TAL Education Group (TAL) 2012 Q3 法說會逐字稿

Hello, ladies and gentlemen. This is Andrea. I will be the operator for this conference call. I would like to welcome everyone to the TAL Education FY/2012 Third Quarter Earnings Conference call.

At this time, all lines are in listen-only mode. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask a question. In fairness to other callers, please keep your questions limited to two.

Now, I would like to turn the call over to Ms. Willow Wu, Investor Relations Assistant of TAL Education Group. Ms. Wu, please proceed.

Thank you all for joining us today for TAL Education's Fiscal Year 2012 Third Quarter Earnings Conference Call. Our third quarter earnings release was distributed earlier today and you may find a copy on our company's IR website or through the newswires. During this call you will hear from Mr. Joseph Kauffman, our Chief Financial Officer. Following his prepared remarks, Mr. Kauffman 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 US 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.

TAL Education does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise except as required. Also, our earnings release and 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 now like to turn the call over to Mr. Joseph Kauffman.

Thank you, Willow, and thank you all for joining us on our third quarter fiscal year 2012 earnings conference call. We are very pleased to report another quarter of rapid growth of our tutoring services business, while at the same time sharing with you some of the efforts we have made to improve cost control and operational efficiency.

On the revenue side, net revenues increased by 69% year-over-year to US$40.7 million, exceeding our top end guidance for the third quarter by US$3.4 million. This growth was supported by very solid enrollments growth of 50%. Our core business, consisting of small class and 1-on-1, once more delivered outstanding top line growth. We are very happy to see the strong uptake in online courses sales accompany the heightened investment we have put behind our online platform this year.

Of note in the quarter was that third quarter revenue included one extra week of fall term classes as compared with the same period in fiscal year 2011. The fall term, which straddles the third and fourth fiscal quarters, consisted of the same total number of weeks this year as last year, so this extra week recognized in the third quarter will be offset by one less week recognized in the fourth quarter. Our fourth quarter revenue guidance already factors in this impact.

Let me now take some time to briefly update you on our progress in the three areas of our growth strategy this year which are learning center rollout, city expansion, and accelerated 1-on-1 growth. During the quarter we added a net seven new learning centers, bringing the total new centers added in the first three quarters to 143. All seven of the net new adds in the third quarter were in Beijing and Shanghai, the two largest K-12 markets in China, and three of the seven were Mobby centers opened in Beijing.

As you may know, Mobby is the brand we have launched for our new, pre-K small class business operating in Beijing. With these learning center additions, Shanghai had 48 total learning centers between small class and one-one-one versus 141 in Beijing.

In the third and fourth quarters our focus is on improving center utilization levels and efficiency while further limiting the number of new learning center additions. Even so, we still expect to meet or beat out full-year target of 150 learning center additions for the year. Overall, we are very pleased with the success of our center rollout plan that we have executed so far during this fiscal year.

Our city expansion plan is on track, and is a growing revenue driver for our small class business. Cities outside of Beijing and Shanghai continue to grow rapidly as we effectively replicate our business model. These cities outside Beijing and Shanghai contributed 17% of small class revenues in the third quarter, compared to only 6% during the same period of the previous fiscal year, and 11% in the previous quarter.

Our last remaining goal to achieve this fiscal year in city expansion is that we are ready to add five new cities in the fourth fiscal quarter. This addition of five new cities - Chongqing, Shenyang, Suzhou, Taiyuan and Zhengzhou puts us right in the middle of the range of four to six new cities that we discussed on last quarter's call.

As for our Zhikang branded 1-on-1 business, you may recall we have gone through a phase of rapid center expansion in the first half of the fiscal year. Due to the seasonality of 1-on-1, the third quarter is typically the lowest in profitability for the full year. This quarter our 1-on-1 business showed a loss as a result of our rapid learning center expansion over the previous two quarters, but we still expect it to be profitable again in the fourth quarter and for the full year.

Starting from the third quarter we have turned our attention from 1-on-1 to improving center utilization, implementing cost controls and increasing revenue per student. Among the measures we took to keep costs and expenses in check, we reduced advertising spend in the quarter while also limiting increases in non-essential new hires.

In addition, we slowed down our new center expansion in the quarter to just two new centers, and in an effort to optimize efficiency in each of our locations decided to close one 1-on-1 center that was under performing. At the same time, we raised the hourly rate for our lowest priced 1-on-1 offering in Beijing from RMB220 per hour to RMB240 per hour.

We are pleased to see continued, strong enrollment growth and momentum after the increase. And as we come out of this seasonally low quarter we expect to see more scaling of this business in the coming two quarters ahead of the summer exam season.

In fact, driving increased scalability will be a key focus for each of our business units in the coming quarters. In our small class and 1-on-1 businesses we will seek to achieve this increased scalability by improving utilization of learning centers while leveraging headquarters personnel, both of which we added primarily over the first half of this year.

As I mentioned on last quarter's call, ramping up our newer business lines -- online courses and our Mobby-branded pre-K small class business -- will take more time. We are focusing our efforts in both of these businesses on accelerating revenues to cover more of our running costs. However, we still expect online course and Mobby again to be loss making in fiscal year 2013, though we expect the loss to be smaller than in fiscal year 2012. We continue to have confidence in both of these businesses for the medium to long term.

Let me now move to the financial results. You will find the complete financial information in the release so I'll keep it reasonably concise to leave enough time for your questions.

I am pleased to report another strong quarter in which our results once more exceeded the high end of revenue guidance. The key driver of our revenue growth was our small class business, followed by our 1-on-1 business. Our online courses business is growing quickly, but still small as a percentage of revenue given the considerably lower ASPs in this segment.

We delivered US$40.7 million in revenue in the quarter, representing revenue growth of 69% versus the same period of the previous year. Driving the quarter's revenue growth was strong total enrollment growth of 50%, combined with higher average selling prices. Total student enrollments increased to approximately 141,100 from approximately 94,100 in the same period one year ago.

The increase in enrollments was driving primarily by small class and online courses enrollments and to a lesser extent by 1-on-1. 1-on-1 continued to grow enrollments very quickly off of a smaller base.

On the ASP side, the year-on-year ASP increases were primarily driven by our small class business, where we still had not yet cycled the shift from two to three hours for a portion of our classes. We also benefited from an increased hourly rate for those students whom we had allowed to phase into the hourly rate increase we took in Beijing in May 2010.

Also contributing to ASP increases, but less meaningfully than small class, was the hourly rate increase for our 1-on-1 business in Beijing, which we implemented in the third quarter.

Finally, the exchange rate was a factor in our year-over-year ASP growth comparison as our ASPs are quoted in US dollars.

In terms of overall operating costs and expenses, the significant increase in the third quarter year on year was largely due to rapid expansion of our learning center network and headcount increases in the first half of the fiscal year, particularly in our sales and marketing and general administrative areas, as well as investment in new growth businesses.

Our gross profits in the quarter were US$17.0 million GAAP, and on a non-GAAP basis, excluding the impact of share-based compensation were also US$17.0 million. Our gross margins were 41.8% in the quarter both on a GAAP and non-GAAP basis. Our gross margins during the same period of the previous year were 41.6% on a GAAP basis, and 42.7% on a non-GAAP basis.

We saw roughly 90 basis points of compression in non-GAAP gross margins from 42.7% to 41.8%. The margin compression, due to the rapid expansion in learning centers in the first half of the year, was offset partially by our benefiting from revenues from one extra week of fall term classes in Beijing in the third quarter that we did not have last year.

Our selling and marketing expenses represented 15.9% of revenues GAAP and 15.2% of revenues on a non-GAAP basis, versus 11.4% on a GAAP basis and 10.0% on a non-GAAP basis during the same period of the previous year. The increase is primarily due to a significant year-on-year increase in sales and marketing staff to support our expanded program and service offerings and to increased advertising expenses for marketing and promotion.

However, on a quarter-on-quarter basis, due to the cost controls we have implemented, sales and marketing expense on an absolute level actually declined versus Q2 levels. Fiscal third quarter sales and marketing of US$6.4 million on a non-GAAP basis was approximately US$300,000 below that of the previous quarter. This was slightly better than the expectation I had on last quarter's call when I said sales and marketing spend could be flat, quarter on quarter.

When looking at it again on a year-over-year basis the increase in total sales and marketing spend reflects the increase in personnel to support the greater amount of sales and marketing activity required to support both our city expansion and learning center rollout. By the end of the second quarter, we had doubled the number of learning centers that we had as of fiscal year 2011 year end.

As I mentioned last quarter, a large part of the increased headcount for sales and marketing is the increase in headcount of our Xueke team, which consists of teacher marketers who work to promote our small class Xueersi Peiyou offering, especially in new cities where parents and students may not be as familiar with our programs.

Advertising as a percentage of revenues remained very low for our small class business, while for 1-on-1 and online courses we increased advertising versus the same period of the previous year as planned. However, for both 1-on-1 and online courses, our advertising declined on both an absolute basis and as a percentage of revenues as a result of our cost control efforts, as I mentioned in my early remarks.

General and administrative expenses as a percentage of revenues were 23.0% but only 20.3% non-GAAP, excluding share-based compensation expenses. G&A expenses for the same period of the previous year were 20.1% GAAP and 14.6% non-GAAP.

From a quarterly sequential perspective, third quarter non-GAAP G&A expenses of US$8.2 million were approximately US$1.1 million higher than in the fiscal second quarter. As I mentioned on last quarter's call, the reason for this was that there was some uptick in G&A expenses from the consultancy projects engaged and kicked off in Q3, as well as the impact of headcount added in the course of the fiscal second quarter, for which we only had the full quarter impact of payroll costs in the fiscal third quarter.

We also saw some additional G&A headcount that was only added in the third quarter, primarily to support our center rollout and bolster our business unit headquarters functions.

The above factors combined to give us GAAP operating income of US$1.2 million, a decrease of 52.2% versus the same period of the prior fiscal year, and non-GAAP operating income excluding share-based compensation of US$2.6 million, a decrease of 40.0% versus the same period of the prior fiscal year.

Operating margins in the quarter were 2.9% GAAP and 6.4% non-GAAP, versus 10.1% GAAP and 18.1% non-GAAP operating margins in the same quarter of the previous year.

Income tax expense in the quarter was US$0.3 million, as compared to US$0.3 million in the third quarter of fiscal year 2011. There was an evening out of the effect of income tax expense, decreasing due to lower income before tax, and increasing because one our entities became subject to a higher tax rate as of calendar 2011.

Our net income for the quarter was US$1.4 million, decreasing by 38.6% and non-GAAP net income, which excludes share-based compensation was US$2.9 million, decreasing by 32.2% compared to the same period of the last fiscal year. Our GAAP net income margins were 3.5% and non-GAAP net income margins were 7.1% in the quarter, versus 9.8% GAAP and 17.7% non-GAAP during the same period of the prior fiscal year.

In summary, in the third quarter we achieved better than expected top line results while, as expected, profitability was affected primarily by the large investment we made in new cities, learning centers and people to support our future growth in previous quarters, as well as the natural seasonality patterns of our business.

In the quarters ahead, we will continue to focus on quality in our growth. We will work to ramp up revenues and invest in the operational support required to sustain our successful business expansion, while at the same time concentrating on keeping costs and expenses in check to strengthen the scalability of our business.

Moving on to guidance. Based on the Company's current estimates, total net revenues for the fourth quarter of fiscal year 2012 are expected to be between US$48.1 million and US$49.8 million, representing an increase of 43% to 48% on a year-over-year basis. The Company expects its total net revenues for the full fiscal year ending February 29, 2012 will be in the estimated range of US$173.4 million to US$175.1 million, which is above the previously offered range of US$165.9 million to US$171.4 million.

Looking further ahead to fiscal year 2013, we expect total net revenues to be in the estimated range of US$225.4 million to US$234.1 million, representing an increase of approximately 30% to 35%, compared to the low end of our fiscal year 2012 guidance, assuming no material change in exchange rate. These estimates reflect the Company's current expectation, which is subject to change.

That concludes my prepared remarks. Operator, I am now ready to take questions.

(Operator Instructions)

Your first question comes from the line of Philip Wan of Morgan Stanley.

Hi, Joe, thanks for taking my question, and congratulations on a very strong quarter.

Thank you.

Sure. My first question is about your network expansion strategy. Again, could you please add more color about this, especially on the progress of your small center strategy? And should we expect a less aggressive network expansion in coming quarters in terms of the number of learning centers? Thank you.

Sure, Philip. We're still working through the learning center number as our annual budget for fiscal 2013 is still being finalized. Keep in mind that our fiscal year starts March 1, so we're still on track in budget planning and expect to finalize our budget over the next month. But, as a preliminary indication I would say that full year -- fiscal year 2013 we'll likely add between 50 and 60 new learning centers.

The majority of these new learning centers will likely be for small class. For our 1-on-1 business, we'll be focusing on improving utilization in the 90 learning centers we added in fiscal year 2012. So, depending on how quickly those ramp up we'll make a call mid-point through the year to decide what the 1-on-1 expansion will look like for the rest of the year.

For Mobby, the plan is to get the model right with the four centers we have in Beijing before expanding further. And, again, with Mobby we'll re-evaluate mid-time through the year, depending on the growth of that business over the coming two terms.

All right, thanks, Joe. That's helpful. And then my second question is -- your deferred revenue more than doubled this quarter. I was wondering within the increase, which business contributed more between the 1-on-1 or small class? Thank you.

Yes, they both contributed to the increase, but 1-on-1 contributed more. The reason for that is partially because 1-on-1 is a greater percentage of revenues. It was 21% of revenues for this quarter versus 13% in the same period the prior fiscal year. Also, 1-on-1, keep in mind people tend to book several months in advance. So you're going to have a lot more cash up front in that business, whereas with small class it tends to be a term at a time, or at most a couple terms at a time. So, those factors help contribute to greater deferred revenue balance.

The other part, also importantly is our small class business. We saw enrollments earlier this year for our winter term and our spring term. So, we saw a greater amount of revenue recognized before November 30 end for our small class business as well. So all of these factors contributed to the really strong deferred revenue growth trend that you see.

All right. Thank you, Joe. I'll get back to the queue.

Your next question comes from the line of Vivian Hao of Deutsche Bank.

Hello? Hello?

Yes, hi, Vivian.

Hi. Thanks for taking my question. I have two questions. First is about your -- could you give us more color on the recent development of your online segment, and also how your offline business and your online business work out together? Second question is regarding the impact of this year's Chinese New Year on your business.

Sure, Vivian, I'll take each of those questions in turn. In terms of the online courses business our strategy hasn't changed. We still continue to see online courses as quite complimentary to our small class and 1-on-1 offerings.

It's geographically complementary in the sense that online courses helps us to get into markets in which we don't currently have a geographic presence. So there are certain cities where it will be quite some time before we have learning centers so we can first go with our online courses.

In our existing cities where we already have learning centers, we find that online courses is also quite complementary to what we're doing with 1-on-1 and small class. The reason is because there are certain classes which parents don't necessarily feel a need to take a full 15-session term times three hours per session. They think they could probably get the key knowledge areas covered in a much shorter period of time. So online really fills in a nice gap there.

From a cost perspective it's also less expensive, especially when the ASPs are lower and then if you also factor in the cost of actually getting to the learning center, it's also a more economical offering.

The other thing that is just a function of online is that people like the flexibility of being able to do things wherever they want, whenever they want. So online really acts as a nice, added product that works together with small class and 1-on-1 in that way as well. So, that's what I'd tell you about the online courses business.

Right --

In terms of the Chinese New Year, we also saw some impact from the earlier timing of the Chinese New Year. The main impact was that for our fifth and sixth graders last year we had 10 sessions per term and this year it's seven sessions. So we expect that to have a RMB4 million to RMB5 million impact on the quarter.

Right. So, as a follow-up, still for your online do you see faster growth in terms of enrollment in new markets than in those with established, offline business markets?

I think they're both growing quickly. The new markets are actually a nice portion of the overall online enrollment and that's what we like to see. What I mean by new markets is those markets where we don't yet have learning centers.

Also, online courses are very strategic for us when we're starting to move into new markets. So remember. we'll first start with our websites and then with a discussion board, et cetera, and then over time we'll add the online courses to give people a trial of what our classes are like before moving in with our small classes. So, you're right to point out that online courses do have a very strategic importance in new markets as well as in markets where we don't yet have learning centers.

Right. Just one last question on the RMB4 million to RMB5 million loss, this will be permanent or a catch up later?

I actually think it's going to be permanent. It's already been factored into our guidance for Q4. Because it's a K-12 tutoring offering it's less a situation where people will come back in the spring. So it's not a huge impact, but I would be conservative and say it's probably not going to come back. That was something that was just a function of the Chinese New Year being a little bit earlier this year, but we factored that into our guidance.

Understood. Thank you.

(Operator Instructions)

Your next question comes from the line of Chao Wang of Merrill Lynch.

Hi, Joe. Thanks for taking our questions. I have two questions. Firstly, could you break down the enrollment between online and offline? Thank you.

I think you can probably back into that number, but I'll make it a little bit easier for you. It's pretty consistent with what it was last quarter. Online course enrollments were 20% this quarter. I think they were 21.9% last quarter.

Okay. Got it. Secondly, I think you mentioned that this quarter has one more week than third quarter last year. I'm not sure if I missed it in the prepared remarks. Just could you elaborate a bit more on that? Like, could you quantify the impact on revenue growth? So, if taking that week away, what would third quarter revenue look like? Thank you.

Yes, I think that it would probably be around US$2 million impact that week, but again, that's something that we've already factored into our guidance for the fourth quarter. It's really the fact just that the fall term covers two different quarters. It covers the fiscal third quarter and the fourth quarter.

So this year we had one extra session in our fall session because last year there was a competition at that time. So this year we were actually able to schedule classes at that time. So we were able to get one more session in the fall semester, which gave us a little bit more revenue in Q3, but we factored that in our guidance for Q4.

Oh, I see. Thank you very much.

Your next question comes from the line of Mark Marostica of Piper Jaffray.

Thank you. Joe, wanted to ask a question about the margin profile of the fourth quarter. You obviously did a nice job -- we see less compression in margins than a lot of us expected in the third quarter, and I'm curious how you view the fourth quarter from a margin perspective.

Sure. As I've mentioned in past quarters, we don't give official guidance on margins, but I can give you a sense of our latest margin trends. Based on our best sense for the current margin trends, I'm still expecting at least 15% non-GAAP operating margins for the full year in fiscal year 2012, but it will be on the back of faster than expected revenue growth.

So we're now expecting revenue growth to be at least 57% for the full year versus the 50% to 55% range I had given previously. So, that kind of gives you the sense the full year hasn't changed in terms of guidance. So, you can kind of back into what that fourth quarter number would be.

Sure. Sure. And then as we look at fiscal 2013, I know that's a long ways ahead of us here, but from a directional standpoint would you expect margins to improve in fiscal 2013 based on your learning center expansion plan that you communicated earlier?

Yeah, Mark. I'm not prepared yet to give margin guidance for fiscal 2013. The reason is because we still haven't completely wrapped up the budgeting process. So I want to make sure we do that before I give guidance on margins. But on the revenue side I feel comfortable with 30% to 35% revenue growth.

And in terms of how we get to that -- and again, this isn't official guidance on enrollments, but the way we're thinking about enrollments is that the offline enrollment growth will probably fall in the range of 20% to 25%, combined with ASP growth of 8% to 10%.

And then once you factor in the enrollments from online courses the total student enrollment will probably be higher for next year than that 20% to 25%, and overall ASP growth will probably be lower just because the online courses is growing more quickly and has lower ASPs. It's RMB20 to RMB40 an hour versus RMB33 to RMB60 an hour for small class and RMB150 an hour for 1-on-1.

So, given that online is still in the early stages and doesn't have a defined growth pattern it's hard for me to give a sense of total student enrollment and ASP growth numbers but that's what it looks like. Mobby will still be insignificant in terms of revenue for next year. So I can't give you too much on margins this quarter, but at least I'm trying to give you a little bit of a sense of how we're getting at least to the top line.

Fair enough. And then one last question, going back to your comments earlier about the learning center expansion in the fourth quarter, I'm wondering if in fact you will hit the 160 to 170 mark, which I think you talked about on the last call. Or, are you suggesting that the 150 mark is what you're targeting for the full year? And I think you're at 143 year-to-date. Any comments on that would be helpful.

Yes, sure, Mark. Yes, we're still targeting the 150 number, so we have pretty actively slowed down the pace of learning center expansion. So I think that it will be at least 150 for the full year, but I don't think it will be in the range of 160 to 170.

And could you walk us through the strategic thinking around that -- what's changed with regards to your thinking around learning center expansion?

Yes, I mean for learning center expansion we've always been looking at kind of an invest and harvest approach. And I think I indicated on the call last quarter that we would be slowing down centers pretty dramatically in the second half of the year. The way we think about learning centers is as they ramp up in terms of utilization then we get more comfortable with continuing to expand.

So, we added a lot of learning centers in the first half of the year. We more than doubled our number to fiscal year end last year. So we're looking for quality growth in this business. And we need to look at those health metrics like utilization, and once they ramp up nicely then we can look at continuing to expand new learning centers. So, our focus over the coming quarters will be in ramping up utilization.

Great. Thanks for the color, Joe.

Thank you, Mark.

(Operator Instructions)

Your next question comes from the line of Ella Ji of Oppenheimer.

Thank you for taking my question, and congratulations. My first question -- I don't know if I missed your answer to your last question. My first question is about the guidance for next fiscal year. Joe, I'm wondering if you could break down between the ASP growth and enrollment growth expectation.

Yes, I did break that down for Mark. I'm expecting -- in terms of our offline business -- for it to be 20% to 25% enrollment growth and then 8% to10% ASP growth. When you factor in online because it's a lower ASP business and growing more quickly your overall enrollment growth will probably be higher and your ASP growth will probably be lower than that range that I just gave.

Got it. Thank you. And then, I still want you to talk about your sales and marketing expenses. I understood that you are trying to do a lot of cost controls, but in the meantime it seems that you would increase advertising and spending in certain areas. Joe, I'm wondering if you have any -- let's say, targets for these sales and marketing expenses, either in the absolute dollar amount or as a percentage of revenue that you are trying to maintain for the next 12 months.

Sure. Well, as you know, our Xueersi Peiyou small class brand is driven by word of mouth, so advertising has never been a part of what we do for our core business, which is approximately 70% of all of our revenues. 1-on-1 as a business model tends to be more driven by advertising expense.

But vis-a-vis our competitors, we still try to differentiate based on the quality of our teaching instruction and content quality for 1-on-1 as we do in small class. But for 1-on-1 we still need to advertise a bit more just given the nature of the business model. So for 1-on-1 you should still continue to see advertising be a considerable percent of revenue.

But, I would like to point out that we've taken down advertising considerably versus Q2. In Q2 1-on-1 sales and marketing as a percentage of revenue for 1-on-1 was 6.8%. In this quarter it was only 2.5%. So, we've taken that number down a lot. And you can expect that advertising will go up when it gets closer to the peak season for 1-on-1.

So as we come into the spring term we will be using advertising for 1-on-1, but I don't expect it to reach similar levels as a percentage of revenue that it did in this last fiscal year.

Online courses is another area where we're spending more in advertising and that's because it's a business in its early stages so we're building that business and supporting it with advertising.

Oh, got it. Thank you. Thank you for the color.

(Operator Instructions)

Your next question comes from the line of Jennifer Gao of Credit Suisse.

Hi, Joe. I have two questions. One is I heard that you mentioned you closed down one learning center for 1-on-1. Can you tell me more about it? Which city is it in, and what's your decision making process on closing down that center?

The second question is about the eduu.com platform. And I read in the news that Zhang Xiaozhang said they would make that business unit independent. And, what does that mean, and what's the rationale behind that move? Thank you.

Sure, in terms of the learning center -- it was in Beijing. And the reason we decided to shut it down was actually that it was underperforming. So, we give learning centers a certain period of time to be able to ramp up enrollments and get to a point where we think they'll be profitable. And once they exceed that period of time then we make the call about whether it makes more sense just to shut it down or move the location to a more favorable location rather than continue running it as is.

So that's essentially the thought process that goes into how we think about when to shut down learning centers. And I think we're going to be very picky about that, especially with our 1-on-1 business, to make sure that each of those centers continues to perform as we continue to focus on profitability in that segment.

In terms of eduu -- as you know, Jennifer, from covering some of the internet companies, open platform is really the trend in the internet. So we think this is the direction things are going, and we want to be an early mover in the education space in also doing so.

Also, this open platform idea was very interesting for the eduu team and offered an exciting new direction for them. So it's exciting to be on a team where it's a new business unit and they like the idea of it being an open platform. It helps them to really want to go after being the winner in this area.

We don't think it's going to have an impact on our center-based offerings -- the fact that it's a new business unit -- because we continue to differentiate ourselves on quality and what we deliver to students in the classroom. So this will continue to be Xueersi's core competitive advantage.

It's just that for the eduu platform we think it makes sense for it to be open and for it to be able to eventually be able to support itself. In terms of what that business model would look like, it's still a work in progress so we'll continue to develop that business model over time and work through it. So, it's not going to happen overnight. For the time being, it's still a cost center for our company rather than a profit center.

Okay. Thanks.

Your next question comes from the line of Philip Wan of Morgan Stanley.

Hi, Joe, thanks for taking my follow-up question. Could you add some more color about your 1-on-1 business, for example, the performance in Beijing versus outside of Beijing? And I am also curious to know have you seen any market demand shift between 1-on-1 versus small class, and say for medium term three to five years? Which kind of business do you see more potential going forward? Thank you.

Sure, Philip. 1-on-1 for us is still -- Beijing is our most mature business and Beijing business is doing really well. We're really just in the early stages of building our 1-on-1 business, even in Shanghai, and certainly in all the other cities. So that's how I would describe our current 1-on-1 business.

In terms of how we're seeing the competitive trends in the market, we're really quite pleased with the way our small class business is growing. That's really outperformed my expectations in the beginning of the year. We think they're really two different consumers with two different needs. And I think small class -- we have a very competitive, differentiated offering for those students that typically are kind of in the top of their class -- top half of their class anyway, and are looking for additional enrichment after school.

For 1-on-1, it's allowed us to be able to offer test prep services when they want to cram and then be able to address a larger market of those students that maybe are on the borderline and aspire to be top students. So, that hasn't really changed. I think that it's a very competitive sector and probably getting more competitive.

Within 1-on-1 there are companies that have gotten VC funding. So, it's going to become a more competitive sector -- barriers to entry are lower -- but we still think it makes sense for our business as long as it's additive, and as long as we continue to make it profitable for us.

In terms of the longer term look at it, I think -- I mentioned that it was 21% of revenues in this quarter. I think for the full year it will be in that 20% to 25% range that I've always talked about -- probably right in the middle of that range. And then, over time -- a three-year kind of timeframe -- we expect it probably to get to approximately 30% more or less of revenue.

We're going to try to manage that growth of the 1-on-1 business. I think 1-on-1 is a business that can be as big a part of your mix as you want it to be, but if you're trying to manage growth against margins and maintain quality growth for our business, which is really our strategy, then it really makes sense to manage growth in the 1-on-1 area as well. So, we're thinking 30% as kind of a target destination as a percentage of revenues over that timeframe.

Thanks, Joe. That's very helpful. And one last question from me. What should we expect for tax rate?

Sure. We're still targeting that 16% tax rate for this year.

And for fiscal year 2013, any direction?

It should come down a little bit, but I wouldn't have huge expectations. I would say kind of 15% is probably a good thing to model for the time being.

Okay, that's helpful. Thank you, again.

Thank you. I would now like to turn the call back over to Mr. Kauffman for any closing remarks.

Thank you all, again, for joining us this evening, and early wishes to all for a happy Chinese Spring Festival holiday. Please do not hesitate to contact myself or Willow if you should have further questions or would like to visit us here in Beijing. Thanks.

Thank you for your participation. This concludes today's conference. You may now disconnect.