Ladies and gentlemen, thank you for standing. And welcome to the TAL Education Group’s Second Fiscal Quarter 2015 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. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, 21 of October 2014. I would now like to hand the conference over to Ms. Mei Li now. Thank you. Please go ahead.

Thank you all for joining us today for TAL Education Group's second fiscal quarter 2015 earnings conference call. The second fiscal quarter earnings release was distributed earlier today and you may find a copy on the company IR website or through the Newswire. During this call, you will hear from our current Chief Financial Officer, Mr. Joseph Kauffman; and the new Chief Financial Officer, Rong Luo. Following their prepared remarks, Mr. Kauffman and Mr. Luo will be available to answer your questions. Before we continue, please note that discussions today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC. Also our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. I’d now 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 second fiscal quarter of 2015. I’d also like to extend a warm welcome to Rong Luo, who will take my place as CFO starting November 1st. We agreed this earnings call would be an excellent and immediate opportunity for our analysts and investors to be introduced to Rong. We are pleased to report on a quarter with revenues in line with our expectations and solid bottom-line results. Today, I will discuss the highlights for the quarter and provide an update on our online education and strategic investment initiatives. Then Rong Luo will go over some further analysis of the financials and discuss our business outlook with you. Net revenue for the second fiscal quarter increased 33.1% year-over-year to US$122.4 million. Revenue growth was primarily driven by a 32.2% increase in enrollments, while overall ASP was approximately flat. Year-to-date revenues have increased 37.8% year-over-year and we are well on track to achieve the full fiscal year budgeted revenue growth target of approximately 35% as articulated on our earlier earnings call. Our positive outlook for the year remains unchanged. Please note that Q2 was a quarter that had the usual every other year seasonality associated with the timing of Chinese New Year among other factors. If we add back any impact of one less week of class due to the timing of CNY and one less Saturday of class in May, which was included in the first quarter, Q2 revenue growth would have been approximately 40%. Our core small-class offering continued to be the main driver of our growth, growing 38% in the quarter. If we add back in the Chinese New Year seasonality and other factors mentioned above, the normalized revenue growth for small-class…

Thank you, Joe. Let me say I’m excited to be joining TAL Education Group management team. And it’s a great pleasure to be working with all of you in the period ahead. To allow for more time for the question-and-answer section, I would like to make just some brief points that will add more colors to the financials you will find in today’s earning press release. As for the second quarter bottomline results, income for operations and net income attributable to holders of ordinary shares, each grew by 24.8% year-on-year. Gross margin expansion was a major driver of our improved profitability in the quarter. Gross margin increased by 320 basis points to 56.5% from 53.3% in the year ago period. SG&A spending increased 57.1% as we continue to execute on our plans to invest in our future growth. You may recall, we did not add as much SG&A expenses as expected in the first quarter. Joe mentioned on last earning call that this is mostly a timing issue. The second quarter saw the higher level of SG&A spending we expected as our planned investment in new business and product lines gathered pace. The increase was attributable to both to a number of initiatives including content development for ICS 3.0 and other programs, enhancement of Xueersi Peiyou app for small classes registration and blended learning, stepped-up marketing spending on our re-branded Jiazhangbang social community and our bringing onboard new talent, particularly for emerging online and mobile-driven business and product lines. To give you a better sense of the total planned investment for the year, we expect a loss of US$12 million and US$15 million for the fourth year of Jiazhangbang on its new product lines and Peiyou’s new initiatives including ICS3.0 and Xueersi Peiyou mobile app. Year-to-date, we have spend roughly…

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

Hi, Joe and Rong. Thanks for the opportunity. It’s always been a pleasure. Wish you all the best. Can you talk a little bit about the competitive situation in your new markets, your low tier cities outside Beijing and Shanghai? How would you compare or contrast their competitive intensity versus in Beijing then I have a follow-up? Thank you.

Yeah. Sure. Thanks, Fei. As we said in our prepared remarks, we continued to see really nice growth out of our cities other than Beijing and Shanghai and as we mentioned, they contributed 48% of overall small class revenue in the quarter. So that’s a new high in terms of the contribution of these cities outside of Beijing and Shanghai to our overall small class revenue. And importantly, we see really strong runway for growth in these markets, main reason is the same reasons as we’ve had before. They continued to be very under penetrated and importantly, the competitive set is actually, we found it to be relatively weak in our core Peiyou segment. There aren’t really strong competitors in these markets, especially if you compare them to Beijing and Shanghai. And we have really highly differentiated products versus the competition in these markets. So if you think about kind of local competitors in each market, you can expect that competition is going to be relatively less fierce than what you would expect in a Beijing or Shanghai.

That’s good to know. Thanks. And also you have rolled out the Jia Zhang Bang app in the past quarter, can you post us on the progress that you have made so far and how has the experience been for students and parents?

Yeah, Jia Zhang Bang continues to be really important for us, as we think about customer acquisition and it’s playing evermore important role in our overall corporate strategy. We are continuing to focus on it everyday, improving the experience for parents. You will see kind of continued upgrades of the product. We are very focused on continuing to get feedback and make it better everyday. One example of that in terms of new functions is that we’ve recently added group function, so that people according to their interest or what school districts they are around they can form their own chat groups on their Jia Zhang Bang platform.

That’s great. Congratulations on the result.

Thanks, Fei.

Thank you. And your next question comes from the line of Tian Hou from T.H. Capital. Please ask the question.

Hi, Joe and Mei and wish you best of luck on your new venture and also welcome Rong on board. So my question is related to your much more longer-term strategy. So as a offline education company where major part of your business is offline business. Now, we have lots of online education companies started and to either of them we can’t say they are perfect. So today, the new concept or the trends is much more O2O, either offline to online or online to offline anyhow? It’s really interaction between two platforms, how to use the other platform to promote this platform. So, I wonder, what is Xueersi’s long-term plan in that area and also we saw lots of where those kinds of online education companies has already started? What are some things you saw upon this thing and was there some thing you saw that are not that interesting and I also have a follow-up after this?

Okay. Thanks, Tian. Appreciate that question. There is a lot that I will try and cover as much as I can. I think it’s an interesting point of view certainly around O2O and importantly that’s where you see, where we are focusing most of our resources. If you see kind of where we are focusing our energy from an SG&A perspective, the bulk of those projects are actually O2O oriented projects. So if you think about Jia Zhang Bang for example, it’s our clearest O2O play, as we have parents from the social community having their children over time take center based classes. That’s pretty straightforward as I mentioned, my response to say that’s we are continuing to improve that project and it’s really gaining traction and an important strategically for us. The other thing that I mentioned as part of my prepared remarks and Rong picked up on in terms of his financial analysis talking about the SG&A was Xueersi Peiyou app which is also a clear example of, kind of the O2O that you are referring to where parents instead of having to go to service centers to be able to register for our classes or change classes, they can do that directly through the app. So it’s a win, win really where you’re getting much better customer satisfaction from parents, while at the same time you’re also having a much more efficient cost structure not having to have as many service centers to handle these kind of issues. And then ICS 3.0 is another thing that was mentioned and that’s also actually an O2O type model, it’s not just about tablets in the class room, but it’s about using the information from the classroom. What answers the kids are answering right, and which ones are having more trouble on and then being able to -- be able to download that information and then have it be used for targeting drilling and exercises that could happen online or mobile, etcetera. So the bulk of what we’re actually trying to do actually is very in line with your observation around the importance of O2O.

That’s very helpful. So another question is really related to this, which is you just raised the money, 230 million, and I guess those money are going to be used for investment, acquisition, etcetera, etcetera. So I wonder what are the area that you feel like you need to invest to make yours much stronger company, and what are the ways to use your money investment -- equity and investments or acquisitions, what are they?

Yes, sure. I mean, in terms of the recent capital raise net of the capped call transactions and the other fees, etcetera was a more like 203 million from a net perspective, but I take your point, we are continuing to focus on, it’s been mostly strategic investments to this point and with strategic investments especially when they are 20% or less are you not going to see the regular P&L impact from consolidations of the financials are recording a minority interest. So as we have discussed before, we see that as a better way to manage a risk around new investments in this showing and then the best investments from a strategic investment or minority stake investment perspective we think about potentially over time increasing that to more of a control stake. We will also look at pure control stake investments right from the start but up till now the bulk of our investments have actually been minority stake investments.

Okay. I see. That’s a very helpful. Thank you.

Thank you.

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

Hi, Joe and Rong, thanks for taking my question. I have two questions. One is on the competition. And could you elaborate on pricing as some of your competitors recently offered discount to tax student in top city like Beijing, Shanghai, while you raised price for similar class in regions at the same time. So have you seen any impact to your enrollments because of this? And then the second question is, as we are given a change in the business mix between small-class and one-on-one as well as growing sales contribution from lower tier cities, how should we think of ASP trend going forward? Thanks you.

Okay, great. Thanks, Philip. In terms of your first question, I think that we do quite different things from the competitor you maybe referring to. We plan a completely different segment where we play with Peiyou and top students. We really don’t believe that a low play strategy is going to work. We don’t believe the parents of top students are going to take the risk of going elsewhere just because of the lower price. Just to put this in context, this is not like we’re super expensive to begin with, over an entire semester of 15 classes, a similar highest price point in all of China which right now is RMB75 an hour in Beijing, a hours per class, 15 sessions of semester. You’re talking RMB3375 over 3.5 months of instruction, right. So roughly a RMB1000 a month, which especially when you are talking about Beijing and Shanghai is quite affordable for the mass markets and we don’t believe that particularly parents of top students are going to sacrifice their kids opportunity for better future for reduction of say a RMB1000 or RMB1500 or something like that. So we think of low price strategy may work in other segments of the market, but for our segment of the market, we don’t think it’s an effective strategy and we are not seeing that kind of strategy work in terms of taking share from us. I think the overall picture is that K-12 is a huge market. And we are still a really small part of that market. The top players are still only a few percent of that market. So everyone can play in their spaces that makes sense to play in. And ultimately, the nationally branded players are probably going to take an edge over time at the expense of the local players, but we don’t see kind of the -- we haven’t seen like head-to-head kind of taking share among the nationally branded players at this point in time. Let me mention Shanghai, I mean importantly Shanghai is growing extremely well for us. And we continue to see a long runway for growth in Shanghai as the typical drivers that we talk about in terms of growth in any given city, subjects, grades, and districts have filled not nearly been completely used up in the Shanghai market. For example, there are still lot of room to grow in middle and high school non-math subjects and city districts, in particular in Shanghai. So that would be how I would address the question related to competition. And then I will turn it over to Rong to talk about how we think about pricing going forward.

Thank you, Joe. And just as I mentioned in my prepared remarks, we have taken the price ahead of the summer term in certain cities. So I think the current price increase for Peiyou small-classes in this quarter should be approximately the range you will see in coming quarters. Our geography distribution has moved into the cities other than Beijing and Shanghai, you may see a slightly low ASP growth for small-class in the quarter. As Joe has mentioned before, the ASP should be in the range around 5% to 8%. And based on what we know today is more likely at a lower end range, at a lower end of that range. The mix is of the lower percentage of one-on-one business. We also expect to continue to pay out over coming quarters. I think the greater percentage of online may not be as strong as in previous quarters, but overall what you spend over a planning ASP to continue to be flat to a slightly down in the coming quarters. I hope it have.

Thanks, Rong.

Thank you. That’s very helpful. If I may have one more follow-up. I may have visit early, could you elaborate a little bit about your expectation on the recovery on Beijing? Thank you.

Yeah. I mean, in terms of Beijing, we talked about in our prepared remarks how we’re already seeing nice recovery in the high school business where you’re seeing 10% enrollment growth in high school based on the enrollments that we see so far in the fall term. So that’s a nice initial indication. We expect in the middle school business that the ICS 3.0, which we’re currently piloting in the 7th grade will continue to add differentiation and support our continued growth in that segment. And then in terms of English, we’re seeing some nice initial traction from Hello English. We believe that for the market as a whole, especially for test-prep oriented English providers, like ourselves and other well-known branded players, it’s going to be a longer period of time before you’re going to get growth back, but I think we’re doing all the right things in terms of focusing on rebranding the product, focusing on more interaction, using mobile, using the new techs together with Cambridge University focusing more on conversational part of the English rather than test-prep. So I think we’re doing all the right things. That part of it will probably take a little bit longer than the others.

Okay. Thanks for the color.

Thanks, Phil.

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

Thank you. Joe, it has being great working with you in the past few years. Wish you all the best and you’re all welcome on board. First, I want you clarify relating to the APAC conference impact of RMB30 million. Is that course going to be delayed to fiscal 4Q, or is it going to be cancelled?

Okay. For this question, we need to wait a little bit, not only for the -- we have missing two classes in Q3. One is because of the APAC in Beijing. The other one is because the late fall-term classes against last year because we started a little later than last year. So all of these two classes has at least contribute RMB30 million. So this will not go away, all of this will rollout throughout the Q4, because most of our business is the long-term business. They’re still and so we’ll not go away just because while to its delay.

Okay. Thank you for the clarification.

A typical fall semester is a 15 class semester. So to Rong’s point, people enroll for the whole semester. They don’t enroll for a couple of classes at a time. So it’s just going to roll into Q4.

Okay.

Our fiscal quarter is not relevant from the parents perspective, it’s -- so anyway that just a further clarification on that point.

Yeah. Got it. And then my second question is relating to your investments and so, one, could you talk about your rational behind your investment of Minerva Project? And since in the past you have been investing in different type of businesses such as Babytree or Kaoyan or now the Minerva, they are in different -- there’s different sub factor in different regions. So what is going to be -- is there going to be a focus of your investment going forward either in a sub segment or in certain geographic region? And two, relating to your in-house investments, the ICS 3.0, (indiscernible) and Jiazhangbang? Can you provide us operating -- key operating metrics such as number of downloads or number of it may used? And with all those spending, where do you -- where this management expects you can achieve, for example, by end of this fiscal year? Thank you.

Sure. In terms of the Minerva investment, Minerva and TAL share similar philosophies in terms of focus on top students and interest in innovation and technology. In terms of relevant for us, we have a strong interest in providing our high school students with options to go not only to the best Universities in China but also the best Universities in the world, like Minerva. Minerva, its early days but the acceptance rate was very low, the yield was very high and they’ve met all their goals in terms of building a very interesting curriculum with top faculty from across the U.S. and the world. So I think its very in line actually in terms of our vision and can directly provide opportunities for our top students beside from the top Universities in China. In addition to that, the innovative use of technology by Minerva, especially around these live interactive online courses is also really interest to us and we think can help with advancement of our own portion based in online courses. So when you think about our investment strategy, I actually don’t see that -- I see there is -- I see a clear logic around Babytree, Kaoyan, Minerva. It’s about extending the lifetime value of the customer. Babytree is about bringing people in earlier while Kaoyan and Minerva are about extending beyond K-12. So I think there is a clear logic around that. And then in terms of the regional piece, I mean I think that typically in terms of providing feeders in terms of user into our business, domestic type strategic investment probably make more sense. In this case, you have our existing students providing them a potential opportunity overseas and then our view is also that Silicon Valley presents a lot of opportunities in terms of technology. It’s just much more advance in terms of technology and we can leverage a lot of that in the China context. So that’s how we’re thinking about it from a regional perspective and from the strategy perspective. And then I’ll let Rong talk a little bit about what we’re thinking around our investments that he mentioned around Jiazhangbang, Haidian, et cetera.

Yeah. I think the logic around Jiazhangbang I think it’s quite straightforward O-to-O as Joe has mentioned just now. And the parents does get information there and after they get enough information they can just make some quick decision, they can come to our school. And for ICS 3.0, I think it’s also very clear way of differentiating our classes and also being able to provide more target in training exercise. It’s a worry in highly interruptive device and which can enable the communication between teacher and students and parents would be much easier. Xueersi Peiyou apps as logic is also clear because you can provide the easiest way for parents to register change of classes. And over long term, if we reduce our reliance on such centers, there is opportunity to be much more efficient for own cost perspective. Well at same time, you can also help to better serve the parents, which because all of them are in the (indiscernible) is very easy way. It’s a win-win situation for both the parents and for the company. For Haidian, I think you’re still in a very earlier stage. We know the live online is our best opportunity to be able to effectively enter markets, where it’s not economical for us to enter with the learning centers. Every time we want to open new city or we want to open the new learning centers, actually we’re -- we treat this very seriously because we need to make sure the quality is good enough. So for Haidian, a kind of the live interactive product, we have asked you to enter this new market very easily. Given that it’s live and there is more interactions that warehouse is much better than the pre-recorded products. And that’s why we believe all of with Haidian’s initiative, we will lead to higher student retention overtime and we wish all of us can hear us to quickly increase our scale in future but again we’ve to say Haidian is at a very early stage. We are still doing some pilots in some few cities. We will keep you posted if we get more information on more progress in future.

Okay. Thank you. Is there any other operating metrics that your management can share with us?

No. Not at this time, Ella. There are relatively early stage works in progress but we are happy with the progress up to this point, and we will share with you the relevant metrics at the appropriate time.

Okay. Thank you, Joe. Thank you, Rong.

Thanks, Ella.

Thank you. And your next question comes from the line of Leon Chik from J.P. Morgan. Please ask the question.

Hi. Sorry to see you go. No, I haven’t covered for a very long. But anyway, the question is I think you mentioned before the small class, tuition was up about 6% and I think overall tuition is up like 1%. So, is that difference just the mix more small class than less one-on-one? And also related to that, is that the reason why -- is that that the only reason why gross profit margin is up because you have more small class versus one-on-one? Thanks.

Sure. Thanks Leon. Yeah. So the reason between the small class which is over 6% than the overall ASP which is less than 1%, is going to be mix related so. But it’s not just one-on-one, remember it’s also online and online had a greater percentage of enrollment this quarter than in the same period last year. And the enrollment and the ASP for online is particularly low because you not only have a lower hourly rate, but people are doing typically many fewer hours than they are in the small class or the one-on-one product. So that impact to online has an effect as well as the one-on-one impact that you mentioned. And then in terms of the gross margin question, the mix shift is important. There is a big gap in gross margin between the one-on-one and small class businesses. We also had improved utilization in the quarter. And last year, we also had a third-party claim in the quarter as well that hit the COGS line. So it was a combination of factors that drove the overall strong improvement on the gross margin line.

Could you give us the, just one-on-one tuition change, can you disclose it? Thanks.

Sure, one-on-one, we actually did not take price in the one-on-one, so you didn’t see an ASP increase for one-on-one in the quarter.

Okay. Thanks.

Thank you, Leon.

Thank you. There are no further questions at this time. I would like to hand the floor back to Mr. Kaufman for closing remarks.

Thank you. I would really like to thank you all again for all these years of great co-operation and support. I have really loved being CFO of TAL and loved working with all of you. I look forward to continue to make contributions to Tal as a Board Member in the future. And I am excited as always about the really bright future that we all have ahead of us. Rong and I will be available for questions as you may have them, so feel free to reach out to Mei, myself or any of our other IR staff. And we will be happy to be available for any questions that you may have over the coming days and week. Thanks again. Again really appreciate it. Thank you.

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