemic in the past 8 months, I think by chance, they introduced a new opportunity to us, which French speaking is a little bit of our imagination before. It's actually we quickly figure out right after so many students they have to use the online model for a few months And when the offline learning centers reopen, actually we see new opportunities. Maybe we can use the word of online merger offline. Sometimes this OMO sometimes may be a little bit misleading because different companies may use different definition on this. So I would like to use one example of Shanghai of short spins in Shanghai to show you guys. In Shanghai today, I think we have in the summer term, we have around 120,000 offline enrollments, which means we have 120,000 enrollments that students come to our physical classrooms and senior classrooms. And at the same time, in summer, we have around 200,000 Peiyou online enrollments. If I take out the promotion enrollments, the number can still be around 150,000 enrollments. This number is higher than the Peiyou offline enrollments. And besides the Peiyou offline enrollments and the Peiyou online enrollments, we still have around 300,000 Schuessler online school enrollment in Shanghai. So which means when we go back to see our number in summer in Shanghai City, of course, summer actually is the peak for the year. If we go into a number in the fall or winter, the number will be lower than the summer. But if I use the summer numbers, Q2 numbers as an example, actually, if we figure out in Shanghai, we have maybe around 600,000 enrollments in one city. If you guys have followed my company for long time, you probably can see that I think 4 or 5 years ago when you guys asked me, hey, what is your expectations on one single city, how many enrollments you have over there? For example, in Beijing, at that time, my answer is, I was very reluctant to say maybe I can reach the number of 150 1,000 enrollments for one city. But today in Shanghai, if we consider all of these enrollments together, we have around 600 enrollments there. And this phenomenon also happen in Beijing, in Guangzhou and some other and a few other cities. Because we did not do all these offers to all the cities, all the Greece and all the factories, charges. We do pretty good in the Tier 1, but we still need we have a lot of white space in other cities now. But this is showing us actually that's the kind of the new opportunity and that show us the direction how we can evolve offline learning centers in the future. So we paid some very deep dive on Shanghai numbers. We probably see that while their parents choose the PayU online offers on top of PayU offline. Number 1, it's more frequency. For example, they come to our offline learning centers once away, but at the same time for example, Maths, but at the same time they will take the other online sessions maybe the shortened class at the same time for the whole week. 2nd, maybe is more subjects. For example, they come to my learning centers to study math, but maybe they study my physics and chemistry in the Peiyou online platform, which is the case already happening in Beijing Shanghai. And number 3, maybe more students. We are also seeing maybe in Shanghai's numbers in summer specifically around 10% to 20% of the Peiyou online students actually they are new students. They are new students, but they are quite close to our learning centers in Shanghai. So which means they know our they come to our learning centers maybe for the text or maybe for the events or maybe for the activities, but most of the learning activities finish online. So this kind of model is showing us actually that's a good opportunity for us to develop more and invest more on the localized online class models, we call the Diwanxiao. What does localized mean? Number 1, local contents. I think in China, if different provinces, they have different versions. So when we talk about education's content, they have maybe kind of 3 kind of dimensions. Number 1 is the different versions. Number 2 is progress, different progress. Number 3 is the different difficulty levels. So in China, we have more than 30 versions in Gaokao. And we probably have over 200 versions of Zhongao. And we have maybe thousands of thousands of different versions if we consider the tax in the primary school. So but if we only have one version to all, sometimes we cannot resolve all the problems. So the local content, local progress and the local difficulty levels will be more powerful for students and for parents to know what exactly happening in the city and do better to them. Number 2, local teachers. So when guys when in our Peiyou online classes, we use the local teachers to teach students. For example, the teacher in Beijing, they have teachers students in Beijing online. So they can still so they know more about this city. They know more about what's happening in this district. So they can provide more tailor made and more kind of the use of information to them. I show one very small story. As right before the national holiday, our Beijing school, we hold a small event is we asked the Peiyou online students to come to our office to visit our Peiyou online teachers. The children are very excited to see all of this. So when we invite the parents or maybe the students, even they finish their study online, but they come to our offline centers for some events, for some seminars, activities, I think this kind of online and offline blending kind of experiences is much better than the other one. Number 3 is local classmates. I think when you are studying with your classmates, you know some of the people in the class that will make the interactions between student and student much more efficient than the other one. Number 4 is local services. So we have a lot of schools, we have a lot of counties and districts. So only Weyong can provide some specific information or maybe the materials or make activities specific for them and they can feel the local needs, which is more helping the one version to all products. So we believe all of this can help us to evolve our Peiyou kind of the small cost models to next stage. So as a summary, I think for the Xueersi Online School Online part, we will keep our investment in technology, teacher supply chain, marketing and some other necessary investments to make sure we can continue being in the leading position in this market because this market has shown very clearly the opportunity of consolidating their markets into several players. We definitely need to be one of them. But of course, we will balance the consideration of investment and ROI to make sure we don't do something stupid. Secondly, we will accelerate our learning center expansions of short Peiyou small class. We will also try to enter more cities in the coming two quarters. So I think one number to share with you guys is just now you asked why we don't adding any new learning centers in Q2 because Q2 that is the pandemic period, so we can't do anything. But coming to Q3 today, we have already rented 14 new learning centers and we also have over 50 in the pipeline. I'm not sure of the reporting periods of these new learning centers because we still need some time to do renovations, ask for license. But we definitely have more on our pipeline to do that. At the same time, we're also trying to roll out the Payoh online offerings to more cities, more grades and more subjects, which definitely is our strategy to go. So if we consider all our information together, I think, looking to quarter over quarter performance, I think Q2 is probably in top line perspective, Q2 is the lowest growth quarter. Q3, based on information what we see today, Q3 will be better than Q2 and Q4 will be better than Q3. Of course, all of these estimates are based on one assumption is we don't foresee any significant public health crisis coming back again. So we are confident we can continue our growth strategy as what I talked about just now. Thank you, Alex. Thank you for the questions. Next questions will come from the line of D. S. Kim of JP Morgan. Please go ahead. Hello, sir. Good evening and thanks so much for the insight you just shared. It's really, really helpful. I actually have one question actually, 2 questions. First, as a housekeeping, may I check what's the segment performances and the currency assumptions you have baked in the November quarter guidance? And my real question, more important question is, as you said in the prepared remarks, like customer acquisition cost seems to be surging a lot from this summer and some say it's as high as RMB4000 to acquire 1 paying user, 1 paying student. And I was wondering if you could share with us what you see on the unit economics and LTV of A student today at this level versus pre COVID period, I. E, how long in your opinion does it take to break even on the cash tuition level after spending current level of customer acquisition? And how many years or semesters that you think you can we cannot retain student on average against the spectrum of higher competition? Thank you so much. Thank you, D. S. That's a long question, right? Let's come back a little bit. In the first place, we have to say, because the online provider opportunities can consolidate to the top guys and the top players have chance to have much bigger market share compared to the offline models. So definitely everyone is competing in this space. And I think when we talk about the new customer acquisition costs, we need to split them into 2 parts. Number 1 is the new customers we acquire from the open market, for example, the WeChat Moments or maybe Toquiao platforms. So for this kind of new students, definitely the cost is higher and higher because everyone is compete over there. And on the other side is we still have the other part we call branding channels, which means when the people know who we are like, share our seats, platformers in the top tier, in the Tier 1, Tier 2 cities. So they will come to us or they will download our apps automatically. So we have some traffic coming from the branding channels and we also try to do more to encourage current students to refer our products to their friends or other students. So we are also doing more over here. So in general, yes, we are seeing the new customer experience cost from the open market channels is increasing. So we are doing more and more. And our percentage of the skills are coming from our branding channels or maybe customer referrals is also increasing. And on the other side, sometimes it's not a simple work to say new customer positions define the size of the user economies for the own education models. Because right after student kind of platform, they still have a lot of steps we can do. Number 1, how to increase the retention sorry, how to increase the conversion, how we can convert more students to from maybe RMB 49 class to our normal price class. And second, how we can do more to improve our retention rates. What we can see is actually we're making a little bit progress in the retention perspective. And number 3 is we also see ways of opportunity for us to cross sell or up sell our other products to them. Number 4 is how we can make sure they can stay longer and longer with SaaS. The number is also increasing in our review. And I think in the online today, I think we definitely will keep our investment level over here and with other market leading position now we will maintain our big positions in the future. That's our goal to do. And all of this, but on the other side, for the Peiyou online will be a different story from the Xueersi online school. We don't pay that much marketing dollars on the pure online. So they will highly connect it to the pure offline business and we don't see any huge cost of new customer acquisitions from there. So our margin from the pure online is much better than the other one. And in the last quarters, we grew our Xueersi online school enrollments by 116%, by the same time we grow our Peiyou online enrollments more than 130%. So we foresee this trend will continue in the coming few quarters. So we need to balance different drivers in our hands, but we're still very confident with our investments in the online space and with our new strategy evolving how to use more Peiyou online plus Peiyou offline offerings to the students, we are confident to deliver healthy growth in the future. Thank you, D. S. Thank you for the questions. We'll take the next question from Sheng Zhong from Morgan Stanley. Please go ahead. Hey, thank you for taking my question. Just want to ask a question about the competition on the online space. You also mentioned that some private companies are getting more financing. And so now already we are at the time post COVID. So at this time point, what do you see the competition going forward? And you said you emphasized that you are targeting to maintain the leadership position in this market. So what kind of investment level do you expect? Thank you. Yes. I think sometimes we will be maybe underestimate the capacity of online education. Sometimes people may simplify the competition to new customer acquisition costs. But actually, the online education is a complicated process. Not only you acquire customers, you acquire students, but how you can make sure you can maintain all of them. So looking into these coming quarters, Q3 and Q4, I think we are fully prepared for any kind of the investments if the other players they want to do. So we are fully prepared for that. We definitely will keep our investment right over here. But if you only talk about marketing or sales side, I think that's only one part of the business. I think besides the marketing, besides the money we spend on marketing channels, we need to know actually we are also doing a lot how to increase our local sorry, our internal technology, our internal teacher supply chain and some other operational efficiencies. So, the competitions are not only happening in the front end, it's happening for all life cycles. Education is now kind of a battlefield which can be concluded very fast. That takes a long time. So for us, we will not be disturbed by anyone get how much money they get. We need to be ourselves. We stick to our own strategy. We stick to our own pace. We continue to hire more teachers as well as we can train, and we continue our growth strategy to cover more and more students. At the end of the Q1, we grew 143 percent enrollments of online school and in the 2nd quarter, we grew 116%. And we foresee we can continue to drive growth in the coming Q3 and Q4. And at the same time, Payoh Online is also triple digit growth in Q1 and Q2. And we also foresee we can grow very healthy in both the short online school and the peer online. So I think the kind of the competition cannot be concluded soon. We need to fully prepare for that. But on the other side is, again, online is one part of the games. It's not all parts of the games. So besides the online, we need to focus how we can use our advantages in the Peiyou small class, how we can combine our offline learning centers and our Peiyou like offerings to make sure we can build more advantages, especially in the top 50 cities. That's the kind of most revenue and the most of the profit coming from. So that's our key strategy now. I don't have more information to share with you guys, but we can say we are fully prepared for that. Thank you for the questions. Our next question comes from the line of Felix Liu of UBS. Please go ahead. Good evening, management. Thank you for taking my question. My question is on the sort of the relationship or synergy between Peiyou and shorts.com. I see that Peiyou online is making very good progress with strong growth and very small amount of the sales and marketing costs. Is there any possibility that we leverage the success of Peiyou online to shurex.com? Any thoughts on sort of adopting the best practice there? And also, is there any room to build more synergy between your offline network and the surestu.com operation? Thank you. Yes. That's a very good question. I think by the end of today, because the online market is still very big, everyone is fast growth. So we have a lot of potential we can grow more market shares. So we prefer is the short online school will kind of execute a breadth strategy, try to cover more geography, try to cover more cities and compete in the whole country level. While the Peiyou online will highly connect you to Peiyou learning centers and we prefer the Peiyou online can be depth strategy, going deeper, going more localized and providing more individual services to the students in the local cities. So for the short online school, we are willing to pay the marketing dollars to promote them to get more market shares, blah, blah, blah. And we are willing to bear some kind of operational loss from there. But by the same time, for pure online, we will develop our new strategies sorry, our new solutions on how we're seeing the local community to make sure we can capture the deeper opportunities. And we can also we not only maintain high growth over there, but we also maintain the Huari Group profitability levels right over there. So based on what I can see today, they will share in the branding perspective, in technology perspective, in the content perspective. And they may also share some kind of operational leverage between the learning centers and online schools because they are using the same name. For example, the branding channel, the students come to the Xueersi online school is because learning is true. But we still prefer the short term online and the PayU online can be run a little bit independently to penetrate different markets. The market is very potential now. So we wish we can leverage these 2 offers to get more market share. For the time. I want to ask for our offline operation. We have seen quite a bit of promotion that impacting the ASP. May I know like how is the promotion development heading into the next quarter? And what is our offline growth target for the next few quarters? How much recovery we will see for offline? Any color is appreciated. Thank you. I think for offline, the coupons you mentioned just now, actually part of that is because in the 1st two quarters, because we moved offline offers to the online due to the pandemic. So it gives certain type of coupons to the students. They can use the coupons in Q2 and maybe part of Q3. So that is now the normal promotions or coupons you have seen in the past. And I think looking into the coming few quarters and even next year, I think promotional coupons is not our most important grandpa to do this. I think we still need to do more work as to how we can provide the online and offline models to the students. For example, if you are if we've seen the learning centers we have in one city, how we can find some ways to do marketing or penetrate the students maybe 3 to 5 kilometers around the learning centers or maybe 15 minutes to 20 minutes by drive, by car. So how can you use these learning centers and how we can attach the online or pay online offers to them. Today, you know, first speaking, we're only running this model in the city level. We still do not go into the detailed management side. If we can if our operations can be more detailed and be more kind of efficient than today, so we can definitely see much more opportunities. I think we need to evolve on maybe reinventing our business models through products, through research and development, but not only through so called promotions of coupons. We wish current offers can provide students the new experiences and we can collect a way we can use the data to provide more tailor made or individualized solutions to them. So that is our key to play in the future. Thank you. Thank you, Manu. Thank you for the questions. Next question comes from the line of Lucy Yu of Bank of America Securities. Please go ahead. Thank you, Lalor for taking my question. So my question is also related to what Mark has just asked. So I'm aware that in the offline market in the Peiyou, so this summer we have offered some discount in addition to the coupon. So I'm wondering how much of that discounting has impacted your GP margin or like OP margin in your Peiyou offline? So I am trying to understand whether your Peiyou offline business margin is flattish or declining or still improving? Thank you. I think especially in Q2, definitely the Peiyou offline business, the margin is decreasing, of course, because of the pandemic. So that is not a normal quarter to compare sometimes. But coming to Q3 and Q4, where everything is compared to normal, we probably didn't see that they will recover from the second quarter's low numbers. So same as why it's just now maybe if we're leaning to all our situations, second half will be better than Q2. Thank you, Olaf. And also may I just follow-up on your 3rd quarter results. Would you mind break that down by business in terms of growth outlook? Thank you. Sorry, we don't disclose that detailed information due to the competitive reasons, but the direction is actually our Xueers online school growth will be similar as what we can see in Q2, plusminus a little bit. So we also see a recovery in growth in the Paylessmall class business. So that's the rough ideas we can share with you guys. Thank you for the questions. We have another question from the line of Alex Liu of China Renaissance. Please go ahead. Two questions. The first question is, could you share with us Tiao's strategy on the so called very popular AI online class? I understand some of your competitors, including Bauma, are quite aggressive on this model and we knew TAO also has a dedicated product for this. So just wondering what's the plan there? And specifically, do you think this model will eventually reach similar revenue size to our current online model? That's the first question. Okay. That's a very good question. I think maybe last year in my earning calls, I recommend one book to you guys. The book was called Own Intelligence Suite by Jeff Hawkins from U. S. Think that's a very good book. You guys can pay attention to that. And sometimes that AI product is a very good word, but sometimes it's too strong word for us. So we are still way off, way from the AI kind of they can so we're still far from AI. I think maybe in the future, if our online business model is getting bigger and bigger, maybe more and more people coming in and our OMO models, especially people online is also fast increasing. So we can penetrate a lot of students and we can claim more of their data, not only their data they study in my learning centers, but also some data they study in the schools or maybe even at home. So we have more data. Maybe possible, we will have chance to develop a new type of maybe intelligent self learning models. I think that will happen definitely, that will happen definitely, but today we don't we can't figure out what's the right pathway to reach the level. So what we can do is we invest in our online both in the Payo Smart class and short online school. We try to invest in our AI lab and we're trying to invest in more research like brain science and something else to make sure we can figure out one way to do that. But I think this kind of product is still has a long way to be mature. But all I can say just now, only common the product of my own company, I have no comments on some other products because I'm not the right one to do that. So in our view, we continue to invest in this area. We continue our investment and we strongly believe in the future the new type of products will come out. The only problem is when. So we wish all the efforts we make in the online park can contribute to the next level products in the future. Thank you, management. With that, ladies and gentlemen, that does conclude our conference for today. I beg your pardon. Do you have any follow-up questions, Alex? Hey, Alex. I remember your second question. Yes. Just quickly on the gross margin decline. Just wondering how much is due to the teacher compensation cost increase? And what how should we think about this trend going forward? Yes. I think let me answer very briefly. I think the gross margin, they have 2 factors. Number 1, as we continue to grow, we continue to develop more learning centers. So the thing as we have said just now, I think in Q1, we're adding around 20 new cities and Q2 is 1 new cities. At the same time, we're adding more learning centers in the current cities now. And Q2 number is very small, but in Q3, we have a big number over there. Today, we have 14, but we have over 15 pipelines. So, all of this definitely will impact a little bit in my gross margins. But on the other side, because tutors is also a timing for us to increase our teacher commendations. So I think we continue our strategy same as before because we are an education company. Even we talk about a lot of things like technology, but we still need to pull our teacher, pull our people in the first priority. So we need to take good care of them. So this kind of that's the normal practice every year. And we don't have specifically how much coming from the new center kind of development, how much coming from the tier combinations. But both the investments on the new capacity and the investments on our teachers are very important for our long term growth. Thank you. Thank you. With that, ladies and gentlemen, we have now come to the end of the conference call. Thank you for your