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

Fan Liu – Goldman Sachs Eileen Do – Deutsche Bank Tian Hou – T H Capital Leon Chik – JPMorgan Anne Shih – Brean Capital Alvin Jiang – Morgan Stanley Cynthia Meng – Jefferies.

Ladies and gentlemen, thank you for standing by, and welcome to the TAL Education Group's First Fiscal Quarter 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 that this conference is being recorded today, July 23, 2015. I would now like to hand the conference to your speaker today, Ms. Mei Li, Investor Relations Manager. Please go ahead, ma'am..

Thank you all for joining us today for TAL Education Group's first fiscal quarter 2016 earnings conference call. The first fiscal quarter earnings release was distributed earlier today. And you may find a copy on the company's IR website or through the newswires. During this call, you will hear from Chief Financial Officer, Mr. Rong Luo.

Following his prepared remarks, Mr. Luo will be available to answer your questions. Before we continue, please note that the discussions today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties, include but are not limited to those outlined in public filings with the SEC.

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

I would now like to turn the call over to Mr. Rong Luo..

Thank you, Mei. And thank you all for joining us on our earnings conference call for the first fiscal quarter of 2016. The first quarter revenue exceeding our expectation, due to the very strong growth in the cities other than Beijing, where we expect the outstanding growths to continue in the second quarter.

Net revenue increased 45.3% year-over-year to $129.4 million. Revenue growth was primarily driven by a robust 47.6% increase in enrollments.

We also achieved solid operating income growth for the first quarter of 43.4% and net income growth of 42%, only back off with strong business momentum, even though we opened 14 new learning centers on a net basis in the first fiscal quarter. Today, I will review our operational progress and highlights of our first fiscal quarter.

After that, I will provide some further analysis of the financials and our business outlook. Let me first update you on our learning center network. On a net basis we added 14 new centers to our learning center network to a total of 303 centers.

With net addition of 13 luxury small-class learning centers and one one-on-one learning center, which bring us to a total of 215 small-class learning centers, including four learning centers for Mobby and 88 for one-on-one.

We added most learning centers in cities with high utilization rates, for example, Nanjing, Shanghai, Guangzhou, Shijiazhuang and Chendgu, of particular know is that we added a net four learning centers in Nanjing, which is now in the top five cities in terms of revenue contribution.

In Beijing, meanwhile as we continue to consolidate capacity, we opened two new and closed five small-class centers, leading to a net addition of 57 classrooms. We added a net of 517 Peiyou small-class classrooms in the first quarter, representing a 42% year-over-year increase.

We start to add capacity from winter earlier than last year and we are accelerating the expansion pace in cities outside Beijing, where the utilization is good, where we're on track with our plan to add more learning capacity before summer term. Let me now provide more detail on each of the three business segments.

In the first quarter, our core small-class offering continued to perform well, up by 54% in the quarter with very strong revenue growth across the board. Enrollment growth for small-class in the first quarter was 44%. ASP for small-class was up by 6.5% year-over-year in the quarter.

The combined cities up outside Beijing grew by high double-digit percentages and seven of them achieved triple-digit revenue growth. These cities are Nanjing, Hangzhou, Zhengzhou, Suzhou, Chongqing, Shenyang and Jinan.

The revenue contribution from small-class in cities outside Beijing, Shanghai was 54% of all small-class revenue, up from 44% in the same year ago period. Combined small-class revenue from Beijing and Shanghai also be aware with solid double-digit year-over-year growth.

Overall retention rate also improved from last year’s spring term with less small-class refunds than we have expected. When we look at revenue contribution from the top cities, we see how our revenue base from Peiyou small-class is becoming more broadly spread over wider number of cities.

In the first quarter, cities ranking below the top five, which are Tianjin, Xi`an, Wuhan, Chengdu, Hangzhou, Zhengzhou, Suzhou, Chongqing, Shenyang, Taiyuan, and the four new cities we added Q2 last year in total contributed 28% of Peiyou small-class revenue. In the same period last year, the cities below top five contributed 20%.

The ASP increase of 6.5% was a result of the last price increase mostly in summer term last year. Last year, we raised the pricing in eight cities including Beijing, Shanghai, Shenzhen, Wuhan, Suzhou, Zhengzhou, and Taiyuan. This year our plan is to increase pricing in five cities including, Tianjin, Nanjing, Suzhou, Zhengzhou, and Chongqing.

Let me briefly update you on Beijing. Revenue growth in the quarter was supported by ASP growth were expected the enrollment of new students [ph] in summer term will be back on our growth track based on the registrations as of today.

Changsha achieved year-over-year growth of over 20% again and representing 9% after spring enrollments in Beijing, [indiscernible] by strong growth in Changsha will continue in the summer. As I explained in last quarter, we have converted initiatives ongoing to reignite growth in Beijing.

This involves consolidation of learning centers to improve utilization and at a new capacity in less penetrated area. That’s why, as I already mentioned, we closed five small-class learning centers and opened two new ones in Beijing. On a net basis, we added 57 small-class classrooms in Beijing in the quarter.

In addition, we have promotions ongoing for Beijing to grow the new center enrollments and increase retention among the new students, specifically for the first grade junior high students and for summer class only. We estimate the revenue impact will be approximately US$2 million to US$3 million in Q2 based on last year's enrollment in price.

We are very pleased that in the spring term, the retention rate has improved year-over-year and [indiscernible] which turned to continue in the summer term and also lead to higher enrollment in fall and winter terms. Shanghai recorded high double digit growth again in the quarter as expected.

We opened two new small-class learning centers to meet a healthy demand for our tutoring services reflected by improved utilization and reduced refunds. We expect the robust enrollment growth will continue in the summer term.

In the first quarter, Nanjing joined the top five cities in terms of revenue contribution with triple digit year-over-year growth. We added four small-class learning centers on net basis. Given the healthy bid development reflected by higher retention rates, we expect Nanjing to continue its rapid growth in the coming quarters.

Let me now turn to the second big segment, our One-on-One business, as you know for quite some time now we have managed growth of One-on-One as a complementary services to our core small-class offerings. In the first quarter, One-on-One revenue grew by 14% year-over-year to 18.2% of total revenue.

Enrollments were up by 18% year-on-year, ASP for One-on-One declined by 2.8% year-over-year. Our online course is a big segment remains one of our fastest growing segments with 70% year-over-year revenue growth in the first quarter as expected.

Online courses xueersi.com contributed 4.5% of total revenue this quarter, compared to 3.8% in the same year ago period. Raised by revenue contribution from online courses continue to increase going forward.

Online enrollments also increased 75% year-over-year to an all time high of 20% of total enrollment this quarter, versus 17% in the same year ago period. Online ASPD climbed by 3% year-over-year mainly because of more, low price course you saw in the quarter.

Since late March, we have been offering a comeback experience of teaching, examination, practice and lab communication. We believe that fundamentally, the intensifying interactions between students and teachers, improve the student outcomes and helps both students and their parents understand this new learning process.

Deferred revenue of online costs by the end of May increased 82% year-over-year, as we used this pilot program to shape and improve the untested mode of online tutoring and teaching. This approach we believe will stimulate other students to enroll. Let me give you a quick update on other O2O progress up now.

As we have said before, we aim to drive our core business through integration of our online and offline efforts and get back to operating leverage from online to offline. We’re pleased to know that rapid adoption of the online registration and payment for our tutoring services.

In the first quarter, we have spent approximately US$4 million, out of the US$20 million to US$22 million full year margin on O2O investment. Let me now go through some financial highlights for the first fiscal quarter, adding some detail and insight on the numbers and finally discuss our guidance. Let me now go over the financials in detail with you.

We delivered US$129.4 million in net revenue in the quarter, representing revenue growth of 45.3% versus the same period in the previous year. Driving the quarter’s revenue growth was an increase in total student enrollments.

Total student enrollments increased to approximately 412,000 and 120 from approximately 279,000 and 200 in the same period one year ago. The increase in total student enrollments was supported by ongoing solid momentum in our course small-class and rapid and rapid growth in online courses.

On the ASP side, year-over-year ASP decrease of 1.5% to US$314 for the first fiscal quarter from US$319 in the first quarter of the previous year. The decrease in ASP was mainly because of the increase in the hourly rate of the small-class course offerings were offset by more enrollment contribution from the online courses.

While first quarter’s ASP for the total business decrease year-over-year in U.S.

dollar terms, importantly, the ASP growth of our core small-class offering continued to be over 6.5% in the quarter, despite the fact that a greater portion of small-class revenue now accounts for cities outside Beijing and Shanghai, where the ASPs are lower than in these two major markets.

This decrease spend in ASP in fact reflects a very positive shift in our business, which I have mentioned in previous quarters. Also, we continue to manage the gross of our one-on-one business, and its contribution to our total revenues decrease over time.

Our two other healthy and high gross business segments, the online courses and small-class are taking more share. Cost of revenues increased by 46.2% to US$61 million from US$41.7 million in the same year ago quarter.

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

Non-GAAP cost of revenue, which excluded share-based compensation expenses increased by 46.2% to $61 million from $41.7 million in the first fiscal quarter of fiscal year 2015. GAAP and non-GAAP gross profit for the first quarter were both US$68.4 million as compared to both being US$47.3 million for same year-ago period.

GAAP and non-GAAP gross margin for the first fiscal quarter were both 52.9%, as compared to both 53.2% for the same period of last year. Selling and marketing expenses increased by 34.1% to US$15.3 million up from US$11.4 million in the first quarter of fiscal year 2015.

Non-GAAP selling and marketing expenses excluded share based compensation expenses increased by 35.5% to US$14.8 million up from US$10.9 million in the same period of last year.

The increase of selling and marketing expenses in the first quarter of fiscal year 2016 was primarily a result of an increase in compensation to sales and marketing staff to support a greater number of programs and service offerings versus the year ago period.

General and administrative expenses increased by 49.8% to US$33.6 million up from US$22.4 million in the first fiscal quarter of fiscal year 2015.

The increase in general and administrative expenses was primarily due to an increase in the number of our general and administrative personnel compared to a year ago period, an increase in compensation to our general and administrative personnel, in particular such personnel supporting our online education initiative among other new programs and service offerings.

Non-GAAP, general and administrative expenses, which excluded share-based compensation expenses increased by 53.8% to US$29 million, up from US$18.9 million in the first quarter of 2015.

The above factors combined to give us operating income of US$19.6 million, representing a year-over-year increase of 43.4%, non-GAAP operating income increased by 39.3% year-over-year to US$24.7 million. Operating margin in the first quarter was 15.1%, as compared to 15.4% in the same period of the previous year.

Non-GAAP operating margin was 19.1% as compared to 19.9% in the same period a year ago. Income tax expense was US$4.8 million, as compared to US$2.4 million in the first quarter of fiscal year 2015. The increase was mainly due to an increase in income before tax and effective tax rate.

The increase of the effective income tax rate was mainly because one of TAL’s subsidiaries was entitled to a two-year exemption from enterprise income tax for calendar years 2013 and 2014 as a Newly Established Software Enterprise, and enjoys preferential tax rate of 12.5% from calendar years 2015 through 2017.

Our net income for the quarter was US$19 million, an increase by 42% year-over-year. Non-GAAP net income for the first quarter was US$24 million, up by 38.1% year-over-year. These keep us a net profit margin of 14.6% as compared to 15% in the same period of last year. Non-GAAP profit margin was 18.6% versus 19.5% in the same period of last year.

Basic and diluted net income per ADS were US$0.24 and US$0.23 respectively for the quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses were US$0.30 and US$0.28.

From the balance sheet as of May 31, 2015, the company had US$582.2 million of cash and cash equivalents and US$49.3 million of term deposits compared to US$470.2 million of cash and cash equivalents and US$21.2 million of term deposits as of February 28, 2015.

Capital expenditures for the first quarter of fiscal year 2016 was US$6.3 million, representing an increase of US$1.9 million, up from US$4.4 million in the first quarter of fiscal year 2015.

The increase was mainly due to the leasehold improvement and the purchase of servers, computers, software systems and other hardware for the company’s teaching and mobile network R&D facilities.

As of May 31, 2015, the company’s deferred revenue balance was US$331.3 million as compared to US$255.8 million as of May 31, 2014, representing a year-over-year increase of 40.5%. The increase was primarily contributed by the tuition revenue collected in advance for Xueersi Peiyou small-class summer and fall semesters.

Let’s move to our Q2 guidance, based on the company’s current estimates, total net revenue for the second quarter of fiscal year 2015 expected to be between US$161.5 million and US$165.2 million, representing an increase of 32% to 35% on a year-on-year basis, assuming no material change in the exchange rate.

These estimates reflect the Company’s current expectations, which is subject to change. Our guidance for the second quarter is based on the usual areas used as analysis in Q2 associated with the timing of Chinese New Year among other factors and incorporates the expected negative impact of Beijing small class summer promotion.

This year, the expected positive impact in Q2 due to area seasonality is offset by the impact of summer promotions in Beijing, specifically for the first grade junior high students, which is estimated to be approximately $2 million to $3 million in U.S. dollar.

If we achieve the guidance of 32% to 35% revenue growth in Q2, then we will have achieved 37% to 39% year-over-year top-line growth for the first half of the year. We have strong business momentum, and maintain our positive outlook for the year. This estimate reflects the Company’s current expectation which is subject to change.

That concludes my prepared remarks. Operator I’m now ready to take questions..

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Fan Liu from Goldman Sachs. Please ask your question..

Hi, Rong Luo and Mei, congratulations on another solid quarter. Would you mind sharing with us, based on what you have out there so far, what’s the impact of the summer promotion programs on your enrollment ASP and then retention rate? Another question is related to your online to offline initiatives.

You have made quite some investment in the past several months. There are already some integration of your investment and the existing businesses. For example, your one-on-one businesses and Jinjin Jaja. Could you please share with us, your envision for all this new business initiatives both top-line and bottom-line impact, if possible? Thank you..

Okay. Thank you for your questions. Specifically, about the summer promotion in Beijing, I’ve seen so far the registration in summer time in the first grade for the junior high and senior high actually is quite positive. It’s several times bigger than what we had in the past year.

But again, since it’s still in summer term, our key priority today is try to improve the retention rate from summer to fall term through improving the teaching quality - and probably I will update you more numbers in Q2 earning call.

While briefing the high-end markets that properly limited promotions will help to give us a bigger dominance in Beijing in terms of the district coverage, and wide range of tutoring charges, which we believe will drive for the industry consolidations.

In a revenue impact perspective, as I’ve mentioned in the prepared remarks, is around approximately $2 million to $3 million negative impact for Q2. Because we only do with kind of targeted and limited promotions for the new students in Beijing and for summer class only.

So we will give - please stay tuned and give us more time to wait for the final retention numbers from summer term to for winter semesters. I will give you more details later. But so far we still feel very good about that.

Specifically to your second question, about our O2O investments, especially you mentioned our integration in Guangzhou with the change in education, which is Jinjin Jaja in Chinese. I think, that’s our minority investment, which we still believe the one-on-one model is now the perfect model in margin perspective.

And we believe the C2C platform they have a lot of market opportunities in the future, so we would like to push with kind of integrations to try to establish some type of new model Guangzhou market. Because its minority investments there, so in Guangzhou is only around 9% of my [indiscernible] overall revenue.

So the impact of there is not that material. But again, since we just announced the deal one month ago, so we will continue all kinds of these integrations. We probably we’ll let you know in the future when we conclude in much solid stage. I hope I answered your questions. Thank you..

Thank you, Rong, san. Very helpful..

Thank you..

The next question comes from Vivian Hao from Deutsche Bank. Please ask your question..

Hi, Rong Luo, this is [indiscernible] asking question on behalf of Vivian Hao. First of all, congratulations on the strong quarter. My question is regarding your ex-Beijing class revenue growth. Since, that we all know that Beijing is quite competitive, what is actually our ex-Beijing strategy for next quarter and the full year? Thanks..

Okay, thank you Eileen. I think I can share you some numbers. Last quarter, our revenue gross for the cities outside Beijing is around 80%, and in Q1, the growth rate of their cities outside Beijing actually is even higher is close to 90%.

So we're still seeing the very strong growth coming from ultra-cities and seven of them achieved the triple digit revenue growth in Q1 and here I even we now consider the four newly added cases, we added starting from the Q2 last year. So, I still feel quite confident about our performance outside Beijing.

And especially, in the – learning center never develops but we also focused more in the places outside there.

The revenue contribution from the ultra-cities outside Beijing and Shanghai actually in Q1 is 54% and way is that this trend will continue in the coming several quarters and we are happy to see the revenue contribution mix from Beijing actually is much lower than what we do in the past now..

Thank you.

And also can I note the how much the margin in the ex-Beijing or Shanghai cities compared with Beijing and Shanghai?.

Okay in margin perspective Beijing and Shanghai is not in the same level, I think Beijing's margin is lower in all other places we have the presence there. In Shanghai and at the other places, the margin is quite similar, which is around 7 points higher than Beijing.

The reason for that is because Beijing is our headquarters, they pay a lot of headquarter functions. Again, in Beijing we have a lot of new courses like Chinese, like English, well in the other places and generally we have – we only have our strongest largest [indiscernible].

So, we are still quite confident to see that with our consolidation on the new centers in Beijing and we set our promotions in Beijing, which if we can maintain a high retention rate from summer term to fall and winter term, we still have a chance to improve the margins for Beijing in the future..

Excuse me, then how about the other cities? The other cities margin levels?.

They are around 5 to 10 points higher than Beijing, and we are seeing because they are most of the KPIs are better, including the retention rates, refund rates, fulfillment rates, all of them are quite healthy and we are even more than confident to say we can maintain a very healthy margin for the places outside Beijing..

Got it. Thank you very much..

Thank you..

The next question comes from Dick Wei from Credit Suisse. Please ask your question..

Thanks. Good evening Luo and Mei. This is Dan Jiao [ph] on behalf of Dick Wei. First, congratulations on another strong quarter. I wonder, what's your view on the top-line growth for the full year? You just gave the guidance for the first half.

And also, could you share with us your view on the margin trend for the second quarter and the full year?.

Okay. Thank you Jialong. As I mentioned in my primary remarks, I delivered my Q2 guidance, the first half revenue growth rate well between 57% to 59% year-over-year. And our momentum for the first half of the year is very much on track.

And in the full year perspective, I think, since we still have very strong business momentum, and we still maintain our positive outlook for the full year.

Internally, we are still shooting for at least 35% of top line growth in RMB terms even though positive impact in Q2, due to our seasonality and the negative impact of summer promotions in Beijing. We think all office factors; we have considered and take into considerations when we give the guidance.

So, in full year perspective since we still have seven months to go, we would like to stick to our revenue target, which is 35% top line perspective.

And specific margin, as I have mentioned in the previous calls, Q1 margin is a little better than what we expected, because of much stronger top line revenue, but in the rest of the year, we still like to maintain our view, is considering, we still have the investments for auto initiatives.

I think for the full year margin, we still will be moderate it down and in baskets remain flat.

We still want to let you guys be more conservative on our outlook, but again, we are still quite confident, if we can deliver much stronger top line revenue growth and we can leverage our investment to try to establish our new auto models in the future, [indiscernible] comments long-term growth in three or five years time timeframe..

Thank you. Thank you very much..

Thank you, Jialong..

The next question comes from Tian Hou from T H Capital. Please ask your question..

Hi, Rong and Mei, I have several questions I'm going to ask all at once. So the first one is how much investment do you plan to have in the – on the full-year basis on the O2O? And the investment on O2O, what's the measurement for the return on those investments? So that is on the O2O.

On the learning center, how many learning centers in total do you plan to open in 2006 sic [ph]? And one quarter has been passed, and among the rest of the planned learning centers, what could be the allocation throughout the year? That's on the learning center.

The last question, I really want to know, and so many companies from China announce privatization, I want to have a clear answer from the management, what’s your plan on that front? Thank you..

Thank you, Tian. And you asked four questions..

Really?.

Yes. The first one is O2O investment..

Yes..

I think the O2O investment budget for us in this fiscal year is around US$20 million to US$22 million versus we have spending US$50 million last year. In Q1 we spend US$4 million already, which is pretty much on track. The second thing is about the measurement office online-offline investments, I still have several metrics.

Number one, we're including our online revenue contribution including the revenue from shares.com and including the revenue from the live class platforms and its online platforms. The second thing is we tried to measure the efficiency after we implement the O2O technologies into my Peiyou business.

For example, the percentage of the online registrations and the percentage of online payments and something like that, some kind of the efficiency KPIs we have. We have long lease over there. The third question about the learning centers, which is also very important. In Q1, we opened 14 new learning centers.

In Q2, I plan to add the other maybe eight to ten. In Q3 and Q4, we have the plan to open some new cities, two to four new cities this year. So throughout the year, in classroom capacity perspective, we are still stick to our plan, try to increase around 25% to 30% capacities throughout the year.

And last question about the privatization, the simple answer is, no. And we’ll keep monitoring the market dynamics in China market and U.S. market and we still believe that U.S.

market is a transparent, a fair place to reflect the company’s value in the long run, and as a company we would like to focus on our business and our key strategies and don't waste our time to think about something else.

By the same time, for some of the companies we have minority investments, for example, like Babytree, if they have the plan to go IPO in China separately, we are also happy to see that..

So, thanks so much for the answer.

And one follow-on question is you invested in the Babytree, so what's your interest in the Babytree? Is that pure financial interest, or there's some other interest?.

Babytree is not only a financial investment deal for us, because Babytree is quite dominant in parents’ community for maybe minus one to around two to three, which is a very important source for our new students, for our mortgage business, and a younger age of the Peiyou business.

So, we also have worked together with them to try different companions to try to fight more synergies, right between us. And – but of course, we also have to see that in financial perspectives, also a good deal. So, in the future, we will continue our philosophies, we ask for the strategy synergy first.

And then, we'll also evaluate kind of the financial returns over there..

Good. Thank you so much. That's all my questions..

Thank you, Tian..

The next question Leon Chik from JPMorgan. Please ask your question..

Yeah. Hi, It's Leon. Well, another boring quarter with 40%-plus growth. So the question is the – you have a budget.

The budget for online development, is it $25 million this year, for last year?.

US$20 million to US$22 million..

Okay. US$20 million to US$22 million. That's FY 2016, right.

What was it in last year?.

US$15 million..

Okay.

So the difference is like about $6 million, right? And I think you mentioned that, basically, margins might be flat or down, so I guess the implication is G&A, as a percentage of sales, you think it will be quite flat this year?.

Yes, the 2012 spending as a percentage of revenue will be maybe flat or slightly higher that that's why my margin will be flat or slightly lower..

Okay. But last year you had about $110 million in G&A costs, so your sales go up with – you mentioned, I think, 35%, or so, so that's like an extra $40 million you can spend on G&A. But O2O, you're only going to spend an extra $7 million, so that leaves $33 million.

So how exactly are you going to spend this G&A? Because it's not for O2O, it must be for some other stuff, right?.

Yes for the cost expenses there actually I've seen the O2O is the priority one and the biggest spending there. We also have some other places where we’d like to invest, too. So we're probably, I think, in margin perspective, we will manage our Company to shoot for the best interest we can get.

But from guidance perspective, we still would like to keep kind of a more conservative feel to make sure all of us can give us more buffer and more kind of room for the Company if we have some new places we want to invest in the coming quarters..

Okay, that's exactly the answer I want to hear. Thank you. .

Thank you, Leon. .

The next question comes from the line of Anne Shih from Brean Capital. Please ask the question. .

Hello, Rong. Hi, Mei. Thanks for taking my question.

I guess, just first, can you provide some more color around the ASP trend just given the dips for the second quarter in a row on online and also one-on-one, and the trend expectations here? Then secondly, you mentioned for O2O spending $20 million to $22 million for this year, following $50 million last year.

Do you think this will continue to taper into 2017? Thank you. .

Thank you, Anne. For ASP question, I think we need to bring down into our small class segment, our one-on-one segment, and online segment. For small class in Q1, we are 6.5% up from last year and because we took price increase in Beijing; Shanghai; Shenzhen; Wuhan; Chengdu; Suzhou; Chongqing, last year.

In fiscal year 2015, we tend to do so in selective cities including Tianjin; Nanjing; Suzhou; Zhengzhuo; and Chongqing. As our geographic distribution move to the cities other than Beijing and Shanghai, you may see slightly low ASP gross for the forecasting fiscal 2016. But still, we should be in around 3% to 5% positive range.

And for the one-on-one, I think the price should be ASP for one-on-one should be flat or slightly down, truly because of the different product mix from one-on-one tariff. And for the online, you have seen where much stronger gross, which is our 70% revenue and 75% enrolments. And the online ASP will relatively stable Q1.

They are around 2% to 3% decline; that’s because of the mix of the low price products. So in the long run, I think in the blended perspective the ASP should be flat, or slightly down.

But we feel good about that because that reflects a positive shift, because we have all of other small-class and online schools are taking more share, where One-on-One is well under control. Apart from certain customer, O2O spending in the longer term maybe in two years to three years timeframe.

First of all, we have to say is by the end of the day, my online revenues were only around 4.5% of my revenue.

So as online still in early stage, we still need to level our need to have a certain level of the investments over there and as a Company, we will control the margins in the big picture perspective so we still can get some margin leverage for our mainstream business small class, but we invest there in O2O and staff, all the online staff, so over there to make sure my margin can be in controllable range.

So, the only thing I can share with you is that, in coming 2017, we plan to invest similar level of the spending in O2O and online initiatives. But the detailed project all the detail projects all the detail things we will do maybe different..

Okay. That's very helpful. Thank you..

Thank you Anne..

The next question comes from Alvin Jiang from Morgan Stanley. Please ask your question..

Hi, Mei and Luo. Thank you for taking my question. Congratulations on a strong quarter. I have two questions; first one is on the investment strategy.

I notice there, actually, a couple of education companies are investing into the whole education value chain, but I'm not sure what's your investment strategy going forward? Will it change the strategy, because of the competition on the investment side? And the second question is on the feedback of your promotion.

I notice you launched a very attractive promotion in Beijing this summer, and apparently it got very positive feedback. Are you going to continue such kind of promotion in coming quarters? Thank you..

Thank you, Alvin. The first question about the investment philosophy, as I talked in the last earnings call, our investment strategy in this year is a little bit different from last year where we’re fully focused on our strategic investment deals, which have some strategic synergy with us.

And so as a result, you may see the number of deals we are investing 2015 may reduce while the deal size may increase. The second thing, when we consider to do investment is we need to evaluate what kind of things we are good at and what kind of things we can do.

For the two deals we are adjusting balance in the past months, Jinjin Jaja, which is the C2C mobile platform helps to connect a math K-12 students with appropriate tutors, in a more efficient and economical way and the other one is [indiscernible] is a O2O overseas value consulting platform, which is similar model to the [indiscernible] is the place we’re not good at, so for all this place we want to invest in cash as well as our strategy support with the selected companies to help them to be successful.

And the second thing about rather we will continue the promotions from summer term I think we have two things need to mention.

Number one is, so far we’ve seen very positive numbers in enrollment and registration perspective, but we still need maybe the other one month to evaluate whether that retention rates can be also quite good as what we expected, so we need some time to evaluate the final outcomes out there.

Given the outcomes is very good and positive, we need to consider the other reason is in general for education the summer term is the best time to do promotions. For the fall term and winter term maybe that outcome of that promotion, may be a little be less than what we do in summer.

So I think all of this is some factors we need to consider when we want to decide for the fall, and the other quarters. So far, we don’t have any plan to do that. But I will give you more backgrounds; I will share with you more numbers in Q2 earning call after I call the detail retention numbers of Beijing..

Great. Thank you this is very helpful..

Thank you, Alvin..

The next question comes from Cynthia Meng from Jefferies. Please ask your question..

Thank you. We have a question, can you give us some more color on your M&A strategy; and also, the CapEx target for FY16? I have a follow-up question after that..

CapEx. We will maintain the similar percent of revenue in CapEx perspective as what we did in the last year, because this quarter the CapEx now often the numbers so I have nothing more to share with that. And the second thing is about M&A is, as I have mentioned, I will very pretty much focus on the strategic synergy with them.

So, we wish we could leverage our cash in a more efficient way. In the past, we did quite well in the deals we have invest in the past several quarters. We will maintain our kind of conservative but very serious approach to make sure my next investments could also be a success.

And in the coming future, I think we will still looking into some opportunities, which can make color gap for us. For example, maybe if they have some strategic deals who can help us to have more dominance in the younger age market, maybe aged from 2 to 8, which is also a good way for us to look at that.

And we quite aggressively looking into new opportunities in this platform and our CEO, Bangxin Zhang, has established a filter style we are chasing, which is kind of a campaign, or is again for older online education entrepreneurs. So we will leverage everything we can get to pitch in to different deals, and make our right investments in the future..

Thank you.

Regarding the online business, can you share with us the online business margin, and if is there an expected target?.

Yes, online, today, the online today, Meng, is the xueersi.com, which is the Xueersi online school, Xueersi one cell. And the And the profit margin of Xueersi one cell is better than one-on-one, but less than the small class.

And for us, I have seen the key priority of the online school today is try to get more market share and increase the enrollments. So we wish we could spend more there so to make sure we can maintain a certain level of margins, but we can maybe double or triple the enrollment growth in online’s tariff..

Thank you, very helpful.

Last question is, is there – is the online course fees still the major monetization model for this business? Are there any other potential monetization models that you could give some more color on?.

We are piloting several different models now. Not only the Xueersi one cell; Xueersi one is not a new model. So please stay tuned, because of the competitive reasons; I will let you know when we make some progress, make some significant progress and I can share with you – with more details in the future..

Okay. Thank you very much..

Thank you..

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

Thank you..