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TAL Education Group (TAL) Q1 2020 Earnings Call Transcript

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TAL Education Group (NYSE: TAL)
Q1 2020 Earnings Call
Jul 25, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Thank you for standing by, and welcome to the TAL Education Group first fiscal-quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator instructions] I must advise you that this conference is being recorded today, Thursday, 25th of July, 2019.

I would now like to hand the conference over to your first speaker today, Mr. Echo Yan, IR director of TAL. Thank you. Please go ahead.

Echo Yan -- Investor Relations Director

Thanks, operator. Thank you all for joining us today for TAL Education Group's first fiscal-quarter 2020 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.

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

Thank you, Echo. Good evening, and good morning to you all. Thank you for joining us today on this earnings call. Our first-quarter revenue performance was based on healthy growth of small class business in the cities we currently cover and the scaling of our online courses.

Revenue growth in the first quarter was 27.6% year over year in U.S. dollar terms to USD 702.8 million and 36.3% in RMB terms. Total student enrollments of normal price long-term courses increased by 40.6% year over year, mostly driven by positive growth in online enrollments, as well as Peiyou small class. GAAP income from operations decreased by 23.6% to USD 57.3 million in the first quarter.

Non-GAAP income from operations decreased by 7.3% to USD 83.4 million. The decrease was mainly due to the increase in sales and marketing and IT investment in our online business, as well as other initiatives. 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 first quarter.

Next, Echo Yan, our IR director will review the first quarter financials. After that I will update you our -- on our new business strategy execution and discuss our business outlook. Linda, please.

Linda Huo -- Vice President of Finance

Thanks, Luo. Fiscal first-quarter revenue was based on steady growth momentum in the various education services of our tutoring business. Let me review the business by different revenue streams. Let me start with small class and other business, which consists of Xueersi Peiyou small class, Firstleap, Mobby and some other education programs and services.

These accounted for 78% of total revenue compared to 83% in the fourth quarter last year. The revenue growth rate was 20% in U.S. dollar terms and 28% in RMB terms. Xueersi Peiyou small class, which remains our core business, represented 64% of total net revenue compared to 71% 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 15% of total revenue in the quarter compared to 9% in the same period last year. As we announced on the previous earnings call, from this quarter onwards, we only disclose the enrollment and ASP performance of normal priced long-term courses for our business. Net revenue from Xueersi Peiyou small class was up by 14% in U.S. dollar terms and 22% in RMB terms.

Online normal priced long-term courses enrollments increased by 21% year over year. This growth rate reflects the stable growth in both Xueersi Peiyou offline/online class. Peiyou offline small class revenue increased by 10% in U.S. dollar terms and 17% in RMB terms, where offline normal priced long-term courses enrollments increased by 13% year over year.

With Peiyou online, as you all know, we offer the online courses as a complementary service to Peiyou offline in major cities of our network. Peiyou online offers regular and short-term courses and other promotion courses. In the first fiscal quarter, net revenue from Peiyou online was up by 148% in U.S. dollar terms and 165% in RMB terms, where normal priced long-term course enrollments increased by 184% year over year.

Peiyou online accounted for approximately 7% of total Xueersi Peiyou small class revenue and 10% of total normal priced long-term Xueersi Peiyou small class enrollments. In the same year ago period, the first fiscal quarter of fiscal-year 2019, Peiyou online accounted for 3% of total Xueersi Peiyou small class business and 4% of total normal priced long-term Xueersi Peiyou small class enrollments. Growth in small class business remains widely distributed across the cities we currently cover. Xueersi Peiyou small class revenue from Top 5 cities, which are based in Shanghai, Guangzhou, Shenzhen and Nanjing, grew by 11% year over year in U.S.

dollar terms and accounted for 58% of Xueersi Peiyou small class business. Revenue generated from cities other than the Top 5, grew by 19% in U.S. dollar terms. And the other cities accounted for the remaining 42% of the Xueersi Peiyou small class business.

This growth momentum is supported by broad market demand across all cities. Incremental ramp-up of enrollments from our earlier classroom expansion, as well as our ongoing efforts to improve operational efficiency. We continue to enrich our cost offerings, with a growing number of offline/online courses in curricular and extracurricular subjects. Chinese and English courses are well on the way to become mainstream courses in our curriculum and continue to grow at a steady pace.

By the end of May 2019, we have offered Xueersi Peiyou Chinese classes in 19 cities and English classes in 24 cities. Furthermore, Firstleap, Mobby, and a few other education programs' revenue and enrollments all grew at a healthy pace in the first quarter of fiscal-year 2020. We expect that these diversified courses will gradually contribute more to our overall business. Next, I'd like to briefly discuss our Zhikang one-on-one business.

This business segment had a solid first quarter and achieved year-over-year revenue growth of 21% in U.S. dollar terms and 29% in RMB terms. Zhikang one-on-one accounted for 8% of total revenue, similar percentage, both in the fourth quarter of fiscal-year 2019. Let me update you on our capacity expansion.

As always, we pursue well paced offline capacity growth, and at the same time, invest in new technology and online business to continue to improve overall operational efficiency and closely follow all the standards and regulations. We added a net 49 learning centers, of which, 35 were Peiyou small class learning centers; two Mobby learning centers; one Firstleap center; and 11 one-on-one centers. During the quarter, we added 746 Peiyou small class classrooms. Meanwhile, we continue to enter new cities at pace according to plan.

In the first quarter, we entered into one new location, [Inaudible], with the dual-teacher small class learning center, further expanding our geographic coverage. Overall, by the end of May, we had 725 learning centers in 57 cities across China, of which, 514 were Peiyou small class, 17 were Mobby small class, 82 were Firstleap small class, and 112 were Zhikang one-on-one. Looking to Q2, till now, we have rented approximately eight Peiyou small class learning centers, and we expect to add a few more and close down some learning centers based on standard operations. These estimates reflect our current expectation, which is subject to change.

Moving now to our online business. First-quarter revenue from xueersi.com grew by 108% in U.S. dollar terms year over year and 122% in RMB terms, while normal priced long-term courses enrollments grew by 121% year over year to over 500,000. Online contributed 15% of total revenues and 31% of total normal priced long-term enrollments this quarter, compared to 9% of total revenue and 19% of total normal priced long-term courses enrollments in the same year ago period, respectively.

The rapid growth in online business was supported by a dedicated sales and marketing efforts, retention of the previous quarters, as well as the rising demand for online education. With that, I will now turn the call over to Echo Yan for the update on the first fiscal-quarter financial results. Echo, please.

Echo Yan -- Investor Relations Director

Thanks, Linda. Let me now go through some key financial points for the first quarter of fiscal-year 2020. The breakdown of ASP for the various businesses is as follows. Normal price, the long-term Xueersi Peiyou small class ASP increased by 0.8% in RMB and decreased by 5.6% in U.S.

dollar terms year over year. Peiyou offline normal price long-term courses ASP increased by a low single-digit percentage in RMB terms year over year. Normal price, the long-term Zhikang one-on-one courses ASP increased by 3.7% in RMB terms and decreased by 3% in U.S. dollar terms year over year.

Normal plan, the long-term online courses ASP increased by 7.8% in RMB and increased by 0.9% in U.S. dollar terms year over year. Gross profit increased by 33.3% to USD 385.9 million from USD 289.6 million in the same year ago period. Gross margin for the first quarter improved to 54.9%, as compared to 52.6% for the same period of last year.

Operating income decreased by 23.6% year over year to USD 57.3 million. Non-GAAP operating income decreased by 7.3% to USD 83.4 million. Net loss attributable to TAL was USD 7.3 million compared to net income attributable to TAL of USD 66.8 million in the first quarter of fiscal-year 2019. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses, decreased by 77% to USD 18.8 million from USD 81.8 million in the first quarter of fiscal-year 2019.

Basic and diluted net loss per ADS were both USD 0.01 in the first quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were both USD 0.03. From the balance sheet, as of May 31st, 2019, the company had USD 1,912.2 million of cash, cash equivalents and short-term investments compared to USD 1,515.6 million of cash, cash equivalents and short-term investments as of February 28th, 2019. The company's deferred revenue balance was USD 968.4 million compared to USD 1,328.5 million as of May 31, 2018, representing a year-over-year decrease of 27.1%, mainly due to the change of tuition fees collection schedule to meet certain regulatory requirements.

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

Rong Luo -- Chief Financial Officer

Thank you, Echo. We have started fiscal-year 2020 with a strong commitment to further transition our base model to a multi-pronged educational service model. This diversified model includes our offline learning center and geography network, online business and various of other education programs and projects, such as our smart education solutions and open-platform business. I would like to give you some brief on each business models as below.

Our core offline business remains a very healthy and stable business for our innovative efforts in all fields of education. Our strategy remains listing as before where we will keep seeking the opportunity to improve our operational efficiency and further enrich our curriculum and competence, arrange [Inaudible] . At the same time, we continue to persuade well-paced capacity expansion with small class and dual-teacher models to meet demand in more geographical areas. Our online business continuously faces intense competition and change in market dynamics.

TAL has [Inaudible] online tutoring, and we have strong confidence in our on education development. We will maintain or enlarge, if necessary, a certain level of investment to strengthen all of our online business advantages such as industry know-how, education, technology, content, bring awareness, and etc. All these efforts will not just allow us to penetrate a large addressable market and also establish an owner education network across China. More importantly, our investment also let us optimize the cost structure and overcome the traditional limits to promote coeducation resources and ideas to more families with affordable pricing a easy online access.

TAL's smart education solution is the product we have developed for the cooperation with the schools, which I mentioned to you earlier on our Q2 earnings call. This set of solutions will help to optimize and promote innovation in traditional teaching, implement the national core competence structure strategy requirements and provide essential education resources through AI and other technologies. Through the end of Q1 fiscal 2020, we have -- cooperating with a few hundred public schools after two years of development. TAL's open platform tends to empowering the whole education sector.

[Inaudible] small and medium-sized education companies in China are set to our core education resources. The open platform allow us -- allows more students to share high quality tutoring results through science and technology. Through the end of Q1 fiscal 2020, our open platforms already has provided various level of services to hundreds of education companies, national wide. As you all know, TAL's mission is to advance education through science and technology.

TAL continuously strives to integrate technology with education, promote innovation, and lead development within overall industry. We provide quality products and services in order to create value for customers and bring long-term returns for both our customers and shareholders. TAL's mission is to become a reputable education company. These new initiatives, online, smart education solutions and open-platform business, are still in their early stage of development.

They clearly have lengthy contributions to our business scaling and require a certain degree of investment in terms of technology, customer development and bring awareness in e-sector. However, they are growing very fast and bringing us new inside opportunities in the market to adjust. On an ongoing basis, and as always, we have placed customer satisfaction first. And this continues to be our key concern.

Our diversified and quality product portfolios and services needs to create real balance to our students and parents. We will follow the government that directions in education reforms, standardizations and regulation. Where needed, we will adjust our business operations accordingly. All these policies are aimed at elevating their standards and improving the entire education -- the whole industry, which is the long-term benefit of peer customers and shareholders alike.

Turning now to our business outlook. Based on our current estimate, total net revenue for the second quarter of fiscal year 2020 are expected to be between USD 895.7 million to USD 916.7 million, representing an increase of 28% to 31% on a year-over-year basis. It's now taking into consideration the impact of potential change in exchange rate between RMB and U.S. dollars.

The projected revenue growth is expected to be in the range of 32% to 35% for the second quarter of fiscal year 2020. This estimate reflects company's current expectation, which is starting to change. That concludes my prepared remarks. Operator, we are now ready to take your questions.

Questions & Answers:


Operator

[Operator instruction] Your first question comes from the line of Sheng Zhong from Morgan Stanley.

Sheng Zhong -- Morgan Stanley -- Analyst

So can you please give some more color on the first -- on the first quarter's margin? And secondly, company actually opened more learning center -- offline learning centers in the first quarter and also, you have a more promotion in the first quarter for online business. So could you please share with us about the company's strategy in the -- in this full year, online and offline? And how to look at the full-year growth in the margin?

Rong Luo -- Chief Financial Officer

Thank you, Sheng Zhong. In the first page line we try to recap some big numbers for Q1 in top-line perspective. In Q1, on the top line, the small class grew around 28%. The Peiyou Life, which is Xueersi online is -- has grew about 165%.

The Xueersi online school grew about 122%. All office numbers actually exactly match what we mentioned to the industry last quarter, I think which is also a direction of our company strategy this year. Let me try to walk through that one by one. The small class offline business, we call -- which is Xueersi Peiyou, our key business this in the past 10 years, even more.

So I think that our strategy today is what is very clear. We wish this segment can maintain the healthy growth in the coming, maybe three or five years. What does healthy means? The healthy means they grow within the ways we can asset. We don't ask for crazy growth from Xueersi Peiyou status, we wish the growth can be stable and very healthy.

So you'll probably can see that in Q1, the 17% to 18% plus/minus for the a lot total small class business. And at the same time, we wish they could improve their margins quarter over quarter, year over year. Last year, the small class offline doing a very good job, delivering much higher margin than before. And this year, we see the trend has continued, which can partially improve by around 2.3% year-over-year improvement in our gross margin.

And again, coming to Q1, we start to add in more planned incentives. Q1 for the whole company, we have adding around 49 new planned incentives, while 35 of the Peiyou are -- Peiyou more capital incentives. We're pursuing the healthy and organic development of our offline business, along with stable top line growth rate and ongoing operational efficiency as well as the profit improvements. So that's our key strategies for our kind of small class offline business.

You probably can see the similar trend in the coming few quarters. And the second driver we need to mention is the -- we call Peiyou Life, the Xueersi online -- Xueersi [Inaudible], which is a very complementary offline models to our Peiyou offline students with more localized contents. The enrollment of Peiyou online increased very fast in the past few quarters. And -- because they are quite complementary to the Peiyou offline, so there is a very limited customer acquisition comes off business models.

The development of Peiyou online will be further benefiting our overall Peiyou profit. And coming to this quarter, we have more than 30 cities, which has the Peiyou -- like Peiyou online offering now, which is much better than what we had last year. And this year, the Peiyou online took around 7% of the total Peiyou revenue. Well, last year, I think quarter is only 3%.

So we are confident to see that Peiyou online will continue to be a very important drivers, boasting the enrollment revenue and the profits for our Peiyou business. We are also very happy to see where we are willing to deploy these offerings to more cities to cover more students in the future. And the third driver is also a very important drivers. I think we have mentioned about that so many times, which is Xueersi online school.

Xueersi online school is our major online education product. I think last year, in the whole fiscal-year 2019, they have grown around 187% beating the revenue growth. And this year, on top of this very base, we're also very happy to see the Xueersi online school in Q1 delivered a growth of 122%. And for the whole year, we are also confident that this Xueersi online school business will deliver a triple-digit growth, same as what we did last year.

I would like to spend a little bit more about the Xueersi online studies. I think starting from three or four years ago, we have a lot of arguments in this industry, whether online is very important way or maybe a feasible way to develop companies to be more scalable and get more market share. And considering a lot of challenges coming from the parents and the student acceptance and all of that. I think with the market and whole industry come into today, this has become a kind of the industry consensus, online is the future of this whole industry.

Where we are only running offline models in this country, we probably have maybe close to 0.5 million competitors across the different provinces. But we're moving this battle into the online stage, similar competitors. The number of competitor is much less. And on the other side, we also see online, so very important, or maybe the only way, to help us to provide affordable solution to serve more and more people as fast as possible, as many as possible.

The online's very important offering to help us to help more people and provide equal education opportunity to serve more students, no matter they are in Beijing, Shanghai or they are the less developed top provinces. So we have seen all kind of -- these services has helped students a lot and that's also beneficial, not only in the economy studies, but also in the social benefit perspective. And last year, you -- I think we probably still remember the story last year. Last year is the first year is for us doing run -- a lot of promotions in summer, and we have more than one million students starting in our own capital last summer.

And last year, the most important lesson actually is coming from the challenge in the supply chain. Last year, we -- tool investment in the marketing study, which a lot of people coming in, but we have some challenges to provide enough -- the teacher assistant support today. So in the last year's, last -- starting from last year, Q4, actually, we do a lot of preparations, both in Q4 and this year, Q1. We need to strengthen our capability in the marketing perspective.

We need to have enough and qualify the teacher assistance to support students who are studying online. We need to hire the people, we need to train the people, we need to make sure they are well-prepared for upcoming summers. So this year, we are -- we continue to invest in online, not only in the marketing perspective, but also, we reinforce our investment to -- in team perspective, both in the technology and the team perspective. So based on the number of today, we are seeing our strategy in online is growing pretty much on track.

We have started to see our growth rate, even last year, the number is huge, but our growth will still be in triple-digit growth. And with -- we in -- with our -- a lot of preparations in the supply chain we also -- we're happy to see for our normal price enrollment, the retention rate, actually, is very stable and even slightly better than last year. And now -- last week of July, where probably we have one or two terms summer promotion class has finished their class. And we also -- we are also very happy to see the retention rate of this kind of promotion classes also pretty much on track.

And we do have three or four terms to come, maybe late July and in August. So the team will work very closely to make sure the conversion rate will be on target. So where we come in today's kind of the competitive landscape, I think compared to last year, July, where we feel the company in much kind of stable and less risk situation. Last year, July, we faced a lot of regulations and uncertainties.

We are first company to select [Inaudible] but coming today, I think our all plus three drivers are running quite stable. The offline drivers, the Peiyou Life, Peiyou online drivers, the Xueersi online drivers. So the key for this quarter, actually, we will go to whether our summer promotions conversion rate can keep our target. And we still have a few ways to work.

And so I can't say we have the perfect numbers, but the whole team will work very closely to make sure we deliver the numbers. So please stay tuned, maybe next earning calls, we will have all the numbers in our hand, we can -- we will be more than happy to show you guys the progress of what we have today. And Xueersi online is a very important way for us to be scalable and penetrate more market. So in the future, we continue in our strategies to maintain a healthy growth in our plan, grow more aggressively in the Peiyou Life and continue to the investments in the Xueersi online school to make sure they could be No.

1 brand in the online education space. And lastly, our slogan for the Xueersi online school actually is very, very important [Foreign language] I don't know how to translate in English. But we wish -- that's our target, and that's our strategy for my -- online this year. So when we consider that -- let me try to give you more colors about your question about the guidance for the full year and the growth and the margins.

I think first speaking, we are a company, we look for long-term values to our students. So actually, we care less about for the quarter-over-quarter preparations. But we still have something to say is in the full-year perspective, we don't have any intention to change our full-year guidance, which is around three -- 30% to 40% top-line revenue growth. We -- the Q1 we grow around 36% due to our guidance today in the highlight is 35%.

And when we can see more numbers, especially Xueersi online school numbers, they can work from a promotion class to the normal price class. We probably can see some good surprise coming from Q3 and Q4. So the balance of the full year, we don't have any intention to change our full-year guidance. We are pretty much on trend over there.

And in the margin perspective, I think for Q2, I think the summer promotion -- marketing we start to do with kind of advertisements, starting from April. So you're probably can see that in April and May, which is the two months in the Q1, and July and -- and June and July, which are two months in Q2. So you probably can see the impact. So considering we do a lot of promotions throughout over there, so the Q2 margins will have some pressures, same as what we said before.

But full year today, we don't have any intention to change full-year guidance. I think the key to decide a full-year trend will be by the end of the summer promotions, depending on the conversion rate and the retention rate after the promotion class. Today, we have no -- a very clearly -- numbers to share with you guys, but when we have more numbers and more kind of tuck-ins, and we'll have more schools that have finished their class and they return to the next quarter, we probably have there -- more colors to share with you guys. But in general, we believe the company is still on the right path.

We grow pretty much on -- as what we planned in the year beginning. So we will continue as per our strategy and deliver a healthy growth, both top line and bottom line. Thank you so much, Sheng Zhong.

Sheng Zhong -- Morgan Stanley -- Analyst

And also very glad to know that all the strategy and implementation are well on track. So just want to double check with you about the triple-digit growth of offline -- of online business is about revenue?

Rong Luo -- Chief Financial Officer

Yes. Both. Revenue, enrollment, both.

Sheng Zhong -- Morgan Stanley -- Analyst

Thank you.

Rong Luo -- Chief Financial Officer

Thank you, Sheng Zhong.

Operator

Your next question comes from the line of Yuzhong Gao from CICC.

Yuzhong Gao -- CICC -- Analyst

Hey, Rong, Linda, Echo. Thanks for the opportunity. So it's on the online shares -- online business. So we seems to notice a shift of strategy for your online promotion.

So before May, we seems to be rather conservative in online promotion. But after June, we seems to have stepped up the investment. And so far we have noticed the conversion rate may not reach our expectation. So if we go back to six months earlier and decide again what kind of investment strategy should we choose, and also, could we have some comment on the trend for student acquisition costs and our retention conversion rate? Are they still balancing each other that even if the short-term cost may rise a little bit that we are still confident in the long-term business profitability?

Rong Luo -- Chief Financial Officer

I think before I answer these questions let me try to recap what we did last year. Last year, I think we made huge progress in the online study. The first year we see one million students in online, in last year Q2. But actually last year we also have a lot of things.

We are not doing high risk especially in product strategy. So by the end of last year, we decided to change the team a little bit. So we wish our online strategy can not only driven by their marketing but need to be driven by the products. So if we go back to six months earlier, all I can say is, yes, we made some mistakes at that time.

For example, we probably need to start the promotions maybe earlier. So we need to be close watch what's happening in this market, especially if some competitor wishes to impact at that time. So we are a little bit behind at that time, we have to say that. But the good thing is the whole team worked very quickly.

So we made the plan and we changed our products for us and we developed a lot of good things at that time. So the team's execution capability is very good. So we are very happy to see after a few weeks, we catch up and even we made -- we even paved the leading positions in online education path now. And the customer acquisition cost is very dynamic.

Sometimes it's higher because of the competition and sometimes it's much lower. But if we put all the people together and lifetime value started based on what we see today, we are still [Inaudible] and we are very competitive in this market. And the conversion rate, actually it rises just now is where you see the conversion rate is improving term over term, so we still have few terms to come, which is the most important terms to come maybe in late July and in August. So we'll close watch what happen at that time and the whole team after the first -- or second terms, kind of the training, so the team become more and more capable.

So we believe the team can do a much better job term over term in coming few weeks. And the final numbers after summer term promotion results, I will disclose the -- I will talk about in the next-quarter earnings call. But again, we -- everyone eyeing this market and everything is transparent. What the other people did, they are transparent to each other.

We need to continue to be very humble and we need to be very careful to look into this online battles. I have something to share with you guys. When you're looking to this kind of online competitions, there are three things you need to be -- you need to pay attention to. Number one, whether the team is a very strong team with core operating experiences and has a very good understanding of online education.

The team is -- our group team can fight each other or the team is a very weak team who always lose. So that's a very important one, looking to the team who is the best team all over the country. Secondly, we need to be very careful about as we will invest in the online marketing. If you don't pay attention to the real teaching quality, if you don't make a student satisfied, if you don't persuade the parents to say you have very good products, that's nothing.

How much money you invest on a marketing sometimes doesn't equal to how many students you can convert in the futures. Education is a very important process, highly interactive. The investment on marketing can only attract people to try your products. But whether they will stay, depending on the teaching quality you can deliver.

And all of this is a very operational and product-driven challenges, which we, as a team, in the past 15 years, we have some kind of advantages over there, especially for education studies. In some place, we need to be very careful about the creative products. We need to make the products very different and kind of progressively even week over week. Here I want to mention, we are very happy to see a lot of new companies coming into this battlefield.

And we're also very happy to see a lot of -- some companies doing a very good job in the product study, sometimes even better than us. So we learn from them and they learn from us. And all these world-leading companies in online education side will push the whole market and the whole industry to net level. We, as one of player in this market, we're happy to see all kinds of competition happening in this market.

And at the same time, we believe when the top players continue to evolve their consolidation, the online will be much easier. So again, thank you so much for your questions. We will continue to do our online strategies. And the whole team today, what we are doing is pretty much on track.

So I will disclose and talk about that in next quarter earnings call. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Rong Luo -- Chief Financial Officer

[Foreign language]

Echo Yan -- Investor Relations Director

[Foreign language]

Operator

Presenters?

Echo Yan -- Investor Relations Director

Please, we shouldn't finish our line. We should continue our call, please.

Operator

I see. Sure ma'am. So our next question comes from the line of Alex Xie from Credit Suisse. Your line is open.

Alex Xie -- Credit Suisse -- Analyst

Hi, management. Thank you for taking my questions. So I would like to ask about our strategy for offline Peiyou business. So in this quarter, the normal price enrollment, I think, grew by 13%.

I think, I mean, this is kind of behind market expectations. So what is the reason for the significant slowdown in offline lower price enrollments? And are we still committed to our plan to accelerate our offline capacity expansion and also offline -- the enrollment growth rates in FY '20? Thank you.

Rong Luo -- Chief Financial Officer

Yes. Thank you for questions. Yes. I think we need to be professional to answer your questions.

When some ask me questions about how many class are you adding, how many capacity we will try to expand in the whole year, some is asking -- real question remains the old traditional growth models. We need to comment the classroom, how many seats, how many teachers, with all the ratios. But today, I think if you go into the speiyou.com you probably can see that. We have transformed the base model from a purely traditional classroom-based teaching models to offline -- merge online models.

Which means today, for example, we're adding -- last year, we're adding around 13% of the total classrooms, but actually we have entered more than 12 cities last year, which is three times or four times as well as the traditional model three or four years ago. And this year, we will continue our approach. We will continue to enter more than 10 new cities across the year. While we don't want to compute how many classroom or classes we were adding because today the model has been a little bit different.

The offline learning centers can be a very good demo to prove who we are and can be a very good way to try the students coming in, and we try to promote our online offerings. So we wish, in the future, our Peiyou offline models can convert to around online, merge offline model, which has proved to be success in the past few quarters. And we continue to be very careful about whether we will add so many classrooms in the short term. Our cost structure on Peiyou will be still as stable and healthy growth.

The Peiyou team have their own reasons and pace the business. But what's more importantly is they need to think about how to leverage the power of technology and leverage the branding and leverage the physical learning center presence to develop the both online and offline business. And by the end of this quarter, we'll enter 57 cities. We will continue this approach in the coming, maybe, few quarters.

So in Q1, we are adding 35 learning centers. Q2, we'll continue to add some of that. Above this trend, we'll continue, as our kind of strategy efforts, how to incorporate the online technologies into the offline models. So when you look into our numbers and our models, sometimes it's not good enough to only counting the number of classroom, but also need to consider the kind of the synergies between online and offline.

And we need to have some close look into the combinations of Peiyou offline and the Peiyou Life products. So this is our overall strategy for the offline. We don't ask for creating numbers or maybe very aggressive growth rate in the classroom numbers. We ask for a good balance to provide high-quality products to the students, not only offline, but also through the Peiyou Life, the online approach.

Alex Xie -- Credit Suisse -- Analyst

Thank you. May I have a follow-up? So how do we view the difference between Peiyou online and xueersi.com? Are we seeing sort of competition between the two?

Rong Luo -- Chief Financial Officer

Yes, that's a very good question. I think the Xueersi online, which is totally independent from all of any kind of the Peiyou offline business, that's a purely independent platform. I think they can share some content element, technology like broadcast system with Peiyou. But in general, operational study, they are highly independent.

So their target is try to cover as many students, national in -- across the country. So which -- they are trying to target their kind of the breadth market, more cities, more provinces, more geographies. And they've tried to target kind of -- their level of difficulty is a little bit lower than the Peiyou business. They try to cover the majority of the market across the country, the breadth strategy.

While the Peiyou Life actually is kind of the depth strategy. They need to go in deep. They need to try more localized content, to all the students across the cities. Because we have a lot of physical learnings centers in 57 cities, so we have the team ready over there to develop some very localized content special for the city.

The Peiyou Life will leverage all these efforts and wants to provide their best strategies, so to provide a depth product to students. So in general, the Xueersi online scope is the breadth strategy and while the Peiyou Life is the depth strategy. They are a little bit different. Based on the numbers, what we see today, and based on the students, what we see today, we don't see a meaningful kind of overlap between the Peiyou Life, and Xueersi online school.

Both online drivers grow quite well, triple digit growth. And we don't see they overlap that much. Thank you.

Operator

Your next question comes from the line of Mark Li from Citi. Your line is open. Please ask your question.

Mark Li -- Citi -- Analyst

Hi, management. May I ask a question for this quarter's enrollment? I understand we exclude the short-term enrollment. But do we have any color on -- if we add the -- add back the short term and promotional enrollment, what is the, roughly, growth for enrollment, to make it more comparable in the previous quarters?

Rong Luo -- Chief Financial Officer

Yeah. In the first place, let me -- I'll try to explain why we want to use the normal price and enrollment starting from this quarter. I think that's what we had set last quarter. And the reason is if you use the Q4 number as a benchmark, my Q4 enrollments, you probably can see that for the total Peiyou enrollments 30%, around 30% of the total Peiyou enrollment last Q4, actually they are promotion enrollments.

While the Peiyou online in last Q4, around 55% of the enrollments are from the short term and promotion costs. And we're looking to last Q4, Xueersi show also online enrollments, around 42% of the Xueersi enrollments are from the short term and promotion costs. Because when we go into the online-driven models, some kind of the pilot class or maybe experienced class, demo class to the students to let them get used to the online approach. And [Inaudible] is a very popular way.

If we continue to count all this kind of the short-term promotion enrollments into our enrollment calculations, we are afraid, sometimes, the numbers will be very misleading and very confusing to the street. So we, as a company, we always want to be conservative. We wish to disclose the kind of the meaningful enrollment numbers to all offering matters, that's why starting from this quarter, we'll only disclose the normal price enrollments. And the growth rate perspective, because in Q1, and especially in Q2, we're running a lot of promotions, if we count into all these kind of promotions into our promotion enrollment into our enrollment definition, the growth rate will be much higher.

But we believe that kind of too high growth rate sometimes is misleading. So I strongly recommend all of you guys still look into our normal price enrollments growth, which make more sense than the promotion enrollment. Thank you, Mark.

Mark Li -- Citi -- Analyst

Thanks. May I have a quick follow-up? Also for the revenue guidance, I think we have two quarters of a bit of soft revenue guidance. So could you give more color on the quarter? Because I guess I might be surprised to see online promotion still yet to kick in for next quarter's revenue. Thanks.

Rong Luo -- Chief Financial Officer

Yes. Yes, that's also a very good question. In the first place, in the full-year perspective, we maintain our revenue growth around 30% to 40%. Last year, we grew our revenue by around 50% when the base is bigger and bigger.

Actually the growth rate is 30% to 40%, also a good number to hit. Secondly, I think someone may be curious about the Q2 revenue guidance. I think we talked about the promotions. When you're looking to our promotions, we have two types of promotion today.

The first one is the RMB 9 and then for maybe one or two classes. And the second one is RMB 49. So we have two products. So this -- so when we have a lot of enrollment coming from these two promotions, for us that enrollment numbers will be huge.

But at the same time, the revenue is kind of very minimal. So only when the students, they finished their class in Q2, and they return in Q3 in the fourth term, Q3 and Q4, you probably can see a much positive, maybe better numbers in the Q3 and Q4 numbers when they return. When they are still doing their class -- promotion class in Q2, there is no reason we can see a huge revenue growth in Q2. When they convert or return from the summer term to the fourth term, you probably can see that the revenue growth will be more meaningful in Q3 and Q4.

So that's kind of -- we need to make sure that logic is very clear. So Q2, we're alluding to our Q2 revenue guidance, I think that's very similar to the trend as what we see in Q1. In Q1, there's more class -- offline growth are maybe below 30% on the plus/minus , while Peiyou Life grew more than 150%, and Xueersi online grew more than 100%. That's pretty much the situations for Q2.

In Q3 and Q4, let's wait for the conversion rates and retention of summer promotions by the end of this quarter. So we probably can talk about that in next-quarter earnings call.

Mark Li -- Citi -- Analyst

Thank you.

Rong Luo -- Chief Financial Officer

Thank you so much.

Operator

Your next question comes from the line of Lucy Yu from Bank of America. Please ask your question.

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

I got two questions here. Firstly, it's also related to our offline enrollment. Because we have already expanded at teens level over the past four quarters in terms of capacity, and we can see that the normal price enrollment growth is also moderating to teens level. So similar to our capacity growth.

So going forward, should we expect that the normal price enrollment growth to be largely in line with our capacity growth? That's the first question. And the second one is regarding the margin for the first quarter has contracted by like 450 basis points. Can we have more color on online versus offline margin trend? Yes, that's my question. Thank you.

Rong Luo -- Chief Financial Officer

Yes. Thanks so much for your questions. I think for the offline, the capacity and enrollment, I think if we are only running a model, the traditional model three or four years ago, we'll purely grow our revenues through adding more classrooms, adding more seats, then the capacity growth and the offline revenue growth will be highly kind of connected. And coming to today, because we control the growth story of offline a little bit and we slowed down a little bit last year after a number of class rooms added every year, and in Q1 we're adding around 35 net small class -- centers, but I think with -- we have more efforts to move the base models from the purely offline models to the online -- merge offline models.

The connectivity between the capacity growth and Peiyou revenue growth may be a little bit different. So we have more drivers coming from online. And so, probably, you can see the variance will be bigger than before. And your question about our online and offline margin trend.

I think for offline, it's pretty much there. They will continue to -- we will continue to grow our offline margins, both gross margins and operation margins year over year. And the online -- the online margins, actually, we don't foresee where we have a huge or big loss this year. We're still -- because we can still see our online offerings can have a lot of students whose lifetime value is well promising.

So we don't foresee a huge or big loss to the online strategy. But one thing I need to draw your attention is because the online grew more than 100%, so the percentage of online has increased so much. For example in Q1, last year Q1 is only 9%. This year, it's 15%.

When the online percentage is higher and higher, even they don't have a huge or big loss over from online, but because the percentage is bigger, the mix has changed, which can also have some kind of pressure to our overall company's profitabilities. So a way we'll balance our drivers in offline and our investment in online to try to measure and deliver a relatively stable margin in a good level. So I think that's pretty much why -- answers your questions. Thank you so much.

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Echo Yan -- Investor Relations Director

Rong Luo -- Chief Financial Officer

Linda Huo -- Vice President of Finance

Sheng Zhong -- Morgan Stanley -- Analyst

Yuzhong Gao -- CICC -- Analyst

Alex Xie -- Credit Suisse -- Analyst

Mark Li -- Citi -- Analyst

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

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