TAL Education Group American Depositary Shares

ladies and gentlemen thank you for standing by and welcome to the third quarter fiscal year 2021 tal education group earnings conference call at this time all participants are in the listen on the mode after the management's prepared remarks there will be a question and answer session today's conference call is being recorded i would like to turn the call over to your first speaker today miss echo yan i are director of tal thank you please go ahead

Thanks, operator. Thank you all for joining us today for TAL Education Group's third physical quarter 2021 earnings conference call. The earnings release was distributed earlier today, and you may find a copy on the company's IR website or through the news web. During this call, you will hear from Mr. Rong Luo, Chief Financial Officer, Limba He, Vice President of Finance, and myself, IR of TAL,

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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 security litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in public 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 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 earning call. In the third quarter, China's public health situation and economy continue to recover. We are pleased to see that our tutoring business as well as our capacity expansion progress in all cities have delivered on track performance. During this fiscal quarter, we further executed on our offline and online strategy, which remain on track. Our learning center network expansions resume at pace after a brief slowdown in the second quarter. A quick overview of the key metrics is as follows. Net revenue growth in the third quarter was 35% year-over-year in U.S. dollar terms to U.S. dollar $1.1 billion and 28% in RMB terms. Total normal price long-term classes student enrollment increased by 46.5% year-over-year, mostly driven by online as well as throughout the pay-off small class enrollments. Gap loss from operations was US$127.4 million compared to income from operations of US$69.4 million in the third quarter last fiscal year. Non-gap operating loss was US$73.4 million compared to non-gap operating income of US$99.6 million 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 third quarter. Next, Echo Yang, our IR Director, will review the third quarter financials. After that, I will update you on our business strategy and discuss our business outlook. Linda, please.

Thank you. I will review the various revenue streams of our tutoring business for the third quarter. Let me start with small class and other business. which consists of Siar Sipayo small class, First Leap, Mobi, and some other education programs and services. These accounted for 66% of total net revenue compared to 75% in the third quarter last fiscal year. The revenue growth rate was 20% in US dollar terms and 13% in RMB terms. Siuas Payoh small class, which remains our stable core business, represented 57% of total net revenue in the third quarter, compared to 63% in the same year-ago period. The lower revenue contribution from Siuas Payoh was mostly due to the faster growth of Siuas.com online courses, which accounted for 28% of total revenue in the quarter compared to 19% in the same period last year. Net revenue from Suarez Payo small class was up by 21% in U.S. dollar terms and 15% in RMB terms, while our normal price long-term cost enrollments increased by 18% year-over-year. Our key operational metrics of Payo such as retention rate, fulfillment rate, and drop-off rate remained once more very stable. In the third quarter, normal price long-term payo small class ASP was flattish in US dollar terms and decreased by 5% in RMB terms year over year. The decline was mainly due to the mixed chains of payo online and offline business. and more lower-tier cities coverage. Our third-counter performance in the various tiers of cities reflected the ongoing normalization trend after the earlier COVID-19 disruption. Xi'an's pale small-class revenue from the top five cities, which are Beijing, Shanghai, Guangzhou, Shenzhen, and Nanjing, increased by 19% year over year. in U.S. dollar terms and accounted for 56% of U.S. payor small class business. Revenue generated from cities other than the top five grew by 24% in U.S. dollar terms. The other cities accounted for 44% of U.S. payor small class business.

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Next, I'd like to discuss our Zhekang one-on-one business. This business sector achieved year-over-year revenue growth of 14% in US dollar terms and 8% in RMB terms. Zhekang one-on-one accounted for approximately 5% of total revenue in the third quarter of fiscal year 2021, compared to 6% in the same year-ago period. In the third quarter, normal price long-term JICAN one-on-one courses increased by 13% in US dollar terms and 7% in RMB terms year-over-year. The increase was mainly due to regular increase of tuition fees in several cities in this fiscal year. Now let me update you on our capacity expansion strategy. Following a temporary slowdown in our expansion drive during the second quarter due to COVID-19, we resumed the pace of geographic coverage extension as planned for this fiscal year. After our entry into 21 new cities in the first half of the fiscal year, we added 11 new cities in the third quarter and surpassed the 100 cities mark. to reach a total of 102 cities. These 11 new cities are Jieyang, Yulin, Huzhou, Ganzhou, Jiujiang, Chenzhou, Dongying, Dezhou, Heze, Binzhou, and Maoming. Similarly, we re-accelerated the widening of our learning center network in the third quarter. based on a healthy and sustainable approach and by following government guidelines and market demand. In Q3, we added 54 new learning centers on a net basis to a total of 990 learning centers. We opened 59 new PAYU small class learning centers and closed six PAYU small class learning centers. We closed four mobi and forced leave centers and we opened six one-on-one centers and closed one one-on-one center. During the quarter, we added 637 pay your small class classrooms. In all, by the end of November 2020, we had 990 learning centers in 102 cities. of which 101 cities in China and one US PEU learning center in the United States. Among the total 990 learning centers, 769 were PEU small class and international education centers, 87 were the merged full-sleep and Mobi small class, and 134 were Jikang one-on-one. As for Q4 of fiscal year 2021 until now, we have conditionally rented 31 PAYU small class learning centers. As always, we expect to add a few more and close down some learning centers based on standard operations. We will continue to closely monitor the developments with regards to COVID-19. These estimates reflect our current expectations which is subject to change. Turning now to our online business, third quarter revenue from Sears.com grew by 102% in US dollar terms year-over-year and 92% in RMB terms, while normal price long-term causes enrollment grew by 92% year-over-year to over 1.7 million. Online contributed 28% of total revenue and 50% of total normal price long-term enrollment this quarter, compared to 19% of total revenue and 38% of total normal price long-term cost enrollment in the same year-ago period, respectively. The growth in online business was supported by increasing demand of online education as well as sales and marketing efforts and retentions of the previous quarters. In addition, in Q3, normal price long-term online course ASP was almost flattish in US dollar terms and decreased by 6% in RMB terms year over year, mainly due to the mixed change of our diversified online course offerings. With that, I will now turn the call over to Eiko Yen for the update on third fiscal quarter financial results. Eiko, please.

Thanks, Linda. Let me now go through some key financial points for the third quarter of fiscal year 2021. Growth profit increased by 29.2% to $600. $3.6 million from $467.2 million in the same year ago period. Growth margin for the third quarter decreased to 53.9% as compared to 56.4% for the same period of last year. Selling and marketing expenses increased by 120.3% to $420.7 million from $190.9 million in the third quarter of fiscal year 2020. Non-GAAP, selling and marketing expenses, which included share-based compensation expenses, increased by 118% to $406.4 million from $186.4 million in the same-year goal period. The year-on-year increase of selling marketing expenses in the third quarter 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 45.5 million US dollars for the third quarter of fiscal year 2021 compared to other expense of 3.7 million US dollars in the third quarter of fiscal year 2020. Other income in the third quarter of fiscal year 2021 was primarily due to the value added tax and the Social Security expense exemptions offered by the government during the COVID-19 outbreak. Impairment loss on long-term investments was $11.5 million for the third quarter of fiscal year 2021 compared to $46.4 million for the third quarter of fiscal year 2020. Impairment loss on long-term investments was mainly due to declined in the value of long-term investments in several industries.

Income tax benefit was 13.9 million US dollars.

in the third quarter of fiscal year 2021 compared to 16.6 million US dollars of income tax expenses in the same period of last year. Net loss attributable to TAL was 43.6 million in the third quarter of fiscal year 2021 compared to net income attributable to TAL of 19.6 million US dollars in the third quarter of fiscal year 2020. New gap net income attributable to TAL which excluded the share based compensation expenses was 10.4 million US dollars compared to non-gap net income attributable to TAL of 49.7 million US dollars in the third quarter of fiscal year 2020. From the balance sheet, As of November 30, 2020, the company had $4,233.2 million of cash and cash equivalents and $864.8 million of short-term investments compared to $1,873.9 million of cash and cash equivalents. and $345.4 million of short-term investment as of February 29, 2020. The company's deferred revenue balance was $1,957.1 million compared to $1,251.2 million as of November 30, 2019. representing a year-over-year increase of 57.7%, which was mainly contributed by the tuition classes, you know, the ones of the fall semester, winter semester, and the part of spring semester of Sears to pay you small classes and online courses through www.sears.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. Long please.

Thank you, Echo. Despite the unprecedented challenges this year, our business has managed and delivered 30% revenue growth year-to-date, on top of our long-term growth expectations. Our investment strategies for the long-term remained unchanged. regardless of the COVID-19 challenges and the growth in the competitive pressures. We aim to remain the top brand in quality education services through our long-term sustainable growth strategy, innovative technology-based education, a comprehensive and cutting-edge product portfolios, and with a strong and proven operational foundation. As China continues to recover from the pandemic, we have resumed the expansion of our learning center networks and geographic coverage in Q3. We expand both our learning center coverage in the big cities and enter into more low-tier cities. We have seen that our offline presence and localized content together have a clear advantage of more precisely meeting our customers' demand in different locations and support us in building both offline and online brand and reputation in all cities that we have covered. Thus, we have continuously developed and rolled out more pay-your-education products to further build our comprehensive OMO model. With this, we can better serve our customers by offering them more flexibility and efficiency. As always, we will conduct our business in line with all relevant government policies and regulations, including those that regarding national public health. Our offline and online operations remain ready to deal with any public health contingencies when needed. In this time of rapid science and technology development and COVID-19 pandemic impact, online education with its easy access and affordable price now has been pervasively affected. China's online market opportunity is attractive, yet the competition landscape is intensive. There are simply no shortcuts in building a sustainable big business, and I would like to reiterate that we will consistently pursue our long-term strategy, regardless of what kind of challenges we are facing. To the end, we will keep investing in technology, teachers, and marketing, and make every effort to build all around online services with top quality content and customer experiences. We firmly believe that as an education player, education is education. Our long-term accomplishment is defined only by the quality of our products, services, and technology, instead of purely marketing. Let me turn finally to our business outlook. Based on our current estimates, Total net revenue for the first quarter of fiscal year 2021 is expected to be between U.S. dollar 1.17 billion and U.S. dollar 1.2 billion, representing an increase of 37% to 40% year-over-year basis. That concludes my prepared remarks. Operator, we are now ready to take questions.

Ladies and gentlemen, we will now begin the question-and-answer session. 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 your request, please press the pound or hash key. Once again, to ask a question, you may press star and the number 1 on your telephone keypad. Your first question comes from the line of Mark Lee from Citi. Please ask your question.

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Hi, management. Thanks for the presentation. May I ask for your next quarter's guidance? How much have you baked in the latest impact from the unfortunate offline tutoring lockdown in Beijing area? And how are we handling the Beijing latest policies? Thank you. Thank you, Mark.

I think it's very important to recap the guidance and Q3 results again, because sometimes if we're only looking to one quarter, sometimes it's misleading. For Q3, we have some numbers need to draw your attention because I'm sure what we talk about in the screen sometimes is too long and you guys don't catch that. Q3, our Payo small class business grows 21%. Compared to previous quarters, it's recovering. And here, one thing we need to mention is actually the Payo live growth. The Payo live revenue growth in the US dollar terms this quarter is 148%. 148%. And second, I think our Schwarz Online School growth in Q3 is 102% in US dollar terms. And it has been around 28% of total revenue for the whole company. And more importantly, I think starting from maybe last quarter, the enrollment from Schwarz Online School has already surpassed 50% of the total enrollments in the company. And the third point, we need to recap the number, is actually if we consider Pay Your Life together with Charles Online School is online, which means the online total revenue, the growth in third quarter is 114.2%. And they have been around 41% of the company revenue and 64% of the total enrollment. So with all of these numbers in Q3, we're going to next quarter, Q4. I think current guidance, we have something to let our guys know. Number one, we all know it's very unfortunate to see, we have seen some cases in Beijing and maybe in some other big cities. And Beijing is a big city with more than 20 million population. Today we have seen around maybe tens of confirmed cases right over there. And we 100% respect the government and follow the government requirements to take some reactions to make sure we always put the students' health in first priority. But the things have changed. If we can still remember last year, I think still is the earning call, maybe almost the same time in last year, January, actually we are worried, you know, that's shock to us. At that time, we don't know what's the right way to do. So we move from offline to online kind of in chaos last year. But coming to this year with the one year experience dealing with this kind of new challenges, and we're also very happy to see the government has effective control a lot of situations in most cases in China. So we are more well prepared than last year. and our feasibility to provide more offerings or maybe kind of more flexibilities to the students and the parents is also improving. I think part of the numbers like the Shure's Pay Your Life growth numbers and the Shure's online growth numbers in Q3 or maybe in the past rolling 12 months can demonstrate actually this company has managed how to use the online technology to deal with all of these contingencies. So we're more than confident than last year to say we can deal with all of these challenges while we're here. Specifically in Beijing, we have followed the government requirements and moved all of our offline classes online. During this transition, we're also happy to see both the parents and the students' acceptance rates are also much better than last year. Last year, we pooled the students in first priority and we sacrificed a little bit in the price and some other stuff. This year, we're happy to see that things are getting better now. And online continues to be a very good way to complement research to the students. And we believe we don't see any major or maybe material impact coming from this kind of move from offline to online this month in Beijing. And my cue for guidance, I think I probably can talk more about it. I think some key directions are almost similar as we will see in Q3. Number one, the payroll revenue is still recovering, and we can see that the payroll revenue growth, even with taking out the low base last year, and the payroll revenue growth in Q4 is still faster than Q3. It continues to do the recovery. And secondly, I think the online school growth, the revenue growth in Q4 is also pretty much on track. But here I have one thing to draw attention to, if you guys can still remember, last year the Spring Festival for China is around January 24th, while this year the time of Spring Festival is February 11th, which means last year, if we consider Q4 numbers, Actually, they have around one weekend of the spring term will fall in the last year, Q4. But this year, because the late timing of the spring festival, which means we will let one... In partnership with Truist, we love celebrating caring people in our life, like my dad.

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One weekend from spring terms into Q4. which means we will have around 10% of revenue lending less in Q4. That's kind of timing differences due to the time of spring festival, which happens especially when the spring festival this year is much later than last year. So with around 10% scheduling means maybe if we can translate that back to the online school revenue growth will be around 20 points to 30 points in the growth rate perspective. If we translate them into the company, overall level revenue of growth will be around eight to 10%, so eight to 10 points. So if we want to have apple to apple comparisons, all of the numbers need to be put back to the situations. And so I think we also need to be fully prepared Maybe what happened in Beijing will also happen maybe in some other cities. So we will continue to leverage, in the past one year, we have a lot of experiences and know-how, how to use the online technologies to help the students and the parents for them to get quality services, not only offline but also online. So we'll continue to do so. And the whole team and the whole board both the Shiraz payout team and the Shiraz online school team, they are also fully prepared for that. We have one year experiences in the past 12 months, so we will get ready for that. And again, we fully believe with our government's very strong executions, we will control this kind of situations very quickly. And one example program in Beijing, you can see that a lot of taxi drivers, they have already get the vaccine. So we believe this year definitely will be better than last year, and next year maybe will be better than this year. And we still will continue to in our growth strategy and make necessary changes where needed. But in general, we're still quite confident about the growth in Q4 in the coming one year. Thank you, Mark.

Sure. Thank you, Roland.

Your next question comes from the line of Alex Hsu. Alex, you can ask your question.

Hi, thank you for taking my questions. I would like to ask two questions about Payo. Firstly, for the Payo offline business, would you please share with us the reason for the for the relatively slower growth compared with the offline tiers? And when should we expect the acceleration after your more proactive extension of many centers? What will be your target for the capacity expansion in the next fiscal year? um and secondly for pay online congratulations on the very strong uh result it's quite impressive um for the 148 percent growth and uh then how should we think about uh our own strategy uh in the in the next year and uh um what about the growth uh targets say for in the night next year thank you thank you alex um

In the first place, I think when we're running our business in this market, the only one we need to compare is ourselves. A different company will choose different strategies, while a different company will have different, maybe, beliefs. We, as a company who promote education through science and technology, we fully believe that online technology can help us to reinforce our capability to serve the students and make our business more scalable. So if we go back to talk about the pale revenue growth, I think same as what I said just now. Number one, the offline is recovering. So we will carefully to expand our new learning centers. Most of them still will be added in the current existing big cities. And some of them, we will go to add them in the new cities. You probably can see that in the last three quarters, we have entered around 31 new cities. But at the same time, I think most of the new classrooms we added actually is still in the current cities. So we need to balance all of them. And on the other side, I think same as what I talked about in the last quarter, in the past few months, it's very important timing for the company because we figure out actually the online-merge-offline models. Some classes offline, some classes online is already by the parents and the students. So we need to leverage all of these efforts. So we'll continue to roll out the pale life to more geography, more subjects, and more grades. And we also try to evolve the pale life models, maybe from big class, maybe to small class, and even more than that. So we believe this kind of online, offline strategy will help us to cover the cities much deeper than what we can do before. it will be much, maybe we can penetrate more markets and then if I only use the traditional offline models. So that is the philosophy we believe in. And all the numbers in the top tier cities where we have stronger appeal like offerings there have proved by the numbers. So I think the OMO going forward Even this quarter, we see some kind of new cases in Beijing or maybe Shanghai, but we still believe if we pull all the things in the longer term, maybe in one year or two years, three years' time, we still believe that OMO will be a very effective strategy. On one side, we need to make the smaller learning centers closer to the parents and cooler to the living communities. In the second place, we will continue to draw on more peer offerings to serve more students and provide them more individual kind of services like that. So all of this combined together with our local contents, local teachers, local students, and local services, we can leverage their time and improve their efficiencies much better. What happened this quarter will not change our long-term growth strategies. And what we need to do today is actually make sure during this transition time, we take care of the students and the parents very carefully. We need to collect more data from the parents and the students in their behaviors and figure out the best way to them. If we look into next year, I think we don't change our outlook in the long run. We still believe the whole company in the long run, in the three years' time, can still maintain in the revenue growth around 30% to 50%. And the strategy, as I said, and direction is also very clear. What we need to do is make sure the execution is right on track. Thank you, Alex.

That is very helpful. Thank you.

Your next question comes from the line of Shang Zhang of Morgan Stanley. Please ask your question.

Hi, thank you for taking my question. My question is about the online education, the customer acquisition cost. Now we see from the market that the cap is going up very quickly. So wondering what is Shares.com's economic model now considering different customer acquisition channels, and with that, what the company's sales marketing plan for next year. Thank you very much.

Thank you, Zhongshan. I think when most people talk about online education, the first thing, first questions come to their mind is customer acquisition costs. sometimes this kind of thinking will oversimplify the complexity of online education models. I think in our perspective, number one, online education is still education. They have a lot of advantages in online. For example, they can get rid of the constraints of the time on relocation, but they are still education. So I personally, I agree with some of the opinions from the articles recently published in the news channels. Education, actually, we need to follow their own rules. We need to pull the quality services, how to teach the students better, how to make sure their outcome is better as a first priority. We are now running a business such as e-commerce. Like e-commerce, they can promote their business very quickly, but education Acquire the customers is only the first step of the loan process. Right after that, we have a lot of things we need to do. In the end, whether you can teach the students where, whether you can maximize their outcome from their limited time, that will tell the differences. So to make sure we can do that, I think we will continue the investment, I think, in maybe four areas. Number one is the content developments. Our PO Life is providing the localized contents, but on the other side, the Shutterstock Online School is also trying to provide more tailor-made contents and services to the students. We try to understand the students more, and we're mapping the right level of difficulty, the right progress, and the right version of the products to the students, which require more investment right over there. And if, for example, if in cartoon perspective, previously all the contents will be the 2D products, but in the future will be 3D products. So all of these necessary investment in contents will be our first priority. Secondly, the technology needs to be more and more important. I think because today we are serving more and more students in our platform, we are serving millions of the normal price long-term enrollments. together with the other maybe millions of their maybe promotion enrollment students here, we offer them affordable price. But which means the more students coming in, but we need to make sure no matter how much they pay, they deserve a very quality technology solutions. So we need to continue to invest over here to make sure we have a much stable platform, we can do more maybe interactions and broadcasting quality and all of that will continue to be improved. I think all of the technology investments are very important. Number three is we need to continue investing in teachers and teacher assistants. I think online education, they have a lot of advantages, but still is one way of education. And right before we have the AI products, maybe three or five years later, today's product still is a people-intensive product. For the people-intensive products, the service is very important, so we need to make sure we do right training to the teachers and teacher assistants. We give them good compensation to make sure, and we also encourage all of teacher and teacher assistants to serve the students well. I think all the necessary investments in the teacher assistants are very necessary. One last point, the marketing is also very important. In France speaking, we are an offline company. Sometimes people ask me, the investors ask me, hey, compared to the other counterparts, what is your strengths and what is your weakness? In general, I think our company will be stronger in the teaching. We teach the students, we use the right content to serve the students, we make sure they can have more kind of All kinds come from us. But in marketing side, in the front end, actually compared to other companies who are waiting to... Success looks different for everyone.

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We're a lot of money. Actually, we are way below. So we are catching on a little bit. But still, in our philosophy, we strongly believe that investment in content, technology, and teachers will matter in the long run. And the necessary investment in marketing may be very important, but we need to make sure we need to balance all the returns and investments in this perspective. We cannot sacrifice the lifetime values only for marketing, so we need to have good balance, be more healthy, and control the investments, the level of investments to make sure the ROI work. I think the CAC in general, yes, is increasing, but we need to separate them in two parts. The own education company can always acquire customers through two kinds of channels. Number one is the non-branding channels, for example, WeChat. maybe Douyin and some other platforms. In these platforms, the CAC is increasing definitely. They will have some maybe fluctuations from time to time in different quarters, but in general, that's increasing. So what we need to do is actually make sure our investments in that channels is in a balanced view, considering both heresy and market share. But on the other side is the branding channels, and we prefer to invest more money on our branding channels. We prefer to invest more money to our current students and parents, encouraging to refer the other parents into our platform. If you ask me, we have maybe $100, where you want to put the monies, we are more than welcome to put the monies in our teachers and the parents and the students, more than the purely marketing. So I think in the long run, we'll always manage the companies in a more balanced view. And we need to pull the managing heresy groups in front of the purely numbers. And the coming maybe one or two quarters sometimes also have a lot of changes because, for example, the cases in Beijing, if they are doing back to their offline, maybe they're doing good online. So we have no idea. So we need to, we as a company, we need to be have more flexible and we can manage a different kind of surprises on the situation or challenges in front of us. By the end, no matter where we are, both offline applications or online applications will always prove the magic healthy growth and the students and the parents in first priority instead of purely marketing. Thank you, Zhongshan.

Thank you.

Your next question comes from the line of Felix Liu of UBS. Please ask your question.

Hello. Good evening, management. Thank you very much for taking my question. So just to follow up on the previous comment, you mentioned that you are investing in content development, especially on the online school side to do more tailor-made content. It sounds like it is moving closer towards the product or content of our PayU side of business. Is there any opportunity to build more synergy between the two business lines, maybe in terms of content and even in terms of customer acquisition? And my second question is that I recall you previously mentioned you still want to keep the level of investment and protect the number one position of your online school. But I think you found it more balanced on the common non-sales and marketing. So I just want to double check whether we still intend to invest enough to keep our number one position. Thank you.

Thank you, Felix. I think both our Payo Smooth Class business and the Shares Online School business, both of them are running under the branding of Shares. So we have a lot of synergies. between these two business teams. Number one is the contents. I think, of course, we are not perfect. We have a long way to go to be perfect. But we have starting, I think from a starting point, we have tried to leverage the contents, not only for one business, but also can be beneficial to other businesses. So we don't want to build maybe the content again and again, or we do a lot of replicate works. So we leverage the content that we have in Payo, and we try to share the investments right over there. So this kind of synergy in the content perspective, especially in the localized content perspective, will help our first online school business in the future. Because sometimes doing localized content is very, that takes some time. You'll need to know maybe more than 100 cities, what's happening right over there, and what is their special requirements in the context value, and what is maybe the features in that city, and all of that. So that takes some time to build a network. So we have the Pale Small Class Network right over there, and we can leverage the beneficials.

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Second, I think the student data is also a very important areas we have synergies. Because today we have seen more and more clearly actually the students can move from online and offline. So we have seen, maybe for example in Shanghai, some students, they started in the Shores Online School in the beginning, and then they moved to the Shores Pay Your Life, the localized online class platform. And some of them, they also moved to the Shores Offline. And we're also seeing the other directions is happening in our platforms. I think no matter Shores Offline, Pay Your Life, or Shores Online School, actually there are different products to the students. The students can choose. based on their own conditions. Some students may prefer the quality, some students may prefer maybe the convenience. So I think with all of these kind of the rich product offerings, we can serve the students and the parents much better. And we also have a lot of synergies in the technology perspective, especially when, I think you guys can still remember how PeerLive come up. And I think the pay-off class in the past is purely offline business. But today, around 22% of their revenue coming from pay-off life now. And that's because the pay-off life is leveraging a lot of technologies from the online school, and they have even more synergies in the future. And for the online, I think online is a very important market opportunity because online offer as an opportunity to leverage the high quality services to waste affordable price to serve more students. You probably can see that if we combine online and offline together, the ASB is decreasing quarter over quarter because more and more contribution coming from online. Online today is around 41%. They offer us a new way to be more scalable in a newly emerging markets. So what we need to do is we wish we can leverage all of our advantages to be leaders in their market. But to be leaders in their market doesn't mean we will maybe burn all the monies to be number one. So we always need to deliver or manage healthy growth. So we still stick to our plan to become a very important, maybe leading platforms. online platform to serve the students, but we care more about the quality of the services, and we care more whether the parents and the students are satisfied with our products. And we also believe online education is still education. If we can continue to deliver our high quality services to them, the parents will buy in. So I think as what we see in the retention rate in our platform, our retention of online is also maybe one of highest in this industry. So which is very important metrics to say whether your services really meet their needs. So looking forward, we continue to be leading in this space, but we will invest more in our product contents and the teachers, and we wish we can our advantages both in the pale small class and in some other areas to make sure we can be more successful in the future. Thank you, Felix.

Thank you. Thank you very much.

Your next question comes from the line of VS Kim of JPMorgan. Please ask your question.

Hi, Rong. Hi, everyone. Thanks for taking my question. To continue on the similar vein, our big picture strategy for online, are we becoming more aggressive trying to diversify our traffic sources given rising channel costs from those ways in and go in and all that? I noticed that we are pushing TeePiPi app more aggressively recently. and wondering how we think about growing proprietary traffic here, or as you just mentioned, you'd rather focus more on synergy between offline channel and online rather than developing our own homegrown apps.

Thank you. That's a very good question. I think number one, we are investing some money to do the T-PiPi, which is a tool for the parents can help their students if they have some difficulty in the homework. That is the nature of the parents' needs in a family. That is now a so-called traffic pool for the K-12 online business. So that's a separate definition. I know some of the companies may say this kind of the tools can be a traffic pool for the K-12 students in the online school park. I think based on what we see in this industry, maybe that's not the case. The original intention for us, we want to leverage this kind of tool to make the work of our parents easier. So when they have some difficulty, they can use a tool to make their life easier. So that becomes part of the needs in the family education side. So we have millions of students in my platform. We need to make them, we need to help them reduce their burdens in this area. So that's our key intention to do that. And we don't believe that it's a worry kind of, that becoming a so-called traffic pool and convert students from there to the Shorts Online School, that's not the case for us today. And secondly, yes, you are right. I think the branding channel, or maybe the students and parents who buy our branding, or maybe who study our platform today, is a very important source for us to acquire more new customers. Because the branding channel, I think for education companies, the branding always has two levels of the meanings. Number one is branding awareness. How many people know you? I think awareness sometimes can be delivered through maybe advertisements. But the second level of the branding actually is how good your brand is, the reputation of your brand. I think for education, the only way to gain reputation is make sure you deliver the good quality services and you teach students where, and which takes some time. So when we want to make sure our branding channel is bigger than before, I think the first thing we need to do is not do marketing. The first thing we need to do is invest in content, teachers, and technology. Make sure the students, they find our offers, they like our platforms, and they feel happy in our platforms, and they make progress in our platforms. So only when they are being taught and have made progress, that's the only way the branding will come. So here we minimize more energies and times right over here. When you serve your students much better, and then the branding will become much better. And more and more people will come to your platform directly because of your brand. So that is the circle we strongly believe.

Thank you so much. That's very insightful, and thank you again.

Thank you.

Your next question comes from the line of Alex Liu of China Renaissance. Please ask your question.

Yeah, thanks for taking the questions. I noticed Tao entered 11 new cities this quarter, and most of these cities are actually Tier 2 or Tier 3 cities. So how would, you know, the business ramp up strategy to different in these cities from our existing cities in terms of speed of the ramp up, you know, scale of the offline capacity as far as the mix of the payout online and offline business eventually.

Thank you. Thank you, Alex. I think when we go into these low-tier cities, I think in general we'll still maintain our practice in the past over maybe 17 years. We'll first enter the new cities, maybe only in single grade, single subject. And we teach the students where, and we try to gain their reputations in the local cities. And right after that, we'll try to promote our peer life offerings on top of that. So because maybe lesson learned in the past few quarters, We merge both online and offline. In the B-Cities like Beijing and Shanghai, we have a lot of kind of experiences. So we are more confident that maybe when we can make our reputations of branding established in the local cities, it may be faster for us to promote maybe the pale life offerings. But today, all the 31 new cities we enter, we don't need to hurry to promote live offerings. We still stick to our old approach, step by step, build strong reputations there. I think the longer time you invest in the city and the better reputations you have built, the maybe bigger potential you will get coming from that place. So we don't hurry to do anything. We still remain calm and patient in the local cities. And of course, sense to the pure life offerings, something that makes it easier. So we will also, based on the students' needs, to make necessary changes when we offer them different types of products right over there. Thank you, Alex.

Thank you. Sorry, just a very quick follow-up, because I think a few years ago we were previously targeting about, I think, 70 to 80 cities where we think it made sense probably for offline operations. But right now, we're already at 100 cities. So just wondering how many cities will the company eventually enter with offline presence?

Yes.

Thank you.

I think that's a very good question. I think several years ago, when I first became CEO of companies at that time, total street, I think we can only enter around 30 to 35 cities at that time. That's considering the traditional offline operating models. If the more we enter, they will sacrifice in the profits and margins. And then, I think the things have changed, especially the technology has evolved very quickly. So with the empowerment of the technologies, we gradually developed the do-it-yourself models, and now we develop the new comprehensive OMO models. We leverage both on our offline advantages. So which means the company, the business models will be more flexible and scalable, so we also will be more confident to penetrate more cities. Today we have around 100 or two cities, 101 in China and the other one, the only one in the US. And maybe looking forward, we still have possibilities, maybe we can enter maybe the other 100 new cities in the longer term. But that will not happen in one or two years. They will happen in another 10. Okay, thank you. Thank you, Alex.

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

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