Ladies and gentleman, good evening and thank you for standing by for New Oriental’s First Fiscal Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host for today’s conference, Ms. Sisi Zhao, New Oriental’s Investor Relations Director. Ms. Zhao, please proceed.

Hello everyone, and welcome to New Oriental’s first fiscal quarter 2014 earnings conference call. Our financial results for the period were released earlier today and are available on the Company’s website as well as on Newswire services. Today, you will hear from Louis Hsieh, New Oriental’s President and Chief Financial Officer. After his prepared remarks, Louis 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 provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now turn the call over to New Oriental’s President and CFO, Louis Hsieh. Louis, please.

Thank you, Sisi. Hello everyone and thanks for joining us today. We are pleased to report another strong quarter of significant bottom-line improvement driven by healthy growth on the top line and operational efficiency improvements across our network. For the third consecutive quarter, we’re posting strong operating margin expansion, which yet again demonstrates a success of the harvest the market strategy which we began in November of last year. The current fiscal year 2014 is shaping up to be a tale of two half. In the first half, which is the first quarter just finished and the second quarter we are currently in, we have been focused on delivering operating margin improvement and increased profitability. And that’s paying off as you can see from today’s results. We have been driving better efficiency and utilization across the network and this is translating into excellent bottom line growth. The second half of the fiscal year covering the Winter and Spring quarters, we expect to see stronger revenue and enrollment growth. This will be the peak season for our K-12 after school tutoring business. And particularly U-Can, middle and high school tutoring businesses, which prepares students for the all-important Gaokao or college entrance exam and Zhongkao high school entrance exam. And with the planned addition of 20 to 30 new learning centers we would expect revenues and enrollments will see robust growth during this period. We also anticipate continued operating margin expansion albeit at a slower rate than in the first half of the fiscal year 2014. First looking at Q1, our overall performance for the quarter was encouraging. Thanks to our emphasis on network efficiency, we recorded excellent bottom-line performance, which more than offset slower than normal revenue growth. On the top line, revenues grew at a slightly slower rate than we…

Thank you. (Operator Instructions). And now your first question comes from the line of Timothy Chan from Morgan Stanley. Please ask your question. Timothy Chan – Morgan Stanley: Hello Louis, I’m Tim. Thanks very much for taking my question. Maybe, could you elaborate more on your second quarter test guidance? How much growth is due to organic growth and you’re also adding new centers. And related to that point could you maybe comment on your guidance trend in this quarter? Thank you.

Thank you Tim. Yes, our guidance in Q2, much of it comes from the deferred revenue balance of 332,000 or, 332 million sorry. More than 50% of that will be recognized in this second quarter. The enrollment growth so far is around 8.3% so far and I would expect that to be approximately that amount. Price increases would be about 10% to 12% and then the mix-shift towards smaller classes will continue, will trend about 5% or so. So, as far as the utilization rates for the summer, it would range between June, July and August, between 11% and 15%, which is about 100 or 200 basis points higher than last year. So we’re getting some operational efficiency. And that number should continue to go up. In learning center openings for Q2 so far, we’ve opened less than 10 and it’s mid or late August so far. Timothy Chan – Morgan Stanley: Thank you. That’s very helpful.

Thank you. And your next question comes from the line of Mark Marostica from Piper Jaffray. Please ask your question. Mark Marostica – Piper Jaffray: Thank you. Louis, I’d like to explore your comments on more integration between online and offline. Can you give us some more color regarding your strategy on online and whether you plan to ramp up a flow online offering? And looking forward into the bottom line should begin to contribute a proportion of revenue sequentially?

That’s a good question, thank you Mark. Our online strategy actually is in flux, right. It’s changing because we have – I think all of our divisions are working on online offerings. And so we’re coordinated between all of them, not just cool ones which are on online website. But our K-12, our kids, every department in New Oriental, is working on integration of online and offline. And we’re coordinating that all together. So it could – it’s to kind of online offline coordinated. One is the partner with internet leaders in China to join and develop programs that will work for both sides. And I don’t want to go too much into that until we developed it further. Second thing is to make all our classes, have an online component. So when students when do their homework, they can do it online, they can do it from their mobile devices. They can listen to classes from their mobile devices, they can do homework and take exams from online or offline. They can do social networks with their classes, with their teachers. And so it’s a number of different things that just allows students to be more productive and use their mobile devices as well as their PCs, as well as when they’re in the classroom. So it’s just a way to give students some much richer experience when you come into Oriental. And also we’ll setup more based entry for us, vis-à-vis our competitors. So it’s a heavy investment that we’re making. And as I mentioned in the call that we’ve priced over 10 million. Last year that number was close to $2 million to $3 million so you can see it’s a three-fold increase. And that’s why Michael has mentioned in speeches in the past that online offline integration is one of our key focus areas going forward. And so we’re putting our money around office. Mark Marostica – Piper Jaffray: Thank you.

Thank you. Your next question comes from the line of Ella Ji from Oppenheimer. Please ask your question. Ella Ji – Oppenheimer: Thank you. Louis, I wanted you to follow-up with your guidance. So, you are seeing enrollment to pick-up to around 8% from 2.3% in this quarter. In which segment are you seeing the growth being accelerated?

Well, for us Ella, almost all our enrollment growth comes from K-12, right. Last year adult English was down in enrollments, overseas test prep was down year-over-year in enrollment. So all the growth came from K-12 which is about 12% to 14% enrollment growth. And so, I think this year will be something similar. K-12 would drive basically most of our enrollment growth. It would be a little bit better this year than last year because last year we added 62 learning centers in Q1. This year we actually did not. And so that’s what hurt the Q1 enrollments. But Q2, we begin to start adding some learning centers, we have 20 to 30 for the rest of the year. That will also help our enrollments as well as the utilization increases organic growth in the existing cities. So, we would expect the enrollments begin to pick up especially at the end of Q2, going into Q3 and Q4. As we highlighted, June is the time for Gaokao and the Zhongkao. And students usually, the K-12 sector, these sections really peak in Q3 and Q4 which is the Winter and Spring. So we would expect as we prepare for that that we would get the faster enrollment growth during this quarter, it’s mostly driven by K-12 and VIP. Ella Ji – Oppenheimer: Got it. If I can sneak in one more?

Sure. Ella Ji – Oppenheimer: Can you also talk about the sizes of the 20 to 30 new centers that are planning to open. And where are the locations of these centers, are they in tier-1 cities or in lower tier cities?

Well, they’re mostly in fast growing cities like Xiang, and Xansa, Tang Du, cities like that. Yeah, Beijing and Shanghai, actually declined in learning centers. So, for the last year Shanghai is actually down 10 learning centers. And that part is why its momentum is down and Beijing is down 15%. Although Beijing is doing quite well now, Beijing is really growing very fast now. So I think is that – that most of the growth will be K-12 learning centers. The size will probably be between 1,000 – between 800 square meters and 1,500 square meters. So they’re usually three floors of a building near in middle high school or elementary school cluster. And they will mostly be used for K-12 small class, a couple of large class and then one-on-one formats. Ella Ji – Oppenheimer: Thanks.

If you think about it, actually our enrollments in small classes is actually up between 15% and 20% year-over-year. So, all the shrinkage is coming from the large class, and that’s market driven, that’s not our preference. The market is saying that as parents and families have more money they’re electing for more expensive smaller classes and one-on-one formats. And so, we’ve actually tried to control the growth of our one-on-one to slow it down, because as you know one-on-one doesn’t have as higher margins. So, we’re actually just doing our best to slow down one-on-one. We were happy with the growth in small class. And I think the large class format is going to be declined regardless of what we do. So, we’ll focus more on one-on-one in small class going forward. Ella Ji – Oppenheimer: Just a quick follow-up. So, as we’re now seeing the market demand shift to smaller and VIP classes. What do you think about your current capacity at your learning centers? Do you think you may have too many larger sized classes but not enough small classes or do you think your capacity is okay?

Well, we spent the last year but we’re closing down 84 or so underperforming learning centers. So we are looking at and we’re also retrofitting some learning centers to turn large classes and the small classes. So I think we’re not perfect, we’re not ideal. But I think we’re getting better in the large class, small class format. So I think we’re getting it closer to right. At the same time don’t forget, our large classes are still used for overseas test prep, adult English and other classes. And even if those are empty 90% of the time, the 10% that are used is actually quite cost effective. Ella Ji – Oppenheimer: Okay. Thank you, Louis. Thank you for taking my questions.

Thank you, Ella.

Thank you. Your next question comes from the line of Zhuang Chao from Macquarie. Please ask your question. Zhuang Chao – Macquarie: Thank you very much for taking my question. I think I’ll stick to the one question. It looks like Shanghai continued to be a drag on your business. Could you talk about, remind us, what are some of the issues in the past, what have you done, what are you going to do to turn the situation around? Thank you.

Yeah. Thank you, thank you Zhuang. Shanghai, the enrollments were down again from 64,000 down to 56,000 this quarter. Partially that’s due because we’ve closed 10 underperforming learning centers in the last year in Shanghai. The main problem is Shanghai actually started four years ago when we did roll out U-Can in Shanghai that we did in the other cities. So Shanghai is still behind from day one in U-Can. And so, Shanghai is for the longest period has relied on overseas test prep and adult English. While overseas test prep is slow, the number of Chinese students leaving is slowing, so it’s a market driven phenomena. And also the adult English as you know, we’ve been happy about it for years now is slowing. So Shanghai is only dependent now on overseas test prep and kids, pop kids English for growth. It’s missing the biggest growth driver which is U-Can, the middle and high school business. And so, what we’ve done about it is as you know we replaced the school head a year and one quarter, almost a year and half now, May of last year. And we brought in our best young school head from Xiang School, where he had rolled out U-Can phenomenally well. He also brought his team with him, so he is slowly replaced I think every department head in Shanghai School, with his own people and with new hires. We also brought in the group marketing director from our whole group it’s from Beijing and moved him to Shanghai. So, we have a brand new team in place as of six months ago, when the team came into place. And even though Q1 was not good, they were actually down 5% in revenue minus 12% in enrollments. This quarter they’re flat in revenues, still down a little bit in enrollments. And the anecdotal evidence is that Q3, Q4, are technically much better for Shanghai. As they pick up K-12, especially U-Can, they’ll basically begin to grow. So I think is that it depends on the success of U-Can in Shanghai, they were four years late in rolling it out aggressively. Zhuang Chao – Macquarie: Thanks Louis, for the comment.

Thank you. Your next question comes from the line of Clara Fan from Jefferies. Please ask your question. Clara Fan – Jefferies: Hi, hello. Thank you for taking my questions. I got a question on the number of centers. I just want to – have we completed the process of closing down our profitable centers. How many centers do we plan to open in second quarter? The new guidance of 20 to 30 new centers for the remaining of this fiscal year, so it’s kind of implying 7% to 18% additions for the whole fiscal year ‘14 which has got a lower than guidance before? So, I’m just wondering the reason why and what’s the implication on enrollment, would that mean build a similar faster 5% to 6% enrollment growth for this year because of like better utilization? Thank you.

Thank you, Clara. I think for us, you’re correct. We did close net of 13 in Q1, which is actually more than I thought. We didn’t know we still had that many 18 underperforming centers. So, we opened between 5 and 10 centers so far in October. I expect to be another 5 or 10 before the quarter ends at the end of November. And now we expect to open another 10 to 15 for the rest of the fiscal year, probably mostly in Q3 the linked quarter. So the number will come up a little bit lower. But you have to remember that we have been trying to digest this over capacity for a year – yes, since November of last year. And so, the fewer centers we opened, the higher our profit actually is, right. So, I think is that – we are motivating our school heads more than 50% of their financial performance, actually probably close to two thirds or more comes from their ability to raise operating profit margin. So I think is that they’re motivated to make sure they’re running as lean and as profitable as possible. But having said that, there are a number of cities that are actually growing very well and so we want to continue to open learning centers there. So, we don’t know the exact number because it depends on demand and the request from individual school heads. But I’ll expect the number to be a little bit lower than our initial guidance at the beginning of the year because – it’s not because we’re not opening centers it’s because we closed more than we thought. Clara Fan – Jefferies: But still we’re probably – we’re almost done with closing down unprofitable centers?

Yeah, we are. But some centers become unprofitable as you go on as well. So you know we’re not opening more new ones, some of them become less profitable. And we may consider closing a few more but not too many. As far as your question in enrollment growth, 2.3 is low, I would expect Q2, Q3, Q4 to be much higher. And I would expect to finish the year with somewhere between 6% and 8% enrollment growth. And then next year assuming demand holds up, we would probably open 60 to 100 learning centers, in which case then enrollments will really begin to ramp up. Also at that point I think the adult English and the large class dampening factors on enrollments will begin to fade a little bit. Because adult English is now and college English test prep is now about 12% of revenue, where it used to be 25% to 30%. So, it’s a fact of getting less and less each year. And I think as we opened more learning centers next year, you won’t have such a strong profit focus then I believe the enrollments will pick up. Clara Fan – Jefferies: As we still – am I right to assume that the 6.8% enrollment growth versus the less center opening means improving utilization?

Yes. And duration is going up for couple of percentage points, year-over-year per quarter. So, it is going up. I would like it to go up faster but it is – the reason it’s not going up so much is because as Ella mentioned earlier, it’s the number of large classes we have. But they’re still cost effective so we still keep it up. So today they stay empty most of the time. But when used they’re actually quite profitable. So I would expect 6% to 8% enrollment growth, I expect to continue to raise prices about 10% to 11% a year, 12% and I would also expect the continued shift towards smaller profits the VIP format to add another 3% to 5% to the revenue line. So that’s why we continuously guide right around 20%. Excuse me, I have something in my throat. If you look at the 15.7% revenue number we have for Q1, and then the guidance for Q2 of 22% to 27%, if you middle that and you combine the two quarters, we’re almost at 20%. And that’s going into the busy period of Q3 and Q4, whereas for the last three years we have really outperformed revenue as we highlighted with the K-12 gaokao and zhongkao tests are coming up. So we would expect to be very comfortable with our guidance of 18% to 22% and hopefully be at the higher end of that of that range. Clara Fan – Jefferies: Thank you.

Thank you. Your next question comes from the line of Fei Fang from Goldman Sachs. Please ask your question. Fei Fang – Goldman Sachs: Hi Louis, I just have a quick question on the sales and marketing expense. This is the second quarter of single digit growth in the sales and marketing expense. So, what drives the savings and all these guidance for the upcoming quarters? And also in the long-term how should we look at the cost line?

That’s a great question. I think for sales and marketing, we’ve been saying for years that they mostly come from word-of-mouth. The reason we spend on sales and marketing promotion expenses in the past as when we open new learning centers. So the reason the expenses are going down is because not opening learning centers. So you’ll see it go up a little bit when we open more learning centers, because you as advertisers are beginning to attract your core business students to that learning center in the neighborhood. So I would expect sales and marketing expenses on the four promotion expenses to continue to be – to decline as a percent of revenue for the rest of this year. We’re really opening 20 to 30 learning centers, so it won’t be high. I think next year it should go up a little bit but it’s always been promotion has always been in New Oriental between 6% and 8% of revenue. The reason that it looked like it was going up in the past year is because we shifted our business model to VIP formats where the one-on-one tutoring customer service that’s accounted in sales and marketing. So you take those out, it’s still pretty consistent between 6% and 8% and it’s going down because we’re not opening learning centers, there is no need to be promoting, we’re not opening new centers because most of our business comes from word-of-mouth anyway. Fei Fang – Goldman Sachs: That’s helpful. Thank you.

Okay. Thank you, Fei.

Thank you. Your next question comes from the line of Tian Hou from TH Capital. Please ask the question. Tian Hou – TH Capital: Hi, Louis. (Inaudible). So the question is currently related to the decent size of your class as which you said in the opening remark. And so the demand is much more shifting towards the small and the VIP classes. So the first question would be, what’s the percentage for big class, small class and VIPs? Or how many students could be in the big class, small class and VIPs? That’s number one. Number two, what is the current composition for this three different classes, sizes, the size of the class. So that’s the question?

Okay, thank you, Tian. We defined VIP as one-to-one through one-to-six, so that’s VIP. Small class for us is 6 students to 40 students. And large class is 40 students and more. So far this last quarter, large classes account for about 36% of completed classes where the students were actually in the class that’s how we count large, small. So it’s different from enrollments where students are new sign-ins coming in. I think 4% came from one-on-one or VIP, and so then that means that almost 60% – about 6% comes from small class, which means six students to 40 students. Tian Hou – TH Capital: So, in fair words, this 6 percentage could be?

I think one-on-one will continue to grow a little bit, so I could see one-on-one becoming five, VIP becoming 5% to 7% of enrollments. I would expect small class 40 and under to continue to grow. And so they’d probably become up to maybe 70% of classes. And big classes will still be about a quarter or 30%, now really two years out, it depends. Tian Hou – TH Capital: I see, I see. So, there is another issue, the seasonality. So in the past, in terms of growth, Q1 could be the highest of growth in terms of enrollment. And now, we’re shifting to takeover. So, I understand the growth factor in Q3, Q4, one is the different sea culture, one is Zhongkao and Gaokao. So what is the seasonality driver in the Q2?

Our Q2 is also gets picked up a little bit by K-12. So K-12, when students go back to school, yes, when they go back to their primary schools, they usually don’t pick the whole quarter out, some do but some don’t. So, Q2 is also driven by the same as Q3 and Q4 but just not quite as strong. Q1 is weakened because Q1 is a big adult English and domestic college English exam quarter, and both of those enrollments are flat or down, I don’t think this is way. And so that’s why Q1 is good. Also Q1 last year had a difficult comp because Q1 last year we opened 62, we actually opened 89 learning centers we paused 27. So, we have very difficult times this year. So that’s why we had that very early. Tian Hou – TH Capital: And I just have a last question. As your fresh team becomes sensation of your classes from big class to small and VIP, high and larger is going to trend?

And that’s why we’re doing it slowly right because obviously the big class has the highest margin. And so that’s why we’ve been very careful when we go to the small class and VIP, so we do it in a way that’s still very profitable. And so that’s why our VIP is not all one-on-one, half the moments are actually one to two, through one to five, six, right. So that’s why. Our small class pricing, our small class is 40 students whereas our competitor’s small classes are 15 or 20 students. So we’re trying to get higher margin, that’s why we have the highest margins in the industry right. That reminds we’re the highest by far among our Chinese peers. It’s because we’re trying to do it in a way that doesn’t kill our profitability. And so we’re doing it slowly and we’re pricing a little bit higher. And what happens when we do that, as we sacrifice enrollments, because when we price out and we pride ourselves out of some people’s affordability. And that’s a cautious choice. That’s why you’ve always heard me say well, Wal-Mart could give you the choice but we’re Tiffany’s price, right. We’re priced above the market, we’re the highest price. And so it’s that intention of raising prices versus going to a lower profitability small class business model. Tian Hou – TH Capital: I see. That’s very helpful. That’s all my questions. Thanks Louis.

Thank you, Tian. Thank you very much.

Thank you. Your next question comes from the line of Vivian Hao from Deutsche Bank. Please ask your question. Vivian Hao – Deutsche Bank: Hi Louis, thank you for taking my questions.

Hi Vivian. Vivian Hao – Deutsche Bank: Hi. My first question I think is a follow-up of Tian’s question. So given this mix-shift, what’s the impact on margins, specifically shall we expect the gross margin might be under pressure in the future versus most of the marketing equipment should come from operating leverage?

Yeah. Vivian Hao – Deutsche Bank: And secondly, please allow me to ask the second question, because this is really a long queue. Your competitor TAL Education posted a 25% year-over-year growth in their enrollment?

Right. Vivian Hao – Deutsche Bank: Mostly driven by their outside Beijing, China, sorry Beijing, Shanghai new market versus our expectation is probably low to mid-teens percent enrollment. Apart from the base effect, do you see there is intensifying competition outside Beijing, Shanghai, I mean, nationwide new market?

Yes. I think I mean, your first question operating margin, I’ll go first then I’ll tackle the TAL question. On operating margin, I think it’s a constant tug-o-war right. Between improve utilization and we increase prices that would drive up operating margin. So one of the reasons why enrollments are actually not so strong during Q1 is we actually raised the price of Pop kids by over 20%. So enrollments are actually down year-over-year. And that was an attempt to improve the profitability. So, we sacrificed enrollments. We’ve been saying this for a year now that we’re willing to sacrifice some growth and some enrollment to gain the operating profit margin advantage. And you saw that this quarter. So, it’s still free lunch. So I think there will be a tug-o-war between utilization increases and price increases versus the format coming down the smaller size classes. Okay, so that’s number one. Number two, on the TAL question, they posted a really strong set of numbers. But they’re basically – if you think about it, they’re not on the scale we are, like they’re four times smaller than we are. So, if you look at TAL that was four years ago, we were posting similar if not higher numbers when we were expanding into the 50 cities. They’re already in 15 cities. So there are different stage in their growth, right. Their base is very small, right. It’s I think their total revenue is around 90 million this quarter and then for the whole year it’s less than one quarter. So, there are off the lower base. And second is that – I think their growth is off a very low base outside of Beijing and Shanghai. I think they’re outside Beijing, Shanghai, only represent about 30% of their revenue whereas for us, outside Beijing, is about 65%. So they are in a stage about three or four years, earlier where we were four or five years ago. So they’re just at a different scale. So when we were – when we started rolling out K-12, we were growing 30% to 40% a year in enrollments as well, right. So, it’s just a different stage of development. I mean, once they get to 50 cities, and they have 1.6 million enrollments then it would be much difficult, much more difficult to grow 25%. Vivian Hao – Deutsche Bank: Okay.

I mean, it’s a different scale, you can’t really compare the two, right. They’re one quarter our size. Vivian Hao – Deutsche Bank: That is still mostly the base effect.

Yes, it’s the base effect, right. Because we’re in 50 cities, we’ve been there for four years. They’ve just arrived in Beijing, Shanghai, a couple of years ago. They’re only in 15 cities. So the base is really low. We have 1.6 million students, if you take away their online students, they’re I don’t know, 500,000 to 600,000. I’m just guessing. But it’s a much smaller number. Vivian Hao – Deutsche Bank: Okay. Thank you.

Okay.

Thank you. Your next question comes from the line of Trace Urdan from Wells Fargo. Please ask your question. Trace Urdan – Wells Fargo: Hi, thanks Louis. I wonder if you can maybe expand on the TAL question a little bit and just talk about competition more generally and maybe to the extent that it’s different between your mature markets in the large cities and some of the newer markets that you’re moving into.

Yeah, I think for us it’s pretty much the same. It’s in the big cities, Beijing is actually doing really well in K-12. So it’s growing very rapidly, over probably about 25% to 30% in revenues and enrollments are increasing. Shanghai you know we’ve had trouble. I mean, a lot of our competitors are also having trouble in Shanghai. So Shanghai is just a tough market. So, outside of Beijing and Shanghai, we’re actually growing very fast. If you look outside of Beijing and Shanghai into our – kids business and our middle and high school business, our enrollments are up over 20% I think for the last 12 months. So it’s Beijing and Shanghai are the slow point. And I think outside of that – and if you look at the small platform out, and one-on-one format, which is what TAL offers, we’re actually growing enrollments well over 20%. And we’re off a bigger base. Trace Urdan – Wells Fargo: I appreciate that.

So, we got to write down our adult English business and our overseas business as far as moments go, we’re talking about big base. Trace Urdan – Wells Fargo: Right. I was just asking a broader question about how we should think about where we are in the evolution of the market and what it looks like I think the market is starting? Yeah, go ahead.

Yeah, the market is still growing, it’s still growing 13% or so a y ear according to IDC. I think the market is shifting towards smaller facets and tearing. So what we’re trying to do, I think some of the better players like TAL and Sheridan and ourselves are trying to differentiate ourselves from the many, many local competitors. So, and that’s why I said a little earlier, we really want to invest in R&D, to give offerings that our competitors can’t really keep up with. Right, we really have the $7 million assessment database right. So we can deliver questions from any point across our network. We want to integrate more online and offline offerings to give students a much more, richer experience. Those are the thing our competitors can’t easily do as it requires a lot of investment and a big student base to spread that cost across. The other thing that’s happening competition wise is that the tearing – so we are using the highest priced premium offering in each of our markets. So, we are very expensive, we’re the Mercedes or BMW or Rolls Royce of our market. And then we are willing to give up a lot of the middle market and low end market because we just can’t get a high margin by playing – I mean, we can’t be all things to all students. And so, we’ve chosen to be at the very highest end, whether it be one-on-one, whether it would be small class or whether it be large class or online. So we’re just priced higher than everyone else – we believe we deserve big because we have a higher quality offering. And then we will sacrifice enrollments and revenue to get that higher margin. And that’s why we have the highest margin in the industry by far. Trace Urdan – Wells Fargo: Okay, thank you.

So, yes, just tearing out, right. I mean, it’s just like any other large market, you’re going to have some high end players, middle end players and low end players. And in the education market, it’s a very fragmented market as you know Trace. So we have hundreds of competitors in every city. So, we’ve chosen that – we can’t have a low margin, 5% to 10% operating margin business. We have to be in the 15% to 20% range. In order to do that we have to play at the high end, we have to sacrifice a lot of good moments in revenue in order to collect the high profit revenue. Trace Urdan – Wells Fargo: Got it. Thanks.

Thank you.

Thank you. Your next question comes from the line of Iain Ding from Flowering Tree. Please ask the question. Iain Ding – Flowering Tree: Hi Louis, thanks for taking my question.

Yes. Iain Ding – Flowering Tree: Firstly, I want to look at the – make sure between the enrollment growth and learning center growth. So, if I compare the first Q12 against first Q14, the learning center growth by almost 80% but enrollment growth is about 15%. So, can you help us understand like what may – where is the enrollment catch up get organic enrollment growth catch up, how much enrollment growth, organic enrollment growth we expect from the existing learning centers?

Like I said, I think that’s not a good way to hit – I don’t like that at all, right. Because you know the last two years we’re opening up small VIP centers, they’re small. So, you’re not comparing apples-to-apples. The older learning centers before we entered the K-12 market were large ones. And the K-12 ones were mostly at the beginning were lot of more small. So of course they’re not going to have the same capacity or the same growth. If you look at it now, you will see that we have fewer learning centers than we did last year and our enrollments are up 2.3% to 2.4%. So, I think our school is learning how to manage the smaller learning center formats. And it’s also you need to understand that our utilization has gone up couple of percentage points. And where the enrollment growth has slowed it’s in large class. That’s the business we’re trying to do in the market. So if you look at our future – who cares about the past, if you look at our future, it’s going to be small class to one-on-one. And in that format we’re growing 19% enrollments and we’re going over 30% in revenues. So we will keep the large class legacy businesses because it’s still very profitable, it’s actually more profitable than the small class ones. So, we’ll keep it, we are not going to throw it away. But our growth drivers that have come from K-12, especially U-Can, middle and high school, and overseas test prep. And those are moving towards smaller formats. Our smaller format enrollments, if we begin to break it out, you’ll see that our smaller prep formats are one-on-one are actually growing very, very fast. And that’s really the feature of this company. We just have a big base from the legacy large class system. Iain Ding – Flowering Tree: Understand.

Better not get throw it away because it’s very profitable. Iain Ding – Flowering Tree: Got it. And just another question like, yesterday there was news that – they need to reform the English exam for the college entrance exam as it is in the rating. How do you deliver, check the end-user business in Beijing?

Yeah, that’s a very good question. I mean, that’s policy as influx. But I think the current – the current manifestation is that they will reduce the English portion from 150 points on the gaokao down to 100 points. And they would allocate those points to Chinese and to mathematics. So, well – I mean, it’s not a positive development for New Oriental, I don’t think it will affect us too much because English is still 100 points out of 750, so still very significant about 13%, 14% of the total score. The second thing is that more practically, how are these people going to find jobs if they don’t speak English, I mean, it’s proven that students who are quite good in English will get a paycheck that’s much higher than if you don’t – if your English ability is not good. The other change in the test is that it’s going to push, my understanding is, they’re going to emphasize the actual use of the language, English and not just taking exams. So I think in that case that will actually help us. Because our whole language training format is to teach kids practical English how to use English language in your daily life, not just to take an examination. So I think is that the one side, the fact the going to rating is not always helpful to us. The fact is that emphasizing more practical English will help us. Also there is talk about not learning a lot of primary school starting English until after third grade, that will probably help us as well because if you’re not learning in school, most parents will send their kids to our centers. So I think there is pluses and minuses to it. I don’t think in the long-run we’ll have too much of an impact plus or minus. Iain Ding – Flowering Tree: Got it, thank you.

Thank you. That was a very good question though.

Thank you. And we are approaching the end of the conference call. I will now turn the call over to New Oriental’s President and CFO, Louis Hsieh for his closing remarks. Thank you.

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Hope you guys have a wonderful day. Thank you very much.

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