Ladies and gentlemen, thank you for standing by and welcome to the TAL Education Group second fiscal quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session [Operator Instructions]. I must advise you that this call is being recorded today, 27th of October 2016. I would now like to hand the conference over to your first speaker today, Ms. Mei Li. Thank you and please go ahead.

Thank you all for turning up today for TAL Education Group’s second fiscal quarter 2017 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 newswires. During this call, you will hear from Chief Financial Officer, Mr. Rong Luo. Following his prepared remarks, Mr. Luo 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 US 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 would now like to turn the call over to Mr. Rong Luo.

Thank you, Mei. And thank you all for joining us on our earnings conference call for the second fiscal quarter 2017. We continued to enjoy very good topline growth in the second quarter, driven by the high demand in all cities and supported by the further capacity expansion. Once again, in this quarter, we saw renminbi depreciate significantly against the US dollar. Despite this negative impact, in dollar terms, topline growth was 56.4% to US$271.1 million, ahead of our expectations. In renminbi terms, the net revenue grew by 66.4% year-on-year. The strong revenue growth was supported by a strong 77% growth in enrollments. The outperformance was mainly due to stronger-than-expected growth in both Peiyou small class as well as online course business. In the quarter, non-GAAP operating profit increased by 33.3% year-on-year. We saw an improving margin trend in the Q2 compared to that of Q1 as we have anticipated. Today, I will briefly review our operational progress in the second quarter. After that, I will provide some further analysis of the financials and our business outlook. Let me first recap our progress for each business segment. Small class continued to grow fast across the board. Small class accounted for 86% of total revenue in Q2 compared to 83% in the same year-ago period. Net revenue for small class was up by 72% in renminbi terms and 62% in dollar perspective. While enrollments increased by 62%, small class revenue generated from the cities other than the top five – Beijing, Shanghai, Guangzhou, Shenzhen, and Nanjing – grew by 89% year-on-year in the US dollar and 102% in renminbi. The other than top-five cities accounting for the 40% of Peiyou’s small class revenues increased from 52% in the same quarter last year. We achieved triple-digit year-over-year renminbi revenue growth in 11…

Thank you. [Operator Instructions] Your first question comes from the line of Zoe Zhao of Credit Suisse. Please ask your question.

Hi, management. Thank you for taking my question. And congratulations on a very strong quarter. I have two questions. First, just on your future expansion plan in terms of both learning centers, new city entrance, and the hiring plan for your online and offline teachers, could you give us an update? And the second question is on your guidance. This is apparently very strong. Could you help us to break down the revenue growth from your organic businesses versus the consolidation business such as Shunshun next quarter? Thank you.

Thank you, Zoe. I think in the first place, we need to remind the whole team, starting from this year – actually, we are seeing the K-12 children market is getting better and better, I think which can also be referenced by the other competitors in this market. They are ultimately a work in progress. So, the big market actually is doing good for us, especially for the top players in this area. So, for our company, our principle is try to – we tried to mainly increase the market demand, so that’s why we have continued to add classroom capacities, recruit more teachers this year. Let me recap. In Q1 – in Q2, probably we have added 1,313 Peiyou small class classrooms, a net of 42 Peiyou small class centers. And we are planning to add another 20 to 30 small class learning centers in Q3, which is also to capture the growing demand and potentials in this market. In Q3, I think the places we probably will add more capacities were in the places we have very good matches including the fulfillment rates and retention rates and the refund rates. So, we have some key priorities there, including Guangzhou, Shanghai, Nanjing, Beijing, Wuhan, Chengdu. And I also want to let you guys know, this year, we continue our pace to add more new cities. And we are planning to add a couple of new cities in the second half of fiscal 2017. So, we have probably a similar – that’s why I told you guys in the previous earning calls, we are targeting to increase our capacities in the range of 40% to 50% and now we’re on track. In a teachers’ perspective, yes, that’s also very important. We will add more teachers to serve more students. I…

Yes, fair. Thank you.

Thank you, Zoe.

Your next question comes from the line of Claire Cao of Morgan Stanley. Please ask your question.

Hi, management. Thanks for taking my questions. Could you help us to break down what’s causing the year-over-year margin decline in the quarter and how should we think about the full year margin profile? Thanks.

Okay, Claire. I don’t think – similar to what I told you in the past several quarters, I think we have two drivers to drive up a little bit of our margins. In the first place is our – a little bit faster than before, the plan to try to expand more networks and more learning centers to meet the increasing demand from the market. And we have added over 1,000 classrooms, as I told you just now. So, we probably will continue to do that in Q3. And the other reason is driven by the new acquired business, the Firstleap Education and Shunshun. And compared to what they were before, they are making a lot of progress. It’s much better than that. But compared to my company, on average, especially compared to the margins of small class, they are a little bit lower. So, if we mix all businesses together, the margin percentage is a little bit down than last year. And I have some numbers to draw your attention. I think, in Q1, the non-GAAP operating margin, we are around six points declined from last year Q1. And Q2 is 3.8 points behind from last year Q2. And Q3 and Q4, the margin trend will be better than Q2 and Q1. For the full year, we’ll continue a little bit down than last year, with very strong topline revenue growth. We will continue to maintain our current strategy and we’re also quite optimistic about the new acquired business. They will contribute to our overall margin. It’s much better in the coming two to three years.

Okay, thanks.

Thank you, Claire.

The next question comes from the line of Fan Liu of Goldman Sachs. Please ask your question.

Hi, Luo Rong. Hi, Li Mei. Thank you for taking my questions. So, my question is about your enrollment growth in Beijing. Would you please update some bit on this aspect? And also, what kind of reason you will attribute Beijing growth to really recover from things several quarters ago? And what’s your plan in the coming quarters for your core cities like Beijing, Shanghai and Nanjing? Thank you.

Okay. I think in Beijing performance, as I mentioned, actually we’re doing okay. We’re doing good in Beijing. And again, I think the margin in Beijing actually is – the market consolidation in Beijing actually is more and more obvious. And we’re seeing the new arrangements also doing quite well in Beijing and we’re also doing quite well in Beijing. Last quarter, my Beijing enrollment is more than 30%. In Q2 actually, even we take all the promotion, the enrollment is also very healthy in Beijing. I think when the market – when the new generation of parents, actually they recommend their friends more than before. So, for the top players in this market, [indiscernible] we can maintain our high quality. Actually, [indiscernible] to get more and more market shares. And so, we’ll still be – based on the retention rates we have seen for the students who retain from summer and fall, we also see it’s very healthy. That’s part of the reason why our Q3 is quite strong. And so, we believe the Beijing market is still will give us a very robust growth in the coming several years. And we also will work together to make sure we can deliver more and more high quality classes to our students and we will continue to invest in technologies and try to improve the learning experience not only in offline, but also in online in Beijing. So, I think that’s also a very good growth driver. We will continue to make Beijing bigger and bigger. And the reason – part of the reason why Beijing has to recover from previously a little bit of the flattish growth in the past maybe one or two years, I think the key is, we have reinforced the operation efficiencies. We have made…

And your next question comes from the line of Natalie Wu of CICC. Please ask your question.

Hi. Good evening, management. Congratulations on a very solid quarter. You have mentioned earlier that your margin will be improved – actually you have mentioned firstly that your margin will be a little bit down this year or in the fiscal year of 2017, but will be improved in two, three years. So, what’s your margin expectation next year or the fiscal year of 2018? Actually, my understanding is during the rapid growth period, it is very reasonable to choose expansion in the sacrifice of margin. But when the growth rate slows down and stable, that should be the time a company will return to its normalized margin. And I recall that management has mentioned before that a normalized non-GAAP operating margin for the small class business in longer-term should be between 18% to 20%. So just wondering what’s the growth rate accordingly at that time. Thank you.

Thank you, Natalie. I’m pleased to see not four questions. It’s two. In the first place, about the margin improvement and the guidance for fiscal year 2017 and 2018, first speaking, we don’t disclose any margin guidance actually as well as in the past. But what I can tell you is, again, in Q1, we declined by 6%. In Q2, we declined by 3.8%. In Q3 and Q4, we will be better than Q1 and Q2. So, the overall year, we’ll be maybe slightly down this year. And going forward to 2018, we see a lot of positive things there. But, again, we’re just starting our budgeting season this month. Certainly, sometime we’ll reveal some key drivers and some key investments we’re going to make next year. So probably maybe I can disclose you guys more details maybe by the end of Q4 earnings call. And in the long run, let me clarify, the 18% to 20%, that’s now the margin range for small class. That is the margin range for non-GAAP for the whole company. I think, last year, we had 17.9%. Two years ago, we are around 19.7%. So that is the range where it comes from. So we still believe, as a company, on one side, we need to deliver a high growth – high topline revenue growth, get more market share. And on the other side, so we need to balance the investments. For example, the double-digit models in the live, today, most people feel is good. But, you know, we started to invest 2 to 3 years ago. So, today, when the product we have developed for 2 to 3 years now coming to the period of production, we need to continue to make investments to make sure we can focus on research and development for something new. For example, our latest learning technologies in the coming to three years. So we want to manage our company in more stable ways. We want to manage it at a healthy growth, not only the top line, but also the bottom line. So, looking forward, in the coming 2 to 3 years, I think we maintain our revenue outlook. Our company will try to maintain our growth rate between 13% to 15% in the coming 2 to 3 years. So that’s the right range for us to hit.

Great, thank you.

Thank you, Natalie.

Your next question comes from the line of Mariana Kou of CLSA. Please ask your question.

Hi. Congratulations, management, on a very strong set of results. I think my question is more on pricing. I think you mentioned a couple of data points on ASP. Just want to get a bit more color on what you think about normalized situation, how you price your classes on year-on-year growth perspective. And also, I think I noticed on the slides that your small class enrollment growth is about 62%. I think you mentioned on the call that one-on-one actually recorded quite a good growth rate this quarter. If you could also help us understand what's kind of the range of enrollment growth that we saw in Q2 for one-on-one. Thank you.

Okay, Mariana. In the first question, for the pricing, I mentioned maybe in the beginning of this year, we have taken price rise in some major cities. We have taken the price rise in Beijing from 75 to 85; Shenzhen, from 70 to 80 [indiscernible] per hour; in Guangzhou, from 60 to 70. And we also took price rise in Shanghai just now. So we’ll maintain our pricing strategies to take the price up every 2 to 3 years in one city. And we’re also very happy to see – all the places we take the price up – actually, in Q2, we also gave some coupons to make sure that parents, they don’t need to pay the price increase in a quarter in summer. But all of this impact, they will show up in my Q3. So, that is part of the reason why you see in Beijing – you know, I say we take the price up, but in Q2, you didn’t see it. In Q3, you probably can see the impact. And for the enrollment growth for the one-on-one, because one-on-one [indiscernible] complementary services. We believe that’s also very important to our core business. And specifically, about the enrollment growth, actually it’s around 10% because we want to manage the percentage of my total revenue in the past several years. I still remember, two years ago, we adjusted [indiscernible] 15% of my revenue and we say around 2 to 3 years. This mix could be around 10%. This quarter, that is around 10%. Also, one-on-one is very important and very complementing to our core business. That’s why you can see we opened around five learning centers, up one learning center in Q2. And looking forward, we probably maintain our strategy to manage the one-on-one growth. And I think 10% is fair – you probably can think about it in the coming 2 to 3 years.

Thank you.

Thank you, Mariana.

The next question comes from the line of Terry Chan of HSBC. Please ask your question.

Hi. Thank you, management, for taking my questions. And congratulations on the strong set of results. I have a question on your live broadcasting initiative. Can you share more color on the business, like, city coverage, student acceptance and feedback, and also your expansion plan? In the next 12 to 18 months, what do you think would be the size and the margin associated with this business? Thank you.

Okay, Terry. In the first place, the live broadcasting, [indiscernible] online school [indiscernible] starting from summer. In a city perspective, because that’s a live product, that is – actually can cover a lot of cities. So based on the numbers we have today, we have covered I think more than 40 cities by – that is purely online. So some cities [indiscernible] matches to do evaluation. And the feedback from the live broadcasting students actually is much better than the prerecorded content because live is more kind of real-time interactive. The teachers can have some feedback interactions with the students real-time. And also, [indiscernible] teacher assistance, the virtual teacher assistants online, so the teacher assistants can give a lot of help, support, maybe start coaching to students, let the students feel they are well – they are being taken care. And besides the live broadcasting classes [indiscernible] two hours, we also have a learning system to make sure we can help the students when it is time for them to do a pre-study, when it is time to do a homework and when it’s time to do the feedback to the teachers. We not only provide live – the teaching process, but also provide a kind of learning management system to make that students are well in line to continue their studies. Based on the retention rate we have seen in the live [indiscernible] compared to the pre-recorded content, retention rate before is much higher. But, of course, compared to our Peiyou small class, it’s right in the middle. In the coming 12 months, we will continue to expand our online live broadcasting as already in the past. We don’t have anything worry. Surprisingly, our worry [indiscernible] grow by themselves. So I think by the end of today, the online is only around 4% of my revenue. We believe the percentage will be increased a little bit, but won’t be a big change over that. So, we will continue their numbers. In Q2, the revenue growth of the live broadcasting is around 95%. The enrollment growth is a little over 100%. So they grow faster than my company average. We still believe the percentage of online will be increased significantly in three years’ time.

Thank you for the answer. But I intended to ask about the [indiscernible]. Could you give several comments on that as well please?

Okay. I think we’re the first company in K-12 area to run the double-digit models since two years ago – I think one-and-a-half years ago. So I think, at that time, when we run the pilots and do a lot of experiments, some people feel that’s not the right model to do compared to offline. Maybe that feature is not efficient. Actually, based on pilots we have been running, based on the feedback from our students and parents, actually we have seen a lot of good, a lot of positive signals. But, again, the double-digit model still is in the early stage. We can’t say because we still have very good feedback from the parents. Then we say the double-digit model can be a game changer and we can grow very fast. We are ready to grow maybe 20 cities or even more. I think that's also too optimistic. I think in education there is no shortcut, so every model we need more time to make sure – we need to tweak every detail to make sure we can maintain high quality. So, for a double-digit model, again, we will maintain our current pace to expand gradually. I think, in Q3, you probably can see we have entered several tiered structures [indiscernible]. So, again, for the whole year, I don't think double-digit models can contribute a meaningful revenue contribution. That is the potential for the coming three or four or five years. I will let you guys know more features and what progress next quarter when we have entered enter there. Again, I think the takeaway is we believe in this model. But we are very patient to grow these models. We wish we could leverage this model to serve more students and still maintain the high quality.

Okay, thank you for your answer. Thanks.

Thank you, Terry.

Your next question comes from the line of Alex Lee of Daiwa. Please ask your question.

Thanks Luo Rong. Congratulations on the strong quarter. I have two questions. First, I understand the company has recently rebranded and reorganized the oversea [indiscernible] business, oversea study business, and I was wondering whether the management can give us some sort of color and characterizations on this medium-term vision for these segments? And the second question is that, I think you just mentioned it's 40% to 50% year-on-year capacity increase in terms of number of classrooms. I was wondering, is that sort of a medium term two to three year target or is it only for fiscal year 2017? Thank you.

Okay. I think for the oversea education, in the first place, I think we face tremendous opportunities to become leading players in the oversea study market. But compared to the to the giants in this market [indiscernible] we are still very small. We are very early stage and we are very small. But we’re seeing this – we have more and more potentials because their best students in the K-12 area, in the K-12 ages. Actually, they are my students. We have the advantages to do more overseas segments in the future. And I think that's why I would say last year – and we have stuck to offer the oversea [indiscernible] English for the younger age students starting from the junior high as well two years ago. And it’s a fast growing – much faster than company average. But the number is still very small. And we also acquired Shunshun which is – and we also acquired the Firstleap. It’s also a very important step for us to do our international business. And we – this year, we don’t expect we have so much profit or revenue contribution coming from this [indiscernible]. We believe they will be very important and very meaningful. And it would – they will be – even become our pillar – a new pillar of the company in the coming three years’ time. And the second question about our capacity growth raise for the coming several years, what I can say is, again, the market is really growing better and better. I think that is across... I think that is across the board, not only us, but also the other players in this market. So we believe that’s the right time to get more market share. At the same time, how fast we can grow the capacity is driven by our operational efficiencies. So what I can say is this year, we probably, can grow by 40% to 50%. Next year, we probably will need to evaluate every city's performance, the market demand and our qualities and our kind of capacities we have in the teachers and the other factors. They will come up with the decisions. I probably let you guys know the [indiscernible] that’s the right time to talk about that.

Okay, thank you.

Thank you.

There are no further questions at this time. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating and you may all disconnect.