TAL Education Group (TAL) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 FY2014 TAL Education Group earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today, October 22, 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, ma'am.

Good evening, everyone. Thank you all for joining us today for TAL Education Group's second quarter of fiscal year 2014 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 fiscal quarter 2014.

We are pleased to report strong growth momentum for the second fiscal quarter as we continued to execute on plan for sustainable growth and expansion. Highlights for the quarter were a net revenue increase of 35.1% year-over-year to $92m, $1.5m above the top end of our guidance. Revenue growth was supported by a 24.8% increase in enrollments.

You will recall that our guidance included an approximately RMB21m impact from the timing of Chinese New Year. Without this impact, revenues increased 30% year-on-year, which is still a significant acceleration from the 24.5% year-on-year growth we achieved in the first quarter.

Our small class business in new markets outside of Beijing and Shanghai remains the key growth engine. At the same time, we are pleased to see that Shanghai had a good quarter once again in both revenue and enrollment growth.

On the back of improved center utilization we took the opportunity to more aggressively ramp up capacity expansion. We expanded the total number of learning centers during the second quarter, which, as you may recall, we had not done in the previous two quarters.

We opened 15 small class centers and closed 2, resulting in a net addition of 13 small class centers. We closed 6 one-on-one centers and opened 2, bringing about a net reduction of 4 one-on-one centers. In total, we had a net addition of 9 learning centers, bringing the total to 264 centers, as compared to 255 at the end of the first fiscal quarter.

In terms of classroom capacity, we added a net 247 classrooms, across our network for our small class business in this quarter. We have already exceeded our plan for classroom additions in fiscal year 2014 due to better-than-expected execution in terms of utilization levels, growth and profitability. For the remainder of this fiscal year, we expect to continue to invest in capacity expansion and add new learning centers, but at a slower pace than in the first half of the year.

In addition to strong top line results, we had better-than-expected net income growth of 45.4% year-on-year, primarily driven by leverage of SG&A expenses and further boosted by interest income derived from our strong cash balance. We kept gross margin flat versus the previous year but I would like to stress that the center and classroom additions that I just outlined do not immediately reflect in the cost of revenues of this quarter. Classroom additions are recognized at the moment of contract signing, and therefore the full costs of operating this expanded capacity will not be borne in the same quarter as the contract signing. We expect to incur higher operational costs and expenses in coming quarters as we continue to invest in center capacity expansion as well as human capital to support our core business and expand into new businesses.

Even with the new center additions during this quarter, the bulk of our investment has gone into adding more classrooms to existing centers. As I explained last quarter, our key rationale for opting for classroom additions rather than opening new centers is that expanding from existing capacity is a more cost-efficient way of investing that allows us to achieve greater scale in each facility.

A new learning center involves start-up costs including hiring people, training personnel, setting up new customer acquisition and registration processes, among other efforts. However, since it is not always practical to expand an existing center, and in many markets we are still quite underpenetrated in terms of number of centers in operations versus the addressable market, we have also opted for new centers in some locations. We continue to take a more incremental approach to manage these people-related costs and invest with discipline as we seek to achieve long-term growth in our small class business.

A more detailed look at the changes in center numbers shows that we expanded capacity in new markets as well as Shanghai and Beijing. We opened 3 new centers in each of Guangzhou and Shanghai. We added 2 centers in each of Beijing and Shenzhen. We opened a new small class center in each of Xi'an, Nanjing, Chengdu, Hangzhou and Chongqing. Meanwhile we closed 1 small class center in each of Shanghai and Xi'an. Out of 15 new small class centers, 10 were opened in cities outside Beijing and Shanghai. A similar picture emerges for classroom additions with the bulk of new classroom allocations occurring in new markets, while we still made sure to add new classrooms to support enrollment growth in Shanghai and be opportunistic as well-placed locations became available in Beijing.

On a net basis we once more reduced the number of one-on-one centers, as we remain mostly focused on improving performance and cost-efficiencies in this part of the business. We opened a one-on-one center in Shenzhen while closing 2 one-on-one centers in Tianjin and 1 in each of Beijing, Shanghai, and Guangzhou. In total, we had 264 centers by end of August 2013, an increase of 9 centers from the previous quarter, of which 173 were small class learning centers, including 4 learning centers for our Mobby branded pre-school and young learners aged three to eight business, and 91 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 second quarter. Small class revenues once again more than doubled versus the same period of the previous year in cities other than Beijing and Shanghai, driven by enrollment growth combined with higher average selling prices. In terms of revenue contribution, cities other than Beijing and Shanghai accounted for 35% of small class revenues in the second quarter, compared to 22% during the same period last year and 34% in the previous quarter. Likewise, cities other than Beijing and Shanghai also contributed a larger portion of total small class enrollments.

In Shanghai, we are pleased to see key business metrics strengthening in the second quarter. Revenue growth is very much on track and driven by enrollment growth as you'll remember we did not take a price increase in Shanghai this year. We currently see this positive momentum continuing for Fall term enrollments.

As for Beijing, our business is still in the process of recovery from last year's change in policy on the use of exam and competition results for selection at key junior high schools. However, while we have not yet seen a meaningful revival in Summer or Fall enrollments, revenues were up by a single digit percentage year over year on the back of the price increase we took in the Summer term. We expect to continue to be in a low revenue growth mode in Beijing in the third quarter. At the same time, we are investing for future growth in this market, primarily through ongoing improvements we make to our curriculum. We are also focusing some resources on new opportunities for pre-kindergarten and high school students as well as subjects outside the math and sciences curriculum. It is early days but we're seeing some of our efforts pay off in the form of improved student retention in the high school business. Importantly the outstanding student achievement that has been our foundation since our founding in Beijing 10 years ago, continues to differentiate our Xueersi Peiyou brand today -- in Beijing 26 of our students achieved a score of 700 or higher on the college entrance exam, the Gaokao, and 8 of the top scorers on the high school entrance exam, the Zhongkao, were all Xueersi students. We also had over 300 of our students gain admittance to Peking University and Tsinghua University, which are widely regarded to be the top universities in China.

Our Zhikang branded one-on-one business also did well in markets outside Beijing. One-on-one growth was particularly encouraging in Guangzhou, Shanghai, Xi'an, Tianjin, Chengdu and Hangzhou. As expected, one-on-one in Beijing continued to be adversely impacted, even though we had encouraging enrollments momentum with high school students.

Overall, revenues from one-on-one contributed 19% of revenues in the quarter versus 21% in the same quarter of the prior year. We continue to manage Zhikang's contribution down as a percentage of our overall revenues, positioning it primarily as a complement to our small class business, as we look for better cost efficiencies and qualitative improvements to the learning method. We also added more mini-classrooms in our Zhikang learning centers following a successful pilot aimed at enhancing tutoring quality and customer experience. Another initiative is the introduction of the education planner, whereby we move away from a direct sales approach, but instead use someone acting as a coach to interact with the students and parents about educational goals and keep tabs on student attendance and motivation. We believe this more personal approach can encourage students to stay longer with us.

Meanwhile, our online strategy is becoming a more important part of our business. The online platform eduu.com continues to serve as a valuable substitute for marketing efforts that help drive our core business. Eduu is currently active in 23 cities and the traffic on these local city websites will help us identify which cities we plan to enter in coming quarters. We expect to roll out 4 new cities over the next half year or so, with at least 2 in the tail end of this fiscal year.

On the product side, first of all, our online courses on xueersi.com give us a commercial basis in cities that we want to service only through online course offerings as long as these cities are not of a scale to serve through a center-based business in an economically viable fashion. This approach helps us to manage a more controlled mode of expansion. Secondly, we are looking into the possibilities of offering more live tutoring sessions online as complementary to our offline business. And thirdly, we are increasingly including online tutoring into a blended learning model, for example by giving our students mobile apps with drilling exercises for use on days that they are not in our classrooms.

In addition, we also look at our online strategy for ways to enhance our customer service. For example, we are experimenting with online and mobile enrollment registrations and payment and fulfillment tracking, so that parents do not always have to visit our service centers to register or modify classes.

We are still in the early days of the new mobile Internet era and it is too soon to determine unequivocally how the education and tutoring landscape will evolve. Even as we enjoy strong top and bottom line growth momentum and focus our attention on the current capacity expansion drive, we are well aware of new technology trends and long term potential effects on our business model. Therefore we will likely seek to participate in this transition through a combination of our own new product initiatives and selective strategic equity stake investments. Last year we made a minority stake investment in a third party educational platform in order to gain valuable understanding of new technology developments. We continue to monitor closely other opportunities to invest for future growth that will allow us to embrace the right online and mobile technologies at the right time and help us to adapt with vision and agility to a new learning environment.

Our long-term vision is to create a better future for our students and in so doing to garner the ongoing respect of students, their parents and all of our key stakeholders. We chose as a new umbrella brand Haoweilai, Good Future, which we launched in the course of this past quarter. We believe the use of new technologies will be critical in creating a better future for our students.

Before I move on to the financial results, I'd like to update you on our latest initiative in corporate social responsibility. We have launched the Haoweilai public welfare fund that will support public welfare programs in China's education sector. Through this fund we will offer assistance to students in remote areas, provide free online self-study materials and solutions to youngsters pursuing secondary education, and work with domestic and international institutions in education research and academic activities. We hope that the Haoweilai public welfare fund will become a new channel to promote equality, innovation and development in China's education field.

With that, I'd like to move on to a more detailed overview of the financial results.

We delivered $92.0m in revenue in the quarter, representing revenue growth of 35.1% 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 308,490 from approximately 247,100 in the same period one year ago. The increase in student enrollments was driven primarily by the small class offerings.

On the ASP side, the year-on-year ASP increase of 8.2% to $298m for the second fiscal quarter from $275m in the second quarter of the previous year was primarily driven by the hourly rate increase of the small class course offerings and the foreign exchange rate fluctuation.

One-on-one tutoring contributed 19% of revenues for the second quarter of fiscal 2014, compared to 29% for the previous quarter and 21% for the same period in fiscal year 2013.

Now moving back to the total Company numbers, cost of revenues increased by 35.0% to $43.0m from $31.8m in the second quarter of fiscal year 2013. The increase in cost of revenues was in line with our revenue increase, and it was primarily due to an increase in teacher compensation, increase in rental costs and other staff costs associated primarily with an expansion of learning center capacity, increases in wages and teacher fees versus the year-ago period and settlement of a third-party claim. As I mentioned earlier, we incurred only a portion of the costs associated with this quarter's capacity expansion immediately in the same quarter, as the full cost will be borne in coming quarters. We continuously monitor utilization levels and other operating metrics closely, and on the back of the very strong class fulfillment and classroom utilization metrics we saw in almost all markets, we ramped up our investment in the second quarter. Non-GAAP cost of revenues, which excludes share-based compensation expenses, increased by 35.1% to $43.0m from $31.8m in the second quarter of fiscal year 2013.

GAAP and non-GAAP gross profit for the second quarter were both $49.0m, as compared to $36.2m and $36.3m, respectively, for the same period of last year. GAAP and non-GAAP gross margin for the second quarter were both 53.3%, essentially unchanged from the same period of last year.

Selling and marketing expenses increased by 20.9% to $8.5m from $7.0m in the second quarter of fiscal year 2013. Non-GAAP selling and marketing expenses, which exclude share-based compensation expenses, increased by 26.1% to $8.2m from $6.5m in the second quarter of fiscal year 2013. The increase primarily reflected an increase in compensation to sales and marketing staff to support a greater number of programs and service offerings.

General and administrative expenses increased by 28.8% to $16.1m from $12.5m in the second quarter of fiscal year 2013. The increase was mainly due to an increase in general and administrative staff expenses to support an expanded number of cities in which the Company had learning center operations and rental and office depreciation and other expenses. Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, increased by 33.0% to $14.6m from $11.0m in the second quarter of fiscal year 2013.

The above factors combined to give us operating income of $24.4m, representing a year-over-year increase of 46.6%. Non-GAAP operating income increased 40.0% year over year to $26.2m.

Operating margin in the second quarter was 26.6% as compared to 24.5% in the same period of the previous year. Non-GAAP operating margin was 28.5% as compared to 27.6% in the same period a year ago.

For the second quarter of fiscal year 2014, other expense was $0.3m, compared to other income of $0.3m in the same period of the last year. Other expense of this quarter was mainly due to a donation of $0.2m to the Ya'an area of Sichuan Province, which was hit by an earthquake in April of this year. The other income of the same quarter of last fiscal year was primarily driven by exchange gains, as we hold the vast majority of our cash balance in renminbi and report in US dollars.

Our net income for the quarter was $23.3m, and increased by 45.4% year over year. Non-GAAP net income for the second quarter was $25.1m, up by 38.7% year over year.

This gives us a net profit margin of 25.4% as compared to 23.6% in the same period of last year. Non-GAAP net profit margin was 27.3% versus 26.6% in the same period of last year.

Basic and diluted net income per ADS were $0.30 and $0.29, respectively for the quarter. Non-GAAP basic and diluted net income per ADS, which exclude share-based compensation expenses, were $0.32 and $0.31 respectively.

Capital expenditures for the second quarter of fiscal year 2014 were $3.3m, representing an increase of $1.6m from $1.7m in the second quarter of fiscal year 2013. The increase was mainly from the purchase of equipment, including servers, computers, and other hardware used in our teaching facilities to better support the Company's operation.

From the balance sheet, as of August 31, 2013, the Company had $267.2m of cash and cash equivalents and $27.0m of term deposits, as compared to $185.1m of cash and cash equivalents and $24.1m of term deposits as of February 28, 2013.

As of August 31, 2013, the Company's deferred revenue balance was $143.7m, as compared to $103.3m as of August 31, 2012, representing a year-over-year increase of 39.0%.

Moving on to Q3 guidance, total net revenues for the third quarter of fiscal year 2014 are expected to be between $69.5m and $71.0m, representing a year-over-year increase of 42% to 45% from the third quarter of fiscal year 2013. If achieved, this will give us year-over-year revenue growth of 34% to 35% for the first nine months of fiscal 2014.

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

(Operator Instructions). Fei Fang, Goldman Sachs.

Hi, Joe and Mei. Very strong results; congratulations. The focus for us is (inaudible) on the strong 3Q guidance. The growth is accelerating, while margin is holding up. So can you elaborate on what drives the 3Q strength?

And just relating to that, what assumptions are we using for the Beijing operation? Thank you.

Yes, sure. So the outperformance we expect to continue to be driven primarily by cities outside of Beijing. So we've talked about this before, Fei. For some time, we've observed an optimistic outlook for these markets, these new markets that we see as providing a lot of untapped potential.

So I think that this outperformance that we see in Q3 and that also happened in [Q2] (Company corrected after the conference call) are at least partially an early indication of timing and philosophy of how we enter new markets, and that is beginning to pay off. As you know, we've always looked at entering new markets in a careful way, opening one center initially and first building our brand reputation, so we're really getting strong word-of-mouth marketing and creating pent up demand.

So I think part of what you're seeing is that this approach is paying off with very strong enrollment and revenue growth in the outer cities. And our business is passing a tipping point in some of these key markets where we're enjoying overall brand strength and also just good quality reputation in these local markets. So I think that's part of it.

I think, as we're continuing to grow, we're also realizing that we can't take a one-size-fits-all approach to our business. So what you see with Shanghai turning around is a case in point there. Our experience there has reinforced with us that managing the business for quality rather than quantity really results in sustainable growth. So Shanghai's back on a solid growth track after a period of transition. So we believe that better execution is also helping with our business.

Then we also took price increases for our small class business in certain markets, including Beijing, in the summer term, which will carry over to Q3. And we've taken a price increase in our one-on-one business in Beijing, starting in September. So I think those are some of the factors.

I couldn't tell from your question about the margin. We haven't given guidance on margin, but we have given the business outlook on revenue guidance.

Right, Joe. My question -- the second bit of my question was, just within that guidance, what assumptions are we using for the Beijing operation, meaning are you seeing enrollment picking up or --?

Right. No. We took the price increase in Beijing in the summer. So, as I mentioned in my prepared remarks, that's part of what contributed to the fact that we were able to get single-digit revenue increases in Beijing. But in terms of the fall term, we're not expecting a huge impact -- and I mentioned that in my prepared remarks as well -- in terms of the recovery there.

So, that said, we're continuing to look at new growth areas. Beijing is our most mature market, but we still think that there are plenty of new growth areas that we can explore potentially new subjects and new grade levels, given the relative maturity of our existing business.

In terms of our existing business, we continue to focus on top teaching quality, product development, curriculum, teacher training. I mentioned in my prepared remarks we're also looking at investing behind intelligent classroom system, ICS 3.0, in the coming quarters, which as you remember is about incorporating technology to interactive whiteboards in the classroom. So there's more that we can do in terms of the interactivity and the assessment type tools we can use in the classroom through ICS, so that's what we are looking at.

But overall, we think that Beijing is kind of like what we did in Shanghai. We've talked about before "Wushi" is one of the core values of our Company, and I think it can be best translated as kind of a low key and focused approach to getting things done. So we are just going to continue to focus on getting the best quality teaching and curriculum to our students in Beijing, and we think the enrollments will follow.

We are overall pretty patient. It may take a few more quarters to get Beijing back. But the important thing is I think that the current challenge in Beijing is fortunately more than offset by the strong performance in other cities in which we operate.

So, getting back to your question, we are not assuming a huge pickup in terms of Beijing, in terms of how we think about Q3 guidance.

That's great. That's very helpful. The last question from me is recently there has been some regulatory changes regarding how English scores are being treated or being weighted in the graduation exam. So, Joe and Mei, do you see any impact either on your own business or on education industry as a whole?

Yes. This is kind of breaking news. We are still in the process of evaluating that potential impact, but at this point don't expect the impact to be large. Our English business is positioned to provide support and tools to students in their studies across the pre-K to 12 curriculum, so it's not only geared specifically for preparation for Zhongkao and Gaokao. So we don't really see a huge impact to our English business at this point.

But what we are excited about is that for our Dongxuetang, our Chinese business, which we are adding more focus on and have rebranded as Dongxuetang, we see this as a potential opportunity that we are pretty excited to go after.

That's great. Thank you very much.

Thank you, Fei.

Gillian Chung, Morgan Stanley.

Congratulations on the strong quarter. I've got two questions. My first question is about the network expansion. Is it possible to give us more details about your expectation on network expansion? And what do you think is the impact on the enrollment and margin?

And my second question would be is it possible to comment on the pricing trend that you expect for the coming quarter? Thank you.

Sure. Thanks, Gillian. So, in terms of the expansion, you may recall from previous investment cycles expansion typically takes place mostly in the first half of the year for us, and I kind of indicated that as I was talking about what's the expansion we'd be looking at for this year.

We will continue to expand in the second half this year, but the speed and scale will depend on the performance metrics that we continue to stress around classroom utilization and fulfillment metrics. That will determine how much we turn up the heat in terms of further capacity expansion.

Right now, it looks like we'll be looking to add over 200 classrooms across our small class business in the second half of the year. So that would be down versus the first half of the year, but will still represent meaningful capacity expansion for us.

Then, in terms of the margin, as you know, I don't give guidance on margin. Directionally, I think that the center aspect is something to think about in terms of the investments we are making and the ongoing center expansion could have some impact on margin. But that said, our growth rate, and assuming that we hit the business outlook for Q3, will also be outperforming to our internal budget, so that will help offset some of these higher costs and expenses.

But we are also, in addition to the center expansion, as I mentioned when I was talking or answering Fei's question, was that we'll be investing behind the intelligent classroom system upgrade to ICS 3.0. We'll have some new Internet driven business models to complement our current online offerings, and we'll be doing some content development initiatives as well.

So, on past calls when we've talked about that, I've said that I expected margins to trend down this year. I think given the two quarters that we've had of really outstanding growth and considering the fall enrollments and Q3 guidance, I would say that we will work towards getting to flat in terms of operating margin versus last year.

But I want to emphasize that this is a work in progress. And I don't yet have visibility into Q4, as the enrollment registration for winter term does not happen until November/December timeframe. But hopefully that gives you a sense of how we are thinking about growth and margins and the way we like to balance those two things as we think through the various metrics in our business.

In terms of your second question on pricing, I mentioned this a little bit in my response to the previous question, but we have taken a price increase for our one-on-one business in Beijing, beginning in September 1.

It's a bit difficult to predict, given different discounting at different tiers for one-on-one. It's a little bit different pricing scheme than you have in your small class business, because it's different based on the different upfront purchase amounts that parents will make. But we expect that the impact will at least be an increase in the single digits in terms of pricing in Beijing for our one-on-one business.

And then we'll also be evaluating taking a price increase in our small class business between winter term this year and summer term of next year. It will be different in different cities. Focus markets for the price increase will be those cities where we didn't take a price increase this past year so, for example, Shanghai, Guangzhou, Shenzhen and other markets.

But again, we are not yet set on the exact timing as regards how much price increase will happen in winter versus spring versus next summer. But that's what we are thinking about in terms of pricing.

That's helpful. Thank you.

Thank you, Gillian.

Ella Ji, Oppenheimer.

Thank you, and congratulations on a very strong quarter. First I wanted to follow up with the prior question regarding the development in Beijing. So it looks like in terms of enrollment growth it will still take a few quarters to get it back. I also see that you have raised the prices in Beijing recently. So is it fair to say that going forward the price increase may be the primary driver of the revenue growth in the Beijing city?

And also, could you just share with us more details with regard to what you are doing on the ground in order to get the enrollment in Beijing back? Thank you.

Sure, Ella. Yes, as I mentioned in my prepared remarks, the single-digit revenue increase that we are seeing is definitely driven primarily by the price increase. So that definitely was the case in the summer and all indications to this point is that that will be the case in the fall.

I don't have a lot of visibility in terms of the winter. I have zero visibility in terms of the winter right now. So, at least for the summer which we reported on this quarter and fall which will impact Q3, that certainly would be the case. And we are not -- to Fei's previous question, we are not assuming a big increase in terms of enrollments in terms of the Q3 outlook that we've given.

In terms of what we are doing, I talked about this a little bit in the prepared remarks, but we are focusing on first and foremost the key drivers of our business, among which are content. So we are really looking at content development initiatives, and particularly doing the upgrade of the intelligent classroom system, which we think is really great in terms of creating an interactive environment for kids in the classroom. So we had upgraded to the 2.0 and then we are upgrading to 3.0 over the next six months. So that's a big part of it.

The other things that we are looking at is focusing on some new age groups that we hadn't focused on as much in the past, including pre-K and the high school business. I mentioned in my prepared remarks that in the high school business we are already seeing some nice increases in terms of student retention for that business. That business, historically, as students have more things going on competing for their time, we didn't see the same level of retention. It's also more of a student-driven decision at that point in time, rather than a parent-driven decision.

So all these things factored into slightly lower student retention at that age group and we are actually seeing that improving for our high school business. So I would say in terms of grades those are some of the things we are looking at.

And then, in terms of product, we talked a lot about, last quarter, how we are continuing to focus not only on our sweet spot in maths and sciences but also on other areas like English and Chinese. And to the question about the potential impact of this policy, we are hopeful that that will also give us a good opportunity for our Chinese business.

So I think those are some of the things that we are focusing on in terms of getting the Beijing business back to an enrollment growth contributor.

Thank you. Thank you for the color. Could you share with us what's your current utilization level? And do you mind breaking it down between Beijing, Shanghai and the cities outside of Beijing and Shanghai?

Yes. So we don't disclose exact utilization numbers, but directionally we have seen good increases in utilization, with overall utilization improving by single digits or even up by 10% in some markets. So this is what prompted our more accelerated expansion in the quarter.

Naturally, with the greater expansion, you'll expect utilization to come back down again in coming quarters. But we still expect that by yearend we should have overall improvements in utilization in most of our markets. So our utilization has definitely been on the upswing for us.

Got it. And last question from me, with your guidance for next quarter, shall we think in terms of the ASP trend it's going to keep the current level, or since you have more price increases in the fall shall we expect the ASP trend to accelerate?

I think it should be more or less consistent. We took the price increase for our small class markets all ahead of the summer term, so the only incremental contributor would be the one-on-one business. But the fall term is not typically the strongest term for the one-on-one business so it may have some marginal upside to the current ASP levels, but I wouldn't expect it to be particularly meaningful.

Got it. Thank you very much, Joe.

Thank you, Ella.

Clara Fan, Jefferies.

Hi. Hello. Firstly, just a few housekeeping questions on your revenue breakdown by small class, one-on-one and online, and the student enrollment by online or offline classes as well.

And lastly, can you give us more color on your business model for online education? Thank you.

Sure, Clara. In terms of the housekeeping matters, small class was 78% of revenue in the quarter, one-on-one was 19% of revenue and online courses was 3% of revenue.

In terms of the online/offline breakdown, online courses were 11% of enrollments, with the remainder being our bricks-and-mortar center based business.

In terms of what we are thinking about with online, I discussed many aspects of our overall online strategy in my prepared remarks. I think what we are looking for are various forms of interaction with students, from apps to prerecorded content to live transmission, and varying price points in it, anticipated "online class sizes" to serve different markets and serve different consumers within a given market.

But overall, we are quite patient as regards online and realize that we are setting the foundation now for an evolution that we see playing out in stages over the next three to five years. So we are really exploring all kinds of different areas across that spectrum, and then at the same time, as I mentioned in my prepared remarks, also looking at how can online help us in terms of providing better customer service in a more efficient way across our platform and allow us to scale more quickly.

So those are the kind of things we are thinking about in the online area.

Just a follow-up question. I remember in your remarks you mentioned about possible equity acquisition as well. Is there any target at the moment?

No, nothing that's at a point that we should be talking about it on a call. Obviously, we are always in the process of looking at particular opportunities for investment, both through partnership and our own investing in the future through stuff we are looking at organically. But nothing is at a point in terms of the pipeline that we should be talking about it yet at this point.

Okay. Thank you.

Thank you, Clara.

Mark Marostica, Piper Jaffray.

Yes. Nice job on the quarter. My first question is related to Shanghai. It seems that the business has gotten some nice momentum in Shanghai. I know other players have been struggling somewhat in that market, and I'm just curious what's been driving the improvement in Shanghai from your perspective. And any comments around the entire competitive landscape in Shanghai would be helpful, as well. Thank you.

Yes, sure. In terms of what's helped us is that we kind of took the knocks in Shanghai early. So we went through a period where we didn't focus a lot on enrollment growth and really just focused on making sure that we had very high teaching quality in every single class that we offered, which really meant that we were purposely constraining enrollment growth.

So that had an impact for us in terms of the growth last year, when we took the knocks for that then. But it's led to our ability to really get the word of mouth back in the business and be able to have people coming to us for that top teaching quality in the market. So I don't think that there were really any secrets.

We haven't had a massive amount of center expansion. We've actually been rationalizing our one-on-one business significantly in that market. But our view is that by managing growth and focusing on quality, sometimes slow is fast in this business and in later quarters it will play out that we are able to get a lot more growth back into the business in that way.

So that's what I would say about what's happening with our business. It's still early days for us in terms of the Shanghai business, as well. I guess the other point vis-a-vis maybe some of the other competitors, we just have a reasonably long runway in that business, as well.

The competitive landscape, I think that our view of the Shanghai market is it's a more fragmented market than you see in other cities. So you don't see one large local player, like you do in other markets. So, from a goal setting perspective, it's a little bit trickier because you don't have this target out there that you think that over time you can just whittle away potentially at their size and be able to take share over time. It's much more fragmented.

And consumers are a little bit different -- they may be more specialized in terms of going for one player, for one offering, for another player to another offering. So you're less able, I think, to be able to offer multiple subjects, multiple grade levels, and be perceived to be the expert in each of those spaces. It seems that there are more specific players in each space.

Within the one-on-one market, you have a player that's not a listed player that's reasonably strong in that market. And then you also have a player that recently listed on the Shanghai market that's also a local player that originally was in the what's called kouyi, interpretive English market, and also has a reasonably strong one-on-one business.

So we have a range of competitors in that market. But I think overall, within the small class business, it's still a relatively open playing field, and I think there is a lot of opportunity if we continue to focus on what really matters in the business around quality, that there is a lot of runway for continued growth.

Thank you, Joe. And then one follow-up with regard to the markets outside of Beijing/Shanghai. I believe you mentioned in your remarks that those markets represent 35% of revenue. It seems to have flattened out in terms of the pace of mix shift from Beijing/Shanghai. I wonder if you can comment on that dynamic, and then what you see going forward in terms of revenue mix as the quarters play out ahead. Thank you.

Yes, sure. I think part of that is that we are able to take the price increase in Beijing so Beijing moved back into revenue growth in Q2, which was a positive in terms of the Beijing/Shanghai portion of that component, and then Shanghai also continued to perform well.

The growth in cities outside of Beijing and Shanghai was still well over 100%, so there was still really strong growth in those markets. I just think that we saw a greater contribution from Beijing and Shanghai in the quarter.

And I think that those dynamics should play out over the coming quarters, as well. And then, if Beijing recovers more meaningfully, then you could potentially see that shift moving towards Beijing and Shanghai a little bit more in the near term.

But overall, the view is that we think that new cities will continue to contribute significantly to our growth story and they are really going to be the driver of growth. From a longer-term perspective, we very much see this trend continuing. And we are just in the early stages of penetration in many of the markets we've added over the last couple of years.

And then we are also going to be adding some new cities in the coming six months, so we'll likely add a couple of cities before the end of this year and then another couple of cities in the first quarter of next year. So that will continue to contribute to the new city contribution to our overall growth.

Very good. Thank you.

Thank you, Mark.

There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

Okay. I'd like to just thank everyone for taking the time to be with us this evening. And we really look forward to continuing to discuss with you the TAL story and welcome you to our markets here in China. If you have any further questions, don't hesitate to reach out to me or any of our other investor relations representatives.

Thanks so much. Have a great day.

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