TAL Education Group (TAL) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to TAL Education Group's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. (Operator Instructions) Now I would like to hand the conference over to your host for the day, Ms. Echo Yan. Over to you ma'am.

Thank you, operator. Thank you all for joining us today for TAL Education Group's Fourth Fiscal Quarter and Full Year 2018 Earnings Conference Call. The earnings release was distributed earlier today, and you may find a copy on the accompanying IR website or through the news fliers. During this call, you will hear from Chief Financial Officer, Mr. Rong Luo. Following his prepared remarks, Mr. Rong will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements, made under the Safe Harbor provision 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 the 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 like now to turn the call over to Mr. Rong Luo. Rong, please?

Thank you, Echo. Good evening and good morning to you all. Thank you for joining us today on this earnings call. Our fourth quarter revenue growth was driven by stable demand in all cities and a rapid growth of our online courses. Revenue growth in the fourth quarter was 59.4% in U.S. dollars (inaudible) to $504.1 million. Student enrollments increased by 95.7% year-over-year, mostly driven by the growth in online enrollments. [Cap] income from operations increased by 54% to USD 66.9 million in the fourth quarter. With solid sales for the fourth quarter results we accomplished our fiscal year of robust operational and financial performance, even as we continue to invest in the network expansion and new education initiatives for future growth. Our revenue growth in the full fiscal year 2018 was supported by higher-than-average enrollments, and supported by the well-paced expansion of small classroom capacity in our spreading geography network. I will now turn the call over to Echo Yan, our new IR Director, who has just joined our team this month. Echo will give you an update on our operational progress in the fourth quarter, and briefly review the full fiscal year results. After that, I would like to give you some update on our company's outlook and the investment plans in the fiscal year 2019. Echo, please?

The robust revenue growth in the fourth quarter was from all business lines in all cities. Let me review the business by segments. Small class, which consists of Xueersi Peiyou small class Firstleap more be and some educational programs and services accounted for 82% of total net revenue compared to 83.6% in the fourth quarter last year. Peiyou small class, which remains our core business, represented 73% of total revenue compared to 75.9% in the same year ago period. This lower revenue contribution from the small class was mainly due to the effective growth of online course business. Net revenue from Peiyou small class was up by 55.4% in U.S. dollar terms, while enrollment increased by 72.4%. This number reflects the ongoing healthy growth in Peiyou off-line classes. As mentioned in the previous quarters, Peiyou off-line students have started taking supplementary online courses (inaudible) Peiyou online, which are tailor-made to the individual. By now, we have rolled this out in major cities we covered. Xueersi payout small class revenue from top-site cities: Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin grew by 53% year-over-year. Revenue generated from cities other than the top 5 cities grew by approximately 59%. These other cities accounted for 40% of the Peiyou small-class business, almost unchanged from last quarter and Q4 last year, which reflects the well-spread growth in the various tiers of cities in our network. The revenue growth across all cities was driven by incremental ramp up of the enrollments from our earlier classroom expansion.

As indicated last quarter, for winter term, we offered Chinese classes in 14 cities and English classes in 20 cities. We are pleased to note that enrollments growth of Chinese and English classes have been split up, as we further rolled out these courses. We will continue to expand our number of subjects offered in more cities and to diversify our course offerings. Our one-on-one business had a solid fourth quarter and achieved year-over-year revenue growth of 40.6% in U.S. dollars. While including the overseas consulting business, accounted for 9% of total revenue compared to 10.6% in the fourth quarter fiscal 2017. Turning to our capacity expansion. As planned, we added a net of 15 learning centers, opening 24 new mini centers and closing down 9 learning centers. During this quarter, we added 284 Peiyou small-class classrooms on top of the 2,089 we have added in first 9 months last fiscal year. We added most of small class classrooms in (inaudible) following the routine room

renovations and the necessary air cleaning. Those class rooms will gradually come into use, and later, with normal utilization approximately, by the summer term. Meanwhile, we continue to expand into new city at pace. In the fourth quarter, we entered 4 new cities: Yantai, Wenzhou, Zhongshan and Zibo. During the quarter, we added a net of 12 small class learning centers. Three Firstleap small class learning centers and 1 Mobby center. We closed a net of 1 one-on-one learning center as part of our standard performance review. By the end of February, we had 594 learning centers in 42 cities across China, of which, 426 were Peiyou small class, 9 were Mobby small class, 63 were Firstleap small class and 96 were Zhikang one-on-one. Looking into Q1 of fiscal 2019, we will maintain well-paced capacity expansion with our estimated additional of 15 to 20 Peiyou small class learning centers. Moving now to our online business. First quarter revenue from (inaudible) grew by 158.6% in U.S. dollars year-over-year, while online course enrollments grew by 127.2% year-over-year, the growth momentum of online continues to be very strong due to the success of live broadcasting. Online contributed 8% of total revenues this quarter compared to 5% in the same year ago period. As the first mover and leading player in going live online on (inaudible) .com, we are very confident about the long-term opportunities of live broadcasting. Finally, other revenues are mostly from online advertising business. It represented 1% of the total revenue versus 0.6% in the same period of last fiscal year 2017. Now I'd like to briefly recap full fiscal 2018. Net revenue grew by 64.4% in the fiscal year 2018, reflecting strong market demand for our services. Growth was driven by an 89.3% enrollment increase and is supported by well-paced expansion of small class classroom capacity in our revenue geographical network. For the whole year of fiscal 2018, we increased the number of small class classrooms by 2,373. A healthy overall capacity increase of 30%, that is 3-0 percent year-over-year compared to fiscal year 2017 capacity expansion. We entered 12 new cities in the year to reach a total of 42 cities. We made strong progress in course diversification as we had planned. Enrollment growth for English and the Chinese courses had outpaced the enrollment growth for our core math and science courses. While math and science still account for the majority of the revenue, we are seeing increased revenue contribution from other subjects. Non-GAAP operating margin in fiscal 2018 was 14.9%, a modest decline from 16.4% in fiscal year 2017. Due to our increased investment, our online business development and the partially offset by continued margin recovery of our off-line small class business and improvement of the capacity fulfillment in the second half of the year. All in all, in fiscal 2018, we managed to deliver growth based on expansion and technology based innovation, while striking a strategic balance between current and future growth opportunities. Let me now go through some other key financial points for the fourth quarter of fiscal year 2018. In the quarter, small-class ASP decreased by 9.9% in USD terms year-over-year. The decrease was mainly caused by significant enrollment contribution from Peiyou online, of which, the price is much lower than Peiyou off-line classes. Meanwhile, ASP of Peiyou normal off-line small classes increased by low single-digit percent. Zhikang one-on-one ASP in U.S. dollar terms increased by 21.4% due to the gradual price increase in the previous quarters and falling exchange rate effects. Online course ASP decreased by 21% in U.S. dollar terms in the fourth quarter, mainly due to the promotion activities. Cost of revenue increased by 56% to USD 246.7 million from USD 158.1 million in the same quarter 1 year ago. The increase in cost of revenue was mainly due to an increase in teacher compensation and the rental costs. Non-GAAP cost of revenue, which excluded share-based compensation expenses, increased by 56% to USD 246.6 million from USD 158 million in the same year ago period. In the fourth fiscal quarter, gross profit was USD 257.4 million, up by 62.7% year-over-year from USD 158.2 million in the same year ago period. Gross margin for the fourth quarter was 51.1% as compared to 50% for the same period of last year. Operating income increased by 54% to USD 66.9 million. Non-GAAP operating income increased by 47.7% year-over-year to USD 79.5 million. Other income was USD 3.2 million for the fourth quarter of fiscal year 2018 compared to other expense of USD 52,700 in the fourth quarter of fiscal year 2017. Income tax expense was USD 8.7 million in the fourth quarter of fiscal year 2018 compared to USD 8.9 million same year-ago period. Basic undiluted net income per ADS was USD 0.13 and USD 0.12 respectively. In the fourth quarter of fiscal year 2018 non-GAAP basic and non-GAAP diluted net income per ADS were USD 0.15 and USD 0.14, respectively. For the balance sheet, as of February 28, 2018, we had a total of USD 1,498.9 million in cash, cash equivalents and short-term investments compared to USD 699.7 million as of February 28, 2017. Capital expenditures for the fourth quarter -- for the fourth fiscal quarter were USD 30.8 million, representing an increase of USD 8.4 million from USD 22.4 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 February 28, 2018, the company's deferred revenue balance was USD 842.3 million compared to USD 518.9 million as of February 28, 2017, representing a increase of approximately 62.3% Deferred revenue primarily consisted of the tuition collected in advance for Spring semester of small classes as well as the deferred revenue related to other businesses. Now I will hand the call back to Mr. Luo to discuss our strategic goals for the fiscal 2019, including our investment priorities and provide a business outlook for the next quarter. Rong, please?

Thank you, Echo. I would like to give you our outlook and priorities for fiscal year 2019. In this coming year, we expect to maintain healthy growth in Peiyou small class, and are offering tuition services, and fully expand our learning center networks at pace. Given the capacity fulfillment improvements we have achieved in the past few quarters, we expect to see improved operating efficiencies in fiscal 2019 in our core off-line small class business compared to fiscal 2018. Online business development and winning more market share off the online (inaudible) Market is and will be our strategy focus in the coming years. In fiscal 2019, we will continue to invest in technology, operating models, marketing and personnels for online market share gains, so that we can turn opportunity into TAL business. While this structure may be margin dilutive in the short term, I would believe, now is the time to capitalize on our first mover competitive advantages as the online market is taking off. TAL's mission is to promote education progress through sense and the technology, and we remain committed to exploring the possibilities of technology-based educational reform. This year, we will further develop our Learning Management System and collect more data to personalize the learning experience, making more fun and effective, with the same top-quality tutoring that TAL is known for. We will continue to ramp pilots in the AI and other cutting-edge areas of educational technology to create innovative ways to better serve our customers. Also, we will further upgrade our (inaudible) learning platform and manage the increasing services' demands on the platform. And last but not least, we are determined to expand our online reach across a wider spectrum of the Chinese market, both by penetrating deeper into the lower tier cities, where our brand is less well known than the sub-areas of the top tier cities. We believe, this efforts altogether will help us widen our competitive edge in education market. Let me now move to our outlook for the next quarter. Based on our current estimates, total net revenues for the first quarter of fiscal year 2019 is expected to be between USD 508.6 million and USD 515 million, representing an increase of 58% to 60% on a year-over-year basis. These estimations reflect our current expectations, which is subject to change. That concludes my prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions) Our first question comes from the line of Mark Li from Citibank.

I have 2 questions. I want to know number one is what is our plan for capacity expansion for the upcoming quarter or for the upcoming financial year? Any color would be appreciated. And also, I want to know what is the update in our recently launched VIPX like the online operation or our investment in data?

The first question about the capacity. Let me recap a little bit what we have done in the past few years. I think the year fiscal 2017, we increased our capacity by more than 80%. And last year -- fiscal year '17 Q4 and Q1 of fiscal year 2018, actually, we continued to increase around 1,500 classrooms per quarter, which is a lot. And in the second quarter, we decided to control it a little bit. So the second quarter, we'll only increase the classroom numbers by around 480 to 490. In Q3, we further control our pace. In last year Q3, we only added, I think it's around 68 classrooms for Q3. In Q4, we would believe that the right timing for us to -- we have a chance to outpace already. So Q4, we continually increase a little bit in the classroom numbers, which is 284. So for the whole year of fiscal 2018, we increased our capacity by around 30%, 3-0. And looking forward to next year, again, our goal is to manage healthy growth. So we will come back to the right range, which is around 30% to 50% in the commensurate of 5 years and next year is more similar to what we did this year. In Q1 I think by the end of today, we're adding around 15 to 20 learning centers. And we probably will potentially see a little bit more in the coming May because, which is prepare for the summer and for autumn. So, but in general, we'll maintain the healthy pace to adding more capacities in which we're in line with -- we do a lot of efforts to increase the classroom fulfillment range to try to leverage the classrooms we have added in the past few quarters. Even this quarter, fulfillment (inaudible) compared to this -- the quarter this year and the quarter last year, which we still have some space we can improve. So -- which is in general, which we will control a little bit in the pace of capacity expansions and make sure our company is still in a very healthy range. And in respect to the question about the VIPX. Actually VIPX is only branding improvement. We changed the name, we offer the services before, we called the rights out before. And now, because we missed new offerings, we used more and more teachers from U.S. So we decided to change the name a little bit. But, which is still quite different from what we invest in that [ad] because the VIPX, even today, they will mainly focus on our current students. So we'll try to provide some services highly related to our off-line courses into our current students, while data is completely mashed in a much bigger space. So we believe, these 2 companies can have a lot of synergies and can share a lot of things in common because the market is huge, not only us. And -- so in general, we believe we could leverage all the things we have today to make things a little bit different than today.

The next question comes from the line of Thomas Chong from Crédit Suisse.

My question is about the revenue growth and margin expectation for FY '19. Can you provide some more color about the growth in each segment as well as the margin profile for off-line and online?

This is a very good question. I'm looking forward to the fiscal '19, the coming year. Actually, our principal or our strategy's very clear. In the first place, for the small class in the one-on-one business, there, our key strategy is to maintain the healthy and stable growth. So especially, for the small class, we wish it would come back to a wide range around 30% to 50% top line growth status. And because in the past few quarters, we adding a lot of classrooms, we have hired a lot of teachers, and now we put them into use gradually, so we probably can see -- we can see some good news coming from margin status. And for the whole year, we are committed to increase the efficiencies of our small class and one-on-one business, and we probably can see some margin improvements over there, which is also quite clear in Q1. At the same time, online, I think the coming 1 or 2 years is the very critical time for the online, and when we come in to this huge market, considering we have around 150 million students, so our goal for online is to win more market share. Last year, our online has increased -- online revenue growth is more than 150%. This year, we continue to -- we wish we can remain the very rapid growth and healthily. So we will continue to invest in some areas in online to make sure can get more market share. The first place is, we will continue to invest in technology and research, including content, including new systems and new technologies. In the past few years, we have do a lot of things. For example, Learning Management Systems, content automations, and we have launched the shared clouds. And -- but all of this compared to the traditional tutorings in the past, this is a huge improvement. But compared to ideal stage with one, as you still worry beginning sections. So in the coming years, we continue to invest in, for example, AI technologies, not only in the facial, but also in the speech, in the writing, and even more, how we can develop some more self-attached learning platform and products to the students. Because we have a huge market over there, a lot of geographies, different level of their maturity in education and deep and level of their resources applications that they have. So online, the new technologies, the only way we can increase our efficiency and be more scalable in the future, if we want to penetrate more market and get more market share. And I share one example is, as the whole group, not only for their online but also including small class one-on-one, for the whole group today, we have around 4,000 people who is focused on content development, product development, IT personnels. And our target in the coming sort of 5 years is to increase this team's number from 4,000 to 10,000, so it reaches the pace we need to invest. Only through the new investment in technology, only through their new system, a new platform, that's the only way for us to show scalable and to cover more students in the much bigger geography in China. Secondly, not only besides the technologies, we also need to do some investment in marketing. And all fundings models, [front speaking] we don't need to do too much on marketing because the parents can see (technical difficulty) senses and they can feel our outcomes directly. But online is a little bit different, especially, when we go into the lower tier cities, shorter spreads, now that us, we are known as more of signature Tier 1, Tier 2 cities. And secondly, is even today, not only for us, even for all the maybe tutoring players in this market, we didn't figure out a most effective or maybe most correct way or channel to touch the -- all the students across more than 35 premises in China. So we need to invest in online marketing, in off-line marketing but most of it will be online marketing. We need to test and pilot different channels under a very serious control on our strategy and our team who is doing online marketing and all of this, is they are learning so fast. They are making a lot of progress. But front speaking, marketing for us is now is, kind of, a new tool. So we definitely, we will face some time we need to make sure the team can adapt to the very steep learning curve to make sure we can leverage all the investment dollars we have and come back as a good result. So all of this -- but even in this case, we still believe the investment online and give them enable the online platform to have more products and to have more automation levels to replace people and have more, kind of, agilities in the system status is very important for us to get more market share in the future. And so, in general, what we -- as a group, we need to balance the small class one-on-one business and online business. But we make it very clear for small class and one-on-one we need to improve their margin a little bit. But for online, we wish they can grow much faster in the top line, gain more market share, but we are very patient on their margins. So in some cases, if online is doing so good, because we need to acquire their online customers, which is higher than our off-line, and we need to get them this quarter and then, we need the other 1 or 2 quarters to get money back, after they retain in our class. So all in all, if the online we can make some very good progress, even better than what we expected and reach or get faster maybe good number in top line but in the profit in the margin perspective, in the bottom of the stats, it will be dilutive. And I have to remind all of you guys, Q1, we are still okay, because in general, Q2 summertime, is important time for online to get more market share. So in some cases, maybe, for the full year, we are likely to decline our margin moderately, and if we can make huge progress in online. So but -- this kind of decline will be very shortened, and we believe that that's very good for us in the coming few years because this time's the very important time, we need to penetrate, we need to give our offers to the younger students. When they get used to our offering, they will stick with us for a much longer time. And so, in general, I think, in the margin perspective, Q1, we should be okay, almost flat. And for the full quarter depending on -- or for the full year depending on the progress in the second quarter, in summer promotion time. But as I said before, I would like to remind you guys to be more conservative in the margin status. Maybe in some cases, we will decline the margin a little bit. But this range will not bigger than what we experienced in the fiscal year 2018. In the fiscal year 2018, we declined our operating margin by around 1.5 points. So fiscal '19 will never be more than that, and we want to give you a kind of conservative case to -- in the first place and we will update you in the second quarter earning call, when we come in to the realtime of summer promotions, which is more data. But in today's strategy, I wish I could breakthrough some online, and we are ready, and we are prepared to decline margin a little bit to accelerate our top line around the growth in online.

The next question comes from the line of Natalie Wu from CICC.

Rong, you mentioned a couple of quarters ago, that online business model would be 5% to 10% higher than off-line because of the details and the rental savings in longer term. But given all the investment plans for R&D, et cetera, as well as all that private money flushing into the field recently. Just curious if management would still maintain a longer term margin target for online at current point? And also, would be great if you can also share with us your thoughts and plans on TAL's globalization?

In the first place, let me clarify. We never say online could be 5% to 10% margin better than off-line. We never say that. I think, we say that before is for the fiscal year 2018, if everything goes right, the online margin will be around 5% to 10% and final number of the online margin this year actually is higher than that. And when we talk about the online's long-term margin churn, I think the first question we need to answer is what is our strategy positioning of online. And if, we only choose online as one of the segment as one of the complementary services should off-line and then, we'll probably -- we'll only need to maintain a fairly faster revenue growth is good enough. For example, it could be 80% or 90%, which is a little bit faster than off-line. And even in that case, I think we still have more than 10% margins same as already last year. And -- but, as to what I mentioned just now, when we move into these huge markets purely off-line learning centers can only penetrate around 30 to 75 cities, while (inaudible), which carried up a lot of cost strains from the teachers we're able to penetrate a much bigger space by around 100 to 150 cities. But still, the numbers are quite limited. In China, we have more than 3,000 counties, we have more than 360 cities. So the only way to penetrate and to get more market share all over the country, to penetrate a much bigger space in the 150 million students, the online is the only way and the only game we could play. So I think, 5 years ago or 6 years ago, we are one of the first movers in the industry to try to pilot the online offerings. As 2 to 3 years ago, we are also the first movers in the industry to try to use the life platform to do the tutoring. And last year, we were also in the first movers in the industry to use the AI technologies bring them into classrooms. And all of this is very good improvement compared to the (inaudible) compared to the ideal case we imagine, with still, a long way to go. So our investment, as I mentioned just now, we'll continue to focus on technology. And also, we'll also spend some money on the market dollars to have our brand can penetrate the sub area of the top tier cities and the lower tier cities. And all of this, I think, as mentioned, we only have 2 choices when we face these huge opportunities. The first one is, we try to be conservative. Grow a little bit faster, which is good enough and save some money increase in the margin, which will make the margin looks okay, maybe a little bit better in the 1 or 2 years' time, but if we pull the business in 5 or 10 years' time, we are missing the whole picture. The second thing is, even today, we have our margin more than 10%, but compared to the huge market space we want to penetrate, we need to invest more in their marketing dollar perspective in (inaudible) perspective, in the teacher assistance perspective, to build out the capabilities to penetrate more spaces and more geographies and more people. And their shortened investment for which will cost us some maybe few quarters to get our money back but if we put them in sort of 5 years' time, in a much bigger, much longer landscape, we believe that's the right strategy for the company to go. So we are a company who try to drive the growth try to target to provide more offerings to all the students. Today, we -- our offering is more, I think, the price of offering for the whole year is around RMB 4,000 to RMB 5,000. But in the ideal case, we need to have much maybe diversified product portfolios, not only $1,000 per (inaudible) product but also maybe $100 even maybe several hundred RMBs products. So we need to continue leveraging the platform, to leverage and continue to improve our products to provide the kind of appropriate shape for us to different level of the customers all over the country. So again, as management, we believe we have education company, we are not only driven by margin. We are not only driven by profit. We also have responsibilities to help more people, help more students, especially, the students, which who are not in top cities but they still wish they didn't have the chance the opportunities to receive the best core tutoring. So even the online, maybe in the future, we have the possibility, we could have much higher margin in off-line, we as a company will never pursue the too high margins in the online status. All of this kind of margins are approximates in what we will spend to develop more diverse products. We will spend more to investing in our IT and technology to make sure we can move things forward, and we will continue to commit to our mission (inaudible) technology to try to leverage more than half to try to build out a new generation and a new formula for learning in the future. So for online in general is, we want to get more market share, we wish we could (inaudible)grossing online. We don't have any intention to pursue a much higher margins in online than off-line, and we only ask for the reasonable margins by we can cover more people, we can serve more students. The second question is about globalization right?

Yes. And also, quickly to clarify, do you mean that the longer term is stable business or your online business will be still be the same as off-line currently?

You mean the margin of online will be same as my margin off-line in the much longer term?

Yes, is that right?

I have no idea. Firstly, I have no idea. I'm not a God, I have no idea. One can say is we only ask for reasonable margins for online but the target is to leverage the online to get more market share. If (inaudible) was heaven, we're very good to see that. But today, I don't have any plans to say the off-line -- the online margin need to be the same as off-line margins.

All right. So about the globalization?

About globalization, I think, looking backwards in the China's education industry, we don't see any companies being globalized that much, even our counterparties, opposite to The Street. And -- but we believe when China is getting more and more power and weight as well for the payers on the education side, we have the possibility to explore some opportunities overseas -- for example, we have seen like the U.K. has used Shanghai's math textbooks to teach their kids. And we also see more and more countries coming to China to learn what's the best way to teach math and other subjects. So we believe, maybe there is some possibility for us to serve their students, not only in China but also overseas. But at the same time, that is not easy. And in the first place, we don't have a team ready over here, and in the past, our team is focused on domestic studies like math and Chinese, the English speaking employees are for our company is still a very small percentage, and we don't have any experience before to acquire some private -- some foreign countries directly, So we don't have the, kind of, the team ready today. So our -- even we wanted to be more globalized, we wanted to do more international business, but we need to be very cautious and step by step approach. So 2 to 3 years ago, we start to do some investments in foreign countries including U.S., Georgia, Israel, and India, and we have invested some projects over there, which is minority stake. And this year, we continued to look for some opportunities in these countries, and with more experience we get from the past projects today, we are a little bit more confident on this. But again, we are still in a very early stage, we'll treat this very important priority but we will run all of this new initiatives in a step-by-step approach to be very cautious about that.

Next question comes from the line of Sheng Zhong from Morgan Stanley.

I have 2 questions. One is a follow-up of the margin related with online business. So there are a couple of detailed questions, sorry. So I see the G&A cost was, as a percentage of revenue, was -- have a year-on-year decline. And actually, this is after many years, G&A generally increased. So, I guess, this is also about our online business or the leverage level. Please confirm or correct me if I'm wrong. So related with this, I'm just curious how can we -- how should we see the channel for G&A cost we see growing size of our online business. And related with this, how -- what's -- and also, our effective tax rate was very low this quarter, is it also partly because of the online business lower tax rate? And can you also share -- give some color on the current teacher to student ratio of our online business or another way is, on average, in one online class is one teacher -- the class size of the online classes on average now and whether retention rate of our current online segment? And the second question is, you mentioned that we do -- we have the subject and -- subject expansion. So can you give some breakdown of our current subject percentage and also, the student grade percentage so primary student and middle school percentage. Thank you very much.

Thank you, and I'll be careful a little bit too many questions at the same time. The first one (inaudible) percentage of revenue. The chain mainly is because we hired the IT person product managers and the development people over here. As far as the G&A percentage costs probably because we -- if you still remember, 2 to 3 years ago, actually, we (inaudible) build a team. So we've a lot of people from (inaudible) to do our products. So at that time, the G&A is declining. So (inaudible) all of this, especially, at that time we focus a lot on our forecast business. So when the product in the system is almost ready there and considering our top line still grow by 60%, so even we continue to invest to hire more people but the G&A percentage is okay. And for our key investments, actually, we'll kind to sales and marketing and because especially, for online and the most important investment, the biggest investment in online maybe in marketing perspective. And so, that's very important, and we're also running some promotions in online, for example, there is one pilot (inaudible) for RMB 50 so all of this so we probably can see that and that will impact our cost line and our sales and marketing. And for the ETR, which is around 80% this year and that's because (inaudible) has very lead hole related to the online because online payment today is only 8% of off-line revenue. That's because we have some legal entities who is eligible to enjoying the 0 rate treatments based on the law. And so, this is normal tax planning. And last year, we had one entity, which is (inaudible) off their group policies and now we have new entities who come and join the policies, which is fully compliant with the law in government. So that's the key reasons. And we foresee, this year, the effective tax rate will be a little bit similar to last year. And the cost size of the online actually, that's because online actually, we don't have physical classrooms. So the class size actually, is virtual. So for example, you want 5,000 students come through one class, with the virtually dividing them by 2 maybe 100 or maybe 19 virtual class and assign a teacher assistant online for this to facilitate the learning process. So today, we are seeing actually, our teacher can cover more and more students at the same time with the improvements of the new technologies, and we foresee we will continue to improve one teacher can cover more students at the same time even in online environment in the future. The retention rate for online, which is also quite good. In a pre-recording contents (inaudible), which is 2 to 3 years ago, the retention of pre-recording content is quite low, I think it's around 30% to 35% and now, with more maturity of my online business to live already. So the life retention rate is much higher and in sometimes even similar to off-line business. So we continue to foresee the higher retention date coming from life (inaudible) to our both the top lines and the margins in the much longer term. And your second specific question about the (inaudible), the (inaudible), what I can say is, even today, math still is more than half of our business, but we are very good to see, by the end of today, we have offered the Chinese class in around 13 cities. The English class by around 20 cities. So the percentage of Chinese and English is quickly (inaudible). The revenue growth of Chinese and English is much faster than math. And in the (inaudible) level today, still, more than half still coming from primary school students. Which is also I think you'll probably need to benchmark to the demographics of Chinese population beta and actually we are seeing it's more and more students coming from primary school. And so we also seeing in some lower tier -- in some new places we have enter, we also starting from primary school. So still more than half coming from primary school. So when a student they came to our class when they are very young, they stay with us much longer term, which is very beneficial to our business. And so, that's kind of the general information (technical difficulty) and quick level for information.

We have the next question from the line of Edwin Chen from UBS.

Just, you keep mentioning online as a top priority now. And just, I was wondering, between online, the dual teacher, if online is now first priority does that mean that (inaudible) There will be lesser focus and the rollout of dual teacher may slow down? And two is, just wondering whether online is targeting on the same similar customer groups as off-line small classes of -- in a way is there any cannibalization between online and off-line small classes, given that online margin and ASP are still much lower than off-line? And three is probably just a thought. Online is growing fast and now is driving size is already big enough. Why not just considering spinoff of online business, so that the method of tail will focus on the margins of off-line that's a concern. Online and online itself can enjoy a better valuation I do believe, probably, now is the hidden value in the overall [disco]. So just the 3 questions.

Okay, yes. The first one, the online, the dual-teacher models. I think, the past 2 years, I talk about a lot of things about dual-teacher models. So even today, if you go into see all the new cities we enter, starting from a few quarters ago, they are dual-teacher model cities, and we continue to increase and a new capacity, new classroom, we have added more and more percentage go to dual-teacher models. Dual-teacher model is a very important model for payer for small (inaudible) to increase their coverage or reach to a much bigger space, which is also very important. Sometimes, as a company, it is very difficult to say who is #1 priority, who is #2, because small class and online are running their own plans. So they have their authorities to decide where they are going. So the dual-teacher model is also very important but compared with online, the dual-teacher model is much more stable and mature. What we need to do is continue to add more classrooms and give them around 12 months for one classroom or for incentives to be breakeven and get them enough time for the parents and teachers to get used to this new format and (inaudible) will follow the growth pattern exactly as -- the same as what we've experienced in off-line. So for dual-teacher model, our key is to do that execution stably. And secondly about, that doesn't mean, I will slow down or I will less focus on (inaudible). No, what I want to say is they will focus on their own executions and we will contribute to the meaningful contributions, maybe in the coming few quarters. Secondly, their customer cannibalizations. In the first place, actually, today, we have more than 500 learning centers, but still, we only cover a very small percentages of the students in this marketing. Even in Beijing, which we are running the business here much longer, and we have more than 70 learning centers in Beijing. But we still only cover around 5% to 10% of students. Looking around, for example, a sub-area of Beijing, we only have 2 to 3 learning centers. So we still have a lot of whitespace market, we are off-line and (inaudible) Cannot penetrate. Secondly, even today, we are penetrating around 42 cities, but most of them are still Tier 1 and Tier 2 cities. And much bigger space and much bigger piece of study, we probably can see (inaudible) 150 million students ahead. So online, very good offering, will be very (inaudible) for us to penetrate to (inaudible). And based on the information and the data we have today, we don't see a huge number or maybe many number of students who online enrollments are coming from off-line. We don't see that. So we are seeing more and more synergies actually, we probably can see online become a worry to complementary ensure off-line, which can help us to penetrate the spaces and the geographies, where we don't have any presence before. So personally, and we still believe the online is the right (inaudible). And we don't see any kind of cannibalization to our off-line business. And sometimes, I don't want to use the (inaudible) for off-line is because in the small class today, where we use a lot of new systems, like IPS, like ICS (inaudible), and we have built out a lot of online and off-line learning circles in our small class business. So they still have classrooms but they are not traditional off-line. They are kind of upgraded level, the new type of blending learning in our classrooms. So sometimes, the limit of online and off-line sometimes is too -- maybe too general. And online will target the (inaudible) off the big cities and the much lower pure (inaudible) cities, where the products will be a little bit different, the pricing will also be different. So we believe all of this will be kind of way to complementary services to the whole group. And your third question about why don't we split off the online. I guess, you probably learned from our counterparties. What all I can say is, here, our whole management, we don't play any kind of different market evaluation game and online is our very important initiative in growth studies. If we don't do online, our off-line, the small class off-line business, will never change, will never evolve as fast as where we sit today. If we go back to see, 5 years ago, when we first tried the online, and we also built the (inaudible) life, (inaudible) has reenergized the shares online school and incentive them to convert from a (inaudible)

contents to Life, and for success, we have achieved in the (inaudible) online school have also given a lot of kind of good news on making pressures (inaudible) off-line business to small class. So, which has led to a lot of new changes and new improvements in technology and content (inaudible) For the small class business. So all of this business are being integrated as one. So we only have one payer. We don't have too many different segments. And all the learnings, all the experience we get from online, we are also benchmark, we are also beneficial -- the benefit to the small class business. And the common development advantages we have achieved in the small class business is also contributing to the online, which saves a lot of costs over there. So we don't have separate heads we have only one. Secondly, we are also very cautious about uniting incentive (inaudible) to our senior managers and to our people. So we don't waste to see 2 different departments, they have 2 different incentive schemes. So we wish everyone can share the same vision, everyone can share the same task, and we only -- all of us can share the company's interest in common. So everyone is working towards to the same goal, we have much bigger part than before. So today and in the future, we don't have any plan to split off the 1 or 2 pieces of business. We are running our company as a whole.

Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all disconnect the lines now. Thank you.