Mei Li - Investor Relations Manager Rong Luo - Chief Financial Officer.

Jia Long Shi - Credit Suisse Fei Fang - Goldman Sachs Leon Chik - J.P. Morgan Vivian Hao - Deutsche Bank Clara Fan - Jefferies Ella Ji - Oppenheimer Tian Hou - TH Capital.

Ladies and gentlemen thank you for standing by and welcome to the TAL Education Group Earnings Fiscal Quarter 2015 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 this conference is being recorded today, 22nd of January 2015. I would now like to hand the conference over to your first speaker for today, Ms. Mei Li. Please go ahead..

Thank you all for joining us today for TAL Education Group’s Third Fiscal Quarter 2015 Earnings Conference Call. The third fiscal quarter earnings release was distributed earlier today and you may find a copy on the Company’s IR website or through the Newswire. 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 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 reconciliation about 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 third fiscal quarter of 2015. We are pleased to report on the quarter which revenues and bottom-line results in line with our expectations.

Today, I will discuss our operational progress for the quarter followed by further analysis of the financials and our business outlook. We have maintained strong growth momentum during the third fiscal quarter. Net revenues increased 35.1% year-over-year to US$99.4 million. Revenue growth was primarily driven by a strong 35.6% increase in enrollments.

Year-to-date net revenues have increased 37% year-over-year and we remain well on track to achieve our full fiscal year projected growth target of approximately 35%.

As I explained last quarter, Q3 was a quarter that we saw the double impact of the late fall term classes against last year and one class delay to Q4 due to the Asia-Pacific Economy Corporation or APEC Forum in Beijing. This impact was around RMB 30 million that is 30 million in the quarter as we had expected.

If we add back this amount to our actual third quarter revenue, third quarter top line growth on a normalized basis would have been over 14%. Let me now provide more detail on each of the three big segments. Our core small class offering continued to be the main driver of our growth up by 37.4% in the quarter.

Enrollment growth for small class in the third quarter was 32.8%. ASP for small class was up by 3.4% year-over-year. Small class contributed 82% of the third quarter revenue up from 81% in the same quarter last year.

I am very pleased to note that, in terms of revenue contribution of small class, cities other than Beijing and Shanghai, for the first time contributed over half of 51% of small class revenue compared to 40% during the same period last year and 48% last quarter.

The ongoing strong performance in cities other than Beijing and Shanghai reflects our success in establishing our differentiated tutoring services in a really favorable competitive environment.

As in previous quarters, a good number of cities achieved triple-digit revenue growth, like cities include Nanjing, Hangzhou, Zhengzhou, Suzhou, Chongqing, Shenyang and Shijiazhuang.

Combined small class revenue from Beijing and Shanghai sustained its low double-digit year-over-year growth over a retention rate also showed improvement from the last year’s fall term.

Shanghai recording high double-digit growth once again this quarter, even as it was negatively impacted by the late fall term, the enrollments in elementary grades one to three are larger than those in grades four to six which in turn are larger than student enrollments.

The largest enrollment base is starting in the lowest age group with - enrollments structure is the highly beneficial to maintain Shanghai’s growth momentum. In addition to strong enrollment growth in the fall term, winter enrollments so far are also very good for Shanghai and we expect this trend to continue.

Small class revenue from Beijing in the third quarter was slightly down year-over-year. If there have been no class rescheduling due to the recent APEC Forum or the late fall term, small class revenue from Beijing will have achieved low double-digit growth driven by ASP increases of over 10% year-over-year in Beijing.

Due to the ongoing uncertainty in Beijing is a policy, we continue to have declining English enrollments.

The proposed new policy focuses more on conversational English, which fortunately is what we have begun to offer last year in cooperation with the Cambridge University Press under a name Hello English and we are pleased to see that half of our Beijing primary English enrollments are by now for Hello English.

And in cities outside Beijing, we see that the winter and spring English enrollments are growing by over 50% that is five zero percent year-over-year.

Meanwhile, with our continuous efforts to upgrade the curriculum of Chinese subjects in Beijing where we saw enrollments in Chinese subjects increased over 30% in the fall term year-over-year and these enrollment numbers look good in winter term based on currently rates of enrollments.

Looking ahead over our winter enrollments for Beijing point to a modest year-over-year growth with improved utilization and retention. Let me now turn to the second big segment, our one-on-one business. As before, we managed the growth of one-on-one business as a complementary services to our core small class offerings.

The third quarter is traditionally the weakest quarter of the year as there is no major testing period for students to confirm. One-on-one revenue grew by 16% year-over-year and representing 14% of total revenues, against 16% in the same quarter last year. Enrollment growth was 15% year-over-year. ASP for one-on-one increased by 1.3% year-over-year.

The third big segment Online Courses was again our fastest growing segment with 72% year-over-year revenue growth in the third quarter. Online contributed 4% of total revenues this quarter, up from 3% in the same year ago period. Online enrollments increased 55% year-over-year, online ASP grew by 10.6% year-over-year.

Our online business was profitable for the fourth quarter in a row. Online enrollments were 19% of total enrollment this quarter, versus 17% in the same year ago period.

You should keep in mind that the proportion of the online enrollment is relatively large for this quarter because the late fall term and the APEC Forum caused a shift of some offline enrollments mostly in Beijing to the fourth quarter.

On an absolute basis, online enrollments have continued the accelerated growth trajectory we have seen in this fiscal year. Let me update you now, our geographic footprint and learning center network. We see promising enrollment growth in the four new cities we added in the first half of the fiscal year, Jinan, Qingdao, Shijiazhuang and Changsha.

Once again we ask you on our proven approach to first establish our brand through student outcomes in the first center and hence create strong demand based on word of mouth before opening new centers. Our learning center network expanding to a total of 289 centers, a net increase of two centers quarter-to-quarter.

Of our total 289 learning centers, 200 were small class learning centers including four learning centers for Mobby and 89 were for One-on-one with six new small class centers opened and six closed, the number of small class centers remain unchanged from last quarter, while we opened a net of two One-on-one centers.

We continued to add center capacity for small class in existing centers with a net of 64 net new classrooms, mostly in Shanghai, Qingdao, Nanjing, Wuhan, Xi`an and Changsha.

Year-to-date, we have added 533 small class classrooms, an increase of 24% compared with the start of the year, which is in line with the capacity expansion of 24% we achieved for the first nine months for the fiscal 2014, average rate we are steadily expanding our capacity in support of our growth and at the same time optimize center utilization.

For the third quarter, we saw over-utilization also improved by 2% as compared with the previous fall term. In the winter, where we will continue to add capacity in cities where the utilization is strong such as Guangzhou.

While in the past year, we have spoken a lot about our online strategy most of our ongoing initiatives, I think if O2O, online-to-offline, the largest key behind this strategy is for us to drive our core business through integration of our online and offline efforts and get better operational leverage from online to offline.

Going forward, we will continue to focus most of our resources on this O2O efforts, that we will have our offline core business. To start with the most obvious O2O project Jiajiaoban, where we have a large and lively online and mobile community of parents whose children are taking or will take classes in our nearly 300 centers.

Looking ahead, we want to acquire more students through Jiajiaoban which is the most cost-effective for us to grow enrollments. By the end of November 2014, Jiajiaoban already have over 6 million users with local websites in 26 cities. Moreover, we want to further boost our offline business and customer services by adding more online capabilities.

Our ICS 3.0 program is already a great example of that, as well as the Xueersi Peiyou app for small class registration and blended learning. In addition, we are piloting ways to offer faster services such as e-class card and online payment.

Last but not least, since we expect online learning to be an opportunity for long-term as we have, where we are also investing in the efforts of the online content and online live class platforms. Finally, if I move on to financial review, I would like to briefly update you regarding our investment progress.

We announced in December that we have taken a minority stake in Guokr, a popular mobile and web-based community for science and technology education in China. Guokr and its Massive Online Open Course, the MOOC content will be an important addition to our blended learning approach across multi-media platforms.

Guokr's customer base of high school, college students and young graduates is also highly complementary to our strong K-12 user base.

Our investment in Guokr is therefore an outstanding opportunity to share our vision and align our interest in building new education models for the future and in incorporating self-education on internet and mobile internet.

To summarize, the third quarter results has brought us with the range of achieving our full year growth target of 35% as before, while we drive growth through expansion and technology based innovation, we continue to look for the right balance between present and future growth.

We will allocate our resources both to our O2O initiatives as well as continued center capacity expansion to meet the strong demand for our class based tutoring. As for the third quarter financials, I would like to make some brief key points to have explain the numbers as well as give you some directional forward-looking points as where I can.

Gross margin was 50.7% as compared to 51.2% in the same year ago period. Without the postponement of the third quarter classes to the fourth quarter, the gross margins would have been higher on a normalized basis with the same year ago period.

Total operating expenses increased by 58.8% year-over-year to $42.2 million, due to our spending on new business initiatives during the course of this fiscal year.

For the fourth quarter, we expect operating expenses to increase from the third quarter raising a manageable bandwidth most because of the yearend bonuses, adding new capacity and our O2O efforts that are estimated to cost up to US$15 million for the full fiscal year 2015.

On the ASP side, the year-over-year blending ASP was almost the same for the third fiscal quarter from the same period of the previous year which continued to reflect a very positive shift in our business in favor of small class and online, so we will manage a growth of our one-on-one business.

Earlier in my prepared remarks, I already gave you separate ASPs for this segment, because blending ASP no longer properly reflects the underlying trend due to the shift in business. Let me briefly recap the ASP numbers.

Small class ASP grew 3.4% in the quarter reflecting price increases in selected cities, we mentioned previously, as compared to the same period of the previous year. Next year, we will continue to increase small class prices in some selective cities.

ASP for one-on-one increased by 1.3% year-over-year in the third quarter fiscal year 2015, the ASPs for online classes in the third quarter increased by 10.6% year-over-year. Income tax expense was US$400,000 in the third quarter of fiscal year 2015 as compared to US$1.9 million in the third quarter of fiscal year 2014.

The decrease was mainly because one of our enteritis, TAL Beijing has qualified as a high and new technology enterprise strongly supported by state in the third quarter of fiscal year 2015. Therefore, it is entitled to have a preferential tax rate of 15% from calendar year 2014 through 2016.

We have trued up that impact for around US$1.1 million of the first half in the year into the third quarter. GAAP and non-GAAP income from operations decline by 30.9% and 6% respectively year-over-year. Basic and diluted net income per ADS were US$0.14 and US$0.13 respectively for the third quarter.

Non-GAAP basic and diluted EPS, net income per ADS which excludes share-based compensation expenses were US$0.20 and US$0.19 respectively. Let me finally turn to our guidance. In the fourth quarter we again deal with the usual every other year seasonality associated with the timing of Chinese New Year.

The late start of spring term, which typically begins after Chinese New Year will cause one less weekend of classes to be recorded in February as compared to last year.

Taking into consideration, this seasonality impact and the revenue shift from Q3 to Q4 we mentioned earlier for the fourth quarter of fiscal year 2015, we expect total net revenue to be between US$116.6 million and US$119.2 million, representing an increase of 34% to 37% on a year-over-year basis.

In addition, please note that this guidance includes the quarter-to-date exchange rate impact, which is negative 2% as of today, and assumes no more material change in exchange rates.

For the fiscal year ending February 28, 2015, we expect total net revenue to be between US$427.4 million and US$430 million, representing an increase of 36% to 37% year-over-year. This estimate reflects the company’s current expectation which is subject to change. That concludes our prepared remarks and operator; we are now ready to take questions..

Thank you sir. [Operator Instructions] We have the first question from the line of Jia Long Shi from Credit Suisse. Please ask your question..

Hi, good evening, Rong and Mei. Thanks for taking my call. First of all congratulations on a very solid quarter. I noticed both your marketing and the G&A expense increased quite significantly in Q3.

Could you provide some colors on the drivers for these two items? And also just wonder if you could provide some guidance for your Op margins in Q4 and next fiscal year? Thank you..

Thank you, Jia Long. I said as we already discussed in our earnings call last time we have highlight because we are adding around 300 technic staffs both as engineers and product managers we have been getting into our organization starting from Q2.

So especially in Q2, some people they are coming in the first month, some people coming in the second month, but in Q3 they have a full quarter. So if you in a quarter-to-quarter perspective, actually our OpEx increased around $2 million to $3 million that is all - most of that is because of their full quarter in Q3.

So, looking forward to Q4 and probably next year, I think, same as before, we don’t provide a guidance on gross margin or operation margin in the coming quarters. But I can give you some of the directional points, our current visibility.

For Q4, as you notice in our guidance, the net impact of revenue shifted from Q3 is almost offset by every other year seasonality associated with the Chinese New Year. Also we have already seen, there would be slight impact from the appreciating dollar. The quarter-to-date is around 2%.

So even so, we still expect our Q4 year-over-year revenue and top-line expenditures will still grow 34% to 37% and small class revenue growth in RMB terms will still be very good over 40%.

As you have mentioned discussing in my Q3 results, we also - in Q4, we still expect our operating expenses to grow from the third quarter within a manageable bandwidth mostly because of three things. Number one is the year-end bonuses, typically Q4 is a big quarter, we will give our management employees the year-end bonuses.

The level of the bonus, I think you have noted the benchmark, what happened in the last year Q4 versus last year Q3. The second things we are also doing is we are adding new capacity starting from Q4 and the last one is our O2O efforts including Jiajiaoban, including Peiyou App, including the live phone line and ICS 3.0.

All of these efforts are estimated to cost up to US$15 million for the full fiscal year 2015. So, directionally, I think, on GAAP operation margin in Q4, we will be below same quarter last year because of all of this O2O investments which are happening in this year, but compared to Q3, we will still be a little better than Q3.

Looking forward to fiscal year 2015, I am sure most of it will be very interesting, what I can say is, we will continue to look for the right balance between the top-line growth momentum and the investment for future growth as we have managing the past.

And therefore I think, in the coming years, we are still confident we can maintain the sustainable and healthy top-line revenue growth, while the non-GAAP operating margin will be moderately down and in the best case it will remain flat for the fiscal year 2016, since we are still in the budgeting season. So we haven’t finalized our budgets yet.

So, that’s I hope I can give through more FY 2016 color during next quarter’s earnings call. So that is - that’s based on what I can see today. I hope you can have the answer to your questions..

Thank you for the details Rong. Thank you. I’ll get back to the queue..

Thank you, Jia Long..

We have the next question from the line of Fei Fang from Goldman Sachs. Please ask your question..

Hi, good evening Rong and Mei. Thanks for taking my question. Can you update us on your expansion plan for the course of 2014? How many centers would you plan to add? What are the geographical focus and would you plan to expand into more cities? Thanks..

Thank you, Fei. Continue to adding more capacity is always our priority. Year-to-date, in the first three quarters, we have adding 15 learning centers and in a classroom perspective we have adding 533 classrooms by the end of November.

And in Q4, this year, we will be a little different is we start to add more capacities one quarter earlier than before. So, in quarter four we have seen some of the cities with a very high utilization rate. So we try to add more over there.

The all over color in Q4 I think we probably will have the all of five to seven learning centers in Guangzhou, Chengdu, Wuhan, Zhengzhou and other cities. And the net increase of the classrooms will be around 100 to 150.

And on the other side, which is a little different than before is we don’t favor the small learning centers now, so we try to open some big learning centers in the future which is the most efficient way to optimize our investments there.

For example in Guangzhou the new centers we will own were over 2500 square meters and the centers in Wuhan maybe will be over 3000 square meters. The centers in Chengdu and Zhengzhou and other cities will be over 1000 square meters.

And, looking forward to next year, fiscal 2016, I think, in general, we will still maintain our pace to add another around 20% to 25% in capacity perspective. We still have some priorities when we try to add capacity, number one is we are closely looking at utilization rates in different cities. So we will monitor that metric and set it as possible.

The second thing is our cities we have just added in the year 2012 and the year 2011, they have reached a very positive milestone and we are carefully looking at their needs and try to add more in the future. At the same time, for some of the cities like Beijing, we will also try to do some optimization.

We will consolidate some of the smallest learning centers to one big learning center and in which has been proved - is much more efficient way to our students and teachers. And, on the other side, I think I also would like to give you more information about capacity, that is our plan to adding new cities next year.

Again, we will maintain our pace to adding maybe two to four new cities next year. By the end of today, we have 19 cities in our hands, but we still have a lot of big cities with good potential in our wish list, for example like Dalian Ningbo, Ruzhou and Xuzhou.

So, all in all, I think we will continue to execute our plan to adding more capacities in a relatively stable pace. And we will let you know and update you more details when we come into the end of each quarter..

Thank you, Rong. That’s very helpful..

Thank you, Fei..

We have the next question from the line of Philip Wan from Morgan Stanley. Please ask your question..

Hey good evening, Rong and Mei. This is George calling on behalf of Philip. Thank you very much for taking my question. And my question is regarding the pricing of your courses.

I understand that it’s because of the mix shift to the overall ASP is down or which is flat, but even if we look at this small class ASPs, overall, it’s still like only 3% this quarter, but this maybe 6% last quarter.

I know in some cities, for example, Beijing, it’s still up like 10%, but do you see more competition that is driving or that is preventing you from increasing the price or across the country going forward? We noticed that in your end you’ve actually introduced some royalty programs in that - effectively lowering their pricing by about 2% to 5%.

So, what do you think of that? Do you think that the competition is actually - you also probably need to give some discount or slow your pace of increasing the price? Thanks..

Thank you, George. The simple answer is no. I think our core small class ASP, we still maintain a very healthy increase, which is 8%, close to 9% in Q1, 6% in Q2 and 3.4% in Q3. And in this year we took price increase in Beijing, Shanghai, Shenzhen, Wuhan, Zhengzhou, Suzhou, Chongqing and Taiyuan since the same period last year.

And we plan to do so in selective cities next year as well.

So we will continue to increase our price from to time-to-time and one thing I need to remind you is, our geography distribution most to cities other than Beijing and Shanghai, just as I mentioned in my script, the cities outside Beijing and Shanghai now contribute more than half of the revenue in my forecast now.

In general, the price in other cities is a little lower than the price in Beijing and Shanghai. So that will be the part of the reason why you see the slightly lower ASP growth. And I think looking forward, we will still maintain our pricing power we had and we can still expect to see our small class ASP growth will be around 3% to 5%.

And at the same time for our one-on-one business and online ASP will remain stable in the coming quarters..

Okay, very helpful.

Can you just quickly, can you remind us in the outer cities, what’s your average premium, price premium for your small classes versus the local players or the competitors?.

Because - it’s different city-by-city, but what I can say is, we can give some big numbers to do the benchmark. In general, I think we can say around 30% to 50% price premium over our local competitors..

Okay, got it. That’s very helpful. Thank you..

Thank you, George..

We have the next question from the line of Leon Chik from J. P. Morgan. Please ask your question..

Yes, hi. First congratulations and also, I was wondering if there is any kind of color you can give on maybe other courses other than math and science any expansion plans into those courses, maybe more humanities or languages, et cetera and if that’s the case that these are just not things that you are interested in? Thanks..

Hi, Leon, can I clarify your question.

Still want to understand our progress, maybe English and Chinese in more cities?.

Yes, English, Chinese in more cities and also maybe just there are probably quite a lot of courses that you are not offering right now, just expand the scope of your core, in math and science where you are good at, that - is there any - it looks like the growth in cities and maybe even the duration maybe not as some people want and if there is another avenue of growth, or even go secondary for example?.

Okay, okay, okay. I fully understand. So specifically in English and Chinese, I think we are making progress in English. As I mentioned just now, the winter term and spring term, the enrollment growth in English in outer cities other than Beijing is over 50%. In winter, it’s over 60%, in spring it’s over 50%, but we still have three weeks to go.

So that number will go up definitely. We also expand our cities with the English class, maybe from five to seven. So, I think for English, we find our conversational product helping, this is a good product. We try to expand more in our existing we have math and science there. So that definitely will be a big plus.

For the structure of Chinese, we are very pleased to see in Beijing, Beijing today is the only city we have Chinese. So we are pleased to see in Beijing the Chinese enrollments also grow more than 30% where the overall Beijing enrollment is almost flat. So we also feel good about that.

In next year, we are also thinking to expand the Chinese to more cities. But again, we will be relatively conservative, we want to make our product right, make our business model right before we go into more cities..

Thank you..

Thank you, Leon..

We have the next question from the line of Vivian Hao from Deutsche Bank. Please ask your question..

Hi, Rong and Mei. Thank you for taking my question. I’ve got two questions here.

First of all, can you tell us what is the current average utilization rate of your classrooms and also maybe the benchmark of what kind of utilization once you hit that benchmark that you will expand your capacity? Second question is, regarding your O2O initiatives, could you elaborate a bit more on the progress, especially your plan of investment for online and mobile related areas for next year? Thank you..

Okay. Thank you, Vivian. So, for the utilization rates in different cities, they are quite different. I think, for example in Beijing, there relatively is a little lower because in Beijing, we have more subjects like Chinese and English in Beijing. And for some of the cities like Guangzhou, and the other places they are much higher more than 90%.

But in general we are speaking, when we are looking at the utilization rates, I think 60% is a very important benchmark for us, because 60% means 80% of the class room and 80% of the seats are occupied at the same time. So when our learning centers the key 60% we will evaluate it needs to add more capacities in that learning center or in that city.

For the O2O efforts as we have mentioned in my prepared remarks, I can give you more details about that the full project there.

For the Jiajiaoban which is very important tool for us to acquire new customers, the resident users of Jiajiaoban both the PC and web have surpassed 6 million resident users and one of the questions we are asking today is, that you will be current and who has logged on the Jiajiaoban apps is higher than the people who log on the Jiajiaoban web.

And we are also seeing the time of stay, the duration of stay in the Jiajiaoban app is also longer than Jiajiaoban web. So now we have their local websites in 26 cities which enable us to try a lot of new business models and try to promote our branding and our core offerings more efficiently. The second thing is about our Peiyou app.

Peiyou app today in October that’s the first month we used Peiyou app into market with pilot in ten cities we used the Peiyou app to do the registration and to do that online payments.

The feedback from the Peiyou app is quite positive in some of the last few cities we even try the model to close all of our 30 centers and the feedback is also very good. So, and by the same time we also see some of the small technical box coming from there because, our peak volume of the registration is quite high.

So, we still need one or two turns to improve the functionality of the Peiyou apps. But I personally feel very good about the progress we are making today. I will share more information when we come into the summer term.

And the third thing we talk about the ICS 3.0, the ICS 3.0 we have deployed 3000 in Q1 and the feedback from the teachers and students are also very positive. That’s why we will continue to deploy more starting from Q4. And next year, we also have the plan to deploy this system into more cities and into more subjects and into more grades.

And the last one is about our live phone line is also making good progress there. Now we have over 1000 students, a couple thousand enrollments now and when we just started with the platform, we only had 100 students there.

So, for Hyperion, we were still chasing a pilot stage because we want to make the product right and we - now we are extending the Hyperion pilot from three cities to seven cities. And that seven, including Beijing, Guangzhou, Shenzhen Xi`an, Zhengzhou, Shenyang and Changsha.

So we will continue to invest in Hyperion live class project to improve its functionality and try to expand more grades before we officially promote in the countrywide. So, all in all, I think we feel good about the progress we are making today, I think and we feel confident they will give us long-term return with the time moving on..

This is very helpful.

Just a one quick follow-up, does that mean that the investment at the magnitude will be similar to this fiscal year - sorry to FY 2015?.

That’s different project-by-project. I think the investment of their Peiyou app and Jiajiaoban will be moderately down or it will be flat coming into next year because it’s almost there. The investment, the content development for ICS 3.0 is almost there but, we need to consider because we want to be probably more pass this to more cities.

So, we need to consider the depreciation cost from there. And Hyperion is doing the pilot stage. Even the growth is quite healthy and quite exciting with two triggers, the pilot stage we will continually invest more over there. So, in general, I think, when I finish my fiscal 2016 budgeting, I can share more about that..

Thank you. This is very helpful..

Thank you, Vivian..

We have the next question from the line of Clara Fen from Jefferies. Please ask your question..

Hi, hello. Thank you for taking my question. I’ve got a question in regards to your English class. So I am just - is it only offered in few cities or in terms of revenue contribution, how big is it now for our English classes and also I would like to ask both - I understand our dividend policies that we don’t regularly give out dividend.

I am just wanting to see almost it’s going to happen this year. Thank you..

Thank you, Clara. For English, as the all over the country it’s around 10% to 12% of my overall revenue. In Beijing, it’s higher, it’s close to 15% of my overall revenue. I think this percentage will go high in the future.

And about the - especially about the dividend, same as before, we will continue to make strategic investments to support our vision of becoming a leading technology-focused education service provider.

So we are making some small investments and we will continue to make more investments with the synergy of our core business which is a little different from this year. Yesterday we have invested some of the deals, all of them are less than 20% minority stake. In the future, we will focus on our K-12 business.

We will focus on our core business and we were looking at deals with high synergy with our core business. And we expect the number of the deals will be down next year and maybe the average size of the deals may go up. So we still want to leverage our cash reserve to make some strategic investments in a controllable way.

So, we are unlikely to do a dividend in the near term. We will balance the long-term growth and internal considerations..

Well, thank you. Just one follow-up question.

So how about math, how much is account for the revenue then?.

Math is over 60%..

Okay, thank you very much..

Thank you, Clara..

We have the next question from the line of Ella Ji from Oppenheimer. Please ask your question..

Thank you for taking my question. First question is relating also to your operating expenses.

Can you give us an update for the key cost components such as teachers’ compensation and also rent expenses, how much year-over-year increase are you seeing there?.

For our OpEx, the teacher compensation and the rent, the percent of net revenue is still stable. The year before last year it’s around 21% and last year it’s around 20%, this year is around 18% for the teacher compensation. Rent is also quite stable..

Okay, but if you are saying this year it’s 18%, is it indicating a declining as a percentage of revenue or slowly decline?.

Yes, for the teacher compensation, it’s slowly declining around maybe one point per year, and the rent is around is 12% to 15%. It’s different quarter-by-quarter because, for example in Q3 and Q4 it’s better in Q3. We expect to add more capacities there.

So, in that quarter, maybe it will be around one or two points higher, but if you are normalizing a one year perspective, it’s also quite stable..

Got it. Thank you. And then secondarily, relating to your investment for the online initiatives, I wonder if you can also help break it down for your budgets for maybe next year.

Are we going to see, for example, which line in the operating expenses are we likely going to see more increases? Is it going to be more in the sales and marketing or in the G&A or in the cost of the revenues?.

More than 60% we will show highly in the G&A. The rest will spread in the S&M and costs..

Got it. Thank you.

Lastly, could you also talk about, so far you have made a lot of investments in - as a minority shareholder in other websites, could you talk about what type of synergies have you seen so far and is it likely that you will maybe increase the investment to be a majority shareholder rather than a minority shareholder?.

Yes, that depends, the development of our the deals we invest. I think we need to consider that in a bigger environment. Now we are looking into the online education. We all know that online education today is still pretty revenue and we don’t see very good or very much models in this market yet.

But at the same time we are also seeing, for the online education, new projects there we have seen, very quickly gained a lot of traffic over there. So, some - they are also very helpful and beneficial for us to expand the consumer coverage before most of our students coming from primary school and K-12.

But, with the own education we even can touch more consumers. For example, when we invest in Guokr, they provide us engines to touch the high school students, college students and the graduate students.

So the reason why we pay less than 20% minority stake is, frankly speaking we are taking a relatively conservative approach, because we feel online education in future definitely to have a bright future, but now we are still - we don’t have enough information, we are not smart enough to judge which deal and which project will succeed in the future.

We take a relatively conservative approach to have less than 20% in stake, but we keep a very close watch of what they are doing today and we are also sending our senior people to become their board of directors. When we see some of the core things - core signals are coming up, we will increase our stake to a higher level, maybe become majority.

By the same time, we will see that deals actually don’t have any synergy with us or maybe they are good but they don’t have any good correlation with our core business. It’s purely a financial investment to us then we will decide to - maybe we adjust our stake or we just quit.

So I think we still need several quarters to evaluate and keep a close watch of what’s happening in this market yet..

Got it. That’s very helpful. Thank you, Rong..

Thank you, Ella..

We have the last question from the line of Tian Hou from TH Capital. Please ask your question..

Hey Rong and Mei. I have two questions. One is your - related to your investment, regarding the O2O investment, I realize there are some investments can be like a one-time such as buying equipment or software outsource and some other investment could be the human capital investment which could last into next years.

So I wonder, this year, how much are those O2O additional investment? How much of that we will roll into or continue into next year or two and how much of that will not have been in the next year? That’s the number one question.

Number two is on your income statement and there is one question, maybe because I am not the accounting background, so I don’t really quite get it, last quarter, your share account fully diluted.

It’s in 90.6 million shares, and this quarter, that was like a 9% decline become 82.4% - 82.4 million and where you have a 2 million share account reduction. So I wonder what’s the reason and what the rule of accounting and going forward, how should we model this part of the item? That’s all two questions..

Okay, thank you, Tian. Just with your first question, I think today our O2O investments in larger part it’s headcount, it’s the people. By the end of November this year, we have adding, maybe incremental around 300 staffs, both IT, engineering and the product managers there. And looking forward to next year, we don’t see we will increase that much.

But the people we hire we also don’t have the plan to quickly place all of them. So they will still be there and in cost of perspective, there we still need to assume, maybe a fair salary increase.

For the small part is the investment we are spending to do the project outsourcing projects or some of the devices and facilities, so all of them will be depreciated into - will be amortized in three years. So, we don’t have similar types of this kind of facility investment next year.

And with respect to your second question about our EPS, I think that is more like accounting treatment. According to the financial accounting standards, the calculation of the diluted EPS it should not assume conversion or exercised or contingent instruments of securities. That will have an anti-dilutive effect on EPS.

In determining whether potential common shares are dilutive or anti-dilutive, issue or series of issues of potential common shares should be considered separately rather than in aggregate, which means, our accounting treatment of the convertible bond is based on the if converted method.

When we calculate the diluted EPS, we should consider two scenarios. Number one, is we are assuming CP we have an anti-dilutive effect. So its impact to net revenue and the share count will not be included in the calculation, which means the first scenario, the formula will be EPS equals net income divided by basic ADS.

The second scenario is we are assuming CP have a diluted effect on EPS, all bonds are converted.

The interest expense incurred from the CP around 2 million in Q3 should be added back to net income and the share counts from the convertible bonds will be included into a denominator, which means the formula will be EPS equals net income plus interest expense divided by diluted ADS.

So, from a cost perspective, we need to compare these two and we need to choose the lowest EPS to report. So that is the accounting treatment..

And going forward, how should we - it’s kind of - for me it’s complicated.

So, I want to see forward that where a simpler version or guidance how should we model going forward?.

Tian Hou, if you are modeling full year number, maybe the 19.6 million is better. If you are modeling one quarter number and that quarter number is - the net income of that quarter number maybe not that much and then you use the lower numbers. So that’s purely accounting treatment we have to follow the US GAAP..

Okay, that’s all my questions. Thank you..

Thank you, Tian..

Okay, thank you all of you to join our conference call. We know it’s quietly internal now. And I looking forward we have more conversations throughout the call. And again, we looking forward both Q3 and in the coming year, I think, or from a company perspective, we will still continue to deliver the strong top-line revenue growth.

And we will also try our best to maintain the relatively stable gross margin and operation margin in the future. So, thank you so much for your coming and looking forward on more conversations in the future. Thank you..

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect..