TAL Education Group (TAL) Q3 2021 Earnings Call Transcript

Table of Contents Contents:Prepared Remarks:Questions & Answers:Call participants: Image source: The Motley Fool. TAL Education Group (NYSE:TAL)Q3 2021 Earnings CallJan 21, 2021, 8:00 a.m. ET Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks: Operator Ladies and gentlemen, thank you for standing by and welcome to the third-quarter fiscal-year 2021 TAL […]

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TAL Education Group (NYSE:TAL)
Q3 2021 Earnings Call
Jan 21, 2021, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by and welcome to the third-quarter fiscal-year 2021 TAL Education Group earnings conference call. [Operator instructions] Today’s conference call is being recorded. I’d now like to turn the call over to your first speaker today, Ms. Echo Yan, IR director of TAL.

Thank you. Please go ahead.

Echo YanInvestor Relations Director

Thanks, operator. Thank you all for joining us today for TAL Education Group’s third fiscal-quarter 2021 earnings conference call. The earnings release was distributed earlier today and you may find a copy of the company’s IR website or through the newswires. During this call, you will hear from Mr.

Rong Luo, chief financial officer; Linda Huo, vice president of finance; and myself, IR of TAL. Following the prepared remarks, Mr. Luo and Ms. Huo will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in the public filings with the SEC.

For more information about these risks and uncertainties, please refer to our filings with the SEC. Also, our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. I would like now to turn the call over to Mr.

Rong Luo. Rong, please?

Rong LuoChief Financial Officer

Thank you, Echo. Good evening and good morning to you all. Thank you for joining us today on this earnings 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’re further executing on our offline and online strategy which remain on track. Our learning center network’s expansions resumes 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{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} year over year in U.S.

dollar terms, to USD 1.1 billion, and 28{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in a — in RMB terms. Total normal price long-term course student enrollments increased by 46.5{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} year over year, mostly driven by online, as well as, Xueersi Peiyou small-class enrollments. GAAP loss from operations was USD 127.4 million, compared to income from operations USD 69.4 million in the third quarter last fiscal year. Non-GAAP operating loss was USD 73.4 million, compared to non-GAAP operating income of USD 99.6 million in the same year-ago period.

I will now turn the call over to Linda Huo, our vice president of finance. She will give you an update on our operational progress in the third quarter. Next, Echo Yan, our IR director, will review the third-quarter financials. After that, I’ll update you on our business strategy and discuss our business outlook.

Linda, please.

Linda HuoVice President of Finance

Thank you. I will review the various [Inaudible] of our tutoring business for the third quarter. Let me start with small class and other business which consists Xueersi Peiyou small class, Firstleap, Mobby, and some other education programs and services. These accounted for 66{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of total net revenue, compared to 75{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in the third quarter last fiscal year.

The revenue growth rate was 20{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in U.S. dollar terms and 13{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in RMB terms. Xueersi Peiyou small class, which remains our stable core business, represented 57{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of total net revenue in the third quarter, compared to 63{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in the same year-ago period. The lower revenue contribution from Xueersi Peiyou was mostly due to the faster growth of xueersi.com online courses which accounted for 28{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of total revenue in the quarter, compared to 19{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in the same period last year.

Net revenue from Xueersi Peiyou small class was up by 21{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in U.S. dollar terms and 15{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in RMB terms, where our normal price long-term course enrollments increased by 18{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} year over year. Our key operational metrics of Peiyou such as retention rate, fulfillment rate, and the job upgrade, remained once more very stable. In the third quarter, normal price long-term Xueersi Peiyou small-class ASP was flattish in U.S.

dollar terms and decreased by 5{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in RMB terms year over year. Their decline was mainly due to the mix change of Peiyou online and offline business, and more lower-tier cities coverage. Our third-quarter performance in the various tiers of cities reflecting the ongoing normalization trend after the earlier COVID-19 disruption. Xueersi Peiyou small-class revenue from the top five cities which are Beijing, Shanghai, Guangzhou, Shenzhen, and Nanjing increased by 19{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} year over year in U.S.

dollar terms, and accounted for 56{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of Xueersi Peiyou small-class business. Revenue generated from cities other than the top five grew by 24{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in U.S. dollar terms. The other cities accounted for 44{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of Xueersi Peiyou small-class business.

Next, I’d like to discuss our Zhikang one-on-one business. This business sector achieved year-over-year revenue growth of 14{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in U.S. dollar terms and 8{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in RMB terms. Zhikang one-on-one accounted for approximately 5{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of total revenue in the third quarter of fiscal year 2021, compared to 6{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in the same year-ago period.

In the third quarter, normal price long-term Zhikang one-on-one courses ASP increased by 13{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in U.S. dollar terms and 7{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} 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 expansion as planned for this fiscal year. After our entry in the 21 new cities in the fourth 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 reaccelerated the widening of our learning center network in this 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 that basis to a total of 990 learning centers. We opened 59 new Peiyou small-class learning centers and closed six Peiyou small-class learning centers. We closed four Mobby and Firstleap centers, and we open six one-on-one centers and closed one one-on-one center. During the quarter, we add 637 Peiyou small-class classrooms.

In all, by the end of November 2020, we had 990 learning centers in 102 cities, of which, 101 cities in China and one Xueersi Peiyou learning center in the United States. Among the total 990 learning centers, 769 were Peiyou small class and international education centers, 87 were the merged Firstleap and the Mobby small class, and 134 were Zhikang one-on-one. As for Q4 of fiscal-year 2021 until now, we have conditionally rented 31 Peiyou small-class learning centers. As always, we expect to add a few more and close down some learning centers based on standard operations.

We will continue to closely monitor the developments with regard to COVID-19. These estimates reflect our current expectations which is subject to change. Turning now to our online business. Third-quarter revenue from xueersi.com grew by 102{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in U.S.

dollar terms year over year and 92{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in RMB terms, while normal price long-term courses enrollments grew by 92{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} year over year to over 1.7 million. Online contributed 28{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of total revenue and 50{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of total normal price long-term enrollment this quarter, compared to 19{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of total revenue, and 38{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of total normal price long-term course enrollments in the same year-ago period, respectively. The growth in online business was supported by increasing demand of online education, as well as, sales and marketing efforts and retentions of the previous quarters. In addition, in Q3, normal price long-term online course ASP was almost flattish in U.S.

dollar terms and decreased by 6{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in RMB terms year over year. Then, we’ll go to the mix change of our diversified online course offerings. With that, I will now turn the call over to Echo Yan for the update on third fiscal-quarter financial results. Echo, please.

Echo YanInvestor Relations Director

Thanks, Linda. Let me now go through some key financial points for the third quarter of fiscal-year 2021. Gross profit increased by 29.2{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} to USD 603.6 million from USD 467.2 million in the same year-ago period. Gross margin for the third quarter decreased to 53.9{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1}, as compared to 56.4{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} for the same period of last year.

Selling and marketing expenses increased by 120.3{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} to USD 420.7 million from USD 190.9 million in the third quarter of fiscal-year 2020. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 118{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} to USD 406.4 million, from USD 186.4 million in the same year-ago period. The year-over-year increase of selling and 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 the brand, as well as, higher compensation to sales and marketing staff to support more programs and the service offerings. Other income was USD 45.5 million for the third quarter of fiscal year 2021, compared to other expense of USD 3.7 million 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 social security expense exemption offered by the government during the COVID-19 outbreak. Impairment loss on long-term investments was USD 11.5 million for the third quarter of fiscal year 2021, compared to USD 46.4 million for the third quarter of fiscal year 2020. Impairment loss on long-term investments was mainly due to declines in the value of long-term investments in several investees. Income tax benefit was USD 13.9 million in the third quarter of fiscal year 2021, compared to USD 16.6 million of income tax expense in the same period of last year.

Net loss attributable to TAL was USD 43.6 million in the third quarter of fiscal year 2021, compared to net income attributable to TAL of USD 19.6 million in the third quarter of fiscal year 2020. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses was USD 10.4 million, compared to Non-GAAP net income attributable to TAL of USD 49.7 million in the third quarter of fiscal year 2020. From the balance sheet as of November 30th, 2020, the company had USD 4,233.2 million of cash and cash equivalents and USD 864.8 million of short-term investments, compared to USD 1,873.9 million of cash and cash equivalents and USD 345.4 million of short-term investments as of February 29th, 2020. The company’s deferred revenue balance was USD 1,957.1 million, compared to USD 1,241.2 million as of November 30th, 2019, representing a year-over-year increase of 57.7{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1}, which was mainly contributed by the tuition collected in advance of the fall semester, winter semester, and part of spring semester of Xueersi Peiyou small classes and online courses through www.xueersi.com.

Now, I will hand the call back to Mr. Luo to briefly update you on our strategy execution and to provide a business outlook of the next quarter. Rong, please.

Rong LuoChief Financial Officer

Thank you, Echo. Despite the unprecedented challenges this year, our business has managed and delivers a 3{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} revenue growth year to date, on par with our long-term growth expectations. Our investment strategies for the long-term remains unchanged regardless of the COVID-19 challenges and 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 continue to recover from the pandemic, we have resumed expansions of our learning center networks and geographic coverage in Q3. We expand both our learning center coverage in the big cities and into more lower — 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. So we have continuously developed and grow our more Peiyou 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 were conducting business in line with all relevant government policies and regulations, including those that those that regard national public health. Our offline and online operations remains ready to deal with any public — 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, and that has been pervasively effective, China’s online market opportunities is attractive, yet the competition landscape is intensive.

There are simply no shortcuts in building a sustainable business. And I would like to reiterate that we have — we will con — con — consistently pursue our long-term strategy regardless of what kind of short-term challenges we are facing. To the end, we will keep investing in technology, teachers, and marketing and make our efforts to build all-around online services with top-quality content and customer experiences. We firmly believe that as 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 from — for the first quarter of fiscal year 2021 is expected to be between USD 1.17 billion and USD 1.2 billion, representing an increase of 37{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} to 40{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} over year-over-year basis. That concludes my prepared remarks.

Operator, we’re now ready to take questions.

Questions & Answers:


[Operator instructions] Your first question comes from the line of Mark Li from Citi. Please ask your question.

Mark LiCiti — Analyst

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.

Rong LuoChief Financial Officer

Thank you, Mark. I think it’s very important to recap the guidance and Q3 results again, because sometimes, if we only look into one quarter, sometimes it’s misleading. For Q3, we have some numbers need to draw attention because I’m sure what we talk about in this [Inaudible], sometimes it’s too long and you guys don’t capture that. Q3, our Peiyou small-class business growth is 21{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1}, compared to previous quarters, it’s recovering.

And here, one thing we need to mention is actually the Peiyou live growth. The Peiyou live revenue growth in the U.S. dollar terms this quarter is 148{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} — 148{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1}. And second, I think our Xueersi online school growth in Q3 is 102{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} in U.S.

dollar terms, and it has been around 28{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of total revenue for the whole company. And more importantly, I think starting from maybe last quarter, the enrollment from Xueersi online school has already surpassed 50{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of the total enrollments in the company. And in the third point, we need to recap the number, it’s actually, if we consider Peiyou live together with Xueersi online schools online, which means the online total revenue, the growth in the third quarter is 114.2{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} — 114.2{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1}. And there — they have been around 41{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of the company revenue and 64{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of the total enrollments.

So with all of these numbers in Q3, we go into next year — next quarter Q4. I think current guidance, we have something to let you 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 populations. Today, we have seen around maybe tens of their confirmed cases around there.

And we 100{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} 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 has changed. If we can still remember last year, I think still is the earning call, maybe almost a similar time in last year, January. Actually, we are worried. You know that’s a shock to us.

At that time, we don’t know what is the right way to do. So we moved from offline to online kind of in chaos last year. But coming to this year with the one year experience dealing with this kind of new challenges and we also were happy to see the government has effective — controlled a lot of situations in most cases in China. So we are more well prepared than last year.

And our visibility to provide more offerings, maybe kind of more flexibility to the students and the parents is also improving. I think part of the numbers like Xueersi Peiyou live growth numbers and then Xueersi 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 are more than confident than last year to say we can deal with the — all of the challenges where [Inaudible]. Specifically in Beijing, we have followed the government requirements and moved all of our offline classes online.

During this transition, we are also happy to see both the parents and students acceptance rates are also much better than last year. And last year, we put students in first priority and we sacrificed a little bit in the price and some other stuff. This year, we have to see, since it’s getting better now. And online continue to be a very good way to — as complementary service 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 Q4 guidance, I think I probably can talk more about that. I think some key directions are almost similar as we will see in Q3. Number one, the Peiyou revenue is still recovering and we can see that the Peiyou revenue growth. Even we were taking our low base last year and the Peiyou’s revenue growth in Q4 still faster than Q3.

It’s continue to do recovery. And second, the Xueersi online school growth — the revenue growth in Q4 is also pretty much on track. But here, I have one thing to draw your attention. If you guys can still remember, last year, the Spring Festival for China is around January 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 of the late timing of the Spring Festival, which means we will let one weekend from spring terms into Q4, which means, we will let around 10{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of revenue — lending less in Q4. That’s kind of the 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{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} scheduling means, maybe if we can translate that back to the Xueersi online school revenue growth, it 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, it will be around 8{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} to 10{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1}. So 8 points to 10 points. So if we want to have a apple-to-apple comparisons, all of the numbers need to be putting back to the situations. And so I think Q, uh — and we also need to be fully prepared.

Maybe something was — what happened in Beijing will also happen within 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 — both — both the Xueersi Peiyou team and the Xueersi 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 probably in Beijing, you can see that a lot of taxi drivers, they have already get a 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 doing our growth strategy and make necessary changes where needed. But in general, we’re still quite confident about our — the growth in the Q4 in the coming one year.

Mark LiCiti — Analyst

Thank you, Rong.

Rong LuoChief Financial Officer

Sure. Thank you, Mark.


Your next question comes from the line of Alex Xie of Credit Suisse. Please ask your question.

Alex XieCredit Suisse — Analyst

Hi, management thank you for taking my questions. I would like to ask two questions about Peiyou. Firstly for the Peiyou offline business, could you please share with us the reason for the sort of relatively slower growth compared with offline peers? And when should we expect the acceleration after your more proactive expansion of learning centers? What will be your target for the capex expansion in the next fiscal year? And secondly, for Peiyou online, congratulations on the very strong results. It’s quite impressive for the 148{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} growth.

And then how should we think about our OMO strategy in the next year? And what about the growth targets for next year? Thank you.

Rong LuoChief Financial Officer

Thank you, Alex. In the first place, I think when we’re running our business in this market, the only one we need to compare is ourselves. Different company will choose different strategies while different company will have different, maybe belief. We, as a company who promote education through center technology, we fully believe the online technology will inherit us to reinforce our capability to serve the students and make our business more scalable.

So in our — if we go back to talk about the Peiyou revenue growth, I think, as why just now. Number one, the offline is recovering. So we will carefully expand our more — 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, saying as why I talked about it in last quarter. In the past few months, it’s very important timing for the company because we figured out, actually the online versus offline models. Some classes offline, some classes online is already be buying by the parents and the students. So we need to leverage all of these efforts.

So we’ll continue to roll out the Peiyou live to more geography, more service, and more grades. And we also try to evolve the Peiyou live models, maybe from big class, maybe to small class and even more than that. So we believe this kind of online versus 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 Peiyou live offerings, they have proved by the numbers. So I think the OMO, going forward, even in this quarter, we see some kind of the new cases in Beijing or maybe in Shanghai. But we still believe, if we put all the things in the longer-term, maybe in one year or two years, three years’ time, we still believe that OMO will be right for that strategy.

On one side, we need to make like smaller learning centers closer to the parents and closer to the living communities. And in the second place, we will continue to grow our more peer offerings to serve more students and then provide them more individual like — 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 them, efficiencies much better. So what happened this quarter will not change our long-term growth strategies.

And what we need to do today is actually make sure, during this transition time, we take care of the students and 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. So if we look into next year, I think, we don’t change our outlook in the long run. We still believe the whole company in the long run, in the three years’ time, can still maintain, you know, revenue growth around 30{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} to 50{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1}.

And the strategy Alex and the direction is also very clear. What we need to do is make sure the execution is right on track. Thank you, Alex.

Alex XieCredit Suisse — Analyst

Got it. Very helpful. Thank you.


Your next question comes from the line of Sheng Zhong of Morgan Stanley. Please ask your question.

Sheng ZhongMorgan Stanley — Analyst

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

Rong LuoChief Financial Officer

Thank you, Zhong Sheng. I think when most people talk about online education, the first thing, first questions coming 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 and the location, 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 rules.

We need to pool the quality services, how to teach the students better, how to make sure they’re all kind is better as a first priority. We are now running a business like — such as e-commerce, like e-commerce they can promote business very quickly by locations. Our pilot customers is only the first step of the long 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 maximum their outcome from their limited time, that will tell the differences. So to make sure we can do that, I think we will continue the investment, I’m thinking, in maybe four areas. Number one is the content development. Our Peiyou live is providing the localized contents.

But on the other side, the Xueersi 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 there. And if — for example, if in content perspective, previously, all the contents will be 2D products, but in the future will be 3D products. So all of this 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 priced long-term enrollments together with the other, maybe millions of the — 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 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 interactions, and our broadcasting quality and all of that will be — continue to be improved. I think all of the technology investments are very important. Number three is we need to continue to invest in teachers and teacher assistants.

I think online education, they have a lot of advantages, but still it’s one way of education. And right before we have the AI products, maybe in three or five years’ time later, today’s product still is a people-intensive products. For the people-intensive products, the strategy 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 we also encourage all of teacher and teacher assistants to serve the students better. I think all the necessary investments in the teacher and the teacher assistants are very necessary. One last point, the marketing is also very important. And frankly speaking, we are an offline company.

Sometimes people ask me — the [Inaudible] ask me, hey, compared to the other counterparties, what’s your strengths and what’s your weakness? In general, I think our company will be stronger in teaching. We teach the students. We use the right content to serve the students. We make sure they can have more kind of — more offers come from us.

But in marketing side, in the front end, actually compared to other companies who are waiting to bring a lot of money, actually, we are way below. So we are catching on a little bit, but still in our philosophy, we strongly believe the investment in content, technology, and teachers will matter in the long run. And the necessary investment in marketing, maybe is very important, but we need to make sure — we need to balance all the returns and the investments in this perspective. We cannot sacrifice the lifetime values only for marketing.

So we need to have a good balance, be more healthy, and control the investments, the level of investments to make sure that it will work. I think the CAC, in general, yes, is increasing, but we need to separate them in two parts. The online education company can always acquire customers through two kinds of channels. Number one, as 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 channel is in a balanced field, both healthy and both — and considering both healthy and market share. But on the other side is the branding channels and we prefer to invest more money on our branding channels.

We prefer to invest more money to our current students and parents, encourage them to refer the other parents into our platform. If you ask me, we have maybe $100, where you want to put the 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’re always managing the companies in a more balanced view and we need to pull — manage healthy growth in front of the purely numbers. And coming, maybe one or two quarters, sometimes it 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 and we can manage the different kind of surprises on the situation of challenges in front of us. By the end, no matter where we are, both offline educations and online educations, we always put the managing healthy growth and students and the parents in first priority instead of purely marketing.

Thank you, Zhong Sheng.

Zhong ShengMorgan Stanley — Analyst

Thank you.


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

Felix LiuUBS — Analyst

Good evening, management. Thank you very much for taking my questions. And so just a follow-up on the previous comment. You mentioned that you are investing in content development, especially on the Xueersi online school side, to do more tailor-made content.

It sounds like, you know, it is moving closer toward the product or content of Peiyou side of business. Is there any opportunity to build more synergy between the two business lines, maybe in terms of content and even in terms of tuck-in acquisitions? And my second question is that I recall you previously mentioned you still want to keep the level of investment and protect the No. 1 position of Xueersi online school. But I think you sounded more balanced on the comment on sales and marketing.

So I just want to double check whether, you know, we still intend to invest enough to keep our No. 1 position? Thank you.

Rong LuoChief Financial Officer

Thank you, Felix. I think both our Peiyou small-class business and Xueersi online school business still — both of them are running under the branding of Xueersi. So we have a lot of synergies between these 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 or maybe the content again and again only do a lot of replicate of course. So we leverage the content demand we have in Peiyou and made some — and we tried to share the investments throughout there.

So this kind of synergy in the content space, especially in the localized content perspective, that will help our Xueersi online school business in the future. Because sometimes doing localized content is very — that takes some time. You need to know, maybe more than 100 cities, what’s happening over there, and what is their special requirements? You know, content studies and ways, maybe the features in that city and all of that. So that takes some time to build a network.

So we have the Peiyou small-class network over there and we can leverage the beneficials. Second, I think the students — the student data is also a very important area where 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 Xueersi online school in the beginning and then they moved to the Xueersi Peiyou live, localized online class platform.

And some of them, they also moved to the Xueersi offline and we’re also seeing the other directions is happening in our platforms. I think no matter Xueersi offline, Peiyou live versus online school, actually they 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 the — maybe the convenience. So I think with all of this kind of the rich product offerings, we can serve the students and the parents much better. And we also have a lot of synergies in the technology perspective, especially when — I think you guys can still remember how Peiyou live come up. And I think the Peiyou small class in the past is purely offline business, but today around 22{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1} of the revenue coming from Peiyou live now.

And that’s because the Peiyou live is leveraging a lot of technologies from Xueersi online school and they have some — even more synergies in the future. And for the online, I think online is a very important market opportunity because online offer us an opportunity to leverage the high-quality services to — with affordable price to serve more students. You probably can see that if we combine online and offline together, the ASP is decreasing quarter over quarter because of more and more contribution coming from online. Online today is around 41{c25493dcd731343503a084f08c3848bd69f9f2f05db01633325a3fd40d9cc7a1}, so I don’t — so online, they offer us a new way to be more scalable in the newly emerging markets.

So what we need to do is we wish we can leverage all of our advantages to be leaders in that market. But to be leaders in that market doesn’t mean we will maybe burn all the monies to be No. 1. So we always need to deliver or manage a healthy growth.

So we still stick to our plan to become a very important or 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. So we — and we also believe online education is still education. If we can continue to deliver our high quality to student, the parents will buy-in.

So seeing as what we see in the retention rate in our platform, our retention of online is also maybe one of highest in this industry. So which is very important metrics to say whether your services really meet their needs. So looking forward, we continue to be leading in this space, but we will invest more in our product contents and the teachers. And we wish we can leverage our advantages, both in the Peiyou small class and other areas to make sure we can be more successful in the future.

Thank you, Felix.

Felix LiuUBS — Analyst

Thank you. Thank you very much.


Your next question comes from the line of DS Kim of J.P. Morgan. Please ask your question.

DS KimJ.P. Morgan — Analyst

Hey, Rong. Hey, everyone. Thanks for taking my question. Perhaps to continue on the similar vein, our big picture strategy for online.

Are we becoming more aggressive trying to diversify our traffic sources, given a rising channel cost from those Weifang and Douyin and all that? I noticed that we are pushing flexibility 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.

Rong LuoChief Financial Officer

Thank you. That’s a very good question. As number one, we are investing some money to [Inaudible], which is a tool for the parents can help their students if they have some difficulty in the homework. That is the natural — the natural parents needs in a family.

That is not 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 par. 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 parents easier. So when they have some difficulty, they can use a tool to make their life easier. So that becomes part of the mix 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 attention to do that and we don’t believe that is a worry kind of — that’s becoming a so-called traffic pool and convert students from Peiyou to the Xueersi online school. That’s not the case for us today. And secondly is, yes, you’re right.

I think the branding channel or maybe the students and parents who buy our branding or maybe who study our platform today, that’s a very important source for us to acquire more new customers. Because the branding channel — I think, for education companies, the branding, obviously has two level 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 the teachers and students where — which takes some time. So we want to make sure our branding channel is bigger than before. I think the first thing we need to do is now do marketing.

The first thing we need to do is invest in content, teachers, and technology. Make sure the students, they find our offers, they like our platforms, and they feel happy in our platforms and they made progress in our platforms. So when — only when they are being taught and have — making progress, that’s the only way the branding will come. So here, we will invest more energies and times 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.

DS KimJ.P. Morgan — Analyst

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

Rong LuoChief Financial Officer

Thank you.


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

Alex LiuChina Renaissance — Analyst

Thanks for taking the questions. I noticed TAL entered 11 new cities this quarter. Most of these cities are actually Tier 2 or Tier 3 cities. So would the business ramp-up strategy is different in these cities from our existing cities in terms of speed of the ramp-up, scale of the offline capacity, as well as, the mix of the Peiyou online and offline business eventually? Thank you.

Rong LuoChief Financial Officer

Thank you, Alex. I think when we go into these low-tier cities, I think, in general, we still maintain our practice in the past over maybe 17 years. We first enter the new cities maybe only in single grade, single subject, and we teach the students where and we try to gain the reputations in the local cities. And right after that, we will try to promote our Peiyou live offerings on top of that.

So because the — maybe lesson learned in the past few quarters, we merged both online and offline in the [Inaudible] in 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 lower-tier cities, it may be faster for us to promote maybe the Peiyou live offerings. But today, all the 31 new cities we enter, we don’t need to hurry to promote the live offerings.

We still stick to our own approach, step-by-step build the strong reputations there. The — I think the longer time you invest in the city, 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 lower-tier cities.

And of course, thanks to Peiyou live offerings, thanks for making it easier. So we will — also based on what students need to make necessary changes when we offer them different types of products over there. Thank you, Alex.

Alex LiuChina Renaissance — Analyst

Well, thank you. Sorry, just a very quick follow-up because I think a few years ago, we were previously targeting about, I think, seven or 70 to 80 cities, where we think makes 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 the offline presence? Thank you.

Rong LuoChief Financial Officer

Yes. I think that’s a very good question. I think several years ago, when I first became the CFO of this company, at that time I told The 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 that since that’s changed, especially the technology has evolved very quickly. So with the empowerment of the technologies, we gradually developed the dual-teacher models and now we developed the new comprehensive OMO models. We leverage both on the offline advantages.

So which means, the company — the business models will be more flexible and scalable. So we also made more confident to penetrate more cities. Today, we have around 102 cities, 101 in China and the other one, the only one in the U.S., and maybe looking forward, we still have possibilities. Maybe we can enter, maybe the other 100 new cities in the longer-term, but that will not happen in one or two years.

That will happen in the longer-term.

Alex LiuChina Renaissance — Analyst

OK. Thank you.

Rong LuoChief Financial Officer

Thank you, Alex.


[Operator signoff]

Duration: 61 minutes

Call participants:

Echo YanInvestor Relations Director

Rong LuoChief Financial Officer

Linda HuoVice President of Finance

Mark LiCiti — Analyst

Alex XieCredit Suisse — Analyst

Sheng ZhongMorgan Stanley — Analyst

Zhong ShengMorgan Stanley — Analyst

Felix LiuUBS — Analyst

DS KimJ.P. Morgan — Analyst

Alex LiuChina Renaissance — Analyst

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