Ladies and gentlemen, thank you for standing by, and welcome to TAL Education Group’s Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be taking questions at the later stage of the call. [Operator Instructions] Now, I’d like to hand the conference over to your host for today, Ms. Echo Yan. Over to you, ma’am.

Thank you, operator. Thank you all for joining us today for TAL Education Group's fourth fiscal quarter and full year 2018 earnings conference call. The 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 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 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 like now to turn the call over to Mr. Rong Luo. Rong, please.

Thank you, Echo. Good evening and good morning to you all. Thank you for joining us today on this earnings call. Our first quarter revenue growth was driven by stable demand in all cities and a rapid growth of our online courses. Revenue growth in the fourth quarter was 59.4% in US dollar terms to $504.1 million. Student enrolment increased by 95.7% year-over-year, mostly driven by the growth in online enrolments. GAAP income from operations increased by 54% to $66.9 million in the first quarter. With the solid set of [ph] fourth quarter results, we accomplished our fiscal year of robust operational and financial performance, even as we continue to invest in the network expansion and new education initiatives for future growth. Our revenue growth in the full fiscal year 2018 was supported by higher than average enrolments and supported by the well-paced expansion of small class room capacity in our spreading geography network. I will now turn the call over to Echo Yan, our new IR Director who has just joined our team this month. Echo will give you an update on our operational progress in the fourth quarter and briefly review the full fiscal year results. After that, I would like to give you some update on our outlook, any investment plans in the fiscal year 2019. Echo please?

The robust revenue growth in the first quarter was from all business lines in all cities. Let me review the business by segment. Small Class which consists of Xueersi Peiyou Small Class, Firstleap, Mobby and some educational programs and services accounted for 82% of total net revenue compared to 83.6% in the fourth quarter last year. Peiyou Small Class, which remains our core business, represented 73% of total revenue, compared to 75.9% in the same year ago period. This lower revenue contribution from the Small Class was mainly due to the effective growth of online course business. Net revenue from Peiyou Small Class was up by 55.4% in US dollar terms, while enrolment increased by 72.4%. This number reflects the ongoing healthy growth in Peiyou offline classes. As mentioned in the previous quarter, Peiyou offline students have started taking supplementary online courses on Xueersi Peiyou Online, which are tailor-made to their individuals. And by now, we have enrolled this out in major cities we covered. Xueersi Peiyou Small Class revenue from top five cities Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing grew by 53% year over year. Revenue generated from cities other than top five cities grew by approximately 59%. These other cities accounted for 40% of the Peiyou Small Class business, almost unchanged from last quarter and Q4 last year, which reflects the well spread growth in the various tiers of cities in our network. The revenue growth across all cities was driven by incremental ramp up of enrolments for our earlier classroom expansion. As indicated last quarter, for winter term, we offered Chinese classes in 14 cities and English classes in 20 cities. We are pleased to note that enrolments growth of Chinese and English classes have been split up as we further rolled out these courses. We will continue…

Thank you, Echo. I would like to give you our outlook and priorities for fiscal year 2019. In the coming year, we expect to maintain healthy growth in Peiyou small class and other offline tutoring services and further expand our learning center networks at pace. Given the capacity fulfilment improvements we have achieved in the past few quarters, we expect to see improved operating efficiencies in fiscal 2019 in our core offline small class business compared to fiscal 2018. Online business development and winning more market share of our online tutoring market is and will be our strategic focus in the coming years. In fiscal 2019, we will continue to invest in technology, operating models, marketing and personnel for online market share gains, so that we can turn opportunity in to our business. While this strategy may be margin dilutive in the short term, I would believe now is the time to capitalize on our first mover competitive advantages as the online market is taking off. TAL’s mission is to promote education progress through sensing the technology and we remain committed to exploring the possibilities of technology based educational reform. This year, we will further develop our learning management system and data to personalize the learning experience, making more fun and effective with the same top quality tutoring that TAL is known for. We will continue to ramp pilots in the AI other cutting edge areas of educational technology to create innovative ways to better serve our customers. Also, we will further upgrade our xueersi cloud based learning platform and manage the increase in services demands on the platform. And last but not least, we’re determined to expand our online reach across a wider spectrum of the Chinese market, both by penetrating deeper into the lower tier cities, where our brain is less well known and in sub areas of the top tier cities. We believe these efforts altogether will help us widening our competitive edge in education market. Let me now move to the outlook for the next quarter. Based on our current estimates, total net revenues for the first quarter of fiscal year 2019 is expected to be between $508.6 million and $550 million, representing an increase of 58% to 60% on a year over year basis. This estimate reflects our current estimations which is subject to change. That concludes my prepared remarks. Operator, we’re now ready to take questions.

[Operator Instructions] Our first question comes from the line of Mark Li from Citibank.

Hi, management. Congratulations on the very strong results. I have two questions. I want to know number one is what is our plan for capacity expansion for the upcoming quarter or for the upcoming financial year, any color would be appreciated? And also, I want to know what is the update in our recently launched VIPX [ph], like the online operation or our investment in data?

Thank you, Mark. The first question about capacity. Let me recap a little bit what we have done in the past few years. I think the year fiscal 2017, we increased our capacity by more than 80% and last year, fiscal year of 17 Q4 and Q1 of fiscal year 2018, we continued to increase around 1500 customers per quarter, which is a lot. And in the second quarter, we decided to control a little bit. So the second quarter, we only increased the customer numbers by around 480 to 490. In Q3, we further controlled pace and in last year Q3, we only added I think it’s around 68 classrooms for Q3. And Q4, we believe that the right timing for us to, we have to adjust our pace already. So Q4, we continue to increase a little bit in classroom numbers, which is 284. So for the whole year of fiscal 2018, we increased our capacity by around 30%. And looking forward to next year, again, our goal is to manage healthy growth. So we’ll come back to the right range, which is around 30% to 50% in the coming five years and that’s more similar to what we did this year. In Q1, by the end of today, we have added around 15 to 20 learning centers. We probably, we can see a little bit more in the coming May, because which is prepared for the summer term. So in general, we will maintain a healthy pace to adding more capacities and which were in line with, we do a lot of efforts to increase the classroom fulfilment range to try to leverage the classrooms we have added in the past few quarters. Even this quarter, fulfilment expense is compared to this, the quarter this year, and…

The next question comes from the line of Thomas Chong from Credit Suisse.

Thanks for taking my questions. My question is about the revenue growth and margin expectation for FY19. Can management provide some more color about the growth in each segment as well the margin pull forward for offline and online?

Thank you, Thomas. This is a very good question and looking forward to the fiscal ’19, the coming year, actually, our principle, our strategy is very clear. In the first place, for the small class and one-on-one business, our key strategy is to maintain the healthy and stable growth. So especially for the small class, we wish you will come back to the range around 30% to 50% top line perspective. And because, past few quarters, we added a lot of classrooms, we have hired a lot of teachers, now, we put them into use gradually. So we probably can see, we can see some good news coming from margin perspective. And for the whole year, we are committed to increase the efficiencies of the small class and one-on-one business and we’re going to see some margin improvements over there, which is also quite clear in Q1. But at the same time, online, I think the coming one or two years is the very critical time for the online and we may come, it’s a huge market, considering we have around 150 million students. So our goal for online is to have more market share. Last year, our online revenue growth is more than 160%. This year, we continue to, we wish we can remain the very rapid growth and healthily. So we will continue to invest in some areas in online to make sure we can get more market share. The first place is, we will continue to invest in technology and research, including content, including new systems and new technologies. In the past few years, we have done a lot of things, for example, learning management systems that come with automations and we have launched the xueersi cloud. And but all of this compared to the traditional tutorings…

The next question comes from the line of Natalie Wu from CICC.

You mentioned a couple of quarters ago that online business margin would be 5% to 10% higher than offline because of the teachers and rental savings in longer term. But given all the investment plans for R&D, et cetera as well as all that private money prices in to the field recently, just curious if management would still maintain a longer term margin target for online at current point? And also, would be great if you can also share with us your thoughts and plans on TAL’s globalization? Thank you.

Thank you, Natalie. In the first place, let me clarify. We never said online could be 5% to 10% margin better than offline. We never say that. I think we said that before is for the fiscal year 2018, online margin will be around 5% to 10% and final number of online margin this year actually is higher than that. And when we talk about online’s long term margin change, I think the first question we need to answer is what is our strategy position in our online. And this will only choose online as one of the segment, as one of the complementary services, should offline and then we probably will only need to maintain maybe a fairly flat revenue growth, for example, it will be 80% or 90%, which is a little bit fast than offline. And in that case, I think we would still have more than 10% margins. And same as where we were last year. And but that’s why I mentioned just not. When we, it is a huge market, purely offline learning centers can only penetrate [indiscernible] which has to be conservative, grow a little bit faster, which is good enough and save some money, increase the margin, which will make the margin lose, okay, on maybe a little bit better in the one or two years’ time, but if we pull a business in five or 10 years’ time, we’re missing the whole future. The second thing is, even today, we have our margin more than 10%, but compared to the huge market space, we want to penetrate, we need to invest more in the marketing dollar perspective in RMB perspective, in the teacher assistance perspective, to build out capabilities to penetrate more spaces and more geographies and more people. And the shortening…

And also quickly to clarify, do you mean that the longer term in stable business, your online business will be still the same versus offline currently?

You mean the margin of online will be the same as margin offline in the much longer term.

Yes. That is right.

I have no idea. Firstly, I have no idea. What I can say is we only ask for reasonable margins for online, but the target is to leverage the online to get more market share. If some good news happen, we will be very good to see that, but today, I don’t have any plan to say the online margin need to be the same as offline margins.

So about the globalization?

About the globalization, I think looking backwards, in the China’s education industry, we don’t see any companies being globalized that much, even our counterparties, opposite to the street. And but we believe when China is getting more and more power and wait us long for the payers in education side, we have the possibility to explore some opportunities obviously. For example, we are seeing like the UK has used Shanghai’s maths text books to teach their kids and also see more and more countries come to China to learn, what’s the best way to teach maths and other subjects. So we are pleased maybe that there is some possibility for us to serve the students not only in China, but also overseas. But at the same time, that is not easy and first place, we don’t have a team readily over here and in the past our team is focused on the, learn maths and Chinese, English speaking employees are for our company is still a very small percentage. And we don’t have any experience before to acquire some foreign countries directly. So we don’t have kind of the team ready today. So, even if we want to be more globalized, we want to do more international business, but we need to be very cautious and step by step approach. So two to three years ago, we started to do some investments in foreign countries including US, Israel and India and we have invested some projects over there, which is minority stake. And this year, we continue to look for some opportunities in these countries. And with more experience we get from the past projects, today, we are a little bit more confident on this, but again, we still in the very early stage, which is very important priority, but we will run all of this new initiatives in a step by step approach to be very cautious about that.

The next question comes from the line of Sheng Zhong from Morgan Stanley.

I have two questions. One is a follow-up of the margin related with online business. So they are a couple of detailed questions, sorry. So I see the SG&A cost was as a percentage of revenue was, have a year on year decline. Actually, this is after many years G&A increase. So I guess this is also about our online business, the leverage level. Please confirm or correct me if I’m wrong. So related with this, I’m just curious how should we see the channel of G&A cost with the growing size of our online business? And related with this, what’s and also our effective tax rate was very low this quarter. Is it also partly because of the online business lower tax rate and can you also give some color on the current teacher to student ratio of our online business or in other way is on average, in one online classes, one teacher, the class size of the online classes on average now and what’s t retention rate of our current online segment? And the second question is you mentioned that we do, we have the subject expansion. Can you give some breakdown of our current subject percentage and also the student’s grades percentage? So primary student and middle school percentage?

The first one for G&A percentage of revenue, the G&A mainly is because we hired the IT person, product managers on and the development people over here. As far as the G&A percentage costs, if you still remember two to three years ago, actually, we had a lot, because that’s the timing to build a team. So we have a lot of people from BAT to come and join our team to do our products. And so at that time, G&A is declining. And all of this, especially at that time, we focus a lot on our business. So when the product is system is almost ready there and considering our top line still grow by 60%, so even we continue to invest to hire more people. But the G&A percent we expect, it looks okay. And for our key investments actually, we will – coming to the sales and marketing and because especially for online, the most important investment, the biggest investment in online may be in marketing perspective. And so that’s the very important and we also run in some promotions in online. For example, one pilot has for RMB50. So all of this, so we probably can see that and that will impact our cost line and our sales and marketing. And for the ETR, which is around 80% this year, and that’s because, that has worried lead hole related to the online, because the online today is only 8% of my revenue. That’s because we have some legal entities who is eligible to enjoying the rates treatment based on the law. And so, this is normal tax planning and last year, we had one entity, which is of the go policy. And now we have new entities who comes and joins the policies which is fully…

We have the next question from the line of Edwin Chen from UBS.

Just, you kept mentioning online as a top priority now and does the, I was wondering between online and the dual teacher, if online is now first priority, does that mean that the dual teacher will be lesser focused and the rollout of dual teacher may slow down. And two is, just whether online is targeting on the same customer groups as offline small classes or in a way, is there any cannibalization between online and offline small classes, given that online margin and ASP are much lower than offline. And three is, probably just a thought, online is growing fast and now is revenue size is already big enough, why not just considering spinoff of online business, so that the method of tail will focus on the margins of offline, that’s a concern. Online and online itself can enjoy a better valuation, I do believe probably now is hit in overall, so just three questions. Thank you.

Okay. Yeah. Thanks for the questions. The first one, the online and dual teacher models. I think that past three years, I talk about a lot of things about dual teacher models. So even today, if you go into see all the new cities we enter, starting from three quarters ago, they are dual teacher model cities and we continue to increase and then the new capacity, new classroom, we have added, more and more percentage are going to dual teacher models. Dual teacher model is a very important model for small class to increase their coverage or reach to a much bigger space and which is also very important. Sometimes, as the company is very difficult to say who is number one priority, who is number two, because small class and online are running their own plans. So their authorities to decided where they are going. So the dual teacher model is also very important, but compared to online, the dual teacher model is much more stable and mature. All we need to do is continue to add more classrooms and give them around 12 months for one class room or for one learning center to be breakeven and get them enough time for the parents and teachers to get used to this new format and wait to follow the growth pattern exactly as the same as what we experienced in offline. So, for dual teacher model, our key is to do the, as tuitions stable. And secondly about the, so that doesn’t mean, I will slow down or have a less focus or dual teachers. No. What I want to say, they will focus on their own executions and will contribute to the meaningful contributions maybe in the coming few quarters. Secondly, customer cannibalizations. In the first place…

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all disconnect your lines now. Thank you.