TAL Education Group (TAL) 2015 Q4 法說會逐字稿

Good evening.

My name is Deirdre and I will be your conference operator today.

At this time I would like to welcome everyone to the TAL Education Group's fourth fiscal quarter and fiscal year 2015 earnings conference call.

(Operator Instructions).

After the speaker's remarks, there will be a question and answer session.

(Operator Instructions).

I will now turn the call over to Mei Li.

You may begin your conference.

Thank you all for joining us today for TAL Education Group's fourth fiscal quarter and fiscal year 2015 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's IR website or through the newswires.

During this call you will hear from Chief Financial Officer, Mr. Rong Luo.

Following his prepared remarks, 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 SEC.

Also, our earnings release in this call includes discussions of certain non-GAAP measures.

Please refer to our earnings release which contains the reconciliation of the non-GAAP measures to the most directly comparable GAAP measures.

I would now like to turn the call over to Mr. Rong Luo.

Thank you Mei and thank you all for joining us on our earnings conference call for the fourth fiscal quarter and fiscal year of 2015.

We are very pleased to report on another year with revenues exceeding our expectation.

We maintained our strong growth momentum during the fourth fiscal quarter.

Net revenue increased 41.6% year over year to $123.2m.

Revenue growth was primarily driven by a robust 44.4% increase in enrollments.

Full year revenues have increased 38.3% year over year and places us securely ahead of the 35% growth target for the year.

We also achieved solid non-GAAP operating income growth for both the fourth quarter and fiscal year, especially given this was a year offset by investments in our future growth.

Today I will review our operational progress and highlights of the fourth quarter and the fiscal year and discuss our plans for fiscal 2016.

After that I will provide some further analysis of the financials and this outlook.

In the fourth quarter, small class revenue growth was strong across the board, with all cities outside Beijing and Shanghai growing by high double digit percentages.

And a good number of cities achieving triple digit revenue growth.

Combined small class revenue from Beijing and Shanghai enjoying double digit year-over-year growth, as expected Q4 has some year over year to the negative impact from the late start of spring term, offset by one class of revenue shifted from Q3 to Q4 due to a late start of fall term and APEC Forum in Beijing last November.

We outperformed on our forecast for the quarter because of stronger than expected enrollments across the board, especially in one-on-one, as well as the less winter class refunds for all offline business.

Our retention rate also improved from last year's winter term.

Possibly, this was due to the relatively late timing of Chinese New Year holidays this calendar year.

Let me now provide more detail on each of the three key segments.

Our core small class offering continued to be the main driver of our growth, up by 46% in the quarter.

Enrollment growth for small class in the fourth quarter was 42%.

ASP for small class was up by 3% year over year in the quarter.

Beijing had better than expected quarter due to the less winter class refunds and we achieved low double digit growth in the fourth quarter with improved retention rate.

Without the class rescheduling due to the APEC Forum, small class revenue from Beijing was still pretty good supported by ASP increase, up over 15% year over year.

There are positive signs that the decline of English enrollments in Beijing slowed down in the quarter because more than half of our Beijing primary enrollments for English are for our conversational Hello English classes.

Chinese subject in Beijing continued to grow very healthily and representing 8% of enrollments in the winter term.

At the moment we are taking some concerted initiatives to give us a firmer basis for growth in Beijing and secure our place in the top rankings of the industry players and potential consolidators in this market.

We are merging and combining some learning centers to increase the classroom utilization and improve efficiencies, which will eventually lead to margin improvement for Beijing business.

At the same time we are adding new capacity in less-penetrated districts like Dongcheng and Chaoyang.

And we are launching very targeted and limited promotions to grow the new subject enrollments and increase the retention among new students, specifically for the first-grade students and for summer class only.

We are confident that this will improve the student retention rate for the upcoming summer term as well as lead to higher enrollment in fall and winter terms in Beijing.

We believe these initiatives will help to give us a bigger dominance in Beijing in terms of the district coverage and the wide range of the tutoring subjects which we believe will drive the industry consolidation.

Shanghai recorded high double digit growth for the fourth quarter, prolonging the very solid growth trend we have had there for some time now.

If you will recall, I explained to you last quarter that we have a pyramid-like enrollment structure with the largest enrollment base in the lowest age group.

We will ensure that added capacity to meet this demand, so we expect our performance in Shanghai to remain healthy going forward.

The same can be said for Guangzhou city.

Fourth quarter growth was also in high double digits with very high retention rate and utilization rates.

As in Shanghai, the enrollment structure is very favorably shaped like a pyramid and we will continue to add capacity in Guangzhou to deliver long-term growth.

Let me now turn to the second business segment, our one-on-one business.

As always, we manage the growth of one-on-one as complementary services to our core small class offerings.

In the fourth quarter, however, we had stronger than expected enrollments for one-on-one before the Chinese New Year holidays, possibly also due to the relatively late timing of Chinese New Year holidays this calendar year, as I mentioned earlier.

One-on-one revenue grew by 18% year over year, resulting in around $2m more revenue than our internal forecast.

Enrollments were up by an unusually high of 25% year over year.

ASP for one-on-one declined by 5% year over year.

Our third biggest segment, online courses, remains one of our fastest growth segments with 66% year over year revenue growth in the fourth quarter.

Online contributing around 4% of total revenues this quarter, slightly up from 3% in the same year-ago period.

Online enrollments increased 70% year over year in the fourth quarter.

Online enrollments were 13% of total enrollments this quarter versus 11% in the same year ago period.

Online ASP declined by 2% year over year in the fourth quarter.

At the moment we are upgrading online class into a combined experience of teaching, examination, priorities, and live communication.

We will further shape and improve this new model of online tutoring and teaching.

We believe these reinforced interactions will help students and parents better evaluate the learning process and achieve better results which, in turn, will help drive the approaching enrollments.

For full fiscal year 2015, let me briefly recap our progress for each business segments where our core small class offering continued to be the main driver of our growth, up by 43% in fiscal 2015.

Enrollment growth for small class increased 37% over the previous fiscal year.

ASP for small class was up by 5% year over year for the full year.

In fiscal 2015, small class contributed 80% of total revenues, up from 77% last year.

The year-over-year change in revenue contribution was mostly due to the ongoing robust growth in Shanghai and other under-penetrated cities.

For full fiscal year 2015, the outstanding point to highlight is that we have once again seen a significant mix shift from small class due to the ongoing high growth in the cities other than Beijing and Shanghai.

These outer cities contributed 48% overall small class revenue compared to 37% in the fiscal 2014.

This is also positive for margins considering we're enjoying higher gross margins, operating margins and utilization rates in cities other than Beijing and Shanghai.

For full fiscal 2015, Beijing recorded single digit growth over fiscal 2014 for small class.

Shanghai recorded high double digit growth for full year fiscal 2015.

One-on-one achieved mid-teen revenue growth and represented 17% of total revenue in the full year of fiscal 2015 compared to 20% in fiscal 2014.

Enrollments were up by 16%.

And ASP for one-on-one business declined by 1% year over year.

I am pleased to report that online business reported full fiscal year revenue close to RMB100m, increasing by 67% from fiscal 2014 and was profitable on annually basis for the first time.

Around 80% of students are in middle school.

Online contributed around 4% of total revenue in fiscal 2015, slightly up from 3% in fiscal year 2014.

Online enrollments increased 64% year over year in fiscal 2015 and contributed 15% of total enrollments.

Online ASP was up by 2% in fiscal 2015.

Let me update you now on our learning center network.

On a net basis, our learning center network remained unchanged from the third quarter at 289 centers with net addition of two small class learnings centers and a net reduction of two one-on-one learning centers, which brings us to a total of 202 small class learning centers, including four learnings centers for Mobby and 87 for one-on-one business.

We added seven new small class centers in cities with high utilization rates, i.e.

Shanghai, Guangzhou, Nanjing, Wuhan and Shijiazhuang.

In the fourth quarter we closed three small class learning centers in Beijing where we are consolidating capacity to improve the classroom utilization and eventually margins, as I mentioned earlier.

However, we continue to add small class classroom capacity in Beijing in the under-penetrated districts.

We added a net of 692 small class classrooms for the full year, representing a 31% year-over-year increase.

Let me give you a quick update on our O2O strategy.

As we have said before, we aim to drive our core business through integration of our online and offline efforts and get better operational leverage from online to offline.

We finished the fiscal year as planned within the $15m spending budget we have allocated for new business initiatives in O2O.

In the fourth quarter we saw continued progress for Jiazhangbang, our online and mobile community parents whose children are taking or will take classes in our nearly 300 centers.

Jiazhangbang is a very cost-effective way for us to grow enrollments.

By the end of February Jiazhangbang had over 6.4m registered users with local websites in 26 cities.

We added more online capabilities to classroom-based learning in the customer services such as our tablet-enhanced ICS 3.0 program that shares the Peiyou app, the eClass card and online payment.

Finally we were continually investing in our online content, online live class platforms in the fourth quarter.

Looking ahead into fiscal 2016 we will continually invest in O2O and new initiatives.

And we have budgeted a similar level of investment as in fiscal 2015.

We will continue to pursue a straightforward growth strategy, mostly driven by enrollments through our offline learning center network and deeper online engagement.

We expect that the highest growth for our core small class business to continue to come from the cities other than Beijing.

Our priorities for this year are the following.

First, we will further penetrate existing markets by expanding classroom capacity.

Most of the expansion of the tutoring capacity will take place in the fastest-growing cities where there is pent-up demand for our small class business.

Second, we plan to enter new markets, adding between two to four new cities in the second half of fiscal year.

Many cities across China are still under-penetrated and under-served.

And we will use our prudent formula of opening one learning center first and build our brand based on the strong student outcomes which in turn will create word of mouth marketing.

Third, we will enhance content offering across subjects and grade levels.

We will also invest in more content development, especially for the new subjects of Chinese and English which we plan to offer in more cities in the coming quarters.

Fourth, we will maintain premium pricing while diversifying programs.

We have planned for price increase for small class in five cities before the summer term.

While we have planned for initial price promotions for new subjects in Beijing, we are determined to maintain our admission benchmark through student entrance exams to protect our premium brand quality and premier pricing power.

Fifth and finally, we plan to expand online and mobile offerings to drive offline enrollment and online engagement.

We will continue to focus much of our resources on our O2O efforts, seeking integration of online and offline, blending learning instead of purely online tutoring.

To summarize, we finished fiscal 2015 with a strong top line performance in the fourth quarter and exceeded our full-year growth target of 35% to achieve over 38% growth and solid operating income.

The mix shift in small class in favor of the cities other than Beijing and Shanghai has continued in fiscal 2015.

Online business achieved around RMB100m revenue and became a profitable business for the full fiscal year.

We stepped our investment in O2O and new business significantly and believe this was the right strategy to solidify our early-mover advantage towards the crossroads where the technology meets education.

For fiscal 2015 we're planning to pursue further growth based on expansion and technology-based innovation with the right balance between present and future growth.

We will dedicate our time, effort and resources to bolster our O2O initiatives as well as continue center capacity expansion to meet the strong demand for our class-based tutoring.

We will bring together the technology, communication and education resources to become a leading technology-focused education services provider in China.

Let me now go through some financial highlights for the fourth quarter and fiscal year adding more detail and insight on the numbers and finally discuss our guidance.

We delivered $123.2m in revenue in the quarter, representing revenue growth of 41.6% versus the same period in the previous year.

Driving the quarter's revenue growth was the strong enrollment growth of 44.4%, supported by ongoing solid momentum in our core small class, better than usual one-on-one enrollment and rapid growth in online courses.

Gross margin was 52% as compared to 53.1% in the same year ago period.

Total operating expenses increased by 54.3% year over year to $49.4m due to an increase in both the selling and marketing staff compensation and the personnel and R&D expenses related to our own education initiatives compared to the same year ago period.

Other expenses for the fourth quarter of the fiscal year 2015 was mainly driven by exchange losses from our cash balance holding in RMB while the Company reports in US dollar.

As a result, other expenses coming at $2.9m for the fourth quarter of fiscal year 2015 compared to $400,000 for the same year ago period.

As we hold a significant portion of cash balance in RMB and report in US dollars, we benefit from exchange gains in times of relative strength of RMB, and incur exchange losses in the times of relatively strength of the US dollars.

On the ASP side, the year over year blended ASP was almost same for the fourth fiscal quarter from the same period of the previous year which continued to reflect a very positive shift in our business in favor of small class and online as we managed the growth of our one-on-one business.

Earlier in my prepared remarks I already gave you separate ASPs per business segment because blended ASP no longer properly reflects the underlying trends due to the shift in the business.

GAAP and non-GAAP income from operations increased by 3.2% and 18.8% respectively year over year.

Basic and diluted net income per ADS were both $0.17 for the fourth quarter.

Non-GAAP basic and diluted net income per ADS, which excluded share based compensation expenses, were $0.24 and $0.23 respectively.

Moving to the year as a whole, we delivered $434m net revenue, a year-over-year increase of 38.3%, supported by enrollment growth of 39.2% and slightly lower ASP caused by the business shift in favor of small class and online as we managed the growth of our one-on-one business.

Total student enrollments increased to nearly 1.5m, up from nearly 1.1m one year ago.

The increase in total student enrollments were driven primarily by increase of enrollments in the small class offering.

For full fiscal year 2015 small class contributed 80% of revenue and one-on-one tutoring contributed around 17% of revenues.

And online contributed around 4% of revenue.

Gross margin for fiscal 2015 were 53.2%, an increase of 150 basis points from 51.7% in fiscal 2014.

GAAP and non-GAAP income from operations increased by 17.2% and 30.3% respectively year over year.

Income tax expense was $9.4m in the fiscal year 2015 as compared to $6.7m in fiscal year 2014 because the Company's effective tax rate increased.

The effective tax rate increased mainly because TAL Beijing is entitled to a preferential tax rate of 15% from calendar year 2014 through 2016 as a high and new technology enterprise strongly supported by the state, but having entitled to be an even lower tax rate of 12.5% from calendar year 2011 through 2013 as a software enterprise.

As a reminder, 10 out of 12 months of the fiscal 2014 fell within calendar year 2013.

Basic and diluted net income per ADS were $0.85 and $0.82 for fiscal year 2015.

Non-GAAP basic and diluted net income per ADS, which excluded share based compensation expenses, were $1.08 and $1.03 respectively.

From the balance sheet as of February 28, 2015 we had $470.2m of cash and cash equivalents and $21.2m of term deposits.

Net cash provided by operating activities for fiscal year 2015 was approximately $147.6m, representing a year-over-year increase of approximately 45.3%.

Let me finally turn to our guidance.

In the first quarter we expect total net revenue to be between $122m and $124.6m, representing an increase of 37% to 40% on a year-over-year basis.

These estimates reflects Company's current expectations, which is subject to change.

That concludes our prepared remarks.

Operator, we are now ready to take questions.

(Operator Instructions).

Vivian Hao, Deutsche Bank.

Hi.

Thank you for taking my question.

I've got two questions.

First of all, we've observed some quite aggressive pricing strategy in Beijing for the high school program.

For example, there's an RMB1.00 for these courses.

Just wondering how long will this strategy last and will we -- are we going to apply this to other regions as well?

Also in terms of the reason for this pricing strategy, is this due to the competition, because we know that EDU has also applied some loyalty program and other promotional methods to their K-12 programs.

This is my first question.

I will wait for the second question.

Okay.

Thank you for your question.

I think our revenue contribution from outer cities other than Beijing actually is doing quite well.

And in the past several quarters, as I have mentioned, they have achieved high double digit and even triple digit growth.

So we are quite confident about that.

Especially in Beijing we are running some of the targeting and limited promotions.

Simple answer is for summer class only, for the new students only and for the new subjects.

I think, as I have mentioned in my prepared remarks, I think it's a good time.

It's not purely from competition purpose, but it's more likely from the view of the industry consolidation.

And even with taking into account all of these promotions we are running in Beijing, actually it's quite immaterial to my P&L in the coming several quarters.

I think as the high-end players in this market, there are certain kind of proper promotions in this market that will help us to grab more market share in a longer time.

And we are quite good in improving the retention of older class.

So we are quite confident these kind of promotions will be very helpful for us to increase the enrollments for the summer term.

And, in the future, it will also be very beneficial for us to do business in fall term and winter term.

Right.

We also closed several learning centers in Beijing.

Is this part of the rationalization for Beijing market?

Let me clarify.

We added seven new centers in cities other than Beijing.

We closed three in Beijing.

I have mentioned that in my last quarter's call because in Beijing our key strategy is we try to consolidate our capacity to improve the classroom utilizations which is because that will be very helpful for us to improve both the gross margins and operational margins.

So I think the consolidation of the centers is not because of competition reasons, but more from the way we want to increase Beijing performance in margin perspective.

Understood.

I have a follow-up question, a very quick question.

What is the total number of new hires in fourth quarter?

And also what is our planned hiring in FY 2016?

In general I think most of our hiring happened in the fiscal 2015.

Actually, they happened in Q2.

So in Q4 we don't have any significant number of new hirings.

Looking forward to 2016, because we have already hired several hundred of the IT and product people in the past, so we don't have a very aggressive plan to hire the big number again next year.

But, of course, because we are a normal company, so we will have maybe 10% to 15% of the normal attrition in the coming year.

That's very helpful.

Thank you.

Fan Liu, Goldman Sachs.

Hi Rong and Mei.

Thank you for taking my question.

Would you mind sharing with us your learning center expansion plan in the next quarter, in the whole year of 2016 if possible?

It seems like in this quarter you have tried to expand the capacity more through the addition of classrooms.

It seems like in this quarter you have tried to expand the capacity more through the addition of classrooms in the existing learning centers.

Will this be a strategy in the coming quarters as well?

And in which cities did you see the triple digit revenue growth this quarter?

Also, I apologize if I missed, what's the small class revenue contribution from the cities outside of Beijing and Shanghai in the fourth quarter of fiscal year 2015 please?

Thank you.

Okay.

Thank you.

So I think for the learning center network development, in the whole fiscal 2015, we added around 692 classrooms which is around 31% of the capacity.

In the coming year 2016, I think we will continue our strategy to adding maybe around 20%, 25% of classroom capacities.

And we're adding the capacity in just different way purely based on that city's situation.

For some cities like Guangzhou and Shanghai, we prefer to adding more classrooms in the current learning centers and we will be ready to adding more learning centers when all the classrooms are potentially -- our classroom's performance rate is quite good.

But for some of the new cities, for example the four cities we just added last year, we may prefer still we will add some learning centers.

We try to add more -- not -- more learning center numbers to make sure we can capture that type of -- that kind of business.

So all of these strategies will be different city by city.

And specifically about the contribution from the cities other than Beijing and Shanghai, for the fourth quarter it is close to 50%.

It's a little behind 50% is because the revenue in Beijing actually is because they have one class they shift from Q3 to Q4.

And that makes Beijing Q4 number is a little bigger.

But in general for the full year, for the cities other than Beijing and Shanghai, the mix of them actually increased around 11% compared to the previous year.

So I think we are still quite good about that and personally I believe this trend that more contribution will coming from other cities will continue in the coming quarters.

Jialong Shi, Credit Suisse.

(Operator Instructions).

Thank you.

Thank you.

My question is just about your growth, top line growth next year.

And I was just wonder if Rong Luo may remind us then what's the revenue growth you now expect for next year especially when you deliver such strong 1Q revenue guidance?

And also your margin dropped in 4Q.

I was just wondering if you may share any colors on the margin trend for 2016.

Thank you, Jialong.

Same as usual, we don't provide the full year guidance on our top line revenue and margins.

But we can try to share some colors.

I think in our [direction], we will continue to deliver the healthy and sustainable top line revenue growth while we also -- we will also invest manageable results to enhance our core business and O2O initiatives.

In the top line revenue perspective, I want to share with you is that our internal budget actually is approximately 35% top line growth in R&D terms in fiscal 2016.

But since the depreciation trend of RMB will likely continue, so let's assume it will be 2% to 3% impaired, the revenue is expected to grow 32% to 33% in US dollar terms.

That is our internal budget for your information.

And specifically, to your question about my margin, I think the O2O initiatives are still our priority.

They will remain at a similar level of investment on the O2O efforts and the new business.

So while the total O2O investment, by the end of the day, are estimated to cost around $20m to $22m for the full fiscal year 2016.

In the past I think we have shown we can, even at times when we invest in new business, we can still continue to manage costs intelligently and ensure our improved efficiency in terms of headcount and center performance and so on.

As for the fiscal 2016, we will continue to look for the right balance between top line revenue growth momentum and investment for future growth as we have managed in the past.

Therefore, I'm confident to say we will maintain sustainable, healthy top line growth while the operating margin will be moderately down in fiscal 2016.

Thank you for the detailed answer.

May I ask a quick follow-up?

I just wonder what the OP margin for ex-Beijing and Shanghai cities and how does it compare to Beijing and Shanghai?

I think actually only Beijing is a little special.

Beijing, actually, we have a lower utilization in Beijing.

So the margin, both operational margin and gross margin etc.

actually Beijing is the lowest city.

All the outer cities other than Beijing, including Shanghai, Guangzhou and other places, actually, they are a little higher than Beijing.

And all these ex-Beijing cities are quite close to the operating margin.

Yes, they are almost in the same range.

Some are a little better.

Some are a little lower.

Thank you.

Thank you very much.

I'll get back to the queue.

Ella Ji, Oppenheimer.

Yes, congratulations on a strong quarter.

I also have a question relating to your total OpEx spending of online initiatives.

Rong-zhong, you mentioned that the total spending level is about $20m to $22m in 2015.

Could you break it down by the major initiatives such is ICS 3.0, Hibian and Jiazhangbang?

And also could you give us dollar spending level target for each of them for 2016?

Thanks.

Yes, thank you for your question.

In general we don't give a detailed breakdown of all the spending by projects.

But in general, I can say is the projects we have mentioned in the past for example, like Jiazhangbang, like Peiyou app, I think they are spending maybe -- we talk about next year compared to the year 2015 as they are almost flat and maybe slightly lower.

But for our investment in ICS 3.0 and Hibian live learning platform, actually we still need to invest more because they will cover more grade levels and more subjects.

In general, we also are thinking about some of the new projects that will happen in the coming quarters.

So in general I think as a Company, we will still manage our investment in the controllable range.

And our expenditure of total $20m, $22m, actually is a fair range for us to invest in the coming year.

Hello, can you still hear me?

Yes.

Okay.

So sorry, I just want to clarify.

So if it's still about the same dollar level spending, then I think you mentioned that the non-GAAP operating margin will moderate down next year.

So I'm just a little bit confused.

If there is still the same level of dollar spending, then normally we should expect to see some margin improvements because of the operational leverage.

Could you clarify for us?

Thanks.

Yes, let me clarify.

I think what I'm talking about is we will in the similar level of the investment on O2O.

Last year is -- I think it's total investment is around $15m and this year it's around $20m to $22m.

So actually maybe more similar in the percentage of revenue perspective, not in the absolute dollar perspective.

Okay.

Got it.

Thank you.

Thank you Ella.

Leon Chik, JP Morgan.

Yes, hi, guys.

I think you answered most of it with the O2O.

But I was wondering did your -- your G&A expenses is more than just O2O.

So for the other G&A expenses, do you think, because your sales is growing so fast at 30%, 35%, would the other non-O2O G&A costs also increase the same amount in proportion to sales?

Frankly speaking, if we streamline business to online and mainstream business including small class, one-on-one.

As I have mentioned I invest $15m, in O2O which is around 3.5% of my net revenue.

And if you're looking into my non-GAAP operating margin this year compared to last year, I only dropped by 1 point.

So actually you can see, despite the O2O, my mainstream business actually can get around 2 to 2.5 points margin expansion every year.

So I think we will balance our investment in O2O in our current business, in our offline capabilities.

In the future term I think we are still -- we still believe we can get some operational margin expansion opportunities from our mainstream business while we will balance our investment in O2O, our margin will be in that range.

Just quickly, in the O2O what haven't you done?

Like what's not available now that will be available at the end of -- FY 2016 with this $20m to $22m?

I mean I would have thought a lot of the things would have already been completed.

I think so far the O2O and online initiatives are still in an early stage.

I cannot comment the other companies in this industry.

I think it is commonsense for all the people in the education sector.

I think we still need to invest in O2O or in online to evolve the model into a more mature stage.

I cannot say the investment is pretty much done over there.

So what I can say is some of the projects like Jiazhangbang, Peiyou app and something like that actually the investment will be flat and slightly down.

But we still have plenty more we need to do.

For example, we need to deploy more tablets for our ICS 3.0.

In fiscal 2015, I only deployed maybe 2,000 tablets.

But in the future I need to try to expand more grades and more cities.

And for live platform, we are still in the pilot stage.

We only have 2,000 students today, but in the future we wish it could be a much bigger number in the future.

So we still need to invest there.

We, as a company again, we will try to control my investment there in a manageable range.

We will wanting no changes.

We will invest there to leverage the technology advantage to improve our efficiencies and to establish some of the new kind of education models in the future.

Okay.

Thank you.

Thank you, Leon.

Anne Shi, Brean Capital.

Hi, Rong.

Hi Mei.

Thanks for taking my question.

I just wanted to follow up on the O2O online business.

And you mentioned that online achieved profitability for the year.

I'm just wondering whether or not you can provide some more detail on where you see this margin trending for the next year?

And could you also specifically talk about whether or not we can continue to anticipate enrollment re-acceleration and where the ASP may move?

Okay.

First of all, I want to welcome our new analyst, Anne coming to our call because I know you just started reporting in April.

I think to your questions, let me answer from the ASP perspective first.

Because we have some kind of promotions in Beijing, a lot of people may ask, hey maybe your ASP in the future will drop down a little bit.

But what I can say to you is that actually we had two price increase in Beijing and Shanghai, Shenzhen, Wuhan, Chengdu, Suzhou, Chongqing and Taiyuan last year.

And in fiscal 2016, I plan to do so in selected cities including Tianjin, Nanjing, Suzhou, Zhengzhou, Chongqing (inaudible).

And so I think we still maintain our pricing strategy.

But as our geographical distribution moves the cities other than Beijing and Shanghai, you may see slightly lower ASP growth for the small class in the fiscal 2016, but still should be around 3% to 5% range.

And for the O2O you have mentioned just now, I think all of these investments, when I talk about the profitable business base specifically for the online school, Xueersi.com, so before we have been -- we have been profitable for five quarters.

And looking ahead to the next year, I think we will still maintain the trending and based on the information in the past two months, which is the beginning of the year, actually we are seeing this kind of growth actually is accelerating.

So we are still quite confident our online school, online courses will still be our fastest growth segment in the future and the percentage of -- the revenue percentages from online will increasing year by year.

That's very helpful.

Thank you.

Tian Hou, TH Capital.

Hi Mei and Rong.

Two questions.

One is related to your expansion in margin.

So now you're at -- your learning presence, center presence are in about 20 cities, so from the previous expansion experience from other companies, what we can learn is once you go beyond those top 20 cities and this expansion is inevitable will also cause margin pressure or compression.

So I wonder how do you balance your growth expansion and margins.

That's the number one.

I will have a second and after you answered the first question.

Thank you, Tian.

I think we are we are quite different from other players in this market because our Company in the past more than 10 years we are taking a relatively more conservative approach when we try to expand to more cities.

So our typical approach is that we only open one learning center with limited students in the beginning.

After we establish our reputations [in all counts] we will try and expand more.

Again all of that is under a kind of conservative approach to do that.

So, when we go into the other cities other than Beijing, you can see we only start with maths first.

You know maths actually is our very strong subject.

So in maths we can have very high retention.

We can have very low rebound rate.

We can have very high class performance and etc.

Actually, in most cities outside Beijing, their margin actually is higher than Beijing.

So we will continue to take this kind of relatively conservative approach to expand more cities.

So we have confidence we will continue what we did in the past to leverage the outer city expansion to increase our margin.

And this has also been proved by our performance in the year 2014 and 2015.

So -- but again I appreciate your questions because when one company tries expand to more cities, actually we will face more questions in the future.

So I will take your advice and recommendations in my mind and to remind all of my team in Beijing and all the other places to be 100% alert and try to maintain our trend to increase our margins by trying to expand to more other cities.

Thank you so much.

And the second question is related to your recent course promotions and particularly in Beijing, like one of the previous analysts mentioned $1 courses.

And I do believe there are so many education like after school tutoring institutions in China and a $1 course promotion does have this kind of market consolidation effect.

And so -- but I do wonder and how those promotions will impact your enrolment and market in the near-term and long-term in Beijing?

Yes, I think that's a very good question.

In the enrolment perspective, because the promotion is actually for summer class only, so it has have no impact on my Q1, but it will have some impact on my Q2.

Enrolment perspective, frankly speaking because we just started to do the promotion maybe several days, based on the data we have seen today actually, it's quite promising.

In the revenue impact perspective, because we only do these kind of targeted and limited promotions for the new students like the first grade students in the junior high, so based on our current estimation, it's immaterial to my P&L of Q2.

We are still very confident to deliver our long-term revenue growth more than 35% for the year in RMB terms.

Again I think all of these promotions actually is a very good move for Beijing market because it is a rough time for the market to do kind of consolidations now.

Okay.

That's all my questions.

Thank you.

Thank you, Tian.

Clara Fan, Jefferies.

Hi, hello.

Thank you for taking my question.

I only have two quick questions.

One is I'm just wondering outside Beijing and Shanghai what is the overall revenue growth of those cities including both like small classes and one-on-one and which are the cities that have been growing at the fastest pace?

And my other question, I just want to clarify on what you have just mentioned about -- on your online tutoring Xueersi.com.

Did you mention that going into fiscal year 2016 we are still expecting it to be profitable because I'm just trying to see whether we are trying to expand our user in expense of our profit, or what are we thinking about that?

Thank you.

Yes, well for online school, Xueersi.com actually we have seen they have very, very good and fine growth rate in the enrollment perspective and they were profitable in the last year.

Looking forward to 2016, there has been no indication to think they will loss making position again, so they still will have -- be profitable next year.

But again I think for our online school the majority purpose for them is not been profitable a lot.

Their key purpose is to maintain a similar level of operational margin but increase the volumes.

Try to cover more cities, cover more grades, cover more students and increase the market share.

That is our key priority for online school.

And your question about my revenue performance in Shanghai and Beijing by -- for small class and one-on-one, I think I need split Beijing and Shanghai separately because they are in different situations.

For Beijing, actually I think in general in Q4, they are low double digit growth because we increased our ASP by 15%.

And in all of these and for the enrollment perspective is almost slightly flat or slightly up.

This is also quite similar for the one-on-one business.

But for Shanghai actually we have seen they achieved very -- they have achieved high double digit growth rate across the board, both enrollments, revenues, plus small class and online school.

So I think this trend will continue that our Beijing performance will continue to be around the 5% to 10% revenue growth, whilst our Shanghai performance continue to be high double digit growth in the coming quarters.

Sorry, just a quick question.

Outside Shanghai and Beijing what's the revenue growth like?

Oh, I'm sorry I don't catch your questions.

Outside Beijing and Shanghai, I think all of them have achieved very healthy growth.

Our average to close to 80% in Q4.

80%.

And most of the cities achieved high double digit growth rates, while a good number of cities achieved triple digit growth rates.

Thank you.

Thank you Clara.

[Alvin Jiang], Morgan Stanley.

Hello?

Hello can you hear me?

Yes, we can hear you.

Hi Rong and Mei.

Thank you for taking my question.

I have two questions.

The first question is on your investment strategy.

Can you give us more color on your investment strategy going forward?

Thank you.

And I have a follow-up.

Okay, for the investment I have kept my investment key philosophy in last call is as you already know in the past several quarters, we have built up a portfolio of smaller and larger-sized stakes in other companies in early stage projects.

So most of them actually happened in the past maybe two to three quarters.

So we are using a very conservative approach to evaluate all of these products.

For the companies who we can see have strong synergies we may increase our stake to a majority holding in the future.

But for the cases, we find is no longer a suitable case for our strategic priority and focus, we probably may decide to reduce our investment exposures.

So in general I think in the future, looking into 2016, our investment will fully focus on strategic investment deals.

We will have very less focus on financial deals.

The only thing we're looking at is whether they have enough strategy synergy with us.

So as a result you may see the number of deals we invest in 2016 may reduce while the deal size may increase.

So in general, we are taking a relatively, maybe a very cautious approach to evaluate our -- all of the deals we just invest in the past or in the future.

Thank you.

This is very helpful.

So would it be more a cooperation with New Oriental Education just like what you did for the Heiha Technology?

Heiha is a very good example.

We invested in them first and in the second round New Oriental has coming in.

I think we are quite open for any kind of cooperation opportunities to cooperate with New Oriental and the other players in this market because the K-12 market today actually is quite big.

We have a lot of potential and we have a lot of space.

Everyone can contribute more.

And if there is specific projects, opportunities, will happen to and can cooperate together, we are happy to do that.

Okay.

Thank you.

Thank you.

My second question is on the Gao Kao and Zhong Kao.

Do you have any updates leading from the new policy, Gao Kao policy and the Zhong Kao policy?

Thank you.

Yes, I think for the Gao Kao and Zhong Kao, some policies, especially for the Gao Kao policy, I still recommend all of you can looking at the documents just released by the MOE maybe in January or in February.

So I think the Gao Kao reform starts from Shanghai and Zhejiang in the year 2017 and try to implement to the whole nation by 2020.

So the new exam will be moved from 3 plus 1 today to 3 plus 3 in future.

Three means -- three compulsory means Chinese, maths, English and the other three are selected from the rest of six or seven subjects including physics, chemistry, biology geography, history, politics when they apply for the colleges.

By far, most of the college majors in China actually are science and engineering which will probably favor the maths and science studies.

This can also be benchmarked, or can also be proved by the case in Shanghai because in Shanghai, most of the college they have released their staff requirements by major.

And for English perspective, I think they will move quickly into conversational English which is a challenge to all the test companies in this market, including us.

We also see the trend that the Gao Kao will be nationally standardized.

Starting from this year, around 25 provinces of China will use the national test papers in the coming Gao Kao.

So we expect the standardization will give TAL with our quality content and nationwide footprint an actual advantage over local competitors.

So personally I feel good about the new policy change and we'll try to do more to capture all of the new opportunities coming from that reform.

Okay.

Great.

Thank you.

Congrats on the strong results.

Thank you.

Thank you.

And there are no further questions.

This does end today's call.

You may now disconnect.