TAL Education Group (TAL) 2014 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 2014 earnings conference call. (Operator Instructions).

I must advise you that this conference is being recorded today, Tuesday, April 22, 2014. I would now like to hand the call over to your first speaker for today, Ms. Mei Li. Thank you, ma'am. Please go ahead.

Thank you all for joining us today for TAL Education Group's fourth fiscal-quarter and fiscal-year 2014 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 the 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 fourth fiscal quarter and full fiscal year of 2014.

We are pleased to report an excellent fourth quarter with revenues at the high end of our guidance and very strong bottom-line results. Today, I will discuss the highlights for the quarter and full fiscal year. Next, I will update you on our online education initiatives and discuss our key themes for fiscal 2015. Finally, I will go over the financials with you.

Net revenue for the fiscal fourth quarter increased 45.9% year over year to $87.0m. Revenue growth was supported by a 38.8% increase in enrollments. Our core small-class offering comprised of Xueersi Peiyou and the ages three to eight Mobby young learners' business was again the main driver of our growth.

We are pleased to report that each of the 15 cities in which we have operations delivered at least double digits' revenue growth in the quarter and 10 cities had triple digits' revenue growth.

We also added a learning center in Jinan in February, making it the sixteenth city in our national K-12 learning center network. We will begin regular class operations in Jinan starting with the summer term this year.

As I explained when guiding for the quarter, we had some additional revenues from the first week of classes of the spring term captured in the fourth fiscal quarter due to the timing of Chinese New Year this year.

Excluding this estimated RMB26m impact year-on-year revenue growth would have been approximately 38%. You may recall we had a similar windfall in the second quarter of fiscal 2014.

Basically, the timing of Chinese New Year versus that of our fiscal year causes revenue tailwind in the second and fourth quarter of one year and some revenue headwind in the same periods of the following year. As it is a predictable variation, we are able to give you timely guidance on this.

Small class contributed 78% of fourth-quarter revenues, one-on-one 19% and online 3%. In terms of revenue contribution for small class, cities other than Beijing and Shanghai accounted for 40% of small-class revenues in the fourth quarter, which was consistent with the third quarter, and compared to 29% during the same period last year.

In addition to strong top-line results we had net income growth of 144.0% year on year. Gross margin expansion was the major driver of our improved profitability in the quarter.

Gross margin increased by 570 basis points from 47.4% to 53.1% year over year. The gross margin improvement came primarily from the extra class in the fourth quarter as well as improved teacher and center utilization and our continued shift towards the higher-margin, small-class business away from one-on-one.

Even as we achieved strong current revenue momentum, we also invested in future capacity ahead of the summer term. We added this capacity through both new centers and more classrooms to existing centers.

Net new small-class classrooms totaled 194, which included the classrooms in the net eight new small-class centers we added in the quarter. We also added one net new learning center for one-on-one, taking our total learning center network to 274 centers, of which 184 were small-class learning centers, including four learning centers for our Mobby branded pre-school and young learners aged three to eight business and 90 were for one-on-one.

This concludes my review of the fourth fiscal quarter. Let me now give you a summary of our fiscal-year 2014 ended on February 28, 2014.

Fiscal 2014 was a year of outstanding progress and execution on plan in all directions; operationally, financially and strategically. We managed 38.9% revenue growth for the year on gross profit margins of 51.7% and GAAP net income growth of 81.2%. And we've delivered on plan to balance current growth opportunities with continued investments for future growth.

We made great progress in expanding our capacity to handle the strong demand for our tutoring services, reflected by year-on-year enrollment growth of 31.6%. This enrollment growth drove our business to exceed the 1 million annual enrollments' milestone this fiscal year.

We added a net of nearly 600 classrooms, taking into account the net addition of 25 new learning centers for small class and the net reduction of six learning centers for one-on-one in fiscal 2014.

Small-class revenue growth in cities other than Beijing and Shanghai continued to be the main driver of our growth in fiscal 2014. Cities other than Beijing and Shanghai contributed 37% of small-class revenues in fiscal 2014 compared to 25% in fiscal 2013.

These cities also took a larger share of the overall enrollment growth, representing 44% of small-class enrolments in fiscal 2014 compared to 31% in fiscal 2013. The small-class business in Shanghai reaccelerated in the course of fiscal 2014, following a year in which we managed our growth in that city in order to refocus on teaching quality and curriculum.

Gross margin improved by 290 basis points versus the previous year. This improved gross margin was driven by an extra week of classes in the second and fourth quarters this year given the timing of Chinese New Year in calendar years 2013 and 2014, as well as better teacher and center utilization and the shift towards the higher-margin, small-class business away from one-on-one.

We also achieved the bulk of our nearly 600 incremental classrooms capacity by adding classrooms to existing centers rather than adding incremental new centers, an approach which was supportive to gross margins.

We were able to leverage SG&A through more efficient human resources management, which contributed together with improved gross margins to operating margins expanding by 440 basis points compared to fiscal 2013. We also carefully managed our growing cash balance and optimized returns through higher interest income.

All of these efforts resulted in strong growth in profitability and operating cash flow for the full fiscal year. In fiscal 2014 we delivered operating cash flow of over $100 million, representing approximately 54% growth versus the previous year. Capital expenditure for the year was about $10.9 million, representing a mere 3.5% of revenues.

The health of our business afforded more management time and resources in fiscal 2014 to spend on future growth opportunities at the crossroads of where technology meets education, particularly for new online and mobile product offerings.

We have begun to reap some rewards from our efforts to be a technology-focused tutoring brand. Our mobile app, Jiazhangbang, or "Helping Parent Community," which we just launched this year, is off to a good start as an extension of the strong organically-built social community on eduu.com.

We are happy also to be recognized by AC Nielsen and Sina in the Sina 2013 China Online Education Report as being the number one choice of online school by surveyed K-12 learners.

In addition to the continued development of our online platform at eduu.com, xueersi.com and on mobile, we also upgraded our Intelligent Classroom System. ICS 3.0 uses enhanced media content and pads to make the classroom experience more interactive than ever.

We also made key strategic investments in fiscal 2014. We acquired kaoyan.com, a website that helps students prepare for post-graduate admissions, and made a minority investment in babytree.com, a leading online community for new parents. Both assets allow us to extend the lifetime value of our customers.

With Babytree we gain access to a younger customer demographic, which we believe over time will help feed into enrollments for our Mobby pre-school and the pre-kindergarten business for our Xueersi Peiyou small-class business.

With Kaoyan we extend our services beyond the twelfth grade, so now students can stay with us even after they have left high school. Meanwhile, our investment in duobei.com earlier in the year offers us valuable insight into the evolution of open platform online learning.

These organically-developed and strategic initiatives support our overall online strategy, which I have discussed on previous calls. We continue to believe that online will not easily disrupt the K-12 space given consumer behavior and the relatively local nature of the content and curriculum requirements.

However, we do see implementation of internet and mobile strategies as critical to maintain our differentiated strategy in the K-12 sector, while increasing interaction frequency and duration with our key users.

The first part of our online strategy is eduu.com and its affiliated websites, including aoshu.com, zhongkao.com, gaokao.com, zuowen.com, and now kaoyan.com.

The Jiazhangbang mobile app I mentioned earlier connects the online parent community on the eduu.com website through their mobile devices. This is essentially a continuation of our longstanding O2O efforts to build a social community online that also helps bring students into our classrooms.

Second, we continue to pursue a blended learning strategy offering online drills and/or apps for students to do exercises during the week while they are away from our classes.

We are developing these tools through speiyou for small class, i-zhikang for one-on-one, i-Mobby for our pre-school and young learners business and other platforms.

Online provides much more than simply an extra tool for tutoring. It helps us create an even stickier and more relevant community of students and parents connected to our brand and services.

Third, online school at xueersi.com continues to help us gain presence in cities where we do not yet have physical infrastructure as well as more enrollments from students in existing cities.

As mentioned earlier, our online school secured the number-one ranking in the Sina 2013 China Online Education Report issued by AC Nielsen and sina.com. This report, based on online responses through sina.com and Sina Weibo, with users of various K-12 online schools, gives us a leading market share in the kindergarten through twelfth grade online tutoring space, with nearly 29% of surveyed users having taken classes at xueersi.com.

Meanwhile, we are testing having more administrative services for our learning centers move online such as class registration, refunds and switching of classes. In addition to convenience for parents and students there is potential for cost efficiency gains over time.

Finally, we are beginning to experiment with free online school, live classes online, and education platform businesses through our beta products Dahai and Haibian, as well as via the minority stake investment in an education platform called duobei.com I mentioned earlier.

Let me now turn to the key themes for fiscal 2015. Our key themes for fiscal 2015 you may recognize as mostly a continuation of the goals we had set out and delivered in 2014. Let me outline them here.

Firstly, we will continue to pursue growth through expansion and innovation. We added a learning center in Jinan in the fourth, quarter which along with three other new cities, will begin operations in the second quarter of fiscal 2015.

The demand for our businesses remains strong and we are positive in our outlook for ongoing growth momentum in fiscal 2015 based predominantly on enrollment growth.

We will continue to pilot ICS 3.0 in select grade levels in Beijing and, if successful, we'll roll out nationally. We will also innovate further to develop the blended learning model with mobile apps as a complementary feature to make learning more fun and effective for students.

Secondly, we will continue to manage the balance between current and future growth. Even as we deliver strong growth with solid profitability and are blessed to be in a generally defensive sector, we are always on high alert for potential opportunities as well as disruptive changes.

As always, our investment focus is on the key growth drivers, new opportunities and operational business fundamentals to further strengthen our business model and distinguish our brand from the competition.

Technological innovation will change the education sector in China as it has other traditional sectors. The exciting new opportunities we see all around us tell us that now is the time to invest.

The strong gains in profitability and profit margins during fiscal 2014 provide us with a sound financial footing to invest in technology and online initiatives to support our long-term future growth as opportunity presents itself. As before, we will carefully weigh the pros and cons of growing our online and mobile presence organically or through strategic investment.

Thirdly, we continue to develop our people, who, it goes without saying, are our most valuable asset. We motivate our employees to strike the right balance between short-term and long-term growth of the Company.

In addition to revenue and profit our bonuses for key operations personnel are also tied to long-term oriented key performance indicators, such as utilization rates of our facilities and student retention levels.

The share grant we did last month, at the beginning of the new fiscal year, will vest over 6 to 10 years to support and reward long-term commitment to TAL.

Fourthly, we will keep investing in back-office capabilities, especially in IT systems, for better forecasting, financial analysis, purchasing and control functions.

An example of this commitment to continually improving our systems strength is our decision to work with Oracle Hyperion software for financial analysis and planning, which we believe will help us to budget for and react to the business environment ever more effectively.

And finally, we aim to continue to deliver on plan through solid execution, as we have done in the past two years.

Let me now go over the financials with you.

We delivered $87.0m in revenue in the quarter, representing revenue growth of 45.9% versus the same period in the previous year. Driving the quarter's revenue growth was strong enrollment growth of 38.8% combined with higher average selling prices.

Total student enrollments increased to approximately 348,000 from approximately 250,700 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 5.1% to $250m for the fourth fiscal quarter from $238m in the fourth quarter of the previous year was primarily driven by the hourly rate increases of the small-class course offerings and the foreign exchange rate fluctuation.

Now, moving back to the total Company numbers, cost of revenues increased by 29.9% to $40.8m from $31.4m in the same year-ago quarter. 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 increases in wages and teacher fees versus the year-ago period.

Non-GAAP cost of revenues, which excluded share-based compensation expenses, increased by 29.8% to $40.8m from $31.4m in the fourth quarter of fiscal year 2013.

GAAP and non-GAAP gross profit for the fourth quarter were both $46.2m as compared to both being $28.3m for the same year-ago period. GAAP and non-GAAP gross margin for the fourth quarter were 53.1% and 53.2% respectively, as compared to both about 47.4% for the same period of last year.

Selling and marketing expenses increased by 33.6% to $10.2m from $7.6m in the fourth quarter of fiscal-year 2013. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 34.9% to $9.9m from $7.3m in the same period of last year.

The increase of selling and marketing expenses in the fourth quarter of fiscal year 2014 was primarily a result of an increase in compensation to sales and marketing staff to support a greater number of programs and service offerings versus the year-ago period.

General and administrative expenses increased by 51.9% to $21.8m from $14.4m in the fourth quarter of fiscal-year 2013. The increase in general and administrative expenses was mainly due to an increase in compensation and to our G&A personnel in recognition of outperformance against budget and to support a greater number of programs and service offerings.

Non-GAAP general and administrative expenses, which excluded share-based compensation expenses, increased by 51.1% to $19.6m from $12.9m in the fourth quarter of fiscal-year 2013.

The above factors combined to give us operating income of $14.4m, representing a year-over-year increase of 154.2%. Non-GAAP operating income increased 129.8% year over year to $17.0m.

Operating margin in the fourth quarter was 16.5% as compared to 9.5% in the same period of the previous year. Non-GAAP operating margin was 19.5% as compared to 12.4% in the same period a year ago.

Our net income for the quarter was $16.7m, and increased by 144.0% year over year. Non-GAAP net income for the fourth quarter was $19.3m, up by 125.1% year over year. This gives us a net profit margin of 19.2% as compared to 11.5% in the same period of last year. Non-GAAP net profit margin was 22.2% versus 14.4% in the same period of last year.

Basic and diluted net income per ADS were both $0.21 for the quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were $0.25 and $0.24 respectively.

Now, moving to the year as a whole, we delivered revenue growth of 38.9%, driven by enrollment growth of approximately 31.6% and ASP growth of 5.6%. We delivered $313.9m of net revenue from $225.9m in fiscal-year 2013.

Total student enrollments increased to approximately 1,073,950 from approximately 816,110 one year ago. The increase in total student enrollments was driven primarily by increases of enrollments in the small-class offerings.

ASP increased [from] (corrected by company after the call) $277 in fiscal-year 2013 to $292 in fiscal-year 2014. The growth in ASP was mainly driven by the hourly rate increases of the small-class course offerings and the foreign exchange rate fluctuation. One-on-one tutoring contributed 20% of revenues for fiscal 2014, compared to 23% for fiscal 2013.

Cost of revenues increased by 30.9% to $151.5m from $115.7m in fiscal-year 2013. 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.

Non-GAAP cost of revenues, which excluded share-based compensation expenses, increased by 31.0% to $151.5m from $115.6m in fiscal-year 2013. GAAP and non-GAAP gross profit were both increased by 47.3% $162.4m from $110.2m and $110.3m respectively in fiscal-year 2013. GAAP and non-GAAP gross margin for the fiscal-year 2014 were both 51.7%, as compared to 48.8% for the prior year.

Selling and marketing expenses increased by 29.2% to $35.8m from $27.7m in fiscal-year 2013. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 33.8% to $34.6m from $25.9m in fiscal-year 2013.

The increase of selling and marketing expenses in fiscal-year 2014 was primarily a result of an increase of sales and marketing staff and related compensation to support an expanded number of cities in which the Company had learning center operations and a greater number of programs and service offerings.

General and administrative expenses increased by 37.5% to $70.3m from $51.1m in fiscal-year 2013. The increase in general and administrative expenses was mainly due to an increase in compensation for our general and administrative personnel, the depreciation of office space purchased in Beijing and an increase in professional services fees.

Non-GAAP general and administrative expenses, which excluded share-based compensation expenses, increased by 41.1% to $63.2m from $44.8m in fiscal-year 2013.

Operating income increased by 82.7% to $57.4m from $31.4m in fiscal-year 2013. Non-GAAP operating income, which excluded share-based compensation expenses, increased by 65.6% to $65.7m from $39.7m in fiscal-year 2013.

GAAP and non-GAAP operating margin for the fiscal year 2014 were 18.3% and 20.9%, respectively, as compared to 13.9% and 17.6%, respectively, for fiscal-year 2013.

Net income increased by 81.2% to $60.6m from $33.4m in fiscal-year 2013. Non-GAAP net income, which excluded share-based compensation expenses, increased by 65.3% to $69.0m from $41.7m in fiscal-year 2013. This gives us a net profit margin of 19.3% as compared to 14.8% of last year. Non-GAAP net profit margin was 22.0% versus 18.5% of the fiscal year 2013.

Basic and diluted net income per ADS were $0.77 and $0.76 respectively in fiscal-year 2014. Non-GAAP basic and non-GAAP diluted net income per ADS, which excluded share-based compensation expenses, were $0.88 and $0.86, respectively.

From the balance sheet, as of February 28, 2014 the Company had $269.9m of cash and cash equivalents and nil of term deposits as compared to $185.1m of cash and cash equivalents and $24.1m of term deposits as of February 28, 2013. Net cash provided by operating activities for the fiscal year 2014 was approximately $100.5m, representing a year-over-year increase of approximately 53.6%.

Capital expenditures for the fiscal-year 2014 were $10.9m, representing an increase of $4.0m from $6.9m in fiscal-year 2013. The increase was mainly due to leasehold improvements and the purchase of servers, computers, software systems and other hardware to support the Company's operations.

As of February 28, 2014 the Company's deferred revenue balance was $132.4m as compared to $102.5m as of February 28, 2013, representing a year-over-year increase of 29.2%.

Based on the Company's current estimate total net revenues for the first quarter of fiscal year 2015 are expected to be between $85.9m and $88.4m, representing an increase of 40% to 44% on a year-on-year basis, assuming no material change in exchange rates.

The first quarter of 2015 includes one more weekend of spring-term classes versus the same period in fiscal 2014. Excluding the estimated RMB29m to RMB30m impact of this extra weekend, the year-on-year revenue increase is estimated between 32% and 35%, again, assuming no material changes in exchange rates.

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

(Operator Instructions). Fei Fang, Goldman Sachs.

Hi, Joe and Mei. Thanks for taking my questions. Great set of results.

My first question is, among the 190 new classrooms that you have added could you provide a rough breakdown by city? And how do you think about the geographical focus of your future expansion? Thanks.

Sure, I'll give it to you by learning centers, Fei. So in Beijing we added three learning centers and discontinued four, so we were net down one in Beijing.

In Tianjin, rather, we were up two small-class learning centers in the quarter. In Xi'an we added one small class and one one-on-one learning center. In Nanjing we were up one, one small-class learning center.

In Wuhan we were up one small-class learning center. In Zhengzhou we were up one small-class learning center. Chongqing was one, Shenyang was one and Jinan is the city we entered in the quarter, the new city, was one as well. So that brought us to a net of eight small class and one one-on-one to get us to nine in total.

Right, so that's all over the map. Would it be fair to say that going forward the focus will be more broad-based and you will add centers in Beijing as well as the lower-tier cities?

Yes. I think that in Beijing you can see it's more opportunistic, so we may be at the end of a lease and see an opportunity to consolidate from smaller centers to larger centers. So I still think that the bulk of the net adds will probably be coming from cities outside of Beijing.

Got it, great.

My second question is on FX. The renminbi has recently stopped appreciating against US dollars, so how do you think about the impact on your earnings, especially on the -- regarding the other income line? And what will be the underlying FX assumption that you are working with in providing the guidance?

Sure. So in terms of renminbi we try not to make currency calls. So in my guidance for the first quarter I assumed no significant change in exchange rate. So I'm not assuming that the renminbi will go down in a big way and I'm also not assuming it'll go up in a big way in terms of my Q1.

I think that when you think about other income that's a good question. Other income already this year was lower than in previous years. Other income, of course, a big factor of that for us is exchange gain on the US dollars that we have offshore. So on a going-forward basis part of it will be the exchange gain we're not expecting to be as large for the renminbi, if at all.

And then you also have the fact that our offshore dollars are less now than they were before, so then there's also that'll have an impact on the amount of exchange gain you're able to derive from those offshore dollars.

Got it, great.

My last question is that I notice that you added one one-on-one learning center during the quarter, so is that -- does it indicate that you are back into the growth mode for the Zhikang brand?

We're continuing to manage the growth of our one-on-one business, so you'll see for the full year it was 20% as a percentage of revenues, which is consistent with what I guided in previous quarters.

And we expect small-class and our online courses businesses to both grow faster than one-on-one in this coming year, so you should expect that to come down further by a percentage of revenue going forward.

That doesn't mean that there aren't opportunities in select markets for one-on-one, and Xi'an would be such a market, where our small-class business is quite strong and one-on-one as a complement to our small-class business has also grown quite well.

So we will opportunistically look for one-on-one opportunities, especially in the cities outside of Beijing, where one-on-one is still relatively under-penetrated.

Great. Thanks, Joe.

Thanks, Fei.

Timothy Chang, Morgan Stanley.

Hi, Joe and Mei. Congratulations on the very strong results and thanks for taking my question.

My question is actually a follow-up to your online education strategy. As you may know, some other online players are now entering in this space. How do you see in terms of the change in any competitive dynamics and what do you think is the competitive edge of TAL over these online platforms? Thank you.

Great. Thanks, Timothy.

So, yes, we're happy to see a lot of interest in the online education space. The way we think about the advantage of the other players that may be going in, more internet-related companies, is they're more of a platform business. So for them they have lots of users and they're looking to aggregate content and provide it to their users.

So I think that that is a different kind of business than what we're trying to achieve. With our xueersi.com online school we differentiate through both the customer experience and the product itself, so the content and curriculum in each market.

So, on the experience side we want to emphasize service and being there for our students as a trusted education advisor given our sole focus on K-12 education. And then in terms of the product we spend a lot of resources in terms of understanding the local content and curriculum of each local market.

So it's very different from a platform business. We're focusing on a product business, a B2C proposition, where we differentiate based on our deep knowledge of the K-12 sector.

Thank you. That's very helpful.

Thank you, Timothy.

Tian Hou, TH Capital.

Hi Joe and Mei. Congratulations on a good quarter. Sorry.

So I have a question related to your ASPs. If I look at the growth drivers I think it's quite healthy that most of the growth are really coming from the enrollment growth. And I think for the education budget actually in terms of families or the whole society, the CPIs, they all have some kind of increase.

You guys have been pretty much in line with the CPI growth and I wonder if there's any plans going forward to increase the price. That's the question number one.

Question number two, so in the content categories I know you're putting a lot of R&D effort in developing your new content or new format of content. I wonder if there are any new categories of content are you going to add in your content portfolio. That's the second question. So I stop right here. Joe, you can start give us answer.

Okay, great. Thanks, Tian.

In terms of ASP, yes, we do have plans to increase price beginning with the summer term in Beijing, Shanghai, Shenzhen and some other markets as well. So there will be a price increase as part of the mix this year in our small-class business.

We typically give a coupon to recurring students to encourage retention and moderate into the price increase, so we'll probably continue to do that again this year.

In terms of what you're seeing, another factor is actually mix, so there are a couple of mix issues. One is within small class we're getting a lot of growth from cities outside of Beijing and Shanghai, and they're going to be lower ASP than Beijing, Shanghai, Guangzhou and Shenzhen, which are typically roughly the same level, Beijing slightly higher.

So that's going to naturally cause ASP on a blended basis, even within the small-class Peiyou business, to be lower than in some of our select cities, where we may be taking 10 or more percent price increase.

So in a given city we're likely to be above CPI, but you have structural shifts and we're not taking a price increase across all of our cities based on where they are in their level of development.

And then when you look across our products you have one-on-one, which is a high ASP business, becoming a lower percentage of revenue. So it went from 23% in last year, fiscal 2013, to 20% in fiscal 2014, and then we're expecting it to be lower this year. So that will also, on a blended ASP basis which you see in the release, has a -- have an impact in moderating the overall blended ASP increase.

And then online courses is growing quite well in terms of enrollments and we actually expect it to grow faster than one-on-one next year. So that's a low ASP product, because remember with our online courses we're trying to promote trial, so many of those classes are only RMB20 an hour and maybe only a few hours in duration, so we can have a nice trial product for people that are new to our classes.

So that's the way I would characterize the ASP. I think for us you're right to point out that we're an enrollment-growth driven business and we seek to continue to be an enrollment-growth driven business. We do think that that's the healthiest way to derive your top-line growth.

And we believe that we have the brand and the pricing power that if we're leaving a little bit on the table in terms of price now that's something that we can use later. So that's what I would say about the overall price increase.

I mentioned the small-class price increase. We may opt to take a price increase for one-on-one. It'll just be a little bit later. Typically, one-on-one it would be in September rather than in the summer term.

But we'll have to continue to see how one-on-one continues to evolve. And we'd likely take that one-on-one price increase in the same markets where we've taken the small-class increase.

So that's what I would say on the ASP side, Tian. In terms of content portfolio there are a couple of things that we're doing.

One is in terms of subjects we're focusing more on English and on Chinese composition, so you may have seen in the media that we recently signed an agreement with Cambridge University Press for content called Hello English, which we think will help us to go after the opportunity at the younger age groups.

Because, as you're aware, there was a change in the policy related to the weighting of English in the Zhongkao and Gaokao as well as kids studying English in the public schools. They won't be studying it before the fourth grade.

So that provides an opportunity to do more with conversational English at a younger age group, because we believe parents will still want their kids to get exposure to English.

It'll just be if the schools aren't providing it in the public forum that that gives an opportunity for training institutions. So that's one area where we're putting a lot of resources this year.

The other is Chinese composition. Again, there's a policy-related reason there where Chinese composition can become more important in terms of the Gaokao and Zhongkao, so we're putting more resources against Chinese composition. In terms of subjects I would say that's our focus.

In terms of age groups I think that the younger age groups right down to kindergarten is probably an opportunity for us, so we're going to spend a little bit more time and effort on.

Obviously, junior high and high school become more important as we develop from primary to junior to high school in each of our markets. We start with primary school and then move to junior high and high school, so that depends on the evolution of the market.

And then in terms of format I mentioned in the call about ICS 3.0. So in addition to the interactive whiteboards that we had before, where kids would have to go up to the front of the room and interact with a whiteboard, we're actually making it even more interactive, where every kid gets a pad when they come into the classroom and they can actually answer questions, boom, right on the spot with a teacher there.

And then you can -- the other kids can see that interaction on the whiteboard. So we think that's going to just make it ever more interactive and exciting for kids to be part of our classes. So that's the big thing we're doing in the classroom in terms of how the format of content.

We're focusing first on Beijing in select age groups, mainly junior high to start, and then we've got some good initial feedback there and if it continues to be good we'll expand it to other age groups within Beijing and then potentially other cities if it continues to be good. The main push for that will be more like the summer term. Right now we're kind of in a pilot mode for that.

And I mentioned on the release the different things we're doing online. So there's pre-recorded video content through our xueersi.com online courses. And then you have dahai.com, which is in a Beta stage, which is our free online school. You have Haibian, which is also in a Beta stage, which is live online. So we're doing a lot of experimentation in terms of presentation online as well.

That's very helpful. Thank you, Joe.

Thanks, Tian.

Clara Fan, Jefferies.

Hello. Thank you for taking my question. I have a few questions.

Firstly, can you give us guidance on your targeted number of center openings and the expansion in first-quarter 2015 and the full-year 2015? And what are the openings will be more skewed towards the first half or the second half?

And, secondly, you mentioned that the online revenue and the small-class revenue will probably be growing faster than one-on-one going into fiscal-year 2015 (technical difficulty), so I'm just wondering what kind of revenue contribution should we be looking at?

And, lastly, we saw that -- I was wondering what was the utilization last quarter compared to a year ago and what are your targets for fiscal-year 2015? Thank you.

Sure, I'll handle each of those questions separately. The first question related to learning centers, we added 19 learning centers last year. Based on plan we expect to add 25 incremental learning centers at least this year.

Of course, we'll add one learning center in each of the new cities we are entering, so in addition to Jinan there'll be three more that we'll be adding. We're also going to be adding new learning centers because there are a number of cities where over the last few years we've entered but we're still less than 10 learning centers, so we feel like it's the right stage of development for us to continue to add new centers in those cities.

So that's the idea in terms of learning centers. Of course, we're also continuing to be opportunistic in terms of adding classrooms to existing learning centers. Obviously, that's the best way to get leverage from your operating costs, but it's not exactly something you can depend on. It depends on the overall occupancy situation and how you're able to negotiate with the landlord etc. So that's what I would say on the learning center side.

We'll be primarily driven by small class. And then I would say it'll be slightly front-ended towards the first half of the year, as we do like to get learning centers in before the summer season as possible, but of course depend on execution and that we're able to find the right locations that we want at the right price, of course. But that's the goal. So that's I think the question related to learning centers.

In terms of -- you asked a question about utilization. The utilization was about 10% higher this quarter than the same period last year, so that's quite good, and we've done that now for a couple of quarters.

I think going forward you should expect it to be more like single digits' increase in terms of utilization. Utilization reaches its ceiling at some point, so I wouldn't necessarily expect that much next year, but we do still expect to get utilization gains, particularly in certain markets like Beijing and others.

You had a third question. Remind me, Clara.

Yes, on the revenue contribution we expected for small class, on-one-one and online in fiscal-year 2015.

Right. So I think that the Zhikang revenue will come down from 20%. It's hard to say exactly how much. It may be in the 17% to 18% range as a percentage of revenue this coming year. That's a guess at this point.

The online may go up from 3% to, say, 4% as a percentage of revenue next year. And then the remainder would be small class. So we're not talking dramatic changes. We're talking about slight moderation.

So just one question on the Zhikang. So do we think that we'll probably maintain -- the revenue contribution from Zhikang will be -- say minimum will be down to 15% or probably around that range in the long term?

I think that over the long term you could see one-on-one continue to go down as a percentage contribution. It can continue to grow. We just think that the small class and online courses businesses will grow faster.

And one quick follow-up question. On the three new cities that you mentioned is there three particular cities that we're thinking of?

There are and they're already set and ready to go, but for competitive reasons we won't disclose them until we're in them.

And we're more thinking of in first half for these three new cities as well?

No, no, they should be in the first quarter. So we think by the end of May you'd -- we'd be in most of them.

Okay, thank you very much.

Thank you, Clara.

Ella Ji, Oppenheimer.

Thank you. Congratulations on strong quarter.

My first question is with regards to your growth rate. Could you break down your growth rate by organic growth in existing centers versus the growth from the new centers in the ballpark?

And also as we look into the full-year FY2015 can you talk about your expectations of the growth trend as we begin to face -- as we begin to lose the benefit of easy year-over-year comp?

Right, okay. So your first question I don't have exact numbers for you for that, but it's in line with what I talked about with Clara in terms of utilization. Because I think one way to think about utilization in our sector is as people would think about same-store sale growth in a retail sector. So I think we're going to be primarily driven by capacity increases, i.e., new stores or new classrooms to existing centers.

But there will still be the same-store growth component, but less, so this year if you look at the utilization improvement in many markets it was 10% and so that's a pretty healthy same-store growth type number. And then on a going-forward basis I think that that number is going to go down to more like a single digits number.

In terms of the revenue growth number I think you're right to say that there will be some harder comps this year than in previous years. Yes, one is that in Q3 and Q4 this year we are cycling a lower base than in previous years.

And then also I mentioned the Chinese New Year impact, which this year we have a bit of headwind in Q2 and Q4. So Q2 and Q4 would be the ones to look out for in terms of where the comps may be a little bit more difficult.

But, that said, while I don't provide full-year guidance on revenues, internally according to our budget we're shooting for at least 35% top-line growth, so we're still pretty confident in terms of the top line.

Thank you, that's very helpful.

And then my second question is you -- obviously, you provided a lot more new offerings on online and also more interactive services in class. Can you talk about, among all the things you now provide, what are the new things that's most welcomed or most popular by the students and their parents?

And as you continue to invest what do you think -- is there anything like a return on the investment target that you have internally?

And, just lastly, could you compare your current offering to the peers -- to the ones that your peers have?

Okay. So in terms of online what works are two things. One is the customer experience and two is the quality of the product. So that's what we're trying to get right in everything we do online.

So you'll see us experimenting with different ways of achieving that; whether it's live, where we're trying to have more direct interaction with students; whether it's adding live to pre-recorded, so doing something more like the flipped classroom where you have the pre-recorded video content which is transferring knowledge, but then offering students the opportunity for practice to have live interaction with teachers; whether it's apps or other drills online to help students to be able to do practice exercises during the week.

So that's one thing that's key. The customer experience having high-quality interactions with students and providing good service to students. The second is the product itself. And we believe that a lot of that depends on our deep knowledge of the content and the curriculum. So I think that those are the two things that we're trying to do across all of those different online products that I mentioned on the call and then in response to Tian's question earlier.

In terms of how we compare to competitors, I think that that's better really just for you guys to do the research and see. I think that for us we're focusing on K-12. We're focusing on those key areas that I talked about in terms of our online strategy from social platform, providing that O2O community that helps to bring people into our classrooms, to providing blended learning, providing a top online courses solution for K-12 parents.

And then we're experimenting with a lot of other new and different things that could potentially be disruptive, or at least differentiating in the sector, like flipped classroom, like live online etc.

Have I answered your questions, Ella?

Yes, Joe, that's certainly helpful.

Just a quick follow-up. I'm just wondering if with all those improved customer experiences do you think they will help grow your enrollments eventually, or you think at this point it probably will just stay as better customer experiences, which will certainly help with your business in the long term, but you're not expecting these new offerings to help with your enrollment?

Well, we're already seeing an enrollment contribution from online. Our online courses had 11% share of enrollments in Q4, so we're seeing that. Year to date it was about 13%.

So I think that we're -- we have continued high expectations that online will help drive enrollments as well as improve customer experience. The ASPs for online courses are lower, as I mentioned, so the contribution to revenues we expect to continue to be lower than the enrollment contribution.

Okay, thanks.

And the last question is regarding your business expansion strategy for next -- for this FY 2015. So you made some acquisitions -- small-sized acquisitions last year. Can you talk about what you're planning for this year? And are you going to make more acquisitions, or do you plan to just focus on the existing ones and just help those companies grow bigger and better?

Yes. We'll be opportunistic in terms of acquisitions or strategic investments. You'll actually see us do a lot more on the strategic investments side, taking minority stakes rather than full acquisitions.

I think we'll continue to be focused more on internet, mobile and that intersection of technology with education. We haven't done center-based acquisitions in the last year and I think that'll probably continue to be the trend going into the next year.

Got it. Thank you so much.

Thanks, Ella.

(Operator Instructions). Leon Chik, JPMorgan.

Yes, hi. It's Leon. Nicely done on the results. I just have a quick question.

You had this massive improvement in your EBIT margin basically in the last few quarters. The question is just how did you do that?

Yes, sure. In terms of the EBIT margin I think that other analysts have talked about the fact that we were cycling the lower quarters in the second half of the year, so I think part of it was through strong enrollment and revenue growth we were able to scale on the SG&A side.

And then by focusing on the balance between utilization of existing facilities and adding new facilities we were able to drive gross margins. And we also took a price increase in certain markets over the last year, including Beijing.

On a going-forward basis we don't provide margin guidance, but based on budget I could see approximately 250 basis points of compression on a non-GAAP basis. Q4, I mentioned the Chinese New Year impact, so there's likely to be a swing of a couple of hundred basis points of margin windfall in one year that would be headwind in the next year.

So this past year, if you talk about the second half of the year and how we did it, a lot of it was execution, but we did have some nice ]tailwind] (corrected by company after the call) just in terms of the timing of Chinese New Year that helped us in Q2 and Q4 of last year which we won't have in this year.

But if you take out that impact then we're going to try to keep it flat to maybe 100 basis points of compression on a non-GAAP basis. If we weren't investing in various businesses, like online, ICS 3.0, O2O and other back-end systems, we wouldn't likely see a decline at all, except for the fluctuation in margins given to the Chinese New Year. But we think these make sense for the long-term growth of the Company.

And as I mentioned with the other analysts that were asking about online, we don't see this as disrupting K-12, but we see it as a big opportunity. So I just wanted to, in addition to answering your questions about how we did in the second half of the year, also give a bit of a heads up about how we're thinking about it for next year.

Just one quick follow-up.

I don't want to ask about next year, but just normally how do you -- when you plan your G&A and your selling expense for the entire year do you do it a quarter at a time, or do you do it for the whole fiscal year and if you had a surprise increase of sales in the last part of the year then you basically don't change the expense at all? Do you have an annual budget like that? Yes, that's the question.

Yes, we do have an annual budget. We start our budgeting process in September of each year by establishing a work plan by department, by business unit, and then we tie that to our budget, which is eventually tied to performance KPIs for everybody in the system. So we have a pretty integrated annual budget system that usually ends in March every year and is approved by the Board in April the following year.

So we will continue to look at things quarter by quarter and as we do see that we're achieving over budget in some cases if we believe that there are opportunities to invest more, like I mentioned ICS 3.0, that interactive classroom pad thing, that, we could just do it in Beijing. If we're achieving very strong top line we may decide that it makes sense to roll that out more broadly, especially if we get great consumer feedback about it, because then we're really investing in our future growth. So that's the way we think about it, Leon.

All right, thanks.

Thank you very much. There are no further questions on the phone at this time. I would now like to hand the call back to your presenter for today, Mr. Joseph Kauffman. Please continue.

Thank you. Thank you all for taking the time to be with us tonight. We look forward to continuing to have communication with you. If you should have any questions or like to arrange a time to come to Beijing please reach out to myself, to Mei or to any of our IR personnel. Thanks so much and have a good day.