TAL Education Group (TAL) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the TAL Education Group's Second Fiscal Quarter 2018 Earnings Conference Call.

(Operator Instructions)

I must advise you that this conference is being recorded today, Thursday, the 26th of October, 2017.

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

Thank you.

Please go ahead.

Thank you.

Thank you all for joining us today for TAL Education Group's Second Fiscal Quarter 2018 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 U.S. 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 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.

Good evening, and good morning to you all, and thank you for joining us on this earning call.

I'm pleased to report strong ongoing growth momentum in the second fiscal quarter 2018 results.

Our top line growth continued to be driven by high demand in all cities and supported by further capacity expansion.

Top line growth in the quarter was 68% year-on-year in dollar terms to U.S. dollar $456 million.

In RMB terms, net revenue grew by 70%, 7-0, year-over-year.

Enrollments increased by 101% year-over-year.

GAAP income from operations increased by 32.6% to $68.3 million in the second quarter, and non-GAAP income from operations increased by 33.7% to $79.9 million.

The decrease of operating margin was mainly caused by seasonal expansions of new teachers and classroom capacity, as well as the slow ramp up of overseas consulting business what we have acquired last year.

In the first two quarters of fiscal year 2018, we have added 2,021 Peiyou small class classrooms.

Total number of Peiyou small class classrooms increased by 74% year-over-year compared to the number of August 31st, 2016.

The new classrooms added, as well as new teachers hired in the spring, has not yet fully utilized, and we will bear a cost of these new capacity expansions in the second quarter.

The combined teachers and rental cost as a percentage of revenue was higher than Q2 last year, this will become normalized as the new teacher continue to take more classes, and the new classrooms become fully used in the second half of the fiscal year.

Now, Mei will give an update of our operational progress in the second quarter.

After that, I will update you on our ongoing investments in technology, which is guided by our long-term strategy vision of advancing education through science and technology.

Revenue growth was supported by the growth across all business lines in all cities.

Small class, which consists of Xueersi Peiyou small class, FirstLeap, Mobby, and some educational programs and services accounted for 80.9% of total net revenue compared to 85.1% in the second quarter last year.

Peiyou small class, which remains our core business, represented 73% of total revenue compared to 77% in the same year-ago period.

This lower revenue contribution from Xueersi Peiyou small class was mainly due to the faster growth of online course business and the consolidation of the newly acquired businesses.

Net revenue for small class was up by 60% in dollar terms and 62% in renminbi terms, while enrollment increased by 77%.

Xueersi Peiyou small class revenue generated from cities other than top five, Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing, grew by approximately 70% in renminbi terms.

Cities other than the top five accounted for 42% of the Peiyou small class business, up from around 40% in the same quarter last year.

We have achieved triple-digit year-over-year renminbi revenue growth in 10 of 25 cities that we have entered by the second quarter of fiscal year 2017, including Jinan, Shijiazhuang, Changsha, Qingdao, Luoyang, Nanchang, Ningbo, Hefei, Wuxi and Fuzhou.

The revenue growth across all cities was driven by incremental ramp-up of enrollments from our early classroom expansion.

Let me give you an update of the summer promotions.

We offered summer promotions in Beijing and a limited number of cities, given the retention rate to the fall term of these promoted courses, we expect that the enrollment growth in the coming quarters to continue to grow robustly.

For our one-on-one business, we had a good second quarter and achieved year-over-year revenue growth of 96% in renminbi terms.

Zhikang one-on-one was in strong demand, partially driven by the growth of our small class business, and also benefited from normal price increases.

One-on-one, including overseas consulting business, accounted for 12.1% of total revenue compared to 10.5% in the same year-ago period.

Turning to our capacity expansion in the second quarter, we added a net eight new learning centers.

During the quarter, we added 489 Peiyou small class classrooms, making the total number of small class classrooms increase by 74% year-over-year, due to strong demand for our services across all cities.

We added the most small class classrooms in Beijing, Tianjin, Guangzhou, Shenzhen, Nanjing, Hangzhou, Zhengzhou, Suzhou, Jinan, and Wuxi.

During the quarter, we entered one new city of Zhenjiang, as always following some renovations and other preparations.

These classrooms will gradually ramp up to full utilization, as we saw last year.

This new capacity expansion will be beneficial in giving us more leverage in the second half of the fiscal year.

We continuously reveal learning center performance on a routine basis, and reduced nine one-on-one learning centers this quarter.

We also opened two FirstLeap small class learning centers in Nanjing.

By the end of August, we had 575 learning centers in 36 cities across China, of which 409 were Peiyou small class, eight were Mobby small class, 58 were FirstLeap small class, and 100 were Zhikang one-on-one.

Looking to Q3, given that the peak of our planned capacity expansion has passed after summer, but these contracts of some new centers were completed in October, we estimate that 20 to 25 Peiyou small class learning centers to be added.

Moving to our online business, in the second quarter, revenue from xueersi.com grew by 144% year-over-year in renminbi terms.

The growth momentum of online continued to be very strong.

Online contributed 6.3% of total revenue this quarter compared to 4.4% in the second quarter of fiscal year 2017.

TAL was the first mover in live broadcasting on xueersi.com because we are very confident about the long-term opportunities for our company and brand.

We strongly believe that innovative technology, AI in particular, will add a new dimension to effective tutoring and helping students excel in a personalized learning process.

We also expect that innovation will greatly improve operational efficiency and scaling in the online live teaching model over time.

In a few minutes, Rong will further elaborate on this.

Finally, on the revenue side per business line, other revenue is mostly from the online enterprise and business, and it represents 0.7% of total revenue in the second quarter.

Let me now go through some key financial points for the second fiscal quarter 2018.

In the second fiscal quarter, small class ASP in renminbi terms decreased by 8.5% year-over-year.

The main reasons of the decrease are, first, strong enrollment growth driven by the promotion activities in a limited number of cities; and second, lower impact from price increases due to lower renminbi contribution from the cities chosen for price increases for this year.

Zhikang one-on-one ASP in renminbi terms increased by 12.8% because of the normal price increases.

Online course ASP was down by 14.1% in renminbi terms in the second quarter, mainly because of the increase of enrollments driven by promotional courses.

Cost of revenue grew by 85.7% to $244.9 million in the second fiscal quarter from $131.9 million in the same quarter one year ago.

The increase in cost of revenues was mainly due to increasing teacher compensation and rental costs, as well as the acquisition of overseas consulting business.

Non-GAAP cost of revenues, which excluded share-based compensation expenses, increased by 85.7% to $244.8 million from $131.9 million in the same year-ago period.

In the second fiscal quarter, gross profit was $210.8 million compared to $139.2 million in the same year-ago period.

Gross margin for the second quarter was 46.3% as compared to 51.4% for the same period of last year.

Operating income increased by 32.6% to $68.3 million Non-GAAP operating income increased by 33.7% year-over-year to $79.9 million.

As we already mentioned, the margin seasonality will be similar to last year.

Basic and diluted net income per ADS were $0.11 and $0.10 respectively in the second quarter of fiscal year 2018.

Non-GAAP basic and non-GAAP diluted net income per ADS were $0.14 and $0.12 respectively.

From the balance sheet, as of August 31, 2017, we had $431.4 million of cash and cash equivalents, and $514.7 million of short-term investments compared to $470.2 million of cash and cash equivalents and $229.5 million of short-term investments as of February 28th, 2017.

Capital expenditures for second fiscal quarter were $37.6 million, representing an increase of $18.7 million from $18.9 million for the same year-ago period.

The increase was mainly due to leasehold improvements and the purchase of a service computer software systems and other hardware for the company's teaching facilities and the mobile network research and development.

As of August 31, 2017, the company's deferred revenue balance was $728.8 million compared to $463.4 million as of August 31, 2016, representing an increase of 57.3%.

Deferred revenue primarily consisted of the tuition collected in advance for the fall semester of Xueersi Peiyou small classes, as well as the deferred revenue related to the acquired businesses.

Now I will hand the call back to Mr. Luo to highlight our recent progress in exploring science and technology and the business outlook of the next quarter.

Thank you.

I would like to give you an update on our progress on the technology investment.

We lately announced establishment of a joint research center with Tsinghua University.

The joint research center will work on applications of smart technologies into each segment of our services.

The technologies, including computing vision technologies, speech recognition technology, and natural language processing technology, etc., will be applied in a real teaching scenarios, and help us to give the students a more efficient and more effective and more joyful experience.

We believe many innovative applications of smart technologies in education context will be noticed and generated from within the education companies.

Our explorations of education plus AI is still at a very early and groundbreaking stage of what will become revolutionary new models of learning.

Let me now move to the outlook for the next quarter.

Based on our current estimates, total net revenue for the third quarter of fiscal year 2018 is expected to be between $411.7 million and $416.9 million, representing an increase of 58% to 60% on year-over-year basis.

These estimates reflect our current expectations, which is subject to change.

That concludes our preparatory remarks.

Operator, we are now ready to take questions.

Thank you, sir.

(Operator Instructions) Alvin Jiang from Deutsche Bank.

This quarter's margin has around 450 bps decline year-over-year.

What are the exact underlying reasons for this margin decline?

And what's the margin outlook for maybe next two quarters, and also long-term margin?

I think your question is very important which I think so many people's concerns about this.

To give you kind of the details about Q2 why the margins declined, we have three key reasons.

The first one, as we have mentioned in the prepared remarks, we have continued to add more capacities in Q2.

I think Q1 we added [60] (corrected by company after the call) learning centers for Xueersi Peiyou small class, and Q2 is 20-plus.

And all of these new classrooms and new teachers who hired correspondently will gradually tie into fully utilized in the coming maybe one or two quarters.

In general, we spent around 12 months to have a learning center to reach the same level of the fulfillment rates, as what we see in other cities, so which takes some time.

But, we are very good to see that with 74% capacity expansions in our first two quarters, and we control a little bit in Q3 and Q4, which can give us a very solid growth foundations for next year.

And our retention rate for this quarter, because of the new added capacities, is gradually going down a little bit, by around 1.5 points, and we are also quite confident to see this number will recover in Q3 and Q4.

And the margins for Q3 and Q4 in outlook persepctive, what we can say is, if we combine Q3 and Q4 together in the second half, the margin does, in year-over-year perspective, will better than Q2.

We see some positive news over there.

In the long run, we still believe the company will on the right track, and we'll try to pace our capacity expansions and try to fulfill our classrooms based on what we need.

And we still try to manage a healthy growth.

So we don't hurry to do something to pull a number up.

We just follow our own way and our pace to manage and to hold the whole business.

So, we probably can see some recovery in Q3 and Q4.

We notice that the deferred revenue growth slow down a bit in this quarter.

And does this make any impact to the growth of next quarter?

And how should we look at the full-year revenue growth and long-term revenue growth?

Thank you.

I think I didn't answer your first question very fully.

I think there -- so let me give more colors about that.

The first, I think we decline the margin by 4.5%, while we have un-leverage from G&A perspective.

We decline our GP margin by around 5.1 points.

I think two points of that is because the capacity we have added during the past few quarters, which I have mentioned just now.

And we also have around 1 to 1.5 points that is because of promotion.

The promotions including two things.

The first one is, we are running the 50 RMB promotions in Beijing and some other, maybe two to three cities, and only for the new students for the first year junior high and the first year senior high.

So all of these promotions actually give us a very good return, and we can see it in Beijing.

We have seen very healthy growth over 40% again.

And this can also give us very good foundations when we move into second half in this year.

And we're also running some promotions for online, which is for the Xueersi online school.

Xueersi online school is also running a 1 RMB promotions, which is also give us a very good return, which can be proved by the top line revenue growth for online growth by 144% while the enrollments for online is grow by very close to 200%.

And the other 2%, actually that two points, that is because the newly acquired business starting from last year of Q3.

And Q2, in general that is a big quarter for them, because most of the students, they receive their offers in Q2.

So part of the reason is because of the unique natures of the overseas consultancy business is actually I think in the first one or two years, they are in loss-making position.

And the other reason is we are also working very proactively to change their models, to change it from a very high commission models to a much more healthy models.

So we can foresee -- I think the overseas consulting business will continue to drag our profit.

I think the timing may be one or two quarters, but we are very confident to see they will become -- they will try to get more recovery and become normal.

I think when we move into next year, because we have see all the numbers in the deferred perspective.

So that is some big colors for why we decline our Q2 margins.

Let me recap a little bit, is the 5.1% from the GP margin decline, 2% of that is because of capacity expansions, 1% to 1.5% of that, that is because of promotions.

So 1.5% to 2% of that, that is because of newly acquired business.

So that's for Q2.

And your question about deferred revenue in Q3, actually I mean I think that it's a question about my Q3 net revenue guidance, so I -- probably I will give more color over there.

I think the first things is very easy.

As we have mentioned in the previous quarters, we have acquired Shunshun from last year Q3.

So when we consider a Q1 and Q2 top line growth, actually they can give us something, additional numbers over there which is around 5% in growth rate perspective.

If I take them out, I think the numbers will be much similar to what we can see in Q3.

And especially in Q3, we also have one class scheduling issues with one class, one weekend class, we are moving to Q4 because of the timing we start the fall class.

So, I think these two reasons are the key things why you can see a little bit slowdown in the Q3 deferred revenue perspective, and that also reasons for our Q3 guidance.

Ivy Luo from Macquarie.

Could you elaborate more on the summer promotion in terms, like, how many enrollment did we get for those discounted summer promotion class?

And actually, what is the number last year?

And what's the retention rate for those students?

I think for the promotions, for offline promotions, that for Xueersi Peiyou.

I think most that we did that in Beijing.

Quite similar to last year, we run promotions of -- for the students in the first grade junior high and the first grade senior high.

And the enrollments for Beijing in promotion perspective is growing quite well, and the retention rate's also better than last year.

It's over 50%.

And that's part of the reason why we see Beijing's performance continue to grow over 40% in past three quarters.

And these growth will continue, even a little bit accelerated in coming one or two quarters.

So for the online, the Xueersi online school promotion, that's the first year we did that.

And the retention rate is lower than the offline school retention rate because that's online, but also is better than what we expected.

So I think, as we have mentioned in Q2, because our these promotions, we grow Xueersi online school enrollments by close to 200% while the top line revenue is more than 144%.

So, we still believe for online, that is the right way to do that.

And so, that's pretty much for the summer promotions.

Compared to our counterpart, because we're only running promotion in very selected cities, and selected grades, so we don't run, and we don't have any intention to run the nationwide promotions maybe even next year.

So we will still evaluate and pilot the promotions very carefully.

What we care more is we need to make sure the quality to the students are still deserve, and we need to -- we'll be very careful to use promotions more than what we can see today.

I just want to clarify that how many classroom did we add this quarter?

Sorry, I didn't get the number clearly.

It seems that it's a bit slowdown from 1Q.

Is that seasonality impact?

Because we said we were going to pace expansion a bit in 4Q and the 3Q.

So I just want to know what should we expect in terms of classroom expansion in second half 2018, yes.

Let me clarify the numbers.

For the first two quarters, we have added classroom numbers which is around 2,000 classrooms, while specifically for Q2, we have added 489 Peiyou small classrooms, 489.

So compared with Q1, yes, we slow down a little bit.

Q1, we're adding around over 60 learning centers.

Q2 is only around 20-plus.

And Q3 is similar level, around 20-plus.

Leon Chik from JP Morgan.

Your G&A cost was up 42% year-on-year, and your sales was up 68%.

Why is it going up slower?

The overall SG&A growth over 60%, which is below our revenue growth, part of the reason why we have the higher selling and marketing expenses growth, that is because in the summer term, that is a very important time for the students.

So we start to run some online marketing for Xueersi online school, Xueersi online school specifically.

So this kind of online marketing spend will record into our Q2 selling-marketing.

And based on our tracking of the ROI, actually we believe there's still a good model to go, but we only do that in summer term because that's the big season and peak season for students.

For Q3 and Q4, We don't have similar plans.

And G&A, why is that down?

I mean, why is it not growing as fast as sales?

For G&A, that is because most of -- actually that is because our back functions people, and we as a company, even we're growing our top line, we still want to make sure our functions will grow much lower than the revenue growth, and we relatively do a good job here in the past few years, we don't increase our number that much in the G&A perspective, in total expenses perspective.

All investments, we will put them into the IT technology and product staffs.

So we control very carefully on our back functions.

That's part of the reason why I think, starting from two to three or four quarters ago, our G&A has grown much slower than our top line revenue growth.

Fan Liu from Goldman Sachs.

My question is that why -- quick question is actually just want to clarify what's your enrollment contribution from online.

And also including -- if we excluded the summer promotion, what should be your enrollment growth?

And also, what would be the enrollment growth look like if we're including the summer promotion?

And the second question is that I think that your network expansion this quarter already slow down a little bit.

So what's your -- exact reason behind that?

Anything related to regulation, or related to other reasons?

Just wanted to get more colors from that.

I think the first question about the enrollment growth.

Online enrollment is around 30% of our total enrollments, which is phenomenon important to us, because we're gaining more market share through the online technologies.

And online enrollment growth is close to 200%.

Even we take out the promotions, still grow grow more than 100%, which can be proved by our top line revenue for online grow 144%.

So because you know the promotion enrollments are 1 RMB, they don't bring revenues.

So even we take them out, I still grow more than my top line revenue growth.

I think for online, the key is to grow more enrollments, get more market share, and try to establish our top tier leaders in online market.

I think that's the key.

Market share is the key.

For expansions, I think we don't have any specific reasons related to regulationary or other reasons.

I think Q1 we have added 1,600 classrooms.

Q2 is close to 500 classrooms.

Compared to what we did in the past few years, I think 500 and 600 classrooms on average for one year actually is quite normal -- for one quarter is quite normal.

So when we have added 1,600 classrooms in Q1, of course we need some time to digest, and some time to make sure our classrooms can be fully used in the coming two, three quarters.

So that is our pace of operation.

We still try to manage healthy growth.

There is no kind of specific things about it.

I think we are in the same market, in the same environment, so we don't have anything unique or special from the other one.

So what's your revenue growth for Shanghai this quarter?

Shanghai is over 70%, 7-0.

Natalie Wu from CICC.

So, excluding Firstleap and Shunshun, just wondering what's the year-on-year growth for this quarter and for next quarters' guidance for the rest of your business.

So when do you expect the positive effect on margin from dual-teacher model to be noticed on the consolidated enterprise level?

And last one is about the capacity expansion plan.

So can you remind us about the capacity expansion plan for the rest of fiscal year of 2018, and also next year for small classes and dual-teacher model classes respectively?

The first one, I think the revenue guidance, or the revenue growth for Q2, we're taking out the Firstleap and Shunshun.

Actually, in general, we don't give this kind of guidance, but what I can say is, in Q2, I think the combined Shunshun and Firstleap, and some other small companies we acquired, which is around 7% to 10% of our total revenue for Q2, in revenue mix perspective.

And especially for Q3, I think that is much easier to do that because, actually, Firstleap, we have acquired I think one or two years ago, so they have been a base, especially in Shunshun , because we acquired in last year Q3, so in Q1 and Q2 they don't have the year-over-year comparisons, which is around 5% in growth rate perspective, while in Q3, because I think it's -- because they have their year-over-year comparisons and their growth rate is below average, so that's kind of drag over there.

But, our mainstream K-12 business still grow faster than that.

And your second question was about the margin for the dual-teacher models.

What we can see is actually we continue to pace our expansions on the dual-teacher models.

And in the first quarter we entered five new cities and all of them are double teacher centers.

And we also try to add more double teacher centers in the current cities.

I think this is well paced.

The contribution from dual-teacher models, this year is still minimal.

I think the good time to talk about it will be in the time of next year summer, because in Q3 and Q4, we're continuing to have more learning centers, some of them are dual-teacher model centers.

So we strongly believe next year summer will be a good time to talk about that.

And the capacity expansions for this year, I think the first two quarters 74%.

The full year, our guidance is around -- our guidance for the capacity expansion will be the same for the coming three years will be in a range around 30% to 50%.

I think this year is definitely close to 50%, maybe a little bit up and down over there.

And next year, and I think the next two to three years, will still be in a range between 30% to 50%.

So that's the case.

We don't -- because we don't change our pace being too much, and in the future we will still make sure we can operate stably and manage a healthy grow in all of our business perspective.

Alex Liu from Daiwa.

This quarter, we see a small class enrollment growth actually accelerate comparing to previous quarters.

But we actually see capacity growth rate slow down a little bit.

Just how should we think about the enrollment in the second half this year, and also next year?

I think the enrollment growth for Xueersi Peiyou small class actually is quite stable in the past few quarters.

They don't change that much.

And the enrollment growth for Firstleap which is part of small class is also much better than before.

I think right before acquisitions, compared to that time to this growth rate, is much better in there.

And the growth rate for the online, I've mentioned that just now.

Summer is there kind of very big numbers, close to 200%.

And I think the longer-term perspective, we still wish our online can continue to grow maybe close to 100%, which is the right number to kind of expect.

And Xueersi -- sorry, the Zhikang one-on-one business, I think the enrollment is not our big numbers so we don't need to talk about that.

So in general, I think we will still maintain our healthy growth, and we more likely to see our enrollment growth move a little bit faster than revenue growth as in coming quarters.

And we are most likely to see our online we continue to grow fastest across all segments.

And because of adding all of these new classrooms, and all prepared teachers here, and I think starting maybe the winter, or maybe spring, we can see more and more contributions over there.

And also, would the management share with us the thinking process now, deciding the timing of capacity acceleration, and also a capacity deceleration perhaps in the angle of competition, and also local demand?

Yes.

I think in general, when we tried to decide to add more capacity, that is driven by numbers.

We have all the numbers, including fulfillment rate, including retention rates requirements, all of that.

And we need to also carefully evaluate the parents' satisfactions on this.

So when we have reached some balance of all these numbers, we are able to add more capacities.

And there are two reasons I think in the past.

The first reason is we receive a lot of consumers complain about they can't enroll into our school, so that's part of the reason we decided to -- while we maintain our quality.

We decided to speed up a little bit in a capacity expansion perspective.

And on the other side is, because we also receive some other feedbacks from the parents, they care more about their kids' health.

So we leave more time for the classrooms to -- because of the environment protection reasons.

So, I think our capacity is -- classrooms were added this year generally takes I think two to three months more than what we did in the past, and to put them into use.

And we believe that is the right pace for a company to do.

And moving forward, we will continue to bear this method, to make sure we can drive a right balance between the revenue profit and between long-term satisfactions from parents.

Lucy Yu from Bank of America.

When you mentioned the 12 months in your previous speech, was that the 12 months that take a learning center to ramp up to a mature learning center, or that's 12 months to reach P&L break-even?

To mature learning centers, the same level of capacity fulfillment rate, as the other kind of mature centers we have seen in past cities.

So how long does it take to break even on a P&L basis?

That's depending on different cities, but in general it's around six months.

I notice that you have closed down some one-on-one learning centers this quarter, but one-on-one is still growing very healthy at about 100% this quarter.

So I'm wondering what's the reason behind that.

I think the one-on-one today we have, actually have two parts, and the first one is the Zhikang business, and the second one is the overseas consultancy Shunshun business.

We put them in one-on-one.

In Q2, you'll see close to 100%.

That part reason is because of Shunshun.

So they don't have the base last year, but in Q1 and in Q2.

Now they have the numbers in Q2.

But even we take overseas consultancy out, the Zhikang one-on-one still growth very well compared to one or two years ago.

They are recovery so much.

Today we have -- see more than half of the students coming from Xueersi Peiyou, and which can significantly reduce our new customer costs.

And we can see their one-on-one business, because there's a line on -- there is cost related to our small class business, with small class growing quite well, one-on-one is becoming -- also grow quite well.

And in profitability perspective, one-on-one is also much better than what we've seen in the previous years.

We also tried to offer some group class, small group classes, one teacher versus maybe eight students or six students as a group.

So I do have a lot of new changes in their one-on-one business, which is doing quite well this year.

But I can't say that they are doing quite well this year, so they will continue to be better and better in the future.

One-on-one still is business we need to be very careful about, and we will work together with the team to make sure we can continue the very healthy growth in one-on-one.

So it sounds like one-on-one is improving.

Why are we closing down any centers?

Part of the reason why they are improving is because we shut down the underperforming centers, and we increase the size of the good performance learning centers.

We centralize a little bit in a city to make sure we can provide high quality services to the students.

So we want to re-energize one business.

You need to have two ways, push and pull.

You cannot only just give them incentives, but you also need to try to close the underperforming centers.

And also, some of that is because of the rental issues, because we maybe -- we have a running of our rentals, so we have to change to the other locations.

So reasons for that.

Mark Li from Citi.

I want to know about for the small class, actually for the ASP, if we exclude the summer class promotion, what is the trend for the ASP for the quarter.

And also, what is the enrollment growth roughly if we exclude the summer class promotions?

I'll answer your second question first, about the enrollments.

We exclude the summer promotions for offline business.

I think they're pretty much similar, because we only run promotion in Beijing, and several big cities.

And in very selected subject and very selected grades, so they don't make any difference over there.

And your first question about ASP, you are taking all the promotions.

I think even taking out promotions, especially for Q2.

They small class ASP declined a little bit.

Two reasons for that.

The first one is I think last year, we increase the price in the big cities, in Beijing, Shanghai, Guangzhou, and Shenzhen.

This year, we also take price up in similar number of cities, but because of the volume of these cities compared with Beijing, Shanghai and Shenzhen, it's much lower.

So that's a little bit negative in ASP.

And second reason, I think the past few quarters we continue to see our revenue and enrollment growth from cities other than the top five is grow faster than the top five.

So because of the mix reasons, they also can see slightly the ASP will going down a little bit this year.

Looking forward to next year, in the future years, we still foresee our ASP can grow by single digits, because we're also rebalancing our pricing strategy so -- over there, and will try to make -- and we're also very happy to see the recovery growth from Beijing, Shanghai, and other business.

So, in the long run, we still foresee that's low single digit growth rate for the ASP for small class.

I also want to ask how is the economics in the learning center for our -- say the core cities of Beijing and Shanghai and Shenzhen versus the lower tier cities, say the margin or the enrollment per center, et cetera?

I think for -- I think that's different by subjects.

I think for the math, I've seen across the country are quite similar.

And you know, in big cities like Beijing, we have a lot of subjects, and we have Chinese, we have English, and Chinese and English is grow much faster than maths, and while -- when we go into the lower tier cities today, you still can see at the new learning center today, we only offer one subject.

So if we combine all the subjects together, Beijing's centers may be a little bit lower than the outer cities, but that is because driven by different subjects.

Alison Lee from CLSA.

I just want to know what is the utilization rate in Q2.

And also, I want to quickly recap on the ASP for the online segment.

I just missed that number.

Thank you.

Same as before, we don't disclose the numbers of our capacity fulfillment rate -- but what I can say is year-over-year comparison perspective, Q2, our capacity fulfillment rate actually compared with last year same quarter is declined by 1.5 points around.

And your second question about my online ASP, my online ASP compared to last year same quarter I think is going down by around 14%, 1-4, because we are running promotions.

Taking out promotions, actually the ASP is slightly up.

Tian Hou from T.H. Capital.

In the different cities, certainly when you are ramp up, you start from some classes, and then you eventually expand it to other subject.

So among all your courses, or classes, what other classes are most well-taken classes by the students?

So in the price-wise, are those in the classes have relatively higher price than others?

And also, what's the pricing strategy on the annual basis?

Recently, we have several education company IPO, so I wonder, if their IPO is going to change some in the offline tutoring market landscape.

You pick up a very good point, is actually every time when we are going to enter new cities, we are only starting from maths, only one subject, one single grade first.

And then, when we have making work and bettering performance, then we will try to expand these maths to more grades.

And when we have I think three or four years when we in the math perspective in that local city we become number one, or we become a top tier.

We will decide to add what more -- some new subjects, maybe physics or chemistry or maybe Chinese or English.

So, we will carefully to pace the new cities growth rate year-over-year.

And even today, we cover all these over 30 cities, but more than half of them, they don't have English, more than 20 of them, they don't have Chinese, so we'll still pace the way to add more subjects and more grades to the cities based on their lifecycle.

And we also take very carefully on their KPIs.

Special about pricing, and we don't have any price difference.

In general, we don't have any price difference among different subjects.

They're all the same price for all subjects.

I think that is a simple but very effective strategy on pricing perspective across different subjects.

Your second question about the education company IPO, I think in the first place, we as one player in the education market, we're very happy to see more and more our counterparts and more and more of our friends, they can go and IPO in the public markets.

Their IPO means the whole market actually is well-recognize the potential for education companies, the potentials of these market.

And we have see in a lot of statistics, we can see in the past few years, the new baby boomer is going up, and more and more people then moving from cities and more and more people, they care more about the education.

We can foresee all these big pictures can contribute and beneficial to education companies in the coming five or 10 years, even longer.

Second thing, you know, when one company decided to go IPO, actually I think that will give us a lot more kind of transparency to see what they are doing.

And we are very happy to see all of these new comings, they have tried to provide much better solutions to the students, and they also provide a lot of transparencies to all the people.

We believe this market, these sectors cannot be driven forward only by two companies, New Oriental and us.

This company -- this sector, this industry, if they want to move advance, they need more and more very good people and very excellent players coming up.

So when we have more and more excellent players together with us, we strongly believe we could make the whole industry much better than before.

And we as a company one player in the industry, we'll continue to bring forth our concept, our philosophy, to advance education through science and technology.

We continue to invest over here to try to create a very unique and very effective way to penetrate into more market share and more students.

So, in general, we are very happy to see that, and we are even more than happy to see more and more companies to go public in the stock markets in the future.

And we wish, and we believe, all of these new players coming together.

We also share our information, share our transparencies, which will drive the whole industry more healthy.

Thomas Chong from Credit Suisse.

Given our strong revenue growth in the second quarter, which is pretty much in line with consensus, how should we think about the full year revenue growth?

And how should we think about the full-year margin compared to last year?

Thanks.

I think the first question about the full year revenue guidance, I think the first two quarters we grow [around] (corrected by company after the call) 70%.

Q3, our guidance is around 58% or 60%.

And I think the full year pretty much should be a number between these two numbers.

And our guidance for next year, well, maybe the next two to three years, as we said before is the range between 30% and 50%.

And this is no change, and we are quite confident to deliver that in two- to three-year timeframe.

And the full year margin perspective, in Q1 we are around one point decline in OP margin perspective.

Q2 is 4.5 points.

And second half year-over-year comparisons will be a little recovery from Q2, and so that's the case.

I think for full year numbers, we probably can give you much better numbers next quarter.

Eric Qiu from CCBI.

My question is regarding to what's Beijing's revenue percentage, and also what's the top five cities revenue percentage this quarter, and also in first quarter?

Because I noticed last year it's about 30 percentage.

And then my follow-up is you said you basically launched the summer promotion in Beijing.

So I just wonder what's in Beijing, and why that you didn't choose to launch the promotion in all of the cities you've entered.

Thank you.

As for the top five cities revenue contribution, we have say that in the prepared remarks is around 58%, 58%.

That's for the top five, which is two points lower than their same quarter last year.

If we put them in the longer-term, around three years' timeframe, I think this number is much lower than before.

And specifically around Beijing, Beijing's revenue contribution is below 20%, and I still remember when it first become TAL CFO three years ago, the Beijing contribution is more than 35%, or more than 40% over there.

Today it's below 20%.

And your second question was about why we don't choose to replicate promotions across the country.

That's a big question, but I'll try to answer in macro and micro perspective both.

In the micro perspective, we need to be very careful.

Promotions sometimes is very effective in the short-term.

Sometimes it takes quite well, because we lower down the price, so many people will feel happy about that, so they will come for you.

But promotions, sometimes you will dilute your focus on the quality, and promotions sometimes will be -- if you do something to easy, you will forgot something tough.

But only when you do a lot of things more difficult and more tough, you can build out your core competencies.

So we still believe, in terms of the parents, in their perspective, what they care more is when they decided to send their students to your school, and when they graduate from your school, they have making progress in their performance.

So the quality is the first priority and the quality is the most important thing that they will care about that.

We also try some promotions before, but we quickly try to control the level of promotions, and we don't have any plan to try to do a national wide promotion plan, because we need to pull it back to routine.

We need to really focus.

We need to be very careful.

We need to focus on qualities.

And promotions in Beijing because we have -- running that promotions for more than three years, around three years, so we have that lessons over there.

And for the outer cities, because we are well paced and we don't added that many capacity before, and we still make sure we can have the very good -- well, the best branding in that city.

We don't want to use promotions that dilute our focus.

And in the end, the only thing can determine whether a company is competitive or not is your quality you deliver to students.

Now there are promotions you give to students.

So, we must continue to evaluate our results of the promotions, and we will continue to very carefully think about how we can use the promotions as a kind of tool to attract new students.

We'll do a right balance about that.

But so far, we don't have any intention to do a national-wide promotion programs in a coming year.

Thank you so much.

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

Thank you for participating.

You may all disconnect.