Joseph Kauffman
Thank you, Mei, and thank you all for joining us on our earnings conference call for the first fiscal quarter of 2015. We are pleased to report once more an outstanding quarter with revenues slightly above our guidance and very strong bottom-line results. Today, I will discuss the highlights for the quarter and provide an update on our online education initiatives and key themes for fiscal 2015. Finally, I will go over the financials with you. Net revenue for the fiscal first quarter increased 45.0% year-over-year to $89.0 million. Revenue growth was driven by a 44.9% increase in enrollments. Our core small-class offering was again the main driver of our growth. Small-class contributed 73% to the first quarter revenues, up from 68% in the same quarter last year, one-on-one represented 23% of revenues compared to 29% in the same quarter last year and online contributed 4% this quarter versus 3% in the same year ago period. In terms of revenue contribution for small-class, cities other than Beijing and Shanghai again achieved a combined over 100% revenue growth in the quarter. Cities other than Beijing and Shanghai accounted for 44% small-class revenues in the first quarter compared to 34% during the same period last year and 40% last quarter. Beijing and Shanghai small-class grew top-line combined 30% in the quarter and together contributed 56% of the small-class revenues. Shanghai continued to show strong growth once again this quarter. In Beijing, primary school, high school and Chinese composition outperformed our expectations in terms of enrollment growth. A highlight for our junior high business in Beijing was the performance of our students on the Zhongkao or high school entrance exam. In 2014, eight of our students in Beijing achieved the top score on the Zhongkao, in their city districts and one of our students had the top score in all of Beijing. On the other hand, the enrollments for English classes were down year-over-year in Beijing, due primarily to the change in policy on the waiting of English in Zhongkao and Gaokao exams. We see no impact from the change of policy on our English enrollments in markets outside of Beijing. In fact, total English enrollments from cities other than Beijing in the spring term have increased 47%, with Guangzhou and Wuhan standing out as performers in terms of growth rate. We are excited about the growth of our English business as a whole and the new English curriculum we have underway that I mentioned last quarter which will make our offerings more attractive given the new policy. Turning now to our one-on-one business, the first quarter is traditionally strong quarter for one-to-one and this first quarter was again seasonally strong. That is why a 23% the revenue contribution from one-to-one was well above the 17% to 18% range for full fiscal year 2015 that I had roughly estimated last quarter. However, it is still well below the 29% revenue contribution of one-on-one in the same period last year. We continue to manage the growth of this business line as reflected in year-over-year moderation and relative contribution to overall revenues. Our online business was again profitable in the first quarter, even though monetization of this business has not been our priority we are pleased to see the financials improving along with some acceleration in revenue for more rapid enrollment growth. Online was our fastest growing business in terms of enrollments in the quarter and online enrollments were 17% of total enrollments this quarter's versus 15% in the same year ago period. We also further diversified our revenues geographically and expanded our geographic footprint as planned. We are pleased to report that as the previous quarter 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. In addition to our entry into the new city of Jinan, where we opened a learning center in February, we entered new cities in the first quarter Qingdao and Shijiazhuang. We also added Changsha in June. This now brings the total number of cities to 19 in our national K-12 learning center network. In recent weeks, we have begun regular class operations for the summer term in Jinan, Qingdao, Shijiazhuang and Tsingtao. During the first quarter, we continued to invest in center capacity ahead of the summer term. Our learning center network expanded to a total of 285 centers, a net increase of 11 centers quarter-over-quarter with a net 10 small-class centers added as well as one additional one-on-one center. We added 199 net new small-class classrooms which included the classrooms in the newly added small-class centers. Of the 285 centers 194 were small-class learning centers, including four learning centers for our Mobby branded preschool and young learners age three to eight business and 91 were for one-on-one. In addition to outstanding top-line results were income from operations growth of 105% and net income growth of 65.7% year-on-year. Gross margin expansion was the major driver of our improved profitability in the quarter. Gross margin increased by 520 basis points to 53.2% from 48% in the year ago period. The gross margin improvement came primarily from center utilization and our continued shift towards the higher margins small-class business away from one-to-one and was also impacted by and extra Saturday of classes in May, which was included in the first quarter this year. June started on Saturday last year, so this Saturday classes was a second quarter event last year. In the first quarter, we also continued to expand classroom capacity mostly by adding classrooms to existing centers rather than adding incremental new centers. While we did not add as much SG&A, headcount is expected in the quarter. This is mostly timing issue as we continue to execute on our plans to invest in our future growth over the coming quarters. Let me now update you on areas of progress in online strategy as we transform ourselves into a leading technology focused education services provider. Our parent community mobile app, Jia Zhang Bang or Helping Parent Community, which we launched last year, has been gaining traction. This is meaningful, because it shows that we are successfully transitioning our strong organically built social community originally on eduu.com to the new mobile era. We've seen better than expected growth in daily active users and new users per day on our Jia Zhang Bang mobile app. We believe that the future for our social community will be driven by mobile, and as such, will change the name of our EDUU platform also to Jia Zhang Bang on August 1st and with it the social community website will move to jzb.com. In this way, we will unify the brand for our social community under Jia Zhang Bang, and it will be on both, PC and mobile. As I mentioned earlier, we experienced robust enrollments and revenue growth in online courses business at xueersi.com in the quarter. Also, in our Kaoyan business, we see good early momentum in our initiative to move more administrative services like class registration, refunds and switching of classes to online and mobile at kaoyan.com and the Kaoyan app. Online administration is convenient for parents and students who now do not need to come to our registration centers. We expect over time that it will also become a more cost efficient process for us. In the quarter, we also moved further ahead in the upgrading of our ICS, or Intelligent Classroom System to a 3.0 version. You will remember for course that ICS is our interactive whiteboard enhanced classroom system. We've operated ICS over the years since its launch in November 2010, but this is the first time with 3.0 that we are introducing live interaction using tablets into the classroom experience. We've begun to roll out initially in mainly junior high school classes in Beijing during the summer months. During the first quarter, we purchased approximately 3,000 tablets which through our internally developed system allows students to directly interact on the table with the teachers on the tablet with the teachers' whiteboard. Before our initial rollout is well received, we will expand our other age groups and possibly other cities as well. The accounting for the tablets will be to depreciate in a straight line method over three years. Meanwhile, in addition to online initiatives, we continue to invest in new growth opportunities in other subjects in addition to math and science. As I explained last quarter, we work with Cambridge University Press for content targeting young learners called Hello English. The timing of this cooperation is good, because we see a particular opportunity to offer English training to younger age groups. We are dedicating a lot of resources to conversational English for young learners as parents want to continue to expose their children English from a young age that have less opportunity to do so now in the public schools. The same goes for Chinese composition, which will become a more important part of Zhongkao and Gaokao exams as a result of the recent policy changes. We see a new opportunity expanding our curriculum to include Chinese composition training, especially in the younger age groups, including Kaoyan and Mobby, where we have seen strong enrollment growth for Chinese composition in the last quarter. We continue to motivate our people and invest in hiring new talent, particularly for content development in our emerging business units. In addition, we maintain our commitment to investing in IT systems to improve our back-office capabilities. Through Oracle Hyperion software project for financial planning and analysis has kicked off in May and we have engaged Cap Gemini to do implementation for Hyperion as well as the new purchasing system, both of which we expect to be in place before the end of this year. In conclusion, the first quarter was marked by solid operational and financial progress and execution on plan of our key priorities for this year. As we pursue new product to expansion and technology-based innovation, we continue to strike a balance between current and future growth. Before I moved to the financials, let me say a few words on our convertible senior notes which were issued in May. The net proceeds of approximately US$203 million together with the remaining approximately US$26 million we had offshore give us US$229 million in offshore cash reserves, a large portion of which is expected to be used for strategic initiatives. We continue to look for new strategic investments and acquisitions in the mobile Internet arena in order together with our internally-driven initiatives explained earlier to support our company mission to help students achieve better outcomes through our more efficient learning process. Let me now go over the financials in detail with you. We delivered U.S. $89.0 million in revenue in the quarter, representing revenue growth of 45% 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 279,200 from approximately 192,650 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 was flat for the first fiscal quarter from the same period of the previous year. While first quarter's ASP for the total business was flat in U.S. dollar terms, importantly the ASP growth of our core small-class offering continue to be very strong and over 8% in the quarter, even as a greater contribution in small-class revenues now comes from cities outside of Beijing and Shanghai, where ASPs are lower than in these two metro markets. This flat blended ASP reflects a very positive shift in our business. As we continue to manage the growth of a one-on-one business, the online courses business and small-class businesses are taking share while one-on-one contribution to our total revenues moderates over time. The ASP for the total business was also affected by the relatively large revenue contribution from outer cities, where ASP are lower and the strength of the U.S. dollar versus the Renminbi. As planned, we have taken price increases for summer classes in Beijing, Shanghai, Shenzhen, Suzhou, Zhengzhou and Chongqing and have already taken price increases in Wuhan and Taiyuan in either the winter spring terms, which will, of course, can place over the summer and fall terms. The ASP of our small-class business continues to grow as parents are willing to pay a premium for the high-quality offerings we provide. However given that, we expect online to remain our fastest growing business and the one-on-one revenue contribution to further decrease in coming quarters. Blended ASP for the total business may in fact trend down in future quarters. Again, we see this trend as favorable from a product mix perspective. Cost of revenues increased by 3.6% to US$41.7 million from US$31.9 million in the same year ago period. The increase in cost of revenues is mainly due to an increase in teacher compensation rental cost and other stuff costs associated primarily to an expansion of learning capacity as well as increases in wages and teacher fees versus the year ago period. Non-GAAP cost of revenues, which exclude share-based compensation expenses increased by 30.6% to US$41.7 million from US$31.9 million in the first quarter of fiscal year 2014. GAAP and non-GAAP gross profit for the first quarter were above US$47.3 million as compared to the US$29.5 million for the same year ago period. GAAP and non-GAAP gross margin for the first quarter were both, 53.2% as compared to both 48.0% for the same period of last year. Selling and marketing expenses increased by 46% to US$11.4 million from US$7.8 million in the first quarter of fiscal year 2014. Non-GAAP, selling and marketing expenses which excluded share-based compensation expenses increased by 45.8% to US$10.9 million from US$7.5 million in the same period of last year. The increase in selling and marketing expenses in the first quarter of fiscal year 2015 was primarily result of an increase in compensation of sales and marketing staff to support a greater number programs and service offers versus the year ago period. General and administrative expenses increased by 49.2% to US$22.4 million from US$15.0 million in first quarter fiscal year 2014. The increase in general and administrative expenses was mainly due to an increase in compensation to general and administrative personnel to support a greater number programs and service offerings. Non-GAAP general and administrative expenses, which excluded share-based compensation expenses, increase by 40.1% to US$18.9 million from US$13.5 million in first quarter fiscal year 2014. The above factors combined to give us operating income of US$13.7 million, representing year-over-year increase of 105%, non-GAAP operating income increased by 106.9% year-over-year to US$17.7 million. Operating margin in the first quarter was 15.4% as compared to 10.9% in the same period of the previous year. Non-GAAP operating margin was 19.9% as compared to 13.9% in the same period a year ago. Income tax expense was US$2.4 million as compared to US$1.2 million in the first quarter of fiscal year 2014. The increase of effective tax rate was mainly because the income tax preferential period of one of TAL's entities expired at the end of calendar year 2013. Our net for the quarter was US$13.4 million and increased by 65.7% year-over-year. Non-GAAP net income for the first quarter was $17.4, up by 74.8% year-over-year. This gives us the net profit margin of 15% as compared to 13.1% in the same period last year. Non-GAAP net margin was 19.5% versus 16.2% in the same period of last year. Basic and diluted net income per ADS were both, US$0.17 for the quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses were both US$0.22. From the balance sheet as of May 31, 2014, the company had US$578.2 million of cash and cash equivalents and US$0.3 million of term deposits as compared to US$269.9 million in cash and cash equivalents and nil of deposits as of February 28, 2014. The company received net proceeds of US$202.5 million from the convertible senior notes issued in May 2014. Capital expenditures for the first quarter of fiscal year 2015 were US$4.4 million, representing an increase of your US$2.4 million from US$2.0 million in the first quarter of fiscal year 2014. The increase was mainly due to leasehold improvements and the purchase of servers, computers, software systems and other hardware for the company's teaching facilities. As of May 31, 2014, the company's deferred revenue balance was US$235.8 million as compared to US$154.2 million as of May 31, 2013, representing year-over-year increase of 52.9%. Based on the company's current estimate, total net revenues for the second quarter of fiscal year 2015 are expected to be between US$120.5 million and US$123.2 million, representing an increase of 31% to 34% on a year-over-year basis assuming no material change in exchange rates. Our guidance for the second quarter is based on the usual every other year seasonality in Q2, associated with the timing of Chinese New Year among other factors that incorporates the expected impact of the weaker Renminbi compared to the year ago period. As I have indicated on previous earnings call, the timing of Chinese New Year determines when spring term classes begin each year. When reconciling to fiscal quarters this effect cause is revenue tailwind in the second and fourth quarter of one year and some revenue headwind in the same periods of the following year. This year we have had the expected impact in Q2 due to the seasonality. Another factor was the exclusion of the Saturday classes that this year took place in May, and therefore has already been recognized in the first quarter. I would like to point out that even after taking into account these study terms to fiscal quarter adjustments, we still expect approximately 40% top-line growth in Renminbi terms for our small-class business in Q2. The segment where we are expecting lower top-line growth estimated to be in the low double digits in Renminbi terms is in the one-on-one business. This has some near-term impact to the top-line, but overall is a very favorable mixed shift for our business. If we achieve the guidance of 31% to 34% revenue growth in Q2, then we will have achieved 36.6% to 38.4% year-over-year top-line growth for the first half of the year. We have strong business momentum and maintain a positive outlook for the year. These estimates reflect the company's current expectation which is subject to change. That concludes my prepared remarks. Operator, I am now ready to take questions.
