China Distance Education Holdings (DL) CEO Zhengdong Zhu on Q2 2014 Results - Earnings Call Transcript

May.21.14 | About: China Distance (DL)

China Distance Education Holdings Limited (NYSE:DL)

Q2 2014 Earnings Conference Call

May 21, 2014 8:00 AM ET

Executives

Zhengdong Zhu - Co-Founder, Chairman and CEO

Ping Wei - CFO

Analysts

Gene Munster - Piper Jaffray

Ella Ji - Oppenheimer & Company

Jialong Shi - Credit Suisse

Steven Martin - Slater Capital Management

Operator

Good evening and thank you for standing by for the China Distance Education Holdings Limited Fiscal Year 2014 Second Quarter Earnings Conference Call. Today’s call will feature commentary by Mr. Zhengdong Zhu, Chairman and CEO; and Ms. Ping Wei, CFO. During management’s prepared remarks, all participants will be in a listen-only mode. Following the conclusion of management’s preferred commentary we will open up the call for your questions.

Before we start, we would like to remind listeners that this conference call contains forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. The outlook of the third quarter and full year fiscal year 2014 and oral statements from management on this call, as well as the Company’s strategic and operational plans, among other things, contain forward-looking statements.

Forward-looking statements involve inherent risk and uncertainties, a number of factors could cause actual results to differ materially from those contained in any forward-looking statements. Further information regarding this and other risks is included in the Company’s Annual Report on Form 20-F and in other documents of the Company as filed with the Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

As a reminder, this conference is being recorded. A summarized presentation can be downloaded from the Company’s IR Web site and which we will refer to during the course of the call. In addition, a webcast of this conference call is available on the Company’s Investor Relations Web site at ir.cedledu.com

I will now turn the call over to Mr. Zhu to discuss the operational highlights. Mr. Zhu, please go ahead.

Zhengdong Zhu

Thank you everyone for joining us on our second quarter fiscal 2014 results conference call. Our operating results were released earlier and are available on the Company’s Web site as well as on Newswire services.

I will begin on Slide 4 with an overview of our results.

In the second quarter of fiscal 2014 we continued to achieve strong growth in each of our core verticals; accounting, healthcare, and engineering and construction OE&C verticals, registering a year-over-year increase of 59.9% in cash receipts from online course registration to $24.6 million. Total course enrollments also increased 27.7% from the same quarter last year reaching 493,000 in the second quarter of fiscal 2014.

Our progress also reflects hitting our financial results. We achieved second quarter revenue of $18.2 million, an increase of 40.4% year-over-year and exceeding the top-end of our guidance by approximately 8%. Our net income increased by 64.7% year-over-year to $1.3 million in the second quarter as well.

We also generated operating cash flow of $36.9 million excluding the $25 million that were temporarily held for our shareholders in the sale of Company shares in the follow-on offering the Company did in March, with yield generating operating cash flow of $11.9 million in the second quarter. This represents a 71.5% increase over operating cash flow of $7 million generated for same period last year. The year-over-year increase was primarily due to our strong online course registration revenue growth in the second quarter of fiscal 2014.

Our strong enrollments and revenue growth are the result of our efforts to align our students with the highest quality results-oriented course and services and the best learning experience possible by combining cutting edge Internet and mobile learning technologies.

Our superior understanding of students’ learning needs are derived from 14 years of interaction listening to their needs and trying to help resolving their issues as we continuously adopt a student centric business philosophy.

In early March, we started to sell our digitized interactive test preparation eBooks online and at the same time, we also provide free eBooks for students who pass the portion. This interactive digitized eBook allows student to freely navigate a generating concept and explanation and practicing excess questions highlight key study points and enjoy study notes.

The eBooks are well received by the market, in less than two months over 70,000 eBooks were either sold or activated by paper book users.

With all this mobile learning functions, we have now formed a complete value chain with our mobile learning platform. Our students can perform all the main learning functions with their mobile devices including watching regular lecture courses, watching more rationalized mobile lectures based on knowledge points.

Reading textbooks and enjoying study notes, practicing excess questions available to them or getting adoptive exercises, having our learning system automatically generate multi-exams for students’ self-test. And finally but not least importantly, getting -- giving support via cast of voice tutoring function and exchanging thoughts and views with their peers via our social media application.

We continue to see very good reception of our comprehensive mobile learning platform. By the end of April 2014, over 26,000 students have registered for free charging standalone mobile courses for total cash registration revenue of about RMB3 million. Tentative feedbacks we received on our courses are very positive. In addition, cumulative downloads for our mobile applications have reached 4.6 million another 1.3 million increases in the first four months of 2014.

In addition, with our regular online course, we also added many new and enhanced the interactive learning features for example our students can now find study buddies nearby to study and -- to study together or simply exchange thoughts and views. Students can also view personalized statistics on their study progress such as percentage of lecture courses complicated, excess questions done and accuracy rate and the number of study questions asked. They can also compare their own study progress with that of their peers to name a few.

All the features and improvement will fully help our current and prospective students get the best-in-class online learning experience, attracting offline students and students who are not taking any test preparation courses to take online course with us and further expand our dominant market share with all our premium verticals.

Now let me walk you through our operating metrics in more detail, starting with our accounting vertical on Slide 6.

Professional Accounts addition is a very large market, each year about 4.6 million people take accounting related exams and over 13 million professionals are required to satisfy testing and educational requirements.

Enrollments for our online CPA course in the second quarter increased by 18.1% year-over-year. ASP increased by 7.2% year-over-year, and cash receipts from online CPA registration increased by 26.6% year-over-year. CPA exams will be administered about one month earlier than last year, as such enrollment peak season started earlier as well.

Our APQE enrollments in the second quarter increased by impressive 84.6% year-over-year as we head into the heavy enrollment season for APQE exams slightly earlier than last year. ASP for online APQE courses decreased by 2.5% compared to the second quarter of fiscal 2013, primarily due to more students signed up lower ASP mobile courses and regular courses.

Other online accounting test preparation course enrollments in the second quarter increased by 22.1% year-over-year driven by our strong operational momentum while ASP increased by 9.8% year-over-year.

Enrollments for Accounting Continuing Education in the second quarter increased by 45% year-over-year as we continue to expand our program reach and catch up other delayed exams on the delayed enrollment from last year. ASP increased by 43.5% year-over-year and enrollments from certain regions have a much higher ASP.

Moving on to our non-accounting verticals on Slide 7.

Our healthcare and E&C verticals also contributed to our success in the second quarter of fiscal 2014.

Online Healthcare Test Preparation course enrollments in the second quarter of fiscal 2014 increased 60.1% year-over-year, once again demonstrating the strong market demand for our high-quality courses and services. We believe that there is a strong word of mouth endorsement of our courses style with professionals who often work together or have gone to school together.

ASP for Online Healthcare Test Preparation course increased by 24.4% year-over-year primarily driven by more healthcare professionals signing up for our high-end premium and elite courses to get more comprehensive services. This resulted in a course registration revenue increase of 99.2% year-over-year, almost doubling that of the prior year period.

Our online E&C vertical also delivered very strong results enrolments for E&C online test preparation courses increased by impressive 66.2% year-over-year with a year-over-year increase of 8.4% in ASP. This resulted in 80.2% of cash registration revenue growth in the quarter.

Enrollments for E&C continuing education courses in the second quarter grew by 12.3% year-over-year, while ASP increased by 9.7% year-over-year.

Both of this, large and fast growing verticals, represents significant growth opportunities for our business. The test preparation market for healthcare is about 2.5 million students per year and its continuing education market is about 6 million students per year. Similarly, the E&C vertical represents an opportunity of 2 million students per year and for test preparation and 6 million students for continuing education.

As we have mentioned in prior calls for the year end into medium term our growth is focused on establishing lifelong learning ecosystem for professionals in our stream of verticals. The lifelong learning may include test preparation courses which help students become professionals in this vertical, continuing education courses for them to maintain their professional licenses and skill-enhancement training courses to help them find better job as higher compensation policy promotion.

While we primarily adopt reading on demand class format for our test preparation and continuing education courses for our skill-enhancement training courses we mainly use online real-time interactive audio/video courses supported by our open learning platform.

Our open learning platform utilize advanced technologies to build all major learning functionalities such as multi-party online real-time interactive audio/video classroom supported by online digital light board costlier and digital content uploading and downloading functions, classroom discussion forums as well as other interactions among teachers, students and our in-house students and customer service staff. We’re also applied the same focus on high quality courses and services with our emphasis on helping students achieve the results they desire.

After ease of technology divestment and market research we entered the commercialization and revenue generating phase in the first fiscal quarter of 2014.

For the second quarter of fiscal 2014 total cash registration revenue exceeded $1.6 million for course and services that has delivered with our open learning platform or included a component of service commitment that requires us to deliver online real-time interactive courses. The net of students who pays to obtain such course of services is approximately 4,000 in the quarter.

We are very pleased with the earnings reception of our skill-enhancement training courses via our open learning platform. We will continue to explore and develop new business models and revenue sources, utilizing our open learning platform. However this new business is expected to contribute modest delay to revenues in the near-term with potential to fuel significant growth over the long-term.

This completes my update on business operations. I will now turn the call over to Wei Ping our CFO to go through our financials.

Ping Wei

Thank you, Mr. Zhu. As Mr. Zhu mentioned once again we delivered revenue growth that exceeded the top-end of our guidance range in the second quarter of fiscal 2014 reflecting continued strong demand for our high-quality course offerings.

Let’s turn to Slide 10, to look at some of our key financial metrics. Total net revenue increased by 40.4% to $18.2 million in the second quarter of fiscal 2014, from $13 million in the same quarter last year. This increase was primarily due to higher revenue in the accounting, healthcare, and E&C verticals. Net revenue from online education services, books and reference materials, and other sources contributed to 77.8%, 9.7% and 12.5% of total net revenue for the second quarter of fiscal 2014 respectively.

Net revenue from online education services increased by 46.7% to 14.2 million in the second quarter from 9.7 million in the prior year period, mainly due to higher revenue from accounting, healthcare and E&C courses. Net revenue from books and reference materials increased by 26% to 1.8 million in the second quarter of fiscal 2014 from 1.4 million in the second quarter of fiscal 2013.

Net revenue from other sources increased by 19.1% to $2.3 million in the quarter from $1.9 million last year. The increase was mainly due to higher revenue from our Tax School and in-person healthcare courses. This increase was partially offset by decreased revenue in business start-up training courses and other in-person training courses.

Cost of sales increased by 39.8% to 9.7 million in the second quarter of fiscal 2014, from 6.9 million in the second quarter of fiscal 2013. The increase in cost of sales was mainly due to increased lecture fees, salaries and related expenses, server lease fees and bandwidth costs, rental and related expenses, and other miscellaneous expenses.

Gross profit increased by 41.1% to 8.6 million in the second quarter of fiscal 2014, from 6.1 million in the prior year period. Gross margin increased slightly to 46.9% in the second quarter of fiscal 2014, compared with 46.6% in the second quarter of fiscal 2013.

Total operating expenses increased by 48.7% to $8 million in the second quarter of fiscal 2014, from $5.4 million in the prior year period. This increase was primarily due to higher marketing and promotional expenses, increased commissions to the Company's distributors, and increased salaries and related expenses.

Selling expenses increased by 64.8% to 5.7 million in the second quarter of fiscal 2014, from 3.5 million in the prior year period, primarily driven by increased commissions to the Company's online distributors and an expansion of marketing and promotional activities. Commissions to online agents in the second quarter of fiscal 2014 were higher than anticipated as online registration cash revenue grew faster than anticipated and all commissions earned from the cash registration incurred in the quarter are fully expensed in the same quarter while relating revenue is only amortized into revenue gradually over this quarter and the next few quarters.

We also incurred much higher marketing and promotional expenses in the second quarter of fiscal 2014 as we utilized the incremental margin generated from faster revenue growth to invest in branding and student acquisitions for sustainable healthy long-term growth. We don’t expect the selling expense increase in the quarter in general will negatively affect our operating margin for the full year of 2014 however.

General and administrative expenses increased by 20% to 2.3 million in the second quarter of fiscal 2014 from 1.9 million in the prior year period, primarily driven by increased salaries and related expenses. Income tax expenses increased by 45.7% to $325,000 in the quarter from $223,000 in the prior year period, primarily due to the increase in taxable income. Net income increased by 64.7% to $1.3 million in the second quarter of fiscal 2014 from 790,000 in the prior year period.

Now let’s turn to Slide 11 to review our cash flow. Net operating cash inflow increased to 36.9 million in the second quarter of fiscal 2014 from 7 million in the prior year period, primarily as a result of the net proceeds of $25 million received on behalf of two selling shareholders and increased deferred revenue balance due to the increased cash received from online course registration. Also contributing to the increase were net income generated in the quarter decreases in accounts receivable, prepayment and other current assets, and deferred costs. The increase in net operating cash inflow was partially offset by increases in inventories and other non-current assets, and decreases in accrued expenses and other liabilities, income tax payable and refundable fees.

Free cash flow was 11.6 million in the quarter excluding the 25 million proceeds and $0.736 increase from the same period last year and again higher or much higher than our net income for this quarter as our business model typically had low CapEx requirements and enjoys an active working capital.

Cash and cash equivalents, term deposits and restricted cash as of March 31, 2014 increased to $140.8 million compared with $81.4 million as of December 31, 2013. Factors contributing to the increase included net proceeds of 29.1 million from the follow-on public offering we completed in March and 25 million held on behalf of two selling shareholders from the same offering, $16.2 million of the dividend bridge loan obtained in the quarter, and robust cash flow generated from operating activities of 11.9 million in the quarter other than the temporary cash held for selling shareholders, all of which were partially offset by the net dividend distribution of $20.3 million in the quarter.

This completes my financial overview. Now I will return the call back to Mr. Zhu for concluding remarks on our strategy and business update as well as financial guidance for the third quarter and fiscal year 2014, Mr. Zhu please.

Zhengdong Zhu

Thank you, Ping. Professional education is a career-long endeavor students must pass certain exams to obtain professional certificate and licenses. A lot of time prerequisite to certain job positions and skill-enhancement training are also the keys to career advancement.

The growing number of Internet users in China as well as prevalence of Internet-enabled devices and smartphones is moving the traditional professional education market online. We believe the trend is either sustainable long-term trend and will continue to fuel our growth for years to come. We are also investing to help drive the overall migration to online.

Our mission is to help students at each stage of their academic and professional development. We have great confidence in further expanding the market for online education and strengthening our leading share position by providing high-quality without on these courses and optimizing our learning platform with cutting edge technology.

Turning to our guidance for the third quarter fiscal 2014 the Company expects to generate total net revenue in the range of $23.2 million to $24.1 million, representing year-over-year growth of approximately 27% to 32%.

For the 2014 fiscal year, the Company is raising its guidance of total net revenue again to the range of $90.6 to $94.2 million, representing year-over-year growth of approximately 27% to 32%. The Company’s prior fiscal 2014 full year net revenue guidance range was from $88.5 to $92.7 million.

That concludes my prepared remarks. Thank you for your time. Operator, we are now happy to take questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Gene Munster from Piper Jaffray. Your line is open. Please go ahead.

Gene Munster - Piper Jaffray

Hi, good evening. I was wondering if you could just give us a sense for how you think you might use the cash proceeds from your secondary? And then second, if you could just give us a quick update in terms of competition, what you are seeing in the marketplace? We have heard some companies talking a little more about education, so anything you are seeing different competitively? Thank you.

Ping Wei

Thank you, Gene. Those are excellent questions. First of all the use of proceeds from our follow-on offering, as we mentioned in the offering, we look at strategic use of proceeds basically looking at the potential acquisition opportunities as we don’t really need cash for operation purposes. We are looking at all options and we don’t have right now any specific targets as yet. We will be very conservative and careful with any potential alliances and acquisitions to make sure if we actually do anything or when we do anything, it will be updated to our shareholders.

And the second question is about competition, we don’t actually see any major changes in competitive landscape both on online and on the as well as from other front. There is a much higher or there is an increased bond or a lifted level of interest in online education and we continue to see a lot of money pulling into online education. We continue to hear offline players, traditional offline training companies, Internet companies including BAT and other names investing and looking at their online education strategies. We don’t view those as threats we view those as -- first of all the sort of heightened interest in online education will actually help us, the existing online education players to look or to upgrade in a much larger market because all the money pulling actually has helped generate more interest in online education and also hopefully making consumers more willing to use the online format as a means of getting training and education.

We believe that trend is happening and we believe from what we see so far, the investments in online education by all parties are actually helping pushing more people look into and possibly using online as a means of getting education. And the key thing for us is to focus on the key strength of the Company basically quality courses, high-quality services and also superior learning platform to help our students achieve the superior results. We believe as long as we do that, we will maintain our leadership in online education space and also potentially getting a sort of getting our share or a decent share from a much larger online education in the market. Gene?

Gene Munster - Piper Jaffray

Yes, thank you.

Ping Wei

Does that answer your question?

Gene Munster - Piper Jaffray

It does, that was helpful. Thank you very much.

Ping Wei

Okay.

Operator

Our next question comes from the line of Ella Ji from Oppenheimer. Your line is open. Please go ahead.

Ella Ji - Oppenheimer & Company

Thank you. Good evening. And so my question is relating to your new mobile and the eBooks offering. Could you tell us what are the primary sales channels for your mobile offering or where do you think where are you seeing the students come from? And also relating to that 26,000 registrations, I understand that those are for standalone courses but just in the near future do you think there are cross-selling opportunities to get them stand-up for your PC courses or at just mostly stand alone courses? Thank you.

Ping Wei

Well Liny will translate the question and I think is for Zhengdong.

Unidentified Company Representative

Zhengdong [Foreign Language]

Zhengdong Zhu

Those mobile apps and eBooks our new initiative rejects offer to the market.

Okay, regarding to the distribution channels actually we have three way statistical our new products, one is from our -- through our China HCC Web site with those new products to existing customers and other one is through distribution channels either online or offline to our students. Also we have partnerships with other companies or small Web sites to small dollar new products and while China we already have 70,000 eBook users and around 26,000 paid mobile courses in terms of student -- where these enrollments come from actually 50 of them especially to other mobile courses are totally new students. Okay, that is really meant lot to us because this is the way to get new students.

Of course there are some students who use our traditional PC courseware and they also purchased standalone mobile courses as well.

Yes, that’s our current progress Ella.

Ella Ji - Oppenheimer & Company

Yes. Thank you very much Zhengdong. And then my second question is in relating to your sales and marketing expenses. I understand that there is differences in timing that raised -- caused this increase as a percentage of revenue but I just want to confirm that is it’s on cash basis is your sales and marketing expenses stay stable versus historical level?

Ping Wei

Okay. The online -- commission to online agents…

Ella Ji - Oppenheimer & Company

Yes, yes.

Ping Wei

For this quarter as a percentage to our cash revenue increased slightly as compared to last year in across the online commission on commission to online distribution agents typically as a percentage of our online -- our total online cash registration revenue we’ve seen slight increase because of more revenue contribution or cash revenue contribution from online channels, which is kind of normal but very slight.

Ella Ji - Oppenheimer & Company

Okay, got it. Thank you very much and congratulations on strong quarter.

Ping Wei

Thank you, Ella. Good questions.

Operator

Our next question comes from the line of Nahuel from ICBC International. Your line is open. Please go ahead.

Unidentified Analyst

Good evening Zhengdong, Ping and Liny congratulations on the strong quarter, I have two questions for quick follow and the first also regarding to your mobile strategy. Just I would like to know could you help us understand how would accounting investing to the mobile learning and also could you share with us about your users habit has situation like what’s the difference about your mobile users compared towards the other online users and also at very high penetration overlap about these users and also what’s you expectation on the mobile revenue contribution for a longer term? Thank you.

Ping Wei

Liny will translate the question first.

Unidentified Company Representative

[Foreign Language]

Zhengdong Zhu

Actually the biggest investment for mobile apps is still the content development. Our content outlook on the 13 Page of the mobile apps because the design of the mobile courses are very different from the level of courses. The course we build after courses around knowledge rather than lectures and we use more fractionalized lectures on mobile apps as well. We put a lot of efforts on the content development as well as renewed lectures for the courses. Of course our focus is always on the high-quality course and service offerings and to provide students with the best user experience.

In terms of -- let me help it for mobile app users. We’ve learned that some students used really fractionalized time for mobile app learning, either waiting for a bus or on the commute. Of course there are some students who also use their time to watch the whole courseware on the mobile app. Well, the aim -- the apps really are saying that students see the smaller and shorter lecture courses are very good especially for mobile apps.

Ping Wei

Students find the knowledge-based learning compared to the traditional chapter-by-chapter lecture format more interesting and unique.

Zhengdong Zhu

In terms of students overlap, actually when we first draw out the mobile apps where a great percentage of students are from our existing students. But after a period of time when we draw out the mobile apps, we would see some new students coming in directly for the standalone mobile courses. Of course there are some overlaps.

While our focus is skewed to develop the best quality courses either in the regular course format or in the mobile app format, our aim is to help students to get results they desire.

Unidentified Analyst

Thank you. So would you like to share with us about your current expectation on the mobile revenues, yes?

Ping Wei

I’ll take the question directly. To-date we generated about RMB3 million of cash revenue from our standalone mobile courses which is a fairly small amount compared to our total sort of revenue base at the moment. We do not, because we only introduced mobile learning as standalone mobile courses October of last year, it’s a very short period of time, so we do not then have a very, very solid view as to the popularity and how fast we’ll grow our mobile courses on more subjects et cetera. Right now we’re only offer mobile courses on three subjects. So we do not expect to contribute significantly to our revenue or to our revenue growth in the next few years. What we aim to do though is to continue to invest and continue to explore mobile learning, and we feel like inevitable trend that a good portion of students will use mobile devices to learn one way or another and we want to be ready when the sort of -- when more students are adapting this kind of learning and we want to make sure remain to be there, so quantitative revenue contribution is not the strategic focus right now. And we don’t anticipate it to contribute significantly.

Unidentified Analyst

Yes thanks. The second one a much broader question maybe for Zhengdong. Regarding to the competitive landscape, because we noticed that there are new genres, also the traditional players like Daney and also the Internet new players like YY and also NetDragon. Just would like to hear your views on education trend because we have seen the increasing investment from previously about online education. And also do you think there are any chances for the vertical players willing to be panel may be some vertical players, just to focus on accounting courses or just focus on like engineering courses. Is there any chances for this vertical player to be winner? Thank you.

Unidentified Company Representative

[Foreign Language]

Zhengdong Zhu

Well of course there are different formats available on the market, such as we learn demand or real time classics, there is actually not very right answer to which one is more superior than the other. The actually key we see is which format is more suitable for different learners. For example VOD format we think is more suitable for knowledge-based courses such as Tax School or continuing education courses, we’re planning to -- what we are offering because students can get any time anywhere learning experience. And for us we can get more leverage by offering VOD courses.

Well on the other hand for real time classes is more practical more hands on, such as IT you just mentioned. Of course we offer practical courses as well in accounting and healthcare. Those courses requires more illustration which sometimes they require offline interaction with students and plus after course tutoring.

Okay, in terms of now who will be the winner, platform players or content players and actually in terms of union that there will be two types of players either content players or purely platform players that may offer the platform by using, by applying all kinds of technology. Actually, we see there is a little chance of success for key technology players to offer online education. What we see that we have to combine technology and content together to help students get a better learning experience online. Though it is hard to run these online platform it’s can be very difficult. Education in the end is all about quality and result that is what we help in trying to provide foreign students over the past 14 years.

In terms of open learning platform, we think that you have to put control over the content and the learning progress over the platform rather than make it available to all third-parties. By controlling the content and learning process, we can ensure students can get a high quality content and students can enjoy better learning experience. So, basically if you look at the current players either they try to provide content and regular realizing they also need to provide services and also ensure the quality of the content they provide i.e. they actually become another sort of content player on their own platform or they basically just gradually develop into traffic in a aggregator like Baidu, Tencent or Alibaba education platform whereby anybody can sale their educational or their online courses via those platforms, the platform provides the traffic and generate either advertising revenue or sort of revenue sharing with those providers of content.

So, the traffic aggregate works as well with those, BAT kind of company with lots of traffic but education or online education provider we think that technology is really just the delivery platform and in the end it’s the education component or the rules for education that we will dictate what kind of model will eventually sort of prevail online education space.

Unidentified Analyst

So just a quick follow-up, do you think there’s a standard education content like language learning and also accounting courses, do you think there is very high entry barrier for this standard education content for those platform players?

Ping Wei

Are you talking about online ones or offline one?

Unidentified Analyst

Online [Foreign Language]

Unidentified Company Representative

[Foreign Language]

Zhengdong Zhu

Well in terms of online education there are three main components, technology, tutoring and customer service, okay, to get the best learning results we feel we emphasize on high-quality tutoring content and services for those open platform players it is more than just getting good lectures to start your course. You have to get years of experience in content research and get and customer service to get a really good understanding of flawless learning needs. Again for us we have been investing over the past 14 years and put a lot of efforts to help students get better results and then results continue to test reports and what else months referral and to form a company brand. This all based on the efforts and emphasize on delivering good -- delivering good results for our students year-over-year. So that we think that those companies really they put a lot of focus and attention and content development, and in consistently delivering superior results for the students. Okay, thank you.

Unidentified Analyst

That’s very helpful, thank you so much.

Operator

Our next question comes from the line of Jialong Shi from Credit Suisse. Your line is open. Please go ahead.

Jialong Shi - Credit Suisse

Hi. Good evening Zhengdong Ping and Liny thanks very much for taking my call first of all congratulations on a very strong quarter. I just have one question I think the management mentioned in the opening remarks you guys might increase the marketing spend from the next quarter. So can management elaborate what are the areas you might focus your marketing campaign on? This is my question. Thank you.

Ping Wei

Okay. Well, we actually adopt quite broad sales and marketing sort of close which includes online and traditional marketing sort of format for example point of sale promotions online promotions search ranking magazines et cetera all kinds of methods. We do spend more money on promoting our course and our service and the quality structure in our brand online and offline. But that’s probably all I can say.

Jialong Shi - Credit Suisse

Understood, actually very helpful thank you.

Ping Wei

Thank you, Jialong.

Operator

Our next question comes from the line of Steven Martin from Slater. Your line is open. Please go ahead.

Steven Martin - Slater Capital Management

Yes, thank you. You made the commentary about selling expenses and how they were elevated this quarter. Can you give us some guidance on what they will look like in the third quarter and for the balance of the year?

Ping Wei

Third quarter probably will be more in line with revenue growth of slightly higher but not as high increase as this quarter because this quarter is a very heavy sort of marketing quarter. Next quarter will still be elevated -- will still be pretty high last year has always pretty high base so the in terms of percentage increase it wouldn’t be as high. For the year Q4 actually it won’t be much because Q4 is not our traditionally promotion season.

You see with our business model our selling and our sales and marketing expense tend to be high in Q3 and Q4 and impact is typically heavy on Q2 because Q2 tend to be our GAAP revenue low quarter. So that’s why you’re seeing kind of relatively dramatic increase. On a yearly basis basically we feel that we are comfortable that on the operating margin level we will either maintain the margin level from last year or still expand our margin as you can see we have quite a bit of leverage on G&A side.

Steven Martin - Slater Capital Management

Okay, and that’s actually my question. Since you did the offering in the second quarter, were there expenses in G&A in the fourth and first quarter for the offering legal accounting or rather?

Ping Wei

No basically offering related expenses as it relates directly to offerings incurred by the company it’s actually charged against the fund raised by the company. And expenses incurred by selling shareholders of full selling shareholders we actually asked the selling shareholders to pay them directly rather than borne by the Company so it doesn’t affect our P&L at all.

Steven Martin - Slater Capital Management

Alright. Thank you very much.

Ping Wei

You’re very welcome.

Operator

There are no further questions. I’d like to turn it back to management for closing remarks. Thank you.

Ping Wei

Thank you. And on behalf of the management team we thank you again for joining us today and we actually look forward to updating you on our progress soon. Thank you.

Operator

That concludes today’s conference. Thank you for participating. You may all disconnect.

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