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Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Fiscal Year 2021 TAL Education Group Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the call over to your first speaker today, Ms. Echo Yan, IR Director of TAL. Thank you. Please go ahead.
Thanks, operator. Thank you all for joining us today for TAL Education Group’s second fiscal quarter 2021 earnings conference call. The earnings release was distributed earlier today and you may find a copy on the company’s IR website or through the newswires. During this call, you will hear from Chief Financial Officer, Mr. Rong Luo; 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?
Thank you, Echo. Good evening and good morning to you all. Thank you for joining us today on this earnings call. We continue to see a positive recovery in China’s public health situation and economy in the second fiscal quarter. In the education sector, schools were able to reopen and start the school year on September 1 following the gradual resumption of the offline teaching and tutoring during the summer months. At TAL, during the second fiscal quarter, we continued to execute on our online and offline strategy, which remains on track. More and more of our offline learning centers could reopen. And currently, all of our learning centers in China are back in business at a certain level.
The second fiscal quarter financial results reflect the extended impact of the earlier COVID-19 outbreak. Net revenue growth in the second quarter was 20.8% year-over-year in the U.S. dollar terms to $1,103.3 million and 21.6% in RMB terms. Total normal priced long-term course student enrollments increased by 65% year-over-year, mostly driven by online enrollments as well as Xueersi Peiyou small class. GAAP loss from operations was $49.1 million compared to income from operations of $60.8 million in the second quarter last fiscal year. Non-GAAP loss from operations was $11.8 million compared to non-GAAP income from operations of $89.7 million in the same period of the prior year.
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 second fiscal quarter. Next, Echo Yan, our IR Director, will review the second quarter financials. After that, I will update you on our business outlook and on our business strategy and discuss our business outlook. Linda, please.
Thanks, Rong. I will review the various revenue streams of our tutoring business for the second quarter. Let me start with small class and other business, which consists of Xueersi Peiyou small class, Firstleap, Mobby and some other education programs and services. These accounted for 67% of total net revenue compared to 75% in the second quarter last fiscal year. The revenue growth rate was 8% in both U.S. dollar and RMB terms.
Xueersi Peiyou small class, which remains our stable core business, represented 57% of total net revenue in the second quarter compared to 65% 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 26% of total revenue in the quarter compared to 17% in the same period last year. Net revenue from Xueersi Peiyou small class was up by 7% in both U.S. dollar and RMB terms, where our normal priced long-term cost enrollments increased by 31% year-over-year. In the second quarter, normal priced long-term Xueersi Peiyou small class ASP decreased by 19% in U.S. dollar terms and 18% in RMB terms year-over-year. Their decline was mainly due to the mix change of Peiyou online and offline business propulsion as well as regular promotions.
Our second quarter performance in the various tiers of cities reflects the relatively larger impact from COVID-19 on the top-tier cities versus the lower-tier cities in our geographic network. Xueersi Peiyou small class revenue from the top 5 cities, which are Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, increased by 3% year-over-year in U.S. dollar terms and accounted for 52% of Xueersi Peiyou small class business. Revenue generated from cities other than the top 5 grew by 11% in U.S. dollar terms. The other cities accounted for 48% of the Xueersi Peiyou small class business.
Next, I would like to discuss our Zhikang one-on-one business. This business sector achieved year-over-year revenue growth of 6% in both U.S. dollar terms and RMB terms. Zhikang one-on-one accounted for approximately 7% of total revenue in the second quarter of fiscal year 2021 compared to 8% in the same year-ago period. In this quarter, normal priced long-term Zhikang one-on-one course ASP increased by 4% in both RMB and U.S. dollar terms year-over-year.
Now, let me update you on our current capacity expansion strategy. Following our entry into 20 new cities in the first quarter, we added 1 more city, Hengyang, in the second quarter. Year-to-date, we are well on track with the planned offline capacity expansion speed. In line with our long-standing approach, we will continue to pursue healthy and sustainable learning center network expansion by following government guidelines and market demand.
In Q2, on a net basis, the number of learning centers was unchanged from Q1 and 936 in total. We opened 22 new Peiyou small class learning centers and closed 19 Peiyou small class learning centers. We also closed a net of 3 Zhikang one-on-one learning centers. During the quarter, we added 25 Peiyou small class classrooms. In all, by the end of August 2020, we had 936 learning centers in 91 cities, of which 90 cities in China and 1 Xueersi Peiyou learning center in the United States. Among the total 936 learning centers, 716 were Peiyou small class and international education centers, 91 were the merged Firstleap and Mobby small class, and 129 were Zhikang one-on-one. As for Q3 of fiscal year 2021 until now, we have conditionally rented 14 Peiyou small class learning centers. As always, we expect to add a few more and close down some learning centers based on standard operations. We will continue to closely monitor the development with regards to COVID-19. These estimates reflect our current expectations, which is subject to change.
Turning now to our online business, second quarter revenue from xueersi.com grew by 87% in U.S. dollar terms year-over-year and 88% in RMB terms, where normal priced long-term course enrollment grew by 116% year-over-year to over $2.9 million. Online contributed 26% of total revenue and 52% of total normal priced long-term enrollments this quarter compared to 17% of total revenue and 40% of total normal priced long-term course enrollments in the same year-ago period respectively. The growth in online business was supported by the structural growth trends in online education as well as sales and marketing efforts and retentions of the previous quarters. In addition, in Q2, normal priced long-term online course ASP decreased by 1% in both U.S. dollar and RMB terms year-over-year.
With that, I will now turn the call over to Echo Yan for the update on second fiscal quarter financial results. Echo, please.
Thanks, Linda. Let me now go through some key financial points for the second quarter of fiscal year 2021. Gross profit increased by 14.3% to $581.2 million from $508.7 million in the same year-ago period. Gross margin for the second quarter decreased to 52.7% as compared to 55.7% for the same period of last year.
Selling and marketing expenses increased by 44.3% to $379.8 million from $263.3 million in the second quarter of fiscal year 2020. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses increased by 43% to $370.3 million from $258.9 million in the same year-ago period. The year-on-year increase of selling and marketing expenses in the second 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 the higher compensation to sales and marketing staff to support more programs and service offerings.
Other income was $45.3 million for the second quarter of fiscal year 2021, was primarily due to the value-added tax and the social security expenses exemption offered by the government during the COVID-19 outbreak. Other expenses was $55.6 million in the second quarter of fiscal year 2020, mainly related to loss from the fair value change of an equity security with readily determinable fair value.
Impairment loss on long-term investments was $4.6 million for the second quarter of fiscal year 2021 compared to $54.2 million for the second 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 expenses, was $2.4 million in the second quarter of fiscal year 2021 compared to $8.1 million of income tax benefit in the second quarter of fiscal year 2020. Net income attributable to TAL was $15 million in the second quarter of fiscal year 2021 compared to net loss attributable to TAL of $23.5 million in the second quarter of fiscal year 2020. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses, was $52.3 million compared to non-GAAP net income attributable to TAL of $5.3 million in the second quarter of fiscal year 2020.
From the balance sheet, as of August 31, 2020, the company had $2,206.1 million of cash and cash equivalents and $580.8 million of short-term investments compared to $1,873.9 million of cash and cash equivalents and $345.4 million of short-term investments as of February 29, 2020. As of August 31, 2020, the company’s deferred revenue balance was $1,172.5 million compared to $497.6 million as of August 31, 2019, representing a year-over-year increase of 135.6%, which was mainly contributed by the tuition collected in advance of part of the fall semester of Xueersi Peiyou small class and online courses through www.com – www.xueersi.com.
Now I will hand the call back to Mr. Luo to briefly update you on our strategy execution and provide the business outlook of the next quarter. Rong, please.
Thank you, Echo. Our business has worked through the unprecedented pressures of COVID-19 operating in the first half of this fiscal year and delivered a 30% revenue growth in RMB terms. We demonstrated our ability to provide quality education services to our customers even in this unexpected circumstance. This underscores the resilience of our long-term vision and strategy, our comprehensive and competitive product portfolio as well as our capacities – capabilities in technology and operations.
Today, along with the encouraging progress in China’s resumption of the activities and liveliness in own works of life our offline business is already in the process of gradual recovery. We will continue to pursue our offline development strategy to further expand our capacity at pace. We will cover more low-tier cities and further intensify our coverage in existing cities based on demand. And meanwhile, we will keep following all relevant government policies and regulations regarding the national public health and remain well prepared to deal with any public health contingencies in the coming period, as always.
As for online, under the current competition landscape we made no fundamental change to TAL’s current execution and long-term strategies. We will keep working on enlarging our online market share by continued investment in technology, teacher supply chain and marketing and consistent hard work of building all-around online services with superior customer experiences. We firmly believe that as the education player, our loan to success is defined by the quality of our product, service and technology.
Let me turn finally to our business outlook. Based on the current estimates, total net revenue for the third quarter of fiscal year 2021 is expected to be between $1,061.1 million and $1,094.3 million, representing an increase of 28% to 32% on a year-over-year basis. These estimates reflect the company’s current expectations, which is subject to change.
That concludes my prepared remarks. Operator, we are now ready to take questions, please.
Thank you. [Operator Instructions] The first question comes from the line of Alex Xie of Credit Suisse. Please go ahead.
Hi, management. Thank you for taking my questions. So I’d like to ask about your thoughts on the growth expectations and strategies. In offline, we have seen that in last quarter, you didn’t really spend much. So what’s your plan for CapEx expansion in the future? And in online, since the competitive landscape just, I think, worsened due to more financing of private players, what will be your strategy going forward? Thank you.
Thank you, Alex. I think it’s a very good question. Right before we talk about some numbers, some certain numbers in this quarter or next quarter, we would like to take this opportunity to walk through our business logic and strategies as a whole to give you some information why – what we are doing and why we are doing. I think if you guys can remember, I think 6 years ago, even earlier, we are a traditional offline tutoring company. We have high-quality teachers. We bring a lot of learning centers. We do our classrooms, we feed students in and we do a lot of stuff like that. So under that operational model, I think in the past years for example between 2014 to 2018, we have entered the cities from 16 to 42. So that is kind of the traditional models we are running today, which is also quite common to see in offline tutoring markets. But coming to the year 2018, I think around 2 years ago, if you guys can still remember, we, as the first one in this industry, we invented or developed the online – the new online education models. So we introduced the online live platform into our products. So we have built a dual-teacher online model in this sector. I think that’s the first time for this industry we can separate the learning and the practice, which has separated the role of master teachers and assistant teachers. The master teachers can teach a lot of students at the same time, while the assistant teachers taking care of – helping them in the online environment. So this kind of dual-teacher online class models has grown very fast. I think 3 years ago, we only have tens of thousands enrollments. But coming to today, last quarter, we have 2.9 million enrollments. I think the revenue contribution of this model 2 years ago is only around 8%. And 4 years ago, it’s below 3%. Today, it’s now 26%. If I consider that Peiyou online is part of the online, i.e., adding these 2 numbers together, last quarter, we have already reached almost 40% of revenue, 4-0, coming from the online model now; and around 70%, 7-0, coming from the online model now.
So this model has a lot of advantages, and we have seen they provide us a lot of capabilities to consolidate this market. If we stay in the traditional offline models, we have a lot of competitors or maybe quanta pass in different cities. We’re running the company for 17 years, but today, we’re still below 5% of the market share. But coming to the online model, we have the chance to see some situations made similar to the server market. So maybe in the future, the top players will be consolidated into maybe top 3 or top 4. So this kind of consolidation opportunity, that is never seen before in this industry. So definitely, in this sector, we definitely, we will keep our investment in technology, in teacher supply chain and as well as marketing to make sure we can maintain our leading positions over here. But on the other side, this model is not a perfect model to resolve all the problems. Education, in the end, is now a simple game of marketing. That is again – that is – the key to playing education is we need to focus to providing the high-quality service to students. We need to pull students in the first priority. We need to not only taking care of the efficiency of the marketing, but also paying careful effectiveness of the students. So when we run into this model, we can see, currently, the online model today, the one master teacher, they’re teaching a lot of students. But it’s a little bit difficult for the students to ask questions because one versus so many asking questions is making it kind of difficult. So – which means maybe this model is more kind of useful to train the students in an individual level or maybe relatively easier contents. It’s a little difficult to talk about the very difficult questions under these models.
And one thing we also see that is – if today, I think normally, as also some quanta pass, you guys probably have seen they have raised the funds from the market. I think more or less, this model today, we have been struggling in the new customer acquisition costs, which is very kind of challenging to all of us. We, as a player, who invented this model, our strong belief is online compared to the traditional offline still is a very revolutionary product, and we believe that can help us to gain more market share, much higher than what we can expect in the past. So we need to be very objective on these models. They have some pros and cons. We need to leverage our branding, our contents we have developed and some other advantages we have to try to reduce the operating cost for the online model. So if we benchmark the case in several markets, I think maybe in the end, only the top guys can have most of the revenues, most of the profits. So we definitely will continue our investment over here to make sure we are the leading players even in the coming few years. And I think because of the pandemic in the past 8 months, I think, by chance, they introduced a new opportunity to us, which, frankly speaking, is a little bit of our imagination before. It’s actually we quickly figured out right after so many students, they have to use the online model for a few months. And when the offline learning centers reopened, actually, we see new opportunities maybe we can use the role of online versus offline. Sometimes this OmO sometimes maybe a little bit misleading because different companies may use different definition on this. So I would like to use one example of Shanghai of – a short piece in Shanghai to show you guys. In Shanghai today, I think we have, in the summer term, we have around 120,000 offline enrollments, which means we have 120,000 enrollments in the students coming to our physical classrooms and seen in the classrooms. And at the same time, in summer, we have around 200,000 Peiyou online enrollments. If I’m taking out the promotion enrollments, the number can be still be around 150,000 enrollments. This number is higher than the Peiyou offline enrollments. And besides the Peiyou offline enrollments and the Peiyou online enrollments, we still have around 300,000 short online school, short lines – yes, short online school enrollments in Shanghai. So which means when we go back to see our number in summer in Shanghai City, of course, summer actually is the peak for the year. If we are doing to a number in the fall or winter, the number will be lower than the summer. But if I use the summer numbers, Q2 number as an example, actually, if we figure out in Shanghai, we have maybe around 600,000 enrollments in one city. If you guys have followed my company for a long time, you probably see that. I think 4 or 5 years ago, when you guys asked me, hey, what is your expectations on one single city? How many enrollments you have over there, for example, in Beijing? At that time, my answer is – I was very reluctant to say maybe I can reach the number of 150,000 enrollments for one city. But today, in Shanghai, if we consider all of these enrollments together, we have around 600 enrollments there. And this phenomenon also happened in Beijing, in Guangzhou and some other – and some – and a few other cities because we did not roll out these offers to all the cities, all the grids and all the strategies. We do practicum in the Tier 1, but we still need a – we have a lot of white space in other cities now. This is showing us, actually, that’s the kind of the new opportunity. And that shows us the direction of how we can evolve the offline learning centers in the future. So we pay some very deep dive on the Shanghai numbers. We probably see that while the parents choose the Peiyou online office on top of Peiyou offline, number one, has more frequency. For example, they come to our offline learning centers once away. But at the same time, for example, math, by the same time, they will take the other online sections, maybe the shortened class at the same time for the whole week. Second, maybe it’s more subjects. For example, they come to my learning centers to study math. But maybe they are studying my physics and chemistry in the Peiyou online platform, which is the case already happening in Beijing and Shanghai. And number three, maybe more students. We are also seeing, maybe in Shanghai’s numbers in summer specifically, around 10% to 20% of their Peiyou online students. Actually, they are new students. They are new students, but they are quite close to our learning centers in Shanghai. So which means they know our – they come to our learning centers maybe for the text or maybe for the events or maybe for the activities, but most of the learning activities finished online. So this kind of model is showing us, actually, there’s a good opportunity for us to develop more and invest more on the localized online class models we call the [indiscernible]. What does localize mean? Number one, local content, I think in China, if different provinces, they have different versions, so when we talk about education’s content, they have maybe kind of 3 kind of dimensions: number one is the different versions; number two is progress, different progress; number three is the different difficulty levels. So in China, with more than 30 versions in gaokao and we would probably – we have to be over 200 versions of [indiscernible] and we have maybe thousands of thousands of different versions if we consider the text in the primary school, so – but if we only have one version to all, sometimes we cannot resolve all the problems. So the local content, local product – local progress and the local difficulty levels will be more helpful for the students and for the parents to know what exactly is happening in the city and do better to them. Number two, local teachers, so when guys are weighing our Peiyou online classes, we use the local teachers to teach the students. For example, the teacher in Beijing, they teach the students in Beijing online. So they can still – so they know more about this city. They know more about what’s happening in this district so they can provide more tailor-made and more kind of the use of information to them and show one very small stories. Actually, right before the national holiday, our Beijing school will hold a small event is we ask the Peiyou online students to come to our office to visit our Peiyou online teachers. The children are very excited to see our office. So when weighing why the parents or maybe the students, even they finish their study online but they come to our offline centers for some events, for some seminars, activities, I think this kind of online and offline blending kind of experiences is much better than the other one. Number three is local classmates. I think when you study with your classmates you know some of the people in the class, that will make the interactions between students much more efficient than the other one. Number four is local services. So we have a lot of schools. We have a lot of counties and districts. So only we can provide some specific information on maybe the materials, maybe activities specific for them, and they can see the local needs, which is more help than the one version to all products. So we believe all of this can prepare us to evolve our Peiyou kind of the small class models to the next stage. So as a summary, I think for the Xueersi online school online part, we will keep our investment in technology, teacher supply chain, marketing and some other necessary investments to make sure we can continue being the leading position in this market because this market has shown very clearly the opportunity of consolidating the markets into several players. We definitely need to be one of them. But of course, we will balance the consideration of the investment and ROI to make sure we don’t do something stupid. Secondly, we will accelerate our learning center expansions of Xueersi Peiyou small class. We will also try to enter more cities in the coming two quarters. So I think one number I can share with you guys is, just now you ask why we don’t adding any new learning centers in second quarter because second quarter, that is the pandemic period, so we can’t do anything. But coming to Q3, today, we have already rented 14 new learning centers, and we also have over 50 in the pipeline. I am not sure the reporting periods of these new learning centers because we still need some time to do renovations, ask for license. But we, definitely, we have more on our pipeline to do that. And at the same time, we are also trying to roll out the Peiyou online offerings to more cities, more grids and more strategies, which definitely is our new – is our strategy to go. So if we consider all our information together, I think looking to quarter-over-quarter performance, I think Q2 is probably, top line perspective, Q2 is the lowest growth quarter. Q3, based on information, what we see today, Q3 will be better than Q2, and Q4 will be better than Q3. Of course, all of these estimates are based on one assumption, is we don’t foresee any significant public health crisis coming back again. So we are confident we can continue our growth strategy, as what I talked about just now. Thank you, Alex.
Thank you for the questions. Next question will come from the line of DS Kim of JPMorgan. Please go ahead.
Hello, sir. Good evening and thank you so much for the inside you just shared. It’s really, really helpful. I actually have one question – actually, two questions. First, as a housekeeping may I check what the segment performances and the currency assumptions you have baked in the November quarter guidance? And my real question, more important question is, as you said in the prepared remarks, like customer acquisition seems to be surging a lot from this summer. And some say it’s as high as RMB 4,000 to acquire one paying user, one paying student. And I was wondering if you could share with us what you see on the unit economics and LTV of a student today at this level versus pre-COVID period, i.e., how long, in your opinion, does it take to break even on the cash tuition level after spending current level of customer acquisition? And how many years or semesters that you think you can – we can obtain student on average against this backdrop of higher competition? Thank you so much.
Thank you, D. S. That’s a long question, right? Let’s come back a little bit. In the first place, we have to say, because the online provider opportunities can consolidate to the top guys and the top players have a chance to have much bigger market share compared to the offline models, so definitely, everyone is competing in this space. And I think when we talk about the new customer acquisition costs, we need to split into two parts. Number one the new customers we acquired from the open market, for example, the WeChat Moments or maybe cultural platforms. So for this kind of the new students, definitely, the cost is higher and higher because everyone is competing over there. And on – but on the other side is we still have the other part, we call branding channels, which means when people know we are like shares, these are like members in the top tier, Tier 1, Tier 2 cities, so they will come to us or they will download our apps automatically. So we have some traffic coming from branding channels, and we also try to do more to encourage the current students to refer our products to their friends or other students. So we are also being a model over here. So in general, yes, we are seeing that new customer acquisition costs from the open market channels, is increasing. So we are doing more and more, and our percentage of the skills coming from operating channels or maybe customer referrals is also increasing. And on the other side, sometimes, it’s not a simple work to, say, new customer acquisitions define the size – you will say it comes for the own acquisition models. Because right after still that kind of platform, they still have a lot of steps they can – we can do it. Number one, how to increase the retention – sorry, how to increase the conversion, how we can convert more students to – from maybe RMB 49 class to our normal priced class. And how – and second, what – how we can do more to improve our retention rates. All I can say is, actually, we are making a little bit progress in the retention perspective. And number three is we also see vast opportunity for us to cross-sell or up-sell our other products to them. Number four is how we can make sure they can stay longer and longer with us. The number is also increasing in our view. And I think in the online today, I think we definitely will keep our investment level over here. And we are the market-leading position now. We will maintain our leading positions in the future. That’s our goal to do. And all of this – but on the other side, for the Peiyou online, will be a different story from the Xueersi online school. We don’t pay that much marketing dollars on the Peiyou online. So they will highly connect it to the Peiyou offline business, and we don’t see any huge cost of new customer acquisitions from there. So our margin from the Peiyou online is much better than the other one. And in the last quarters, we grew our shares. Online school enrollments spread by 116%. But at the same time, we grew our Peiyou online enrollment more than 130%. So we foresee this trend will continue in the coming few quarters. So we need to balance different drivers in our hands, but we are still very confident with our investment in the online space and with our new strategy evolving, how to use small Peiyou online class than Peiyou offline offerings to the students, we are confident to deliver a healthy growth in the future.
Thank you for the questions. We will take the next questions from Sheng Zhong from Morgan Stanley. Please go ahead.
Thank you for taking my questions Just wanted to – on the – a question about the competition on the online space. You also mentioned that some private companies are getting more financing. And so now already, we are at the time post-COVID. So at this time point, what do you see the competition going forward? And you said – you emphasized that you are targeting to maintain the leadership position in this market. So what kind of investment level do you expect?
Yes. I think sometimes, we will be maybe underestimate the complexity of online education. Some people may simplify the competition to new customer acquisition costs. But actually, the online education is a complicated process. Not only you acquire the customers, your question is about how you can make sure you can maintain all of that. so looking to these coming quarters, Q3 and Q4, I think we are fully prepared for any kind of their investments if the other players they want to do. So we are fully prepared for that. We definitely will keep our investment right over here. But if you only talk about marketing or sales side, I think that’s only one part of the business. I think besides the marketing, besides the money we spend on marketing channels, with these notes, actually, we also do a lot how to increase our local – sorry, our internal technology, our internal teacher supply chain and some other operational efficiencies. So the competitions are not only happening in the front end. It is happening from all life cycles. Education is now a kind of a battle field which can be concluded very fast. That takes a long time. So for us, we will not be disturbed by anyone get – how much money they get. We need to be ourselves. We will stick to our own strategy. We will stick to our own pace. We will continue to hire more teachers. There is more we can train, and we will continue our growth strategy to cover more and more students. I think in the first quarter, we grew 143% in enrollments of online school. And in the second quarter, we grew 116%. And we foresee we can continue doing the high growth in the coming Q3 and Q4. And at the same time, Peiyou online is also a triple-digit growth in Q1 and Q2. And we also foresee we can grow very healthily in both the Xueersi online school and the Peiyou online. So I think the kind of – the competition cannot be concluded soon. We need to fully prepare for that. But on the other side is – again, online is one part of the games. It’s not all parts of the games. So besides the online, we need to focus how we can use our advantages in the Peiyou small class, how we can combine our offline learning centers and our Peiyou live offerings to make sure we can build more advantages, especially in the top 50 cities. That’s the kind of most revenue and most of the profit coming from. So that’s our key strategy now. I don’t have more information to share with you guys. But what we can say is we are fully prepared for that.
Thank you for the questions. Our next question comes from the line of Felix Liu of UBS. Please go ahead.
Good evening gentleman thank you for taking my question. My question is on the sort of the relationship or synergy between Peiyou and xueersi.com. I see that Peiyou online is making very good progress with the strong growth, very small amount of the sales and marketing costs. Is there any possibilities that we leverage the success of Peiyou online to xueersi.com? Any thoughts on sort of adopting the best practice there? And also, is there any room to build more synergies between your offline network and the xueersi.com operation? Thank you.
Yes, that’s a very good question. I think by the end of today, because the online market is still very big, everyone is fast growth. So we have a lot of potential. We can grow – grab more market shares. So we prefer is – the Xueersi online school will kind of execute a breadth strategy, try to cover more geography, try to cover more cities and compete in the whole country level. While the Peiyou online will highly connect you to Peiyou learning centers. And we prefer that Peiyou online can be best strategy, going deeper, going more localized and provide more individual services to the students in the local cities. So for the Xueersi online school, we are willing to pay the marketing dollars to promote them to get more market shares, blah, blah, blah. And we are willing to bear some kind of operational loss from there. But for – but at the same time, for Peiyou online, we will develop our new strategies – sorry, our new solutions on top, raising the local community to make sure we can capture the deeper opportunities. And we can also – we’ll not only maintain high growth over there, but we will also maintain the group profitability levels rather there. So based on what I can see today, they will share in the branding perspective and technology perspective, comp perspective. And they may also share some kind of operational leverage between the learning centers and online schools because they are using the same name. For example, the branding channel, the students come to the school is because blending is for us. But we still prefer the Xueersi online, and the Peiyou online can be a little bit independent to penetrate different markets. The market is a wide potential now, so we wish we can leverage these two offers to get more market share.
Thank you
Thank you.
Thank you for the questions. Next question comes from the line of Mark Li of Citi. Please go ahead.
Thank you for the time. I want to ask, for our offline operation, we have seen quite a bit of promotion that’s impacting the ASP. May I know like how is the promotion development heading into the next quarter? And what is our offline growth target for the next few quarters? How much recovery we will see for offline? Any color is appreciated. Thank you.
I think for offline, the coupons you mentioned just now, actually, part of that is because in the first two quarters, because we moved the offline offers to the online due to the pandemic, so it gives certain type of coupons to the students. They can use the coupons in Q2 and maybe part of Q3. So that is now the normal promotions of coupons you have seen in the past. And I think looking into – coming in third quarter and even next year, I think promotion in coupons is now our most important ramp-up to do this. I think we still need to do more work is how we can provide the online and merge offline models to the students. For example, if you are waiting in the learning centers we have in one city, how we can find some ways to do marketing or penetrate the students, maybe three to five kilometers around the learning centers or maybe 50 minutes by drive, by car, so how can you use these learning centers and how we can attach the online Peiyou on that office to that? Today, frankly speaking, we are only running this model in the city level. We still do not go into the detailed management side. We can – if our operations can be more detailed and be more kind of efficient, then today, so we can definitely see much more opportunities. I think we need to evolve on maybe reinventing our business models through product, through research and development, but not only through so-called promotions of coupons. We wish current offers can provide students the new experiences. And we can collect – we can use the data to provide more tailor-made or individualized solutions to them. So that is our key to play in the future.
Thank you.
Thank you, Mark.
Thank you for the question. Next question comes from the line of Lucy Yu of Bank of America Securities. Please go ahead.
Thank you, Rong for taking my question. So my question is also related to what Mark has just asked. So I am aware that in the offline market, in the Peiyou Xueersi, so this summer, we have offered some discount in addition to the coupon. So I am wondering how much of that discounting has impacted your GP margin or like OP margin in your Peiyou offline? So I am trying to understand whether your Peiyou offline business margin is flattish or declining or still improving? Thank you.
I think, especially in Q2, definitely, the Peiyou offline business, the margin is decreasing, of course, because of the pandemic. So that is not normal quarters to compare sometimes. But coming to Q3 and Q4, when everything can come back to normal, we probably can see that they will recover from the second quarter’s low numbers. So the thing, as what I said just now, is maybe if we look into all our situations, second half will be better than Q2.
Thank you, Rong Luo. And also, may I just follow up on third quarter results? Would you mind to break that down by business in terms of gross outlook? Thank you.
Sorry, we don’t disclose that detailed information due to the competitive reasons. But the direction is actually our Xueersi online school growth will be similar as what we can see in Q2, plus/minus a little bit. So we also see a recovery in growth in the Peiyou small class business. So that’s the rough ideas we can share with you guys.
Thank you.
Thank you.
Thank you for the questions. We have another question from the line of Alex Liu of China Renaissance. Please go ahead.
Thanks for taking my question. Two questions. The first question is, could you share with us TAL’s strategy on the so-called very popular AI online class? I understand some of your competitors, including PAMA, are quite aggressive on this model, and we knew TAL also has a dedicated product for this. So just wondering, what’s the plan there? And specifically, do you think this model will eventually reach similar revenue size to our current online model? So that’s the first question.
Okay. That’s a very good question. I think maybe last year, in my earnings call, I recommend one book to you guys. The book was called On Intelligence written by Jeff Hawkins from U.S. I think that’s a very good book. You guys can pay attention to that. And sometimes, AI product is a very good word, but sometimes too strong a word for us. So we are still away from the AI kind of – they can – so we are still far from AI. I think maybe in the future, if our online business model is getting bigger and bigger, maybe more and more people coming in, and our OmO model, the specialty online, is also fast increasing, so we can penetrate a lot of students and we can claim more of their data. Not only their data as they start in my learning centers, but also some data they started in the schools or maybe even at home. So we have more data. Maybe possible, we will – we have a chance to develop a new type of maybe intelligent self-learning models. I think that will happen definitely. That will happen definitely. But today, we don’t – we can’t figure out which is the right pathway to reach that level. So what we can do is we invest in our online, both in the Peiyou small class and Xueersi school. We try to invest in our AI lab, and we try to invest in more research like the brain sensing and something else to make sure we can figure out one way to do that. But I think this kind of product is still – has a long way to be mature. But all – what I can say just now, only comment the product of my own company. I have no comments on other products because I’m not the right one to do that. So in our view, we’ll continue to invest in this area. We will continue our investment. And we strongly believe in the future, the new type of products will come out. The only problem is when. So we wish all the efforts we make in the online part can contribute to the next level products in the future.
Thank you, management. With that, ladies and gentlemen, that does conclude our conference for today. I beg your pardon. Do you have any follow-up questions, Alex?
Hey, Alex. I remember your second question.
Yes, just quickly on the gross margin decline. Just wondering how much is due to the teacher compensation cost increase and what – how should we think about this trend going forward?
Yes. I think – let me answer very briefly. I think the gross margin, we have 2 factors. Number one is we continue to grow – we continue to develop more learning centers. So I think, as what I said just now, I think in Q1, we are adding around 20 new cities and Q2 is 1 new city. At the same time, we are adding more learning centers in the current cities now. And in Q2, the number is very small. But in coming to Q3, we have a big number rather there. Today, we have 14, but we have over 15 in the pipelines. So with all of this, definitely, it will impact a little bit in my gross margins. But on the other side, because Q2 is also a timing for us to increase our teacher compensations, so I think we continue our strategy same as before because we are education company. Even we have talked about a lot of (inaudible), but we still need to put our teacher for our people in the first priority. So we need to take good care of them. So this kind of – that’s the normal practice every year. And we don’t have specificity how much coming from the new center kind of development, how much coming from the teacher commendations. But both the investments on the new capacity and the investments on our teachers are very important for our long-term growth. Thank you.
With that, ladies and gentlemen, we have now come to the end of the conference call. Thank you for your participation. You may now disconnect your lines.