TAL Education Group (TAL) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the TAL Education Group first fiscal quarter 2016 earnings conference call.

(Operator Instructions).

I must advise you that this conference is being recorded today, July 23, 2015.

I would now like to hand the conference over to your speaker for today, Ms. Mei Li, Investor Relations manager.

Please go ahead, ma'am.

Thank you, all, for joining us today for TAL Education Group's first fiscal quarter 2016 earnings conference call.

The first 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 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 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 the recalculation of 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 first fiscal quarter of 2016.

The first quarter revenue exceeded our expectations, due to the very strong growth in the cities other than Beijing.

We expect the outstanding growth to continue in the second quarter.

Net revenue increased 45.3% year over year to $129.4 million.

Our revenue growth was primarily driven by a robust 47.6% increase in enrollments.

We also achieved solid operating income growth for the first quarter of 43.4%, and net income growth of 42%, on the back of the strong business momentum, even though we opened 14 new learning centers on a net basis in the first fiscal quarter.

Today, I will review our operational progress and highlights of the first fiscal quarter.

After that, I will provide some further analysis of the financials and our business outlook.

Let me, first, update you on our learning center network.

On a net basis, we added 14 new centers to our learning center network to a total of 303 centers, with net addition of 13 small class learning centers, and one one-on-one learning center, which brings us to a total of 215 small class learning centers, including four learning centers for Mobby, and 88 for one-on-one.

We added most learning centers in cities with high utilization rates, for example, Nanjing; Shanghai; Guangzhou; Shenzhen; and Chengdu.

Of particular note is that we added a net four learning centers in Nanjing, which is now in the top-five cities in terms of revenue contribution.

In Beijing, meanwhile, as we continue to consolidate capacity, we opened two new and closed five small class centers, leading to a net addition of 57 classrooms.

We added a net of 517 Peiyou small class classrooms in the first quarter, representing a 42% year-over-year increase.

We start to add capacity from winter earlier than last year, and we are accelerating expansion pace in cities outside Beijing, where the utilization is good.

We're well on track with our plan to add more learning capacity before summer term.

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

In the first quarter, our core small class offering continued to perform well, up by 54% in the quarter, with very strong revenue growth across the board.

Enrollment growth for small class in the first quarter was 44%.

ASP for small class was up by 6.5% year over year in the quarter.

The combined cities outside Beijing grew by high double-digit percentages, and seven of them achieved triple-digit revenue growth; these cities are Nanjing, Hangzhou, Zhengzhou, Suzhou, Chongqing, Shenyang, and Taiyuan.

The revenue contribution from small class in cities outside Beijing and Shanghai was 54% of all small class revenue, up from 44% in the same year-ago period.

Combined small class revenue from Beijing and Shanghai also did well with solid double-digit year-over-year growth.

Overall retention rate also improved from last year's spring term with less small class refunds than we had expected.

When we look at the revenue contribution from the top cities, we see how our revenue base from Peiyou small class is becoming more broadly spread over a wider number of cities.

In the first quarter, cities ranking below the top five, which are Tianjin; Xi'an; Wuhan; Chengdu; Hangzhou; Zhengzhou; Suzhou; Chongqing; Shenyang; Taiyuan; and the four new cities we added through to last year, in total contributed 28% of Peiyou small class revenue.

In the same period last year, the cities below top five contributed 20%.

The ASP increase of 6.5% was a result of the last price increase, mostly in summer term last year.

Last year, we raised the price in eight cities, including Beijing; Shanghai; Shenzhen; Wuhan; Suzhou; Zhengzhou; and Taiyuan.

This year, our plan is to increase price in five cities, including Tianjin; Nanjing; Suzhou; Zhengzhou and Chongqing.

Let me briefly update you on Beijing.

Revenue growth in the quarter was supported by ASP growth.

We expected English enrollments in the summer term will be back on a growth track, based on the registrations as of today.

Chinese subject achieved year-on-year growth of over 20% again, and represented 9% of the spring enrollments in Beijing.

We expect the strong growth in Chinese subject will continue in the summer.

As I explained last quarter, we have concerted initiatives ongoing to re-ignite growth in Beijing.

This involves consolidation of learning centers to improve utilization and adding new capacity in less penetrated area.

That's why, as I already mentioned, we closed five small class learning centers and opened two new ones in Beijing.

On a net basis, we added 57 small class classrooms in Beijing in the quarter.

In addition, we have promotions ongoing for Beijing to grow the new subjects enrollments, and increase retention among the new students, specifically for the first grade junior high students, and for summer class only.

We estimate the revenue impact will be approximately $2 million to $3 million in Q2, based on last year's enrollment price.

We are very pleased that in the spring term the retention rate has improved year on year.

And we expect this trend to continue in the summer term, and also lead to higher enrollments in the fall and winter terms.

Shanghai recorded high double-digit growth again in the quarter, as expected.

We opened two new small class learning centers to meet the healthy demand for our tutoring services, reflected by improved utilization and reduced refunds.

We expect the robust enrollment growth will continue in the summer term.

In the first quarter, Nanjing joined the top five cities in terms of revenue contribution with triple-digit year-over-year growth.

We added four small class learning centers on a net basis.

Given the healthy bid development reflected by high utilization and retention rates, we expect Nanjing to continue its rapid growth in the coming quarters.

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

As you know, for quite some time now we have managed the growth of one-on-one as a complementary service to our core small class offerings.

In the first quarter, one-on-one revenue grew by 14% year over year to 18.2% of total revenue.

Enrollments were up by 18% year on year.

ASP for one-on-one declined by 2.8% year over year.

Our online course business segment remains one of our fastest-growing segments with 70% year-over-year revenue growth in the first quarter, as expected.

Online courses, xueersi.com, contributed 4.5% of total revenue this quarter, compared to 3.8% in the same year-ago period.

We expect revenue contribution from online courses to continue to increase, going forwards.

Online enrolments also increased 75% year over year to an all-time high of 20% of total enrollments this quarter, versus 17% in the same year-ago period.

Online ASP declined by 3% year over year, mainly because of more low-priced courses sold in the quarter.

Since late March, we have been offering a combined experience of teaching, examination practice, and live communication.

We believe that, fundamentally, the intensified interactions between students and teachers improve the student outcomes and helps both students and their parents understand this new learning process.

Deferred revenue of online course by the end of May increased 82% year over year as we used this pilot program to shape and improve the untested model of online tutoring and teaching.

This approach, we believe, will stimulate other students to enroll.

Let me give you a quick update on other O2O progress of note.

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

We are pleased to note that rapid adoption of the online registration and payment for our tutoring services.

In the first quarter, we spent approximately $4 million out of the $20 million to $22 million full-year budget on O2O investments.

Let me now go through some financial highlights for the first fiscal quarter, adding some detail and insight on the numbers; and finally, discuss our guidance.

Let me now go over the financials in detail with you.

We delivered $129.4 million in net revenue in the quarter, representing revenue growth of 45.3% versus the same period in the previous year.

Driving the quarter's revenue growth was an increase in total student enrollments.

Total student enrollments increased to approximately 412,120, from approximately 279,200 in the same period one year ago.

The increase in total student enrollments was supported by ongoing solid momentum in our core small class and rapid growth in online courses.

On the ASP side, year-on-year ASP decreased of 1.5% to $314 for the first fiscal quarter from $319 in the first quarter of the previous year.

The decrease in ASP was mainly because the increase in the hourly rate of the small class course offerings were offset by more enrollment contribution from the online courses.

While first quarter's ASP for the total business decreased year on year in US dollar terms, importantly, the ASP growth of our core small class offering continued to be very strong at over 6.5% in the quarter, despite the fact that a greater portion of small class revenue now comes from cities outside Beijing and Shanghai, where the ASPs are lower than in these two metro markets.

This decreased blend in ASP, in fact, reflects a very positive shift in our business, which I have mentioned in previous quarters, as we continue to manage the growth of our one-on-one business, and its contribution to our total revenues decrease over time.

Our two other healthy and high-growth business segments, the online courses and small class, are taking more share.

Cost of revenues increased by 46.2% to $61.0 million from $41.7 million in the same year-ago quarter.

The increase in the cost of revenues was mainly due to an increase in teachers' 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 46.2% to $61.0 million from $41.7 million in the first fiscal quarter of fiscal year 2015.

GAAP and non-GAAP gross profit for the first quarter were both $68.4 million, as compared to both being $47.3 million for the same year-ago period.

GAAP and non-GAAP gross margin for the first fiscal quarter were both 52.9%, as compared to both 53.2% for the same period of last year.

Selling and marketing expenses increased by 34.1% to $15.3 million, up from $11.4 million in the first quarter of FY15.

Non-GAAP selling and marketing expenses, which exclude share-based compensation expenses, increased by 35.5% to $14.8 million; up from $10.9 million in the same period of last year.

The increase of selling and marketing expenses in the first quarter of FY16 was primarily a result of 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 49.8% to $33.6 million; up from $22.4 million in the first fiscal quarter of FY15.

The increase in general and administrative expenses was primarily due to an increase in the number of our general and administrative personnel compared to a year-ago period, and an increase in compensation to our general and administrative personnel; in particular, such personnel supporting our online education initiatives, among other new programs and service offerings.

Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, increased by 53.8% to $29 million; up from $18.9 million in the first quarter of 2015.

The above factors combined to give us operating income of $19.6 million, representing a year-over-year increase of 43.4%.

Non-GAAP operating income increased by 39.3% year over year to $24.7 million.

Operating margin in the first quarter was 15.1%, as compared to 15.4% in the same period of the previous year.

Non-GAAP operating margin was 19.1%, as compared to 19.9% in the same period a year ago.

Income tax expense was $4.8 million, as compared to $2.4 million in the first quarter of FY15.

The increase was mainly due to an increase in income before tax and effective tax rate.

The increase of the effective income tax rate was mainly because one of TAL's subsidiaries was entitled to a two-year exemption from enterprise income tax for calendar years 2013 and 2014 as a newly established software enterprise and enjoys preferential tax rates of 12.5% for calendar years 2015 through 2017.

Our net income for the quarter was $19.0 million, an increase by 42% year over year.

Non-GAAP net income for the first quarter was $24.0 million; up by 38.1% year over year.

This gives us a net profit margin of 14.6%, as compared to 15.0% in the same period of last year.

Non-GAAP profit margin was 18.6% versus 19.5% in the same period of last year.

Basic and diluted net income per ADS were $0.24 and $0.23, respectively, for the quarter.

Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were $0.30 and $0.28.

From the balance sheet, as of May 31, 2015, the Company had $582.2 million of cash and cash equivalents; and $49.3 million of term deposits, compared to $470.2 million of cash and cash equivalents, and $21.2 million of term deposits as of February 28, 2015.

Capital expenditures for the first quarter of FY16 were $6.3 million, representing an increase of $1.9 million up from $4.4 million in the first quarter of FY15.

The increase was mainly due to the leasehold improvements and the purchase of servers; computers; software systems; and other hardware for the Company's teaching and mobile network R&D facilities.

As of May 31, 2015, the Company's deferred revenue balance was $331.3 million, as compared to $235.8 million as of May 31, 2014, representing a year-over-year increase of 40.5%.

The increase was primarily contributed by the tuition revenue collected in advance for the Xueersi Peiyou small class summer and fall semesters.

Let's move to the Q2 guidance.

Based on the Company's current estimates, total net revenue for the second quarter of FY16 are expected to be between $161.5 million and $165.2 million, representing an increase of 32% to 35% on a year-on-year basis, assuming no material change in exchange rates.

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

Our guidance for the second quarter is based on the usual every-other-year seasonality in Q2 associated with the timing of Chinese New Year, among other factors, and incorporates the expected negative impact of Beijing small class summer promotion.

This year, the expected positive impact in Q2 due to this seasonality is offset by the impact of summer promotions in Beijing, specifically for the first grade junior high students, which is estimated to be approximately $2 million to $3 million.

If we achieve the guidance of 32% to 35% revenue growth in Q2 then we will have achieved 37% to 39% year-over-year top-line growth for the first half of the year.

We have strong business momentum, and maintain our positive outlook for the year.

This estimate reflects the Company's current expectations, which is subject to change.

That concludes my prepared remarks.

Operator, I'm now ready to take questions.

Thank you.

(Operator Instructions).

Fan Liu, Goldman Sachs.

Congratulations on another solid quarter.

Would you mind sharing with us, based on what you have observed so far, what's the impact of the summer promotion programs on your enrolment ASP and the retention rate?

Another question is related to your online-to-offline initiatives.

You have made quite some investment in the past several months.

There are already some integration of your investment and the existing businesses, for example, your one-on-one business and Qingqing Jiajiao.

Could you please share with us your vision for all these new business initiatives, both top-line and bottom-line impact, if possible?

Thank you.

Okay, thank you for your questions.

Specifically about the summer promotions in Beijing, I think, so far, the registration in summer term in the first grade for the junior and senior high, actually, is quite positive.

It's several times bigger than what we had in the past year.

But again, since it's still in the summer term, our key priority today is try to improve the retention rate from summer to fall term through improving the teaching quality and update -- and, probably, I will update you more detail in Q2 earnings call.

We believe in the high-end markets that properly limited promotions will help to give us a bigger dominance in Beijing in terms of the district coverage and wide range of the tutoring charges, which we believe will drive the industry consolidations.

In the revenue impact perspective, as I've mentioned in the prepared remarks, it's around approximately $2 million to $3 million negative impact for Q2.

And because we only do these kind of targeted and limited promotions for the new students in Beijing, and for summer class only, so we will give -- please stay tuned and give us more time to wait for the final retention numbers from summer term to fall and winter semesters.

I will give you more details later, but, so far, we still feel very good about that.

Specifically to your second question about our O2O investments, especially you mentioned our integration in Guangzhou with the change in education, which is Qingqing Jiajiao in Chinese, I think that is our minority investment, which we still believe the one-on-one model is now a kind of the perfect model in margin perspective.

And we believe the C2C platform, they have a lot of market opportunities in the future, so we would like to push with integrations to try to establish some type of new model to change the market.

Because it's minority investment there, so in Guangzhou is only around 9% of my Zhikang overall revenue, so the impact of there is not that material.

But again, since we just announced the deal one month ago, so we will continue all kind these integrations.

We probably will let you know in the future when we conclude in a much solid stage.

I hope I answered your questions.

Thank you.

Thank you, Rong.

Very helpful.

Vivian Hao, Deutsche Bank.

Eileen Deng, asking a question on behalf of Vivian Hao.

First of all, congratulations on the strong quarter.

My question is regarding your ex-Beijing class revenue growth.

Since that we all know that Beijing is quite competitive, what is actually our ex-Beijing strategy for next quarter, and the full year?

Thanks.

Okay, thank you Eileen.

I can share you some numbers.

Last quarter, our revenue growth for the cities outside Beijing is around 80%.

And in Q1, the growth rate of the cities outside Beijing, actually, is even higher, is close to 90%.

So we're still seeing a very strong growth coming from outer cities; and seven of them achieve the triple-digit revenue growth in Q1.

And here, I even did not consider the four newly added places we added, starting from Q2 last year.

So we still feel quite confident about our performance outside Beijing.

And especially in the learning center network development perspective, we also focus more in the places outside there.

The revenue contributions from outer cities are up -- outside Beijing and Shanghai, actually, in Q1 is 54%, and in a way we expected.

This trend will continue in the coming several quarters.

And we are happy to see the revenue contribution mix from Beijing, actually, is much lower than what we did in the past now.

Thank you.

And also, can I know the -- how much the margin in the ex-Beijing or Shanghai cities, compared with Beijing and Shanghai?

Okay.

In margin perspective, Beijing and Shanghai is not in the same level.

I think Beijing's margin is lowest in all the places we have the presence there.

And Shanghai, and the other places, their margins is quite similar, which is around several points higher than Beijing.

The reason for that is because Beijing's our headquarters they bear a lot of headquarter functions.

Again, in Beijing we have a lot of new subjects, like Chinese, like English, while in the other places, in general, we only have our strongest subjects, like science and math.

So we are still quite confident to see that with our consolidation on the new centers in Beijing, and with sale promotions in Beijing, which, if we can maintain a high retention rate for summer into fall and winter term, we still have chance to improve the margins for Beijing in the future.

Excuse me, then how about the other cities?

The other cities' margin level?

They are around 5 to 10 points higher than Beijing.

And we are seeing, because their most of the KPIs have including retention rates, refund rates, fulfillment rates, all of them are quite healthy, and we are even more than confident to say, we can maintain our healthy margins for the places outside Beijing.

Got it.

Thank you very much.

Dick Wei, Credit Suisse.

Dan Zhao, on behalf of Dick Wei.

First, congratulations on another strong quarter.

I wonder, what's your view on the top-line growth for the full year?

You just gave the guidance for the first half.

And also, could you share with us your view on the margin trend for the second quarter and the full year?

Okay, thank you,Dan.

As I mentioned in my preliminary remarks, if I deliver my Q2 guidance, the first-half revenue growth rate will be between 37% to 39% over year.

And our momentum for the first half of the year is very much on track.

In the full-year perspective, I think, since we still have very strong business momentums, and we still maintain our positive outlook for the full year.

Internally, we are still shooting for at least 35% of top-line growth in RMB terms, even though the positive impact in Q2, due to every-other-year seasonality, and the negative impact of summer promotions in Beijing, we think all of these factors we have considered and taken into considerations when we give the guidance.

So in full-year perspective, since we still have seven months to go, we would like to stick to our revenue target, which is 35% top-line perspective.

And specifically in margin, as I have mentioned in the previous calls, Q1 margin is a little better than what we expected because a much stronger top-line revenue.

But in the rest of the year, we still would like to maintain our view; is considering we still have the investments for O2O initiatives, I think for the full-year margin we still will be moderately down, and in best remain flat.

We still want to let you guys be more conservative on our outlook.

And -- but again, we are still quite confident, if we can deliver a much stronger top-line revenue growth, and we can leverage our investment to try to establish our new auto models in the future, all of them will contribute to maintain this long-term growth in three or five years' timeframe.

Thank you.

Thank you very much.

Tian Hou, T.H. Capital.

Rong and Mei, I have several questions I'm going to ask all at once.

The first one is how much investment do you plan to have in the -- on the full-year basis on the O2O?

And the investment on O2O, what's the measurement for the return on those investments?

So that is on the O2O.

On the learning center, how many learning centers in total do you plan to open in [2016] (corrected by company after the call)?

And one quarter has been passed, and among the rest of the planned learning centers, what could be the allocation throughout the year?

That's on the learning center.

The last question, I really want to know, and so many companies from China announce privatization, I want to have a clear answer from the management, what's your plan on that front?

Thank you.

Thank you, Tian.

You asked four questions.

The first one is the O2O investment.

I think the O2O investment budget for us in this fiscal year is around $20 million to $22 million, versus we have spending $50 million last year.

In Q1, we spend $4 million already, which is pretty much on track.

The second thing is about the measurement of this online, offline investments.

As you have several metrics, number one, we are including our online revenue contribution, including the revenue from xueersi.com, and including revenue from the live class platforms, and some other online platforms.

The second thing is that we try to measure the efficiency after we implemented the O2O technologies into my Peiyou business.

For example, the percentage of the online registrations, and the percentage of the online payments, and something like that, some kind of efficiency KPIs we have, we have a long list over there.

The third question about the learning centers, which is also very important, in Q1, we open 14 new learning centers.

In Q2, I plan to add the other, maybe, eight to 10.

In Q3 and Q4, we have the plan to open some new cities, two to four new cities this year.

So throughout the year, in classroom capacity perspective, we still stick to our plan; try to increase around 25% to 30% capacities throughout the year.

And the last question, about the privatizations, the simple answer is, no.

And we keep monitoring the market dynamics in China market and US market, and we still believe that US market is a transparent and fair place to reflect the Company's value in the long run.

And as a Company, we would like to focus on our business and our strategy -- and our key strategies and don't always have a time to think about something else.

But at the same time, for some of the companies we have minority investments, for example, like Babytree, if they have the plan to go IPO in China separately, we are also happy to see that.

So, thanks so much for the answer.

And one follow-on question is you invested in the Babytree, so what's your interest in the Babytree?

Is that pure financial interest, or there's some other interest?

The Babytree's not only a financial investment deal for us, because Babytree's quite dominant in the parents' community, from maybe minus 1 to around 2 to 3, which is a very important source for our new students, for our Mobby business, and a younger age of the Peiyou business.

So, in a way, also have worked together with them to try different campaigns to try to find more synergies right between us.

But, of course, we are also happy to see that, in financial perspective, it's also a good deal.

So, in the future we will continue our philosophies.

We ask for the strategy synergy first, and then we also evaluate kind of the financial returns over there.

Good.

Thank you so much.

That's all my question.

Thank you, Tian.

Leon Chik, JPMorgan.

Another quarter with 40%-plus growth.

So the question is the -- you have a budget.

The budget for online development, is it $25 million this year, for last year?

$20 million to $22 million.

Okay, $20 million to $22 million.

That's FY16, right?

What was it in last year?

$15 million.

Okay.

So the difference is like about $6 million, right?

And I think you mentioned that, basically, margins might be flat or down, so I guess the implication is G&A, as a percentage of sales, you think it will be quite flat this year?

The O2O spending, as percentage of revenue, will be maybe flat, or slightly higher; that's why my margin will be flat or slightly lower.

Okay.

But last year you had about $110 million in G&A costs, so your sales go up with -- you mentioned, I think, 35%, or so, so that's like an extra $40 million you can spend on G&A.

But O2O, you're only going to spend an extra $7 million, so that leaves $33 million.

So how exactly are you going to spend this G&A?

Because it's not for O2O, it must be for some other stuff, right?

Yes, for the cost expenses, there, actually, I think that O2O is the priority one, and the big spending there; but we also have some other places where we'd like to invest, too.

So we're probably, I think -- in margin perspective, we will manage our Company to shoot for the best interest we can get.

But from guidance perspective, we still would like to give kind of a more conservative feel to make sure all of us can give us more buffer and more room for the Company if we have some new places we want to invest in the coming quarters.

Okay, that's exactly the answer I want to hear.

Thank you.

Thank you, Leon.

Anne Shih, Brean Capital.

I guess, just first, can you provide more color around the ASP trend just given the dips for the second quarter in a row on online and also one-on-one, and the trend expectations here?

Then secondly, you mentioned for O2O spending $20 million to $22 million for this year, following $50 million last year.

Do you think this will continue to taper into 2017?

Thank you.

Thank you, Anne.

For ASP question, I think we need to break it down into the small class segment, our one-on-one segment, and online segment.

For small class in Q1, we are 6.5% up from last year, because we took price increase in Beijing; Shanghai; Shenzhen; Wuhan; Zhengzhou; Suzhou; Chongqing; and Taiyuan last year.

In FY16, we plan to do so in selective cities including Tianjin; Nanjing; Suzhou; Zhengzhou; and Chongqing.

As our geographic distribution move to the cities other than Beijing and Shanghai, you may see slightly lower ASP growth for the small class in FY16, but still we should be in around 3% to 5% positive range.

And for the one-on-one, I think there the price should be -- the ASP for one-on-one should be flat, or slightly down, purely because of the different product mix from one-on-one perspective.

And for the online, you have seen we have much stronger growth, which is 70% in revenue and 75% in enrollments.

And the online ASP will relatively stable.

In Q1, they are around 2% to 3% decline; that is because of the mix of the low price products.

In the long run, I think in the blended perspective the ASP should be flat, or slightly down.

But we feel good about that because that reflects a positive shift, because we have all of our small class and online schools are taking more share, while one-on-one is well under control.

About your second question about the O2O spending in the longer term, maybe in two to three years' timeframe, firstly, we have to say is by the end of today my online revenues only around 4.5% of my revenue.

So, the online still in early stage.

We still need to level of -- need to have a certain level of investments over there.

And as a Company, we will control the margins in the big picture perspective so we still can get some margin leverage from our mainstream business small class, but we invest there in O2O, and in some other online stuff.

So we're there to make sure my margin can be in a controllable range.

The only thing I can share with you is that in the coming 2017, we plan to invest similar level of the spending in O2O and online initiatives.

But the detailed project, or the detailed projects, or the detailed things we will do may be different.

Okay, that's very helpful.

Thank you.

Alvin Jiang, Morgan Stanley.

Congratulations on a strong quarter.

I have two questions; first one is on the investment strategy.

I notice there, actually, a couple of education companies are investing into the whole education value chain, but I'm not sure what's your investment strategy going forward?

Will it change the strategy, because of the competition on the investment side?

And the second question is on the feedback of your promotion.

I notice you launched a very attractive promotion in Beijing this summer, and apparently it got very positive feedback.

Are you going to continue such kind of promotion in coming quarters?

Thank you.

Thank you, Alvin.

The first question about the investment philosophy, as I talked in the last earnings calls, our investment strategy in this year is a little bit different from last year.

We will fully focus on our strategic investment deals, which have some strategic synergy with us.

So, as a result, you may see the number of deals we invest in 2015 may reduce, while the deal size may increase.

The second thing, when we consider to do investment is we need to evaluate what kind of things we are good at and what kind of things we can do.

For the two deals we just invest in the past months, the Qingqing Jiajiao, which is C2C mobile platform, helps to connect and match -- cater our students with appropriate tutors in a more efficient and economical way; and the another one is Shunshun Liuxue, is a O2O overseas value-consulting platform with a similar model to the Qingqing Jiajiao.

All of these things is in a place where we're not good at, so for all of these place we want to invest some cash, as well as our strategy support, with the selected companies to help them to be successful.

And the second thing's about whether we will continue the promotions from summer term.

I think we have two things need to mention.

Number one is, so far, we see very positive numbers in the enrollment and registration perspective.

But we still need maybe the other one month to evaluate whether retention rates can be also quite good as what we expected.

So we need some time to evaluate the final outcomes out there.

Even the outcome is very good and positive, we need to consider the other reason is, in general, for education, the summer term is the best time to do promotions.

For the fall term and winter term, maybe, the outcome of that promotion maybe a little bit last thing what we do in summer.

I think all of this is some factors we need to consider when we want to decide for the fall, and the other quarters.

So far, we don't have any plan to do that.

But I will give you more backgrounds; I will share with you more numbers in Q2 earning call, after I got the detailed retention numbers of Beijing.

Okay, thank you.

This is very helpful.

Cynthia Meng, Jefferies.

We have a question, can you give us some more color on your M&A strategy; and also, the CapEx target for FY16?

I have a follow-up question after that.

CapEx, we will maintain the similar percentage of revenue in CapEx perspective as what we did last year, because this quarter the CapEx now outstanding numbers.

So I have nothing more to share with that.

And the second thing about M&A is, as I have mentioned, I will very pretty much focus on the strategic synergy with them.

So, we wish we could leverage our cash in a more efficient way.

In the past, we did quite well in the deals we have invested in the past several quarters.

We will maintain our kind of conservative but very serious approach to make sure my next investments could also be a success.

And in the coming future, I think we are still looking into some opportunities which can make color gap for us.

For example, maybe if they have some strategic deals who can help us to have more dominance in the younger age market, maybe aged from 2 to 8, which is also a good way for us to look at that.

And we quite aggressively looking into new opportunities in this platform and our CEO, Bangxin Zhang, has established a future star, which is kind of a campaign, or is a can for all the online education entrepreneurs.

So we will leverage everything we can get to pitch in to different deals, and make our right investments in the future.

Thank you.

Regarding the online business, can you share with us the online business margin, and if is there an expected target?

Yes, online, today, the online today, we mean, is the xueersi.com, which is the Xueersi online school.

And the profit margin of Xueersi online school is better than one-on-one, but less than the small class.

And for us, I have seen the key priority of the online school today is try to get more market share and increase the enrollments.

So we wish we could spend more there so to make sure we can maintain a certain level of the margins, but we can maybe double or triple the enrolment growth in online perspective.

Thank you, very helpful.

Last question is, is there -- is the online course fees still the major monetization model for this business?

Are there any other potential monetization models that you could give some more color on?

We are piloting several different models now.

Not only the Xueersi online school; Xueersi online school actually is not a new model.

So please stay tuned, because of the competitive reasons; I will let you know when we make some progress, make some significant progress, and I can share with you with more details in the future.

Okay.

Thank you very much.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for participating.

You may all disconnect.

Thank you.

Thank you.