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ChinaEdu Corporation (NASDAQ:CEDU)

Q2 2009 Earnings Call

August 20, 2009 08:00 am ET

Executives

Jimmy Xia - Manager, IR

Julia Huang - Chairman and CEO

Shawn Ding - President and COO

Lily Liu - CFO

Analysts

Mark Marostica - Piper Jaffray

Jeff Lee - Signal Hill

Echo He - Oppenheimer

Operator

Welcome to the ChinaEdu Second Quarter 2009 Financial Results Conference Call. At this time all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. As a reminder, this conference is being recorded on August 28, 2009.

I would now like to turn the conference over to ChinaEdu's investor relations manager, Mr. Jimmy Xia. Please go ahead, sir.

Jimmy Xia

Thank you. Good morning and good evening. Thank you for participating in today's call. Joining me today are Ms. Julia Huang, Chairman and CEO; Mr. Shawn Ding, President and COO; and Lily Liu, CFO.

After the close of the US markets on Wednesday, ChinaEdu issued a press release announcing its 2009 second quarter financial results, which is available on the company's IR webpage at www.ir.chinaedu.net.

This call is also being broadcast live, over the Internet and a copy of the presentation that will be used for today's call is also available on the company's website.

Before the management's presentation, I would like to refer to the Safe Harbor statement in connection with today's conference call. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties.

Forward-looking statements involve known and unknown risks, uncertainties, and contingencies, many of which are beyond our control, which may cause actual results, level of activity, performance, or achievements to differ materially from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements.

The company's actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including those described under the heading “Risk Factors” in the company's annual report on Form 20-F for the year December 31, 2008 filed with SEC and in documents subsequently filed by the company from time to time with the SEC.

Unless required by law, the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

I would now like to turn the call over to our ChinaEdu's Chairman and CEO, Ms. Julia Huang. Ms. Julia?

Julia Huang

Thank you, Jimmy. Good morning and good evening. Thank you for joining us today. I would like to begin by stating that ChinaEdu's performance has again exceeding management guidance and beat our consensus during the second quarter of 2009. ChinaEdu has once again shown that the management team is more than capable of leading the company to growth and success.

Overall net revenue in the second quarter of 2009, grew by 11% to RMB88.3 million compared to the second quarter of 2008. Our net revenue for online degree programs was RMB71.4 million, which represents growth of 9.6% in the second quarter of 2009, compared to the second quarter of 2008.

The increase in revenue is mainly due to the 147,000 revenue students for our online degree programs. We are pleased to announce these results through organic growth from our existing business and product lines. Our adjusted EBITDA, which is a non-GAAP measure defined as net income before interest income, tax depreciation and amortization and share-based compensation and goodwill and intangible impairment charges that applicable in the second quarter of 2009 was RMB29.5 million compared to RMB31.8 million in the second quarter of 2008.

The slight decline is due to our investment in expansion of the learning centers networks, as well as our investments in the K-12, land based campus and other business as well. Our GAAP net income attributable to CEDU decreased to 8.9 million compared to 9.2 million year-over-year. Adjusted net income decreased slightly to RMB12.1 million. Our basic GAAP earning per ADS was [$0.081] in the quarter versus [$0.069] in the second quarter of 2008, which exceeded analyst consensus by $0.03. The improvement from second quarter of 2008 was due to better operating results as well as a share count reduction.

Although, there was a decline in gross profit, operating income and net income in the second quarter of 2009, compared to the same period of 2008, the company's margins for EBITDA adjusted operating income and net income remains stable in the first half of 2009, compared to the first half of 2008, which we believe reflect improvement in the company's operations given the expansion of the learning center network and the investment in the campus and other business.

We believe the efforts in learning center expansion, product development and increase in service quality brought positive results for the company in the first half of 2009. We also believe that focusing on our core business, also focus our management attention in resources in our online learning and education space provides us a solid foundation for long-term growth. In turn it will bring the best return for our investment and increase shareholder value, because we believe the business model brought in the scalability for us.

Let's now turn to Shawn Ding, our president and COO for business and operational highlight followed by Lily Liu, our CFO for more financial highlights. Shawn?

Shawn Ding

Thank you, Julia. Good morning and good evening, and thank you for participating in today's call. During the second quarter of 2009, we continued to focus and develop on our strengths, specifically in online education programs. Now, looking at slide five, as of the end of the second quarter, our learning center network consists of 35 contracted and 21 proprietary learning centers, making a total of 56 learning centers.

Comparatively, we had 29 contracted and 20 proprietary learning centers at the end of last quarter. Our learning centers met our six months objective and are well on track for the whole year. Also during the quarter, we continued our investment in courseware development, technology development and for selected online degree programs. Through updates in technology and services, we are raising our university partners profile and contributing in the long-term growth of these programs.

From the business development perspective, ChinaEdu recently added two additional partners in the online education business. We recently signed Jiangsu University to a long-term technology and support agreement. Jiangsu University is currently awaiting MOE's approval for its online degree offering.

Under the agreement, we will provide exclusive technology and support services to Jiangsu University's adult education college prior to the approval for the online degree program.

Once the online degree program is approved, the company will continue to provide Jiangsu University with exclusive technology and support services to their online degree program. We also signed a collaborative alliance agreement with Fujian Radio and TV University in the Fujian province.

You may have seen our earlier press release, under the agreement, the company holds a 51% equity interest, and it will provide the development and delivery of online education services to Fujian's K-12, future training and adult students.

Now, let's turn to slide six. Our other lines of business are performing as expected as well. Our 101 online tutoring businesses saw net revenue grow by 15% during the second quarter of 2009. The changes we had implemented in 101 online have shown positive results, so we expect more in the coming quarters.

Phase II construction at the Anqing School is at its final stage, and it will be ready for the fourth semester. The Anqing School and the Pingdingshan School fall recruitment are underway. As of today, both schools have already exceeded our full enrollment target, indicating their acceptance and recognition by the local communities.

The status of the Jingzhou School is still the same. Its construction project continues to be at halt. Our international curriculum business is continuing its business development efforts in securing additional Chinese high school partners.

In conclusion, our online programs once again successfully completed spring enrollment with strong results. Overall, ChinaEdu has continued to execute on our strategy and organically grow at a healthy pace.

With that in mind, we will continue to focus on opportunities in online education through the initiatives that we have set our both in business operation and business development.

Now, Lily will review some of the key financial information for the quarter. Lily?

Lily Liu

Thank you, Shawn. Good morning and good evening. I'd like to actually start by adjusting the correction to our earnings release earlier. Our EPS numbers in RMB remained the same, but currency conversion differences and rounding differences caused a misalignment in previously released numbers. We have issued a correction shortly before this earnings release.

We have taken appropriate measures by existing three digits for the conversion process in order to assure no such difference will appear in the future.

Now, let us turn to slide eight. As mentioned by Julia in the financial highlight section, our net revenue for the online degree program has reached RMB71.5 million, which grew approximately 10% from the second quarter of 2008. This is driven by strong 2009 spring semester enrollment with the revenue students' numbers increasing by nearly 18% from a 125,000 to 147,000.

Let me clarify here that in 2008 spring term, our student number of 125,000 did not include student numbers, student from Lanzhou University, Nanjing University or our learning centers at that time, therefore the student numbers growth of 18% appear higher than our net revenue growth.

Our total revenue for the quarter reached approximately RMB88 million, with approximately 11% growth from the second quarter of last year.

Now, on page nine, with net revenue breakdown for the other three business segments. Our 101 online tutoring, private school also recorded healthy growth from the second quarter of 2008. 101 online tutoring's net revenue grew by 15% to RMB4.7 million. This segment has continued to perform since the end of last year. Private schools net revenue for this quarter grew by 85% to RMB6.9 million, driven by Anqing school's new campus.

International curriculum as we have indicated last year and last quarter, net revenue continued to decrease to RMB5.2 million in this quarter. Our business development efforts have continued with the new the SEC program and we are confident that this business will begin to see growth in 2010.

Now page 10 highlights our gross margins. Gross margins for the online degree program was 68% this quarter, which decreased, when compared to 79% in the second quarter of 2008. At the end of this quarter, we have a total of 56 learning centers as compared to a total of 22 at the end of second quarter in 2008. Learning centers have a different cost and expense structure than the traditional online degree programs.

Most of the expenses incurred by the learning centers is considered sales related and therefore, recorded as cost of revenue, therefore, learning centers have lower gross margins than our traditional online degree programs. However, learning centers also incurred net operating expenses. Therefore, we believe on the normalized basis our learning centers should have similar net profitability as our traditional online degree program.

We are on track to achieving breakeven net profitability for our learning centers network by the end of 2009. Also in this quarter, our 101 Online Tutoring programs gross margin also declined. This is due to the impact from the YoYo Bear product which has a different cost and expensive structure than our traditional 101 Online Tutoring program. YoYo Bear products has a higher fixed cost and therefore a lower gross margin.

Finally for our Private Schools gross margins it declined moderately due to increased staff costs at Anqing school with the new campus.

Next page, total operating expenses were RMB33 million in this quarter, which grew moderately by 6% compared to RMB31 million in the second quarter of 2008. The increase was primarily due to increases in G&A expenses and R&D expenses, which were offset by decreases in sales and marketing expenses.

Our general and admin expenses were approximately RMB20 million for the quarter, compared to 18 million in the second quarter of 2008. The increase is primarily due to an increase in performance based employee compensations which includes incremental expenses recognized from the option reprising conducted in this quarter.

Our R&D expenses were approximately RMB8 million this quarter, increased by 35% from RMB5.8 million in the second quarter of 2008. Increased R&D expenses include those for the university partners, as well as, 101 Online Tutoring program.

Finally, our sales and marketing expense were RMB5.4 million in this quarter, which declined from RMB7 million in the second quarter of 2008, as we streamlined our general advertising and promotional activities at our learning centers operation, which significantly offset sale and marketing increases for our online degree program and 101 Online Tutoring programs.

As a result due to the increase in cost of revenue and operating expenses this quarter, our EBITDA declined slightly from RMB32 million in the second quarter of 2008 to RMB30 million this quarter. EBITDA margins declined from 40% to approximately 33% this quarter. However, we believe on ongoing basis EBITDA margin of approximately 30% is a more sustainable level.

On six months basis, which we believe better reflects our ongoing operations, EBITDA growth by nearly 10% this quarter versus second quarter of last year and EBITDA margin remained stable at 33% in the first half of 2009 versus 34% in the first half of 2008.

Similarly on the next page, if we look at adjusted operating income, which is GAAP operating income, with amortization and share-based compensation added back. On a quarter-to-quarter basis, adjusted operating income declined from 29 million to RMB 26 million. And operating margins declined from 36% to 29%. However, if we compare on a year-to-date basis, adjusted operating income grew by 6% and adjusted operating income remains relatively stable at 28% year-to-date versus 30% in the first six months of 2008.

Similarly on the next page, this trend holds for our adjusted net income and margins. Our adjusted net margin for the quarter was 14% and for year-to-date adjustment net margin was 15%. Although, adjusted net income for the quarter declined slightly, when compared to second quarter of 2008, both adjusted net income and margin growth when compared on a six months basis to last year.

As mentioned in the financial highlight section, our EPS growth significantly compared to last year, due to the Tiger share repurchase in the open market share repurchases, conducted in late 2008 and early 2009. As a result on a six month basis, our basic EPS doubled to RMB 0.38 in the first half of this year, from RMB 0.19 in the first half of 2008.

Also as expected and explained in the previous quarters, our statutory tax rate decreased for 2009 compared to 2008, resulting in our effective tax rate being 26% this quarter versus 35% in the second quarter of 2008.

Finally, a quick review of our balance sheet. Again, our balance sheet is very strong. Cash and term deposits at the end of the quarter was approximately $45.5 million, the reduction of approximately $4 million or RMB28 million was primarily due to CapEx for Anqing School. For the private schools, approximately RMB92 million has already been spent on construction and approximately a total of RMB120 million will have to be spent by the end of this year, and this includes both Phase I and Phase II construction CapEx.

Lastly, I'd like to give our management guidance for the third quarter total net revenue. Our view is that we will achieve between RMB84 million to RMB88 million in total net revenue for the third quarter, representing a growth of 2% to 7% year-over-year.

This concludes my review of the financial performance. Now, I'd like to open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mark Marostica of Piper Jaffray. Please proceed.

Mark Marostica - Piper Jaffray

Thank you and nice job on the quarter. My first question deals with the topic Lily you explore, and that is the disparity between revenue growth and enrollment growth. Could you again walk me through why there was the disparity?

Lily Liu

The disparity is a result of the fact that in 2008 spring semester or Q2, we did not include student numbers from Lanzhou University, Nanjing University or the learning centers at that time. So, essentially, the student number for Q2 2008 was lower than actual student numbers, making the growth to 147,000 this quarter higher.

Mark Marostica - Piper Jaffray

If you included those schools in Q2 of '08 what would the normalized growth rate on revenue and enrollments have looked like?

Lily Liu

The revenue growth is 10%, and if we had included student numbers back in 2008, the student number would have been increasing at approximately 10%. 10% for the schools excluding Lanzhou University, Nanjing University and the learning centers.

Mark Marostica - Piper Jaffray

If you look at your plans for pricing increases that are built into the contracts, given that the revenue and enrollment growth are equivalent, that there are no pricing increases built in or planned gong forward?

Lily Liu

We don't have pricing increases built into the contract. Having said that, it doesn't mean that we will not for selected areas, selected schools and selected programs, we may have certain price increases, but we don't believe price increase will be a significant driver for revenue growth going forward.

Mark Marostica - Piper Jaffray

Switching gears, again, you've signed a couple of more contracts which is great. My question that I've asked before as well relates to the MOE approval, and can you review for us what schools you are still awaiting approval for so they can offer online degrees, and what the timing maybe and what you think the holdup is? Thank you.

Julia Huang

Mark, we signed two contracts. Once is a technology contract with Jiangsu University which is technology service contract. Jiangsu is still waiting for MOE approval, but even before approval we'll have a minimal amount of a technology service fee earned even at the current stage. Post approval, we'll receive approximately 8% of a total growth tuition revenue for our service fees.

For the other joint venture partnership, it's a joint-venture with Fujian Province, TV and Radio University is actually a part of the strategy of our learning center expansion plan. So, for that province, we're not going to build our proprietary learning centers. The whole province will leverage existing Fujian TV and Radio University to expand our learning centers there through the joint-venture partnerships, which is quite similar to our joint venture partnerships.

The difference is that our previous learning model, learning joint venture is the upstream which we provide operations, the online learning or online education operations, which provide student recruiting, courseware development; all the necessary parts which the online college needs. However, the joint venture with Fujian TV University is more a channel contract in which we formed a joint venture with the province TV University to build a network for students, which is going to conduct offline final exams, entrance exams, admission procedures, and also self marketing activities in the local areas.

Mark Marostica - Piper Jaffray

And then, regards to the other I believe there are two other relationships that you had struck a while back, where do those stand in terms of approvals?

Julia Huang

We have three joint venture partners, which are waiting for approval. They are still in the pipeline for approval. The two joint ventures was TV Universities don't need to get approved. They are mostly for learning center expansion.

Mark Marostica - Piper Jaffray

On these JV partners, when do you think the approval will occur? I know it's hard to predict but can you give us a sense for what maybe holding back the approvals?

Julia Huang

Actually, it's uncertain for us as well, because there is no clear guidelines when and what time it's going to approve. On the other hand it's actually determined by minister by of the education. Although reports and submissions applications already submit on his table, but it's quite, it's not something that there is a schedule to be determined that that is going to be approved.

Mark Marostica - Piper Jaffray

Understand. And then one last question, Lily you mentioned the effective tax rate for the second quarter, I believe was around 26%. How should we be modelling the tax rate going forward?

Lily Liu

The effective tax rate for, I would keep it at approximately the same percentage going forward for the remaining of the year.

Operator

Your next question comes from the line of Jeff Lee with Signal Hill. Please proceed.

Jeff Lee - Signal Hill

First question, due you expect enrollment growth to hold at about the same levels for the rest of the year? And then maybe talk about the factors or why it's been down from the previous four quarters where it's all been about over 25%?

Lily Liu

We believe our revenue growth should be sustainable at approximately at the same rate around 10% going forward. This of course is does not include any future approvals. Our learning centers have been growing faster but the learning centers contribution currently is still small. I think the factors, when you mentioned the factors contributing to the growth, this 10% growth really were mostly organic growth for the existing partners that we already have. So unless we have new university approvals, or higher contribution from learning centers, this growth should hold for the near future.

Julia Huang

Although, the growth from K-12 schools, growth from 101 online, also growth coming from learning centers, because the percentage of those business is relatively small, so that doesn't contribute the growth significantly from what we are seeing today.

Jeff Lee - Signal Hill

The growth at 101 online was relatively strong this quarter versus previous quarters where a decline, what do you attribute the strong growth to?

Julia Huang

We have spent a lot of efforts this year, one is in the sales and channels, sales and marketing efforts, we have spent a lot of efforts in sales and marketing. Two, we have done a lot of works improving our product services and also training our sales agents how to improve their sales skills. So we spend a lot of efforts in both product and also sales efforts.

Jeff Lee - Signal Hill

I want to ask about expenses. You kept on the G&A line, selling and marketing and research and development, you kept those expenses relatively in line with what you had last quarter on an absolute basis. What are your expectations for the rest of the year? Should we see those being relatively aligned for next two quarters or is there any big planned jumps?

Lily Liu

I would say the R&D, for the R&D expenses we're continuing to expect to see increases in R&D. I think this year as we mentioned before that there are going to be increases in R&D expenses. Sales and marketing expenses as percent of revenue should stay relatively stable for the rest of the year although there is a bit of a seasonality, so for example for our 101 online tutoring business, the first quarter tends to be heavier in terms of sales and marketing expenses. Our G&A expenses as percentage of revenue should stay relatively stable.

Jeff Lee - Signal Hill

And last question is with related to the international curriculum segment, is there any update as far as trying to renew your international curriculum partners?

Julia Huang

Jeff, in addition to the FEC and BCIT programs we are having, right now we are adding one more partner, a Canadian high school, which we are trying to integrate more course curriculums into the high school partners. We are also trying to have partnership with more US universities to give better alternatives to our high school grads when they graduate from high schools. So, we are enriching our contents and service offerings for our international curriculums. However, but on the other hand, the revenue contribution will take some time to really to come up because it takes time to build up the curriculum, and it also takes time for developing more partners in China.

Operator

(Operator Instructions). Your next question comes from the line of Echo He with Oppenheimer. Please proceed.

Echo He - Oppenheimer

Hi. Thank you for taking my question. First Lily, you just had your sales and marketing decreased year-over-year just because you aligned your sales and marketing effort. Is that because you increased the learning center building up than decreasing the actually sales promotion?

Julia Huang

No, Echo. Actually, this year in the spring enrollment, we increased our telemarketing efforts and spend slightly less on our sales and marketing advertising dollars, but in the fall, right now, our advertising costs especially in Q3 goes up compared with Q2.

Echo He - Oppenheimer

Okay. Why is that, if you decreased sales and marketing effort, you did not see your enrollment decrease? Is that because your region is stable?

Julia Huang

Actually Echo, it's a different approach. We are doing advertising, telemarketing, online sales and marketing, and all different approach. Although, we didn't increase our advertising dollar but we did increased our telemarketing staff costs. So, all of this approach will contribute in the enrollment growth, but we always are trying to use different approach to see which one makes the best contribution in terms of enrollment growth.

Echo He - Oppenheimer

So, in another words, telemarketing is more economic than previously advertising.

Julia Huang

It's more direct in terms of contribution on the student enrollment, but putting in this word, it doesn't mean that we are not going to do advertising. In the Q3, we are increasing our advertising dollars to pump up our branding and reputation, as well as we are doing some online advertising on the QQ to pull more interested students into our program.

Echo He - Oppenheimer

All right, that makes sense. A question also on your Anqing School, actually on your just land-based those school programs, what's the enrollment of each school? What's their target enrollment?

Shawn Ding

Echo, are you asking physical schools?

Echo He - Oppenheimer

Right, yes.

Shawn Ding

I can give you the target numbers. The target numbers for Anqing School is 850 to be specific.

Julia Huang

For the Anqing School, our target for the new campus is 850, plus around 450, but now our fall enrollment's already exceeding those two targets for Anqing School, and for the new enrollment for the fall for our Pingdingshan School, the targets was close to 400. We have already exceeded that target.

Echo He - Oppenheimer

The reason I'm asking is, I want to know since you said that in Anqing School, you're putting in RMB120 million on the CapEx for construction?

Julia Huang

Actually that's an estimated number. So far, the cash we have spend for Phase I was over RMB40 million. For Phase II the estimated budget was RMB45 million, but we haven't really spend that much capital yet.

Echo He - Oppenheimer

Could you give some economics of the physical schools like if you spend this amount of CapEx, what's your net margin basically, and how many years you expect the return of that investment capital?

Julia Huang

Echo, right now, we don't have a line numbers for you. Maybe we'll work through with you when we get chance offline.

Echo He - Oppenheimer

Okay. I've got you. Also you said that you probably expect to see a rebound of revenue of revenue growth from international curriculum programs in 2010. What was the reason particularly?

Julia Huang

We didn't give out any time yet for rebound for any particular timeline. What I mentioned was, it takes sometime to get revenue.

Echo He - Oppenheimer

Actually, I'm asking why you're seeing that's going to come back. Are you signing more partnerships?

Julia Huang

Yeah, we are doing both. We've signed up more partnerships in overseas and after we increase more curriculum offerings, trying to do more business development in China for partnerships in China to expand our business.

Echo He - Oppenheimer

Okay, so that's after you lost the partners, partner in the previous quarter and then okay that's kind of a new partnership right? What I am saying is you are taking the new approach where some different from previous approach? I just want to know your strategy better?

Julia Huang

We are trying to tuning our product offerings to better meet student's demand and student needs.

Echo He - Oppenheimer

You mean you didn't even change your course offering, you changed your -- what would I say just--

Julia Huang

We're trying to enrich our content. Before it was only pure English course, now we are trying to adding more curriculums to make the program more attractive.

Operator

We've a follow up question from the line of Mark Marostica with Piper Jaffray. Please proceed.

Mark Marostica - Piper Jaffray

I wanted to dive into the gross margins in a little more detail. If you looked at the three items that you talked about that were weighing on the margins, the gross margin in the quarter, expanding learning center network, the Anqing school and the 101 tutoring, specifically the YoYo Bear product expenses. If you look at those three and strip those three items out, what would gross margins have been on a normalized basis in the quarter?

Lily Liu

I am sorry, you out only the 101online tutoring private schools and private…

Mark Marostica - Piper Jaffray

Yeah, the three items that you mentioned were weighing on the gross margins in the quarter. I am just trying to get a sense for the run rate on a gross margin line. What that should look like on a normalized basis once these three items disappear.

Lily Liu

I think essentially you are asking what our normalized gross margin would be just for the online degree programs.

Mark Marostica - Piper Jaffray

Yeah. That's fair.

Lily Liu

Well, as we mentioned the online degree programs right now is a blend of learning centers business, as well as the traditional online degree programs. The learning centers currently have much lower gross margins. On a normalized basis, it has a lower gross margin than our traditional online degree programs anyway. That is because as we mentioned, that most of the recording efforts that we performed are recorded as cost of revenues.

Julia Huang

Mark the learning center business for this quarter dropped down by 4% of our gross margin. So if you added back it's about 72% or 71%.

Mark Marostica - Piper Jaffray

And is that 4% tied exclusively to expanding the learning center network?

Julia Huang

That's the COGS, cost of revenue or cost of the sales of the learning center. For learning center the major cost over 80%-90% of the cost goes to the COGS rather than into the expenses. So the margin is really low for the learning center business.

Mark Marostica - Piper Jaffray

Do you expect that to reverse itself once the learning center network achieves profitability at the end off this year?

Julia Huang

No, it doesn't have anything to do with the probability, it's more of the cost structure.

Mark Marostica - Piper Jaffray

Got you.

Julia Huang

All the learning center expenses and cost goes to the COGS. So, that's why the margin is low.

Mark Marostica - Piper Jaffray

Julia, could you walk through same logic for Anqing and 101. You mentioned 4% on a learning center business. What was the impact from each of those two items on the margins.

Julia Huang

Actually I didn't look into the Anqing, for online tutoring for this quarter, YoYo Bear probably also take down 3% to 4% of our margins.

Mark Marostica - Piper Jaffray

And on that particular line item is that going to be with us as a headwind for the next few quarters or is that expense.

Julia Huang

That seems to drag down our margin as well because YoYo Bear is offline product, and the product consists of book, toys, DVD and parent book, so all that goes to COGS, as well as our sales cost. So, the gross margin probably will below 30% or so. So, that will drag down our margins a lot for 101 online tutoring business.

Mark Marostica - Piper Jaffray

So, that is inherent in the model for 101. And then I could follow-up later on Anqing, because it sounds like you don't have the information handy. But, when you look at Q3, and you think about gross margins, how should we think about the behavior of the gross margin in Q3 relative to Q2.

Julia Huang

As our learning center continues to grow, that's going to drag down our gross margins, because of the cost structure incurred. So, the gross margin should go down.

Mark Marostica - Piper Jaffray

On a year-over-year basis or quarter-to-quarter basis?

Julia Huang

I think both.

Operator

(Operator Instructions). At this time, there are no further questions. I would like to turn the call over to management for closing remarks. Please proceed.

Julia Huang

Ladies and gentlemen, thank you again for participating in ChinaEdu's second quarter 2009 earnings call. I'd like to close by reiterating how much we appreciate your interest and support. We have focused and we'll continue to concentrate our attention and resources to our core business, online education. The management team believes that our executions in our strategic directions will bring long-term success and long-term value to our shareholders.

We look forward to keeping you apprised of our future success. Thank you and have a good day and good night.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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