TAL 好未来

Operator

Ladies and gentlemen thank you for standing by and welcome to the TAL Education Group Fourth Fiscal Quarter and Fiscal Year 2014 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 you that this conference is being recorded today, Tuesday, April 22, 2014. I would now like to hand the call over to your first speaker for today, Ms. Mei Li. Thank you ma’am. Please go ahead.

Mei Li

Thank you all for joining us today for TAL Education Group’s Fourth Fiscal Quarter and Fiscal Year 2014 Earnings Conference Call. The fourth fiscal quarter and fiscal year earnings release was distributed earlier today and you may find a copy on the company IR website or through the Newswire. 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 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 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.

Joseph Kaufman

Thank you, Mei and thank you all for joining us on our earnings conference call for the fourth fiscal quarter and full fiscal year of 2014. We are pleased to report an excellent fourth quarter with revenues at the high end of our guidance and very strong bottom line results. Today, I will discuss the highlights for the quarter and full fiscal year. Next, I will update you on our online education initiatives and discuss our key themes for fiscal 2015. Finally, I will go over the financials with you. Net revenue for the fiscal fourth quarter increased 45.9% year-over-year to $87.0 million. Revenue growth was supported by a 38.8% increase in enrollments. Our core small-class offering comprised of Xueersi Peiyou and the ages 3 to 8 Mobby young learners business was again the main driver of our growth. We are pleased to report that each of the 15 cities in which we have operations delivered at least double-digits revenue growth in the quarter and 10 cities had triple-digits revenue growth. We also added a learning center in Jinan in February making it the 16th city in our national K-12 learning center network. We will begin regular test operations in Jinan starting with the summer term this year. As I explained when guiding for the quarter, we had some additional revenues from the first week of classes of the spring term captured in the fourth fiscal quarter due to the timing of Chinese New Year this year. Excluding this estimated RMB26 million impact, year-on-year revenue growth would have been approximately 38%. You may recall we had a similar windfall in the second quarter of fiscal 2014. Basically, the timing of Chinese New Year versus that of our fiscal year causes revenue tailwind in the second and fourth quarter of one year and some revenue headwind in the same periods of the following year. As it is a predictable variation, we are able to give you timely guidance on this. Small-class contributed 78% of fourth quarter revenues, one-on-one 19% and online 3%. In terms of revenue contribution for small-class, cities other than Beijing and Shanghai accounted for 40% of small-class revenues in the fourth quarter, which was consistent with the third quarter and compared to 29% during the same period last year. In addition to strong top line results, we had net income growth of 144.0% year-on-year. Gross margin expansion was the major driver of our improved profitability in the quarter. Gross margin increased by 570 basis points from 47.4% to 53.1% year-over-year. The gross margin improvement came primarily from the extra class in the fourth quarter as well as improved teacher and center utilization and our continued shift towards the higher margin small-class business away from one-on-one. Even as we achieved strong current revenue momentum we also invested in future capacity ahead of the summer term. We added this capacity to both new centers and more classrooms to existing centers. Net new small class classrooms totaled 194, which included the classrooms in the net eight new small class centers we added in the quarter. We also added one net new learning center for one-on-one taking our total learning center network to 274 centers, of which 184 were small class learning centers including four learning centers for our Mobby branded preschool and young learners age three to eight business and 90 for one-on-one. This concludes my review of the fourth fiscal quarter. Let me now give you a summary of our fiscal year 2014 ended on February 28, 2014. Fiscal 2014 was the year of outstanding progress in execution on plan in all directions operationally, financially and strategically. We managed 38.9% revenue growth for the year on gross profit margins of 51.7% and GAAP net income growth of 81.2%. And we delivered on plan to balance current growth opportunities with continued investments for future growth. We made great progress in expanding our capacity to handle the strong demand for our tutoring services reflected by year-on-year enrollment growth of 31.6%. This enrollment growth drove our business to exceed the 1 million annual enrollments milestone this fiscal year. We added a net of nearly 600 classrooms taking into account the net addition of 25 new learning centers with small class and the net reduction of six learning centers for one-on-one in fiscal 2014. Small class revenue growth in cities other than Beijing and Shanghai continue to be the main driver of our growth in fiscal 2014. Cities other than Beijing and Shanghai contributed 37% of small class revenues in fiscal 2014 compared to 25% in fiscal 2013. These cities also took a larger share of the overall enrollment growth representing 44% of small class enrollments in fiscal 2014 compared to the 31% in fiscal 2013. The small class business in Shanghai reaccelerated in the course of fiscal 2014 following a year in which we managed our growth in that city in order to refocus on teaching quality and curriculum. Gross margin improved by 290 basis points versus the previous year. This improved gross margin was driven by an extra week of classes in the second and fourth quarters this year given the timing of Chinese New Year in calendar years 2013 and 2014 as well as better teacher and center utilization and the shift towards the higher margins small class business away from one-on-one. We also achieved the bulk of our nearly 600 incremental classrooms capacity by adding classrooms to existing centers rather than adding incremental new centers an approach which was supportive to the gross margins. We were able to leverage SG&A through more efficient human resources management which contributed together with improved gross margins to operating margins expanding by 440 basis points compared to fiscal 2013. We also carefully managed our growing cash balance and optimized returns to higher interest income. All of these efforts resulted in strong growth in profitability and operating cash flow for the full fiscal year. In fiscal 2014 we delivered operating cash flow of over $100 million representing approximately 54% growth versus the previous year. Capital expenditure for the year was about $10.9 million representing a near 3.5% of revenues. The health of our business supported more management time and resources in fiscal 2014 to spend on future growth opportunities at the crossroads of where technology meets education particularly for new online and mobile product offerings. We have begun to reap some rewards from our efforts to be a technology-focused tutoring brand. Our mobile app, (indiscernible) were helping parent community, which we just launched this year is off to a good start an expansion of the strong organically built social community on eduu.com. We are happy also to be recognized by AC Nielsen and Sina in the Sina 2013 China Online Education Report as being the number one choice of online school by surveyed K-12 learners. In addition to the continued development of our online platform ads, eduu.com, xueersi.com and on mobile, we also upgraded our Intelligent Classroom System. ICS 3.0 uses enhanced media content and pads to make the classroom experience more interactive than ever. We also make key strategic investments in fiscal 2014. We acquired kaoyan.com, kaoyan.com, a website that helps students prepare for postgraduate admissions and made a minority investment in babytree.com, a leading online community for new parents. Both asses allow us to extend the lifetime value of our customers. With Babytree we gained access to a younger customer demographic which we believe over time will help feed into enrollments for our Mobby preschool and the pre-kindergarten business for our Xueersi Peiyou small class business. With Kaoyan we extend our services beyond the 12th grade so now students can stay with us even after they’ve left high school. Meanwhile our investment in duobei.com earlier in the year offers us valuable insight into the evolution of open platform online learning. These organically developed and strategic initiatives support our overall online strategy which I’ve discussed on previous calls. We continue to believe that online will not easily disrupt the K-12 space given consumer behavior and the relatively local nature of the content and curriculum requirements. However we do see implementation of Internet and mobile strategies as critical to maintain our differentiated strategy in the K-12 sector while increasing interaction frequency and duration with our key users. The first part of our online strategy is eduu.com and its affiliated websites including aoshu.com, zhongkao.com, gaokao.com, zuowen.com and now kayoan.com. The Jiajiaoban mobile app I mentioned earlier connects the online parent community on the eduu.com websites with their mobile devices. This is essentially a continuation of our longstanding O2O efforts to build a social community online that also helps bring students into our classrooms. Second, we continue to pursue a blended learning strategy offering online drills and/or apps for students to do exercises during the week while they’re away from our classes. We’re developing these tools through our X Peiyou for small class, i-Zhikang for one-on-one, i-Mobby for preschool and young learners business and other platforms. Online provides much more than simply an extra tool for tutoring. It helps us create an even stickier and more relevant community of students and parents connected to our brand and services. Third, online school at xueersi.com, xueersi.com continues to help us gain presence in cities where we do not yet have physical infrastructure as well as more enrollments from students in existing cities. As mentioned earlier our online school secures the number one ranking in the Sina 2013 China online education report issued by A.C. Nielsen and sina.com. This report based on online responses through sina.com and Sina Weibo with users of various K-12 online schools gives us a leading market share in the kindergarten through 12th grade online tutoring space with nearly 29% of surveyed users having taking classes at xueersi.com. Meanwhile we are testing having more administrative services for our learning centers move online such as class registration, refunds and switching of classes. In addition to convenience for parents and students there is potential for cost efficiency gains over time. Finally we’re beginning to experience with free online school, live classes online and education platform businesses through our beta products, Dahai and Haidian, Dahai and Haidian as well as via the minority stake investment in an education platform called duobei.com, duobei.com I mentioned earlier. Let me now turn to the key themes for fiscal 2015. Our key themes for fiscal 2015 you may recognize is mostly a continuation of the goals we’ve set out and delivered in 2014. Let me outline them here. Firstly we will continue to pursue growth through expansion and innovation. We added a learning center Jinan in the fourth quarter which along with three other new cities will begin operations in the second quarter of fiscal 2015. The demand for our businesses remained strong and we are positive in our outlook for ongoing growth momentum in fiscal 2015 based predominantly on enrollment growth. We will continue to pilot ICS 3.0 in select grade levels in Beijing and if successful we will rollout nationally. We will also innovate further to develop the blended learning model with mobile apps as the complementary feature to make learning more fun and effective for students. Secondly, we will continue to manage the balance between current and future growth. Even as we deliver strong growth with solid profitability and are blessed to be in a generally defensive sector, we are always on higher road for potential opportunities as well as disruptive changes. As always our investment focus is on the key growth drivers, new opportunities and operational business fundamentals to further strengthen our business model and distinguish our brand from the competition. Technological innovation will change the education sector in China as it has other traditional sectors. The exciting new opportunities we see all around TAL said now is the time to invest. The strong gains in profitability and profit margins during fiscal 2014 provide us with a sound financial footing to invest in technology and online initiatives to support our long-term future growth as opportunity presents itself, as before we will carefully weigh the pros and cons of growing our online and mobile presence organically or through the strategic investment. Thirdly, we continue to develop our people who it goes without saying our most valuable asset. We motivate our employees the strength of right balance between short-term and long-term growth of the company. In addition the revenue and profit are bonuses for key operations personnel are also tied to long-term oriented key performance indicators such as utilization rates of our facilities and student retention levels. The share grant we did last month at the beginning of the new fiscal year will vest over 6 to 10 years of support and reward long-term commitment to TAL. Fourthly, we will keep investing in back office capabilities especially in IT systems for better forecasting financial analysis, purchasing and control functions. An example of this commitment to continually improving our systems strength is our decision to work with Oracle Hyperion software for financial analysis and planning, which we believe will help us to budget for and react to the business environment ever more effectively. And finally we aim to continue to deliver on plan through solid execution as we have done in the past few years. Let me now go over the financials with you. We delivered $87.0 million in revenue in the quarter representing revenue growth of 45.9% versus the same period in the previous year. Driving the quarter’s revenue growth was strong enrollment growth of 38.8% combined with higher average selling prices. Total student enrollments increased to approximately 348,000 from approximately 250,700 in the same period one year ago. The increase in total 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 5.1% to $250 for the fourth fiscal quarter from $238 in the fourth quarter of the previous year was primarily driven by the hourly rate increases of the small class course offering and the foreign exchange rate fluctuation. Now, moving back to the total company numbers, cost of revenues increased by 29.9% to $40.8 million from $31.4 million in the same year ago quarter. The increase in cost of revenues was mainly due to an increase in teacher compensation, rental costs and other staff costs associated primarily with the 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 29.8% to $40.8 million from $31.4 million in the fourth quarter fiscal year 2013. GAAP and non-GAAP gross profits for the fourth quarter were both $46.2 million as compared to both being $28.3 million for the same year ago period. GAAP and non-GAAP gross margin for the fourth quarter were 53.1% and 53.2% respectively compared to about 47.4% for the period – same period of last year. Selling and marketing expenses increased by 33.6% to US$10.2 million from US$7.6 million in the fourth quarter of fiscal year 2013. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 34.9% to US$9.9 million from US$7.3 million in the same period of last year. The increase of selling and marketing expenses in the fourth quarter of fiscal year 2014 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 51.9% to US$21.8 million from US$14.4 million in the fourth quarter of fiscal year 2013. The increase in general and administrative expenses were mainly due to an increase in compensation to our G&A personnel in recognition of outperformance against budget and to support a greater number of programs and service offerings. Non-GAAP general and administrative expenses, which excluded share-based compensation expenses, increased by 51.1% to US$19.6 million from US$12.9 million in the fourth quarter of fiscal year 2013. The above factors combined to give us operating income of US$14.4 million representing a year-over-year increase of 154.2%. Non-GAAP operating income increased 129.8% year-over-year to US$17.0 million. Operating margin in the fourth quarter was 16.5% as compared to 9.5% in the same period of the previous year. Non-GAAP operating margin was 19.5% as compared to 12.4% in the same period a year ago. Our net income for the quarter was US$16.7 million and increased by 144.0% year-over-year. Non-GAAP net income for the fourth quarter was US$19.3 million, up by 125.1% year-over-year. This gives us a net profit margin of 19.2% as compared to 11.5% in the same period of last year. Non-GAAP net profit margin was 22.2% versus 14.4% in the same period of last year. Basic and diluted net income per ADS were both US$0.21 for the quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses were US$0.25 and US$0.24 respectively. Now, moving to the year as a whole, we delivered revenue growth of 38.9% driven by enrollment growth of approximately 31.6% and ASP growth of 5.6%. We delivered US$313.9 million of net revenue from US$225.9 million in fiscal year 2013. Total student enrollments increased to approximately 1,073,950 from approximately 816,110 one year ago. The increase in total student enrollments was driven primarily by increases of enrollments in the small-class offerings. ASP increased by US$277 in fiscal year 2013 to US$292 in fiscal year 2014. The growth in ASP was mainly driven by the hourly rate increases of the small class course offerings and the foreign exchange rate fluctuation. One-on-one tutoring contributed 20% of revenues for fiscal 2014 compared to 23% from fiscal 2013. Cost of revenues increased by 30.9% to US$151.5 million from US$115.7 million in fiscal year 2013. The increase in cost of revenues was mainly due to an increase in teacher compensation, rental costs and other staff costs associated primarily with an expansion of learning center capacity. Non-GAAP cost of revenues, which excluded share-based compensation expenses, increased by 31.0% to US$151.5 million from US$115.6 million in fiscal year 2013. GAAP and non-GAAP gross profit were both increased by 47.3% to US$162.4 million from US$110.2 million and US$110.3 million respectively in fiscal year 2013. GAAP and non-GAAP gross margin for the fiscal year 2014 were both 51.7% as compared to 48.8% for the prior year. Selling and marketing expenses increased by 29.2% to US$35.8 million from US$27.7 million in fiscal year 2013. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 33.8% to US$34.6 million, from US$25.9 million in fiscal year 2013. The increase of selling and marketing expenses in fiscal year 2014 was primarily a result of an increase of sales and marketing staff and related compensation to support an expanded number of cities in which the company had learning center operations and a greater number of programs and service offerings. General and administrative expenses increased by 37.5% to US$70.3 million from US$51.1 million in fiscal year 2013. The increase in general and administrative expenses was mainly due to an increase in compensation for our general and administrative personnel, the depreciation of office space purchased in Beijing, and an increase in professional service fees. Non-GAAP general and administrative expenses, which excluded share-based compensation expenses, increased by 41.1% to US$63.2 million from US$44.8 million in fiscal year 2013. Operating income increased by 82.7% to US$57.4 million from US$31.4 million in fiscal year 2013. Non-GAAP operating income, which excluded share-based compensation expenses, increased by 65.6% to US$65.7 million, from US$39.7 million in fiscal year 2013. GAAP and non-GAAP operating margin for the fiscal year 2014 were 18.3% and 20.9% respectively as compared to 13.9% and 17.6% respectively for fiscal year 2013. Net income increased by 81.2% to US$60.6 million from US$33.4 million in fiscal year 2013. Non-GAAP net income, which excluded share-based compensation expenses, increased by 65.3% to US$69.0 million from US$41.7 million in fiscal year 2013. This gives us a net profit margin of 19.3% as compared to 14.8% of last year. Non-GAAP net profit margin was 22.0% versus 18.5% for the fiscal year 2013. Basic and diluted net income per ADS were US$0.77 and US$0.76 respectively in fiscal year 2014. Non-GAAP basic and non-GAAP diluted net income per ADS, which excluded share-based compensation expenses, were US$0.88 and US$0.86 respectively. From the balance sheet as of February 28, 2014, the company had US$269.9 million of cash and cash equivalents and nil 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. Net cash provided by operating activities for the fiscal year 2014 was approximately US$100.5 million representing a year-over-year increase of approximately 53.6%. Capital expenditures for the fiscal year 2014 were US$10.9 million, representing an increase of US$4.0 million from US$6.9 million in fiscal year 2013. The increase was mainly due to leasehold improvements and the purchase of servers, computers, software systems and other hardware to support the company’s operations. As of February 28, 2014, the company’s deferred revenue balance was US$132.4 million as compared to US$102.5 million as of February 28, 2013, representing a year-over-year increase of 29.2%. Based on the company’s current estimate, total net revenues for the first quarter of fiscal year 2015 are expected to be between US$85.9 million and US$88.4 million, representing an increase of 40% to 44% on a year-on-year basis, assuming no material change in exchange rates. The first quarter of 2015 includes one more weekend of spring term classes versus the same period in fiscal 2014. Excluding the estimated RMB29 million to RMB30 million impact to this extra weekend, the year-on-year revenue increase is estimated between 32% and 35%, again assuming no material changes in exchange rates. That concludes my prepared remarks. Operator, I am now ready to take questions.

Operator

(Operator Instructions) Your first question comes from the line of Fei Fang from Goldman Sachs. Please ask your question.

Fei Fang

Hi, Joe and Mei. Thanks for taking my questions. Weak set of results. My first question is among the 190 new classrooms that you have added, could you provide a rough breakdown by city and how do you think about the geographical focus of your future expansion? Thanks.

Joseph Kaufman

Sure. I will give it you by learning centers, Fei. So, in Beijing, we added three learning centers and discontinued course where we net down one in Beijing. In Shanghai – in Tianjin rather, we were up two small-class learning centers in the quarter. In Xi`an, we added one small class and one one-on-one learning center. In Nanjing, we were up one small class learning center. In Wuhan, we were up one small class learning center. In Zhengzhou, we were up one small class learning center. Chongqing was one, Shenyang was one, and Jinan is the city we entered in the quarter, the new city was one as well. So that brought us to a net of 8 small class and 1 one-on-one to get us to 9 in total.

Fei Fang

Right. So, that’s all over the math. Would it be fair to say that going forward, the focus will be more broad-based new app centers in Beijing (indiscernible) your cities?

Joseph Kaufman

Yes. I mean, I think that in Beijing you can see it’s more opportunistic. So, we maybe at the end of and at least see an opportunity to consolidate from smaller centers to larger centers. So, I still think that the bulk of the net adds will probably be coming from cities outside of Beijing.

Fei Fang

Got it, great. My second question is on FX, so renminbi has recently stopped appreciating against U.S. dollars, so how do you think about the impact on your earnings, especially on the – regarding the other income line? And what will be the underlying FX assumption that you are working with in providing the guidance?

Joseph Kaufman

Sure. So, in terms of renminbi, we try not to make currency calls. So, in my guidance for the first quarter, I assumed no significant change in exchange rates. So, I am not assuming that the renminbi will go down in a big way and I am also not assuming they will go up in a big way. In terms of my Q1, I think that when you think about other income, that’s a good question. Other income already this year was lower than in previous years, other income, of course, a big factor that for us as exchange gain on the U.S. dollars that we have offshore. So, on a going forward basis, part of it will be the exchange gain we are not expecting to be as large for the renminbi if at all. And then you also had the fact that our offshore dollars are less now than they were before, so that there is also that will have an impact on the amount of exchange gain you are able to derive from those offshore dollars.

Fei Fang

Got it, great. My last question is that I noticed that you added one one-on-one learning center during the quarter, so is that – does it indicate that you are back into the growth mode for the Zhikang brand?

Joseph Kaufman

We are continuing to manage the growth of our one-on-one business. So, you will see for the full year, it was 20% as a percentage of revenues, which is consistent with what I guided in previous quarters. And we expect small class and our online courses business to both grow faster than one-on-one in these coming years. So, you should expect that to come down further by a percentage of revenue going forward. That doesn’t mean that there aren’t opportunities in select markets for one-on-one and Xi`an will be such a market, where our small class business is quite strong and one-on-one as the complement to our small class business has also grown quite well. So, we will opportunistically look for one-on-one opportunities, especially in the cities outside of Beijing, where one-on-one is still relatively under-penetrated.

Fei Fang

Great. Thanks, Joe.

Joseph Kaufman

Thanks, Fei.

Operator

Thank you very much. Your next question comes from the line of Timothy Chan from Morgan Stanley. Please ask a question.

Timothy Chan

Hi, Joe and Mei. Congratulations on the very strong results and thanks for taking my questions. My question is actually a follow-up to your online education strategy. As you may know, some online players are now entering in this space, how do you see in terms of the change in any competitive dynamics and what they think is the competitive edge of TAL with these online platforms? Thank you.

Joseph Kaufman

Great, thanks Timothy. So, yes, we are happy to see a lot of interest in the online education space. The way we think about the advantage of the other players that may be going in more internet related companies is they are more of a platform business. So for them they have lots of users and they are looking to aggregate content and provide it to their users. So I think that that is a different kind of business and what we are trying to achieve. With our xueersi.com online school we differentiate through both the customer experience and the product itself, so the content and curriculum in each market. So, on the experience side we want to emphasize service and being there for our students as a trusted education advisor given our sole focus on K-12 education. And then in terms of the product, we spend a lot of resources in terms of understanding the local content and curriculum of each local market. So it’s very different from a platform business, we are focusing on a product business, our B2C proposition where we differentiate based on our deep knowledge of the K-12 sector.

Timothy Chan

Thank you. That’s very helpful.

Joseph Kaufman

Thank you, Timothy.

Operator

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

Tian Hou

Hi Joe and Mei. Congratulations on the good quarter. Sorry, so I have a question related to your ASPs, if I look at the growth drivers I think it’s quite healthy that most of the growth are really coming from the enrollment growth and I think for the education budget actually in terms of families or the whole society to CPIs, we all have some kind of increase, you guys have been pretty much in line with the CPI growth and I wonder if there is any plans going forward to increase the price, that’s question number one. Question number two, so in the content categories I know you are putting a lot of R&D efforts in developing new content or new formats of content. I wonder if there are new categories of the content are you going to add in your content portfolio, that’s the second question. So I will stop right here, Joe you can start give us answer?

Joseph Kaufman

Okay great. Thanks Tian. In terms of ASP as we do have plans to increase price beginning with the summer term in Beijing, Shanghai, Shenzhen and some other markets as well. So there will be price increase as part of the mix this year in our small class business. We typically give a coupon to recurring student to encourage retention and moderate into the price increase. So we will probably continue to do that again this year. In terms of what you are seeing another factor is actually mix. So there are a couple of mix issues. One is within small class we are getting a lot of growth from cities outside of Beijing and Shanghai. And there are going to lower ASPs in Beijing, Shanghai, Guangzhou and Shenzhen which are typically roughly the same level, Beijing is slightly higher. So that’s going to naturally cause ASP on a blended basis even within the small class Peiyou business to be lower than in some of our select cities where we may be taking 10% or more percent price increase. So in a given city we are likely to be a bud CPI, but we had structural shifts and we are not taking a price increase across all of our cities based on where they are in their level of development. And then when you look across our products one-on-one which is the high ASP business becoming a lower percentage of revenues, so it went from 23% in last year fiscal 2013 to 20% in fiscal 2014 and then we are expecting to be lower again this year. So that will also on a blended ASP basis which you see in the release have an impact in moderating the overall blended ASP increase. And then online courses is growing quite well and in terms of enrollments and we actually expected to grow faster than one-on-one next year. so that’s the low ASP product, because remember with online courses we are trying to put on a trial so many of those classes are only RMB20 an hour and maybe only a few hours in duration. So we can have a nice trial product for people that are new to our classes. So that’s the way I would characterize the ASP. I think for us you’re right to point out that we’re an enrollment growth driven business and we seek to continue to be an enrollment growth driven business, we do think that that’s the healthiest way to derive your top-line growth and we believe that we have the brand and the pricing power that if we’re leaving a little bit on the table in terms of price now that’s something that we can use later. So that’s what I’d say about the overall price increase. I mentioned the small class price increase, we may also take a price increase for one-on-one, it will just be a little bit later, typically one-on-one it would be in September rather than in the summer term, but we’ll have to continue to see how one-on-one continue to evolve and we likely take that one-on-one price increase in the same markets where we’ve taken the small class increase. So that’s what I’d say on the ASP side, Tian. In terms of content portfolio there are a couple of things that we’re doing, one is in terms of subjects we’re focusing more on English and one on Chinese composition. So you may have seen in the media that we recently signed an agreement with Cambridge University Press for content called Hello English which we think will help us to go after the opportunity at the younger age groups because as you’re aware there was a change in the policy related to the waiting of English in the Zhongkao and Gaokao as well as kids studying English in the public schools, they won’t be studying it before the fourth grade so that provides an opportunity to do more with conversational English at a younger age group because we believe parents will still want their kids to get exposure to English, it will just be if the schools aren’t providing it in the public form that gives an opportunity for training institution. So that’s one area where we’re putting a lot of resources this year. The other is Chinese composition again there was a policy related reason there where Chinese compositions can become more important in terms of Gaokao and Zhongkao so we’re putting more resources against Chinese composition. In terms of subjects I would say that’s our focus. In terms of age groups I think that the younger age groups upright down to kindergarten its probably an opportunity for us that we’re going to spend a little bit more time and effort on obviously junior high and high school become more important as we develop from primary to junior to high school in each of our markets, we start with primary school and then move to junior high and high school so that depends on the evolution of the market. And then in terms of format I mentioned in the call about ICS 3.0, so in addition to the interactive whiteboards that we had before where kids would have to go up to the front of the room and interact to the whiteboard. We’re actually making even more interactive where every kids gets a pad when they come into the classroom and they can actually answer questions boom right on the spot with a teacher there and then you can – the other kids can see that interaction on the whiteboard. So we think that’s going to just make it ever more interactive and exciting for kids to be part of our classes. So that’s the big thing we’re doing in the classroom in terms of how the format is content. We’re focusing first on Beijing and select age groups mainly junior high to start and then we’ve gotten some initial feedback there and if it continues to be good we’ll expand it to other age groups within Beijing and then potentially other cities if it continues to be good. The main push for that will be more like the summer term. Right now we’re kind of in a pilot for that. And then I mentioned on the release the different things we’re doing online so there is prerecorded video content through our xueersi.com online courses and then you have dahai.com which is in a beta stage which is free online school, Haidian which is also in a beta stage which is live online. So we’re doing a lot of experimentation in terms of presentation online as well.

Tian Hou

That’s very helpful. Thank you, Joe.

Joseph Kaufman

Thanks, Tian.

Operator

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

Clara Fan

Hi hello. Thank you for taking my question. I have a small question. Firstly, can you give us the guidance on your targeted number of center openings and fee expansion in first quarter ’15 and the full year ’15 and whether the openings will be more secured towards the first half or the second half. And secondly, you mentioned that the online revenue and small classes revenue will probably be growing faster than one-on-one going to fiscal year ’15 and so on, so I am just wondering what kind of revenue contribution should we be looking at. And lastly, we saw that – I was wondering what was the utilization last quarter compared to a year ago and what that target for fiscal year ‘15? Thank you.

Joseph Kaufman

Sure, I will handle each of those questions separately. The first question related to learning centers, we added 19 learning centers last year, based on plan we expect to add 25 incremental learning centers at least this year. Of course, we will add one learning center in each of the new cities we are entering. So in addition to G9 there will three more that we will be adding. We are also going to be adding new learning centers because there are a number of cities where over the last few years we have entered, but we are still less than 10 learning centers, so we feel like it’s the right stage of development for us to continue to add new centers in those cities. So that’s the idea in terms of learning centers. Of course, we will also continue to be opportunistic in terms of adding classrooms to existing learning centers. Obviously that’s the best way to get leverage from your operating costs, but it’s not exactly something you can depend on. It depends on the overall occupancy situation and how you are able to negotiate with the landlord etcetera. So that’s what I would say on the learning center side, they will be primarily driven by small class. And then I would say there will be slightly swung ended towards the first half of the year as we do like to get learning centers in before the summer season as possible. That will of course depend on execution and that we are able to find the right locations that we want at the right price, of course, but that’s the goal, so that’s I think the question related to learning centers. In terms of you asked the question about utilization, the utilization was about 10% higher this quarter than the same period last year. So that’s quite good and we have done that now for a couple of quarters. I think going forward you should expect it to be more like single digits increase in terms of utilization, utilization which is a ceiling at some point. So I wouldn’t necessarily expect that much next year what we do still expect to get utilization gains particularly in certain markets like Beijing and others. You had a third question remind me Clara.

Clara Fan

Yes, on the revenue contribution we expected for small class, one-on-one and online in fiscal year ’15?

Joseph Kaufman

Right. So, I think that the (indiscernible) revenue will come down from 20%, it’s hard to say exactly how much maybe in kind of the 17% to 18% range as a percentage of revenue this coming year, that’s a guess at this point. The online may go up from 3% to say 4% as a percentage of revenue next year. And then the remainder will be small class. So we are not talking dramatic changes, we are talking about slight moderation.

Clara Fan

So just a follow-up question on the eduu.com, so do we think that we will probably maintain like the revenue contribution from eduu.com would it be same minimum it will be down to 15% or probably will stay at around that range in the long-term?

Joseph Kaufman

I mean I think that over the long-term you could see one-on-one continued to go down as a percentage of contribution. It’s going to continue to grow. We just think that the small class and online courses businesses will grow faster.

Clara Fan

And one quick follow-up question on the three new cities that you mentioned, is there – are there particular cities that we think you are?

Joseph Kaufman

There are, they are already said and ready to go, but for competitive reasons, we won’t disclose them and so we are in them.

Clara Fan

Again, we are more thinking of them in the first half for these three new cities as well.

Joseph Kaufman

No, no, they should be in the first quarter. So, we think by the end of May, you would have – we would be in most of them.

Clara Fan

Okay, thank you very much.

Joseph Kaufman

Thank you, Clara.

Operator

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

Ella Ji

Thank you. Congratulations on strong quarter. My first question is with regards to your growth rate, could you breakdown your growth rate by organic growth in existing centers versus the growth from the new centers in the ballpark? And also as we are looking to the full year FY ‘15, can you talk about your expectations of the growth trend as we begin to face – as we begin to lose the benefits in the year-over-year comp?

Joseph Kaufman

Right, okay. So, your first question, I don’t have exact numbers for you for that, it’s kind of in line with what I talked about with Clara in terms of utilization, because I think one way to think about utilization in our sectors as people will think about same-store sale growth in our retail sectors. So, I think we are going to be primarily driven by capacity increases, i.e., new stores or new classrooms to existing centers, because there still be a same-store growth component, but less. So this year, if you look at the utilization improvement in many markets, it was 10%. So that’s a pretty healthy same-store growth type number. And then on a going forward basis, I think that that number is going to go down to more like a single-digit number. In terms of the revenue growth number, I think you are right to say that there will be some harder comps this year than in previous years. I mean, yes, one is that in Q3, Q4 this year, we are pipelining a lower base than in previous years. And then also I mentioned the Chinese New Year impact which this year we have a bit of headwind in Q2 and Q4. So, Q2 and Q4 would be the ones to lookout for in terms of where the comps maybe a little bit more difficult, but that said well, I don’t provide full year guidance on revenues internally according to our budget, we are shooting for at least 35% top line growth. So, we are still pretty confident in terms of the top line.

Ella Ji

Thank you. And that’s very helpful. And then my second question is you – obviously you provided a lot more new offerings on online and also more interactive services in class. Can you talk about among other things you now provide, what are the new things that’s most welcomed or most popular by the like students and their parents? And as you continue to invest, what do you think is there anything like return on the investment target that you have internally? And just lastly, could you compare your current offering to the peers – to the ones that your peers have?

Joseph Kaufman

Okay. So, in terms of online, what works are two things, one is the customer experience and two is the quality of the product. So, that’s what we are trying to get right in everything we do online. And so you will see us experimenting with different ways of achieving that, whether it’s life where we are trying to have more direct interaction with students, whether it’s adding life to pre-recorded and so doing something more like a flip classroom, where you have the prerecorded video content, which is transferring knowledge to them offering students the opportunity for practice, to have live interaction with teachers, whether it’s apps or other drills online to help kids to be able to do practice exercises during the week. So that’s one thing that’s key, the customer experience having high quality interactions with students and providing good service to students. The second is the product itself and we believe that a lot of that depends on our deep knowledge of the content and the curriculum. So I think that those are the two things that we are trying to do across all of those different online products that I mentioned on the call and then in response to Tian’s question earlier. In terms of how we compare to competitors, I think that’s better really just for you guys to do the research and see. I think that for us we are focusing on K-12, we are focusing on those key areas that I talked about in terms of our online strategy from social platform providing that O2O community that helps to bring people into our classrooms to provide a lending learning to providing a top online courses solution for K-12 parents. And then we are experimenting with a lot of other new and different things that could potentially be disruptive or at least differentiating in the sector like flip classroom like live online, etcetera. Have I answered your questions, Ella?

Ella Ji

Yes, that’s certainly helpful. Just a quick follow-up, I am just wondering if with all those improved customer experiences, do you think they will help grow your enrollments eventually or you think at this point it probably will just stay as like better customer experiences which will certainly help with your business in the long-term, but you are not expecting these new offerings to help with your enrollment?

Joseph Kaufman

Well, I mean, we are already seeing an enrollment contribution from online or online courses had 11% share of enrollments in Q4. So we are seeing them. Year-to-date, it was about 13%. So, I think that where we have continued high expectations that online will help drive enrollments as well as improve customer experience. The ASPs for online courses are lower as I mentioned. So the contribution to revenues we expect to continue to be lower than the enrollment contribution.

Ella Ji

Okay, thanks. And the last question is regarding your business expansion strategy for this FY ‘16 so you made some acquisitions, small size acquisitions last year. Can you talk about what’s your planning for this year? And are you going to make more acquisitions or do you plan to just focus on the existing ones and just help those companies grow bigger and better?

Joseph Kaufman

Yes. We will be opportunistic in terms of acquisitions or strategic investments. You actually see us do a lot more in the strategic investment time taking minority stakes other than full acquisitions. I think we will continue to be focused more on internet, mobile and that intersection of technology with education. We haven’t done kind of center-based acquisitions in the last year and I think that will probably continue to be the trend going into the next year.

Ella Ji

Got it. Thank you so much.

Joseph Kaufman

Thanks, Ella.

Operator

Your next question comes from the line of (indiscernible) from JPMorgan. Please ask your question.

Unidentified Analyst

Yes, hey, hi, it’s (Lyon). Nicely done on the results. I just have a quick question like you have this massive improvement in your EBIT margin basically in the last two quarters, right, the question is just how did you do that? Thanks.

Joseph Kaufman

Yes, sure. In terms of the EBIT margin, I mean, I think that other analysts have talked about the fact that we were cycling a lower quarter in the second half of the year. So I mean I think part of it was through strong enrollment and revenue growth we are able to scale on the SG&A side and then by focusing on the balance between utilization of existing facilities and adding new facilities we were able to drive gross margin and we also took a price increase in certain markets over the last year including Beijing. On a going forward basis we don’t provide more urgent guidance but based on budget I could see approximately 250 basis points of compression on a non-GAAP basis. Q4 I mentioned the Chinese New Year impact, so there is likely to be a swing of a couple of 100 basis points of margin windfall in one year that would be headwind in the next year. So this past year if you talk about the second half of the year and how we did it a lot of it was execution but we did have some nice headwind just in terms of the timing of Chinese New Year that helps us in Q2 and Q4 of last year which we won’t have in this year. But I you take out that impact then we’re going to try to keep it flat to maybe 100 basis points of compression on a non-GAAP basis. If we weren’t investing in various businesses like online, ICS 3.0, O2O and other backend systems we wouldn’t likely see a decline at all except to the fluctuation margins given to the Chinese New Year. But we think these makes sense for the long-term growth of the company as I mentioned would be other analysts that we’re asking about online, we don’t see this is disrupting K-12 but we see it as a big opportunity. So I just wanted to – in addition to answering your questions about how we did in the second half of the year also give a bit of a heads-up about how we’re thinking about it for next year.

Unidentified Analyst

Just a quick follow-up I don’t want to ask about next year but just by – how do you – when you’re applying your G&A and your selling expense for the entire year like do you do it like a quarter at a time or just you do it in the whole fiscal year and if you had a surprise increase in sales and like for the last part of the year then you basically don’t change the expense at all like an annual budget like that, that’s the question?

Joseph Kaufman

Yes, we do have an annual budget. We started our budgeting process in September of each year by establishing a work plan by department by business unit and then if we tie that to our budget which is eventually tied to performance KPIs for everybody in the system. So we have a pretty integrated annual budget system that usually ends in March every year and is approved by the board in April the following year. So we will continue to look at things quarter-by-quarter and as we do see that we’re achieving over budget in some cases if we believe that there are opportunities to invest more like I mentioned ICS 3.0 that interactive classroom pad thing. That we could just do it in Beijing if we were achieving very strong top-line we may decide that it makes sense to roll that out more broadly especially if we get great consumer feedback about it because then we’re really investing in our future growth. So that’s the way we think about it, yes.

Unidentified Analyst

Okay, alright. Thanks.

Operator

Thank you very much. There are no further questions in the phone at this time. I will now like to hand the call back to your presenter for today Mr. Joseph Kaufman. Please continue.

Joseph Kaufman

Thank you. Thank you all for taking the time to be with us tonight. We look forward to continuing to have communication with you. If you guys should have any questions or like to arrange the time to come to Beijing please reach out to myself, to Mei or to any of our IR personnel. Thanks so much and have a good day.