Ladies and gentlemen, thank you for standing by and welcome to the TAL Education Group Fourth Fiscal Quarter and Fiscal Year 2016 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 advice you this conference is being recorded today, Thursday, 28 of April, 2016. I would now like to hand the conference over to your first speaker today, Ms. Mei Li. Thank you. Please go ahead, ma’am.

Thank you, all, for joining us today for TAL Education Group's fourth fiscal quarter and FY 2016 earnings conference call. The fourth fiscal quarter and fiscal year 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 introductory 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 under 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 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 structurally 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 earning call. I'm so sorry because I caught fever. I almost lost my voice, so I will authorize Mei to race through the prepared remarks by us, and I will be ready to answer your questions after that. Thank you.

Thank you, all, for joining us today on our earnings conference call for the fourth fiscal quarter and the full FY 2015. We are pleased with our fourth quarter and full fiscal year results that reflect the continued strong growth momentum for small class in the outer cities. Due to high demand for our tutoring services, we expanded small class classroom capacity by over 50% in FY 2016 compared to the previous year, and managed higher utilization rates throughout the year. In renminbi terms, full-year revenue growth was [46.5%]. Today, I will briefly review our operational progress in the fourth quarter, and also offer you some highlights for the full fiscal year. After that, I will provide some further analysis of the Q4 and the full fiscal year financials and our business outlook. We had a strong performance on the top line in the fourth quarter, supported by ongoing capacity expansion with the high demand. In dollar terms, the fourth-quarter net revenue grew by 42.1% year over year to $175.0 million. And in renminbi terms, the top-line growth was 49%, both exceeding our expectations. Revenue growth was primarily driven by our 57% year-over-year growth in enrollments across all cities. We also achieved solid year-over-year non-GAAP operating income growth of 25.2% in the fourth quarter. Small class revenue growth was strong across the board. Small class revenue accounted for 84% of total revenue in the fourth quarter compared to 80% in the same year-ago period, and was up by 48.4% in dollar perspective, and 55.6% in renminbi terms, where enrollments increased by 58%. Revenue generated from cities other than the top five, Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, accounted for 33% of Peiyou small class revenues compared to 23% in the same quarter last year, reflecting the faster growth dynamics in…

Thank you. Ladies and gentlemen we will now begin the question-and-answer session [Operator Instructions] And our first quarter comes from the line of Zoe Zhao, Credit Suisse. Please ask your question.

Can I have two questions, please? First one is on our guidance. Can management break down the next quarter's guidance by our core business and Firstleap, as well as give us the full-year revenue guidance for FY 2017? And second question is, could you provide us some guidance on your full-year margin outlook? Thank you.

Thank you, Zoe. For the top-line guidance in revenue perspective for Q4, for Firstleap, it's around 5% of my business. So you could just use 5% as a benchmark. And on average, we are seeing is the growth rate of Firstleap is actually higher than my Company average. [After] (Ph) integrations we have done in the last quarter, the whole thing has merged together and the integration is quite well, so we are seeing a [solid] growth rate coming from Firstleap. And for the full-year guidance, again, we don't provide official full-year guidance on revenue, but I want to share with you that in our internal budget, actually, we estimate approximately 45% top-line revenue growth in renminbi terms for the FY 2017. And so far, the renminbi depreciation against dollar in the first quarter is roughly 5%, so that's my internal target. And your second question about the margin perspective. I think we should break down this question by business. For the Peiyou small class business, I think we continue to see a very strong demand for the parents and students for our children's services. In last year, we have added more than 50% classroom capacity, faster than before, to meet a strong demand, and we will continue to add capacity at a reasonable pace in the FY 2017. As mentioned in the prepared remarks in the first quarter, we are going to add around 20 to 35 new small class learning centers. Accordingly, not [only rental], we also need to hire and reimburse a large number of teachers to fill needs. You know in general, both the capacity and the teachers, it takes around two quarters to ramp ups, so I think the good timing for them to be fully utilized will starting from this summer. When they come…

Thanks a lot and take care. It sounds really [multiple speakers].

Thank you.

And next question from the line of Anne Shih from Brean Capital. Please ask your question.

I guess this is somewhat related to the previous question in regard to the margin. I was wondering if you could give us an update on the plans for the geographic expansion next quarter and next year. And then, can you also talk about the impact of the expansion to margin, and then how we should think about the margin trend for FY 2017. And then just separately on the income tax, this quarter was very high with the expiration of the exemption. I was just wondering what we should expect for the rate going forward. Thank you.

Thank you, Anne. For the geo expansion, some key numbers to share with you. In the year 2016, we have entered five new cities. The other one we plan to enter - actually, we are there, but our reporting only start to report we enter one new city when we start to recruit students. So that's because some of the time that they will - other one city will [slip] from last fiscal year to this fiscal year. And capacity [expansion] we have mentioned in the prepared remarks. We have added more than 51%. So about the reason of adding more capacity, I think the key philosophy for us is still we need to make sure we can meet the needs from the parents and the students. So compared to the years before, we're a little bit faster. That is because we have seen much stronger demand from our local markets, especially for the low-tier cities. I use the four cities we're just adding in the year 2014 as an example. They are growing actually faster than the other - in the same period of the other places as already before. So we are seeing the trending is accelerating. That's why we want to add in more to feed the needs. Again, as a TAL location, we always treat the teaching quality as the top priority. So even with a little [bit] in adding more capacity, but we still maintain our high quality on the teachers' training. So we hire teachers there; we train them in six months. And then, we will send them to start classes. So which means when we - in the timing, we're adding more capacities over there. It will bring us a little bit short-term pressure in the new quarter. But in the long run, that's very beneficial and very good for the Company's long-term growth. And about your second question about the income tax, last year, we have our very special case. That's because we use the Guangzhou one-on-one business as investment on Changing Education to exchange their stake. So this is kind of the [dispersal] in accounting. So we have gained 15 million gain from there, and we need to apply 25% tax rate over there, which is a special case. If we take all this special case, the [ETR] actually will go back to around 21%/22%, which aligns our expectations before. Looking forward to next year, we have - China has some policy changes, tax policy changes in the past. So we foresee the tax rate should be lower than what we can see this year, but this is still too early to tell you guys numbers. We need to go back to [dig out] how the policy will impact us in both revenue and profit perspective. But in the [indiscernible] perspective, next year the ETR will be lower than what we see this year.

That's helpful. Thank you.

Thank you, Anne.

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

I have two questions. The first one is regarding the O2O initiative. Just wondering. Is it possible that management shares some more color with us on the [indiscernible] program? Is there any initial operational debt data that you can share with us? And the second question is regarding the low price strategy. So could you comment on your strategy going forward as New Oriental expands such strategy to other core cities? So do we plan to escalate our strategy, and how are we going to balance between market share gain and our financials going forward? Thank you.

Okay. Especially from O2O perspective, actually, we have two synergies ongoing. The first one is we call spoken in Chinese. So we have the teachers maybe in one place, and we have students in their places, maybe very far from their teachers. So the second thing is Hybean. All I can say is all of them are actually - oh, I'm sorry. I forget to mention my Xueersi online school. So Xueersi online school actually before was pre-recording kind of model. This year, starting from summer, we are transforming the model from pre-recorded to live class. So all of this O2O and online initiatives, actually, it's making very good progress. Based on the numbers where we seen in the summer term, we still have one month to go, that all the numbers are quite positive. But again, the percentage of them, the percentage of contribution from them is still below 10%, so we would like to - we will probably give you guys more details on numbers when they become more meaningful. And so that is the current situation of our online space. But again, I need to emphasize is we are hiring more teachers and teacher assistants for both the O2O [indiscernible] and the Xueersi online school in Hybean. When it's there, we will have more meaningful contribution from them maybe in the coming quarters. And your second question about the promotions, and you have mentioned, [indiscernible] have tried to expand their promotion offers to a lot of places. For us, I think last summer, the [indiscernible] summer class offer for the first year junior high students in Beijing actually are tracking sale times of the amount of the previous summer registrations in Beijing. We have a very good retention rate from there, which is also part of reason…

That's very helpful. Thank you.

Thank you, Claire.

And next question from the line of Tian Hou, T.H. Capital.

Two questions. One is related to your acquired company in southern part of China. I wonder how much revenue this part of the business will contribute to the total business in the new fiscal year. And I know that part of business has submitted its - has relatively low margin, and what's the impact from this part of the business to the whole Company's margin in the fiscal year? That's the first question.

Thank you, Tian. Yes. I answer first question first, and then you can go on to a second question. About Firstleap, right?

Yes.

Okay. For the Firstleap Education, in the first place, the new type product should be complementary of our product portfolio in my Company. Before we were running a lot of things like the Test for English, but all of us know that Test for English is not a very good product, and because of the demand from the students and the parents, they are changing. So as one of the top players in the new type of the [old style] of tutoring, old style tutor English products, firstly actually, it's a very good product. And compared to the timing, before we don't invest in and now we have acquired 100%, the only difference is they have significantly lowered down their new classroom acquisition costs. That's why you can see last year there's still around a 10% to 15% loss-making position. But coming to today, it's almost break even. So we are very confident with more time, the synergy between these two companies will be more significant, and we are more than confident to say the profit margin of Firstleap will be around 10% to 20% in two to three years' timeframe. But I also agree with you. Compared with Peiyou small class business, the margin is definitely lower than that. But the good thing we need this product to try to increase our product portfolio, increase our top-line revenue, and the actual number perspective, both the revenue and profit will be beneficial with this new business; and we are still confident that Firstleap will continue the growth momentum to grow faster than company average and become a very important profit contributor to my Company in two to three years' time.

That's very helpful. And the second question is, in this quarter's earnings, and below the line, there are some gains from selling your [previous] investment. And I realize you guys made many investments in the last two years and you are in the process of getting rid of some of them and then making money. So I wonder, going forward, how should we see this part of the business activity? Is that going to be ongoing-based, or is that going to be pretty concentrated? How do we see that?

Yes. Okay. We start to make an investment actually maybe by the end of the year 2013, and in the past three years, we invest on a significant number of deals. And as I mentioned in the previous quarter's earning call, as we're starting from last year Q2/Q3, we start to classify the deals we have invested, and we will treat them differently. And now, we have seen wage slip development and a very good churn of the [companies][ we have invested, and we have seen bigger and bigger [trends]. Some of them they have the very good synergy with us. Then, we have increased their stake from minority to share - to a controlled stake. For some of them, they are doing quite well, but actually, they are still a little bit far from my K-12 business. We are happy to actually sell our stakes to the other people, which is also a very good way to concentrate our focus in L-12 area. Because we invest a significant amount of deals in the past, so we can foresee in the coming quarters, we can see more and more deals we will start to get some capital gains. I cannot guarantee which quarter, how many deals we have over there, but the only thing I can say is for the deals we have high synergy, I will continue to increase my stake. For the deals where they are doing well but it's a little bit far from my core business, I - we will leverage the timing to sell a stake and to get more capital gain over there. I will let you guys - post you about any progress we have made over here.

So, Luo, just one question. How much does the capital gains happened in last quarter?

It's around $1 million to $2 million.

Okay. Thank you. That's all my questions.

Thank you.

And next question from the line of Fan Liu from Goldman Sachs.

I have two quick questions. Number 1 is that I understand that after this summer you will replace your pre-recorded courses by the live broadcasts, broadcasting courses for all the grades and then the high [school] grades. So may I know how we should think about the margin profile for this live broadcasting segment compared to other segment? And also, the second question is that about Beijing's enrolment growth and also revenue growth. I recall at last quarter, it's around 25% in RMB terms. So would you mind sharing with us what it looks like this quarter? Thank you.

Thank you, Liu Fan. Can I clarify the second question first? Do you mean my Beijing revenue growth or my --? I'm sorry. I didn't quite follow that, the second question.

Yes. So actually, just the enrolment growth, so revenue growth in Beijing.

Okay. I got you. Because of the competitive reasons, we didn't disclose the Beijing enrolment and revenue growth since two quarters ago. But the only thing I can say is Beijing has recovered and regained the growth much better and faster than what we expect. So with the new measures in place, we are more than confident to say Beijing will continue its growth momentum in the coming quarters, and even the coming one/two years. For the online school, thank you so much. You are one top few people who carry my Xueersi online school's website [indiscernible]. Starting from this summer term, yes, we have transformed our Xueersi online school from the pre-recorded content to online, to live online. And that is a very important change because we believe the live is a very important way, and maybe very halfway to increase the value of online school. So I can share with you some of the numbers there. The online price - actually, the live online price, live class price actually is around 2 to 3 times higher than the pre-recorded content. And enrolment perspective, before, we treat - if one student enroll in my online school for one year we treat him as one enrollment. Now we have changed their learning behavior from one year to four terms, which is similar to my small class business. So based on the preliminary numbers we can see, it's more likely the margin of the live class platform will be better than pre-recorded content. But again, summer is the first season for us to do that. Now we're under the change of shifting the students who are - who get used to the pre-recorded content now, they have to go with the live platform. So in the short term, it's hard to keep - it's hard to estimate the impact for the margins, but right after summer, in the longer term definitely, the live class platform margins is much better than the pre-recorded contents.

Thank you, Rong Luo.

Thank you, Liu Fan.

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

I have actually two questions. I think my first one is really just I think from our discussion on firstly having a lower margin but higher growth. And also, your comment just now that the online business is shifting from pre-recorded to live business is also at a pretty early stage, so we are not too sure on the margins. Would it be fair to say that like non-GAAP, OP margin this year on a year-on-year basis will probably be under pressure? And then, more of a longer-term basis, do you think that, say, in three years we'll be able to get back to what we used to be seeing, say, for 20% type of non-GAAP OP margin level? That's my first question.

Okay. For the margin question, again, as I mentioned earlier, for the new quarter, yes, we're under pressure because of the factors I've mentioned on the call. And one year, I still need to wait for some class results because we are seeing very positive number over there, so we should have some chance to make up a little bit. For the Firstleap, they are improving their profitability, even though they are still lower, but they are only around 5% of my business. So I think maybe when we come into summer, I have much - maybe, much clearer visibility on the operating margin and profit margin and profit margin during this year. And coming to the total three years' time, it's also very difficult to say whether we will go back to 20%/21% margin or not, but the only thing I can share is all the investments we have made in online and O2O, actually, they are paying off now. We are seeing the numbers are going up very quickly. So in margin perspective, in profit perspective, I think we are quite confident in two to three years' time we will perform much better than what we expect, and we are still confident the Company is right on the track. And the online, O2O can give us a lot of ways to be scalable, not only the physical learning centers. So that is the [indiscernible] I can share with you guys.

Thanks. My second question is a small question. I think some of your competitors talked about the change of tax regime from business taxes to VAT. How would that impact your business? If there's any - maybe on the top line and bottom line, if there's any impact, if you could just share with us. Thanks.

Yes. I think start from May, the VAT will be introduced to customers, [circles] like us, replacing the business tax. So from then on, our top line - I'm sorry for that. So from then on, I think our business will be subject to around 6% of the VAT for gross revenues instead of 3% business tax. So given the timing, I think there is very minimal impact in revenue for Q1, but in the long run, the impact will be around 2% to 3%, because most of my revenue actually coming from school. But from a bottom-line perspective, actually, we still treat this policy as positive because we can use our invoices from rental and selling investments to deduct the tax. So what I can say is, in the bottom line perspective, I treat it as neutral to my business.

Thank you, management. That's very helpful.

Thank you.

And you have a question from the line of Leon Chik from JP Morgan. Please ask your question..

Just one question. I think selling expenses has not really changed as a percentage of sales, and your competitor has been able to cut it basically using online to offline in order to cut traditional advertising and also online advertising. So is there any scope for you guys to cut your selling and marketing once online, once your O2O is mature? Thanks.

Thank you, Leon. Where we are different from them is, actually, we don't have any marketing advertisements, online advertisements over there. All the numbers in the sales magazine actually are people. So our investment is in the IP platform, product management. So I think in the coming year, because in O2O initiatives we have invested a huge number of product and technology over there, people over there, now we shift our focus to invest more on teacher and teacher assistant side. So we probably can see the sales and marketing will be more stable, and all of this will be in line with my brand new growth; maybe even a little bit higher. So we are quite confident of this. For online and online O2O initiatives, they will bring us a much bigger space in the coming two to three years, and help us to be scalable all over the country. So in the long run, again, I will still maintain my investment level in O2O and online initiatives. The only difference is before we invest more in sales and marketing and G&A, now we invest more in the cost side because we have more classrooms. We have more teachers and teacher assistants over there. So in general, that's still a very good investment, and we believe they will be more meaningful in the coming quarters and next year.

Thank you.

That's the last question. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may all disconnect.