Apr 23, 2013
Executives
Joseph Kauffman – Chief Financial Officer Mei Li – Investor Relations Manager
Analysts
Fei Fang – Goldman Sachs Philip Wan – Morgan Stanley Ella Ji – Oppenheimer & Co. [Titia Bing] – Jefferies Chao Wang – Merrill Lynch Mark Marostica – Piper Jaffray
Operator
Ladies and gentlemen, thank you for standing by and welcome to the TAL Education Group’s F4Q 2013 and F2013 Earnings Conference Call. (Operator instructions.)
I must advise you that this conference is being recorded today, Tuesday, the 23rd of April, 2013. I would now like to hand the conference over to your first speaker for today, Ms.
Mei Li, Investor Relations Manager. Thank you, please go ahead.
Mei Li
Thank you all for joining us today for TAL Education Group’s F4Q and F2013 earnings conference call. The F4Q and F2013 earnings release was distributed earlier today and you may find a copy on the company’s IR website or through the news wires.
During this call we will hear from Chief Financial Officer Mr. Joseph Kauffman.
Following his prepared remarks Mr. Kauffman 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.
Potential risks and uncertainties include but are not limited to those outlined in public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC.
Also our earnings release and 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 Kauffman.
Joseph Kauffman
Thank you, Mei, and thank you all for joining us on our earnings conference call for F4Q and F2013. Before I go through the quarter and full year numbers I would like to represent the entire TAL management team in sending our warmest wishes to all of our teachers, employees, parents and students who have been affected by the earthquake disaster that ravaged several areas in Sichuan over the weekend.
Particularly in our hearts and minds at this time are the family members of our teachers, employees, parents and students in our Chongqing and Chengdu schools. We’ve decided to donate RMB 1 million to the victims of the earthquake to support reconstruction work and get education back on track after the disaster and we will include Ya’an in our existing annual teaching assistance program.
We’ll monitor the situation and decide on further assistance programs if needed. Moving to the quarter, we are pleased to report F4Q results with revenues in line with our guidance.
Net revenues increased by 14.2% year over year to $59.6 million US, near the high end of our guidance. Revenue growth was supported by a 9.7% increase in enrollments.
In Beijing, we continued to operate in a challenging environment due to the change in policy on the use of exam and competition results for selection at key junior high schools. We saw the impact from the change in Beijing policy not only on small classes but also on our one-on-one business in Beijing, which is positioned largely as a cross-sell offering to our small classes.
Revenue growth was also affected as we mentioned last quarter by the late timing of Chinese New Year that reduced the number of classes scheduled in F4Q ending February 28th. In Shanghai on the other hand we saw growth momentum returning once again, and the small class business activities outside Beijing and Shanghai, our new markets, delivered outstanding growth.
Our full year results underscore how F2013 has been a year of harvesting following a year of large scale investment and business expansion. Operating leverage was boosted by our efforts to improve learning center utilization and budgetary discipline.
Even as we still managed to grow the top line by 27.3% for the year, we saw operating income increase by 49.4% and net income by 37.5%. Our operating margin expanded to 13.9%, an improvement of 210 basis points versus F2012.
Last quarter I mentioned we are now in the early phase of our next investment cycle and we plan for net center expansion in the first half of F2014. In F4Q we still had a net reduction of centers at the tail end of our year-long focus on operational efficiency.
We opened one new small class center in each of Beijing, Xian, Nanjing and Taiyuan, and one one-on-one center in Nanjing; and closed a combined nine small class and one-on-one centers in Beijing, Shanghai and Tianjin. We had 255 centers by end of February, 2013, of which 159 were small class learning centers including four learning centers for our Mobby-branded pre-K business and 96 were for 101.
Let me now go over the different business lines. The small class business in new markets continued to drive our growth.
In the quarter, small class revenues as well as enrollments in cities other than Beijing and Shanghai again more than doubled versus the same period in the previous year. The full year growth rate of small class revenues in cities other than Beijing and Shanghai grew by over 140%, making it the primary driver of our overall growth this fiscal year.
In terms of revenue contribution, cities other than Beijing and Shanghai accounted for 29% of small class revenues in F4Q compared to only 16% during the same period in the previous fiscal year and 28% in F3Q 2013. In F2014 we plan to add new centers in cities other than Beijing and Shanghai.
We believe there is much growth potential left in the cities outside Beijing and Shanghai as our expansion strategy has been carefully focused on quality and less on quantity in the early stages to set the stage for rapid future growth. For the cities of Xian, Nanjing, Chengdu and Hangzhou which we entered in calendar year 2011, the combined total enrollments more than doubled year-over-year in F4Q as well as F2013.
The cities that we entered in calendar year 2012 – Chongqing, Zhengzhou, Taiyuan, Suzhou and Shenyang had an average of over 950 enrollments by the end of the fiscal year reported. We are pleased to see Shanghai coming back to a growth trajectory.
Our business in Shanghai has gone through a transition following the efforts we made last year to manage our growth in order to refocus on teaching quality and curriculum. We see continued positive business momentum in the cities we entered in 2009 and 2010 – Guangzhou and Shenzhen, driven by a strong focus on quality of our business metrics.
Once again, the successes we have had in each of our cities outside of Beijing underscores the importance of discipline in our expansion strategy. We continue to believe that managing our growth to maintain quality of teaching and curriculum forms the foundation for long-term growth of our business.
We also continue to invest in supplementing our small class offerings with online content and increased tutoring interactivity to create a more blended learning model in which online exercises and practice materials can be utilized by our small class students through our www.speiyo.com platform. As for Beijing, our visibility remains low as we continue to see the impact of the change in policy on how exams and competitions are being used as an entrance criteria for selection into key junior high schools.
The spring term small class enrollment numbers are still down year-on-year as was the case in the fall and winter terms. As we said before the impact from the policy change will not likely disappear in the next couple of quarters; however, we believe more students will come back to our classes over time and will take advantage of the content and assessment tool enhancements we continue to make to support our curriculum.
In our Zhikang branded one-on-one business we saw a seasonal uptick in F4Q from F3Q which is typically the lowest quarter of the year. However, as a percentage of revenues Zhikang’s contribution was less than in the same period of the previous year for each of the past two quarters.
Revenues from one-on-one contributed to 22% of revenues in F4Q compared to 19% for the previous quarter and 24% for the same year-ago period. For the full year, 101’s contribution to overall revenues was 23% consistent with its full-year contribution in F2012.
As I mentioned, our business in Beijing has been affected by the change in junior high school admission policy. Given the relatively fixed cost structure of the one-on-one business, the adverse impacts on the profitability in the second half of the year for Zhikang has exceeded that for small class and the growth momentum of Zhikang in other cities has not been strong enough to compensate for this.
We expect this trend to continue in F1Q. The current top line weakness in one-on-one also affected the bottom line.
On a full year basis, Zhikang was not as profitable in F2013 as in F2012 despite operational improvements we made during the year. We continue to look for further efficiencies in this business.
Currently we are changing the layout of learning centers to conduct one-on-one sessions in mini classrooms instead of cubicles which could bring up utilization. We’re also investing in content which we hope will improve the scalability of an inherently less-scalable one-on-one model.
We’ve also considered making further cost efficiency decisions to ensure that sales continue to support the relatively fixed cost structure of this business line. Let me briefly update you on our other business units.
Our Mobby branded preschool small class centers in Beijing continue to have healthy enrollment and business momentum. Moving to online, our online courses at www.xueersi.com form the revenue generating part of our online strategy.
Xueersi.com will continue to offer a lower price point in order to provide a low cost of entry for trial and existing markets as well as new markets where we do not yet have learning centers. While monetization is not our key focus, www.xueersi.com is expected to be close to breakeven by the end of F2014 as we manage our costs in line with the current growth outlook.
In addition to our ongoing efforts at www.xueersi.com we will continue to invest behind exploring other potential online learning models in F2014. As for EDUU, our social network for parents and students, we have been pleased with the role this platform has played in our existing cities particularly the new cities we have entered in recent years.
In the coming year we will continue to invest behind EDUU and we will also explore new potential online learning models but will seek to reduce the losses we’ve experienced in previous years in our other new business lines – Mobby and Xueersi.com. Overall, with the solid foundation we set in F2013 and ongoing positive growth momentum in cities outside of Beijing we are ready to reenter the investment stage of our business in F2014.
We plan to drive new growth opportunities in those markets we believe to be currently underserved by opening the equivalent of at least 30 new learning centers in F2014. In the coming fiscal year, we will undertake new content initiatives as well.
We will maintain our organizational focus on the math and science areas, and further build out our science curriculum to support the broader math and sciences curriculum offered in middle school and high school. At the same time we will invest efforts into further enhancing our LeJiaLe branded English offering to make it an even more attractive cross sell to our students.
As always, we continue to invest in maintaining our top level teacher quality based on solid training, competitive salaries and a good work environment. All these efforts require continued investment back into the business.
Finally, in F2014 we will also improve our IT systems for the external and interfacing areas of the business such as improved registration processes and assessment metrics at each level of our curriculum. This is the final leg in a two-year drive to better manage and control our business.
Earlier we were engaged in building EHR, OA and financial reporting systems, headquarter our business unit functions as well as IT systems and processes for sustainable scaling and controlled [division]. This year we will look at more customer-oriented operational improvements.
Of note, while the monies were invested in the EHR and OA systems in the second half of last year, given the actual timing of the project completion by various venders the P&L for these projects will not be felt until beginning in F1Q 2014 rather than the second half of F2013 as previously anticipated. We believe the investments we have planned for F2014 are appropriate because these initiatives are centered around our core competency of being a specialized top-level tutoring services provider in the market.
We aim to raise the barriers to entry with our high-end customized content and subject expertise vis-à-vis local competitors. The timing is right given the continued attractive growth opportunities in China’s K-12 tutoring sector.
Let me now go over the financial results for you. We delivered $59.6 million US revenue in the quarter, representing revenue growth of 14.2% versus the same period in the previous year.
The revenue growth was mainly driven by an increased number of total student enrollments combined with higher average selling prices. Total student enrollments increased 9.7% to approximately 250,700 from approximately 228,500 in the same period a 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 4.1% to $238 US for F4Q was primarily driven by the hourly rate increases of a portion of center-based course offerings and the foreign exchange rate fluctuation.
one-on-one tutoring contributed 22% of revenues for F4Q 2013 compared to 19% for the previous quarter and 24% for the same period in F2012. Now moving to the total business numbers, cost of revenues increased by 10.1% year-on-year to $31.4 million US.
The increase in cost of revenues was primarily due to an increase in teacher compensation, rental costs and other staff costs associated with an expansion of learning centers’ capacity as well as increases in wages and teacher fees versus the year-ago period. Non-GAAP cost of revenues, which excluded share-based compensation expenses increased by 10.4% to $31.4 million US.
GAAP and non-GAAP gross profit for F4Q were both $28.3 million US as compared to $23.7 million US and $23.8 million US respectively for the same period last year. GAAP and non-GAAP gross margin for F4Q were both 47.4% as compared to 45.4% and 45.5% respectively for the same period of last year.
Selling and marketing expenses increased by 37.8% to $7.6 million US. The increase of selling and marketing expenses in F4Q 2013 was primarily a result of an increase in compensation to sales and marketing staff to support a greater number of programs and service offerings as well as an increase in brand promotion and advertising expenses.
Non-GAAP selling and marketing expenses which excluded share-based compensation expenses increased by 41.9% to $7.3 million US. General and administrative expenses increased by 21.3% to $14.4 million US.
The increase in general and administrative expenses was mainly due to an increase in compensation to our general and administrative personnel to support a greater number of programs and service offerings as well as the depreciation expenses for the office space purchased by the company in Beijing which commenced in F4Q 2013. Non-GAAP general and administrative expenses, which excluded share-based compensation expenses, increased by 19.3% to $12.9 million US.
Operating income was $5.7 million US, representing a year-over-year decrease of 10.4%. Non-GAAP operating income decreased by 4.8% year-over-year to $7.4 million US.
We took an impairment loss in the quarter as we wrote off the long-term prepayment balance of $0.6 million US as the group revised its business strategy and decided not to develop its study abroad intermediary admissions consulting services for the foreseeable future. Taking out the impairment loss of $0.6 million US income from operations was $6.3 million US and decreased by 1.0% year over year.
Operating margin in F4Q was 9.5% as compared to 12.1% in the same period the previous year. Non-GAAP operating margin was 12.4% as compared to 14.9% in the same period the previous year.
Our net income for the quarter was $6.8 million US and decreased by 9.7% year over year. Non-GAAP net income for F4Q was $8.6 million US down by 5.0% year-over-year.
Taking out the impairment loss of $0.6 million US net income attributable to TAL was $7.4 million US and decreased by 1.8% year over year. Basic and diluted net income per ADS were both $0.09 for the quarter.
Non-GAAP basic and diluted income per ADS which excludes share-based compensation expenses were both $0.11 US. Moving to the year as a whole, we achieved solid growth in F2013.
We delivered revenue growth of 27.3% driven by enrollment growth of approximately 18.2% and ASP growth of 7.7%. Net revenues broke the $200 million US mark, reaching $225.9 million US for F2013 from $177.5 million US in F2012.
Cost of revenues increased by 21.1% to $115.7 million US from $95.6 million US in F2012. The increase of 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 an increase in wages and teachers’ fees.
Non-GAAP cost of revenues which excluded share-based compensation expenses increased by 21.5% to $115.6 million US from $95.2 million US in F2012. Selling and marketing expenses increased 19.5% year-on-year and were 12.2% as a percentage of revenues as compared to 13.0% in F2012.
Non-GAAP selling and marketing expenses as a percentage of revenue was 11.4% compared to 12.2% in F2012. Our word-of-mouth-driven model enhanced by the strength of our interactive online education community continued to keep our spending on advertising and brand promotion low.
We also were able to see some scale out of the sales and marketing personnel we added in F2012 to support our selling and marketing efforts. General and administrative expenses increased by 35.2% in F2013 to $51.1 million US from $37.8 million US in F2012.
Non-GAAP general and administrative expenses, which excluded share-based compensation expenses, increased by 40.6% to $44.8 million US from $31.8 million US in F2012. The increase in general and administrative expenses was mainly due to an increase in compensation to our general and administrative personnel to support a greater number of programs and service offerings as well as the depreciation expenses for the office space purchased by the company in Beijing which commenced in F4Q 2013.
Our operating margin in F2013 was 13.9%, an expansion of 210 basis points versus the prior year. Non-GAAP operating margin was 17.6% for the year, an expansion of 130 basis points versus the prior year.
For the full F2013, other income was less than $0.8 million US compared to other income of over $3.9 million US in F2012. The other income in both years was primarily driven by exchange gains.
The company, which holds the vast majority of its cash balance in RMB and reports in US dollars, benefits from exchange gains in times of relative strength of RMB and experiences exchange losses in times of relative strength of the US dollar. The lower appreciation of RMB versus US dollar in F2013 compared to F2012 was the primary driver of the smaller exchange gain and thus lower other income recorded in [F2013 versus F2012].
Income tax expense of $4.1 million US for F2013 is compared to $4.2 million US in F2012. We finished the year with an annual tax rate of just under 11% in F2013.
However, considering some entities will become subject to higher tax rates in the coming year, we estimate the effective tax rate for F2014 to be between 13% and 14%. Net income increased by 37.5% to $33.4 million US from $24.3 million US in F2012, giving us 14.8% net margins for F2013 as compared to 13.7% in F2012.
Non-GAAP net income attributable to TAL which excluded share-based compensation expenses increased by 29.5% to $41.7 million US from $32.2 million US in F2012, giving us non-GAAP net margin of 18.5% for F2013 as compared to 18.1% in F2012. Basic and diluted net income per ADS were both $0.43 US in F2013.
Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses were $0.54 US and $0.53 US respectively. From the balance sheet, as of February 28, 2013, the company had $185.1 million US of cash and cash equivalents and $24.1 million US of term deposits as compared to $188.6 million US of cash and cash equivalents and $10.3 million US of term deposits as of February 29, 2012.
Net operating cash flow for F2013 was approximately $68.3 million US. Capital expenditures for F2013 were $6.9 million US, representing a decrease of $67.4 million US from $74.3 million US in F2012.
This decrease was driven largely by the purchase of office space at $62.5 million US in F2012. As of February, 2013, the company’s deferred revenue balance was $102.5 million US, representing a year-on-year increase of 19.8%.
Based on the company’s current estimates, total net revenues for F1Q 2014 are expected to be between $57.7 million US and $59.2 million US, representing an increase of 17% to 20% on a year-on-year basis taking into account the continued near-term impact of the new Beijing policy which has affected both our small class and one-on-one businesses in that city. That concludes my prepared remarks.
Operator, I am now ready to take questions.
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.
(Operator instructions.) Our first question comes from the line of Fei Fang from Goldman Sachs.
Please ask your question now.
Fei Fang – Goldman Sachs
Hi, Joe and Mei. Thanks for a great quarter.
My first question is about the network expansion. So the total number of centers have further declined from F3Q, so how do we think about the revenue impact on spring and summer courses?
And also among the new 30 centers that you plan to add, what rollout schedule should we expect? Then I have a follow-up question, thanks.
Joseph Kauffman
Sure, Fei. In terms of discrete learning centers, they did decline but I said on previous calls that we wanted to add 100 incremental classrooms in the second half of the year and we beat that handily by adding over 130 classrooms during that period.
So in terms of overall capacity, we actually saw gains in the quarter though we were kind of opportunistic in looking at certain learning centers that would be more economic to close where we added capacity to other learning centers. So I think that that’s probably the best way to go about getting growth and profitability in the business.
In terms of expansion for next year, we’re still on track. We’re focused on at least 30 new centers in our existing 15 cities led by small class.
We’ll also likely move in to four new cities at the tail end of this coming fiscal year – likely in the January, 2014 timeframe.
Fei Fang – Goldman Sachs
Understood, thanks. My second question is can management give guidance on the dividend [spend] for F2014?
Joseph Kauffman
As I said on previous calls, it’s early to be able to say anything about a dividend at this point and whether or not there will even be a dividend in F2014. We’ll continue to look at ways to give back to shareholders; it’s just in terms of efficiency and the amount that actually ends up in shareholders’ hands, we need to make sure we’re being efficient about our dividend policies.
So we tend to dividend out a greater amount maybe less frequently than a smaller amount more frequently because of fees and other things that lead to it not being an efficient way to do it if the payout ratio is too low. So we’ll continue to evaluate that and see what makes sense in terms of giving back to shareholders.
I’ll probably be able to give a better update on that in the October timeframe.
Fei Fang – Goldman Sachs
Great, thanks Joe, very helpful.
Operator
Thank you for your questions. The next question comes from the line of Philip Wan from Morgan Stanley.
Please ask your question now.
Philip Wan – Morgan Stanley
Hi Joe and Li. Thanks for taking the question.
My first quick question is about the bird flu in China. Are you seeing any impact such as lower enrollments or class (inaudible) because of this flu?
And then I have a follow-up question, thank you.
Joseph Kauffman
Sure. Up to now we’re not aware of any impact from the bird flu.
Obviously Shanghai was more effected. I just got off the phone with a school out there and we haven’t seen hardly any impact at all from the bird flu up till now.
Now, we’re taking all the right precautions so when students and parents come into our center the first thing we have them do is wash their hands and have them sterilize; and we are also making sure to sanitize all of our desks and chairs and classrooms to make sure that we’re doing everything we can to take the best precautions. But we haven’t seen any impact to our business at this point.
Philip Wan – Morgan Stanley
Great, thank you. And then I would like to drill down a little bit more on the margins, just a couple moving parts.
First of all I wonder if you could comment on the potential margin impacts from them separately in terms of accelerating [the new businesses], the new content initiatives that you mentioned in the prepared remarks as well as the existing projects including developing platforms and Mobby. Thank you.
Joseph Kauffman
Sure. Well, I can address the new businesses part of that question.
The new businesses, I said in previous quarters that we expected to spend about $7 million US but have the $7 million operating loss in those businesses last year in F2013. It ended up being about $6.5 million.
In terms of this year it’s likely to be more like $7.5 million. So what we’ve seen is that Mobby and online courses have become more profitable as I mentioned in my prepared remarks, but we’re continuing to invest behind EDUU because we see that as really helpful for us in getting into these new markets.
We’ve gotten great growth out of new markets and EDUU has been really effective of setting that awareness ahead of when we come in with learning centers. So we think that’s an effort worth spending more on and investing behind, and a true competitive barrier for us in our business that’s not so easy to replicate.
And we’re also setting aside some budget for potential new business models within the online area that would fit into that new business area that would be a loss for next year. In terms of the other aspects that you talked about, the learning centers, I mean 30 learning centers – we’ve talked in the past about the average capital expenditures being around $100,000 US for those learning centers.
So you can use that as kind of a back of the envelope in terms of the impact of the learning center expansion. Now, there are people costs and other costs on top of that as well but that gives you a sense at least in terms of the capital expenditure.
And then the IT systems-related stuff is primarily being done in-house. So where we’ll see the impact is more in headcount and incremental G&A costs on the people side rather than going out and hiring a third-party vendor.
I think we will have some consulting fees but they will be less than RMB 5 million I would say in terms of the IT implementation. But we do still have some carryover in terms of the systems that we put in last year, so the EHR system, the OA system, etc.
you have some carryover from last year. So hopefully that gives you a little bit of color, Philip, in terms of the granularity you were looking for on the investments.
Philip Wan – Morgan Stanley
Alright, that’s very helpful. Lastly, could you comment on the pricing trends?
I recall that you planned to increase price for the summer session this year – is that still happening? And then also how should we look at the ASP growth going forward?
Thank you.
Joseph Kauffman
Sure. Yes, we still intend to take a price increase for our small class business beginning in the summer term.
It will vary by market and we may not take a price increase in all markets but I would say the breadth of the price increase will cover more cities than it did in last year. And the price increase should at least be 10% or more, and more in certain markets; and as is typical we’ll offer coupons to returning students in the first semester or two – usually two – so you won’t get that full price increase right away.
In the one-on-one business we’re also looking at opportunities to take price increases in some of our better-performing markets, and have already taken a price increase in Guangzhou and Shenzhen. We were able to take a price increase of 20% because we didn’t actually take a price increase last year for the one-on-one business.
So that’s what we’re looking at in terms of pricing. It’ll vary by market but we do expect to take price increases again this year, and the idea is to have a moderate rate of center expansion and a moderate rate of price increases each year.
It’s hard for me to be able to set an exact number but I expect it’ll again be less than 10% as it was in the most recent year.
Philip Wan – Morgan Stanley
Alright, that’s very helpful.
Operator
Thank you for your questions. Your next questions come from the line of Ella Ji from Oppenheimer.
Please ask your questions.
Ella Ji – Oppenheimer & Co.
Good evening, Joe and Mei, and congratulations, good quarter. My first question is with regards to your network expansion.
Correct me if I’m wrong, but I think [last quarter you mentioned] a plan for the first half of the next fiscal year. And I think this time it’s going to extend to the entire fiscal year.
I wonder if you can explain whether you made any strategic changes with regard to your network expansion.
Joseph Kauffman
Sure, Ella. No, we haven’t.
As I said last quarter we’ll start with the equivalent of 30 learning centers in the first half of the year and then we’ll see how things go, and based on the ramp up and the utilization levels we’ll look at expanding more in the second half of the year. So that’s still on track; I’m just being conservative in terms of what the outcome would be in the second half of the year after we look at the ramp up in the first half of the year.
Ella Ji – Oppenheimer & Co.
So it’s likely that it just represents [utilization level, that] by doing well you may see the [total count target]?
Joseph Kauffman
Absolutely. That’s how we look at it.
We look at utilization levels, those metrics that we’ve talked about on previous calls and if things are trending in the right direction there’s no reason why we wouldn’t add more centers in the second half of the year. And of course, in response to Fei’s question I also mentioned that we would be going into four new cities in January of 2014, the tail end of this fiscal year, and that will require at least one new learning center in each of those cities as well.
Ella Ji – Oppenheimer & Co.
Okay, great. And then I know that [performance outside of Shanghai] was very terrific but I wonder if you can talk about [the margins for this business] as far as what you’ve entered for more than a year.
How are their margins comparing to Shanghai?
Joseph Kauffman
It’s not particularly clear so I’ll try to respond as best I can based on what I heard. What I heard was kind of about margins in cities outside of Beijing and Shanghai that we’ve entered for more than one year versus Beijing and Shanghai.
And actually there’s not a clear relationship. So we have cities that experience better margins than Shanghai that are cities outside of Shanghai.
I haven’t been breaking down by city but typically what happens is that it has more to do with the stage of development in that invest and harvest cycle. So when we get really high utilization levels, which we do have in some of our markets, they will have better profitability than the Shanghai and even in Beijing in some quarters.
So it really has to do with what stage we’re in. If we only have one center and then we add a second center, and we’re just ramping up in that second center well then you may not have as high profitability.
If you’re just in one center and that thing is super high utilization then you’re going to have higher profitability than any of the other cities. So there are aspects of differences in ASP levels between different cities, but really what we found especially over the last year is that if we can really focus on the key operational metrics like utilization we can overcome some of those disparities between cities.
Ella Ji – Oppenheimer & Co.
Okay, great. That’s very helpful.
And then my last question is with regards to the continuation of your (inaudible) movements. You mentioned a broader offering [on the internet] and a cross-selling opportunity into English.
I wonder if you can provide details with regards to how you are going to approach these opportunities.
Joseph Kauffman
Sure. In terms of English that’s always been an important cross-sell for our business.
In our more developed markets like Beijing it’s historically been 20% revenue contribution and that’s largely from cross-sell. And parents that come for us for math and the sciences, if we have English timed at the right time – after those classes are finished and right across the hall – parents will come to us for convenience, especially these days, rather than fight the traffic in Beijing to necessarily go somewhere else.
So that’s always been a part of what we’re doing. In terms of the investment, we’re investing more behind making sure that the outcomes that are achieved in English are good – so aligning that with the English curriculum here in China, making sure it helps students with how they will test and how they will perform in the local domestic market.
So I would say that’s the difference in our positioning probably versus other English players and it’s the area where we’re investing. In terms of technology in the classroom, I think that’s what I heard as the other part of your question – again, it wasn’t particularly clear.
But the technology we’re implementing, part of it is to make it more convenient for parents to be able to register online and through mobile devices which I think will ultimately help us in being able to reduce the cost structure around registration centers throughout our network in addition to creating convenience for parents. So that’s one whole area that’s more customer-facing and helping convenience for our parents.
The other area is in assessment. So we’re looking to be able to use technology to help better place kids into different sections, different levels of difficulty within our various math and science curriculums.
And then the third is continuing to upgrade the interactivity of our ICS or Intelligent Classroom System in the classroom using whiteboards and technology to just make the classes all that more interesting. So those would be some of the more customer-oriented technology initiatives that we have planned for this coming year.
Ella Ji – Oppenheimer & Co.
Okay, great. That’s very helpful, thanks.
Operator
Thank you. Your next questions come from the line of [Titia] Bing from Jefferies.
Please ask your question.
[Titia Bing] – Jefferies
Hello, I have a few questions. First of all, I want to confirm that you just mentioned the ASP growth will be less than 10% in F2014.
And the other question is more on the margins – given that we are going into the investment phase again and will focus on small classes and at the same time scaling back from lower-margin one-on-one classes. Net-net do you think, what will be the impact on the gross profit margin and operating profit margin?
And lastly, just some housekeeping questions: what was the revenue contribution from one-on-one and online businesses, and the (inaudible) by enrollment? Thank you.
Joseph Kauffman
Okay. Sure, I’ll try to address each of those questions.
In terms of the ASP, yeah – that’s part of our strategy. So rather than going through these massive invest and harvest cycles and massive differences in pricing year by year where you take a huge 20% or 30% price increase one year and then don’t raise price the next we’re trying to go into a more moderate pricing and more moderate investment harvesting cycles.
So just like this year, the overall ASP increase for the year was 7% plus, high single-digits, that’s what we would expect for next year. So the short answer to your first question is yes.
In terms of margins, as you know I don’t give margin guidance but I can give some color as follows: I mentioned we’ll be investing in center expansion, new content initiatives, further IT systems following a year of harvest. That’ll create margin pressure in this year of investment, so just as you saw margin expansion in a harvesting year like last year you’ll see margin pressure here.
But as I said, we’re looking at more moderate flows in investment/harvest cycles. So it’s not possible to completely avoid that nature of our business because you do have centers that need to ramp up, you need to continue to invest [behind their strengths] including people, content, technology.
But we’re looking for the difference in the margin pressure in years between investing and harvesting to be less. And I also talked about how we’ve delayed some P&L impact from F2013 into F2014 so you have renovation expenses, depreciation of the new headquarters building, additional renovation of the office space that we’re in now, etc., that’ll come into F2014.
So I’m not going to give you a specific number but in terms of kind of directionally looking at it throughout the year you can expect that F1Q will be a challenging quarter in which profitability will be down year-on-year. F1Q we’ll have the effects of slower growth and higher spending on our investment initiatives but by F2Q we do expect to see some margin improvement.
It’s a seasonally higher margin quarter anyway even as we’re cycling a very good margin performance from last year. And then how margins will trend in the second half of the year will depend on how well we’re able to cycle the lower comps in the second half of the year.
So the good thing is that we’ll have lower comps to be cycling in the second half of the year but our visibility is still relatively low in terms of how the Beijing outlook continues to go even though we have very good growth in places like Shanghai and our new markets. So that kind of gives you a sense of how we see the overall year and how it progressed quarter-by-quarter but overall profitability for the full F2014, because it is an investment year you shouldn’t expect that to be as strong as in a harvesting year like F2013.
In terms of your question, I think there was an enrollment mix question and typically we don’t break down enrollments except for the online enrollments part, and that was 10% was online enrollments in the quarter. And then for one-on-one, and then for the revenues side we do break it out by business unit, so small class was 75%, one-on-one was 22% and online was 3% in terms of the revenue mix between the different business units in the quarter.
[Titia Bing] – Jefferies
Thank you.
Operator
Thank you for your questions. Your next questions come from the line of Chao Wang from Merrill Lynch.
Please ask your questions.
Chao Wang – Merrill Lynch
Hi, good evening. Thanks for taking the questions.
Firstly as a follow-up on the cross-sell, do you expect more direct competition with [Nuen] going mainly in high school English courses? Or in other words, in terms of your product, of product quality how do you differentiate with them?
Thank you.
Joseph Kauffman
Sure. We lead with math and sciences, so Xueersi (inaudible) studying math and sciences come to Xueersi.
So that’s our positioning in the market. We also happen to believe that we offer a very good English product.
We also use McGraw-Hill content, we also use interactive whiteboards; we also train to New Concept English, Cambridge Young Learners and a lot of the other test metrics in the market. So you know, we’re just trying to add additional valued services to our existing customers and that convenience of being able to go to us right after a math and sciences offering and have something that’s a comparable offering I think will be attractive as it has been in the past.
If I had to say anything else I would say, as I mentioned in the previous remarks we’re geared more toward the domestic market and doing well with testing within the domestic market where some of our competitors may have more of a study abroad orientation or preparing for a study abroad eventual experience depending on what grade level we’re talking about – I mean that varies for our competitor by grade level so I don’t want to generalize. But if you put me on the spot and asked me how I would make the comparison that would probably be how I’d do it.
Chao Wang – Merrill Lynch
Thank you. Secondly, regarding the [entailment] can you briefly introduce the related business?
And also can we expect any further [entailment] in the future? Thank you.
Joseph Kauffman
Sure. That was an asset purchase we made as essentially a license which would allow us to do that admissions counseling business.
So that business is helping kids to find the right college or university for them abroad. We had bought a license because they’re in limited supply, essentially made an acquisition that allowed us to get that license as an asset with the intent to go into that business.
And now that it doesn’t look like we’ll necessarily go into that business for the foreseeable future we decided to write down that asset. So our view is that there is a ton of opportunity within the K-12 market and we’re continuing to focus on our strengths in that market, continue to block and tackle and go into these new markets and execute well and stay focused.
Chao Wang – Merrill Lynch
Thank you.
Operator
Thank you for your questions. Your last question comes from the line of Mark Marostica from Piper Jaffray.
Please ask your question.
Mark Marostica – Piper Jaffray
Thank you. Question on Beijing and I’d like to get a sense for the trend line for Beijing throughout the quarter and thus far in F1Q from an enrollment perspective – what exactly you’ve been implementing to help offset the negative headwinds from the policy change that we talked about.
And then how parents are receiving those changes as well. And then as a follow-up question, you mentioned Shanghai had some nice performance which perhaps you can touch on the reasons for the strong performance in Shanghai.
Thanks.
Joseph Kauffman
Yeah, sure. In terms of Beijing we’re still seeing some decline in enrollments in the spring term as we did in the winter and fall terms.
That said, we are implementing a lot of those content- and assessment-oriented initiatives that I talked about before. Making sure that the right students are in the right classes I think is really important.
We do have a leveling system and making sure that that leveling system is executed well through a refined assessment system I think has already been able to demonstrate increased satisfaction among our parents and students. And then making the classes even more interactive through the focus on Intelligent Classroom System, creating an environment where kids can get up and not be in their seats the whole time; get up to the front of the classroom, work with the whiteboards, work with the teachers in an interactive environment – so those are a couple of the areas where we’re focusing some of our initiatives along with what I mentioned on the call, which is focusing on the broader sciences.
As students graduate with us from primary school into junior high and high school the physics, the chemistry, the biology – these are all really important areas and we’re investing more of our resources into building out that curriculum. And we think we’ve gotten some very good responses from parents in terms of some of the specific initiatives we’re doing especially in the sciences and using some of that multimedia technology in that area as well.
That would be how I’d answer the first part of your question, and then in terms of Shanghai that’s just another example of what happens when you focus on the right things in the business. So starting about a year ago we didn’t look at expansion of learning centers; we focused on utilization of our existing learning centers, improving the utilization of our teachers; making sure that they’re being compensated well, that their classes were full which allowed them to be compensated better and also allowed for a better classroom environment which is better for the students and more gratifying for the teachers; making sure that we’re providing the right kind of training and that we’re building a really stable teaching force.
And you know, it takes several months to see the benefits from that but we’re starting to see that now and that’s just the nature of our business. We’ve seen it in Shanghai, in Guangzhou and a number of our markets and there’s nothing to substitute for just having discipline and focusing on the right areas of our business.
Mark Marostica – Piper Jaffray
Okay, great. Thank you, I’ll turn it over.
Operator
Thank you for your questions. Ladies and gentlemen, that does conclude the conference call for today.
Thank you for your participation. You may now disconnect the lines.