Mei Li - IR, Manager Joseph Kaufman - CFO.

Philip Wan - Morgan Stanley Fei Fang - Goldman Sachs Clara Fan - Jefferies Jal Onkoni - Credit Suisse Tian Hou - TH Capital Ella Ji - Oppenheimer.

Ladies and gentlemen, thank you for standing-by and welcome to the TAL Education Group’s Third Quarter of Fiscal Year 2014 Earnings Conference Call. At this time, all participants are in listen-only mode.

Following the presentation, there will be a question-and-answer session (Operator Instructions) I must advice you that this conference is being recorded today Wednesday 22nd of January 2014. I would now like to hand the conference over to your first speaker today, Ms. Mei Li, Investor Relations Manager. Thank you, please go ahead..

Thank you for joining us today for TAL Education Group’s Third Quarter of Fiscal Year 2014 Earnings Conference Call. The third quarter earnings release was distributed earlier today and you may find a copy on the Company IR website or through the News Wire. During this call you will hear from Chief Financial Officer Mr. Joseph Kaufman.

Following his prepared remarks Mr. Kaufman 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 public filings with SEC.

For more information about these risks and uncertainties, please refer to our filings with the SEC. Also, our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures.

I would now like to turn the call over to Mr. Joseph Kaufman..

Thank you, Mei, and thank you all for joining us on our earnings conference call for the third fiscal quarter 2014. We are pleased to report a stellar quarter highlighted by both outperformance on our revenue growth versus guidance and strong profitability.

Cities, other than Beijing and Shanghai, enjoyed excellent momentum, while Shanghai performed well and Beijing has begun to show signs of recovery.

At the same time the cost of business expansion remained well under control as we temper the pace of center capacity extension and achieve greater leverage from our sales and marketing and general and administrative personnel as planned.

Net revenue for the quarter increased 50.4% year-over-year to $73.5 million, which is $2.5 million above the top-end of our guidance. Revenue growth was supported by a 46.2% increased enrollments.

While we knew we were cycling on unusually low quarter in fiscal 2013 and expected revenue growth to be robust, revenue in the quarter still ended higher than our expectation. We continue to execute on our plan to invest in capacity extension through both new learning centers and the addition of classrooms to existing learning centers.

But as guided, we did showed a slower pace than in the first half of the year. The third fiscal quarter, which comes right after our summer term, is typically a more modest quarter for having classrooms as we tend to prepare the bulk of our classrooms ahead of the summer term each year.

We had a net addition of 52 classrooms in the quarter, which includes both classrooms added to existing centers and classrooms in new centers. Almost all of these net additions were in cities other than Beijing and Shanghai. You may recall, we added a net nine centers and 351 classrooms in the first half of the year.

We intentionally added capacity aggressively during the first half of the year to ensure we have enough classrooms in place to handle the strong demand for our business from the summer term onward.

We carefully selected locations for our new centers considering many criteria, and in most cases selected to add incremental capacity first to existing learning centers before extending to new centers. This is especially the case in markets where it reached a certain level of center penetration.

This deliberate approach, while perhaps taking longer on the front-end, often results in our achieving faster ramp-up in center utilization levels, leading to center gross margins reaching breakeven more quickly.

In terms of learning center adds we increased our center network by one new center on a net basis in the third fiscal quarter, bringing the total to 265 centers. We opened a net three new small class learning centers and closed the net two learning centers for one-on-one.

By quarter end of the total of 265 learning centers, 176 were small class learning centers, including four learning centers for our Mobby branded preschool and young learners age three-to-eight business, and 89 were through one-on-one.

In addition to strong top-line results, we had better than expected net income growth of 123.4% year-on-year, primarily driven by the carefully managed investment in learning center capacity at this run. A continued shift towards a higher margin small class business away from one-on-one was also positive for margins.

Overall, gross margin increased by 590 basis points from 45.3% to 51.2% year-over-year, reflecting our system-wide focus on future and center utilization even as we expand.

We also were able to leverage G&A and sales and marketing expenses through more efficient human resources management, and improve the returns generated from our strong cash balance as reflected in the growth of our interest income in the quarter. Let us now go over the different business lines.

The small class business in new markets continued to drive our growth in the third quarter. Small class revenues once again more than doubled versus the same period the previous year in cities other than Beijing and Shanghai, driven by enrollment growth, combined with higher average selling prices.

In terms of revenue contribution, cities other than Beijing and Shanghai accounted for 40% of small class revenues in the third quarter, compared to 28% during the same period last year and 35% in the previous quarter. This increased revenue contribution was primarily driven by robust enrollment growth for small class in these markets.

In shanghai, as we expected we saw continued strong positive momentum in both enrollments and revenue growth for our small class business.

As a testament to our focus on improving the quality of our offerings in Shanghai, we were pleased to see a drop in our refund rates with three-to-five as the number of parents and students asking for refund after classes have begun.

Our continued efforts around teacher recruitment, training and curriculum development over the past year have been recognized as higher customer satisfaction which in turn has driven word-of-mouth referrals in returning enrollments. As such we expect Shanghai to continue to do well on the fourth quarter.

As for Beijing after the challenging prior 12 months we saw some strength coming back in enrollments, as small class enrollments increased by a high single-digit percentage in the third quarter. We are very pleased to see reviving demand for mass tutoring for primary school students and higher retention rates especially for our high school segment.

We also had better enrollments than expected for our Zhikang small class training which typically consists of an average of approximately three classes in the targeted knowledge area larger than the typical 15 classes in the regular fall and spring terms.

Revenues from our Zhikang branded one-on-one business contributed 16% of total revenues in the quarter versus 19% in the same quarter of the prior year. We continue to position one-on-one primarily as the complement to our small class business, given it is a relatively low margin business with comfortably lower barriers to entry.

Zhikang showed good momentum in markets outside Beijing. In Beijing one-on-one is recovering at a slower pace than in small class, but a bright side is the promising momentum we have seen in one-on-one demand from high school students, complementing our traditional strength in primary and middle school.

Meanwhile, we continue to dedicate Company resources to our revolving online strategy. As a Company our vision is to be at the intersection of where education meets technology and in so doing to ensure we’re providing more efficient and effective tutoring services to our students.

We place high priority on introducing new tutoring practices where technology makes that possible. For example, we’re taking the interactive classroom to a new level with a recent launch of ICS 3.0 in Beijing.

This new version is a major upgrade and provides an interactive whiteboard and pad-based environment to our students in order to heighten student engagement in class. As we have discussed on previous calls, we use the online platform eduu.com as a substitute for more expensive and less differentiated traditional brand promotion efforts.

In the coming months, our focus for eduu.com will continue to be on providing the best possible online service to our parents and students, as they navigate the K-12 running process rather than seeking to monetize the eduu platform.

Revenues from our online courses on xueersi.com again accounted for approximately 3% of revenue while its enrollment contribution this quarter crossed up to 17%.

We continue to be innovative at our online school and are testing how to provide greater levels of interaction in our pre-recorded video courses while experimenting with various live formats. Overall we believe that our Company is ready to explore the tremendous new growth opportunities in education.

Mobile Internet is changing consumer behavior, while government efforts to modernize education are well underway. Fundamental changes are taking place in the demand for labor and the skills that young adults need to have good employability. These trends are revolutionizing the way in which students learn in and around school.

We see a host of new opportunities such as widely in the range of subjects, introducing new tutoring formats and expanding addressable markets. One piece at a point is the recent indication from the Beijing Education Ministry to change the relative point scale for different subjects for the high school and college entrance examinations.

Such that Chinese composition will be a more important subject than English in these exams was. Pilot projects will start in 2014.

Since this announcement in October, we have increased our investment and focus on our Chinese composition tutoring website duowan.com, that’s duowen.com to stay ahead of the expected increase in interest from parents and students. During the quarter we also acquired a domain name called kaoyan.com, kaoyan.com.

This website offers information, online community and study materials for university students to help them prepare for postgraduate school admissions to Chinese universities. Through kaoyan.com we expect we extend the lifetime value of a portion of our customers while also gaining access to a new customer.

We do not yet have the center-based business for graduate school admissions exams but kaoyan.com is a nice complement to eduu’s array of websites including, youjiao.com, aoshu.com, zhongkao.com, and gaokao.com among others. Our websites now stand the duration and the students learning from pre-tutor college.

We may be able to apply our prudent strategy of using eduu’s that worked so well for geographic whole expansion also to new business verticals as we first fuel off the market through our online community before investing in center-based business operations.

At the same time, we can also slow potential synergies such online communities may have with our existing business units. Also in the coming year, in addition to new business opportunities we will also explore addition online to offline opportunities across our business segments.

We will increase the number of interactions with each student through mobile and online practice exercises during the week and with that distinctiveness of our students to our brand and platform.

We will also seek to increase convenience for parents by experimenting with registration centers that are primarily using technology rather than people should register refunded switch classes.

Looking ahead, we continue to explore both the possibilities for online and mobile learning and also how better to utilize technology in the Internet in our existing center-based businesses.

As mentioned before, we will likely participate in this transition through a combination of in-house product development and selective strategic equity stake investments. We seek to truly embrace the technology advances that will transform the education sector. With that, I’d like to move on to a more detailed overview of the financial results.

We delivered US$73.5 million in revenue in the quarter, representing revenue growth of 50.4% versus the same period in the previous year. Driving the quarter’s revenue growth with strong enrollment growth of 46.2% combined with higher average selling prices.

Total student enrollments increased to approximately 224,810, from approximately 153,800 in the same period one year ago, the increase in student enrollments was driven primarily by increases of enrollments in the small class offerings.

On the ASP side, the year-on-year ASP increase of 2.8% to US$327 for the third fiscal quarter from US$318 in the third quarter of the previous year was primarily driven by the hourly rate increases of a portion of the small class course offerings and the foreign exchange rate fluctuation.

The increase from the hourly rate was partially offset by more a short-term classes and online courses, as well as the greater percentage of revenues of our -- from city to outside of Beijing and Shanghai which on average have lower tuition rates.

One-on-one tutoring contributed 16% of revenues for the third quarter of fiscal 2014, compared with 19% for the previous quarter and for the same period in fiscal year 2013. The lower revenue contribution from one-on-one also is a drag on overall blended ASP as tuition rates for one-on-one are higher than our other offerings.

Now moving back to the total Company numbers, cost of revenues increased by 34.1% to US$35.9 million from the US$26.7 million in the same year ago quarter.

The increase in cost of revenues was mainly due to an increase in teacher compensation, rental cost, and other staff cost associated primarily with an expansion of learning center capacity, as well as the increases in wages and teacher fees versus the year ago period.

Non-GAAP cost of revenues, which excluded share-based compensation expenses, increased by 34.2% to US$35.9 million from US$26.7 million in the third quarter of fiscal year 2013. GAAP and non-GAAP gross profit for the third quarter were both US$37.7 million, as compared to both being US$22.2 million for the same year ago period.

GAAP and non-GAAP gross margin for the third quarter were both 51.2%, as compared to 45.3% and 45.4%, respectively, for the same period of last year. Selling and marketing expenses increased by 34.8% to US$9.3 million from US$6.9 million in the third quarter of fiscal year 2013.

Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 40.0% to US$9.0 million from US$6.4 million in the same period of last year, the increase in selling and marketing expenses in the third quarter of fiscal 2014 was primarily a result of an increase in compensation in sales and marketing staff to support a greater number of programs in service offerings.

General and administrative expenses increased by 35.2% to US$17.3 million from US$12.8 million in the third quarter of fiscal year 2013.

The increase was mainly due to an increase in compensation to our general and administrative personnel in recognition of the outperformance against budget and to support a greater number of programs and service offerings, also the depreciation at Beijing office space was an expense the Company incurred this quarter but not in the same period of the previous year.

Non-GAAP general and administrative expenses, which excluded share-based compensation expenses increased by 41.0% to US$15.5 million from US$11.0 million in the third quarter of fiscal year 2013, the above factors combine to give us operating income of US$11.9 million representing a year-over-year increase of 287.5%.

Non-GAAP operating income increased 162.3% year-over- year to US$14.0 million. Operating margin in the third quarter was 16.2% as compared to 6.3% in the same period of the previous year. Non-GAAP operating margin was 19.0% as compared to 10.9% in the same period a year ago.

Our net income for the quarter was US$12.5 million, an increase by 123.4% year-over-over. Non-GAAP net income for the third quarter was US$14.6 million, up by 85.6% year-over-year. This gives us the net profit margin of 17.0% as compared to 11.4% in the same period of last year.

Non-GAAP net profit margin was 19.8% versus 15.1% in the same period of last year. Basic and diluted net income for ADS were US$0.16 and US$0.15 respectively for the quarter. Non-GAAP basic and diluted net income for ADS, which exclude share-based compensation expenses were US$0.19 and US$0.18 respectively.

Capital expenditures for the third quarter of fiscal year 2014 were US$3.3 million, representing an increase of US$2.0 million from US$1.3 million in the same year ago period. The increase was mainly due to leasehold improvements and the purchase of servers, computers, software systems and other hardware, for the Company's teaching facilities.

From the balance sheet, as of November 30, 2013, the Company has US$304.0 million of cash and cash equivalents and US$29.2 million of term deposits as compared to US$185.1 million of cash and cash equivalents and US$24.1 million of term deposits as of February 28, 2013.

As of November 30, 2013, the Company's deferred revenue balance was US$173.0 million as compared to US$107.3 million as of November 30, 2012, representing a year-over-year increase of 61.2%.

Moving onto guidance, total net revenues for the fourth quarter of fiscal year 2014 are expected to be between US$84.7 million and US$87.1 million, representing a year-over-year increase of 42% to 46% from the same year ago quarter, if achieved this will give us year-over-year revenue growth of 37.9% to 39.0% for the full fiscal year 2014.

You should note that the fourth quarter will include an extra week of classes due to semester in fiscal quarter reconciliation and the timing of Chinese New Year. So, a similar to the third quarter in the fourth fiscal quarter we will once again be cycling on unusually low fiscal quarter for the same period in 2013.

This partially explains the outer momentum as reflected in our business outlook for the fourth fiscal quarter. That concludes my prepared remarks. Operator, I am now ready to take questions..

Question:.

and:.

Certainly, ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Philip Wan from Morgan Stanley. Please ask your question..

Hi, Joe and congratulations on the very strong results and thanks for taking my question. My first question is regarding your performance year-to-date especially on the margin side, with a very strong outperformance.

So, what should we expect for the remaining of the fiscal year? And then also could you elaborate a little bit more on what were the key reasons for the better than expected performance for both the top-line as well as on the cost side on this date? Thank you..

Hi, Joe and congratulations on the very strong results and thanks for taking my question. My first question is regarding your performance year-to-date especially on the margin side, with a very strong outperformance.

So, what should we expect for the remaining of the fiscal year? And then also could you elaborate a little bit more on what were the key reasons for the better than expected performance for both the top-line as well as on the cost side on this date? Thank you..

Yeah, thanks, Philip. Well as you know we don’t provide specific operating margin guidance. I can say that we expect clearly to have operating expansion this year on the back of strong execution, outperformance on revenue and effective cost controls.

In terms of the outperformance the main reason is that we out delivered on the top-line cities other than Beijing and Shanghai continue to grow rapidly and now that we have established ourselves in these markets, there is going to be a long runway for future growth.

Shanghai had a much stronger recovery than anticipated and our expectations for Beijing were relatively low. So, Beijing also surprised us on the upside especially in the past quarter..

Okay, thank you. And then my second question is regarding your Q4 guidance. So you talk about it benefiting from the timing of Chinese New Year, I just wonder could you qualify if in terms of the revenue contribution? Thank you..

Okay, thank you. And then my second question is regarding your Q4 guidance. So you talk about it benefiting from the timing of Chinese New Year, I just wonder could you qualify if in terms of the revenue contribution? Thank you..

Yes, sure. That was about a RMB23 million impact as we see it, that was probably what we had estimated the CNY impact. So, if you take that out, you are probably looking at more or like 35% to 40% revenue growth without that number. And then turning back to your previous question, it occurs to me that I didn’t cover the cost side.

In terms of the quarter side for the outperformance in budget I mean I think a key part of it was our expansion drive we did it in a much more effective way. So we used adding classrooms to achieve incremental capacity to our existing learning centers.

So that along with improved classroom utilization and class fulfillment ratio has helped us on the margin side. And then some of the investments that we talked about in the first part of the year, like ICS 3.0, and other center investments, they took place later in the year, so there is less cost that’s going to be hitting this year.

Then other IT investments, like the finance system upgrade, office automation, or OA system, purchase and enroll system implementation et cetera, also didn’t happen in this year. So we still intend to make those investments in the coming years. So it will likely impact us in the coming year.

But that’s part of the explanation as well for the outperformance this year. The good news is that these are all kind of discretionary investments that we are making in order to support our business..

Okay that’s very helpful. Thanks Joe and I will get back in the queue. .

Okay that’s very helpful. Thanks Joe and I will get back in the queue. .

Thanks Philip..

Thank you very much. And your next question comes from the line of Fei Fang from Goldman Sachs. Please ask your question..

Hi, good evening Joe and Mei. Thanks for the opportunity, very strong results.

First, can you discuss the network expansion plan for 2014 and, just relating to that, what's the current utilization levels of your network and, whether you can quantify that or not, I'd like to know how much more revenue potential do we have with the existing geographical coverage on the learning center side? Thank you..

Hi, good evening Joe and Mei. Thanks for the opportunity, very strong results.

First, can you discuss the network expansion plan for 2014 and, just relating to that, what's the current utilization levels of your network and, whether you can quantify that or not, I'd like to know how much more revenue potential do we have with the existing geographical coverage on the learning center side? Thank you..

Sure Fei. Last quarter I talked about adding 200 classrooms for the second half of the year. So we have just over 50 net classrooms that we added this quarter, so we’d be looking to add 150 in the next quarter. At least on a gross basis, that number of 200 that I gave was actually gross number.

This is an execution related matter, so it will depend in terms of timing and negotiation with specific landlords we are not going to give up on negotiating terms just hit that number. But we also don’t see the actual number signed in Q4 to vary too much.

I would think it would probably be not more than 15% to 20% versus this number that I gave, and in any case this is capacity that we will need to drive our business. So if it is not signed in Q4 then we will look to sign in Q1 of next year.

In terms of utilization, given that everyone seems to measure utilization differently we don’t give absolutely utilization levels as part of our disclosure. But I can say that in terms of utilization trends in the quarter we had strong utilization gains for small class in all but two of our 15 cities.

So we believe this deliberate approach to center expansion has helped us to ramp-up more quickly and in a healthier way.

In terms of on a going forward basis, I wouldn’t think that we have as much room for utilization improvement in the coming year, fiscal year 2015 as we’ve been able to achieve in 2014, the reason being that many markets have already reached a very healthy utilization level situation, especially for our small class business.

That said I do think that there are a couple of cities within small class that we still have opportunity and Zhikang one-on-one business I still think has meaningful opportunities for incremental utilization improvement.

So as a back of the envelope number, I would think that if we were looking for incremental 3% to 5% on the utilization improvement side for next year. I would think that would be a reasonable assumption at this point..

Great, thanks. Last question from me, so last night New Oriental, your competitor, reported encouraging results from Beijing, so just have a follow-up question on that.

So how would you think about the competitive dynamics in the City of Beijing going forward, especially in the K-12 segment?.

Great, thanks. Last question from me, so last night New Oriental, your competitor, reported encouraging results from Beijing, so just have a follow-up question on that.

So how would you think about the competitive dynamics in the City of Beijing going forward, especially in the K-12 segment?.

Sure, thanks, Fei. I appreciate that question. I think the most important thing to remember is that K-12 market is extremely large. So based on third-party research the top five players combined only have the few percent of this huge market. So there is lots of room for each player to grow without cannibalizing the other’s market.

We play in the Peiyou market focusing on tutoring for top students, New Oriental plays in a different market. But I mean I think the important thing to understand is there is enough demand for various players targeting various segments, this is definitely not a zero some day.

In terms of our business, overall we grew revenues over 50% in the quarter, enrollments over 40% in the quarter. Beijing is an important market for us of course but we are not relying on Beijing growth for our overall Company growth.

And as I mentioned in my preferred remarks Beijing has turned the corner and we are starting to get high single-digits enrollment growth out of that market which is quite encouraging. And then with the price increase we’re well into the double-digits for revenue growth.

And then just in terms of the dynamics I think, based on our understanding New Oriental has had the greatest success in Beijing in the high school segment. Given our retention model we have started primary and move to middle school and then high school.

So high school for us even in a relatively developed market like Beijing is still smaller than primary and middle school. But we have been focusing on high school in recent quarters and have seen good improvements in retention, as I mentioned in my prepared remarks.

Both semesters, semester and also from first year high school all the way to the last year when students are preparing for Gaokao, so that’s quite encouraging for us as well, hope that’s helpful, Fei..

That’s helpful. Thank you..

That’s helpful. Thank you..

Thank you very much. And your next question comes from the line of Clara Fan from Jefferies. Please ask your question..

Thank you for taking my questions. First of all, I would like to ask, as you mentioned about we added 52 classrooms in third quarter and probably another 150 in fourth quarter.

So I'm just wondering, given that we didn't actually add that many classrooms, what is the reason for the exceptionally strong enrollment growth? And secondly what is the revenue per town for small class is, and one-on-one and online? Thank you..

Thank you for taking my questions. First of all, I would like to ask, as you mentioned about we added 52 classrooms in third quarter and probably another 150 in fourth quarter.

So I'm just wondering, given that we didn't actually add that many classrooms, what is the reason for the exceptionally strong enrollment growth? And secondly what is the revenue per town for small class is, and one-on-one and online? Thank you..

Sure, well keep in mind that the classroom adds are reflective of when we sign the contracts with landlords.

So they’re not going to be contributing to enrollments in the quarter, so the enrollment growth that we got in the quarter, has to do with all the classrooms that we added in the first half that are ramping up and we’re getting very strong utilization improvements there.

Such that I would say about that, I mean there’s a delayed effect in terms of what you see in terms of classroom adds and when that’s going to impact enrollments. In terms of the breakdown, it’s 3% online, 81% is small class and 16% is on one-on-one..

Thank you. I've got one follow-up question. If we looked at the margin extension, we realize that it's mainly from gross profit margin expansion. And can you explain a little bit more on that? Thank you..

Thank you. I've got one follow-up question. If we looked at the margin extension, we realize that it's mainly from gross profit margin expansion. And can you explain a little bit more on that? Thank you..

Sure, so, for us the cost associated with the learning center are captured in COGS, so as you see strong utilization improvements as reflected by COGS and utilization combined with what we call MAMADOU which is class fulfillment ratios combined with a moderate approach taken to incremental classroom and center expansion, you can typically expect that you’re going to get strong growth in terms of the gross margin line.

.

Thank you..

Thank you..

Thank you very much. And your next question comes from the line of Dick Wei from Credit Suisse. Please ask your question. .

Hi, good evening, this is [Jal Onkoni] on behalf of Dick Wei. First of all, congratulations on a very solid quarter and, based on your earning release, compensation growth seems to have played a big part in the increase of your overall expenses in the past quarter.

So I just wonder how often you guys raise salaries, and what's the range of increase for your teachers? Thanks you..

Hi, good evening, this is [Jal Onkoni] on behalf of Dick Wei. First of all, congratulations on a very solid quarter and, based on your earning release, compensation growth seems to have played a big part in the increase of your overall expenses in the past quarter.

So I just wonder how often you guys raise salaries, and what's the range of increase for your teachers? Thanks you..

Sure, thanks Jal and we don’t disclose figures specifically because we view that as competitive, but typically you can expect around a 10%-12% increase in overall salaries across the board. In terms of, and that will vary of course but that’s an average number.

In terms of the frequency, for staff it’s usually once a year, for teachers the performance-based aspect of their pay will be evaluated on a quarterly basis, it’s actually term basis, it’s probably term basis because we have the four terms throughout the year, spring, summer, fall, winter..

Thank you. That's my question..

Thank you. That's my question..

Thank you, Jal. I appreciate your joining..

Thank you very much. Your next question comes from the line of Tian Hou from TH Capital. Please ask your question..

Thank you and my congratulations on a good quarter. I have a question regarding your opening plan. So you do say you are planning to invest in the coming year. So can I interpret that, like this year, you are not going to increase learning centers; you are going to concentrate on adding classrooms? So that's number one.

Number two, so you say investing in coming years, what exactly your plan? Are you going to add more rooms -- classrooms, or are you going to adding new centers, go to new places? What exactly does it mean? So that's the first part of the question. I will follow-up with the second one after this..

Thank you and my congratulations on a good quarter. I have a question regarding your opening plan. So you do say you are planning to invest in the coming year. So can I interpret that, like this year, you are not going to increase learning centers; you are going to concentrate on adding classrooms? So that's number one.

Number two, so you say investing in coming years, what exactly your plan? Are you going to add more rooms -- classrooms, or are you going to adding new centers, go to new places? What exactly does it mean? So that's the first part of the question. I will follow-up with the second one after this..

Sure, in terms of classroom versus centers we’re pretty opportunistic, so our preference especially in cities that are relatively penetrated with centers is to go with classrooms to existing centers because then you can scale up this fast in your existing centers. So you’re able to create a little bit of the economy, the scale in this business.

That said, landlords are not always rational and if they’re not rational we’re not able to reach a deal then we will sometimes add a new center quite close to existing center in order to address the spillover of demand from the center which has already reached the maximum utilization.

In a new market where we started just one learning center, we will typically want to at least get a bit of a footprint in the city, so you may see us go with more new centers in a new market.

But overall, I think if you look at the overall adds in terms of new centers and classrooms, we’ve had a nice balance this year of adding new centers and also adding incremental classrooms to existing centers. And I would expect to achieve a similar type balance in the coming year..

So for your existing learning centers how much room do you have to continue increase classrooms? Are they fully penetrated, or are you still can add a lot of classrooms without adding new learning centers?.

So for your existing learning centers how much room do you have to continue increase classrooms? Are they fully penetrated, or are you still can add a lot of classrooms without adding new learning centers?.

Truly on a case-by-case basis, it really depends -- it’s hard to tell now because a tenant may move out. We lease all of our facilities so there may be a tenant that moves out of the building and then we see that as an opportunity for us to take that space.

So it’s not really something that’s predictable it’s something that we seek the opportunity when we see it..

Okay.

So I didn't really capture what you said, how many learning centers or classrooms are you planning to add in the next quarter, in Q4?.

Okay.

So I didn't really capture what you said, how many learning centers or classrooms are you planning to add in the next quarter, in Q4?.

Right, so I won’t give guidance in terms of learning centers versus classrooms for any quarter because as I said it’s opportunistic, so I can’t predict. What I can talk about is incremental capacity and that’s really what’s most important because that’s what’s going to drive the enrollment.

So what I’ve said was 150 classrooms gross adds is what we talked about last quarter and I think we should achieve that within a 15% to 20% margin of error based on execution and whatever but whatever we don’t have this quarter we expect to add in the coming quarter..

Okay, okay. I think the last question is regarding the guidance. So the guidance was really strong.

So I wonder how much that strong growth comes from enrollment growth, how much comes from ARPU growth?.

Okay, okay. I think the last question is regarding the guidance. So the guidance was really strong.

So I wonder how much that strong growth comes from enrollment growth, how much comes from ARPU growth?.

I would expect unlike this quarter to be driven primarily by enrollment growth..

Okay thank you Joe that’s all my questions..

Okay thank you Joe that’s all my questions..

Okay thanks, Tian. .

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

Thank you for taking my questions, and congratulations on a strong quarter. My first question is a follow-up regarding your network expansion plan. Given that you already have very high utilization rate, and that you achieved a very strong growth in second half of this year.

Can you talk about your thoughts for the expansion plan for next year? Do you think the expansion for next year will be in a bigger scale comparing to this year?.

Thank you for taking my questions, and congratulations on a strong quarter. My first question is a follow-up regarding your network expansion plan. Given that you already have very high utilization rate, and that you achieved a very strong growth in second half of this year.

Can you talk about your thoughts for the expansion plan for next year? Do you think the expansion for next year will be in a bigger scale comparing to this year?.

No I think it’s early to say Ella because as you know we’re at February fiscal year-end, so I’m working very hard with each of the business units to get the budget down for next year.

But I would expect that you’ll see less this invest in harvest kind of situation which is again something that the education industry in China has dealt with over the last few years and you’ll see more of a moderate approach where we’re trying to balance the right level of incremental capacity investment.

I think that this year was a great example of that, so I think that you should expect to see more adds in first half of the next year than second half of next year. But I think that overall it will be the kind of moderate approach to capacity increases that we saw this year..

Got it, and then my second question is regarding online education development obviously this is a very popular topic on the industry and some companies have made some progresses in this area. You always have online education courses, can management talk about -- if you are also going to offer online live courses in the near future.

And also at this point most of the online education, are serving as a complementary service to offline tutoring, I wonder if management can talk about your thoughts if you think the online education can become a standalone classes or a type of standalone offering in the near future?.

Got it, and then my second question is regarding online education development obviously this is a very popular topic on the industry and some companies have made some progresses in this area. You always have online education courses, can management talk about -- if you are also going to offer online live courses in the near future.

And also at this point most of the online education, are serving as a complementary service to offline tutoring, I wonder if management can talk about your thoughts if you think the online education can become a standalone classes or a type of standalone offering in the near future?.

Sure. We do see that opportunity we don’t know when the catalyst would be for that. So how near that near future will be, we’re not sure. But we are preparing and the online courses, is a great example of how we use it as a separate business.

We’re going after that primarily to help us to get incremental users in markets that we don’t yet have the physical presence that way we can continue to focus on a relatively smaller number of cities.

We’re right now in 15 cities but to become the number one player in each of those cities in our Peiyou segment while also being able to address the opportunity that exists in other markets that we can’t yet economically serve through learning centers.

So we very much do believe in the additional opportunity in online as a standalone business and that’s why we’ve continued to invest in it year-after-year from 2010 when we started to invest in that business up to now and going forward even though it hasn’t been profitable for us. So we very much believe in and that is a longer term story.

In terms of the live aspect we’re already starting to experiment with some live offerings. For example on our xueersi.com we’re doing some live as a complement to our pre-recorded video content. So we’re not doing it as a separate offering but it’s a way to increase the interaction for our existing content that’s just an example.

We’re also doing live with some other websites as well, but that’s one example of the kind of thing we’re doing there. But as we mentioned it’s also very important from a blended perspective. So we talk a lot about how eduu is very complementary to us in terms of bringing new enrollments to our offline business.

We talked about all that they’re doing in terms of developing apps and exercises during the week to help students be able to have more interaction with us and our content and create more stickiness between us as a Company and our students and parents. So I think that all of those aspects are quite important.

But over a longer period of time we definitely do think that there will be a standalone opportunity that will present itself as well..

Thank you, I appreciate the color. My next question is with regarding to your acquisition strategy. So you acquired a website such as kaoyan.com.

Are you going to make more of such acquisitions in the coming year?.

Thank you, I appreciate the color. My next question is with regarding to your acquisition strategy. So you acquired a website such as kaoyan.com.

Are you going to make more of such acquisitions in the coming year?.

I think we’ll be opportunistic in terms of looking at various forms of strategic investment.

So it doesn’t necessarily have to be an acquisition but kaoyan.com is a great example of how we’re able to extend our product line into a whole new segment and in so doing expand the life of our student from high school into the college years and even address the new customer that we hadn’t been addressing before.

So we’ll watch for those kinds of opportunities. As I mentioned our vision is to be at the intersection of where education of these technology and in so doing to be able to create a more effective and efficient way for students to study.

So we will be looking at various forms of strategic investments that are in line with that vision whether that investing ourselves by having our own small team to go after a particular opportunity organically or whether we look at various forms of strategic investments with players from the outside..

Get it. That's helpful. And my last question is an accounting-related question.

So with regards to development of the ICS 3.0, I wonder what's the accounting policy in terms of the development cost, for example, how long are you going to amortize this cost, over how long a period? And also, given that you've achieved such strong performance in most recent two quarters, is there going to be a spike in the bonuses in the fourth quarter, before your fiscal year ends?.

Get it. That's helpful. And my last question is an accounting-related question.

So with regards to development of the ICS 3.0, I wonder what's the accounting policy in terms of the development cost, for example, how long are you going to amortize this cost, over how long a period? And also, given that you've achieved such strong performance in most recent two quarters, is there going to be a spike in the bonuses in the fourth quarter, before your fiscal year ends?.

Sure. So on the ICS 3.0, it’s mostly equipment costs that you’ll see amortized we developed all the content ourselves. So we’ve been bearing the cost of all those developments through the people costs that has been in our business mostly reflected in the G&A line over the last few years.

And so this is something that takes a long time to develop and we’ve been bearing that cost even though we haven’t been able to generate incremental revenue from it over a longer period of time. But the equipment cost like the computers and servers are typically going to be depreciated over a period of three years.

In terms of the bonus question we will be giving incremental compensation based on our performance for this year.

And so you should expect to see some impact most likely in the G&A line in Q4, but based on current trend I still think that you should see overall operating margin expansion for the full year and so it won’t take away that general healthy trend..

Thank you very much Joe..

Thank you very much Joe..

Thank you, Ella..

Thank you very much. There are no further questions at this time and I would like to turn the call back to Mr. Joseph Kauffman, Chief Financial Officer for closing remarks..

Thank you and thank you all for spending time with us tonight, I really appreciate your being here with us and look forward to seeing you in Beijing or in future conferences and meetings over the coming months. If you should have any further questions feel free to reach out to me anytime or Mei or any of our IR professionals. Thanks you so much.

Have a great day..