TAL Education Group (TAL) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the TAL Education Group second fiscal quarter 2015 earnings conference call. (Operation Instructions).

I must advise you that this conference is being recorded today, Tuesday, October 21, 2014. I would now like to hand the conference over to Ms. Mei Li now. Thank you. Please go ahead.

Thank you all for joining us today for TAL Education Group's second fiscal quarter 2015 earnings conference call. The second fiscal quarter earnings release was distributed earlier today and you may find a copy on the Company's IR website or through the newswires.

During this call, you will hear from our current Chief Financial Officer, Mr. Joseph Kauffman and the new Chief Financial Officer, Rong Luo. Following their prepared remarks, Mr. Kauffman and Mr. Luo 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 of 2015. I'd also like to extend a warm welcome to Rong Luo, who will take my place as CFO starting November 1st. We agreed this earnings call would be an excellent and immediate opportunity for our analysts and investors to be introduced to Rong.

We are pleased to report on a quarter with revenues in line with our expectations and solid bottom-line results. Today, I will discuss the highlights for the quarter and provide an update on our online education and strategic investment initiatives. Then, Rong Luo will go over some further analysis of the financials and discuss our business outlook with you.

Net revenue for the second fiscal quarter increased 33.1% year over year to $122.4m. Revenue growth was primarily driven by a 32.2% increase in enrollments, while overall ASP was approximately flat. Year-to-date revenues have increased 37.8% year over year, and we are well on track to achieve the full fiscal year budgeted revenue growth target of approximately 35%, as articulated on our earlier earnings call. Our positive outlook for the year remains unchanged.

Please note that Q2 was a quarter that had the usual every-other-year seasonality associated with the timing of Chinese New Year, among other factors. If we add back in the impact of one less week of class due to the timing of CNY and one less Saturday of class in May which was included in the first quarter, Q2 revenue growth would have been approximately 40%.

Our core small-class offering continued to be the main driver of our growth, growing 38% in the quarter. If we add back in the Chinese New Year seasonality and other factors mentioned above, the normalized revenue growth for small class in the second quarter would have been 44%.

One-on-one has grown less than budget at 7% revenue growth in the quarter, but this has come with better profit contribution for this segment line than expected, as we have managed its growth for profitability. Online courses continue to be our fastest-growing segment at 62% revenue growth in the second quarter.

As for revenue breakdown by business segment, small class contributed 82% of second quarter revenues, up from 78% in the same quarter last year. One-on-one represented 15% of revenues compared to 19% in the same quarter last year; and online contributed 3% this second quarter, unchanged from the same year-ago period.

Now, let's take a closer look at the small-class business. In the quarter, cities other than Beijing and Shanghai again increased their contribution to overall small-class revenue. Cities other than Beijing and Shanghai accounted for 48% of small-class revenues in the second quarter, compared to 35% during the same period last year and 44% last quarter. As you can see, these cities continued to grow especially quickly, as we are able to offer particularly strong differentiation while facing a relatively favorable competitive set in these markets.

The cities I would like to highlight this quarter include Xi'an, Nanjing, Hangzhou, Zhengzhou, Suzhou, Chongqing, Shenyang and Taiyuan, which all achieved triple-digit revenue growth. Shanghai recorded strong double-digit revenue growth once again this quarter. Beijing was slightly down year over year. As I indicated in the previous quarter, we see some impact from the change in policy in Beijing on the weighting of English in Zhongkao and Gaokao exams. As a result, enrollments for our English classes were down year over year again in Beijing this quarter.

We are happy to see Hello English begin to take hold in Beijing, with Beijing enrollments contributing close to 60% of total Hello English enrollments for the four cities where we have provided the courses. Other than English, we see some weakness from junior high in Beijing. We have focused our highly differentiated, Intelligent Classroom System 3.0 version on this junior high segment and are confident through this product upgrade we will bring junior high in Beijing back to growth. High school, while flat in the summer semester, is looking good for fall term, with over 10% enrollment growth based on currently registered enrollments.

Let me turn now to our one-on-one business. We continued to manage the growth of our one-on-one business. While growth has moderated, this business segment's profitability was higher than the same period last year. We continue to exercise effective cost control and are able to manage one-on-one for profitability and as a complementary offering to our core small class.

As for our online business, it was again profitable in the second quarter. Online enrollments were 13% of total enrollments this quarter versus 11% in the same year-ago period.

Let me update you now on our geographic footprint and learning center network. We held regular class operations for the summer term in the four new cities we added in the first half of the fiscal year: Jinan, Qingdao, Shijiazhung and Changsha. As usual, we provide limited seats to students in the first learning center before we roll out to multiple centers in a new city. We expect these initial new learning centers to do well and help establish our brand affiliation with outstanding performance that in turn will drive word-of-mouth marketing.

Our learning center network expanded to a total of 287 centers, a net increase of two centers quarter over quarter, with a net six small-class centers added and a net four one-on-one centers closed. We added a net 270 new small-class classrooms, which included the classrooms in the newly added small-class centers. The key cities where we added the most net classroom capacity for small class were Nanjing, Shenzhen, Hangzhou and Guangzhou. By the end of the quarter, of our total of 287 learning centers, 200 were small-class learning centers, including four learning centers for Mobby and 87 for one on one.

Before I give the floor to Rong for the financial overview, let me briefly recap our recent $18m investment in the Minerva Project. Minerva aims to reinvent the undergraduate experience for the world's highest potential university students, combining online interactive education with an 'offline' intercontinental living experience.

Our investment, along with two other Chinese firms, ZhenFund and Yongjin Group, and Silicon Valley-based Benchmark Capital, represents an initial close for Minerva's series B preferred stock financing, with a final close scheduled within three months thereafter that will total up to $70m of new financing. Under the terms of the investment agreement, a representative from TAL will sit on the Minerva board.

We are very excited to have made this investment. There are strong similarities between our own and Minerva's teaching philosophies, drive for innovation and focus on top students with outstanding performance. Through this investment in Minerva, we extend our reach beyond K-12 and also gain exposure to new education technology that can help inform our thinking about the ongoing advancement of our own programs.

We will continue to search in China and globally for additional investment opportunities that will complement and enhance our core business and support our vision of becoming a leading technology-focused education services provider.

In summary, the second-quarter results have brought us to a solid midpoint of the fiscal year with operational, strategic and financial execution according to plan. As before, while we drive growth through expansion and technology-based innovation, we continue to look for the right balance between present and future growth.

And finally, on a personal note, I would like to thank you all for four years of great cooperation and support in my function as CFO of TAL.

I will continue to sit on the Board and support TAL in the future. I am passing the baton to Rong Luo, whom some of you may already know in his previous capacity as CFO at eLong.

Thank you, Joe. Let me say, I'm excited to be joining the TAL Education Group management team, and it's a great pleasure to be working with all of you in the period ahead.

To allow for more time for the question-and-answer session, I would like to make just some brief points that will add more colors to the financials you can find in today's earnings press release.

As for the second-quarter bottom-line results, income from operations and net income attributable to holders of ordinary shares each grew by 24.8% year on year. Gross margin expansion was the major driver of our improved profitability in the quarter. Gross margin increased by 320 basis points to 56.5% from 53.3% in the year-ago period.

SG&A spending increased 57.1%, as we continued to execute on our plans to invest in our future growth. You may recall, we did not add as much SG&A expenses as expected in the first quarter. Joe mentioned on the last earnings call that this is mostly a timing issue. The second quarter saw the higher level of SG&A spending were expected as our planned investment in new business and product lines gathered pace. The increase was attributable to a number of initiatives, including content development for ICS 3.0 and other programs, enhancement of Xueersi Peiyou app for small classes registration and blended learning, stepped-up marketing spending on our rebranded Jiazhangbang social community and our bringing onboard new talent, particularly for emerging online and mobile-driven business and product lines.

To give you a better sense of the total planned investment for the year, we expect a loss of between $12m and $15m for the full year for Jiazhangbang and other new product lines and Peiyou's new initiatives, including ICS 3.0 and Xueersi Peiyou mobile app. Year to date, we have spent roughly $7.5m; and we will continue to invest more in the second half of the year and expect the overall investment to be closer to the high end of that $12m to $15m range.

On the ASP side, the year-on-year blended ASP was flattish for the second fiscal quarter from the same period of the previous year, which continues to reflect a very positive shift in our business in favor of small class and online, as we manage the growth of our one-on-one businesses.

Small-class ASP grew 6.1% in the quarter, reflecting price increases in Beijing, Shanghai, Shenzhen, Wuhan, Zhengzhou, Suzhou, Chongqing and Taiyuan since the same period of the previous year. We also saw the diversification of our small-class revenues, away from Beijing and Shanghai and toward our more recently opened cities, which have low ASPs.

Basic and diluted net income per ADS were $0.37 and $0.34, respectively, for the quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were $0.42 and $0.39, respectively.

Let me briefly discuss the EPS effect from the Convertible Notes issued in May 2014. From a basic EPS perspective, the share count did not increase, because none of our CB investors converted in the quarter. From a diluted EPS perspective, the current diluted net income per ADS is based on the assumption that all convertible bonds have been converted to shares, as consistent with the "if converted" converting method according to US GAAP.

As such, diluted EPS does not reflect the generally anti-dilutive effect of the capped call transaction. However, if at the expiration of the capped call contracts or their early termination, the stock price is above the lower strike of the capped call, or $26.29, then the exercise or early termination of the capped call is expected to effectively reduce the number of incremental shares that would be added to the total shares outstanding.

Therefore, in a case of the Company's choosing to receive shares rather than cash from their counterparties to the capped call, the existence of the capped call would positively impact basic EPS versus a situation in which there were no capped call.

In terms of CapEx, the earnings release provided capital expenditure numbers for the first half of the year. Capital expenditures for the second quarter of fiscal year 2015 were $8.6m, representing an increase of $5.3m from $3.3m in the second quarter of fiscal year 2014. The increase was mainly due to leasehold improvements, IT project expenses and the purchase of servers, computers, software systems and other hardware for the Company's teaching facilities.

Let me finally turn to our guidance.

For the third quarter of fiscal 2015, we expect based on our current estimate total net revenues to be between $96.3m and $98.5m, representing an increase of 31% to 34% on a year-on-year basis, assuming no material change in exchange rates. If we achieved the guidance of 31% to 34% revenue growth in Q3, then we will have achieved 35.6% to 36.6% year-on-year top-line growth for the first nine months of the year. Our guidance for the third quarter has already taken into consideration the impact of late fall-term classes against last year and one course delay to Q4, due to the APAC Conference in Beijing. We expect this impact to be at least RMB30m. That is RMB30m in the quarter. Assuming we add back this approximately RMB30m to our third-quarter guidance, then the revenue growth on a normalized basis for the quarter would be 37% to 40%.

These estimates reflect the Company's current expectation, which is subject to change.

And that concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions). Fei Fang, Goldman Sachs.

Hi, Joe and Rong. Thanks for the opportunity. Joe, it's been a pleasure. Wish you all the best. Can you talk a little bit about the competitive situation in your new markets in lower-tier cities outside of Beijing and Shanghai? How would you compare or contrast their competitive intensity versus in Beijing? Then I have a follow up. Thank you.

Yes, sure. Thanks, Fei. As we said in our prepared remarks, we continue to see really nice growth out of our cities other than Beijing and Shanghai, and as we mentioned, they contributed 48% of overall small-class revenue in the quarter, so that's a new high in terms of the contribution of these cities outside of Beijing and Shanghai to our overall small-class revenue.

And importantly, we see really strong runway for growth in these markets. The main reason is the same reasons as we've had before. They've continued to be very underpenetrated, and importantly, the competitive set is actually -- we found it to be relatively weak.

In our core Peiyou segment, there aren't really strong competitors in these markets, especially if you compare them to a Beijing and a Shanghai, and we have really highly differentiated products versus the competition in these markets. So, if you think about kind of local competitors in each market, you can expect that that competition is going to be relatively less fierce than what you'd expect in a Beijing or a Shanghai.

That's good to know. Thanks. And also, you have rolled out the Jiazhangbang app in the past quarter. Can you post us on the progress that you have made so far, and how has the experience been for students and parents?

Yeah. Jiazhangbang continues to be really important for us as we think about customer acquisition, and it's playing an ever-more-important role in our overall corporate strategy. We are continuing to focus on it every day, improving the experience for parents.

You'll see continued upgrade to the product. We're very focused on continuing to get feedback and make it better every day. One example of that in terms of new functions is that we've recently added a group function so that people, according to their interests or what school districts they're around, they can form their own chat groups on the Jiazhangbang platform.

That's great. Congratulations on the results.

Thanks, Fei.

Tian Hou, T.H. Capital.

Hi, Joe. It's Tian, and wish you best of luck on your new ventures and also welcome Rong onboard. So my question is related to your much more longer-term strategy, so as an offline education company, where a major part of your business is offline business. Now, we have a lot of online education companies started, and either of them, we can't say they're perfect.

So today, the new concept or the trend is much more an O2O, either offline to online or online to offline. Anyhow, it's really interaction between two platforms, how to use the other platform to promote this platform. So I wonder, what is the serious long-term plan in that area?

And also, we saw a lot of those kind of online education companies have already started. What are some things you saw are promising and what are some things you saw that are not that interesting?

And I also have a follow up after this.

Okay, thanks, Tian. I appreciate that question. There's a lot there, and I'll try and cove as much as I can. I think it's an interesting point of view, certainly around O2O, and importantly, that's where you see where we're focusing most of our resources. If you see where we're focusing our energy from an SG&A perspective, the bulk of those projects are actually O2O-oriented projects.

So if you think about Jiazhangbang, for example, it's our clearest O2O play. So you have parents from the social community having their children over time take our center-based classes. It's pretty straightforward. As I mentioned in my response to Fei, we're continuing to do improve that project and it's really gaining traction and important strategically for us.

The other thing that I mentioned as part of my prepared remarks and Rong picked up on in terms of his financial analysis talking about the SG&A was the Xueersi Peiyou app which is also a clear example of the O2O that you're referring to where parents, instead of having to go to service centers to be able to register for our classes or change classes, they can do that directly through the app. So it's a win-win really where you're getting much better customer satisfaction from parents while at the same time you're also having a much more efficient cost structure, not having to have as many service centers to handle these kind of issues.

And then ICS 3.0 was another thing that was mentioned and that's also actually an O2O type model; it's not just about tablets in the classroom but it's about using the information from the classroom, what answers the kids are answering right and which ones they're having more trouble on and then being able to be able to download that information and then have it be used for targeted drilling and exercises that could happen online or mobile, etc.

So the bulk of what we're actually trying to do actually is very in line with your observation around the importance of O2O.

That's very helpful. So another question is really related to this which is you just raised the money, RMB230m, and I guess this money is going to be used for investment, acquisitions, etc. So I wonder what are the areas that you feel like you need to invest to make Xueersi a much stronger company and what are some -- what are the ways to use your money, investment, equity investment or acquisition? What are they?

Yes, sure. In terms of the recent capital raise, net of the capital transactions and the other fees, etc. it was more like RMB203m from a net perspective. But I take your point. We're continuing to focus on -- it's been mostly strategic investments to this point and with strategic investments, especially when they're 20% or less, you're not going to see the regular P&L impact from consolidation of the financials or recording a minority interest. So as we've discussed before, we see that as a better way to manage the risks around new investments initially and then the best investments from a strategic investment or minority stake investment perspective we can think about potentially over time increasing that to more of a control stake.

We'll also look at pure control stake investments right from the start but up until now the bulk of our investments have actually been minority stake investments.

Okay, I see. That's very helpful. Thank you.

Thank you, Tian.

Philip Wan, Morgan Stanley.

Hi, Joe and Rong. Thanks for taking my questions. I have two questions. One is on the competition and could you deliberate on pricing as some of your competitors recently offered discounts to attract students in top tier cities like Beijing and Shanghai while you've raised prices for small classes in the regions at the same time. So have you seen any impact to your enrollment because of this?

And then the second question is as we are given a change in the business mix between small classes and one-on-one as well as growing sales contribution from lower tier cities, how should we think of the ASP trend going forward? Thank you.

Okay, great. Thanks, Philip. In terms of your first question, I think that we do quite different things from the competitor you may be referring to. We play in a completely different segment. Where we play with Peiyou and top students we really don't believe that a low price strategy is going to work. We don't believe the parents of top students are going to take the risk of going elsewhere just because of a lower price.

Just to put this in context, it's not like we're super expensive to begin with. Over an entire semester of 15 classes assume our highest price point in all of China, which right now is RMB75 an hour in Beijing. It's three hours per class, 15 sessions every semester, you're taking RMB3,375 over three and a half months of instruction. So it's roughly RMB1,000 a month which, especially when you're talking about Beijing and Shanghai, is quite affordable for the mass market. And we don't believe that particularly parents of top students are going to sacrifice their kids' opportunity for a better future for a reduction of say RMB1,000 or RMB1,500 or something like that.

So we think a low price strategy may work in other segments of the market but for our segment of the market we don't think it's an effective strategy and we're not seeing that kind of strategy work in terms of taking share from us. I think the overall picture is that K-12 is a huge market and we're still a really small part of that market. The top players are still only a few percent of the market. So everyone can play in their spaces that it makes sense to play in and ultimately the nationally branded players are probably going to take an edge over time at the expense of the local players. But we don't see -- we haven't seen head-to-head kind of taking share among the nationally branded players at this point in time.

And you mentioned Shanghai. Importantly, Shanghai is growing extremely well for us and we continue to see a long runway for growth in Shanghai as the typical drivers that we talk about in terms of growth in any given city, subjects, grades and districts, have still not nearly been completely used up in the Shanghai market. For example there's still a lot of room to grow in middle and high school, non-math subjects and city districts, in particular in Shanghai. So that would be how I would address the question related to competition.

And then I'll turn it over to Rong to talk about how we think about pricing going forward.

Thank you, Joe. And, just as I mentioned in my prepared remarks, we have taken the price ahead of the summer term in certain cities. So we think the current price increase for Peiyou small classes in this quarter should be approximately in the range you will see in the coming quarters. As our geography distribution has moved into the cities other than Beijing and Shanghai you may see a slightly lower ASP growth for small classes in the quarter. As Joe has mentioned before, the ASP should be in the range around 5% to 8%. Based on what we know today, it's more likely at the lower end range -- at the lower end of the range.

The mix effect of the lower percentage of one-on-one business we also expect to continue to play out over the coming quarters. I think the greater percentage of online may not be as strong as in previous quarters but overall we expect the overall blended ASP to continue to be flat to slightly down in the coming quarters. I hope it helps.

Thanks a lot, Philip.

Thank you. That's very helpful. If I may have one more follow-up. I may have missed it earlier. Could you elaborate a little bit about your expectation on the recovery on Beijing? Thank you.

Yes, in terms of Beijing, we talked about in our prepared remarks how we're already seeing nice recovery in the high school business where you're seeing 10% enrollment growth in high school based on the enrollments that we see so far in the fall term. So that's a nice initial indication. We expect in the middle school business that the ICS 3.0 which we're currently piloting in the seventh grade will continue to add differentiation and support our continued growth in that segment.

And then in terms of English, we're seeing some nice initial traction from Hello English. We believe that for the market as a whole, especially for test-prep-oriented English providers like ourselves and other well-known branded players, it's going to be a longer period of time before you're going to get growth back but I think we're doing all the right things in terms of focusing on rebranding the product, focusing on more interaction, using mobile, using the new texts together with Cambridge University, focusing more on conversational part of English rather than test prep.

So I think we're doing all the right things. That part of it will probably take a little bit longer than the others.

Okay. Thanks for the color.

Thanks, Philip.

Ella Ji, Oppenheimer.

Thank you. Joe, it has been great working with you in the past few years. I wish you all the best and Rong warm welcome on board. First, I want to clarify relating to the APAC conference impact of RMB30m. Is that course cost to be delayed to fiscal 4Q or is it going to be cancelled?

Okay, for this question we need recap a little bit not only for where we have missing two classes in Q3. One is because of the APAC in Beijing. The other one is because the late fall term classes against last year because we start a little later than last year. So, all of these two classes have at least contributed RMB30m. So this will not go away. All of this will roll out to Q4 because most of our business is long-term business. The students will not go away just because one or two is delayed.

Okay. Thank you for the clarification.

A typical fall semester is a 15-class semester so, to Rong's point, people enroll for the whole semester; they don't enroll for a couple of classes at a time. So it's just going to roll into Q4. Our fiscal quarters aren't relevant from a parent's perspective. So anyway, just further clarification on that point.

Yes, got it. And then my second question is relating to your investments. So one, can you talk about your rationale behind your investment of Minerva project. And since in the past year you have been investing in different types of businesses such as Babytree or Kaoyan or now the Minerva, they are in different sectors and in different regions. So what is going to be -- is there going to be a focus of your investment going forward, either in a sub-segment or in a certain geographic region?

And two, relating to your in-house investment, your ICS 3.0, Haibian.com and Jiazhangbang, can you provide us key operating metrics such as the number of downloads or number of MAUs. And with all the spending, where do you -- where does management expect you can achieve for example by end of this fiscal year? Thank you.

Sure. In terms of the Minerva investment, Minerva and TAL share similar philosophies in terms of focus on top students and interest in innovation and technology. In terms of relevance for us, we have a strong interest in providing our high school students with options to go not only to the best universities in China but also the best universities in the world, like Minerva. Minerva -- it's early days but the acceptance rate was very low, the yield was very high and they've met all their goals in terms of building a very interesting curriculum with top faculty from across the US and the world.

So I think it's very in line actually in terms of our vision and can directly provide opportunities for our top students aside from the top universities in China.

In addition to that, the innovative use of technology by Minerva, especially around these live interactive online courses, is also really of interest to us and we think can help with the advancement of our own classroom-based and online courses.

So when you think about our investment strategy, I actually don't see that -- I see there is -- I see a clear logic around Babytree, Kaoyan, Minerva. It's about extending the lifetime value of the customer. Babytree is about bringing people in earlier; Kaoyan and Minerva are about extending beyond K-12. So I think there's a clear logic around that.

And then in terms of the regional piece, I think that typically in terms of providing feeders in terms of users into our business domestic type strategic investments probably make more sense. In this case you have our existing students and providing them a potential opportunity overseas and then our view is also that Silicon Valley presents a lot of opportunities in terms of technology. It's just much more advanced in terms of technology and we can leverage a lot of that in the China context.

So that's how we're thinking about it from a regional perspective and from a strategy perspective. And then I'll let Rong talk a little bit about what we're thinking around our investments that you mentioned around Jiazhangbang, Haibian, etc.

Yes, thank you Joe. I think the logic around Jiazhangbang I think is quite straightforward O2O as Joe has mentioned just now. And the parents, they can get information there and they can -- and after they get enough information they can just make some quick decisions they can come to our school.

And for ICS 3.0, I think it's also a very clear way of differentiating our classes and also being able to provide more targeting (inaudible). It's a very highly interactive device which can enable communication between the teacher and students and parents to be much more easier.

Xueersi Peiyou app, the logic is also clear because it can provide the easiest way for parents to register, change classes and over the long term if we reduce our reliance on such centers there is the opportunity to be much more efficient from a cost perspective while at the same time it can also help to better serve the parents because all of them are in the app, in the [server]. It's a very easy way. It's a win-win situation for both the parents and for the Company.

For Haibian, I think it's still in the very early stages but we do -- the live online is our best opportunity to be able to effectively enter markets where it's not economical for us to enter with the learning centers. Every time we want to open new cities or we want to open some new learning centers actually we are -- we treat it very seriously because we need to make sure the college is good enough. So for Haibian, a kind of live interactive product will help us to enter these new markets very easily.

Given that it's live and there is more interactions, that will help and it's much better than a prerecorded product. And that's why we believe all of this Haibian initiated will lead to a higher student retention over time which all of it can help us to quickly increase our scale in the future. But again, we have to say Haibian is in very early stage. We are still doing some pilots in some key cities. We will keep you posted if we get more information or more progress in future.

Okay, thank you. Is there any other operating metrics that management can share with us?

No, not at this time, Ella. They're relatively early stage works in progress but we're happy with the progress up to this point and we'll share with you the relevant metrics at the appropriate time.

Thank you, Joe. Thank you, Rong.

Thanks Ella.

Leon Chik, JPMorgan.

Yes, hi. Hi, it's Leon. Sorry to see you go. I know I haven't covered you for very long. But anyway the question is I think you mentioned before the small class tuition was up above 6% and I think overall tuition is up 1%. So is that difference just the mix, more small class and less one-on-ones? And also, related to that, is that the reason why -- is that the only reason why gross profit margin is up because you have more small class versus one-on-one? Thanks.

Sure. Thanks, Leon. Yes, so the reason between the small class which is over 6% and then the overall ASP which is less than 1% is going to be mix related. But it's not just one-on-one; remember it's also online. And online had a greater percentage of enrollments this quarter than in the same period last year. And the enrollment -- and the ASP for online is particularly low because you not only have a lower hourly rate but people are doing typically many fewer hours than they are in the small class or the one-on-one product. So that impact of online has an effect as well as the one-on-one impact that you mentioned.

And then in terms of the gross margin question, the mix shift is important. There is a big gap in gross margin between the one-on-one and small class businesses. We also had improved utilization in the quarter and then last year we also had a third party claim in the quarter as well that hit the COGS line. So there was a combination of factors that drove the overall strong improvement on the gross margin line.

Could you give us the just one-on-one tuition change? Do you disclose it? Thanks.

Sure. One-on-one we actually did not take price in the one-on-one. So you didn't see an ASP increase for one-on-one in the quarter.

Okay. Thanks.

Thank you, Leon.

Thank you. There are no further questions at this time. I would like to hand the floor back to Mr. Kauffman for closing remarks.

Thank you. I would really like to thank you all again for all these years of great cooperation and support. I've really loved being CFO of TAL and loved working with all of you. I look forward to continuing to make contributions to TAL as a Board member in the future and I'm excited, as always, about the really bright future that we all have ahead of us. Rong and I will be available for questions as you may have them. So feel free to reach out to Mei, myself or any of our other IR staff and we'll be happy to be available for any questions that you may have over the coming days and weeks. Thanks again. Again really appreciate it. Thank you.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect. Have a nice day.