TAL Education Group (TAL)

Earnings Call: Q1 2021

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Jul 30, 2020

Ladies and gentlemen, thank you for standing by, and welcome to First Quarter FY 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 Q and A session. Today's conference call is being recorded. I would now like to turn the call over to your first speaker today, Ms. Echo Yan Hai, our Director of TAL. Thank you. Please go ahead. Thanks, operator. Thank you all for joining us today for TAL Education Group's 1st fiscal quarter 2021 earnings conference call. The earnings release was distributed earlier today, and you may find a copy on the company IR website or through the newswares. During this call, you will hear from Chief Financial Officer, Mr. Rong Luo Lin Da He, 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 the certain non GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non GAAP measures to the most directly comparable GAAP measures. I would like now to turn the call over to Mr. Rong Luo. Rong, please. Thank you, Echo. Good evening and good morning to you all. Thank you for joining us today on this earnings call. Compared to the situations 1 quarter ago, we have been encouraged by the progress that the government and people in China have collectively made to kill the COVID-nineteen under control. We are still saddened by the strength that this pandemic has put on public and personal life and ongoing challenges in many other countries. At TAL, during the 1st fiscal quarter, we continued to operate within the possibility in the restrictions as the overall situation evolves. With operational adjustments in place since February, we managed to mitigate the negative impact after the Q1 by the growth in student enrollments in online courses and related revenues. Net revenue growth in the Q1 was 35.2 percent year over year in US dollar terms to US910.7 $1,000,000 41.5 percent in RMB terms. Total normal price long term courses student enrollments increased by 72.1% year over year, mostly driven by the online enrollments as well as Xueersi Peiyou Small Class. GAAP income from operations was US35.5 million dollars a year on year decrease of 26.8 percent from US48.5 million dollars Non GAAP operating income of US68.8 million dollars decreased by 7.8 percent from US74.6 million dollars in the same year ago period. I will now turn the call over to Linda He, our Vice President of Finance. She will give you an update on our operational progress in the Q1. Next, Echo Yan, our IR Director, will review the Q1 financials. After that, I will update you on our business strategy and discuss our business outlook for next quarter. Linda, please. Thanks, Zhu. I will review the various revenue streams of our children's business for the Q1. Let me start with small class and other business, which consists of Xueersi Peiyou Small Class, 4thB, Mobby and some other education programs and services. These accounted for 68% of total net revenue compared to 77% in the Q4 last fiscal year. The revenue growth rate was 21% in U. S. Dollar terms and 27% in RMB terms. Xueersi Peiyou Small Class, which remains our stable core business, represented 60% of total revenue in the Q1 compared to 67% 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 25% of total revenue in the quarter, compared to 15% in the same period last year. Net revenue from Xueersi Peiyou Small Class was up by 22% in U. S. Dollar terms and 28% in RMB terms, where our normal price long term cost enrollments increased by 43% year over year. In the Q1, almost all of Peiyou business continued to be delivered by online platform due to impact of the COVID-nineteen outbreak. In Q1, normal priced long term Xueersi Peiyou Small Class ASP decreased by 13% in RMB terms and 17% in U. S. Dollar terms year over year. The decline was mainly due to the mix change of more lower tier cities coverage as well as the coupons offered to online small class customers who had to move from offline to online during the COVID-nineteen outbreak period. Our Q1 performance reflected stable growth of small class business across all 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 18% year over year in U. S. Dollar terms and accounted for 56% of Xueersi Peiyou Small Class Business. Revenue generated from cities other than the top 5 grew by 27% in U. S. Dollar terms. The other cities accounted for 44% of the 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 5% in U. S. Dollar terms and 10% in RMB terms. Jikang 1 on 1 accounted for approximately 6% of total revenue in the Q4 fiscal year 2021 compared to 8% in the same year ago period. In this quarter, normal price long term Zhikang 1 on 1 courses ASP was almost flattish in RMB terms and decreased by 3% in U. S. Dollar terms year over year. Now let me update you on our current capacity expansion strategy. We briefly slowed down our offline capacity growth plan in order to better deal with the COVID-nineteen near term impact. During the past month, except in a few cities, the situation in China has been continuously improving. Alongside this progress, we have cautiously resumed our offline capacity expansion plans to cover the cities and areas which were already in our fiscal year 2021 annual pipeline before the COVID-nineteen outbreak last year. In the rest of this year and foreseeable future, we will continue to pursue healthy and sustainable sustainable learning center network expansion by following government guidelines and market demand. In Q1, we added or net 65 learning centers. We opened 78 new Peiyou small class learning centers and 5 1 on 1 centers and closed 13 Peiyou small class learning centers, 4 First Leap Maui centers and 1 1 on 1 center. During this quarter, we added 685 peiyou small class classrooms. We entered 20 new cities, which accounted for 1 new Peiyou small class learning center each. The new cities are Yiyang, Chengdu, Henmyang, Mianyang, Dewyang, Wuhu, Liuzhou, Zuenny, Auto, Xinyan, BaoZi and BaoDing. In all, by the end of May 2020, we had 936 learning centers in 90 cities, of which 89 China Cities and 1 Xueersi Peiyou Learning Center in the United States. Among the total 936 learning centers, 713 were Peiyou small class and international education centers, 91 were newly merged for sleep and Maori small class and 132 were Zhikang 1 on 1. As for Q2 of fiscal year 2021 until now, with the gradual work resumption in different cities and ongoing digital workplace practice, as well as the continued observation of COVID-nineteen impact, we had conditionally rented 10 Keiyou Small Class learning centers and we expect to add a few more and close down some learning centers based on standard operations. These estimates reflect our current expectations, which is subject to change. Moving now to our online business. 1st quarter revenue from xueas.com grew by 123% in U. S. Dollar terms year over year and 133% in RMB terms, while normal price long term courses enrollments grew by 143% year over year to approximately RMB1.28 million. Online contributed 25% of total revenue and 43% of the total normal price long term enrollments this quarter, compared to 15% of total revenue and 31% of total normal price long term courses enrollments in the same year ago period, respectively. The accelerated growth in online business was supported by the current circumstances that drive the secular demand for online education as well as sales and marketing efforts and retentions of the previous quarters. In addition, in Q1, normal priced long term online cost ASP decreased by 9% in RMB terms and 13% in U. S. Dollar terms year over year, mainly due to the mix change of our diversified online comps offerings. With that, I will now turn the call over to echo Yan for the update on our 1st fiscal quarter financial results. Echo, please? Thanks, Linda. Let me now go through some key financial points for the Q1 of fiscal year 2021. Gross margin increased by 27.6 percent to US481.1 million dollars from US377 million dollars in the same year ago period. Gross margin for the Q1 decreased to 52.8 percent as compared to 56 percent for the same period of last year. Selling and marketing expenses increased by 41% to US219.1 million dollars from US155.4 million dollars in the Q1 of fiscal year 2020. Non GAAP selling and marketing expenses, which excluded share based compensation expenses increased by 39.6 percent to US211.2 million dollars from US151.4 million dollars in the same year ago period. The year on year increase of selling and marketing expenses in the Q1 of fiscal year 20 21 was primarily a result from 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 US42.1 million dollars for the Q1 of fiscal year 2021 compared to other expenses of US31.3 million dollars in the same year ago period. Impairment loss on long term investments was US2.3 million dollars for the Q1 of fiscal year 2021 compared to US50.6 million dollars for the Q1 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 expenses was US22 million dollars in the Q1 of fiscal year 2021 compared to US2.8 million dollars of income tax benefit in the Q1 of fiscal year 2020. Net income attributable to TAL was US81.7 million dollars in the Q1 of fiscal year 2021 compared to net loss attributable to TAL of US16.2 million dollars in the Q1 of fiscal year 2020. Non GAAP net income attributable to TAL, which excluded share based compensation expenses, was US100 and $14,900,000 compared to non GAAP net income attributable to TAL of US9.9 million dollars in the same period of the prior year. From the balance sheet, as of May 31, 2020, the company had US2323.8 million dollars of cash and cash equivalents and US599.6 million dollars of short term investments compared to US1876.9 million dollars of cash and cash equivalents and $345,400,000 of short term investments as of February 29, 2020. As of May 31, 2020, the company's deferred revenue balance was US1495.4 million dollars compared to US968.4 million dollars as of May 31, 2019, representing a year over year increase of 54.4%. Deferred revenue primarily consisted of the tuition collected in advance of Xueersi Peiyou small classes and online courses through 3w. Xueersi.com as well as deferred revenue related to other business. A final point concerns the share repurchase program that the Board of Directors had authorized on April 28, 2020. By May 31, 2020, the company had repurchased 185,000 ADS for a total of about US10 $1,000,000 Company management also bought back 36,000 ADS in this period. Now I will hand the call back to Mr. Luo to briefly update you on our strategy execution and provide the business outlook for the next quarter. Rong, please? Thank you, Ed. Firstly, I would like to say that we are most grateful for the recent government led progress in stopping the spread of COVID-nineteen in China. And since to the concerted efforts of our teachers, technology staff, all our employees and the trust and cooperation from our customers and partners, we have been able to offer our tutoring services online and deliver some free online courses and technology services in support of the overall education continuity. Secondly, I would like to emphasize that to achieve the long term success of our business requires a strong foundation, and this is more important than just pure near term size of the business. We will aim to offer the best possible quality of goods and services, really understand and adjust the needs of our students and satisfy the parents in different situations and at different times. Based on this principle, our market share gain and profitability optimizations have to go hand in hand with our serious ambition for long term quality success. Last but not least, even as the situation in China continues to improve, we will abide by all government policies and regulations regarding the protection of the national public health. We will always trade at the health and the safety of our students and employees as our first priority and operate our business based on that priority. All in all, as one of the leading players with a long term record in education technology and service, we remain fully confident in our future development and education market opportunity in China. Let me turn finally to our business outlook. Based on our current estimates, total net revenue for the Q2 of fiscal year 2021 is expected to be between US1077.6 million dollars to US1105 million dollars representing an increase of 18% to 21% on a year over year basis. If not taking into consideration of the impact potential change in the exchange rates between RMB and the U. S. Dollar, the projected revenue growth rate is expected to be in the range of 20% to 23% for the Q2 of fiscal year 2021. 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 Natalie Wu from CICC. Please ask your question. Hi, good evening, Lozheng, Linda and Echo. Thanks for taking my question. Just wondering for your next quarter guidance 20% to 23% year on year in RMB terms. How does that imply the growth of offline Peiyou and online shares.com respectively? And how should we think about the margin going forward? Also in the long run, how should we think about the online business margin profile as well as the competitive landscape? Just curious if any change of your thoughts on longer term prospect for online business given the dynamics in latest several months? Thank you. Thank you, Natalie. I think in the first place, we need to clarify on the numbers. Q1, we grew our revenue in 41 point 5% in RMB terms. And Q2, our guidance is 20% to 23%. And here, we need to take something into consideration. It's actually because of the scheduling issues, there is some revenue actually that shift from Q2 to Q1. So Q1 number lose better than the real numbers, while Q2 lose a little bit smaller. If we I think one of the best way to look at our numbers is combine the Q1 and Q2 together, I think, which is also quite similar for our other counterparts in this industry. So if we combine them together, our first half revenue growth will exceed around 30% through 0 plus. And secondly, I think if we go deeper to different segments, we need to walk through some numbers 1 by 1. In the first place, for the Peiyou small class business, here, we need to be very careful. Peiyou small class means our traditionally offline business models. In last quarter because of COVID-nineteen outbreak, so most all of this offline learning actually is delivered through our online platform. So for this kind of Peiyou small class business, I think we have experienced and we are continuing to experience the same challenge and same pressures same as other companies in this industry. We need to wait for what's going on after the COVID-nineteen outbreak. We're very happy to see coming into this quarter with the government led efforts, So we can put we are under control and we have seen most of our new cities actually they have stopped operating gradually. But compared to the normal time we have in the previous years where we don't have any kind of the virus issue before, actually the recovery is still slower. And we are in the same industry and we are in the same situation. So we are happy to see we are gradually come back to normal. But this kind of recovery need to be very cautious because in any time, we need to prove the safety and health of the teachers and students as a first priority. And we also abide by all government policies and regulations to reopen our schools gradually. And in general, if based on what we can see today, if the pandemic will not be getting worse in China in the second half, then probably we can say, looking based on the information we today, the second half growth will be better than the first half for the Peiyou small class business. And secondly, we also need to talk about something about the Peiyou Live business. Peiyou Life is an online offering affiliated to the Peiyou SmartCast. This business this year is continued to grow quite rare. Last year, if you guys can still remember, the Peiyou Life grew more than, I think, triple digit growth. And this year in Q1, they are also over 100% growth. And based on number of workers today, the Q2, they maintained a similar trend. And in the 3rd place, the shortlist online school, which is also our 25% revenue for this quarter and continue to grow 143% enrollments in Q1 and 133 percent in revenues in Q1. And based on the numbers we have today, we are also pretty much on track to achieve around triplet growth in the Q2, plusminus in small range. So in general, I think our growth for Xueersi Peiyou Small Class and Xueersi Peiyou Life and Xueersi Online School is pretty much on track as what we say last quarter. And if we go down to the bottom line, I think same as before, it's a little bit difficult to give clarity guidance about what the bottom line will be. We have some colors or directions can draw attention. Especially, we encourage you guys to pay attention to the headwinds possibly in our business in the profitability strategy. Number 1, the Payoh small companies, same as YSA just now, we're very happy to see everything is under control. More than 90% of the cities actually they start to resume the business gradually, not the same as what we did before, but better than what we have been last quarter. So this will take some time, the whole recovery will take some time. If we don't see any kind of unexpected kind of the virus operate again, then we will probably see the situation will be getting better in second half. But specifically for my Q2, the challenge and the pressure is still there. Especially, you probably can see that we also entered some new cities 20 new cities in Q1. And this kind of profit pressures for Q2 for the short pay or small cost business will still be there. And secondly, about the 1 on 1, I think even today, our Q1, we have the normal price long term enrollments in Q1 for online school is around RMB1.28 million, and which means 143 percent year over year growth in new home studies. But even in the 1 point $2,000,000 divided by the big market potential of the total numbers, total K drop numbers in China, actually that's still a very immature numbers. So we still believe there is a huge potential or maybe kind of the market opportunity ahead of us. So for online, there's still a market share gain. So way to achieve more market shares in the online space, we need to invest at least in the following areas, but not limited to the following areas. Number 1, we need to continue to invest in technology. Frank speaking, I think few years ago, when we just opened our Peiyou Life business, we don't imagine someday we will support millions of students at the same time doing the live learning platform. But today, that is what happens every day. And the enrollment growth of virtual learning school is still very healthy and very high. So this kind of challenges on the technical platform will be even bigger than before. So we need to maintain our investment and even increase a little bit more in our investment in technology strategy to make sure our technical platform can be very highly competitive in this market. Secondly, we need to also invest in the teachers and the teacher assistants. Because under today's model, we still need teacher assistants to support the students to have better learning experiences. So the online learning sometimes is not simple in moving the students from offline to online. Actually, that's a brand new learning models. So besides the very good master teachers we need to have, we also need to build a very strong teacher assistant team to support them. So here, even during the COVID-nineteen periods, we continue to progress to hire more teacher assistants for our online team. Today, the number is much healthy before now and we get ready for the high traffic coming in the summer. And in the 3rd place, we also need to invest the necessary sales and marketing dollars to make sure we can achieve more students new students in the coming summer. And I think we're running this strategy, I think, in the past 2 years. So we have a lot of lessons learned. We will always balance on what only possible students we can touch versus the efficiency of the overall efficiency and efficacy of this kind of investments. So we have a system ready to evaluate our app by different channels. And we need to change or adjust due to the different channels performance real time. So this kind of the necessary sales and marketing investments is also important to help us to make more people know us and try to attract more people to try our products and we will use our high quality products to improve the conversion rate and finally make sure the lifetime better work. So all in all, we need to consider investing in online space, in technology space, in the teacher perspective and in the sales and marketing perspective. This kind of investment will also give us some kind of pressure especially in Q2. And again, I think we're running this business for a long time. And today, the situation is much more difficult, sorry, much more different than what we are maybe 5 years ago. 5 years ago, when we were first doing a lot of things in the online space, in the digital model space, maybe there is not that many followers that were traveling for us. But today, the competition is always there. And we probably can see some of the private companies get a lot of money. And so we still need to maintain our competitiveness to make sure we're ahead of the whole industry. But again, even we pick the top 5 online players in this area, we calculate their numbers together. Actually, still, this kind of online students divided by the total numbers in KTL population, that's still a small percentage. I think we still have a lot of market potentials we can go. Today, it's too early to talk about head to head competitions. What we need to do more is actually we're doing to ourselves to make sure we can improve our operating efficiency to maintain the healthy level of our investment and balance our growth drivers both in online digital models, Peiyou Life and Xueersi Online School to deliver a well paced growth and to deliver a healthy and sustainable growth in the long run. Thank you, Natalie. Got it. Very clear. Thank you, Rodol. Your next question comes from the line of Mark Lee of Citi. Please ask your question. Hi, Ruo, congratulations on the results. I want to ask a bit more on the online because I remember last year you mentioned you mostly focused in the products online in the strategy. And it seems like for the shares online growth has been stronger than what we expected in recent quarters. So looking back for the online summer promotion, do you think what we make right in this summer promotion and looking ahead for the 2nd part of it and maybe for the upcoming quarter, what do you focus on the strategy for this year compared to last year? I just want to hear a bit more. Thank you. Thank you, Mark. I think if we recap some numbers, last year, our Shores online school revenue growth is around 86% to 87%, close to around 90% next year of last year. And this year, Q1, we grew by 133%. And Q2, we're pretty much on track to around triple digit growth, plusminus in a small range. So I think part of the reason is because of the market change. In the past few months, most of China students are forced to stay at home and pay the online offers. So which accelerate the online popularity to the students and the teachers. So we as one of the leading players in the online education player, we also got some benefit from there. So if you guys can do interest some other online players in this market, actually, that is quite common, not only for us, but also for the whole industry. So this I think the market environment is a very important reason. We need to be very honest about that. Secondly, I think right after we're running the business for a few years, especially for the online for a few years, I think we have tried to improve our competitiveness of the products. And when sometimes the only application is now kind of the magic actually that require a lot of the detailed operations and efforts. So that's not simply say we're just moving students from offline and online, we're just moving them from classroom to a screen, everything okay. That's not the case. Actually, we need to redesign a lot of process. We need to restructure the way how we touch the students, how we pursue the students to rest in our platform, how we invite them to try our pilot class and how we can make sure the online interactions is better than offline to make sure students feel actually they are learning in a very interesting classroom even that is unfortunately online. So we also need to restructure the way how we can train our teacher assistants, how the teacher assistants interact with students and their parents to make sure they can effectively hire the students to get in touch with online offerings and get along with them in a much longer time. So all we have a lot of details right there. So we continue to invest our energy and our investments in the technology perspective, which help us to make sure our systems and our process can be improved to taking out to deal with this kind of fast growing enrollments. And I think that's something I think we are doing that in the past maybe 3 or 5 years, We will continue to do that in the foreseeable future because only we invest in technology, only we invest in the platform, only we invest in the products, that's the only way we can serve more students. And that's also the only way we can serve more students in an affordable way, which is maybe more important. You probably can see that our ASP of all offerings, blended offerings is also decreasing because that is not because we reduced the price, that's because we try to offer more online products and more affordable price products to the students. So the continued investment in the technology and all the platform in the products is something we continue to do that. I can't say we're doing it right or wrong, but that's something we need to do. And we also, I think in today's online education, the teacher assistance is very, very critical. And we need to have enough teachers and teacher assistance to support students. So which is also a lot of efforts now. French speaking, we if you need to hire thousands of students as the teacher assistants, that's not easy. So we need to make sure our whole system work effectively, so we can hire enough students and train the students to make sure they can deliver the high quality service to the students, to the parents and the students to make sure that the teaching qualities can be secure. I think continue to improving the operating efficiency and make sure we can optimize the different detail operating process is a must do job. We continue to make efforts every quarter and every year. So and looking into summer, what we can say is actually what I disclosed today is the Q1 results. Most of the numbers actually is the Sprint numbers. So the Q2 numbers for some numbers will be dispaced in next quarter. But in general, we can see that we're pretty much on track with our growth targets right over there. And for the summer, I think we don't have anything special we need to draw attention, but continually we need to make sure we pull the product quality as the first priority. We need to make sure our own offerings can fit the students' needs and the people will feel satisfied about our product offerings. They feel they pay the money and the money is worth the efforts they pay. So all of this is a detailed works. We don't have any metrics or we don't have any shortcuts to create success. There is not that much kind of secret. What we need to do is hands down do everything, every details as better as possible and continue to improve. On the other side, we need to keep eyes open. We see a lot of who counterparts in this industry, and we learn a lot from them, not only in the marketing, branding, product design and a lot of top spaces. So we are very happy to see we are lucky in this industry. We have more counterparts who are also devote their energies and time in this industry and they have a lot of new creations, new creative features, which we can learn from them. So that's something we continue to will do in the future years. So all in all, we don't have any metrics. What we need to do is start talking that much, but hands down, do our job harder and harder than before. Thank you, Mark. Your next question comes from the line of DS Kim, JPMorgan. Please ask your question. Hi, everyone. Good evening. Thanks for taking my questions and congrats on the good results. First, I have two questions, if I may. First, on margin, may I check why gross margin this quarter went down 300 bps despite bigger contribution from SIROS online, I. E, OP margin was a big positive surprise. So just trying to understand why GP margin was lower versus the mix and wondering whether this is because of a big drop in small class margin segment or something else? And I have one small follow-up after this. Thank you. Thank you for your question. I think for the gross margin for KY is a little bit decline is because when moving the students, the Peiyou small class students from offline to online, which is quite successful. Most of our students actually moved there. And one thing we need to draw attention is actually in the Q2, when we try to retain the students from Springton to Summerton, actually the retention rate is quite good. It's even a little bit higher than last year. So these efforts work, but when we're moving the students from offline to online, actually, we provide some kind of price coupons to them, so which will deduct a little bit in revenue, so which will make the gross margins of the Payoh smartphone a little bit lower than before. And I think that's the most important reasons that we have for the gross margins, why they are relatively different. And can I clarify your second question is about OP margin? No, I think you already kindly explained all that. Thank you. And if I may follow-up on other point, this is more medium term, but how are we going to balance Peiyou offline and Peiyou Life given now the lines between the 2 are a little bit blurred since COVID? So are we in the future thinking of matching online price to that of offline essentially replacing Payyo offline with the live or are we going to keep 2 segments completely separate or complementary to each other and try to serve different group of students? And that's all. And thank you for taking my question. Yes. Frank speaking, I think the best answer to this question should be go to ask the parents Because actually, our different drivers of growth models, actually, the fundamental drivers to them actually is the need from this market, the need from the parents and need from the students. And I think the past several months after COVID-nineteen outbreak, I think that it's a special time. That is the first time for all of us. So it's very special and maybe it's very unique. So we can't just use the 3 months or 4 months experience to decide what we need to do in the coming 3 or 5 years. So we carefully evaluate and observe what's happening in the past 3 or 4 months, especially we are seeing some more students they choose the online offering. But we need to make sure is that a temporary phenomenon or that is a forever phenomenon? Today, it's too early to make a judgment call. And secondly, I think today, seeing as what we're running the company before is very good, the insurance pay off small class and the insurance online business, actually they're running separately. Because the Peiyou small class business, they are covered city by city. You probably can see that in Q1, they cover the other 20 new cities. So the total number is around 90 cities, not 0, including 1 in the U. S. So the Peiyou Live is highly connected to the Peiyou small class business. The Peiyou Live is complementary service to them. So they will focus on how to provide the best service to the offline students, especially they will provide more localized content to them. And that's our purpose for the Payoh Live offerings. So this is part of the Payoh's class. Well short online school, since it's the beginning, it's a broad strategy. We want to use these offers to cover the majority of the whole markets. So they will pay attention to the general contents and general features and general strategies. So we prefer they can cover more students, especially how to serve the low tier students in the run. So based on what we have today, we're still encouraged the Peiyou small class and the short online school to run in their own directions and to try to penetrate and try to attract different parents because the parents' needs are different. Now 100% of the parents, they like offline offering. But also, it's now 100% of students or the parents, they like online offerings. So we need to make sure we can have that diversified offerings to we can support different needs of the students. And again, today, no matter offline and online, our overall number of stores actually is very small. The market share is maybe low single digit. So it's too early to say. We need to combine them together or we need to do something else. We what we need to do is focus on our strategy and continue our current executions, working harder and harder to make sure we can deliver quality growth in the long run. Thank you. Thank you. That's very clear. Your next question comes from the line of Sheng Zhong of Morgan Stanley. Please ask your question. Hi, good evening. Thank you for taking my question. My question is about your online business. So can you give us roughly number how much of your students now is from lower tier cities for online learning? And I think previously you mentioned that you are doing some trial of different business models in lower tier cities to see which are the best models. So can you share some color, some of the vision with us and the company's thinking about the future strategy in lower tier cities? Thank you. Thank you, Zhongxian. I think it's always a very important question how we can penetrate the low tier cities. And in last year, if you guys can still remember, I think last year for our short online school enrollments, we have around 20% of students coming from the low tier cities. But this year, the situation has a little bit changed, especially right after the outbreak of the COVID-nineteen. And we're running some free class promotions and the classes to the students all over China. And we also optimized our products to try to train more students from the low tier cities. So what we can see is actually for the new students and especially for the promotion students, more and more of them are coming from low tier cities. I think even today, I don't have a perfect answer to say, hey, that's the best strategy to penetrate the low tier cities. We don't have a shortcut year. But we're happy to see that is with our continued involvement of our products and we are seeing more and more students actually are coming from the low tier cities in the coming in the past few months. And this trend will continue in the coming few quarters. But again, what I want to say is actually, the students who live in the low tier cities, compared to the students who live in the big cities, they are the same. They have the same demand, they have the same needs, and they have the same ambition, try to be more competitive. They want to learn better and they want to have a better life. So what we need to do is, when we go into the low period cities, we need to find a very important way to how to make our offerings more affordable, but the teaching quality should always be the same. So we need to treat the teaching the product quality as high priority when we go in there. We need to make sure what we teach is really hard. So we will continue our current offering now and we will evaluate our data and especially the low tier tier city student status to continuing workflow products to fit their needs. So all in all, what I can say is, we are good to see more and more students in our online platform actually that coming from low tier geographies and this trend will continue in the coming few quarters. Thank you, Dongxian. Thank you. Your next question comes from the line of Felix Lu of UBS. Please ask your question. Thank you for taking my question and congratulations on the rest of Q1. My question is on the deferred revenue side. I see your deferred revenue is around RMB1.5 billion while the guidance for the next quarter is, I think, a little bit below that. So could you help us understand the difference here? I think the government doesn't really allow prepayment for too long, right? Yes. Thank you for your question. Deferred revenue growth is impacted by our faster growth of online business as well as the consolidation of newly acquired online 1 on 1 English tutoring service provider. The consolidation start from May 1 this year. And hope this answer your question. Thank you. Okay. Thank you very much. And how just to follow-up on that, how what is the time line for recognizing this increased deferred revenue from consolidation? What is the typical period to fully recognize this? I think these acquisitions happened in the Q1, mid fiscal year. But I need to give more color about that actually because they have higher numbers in the different revenue perspective, but it's going to the net revenue because that's depending on their consumptions 1 by 1. So actually, the revenues to our P and L, the net revenue is immaterial. I see. Thank you very much. Your next question comes from the line of Alex Hsieh from Credit Suisse. Please ask your question. Hi, management. Thank you for taking my question. So I actually would like to ask about your thought about the online small class model. I think in the last quarter, you provided the online class small class model to millions of students and got good retention rates as you just mentioned. So in the future, are you going to keep some online small class offerings in your previously large class nominated Peiyou Live? And do you see a demand or do you have plan to do online small class in the hub cities, say to attract the surrounding cities as a way to, say, penetrate into some low tier cities to see the potential in that. Thank you. Thanks, Alex. I think last quarter, we moved for the students. We delivered Peiyou small class through online platform. Actually, that is we have to do that because of the COVID-nineteen. So we are good to see the retention rate is pretty much okay. And but we also see some challenges from that model. So I think today, it's too early to say whether we will do some significant kind of the strategy changes in the Payo Smart customers because that's only 3 or 4 months. With a lot of cities come back to normal, we're also seeing a lot of students and parents, they are coming back to offline schools now. So I think whatever decision we will make need to depending on the parents' satisfaction rates and whether they will continue with offers in the longer term. Today, we see some preliminary positive signs or results, Valentine's only 2 to 3 months. It's too early to judge or it's too early to draw a conclusion. So we'll continue to run our business in this way. And we will also resume our offline business in the cities. It's come back to normal. So we will leave more time leave more time to the parents and the students. And we're based on the feedback of the market, we're based on the feedback of the customers to make the decisions. Our strategies always evolve based on this kind of new dynamics in the market. Thank you. Your next question comes from the line of Lucy Yu of Bank of America. I got two questions. First is on expansion strategy. I've seen that you've entered more new cities this quarter. Possibly there could be some delay from the previous quarters. Going forward, what's the strategy of offline expansion? Will that be largely concentrated in new cities like what we have done or more of that will be existing cities? Because as you mentioned, penetrating to new cities will dilute or at least pressure our margins in the near term. So whether we will continue to do that or scale back New Cities a little bit and focus more on margins? So that's question number 1. Number 2 is on the revenue forecast of around 20%. As you mentioned that xueersi.com is likely to grow at triple digits in the following quarter, as well as the Peiyou Life will also grow at triple digits. It looks like the rest of the business will be under huge pressure, then we will achieve we will arrive at 20%, otherwise it will be much higher than that. So could you please help us to understand better of your revenue forecast? Thank you. Okay. I think for the geographic expansion, actually, we're pretty much on chose our plans last year. And this plan has been stopped a little bit by the last several months' COVID-nineteen outbreak. Today, we gradually resume back to our pace. But again, we'll be very cautious about that. We need to spend a few more time to look into what will happen of this kind of pandemic in China in the coming few months. In Q1, we have entered 20 new cities and we have adding around 65 new learning centers. In Q2, by the end of today, we have rented around only 10 new learning centers. So I think this is highly depending on what's happening after the virus in the coming full months. Based on what we see today, if everything still were under control, we probably can see we'll be more positive about that. And around your question about the new cities, our current cities, first speaking, I think we will maintain our similar pace to enter new cities. Last year, if I remember correctly, we have entered around 15 new cities. And the year before last year is around 13 to 14 plusminus. So this year in Q1 entered 20. So that's pretty much on track. We continue to enter the sizable number of the new cities every year. And we also continue to optimize our current cities' efficiencies. And based on the different KPIs, especially fulfillment rates and all other KPIs to decide to add new learning centers. I think we're running our new network expansion strategies pretty much same as what we did in the past. But considering we have COVID-nineteen right over here, so in the most recent quarters, we will be more cautious than before. And by the long run, we will still try to enter more new cities as what we can see in the past. On the revenue forecast, I think I have talked about it in the beginning, but I can break a little bit. In the first place, I don't suggest you guys only looking to 1 single quarter numbers because actually because of the scheduling issues with some benefits in Q1 to make the Q1 numbers better than before, and we have some kind of loss in Q2. So if we combine the Q1 and Q2 together for the whole first half, our growth rate is more than 30% -plus. So and specifically, yes, you are right. So we have healthy growth in the PayU Live, healthy growth in the short online school. We have some challenges in or some pressures of the Xueersi small Peiyou small class business. That's because if you go back to our Q1 typically is March, April May. Our Q2 is typically June, July August. When the students day and the parents, they decided to rush my Q2 classes, the summer classes, actually, the time should be around April May. So if you can still recap the stories in April May, I think at that time, a lot of parents and even the whole society are still a little bit worried about the virus and a lot of people are hesitant or maybe they don't make a decision yet. So I think Q2 is a challenge quarters and the growth rates also were under pressure. I think we have to make work there now. And if everything is getting better and better, probably second half will be better than first half for an offline perspective. Thank you. Thank you, Laurent. Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now all disconnect.

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