TAL Education Group (TAL) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the TAL Education Group second fiscal quarter 2017 earnings conference call. (Operator Instructions). I must advise you that this call is being recorded today, October 27, 2016. I would now like to hand the conference over to your first speaker today, Ms. Mei Li. Thank you, and please go ahead.

Thank you all for joining us today for TAL Education Group's second fiscal quarter 2017 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 proper provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in public filings with the SEC.

For more information about these risks and uncertainties, please refer to our filings with the SEC. Also, our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a [record for the Asians], 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 2017. We continue to enjoy very good top line growth in the second quarter, driven by the high demand in all cities and supported by the further capacity for expansion.

Once again, in this quarter we saw renminbi depreciate significantly against the US dollar. Despite this negative impact, in dollar terms top line growth was 56.4% to $271.1 million, ahead of our expectations. In renminbi terms the net revenue grew by 66.4% year-on-year. The strong revenue growth was supported by a strong 77% growth in enrolments. The outperformance was mainly due to stronger than expected growth in both Peiyou small class as well as online course business.

In the quarter, non-GAAP operating profit increased by 33.3% year-on-year. We saw an improving margin trend in the Q2 compared to that of Q1, as we had anticipated. Today I will briefly review our operational progress in the second quarter. After that I will provide some further analysis of the financials and our business outlook.

Let me first recap our progress for each of the segments. Small class continued to grow fast across the board. Small class accounting for 86% of total revenue in Q2 compared to 83% in the same year ago period. Net revenue for small class was up by 72% -- seven, two -- in renminbi terms, and 62% in dollar perspective. While enrolments increased by 62%. Small class revenue generated from the cities other than the top five, Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, grew by 89% -- eight, nine -- year-on-year in US dollar and 102% in renminbi. The other than top five cities is accounting for 40% -- four, zero -- of Peiyou small class revenues, an increase from 32% in the same quarter last year. We achieved triple-digit year-over-year renminbi revenue growth in 11 out of all 19 cities that we enter by Q2 last fiscal year, including Chengdu, Wuhan, Hangzhou, Suzhou, Chongqing, Shenyang, Taiyuan, Jinan, Shijiazhuang, Changsha and Qingdao.

Once again, the highlight for the quarter is the ongoing growth momentum in Beijing, our summer promotion has been a great success. The enrolment growth rate was very strong for the first grade of the junior high and even stronger for the first grade of senior high. And the retention rates for these grades are also quite outstanding. Enrolments in other grades and subjects for which we have no promotions were also strong, as we experienced in the past quarters. We expect Beijing to maintain robust growth in the near future.

Across China, we are very pleased with the ongoing strong growth in enrolments for Chinese and English. We continue to provide more courses in more cities. Apart from Beijing we now provide Chinese courses in Guangzhou, Shanghai and Tianjin as well. We provide English courses in Beijing, Chengdu, Guangzhou, Hangzhou, Nanjing, Shanghai, Shenzhen, Tianjin, Wuhan and Xi'an, a total of 10 cities. And once again in Q2 the enrolment growth from the Chinese and English increased much faster than what we have in maths and science. And we will continue to try to expand the Chinese and English to more cities.

A brief update on our Zhikang 1-on-1 business. 1-on-1 -- our Zhikang business contributed 10% of our revenue in Q2 compared to 13% in the same year ago period. Driven by the local demand we opened five new 1-on-1 learning centers in the quarter, two in Tianjin and one each in Shanghai, Shenzhen and Suzhou.

Let me now turn to our online courses segment. As I explained on our last earning call, starting in this quarter, xueersi.com has begun to transform from an online platform of pre-recorded content into live broadcasting. Many live classes have been started in the second quarter. Revenue from xueersi.com online grew 83% -- eight, three -- eight, three -- year-on-year in US dollars and 95% year-on-year in renminbi terms. We manage this rapid growth despite the limited promotions offers, such as discounts and coupons in Q2 for online live classes. Online courses contributed around 4% of total revenue this quarter, flat with the year ago period. Online enrolment accounting for 23% of the total enrolments, compared to 15% in a year ago period.

Now, I would like to update you on our capacity expansion. In the second quarter, we added a net of 27 new learning centers, according to plan. In the quarter, we added 26 new Peiyou small class learning centers, or 545 classrooms, indicating a 57% -- five, seven -- year-on-year growth. We also opened two Mobby small class learning centers in each of Beijing and Shanghai. And in the second quarter, we're expanding in cities with strong demand and high capacity utilization rates, including Beijing, Nanjing, Xian, Shanghai, Tianjin, Chengdu, Zhengzhou, Suzhou, Chongqing, Shijiazhuang and Qingdao.

Even with this rapid rate of expansions, we are pleased to see our utilization rate to continue to grow by low single digit. By the end of the second quarter we have 422 learning centers, of which 291 are small class, 47 are Firstleap small class and 84 are 1-on-1. Looking to Q3, we are planning to add another 20 to 30 new learning centers. We expect the classroom capacity we have added to contribute to our growth in the near future.

By looking forward we maintain our positive outlook for the second half of fiscal 2017. We expect our biggest momentum of demand driven growth to continue and accordingly, we expand our learning center network at a healthy pace. Meanwhile, we are determined to deliver on our new education initiatives as well as our global brand building for the company's long-term growth and competitive strengths.

Before I go through the key financial results, I will like to draw your attention that as of December 1, 2016, TAL Education Group's ticker symbol on the New York stock exchange will change from XRS to TAL. With the Company retaining the listing of its American depository shares under the new name TAL on the NYSE, we're excited to see our group name and abbreviate stock symbol unified.

Let me now review our financial performance in the second quarter. After that I will provide some further analysis of our business outlook for the third quarter.

In the second fiscal quarter, small class ASP in renminbi terms increase by 6% year-over-year due to a rise in prices in select cities in the summer term. 1-on-1 ASP in renminbi terms increased by 10% as we sold more high-end premier classes. Online courses ASP was down by 30% in renminbi terms in the second quarter, mainly due to the promotion offers, such as discounting coupons for Q2 only for the limited online live classes, as well as the transformation into the live class model.

As we mentioned last quarter, we recognized revenue but we deliver the classes. And the method used to count enrolments of live class was the same as that of small class. As more students choose to take the online live classes, which typically last around one quarter, the recognition of online enrolments increased accordingly.

Cost of revenues increased by 63.9% to $131.9 million from $80.5 million in the same year ago quarter. The increase in the cost of revenue was mainly due to the addition of the classroom capacities and the numbers of teachers and the standard increase of the teacher compensation. And also driven by the new acquired business. Non-GAAP cost of revenue, which excluded share based compensation expenses, increased by 63.9% to $131.9 million from $80.4 million in the same year ago period.

In the second quarter, gross profit was $139.2 million as compared to $92.9 million for the same year ago period. Gross margin for the second quarter was 51.4%, as compared to 53.6% for the same period of last year, due to expansion of new capacity and the teacher team, as well as the newly acquired businesses.

Operating income increased by 31.4% to $51.5 million. Non-GAAP operating income increased by 33.3% year-over-year to $59.8 million. We saw an improving margin trend in Q2 compared to that of Q1, as we have talked about in the last earnings call.

Basic and diluted net income per ADS were $0.69 and $0.61 respectively for the quarter. Non-GAAP basic and diluted net income per ADS, which excluded share based compensation expenses were $0.79 and $0.70.

For all the balance sheet, as of August 31, 2016, we had $503.8 million of cash and cash equivalents and $1.5 million of term deposit, compared to $434 million of cash and cash equivalents and $17.3 million of term deposits on February 29, 2016.

Capex for the second quarter was $18.9 million -- one, eight point nine, representing an increase of $8.1 million from $10.8 million for the same year ago period. The increase was mainly due to the leasehold improvements and the purchase of servers, computers, software and other hardware for the Company's teaching facilities and the mobile network research and development.

As of August 31, 2016, the Company's deferred revenue balance was $463.4 million, compared to $239.0 million as of August 31, 2015, representing an increase of 93.9%.

Let me now turn to the Q3 revenue guidance. For the third quarter to date, we see that renminbi significantly depreciate against US dollars. Based on our current estimates, we expect total net revenue, including newly acquired business, for third quarter of fiscal year 2017, are expected to be between $227.5 million and $230.3 million, representing an increase of 60% to 62% on a year-over-year basis. In renminbi terms, we expect the projected revenue growth rate should be in the range of 68% to 70% for the third quarter of fiscal year 2017.

These estimates represent our current expectation, which is subject to change.

That concludes my prepared remarks. Operator, we're now ready to take questions.

Thank you. (Operator Instructions). Your first question comes from the line of Zoe Zhao of Credit Suisse. Please ask your question.

Hi, management. Thank you for taking my question and congratulations on a very strong quarter. I have two questions. First is on your future expansion plans, in terms of both learning centers, new city entrants and the hiring plans for your online and offline teachers. Could you give us an update?

And the second question is on your guidance. This is apparently very strong. Could you help us to break down the revenue growth from your organic businesses versus the consolidation business, which is Shunshun next quarter? Thank you.

Thank you Zoe. I think in the first place we need to remind the whole team, starting from this year actually we are seeing the K-12 tutoring market is getting better and better. I think which can also be referenced by the other counterparts in this market. We have seen they are -- also made a very good progress. So, the big market actually is doing good for us, especially for top players in this area.

So, for our Company, our principle is try to -- we try to meet the increasing market demand, so that's why we have continued to add classroom capacities and recruit more teachers this year. Let me recap. In Q1 and Q2 we probably have added 1313 Peiyou small class classrooms in a net of 42 Peiyou small class centers. And we're planning to add another 20 to 30 small class learning centers in Q3, which is also to capture the growing demand and potentials in this market.

And in Q3 I think the places we probably will add more capacities will be in the places we have very good metrics, including the fulfilment rate and retention rates and the refund rates. So, we have some key priorities there, including Guangzhou, Shanghai, Nanjing, Beijing, Wuhan, Chengdu. And I also want to let you guys know, this year we continue our pace to enter more new cities. And we are planning to enter a couple of new cities in the second half of fiscal 2007 -- 2017.

So, we probably are similar to what I told you guys in the previous earning calls. We are targeting to increase our capacities in a range of 40% to 50% and now we are well on track.

In the teacher perspective, that's also very important. We will add more teachers to serve more students. I think we hire the teachers and the teacher assistants this quarter and the last quarter, not only for our Peiyou small class business but also for our online and our double teacher models. And all of these are also on track and we have a structured thinking to balance the growing demand and the growing capacity and the growing teachers, which have proved to be quite successful in the past.

Now, based on the numbers we have seen, one thing I need to draw your attention is actually this quarter we see a stronger revenue growth. Part of the reason is because the learning centers we've added, starting from last year Q4, actually, they are coming into fully used and we have seen all of the metrics also doing well, so we'll probably continue our approach to grow our capacity to meet the increasing market demands.

And especially for your second question about the organic growth and the new acquired business. Actually, for our new acquired business the biggest part is the Firstleap Education. Last year -- sorry, last quarter the Firstleap Education is around 7% by revenue and this quarter it's around 5% of my revenue. In the full year, I think they will also be around 5% by revenue.

For the Shunshun which also acquired and Shunshun actually because their revenue recognition is around 10 months' to 12 months' delay, so this year we don't have so much revenue coming from Shunshun. It's very minimal. And it's very immaterial to my overall numbers.

Most of my growth is driven by the very healthy growth coming from Peiyou small class business, the online school and also 1-on-1 business, it's also better than my purchase. So, that -- I wish I answer your questions, Zoe.

Yes, sure. Thanks. Thank you.

Thank you, Zoe.

Your next question comes from the line of Claire Cao of Morgan Stanley. Please ask your question.

Hi, management. Thanks for taking my question. Could you help us to break down what's causing the year-over-year margin decline in the quarter? And how should we think about the full year margin profile? Thanks.

Okay, Claire. I think a similar to what I told you in the past several quarters, I think we have two drivers to drive up a little bit of our margins. In the first place, it's our -- a little bit faster than before the plan to try to expand more networks and more learning centers to meet the increasing demand from the market. And we have added over 1000 classrooms as I have told you just now. So, we will probably continue to do that in Q3.

And the other reason is driven by the new acquired business, the Firstleap Education and Shunshun. And because compared to what they were before, they are making a lot of progress. It's much better than there. But compared to my company on average, especially compared to the margins of small class, they are a little bit lower. So, if we mix all these things together, the margin percentage is a little bit down than last year.

And I have some numbers to draw your attention. I think in Q1 the non-GAAP operating margin we have around six points decline from last year Q1 and Q2 is 3.8 points decline from last year of Q2. And Q3 and Q4 the margin trend will be better than Q2 and Q1, so we -- for the full year we will continue to be a little be down than last year, but with a very strong top line revenue growth. We will continue to maintain our current strategy.

And we are also quite optimistic about the new acquired business. They will contribute to our overall margins much better coming -- in the coming two to three years.

Okay, thanks.

Thank you Claire.

The next question comes from the line of Fan Liu of Goldman Sachs. Please ask your question.

Hi. Hi, Luo Rong. Hi, Li Mei. Thank you for taking my question. So, my question is about your enrolment growth in Beijing. Would you please update some bit on this aspect? And also, what kind of reason you will attribute Beijing growth to really recover from I think several quarters ago? And what's your plan in the coming quarters for your course? It is like Beijing and Shanghai and Nanjing? Thank you.

Okay. I think in Beijing performance, as I mentioned in the script, actually we're doing okay and we're doing good in Beijing. And again, I think the market in Beijing actually is -- the market consolidation in Beijing actually is more and more obvious. We are seeing the New Oriental is also doing quite well in Beijing and we are also doing quite well in Beijing.

Last quarter my Beijing enrolments is more than 30% in Q2. Actually, either way, take all the promotion, the enrolment is also very healthy in Beijing. I think when the market -- when a new generation of parents actually they recommend to their friends more than before, so for the top players in this market, if we can control or we can maintain our high quality, actually will be -- really help us to gain more and more market shares.

So, we still believe, based on the retention rates we are seeing, for the students who retain from summer and fall, we also see it's very healthy. That's part of the reason why our Q3 is quite strong. And so we believe the Beijing market still will give us a very robust growth in the coming several years.

And we also will work together to make sure we can deliver more and more high quality classes to our students. And we will continue to invest in technologies and to try to improve the learning experience, not only in offline but also in online in Beijing. So, I think that's also very good growth drivers and will continue to make Beijing bigger and bigger.

And part of the reason why Beijing has to recover from previously a little bit of the flattish growth in the past maybe one or two years, I think the key is we have reinforced the operation efficiencies. We have made a lot of improvement there and we have a change in the management there and we have done a lot of new things. And we also upgraded our products.

But again, compared to the best case we can do actually we still have a lot of such ways we can improve in Beijing. So, for education actually, if one company, they focus on the core area of the teaching -- they focus on the teaching quality, they focus on the operating models, they focus on the students. They spend more time to improve the overall experience, not only for the parents, for the students and the teachers, then we should have opportunity to enjoy the much better growth.

So again, given the number, the growth numbers in enrollments in Beijing is doing good, but we still see a lot of potential there and we also see we still have a lot of places we need to do better, but we haven't done yet. So, we will continue to work on -- in the Beijing market and try to consolidate more market share in the coming several years.

And especially a question about our core plans and in the core cities, I think in our core cities, for example, the top five cities, Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, we will continue to improve our operations. We'll plan to add more our capacity there, even in Beijing, we will add more classrooms. In Q2 we probably added more than 100 classrooms in Beijing.

And we also try to give more -- try to expand more subjects. For example, last year we have introduced Chinese subject to Shanghai and we probably will do that with the other places in the coming several quarters. And we also try to do more, for example, overseas education classes in the big cities.

So, same as what we did before; we will try to make sure we're getting -- do deeper and deeper in the market. And that's our plan; to try to develop more and more market potential in the top cities. Thank you Liu Fan.

And your next question comes from the line of Natalie Wu of CICC. Please ask your question.

Hi, good evening, management. Congratulations on a very solid quarter. You have mentioned here that your margin will be improved. Actually, you have mentioned firstly, that your margin will be a little bit down this year, or in the fiscal year of 2017, but will be improved in two or three years. So, what's your margin expectation next year? Or does this go with the year of 2018?

Actually, my understanding is during the rapid growth period it is very reasonable to choose expansion in the sacrifice of margin. But when the growth rate slows down and stables, that should be the time a company will return to its normalized margins. And I recall that management has mentioned before that a normalized non-GAAP operating margin for the small class business in longer terms should be between 18% to 20%. So just wondering, what's the growth rate accordingly at that time? Thank you.

Thank you, Natalie. I'm going to see ? no four questions, it's two. In the first place, about the margin improvement in the guidance for the fiscal year 2017 and 2018, first speaking, we don't disclose any margin guidance actually, as what we did in the past. But what I can tell you is again in Q1 we declined by 6%, in Q2 we declined by 3.8%. In Q3 and Q4 will be better than Q1 and Q2, so over a year we will be maybe slightly down this year.

And going forward to 2018, we see a lot of positive things there, but again we still -- we just started our budgeting season this month, so I need some time to review the key drivers and some key investments we will make next year. So probably maybe I can disclose to you guys more details maybe by the end of the Q4 earnings call.

And in the long run, let me clarify 18% to 20%, that's not the margin range for small class. That is the margin range for non-GAAP for the whole Company. I think last year we are 17.9%, one year ago -- two years ago we were on 19.7%. So, that is the range where it comes from. So, we still believe as a company on one side, we need to deliver the high growth, high top line revenue growth, get more market share. On the other side, we need to balance the investments.

For example, the double teacher model and the live, today most people feel is good, but you know we start to invest two to three years ago. So today with the products we have developed for two to three years now coming to the period of production, we need to continue to make investments to make sure we can focus on research and development for something new. For example, the adaptive learning technologies in the coming two to three years.

So, we want to manage our Company in a more stable way, we want to manage our healthy growth, not only in the top line but also in the bottom line. So, looking forward in the coming two to three years, I think we'll maintain our revenue outlook is -- our Company will try to maintain our growth rate between 30% to 50% in the coming two to three years. So, that is the right range for us to hit.

Great, thank you.

Thank you, Natalie.

Your next question comes from the line of Mariana Kou of CLSA. Please ask your question.

Hi, congratulations, management, on a really strong set of results. I think my question is more on pricing. I think you mentioned a couple of data points on ASP. Just want to get a bit more color on what you think about normalized situation, how you price your classes on year-on-year growth perspective.

And also, I think I noticed on the slides that your small class enrollment growth is about 62%. I think you mentioned on the call that 1-on-1 actually recorded quite a good growth rate this quarter. If you could also help us understand what's the range of enrollment growth that we saw in Q2 for 1-on-1. Thank you.

Okay, Mariana. In the first question for the pricing, I mentioned at the beginning of this year we have obtained a price up for our major cities. We have taken the price up in Beijing from 75 to 85. We -- Shenzhen from 70 to 80 yuan per hour. In Guangzhou from 60 to 70. We also take price up in Shanghai just now. So we will maintain our pricing strategies to take price up every two to three years in one city.

And we also were happy to see all the places we did a price up actually in Q2, we also give some coupons to make sure the parents, they don't need to pay the price increase in a course in summer. But all of this impact, they will show up in Q3. So, that is part of the reason why you see in Beijing, even I say we take the prices up, but in Q2 you didn't see, in Q3 you probably can see the impact.

And for the enrollment growth for the 1-on-1, because 1-on-1 firstly that's our complementary services, we believe that's also very important to our core business. Especially about the enrollment growth actually is around 10%, because we want to manage the percentages of my total revenue in the past several years. I still remember two years ago when I?just joined the Company, we say the 1-on-1 is around 15% of my revenue and we say around two to three years this mix could be around 10%. This quarter, that is around 10%. But also 1-on-1 is also very important and very complementary into our core business. That's why you can see we opened around five learning centers of 1-on-1 learning centers in Q2.

And looking forward, we'll probably maintain our strategy to manage the 1-on-1 growth. And I think 10% is a fair expectation for -- you probably can think about it in the coming two to three years.

Thank you.

Thank you, Mariana.

The next question comes from the line of Terry Chan of HSBC. Please ask your question.

Hi, thank you, management, for taking my questions and congratulations on the strong set of results. I have a question on your live broadcasting initiative. Can you share more color on the business, like city coverage, student acceptance and feedback and also your expansion plan? And in the next 12 to 18 months, what do you think will be the size and the margin associated with this business? Thank you.

Okay, Terry. In the first place, the live broadcasting we have just transferred the Xueersi online school from pre-recording to live-broadcasting starting from summer. And in city perspective because that's a live product, that actually can cover a lot of cities. So, based on the numbers we have today, we have cover I think more than 40 cities. I don't know, that is purely online, so some cities is not the right metrics to do evaluation.

And the feedback from the live broadcasting students actually is much better than the pre-recorded contents, just live is more kind of real time interactive, the teachers can have some feedback interactions with the students, real time. Also beside the teacher assistants, the virtual teacher assistants online, so the teacher assistants can give a lot of help, support, or maybe some coaching to the students, let the students feel they are being taken care of.

And besides the live broadcasting classes in one or two hours, we also have a learning system to make sure we can help the students when is the time for you to do a pre-study, when is the time to do your homework and when is the time to do feedback for teachers. We not only provide a live cast, the teaching process, but also provide a learning management assistant to make sure the students are well in line to continue to -- in their studies. Based on the retention rate we have seen in the live Xueersi online school in the summer, actually it's very good compared to the pre-recorded contents, the retention rate before is much higher, but of course, compared to our Peiyou small class, it's right in the middle.

In the coming 12 months, we will continue to expand our online live broadcasting, as what we did in the past. We don't have anything worries, surprisingly, or worry unusual, we just follow the business and follow the students and follow the way to grow by themselves. So, I think by the end of today, the online is only around 4% of my revenue. We believe the percentage will be increased a little bit, but won't be a big change overnight. So, we'll continue to grow the numbers.

In Q2, the revenue growth of the live broadcasting is around 95%, the enrollment growth is over 100%. So, they grow faster than the company average. We still believe the percentage of online will be increased significantly in three years' time.

Thank you for the answer, but I intended to ask about the double teacher model. Could you give several comments on that as well please?

Okay, I think we are the first company in K-12 area to run double teacher model since two years ago, I think one-and-a-half years ago. So, I think at that time, when we run the pilots and do a lot of experiments, some people feel that's not the right model to do compared to offline. Maybe that teaching is not efficient, but actually based on the pilots we have run, based on the feedback from our students and parents, actually we have seen very good and very positive signals.

But again, the double teacher model still is in the early stage. We can't say because we still have very good feedback from the parents, then we say the double teacher model can be a game changer and can grow very fast. We are ready to grow maybe 20 cities or even more. I think that's also too optimistic.

I think in education there is no shortcut, so every model we need more time to make sure -- we need to treat every detail to make sure we can maintain high quality. So, for the double teacher models again, we will maintain our current pace to expand gradually. I think Q3 you probably can see we have entered several tier two or tier three cities. So again, for the whole year I don't think double teacher models can contribute a meaningful revenue contribution. That is the potential for the coming three, four or five years.

I will let you guys know more details and what progress in the next quarter when we enter there. Again, I think the takeaway is we believe in this model, but we are very patient to grow these models. We wish we could leverage this model to serve more students and still maintain a high quality.

Okay, thank you for your answer. Thanks.

Thank you, Terry.

Your next question comes from the line of Alex Liu of Daiwa. Please ask your question.

Thanks Rong Luo. Congratulations on the strong quarter. I have two questions. First, I understand the Company has recently rebranded and reorganized the oversea test business, oversea study business, and I was wondering whether the management can give us some sort of color and characterization on this medium term vision for these segments?

And the second question is that I think you just mentioned it's 40% to 50% year-on-year capacity increase in terms of number of classrooms. I was wondering, is that a medium term two to three year target? Or is it only for fiscal year 2017? Thank you.

Okay, I think for the overseas education, in the first place, I think we face a tremendous opportunity to become the leading players in the overseas study market. But compared to the giants in this market like New Oriental, we are still very small. We are in the very early stages and we are very small.

But we are seeing that we have more and more potential, because the best students in the K-12 area and in the K-12 ages, actually they are my students. We have the advantages to do more overseas segments in the future.

And I think that's why I said last year we have start to offer the overseas test prep English for the younger age students, starting from the junior high and senior high, as one or two years ago. And it is fast growing, much faster than the Company average, but the numbers are still very small. And we also acquired Shunshun, which is -- and we also acquired -- Firstleap, it's also a very important step for us to do our international business.

And this year we don't expect we have so much profit or revenue contribution coming from these initiatives. We believe they will be very important and very meaningful and they will even become a new pillar of the Company in the coming three years' time.

And the second question about the capacity growth rates for the coming several years, what I can say is again the market is really going better and better. I think that is across the broad, not only us but also the other players in this market. So, we believe that's the right time to get more market share.

At the same time, how fast we can grow the capacity is driven by our operational efficiencies. So, what I can say is this year, we probably can grow by 40% to 50%. Next year we probably will need to evaluate every city's performance, the market demand and our qualities and our capacities we have in the teachers and some other factors and then we will come up with the decisions. I probably let you guys know maybe next quarter of maybe Q4 earnings call, that's the right time to talk about that.

Okay, thank you.

Thank you.

There are no further questions at this time. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating and you may all disconnect.