TAL Education Group (TAL) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by; and welcome to TAL Education Group third-fiscal quarter 2017 earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today, Thursday, January 19, 2017.

I would now like to hand the conference over to your speaker host today, Miss Mei Li. Thank you, please go ahead.

Thank you, operator. Thank you all for joining us today for TAL Education Group's third-fiscal quarter 2017 earnings conference call. The third-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 include discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP financial -- 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. Thank you all for joining us on our earnings conference call for the third-fiscal quarter 2017.

In the third quarter, we are happy to see revenue growth exceeded our expectation, mainly driven by the strong enrollment growth across all business lines.

Once again, in this quarter, we saw renminbi depreciate significantly against the US dollar. Despite of this negative impact, in dollar terms top-line revenue growth was 83.3% to $260.6 million, ahead of our expectation. In renminbi terms, the net revenue grew by 94.5% year on year.

The strong revenue growth was supported by two key reasons. First, on top of the ongoing strong momentum of our core small class across all cities, we're enjoying an extra push from a growth from the class room capacity that we have added in the past few quarters. This added capacity gradually gets better utilized. We also see the class are filled with more and more new students. The second major factor boosting our top line, in the third quarter, was the contribution from the newly acquired business, Firstleap and Shunshun in particular, which were not yet consolidated last year, but grew healthily and contributed more revenue than expected in the third quarter.

Non-GAAP operating profit increased by 93.1% year on year, also above our expectation.

Now, let me briefly review our operational progress for the third quarter. After that, I will provide some further analysis of the financials and our business outlook.

Firstly, let me clarify that we break out revenue by small class, one-on-one, and online courses. Small class, including Xueersi Peiyou, Firstleap, Mobby, and some other educational programs and services; one-on-one, including Zhikang one-on-one and Shunshun overseas consultancy businesses. Online courses are from our xueersi.com. Other revenue are mostly from online community business.

In the third quarter, small class accounting for 85% of total net revenue, compared to 85% in the same year-ago period. In particular, Peiyou small class represented 75% of total revenue, compared to 82% in the same year-ago period.

The core small class business maintained its robust growth momentum across the board. Net revenue for small class was up by 94% year in renminbi terms, and 83% in dollar terms; while enrollment increased by 71%. Peiyou small class revenue generating from cities, other than the top five, Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, grew by 93% year over year in dollar terms and 104% in renminbi terms. The other-than top five cities accounted for 39%, three nine, of Peiyou small class revenues, an increase from 34% in the same quarter last year.

We achieved triple-digit year-over-year revenue growth in 11 of all 19 cities that we enter by Q3 of last fiscal year, including Shenzhen, Xi'an, Chengdu, Wuhan, Chongqing, Shenyang, Taiyuan, Jinan, Shijiazhuang, Changsha and Qingdao.

The enrollment growth in Beijing was over 30%, three zero, year over year again, and in the previous quarter -- same as the previous quarters. These further support our belief that Beijing will maintain its robust growth in the coming quarters. Encouraged by the outstanding success of our summer promotion, we have started to promote packages in winter courses in Beijing. These limited promotions activities have encouraged more students to take more subjects than ever before, and we believe this operation will help to increase average number of courses that Beijing students take.

Our ongoing efforts to roll out a wider variety of tutoring courses in more cities, progresses quite well in this quarter. We continue to deliver a higher sales of Chinese and English courses. Enrollments from English and Chinese increase at a faster rate than from math and science, as we already saw in previous quarters. We have successfully captured momentum and will continue to expand the number of courses in a larger number of cities.

In the third quarter, we added a net 32 Peiyou small class learning centers, or 1,072 classrooms indicating over 60, six zero, year-on-year growth rate by the end of November 2016. Let me point out that even with this rapid rate of expansion, we are pleased to see our capacity utilization rate continue to grow by a low single digit. We also opened five Firstleap small class centers, three in Beijing and one in each of Nanjing and Shenyang, reflecting the strong demand for Firstleap's English tutoring services.

As before we expanded in cities with shown demand and high-capacity utilization rates, not only to meet the demand-driven needs for our services, but also to ensure the efficient ramp-up period for the new centers to reach the normal capacity levels. This quarter we added more small classrooms in Shanghai, Nanjing, Beijing, Guangzhou, Wuhan, Chongqing, Hangzhou, Shenzhen, Tianjin, Zhengzhou, Shenyang and Changsha. As planned, we also entered two new cities, Changchun and Guiyang. By the end of November 2016, we have 474 learning centers, of which 315 are Peiyou small class; eight are Mobby small class; 52 are Firstleap small class; and 99 are one-on-one. Our geography footprint currently covers 27 cities across China. Looking into Q4, we are planning to add 30 to 40 new small class learning centers.

We finish a good quarter for our one-on-one businesses. One-on-one achieved the highest year-over-year enrollment growth in the past four quarters, driven by strong local demand. And, we also added new one-on-one learning centers in cities, including Beijing, Shanghai, Xi'an, Nanjing, Guangzhou, etc., and shut down three centers in Nanjing, Tianjin and Chengdu. One-on-one accounting for 8.9% of total revenue compared to 10.6% in a same year-ago period.

Let me now turn to our online courses segment. We are successfully managing the transformation of xueersi.com to an online platform of live broadcasting. While we began this process only in May 2016, by the end of November 2016 already online live classes have contributed more than the pre-recorded both in the enrollments and in the revenues.

We are pleased to see accelerating growth from the online live broadcasting after we reduced the promotion offer when we started the transformation of xueersi.com platform last May. In the third quarter, revenue from xueersi.com grew by 95%, year over year, in US dollar terms, or 107%, year over year, in renminbi terms.

Online costs contributed 4.7% of total revenue this quarter compared to 4.4% in a year-ago period. Online enrollments accounted for 23% of total enrollments, compared to 21% in the third quarter last fiscal year, yet unchanged from the previous quarters. Given the tremendous long-term growth opportunity ahead of us, we take the time to make these new services right in every detail to lay a strong foundation for new models of success in education.

Other revenues are mostly from online community business. It represented 1.7% of total revenues in the third quarter of fiscal year 2017.

To summarize our operational progress, we expect our business momentum of demand-driven growth to continue and remain underpinned by expansion of our learning center network at a healthy pace. The newly acquired businesses also continue to improve profitability and, at the same time, are integrating into the TAL eco system at pace. We believe our innovative business models and our paced integration of the newly acquired businesses will further strengthen operational efficiencies as we scale the business. Meanwhile, we are determined to stay at the forefront of the innovation with our education initiatives and continue to build our global brand.

Let me now go through the financial performance in the third quarter. After that, I will give our business outlook for the fourth quarter.

In the third-fiscal quarter, small class ASP in renminbi terms increased by 13.5% year over year, mainly driven by the newly acquired business, in particular Firstleap. Zhikang one-on-one ASP, in renminbi terms, increased by 3.2% as a mixed result of regular price increase and higher revenue contribution from lower tier cities, which have lower ASP than top-tier cities. Online course ASP increased by 6.5%, in renminbi terms, in the third quarter, mainly because the increase of sales of the online live class model, which generates a higher ASP than pre-recorded classes.

Cost of revenue increased by 79.6% to $131.9 million, from $73.4 million in the same year-ago period. The increase in the cost of the revenue was mainly due to, one, an increase in teacher compensation and rental costs; and second, cost of sales attributable to the newly acquired business. Non-GAAP cost of revenues, which excluded share-based compensation expenses increased by 69.5% to $364.2 million from $214.9 million in the first nine months of the fiscal year 2016.

In the third quarter, gross profit was $128.7 million, as compared to $68.7 million from the same year-ago period. Gross margin for the third quarter was 49.4%, as compared to 48.4% for the same period of last year.

Operating income increased by 129.8% to $22.1 million. Operating margin for the third quarter was 8.5%, as compared to 6.8% for the same period of last year. Non-GAAP operating income increased by 93.1%, year over year, to $31.1 million. We saw an improving margin trend in Q3 compared to that of Q2 in year-over-year comparison, similar to the sequential year-over-year margin trend in Q2 over Q1.

Basic and diluted net income per ADS were $0.17 and $0.16 in dollar perspective for the third quarter. Non-GAAP basic and diluted income per ADS, which excluded share-based compensation expenses, were $0.28 and $0.26 respectively.

For the balance sheet, as of November 30, 2016, we had $582.3 million of cash and cash equivalents, $34.2 million of term deposits, and $59.9 million of short-term investments; as compared to $434.0 million of cash and cash equivalents, $17.3 million of term deposits, and $27.5 million of short-term investments as of February 29, 2016.

Capital expenditures for the third quarter were $17.1 million, representing an increase of $10.7 million from $6.4 million in the same year-ago period. The increase was mainly due to leasehold improvements and the purchase of servers, computers, software systems, and other hardware for the Company's teaching facilities, and the mobile network research and development.

As of November 30, 2016, the Company's deferred revenue balance was $679.9 million, as compared to $351.7 million as of November 30, 2015, representing an increase of 93.3%. Deferred revenue primarily consisted of the tuition revenue collected in advance of the spring semester and the winter holiday of Xueersi Peiyou small classes, and the deferred revenue acquired during the business acquisitions.

Let me now turn to the Q4 revenue guidance. For the fourth quarter, today, seeing the renminbi significantly depreciated against US dollars, based on our current estimates, total net revenue, including the newly acquired business, for the fourth quarter of FY17 are expected to be between $285.3 million and $288.8 million, representing an increase of 63% to 65% on a year-over-year basis. In renminbi terms, the projected revenue growth rate is expected to be in the range of 73% to 75% for the fourth quarter of FY17. These estimates reflect our current expectations, which is subject to change.

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

(Operator Instructions). Zoe Zhao, Credit Suisse.

Congratulations on a very strong quarter. So, I have two questions. The first one is on the very high revenue growth. Can management share with us a bit on the organic part and the acquisition part in terms of the revenue mix? And what's your revenue growth current outlook in the coming fiscal year?

And the second question is on the capacity expansion, especially on Firstleap. It seems that the number of learning centers has doubled in the past quarter. So, what's our plan there? And then, how would it affect our gross profit margin as it seems to be expanding again? Thank you.

Thank you, Zoe. For Q3 the top-line revenue growth is higher than our expectations. I think one of the important reason is the newly acquired business is, actually, doing quite well, and they don't have any year-over-year comparison in last year, because we just acquired in this year.

In particular, the Firstleap's also growing quite well. In the first one quarter or two quarters they are around 5% of my business. Today, they are around over 6% of my business now.

We're also seeing we have some new acquisitions this year, for example, like Shunshun, which contributed a little bit in my revenue. But also, compared to last year we don't have anything, which is also a plus for us. So, the newly acquired business is growing quite well. It's one important reason for us.

Second, if you still remember last year, Q3 and Q4, we started to add more capacity, more classrooms in the places we have huge demand. And we also had quite high capacity fulfilment rates. So, in general, it takes two quarters to three quarters for these centers to go to fully utilized. The peak time for them is summer. We're also happy to see, following summer, in the fourth term, they're also growing quite well. So, all of this has proved the newly added capacities has been success in the past few quarters.

Looking forward to Q4 and the coming year, I think especially for Q4 I think, in general, they will be similar to the case in Q3. But please, keep in mind, last year, actually, we have acquired Firstleap already in Q4, so the comparison is a little bit different. Q4 guidance today is a little bit lower than Q3, but still maintaining a very healthy and very strong growth for the mainstream business.

Looking to FY18, we also feel quite confident about the top-line revenue growth. I think that's why we told the street before, our guidance to the coming three or five years, the revenue will be between in the range 30% to 50%, so maybe next year we're closer to our high end.

But again, we probably will finalize our budget very soon, so I will probably be able to share more details about next year in my Q4 earnings call. Please, stay tuned.

The second reason about -- the second question about our expansion. Yes, in Q3 we have added 1,072 Peiyou small class classrooms.

You are also right, we also added more classrooms and learning centers for the Firstleap business, because they are really doing quite well.

So, this year, 2017, we will increase the capacity more than 60%. Next year, we probably will go back to a range between 30% and 50% in capacity. We will maintain our healthy growth and we don't drive for any unusual growth. What we want is managing healthy growth of our business to make sure we could be stable.

Looking into next year, we -- probably, we will continue to enter new cities, similar as what we did in the past; and, we will continue to pilot our new models in the low-tier places. So, all of them are well on track. I will let you guys know more details when we have more progress in the coming few quarters. Thank you, Zoe.

Thank you.

Claire Cao, Morgan Stanley.

My question is regarding the margin. We see margin expansion in the quarter. Can management help us to breakdown the margin, the gross margin, for the core business and for the newly acquired business?

Also, how should we think about the future margin trend in coming quarters? Thank you.

Thank you, Claire. I think, in general, for Q3 and even for the coming quarter, Q4, the mainstream business is continue to be stable in margin and even improve a little bit, if the new capacity we have added last year and last few quarters have come to fully utilize. That will give us more positive things in the margin perspective.

The newly acquired businesses, including Firstleap and Shunshun, especially Shunshun, actually, is loss-making position, because they are unique revenue recognition rule. Every year if they sign more contracts, actually, they pay the sales and marketing, they can book them in deferred revenue. But only when the students get their offers and the visa and go to study abroad, which is typically 10 months to 12 months later, we can now recognize any revenue. That will create a delay over there.

So, this year, I think the newly acquired businesses, actually, in margin perspective is a negative impact on us. Looking forward to next year, they will be better and better.

Going to next year I think the newly acquired part will be a little bit better. But we will continue to invest in technology and the new platforms. That's the only way for us to be scalable all over China. Our mission is we will leverage the sales and technology to advance education, so that is the place we will continue to invest.

And we -- also, we'll continue to add in more capacity based on the market demand. All of this will have a little bit negative impact in the margin. I think we both have some good things and some pros and cons, some good things and some challenges there.

Coming to today, I can't give you a very clear guidance, a direction, what the margin will be for next year. I think next quarter will be the good time to talk about that, after we've finalized all the budgets.

Thank you, Claire.

Thanks.

Fan Liu, Goldman Sachs.

I have two questions. Number one is about regulation front. There were recently some updates on the 13th five-year education plan; and also, on the education promoted law for private education. How do you assess the impact on you guys and also on the sector, and the competition side?

And also, second question is about your capacity expansion. If we see that in the previous years, actually you said before the FY16 you actually expanded network at a very cautious level, a very -- like a single-digit increase, in terms of number of learning centers. But from fiscal year 2016, you increased the capacity, 40% to 50% in terms of seat.

So, what's really behind this kind of capacity expansion plan? What drives your motivation to accelerate expansion in the network? Thanks. Yes, thank you.

Thank you, Liu Fan. The first question about the regulation. We also saw the news about what happens in Shanghai, and we also saw the new incentive policies which are just released in Beijing. And just today, we also see some new policies coming from the central government level to give more flexibility for the private education sector.

So, I think all of this information combined together, actually, they deliver a very clear message, which is the government will spend more attention and more time on this industry; and they wish the players in this sector can continue to deliver high-quality services to the students.

We -- as one of the players in this industry, we fully agree and we will also follow the government directions, to try to improve our operations and to continue to provide a high-quality service to the students.

We also believe the government directions and the government administrations on this industry will help, especially when the market is very fragmented. For example, in Beijing and Shanghai, there are thousands and thousands of private companies here, so I think if the government regulation is try to make -- we will make the whole sector healthier and more sustainable.

We also work with the government, for example, on national reform and development council to set tasks and a new initiative. For example, we launched our online platform called xiwang.com, which should help provide a free education services to the developing provinces in China. We'll continue to do the things like that, try to help more people and more students all over China.

In general, we believe we, as a player in this industry, we 100% will follow the government directions to improve our operations. We also, will try our best to help more students and more people in the developing provinces in the long run.

So, we believe the new policies, all of these new policies or new discussions will be beneficial for the whole sector, and help the sector to grow more healthy and sustainable.

Your second question about my expansion. I think our expansion -- actually, we don't actually look into the number of learning centers. What I care more is the number of classrooms. So, when I talk about the capacity, it means the number of classrooms.

I think in the past, in general, we increased the capacity by 30% to 35%. Last year and this year, it's a little bit faster.

I think the key reasons -- we have two key reasons. The first one is the market -- that is purely market driven, and we have experienced good demand from the cities. We also -- on the other side, we also continue to expand into new cities every year. So, when we cover more geography, the demand is -- definitely, will be better than before. So, that is market demand driven.

The second key reason will be, we are -- our model is different from the other companies. We establish a big platform and we have central functions focused on teacher training, recruitment, content development, R&D, etc. After we've run this model for several years, we have some operating leverage. For example, several years ago, we only had one teacher training center; now, we have more than four. So, our internal capacities also improve, and we have more and more school heads ready, and we have more and more capabilities ready. So, that is also we can manage a little bit faster our expansion than before.

But again, we, as a company, managing healthy growth is always our top priority. So, we will keep that in mind and make sure our expansion is well on track, and don't -- we will not lose ourselves when we grow too fast. So, we will control a little bit and we will make sure we will be stable in the coming three or five years.

Thank you, Liu Fan.

Cheryl Yang, CICC.

Congratulations for the strong quarter. I have two questions. The first one is, could you please provide more color on the price range of Firstleap, in terms of the per hour price of the classes?

And the second one is, how much marketing dollar increase there was --during the quarter was related to Shunshun?

Okay. The first question. I think for Firstleap, their price is similar to the price of the Rise English, which is the market leader in Beijing. I think the price ranged from 120 to 140 per hour. Compared to small class -- actually, like Peiyou, the Firstleap price is a little bit higher.

The marketing dollars, we have spending on Shunshun, when they acquire new students, I think that's still the immaterial part of -- in the percentage of net revenue perspective.

So, let me repeat again. For the Shunshun's model, it's every year they sign a contract with students, they need to pay the sales and marketing tutor to the channels who provide the students, and they cannot recognize any revenue, so they have a delay. But, in the long run, looking to next year and the year after next year, we are -- we feel quite good about that.

Thank you, Cheryl.

Got it. Thank you very much.

Terry Chen, HSBC.

Congratulations on a strong result. In your prepared remarks, Luo Rong, you mentioned the promotion for the winter courses helped the growth in Beijing. So, I'm just curious about your promotion strategy going forward. Will we see more and more promotion in the key cities, or in smaller cities? Thank you very much.

Thank you, Terry. I think our summer promotion, actually, is quite successful. The winter promotion is ongoing today, so it's too early to judge whether they are good or not.

But based on the number what we see, actually, we have seen the students have taken more subjects than what they did in the past. I think the promotion is very -- is one of the tools what you can try to get more market share.

Only way in the cities there -- we -- only in the cities, we have more empty space. For example, in Beijing the fulfilment actually, it's lower than the other cities, so we have the bandwidth to do that.

Today, we don't have any -- we don't have a big plan to say we want to do promotions all over China, because actually we don't have that much space there. But what we can say is, in Beijing, based on the records of successful promotion started in the past two years in summer, we probably will try some new ways to do promotions in winter.

We probably will continue to do that in summer, based on very good results. But I don't think that promotions will be a national-wide campaign for us in the coming year.

All of these promotions are based on different factors in the city, and we evaluate them very carefully. Only when we believe the promotion can help in both the enrollment revenue and profitability, we will do that. Otherwise, we will keep very cautious.

Thank you, Terry.

Okay. Yes, thank you very much.

Tian Hou, T.H. Capital.

The question is related to the future expansion. We do realize, China, there's a lot of educational services, like supplies. In the past, the expansion from you guys is pretty rapid, and already went to 27 cities, and soon probably will go on to 40/50, reaching the level of New Oriental. I think during this expansion from a previous experience of your peers, once you're reaching the same kind of scale, you may facing the challenges of management capacity, and as you are going to -- you have to managing so many learning centers in so many cities. So, I wondered what kind of a management capacity does -- TAL has put in place to manage the upcoming growing learning centers? That's my question.

Thank you, Tian. In the first place, actually, our expansion model is different from our peers, and they quickly enter more than 50 cities in a very short time. But, actually, for us, we have been running the Company for 14 years now, we're only at 27 cities. Every year, we enter around four to six cities.

Secondly is, actually, we -- our model is based on big platforms, a centralized version and functions that we have established in Beijing. So, the new learning centers in the new cities, actually, they look like to the KFC stores. They are not full function school, they focus on delivering to the students.

So, when we build the platform and when we build the centralized function stronger and strong, so our expansions will be a little bit easier than the other companies.

In the third place, I also quite agree with you. When we expand a little bit faster than before, it requires more and more talent in management perspective. So, we are very happy to see, we have some lessons learned in the year of 2012, if you guys have a memory at that time. In the year 2013 and in the first half of 2014, actually, we don't enter any new cities. We stopped there and we focused on improving our management platforms.

So rather that way we have established our mechanism every year we would train a lot of the new school heads in our training sections. We give them training for two years before they could be a school head. We also train a similar level of different management people there.

We have established a big pipeline for that, so we believe in the coming several years, if we continue to increase the penetration to the new cities of four to six every year we feel that's still on track.

Again, thank you so much for your reminders; we also keep them in mind. We also establish some KPIs and metrics to look into how healthy the new city is. So, we've based all of these monitors to decide whether we should do more or whether we should slow down. We have a very important alert system to flag them out.

So, we -- as a Company, again, managing healthy growth is always our top priority. We will keep all your reminders in mind to make sure we don't make some mistakes.

Thank you, Tian.

Thank you.

Mariana Kou, CLSA.

Congratulations on a strong set of results again. My question is, actually, on a bit more actually looking back into the quarterly results, because I noticed that I think, if I hear it correctly just now, the one-on-one portion, actually, came down a bit, but then the GAAP ASP, actually, increased this quarter.

So, I think could it be fair to assume that it's mostly coming from Firstleap and, if that's the case, then next quarter, given that the base by last Q4 we only got Firstleap, we shouldn't really be expecting, on a GAAP basis, an ASP increase?

Yes. Let me clarify. Your question is, actually, about my ASP, right?

Yes, ASP on a planned ASP basis, because it seems like Firstleap did help quite a bit this quarter. So, for next quarter, given that we have like-for-like comparison, so what should we expect?

So I think -- (multiple speakers). Yes, please?

No, I just -- please go ahead.

Thank you, Mariana. In the first place, I strongly recommend and encourage you guys to split your model a little bit, don't use the blended ASP; sometimes it's misleading. So, I give you more descriptions on ASP per segment.

The Peiyou small class ASP, actually, is increasing by low-single digit, because we take price up several cities, including Beijing, Shenzhen and Guangzhou, the major cities there.

The Firstleap, because we don't have a year-over-year comparison last year, so -- and they only -- the students in Firstleap they only pay us once a year, so the ASP is higher. So, when they have more mix the ASP will be driven a little bit higher.

For the one-on-one -- the Zhikang one-on-one, actually, the ASP grow by 3.2%, and considering we have tried to offer the high-price products in the big cities.

The online ASP is also increasing by high-single digits, because the live class platform -- the live class ASP is a little bit higher than the pre-recorded contents. Today, we have seen we have more than half of the revenue is coming from the live.

Looking forward, I think we will -- all of these three segments will maintain similar trend of this year. The forecast will be low-single digit: the one-on-one will be similar and the online will continue to be low-single-digit increase. I think that is the trend to go in the coming years.

Thanks. Also, more on the margin side. I think so the past few quarters we have been consistently adding more, in terms of classrooms.

This year, this quarter in particular, I think the margin definitely came off much better on a non-GAAP basis and year-on-year increase. We see that as more of an acceleration in terms of enrolment, although on enrolment I think we are roughly in line with Q2. But then, I think on the margin side, it seems like, really, that's like the utilization and filling classrooms seems to be better.

Yes. Yes, you're exactly right. I think we -- the pace of adding more capacity is, actually, similar in the past four quarters. We don't speed up or we don't slow down. So, in the Q3 we added around 32 Peiyou small class learning centers there.

Looking forward, we will maintain a similar trend. In Q3 -- in Q4, we plan to add around 30 to 40 new learning centers there.

The capacity actually -- when we have entered a new capacity it takes us around two to three quarters to reach the level of the normal fulfillment rate.

In -- this Q3, we're happy to you see, all the places we have added in the past several quarters now coming into fully utilized. That's part of the reason why we can improve our gross margins this year, in this quarter.

That is -- so, the gross margin is a balance of how many capacity we've added in the past now coming to fully utilized; and how many new classroom and new classes we try to add in this quarter and in the coming quarters.

But, in general, we believe our gross margin will be similar, or will be quite stable, in the coming several quarters. There are small ups and downs, but, in general, they will be quite stable.

Thanks. I think we just -- I have one small question. I think we've talked about, the other analyst also asked about the Shunshun business in terms of seasonality. When the students actually get the offers to go overseas, then we will start booking the revenue, so would that be in the quarter ended May, or would that be in the summer, quarter ended August?

Actually, the revenue recognition of the Shunshun business is based on they need to get an offer and they need to get a visa. I think, in general, most of them will come in to recognize maybe in Q3 or Q4, next fiscal quarter.

Okay, thank you.

Thank you, Mariana.

Alex Liu, Daiwa.

I have various big picture questions. I think in the past 10 years, we see the newborn population in selective cities, in Beijing, in Shanghai, in Guangzhou has been picking up quite notably.

I think there are -- definitely, demographic is one of the major factors contributing to the overall industry growth, along with the penetration of the tutoring and also the pace of industry consolidations.

I'm just wondering what factor do you think is, actually, currently contributing to most of the growth for the industry right now. Any color would be helpful. Thank you.

Okay. Thank you for your question. I think the three factors you have mentioned, including the new population, including the penetration of tutoring and the consolidation of the market are also very important to contribute to the high growth for the top players, not only us, but also New Oriental.

Frankly speaking, I don't have a scientific report or statistic report to give you clear answers which driver contributes more in this growth. What I can say is for the population perspective, actually, you can see in Beijing, every year we have more than 200,000 students coming to primary school. About several years ago, it's only around below -- the number is only around 100,000 students.

So, we are seeing more and more students who were born after the year 2008 are now coming to primary school and which have increased the base for us.

That's also been proved by the growth in our primary school students. We have seen a very strong demand coming from the grade 1 to grade 3 students in primary school.

We believe those are very important reasons for all over China. We are also happy to see the populations -- the students in Beijing, Shanghai, Guangzhou, Shenzhen today are quite similar now.

The penetration rate, also, is quite important. But I think in Beijing, Shanghai, for these big cities, I think the penetration rate increase is low-single digit, because most of our students, they have been training in tutor already.

The consolidation is also definitely one of the most important reasons there, but this only happens in the big cities, for example, in Beijing, Shanghai.

We believe all of these three factors continue to be very important growth levers for us in the coming five to 10 years. If you will consider a K-12, actually, it's 12 years' life cycle. So, we believe the whole sector will be in the good time.

But what we need to do actually is when we see these tremendous opportunities, we need to be very cautious; we need to continue to invest in technology and in our system to try to make sure we can deliver the high-quality services.

We also need to make sure we not only cover students who pay us, but also provide more services, or even free services, to the students who cannot be touched by us, but we can provide them some online offerings and some other things to support them.

Again, we believe all of these three factors are very important and if I have more ideas about them, I will share with you.

Thank you very much. Just another housekeeping question. You recorded I think around $4 million impairment loss this quarter. I'm just wondering what type of investment is that impairment about.

Yes. I think if you still remember in the year 2014 and the year 2015, we invested some deals at that time. It's the starting point of the online education. So, we have invested some of the very early-stage products.

We don't invest them in huge amount. For every deal, we really only invest maybe $1 million or $2 million, even less than that.

Today, coming to -- after two to three years, we have seen some of these doing quite well and they are also highly connected to our business and we have a lot of energies.

Some of them is maybe not doing that well. So, from my perspective, we always pay a conservative approach to look into all the investments. For the deals who we believe have some challenges -- or they have some very important difficulties, so we will take them down. That is our normal practice.

We also work with our auditors to make sure all the impairments are well on track.

But all of this is a very small part of the investment we have made in the past. Most of our investment deals are growing quite well and some of them you can also benchmark from the public news.

Again, looking forward, we will continue to be very cautious about all the investment we make and keep very close watch on any progress they make.

We probably will continue to see our investment portfolio is performing quite well and we're also about to see if some deals are not going well, we will do some impairment. But in the short term, we don't have anything in our pipeline, that is based on a quarter-by-quarter review with the auditor.

I got it. Thank you.

Thank you.

Alvin Jiang, Deutsche Bank.

I have two questions. The first one is on investment. We are happy to see that Firstleap and Shunshun are both doing well after being acquired.

Can you share with us some more color on your investment plan going forward? Shall we expect more direct contribution from investees and how's the focus to, on your education ecosystem? Thank you.

Thank you, Alvin. Looking backwards in the past 18 months, we have acquired some important companies and combined them into the TAL family, including Firstleap, including Shunshun and another small one.

This is very important for us, because they're helping us to establish international educational sectors for me. That's the new pillar of my Company's growth. They may not be very material this year, but coming to two or three years' time, they will become more and more important.

Actually, we have finished several deals already and our current focus will be how we can integrate them into the TAL family, so we spend a lot of time over there.

In the short term, we don't have any bid deals in my pipeline. We don't foresee any huge acquisition happening in the first quarters. What we need to do today is focus, focus, focus on integration of current deals.

Got it. Thank you, this is very helpful. My second question is on double-teacher system. How big is the revenue contribution now and what's the expectation on this system?

There are some news reports saying that maybe TAL will leverage the system to cooperate with some local, small players to cover those uncovered cities. So, do you have any detailed plans on that?

For the double-teacher model, actually, if you still remember, we are the first one to develop and put them into application in this sector, so we have a very deep understanding about these models.

We believe this model is very helpful, especially for us to penetrate the low-tier cities. It's also very helpful for us to cooperate with some, maybe low-tier city players, to provide more service to the other people.

But what I can say is, the future is very bright and very good, but we also need to keep in mind this model is also a new model, also in a very early stage. We continue to heads down to make it work. We continue to expand one city by one city; one learnings center by one learning center.

Today, by the end of today, the revenue contribution -- or profit contribution from them are still very immaterial, so we're still with the team continuously to invest in technology and make sure they could make their whole model better and better.

We don't hurry to try to expand this model to a wider geography. We will did the same as what we did to Xueersi Peiyou. We need to make sure one city, one learning centers working and then we consider to do more expansions.

We don't foresee significant revenue contributions for double-teacher model this year. I will let you guys know the updates about what will happen in the coming two to three years.

Okay, got it. Thank you.

Thank you, Alvin.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.