Ladies and gentlemen, thank you for standing by and welcome to the Q2 FY2014 TAL Education Group Earnings Conference Call. At this time all participants are in the listen only mode. There will be a presentation followed by a question and answer session, (Operator Instructions), I must advice you that this conference is being recorded today October 22, 2013, I will now like to hand the conference over to your first speaker today Ms. Mei Li, Investor Relation Manager. Thank you, please go ahead ma'am.

Good evening everyone. Thank you all for joining us today for TAL Education Group’s second quarter of fiscal year 2014 earnings conference call. The second quarter earnings release was distributed earlier today and you may find a copy on the Company IR website or through the News Wire. During this call you will hear from Chief Financial Officer Mr. Joseph Kaufman. Following his prepared remarks Mr. Kaufman 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 risk 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 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. Joseph Kaufman.

Thank you, Mei, and thank you all for joining us on our earnings conference call for the second fiscal quarter 2014. We are pleased to report growth momentum for the second fiscal quarter as we continue to execute on plan for sustainable growth and expansion. Highlights for the quarter were a net revenue increase of 35.1% year over year to U.S. $92 million, $1.5 million above the top end of our guidance. Revenue growth was supported by a 24.8% increase in enrollments. You will recall that our guidance included approximately RMB21 million impact from the timing of Chinese New Year. Without this impact revenues increased 30% year-on-year which is still a significant acceleration from the 24.5% year-on-year growth we achieved in the first quarter. Our small class business in new markets outside of Beijing and Shanghai remains a key growth engine. At the same time we are pleased to see that Shanghai had a good quarter once again in both revenue and enrollment growth. On the back of improved center utilization we took the opportunity to more aggressively ramp up capacity expansion. We expanded the total number of learning centers during the second quarter, which as you may recall we had not done in the previous two quarters. We opened 15 small class centers and closed two, resulting in a net addition of 13 small class centers. We closed six one-on-one centers and opened two bringing about a net reduction of four one-on-one centers. In total we had a net addition of nine learning centers, bringing the total to 264 centers as compared to 255 at the end of the first fiscal quarter. In terms of classroom capacity we added a net 247 classrooms across our network for our small class business in this quarter. We have already exceeded our…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Fei Fang of Goldman Sachs. Please ask your question.

The focus for us is apparently on the strong 3Q guidance. The growth is accelerating while margins holding up. So can you elaborate on what drives the 3Q strength and just relating to that what assumptions are we using for the Beijing operation? Thank you.

Yes, sure. So, the outperformance, we expect to continue to be driven primarily by cities outside of Beijing. So we’ve talked about this before Fei. For some time we’ve observed an optimistic outlook for these markets, these new markets that we see as providing a lot of untapped potential. So I think that this outperformance that we see in Q3 and that also happened in QR are at least partially an early indication of timing and philosophy of how we enter new markets and that's beginning to pay off. As you know we have always looked at entering new markets in a careful way opening one center initially and first building our brand reputation. So we're really getting strong word of mouth marketing and creating pent up demand. So I think part of what you are seeing is that this approach is paying off with very strong enrollment in revenue growth in the outer cities and our business is passing a tipping point in some of these key markets where we’re enjoying a real brand strength and also just good quality reputation in these local markets. So I think that's part of it. I think as we’re continuing to grow we're also realizing that we can't take a one size fits all approach to our business. So what you see with Shanghai turning around is a case in point there. Our experience there has reinforced with us that managing the business for quality rather than quantity really results in sustainable growth. So Shanghai is back on a solid growth track after a period of transition. So we believe that that's also, better execution is also helping with our business. And we have also took price increases for our small class business in certain markets including Beijing in the summer term which will carry over to Q3 and we have taken a price increase in our one-on-one business in Beijing starting in September. So I think those are some of the factors. I couldn't tell from your question about the margin. We haven't given guidance on margin, but we have given the business outlook on revenue guidance.

Right Joe second bit of my question was within that guidance what assumptions are we using for the Beijing operation? Are you seeing enrollment picking up or?

We took the price increase in Beijing in the summer. So as I mentioned in my prepared remarks, that’s part of what contributed to the fact that we were able to get single digit revenue increases in Beijing, but in terms of the full term, we are not expecting a huge impact and I mentioned that in my prepared remarks as well in terms of the recovery there. So that said, we're continuing to look at new growth areas. Beijing is our most mature market but we still think that there are plenty of new growth areas that we can explore, potentially new subjects, new grade levels, given the relative maturity of our existing business. In terms of our existing business we continue to focus on top teaching quality, product development, curriculum, teacher training. I mentioned in my prepared remarks we’re also looking at investing behind intelligent classroom system, ICS 3.0 in the coming quarters which as you remember is about incorporating technology through interactive white boards in the classrooms. So there is more that we can do in terms of the interactivity and the assessment type tools we can use in the classroom in the through ICS. So that's what we're looking at. I mean overall we think that Beijing is kind of like what we did in Shanghai. As we have talked about before Aoshu. It is one of the core values of our company and I think it can be best translated as kind of the low key and focused approach to getting things done. So we're just going to continue to focus on getting the best quality teaching and curriculum to our students in Beijing when we think the enrollments would follow. We’re overall pretty patient, it may take a few more quarters to get Beijing back, but the important thing is I think that the current challenge in Beijing is fortunately more than offset by the strong performance in other cities in which we operate. So getting back to your question, we're not assuming a huge pickup in terms of Beijing in terms of how we think about Q3 guidance.

That's great, that's very helpful. The last question from me is recently there has been some regulatory changes just regarding how English schools are been treated or being weighted in the graduation exam. So Joe do you see any impact either on your own business or on education industry as a whole?

Yes I mean this is kind of breaking news. We're still in the process of evaluating the potential impact, but at this point don't expect the impact to be large. Our English business is positioned to provide support and tools to students, and they are starting to cross the pre K-12 curriculum. So it's not only geared specifically for preparation for Zhongkao and Gaokao. So we don't really see a huge impact to our English business at this point. But what we are excited about is that for our Dongxuetang Chinese business which we’re adding more focus on and have rebranded as Dongxuetang. We see this as potential opportunity that we’re pretty excited to go after.

The next question comes from the line of Julian Chung of Morgan Stanley. Please ask your question.

I’ve got two questions. My first question is about the network expansion. Is it possible to give us more details about your expectation on network expansion? And what you see is the impact on the enrollment and margins? And my second question would be, is it possible to comment on the pricing trend that you expect for the coming quarter? Thank you. Morgan Stanley: I’ve got two questions. My first question is about the network expansion. Is it possible to give us more details about your expectation on network expansion? And what you see is the impact on the enrollment and margins? And my second question would be, is it possible to comment on the pricing trend that you expect for the coming quarter? Thank you.

So in terms of the expansion, you may recall from previous investment cycles, expansion typically takes place mostly in the first half of the year for us. I kind of indicated that as I was talking about what the expansion we’d be looking at for this year. We will continue to expand the second half of this year, but the speed and skill will depend on the performance metrics that we continue to stress around classroom utilization and fulfillment metrics and that will determine how much we turn up the heat in terms of further capacity expansion. Right now it looks like we’ll be looking to add over 200 classrooms across our small class business in the second half of the year. So that would be down versus the first half of the year, but will still represent meaningful capacity expansion for us. And then in terms of the margin, as you know I don’t give guidance for margin. Directionally I think that the center aspect is something to think about in terms of the investments we’re marking and the ongoing center expansion. It could have some impact on margin. But that said our growth rate and assuming that we hit the business outlook for Q3, we’ll also be outperforming to our internal budget. So that will help offset some of these higher costs in expenses. But in addition to the center expansion as I mentioned when I was talking or answering Fei’s question was that we’ll be investing behind the Intelligent Classroom System upgrade to ICS 3.0. We’ll have some new Internet driven business models to complement our current online offerings and we’ll be doing some content development initiatives as well. So on past calls when we talked about that, I said that I expected margins to trend down…

The next question comes from the line of Ella Ji of Oppenheimer. Please ask your question.

First I wanted to follow-up with the prior question regarding the development in Beijing. So it looks like in terms of enrollment growth it will still take a few quarters to get it back. I also see that you have raised the prices in Beijing recently. So is it fair to say that going forward the price increase may be the primary driver of the revenue growth in the Beijing City and also could you just show us more details with regards to what you are doing on the ground in order to get the enrollment in Beijing back? Oppenheimer: First I wanted to follow-up with the prior question regarding the development in Beijing. So it looks like in terms of enrollment growth it will still take a few quarters to get it back. I also see that you have raised the prices in Beijing recently. So is it fair to say that going forward the price increase may be the primary driver of the revenue growth in the Beijing City and also could you just show us more details with regards to what you are doing on the ground in order to get the enrollment in Beijing back?

As I mentioned in my prepared remarks, the single digit revenue increase that we're seeing is definitely driven primarily by the price increase. So that definitely was the case in the summer and all indications at this point is that that'll be the case in the fall. I don't have a lot of visibility in terms of the winter. I have zero visibility in terms of the winter right now. So at least for the summer which we reported on this quarter and fall which will impact Q3, that certainly would be the case. And we're not, to Fei’s previous question we're not assuming a big increase in terms of enrollments in terms of the Q3 outlook that we've given. In terms of what we're doing, I talked about this a little bit in the prepared remarks but we're focusing on first and foremost the key drivers of our business, among which are content. So we're really looking at content development initiatives and particularly the, during the upgrade of the intelligent classroom system which we think is really great in terms of creating an interactive environment for kids in the classroom. So we had upgraded to the 2.0 and then we're upgrading into 3.0 over the next six months. That's a big part of it. The other things that we're looking at is focusing on some new age groups that we hadn't focused on as much in the past including pre K and the high school business. I mentioned in my prepared remarks that the high school business, we're already seeing some nice increases in terms of student retention to that business. Historically as students have more things going on, competing for their time, we didn't see the same level of retention. It's also more of a student driven decision at that point in time rather than a parent driven decision. So all these things factored into slightly lower student retention at that age group and we're actually seeing that improving for our high school business. So I would say in terms of rates, those are some of the things we're looking at. And then in terms of product, we talked a lot about last quarter how we're continuing to focus not only on our sweet spot in math and sciences but also on other areas like English and Chinese and to the question about the central impact of this policy we're hopeful that that’ll also give us a good opportunity for our Chinese business. So, I think those are some of the things that we're focusing on in terms of getting the Beijing business back to an enrollment growth contributor.

Could you show us as to what's your current utilization level, and do you mind breaking it down between Beijing and Shanghai and the cities outside of Beijing and Shanghai? Oppenheimer: Could you show us as to what's your current utilization level, and do you mind breaking it down between Beijing and Shanghai and the cities outside of Beijing and Shanghai?

Yes, so we don't disclose exact utilization numbers, but productionally we have seen good increases in utilization with overall utilization improving by single digits or even up by 10% in some markets. So this is what prompted our more accelerated expansion in the quarter. Actually with a greater expansion you expect utilization to come back down again in coming quarters but we still expect that by year end we should have overall improvements in utilization in most of our markets. So utilization has definitely been on the upswing for us.

And last question from me. With your guidance for next quarter, should we think in terms of the ASB trend it's going to keep the current level or since you have more price increases in the fall, shall we expect the ASB trend to accelerate? Oppenheimer: And last question from me. With your guidance for next quarter, should we think in terms of the ASB trend it's going to keep the current level or since you have more price increases in the fall, shall we expect the ASB trend to accelerate?

I think it should be more or less consistent. We took the price increase for our small class markets well ahead of the summer term. So the only incremental contributor would be the one-on-one business but the fall term is not typically the strongest term for the one-on-one business. So it may have some marginal upside to the current ASB levels but we didn’t expect it to be particularly meaningful.

The next question comes from the line of Clara Fan of Jefferies. Please ask your question.

Just a few housekeeping questions on your revenue breakdown by small class, one-on-one, and online and the student enrollment by online and offline classes as well and lastly if you could give more color on your business model for online education?

In terms of the housekeeping matters, small class was 78% of revenue in the quarter, one-on-one was 19% of revenue and online courses was 3% of revenue. In terms of the online and offline breakdown, online courses were 11% of enrollments, with the remainder being our Bricks-and-Mortar center based business. In terms of what we were thinking about, we do online, I discussed many aspects of our overall online strategy in my prepared remarks. I think what we were looking for, various forms of interaction with students from apps to prerecorded content, to live transmission and varying price points and anticipated “online class prices” to serve different markets and serve different consumers. So very different market. But overall we are quite patient as regards to online, and realize that we are setting the foundation now for an evolution that we see playing out in stages over the next three to five years. So we’re really exploring all kinds of different areas across that spectrum. And then at the same time as I mentioned in my prepared remarks, also looking at how can online help us in terms of providing better customer service in a more efficient way across our platform, how can it allow us to scale more quickly? So those were the kinds of things we were thinking about in the online area.

A quick follow up question; remember in your remarks, you mentioned about possible equity acquisition as well. Is there any like target at the moment?

No, nothing, that’s out of point that we shouldn’t be talking about it on a call. Obviously we are always in the process of looking at particular opportunities for investment, both through partnership and our own investing in the future through stuff we are looking at organically. But nothing is at a point in terms of the pipeline that we should be talking about it yet at this point.

Your next question comes from the line of Mark Marostica of Piper Jaffray. Please ask the question.

My first question is related to Shanghai. It seems that the business has gotten some nice momentum in Shanghai. I know other players have been struggling somewhat in that market and I’m just curious what’s been driving the improvement in Shanghai from your perspective and any comments around the entire competitive landscape in Shanghai would be helpful as well. Thank you.

Yes, sure. In terms of what’s helped us is that we kind of took the knocks in Shanghai early. So we went through a period where we didn’t focus a lot on enrollment growth, and really just focused on making sure that we had very high teaching quality in every single class that we offered which really meant that we were purposely constraining enrollment growth. So that had an impact for us in terms of the growth last year when we kind of took the knocks for that then but it led to our ability to really get the word of mouth back in the business and be able to have people coming to us for that top teaching quality in the market. So I don’t think that there were really any secrets. We haven’t had a massive amount of center expansion. We’ve actually been rationalizing our one-on-one business significantly in that market but our view is that by managing growth and focusing on quality, sometimes slow is fast in this business and in later quarters it will play out that we are able to get a lot more growth back into the business in that way. So that’s what I would say about what’s happening with our business. It’s still early days for us in terms of the Shanghai business as well. That’s I guess the other point, viz-a-viz may be some of the other competitors we just have are reasonably long runway in that business as well. Competitive landscape, I think that our view of the Shanghai market is it’s a more fragmented market than you see in other cities. So you don’t see one large local player like you do in other markets. So from a goal setting perspective, it’s a little bit trickier because you don’t…

And one follow-up with regards to the markets outside of Beijing and Shanghai. I believe you mentioned in your remarks that those markets represent 35% of revenue. It seems to have flattened out in terms of pace of mix shift from Beijing and Shanghai? I wondered if you can comment on that dynamic and then what you see going forward in terms of revenue mix as the quarters play out ahead.

Sure, I think part of that is we were able to take the price increase in Beijing. So Beijing moved back into revenue growth in Q2, which was a positive in terms of Beijing and Shanghai portion of that component. And then Shanghai also continued to perform well. The growth in cities outside of Beijing and Shanghai were still well over 100%. So there was still really strong growth in those markets. I just think that we saw a greater contribution from Beijing and Shanghai in the quarter. And I think that those dynamics should play out over the coming quarters as well and then if Beijing recovers more meaningfully then you could potentially see that shift moving towards Beijing and Shanghai a little bit more in the near term, but overall I mean this year we think that new cities will continue to contribute significantly to our growth story and they’re really going to be the driver for us. So from a longer term perspective we very much see this trend continuing and we’re just in the early phases of penetration in many of the markets we’ve added over the last couple of years and then we’re also going to be adding some new cities in the coming six months. So we’ll likely add a couple of cities before the end of this year and then another couple of cities in the first quarter of next year. So that will continue to contribute to the new city contribution to our overall growth.

There are no further questions at this time. I will now like to hand the conference back to today’s presenter. Please continue.

Okay. I would like to just thank everyone for taking the time to be with us this evening and we really look forward to continuing to discuss with you the TAL story and welcome you to our markets here in China. If you have any further questions, don’t hesitate to reach out to me or any of our other investor relations representatives. Thanks so much. Have a great day.

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