TAL Education Group (TAL) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the TAL Education Group fourth fiscal quarter and 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).

I must advise you that this conference is being recorded today, Tuesday, April 23, 2013. I would now like to hand the conference over to your first speaker today, Ms Mei Li, Investor Relations Manager. Thank you, please go ahead.

Thank you all for joining us today for TAL Education Group's fourth fiscal quarter and fiscal year 2013 earnings conference call. The fourth fiscal quarter and fiscal year 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 SEC. 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, Mei, and thank you all for joining us on our earnings conference call for the fourth fiscal quarter and full fiscal year 2013. Before I go through the quarter and full-year numbers, I would like to represent the entire TAL management team in sending our warmest wishes to all of teachers, employees, parents and students who have been affected by the earthquake disaster that ravaged several areas in Sichuan over the weekend. Particularly in our hearts and minds at this time are the family members of our teachers, employees, parents and students in our Chengdu and Chongqing schools. We've decided to donate RMB1million to the victims of the earthquake to support reconstruction work and get education back on track after the disaster and we will include Ya'an in our existing annual teaching-assistance program. We'll monitor the situation and decide on further assistance programs if needed.

Moving to the quarter, we are pleased to report fourth fiscal quarter results with revenues in line with our guidance. Net revenues increased by 14.2% year-over-year to $59.6m, near the high end of our guidance. Revenue growth was supported by a 9.7% increase in enrollments. In Beijing we continued to operate in a challenging environment due to the change in policy on the use of exam and competition results for selection at key junior high schools. We felt the impact from the change in Beijing policy, not only on small classes but also on our one-on-one business in Beijing, which we position largely as a cross-sell offering to our small classes. Revenue growth was also affected, as we mentioned last quarter, by the late timing of Chinese New Year that reduced the number of classes scheduled in the fiscal fourth quarter ending February 28. In Shanghai, on the other hand, we saw growth momentum returning once again. And the small class business in cities outside Beijing and Shanghai, our new markets, delivered outstanding growth.

Our full-year results underscore how fiscal 2013 has been a year of harvesting following a year of large- scale investment and business expansion. Operating leverage was boosted by our efforts to improve learning center utilization and budgetary discipline. Even as we still managed to grow the topline by 27.3% during the year, we saw operating income increase by 49.4% and net income by 37.5%. Our operating margin expanded to 13.9%, an improvement of 210 basis points versus fiscal 2012.

Last quarter I mentioned we are now in the early phase of our next investment cycle and we plan for net center expansion in the first half of fiscal 2014. In the fourth quarter we still had a net reduction of centers at the tail-end of our year-long focus on operational efficiency. We opened one new small class center in each of Beijing, Xi'an, Nanjing and Taiyuan and one one-on-one center in Nanjing, and closed a combined nine small class and one-on-one centers in Beijing, Shanghai and Tianjin. We had 255 centers by end of February 2013, of which 159 were small-class learning centers, including four learning centers for our Mobby- branded Pre-K and 96 were for one-on-one.

Let me now go over the different business lines.

The small class business in new markets continued to drive our growth. In the quarter, small class revenues as well as enrollments in cities other than Beijing and Shanghai again more than doubled versus the same period in the previous year. The full-year growth rate of small class revenues in cities other than Beijing and Shanghai grew by over 140%, making it the primary driver of our overall growth this fiscal year. In terms of revenue contribution, cities other than Beijing and Shanghai accounted for 29% of small class revenues in the fourth quarter, compared to only 16% during the same period in the previous fiscal year, and 28% in the third quarter of fiscal 2013.

In fiscal 2014 we plan to add new centers in cities other than Beijing and Shanghai. We believe there is much growth potential left in the cities outside Beijing and Shanghai as our expansion strategy has been carefully focused on quality and less on quantity in the early stages to set the stage for rapid future growth. For the cities of Xi'an, Nanjing, Chengdu and Hangzhou, which we entered in calendar year 2011, the combined total enrollments more than doubled year-over-year in the fourth quarter as well as fiscal year 2013. The cities that we entered in calendar year 2012 -- Chongqing, Zhengzhou, Taiyuan, Suzhou and Shenyang -- had an average of over 950 enrollments by the end of the fiscal year reported.

We are pleased to see Shanghai coming back to a growth trajectory. Our business in Shanghai has gone through a transition, following the efforts we made last year to manage our growth in order to refocus on teaching quality and curriculum. We see continued positive business momentum in the cities we entered in 2009 and 2010, Guangzhou and Shenzhen, driven by a strong focus on quality of our business metrics. Once again the successes we have had in each of our cities outside of Beijing underscore the importance of discipline in our expansion strategy. We continue to believe that managing our growth to maintain quality of teaching and curriculum forms the foundation for the long-term growth of our business. We also continue to invest in supplementing our small class offerings with online content and increased tutoring interactivity to create a more blended learning model in which online exercises and practice materials can be utilized by our small-class students through our www.speiyou.com platform.

As for Beijing, our visibility remains low as we continue to see the impact of the change in policy on how exams and competitions are being used as an entrance criterion for selection into key junior high schools. The spring term small class enrollment numbers are still down year on year, as was the case in the fall and winter terms. As we said before, the impact from the policy change will not likely disappear in the next couple of quarters. However, we believe more students will come back to our classes over time, and will take advantage of the content and assessment tool enhancements we continue to make to support our curriculum.

In our Zhikang branded one-on-one business, we saw a seasonal uptick in the fourth quarter from the third quarter, which is typically the lowest quarter in the year. However, as a percentage of revenues, Zhikang's contribution was less than in the same period of the previous year for each of the past two quarters. Revenues from one-on-one contributed 22% of revenues in the fourth quarter, compared to 19% for the previous quarter and 24% for the same year-ago period. For the full-year, one-on-one's contribution to overall revenues was 23%, consistent with its full-year contribution in fiscal 2012. As I mentioned, our business in Beijing has been affected by the change in junior high school admission policy. And given the relatively fixed cost structure of the one-on-one business, the adverse impact on the profitability in the second half of the year for Zhikang has exceeded that for small class, and the growth momentum of Zhikang in other cities has not been strong enough to compensate for this. We expect this trend to continue in the first quarter.

The current topline weakness in one-on-one also affected the bottom-line. On a full-year basis, Zhikang was not as profitable in fiscal 2013 as in fiscal 2012 despite operational improvements we made during the year. We continue to look for further efficiencies in this business. Currently we are changing the layout of learning centers to conduct one-on-one sessions in mini-class rooms instead of cubicles, which could bring up utilization. We are also investing in content, which we hope will improve the scalability of an inherently less scalable one-on-one model. We would also consider making further cost-efficiency decisions to ensure that sales continue to support the relatively fixed cost structure of this business line.

Let me briefly update you on our other business units.

Our Mobby-branded pre-school small class centers in Beijing continue to have healthy enrollment and business momentum. Moving to online, our online courses at www.xueersi.com form the revenue-generating part of our online strategy. Xueersi.com will continue to offer a lower price point in order to provide a low cost of entry for trial in existing markets as well as new markets where we do not yet have learning centers. While monetization is not our key focus, www.xueersi.com is expected to be close to break-even by the end of fiscal 2014 as we manage our costs in line with the current growth outlook. In addition to our ongoing efforts at www.xueersi.com, we will continue to invest behind exploring other potential online learning models in fiscal 2014.

As for Eduu, our social network for parents and students, we have been pleased with the role this platform has played in our existing cities, particularly the new cities we have entered in recent years. In the coming year, we will continue to invest behind Eduu -- and we will also explore new potential online learning models -- but will seek to reduce the losses we have experienced in previous years in our other new business lines, Mobby and Xueersi.com.

Overall with the solid foundation we set in fiscal 2013, and ongoing positive growth momentum in cities outside of Beijing, we are ready to re-enter the investment stage of our business in fiscal 2014. We plan to drive new growth opportunities in those markets we believe to be currently underserved by opening the equivalent of at least 30 new learning centers in fiscal 2014.

In the coming fiscal year, we will undertake new content initiatives as well. We will maintain our organizational focus on the math and science areas and further build out our sciences curriculum to support the broader math and sciences curriculum offered in middle school and high school. At the same time, we will invest efforts into further enhancing our LeJiaLe-branded English offering to make it an even more attractive cross-sell to our students. As always, we continue to invest in maintaining our top-level teacher quality, based on solid training, competitive salaries and a good work environment. All of these efforts require continued investment back into the business.

Finally, in fiscal 2014 we will also improve our IT systems for the external and customer-facing areas of the business, such as improved registration processes and assessment metrics at each level in our curriculum. This is the final leg of a two-year drive to better manage and control our business. Earlier, we were engaged in building e-HR, OA and financial reporting systems, headquarter and business unit functions, as well as IT systems and processes for sustainable scaling and control of the business. This year, we will look at more customer-oriented operational improvement. Of note, while the moneys were invested in the e-HR and OA systems in the second half of last year, given the actual timing of the project completion by various vendors, the P&L impact for these projects will not be felt until beginning in the first quarter of fiscal year 2014, rather than in the second half of fiscal 2013 as previously anticipated.

We believe the investments we have planned for fiscal 2014 are appropriate because these initiatives are centered around our core competency of being a specialized, top-level tutoring services provider in the market. We aim to raise the barriers-to-entry with our high-end customized content and subject expertise vis-a-vis local competitors. The timing is right given the continued attractive growth opportunities in China's K-12 tutoring sector.

Let me now go over the financial results with you.

We delivered $59.6m in revenue in the quarter, representing revenue growth of 14.2% versus the same period in the previous year. The revenue growth was mainly driven by an increased number of total student enrollments combined with higher average selling prices.

Total student enrollments increased 9.7% to approximately 250,700 from approximately 228,500 in the same period one year ago. The increase in total student enrollments was driven primarily by increases of enrollments in the small class offerings.

On the ASP side, the year-on-year ASP increase of 4.1% to $238 for the fourth fiscal quarter was primarily driven by the hourly rate increases of a portion of center-based course offerings and the foreign exchange rate fluctuation.

One-on-one tutoring contributed 22% of revenues for the fourth quarter of fiscal 2013, compared to 19% for the previous quarter and 24% for the same period in fiscal year 2012.

Now moving to the total business numbers. Cost of revenues increased by 10.1% year-on-year to $31.4m. The increase in cost of revenues was primarily due to an increase in teacher compensation, rental costs and other staff costs associated with an expansion of learning center capacity, as well as increases in wages and teacher fees versus the year-ago period. Non-GAAP cost of revenues, which excluded share-based compensation expenses, increased by 10.4% to $31.4m.

GAAP and non-GAAP gross profit for the fourth quarter were both $28.3m as compared to $23.7m and $23.8m, respectively, for the same period of the last year. GAAP and non-GAAP gross margin for the fourth quarter were both 47.4%, as compared to 45.4% and 45.5% respectively for the same period of last year.

Selling and marketing expenses increased by 37.8% to $7.6m. The increase of selling and marketing expenses in the fourth quarter of fiscal year 2013 was primarily a result of an increase in compensation to sales and marketing staff to support a greater number of programs and service offerings, as well as an increase in brand promotion and advertising expenses. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 41.9% to $7.3m.

General and administrative expenses increased by 21.3% to $14.4m. The increase in general and administrative expenses was mainly due to an increase in compensation to general and administrative personnel to support a greater number of programs and service offerings, as well as the depreciation expenses for the office space purchased by the Company in Beijing, which commenced in the fourth quarter of fiscal year 2013. Non-GAAP general and administrative expenses, which excluded share-based compensation expenses, increased by 19.3% to $12.9m.

Operating income was $5.7m, representing a year-over-year decrease of 10.4%. Non-GAAP operating income decreased 4.8% year over year to $7.4m. We took an impairment loss in the quarter as we wrote off the long-term pre-payment balance of $0.6m as the Group revised its business strategy and decided not to develop its study abroad intermediary and admissions consulting services for the foreseeable future. Taking out the impairment loss of $0.6m, income from operations was $6.3m, and decreased by 1.0% year over year.

Operating margin in the fourth quarter was 9.5% as compared to 12.1% in the same period of the previous year. Non-GAAP operating margin was 12.4% as compared to 14.9% in the same period in the previous year.

Our net income for the quarter was $6.8m, and decreased by 9.7% year over year. Non-GAAP net income for the fourth quarter was $8.6m, down by 5.0% year over year. Taking out the impairment loss of $0.6m, net income attributable to TAL was $7.4m, and decreased by 1.8% year over year.

Basic and diluted net income per ADS were both $0.09 for the quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were both $0.11.

Moving to the year as a whole, we achieved solid growth in fiscal year 2013. We delivered revenue growth of 27.3%, driven by enrollment growth of approximately 18.2% and ASP growth of 7.7%.

Net revenues broke the $200m mark, reaching $225.9m for fiscal year 2013 from $177.5m in fiscal year 2012.

Cost of revenues increased by 21.1% to $115.7m, from $95.6m in fiscal year 2012. The increase in cost of revenues was mainly due to an increase in teacher compensation, rental costs and other staff costs associated primarily with an expansion of learning center capacity as well as an increase in wages and teachers fees. Non-GAAP cost of revenues, which excluded share-based compensation expenses, increased by 21.5% to $115.6m, from $95.2m in fiscal year 2012.

Selling and marketing expenses increased 19.5% year-on-year, and were 12.2% as a percentage of revenues as compared to 13.0% in fiscal 2012. Non-GAAP selling and marketing expenses as a percentage of revenue was 11.4% compared to 12.2% in fiscal 2012. Our word-of-mouth driven model enhanced by the strength of our interactive online education community continued to keep our spending on advertising and brand promotion low. We also were able to see some scale out of the sales and marketing personnel we added in fiscal 2012 to support our selling and marketing efforts.

General and administrative expenses increased by 35.2% in fiscal year 2013 to $51.1m from $37.8m in fiscal year 2012. Non-GAAP general and administrative expenses, which excluded share-based compensation expenses, increased by 40.6% to $44.8m from $31.8m in fiscal year 2012. The increase in general and administrative expenses was mainly due to an increase in compensation to our general and administrative personnel to support a greater number of program and service offerings, as well as the depreciation expenses for the office space purchased by the Company in Beijing, which commenced in the fourth quarter of fiscal year 2013.

Our operating margin fiscal year 2013 was 13.9%, an expansion of 210 basis points versus the prior year. Non-GAAP operating margin was 17.6% for the year, an expansion of 130 basis points versus the prior year.

For the full fiscal year 2013, other income was less than $0.8m, compared to other income of over $3.9m in fiscal year 2012. The other income in both years was primarily driven by exchange gains. As the Company holds the vast majority of its cash balance in RMB and reports in U.S. dollars, it benefits from exchange gains in times of relative strength of the RMB and incurs exchange losses in times of relative strength of the U.S. dollar. The lower appreciation of the RMB versus the USD in fiscal 2013 compared to fiscal 2012 was the primary driver of the smaller exchange gain and thus lower other income recorded in fiscal 2014 versus fiscal 2013

Income tax expense was $4.1m for fiscal 2013 as compared to $4.2m in fiscal year 2012. We finished the year with an annual tax rate of just under 11% in fiscal year 2013. However, considering some entities will become subject to higher tax rates in the coming year, we estimate the effective tax rate for fiscal 2014 to be between 13% and 14%.

Net income increased by 37.5% to $33.4m from $24.3m in fiscal year 2012, giving us 14.8% net margins for fiscal 2013 as compared to 13.7% in fiscal 2012. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses, increased by 29.5% to $41.7m from $32.2m in fiscal year 2012, giving us non-GAAP net margin of 18.5% for fiscal 2013 as compared to 18.1% in fiscal 2012.

Basic and diluted net income per ADS were both $0.43 in fiscal year 2013. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were $0.54 and $0.53 respectively.

From the balance sheet, as of February 28, 2013, the Company had $185.1m of cash and cash equivalents and $24.1m of term deposits, compared to $188.6m of cash and cash equivalents and $10.3m of term deposits as of February 29, 2012. Net operating cash flow for fiscal year 2013 was approximately $68.3m.

Capital expenditures for fiscal year 2013 were $6.9m, representing a decrease of $67.4m from $74.3m in fiscal year 2012. The decrease was driven largely by the purchase of office space of $62.5m in fiscal year 2012.

As of February 2013, the Company's deferred revenue balance was $102.5m, representing a year-on-year increase of 19.8%.

Based on the Company's current estimate, total net revenues for the first quarter of fiscal year 2014 are expected to be between $57.7m and $59.2m, representing an increase of 17% to 20% on a year-on-year basis, taking into account the continued near-term impact of the new Beijing policy, which has affected both our small-class and one-on-one businesses in that city.

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

Thank you, ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions). The first question comes from the line of Fei Fang of Goldman Sachs. Please ask your question now.

Hi, Joe and Mei, thanks for a great quarter. My first question is about the network expansion. So the total number of centers has further declined from 3Q, so how do we think about the revenue impact on spring and summer courses?

And also, about the new 30 centers that you plan to add, what rollout schedule should we expect? Then I have a follow-up question.

Sure, Fei, in terms of discrete learning centers, they did decline, but I've said on previous calls that we wanted to add 100 incremental classrooms in the second half of the year and we beat that handily by adding over 130 classrooms during that period. So in terms of overall capacity we actually saw gains in the quarter, though we were kind of opportunistic about looking at certain learning centers that would be more economic to close while we added capacity to other learning centers. So I think that that's probably the best way to go about getting growth and profitability in the business.

In terms of expansion for next year, we're still on track. We're focused on at least 30 new centers in our existing 15 cities led by small class. We'll also likely move into four new cities at the tail end of this coming fiscal year, likely in the January 2014 timeframe.

Understood, thanks. Second question is can management give guidance on the dividend plan for fiscal year 2014?

We -- as I've said on previous calls, it's a little early to be able to say anything about a dividend at this point and whether or not there will even be a dividend in fiscal 2014. We'll continue to look at ways to give back to shareholders. It's just in terms of efficiency and the amount that actually ends up in shareholders' hands we need to make sure we're being efficient about our dividend policy. So we tend to dividend out a greater amount maybe less frequently than a smaller amount more frequently, because of fees and other things that lead to it not being an efficient way to do it if the payout ratio's too low. So we'll continue to evaluate that and see what makes sense in terms of giving back to shareholders. I'll probably be able to give a better update on that in the October timeframe.

Great, thanks, Joe, very helpful.

Thank you for your questions. The next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question.

Hi, Joe and Mei, thanks for taking my questions. My first quick question is about the bird flu in China. Are you seeing any impact such as lower enrollment or class cancellations because of the flu? And then I have a follow-up question. Thank you.

Sure, no, up to now we're not aware of any impact from the bird flu. Obviously Shanghai was more affected. And I just got off the phone with the school head there and we haven't seen hardly any impact at all from the bird flu up till now.

Now, we're taking all the right precautions. So, when students and parents come into our center, the first thing we have them do is wash their hands and sterilize and we also are making sure to sanitize all of our desks and chairs in the classrooms to make sure that we're doing everything we can to take the best precautions. But we haven't seen any impact to our business to this point.

Okay. Thank you. And then, I would like to drill down with this a little bit more on your margins, given a couple of moving parts. First of all, I wonder if you could comment on the potential margin impact from them separately in terms of salary and work compensation, the new content initiatives that you mentioned in the prepared remarks, as well as the existing projects, including the online platform and Mobby. Thank you.

Sure. Well, I can address the new businesses part of that question. In terms of the new businesses, I said in previous quarters that we expected to spend about $7m or have $7m operating losses in those businesses. Last year, fiscal 2013, it ended up being about $6.5m. In terms of this year, it's likely to be more like $7.5m.

So, what we've seen is that Mobby and online courses have become more profitable, as I mentioned in my prepared remarks, but we're continuing to invest behind Eduu because we see that as really helpful for us in getting into these new markets. We've gotten great growth out of new markets. And Eduu has been really effective in setting that awareness ahead of when we come in with learning centers. So, we think that's an effort worth spending more on and investing behind, and a true competitive barrier for us in our business that is not so easy to replicate.

And we're also setting aside some budget for potential new business models within the online area that would fit into that new business area that would be a loss for next year.

In terms of the other aspects that you talked about, the learning centers, 30 learning centers we've talked in the past about the average capital expenditures being around $100,000 for those learning centers. So, you can use that as kind of a back of the envelope, in terms of the impact of the learning center expansion. Now, there are people costs and other costs on top of that as well but that gives you a sense in terms of the capital expenditure.

And then, the IT systems-related staff, it's primarily being done in house, so where we'll see the impact is more in headcount and incremental G&A cost on the people side rather than going out and hiring a third-party vendor. I think we will have some consulting fees but they'll be less than RMB 5m, I would say, in terms of the IT implementation. But we do still have some carryover, in terms of the systems that we put in last year, so the e-HR system, the OA systems, etc., you have some carry over from last year.

So, hopefully, that gives you a little bit of color, Philip, in terms of the granularity you are looking for on the investment.

Great. That's very helpful. Lastly, could you comment on the pricing trend? I recall that you plan to increase price for the summer session this year. Is this still happening? And then, also, how should we look at the ASP growth going forward? Thank you.

Sure. Yes, we still intend to take a price increase for our small-class business beginning in the summer term. It will vary by market and we may not take a price increase in all markets. But I would say the breadth of the price increase will cover more cities than it did in last year. And the price increase should at least be 10%, and more in certain markets. And as is typical, we'll offer coupons to returning students in the first semester or two -- usually two -- so, you won't get that full price increase right away.

In the one-on-one business, we're also looking at opportunities to take price increases in some of our better-performing markets and have already taken a price increase in Guangzhou and Shenzhen. We were able to take a price increase of 20% because we didn't actually take a price increase last year for the one-on-one business. So, that's what we're looking at in terms of pricing. It'll vary by market but we do expect to take price increases, again, this year and the idea is to have a moderate rate of center expansion and a moderate rate of price increases each year.

It's hard for me to be able to set an exact number but I expect it will again be less than 10% as it was in the most recent year.

All right. That's very helpful.

Thank you for your question. Your next question comes from the line of Ella Ji from Oppenheimer. Please, ask your question.

Good evening, Joe and Mei, and congratulations on a good quarter. This question is with regards to your network expansion. Correct if I'm wrong but I think that (technical difficulty) 30 centers for the first half of the next fiscal year. And I think this time, it's 30 centers for the entire fiscal year. And if you can explain whether if you any strategic change with regards to your network expansion?

Sure, Ella. No, we haven't. As I said last quarter, we'll start with the equivalent of 30 learning centers in the first half of the year, and then we'll see how things go. And based on the ramp up and the utilization levels, we'll look at expanding more in the second half of the year.

So, that's still on track. I'm just being conservative in terms of what the outcome would be in the second half of the year after we look at the ramp up in the first half of the year.

Thanks. So, it's still likely that if the 30 new learning centers are doing well you may exceed the -- your total target?

Absolutely. Yes. I mean that's how we look at it. We look at utilization levels, those metrics that we've talked about on previous calls. And if things are trending in the right direction, there's no reason why we wouldn't add more centers in the second half of the year. And of course, in response to Fei's question, I also mentioned that we would be going into four new cities in January of 2014, the tail end of this fiscal year, and that will require at least one learning center in each of those cities as well.

Okay, great. And now in -- and then, I know that performance out of Beijing, Shanghai was very terrific. I wonder if you can talk about margins in those cities (technical difficulty) which you've entered for more than one year. How are their margins comparing to Beijing and Shanghai?

It's not particularly clear. So, I'll try to respond as best as I can based on what I heard. What I heard was kind of about margins in cities outside of Beijing and Shanghai that we've entered for more than one year versus Beijing and Shanghai. And actually, there's not a clear relationship. So, we have cities that experience better margins than Shanghai -- that are cities outside of Shanghai. I haven't been breaking down by city. But, typically, what happens is that it has more to do with the stages of development in that invest and harvest cycle.

So, when we get really high utilization levels, which we do have in some of our markets, they will have better profitability than in Shanghai and even in Beijing in some quarters. So, it really has to do with what stage we're in. If we only have one center and then we add a second center, we're just ramping up in that second center, well, then, you may not have as high profitability. If you're just in one center and that thing is at super high utilization then you're going to have higher profitability than any of our other cities.

So, there are aspects of differences in ASP levels between different cities but really we found, especially over the last year, is that if we can really focus on the key operational metrics like utilization, we can overcome some of those disparities between cities.

Okay, great. That's very helpful. And then my next question is with regards to your (technical difficulty) you mentioned a broader offering in the math and cross-selling opportunities in English. I wonder if you can provide some details with regards to how you are going to approach these opportunities.

Sure. In terms of English, that's always been an important cross-sell for our business. In our more developed markets like Beijing, it's historically been 20% revenue contribution. And that's largely from cross sell from parents that come to us for math and the sciences. If we have English timed at the right time after those classes are finished and right across the hall, parents will come to us for convenience, especially these days rather than fight the traffic in Beijing to necessarily go somewhere else. So, that's always been a part of what we're doing.

In terms of the investment, we're investing more behind making sure that the outcomes that are achieved in English are good. And so, aligning that with the English curriculum here in China, making sure it helps students in terms of how they will pass and how they will perform in the local, domestic markets. So, I would say that that's a difference in our positioning probably versus other English players and it's the area where we're investing.

In terms of the technology in the classroom, I think that's what I heard is the other part of your question. Again, it wasn't particularly clear. But the technology we're implementing, part of it is to make it more convenient for parents to be able to register online and through mobile devices, which I think will ultimately help us in being able to reduce the cost structure around registration centers throughout our network, in addition to creating convenience for parents, so that's one whole area that's more customer facing and helping convenience for our parents.

The other area is in assessment, so we're looking to be able to use technology to help better place kids in the different sections of different levels of difficulty within our various math and science curriculums.

And then, the third is continuing to upgrade the interactivity of our ICS or Intelligent Classroom System in the classroom using whiteboards and technology that just make classes all that more interesting. So, those would be some of the more customer-oriented technology initiatives that we have planned for this coming year.

Okay, great. So, that's a lot of help. Thanks.

Great. Thank you, Ella.

The next question comes from the line of Cynthia Meng from Jefferies. Please, ask your question.

Hi, hello. I have just two questions. Firstly, I want to reconfirm that you just mentioned that the ASP growth will be less than 10% in FY '14.

And the other question is more on the margins, given that we are going into the investment phase again with focus on small classes. And at the same time, scaling back from lower-margin one-on-one classes. Net-net do you think what would be the impact on the gross profit margin and operating profit margin?

And lastly, just some housekeeping questions. What was the revenue contribution from one-one-one and online businesses and the online/offline split by enrollment? Thank you.

Okay. Sure. I'll try to address each of those questions. In terms of the ASP, yes, that's part of our strategy. So, rather than going through these massive invest and harvest cycles and massive differences in pricing year by year, where you take a huge 20% or 30% price increase one year and then don't raise price the next, we're trying to go into a more moderate pricing and more moderate invest and harvest cycle.

So, just like this year, the overall ASP increase for the year was 7%-plus, high single-digits. That's what we would expect for next year. So, short answer to your first question is yes.

In terms of margins, as you know, I don't give margin guidance but I can give some color as follows. I mentioned we'll be investing in center expansion, new content initiatives, further IT systems, following a year of harvest that will create margin pressure in this year of investment.

So, just as you saw margin expansion in a harvesting year like last year, you'll see margin pressure here. But as I said, we're looking at more moderate flows in the invest and harvest cycle. So, it's not possible to completely avoid that nature of our business because you do have centers that need to ramp up. You need to continue to invest in competitive strengths, including people, content, technology but we're looking for that -- the difference in the margin pressure in years between investing and harvesting to be less.

And I also talked about how we've delayed some P&L impact from 2013 into 2014, so you have renovation expenses, depreciation in new headquarters building, additional renovation of the office space that we're in now, etc. that will come into 2014.

So, I'm not going to give you a specific number. But in terms of kind of directional look at it throughout the year, you can expect that Q1 will be a challenging quarter, which probably will be down year on year. The first quarter, we'll have the effects of slower growth and higher spending on our investment initiatives. But by the second quarter, we do expect to see some margin improvement. It's a seasonally higher margin quarter anyway, even as we're cycling a very good margin performance from last year.

And then, how margins will trend in the second half of the year, it will depend on how well we're able to cycle the lower comps in the second half of the year. So, the good thing is that we'll have lower comps to be cycling in the second half of the year. But our visibility is still relatively low in terms of how the Beijing outlook continues to go, even though we have very good growth in places like Shanghai and our new markets.

So, that kind of gives you a sense of how we see the overall year and how we'd progress quarter by quarter. But overall, our profitability for the full fiscal year in 2014, because it is an investment year, you shouldn't expect that to be as a strong as in a harvesting year like fiscal year 2013.

In terms of your questions, I think there was an enrollment mix question. And typically we don't break down enrollment except for online enrollments part, and that was 10% was online enrollments in the quarter. And then for one-on-one -- and then, for the revenue side, we do break it out by business units. So small class was 75%, one-on-one was 22% and online was 3% in terms of the revenue mix between the different business units in the quarter.

Thank you.

Thank you for your question. Your next question comes from the line of Chao Wang from Merrill Lynch. Please ask your question.

Hi. Good evening. Thanks for taking my questions. Firstly is the follow up on the cross sell. So, do you expect more direct competition with New Oriental in high school English courses? Or, in other words, in terms of a product -- of product quality, how do you differentiate with them? Thank you.

Sure. We lead with math and sciences, so "Xue Li Ke, Qu Xueersi" -- "if studying math and sciences, come to Xueersi." That's our positioning in the market. And we also happen to believe that we offer a very good English product. We also use McGraw-Hill. We also use interactive whiteboards. We also train to New Concept English, Cambridge Young Learners and a lot of the other test metrics in the market.

So, we're just trying to add additional valued services to our existing customers. And that convenience of being able to go to us right after a math and sciences offering and have something that's a comparable offering, I think will be attractive, as it has been in the past.

If I had to say anything else, I would say, as I mentioned in the previous remarks, we're geared more towards the domestic market and doing well with testing within the domestic market, where some of our competitors may have more of a study abroad orientation or preparing for a study abroad eventual experience, depending at what grade level we're talking about. That varies for our competitors by grade level, so I don't want to generalize. But if you put me on the spot and ask me how I would make the comparison that would probably be how I'd do it.

All right. Thank you. And secondly regarding the impairment, can you briefly introduce the related business? And also, do you expect any further impairment in the future? Thank you.

Sure. That was an asset purchase we made to, essentially, a license, which would allow us to do that admissions counseling business, so that business is helping kids to find the right college or university for them abroad. We had bought a license because they're in limited supply, essentially made an acquisition that allowed us to get that license as an asset with the intent to go into that business. And now that it doesn't like that we'll necessarily go into that business for the foreseeable future, we decided to write down that asset.

So, our view is that there's a ton of opportunity within the K through 12 market and we're going to continue to focus on our strengths in that market, continue to block and tackle and go into these new markets and execute well and stay focused.

Thank you.

Okay. Thank you for your question. Your last question comes from the line of Mark Marostica from Piper Jaffray. Please ask your question.

Thank you. A question on Beijing and I'd like to get a sense for the trend line for Beijing throughout the quarter and thus far in Q1 from an enrollment perspective. What exactly you've been implementing to help offset the negative headwinds from the policy change that we've talked about and then how parents are receiving those changes as well?

And then, as a follow-up question, you mentioned Shanghai had some nice performance, perhaps you can touch on the reasons for the strong performance in Shanghai. Thanks.

Yes, sure. In terms of Beijing, we're still seeing some decline in enrollments in the spring term, as we did in the winter and fall terms. That said, we are implementing a lot of those content and assessment-oriented initiatives that I talked about before, making sure that the right students are in the right classes, I think, is really important. We do have a leveling system, and making sure that that leveling system is executed well through a refined assessment system I think has already been able to demonstrate increased satisfaction among our parents and students. And then making the classes even more interactive through the focus on intelligence classroom system, creating an environment where kids can get up and not be in their seats the whole time; get up to the front of the classroom, work with the whiteboards, work with the teachers in an interactive environment.

Those are a couple of the areas where we're focusing some of our initiatives along with what I mentioned on the call, which is focusing on the broader sciences. As students graduate with us from primary school and to junior high and high school, the physics, the chemistry, the biology, these are really important areas, and we're investing more of our resources into building out that curriculum that we think we've gotten some very good responses from parents in terms of some of the specific initiatives we're doing, especially in the sciences and using some of that multimedia technology in that area as well.

That would be how I'd answer the first part of your question. And then, in terms of Shanghai, that's just another example of what happens when you focus on the right things in the business. So, starting about a year ago, we didn't look at expansion of learning centers, we focused on utilization of our existing learning centers, improving the utilization of our teachers, making sure that they're being compensated well, that their classes were full, which allowed them to be compensated better and also allowed for a better classroom environment, which is better for the students and more gratifying for the teachers, making sure that we're providing the right kind of training and we're building a really stable teaching force.

And it takes several months to see the benefits from that but we're starting to see that now. And that's just the nature of our business. So you've seen it in Shanghai, in Guangzhou and a number of our markets, and there's nothing to substitute for just having discipline and focusing on the right areas of our business.

Okay, great. Thank you. I'll turn it over.

Thank you for your questions. Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation. You may disconnect the lines.