TAL Education Group (XRS) Q3 2016 Results Earnings Conference Call January 27, 2016 8:00 AM ET
Mei Li - IR Manager
Rong Luo - Chief Financial Officer
Alvin Jiang - Deutsche Bank
Leon Chik - JPMorgan
Anne Shih - Brean Capital
Cynthia Meng - Jefferies
Andrew Orchard - Nomura
Tian Hou - T.H. Capital
Mariana Kou - CLSA
Zoe Zhao - Credit Suisse
Ladies and gentlemen, thank you for standing by, and welcome to the TAL Education Group's Third Fiscal Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I must advice you that this conference is being recorded today, Wednesday, 27th of January, 2016.
I would now like to hand the conference over to your first speaker today, Ms. Mei Li. Thank you. Please go ahead, ma'am.
Thank you all for joining us today for TAL Education Group's third fiscal quarter 2016 earnings conference call. The third fiscal quarter earnings release was distributed earlier today. And you may find a copy on the company's IR website or through the newswires. During this call, you will hear from Chief Financial Officer, Mr. Rong Luo. Following his prepared remarks, Mr. Luo will be available to answer your questions.
Before we continue, please note that the discussions today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties, include but are not limited to those outlined in public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC. Also, our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains the reconciliation of the non-GAAP measures to the most directly comparable GAAP measures.
I would now like to turn the call over to Mr. Rong Luo.
Thank you, Mei. And thank you all for joining us on our earnings conference call for the third fiscal quarter of 2016. We have very strong third quarter on our top line and our bottom line also performed as what expected.
In RMB terms, the net revenue grew by 49% year-on-year and in dollar perspective the growth was 43% to $142.2 million, both exceeding our anticipation. Revenue growth was primarily driven by an outstanding to 57, 5-7, a big rose in our key enrollments.
The growth was again broadest across cities, a particular highlight for us was turnaround of solid growth in Beijing. We continue to invest in our future growth, year-to-date, our learning center capacity has expanded by 40%, 4-0, over a year ago period.
Today, I will briefly review our operational progress in the third quarter. After that, I will provide some further analysis of the Q3 financials and our business outlook.
Small class accounting for 85%, 8-5, of revenue compared to 82% in the same year ago period. Net revenue for small class was up by 54%, 5-4 in RMB terms and 48% in dollar perspective, the enrollments increased by 56%, 5-6.
In RMB terms in nine of the other cities we achieved triple digit revenue growth, which cities are Nanjing, Wuhan, Suzhou, Chongqing, Shenyang, Shijiazhuang, Qingdao and Changsha.
Peiyou small-classes revenue contributed of the cities also the top five was 34%, an increase from 26% in the same year ago period, showing the higher growth dynamics in other cities.
The revenue growth of cities all that are top five cities was 98% in RMB terms, 9-8, in a quarter. Meanwhile cities outside Beijing and Shanghai contributed 59%, 5-9, of small class revenue compared to 51% same quarter last year.
Let me update you on Beijing's small-class performance. We are already pleased that we have managed to generate the vigorous growth in Beijing enrollments in all subjects sizes [ph] following our targets summer promotions.
We are excited that our limited offers our very effect way to win market share as the market leader with a strong brand in Beijing. In effect, our limited price offers therefore accelerated the process of consolidation in the market.
Meanwhile, our English and Chinese classes also progressed quite well and currently enrollments are trending as expected. We believe we can sustain a robust enrollment driven growth in Beijing in the coming quarters.
Turning briefly to our One-on-One business. One-on-One contributed 11% of our revenue in Q3, compared to 14% in the same year ago period. We exchanged 10 One-on-One learning centers in Guangzhou to Tianjin [ph] Education.
Following the agreements back in June 2015, you remember last quarter I stated that this transaction will not have much material impact on our P&L, as worldwide what's theoretically low margin business in our revenue from this 10 centers was 11% of One-on-One business in Q2.
That this pass of our One-on-One component in Guangzhou is a special case. Is that Guangzhou one-on-one business we are planning to retain our One-on-One learning centers in other cities and continue to expand our presence where needed.
Let me turn to our online courses segment, which remains one of our fastest growing sectors with 54%, 5-4, year-over-year revenue growth. Online courses xueersi.com contributed to 4% of total revenue this quarter similar with the year ago period.
Online enrollments also increased to an all time high of 21% of the total enrollments this quarter worth of 19% in the same year ago period. We continue to expand classroom capacity to support the strong demand for our tutoring services. We opened 16, 1-6, new small class learning centers in Guangzhou entering other cities, and two One-on-One learning centers during the third quarter.
In December we also opened another 7 new small class learning centers in Guangzhou and other cities. We will add more learning centers in the remainder of the fiscal year.
We also closed six more class learning centers and four One-on-One learning centers besides the 10 in Guangzhou in line with our long-term adjusted to build a net of larger size centers with co-efficiency and capacity fulfillment rate
Meanwhile, in the third quarter we entered five new cities with one center each. By the end of the third quarter our learning center network had 301 learning centers of which 227 as small class and 74 are One-on-One.
Importantly, in the quarter we have entered five new cities. According to our schedule we are going to enter lot more city in the fourth fiscal quarter with years of successful experience in city expansion, as our track record we will maintain a stable expansion pace going forward.
Let me now update on notable progress in the investment area, particularly on the ongoing acquisition of Firstleap Education, which offers all subject to tutoring services in English in China to children between 2 to 15 years old.
The integration is proceeding smoothly. We are very pleased with the whole Firstleap team that is drawing us, particularly in Beijing and Nanjing where this show as immediate synergies.
Given with positive results, we believe that we can finalize for acquisition ahead of schedule. We will start to consolidate the financial statement of Firstleap Education beginning in the month February.
Since this is the month in which we have the nationwide spring festival holidays, the P&L impact for the consolidation of the Firstleap will be very minimal. Firstleap was almost breakeven in the most recent quarter with this business to become profitable within two to three years with a profit margin of between 10% to 20%.
To summarize, we continue to enjoy solid top line growth as the amount for our tutoring services is robust and widely spread across cities. We are pleased to see the turnaround of enrollment driven growth in Beijing. And we believe that our gains in market share in Beijing are contributing to the market consolidation.
The 40% year-to-date increase in learning center capacity is demand driven and also firm based for our continued long-term growth. Meanwhile, we are very pleased with this most ongoing integration of Firstleap which needs to be complement our business model of tutoring services for the core K-12 students.
The revenue consolidation of Firstleap underscores that will the right structure of making fewer, but larger investments. They are well timed, well aligned and we are focus on education services aim at our K-12 segment.
Lastly, we announced a minority investment in Knewton, a global leader in adaptive learning. In addition we have signed a letter of intent to incorporate Knewton's adaptive platform in TAL's online learning environment.
Knewton provides students with tailored recommendations for exactly what to study, teachers with analytics to better support our student, and publishers with content insights to develop more effective products.
Knewton powers adaptive content to make specific, real-time recommendations for each student based on how the student learns, what she has already mastered, goals she has set with her teacher, and what works best for similar students.
Knewton has provided more than 15 billion learning recommendations to more than 10 million students. Its platform currently powers the adaptive learning products for many of the worth largest education companies.
We are very pleased to invest and where is Knewton, because the ongoing advances in the education technology have created unprecedented – new possibilities to individualize and dynamically adjust the online learning experience.
TALs cooperation with Knewton is based on a shared commitment on to the future of education through the integration of technology, Internet and education on a global scale.
Now let me go over some financial points, I will like highlight. In the third quarter the net revenue was up by 43% even with the net impact of the further depreciation of RMB against dollar.
In RMB terms the growth was 49% year-on-year. Fiscal year to date, the revenue was up by 43% in US dollar and 45% in RMB terms. The ASP for our small class was almost flat in RMB terms during the third quarter, mainly because we had more revenue contribution from other cities, where price is lower than the same price in Beijing and Shanghai.
We expect to take price - increase for small class in some major cities next year, including Beijing and Guangzhou and some other places. Our pricing capacity remains strong due to other market share gains across wide geography network.
GAAP and non-GAAP cost of revenue increased by 50% to US dollar US$73.4 million from US$49 million in the same year ago period.
As I mentioned in the last call, we increased more class room capacity significantly in the third quarter. We added 467, 4-6-7, new class rooms, as compared to 64 in the third quarter last year. Typically it takes around two quarters for the new class room capacity to develop. We believe that capacity expansion is critical to long-term – to our long-term top line growth.
Gross margin for the third quarter was US$68.7 million, as compared to $50.4 million for the same year ago period. Gross margin for the third quarter was 48.4%, as compared to 15.7% for the same period of last year.
Selling and marketing expenses increased by 27.1% to US$17.2 million from US$13.6 million in the third quarter of last year. Non-GAAP selling and marketing expenses, which excluded share based compensation increased by 27.3% to US$16.6 million from US$13.1 million in the same period of last year.
G&A increased by 48.5% to US$42.6 million from US$28.7 million in the third quarter of fiscal year 2015. Non-GAAP G&A expenses, which excluded share-based compensation increased by 51.1% to US$36.7 million from US$24.3 million in the same year ago period.
In the third quarter we spend US$7 million in O2O initiatives. Fiscal year today, we have spend US$60 million of the annual budget of US$22 million.
The above factors combine to give us operating income of US$9.6 million, representing a year-over-year increase of 16.8%. Non-GAAP operating income increased by 22.8% year-over-year to US$16.1 million.
Income tax expense was US$2.6 million in the third quarter of fiscal year in 2016, compared to US$400,000 million in the third quarter of fiscal year 2015. Our net income for the quarter was US$9.6 million, as compared to US$11 million in the same period of the previous year.
Non-GAAP net income for the third quarter was US$16.1 million, as compared to US$15.9 million in the third quarter of last year.
Basic and diluted net income per ADS were both US$0.12 for the quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation was US$0.20 and US$0.19.
From the balance sheet, as of November 30, 2015, the company had $563.2 million of cash and cash equivalents and we also have $27 million of term deposits, as compared to $470.2 million of cash and $21.2 million of term deposits as of February 28, 2015.
CapEx for the third quarter of fiscal year 2016 were US$6.4 million, representing a decrease of US$1.1 million from US$7.5 million in the third quarter of last year.
As of November 30, 2015, the company's deferred revenue balance was $351.7 million, compared to $247 million as of November 30, 2014, representing a year-over-year increase of 42.4%.
Taking into consideration, the results can change RMB exchange against US dollar, we expect total net revenue for the fourth quarter of fiscal year 2016 to between $166.3 million and $168.8 million, representing an increase of 35% to 37% year-over-year, assuming no material change in exchange rate.
If not including the impact from the most recent depreciation of RMB against the U.S. Dollar, the projected revenue growth rate is expected to be in the range of 40%, 4-0, to 42%, 4-2, for the fourth quarter of fiscal year 2016.
If we achieved the RMB revenue growth of 40% to 42% in the first quarter than we will achieved 41% to 43% year-over-year top line growth for the fiscal year 2015, which is higher than our previous guidance of 40% to 42%. This estimate reflect the comments current expectations which is started to change.
That concludes my prepared remarks. Operator, we are now ready to take questions.
[Operator Instructions] Your first question comes from the line of Alvin Jiang from Deutsche Bank. Please ask your question.
Hi, Rong and Mei. Thank you for taking my questions. Congratulations on a strong result. I have two questions. The first one is on your enrollments guidance. I think it’s quite strong. Can you share with us some more color on that, maybe there is some non-operating income sectors or maybe add more color?
Thank you, Alvin. For the enrollments this quarter is quite strong. Actually as I had mentioned in the last – in our previous earning call, the September 3 [ph] actually has been made as a holiday by the state council this year. So we have one way delayed these all cities, including Beijing. So this enrollment we have factored in all of these regions and the one week delay of the Beijing and other places will go to our Q4 numbers.
The second question is on the margin. I think you were reaching out to some new cities, actually five new cities in the quarter. I'm not sure if this will make some negative impact on the margins in the coming quarters. And could you please remind us like how many quarters you can reach break even or you can reach the normalized margin level for those new learning centers? Thank you.
Yes. That’s a local question. In general for our learning centers, we need two quarters in the ramp to be the same level of preliminary and same level of the retention rate as our current learning centers.
So we have added 467 classrooms this quarter and we have entered five new cities this quarter. Yes, definitely they have a little bit impact to margin this quarter. But in the long run we believe that is worry and critical and very important step for us to do that. Where as more and more capacities we can set up this quarter, which were very beneficial to next year top line revenue growth.
Got it. Thank you.
Thank you, Alvin.
And your next question comes from the line of Leon Chik from JPMorgan. Please ask your question.
Hi, Good evening, Rong and Mei. You guys keep knocking this thing out of the park, congrats. Just a question on your EBIT margin. I know you don't give guidance, but you guys are still about 4% below the peak levels in FY14, and next year, your sales probably will be triple that level.
So we're just trying to see what the impact of EBIT will be. Firstly, your online spending, is that going to continue to go up, which is part of your G&A? And secondly, we see marketing expense as a percentage of sales has come down quite a lot in the third quarter; that's good, that's positive. Is that going to continue? Okay, thanks.
Thank you, Leon. Q3 is the lowest margin quarter, mainly due to we have the lower revenue and we have faster network development. And Q4 is starting to do better than Q3 and specific to your question about the online investment, I think we are pretty much on track.
Considering we only have to 4% to 5% of my total revenue is online revenue. So we will maintain the same level of investment also in space in the coming years. Similar levels means, maybe the percentage of the net revenue will be quite stable.
So in general, I think Q4 mark - Q4 margin it will be a good number and better than Q3. But we don’t give any specific guidance on detail numbers. And looking forward to next year, since we are still doing the budgeting, so I can't share too much number with you, we'll have much more visibility maybe in next quarter. But rationally speaking, we foresee the margin will be stable in the coming years.
Well, the marketing is - why does it include so much?
The marketing actually is some consultants or some sales people in the learning centers. Because we invest in the online technology and we have deployed the Peiyou [ph] app to do a lot of things like that. So which means, same number of staff, but we can support more and more parents and students.
So in this case you will see the selling and marketing thing its growth will be lower than my top line revenue growth. And I am confident this trend will be a good figure so far to improve margin in the future.
Yes, that’s helpful. Thanks.
Thank you, Leon.
And your next question comes from the line of Anne Shih from Brean Capital. Please ask your question.
Hi, Rong, Mei. Thanks for taking my question. My questions are related to ASP, which was down further this quarter. First, could you talk about the different factors driving this? I understand the RMB depreciation is impacting this, but also, any color on discounting, the geographic mix, or the class-type mix?
Second, you mentioned earlier plans to increase ASPs for small classes next year. Can you share just the outlook for pricing or pricing strategy for next quarter and next year? Thanks.
Thank you, Anne. We had mentioned in the call the ASP of small class in RMB terms actually is flat this quarter, part of reasons because we have much bigger revenue contribution from all other cities.
The other cities decide the top five. Their top line growth rate is 98% in RMB terms, which means besides the top five we have today, the rest all of the places are close to 100%, which is we – there are some very healthy growth for us, but which also consider the pricing of its cities, the absolute dollar compared to the price in Beijing actually is lower.
So when we have much more revenue contributions coming from other cities in the mix that is that will drop down a little bit in my ASPs. In the coming years we are trying to pay the price increase in major city, including Beijing, Guangzhou and other places. So we are quite confident in the long run that ASP for small class in RMB terms will be low single digit growth rate.
Thank you, Anne.
And your next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.
Thank you, Rong. We have seen the blended ASP has been decreasing on a year-over-year basis for the first nine months, three quarters of FY16, and the enrolment growth continues to be very strong.
Can you talk about TAL Education's strategy? Is it to focus more enrolment growth and capacity expansion, rather than ASP growth? And can you provide some color on the ASP growth for the next few quarters? And then I have --
Thank you, Cynthia.
Yes. I think our pricing strategy is quite stable. We will pay the price out for other city, maybe around two years. So this year we have tried to increase the capacity a little bit faster than what we did last year and that is because we have seen a lot of strong demand coming from the city.
I am more than happy to see my business is driven by enrollment. But this doesn’t means I will raise my price or I will do more promotions. In the long run, I think looking forward to the future quarters, our pricing strategy will be lessen and we will take price on major cities and we still foresee for the small class in RMB terms their ASP are low single digit growth.
For the one-on-one because no we are promoting a small group, small group class which is one teacher versus 6 students, their price is much lower than the normal one-on-one, but their margin is much better than normal one-on-one. So with the bigger mix in the small group classes, the ASP on one-on-one will be less than before.
For the online the ASP is quite stable. They have some flat regions that’s because of the products mix easier. So internal we still feel quite confident on our pricing power, and we will maintain our cost strategies to pay price regularly.
Thank you. My follow-up question is, we notice from recent news, Mr. Zhang Bangxin announced management's expectation of the next decade and said that TAL Education's revenue will reach RMB100 billion in 10 years. That implies a 10-year CAGR of about 16% to 17%.
Given that TAL Education has already experienced top-line annual growth of 30% to 40% for the past several years, so from management's point of view, how many years will such high-speed growth of revenue continue? And what do you expect for top-line growth in the short term and mid term?
Yes. In the first place, I think every company they would have their own targets. They should have their own vision and mission and try to deliver what will be in the behalf of 10 years. So we are very happy to see the strong ambition and aggressive trend to which target to meet our company bigger and bigger.
I think 100 billion that’s a number to let us know what's the direction we are going to. So specific about the top line revenue growth in this year and next year, I think this year our guidance is quite strong, its 41% to 43%, next year we are probably maintaining the level of the growth.
But because next year I will consolidate the Firstleap Education to my P&L, so the top line revenue growth maybe a little bit higher, but all of this is still the very plain, linear view as of today. We are still didn’t finalize my budget yet. So I can share more details maybe in next quarter earning call.
Thank you, Cynthia.
Next question from the line of Andrew Orchard from Nomura. Please ask your question.
Hi, guys. Thanks for taking my question. I have a couple of questions I would like to ask you. Number one would be on the small group class, which was touched upon briefly in an earlier question. Can you give us some color on what the growth is like of this small group class, and also what the relative margins are of this format one-to-one?
And the other question is on your Beijing market share, you mentioned earlier that you've seen some consolidation in the market, do you have any sort of data point that you can share with us to give us a bit more insight to this market lease? Thanks.
Okay. So for the small group class, we have some big numbers we can share with you. The price of the small group class compared to the normal one-on-one is 35% to 40%, and the margins of the small group class is 10 to 15 points better than normal one-on-one. Today we are promoting the small group classes in most of our big cities we have today and we foresee the mix of small group classes will increase in the coming quarters.
And upon the second question, Beijing market share, for us speaking, no number in my hand, because that market is very segmented. But I think we can benchmark the very solid result in Q3 both for TAL Education and for my counterparts.
And so we have seen a very strong growth from both them and me. So we are very happy to see the market leaders, the big company all has very good branding in this market will benefit from a consolidation of this market. But this consolidation process will be a long time. We are happy to see we can leverage our technology, our branding and a lot of stuff to try to accelerate the process. So we are very confident this will be very beneficial for to my - long-term development and long-term growth in the coming years.
And your next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.
Hi, Mei and Rong. Congratulations on a good quarter. I have several questions. One is regarding the consolidation of the acquired companies. And so when we are doing models in the next quarter, how much top line we should consolidate then? That is question one.
And also, related to the O2O, you did mention about O2O investment in the previous answering the questions. So I wondered if you could give us some colors on TAL's O2O initiative and the progress and what you expect to accomplish by the end of the next fiscal year, that's on O2O.
And I also have a third question which is, the company mentioned a couple of times you are not going to do privatization. However, you do have a lot of investments. Those investees may go listed in the local market. And I wonder how TAL, as a US listed company, benefits from such kind of listing in domestic. That's my three questions. Thank you.
Thank you, Tian. The first question, Firstleap Education we will start to consolidate from February 1. So in top line perspective because February is spring festival, so they only have to be one or two classes in the months. So the top line from then is very, very minimal.
And the second thing about our O2O initiative, I think we have a lot of things we have done in the past. For example, we have launched our pay Peiyou approximately, which can enable the parents and students to do a lot of things without going to our learning centers.
For example, they can go to into our classes, they can transfer, they can pay. And we also developed the functions to connect through to our ICS 3.0, which means we can collect information’s from a class and send some homework or send some questions to our students through the app. So all of this is very good experience, and we are also pilot some of the new auto models in some area.
So I think we have made good progress. But again, I think that’s due in their well early stage of how education leverage the technology to improve the efficiency and maybe to create some new business models. So we will keep eyes open. We will maintain a similar level of investment over there.
Specific about your questions in – about the local stock market, again, we have no plan for privatization, no. But we are also very glad to see some of the portfolio companies they are doing quite well, and I know some of them about to be listed in China in the coming quarters.
We are – as a company we are happy to see this. It’s a very good, trend because in the education company in China they make highest, maybe higher key multiples in China than in US. And the market also comes in a little bit. So we are very happy to see the portfolio companies can be listed and we can also benefit from our investment over there.
And we will – when we have some news we can realize the benefits, we will let you guys know. But in general that is good news for us.
Okay. Thank you, Rong
Thank you, Tian.
And your next question comes from the line of Mariana Kou from CLSA. Please ask your question.
Hi, management. Congratulations on a very good set of results. I have a few questions. My first question is on the split between small classes, one-on-one and online. If you could just comment on whether you are quite happy with the current mix or you're just going to let it literally progress where you might have all one-on-one still on a down trend or you try to keep the current ratio?
And my second question is on the O2O investment, I think in the previous earnings call, you were talking roughly 20 million on O2O projects, is that still a target that you are maintaining for this year and how much have you really spent in the first nine months. And I guess a follow up would be how much you are targeting extra dollar number in terms for next year?
And I guess my last question is a bit related to the question just now, just to play devil's advocate on the portfolio companies. I know, I think that a lot of your investment are actually doing quite well.
But just in the case of perhaps one or two not trending as well, should we be worried that you might have to put down some write-off or just some provisions on those type of portfolio investments? Thank you.
Okay. The first question, the small class, the revenue contribution, the mix is around 85% and the one-on-one is 11% and the online is around 4%. Because we have managed the one-on-one business in the past, as well as we did in the past two years. So I think the revenue mix coming from one-on-one will continue to be lower than before and we have more and more strong growth coming from small class and online. And that’s also because the margin of one-on-one is also now that grew and we definitely will like to control the development of that business.
And the online is also growing so fast. They have been our fastest growth segment for many quarters and we are also happy to see this business is profitable and the margin is even higher than the one-on-one. So we are also continued to invest there and to make sure our online growth maybe even faster.
About your second question for the O2O spending, our guidance before is we will spend around $22 million this year and in the first nine months we have spent $16 million, 1-6 million already, which is pretty much on track. So I think the full year we will be around $22 million that is the right number we can hit. And looking forward to next year, we will maintain a similar level of investment in O2O, I mean, maybe the percentage of net revenue will be quite stable.
And upon your question about our portfolio companies, actually as a company we are always use a very conservative way to evaluate our investments in all of its companies. So we are very conservative, if anything which is not doing well, we will let them off.
So far based on the valuation we've done together with AA and Deloitte, we feel cool about the progress of this portfolios of companies, in some companies they have got a second round of investment financing already.
So we will continue to monitor all of this deals very closely and we will let you guys know if something is not doing well. But they - I still quite feel very confident they are still trending well. Thank you, Mariana.
And your next question comes from the line of Zoe Zhao from Credit Suisse. Please ask your question.
Hi, management. Congratulations on a strong quarter. Two questions from me. One is, could you share with us a little bit on your expansion plan in the next two years in terms of new cities entrants as well as the course offerings, particularly high school course offerings in some of the new cities that you are entering.
And the second question is, could you share with us your thinking behind your equity investments, especially the overseas ones, such as Knewton, like what are your targets and how do you locate your targets? Thank you.
Thank you, Zoe. I think in total Q3 we added 467 new classroom, small classroom, yesterday we have added 1,191 small class - classrooms. I think this is a very important step because we have added around 40% of the capacity they what we did last year, but we still have more to come in the Q4.
And we will be very confident to state with the little bit fast expansion than before, which is very beneficial to my next years top line revenue growth and looking forward to the coming several years I think we will maintain a similar level of the capacity increase around 35% to 40%. And for the new city we enter last year we entered four, this year we entered six, next year we probably around four. So all of this is still in discussion time, I will share more with you in next quarter.
Upon high school, that’s a very good point, especially in Beijing, Shanghai and Guangzhou and some major cities. In Beijing we have around 25% of my revenue coming from high school, while this mix in Beijing – in Shanghai, Guangzhou, Shenzhen and other places is quite more, that is because we are kind of the highly retention model.
We start from the sixth grade of primary school and then we need to wait for the students to grow bigger, older and older and when they go a high school we will do more high school. So now we are seeing the high school mix will become much bigger in the coming years.
And upon your second question, my investment philosophy, I think again, our strategy plan is to get the long-term leverage in the future education business models and become a leading technology focus education provider. So with this we have made some very strong stretching investments in the past and will bring the long-term value to our shareholders.
Our recent investments have been well coordinate, align with our long-term strategy plan and all of them in common core focus on education, especially in K-12 segment. So coming to this fiscal year as I mentioned before, we have deeper understanding and the market is much mature for all education.
We are focused on our K-12 segment which is our key business and we intend to do fewer but larger deals. So you can see the number of deals have to reduce a lot but the average size of the deals has increased.
And we also will make some strategy investments globally because we need to incorporate the best technologies in the world and bring them back to China, try to improve the efficiencies in China.
So in the future we will continue to monitor and keep eyes open for any opportunities. But again we will also be very cautious and be very conservative to when we decided to do anything different. So this year I think in general we will focus on the synergy, but the first priority in investment. This will continue in the coming years.
Thank you, Zoe.
And there are no further questions at this time. Please continue, sir.
And ladies and gentlemen the conference for today. Thank you for participating. You may all disconnect.
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