TAL Education Group American Depositary Shares

Ladies and gentlemen, thank you for standing by and welcome to the Q3 full year 2020 TAL Education Group earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference has been recorded. I would now like to hand the conference over to the speaker today. Ms. Ekoyan, IR Director of TAL. Thank you. Please go ahead, ma'am.

Thanks, operator. Thank you all for joining us today for TAL Education Group's third fiscal quarter 2020 earnings conference call. The earnings release was distributed earlier today, and you may find a copy on the company IR website or through the news wires. During this call, you will hear from Mr. Rong Luo, Chief Financial Officer Linda 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 findings with the SEC. For more information about these risks and uncertainties, please refer to our findings with the SEC. Also, our earnings release in this call includes discussions of certain non-GAAP financial matters 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. Our so-called revenue performance was based on a solid growth momentum of both our overall small-class business in the cities we currently cover and the continuous scaling of our online courses. Net revenue growth in the third quarter was 47.2% year-over-year in the U.S. dollar terms, to U.S. dollar $862.4 million, and 50.7% in IRB terms. Total normal price long-term courses student enrollments increased by 66% year-over-year, mostly driven by online enrollments as well as Charles Pell's small class. GAAP income from operations grew by 9.9% to US$78 million. In the third quarter, non-GAAP income from operations increased by 16.4% to US$108.2 million. This quarter's results reflect the progress in our efforts to build a healthy and sustainable beans model based on our product development, technology, customer satisfaction, and operational efficiencies. I will now turn the call over to Linda He, our Vice President of Finance. She will give you an update in our operational progress in the third quarter. Next, Echo Yang, our AI Director, will reveal the third quarter financials. After that, I will update you on our key strategy execution and discuss our business outlook. Linda, please.

Thanks, John. Fiscal year total revenue was based on solid growth momentum in the various education services of our tutoring business. Let me review the business by different revenue streams. Let me start with small class and other business, which consists of Siu Ar Si Pei You small class, FirstLeap, Maobi, and some other education programs and services. These accounted for 76% of total net revenue, compared to 79% in the third quarter last year. The revenue growth rate was 41% in U.S. dollar terms and 44% in RMB terms. CRC Payo small class, which remains our stable core business, represented 61% of total net revenue compared to 65% in the same year-ago period. The lower revenue contribution from CRC Payo was mostly due to the faster growth of CRC.com online courses. which accounted for 18% of total revenue in the quarter, compared to 15% in the same period last year. Net revenue from Suarez-Tejo small class was up by 36% in U.S. dollar terms and 40% in RMB terms, while normal price long-term cost enrollments increased by 51% year-over-year. This growth rate reflects the solid growth of both U.S. pay-your-offline and online class. Pay-your-offline small class revenue increased by a steady rate of 27% in U.S. dollar terms and 30% in RMB terms, while offline normal price long-term cost enrollments increased by 32% year-over-year. With pay-your-online, we offer online courses with localized contents as a bundled while still complimentary service to pay your offline in over 30 major cities of our network. We have in recent quarters added more regular and short-term courses, subjects, and other promotion courses. These are increasingly synchronized with offline courses and support the learning process and learning experience for our students. In the third quarter of fiscal year 2020, PayU Online accounted for approximately 11% of total CRC PayU small class revenue and 18% of total CRC PayU normal price long-term small class enrollments. By comparison, in the same year-ago period, revenue and normal price long-term enrollments from PayU Online were 5% and 7%, respectively, of total CRC PayU small class business. We continue to record steady growth because of part of the cities we currently cover. CRCPO small class revenue from the top five cities, which are Beijing, Shanghai, Guangzhou, Shenzhen, and Nanjing, grew by 32% year over year in U.S. dollar terms and accounted for 57% of CRCPO small class business. Revenue generated from cities other than the top five grew by 42% in U.S. dollar terms, and the other cities accounted for the other 43% of this year's PAYO small class business. This outspread growth is based on solid market demand across our cities, incremental ramp up of enrollment from our earlier classroom expansion, faster growth of PAYO online courses, as well as our ongoing efforts to improve operational efficiency. We continue to extend course offerings with a wider array of offline and online courses in curricular and extracurricular subjects. As always, we invest in to develop products and content that change how students learn and improve student outcomes. Our Chinese and English courses are by now widely in use. By the end of November 2019, We have offered Chinese classes in 25 cities and English classes in 29 cities. During the quarter, we have merged the FirstLeap and the Mobi centers in order to achieve more operational efficiencies and enjoy better product and promotional efficiencies. FirstLeap, Mobi, and other education programs all grew at a steady pace, both in revenue and enrollment. in the third fiscal quarter. We expect that these diversified causes will gradually contribute more to our overall business. Next, I'd like to briefly discuss our Jicang one-on-one business. This business sector had a good third quarter and achieved year-over-year revenue growth of 48% in U.S. dollar terms and 52% in IMB terms. Zhicang one-on-one accounted for approximately 6% of total revenue in the third quarter of both fiscal year 2019 and 2020. Let me update you on our capacity expansion. As always, we pursue well-paced offline capacity growth that is healthy and sustainable. As we mentioned with our last quarter's earnings call, We are planning to gradually and modestly accelerate the offline learning center expansion rate. Alongside any expansion effort, we invest in new technology and online business to improve overall operational efficiency and abide by the standards and regulations. We added a net 36 learning centers. We opened a net of 34 new Peiyu small class learning centers, and seven one-on-one centers. Due to the merging of First Leap and Mobi and other standard operational related reasons, we closed less of five First Leap and Mobi centers. During the quarter, we added 670 Peiyu small class classrooms. During the quarter, we did not enter any new cities in China, taking a bit of time for consolidation following our entry into 13 new cities year-to-date. In this quarter, we opened our first Xiaosi Taiyou International Learning Center in Silicon Valley area in United States. In all, by the end of November, we had 794 learning centers in 70 cities. 69 China cities, and one U.S. PAYO Learning Center in one U.S. city, of which 575 were PAYO small class and international education centers. 98 were newly merged Mobi and FirstLeap small class, and 121 were Zhikang one-on-one. As for PAYO 4 till now, we have rented approximately 76 pay-your-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 expectation, which is subject to change. Moving now to our online business, third-quarter revenue from Suresu.com grew by 82% in U.S. dollar terms year over year. and 86% in RMB terms, while normal-priced long-term causes enrollment grew by 107% year-over-year to about 890,000. Anlan contributed 18% of total revenues and 38% of the total normal-priced long-term enrollments this quarter, compared to 15% of total revenues and 31% of total normal-priced long-term houses enrollment in the same year-ago period, respectively. The rapid growth in online business was supported by seasonality-driven sales and marketing efforts, retentions of the previous quarters, as well as the secular demands for online education. With that, I will now turn the call over to Aiko Yen, for the update on third fiscal quarter financial results. Echo, please.

Thanks, Linda. Let me now go through some key financial points for the third quarter of fiscal year 2020. The breakdown of ASP for the various business is as follows. Normal price, long-term, Jersey Payo small class ASP decreased by 7% in RMB and 9% in U.S. dollar terms year over year. Payo offline, normal price, long-term courses ASP was almost slattish year-over-year. Normal-priced long-term Zhicong 11 courses ASP increased by 8% in RMB and increased by 6% in US dollar terms year-over-year. Normal-priced long-term online course ASP decreased by 9% in RMB and 11% in US dollar terms year-over-year, partly due to the mixed change of our diversified online course offerings. Growth profit increased by 49.9% to $477.2 million from $318.4 million in the same year ago period. Growth margin for the third quarter improved to 55.3% as compared to 54.3% for the same period of last year. Selling and marketing expenses increased by 87.9% to $190.9 million from $101.6 million in the third quarter of fiscal year 2019. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 89.2% to $186.4 million from $98.5 million in the same-year goal period. The increase of selling marketing expenses in the third quarter of fiscal year 2020 was primarily a result of more marketing promotion activities to expand our customer base and brand enhancement, as well as a rise in the competition to sales and marketing staff to support a greater number of programs and service offerings compared to the same period in the prior year. operating income increased by 9.9% over the year to $78 million from $71 million in the same year ago period. Non-GAAP operating income increased by 16.4% to $108.2 million from $92.9 million in the same period in the prior year. Other expenses was 3.7 million US dollars for the third quarter of fiscal year 2020 compared to other income of 98.7 million US dollars in the third quarter of fiscal year 2019. Other income in the third quarter of fiscal year 2019 was substantially all from the fair value change of a long-term investment. The fair value changes of the long-term investment was transferred from accumulated other comprehensive income to other income as the investment was reclassified from available for sale investment to equity security with readily determinable fair value upon listing on the Hong Kong Exchange in November 2018. Impairment laws on long-term investment was $46.4 million for the third quarter of fiscal year 2020, compared to $41.1 million for the third quarter of fiscal year 2019. Impairment loss on long-term investments was mainly due to other than temporary decline in the value of long-term investments in several USPs. Income tax expenses was $16.6 million in the third quarter of fiscal year 2020 compared to 10.4 million U.S. dollars of income tax expenses in the same year goal period. Net income attributable to TAL was 28.2 million U.S. dollars in the third quarter of fiscal year 2020 compared to net income attributable to TAL of 123.8 million U.S. dollars in the third quarter of fiscal year 2019. Non-GAAP net income attributable to TL, which excluded share-based compensation expenses, was $58.3 million compared to $145.8 million in the same period in the prior year. Basic and diluted net income per ADS were both 0.05% U.S. dollars in the third quarter of fiscal year 2020, non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were 0.1 and 0.09 U.S. dollars respectively. From the balance sheet as of November 30, 2019, the company had 2,780 and $29.8 million of cash, cash equivalents, and short-term investments, compared to $1,515.6 million of cash, cash equivalents, and short-term investments as of February 28, 2019. As of November 30, 2019, our deferred revenue balance was 1,241.2 million U.S. dollars compared to 866.3 million U.S. dollars as of November 30, 2018, representing the year-over-year increase of 43.3%. Deferred revenue primarily consisted of the tuition collected in advance of jurisprudential small classes as well as deferred revenue related to other business. 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. Long please.

Thank you, Echo. Let me update you on our beans and development strategy. We continue to develop our diversified bean sectors and new programs and projects to offer more suitable and overall educational services to our customers. I will briefly discuss each major bean sector. Our core PAYO small classrooms remain healthy and stable. As I mentioned last quarter, we decided earlier in this fiscal year to gradually accelerate a little bit the offline learning center expansion rate. Our network of 70 cities, of which 40 newly entered this year, currently consists of well over 13,000 classrooms. We will enter more cities in the coming years. Meanwhile, Payo Online is growing rapidly this year. It's an attractive platform for students, both as a course supplement and synchronized courses content to Payo Offline. In this emerging model, we are cross-leveraging Payo Offline and Payo Online in both directions. The growth dynamics of these things and our operational efficiency efforts have made positive contributions and will continue to do so to help balance our growth and our profitability as well. In the coming few quarters, we expect the growth momentum of Payos class to continue as we further develop our offline network at a suitable speed and scale of business. We believe we can further leverage our offline and online advantages and resources, especially through our AI and other technologies. This will enable us to build an education services model which is demand-driven and sustainable for the long term. Meanwhile, our online business is a high-growth, early-stage business in competitive and quickly-evolving markets. At this stage of the business, we will continue to promote the brain awareness of Shares.com. At the same time, we do our best to continuously improve our overall online education services and operational efficiencies. We manage this by leveraging our accumulated industry know-how, ongoing product diversification, and technology innovation. Ever since we pioneered these business models, we have been confident about the great social value and the market opportunity in the online education area. which we will continue to explore and develop. Now a brief update on smart education solutions and open platform business. By the end of Q3 2020, mainly in the lower tier cities or geography areas, we have cooperated with a growing number of public schools with our small education solutions. We also work with a few thousand of small and medium sized education institutions across China through different service level in our open platform business. With these new projects and programs, we can contribute to the elevation of our education sector and make education more inclusive and more widely available in lower tier areas. As we move ahead, we remain cautious that education programs and services require quality and care to lead to lasting customer satisfaction. With any new courses, products, and interactive tools, we aim to help solve students' learning problems. Our company's revenue growth and profitability can only be sustainable if the process of learning can adapt to each student's personal needs and result in improved outcomes. We do not pursue growth for growth's sake. I would like to emphasize once more, on an ongoing basis, we will invest to innovate the curriculum, our products, student interactions, technologies, and operational efficiencies. Turning finally to our business outlook, based on our current estimates, total net revenue for the first quarter of fiscal year 2020 was expected to be between US$959.1 million and US$980.9 million, representing an increase of 32% to 35% on a year-over-year basis. If not taken into consideration of the impact of potential change in the exchange rates between RMB and the US dollar, The projected revenue growth rate is expected to be in the range of 35 to 38% for the first quarter of fiscal year 2020. 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. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel a request, please press pound or hash key. We have the first question from the line of Yuzhong Gao from CICC. Please go ahead.

Hey, management, thanks for the opportunity. Congrats on a very strong third quarter. Notice your offline capacity expansion has accelerated meaningfully, and your pay-your-revenue, even excluding the effect from a low base last year, still booked a pretty strong result. So how should we see the capacity expansion pace and your pay-your-revenue growth for the upcoming few quarters? Thanks.

Thank you. I think for the pay-your-small-class business, We talked about it last quarter, actually. I think two quarters ago, right after the evaluation of our current BIMS model and the evaluation of the environment of total regulations, we decided to accelerate a little bit of the payload small class. We tried to enter more cities. This year, we have entered around 13 cities, including one in the U.S., and we probably will try to enter more cities next year. And last year, you probably recall it, we're only adding around 13% of total classroom capacities last year. And by the end of this quarter, we are already adding around 17%, one-seven. And considering by the end of today, in the quarter four, we have already entered open 76 PAYO small-class learning centers already. and we expect to add in a few more in the coming one month. So, overall, the PAYO small class expansion rate will be in the range of 20% to 30%. But one thing I need to remind all of you guys is here, when we report, we open a new lending center in the existing cities, which means we have signed a contract for the rental. But in general, it takes a few quarters to finish the renovations, ask for the license, and then we will put them into use, which typically will take around two to three quarters. So all the learning centers we added last quarter and this quarter probably will contribute more revenue in this year's summer and fall. And looking into next year, I think we probably With all of these learning centers added in this year, Q2, Q3, and Q4, Q2, 20 plus learning centers, Q3, 36 plus new learning centers, and while Q4, 76 even more. So we are confident about our pay-off offline, top-line growth in the coming year. But again, one thing I need to say is actually the new model we added is we call OMO model, which is a little bit different from the traditional pure offline models. We use a lot of online technologies to equate our offline classrooms. We have a lot of know-how from the online school and all of these, especially some of the AI technologies will contribute back to our offline business. And a lot of new cities we enter actually do teacher models. We leverage the live broadcasting technology to enable our master teachers and the best master teachers in Beijing and Shanghai can teach more students all over China. And we also try to enable the teachers can teach the other classrooms within the same city remotely. And PayoLife is also one of very good products we have ever had by the end of today. I think in Q1 and Q2, they grew more than 150% plus minus. And in Q3, they grew more than 200%. In Q4 and in the coming one year, we're confident they can continue in triple-digit growth, which will be a very important complementary service to the Payo offline business. And that's also very key to move from the BINS model to OMO model. And so all in all, we believe this year we probably will add in the classrooms in around 20% to 30%. And all of these new classrooms we added will contribute to our revenue growth next summer or fall. So we are quite confident about our PO small class top line revenue growth in the coming year.

Thank you. Very helpful.

Thank you. Thank you. The next question comes from the line of Mark Lee from Citi. Please go.

Hi, management. Congratulations. May I ask, I think our long-term operating margin this quarter better than the guidance of a downfall of five points. Could you rank the factors that is better than your expectation? And how are these factors changing for next quarter's color? Thank you. Thank you. Thank you, Mark.

I think for Q3, in the first place, we did a better job in the paleo small class business than we expected. So you probably can see that we increased our gross margin by one point, which can also contribute a little bit better in the profit perspective. On the other side, we spent some of the online marketing In Q3, you probably can see that compared to last year, the same quarter is actually more than last year. But the outcome and results are also well on track. We feel that the promotion results are well on track, which can also give us some kind of buffer in the profitability perspective. So we're quite happy to see that Q3, in the margin perspective, is a little bit better than what we talked about before. Looking to Q4, I think there is two points we need to be very careful. Number one, as you probably can see there, we have already opened 76 PAYO Summer Class learning centers already, and we still will add a few more in the coming months. So this number almost equals to the first three quarters numbers. That's a lot of new learning centers happening across China. So which will, when we decided to add in more learning incentives in the short term, they would have some pressure in the margin studies. On the other side, I think the Payo, sorry, the Shorosu online school in Q4, we still have one month to go. We need to evaluate their market dynamics and especially what's happening most recently. to decide whether we need to give more promotion courses in the online perspective. So I can't give you a clear answer now, but we will try our best to balance all the investment we made in this area. And on the other side, I also would like to spend some time to talk about Q4 performance because the market is changing and the new situation is happening every day compared to Yesterday, our counterpart's earning call. I think today we have more information to share. Number one is I need to remind all of you guys, actually, we don't want to see it, but we already know it's in Wuhan areas. There is some virus or disease happening over there. And we have fully followed the government requirements and kind of policies to make necessary change in orphanage incentives. and this we have we're considering our guidance but uh french speaking because we have no idea what will happen in the next months about this kind of virus or this kind of disease so what we can do is try our best to make relative conservative projections of revenue and we we will cure gas positive as what kind of impact on to our business uh coming from this kind of challenge. And so when we're looking into Q4, what we want to say is all the numbers we share is based on the situations and the information we got today, which is starting to change. We will keep you guys posted if we have some material impact will happen. Thank you.

Thank you, Mr. Luo.

Thank you. Thank you. The next question comes from the line of DF Kim from JP Morgan. Please go ahead.

Hi. Good evening, everyone. Thanks for taking my questions. Just to follow up on that point, can we discuss a little more detail on our guidance for Q, i.e., you know, like versus this quarter, there was a meaningful – there will be a meaningful deceleration already baked in. how much of that is coming from higher comms from last year and how much of the wuhan class impact is baked in there and can we also talk a little bit about uh hey yo versus source.com and other segment growth baked in for a fourth quarter guidance and i have another follow-up after this thank you i think uh the guidance today we have considered

the impact of Wuhan in our guidance based on what we see today. I think in Q3 and Q4, I recommend you guys to combine them together because In Q3, we have one class actually they shift from Q4 to Q3. So if we look into our company's overall growth, the best way to do this is combine Q3 and Q4 together to look at the revenue growth. Sometimes the quarterly split will be kind of misleading. And secondly, specifically about the Wuhan kind of virus and disease, I think in the first place, As a Chinese citizen, we also worry kind of heartache to see this happen. I myself was in the college when the SARS was happening in the year 2003. So we have all the experience at that time. And we trust the government is much better and much stronger than before. So we fully believe with the government, all the measures in place, this will be controlled. We support 100% of all their policies or all the requirements coming from government to make necessary changes in our schools. And in the second place, I think right after this happened, we have quickly made some changes. We have tried to recommend more students moving from offline to online offerings. Thanks to our investment and our our teams in the past few years, we have successfully building our strong capability in online perspective. We have both pay-on-life team and online school team. So we have online capability almost every city. So in Wuhan area, we have already recommend students moving from offline to online. And considering our pay-on-life offering has very good reputation in Wuhan areas, and it's where It's widely accepted by the students and parents, so we're seeing the transition is quite good. And all the other cities, some of them, maybe they will also receive similar notification from the government to stop, to close their learning centers temporarily, which is subject to the government. One players in the tutoring market, we definitely 100% will follow the government policies to do so. And if that happens, we also will benchmark the case in Wuhan to suggest most of the students moving from offline to online. I think compared to revenue, compared to enrollments, we care more is actually the students and the parents' health and their safety. That's number one priority. And our team is also fully prepared for this So we have, I think all the nine, 70 cities we entered today, all of them will have basic capability to build online learning models. So the whole IT team is also working very hard to make necessary preparations for that. By the end of today, we don't see any more material bad news coming out, but we need to be fully prepared for that. If we have the same information channel as you guys, So if we have the more kind of the latest news or maybe notifications from government, we will let you guys know right away. And the online offerings, both Pale Life and the Shores Online School is also ready to help the students even in a larger scale perspective. Our Shores Online School in the summertime, we have support millions of students at the same time. Our PO Lab today, we have more than 240,000 students, and we can support more in the long run. So even for students, maybe they are not our students now, but in the future, if they have some needs, we also will try to help them through our online offerings. We are ready for this. And the current guidance can only reflect our understanding and our information we received from Wuhan by the end of today. which is very minimal to the overall revenue. We don't have more information to share because this changes every day. But we will keep you guys updated if we have some new information coming out. And especially for the Payo offline and the online revenue growth next quarter, what we can say is actually Payo continue to grow very healthily. And offline, we have seen some more kind of positive enrollments coming from our promotions we're running today. So we will keep a very close watch on the final numbers of our Q4 enrollments for both online and offline. And we will try to continue to manage healthy growth and try to be more sustainable. Thank you.

Thank you very much for the caller. If I may follow up one more, can we talk a little bit about winter promotion for online in the past couple months, i.e., how competitive it was, any initial conversion figures, or more importantly, were there any meaningful observations or lessons that we learned from promotions? That's all from me. Thank you very much again.

Yes. I think for the whole year, generally, the summer promotion is the most kind of competitive time. And going to the fall and winter, actually, the level of competition is actually less than summer. And we're running some promotions for online, especially in the Q3 and Q4. So we are seeing, actually, we have to make some progress in the conversion representative, in the retention representative. I think for online products, the promotion is part of the overall business. So we have a very clear ROI system to evaluate their return. If their return, considering the new customer acquisition cost, conversion rate retention, and the lifetime value, all of these metrics can feed in our threshold, we'll continue to do the investment. on the marketing strategy. But if one of them fails, the overall ROI doesn't work, we will stop the investment. So we will manage all of this very carefully.

Thank you very much.

Thank you.

Thank you. The next question comes from the line of Sheng Zhang from Morgan Stanley. Please go ahead.

Thank you for taking my question. Mr. Wu, you shared a lot of growth outlook for Payo. Can you please also share the management thinking about the Shares.com in coming year in terms of the Shares.com positioning in the company's overall structure and also compare with the key competitors, so how to differentiate and how to improve the overall process? And the last thing is, what's the current growth outlook for Shores.com for next year? Thank you.

Yes. I think the pale small class business, the OMO model, and the Shores.com, the online business, are equally important in our company, are equally important. And Shores... Charles Online School, I think this year, in Q3, we grow the revenue by around 86%, while we grow the enrollment by around 107%. And this is a very healthy growth, especially in enrollment value. And we're looking to the next year because the base is bigger and bigger, so we believe we can see, we can continue to see that we have very good and very fast and healthy growth from our space, but we don't expect to see the revenue growth triple-digit every quarter because the base are a little bit different. And we maintain, when we're looking into the online business actually, we care a lot about their quality and their students' and parents' satisfaction about this, which can represented by a retention rate. So in the past few quarters, we made a lot of efforts and we're also happy to see we improved our conversion rates and we improved our retention rates by a high single digit. So which is all of this showing the oral basis becoming more and more healthy. Looking to next year, we believe the online still will grow much faster than offline. And the enrollment growth may grow faster than the revenue growth. So that's still a very healthy growth. When we look into the online education side, we probably can see the top one guy can be around 20% to 30% market share. But in profit perspective, maybe even more. So we will maintain our leader position in the online education area and make necessary investments both in the technology perspective and in the system perspective, and the online marketing perspective. I think one thing, if one online product needs to be differentiated from the other one, from the other company, it's their teaching quality and their operating efficiencies. Education, no matter offline or online, in the end, they try to teach students and help students achieve very good outcomes. So we need to care more about the teaching quality, how we can leverage our platform know-how to make the students study more and more efficiently and better and better. So that's something we can quite differentiate from the other one. The new customer positions are some kind of the marketing channels promotions. That's now the most important features which are different from the other one. We care more about teaching quality and the students.

Thank you very much. May I follow up? You comment that your retention rate, conversion rate improved by a high single digit. This is comparing with when?

That compare with summer.

Okay. So we can say that it's a four semesters conversion rate or retention rate comparing with summer.

Both fall and winter.

Okay. Thank you very much.

Thank you. The next question comes from the line of Alex Xu from Credit Twist. Please go ahead.

Hi, Benjamin. Thank you for taking my question. So we have seen the announcement about the board member changes. What are the implications of these arrangements, and how should we think about new roles of Mr. Zhang in the company? Thank you.

Yes. I think when we talk about one company's long-term growth potential, on one side we need to talk about the business, the business models, the investment we make. But on the other side, we need to talk about actually the corporate governance structure. Only, I think six years ago, when I just joined the company, actually at that time we were a small company, around 9,000 employees, around 2 billion IMB revenue as a small company. And coming to today, we are much bigger, than before and we have more than 47 solid employees now. So one thing in our management, we have reached our agreement as we need to establish a worried balance and more heresy corporate governance structures to drive the company's long term growth. So coming from these assumptions, we made some necessary changes. Mr. Byron Fung, our co-founder and our president of the group today, will enter the board of the company and act as the chairman of the board. And Mr. Bai is a venture in our company who led our pale beans in the past 14 years and made a very good job. And in the most recent years, he also do a very good job into building the middle platform team for our company and also have represent our company while we are in front of government medias and a lot of occasionals. And so considering Mr. Bai's both doing well on inside and outside, so these kind of promotions will enable Mr. Bai to contribute more in the board level. He will let the board of directors to give more advice and lead the strategy directions of the company and support the management to do a much better job in the future. And on the other side is Tom, Mr. Zhang, our CEO and the former chairman, will continue to be our CEO in the company. He still has around 30% of the company's share and he still has more than 50% of voting power. This is no change. But the separation of the role of chairman and the CEO, which can give more kind of balance, balancing power in our company, which is also a huge progress in the corporate government perspective. Tom, as CEO of the company, will focus on executions, strategies, people and organizations, and corporate culture, and all of that. And he will work with the board And he's also the board director. He will work with the board when we make final decisions, when we make some big kind of breakthrough plans to make our decisions more healthy and more balanced than before. And we are a kind of learning community and learning team in our company. All of our senior members will only have one target is try to made the company better and better to deliver our mission. So this kind of new and necessary change will highly promote our company's current corporate governance, and which will set the very healthy fundamentals for our long-term growth. We, both from the management perspective and the board director's perspective, are highly aware of this change, and we'll keep all our guys posted if we have many, many have new, and all of, And yeah, same as before, all of these changes happening in the board will give clearly signals to all employees in the street where TAL would like to make more progress in corporate governance. And because what we want to drive is the long-term, healthy, and sustainable growth. Thank you.

Thank you, .

Thank you. The next question comes from the line of Alex Liu from China Renaissance. Please go ahead.

Thanks, Lelouch, management, for this opportunity. I have two questions. So the first question is on the offline payo growth accelerations. We noticed, I think, enrollment for offline payo has a notable acceleration versus previous quarter. Despite, I think, the capacity was relatively low kept at the low-teen level in the previous quarter. So just wondering what are the major drivers for this notable offline enrollment acceleration. And the second question is we noticed, I think, for top five cities, the revenue growth was more or less in line with the now top five cities this quarter. So just wondering what's the sort of growth strategy we're seeing in the lower tier cities in the coming fiscal year? Thank you.

Yes, I can answer from a second question first. In the past few years, we've developed or making more perfect of the dual-teacher models. So when we enter the new cities, starting from three years ago, actually we leveraged dual-teacher models to do so, which can help us to get rid of the bottleneck of the teachers and can give more interactive experiences leveraging the online technology we have today to the students. Actually, all of this has received very positive feedback from the students. And that's becoming one of the most important ways when we go into the local cities. I think this year we entered around 13 cities, and last year we entered around 15 cities. And next year we'll enter definitely more cities than this year. And this kind of acceleration is because we're leveraging the power of digital moderns and the power of technology. And offline growth accelerations in Q2 and Q4, I think on one side is we're adding more classrooms starting from Q2, but more importantly is actually we improve a little bit in our key operational KPIs, including the refund rate, retention rate, and the and all of that. We try to manage and improve our operational efficiencies in the pale small casks every day. So this has resulted in Warigu positive numbers in both Q3 and second half. And about their capacity growth, let me repeat the numbers. Last year, we added around 13% one-three. And this year, Q3, we added net 36%. learning centers, and overall we have added 17%, one-seventh of the total classrooms. And considering the 76 new learning centers we have already rented in Q4, so we foresee the whole year we will be adding capacity by around 20 to 30%, which will contribute to our next year growth from summer. So our pale small class revenue growth next year will be strongly supported by this kind of authority in more classrooms next year. Yeah, so that's our considerations. Thank you, Alex.

Thank you. Thank you.

Thank you. The next question comes from the line of Lucy Yu from Bank of America. Please go ahead.

Thank you, Olash. I got two questions. First one is on the guidance of next quarter. of 35% to 38% growth in RMB terms. So could you elaborate a little bit on, like, how much is the online shares.com growth embedded in this kind of assumption, and how much is the PayU small class growth? And my second question is on the margin side. I noticed that in this quarter, the GP margin only expanded by one percentage point versus, like, more than 2% in the first half and over 6% in 2019. So is it because our acceleration of expansion so that we see less margin expansion? So if that's the case, if we continue to accelerate in the following quarter, are we going to see margin contraction or maybe flattish margin in the fourth quarter? Thank you. Thank you.

Thank you, Lucy. I think the cue for guidance. Q4 guidance, because at the end of today, we received a lot of information, both offline and online, especially some information from Wuhan. So current guidance, what I can say is we have reflected the best estimation we have. Especially for online and offline, what I can say is in general, we don't disclose the online and offline separately because of competitive reasons. But what I can say is online is still growing much faster than offline. And the online, if we're based on the number of winter class, actually it runs quite weird. So, I think we, about, when we talk about Q4 guidance, we need to be more cautious about what will happen in the coming months. So, we will have more preparations to offer the pay-or-life classes and the online classes to our students, if necessary. So this guidance, that's the best numbers we have today. And the margin perspective, yes, you are right. Part of the reason is we're starting to acceleration, we're adding more classrooms, which will lead to a short-term process in the gross margin perspective. Looking into Q4, because we're adding a lot of new learning centers. But the final number was not confirmed yet, so the pressure in the growth product perspective will be a little bit bigger than before. But all of this will contribute to the revenue growth of the two to three quarters. So we believe that's the necessary cost we need to pay. Thank you, Lucy.

Thank you, Lelouch. One follow-up quickly. On the Wuhan virus, so nowadays we got pay you online for like, 30 out of, in total, 70 cities. So in those 30 cities, students can actually transform seamless to the pay-your-online because online and offline are offering the same thing. But how about for the other 40 cities that do not have pay-your-online? What do we do with that? Thank you.

I think you asked a very good question. Actually, I think for most of our cities we enter, we have the IT capability to provide online offerings. But of course, we need some time to preparations because we have the, because you know the new cities we enter, all of them are dual teacher models. For the dual teacher model cities, they need to build their own online capability over there. So at least we have their basic capabilities ready. So we need to make some necessary change and arrangements and investments in IT team perspective to make this offer. available all over China, but which is something we can do. It takes some time, it takes some investment, but that's something we can do. And we also have Shiraz Online School, which is already available for all the cities and all the geographies. So we will consider if something getting worse, which we don't see today, but if something getting worse, we will have both Pay Your Life and a picture of online offerings ready for the students. No matter there are current existing students or maybe there are new students coming from the other schools, we're always ready for that.

Thank you so much. Thank you, Lucy.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect. Thank you.