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China Distance Education Holdings Limited (NYSE:DL)

F3Q 2011 Earnings Conference Call

August 18, 2011 8:00 AM EST

Executives

Zhengdong Zhu – Chairman and CEO

Ping Wei – CFO

Analysts

Mark Marostica – Piper Jaffray

Grace Lam – Citi

Ella Ji – Oppenheimer

Operator

Good evening and thank you for standing by for the China Distance Education Holdings Limited third quarter fiscal 2011 earnings conference call.

Today, you will hear from Mr. Zhengdong Zhu, Chairman and CEO of the company; and Ms. Ping Wei, the CFO.

During the prepared remarks, all participants will be in a listen-only mode. After that, the company's management will be available to answer 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 US Private Securities Litigation Reform Act of 1995. Among other things, the outlook of the fourth quarter of fiscal year 2011 and oral statements from management on this call, as well as the company's strategic and operational plans, contain forward-looking statements. Forward-looking statements involve inherent risk and uncertainty. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement.

Further information regarding these and other risk is included in the company's Annual Report on Form 20-F and 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 call is being recorded. A summarized presentation can be downloaded from the company's IR website 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 website at ir.cdeledu.com.

I will now turn the call over to Mr. Zhu to discuss the operational highlights. Mr. Zhu, you may begin.

Zhengdong Zhu

[Interpreted]

Thank you, everyone for joining us on our third quarter fiscal 2011 results conference call. Our operating results were released earlier and are available on the company’s website as well as our new slide services.

We are pleased to report yet another quarter of healthy performance in the third quarter with 22.7% year-over-year revenue growth exceeding our guidance range and increasing profitability on a non-GAAP basis.

Our results were driven by a steady increase in our core online education services net revenue, supported by broad based enrollment and ASP growth. Of course, our APQE and other accounting courses, healthcare and the construction engineering courses, as well as strong enrollment growth from accounting continuous education courses.

We also benefited from an increase in other revenue, resulting from offline business start-up training courses provided by Yucai, in-person courses for the “Big Four” accounting firms in addition to our online courses and services and the primary and secondary school supplementary courses. Such increase was partially offset by the decrease in revenues from courseware production services.

Our results reflect the continued execution of our strategy to provide a high-quality comprehensive life-long learning programs. Throughout 2011 we have focused on investing in our co-businesses and continuing to develop our newer initiative.

Our goal is to provide more students with comprehensive and high-quality educational content and services, by leveraging our scalable IT platform and our centralized marketing distribution network, powerful content development and the student service processes.

This investment which incur investments in our online learning platform, extensive marketing and advertising campaigns and efforts to bolster the quality of our courses and services are all aimed at further strengthening our brand name and delivering balanced top and bottom-line growth.

We believe we are successfully executing on this strategy and that our investment will lead to continued growth. We remain confident in our prospects and are committed to increasing value of our shareholders over the long-term.

Let me now walk you through our operational development for the quarter in more detail, starting on slide five. Net revenue for the quarter increased 22.7% year-over-year to $12.7 million, exceeding our guidance and the total cost enrollment was $324,400, an increase of 34% year-over-year. As noted, this result was supported by a healthy increase in online education service net revenue.

Starting with our accounting vertical on slide 7, our online accounting vertical performed well in the third quarter, with total accounting enrollment increasing 45.5% and average student payment or ASP for our accounting test preparation courses increasing by 25.5%. This quarter, we continued to deliver strong growth with our other online accounting training courses, in particular accounting certificate exam test preparation courses and accounting practical training. All-in-all, other online accounting enrollments grew by 52.4% year-over-year and ASP grew 17.5%.

Online accounting continuous education also continued its trend of strong growth with a 106.4% year-over-year enrollment increase. We continue to offer this course at a low ASP to grow our market share in this large market, which accounts for about 30 million students per year at impressive 54.9%. APQE exam was held last weekend. As this market tends to include a high level of repeat customers, we believe our relatively low pricing point is a good strategy to attract more students to CDEL’s online learning motto. And we believe our competitive pricing strategy will eventually payoff handsomely with large market share gains.

Online APQE exam enrollment increased 9% in the third quarter. In addition, ASP for APQE also increased 31.2% in the quarter as compared to the same period of last year. All-in-all for the 2011 test season which is roughly from Q4 of 2010 to Q3 of 2011, enrollment for APQE has been relatively unchanged as compared to the last year due to the relatively flat overall growth of the market. However, we demonstrated that we can grow our revenue amid a slow market as ASP for this test season increased again by 18.4%. Thanks to our diligence in delivering quality courses and services and our consistent focus on building a strong brand name. For the third quarter, online CPA test preparation course cash revenue continues to grow, even though enrollment decreased by 16%. Thanks to a strong ASP increase of 33.5%.

Let’s turn to slide eight about other non-accounting course offerings. Enrollment grew about a robust 47.1% in our steadily growing self-taught higher education vertical. As our program continue to gain traction in the [inaudible] we have signed contracts. Going forward, we will continue to focus on building brand awareness in the provinces where we offer our highly promising partial credit cards to grow enrollment. We’ll have the provinces that will have certain contract raise and we continue to introduce this program to more provinces.

Moving to slide nine, our online healthcare vertical again grew at relatively steady pace this quarter with enrollments growing 12.6% year-over-year and ASP increasing 17.7%. The growth in healthcare vertical its broad based as it would relate all of our house test preparation courses has registered revenue and ASP growth. This is primarily the result of our continued investment in offering more courses in this vertical. Continued focus in delivering end results to our existing students and continued effort in promoting awareness of our products and services to a large student base. We anticipate this vertical to continue if steady growth going forward.

Enrollments in our construction engineering courses rebounded after a relatively slow second quarter, resulting in healthy 22.5% growth in the third quarter. Enrollments was supported by continuous education courses which constitutes a large part of the total construction engineering enrollment. ASP increased to 6.8% year-over-year primarily due to the shift in revenue mix.

Moving onto slide 10, in terms of our offline businesses, this year we’re starting to test the orders by offering online and offline combined courses to further boost ASP for some of our many online type preparation subjects such as CPA and healthcare courses. We saw a decent level of interest and program participation. And as a result, potential in courses cash revenue for our professional awarding course for the fiscal year to date has already exceeded $1.1 million, while GAAP revenue for this quarter rose by a $160,000 to $510,000 as compared to the same period of last year.

We continue to offer business that have training courses and services and class payments for the training and services that were provided through our subsidiary Zhengbao Yucai. Yucai became our 60% owned subsidiary in March of 2009 through our acquisition for total of $2.4 million cash payment to its founder. We also injected $2.9 million of working capital into Yucai at the time. We had a challenging year in 2010, adjusting the management team, refining cost contents as well as stressing our partnership with the Ministry of Human Resources and the Social Security and various corporation parties.

We are happy to report to our shareholders that this year Yucai has made steady progress in growing revenues, expanding partnerships and collecting from its customers. This quarter, Yucai again generated revenue of $0.3 million. We expect Yucai to continue growing its revenue at a healthy pace going forward and to become an important revenue generator for DL.

In addition, we are very happy to report that in the quarter we were awarded the remaining 40% equity interest of Yucai for free by China International Economic and the Trade Arbitration Commission, the CIETAC. Following a year long arbitration process aiming to have the seller-owner the investment agreement we signed in 2009. In addition, we were also awarded $0.6 million of payment from the seller in compensation for loss of business suffered and the related legal cost. Such amount was paid to us subsequently to the quarter end.

As part of our original investment agreement, it was agreed that DL had a right to purchase the remaining 40% equity interest of Yucai. Such right was recorded as a purchased call option at the time of purchase. At the way we were awarded the 40% remaining equity interest by the CIETAC, we no longer have the need to exercise such purchased call option. As such, this quarter, we wrote-off the total book value of the purchased call option, resulting in a net GAAP noncash charge of $0.8 million net of income and income tax.

Finally turning to slide 11, we continued to make progress in our online K-12 after school training vertical. This quarter we reported another $0.6 million of courseware production service revenue from the Famous School Coalition program as we continued to record courses as evident to the coalition online platform. Our other K-12 initiatives such as in-person courses, case studies, digital class solutions and Educomp Smart-class are also progressing as we planned and have started to contribute to our revenue growth in the quarter.

Finally a word on our growth strategy. To date we have been very focused on growing our businesses with our co-online and professional offerings. This focused growth approach has started to payoff. For the fourth straight quarters of this fiscal year, we have already generated non-GAAP net income similar to the annual profit of fiscal year 2010. And with we have the fourth quarter to go, which is traditionally our largest revenue and the profit quarter. Such results will achieve end result of us investing more aggressively in marketing and brand building this year.

We believe that the investments will help us broaden our student base and enable us to charge a premium priced lower cost offering. As such, going forward, we will continue to invest more in this area, invest selectively and prudently, positioning the company well as a leader of our education in China and ensuring years of sustainable future growth.

This completes my update on business operations. Let me now turn the call over to Wei Ping, our CFO, to walk you through our financials.

Ping Wei

Thank you, Chairman Zhu. As Chairman Zhu mentioned, we have maintained a balanced approach as we strive to grow our balanced top and bottom-line results. This approach has included our continuous – continued prudent investment in our marketing and growth initiatives, while maintaining a strict focus on cost control. Our investment in growth didn’t impact our bottom line, compounded by some inflationary headwind. However, we were also able to mitigate some of the cost increases by successfully controlling expenses elsewhere in the business. We will continue to maintain our focus on effectively balancing growth and investment and we believe this effort together with our share repurchase program will allow us to deliver healthy returns to our shareholders.

Let me now recap our key financial metrics for the third quarter on slide 13. Total net revenues for the third quarter were $12.7 million, representing a year-over-year increase of 22.7% from $10.3 million in the third quarter of fiscal 2010. Online education services net revenues for the third quarter of fiscal 2011 were $8.9 million, an increase of 42% from the third quarter of fiscal 2010. This increase was a result of increased revenue from accounting professional qualification exams or APQE, CPA exams, accounting certificate exams, accounting continuous education, healthcare and construction and engineering courses.

Net revenue from books and reference materials decreased by 25.1% to $1 million for the third quarter of fiscal 2011 from that of the same period fiscal 2010. The decrease by mainly caused by a new GAAP literature, requiring us to allocate price between study cards and books for our bundled book sales. In the quarter, about $0.4 million of book revenue was reallocated to online revenue. Excluding the effect of this reallocation, net revenue for books and reference materials would have increased by about 8.3% to $1.5 million for the third quarter of fiscal 2011.

Other revenues increased 1.2% year-over-year to $2.7 million for the third quarter of fiscal 2011. The increase was a result of increased revenues in the business start-up training courses, in-person training courses to supplement online courses for the “Big Four” accounting firms and primary and secondary school supplementary courses. Such increase was partially offset by the decrease in revenues from courseware production services from our Famous School Coalition program.

Cost of sales for the third quarter of fiscal year 2011 was $5.4 million, a 23.9% increase year-over-year. Excluding share-based compensation, non-GAAP cost of sales for the third quarter was $5.0 million, an increase of 27.8% over the same period last year. The increase in cost of sales was primarily due to increased salary and related expenses, lecture fees due to further expansion of our online course offerings, and cost of our books and reference materials due to the increase in sales.

Gross profit for the third quarter was $7.3 million, a 21.8% increase year-over-year. Excluding share-based compensation, non-GAAP gross profit was $7.7 million, an increase of 19.5% year-over-year. Gross margin for the third quarter was 37.6% in line with the third quarter of fiscal year 2010. Excluding share-based compensation, non-GAAP gross margin for the third quarter was 60.5% as compared to 62.1% in the same period of 2010. The decrease in non-GAAP gross margins was primarily a result of the increased lecture fees.

Total operating expenses for third quarter were $7.0 million, an increase of 42.4% year-over-year. Excluding share-based compensation and the write-off of a purchased call option asset for acquisition of Yucai, non-GAAP operating expenses were $5.3 million, representing a year-over-year increase of 23.6%.

Selling expenses and marketing $3.1 million for the third quarter, representing a 6.8% increase year-over-year. Excluding share-based compensation, non-GAAP selling expenses were $3.3 million, a 61.6% increase from the same period last year. The year-over-year increase was the result of increased advertising and promotional activities, salary and related expenses, and commissions to our agents due to the increased in sales.

G&A expenses were $2.8 million in the third quarter of fiscal 2011, a 5.5% year-over-year decrease. Excluding share-based compensation charge, non-GAAP G&A expenses were $2.3 million, a decrease of 5.8% year-over-year. The decrease in G&A expenses year-over-year was primarily due to decreased of bad debt provision for outstanding receivables according to our accounting policy. Such decrease was partially offset by increased salary and related expenses and professional fees.

Income tax expenses for the third quarter was $0.2 million as compared with income tax expense of $0.3 million in the same period last year. Net income was $0.9 million for the third quarter compared to net income of $1.3 million in the same period of 2010. Excluding share-based compensation and the $0.8 million of write-off of purchased call option for acquisition of the additional equity interest in Zhengbao Yucai, non-GAAP net income for the third quarter was $2.7 million, compared to non-GAAP net income of $2.4 million in the corresponding quarter in 2010.

Turning onto our balance sheet on slide 14, net operating cash inflow for the third quarter of fiscal 2011 was $0.8 million as compared to a net operating cash inflow of $1.8 million in the same period last year. This is primarily due to the increase in noncash working capital in fiscal year 2011. Cash and cash equivalents, term deposit and restricted cash as of June 30th, 2011 was $58.6 million, a decrease of $5.3 million from March 31, 2011, primarily due to the repurchase of $5.5 million worth of our shares and the CapEx of about $700,000 in the quarter. The cash balance at end of the quarter represents $1.8 per ADR.

Finally, at end of June 30th, 2011 total issued an outstanding shares of the company was 129, 643,500 shares or about 32.4 million ADR. We still have $7.2 million left in the Board approved share buyback programs and we intend to continue to buyback shares to boost our shareholder value. And this completes the financial overview.

Now I will turn the call back to Mr. Zhu for the final remarks on our strategy and business update, as well as revenue guidance for the fourth quarter of fiscal 2011. Mr. Zhu.

Zhengdong Zhu

[Interpreted]

Thank you, Wei Ping. In conclusion, we continue to make positive strides in our goal to deliver consistent and a profitable growth. Our core businesses remains fundamentally sound and we are seeing steadied progress from our various growth initiative.

We expect this new verticals to beginning trending up in the coming quarters, which we believe will contribute new revenue streams and to strengthen our comprehensive course and service offering. In addition, we will continue to build further brand awareness to focus advertising and marketing campaigns which addresses the high-quality end value of our service.

As such, we expect our revenue for the fourth quarter to be in the range of $12.7 million to $13.3 million as compared to the net revenue of $11.4 million in the fourth quarter of fiscal 2010, representing 11% to 17% year-over-year increase. This represents our current and the preliminary review which is subject to change.

Thank you for your time. We’d now be happy to take your questions.

Question-and-Answer Session

Operator

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

Mark Marostica – Piper Jaffray

Thank you. Yes, my first question relates to the accounting ASP increases that you’re seeing. I think you mentioned just over 25% in the quarter. I’m curious, is that driven by a mix shift within accounting to more premium or elite programs, or are you just seeing an ability to lever prices higher on the same mix of regular versus elite?

Ping Wei

Hello Mark, good evening. In fact it’s in both. The increase in accounting ASP are both by straight same cost ASP increase and the revenue mix shift, both from agent revenue to direct online enrollment, as well as product mix. So it’s an all in one.

Mark Marostica – Piper Jaffray

I see. And do you anticipate that these ASP increases in this area will be sustainable for the next couple of quarters or give us a sense when you anniversary this type of level.

Ping Wei

Yes. In fact – that’s a very good question Mark. In fact this is exactly one of our key strategies that is pulling away from sort of an low-cost online course provider kind of competition and establish ourselves as the premium brand, premium priced and premium online service company, online educational services company. So we fully expect and going forward to be able to have a reasonable ASP sort of increase on a yearly basis, again mixed ASP increase both by an same cost increase and by revenue mix shift.

Mark Marostica – Piper Jaffray

Ping, on that point as you look to fiscal ’12, how should we think about – would there eventually be revenue for student increases, if you kind of put it all together in terms of quantifying that amount for fiscal ’12 roughly?

Ping Wei

I actually will translate that question for Mr. Zhu, for him to answer that.

[Foreign Language – Chinese]

And we’ll also have shift of students from regular class to more higher priced premium and elite classes. And also the – we’ll have more students from direct registration online without shifting from sort of distributed generated revenue. All of those will give us an still healthy ASP increase.

Right now we are not in a very good position to give you that information yet, but 5% to 10% of the ASP increase for the next year will not be sort of outrageous or unreasonable. Simultaneously what Zhengdong just said, sorry I have Liny [ph] to translate it. I think you must realize that he was saying in Chinese. Liny why don’t you translate it first, then I’ll finish what I wanted to –

Zhengdong Zhu

[Interpreted]

Because we have – and during this year we have risen our prices for our core combined courses such as CPA and APQE, so next year we will not raise prices that much compared at the same level of this year. But we can’t – we expect a larger enrollment increase in 2012. As we mentioned in the script, we’re also started to offer online and offline combined courses within accounting verticals, so this will again increase our branded ASP.

Mark Marostica – Piper Jaffray

I appreciate that color. And then, Ping, I just wanted to touch on the selling and marketing increase in the quarter, up 57% year-over-year. Can you talk about where the incremental selling and marketing spend was directed or is it that incremental amount roughly $1 million compared to the prior quarter was more a broad based and spread across a number of initiatives.

Ping Wei

Actually it’s quite targeted. It’s a primarily marketing and branding spending unlike sort of advertising on the buses as well as the online ranking, keywords trend, what is that word like an –

Zhengdong Zhu

[Interpreted]

Like the ranking bid in Bido [ph].

Ping Wei

Bido ranking bids yes, and then keyword search, that’s the direction we invested our advertising and marketing dollars. A second increase in sales and marketing of lesser extent was because of the commission paid to online agents, because we generate more revenues directly from our online agents. And also as you can see we had quite a bit of increase in revenue in total in the quarter both on cash revenue side and on GAAP revenue side.

Mark Marostica – Piper Jaffray

And so then the follow-on there is, should we expect the level that you’re currently at to be the run rate going forward, that $3 million-ish level?

Ping Wei

Actually, no. I forgot to mention that. March to June quarter is actually heavy quarter for promotional or marketing activities for us, because some – like a lot of our key test prep courses, the exams for those courses are September and therefore promotion season is actually June – April to June. So that’s why March quarter, Q3 is traditionally a heavy promotional quarter anyways.

On Q4 and beyond, we should be at a lower spending level. At this moment, I anticipate the sales and marketing expenses spending on a non-GAAP basis – well the commission is always the wild card, but other than that we think we should be comfortable with about $2.5 million kind of number for next quarter on a non-GAAP basis and then that probably will be a better sort of runway going forward for, let’s say, for the next few quarters.

Mark Marostica – Piper Jaffray

Okay, that’s great.

Ping Wei

And also Mark, one – sorry one additional comment our – on your question about ASP increase for fiscal 2012, we forgot to mention actually a fairly important point. Starting this year, we started to offer online and offline combined course, which is typically priced at an private premium to our current course offerings and we are seeing encouraging our results this year as first year – basically on this first year of testing water. So next year we also anticipate pretty healthy growth in this particular segment that will actually help on ASP side as well.

Mark Marostica – Piper Jaffray

Very good. Thank you for all the information.

Ping Wei

Thank you, Mark.

Operator

(Operator Instructions). Your next question comes from the line of Grace Lam from Citi.

Ping Wei

Hello, Grace.

Grace Lam – Citi

Hello.

[Foreign Language – Chinese]

My question is on the M&A strategy, just wondering if there is any possibility to do more M&A to fasten our expansion. Thank you.

[Foreign Language – Chinese]

Zhengdong Zhu

[Interpreted]

We are looking for acquisitions selectively and prudently at the moment. Given the integration – kind of integration, and we have – we had in Yucai. So overall we are positively looking for acquisitions, but very carefully evaluate those kind of potential targets.

Ping Wei

And sort of one additional point, you probably noted and we actually had an lower G&A expenses this quarter compared to last – same period of last year. However, while the major reason of decrease was a much lower level of bad debt provisioning for accounts receivable, simultaneously we actually just spent a bit more money on our professional fee in our quarter and we – that’s actually probably because we engaged professional advisors to help us look at the potential acquisition targets to make sure we have objective and professional input before we make any major decisions, not to say that and not – it’s not to think that there is any deal anytime soon, just an indication of how serious and how carefully we sort of look at our acquisition targets.

Grace Lam – Citi

[Foreign Language – Chinese]

Could you share more colors on the offline business which you mentioned before it’s developing very well? Thank you.

Ping Wei

Okay. I think, first of all I will try to answer that question by saying, first of all we are seeing very encouraging signs this year. Zhengdong mentioned, to date we have collected more than $1.1 million from offline training from the new offline and online combined test prep training courses alone, and that’s actually fairly encouraging. Simultaneously that $1.1 million is actually not sort of just from a few classes, this is actually from sort of an various types of classes across various verticals.

Why we have such a wide spread of cost type and sort of on verticals is because we wanted to test order sort of which vertical or which product will kind of product composition will be best received by the market. Now after this year’s sort of test run, we now have a pretty good idea of where online and offline combined courses are most welcomed, both on vertical side as well as on sort of product structure. For example, weekend courses versus sort of an daily courses, sort of the elite class which includes a money back guarantee kind of cut costs or just an sort of regular classes with no results guaranteed. So those are all the things we’ve been testing this year.

And then, I will say next year, the offline courses will be much more focused, but will be also much larger scale as well based on our preliminary assessment. So online and offline combined approach probably will be the way to go for a few of our course type and a few of our products not necessary for all of them but some of them. And that’s all I can share at this moment, Grace.

Grace Lam – Citi

Thank you.

Ping Wei

You’re very welcome.

Operator

(Operator Instructions). Your next question comes from the line of Ella Ji of Oppenheimer.

Ella Ji – Oppenheimer

Thanks. First of all, I wanted to clarify on your pricing strategy, especially in the accounting courses, because I think you mentioned that you actually adopted a low-priced strategy, and again this year 30 million students in continuous education market, in the meanwhile, you have raised the price I think for APQE and CPA. So could you please elaborate overall why do you raise price in certain courses versus lower price in others?

Ping Wei

I’m sorry, I think – Ella thank you for your question. I think and I probably forgot to mention, yes, the – in terms of classes, test prep courses and continued education courses are actually of distinct [ph] kind of nature. With test prep courses, the key is in we have established results, we have established track record and our brand are well known. So with that kind of a courses, we basically – we have already the track record, so it makes a lot of sense to raise prices and to sort of continue to promote high-end courses. Simultaneously, accounting continuous education as well as some other continuous education courses is more of sort of an low-service cost no need and highly repetitive kind of market.

Once a student starts to use our online courses for continued education, they’re very likely to come back next year and the year after, because they need to do it every year anyway, then online is very convenient. So for those kind of courses, it’s very important to take as much as market as you can as quickly as possibly is kind of a rate. So for those kind of a – and it’s a huge market. Accounting alone is like a 13 million people and then healthcare and the construction and the engineering, both are also fairly large.

So in this kind of large market to capture market share as quickly as possible, low pricing strategy, we believe is the way to go for now. So we probably will keep pricing on our continued education courses at a relatively low level going forward for at least a year or two. And then with the – say we’ve already taken 50% of the accounting market share in three years time, then we’ll consider pricing strategy again.

It’s not our goal, okay? I’m just saying it for example.

Ella Ji – Oppenheimer

And could you give us an example of how much you are charging down for those online and offline blended courses versus purely online courses?

Ping Wei

Well, pure online courses, and the ASP for regular classes annual from like $30, $40 to an – to like $60, $70, and premium is like on $150 – yes, about a $100 to $150, elite is about double of the premium. Now, with online and offline combined courses, ASP can be anywhere from like a $120, $150, $200 to $2000. And the extreme high end AICPA courses we charge students over $3000 per enrollment for a subject. So there is a lot, but as you can see the lowest ones like $150, $200 is already higher than some of our premium classes.

Ella Ji – Oppenheimer

Okay, got it. And then, regarding our margins, I think you mentioned next – well, next year’s target is to maintain margin performance. And so I would assume that you may continue to spend in some growth areas, so could you give us some examples in terms of in which area are you going to spend?

Ping Wei

Well, our standard is to provide quality of courses and services and make our courseware sort of as user friendly as possible, so that will be where we spend the money, including continue to improve quality, continue to enhance service, continue to invest in our IT infrastructure. So our courseware and our learning path is at the cutting edge of the technology. And in addition to generate higher revenue and to make sure our courses reach a broader student base, we need to market our courses better, so we will also be spending money in marketing and branding. So those [inaudible] the money.

So in general for next year, margin wise – this year the inflationary environment did not help much with our margin. Though in the end we’re more less mentioned our gross margin for this year and then cover slightly lower. And on the next non-GAAP net margin level we are – we’re still sort of think we can do about 16%, 17% non-GAAP net margin for the year. Now for next year, we will not have as difficult as inflationary environment, because we’ve already done quite a bit of an payroll raises already.

So next year we have a much more beneficial sort of cost environment and we believe we can carefully sort of improve our net non-GAAP margin by 1 percentage points to 2 percentage points. Then, in addition, our GAAP level, this year is the last year we have close to $4 million of share-based compensation charge, basically $1 million per quarter. Now by next year, we still have about $800,000 to $900,000 – about $800,000 share-based compensation charge for the first three quarters. And then in Q4 fiscal year 2012 we won’t have much at all. So full total share-based compensation charge for fiscal year 2012 will be around $2.5 million. As you can see that will also help a lot with our GAAP net income numbers for fiscal year 2012. Hope that answers your question, Ella.

Ella Ji – Oppenheimer

Yes, thank you for the color. That’s very helpful. And lastly, I just wanted to confirm, since you now have the 100% of Yucai, so going forward if there are going to be no more minority interest on your P&L?

Ping Wei

Correct.

Ella Ji – Oppenheimer

Okay, great. Thanks for taking my questions.

Ping Wei

Okay, thank you, Ella.

Operator

(Operator Instructions). And there are no audio questions. I would like to turn it over to management for closing remarks.

Ping Wei

Okay. Thank you all again for joining us today and we look forward to updating you on our progress in the near future. Thank you.

Zhengdong Zhu

Thank you.

Operator

Thank you for your participation. This concludes today’s conference. You may now disconnect.

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