TAL Education Group (TAL) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to TAL Education Group second fiscal quarter 2016 earnings conference call.

(Operator Instructions).

I must advise you that this conference is being recorded today, Thursday, October 22, 2015.

I would now like to hand the conference over to your first speaker today, Ms. Mei Li, IR Manager.

Thank you.

Please go ahead.

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

The second fiscal quarter earnings release was distributed earlier today, and you may find a copy on the Company IR website, or through the newswires.

During this call, you will hear from Chief Financial Officer, Mr. 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 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 second fiscal quarter of 2016.

As we communicated last quarter, we were expecting this to be a strong quarter.

The second quarter revenue still exceeded our guidance, due to very strong growth of our small class business, particularly in outer cities, as well as better-than-expected one-on-one business.

Net revenue increased 41.6% year over year to US$173.3 million.

In RMB terms, growth was up by 43%, due to the depreciation of the RMB versus the US dollar.

Revenue growth was primarily driven by an outstanding 55% increase in enrolments.

The out performance of the top line resulted in a very solid quarter for operating income, as well, with a year-on-year increase of 28.5%, even as we continued to expand classroom capacity and invest in O2O initiatives.

Today, I will briefly review our operational highlights in the second quarter, and then discuss our most recent progress in strategic acquisitions and investments.

After that, I will provide some further analysis of the Q2 financials and our business outlook.

Overall, the second quarter was a continuation of the positive growth trend we saw in the first quarter.

A major contributor to growth in the second quarter was our small class business.

In the second quarter, small class accounted for 83% of total revenue, compared to 82% in the same year-ago period.

Net revenue for small class was up by 44% and enrolments increased by 52%.

Outer cities, especially the new cities that we entered in the past two years, continued on a full steam-ahead trajectory, and even did a little better than expected.

In Q2, as many as nine cities grew by over 100% year on year.

This makes our revenue base from small class more widely spread geographically.

Another way to show this is by looking into the 14 cities ranking below the top five cities, which are Tianjin; Xi'an; Wuhan; Chengdu; Hangzhou; Zhengzhou; Suzhou; Chongqing; Shenyang; Taiyuan; and four new cities we added in the course of last year.

These 19 cities -- sorry, these 14 cities together contributed 32% of Peiyou small class revenue in Q2.

In the same period last year, the cities below top five contributed 24%.

Let me update you on Beijing small class performance.

Our concerted efforts to regenerate growth in Beijing are beginning to pay off.

The RMB1 summer class offer for the first year junior high students attracted several times the amount of last year's summer registrations.

We had a high rate of over 80% registered enrolments actually going to class.

This promotion was quite successful, and resulted in a very solid retention rate of over 50% in the first-year class from summer to fall.

We are confident that this will continue to lead to growth in coming quarters.

Another positive indicator is the fall term overall enrolment increase in Beijing is around 10% year over year, as of today.

By comparison, overall Beijing enrolments were slightly down in the same period last year.

In addition, our English and Chinese class promotions also progressed quite well.

Beijing Chinese enrolments more than doubled in the summer term, and we saw around 70% of enrolment growth year over year in the fall term up to now.

Beijing English enrollments were also up by around 20% in the summer term, and are growing at a similar pace year over year in the fall term up to now.

Overall Q2 revenue in Beijing was flat year over year, while enrollment growth was over 15%.

As you may recall, revenue growth in Beijing was mostly price driven in the past quarters.

Enrollment growth was up by high single-digit, if we exclude the impact of first-year junior high school summer promotions.

We are very clearly moving into the right direction of enrollment-driven growth for Beijing, and we are confident about the growth in the coming quarters.

Turning briefly to our one-on-one business.

One-on-one performed better than expected, contributing 13% to overall revenue in Q2 compare to 15% in the same year-ago period.

This remains a business that is hard to give guidance for.

The reason is that parents pay in advance for a certain amount of tutoring sessions, but we cannot control when students actually come in for sessions.

In selected regions, we have started to offer small-group class as a supplement to one-on-one tutoring.

Meanwhile, we continued to expand learning center capacity to support the robust demand for our services.

During the quarter, we added 207 new classrooms.

By the end of August, we had closed some learning centers, but these were small scale, counting around seven classrooms per center versus the average of 18 classrooms per center.

By the end of Q2, our learning center networks covered 300 centers, of which 214 are small class learning centers, including four learning centers for Mobby, and 86 are one-on-one learning centers.

Fiscal year to date, the total learning capacity expansion is 25%, which is basically in line with the 26% capacity growth we recorded in the first half last fiscal year.

Most classrooms were added in the cities including Tianjin; Shenzhen; Xi'an; Guangzhou; Wuhan; Beijing; Zhengzhou; Suzhou; and Hangzhou.

Our expansion plan was delayed a little bit in second quarter, so we are going to make up for this in the third quarter.

In addition, in proportion to the local demand, we will add more classrooms in cities with very high utilization rates, including Shanghai; Guangzhou; Nanjing; Hangzhou; Tianjin; and Chengdu.

The four new cities we entered last year are also doing quite well now.

Revenues in the second quarter were several times those in the same quarter last year.

All the four cities, including Jinan; Qingdao; Shijiazhuang; Changsha achieved operating profit in the second quarter, ahead of our expectations.

As a result, we are going to add more capacities over there earlier to meet increasing demand.

Due to these factors, in the third fiscal quarter, we are preparing for adding 20 to 30 new learning centers and for the full fiscal year 2016, we probably will add more classrooms than 25% to 30% that we mentioned last quarter.

And we maintain our plan to enter at least four new cities by the end of this fiscal year.

As expected, in the second quarter, our online courses business segment remains one of our fastest growing segments with 69% year-over-year revenue growth.

Online courses on xueersi.com, contributed 4% of total revenue this quarter, compared to 3% in the same year-ago period.

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

Online enrollments also increased 74% year over year to 15% of the total enrollment this quarter, versus 13% 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.

Let me now take you through our most recent acquisition and investment deals.

We are very pleased to have made some important strategic advances with our recent investment in Changing Education; the acquisition of Firstleap Education; and our latest investment in Phoenix E-Learning Corporation.

Before I update you on each one, let me highlight what we consider for the common themes of these deals.

First, each of these has been well coordinated in terms of planning, preparation, and timing.

Second, each has a very strong fit within our strategic plan to gain long-term leverage in the future education business models, and become a leading technology-focused education service provider.

And as the third common theme, these businesses all have a core focus on education, aimed at the K-12 segment, and are very complementary in such a way that we can continue to lead with our own organic growth strategy.

Let me first discuss the Changing Education -- in Chinese, Qingqing Jiajiao -- a Shanghai and Guangzhou based company operating an O2O platform and a mobile app that helps connect tutors and K-12 students.

In June, we took a minority stake in this company, investing both cash and asset resources.

The asset investment was by way of integrating our one-on-one business in Guangzhou with Changing Education's operations.

The main points I want to share with you today are as follows.

This step has not materially affected our P&L, as our revenue from one-on-one in Guangzhou was around 10%, 9% in Q1 and 11% in Q2, of the overall one-on-one revenue, and it's a relatively low-margin business.

While this is a minority investment and therefore there is no consolidation in our P&L, we exchanged our Guangzhou one-on-one business for equity in the investment; and as such recorded a capital gain of $50 million this quarter based on US GAAP.

More recently, in September, we have entered into a definitive agreement to acquire Firstleap Education.

I would like to update you on the business and financial aspects of this deal.

Firstleap provides all-subject tutoring service in English in China to children aged from 2 to 15 years old.

We are very pleased with this acquisition, which will strengthen our English training capability.

Firstleap's practical English training in all subjects complements our exam-focused LeJiaLe, and oral tutoring in LeWaiJiao brands.

The separate brands will also work together with Shunshun Liuxue, the online C2C overseas studies consulting platform in which we have invested last quarter.

We expect to see all of these separate brands to grow into integrated business under the TAL umbrella.

Firstleap now operates 66 learning centers in 25 cities.

Of these, 36 centers are self-operated and 30 are franchised.

The numbers of students in August 2015 was around 20,000.

During the period from September 1, 2014 to August 31, 2015, unaudited revenue per book was around $30 million.

Firstleap is loss-making at the moment.

With cross-selling on our platform, we can help lower down the new customer acquisition costs for Firstleap.

We expect this business to become profitable within two to three years with a profit margin of between 10% to 20%.

Now turning to our most recent investment in Phoenix E-Learning Corporation.

We invested $30 million in Phoenix E-Learning, which operates zxxk.com, Xueke Wang in Chinese), the largest online educational platform serving the public school system in China.

Upon completion of the investment, which is subject to filing with the relevant government authorities, TAL will hold 32% equity interest in Phoenix E-Learning Corporation.

zxxk.com, Xueke Wang, is highly recognized by the schools, teachers, parents and students in China.

It's used in over 30,000 public schools, and has over 15 million registered users, the vast majority of whom are teachers.

With this investment, we have opened up a very important gateway to enter the market of digitalizing public schools, which is a white space field for our content and tutoring services.

We are excited about this deal.

To summarize, as we are now at the mid-point of FY2016, we are well on track pursuing this year's straight forward growth strategy mostly driven by enrollments, through our offline learning center network and deeper online engagement.

The highest growth for our core small class continues to come from the cities other than Beijing, giving us a very solid broad revenue base for future growth.

Meanwhile, our efforts to bring back enrollments driven growth in Beijing are also paying off.

We believe we have made very sound strategic investments in recent months that will bring long-term value to our shareholders.

Our recent investments have been well coordinated, align with our long-term strategic plan, and all have in common a core focus on education, aimed at the K-12 segment, and complement to our organic growth.

Now, let me go over some financial points I would like to highlight for the second quarter.

The decrease of ASP was mainly attributable to a mix of factors affecting the separate business lines including the small class summer promotion in Beijing, the RMB1 promotion in Beijing, more offerings of small-group class as a supplement to the one-on-one; and more enrollment contribution from online courses.

These factors were only partially offset by the increase in the hourly rate of the small class course offerings.

Small class ASP declined by 5.3% year on year, mainly because our summer promotions in Beijing for the RMB1 class offering.

We increased the hourly rate of small class in five cities, and the ASP will be back on track in future quarters.

One-on-one ASP declined by 17.4%, because we offered more small-group class in selected regions in the quarter.

This new type of small-group class received positive feedback and contributed more than 25% of the one-on-one enrollments in the second quarter.

ASP of small-group class was significantly lower than the regular one-on-one.

Online ASP was down 3.1% year on year in Q2 because of more low-priced classes sold in the quarter.

Other expenses were $4.1 million for the second quarter of FY2016, compared to other income of $1.4 million in the second quarter of FY2015.

Other expense in this quarter was mainly driven by exchange losses.

As the Company holds a significant portion of cash balance in RMB and reports in US dollars, it benefits from exchange gains in times of relative strength of RMB and incurs exchange losses in times of relative strength of the US dollars.

Basic and diluted net income per ADS were $0.79 and $0.72, respectively for this quarter.

Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were $0.87 and $0.78, respectively.

Finally, before I give our guidance for the third quarter, I would like to clarify some key points.

First, September 3 has been made a holiday by the state council this year in memory of the 70th anniversary of the victory of World War II.

Even though we originally expected one week of our small class course to be delayed to the fourth quarter in all cities, we managed to hold classes in more than half of the cities on September 3. And the revenue in the third quarter is better than our expectations.

Second, the acquisition of Firstleap is to be done in two stages.

And according to the relevant US GAAP guidance, the Company would consolidate Firstleap into its financial statements upon obtaining the effective control of Firstleap.

As a result, our third quarter guidance does not, again, does not, reflect the revenue estimate of Firstleap Education.

We estimate total net revenue for the third quarter of FY2016 to grow 40% to 43% year over year in RMB terms.

Taking into consideration of the recent significant change in RMB exchange rate against the US dollars, we expect total net revenue for the third quarter of FY2016 to be between $135.1 million and $138.1 million, representing an increase of 36% to 39% year over year, assuming no material change in exchange rates.

If we achieve the guidance of 36% to 39% revenue growth in Q3, then we will have achieved 41% to 42% year-over-year top-line growth for the first nine months of the year.

Given the strong results in the first half of FY2016, and very healthy business fundamentals, we are more optimistic for the full year of 2016 than earlier in the year.

We now estimate total net revenue for FY16 to grow 40% to 42% in RMB terms, as compared to the 35% year-on-year revenue growth recorded last year.

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

That concludes my prepared remarks.

Operator, we are now ready to take questions.

Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions).

Fan Liu, Goldman Sachs.

Rong, Mei, thank you for taking my questions, and congratulations on another solid result.

I just have one quick question.

The gross margin actually is a bit weaker than expectation, as the cost of revenue increased 3% year on year.

Have we come across a higher-than-expected teacher compensation increase during the quarter, or something else is the driver behind?

And also, could you guide what we should we look at the operating margin for the whole year of FY16?

Thank you.

Specifically in Q2, the gross margin is a little bit down.

That is because, our summer promotions in Beijing, we have several times bigger amount of the students in Beijing.

So they only pay RMB1, but we need to bear the same costs, including teacher compensations over there.

So that's a one-off event.

And going into the coming quarters, as I have mentioned in the call, Q3 we have planned to open the other, maybe, 20 to 30 learning centers in Q3.

And that probably will be one of the largest quarters in the past two years, which will also impact a little bit in my gross margins.

But the good thing is, if we open the learning centers in Q3, all of them will come into effect maybe in the spring term next year, and will contribute to my next year growth rate.

The reason we did that is because, actually, we are seeing a very strong demand from the local cities, especially like in Shanghai; Guangzhou; Nanjing; and so many places over there.

And something I want to highlight is the four new cities we added last year actually growing much better and faster than we expect.

So, with all of these investments to continue to add more capacity in Q3, probably, the margin situation for Q3 will quite similar to Q2.

And looking along to the full year, let me recap, the first half of FY2016 the non-GAAP operating margin is 22.9%, as compared to 24.8% in the same period last year.

So I think that is quite in line with our assumptions.

As I said last quarter, I'm quite confident we will still maintain very sustainable healthy top-line revenue growth.

That's why we guide the full-year RMB growth around 40% to 42%.

And we are also quite confident the margin will be moderately down, and in a manageable range.

And the growth rate, year-over-year growth rate, of the absolute profit numbers will be very healthy, as already in the past.

So that's our estimation, for your information.

Thank you.

Leon Chik, JPMorgan.

Congrats.

I was just wondering do you have any plans for how many learning centers to add after third quarter?

Is it just like one big lump of learning centers, or are you going to start a strategy of adding learning centers every quarter?

Thanks.

As I mentioned in the prepared remarks last quarter, each quarter we will add more than 20 to 30 learning centers.

Part of that is because we delay a little bit in Q2 because of the licensing issues.

And part of that is because we have seen a very strong demand and very high classroom fulfillment rate in Shanghai; Guangzhou; Nanjing and in some other places.

So, we decided to add more capacity to feed the needs.

And part of the reason is also because we have seen a very strong demand in the new added cities last year.

Again, we still maintain our plan to add at least four new cities this year.

Most of them will happen in Q4.

In Q4, we will continue to add more learning centers, but the numbers should be lower than Q3.

Okay.

Thank you.

Cynthia Meng, Jefferies.

Rong and Mei, I have one question.

Given TAL Education's strategic investment in the Phoenix E-Learning and the acquisition of Firstleap, what updates can you share to what is the TAL Education revenue growth for FY16 and FY17?

Because of that, any updates on your overall guidance?

I mean, your 40% to 42% doesn't include this, right?

Let me clarify.

We start from the minority investment deals, the Phoenix E-Learning Corporation, which we will take 32% of the company's share.

Phoenix E-Learning Corporation, actually, because we're only 32%, so we don't need to consolidate their top-line numbers.

Especially for this Company they are slightly profitable.

Last year, based on PRC GAAP, they have several million RMB profits.

So we will take the 32% of that several million RMB profits into our P&L, maybe, when we close the deals, in the coming quarters.

So the number is immaterial.

And the second this is about Firstleap.

Actually, that is a two-step approach.

We will not consolidate the Firstleap top-line revenue until we get effective control of that company.

So, based on US GAAP, we probably, we need to finish some stage of the closings, and meet the requirement, and meet the condition of the consolidation in the P&L.

Personally, I think this will happen in the coming, maybe, six months to 12 months.

But today, when we talk about the guidance, both for Q3 and full year, it does not reflect anything from Firstleap Education.

For this company, as mentioned just now, last year, the rolling 12 months, based on the PRC GAAP, the unaudited revenue for Firstleap is around $30 million.

And they are still growing.

We believe they will contribute to our, maybe, growth, on top of the guidance, next year.

Okay.

Thank you very much.

Eileen Deng, Deutsche Bank.

Thank you, management, for taking my question.

I just have one more point to the acquisition recently.

You just mentioned the revenue impact may be happening in six months, 12 months away, but could you give us some color on the bottom-line impacts on this acquisition?

Thank you.

Specifically, for Firstleap, they are slightly loss-making position, because their top-line revenue is around $30 million.

So we will, in the first stage, consolidate certain percentage of their slight loss into our P&L.

But because the number is really small, so it's very immaterial to my P&L, actually.

Thank you.

And could you also comment on the investment scale for the full year on your online initiatives?

I think for investment, starting from this quarter, the first earning costs we have talked about our investment philosophies.

Last fiscal year, actually, is the first year we see a lot of spikes in the online education, so we invest, maybe, several deals, most of which are very small size.

Coming to this fiscal year, we have more understanding, and the market's more mature for online education, so we start to focus.

We focus our K-12 segment, which is our key business, and we intend to do more big deals.

So, you can see, the number of deals has reduced a lot, but average size of the deals has increased.

By the end of today, we can say is we have made some strategic move in this area.

And in the future, we will continue to monitor and to keep very close connection to this market to see what is the right target for us.

The only thing I can share is in the coming, maybe, two quarters I don't have any big deals in my pipeline, but we will still keep eyes open for any opportunities in this market.

Thank you.

Tian Hou, T.H. Capital.

Congratulations on a good quarter and a strong guidance.

I have some questions related to your income statement.

Below the line of interest from operations there are several lines, one is impairment loss on long-term investments, $7.5 million; and then gains from long-term investments, and gains from disposals components, as well as gains from disposal of investment.

And I saw that as a one-time item.

So would you please give us some explanation on those four items?

Thank you, Tian.

It's very important to bring this number out.

Let me show you the math.

In the first place, we have positive $50 million, which is the capital gain we integrate our Guangzhou one-on-one business with Changing Education.

The deal is quite good.

And some other investors also invest at the same time, including IDG, Sequoia, and Zhixin Ziben.

So, this is based on the US GAAP, we have to do that.

In negative perspective, we need to pay certain percentage of that deal amount as company tax.

At the same time, we have done some impairment by $7.5 million, which is around four, five deals.

That's because in the year FY2015 we invest a lot of deals there; more than 30 deals in that year.

Some of them are not related to K-12 segment, and some of them are not doing well because we invested in the angel stage.

As I have mentioned, maybe, two quarters ago, we will start to look into all of these deals.

The underperforming deals, and in the deals maybe, for example, they don't have cash, or they are not running quite well, we will discuss with our auditors and then determine to do a certain percentage of the impairments to reflect their situations.

That is the $7.5 million.

And we also have, maybe, $2.7 million, the government tax refund.

So that happens from time to time.

We cannot control the timing of the governments.

So, that's $2.7 million tax refund.

We also have a $3.7 million that is the loss coming from exchange rates, which is also uncontrollable.

So, if we consider all of these together, the simple math will be you can just deduct around $23 million from my $69 million net income this quarter and that will be more reasonable numbers.

Okay, got it.

Another question is related to the margin.

As you are going to increase the opens in the learning centers, and so how much gross margin will be deducted in the next quarter?

And which quarter the gross margin could go back to normal?

Next quarter, we will open around 20 to 30 learning centers, so I think the gross margin trend will be quite similar as well as in Q2.

In general, if I open one new learning center it takes me around two quarters to back to normal margins.

So, all of these new added learning centers will contribute to margin expansion, maybe next year; the first quarter next year.

Okay.

One more question is for the similar class, like a same class, what's the price difference between the different locations, like in Beijing, Shanghai, or other cities, like Wuhan or Zhengzhou?

Is there a price difference?

Yes.

Beijing is most expensive, RMB75 per power; Shanghai, RMB70; Shenzhen, RMB70; Guangzhou, RBM60.

The cheapest is in Shenyang -- sorry, in Jinan is RMB48.

Okay, I got it.

That's all my question.

Thank you.

Congratulations, again.

Thank you, Tian.

Anne Shih, Brean Capital.

Rong, Mei, thanks for taking my question.

Could you just elaborate on your pricing strategy, going forward, especially for small class and one-on-one classes?

Will any of the promotions be extended or expanded beyond Beijing?

Thanks.

Thank you, Anne.

Our pricing strategy for small class has no change.

In most cities, every two years we will take price up.

Last year, we increased the price in eight cities, and this year we increased the price in five cities.

The reason of the overall ASP, their growth rate is a little bit lower, that is because we have more and more contributions from outer cities.

Even they are growing very fast, and even we take the price up over there, but because their absolute price point is still lower than Beijing.

So, that's kind of the mix issues.

We don't have any plans to change our pricing strategy.

We will continue to do that.

Specifically for one-on-one, we also don't change our price in one-on-one.

The only difference is because we start to offer the small group class, which is one teacher versus six students.

So the price of the small group class is significantly lower than the regular one-on-one, but still higher than the small class.

Compared to the regular one-on-one their price is lower; that's why you can see the blended ASP of the one-on-one actually is declining a little bit.

About the promotions, I have something -- some color to add.

In the first place, in general, summer is the best season to do the promotions.

The students just graduate from the sixth grade and prepare for going to the next level.

The second thing, I think the promotions will -- usually, will happen in the places with maybe high market dynamics, for example, in Beijing.

We also will monitor what is our key counterparts doing in this market.

So far, we didn't see -- we don't have a clear plan to say I want to do more promotions in other cities.

But, again, we will keep eyes open.

We will maintain our pricing strategy, while we also will keep our eyes open to see what's happening in this market.

Just a quick question to follow up.

With the small group, one-on-one, where it's the six students to one teacher, presumably, would the margin for this type of course be higher than the typical one-on-one?

Yes, the price of the small group is lower, but the margin of that is better than the regular one-on-one.

Thank you.

Andrew Orchard, Nomura.

I just have a follow-up question on the one-to-one business, as well.

Can you give us some color on what do you think the enrollment trend is going to be?

Are you still going to keep this new small group class format?

And also, can you give us some color on what the price differential between this format and your regular one-to-one business?

Thanks.

Okay, I think for the enrollment perspective, the small group class actually contribute a lot in the one-on-one enrollments; they are more than 25% in Q2.

In the future, in a way -- because in Q2 it only did some pilots in selected cities, not all the cities, and in the coming quarters we are thinking about to do more in more places.

About the price, I think the small group price is lower than the regular one-on-one, but still higher than a small class.

So we manage them in a right price point to not affecting my small class business, but also can attract more students from one-on-one to small group because their profit is a little bit better than the regular one-on-one.

Okay, got it.

Thanks.

Dick Wei, Credit Suisse.

This is Dan Zhao, calling on behalf of Dick Wei.

I have a follow-up question on your investment strategy.

What areas do you focus on?

And, as we see, you have been making good efforts in English subjects, so what's your strategy in English subjects, going forward?

Thank you.

Okay, from the investment perspective, our strategy is, in a sense, what I told you guys in the past several quarters.

We only focus on K-12.

We focus on the deals where it's very high strategic synergy with my core business.

And we prefer to do some big deals, and even some acquisitions, to strengthen our advantages in the K-12 segment.

In particularly for English, I think, firstly, it's a very good start because their product is much better than the test product in the past.

And they will focus on the children aged from 2 years to 15 years.

And we also have our LeJiaLe English which is test prepare English focused on the students in the primary school and middle school.

And starting from last quarter, we also developed the online oral English tutoring, we call LeWaiJiao, which is quite similar to VIPABC, which will provide online oral English to the students.

So, we have all of these products ready over here.

In the future, we try to integrate them, and to develop our English brand under the TAL umbrellas.

Today, it's too early to judge how successful we will be in the future.

I will keep you guys updated about any progress.

But in the management team perspective, we are so excited, and we're quite confident all of these will work in the future.

Very clear.

Thank you.

Leon Chik, JPMorgan.

Can you talk a little bit about your O2O spending and strategy?

In particular, we continue to get enrolment growth next year of whatever percent.

Do you expect O2O spending to also continue to go up along with sales for FY17?

Thanks.

Thank you, Leon, for reminding me about my O2O investment.

This year, we give guidance to you guys, is we will invest around $20 million to $22 million on O2O projects.

In Q1, we spent around $4 million; in Q2, we spent around $5 million.

All of these are pretty much on track.

Looking forward to the coming years, I would like to be a little bit conservative.

Considering the opportunities over there, we think it may be better if we maintain the similar percentage of revenue, the investment in the O2O space.

And we are seeing a lot of key progress even from the online school Xueersi Online School, and from Haibian the online live platform.

So we still believe all of these will contribute significant portion of my business in three or five years' time, so we wish we can maintain our investment over there.

Thank you.

Ladies and gentlemen, we have no further questions at this time.

Once again, thank you management.

And I would like to thank all the participants for dialing in.

That concludes the conference for today.

Thank you.

You may now disconnect the lines.