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Edited Transcript of TEDU earnings conference call or presentation 21-Aug-18 1:00am GMT

Q2 2018 Tarena International Inc Earnings Call

Beijing Aug 28, 2018 (Thomson StreetEvents) -- Edited Transcript of Tarena International Inc earnings conference call or presentation Tuesday, August 21, 2018 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lei Song

* Shaoyun Han

Tarena International, Inc. - Founder, Chairman of the Board & CEO

* Yuduo Yang

Tarena International, Inc. - CFO

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Conference Call Participants

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* Alex Xie

Crédit Suisse AG, Research Division - Analyst

* Fiona Chan

* Kin Man Wong

Jefferies LLC, Research Division - Equity Analyst

* Mariana Kou

CLSA Limited, Research Division - Head of China Education and HK Consumer

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Tarena International Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at any time.

I would now like to turn the call over to your host for today's conference, Ms. Lei Song, Tarena's Reporting Director. Thank you. Please go ahead.

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Lei Song, [2]

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Thank you, operator. Hello, everyone, and welcome to Tarena's Second Quarter 2018 Earnings Conference Call. The company's earnings results were released earlier today, and are available on our IR website, ir.tedu.cn as well as on newswire services.

Today, you will hear opening remarks from Tarena's Founder, Chairman and CEO, Mr. Shaoyun Han; followed by our Chief Financial Officer, Dennis Yang, who will take you through the company's operational and financial results for the second quarter 2018 and give guidance for the [third] quarter (corrected by company after the call). After their prepared remarks, Mr. Han and Mr. Yang will be available to answer your questions.

Before we continue, please note that the discussion today will contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Tarena does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Also, please note that some of the information to be discussed includes non-GAAP financial measures as defined in Regulation G. The U.S. GAAP financial measures and information reconciling these non-GAAP financial measures to Tarena's financial results prepared in accordance with U.S. GAAP are included in Tarena's earnings release, which has been posted on the company's IR website at ir.tedu.cn.

Finally, as a reminder, this conference is being recorded. In addition, a webcast of this conference call is available on Tarena's Investor Relations website.

I will now turn the call over to Mr. Shaoyun Han, Tarena's Founder, Chairman and CEO. Mr. Han will speak in Mandarin and Mr. Yang will translate.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [3]

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(foreign language)

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Yuduo Yang, Tarena International, Inc. - CFO [4]

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Thank you, Lei, and welcome, everyone to our second quarter 2018 earnings conference call.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [5]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [6]

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First of all, I'm very pleased to report that our net revenues in second quarter increased by 13.6% to reach RMB 518 million, meeting our previously issued guidance. During this quarter, the growth rate of our student enrollment in adult education business has recovered. Meanwhile, we focus on resources optimization and cost control, which led to improvement in many efficiency indicators. In addition, our kid programming education business has once more achieved rapid growth in both student enrollment and tuition cash receipts. We enrolled 10,570 students during this quarter, achieving a year-over-year increase of more than 5x.

The total K-12 cash receipts of this quarter was approximately RMB 127 million and the total (inaudible) revenue of K-12 business is about 12.2% of Tarena's consolidated total contract value.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [7]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [8]

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In adult education business, student enrollment growth is a strong factor contributing to our net revenue growth. The adult education market is steadily improving and gradually recovering. Enrollment in this quarter was 37,138, achieving a year-over-year growth of 21.6%.

Enrollment through retail channel delivered 29,448 with a year-over-year growth of 12%, while enrollment through university channel reached 7,690 with year-over-year growth of 81%. The main driver of the growth in university channel is through joint major partnership with the universities. As we mentioned in previous calls, this kind of enrollment will help us to establish cooperation in depth with universities, to ensure long-term growth to enhance enrollment efficiency and reduce student acquisition cost. However, with the 2- to 3-year education period, the revenue recognition period is also lessened accordingly. Certain tuition with signed contract has deferred to later years due to that the education service will be delivered in the later years.

This results in a gap between the growth of student enrollment and the growth of net revenue. For example, during the first half of 2018, the student enrollment through university channel contributed 18% of total student enrollment and was 17% of total signed contract. While the net revenue contribution from -- the revenue from university students were about 8%.

Despite the temporary short-term impact on our net revenues with the business model of the student enrollment through university channel, the long-term partnership with universities will bring us rapid growth in student enrollment, which will lay a solid foundation for the company's adult education business in the future.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [9]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [10]

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Among Tarena's adult student Python course, Big Data course and Linux cloud computing course become more and more popular, contributing a total of 6,130 students in this quarter, which was 16.5% of total student enrollment, which also improved from last quarter. We expect artificial intelligence-related courses will continue their rapid growth in the future. Since last year, we promoted the advanced course modules and have successfully introduced to the market. We are going to continue the effort in promoting the advanced course modules. The percentage of the students taking advanced modules increased to more than 20% this quarter, which helpes the company to accomplish a better service quality and to realize an increasing tuition revenue.

Tarena persists in the development of those IT courses and non-IT courses. There are quite a few non-IT courses in our course development stage. Diversifying with more non-IT courses to be launched, Tarena's overall course structure will be better prepared to cope with the periodic fluctuation in education business brought by the IT industry business cycle. In this way, Tarena is able to achieve steady growth in its adult education business with its competitive edge in the professional education area.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [11]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [12]

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During this quarter, the company paid more attention to the distribution of resources, efficiently building new learning centers, adding more classrooms and seats. At the same time, efforts were put into optimizing human resources structures to improve operational efficiency.

The company have evaluated nonperforming centers one by one and closed or merged total of 16 centers. Since we take very positive view on IT professional education market in Tier-3 cities, we also aim to extend our presence and build up more seat capacity in Tier-3 cities.

Tarena opened 14 new centers, entering 6 new cities this quarter. At the end of second quarter, there were 198 adult learning centers, covering 67 cities with 52,153 seats, which represented 9% year-over-year growth. By optimizing seat layout and usage, the seat utilization rate indicated an huge improvement from last quarter to 73.2%, narrowing the year-over-year gap, when comparing the same quarter last year of 73.6%.

Meanwhile, the company is adjusting its human resources structure step-by-step to aim to improve business operation efficiency, while ensuring to support new business growth.

During this quarter, we saw improvement in total selling and marketing expenses per student, which reduced from an average of 3 quarters, although the advertising spending per student was slightly higher than the last quarter. The improvements in seat utilization rate and per capita productivity prove the effectiveness of centers' resource optimization strategy. We believe that this strategy will have positive impact in the future.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [13]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [14]

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Next, I would like to report the exciting progress in our kid education business during this quarter. As I mentioned previously, the student enrollment of kid education business continued a rapid growth, achieving more than 500% year-over-year increase, reaching 10,570. The company will accelerate its investment in kid education business. We built 15 centers for kid education. By the end of this quarter, kid education business reached 99 learning centers. There are also 21 shared learning sites with adult education business, which provides classrooms. Our kid education business covers 39 cities by the end of this quarter.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [15]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [16]

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We believe that IT technology education will become more and more widely known in China, forming a phenomenal market with significant potential. Our core competitiveness to rapid expansion of K-12 education business in a short period our strong IT courses development ability uniquely originated from our adult education business. Our dual teacher teaching ability, our exceptional skills to recruit and train IT teaching faculties as well as our operating management teams in 67 cities. Tarena will continue to invest in course development, targeting to build a complete kid programming course system covering kids of age from 4 to 18 years old, maintaining our leading position in kid programming education market.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [17]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [18]

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We noticed that recent change in government regulations related to kid education industry and believe that this will have positive impact on quality-oriented courses, including children programming education. With the increasing importance of information technology and artificial intelligence skills, programming courses become more and more important. Tarena will continue to invest in K-12 area in 2018 and in next 2 to 3 years in terms of new course research and development, network expansion as well as talent recruitment. We plan to open a total of 70 to 80 K-12 new centers in 2018 as well as adding another 20 to 30 centers by acquisition. Total number of learning centers reach around 140 by the end of this year. These initiatives require for more investment and may affect the margin level in short term as we -- as the new learning centers are still in the ramp-up period before it could breakeven. However, given the broad market prospect and rapid business growth, K-12 business will provide a strong foundation for the company to grow in the coming years.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [19]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [20]

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Our non-GAAP operating loss in this quarter was RMB 128 million, lower than non-GAAP operating profit of RMB 55 million in the same period last year. On one hand, with the past year's rapid expansion of the kid education business, 70% of the K-12 centers are less than 1-year-old and they are in the financial loss position, which led to a non-GAAP operating loss of RMB 77 million. We believe that with more and more students in class, more and more k-12 education centers will start to make profit.

On the other hand, there were non-GAAP operating loss of RMB 51 million from adult education business. The reason for year-over-year decrease of profit was due to the significant portion of revenue which was deferred to later periods caused by the student enrollment in joint major program model as well as the positive impact from resources integration from adult learning centers and human resources have not been fully realized in this quarter. Our CFO, Dennis, will elaborate on this further in his later remarks.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [21]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [22]

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To sum up, I'm very pleased to see the gradual recovery of student enrollment in adult education business during the second quarter of 2018; the smooth progress in joint major program with partner universities as well as the positive effect from improvement of enrollment efficiency. We believe that the main drivers for the growth of adult education business will continue to exist. For example, the number of annual university graduates and the fact of low job replacement rate of university graduates. We are confident in the long-term growth in adult education business. We will continuously upgrade our course content and the business model according to the change in the market to maintain Tarena's leading position in the industry.

In addition, Tarena delivered higher-than-expected student enrollment and growth of cash receipts in our K-12 business. With broad market, Tarena's inherent competitiveness and the favorable government regulations, we have every confidence in this business segment. We'll further expand our center network, recruit talents and improve course structures, ensuring rapid improvement of business indicators. The solid performance and growth in both adult and kid education business ensures the company to meet its business target in 2018 and will lay a strong foundation for the long-term growth.

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [23]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [24]

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With that, I will turn the call over to our CFO, Dennis Yang, to discuss the quarter financial results and outlook for the third quarter.

Thank you, Shaoyun, and hello, everyone, on the call. We're very pleased to see the professional education business student enrollment growth recovered and exciting results from our K-12 education segment in second quarter. Since you already have the detailed numbers in press release, I will review financial results for this quarter briefly by focusing some important areas.

Let's start with net revenues. For the second quarter of 2018, our net revenues increased by [13.6%] (corrected by company after the call) year-over-year to RMB 518 million, which consisted of RMB 488 million from adult education business and RMB 29 million from kids training programs. One major driver for adult business net revenue growth is the enrollment growth. The total course enrollment in this quarter increased by 5% year-over-year to 29,355, which was the main contributor to the net revenue growth this quarter.

We observed professional training market gradual recovery in this quarter and our total student enrollments reached at 37,138, which represented a 21.6% year-over-year growth. Accelerated student enrollment growth will be a lead indicator of fast revenue growth in the future quarters.

Besides enrollment growth, ASP increase is another driver for adult business net revenue growth. In this quarter, average revenue per course enrollment was RMB 16,638 which was 3% higher than the same period a year ago. Higher ASP resulted from the increase of our standard tuition fees for selected courses and roll-out of advanced course modules since 2017.

In the second quarter, the company slowed down adding new seats and optimized center resources by closing down or merging 16 nonperforming learning centers. By the end of this quarter, our adult business seat capacity was 62,153, which represented a 9% year-over-year increase. We also saw better seat utilization rate, which was 73.2% in this quarter, narrowing the year-over-year gap when comparing the same quarter last year of 73.6%.

Despite the seat utilization rate improvement, gross margin declined by 790 basis points year-over-year to 60.7%. Such a decline in gross margin was mainly due to the following couple of reasons: First, K-12 business gross margin drag by approximately 500 bps. The company has built up 57 K-12 learning centers in the past 12 months. And by the end of this quarter, we have 99 learning centers. As most of K-12 learning centers have not yet reached an ideal utilization level, current gross margin of K-12 business is significantly lower than the margins of our traditional adult training business.

Second, deferral of revenue from joint major program students. As we communicated in previous quarters, Tarena started to partner with universities to promote joint major programs from 2017. Joint major program normally lasts 2 to 3 years and majority of training is delivered in the students' third year on campus. In 2017, we recruited more than 5,000 students under such multi-year programs and most of the revenue of these 2017 joint major program students will defer into 2019, which is the third year of 2017 students.

Overall speaking, the key reason for the decline of gross profit margin was ramp up of 2 new businesses, K-12 STEAM courses and on-campus multi-year joint major programs. We expect gross margin will improve along with the maturity of such businesses.

Meanwhile, the company continues to improve center resources utilization of our traditional business by aligning seat capacity increase with enrollment growth and by optimizing our current learning center resources. We believe that improved seat utilization can also drive future gross margin expansion.

And now, let's move on to operating expenditures. First, let's talk about student acquisition cost.

As Han Zong mentioned, the professional training market continued recovering in the second quarter and at the same time, the company also attempted to adjust acquisition channel mix and to improve sales team productivity. Although average advertising spending per students were pretty much flattish in second quarter as compared with the prior quarter, total student acquisition cost per student, which is defined as total selling and marketing expenses divided by total student enrollment, of adult business was RMB 6,134 in the second quarter as compared to RMB 5,083 in the same quarter in 2017 and to RMB 6,789 in the first quarter of 2018.

We noted approximately 21% year-over-year increase of average student acquisition cost. However, we also observed a 10% quarter-over-quarter improvement. We believe that our center resource optimization strategy start to bear fruits in the quarter and we plan to further improve sales efficiency by adherence to our current acquisition optimization strategies and continued sales team skill development.

Second, in G&A expenses, we recorded bad debt allowances for doubtful account receivables of RMB 33 million this quarter to reflect the difficulties in collection of account receivables from 2017 students. Company extended credits to some of 2017 students who failed in securing loans from third-party loan providers, due to capricious credit policy of loan companies in the second half of 2017. As the company has established the partnership with a group of loan providers since late 2017, in our view, relatively high risk of account receivable from 2017 students is an isolated case and won't change the long-term outlook of bad debt provision levels in our adult business.

Third, let's discuss about R&D expenses. Non-GAAP R&D expenses increased by RMB 17 million year-over-year to RMB 35 million this quarter, the incremental R&D spending were our research investments of multiple new courses in both adult and K-12 business sectors. We believe these investments are crucial to make our courses abreast of the industry changes and continuously attractive to our students.

For K-12 business, we enrolled 10,570 students this quarter. The total tuition cash receipts were RMB 127 million and net revenue recorded was RMB 29 million. Despite broader business growth, our typical K-12 course lasts for about 1 year and during this the k-12 business ramp-up period, an operating loss for the business segment comes from K-12 student acquisition costs occurred ahead of revenue recognition. By the end of the second quarter, about 70% of our K-12 learning centers have been in operation less than 1 year and those learning centers are still loss-making. Non-GAAP operating losses from kids business was about RMB 77 million for this quarter. Although K-12 segment operating losses recently, we're confident that the K-12 business will be profitable in couple of years.

Our non-GAAP operating losses for this quarter was RMB 128 million as compared to an operating profit of RMB 55 million in the same quarter in 2017. Such a decline in non-GAAP operating profitability in the quarter were a combination of an increase of losses from K-12 business and an increase of losses from adult business due to deferral of revenues from joint major program students of 2017 to later years, higher student acquisition cost and incremental cost for some one-time issue.

Income tax expenditure for this quarter included an withholding tax of RMB 24.7 million paid to Mainland China, which was risen from the payment of cash dividend made from our onshore entities to offshore parent company during this quarter.

Finally, let me talk a little about operating cash flows. Net cash inflows from operating activities for the second quarter of 2018 was RMB [80.5] million, (corrected by company after the call) which was the highest quarterly amount in the past 1 year. This increase resulted from our accelerated tuition collection of our adult business in 2018 and our K-12 business enrollment growth, both of which brought us more significant deferred revenues in the balance sheet.

In the quarter, the company also used the cash balance in stock repurchases and the cash dividend payment with the total amount of USD 16.9 million.

Looking forward to the third quarter of 2018, we expect the total net revenues are between RMB 675 million and RMB 705 million, representing an increase of 18.8% to 24.1% on a year-over-year basis.

So now operator, we are open to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Mariana Kou from CLSA.

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Mariana Kou, CLSA Limited, Research Division - Head of China Education and HK Consumer [2]

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I actually have 2 questions. One is on the gross profit margin for the adult business. I understand, I think, just now on explanation, Yuduo Yang was explaining that it's always due to the joint major program. But just wondering, in terms of the mix of the adult business in revenue terms or student terms, when do we expect that, that sales mix to kind of stabilize? And then also on the GP margin to stabilize? And the second question, I guess, more high level at the operating profit margin level. Understand that this year is an investment year for K-12, so how should we think about the next few years? I think we're kind of planning to expand into K-12 and kind of invest a lot. If management could give us a little bit color of when we should expect [this level of investments] to level of?

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Yuduo Yang, Tarena International, Inc. - CFO [3]

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Thank you, Mariana. Let me address 2 of your questions. The first question, your question about the gross profit margin. Yes, it's true that joint major program revenue deferral has adverse impact on our GP margin in 2018 as well as we also mentioned there's an adverse impact in 2017. I also talk about this in our -- in the call that most of the revenue for the joint major program of 27 students will be recognized in 2019, which is the next year. So my view is our gross profit margin we're getting stabilized starting from 2019. And for -- maybe it spans a couple of years that GP margin impact will be phased out. That will be a gradual change in the future couple of years. Your second question about the OP margin. The K-12 that's definitely a huge drag on OP margin on 2018. And we believe that K-12 with more and more learning centers, K-12 learning centers getting mature in the future couple of years. And we also are about to open 80 to 100 learning centers each of the future 2 years for our kids business. That means percentage of matured learning centers is getting greater over the years. So our projection shows that in 2020, the K-12 business we're at close to breakeven. This is the OP margin for K-12. And for the adult business OP margin, still you will see then a gradual recovery over the years in 2019, 2020. Again, the joint major program, this model has sort of adverse impact in 2018, 2019 because more students recruited under such multiyear program in 2018. With those -- the huge increase of students sign up for the multiple-year program and those revenue will be recognized in later years, as you have sort of adverse impact there, yes. It is very likely that 2020, the joint major program OP margin we're getting stabilized.

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Operator [4]

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Your next question comes from the line of Fiona Chan from Buena Vista Fund.

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Fiona Chan, [5]

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My first question is on the university channel. I wanted to ask about the volatility in university enrollments. Is this seasonality or is this due to new university partners that we've made? And how many university partners do we now have?

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Yuduo Yang, Tarena International, Inc. - CFO [6]

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The fluctuation were significant growth for the student enrollment in university channel this year, I think the core reason is the joint major program started in 2017 with a low base last year. We [signed up] in more universities and colleges this year that showed very good growth, 81% year-over-year growth. Currently, we signed up about 50 -- I'm sorry, 123 universities for joint major program with specialty classes, most of which are the partnership model between Tarena and universities. Going forward, we still believe the enrollment growth from joint major program will be very fast in the growth rate for the future couple of years.

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Fiona Chan, [7]

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Sorry, so just to clarify, the students enroll quarterly for the joint major program, so it's not an annual enrollment?

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Yuduo Yang, Tarena International, Inc. - CFO [8]

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Majority of the students enter joint major program again enroll in fall, in the third quarter. By the end of first 2 quarters or the fourth quarters -- sorry, in the fourth quarter, they still have -- it is not in their freshman year, they can enroll in our (inaudible). So they still have new addition in enrollment for joint major program in the quarters other than Q3.

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Fiona Chan, [9]

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Got it. My second question is on your increase in staff. I noticed that you attribute a lot of the increase in expenses to headcount. What is your total number of instructors now?

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Yuduo Yang, Tarena International, Inc. - CFO [10]

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We can reach the number.

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Lei Song, [11]

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The total instructors is 391.

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Yuduo Yang, Tarena International, Inc. - CFO [12]

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391 instructors by the end of Q2.

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Operator [13]

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Your next question comes from the line of Alex Xie from Crédit Suisse.

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Alex Xie, Crédit Suisse AG, Research Division - Analyst [14]

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I have 2 questions. One is that I noticed that G&A expenses -- the non-GAAP G&A expenses increased by 81% year-over-year in this quarter. I wonder what is the main driver of increasing G&A expenses and what's the trend going forward? And the second question is about our K-12 education business. Management has mentioned their plan to increase learning centers to 140 in -- by the end of this year. And I think it seems that this is higher than our previous expectations. And I'm wondering whether management also expects higher student enrollments from the kid education business with a new target for enrollment this year. And I also noticed, we launched online K-12 programming courses in Q2. And I'm wondering what's the rationale behind it and how much are we going to invest in online education model of the kid education business?

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Yuduo Yang, Tarena International, Inc. - CFO [15]

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Yes, Alex, your first question about the G&A expenses. In this quarter, a part of the bad expenses, the G&A increased by about 50% year-over-year. The main driver are the additions in headcount and related leased areas and the depreciation. This is the main driver. So the key driver in our G&A is the headcount. So on the long term, the G&A, we believe the growth rate will be year-over-year 30%. This is our forecast right now. Those are my comments to your first question. Your second question on the K-12 enrollment expectation for 2018. Yes, we recorded very strong enrollment in the second quarter. And the first half of 2018, the total student enrollment of our K-12 business already reached at 14,000. So we expect about -- around 30,000 student enrollment in total for the K-12 business in 2018. Yes, this is also, once again, we put in a higher target for our K-12 business enrollment. Your third question about online coding -- K-12 coding business, actually, we -- that online business right now is still in the pilot operating stage. We just put it online in mid of July and a few of -- with hundreds of students online to run pilot process. The rationale behind we want to step into online K-12 coding business is that our off-line learning centers currently cannot fully satisfy the demand in the market. Some of our students and parents come to local learning centers have a trial (inaudible) of a program that they very like. They want to participate, but our learning center may not be that close to their location, their desired locations, or some of the students in cities other than we already have our K-12 presence want to have a chance to participate in our courses. So we deliver an option to those group of customer in the market to have them a chance to have our courses. So in the longer-term, we may consider the online plus off-line business, we do the both. But again, the online business is just in the pilot stage.

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Operator [16]

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Your next question comes from the line of Johnny Wong of Jefferies.

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Kin Man Wong, Jefferies LLC, Research Division - Equity Analyst [17]

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My question is actually quite similar to the ones asked previously. But I just want to ask about our sales staff, that is -- I think that is one of the main reasons why our selling expenses have been going up. Can maybe management give us more color on the level of sales staff that we would be happy with? And whether or not this will increase. And yes, where do we see a suitable level going forward?

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Yuduo Yang, Tarena International, Inc. - CFO [18]

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Johnny, can you speak in Mandarin for the benefit of Han? I think this question is better for Mr. Han to address.

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Kin Man Wong, Jefferies LLC, Research Division - Equity Analyst [19]

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Okay. (foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [20]

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(foreign language)

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Yuduo Yang, Tarena International, Inc. - CFO [21]

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Let me translate Mr. Han's comment on the sales staff outlook. In the second half 2017, the company started to use aggressive marketing strategy to hire more sales staff and the team to improve the sales lead conversion rate. So this is why in the past couple of quarters, you observed that increase in sales accounts. We put the rationale behind that each sales staff if they -- if the sales staff can acquire 1 new incremental student, that would be good to drive higher probability at the mature level -- mature adult learning center, because the tuition from that incremental student could cover incremental cost for that additional sales staff. So this is the rationale we used for -- behind this strategy. And in the most recent quarter, you already seen that the improvement in the overall acquisition for students, even that the sales lead cost, I mean, now they're significantly improved. This is because we improved the sales team efficiency that we -- to evaluate the capability of each sales team member and to have the better or more talented sales staff stay and that the -- and the poor performing staff to leave the company. This is the kind of adjustment where optimization of the sales team going -- continue to fulfill in the future quarters.

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Kin Man Wong, Jefferies LLC, Research Division - Equity Analyst [22]

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(foreign language)

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Shaoyun Han, Tarena International, Inc. - Founder, Chairman of the Board & CEO [23]

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(foreign language)

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Yuduo Yang, Tarena International, Inc. - CFO [24]

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In the second quarter of 2018, the number of the headcount still -- headcount of sales team there's still gradual increasing, but not that much.

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Operator [25]

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And there are no questions at this time. I will now revert the call to Ms. Lei Song, Tarena's Reporting Director.

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Lei Song, [26]

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Thank you, operator. If there are no further questions at present, we would like to conclude by thanking everyone for joining our conference call. We welcome you to reach out to us directly by e-mailing at ir@tedu.cn. Should you have any questions or requests for additional information, we encourage you to visit our Investor Relations site at ir.tedu.cn. Thank you.

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Operator [27]

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