TAL Education Group (TAL) 2013 Q2 法說會逐字稿

Thank you for standing by and welcome to the TAL Education Group's second-quarter of fiscal year 2013 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).

Please be advised that this conference is being recorded today, October 23, 2012.

I would now like to hand the conference over to your speaker today, Mei Li, IR Manager.

Thank you all for joining us today for TAL Education Group's second quarter of fiscal year 2013 earnings conference call.

The second-quarter earnings release was distributed earlier today and you may find a copy on the Company IR website or through the newswires.

During this call, you will hear from Chief Financial Officer, Mr. Joseph Kauffman.

Following his prepared remarks, Mr. Kauffman will be available to answer your questions.

Before we continue, please note that the discussions today will contain forward-looking statements made under the Safe Harbor Provisions of the 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.

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 now like to turn the call over to Mr. Joseph Kauffman.

Thank you, Mei, and thank you all for joining us on our earnings conference call for the second quarter of fiscal year 2013.

We are very pleased to report solid top line growth combined with a strong performance in both operating income and net income in the quarter.

These results reflect our emphasis this year on the quality of our revenue growth following the rapid business expansion of the previous year, and on our operational focus on the core competencies needed to support our healthy long-term development.

On the revenue side, net revenues increased by 32.3% year-over-year to $68.1 million, exceeding the top end of our guidance.

Revenue growth was supported by an increase in enrollments of 24.8%.

Our center-based business, consisting of small class and one-on-one, led the way in delivering this solid top line number with our core small class continuing as our key growth driver.

In particular, cities other than Beijing and Shanghai maintained their outstanding business momentum.

On the profit side, operating income increased by 65.1% to $16.7 million.

Our operating profit margin was strengthened by over 480 basis points year-over-year.

Net income increased by nearly 50% year on year.

We achieved this mainly through a combination of more effective utilization of learning centers and budgetary discipline.

Let me now take some time to update you on key developments in the second quarter of fiscal 2013.

In our ongoing drive to optimize performance of our learning centers, we further consolidated our tutoring capacity, bringing down the total number of centers to 257.

On a net basis, we closed 13 learning centers, 12 of which were one-on-one centers as we managed the one-on-one business for profit rather than market share.

While we closed some centers, we also saw opportunities to add three new small class learning centers in the cities of Shenzhen, Wuhan, and Xi'an.

Of the 257 centers we had at quarter-end 158 were small class learning centers, which include four learning centers for our Mobby branded pre-K business, and 99 learning centers were for one-on-one.

We continued to make good progress in the five cities we entered between January and March of this year.

When we enter a new city, our focus is first and foremost on creating the best outcomes for our students, which in turn will support the word-of-mouth that drives our brand over the long term.

Therefore, we will intentionally limit the numbers of centers and classes we open in each market until such time as we have the built-up demand to support our further expansion.

In each of the cities we entered between January and March this year, Chongqing, Zhengzhou, Taiyuan, Suzhou, and Shenyang, we started with one learning center and had an initial intake in the summer term averaging approximately 200 enrollments per learning center.

This is the strategy that worked so well for us in Beijing, Guangzhou, and each of the other markets we have entered organically -- to manage our growth initially in order to firmly set in the minds of our parents and students how differentiated our offering is in the market.

Where we have focused on ensuring we are delivering outstanding teaching quality, effective and relevant content, and top student outcomes, the long-term outlook for the business has been much greater for us than in situations when we have focused more on near-term enrollments.

This strong growth momentum in new markets drove our small class revenues from cities other than Beijing and Shanghai to grow by 165% versus the same period in the previous year, supported by strong enrollment growth of over 150%.

Year-to-date our small class business in cities other than Beijing and Shanghai grew by over 180%, making it a key driver of our overall growth this fiscal year.

In terms of revenue contribution, cities other than Beijing and Shanghai accounted for 22% of small class revenues in the second quarter compared to only 11% during the same period in the previous fiscal year and 21% in the first quarter of fiscal 2013.

Our Zhikang branded one-on-one business grew at a more moderate pace in the second quarter, as we expected on last quarter's call.

Our focus this year is on improving the utilization of our centers and driving cross-sell from small class as we use our one-on-one personalized premium services primarily as a complementary platform to our core small class business.

This approach has begun to pay off in the quarter.

Utilization of one-on-one centers in the second quarter more than doubled versus the same time of the previous year.

I am also happy to report that we are now booking some early successes in replicating our one-on-one model outside Beijing and Shanghai.

Especially in cities where we have established a solid base with our core small class business, enrollment numbers for one-on-one have increased nicely, demonstrating the effectiveness of cross-sell in our tutoring businesses.

Turning now to our other business units, online courses revenues were up year on year in the quarter though growth momentum was relatively modest in the second quarter compared to the previous quarter.

Online courses is still not material for us in terms of revenue; however, we continue to allocate resources to determining how best to grow and monetize this new business.

Our Mobby branded pre-school small class business continues to show strong momentum year on year off of a small base even as we keep our primary focus on getting the model right in the four centers in Beijing rather than ramping up center expansion.

We continue to believe in the long-term growth opportunities of these new business lines.

Let me take this opportunity to comment on our upcoming third fiscal quarter.

Based on a new policy adopted by the Beijing Education Commission, we have amended and upgraded our mathematics content for primary school classes.

Since this occurred just at the start of the fall semester, it caused some uncertainty for students and parents.

We expect this adjustment to have a near-term impact on student enrollments in our fiscal third quarter as well as fourth quarter because the fall semester straddles both of these quarters.

However, on the positive side, over a longer timeframe, the improvements we are now making we believe will offer students an even more enjoyable and effective environment to pursue their studies, which will support the ongoing health and sustainable growth of our business.

I would like to emphasize that this is a policy-related and not economy-related issue.

We expect overall demand for after-school tutoring to continue to grow.

Investment in children's education remains a top priority for Chinese urban families, therefore it has good resilience to a slowdown in macro-economic growth.

Independent research firm IDC has reported that the after-school tutoring market in China totaled $23.9 billion in 2011 and it forecasts a 10% to 15% CAGR for the next three years to $30 billion.

And we continue to believe that we are very well-positioned within this overall market.

We have a growing presence in other markets outside Beijing where we are still under-penetrated and have a great opportunity to take more market share in these new markets based on our track record of strong execution, financial resources, and fiscal discipline.

Let me now go over the financial results with you.

We delivered $68.1 million in revenue in the quarter, representing revenue growth of 32.3% versus the same period in the previous year.

Driving the quarter's revenue growth was strong enrollment growth of 24.8% combined with higher average selling prices.

Total student enrollments increased to approximately 247,100 from approximately 198,000 in the same period one year ago.

The increase in student enrollments was driven primarily by small class, one-on-one tutoring services as well as online courses.

On the ASP side, the year-on-year ASP increase of 5.8% to $275 for the second fiscal quarter from $260 in the second quarter of the previous year was primarily driven by the hourly rate increases of a portion of our center-based course offerings.

One-on-one tutoring contributed 21% of revenues for the second quarter of fiscal 2013, compared to 31% for the previous quarter and 21% for the same period in fiscal year 2012.

Zhikang utilization rates and corresponding profitability levels were also improved as compared with the second quarter of fiscal 2012.

Now moving back to the total Company numbers, cost of revenues increased by 26.0% to $31.8 million from $25.3 million in the second quarter of fiscal year 2012.

The increase in cost of revenues was primarily due to an increase in teacher compensation, other staff costs, and rental costs associated primarily with an expansion of learning center capacity.

Non-GAAP costs of revenues, which excludes share-based compensation expenses increased by 26.4% to $31.8 million from $25.2 million in the second quarter of fiscal year 2012.

GAAP and non-GAAP gross profit for the second quarter were $36.2 million and $36.3 million respectively, as compared to $26.2 million and $26.3 million for the same period of the last year.

GAAP and non-GAAP gross margin for the second quarter were 53.2% and 53.3% respectively, as compared to 50.9% and 51.1% respectively for the same period of last year.

Selling and marketing expenses increased by 2.7% to $7.0 million from $6.8 million in the second quarter of fiscal year 2012.

The slight increase primarily reflected an increase in sales and marketing staff expense to support a greater number of programs and service offerings, which was mostly offset by reduced advertising and other expenses.

Non-GAAP selling and marketing expenses, which excludes share-based compensation expenses, increased by 1.2% to $6.5 million from $6.4 million in the second quarter of fiscal year 2012.

General and administrative expenses increased by 36.7% to $12.5 million, from $9.2 million in the second quarter of fiscal year 2012.

The increase was mainly due to an increase in general and administrative staff expenses to support expanded number of cities in which the Company had learning center operations and rental and office expenses.

Non-GAAP general and administrative expenses, which excludes share-based compensation expenses, increased by 54.1% to $11.0 million from $7.1 million in the second quarter of fiscal year 2012.

The above factors combined to give us operating income of $16.7 million, representing a year-over-year increase of 65.1%.

Non-GAAP operating income increased 48.5% year-over-year to $18.8 million.

Operating margin in the second quarter was 24.5% as compared to 19.6% in the same period of the previous year.

Non-GAAP operating margin was 27.6% as compared to 24.6% in the same period a year ago.

As we hold the vast majority of our cash balance in renminbi and report in US dollars, we benefit from exchange gains in times of relative strength of the renminbi and incur exchange losses in times of relative strength of the US dollar.

We record exchange gains or losses in the other income/(expense) line.

For the second quarter of fiscal year 2013, other income was $0.3 million compared to other income of $1.5 million in the same period of the last year.

Our net income for the quarter was $16.0 million, and increased by 49.7% year-over-year.

Non-GAAP net income for the second quarter was $18.1 million, up by 36.8% year-over-year.

Both basic and diluted net income per ADS were $0.21 for the quarter.

Both non-GAAP basic and diluted net income per ADS, which excludes share-based compensation expenses, were $0.23.

From the balance sheet, as of August 31, 2012, the Company had $223.0 million of cash and cash equivalents and $15.8 million of term deposits as compared to $188.6 million of cash and cash equivalents and $10.3 million of term deposits as of February 29, 2012.

As of August 31, 2012, the Company's deferred revenue balance was $103.3 million as compared to $70.1 million as of August 31, 2011, representing a year-over-year increase of 47.3%.

I would now like to move to our announcement of the completion of our Company's share buyback program and concurrent dividend declaration.

The Company's share repurchase program authorizing the Company to repurchase up to $50 million of its ADSs which was approved by the Board of Directors in October 2011, has now been completed.

The Company has repurchased 288,969 XRS ADSs in the open market, at an average price of $8.43 per ADS, for an aggregate consideration of $2.44 million.

We are also very pleased that the Board of Directors has approved our first ever dividend since we became a listed Company of $0.25 per common share or $0.50 per ADS.

We believe this is a suitable strategy to achieve capital returns for our shareholders at this time, and a more effective approach than a renewed share buyback program given the impact of the latter on stock liquidity.

The cash dividend will be paid on or about December 28, 2012 to shareholders of record at the close of business on December 7, 2012.

It will be funded by surplus cash on the Company's balance sheet.

Moving onto Q3 guidance, taking into account the near-term impact of the new Beijing policy, total net revenues for the third quarter of fiscal year 2013 are expected to be between $48.0 million and $49.2 million, representing a year-over-year increase of 18% to 21% from the third quarter of fiscal year 2012.

Based on the current visibility, we adjust our full-year guidance from that provided earlier and expect our full-year revenue to be in the estimated range of $227.2 million to $232.6 million, representing an increase of 28% to 31% year-over-year.

That concludes my prepared remarks.

Operator, I am now ready to take questions.

Philip Wan, Morgan Stanley.

Joe, thanks for taking my question.

My first question is about the new policy in Beijing.

What would you think about the long-term impact of the policy and also when would you expect the enrollment growth in Beijing to recover?

Thank you.

Sure.

Thanks, Philip.

Current thinking is that while there may be some near-term impact we believe one thing won't change, which is that a strong foundation in mathematics will continue to be important for students in each stage of their academic careers.

So we believe that mathematics at some level will continue to be an important area of aptitude for entrance into key schools at the various levels of the education system.

Over the long term, we will continue to improve our content and curriculum to continue to meet the needs of our parents and students.

Then the second part of your question I think was around when they will recover and that's hard to say at this point, but we do hope to see some recovery as early as the Chinese New Year term.

But we've also prepared internally for the potential that Beijing may not return to its previous revenues until the summer of next year.

It will take us some time to continue to improve the content while at the same time maintaining our ongoing dialogue with parents about the benefit of our newly amended and upgraded curriculum.

Hopefully that helps with your first question, Philip.

Sure, and then my second question is about your one-on-one strategies.

Since the Company has been scaling back its one-on-one coverage in terms of learning centers, could you please give us some color about the Company's expectations on the one-on-one in terms of maybe a sales contribution and also network expansion going forward?

Thank you.

Sure, Philip.

We are indeed seeking to manage the growth of our one-on-one business, so you are right on in that observation.

We believe the business model is not nearly as favorable as our small class business.

Barriers to entry are lower and competition more fierce.

That said, we believe that one-on-one still has a very important role in our overall portfolio.

I've talked about this before, but going back to how we started one-on-one back in 2007, it was primarily as a defensive gesture because we wanted to be able to serve the full set of needs of our students and even our small class students at certain times of the year may want to study in a one-on-one format.

So going forward, that's still going to be the positioning of the one-on-one business in terms of our overall portfolio.

We will continue to invest in growing the one-on-one business but focusing on ensuring it is complementary to our highly differentiated small class model.

We will be seeking to continue to ensure profitability in this segment rather than relentlessly going after market share.

So for that reason, that we are managing the growth of this business, the contribution of one-on-one before we've talked about it reaching the 30% contribution, I would just say that it will probably take a little bit longer for us to get there.

It may be more like a three- to five-year timeframe to get there in terms of the overall contribution of the business, but it's a lower margin business than small class anyway, so that should be less dilutive to margins.

Thanks, that's very helpful.

Then lastly, could you share with us any update about your investment in new businesses, which includes your online platform as well as Mobby?

And also the investment in your corporate structures such as system upgrades and trainings or maybe hiring plans as we discussed earlier this year?

Sure, Philip, we do continue to invest in our new businesses -- eduu online platform, Xueersi.com, which is our online courses platform, and Mobby pre-K.

We continue to see the eduu platform as crucial for driving our word-of-mouth.

We've seen how it works in new markets where we don't have new learning centers or where we are at an early stage of learning center expansion.

But the good thing is we have sought to be disciplined about our investment in new businesses and at this point believe that the three new businesses of online courses, Mobby pre-K and eduu online platform combined will lose more like $7 million versus the $8 million to $9 million estimated at the beginning of the year.

I mentioned in my prepared remarks about online courses and about Mobby.

They are both continuing to grow but are not yet material in terms of our overall business.

So overall, I would say that we have done a decent job of exercising fiscal discipline as regards these new businesses, but we are also continuing to invest as they are in the early stages of their growth.

In terms of the organization structure systems and renovation of the office, etc., the organization structure I think we've done a really very good job of keeping headcount in check especially at the group level.

At the business unit level, we are adding people but in a disciplined way around areas that reinforce our core competencies like teacher training, content development, etc.

In terms of the systems, it's on track.

The EHR system project has been launched.

It is on track; the OA system is on track.

I mentioned last quarter that our finance system can already automatically produce US GAAP and PRC GAAP financial statements.

So I think we are in a good place there in terms of what we expected for the full year.

And then the other piece that was potentially a big cost item was the renovation as regards our office space and I think the good news there is we have been more modest in terms of what we were thinking in terms of the renovation of that facility, so we should see some savings in terms of the renovation for the office space we bought last year that in the beginning of the year I was concerned might be a bigger hit to the P&L than I think it will be at this point.

That's very helpful.

Thanks, Joe.

Vivian Hao, Deutsche Bank.

Thank you for taking my question.

I have got two questions.

One is along the lines of the recent Beijing policy change on the Olympics math competition courses.

Can you give us some color on the recent August and September enrollment momentum in Beijing to better understand the situation?

And secondly is additional to strategic reasons of closing down those nonperforming one-on-one centers, do you think there is for the segment the macro headwinds have some negative impact on the one-on-one segment as well?

Sure, Vivian.

In terms of your first question, we are not going to disclose enrollments by city.

What I can say is that our Q3 guidance reflects the impact in Beijing as well as the new full-year adjusted guidance that we've given.

There wasn't an impact in the summer as the policy came out at the very end of August, so the impact started with September.

In terms of your second question related to one-on-one, I think that it's strategic for us.

I think that in terms of our portfolio, the way we are positioning one-on-one makes sense for us.

That said, it is a higher price point offering.

So I think at that kind of a price point of well over RMB200 per hour, at times when you can take it or not, in other words it's not right before an examination when people are cramming, I think that it does become more discretionary than some of the other offerings, particularly our small class offering, which is still at only RMB60 in Beijing, Shanghai, Guangzhou, and Shenzhen and less than that in markets where affordability is not as high as Beijing, Shanghai, Guangzhou, and Shenzhen.

So I think that you astutely point to a good point in that regard.

For the people that can afford one-on-one all the time throughout the year, year in and year out, I think that that is a relatively smaller part of the population.

So at least the market we focus on as we talked about before is one where you may see more so than small class some impact.

Then in terms of the other point I guess you are making is the only other thing I can think about besides our own strategy would be the competitive situation is more fierce in the one-on-one segment than small class based on our observation.

So we are leaning towards an area where we really differentiate in small class where we think there's a better business model and greater opportunity for differentiation with a higher barriers to entry business.

Okay, that's very helpful.

Just one more follow-up question.

So I noticed there are about like -- in terms of quarter numbers for the small class learning centers, the center production of total numbers this quarter, is that a combination of centers or it is a closing down of the small class centers?

Yes, and we did primarily close down one-on-one centers on a net basis but we also did close down some small class centers.

Typically when we close down a small class center, it's because -- I think you understand how we have developed our centers.

We start with a center that's relatively small and then over time as enrollments ramp up, we seek to add levels to that center.

Or if we are unable to add levels to that center, then we will add centers around that center.

So similarly when we close down centers, it's often that these centers that we have added around another center, they are not economically as profitable as when you just add a level or add classrooms to an existing center, so sometimes we will seek to rationalize in that way where we will add classrooms or add square meters to existing centers and then we will close down a center around that center that may be less profitable.

So that's mainly what's going on in the small class business.

Understood, thank you.

Chao Wang, Merrill Lynch.

Quick question, a couple of questions.

Firstly is just a house-keeping one.

Could you give us online versus off-line mix in terms of revenue and enrollment?

Secondly on margin side, I noticed that sales and marketing savings is particularly significant so is that related to the scale back of your one-on-one business?

And also could you disclose the headcount number and its growth?

Also any guidance on the margin for the upcoming quarters?

Thank you.

Okay, there's a lot there.

Let me try to go through as much as I can.

In terms of the online courses, enrollments and revenue, it was 12% of enrollments and approximately 3% of revenues in the quarter.

In terms of the question about sales and marketing expense, I think you were asking about what contributed to our getting better leverage out of the sales and marketing expense.

And the primary factor was that we were able to have better leverage out of our advertising.

I think you asked about whether that had something to do with our managing the growth of our one-on-one business, and the answer would be yes.

As you know, we spend very little on advertising for our small class business, so last year during the same period, was a record high in terms of percentage of revenue that we spent on advertising for our one-on-one business and this year in the strategy of managing the growth of that business and focusing on making it complementary to our small class business, we didn't spend as much on advertising as we did in the previous year.

In terms of margins going forward, I don't offer margin guidance.

I think in terms of the trend, it's quite apparent that we have had very good delivery on the profit side through the first half of the year.

Keep in mind that next quarter is a seasonally low quarter in terms of profitability.

Q2 is a seasonally high quarter in terms of profitability and we do have the investments that I talked through with Philip earlier in the call both in terms of new businesses and organizational structure systems, etc.

That said, what I can tell to this point is that the trend looks more like margin expansion for the full year than margin contraction, as I indicated on previous calls.

And at this point if I had to give it a range, I would say it's at least 50 to 100 basis points that we would be looking at in terms of margin expansion based on the current trend.

And this is by no means guidance in that area, but that's the sense that I get from what I can see so far.

Can you disclose that headcount maybe absolute number or gross?

On the headcount side, we are not going to be disclosing headcount every quarter.

I can just tell you that we have done a reasonably good sized -- good job of controlling the headcount number.

And you can see that from the numbers in terms of the operating margin that we have achieved in the quarter.

So qualitatively, as I mentioned earlier, we have done a very good job of controlling headcount at the group level and then where we have added headcount, it's been primarily around the new centers that we have added in the quarter and then improving capabilities in terms of some of our core competencies at the business unit level.

Okay, sure, sure.

One last question from me.

On cash balance side, how much is offshore money that you can utilize to pay dividends without incurring withholding tax?

Thank you.

Yes, sure, prior to the declaration of this dividend, we had approximately $100 million offshore, which is held primarily in renminbi.

That's the approximate ballpark number that we have in terms of offshore.

Got that, thank you.

Fei Fang, Goldman Sachs.

Thanks for taking the question.

My question is regarding your expansion plan.

So how many new centers and new cities do you plan to roll out in the rest of the year?

Sure, that's a great question, Fei.

While we are taking investment up again over the coming quarters, I would like to make the point that it's not going to be the same pace as in fiscal year 2012.

We are seeking a more regular path to investment and capacity to drive our future growth in these deep cycles of investment harvest you've seen in the past.

For the second half of this year, I would say we are on track for the equivalent of 20 additional learning centers for our small class business before the end of our fiscal year in February.

When I say equivalent I mean in terms of classrooms.

We may get there through adding classrooms to existing centers or adding new classrooms and I'm thinking along the lines of back of the envelope five classrooms per center when talking about that equivalent 20 additional centers numbers.

Some centers will have six to eight classrooms but for back of the envelope ballpark, you can use five to kind of think about it.

Then going into next year, I think for the first half of next year we are targeting the equivalent of 30 learning centers, so we are trying to have a pretty regular approach to this learning center expansion.

Again, these will come in different sizes and we'll be looking at a combination of adding classrooms or square meters to existing centers combined with adding new centers.

Great, that's helpful.

Another follow-up question on the dividend, so given that you have this offshore cash I think that's sufficient to finance the dividend payment, can we assume that there will be no incremental tax implications on the top of this, our dividend payment?

Yes, from a Company perspective, we're not -- we would not be subject to that PRC withholding tax that I think you are referring to because the money is already offshore.

Great.

Thanks, Joe.

Ella Ji, Oppenheimer.

Thank you for taking my questions.

First a question relating to the change in Beijing schools.

So, Joe, could you give us some details in terms of what have you really changed in the contents of the classes in Beijing?

Sure, Ella.

We are continuing the steps of this ICS that I think you will remember that we announced shortly after becoming a listed company.

ICS is "intelligent classroom system" launched over two years ago now.

We are accelerating the pace of that change, so through multimedia and automated content projected on interactive whiteboards, we are continuing to make the content more fun, more easily accessible to more students.

We are also improving the leveling system, in other words making sure the students are being assessed more effectively before starting class, being put in the right level for their current level of capability.

Another key change is that we are changing the sequencing of our knowledge areas so we are trying to teach in a way that's more aligned to the way students learn.

So it is through this combination of improvements that we hope to be able to deliver a more effective classroom experience for our students, which will help with the long-term health of the growth of our business.

Sure, so with those changes and you mandated the mathematics courses, would you consider for example any promotional activities with these new changes?

And also for example, any changes in the ASP of the classes that you're offering?

That's a great question, Ella.

We are not considering a promotion in the sense of discounting, if that's what you mean because our Peiyou business focusing on those top students, it's really not the way we differentiate in the market.

We differentiate based on the quality of the teaching, the quality of the content and the curriculum, and we will continue to differentiate in that way.

So I don't -- we are not going to be doing kind of a price discounting or something related to this.

We will promote the classes if you mean in terms of lectures and that kind of thing where we are already doing lots of lectures and communications with parents to help them understand the changes we have made to the curriculum, and we will continue to do that from now up until the enrollments for our winter term begin.

Okay, my next question relates to the impact from China's economy.

I am sure you know the education is very resilient but can you talk about is there anything that you are seeing for example, a switch back to small sized classes from one-on-one because small sized classes are cheaper?

And also could you talk about the salary levels for the new hires, are you still seeing the labor cost being quite a major overhang on the margin expansion?

Thank you.

Sure, Ella, these are great questions.

I think directionally you're right, we are not seeing a meaningful impact from the economic slowdown.

We continue to believe as you mentioned that education is a high-priority item in the household budget of these Chinese parents regardless of the macroeconomic environment.

I think that Vivian touched on this point earlier in talking about one-on-one.

I don't have any definitive data to support that because typically people don't go from one-on-one to small class in quite that way.

Usually one-on-one is a cross-sell at least for us from our small class business.

We are seeing one-on-one grow at a slower rate than previously but we are also managing the growth of that business, so it's hard for us to get a sense for whether the overall market is slowing or whether we're just really, really effective in making sure that we are managing that growth for better profitability.

But I do think that overall one-on-one is more susceptible to a potential economic slowdown than would be our small class business, which I think is especially well-positioned in these times.

In terms of the question on wages, yes, despite the macroeconomic environment we still do consider -- continue to see pressures on wages particularly in our SG&A areas and the way we are addressing that is by improving classroom utilization, improving the utilization of personnel.

So even in a situation where we are seeing these increases in absolute wages because of the efforts we have made, we've been quite effective through the first half of the year in improving the operating leverage in our business.

Great, thank you.

That's all my questions.

(Operator Instructions).

Cynthia Meng, Jefferies.

I have a few quick questions.

Firstly, do you see any chance in the Beijing policy spreading to other cities in China?

Secondly, besides top line impact, do you see any cost impacts on the new Beijing policy?

Lastly, I mentioned about margin expansion for the full year.

Is it mainly because of decreasing selling expenses to sales ratio and improving gross profit margins?

Thank you.

Sure, Cynthia, I will try to handle each of those questions.

In terms of the first question, we are not seeing to this point the impact of the Beijing policy on other markets.

Those markets continue to experience very solid growth as I mentioned in our prepared remarks.

At the same time, the kind of improvements we are making to the content in Beijing we'll seek to extend to new markets in terms of sharing learnings and sharing best practices within the organization.

In terms of the second question, I wasn't sure if I completely understood but I would say at this point, the main impact we are seeing is from a top line perspective.

I don't think that we have seen to this point a big increase in costs and expenses though we are investing heavily in our content development but that has always been a big area of investment for the Company and one of our core areas of competitive advantage.

So I think that I would think of it primarily as an impact in terms of the topline.

Then remind me of your last question.

Last question as you mentioned about margin expansion.

Margin expansion, right, sure, I got it.

So in terms of margin expansion, clearly we are adding less learning centers this year than we did in previous years, so that will help on the gross margin side.

Then I think that on the sales and marketing side, we are going to continue to manage that tightly.

I don't know that you will see the same leverage out of sales and marketing that you saw this quarter because this quarter we were cycling a Q2 of last year where we had an elevated level of sales and marketing.

But we will continue to pay attention to this line item.

And then the investment in systems, processes, organizational structures, the new office building renovation etc.

all flows into G&A, so that area I wouldn't expect to see as much improvement on as the other areas.

Thank you.

Mark Marostica, Piper Jaffray.

Thank you, my first question, Joe, is going back to a topic that has been discussed at length on the call and that is the Beijing policy change.

Could you just walk through the details of the change itself and any reaction you've had thus far from parents regarding the amended curriculum if you've done any surveys with parents, just curious what they are thinking?

Sure, Mark.

The policy statements on the public record, so I'd encourage you to review it as well but it's essentially clarifying that Olympiad mathematics competitions and tests should not be used as selection criteria for students seeking admission to key schools in Beijing.

In terms of the content, I do think we are getting good feedback.

We don't have this survey that we have had a third party do but we are spending a lot of time at all levels of management listening in on classes, getting feedback from parents right up to the CEO spends a day each week in the classroom listening to classes and getting feedback.

So I think that the feedback has been good for the most part and also we are able to get more feedback all the time, which helps us continue to evolve the content over time.

Okay, thanks for that color.

On the sales and marketing line, significant leverage there.

You talked about this notion of less one-on-one focus or growth contributing to lower advertising spend growth.

I'm curious, has there been any structural change to how you approach sales and marketing for the one-on-one business or is this leverage that you have seen on selling and marketing exclusively tied to the one-on-one commentary?

Yes, I think our approach to the market remains the same for the small class business, so where we are able to see the savings on the sales and marketing side has been due to a change of strategy on the one-on-one side where we are not employing as much advertising expense and seeking to be much more complementary to our small class business.

So I would say that the change in strategy on the sales and marketing front is primarily on the one-on-one area.

Okay, then two last questions.

On the ASP front, can you talk about what your plans for ASP increases are from here?

And then lastly, plans for new city expansion in the back half of the fiscal year?

Thanks.

Sure, Mark.

In terms of ASP, we do expect to take a price increase again next year but the timing and magnitude of that increase is still to be determined.

At this point, it's not likely that we will take a price increase prior to the summer term next year so that's what I can say in terms of the pricing at this point.

And then in terms of city expansion, I indicated this on last quarter's call as well where I said it was more likely than not that we wouldn't add new cities again in January to March of this coming year, this fiscal -- this calendar year 2013 year.

And I would maintain that guidance in terms of city expansion.

We have -- we are early days in the cities that we added this year.

There is a lot more bang to -- for the buck we think in continuing to grow the cities that we are in now, those 15 cities have performed very well and we think that they are the highest potential cities for us in terms of K-12.

So I wouldn't expect us to go into new cities again in that January to March timeframe of this coming calendar year as we did last year.

Okay, thank you.

Thank you, Mark.

That concludes the Q&A session for today's call.

I will now turn the call back over to Mr. Kauffman for closing remarks.

Thank you all for taking the time to be with us on this evening's call.

All of us at TAL Education Group encourage you to come out and see us in Beijing and come and visit our centers and get an experience for the teaching experience that we offer here in China to our students.

So look forward to hearing from you and thanks for your time today.

Thank you for joining today's conference call.

You may --.