Ladies and gentlemen, thank you for standing. Welcome to the First Quarter 2015 TAL Education Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session. I must advise you that this conference is being recorded today, Monday, 21 of July 2014. I would now like to hand the conference over to the Investor Relations Manager, Ms. Mei Li. Thank you. Please go ahead.

Thank you for joining us today for TAL Education Group's First Fiscal Quarter 2014 Earnings Conference Call. The first fiscal quarter earnings release was distributed earlier today and you may find a copy on the company IR website or through the Newswire. During this call, you will hear from Chief Financial Officer, Mr. Joseph Kauffman. Following his prepared remarks, Mr. Kauffman will be available to answer your questions. Before we continue, please note that the discussions today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in the 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. Now, I would like to turn the call over to Mr. Joseph Kauffman.

Thank you, Mei, and thank you all for joining us on our earnings conference call for the first fiscal quarter of 2015. We are pleased to report once more an outstanding quarter with revenues slightly above our guidance and very strong bottom-line results. Today, I will discuss the highlights for the quarter and provide an update on our online education initiatives and key themes for fiscal 2015. Finally, I will go over the financials with you. Net revenue for the fiscal first quarter increased 45.0% year-over-year to $89.0 million. Revenue growth was driven by a 44.9% increase in enrollments. Our core small-class offering was again the main driver of our growth. Small-class contributed 73% to the first quarter revenues, up from 68% in the same quarter last year, one-on-one represented 23% of revenues compared to 29% in the same quarter last year and online contributed 4% this quarter versus 3% in the same year ago period. In terms of revenue contribution for small-class, cities other than Beijing and Shanghai again achieved a combined over 100% revenue growth in the quarter. Cities other than Beijing and Shanghai accounted for 44% small-class revenues in the first quarter compared to 34% during the same period last year and 40% last quarter. Beijing and Shanghai small-class grew top-line combined 30% in the quarter and together contributed 56% of the small-class revenues. Shanghai continued to show strong growth once again this quarter. In Beijing, primary school, high school and Chinese composition outperformed our expectations in terms of enrollment growth. A highlight for our junior high business in Beijing was the performance of our students on the Zhongkao or high school entrance exam. In 2014, eight of our students in Beijing achieved the top score on the Zhongkao, in their city districts and one of our…

Thank you very much. (Operator Instructions). Your first question comes from the line of Fei Fang from Goldman Sachs. Please ask the question.

Hi. Joe and Mei. Congratulations on the quarter. Very strong results. Can you discuss expansion plan for the rest of the year, especially in the context of the convertible bond proceeds you have raised. How many new learning centers would you plan to view in the rest of the year and also what's the plan to go into further new cities and of course also how would you plan to expand your online revenues. Then I have a quick follow-up. Thank you.

Sure. Thanks for your question, Fei. The first thing I would point is that the convertible bond proceeds won't be used for domestic expansion, so the reason for the convertible bond is because we didn't have sufficient cash offshore, so those proceeds will remain offshore and our expansion onshore will be driven by the free cash flow of our business. In terms of how we are thinking about the rest of the year from a cities' perspective, we have reached the plan that we said we would. We are at the high end of the two to four new cities per calendar year, having added those four cities this calendar year between February and June, so we shouldn't expect us to be adding more cities, but you should expect us to continue to be adding learning centers in classrooms through existing learning centers. If you look at where we added the learning centers this year, you will find that that our fiscal year 2012 cohort was the focus of our center addition efforts with Hangzhou and Chengdu each adding a net two centers and Nanjing adding a net one center, because Xi`an actually added two new learning centers in Q4, one small-class and one one-on-one. We didn't make net additions again in Q1 to Xi`an. On a per city basis, we added the most learning centers in Shanghai with a net three adds, so this will help support the rapid growth of our business there. Then we added a net small-class learning center in Qingdao and a net one-on-one learning center in Wuhan. In addition, of course, adding learning centers to Shijiazhuang and Qingdao, which we added in the quarter. Again, the 2013 cohort Zhengzhou, Chongqing and Shenyang, each added a center in Q4 last year, so we didn't feel like we need to do that again in Q1, but I think we can see the pattern that we are going to continue to be putting in the learning centers and added capacity, where we are getting that really robust growth in Shanghai and all of those cities outside of Beijing and Shanghai that experienced over 100% growth for the small-class business this quarter.

Great. Thanks for that. That's very helpful. With regard to your online revenues, do you have a plan for, in the rest of the year, how fast you will have to run online contribution?

Yes. I mean, online is definitely a focus. We saw really great performance out of our online business at xueersi.com in the quarter and we expect that to continue. It is our fastest growing enrollments business unit of all of our business units and you saw that the revenue contribution went from 3% to 4%, so I think we talked about this in previous quarters, but I would like to see online just to be at least 4% of overall revenues this year from 3% last year.

That's very helpful. Last question from me, a quick housekeeping one, your guidance for the next quarter what's the FX assumption that you are working with?

Right. We used 0.612 for Q2 versus 0.1603 for Q1.

Got it. That's very helpful. Thank you.

Thank you. Your next question comes from the line of Philip Wan from Morgan Stanley. Please ask the question.

Hi, Joe and Mei. Thanks for taking my question and congrats on a very strong quarter. My question is about your investment or M&A, so given the company has successfully raised $200 million U.S. dollars from the CP, and now you have also completed a few acquisitions in the past couple of months, I wonder if you could share with us your views on investment on M&A going forward. Thank you.

Yes. Thanks a lot, Philip. Just to be clear, firstly I would like to emphasize we will continue to be an organically-driven company for the foreseeable future, but we are making strategic investments now because we believe that this is precisely the right time when our organic growth is strong that we should be making strategic investments, not waiting until organic growth has slowed down, so we expect the vast majority of our investment activity to be in the online and technology area as I mentioned before and our center-based businesses will continue to be driven by organic growth. We are essentially looking for three things from strategic investments or acquisitions. We are seeking highly complementary assets that will get us, one, new users, two, extend lifetime of our existing users and, three, a greater number of valuable interactions with our users. Of course, time is of the essence, so we will of course buy in time through making strategic investments in acquisitions. If you think about our past investments and acquisitions we have made in the context of that, you will see that for example with kaoyan.com, we are fundamentally extending lifetime value of our customer beyond high school. For Babytree, we are bringing in new users, even younger that feed into our Mobby and Kaoyan young learners business, so that's how we are thinking about our investment strategy, Philip.

All right. Thanks, Joe. My follow-up question is about your ASP. I may have missed it earlier. Could you comment on by only looking at the small-class business, what would be the ASP growth for this quarter and what will be the trend that we should expect coming quarters. Thank you.

Yes. This quarter was over 8%, it was 8.4% in U.S. dollar terms in this quarter. We have taken the price increases actually ahead of the summer term, so that's affecting Q2, so with those price increases we went from 70 to 75 in Beijing, from 60 to 70 in Shanghai, 60 to 70 in Shenzhen, 40 to 50 in Suzhou, 40 to 45 in Zhengzhou and Chongqing. These are all hourly rates in Renminbi terms. I mentioned on the call that we also took a price increase in Wuhan in the Chinese New Year period from 33 to 40, which will of course extend through Q2 and Tianjin from 40 to 50 in the spring which will of course extend through Q2, so I think that we are going to continue to see very good pricing power and the ability continue to grow ASPs of our core small-class segment.

Great. That's helpful. Thank you.

Thank you, Philip.

Thank you. Your next question comes from the line of Jack Yang from T.H. Capital. Please ask the question.

Hi, Joe and Mei. I have a question about your new education and the mobile product and Jia Zhang Bang, and we know that you have the advantage platform in PC - and your mobile users also surpassed the PC users, so I wonder how is your Internet strategy new market of occupying in terms of mobile product?

Sure. Well, we fundamentally believe that we need to lead with mobile. Mobile is where the future is, especially for social products like Jia Zhang Bang, what was previously EDUU, on the PC format. If you think about what we are trying to achieve, we are trying to create lots of interactions among parents who care so much about their kids, so it makes a lot more sense for them to be able to hear their mobile vibrator or ring every time they hear from other parents they want to hear from rather than having to go back to their computer at certain times of the day and see what has happened on the discussion boards since the last time they left their computer. Mobile is fundamental to creating what we want to achieve in terms of a highly interactive platform of these parents or the real key decision-makers for the K-12 segment.

Okay. I have a follow-up question about the online enrollment. We know that in online enrollment increased extremely rapidly in the past quarters, so I wonder could there be a possible - it is possible cannibalization going forward for examining the existing cities or do we noticed that some students choose online instead of the offline course.

Sure. That's a great question, Jack. What we see is no cannibalization, so what we see is that when students have a choice between online and offline that will go to a small-class setting. In cities where we do have both, online and offline, because of the pricing of the online product, people will view it as a supplementary offering, so it's an opportunity for kids if they miss something when they were first listening to it in a small-class segment to go back and hear it again, because you get access to online over an extended period of time or there may be some subject areas, where they don't need the full 15 times and three hours per time 45 hours of instruction for a typical small-class over the spring term. They could probably buy a skew online that will give them 4 hours, 5 hours, 10 hours in exactly the area where they need the attention. That's what we are achieving online. We don't see cannibalization at this point in time.

Thank you. That's fair and helpful.

Thank you, Jack.

Thank you. Your next question comes from the line of Ella Ji from Oppenheimer. Please ask the question.

Thank you. First, a quick follow-up relating to your M&A strategy, for future M&As is it also going to be minority shareholders most likely. Also, for your existing investments, do you see any chance that you may increase from minority shareholder to maybe a majority shareholder?

Yes. In both cases, so up till now we have also had acquisition. Kaoyan.com was an acquisition, Babytree was a minority stake investment, so we have done a mix of both, control and minority stake investments and we intend to continue to do so in the future. In terms of going from a minority stake to a took controlled investment, yes, that's also something that we would consider. We like the idea of minority investments, because it allows us to typically sit on the board of the company and get a good understanding as the company to be able to select those companies that we see as the highest potential and move towards the path to control those companies. I think that both of those things you said are accurate.

Okay. Great. Then my next question is relating to the one-on-one market, so one-on-one mix continue to decline and I see that you have a fewer centers comparing to when one year ago. My question is that do you think the amount for one-on-one Q3, on the market is declining or not growing as fast as for other segments or is it that your company's a particular intention to lower the mix, because that's not most ideally class for margin performance.

Sure. Yes. I mean, I think that you are seeing probably a combination of both. I mean, the market related slowdown. You know, there are comps that you can look at and get a sense for that. My sense of not yet listed players is that, they also are not growing as fast as they have in the past, but that doesn't mean that our approach is entirely consistent with the market. As you remember, we position one-on-one as a complement to our small-class business, so we are trying to make it for those top students that need one-on-one at cram at certain times of the year. We want to be able to address their needs, so we can take the full share of pocketbook of these consumers and also it addresses those students and maybe borderline top students, so they test it into our small-class, but they are kind of borderline, they feel like they need more help, they can go in to one-on-one. We are addressing a different segment of the one-on-one. Overall industry, our approach is different as well, so I think it's probably a combination of the two factors that you talked about, Ella.

Okay. Going forward should we expect that their mix of one-on-one continue to decline for you?

Yes. I actually talked about this last call as well. I mean, I think the long-term destination of one-on-one should be 10% to 15% if you look at us in the three to five years time, so yes I would expect that and I think it's a very favorable mix shift for our business.

Okay. Then last question is, you mentioned an impact of the regulatory change in Beijing that the enrollment of English class. I think you said it was down this quarter. Could you quantify that for us in what range do you think the enrollment is down year-over-year?

Yes. Sure. I mean, it was down a few thousand enrollments just to give you kind of a ballpark number. I don't want to disclose specific subject by city enrollments data, so that kind of gives us you sense. I think that we are addressing it very swiftly and in the right way, with our curriculum development, so Hello English in addition to the book curriculum text-based stuff we are also doing a lot with digital, mobile, so that's going to be an exciting new shift for our business. It will probably take a couple quarters before it actually funnels into the business, but will be good. Then this coming summer term, what we have done is we have really promoted trial for our English, so we have a really cool offering which is six sessions and three hours per session for a total of RMB 89, so we have a really strong belief that given the high quality of our product, if you come into a low-jell-o classroom, you will know the difference and stay with us, so we are doing a lot of activities also to drive trial for our English business. Again, as I mentioned in my prepared remarks, English is growing 47% outside of Beijing, so it's a very strong category for us where we continue to expect high growth from a total China perspective and will continue to put resources against it.

Got it. That's very helpful. Thank you.

Thank you, Ella.

Thank you. Your next question comes from the line of Clara Fan from Jefferies. Please ask the question.

Hi. Hello. Thank you for taking my question. I have got two questions. Firstly, would you mind sharing with us some financial and operating stats of xueersi.com? You mentioned that is profitable this year. Just wondering about the margins compared to your other segments and what are we expecting for the full-year fiscal '15? Are we expecting xueersi.com to be profitable? Secondly, a little more about the ASP trend. Would it be possible going forward given the online is contributing more to the business than one-on-one is coming down. For fiscal year '15, would it be possible that ASP would probably be down or maybe only around one percentage points to three percentage points? Thank you.

Sure. Thanks, Clara. Yes. In terms of online, at scale, I think, online has the potential to have profitability somewhere between the one-on-one business and the small-class business. It was roughly a breakeven business for us last year. It's new to profitability, but I don't think that at this stage in the game, profitability is what we should be looking for in the online business. It should be more about user acquisition and retention and that's what excites me about the online business that the user enrollment numbers are up and it's the fastest growing enrollment business for us that retention has improved and one we still have a lot of room to get on both of those metrics, so that's going to continue to be the focus over the coming months. In terms of ASP, I mean, I mentioned in my prepared remarks that based on current trends and how we are seeing this nice strength in our online business, you could potentially see ASP trend slightly down. My view is that, what's the most important thing you should be looking at is the pricing power of our core small-class business that's where we differentiate. The other stuff that you are seeing is mix shift, which I think is actually very favorable mix shift, moving away from one-on-one, moving more towards small-class and online. That's what we want to be doing. That's where the future is.

I have got a quick follow-up, so last quarter we mentioned that probably looking at around 35% top-line growth for the full year fiscal year '15. Are we still seeing the same growth, but probably a slightly different mix with the high enrollment growth, but lower ASP growth? Thank you.

Yes. That was the budget number. There has been no change to our budget. That remains intact. Yes. It will be more enrollments-driven.

Thank you.

Thank you very much. The next question comes from the line of Leon Chik from JPMorgan. Please ask the question.

Yes. Hi. Congratulations on your strong margins. Okay, the question is like this. Like, for your cities where you have one center right now, like the other - now before you add another one or you can go from like one to four, because it look like [past] add like one a year. That's the question.

Yes. Certainly, it's not about filling them up. It's about making sure that we are getting the tipping point business dynamics that we are looking for, so we could easily set up four, five centers right away and fill them up right off the bat, but that is not what the game is about for us. I would expect that you are going to similar type expansion as we have seen in the several years where you start with one, you go to two to three to four, but it's not quite as slow as you may be thinking with one learning center per year. I mean, if you look at Chongqing, it has four learning centers. We entered that market in 2012 for example. The approach, it's very important for us to continue with approach that we have had up from now. Not because the demand is out there, but this is how we get the high quality demand that we are looking for.

To follow-on on that, obviously you have some cities with like 10 centers and you got some cities with the population with one center. Looking at your center development in the past, it does look like you do kind of like one a year. Then once you hit the third and fourth year, you do like three. I mean, is there any reason why none of these cities - in time all be like 10 centers?

Yes. Of our existing cities that we looking at, yes, I mean, these are all cities that we see - potential K-12 market. I think that they all have the potential. That's why we have chosen them and that's why we add two to four new cities each year rather than some bigger number, because we are going after the highest potential market since we fared in terms of K-12.

Thank you.

Thank you, Leon.

Thank you. (Operator Instructions) There are no further questions. I would now like to hand the floor back to Mr. Kauffman for closing remarks.

Thank you, all, for taking the time to be with us today. We look forward to meeting you in Beijing, taking around to our centers here and helping to learn more about our business. If you have any further questions, feel free to reach out to myself, or Mei or any of our other IR associates. Thanks so much and have a great day.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect. Have a nice day.