TAL Education Group (XRS) Q4 2016 Results - Earnings Call Transcript

| About: TAL Education (TAL)

TAL Education Group (XRS) Q4 2016 Earnings Conference Call April 28, 2016 8:00 PM ET

Executives

Mei Li - Investor Relations Manager

Rong Luo - Chief Financial Officer

Analysts

Zoe Zhao - Credit Suisse

Anne Shih - Brean Capital

Claire Cao - Morgan Stanley

Tian Hou - T.H. Capital Research

Fan Liu - Goldman Sachs

Mariana Kou - CLSA Limited

Leon Chik - JPMorgan

Operator

Ladies and gentlemen, thank you for standing by and welcome to the TAL Education Group Fourth Fiscal Quarter and Fiscal Year 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 this conference is being recorded today, Thursday, 28 of April, 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.

Mei Li

Thank you, all, for joining us today for TAL Education Group's fourth fiscal quarter and FY 2016 earnings conference call. The fourth fiscal quarter and fiscal year earnings release was distributed earlier today, and you may find a copy on the Company IR website or through the newswires.

During this call, you will hear from Chief Financial Officer, Mr. Rong Luo. Following his introductory 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 under the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with SEC.

Also, our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of the non-GAAP measures to the most structurally comparable GAAP measures.

I would now like to turn the call over to Mr. Rong Luo.

Rong Luo

Thank you, Mei, and thank you, all, for joining us on earning call. I'm so sorry because I caught fever. I almost lost my voice, so I will authorize Mei to race through the prepared remarks by us, and I will be ready to answer your questions after that. Thank you.

Mei Li

Thank you, all, for joining us today on our earnings conference call for the fourth fiscal quarter and the full FY 2015. We are pleased with our fourth quarter and full fiscal year results that reflect the continued strong growth momentum for small class in the outer cities. Due to high demand for our tutoring services, we expanded small class classroom capacity by over 50% in FY 2016 compared to the previous year, and managed higher utilization rates throughout the year.

In renminbi terms, full-year revenue growth was [46.5%]. Today, I will briefly review our operational progress in the fourth quarter, and also offer you some highlights for the full fiscal year. After that, I will provide some further analysis of the Q4 and the full fiscal year financials and our business outlook.

We had a strong performance on the top line in the fourth quarter, supported by ongoing capacity expansion with the high demand. In dollar terms, the fourth-quarter net revenue grew by 42.1% year over year to $175.0 million. And in renminbi terms, the top-line growth was 49%, both exceeding our expectations.

Revenue growth was primarily driven by our 57% year-over-year growth in enrollments across all cities. We also achieved solid year-over-year non-GAAP operating income growth of 25.2% in the fourth quarter. Small class revenue growth was strong across the board. Small class revenue accounted for 84% of total revenue in the fourth quarter compared to 80% in the same year-ago period, and was up by 48.4% in dollar perspective, and 55.6% in renminbi terms, where enrollments increased by 58%.

Revenue generated from cities other than the top five, Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, accounted for 33% of Peiyou small class revenues compared to 23% in the same quarter last year, reflecting the faster growth dynamics in all tier cities. In the fourth quarter, revenue from cities outside the top five grew by over 100% year over year, and we achieved a triple-digit percentage growth in 10 cities. These cities are: Chengdu, Hangzhou, Jinzhou, Suzhou, Chongqing, Shenyang, Jinan, Shijiazhuang, Qingdao and Changsha.

In the winter term across the Group, we saw robust growth in all core subjects of our tutoring service. In particular, Chinese and English subjects achieved an enormous growth of above 50% year over year, faster than average growth. We will expand our English and Chinese core offering to more cities, and expect the strong growth momentum to continue in the future.

Let me update you on Beijing's small class performance. We are very pleased that we have managed a robust recovery in Beijing enrollments in all subjects following our targeted summer promotions last year. As the growth in enrollments came back, we also worked on re-energize the team, revise accounts, and better optimize greater operational efficiencies such as the optimization of small class centers. We continue to take the initiatives that will further strengthen our basis for growth in Beijing, and secure our place in the top ranking of the industry players and the potential consolidators in this market.

Turning briefly to our one-on-one business. One-on-one contributed a 12% of our revenue in Q4 compared to 16% in the same year-ago period. As I mentioned last quarter, we continue to expand our one-on-one presence where needed as a supporting business for small class. In the fourth quarter, we opened one new one-on-one learning center in each of Jinzhou and Suzhou, two cities we entered in 2012.

Let me now turn to our online courses segment which remains one of our fastest-growing sectors with 55% year-over-year revenue growth in US dollars and 63% in renminbi terms. Online courses through xueersi.com contributed 4% of total revenue this quarter and changed from the year-ago period. Online enrolments were 14% of the total enrolments this quarter versus 13% in the same year-ago period.

Let me update you on our capacity expansion. Because of a much stronger demand for our tutoring services this past year, we expanded more than originally planned. To support our healthy expansion, we have reinforced the training programs for new teachers. We are very proud of our training team that enables us to uphold the outstanding tutor quality that TAL is known for.

During the fourth quarter, we opened 23 new Peiyou small class learning centers, [ran more] these small class learning centers, and added classrooms in existing centers in cities with a strong demand and high utilization rates, such Wuhan, Beijing, Guangzhou, Nanjing, Xi'an, and other cities.

Overall, we added a net 305 Peiyou small class classrooms in the fourth quarter. In addition, we opened two one-on-one learning centers. We also closed five small class learning centers in line with our long-term objective to build a network of larger-sized centers with good efficiency and utilization.

In the first quarter of the current FY 2017, we are going to maintain the faster pace in network expansion, and add between 20 and 35 small class learning centers in the cities where the market demand is particularly high. We incorporated the learning centers into our physical network from the newly-acquired business unit, Firstleap Education. By the end of the fourth quarter, our network covered the 246 Peiyou and Mobby small class learning centers, 41 Firstleap small class learning centers, and 76 one-on-one learning centers.

Let me now go over some of the full-year highlights. Full FY 2016 has been a year of excellent growth performance. In the renminbi terms, revenues increased 46.% year over year, and in dollar terms, the top-line growth was 42.9% to $600.19 million, ahead of our expectations. Total student enrolments increased by [55%] (Ph) year over year to 2.3 million. We also achieved solid year-over-year non-GAAP operating income growth of 29.4% for the full fiscal year, even as we made significant investments in our future growth.

For full FY 2016, let me briefly recap our progress for each business segment where our core small class offering continued to be the main driver of our growth, up by 48.0% in US dollars, and 51.9% in renminbi terms. Enrollment growth for small class increased [53.5%] (Ph) over the previous fiscal year. ASP for small class in renminbi terms was almost flat year over year for the full-year.

Small class accounted for 83% of total revenue, up from 80% last year. The year-over-year change in revenue contribution was mostly driven due to the ongoing robust growth in under-penetrated cities. We are pleased with this accelerated revenue growth in both Beijing and outside cities. Revenue generated from cities outside the top five accounted for 32% of total Peiyou small class, and was up by 96% year over year.

In FY 2016, we raised small class prices in five cities, in Xi'an, Wuhan, Qingdao, Chongqing and Shenyang. In FY 2017, we will maintain premium pricing, and plan to increase small class prices in cities including Beijing, Guangzhou, and several other cities. In FY 2016, we added 44 Peiyou and Mobby small class learning centers on a net basis, or 1,512 Peiyou and Mobby small class classrooms, which represented 51% of classroom capacity expansion versus the previous year.

One-on-one achieved mid-teen revenue growth and represented 13% to total revenue in the full-year of FY 2016 compared to 17% in FY 2015. One-on-one revenue growth was 17% in renminbi terms and 14% in US dollars, driven by a 26% enrolment growth, taking into consideration of the transfer of our Guangzhou-based one-on-one business to Changing Education.

Online course revenue grew by 61% in US dollars and 65% in renminbi terms for the fiscal year. Online courses represent 4% of total revenue and 17% of total enrollments. In FY 2016, we spent a total of $22.5 million budget on organic and new business initiatives aligned with our original budget. We are pleased with the structural progress in our O2O and online business based on the positive initial results, excluding enrolment growth.

Going forward, we will maintain similar levels of investment in O2O and online initiatives, and we expect the O2O and online contribution to become more meaningful in FY 2017. For FY 2017, we plan to strategically stay the course of the past year, which is to fulfill further growth based on expansion and technology-based innovation with the right balance between present and future growth.

We will further build on our O2O initiatives, and at the same time continue to expand the center capacity to meet the strong demand for our class-based tutoring. Based on the outstanding progress we have made this past fiscal year, we are confident that our ongoing efforts to [coverage] technology, communication and education resources, will help us become a leading technology-based education services provider in China.

Let me now review our financial performance in more detail, followed by some comments on our business outlook. Now let me go over some financial points I would like to highlight. In the fourth fiscal quarter, small class ASP renminbi terms was almost flat year over year. We expect ASP of the regular small class to rise by low single-digit percentage in FY 2017 after we raise price in the aforementioned cities.

One-on-one ASP was down by 1.9% due to the increasing enrolment contribution from the small group class which charge lower hourly price. We expect small group class to continue to gain popularity in future and lower ASP of our one-on-one business.

Online course ASP was almost flat year over year in renminbi terms in the fourth quarter. In the fourth quarter, gross profit was $86.3 million as compared to $64 million for the same year-ago period. Gross margin for the fourth quarter was 49.3% as compared to 52.0% for the same period of last year, due to accelerated expansion, capacity expansion, and teacher recruitment for the coming summer term.

Operating income of $16.6 million represented a year-over-year increase of 12.1%. Non-GAAP operating income increased by 25.2% year over year to $25.2 million. Basic and diluted net income per ADS were $0.14 and $0.13 respectively for the quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were $0.24 and $0.23 respectively.

In FY 2016, GAAP and non-GAAP income from operations increased by 26.5% and 29.4% respectively year over year. Non-GAAP operating margin of 17.9% aligned with our expectation.

Income tax expense was $33.5 million in FY 2016 compared to $9.4 million in FY 2015. The increase was mainly due to accrued one-off income tax expense of $12.5 million related to a gain from disposal of one-on-one business in Guangzhou and an increase of $7.3 million in income tax expense due to the expiration of an EIT exemption period for one of TAL's subsidiaries, Beijing Xintang Sichuang Education Technology Co., Ltd., upon which the subsidiary became subject to an EIT rate of 12.5%. Basic and diluted net income per ADS were $1.29 and $1.21 for FY 2016. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses, were $1.61 and $1.49 respectively.

From the balance sheet, as of February 29, 2016, we had $434.0 million of cash and cash equivalents, and $17.3 million of term deposits compared to $470.2 million of cash and cash equivalents and $21.2 million of term deposits as of February 28, 2015.

Capital expenditures for FY 2016 were $35.1 million, representing an increase of $4.5 million from $30.6 million the same year-ago period. As of February 29, 2016, our deferred revenue balance was $289.3 million as compared to $177.6 million as of February 28, 2015, representing a year-over-year increase of 62.8%.

Taking into consideration the recent significant change in the renminbi exchange rate against the US dollar, based on our current estimates, total net revenues for the first quarter of FY 2017 are expected to be between $181.1 million and $183.2 million, representing an increase of 40% to 42% on a year-over-year basis.

If not including the impact from the recent depreciation of renminbi against the US dollar, the projected revenue growth rate is expected to be in the range of 45% to 47% for the first quarter of FY 2017. These estimates reflect our current expectation which is subject to change.

That concludes my prepared remarks. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now begin the question-and-answer session [Operator Instructions] And our first quarter comes from the line of Zoe Zhao, Credit Suisse. Please ask your question.

Zoe Zhao

Can I have two questions, please? First one is on our guidance. Can management break down the next quarter's guidance by our core business and Firstleap, as well as give us the full-year revenue guidance for FY 2017? And second question is, could you provide us some guidance on your full-year margin outlook? Thank you.

Rong Luo

Thank you, Zoe. For the top-line guidance in revenue perspective for Q4, for Firstleap, it's around 5% of my business. So you could just use 5% as a benchmark. And on average, we are seeing is the growth rate of Firstleap is actually higher than my Company average. [After] (Ph) integrations we have done in the last quarter, the whole thing has merged together and the integration is quite well, so we are seeing a [solid] growth rate coming from Firstleap.

And for the full-year guidance, again, we don't provide official full-year guidance on revenue, but I want to share with you that in our internal budget, actually, we estimate approximately 45% top-line revenue growth in renminbi terms for the FY 2017. And so far, the renminbi depreciation against dollar in the first quarter is roughly 5%, so that's my internal target.

And your second question about the margin perspective. I think we should break down this question by business. For the Peiyou small class business, I think we continue to see a very strong demand for the parents and students for our children's services. In last year, we have added more than 50% classroom capacity, faster than before, to meet a strong demand, and we will continue to add capacity at a reasonable pace in the FY 2017.

As mentioned in the prepared remarks in the first quarter, we are going to add around 20 to 35 new small class learning centers. Accordingly, not [only rental], we also need to hire and reimburse a large number of teachers to fill needs.

You know in general, both the capacity and the teachers, it takes around two quarters to ramp ups, so I think the good timing for them to be fully utilized will starting from this summer. When they come in June, more kind of utilization, so their margin and their profits will have a little positive impact from there. But especially for the first quarter, maybe they will have some pressures over there.

And for our online business, as Mei mentioned in the prepared remarks, we spend around $22.5 million last, year which is around 4% of my total revenue. This year, we will maintain a similar level of debt, and our - but the numbers should be similar but the place where you spend the money will be very different.

Last year, we emphasized to hire a lot of IT managers, product managers, to establish the platform. This year, we intend to hire more teacher and teacher assistants to let them play in the platform. So based on the preliminary numbers we have seen, both in our Xueersi online school, Xueersi [indiscernible], and the [indiscernible] platform and our O2O initiatives, we are seeing very positive numbers from there, so we are more than happy to see the live class in the Xueersi online school should have maybe more contribution start from summer. But again, to prepare for the summer, we need to hire some teacher assistants and teachers to play in that platform.

About Firstleap, I also would like to remind all of you Firstleap is continue to enhance operating efficiency, and we expect the Firstleap to become profitable within two to three years with a profit margin of within 10% to 20%. While this margin level should not catch up with our short scale small class business in the near term, they're still a very complete management services to my Company, which is a very good maker of my Company's product portfolio.

So for Firstleap, they grow top line faster than Company average. Their margin level today is lower than the Company average. So, yes, it will bring kind of the diluted impact to my net profit margin, but in absolute dollar perspective in the long run, they will be a big plus.

So that's overall situation we have today. What I can say is, especially for the coming quarter, we have some pressures over there because we have adding a lot of capacity and we have more teachers there. But in the longer term, rather that will impact the full-year number - my full year margin.

Probably, I will allow you guys to stay tuned. We probably can share more information with you guys right after summer class. That is a very important season for us to have more ideas on what visibility about the figure numbers.

Zoe Zhao

Thanks a lot and take care. It sounds really [multiple speakers].

Rong Luo

Thank you.

Operator

And next question from the line of Anne Shih from Brean Capital. Please ask your question.

Anne Shih

I guess this is somewhat related to the previous question in regard to the margin. I was wondering if you could give us an update on the plans for the geographic expansion next quarter and next year. And then, can you also talk about the impact of the expansion to margin, and then how we should think about the margin trend for FY 2017. And then just separately on the income tax, this quarter was very high with the expiration of the exemption. I was just wondering what we should expect for the rate going forward. Thank you.

Rong Luo

Thank you, Anne. For the geo expansion, some key numbers to share with you. In the year 2016, we have entered five new cities. The other one we plan to enter - actually, we are there, but our reporting only start to report we enter one new city when we start to recruit students. So that's because some of the time that they will - other one city will [slip] from last fiscal year to this fiscal year. And capacity [expansion] we have mentioned in the prepared remarks. We have added more than 51%.

So about the reason of adding more capacity, I think the key philosophy for us is still we need to make sure we can meet the needs from the parents and the students. So compared to the years before, we're a little bit faster. That is because we have seen much stronger demand from our local markets, especially for the low-tier cities.

I use the four cities we're just adding in the year 2014 as an example. They are growing actually faster than the other - in the same period of the other places as already before. So we are seeing the trending is accelerating. That's why we want to add in more to feed the needs.

Again, as a TAL location, we always treat the teaching quality as the top priority. So even with a little [bit] in adding more capacity, but we still maintain our high quality on the teachers' training. So we hire teachers there; we train them in six months. And then, we will send them to start classes.

So which means when we - in the timing, we're adding more capacities over there. It will bring us a little bit short-term pressure in the new quarter. But in the long run, that's very beneficial and very good for the Company's long-term growth.

And about your second question about the income tax, last year, we have our very special case. That's because we use the Guangzhou one-on-one business as investment on Changing Education to exchange their stake. So this is kind of the [dispersal] in accounting. So we have gained 15 million gain from there, and we need to apply 25% tax rate over there, which is a special case. If we take all this special case, the [ETR] actually will go back to around 21%/22%, which aligns our expectations before.

Looking forward to next year, we have - China has some policy changes, tax policy changes in the past. So we foresee the tax rate should be lower than what we can see this year, but this is still too early to tell you guys numbers. We need to go back to [dig out] how the policy will impact us in both revenue and profit perspective. But in the [indiscernible] perspective, next year the ETR will be lower than what we see this year.

Anne Shih

That's helpful. Thank you.

Rong Luo

Thank you, Anne.

Operator

And next question from the line of Claire Cao from Morgan Stanley. Please ask your question.

Claire Cao

I have two questions. The first one is regarding the O2O initiative. Just wondering. Is it possible that management shares some more color with us on the [indiscernible] program? Is there any initial operational debt data that you can share with us? And the second question is regarding the low price strategy. So could you comment on your strategy going forward as New Oriental expands such strategy to other core cities? So do we plan to escalate our strategy, and how are we going to balance between market share gain and our financials going forward? Thank you.

Rong Luo

Okay. Especially from O2O perspective, actually, we have two synergies ongoing. The first one is we call spoken in Chinese. So we have the teachers maybe in one place, and we have students in their places, maybe very far from their teachers.

So the second thing is Hybean. All I can say is all of them are actually - oh, I'm sorry. I forget to mention my Xueersi online school. So Xueersi online school actually before was pre-recording kind of model. This year, starting from summer, we are transforming the model from pre-recorded to live class. So all of this O2O and online initiatives, actually, it's making very good progress. Based on the numbers where we seen in the summer term, we still have one month to go, that all the numbers are quite positive.

But again, the percentage of them, the percentage of contribution from them is still below 10%, so we would like to - we will probably give you guys more details on numbers when they become more meaningful. And so that is the current situation of our online space. But again, I need to emphasize is we are hiring more teachers and teacher assistants for both the O2O [indiscernible] and the Xueersi online school in Hybean. When it's there, we will have more meaningful contribution from them maybe in the coming quarters.

And your second question about the promotions, and you have mentioned, [indiscernible] have tried to expand their promotion offers to a lot of places. For us, I think last summer, the [indiscernible] summer class offer for the first year junior high students in Beijing actually are tracking sale times of the amount of the previous summer registrations in Beijing. We have a very good retention rate from there, which is also part of reason why we can get [gross[ recovery in Beijing.

And this year, we are going to launch a second, a limited campaign for the summer promotions for Slatty grades again, mainly in Beijing, with special offers for the [indiscernible] in the first year of junior high and senior high students. The difference is this year in Beijing, we're adding some promotions for the first year of the senior high students. Once again, these limited offers could prove to be a very effective way to win the market share and promote market consolidations. At the same time, please note we will also increase the small class price in Beijing, Guangzhou, Shenzhen, and some other cities.

Today, we don't have the intention to expand very aggressively of the price promotion to some other cities, but we are encouraging some cities based on their reality that they can decide for themselves if they want to run some limited promotions for the new foundries, or maybe for the new grade of students.

For example, maybe in Chengdu, we are doing some limited offers on English; and some other places, we are doing some promotions on Chinese. So that's something what we'll do, but the scale is very, very small.

And we don't have the plan to do the same as what [indiscernible]. We still try to limit the promotions and the offers, most of them in Beijing. And we - but again, in Beijing, we still strongly believe the summer promotions will intensify the market consolidations, since the promotions is quite limited. So we don't expect they have any mature impact to [indiscernible] now in the coming quarters.

Claire Cao

That's very helpful. Thank you.

Rong Luo

Thank you, Claire.

Operator

And next question from the line of Tian Hou, T.H. Capital.

Tian Hou

Two questions. One is related to your acquired company in southern part of China. I wonder how much revenue this part of the business will contribute to the total business in the new fiscal year. And I know that part of business has submitted its - has relatively low margin, and what's the impact from this part of the business to the whole Company's margin in the fiscal year? That's the first question.

Rong Luo

Thank you, Tian. Yes. I answer first question first, and then you can go on to a second question. About Firstleap, right?

Tian Hou

Yes.

Rong Luo

Okay. For the Firstleap Education, in the first place, the new type product should be complementary of our product portfolio in my Company. Before we were running a lot of things like the Test for English, but all of us know that Test for English is not a very good product, and because of the demand from the students and the parents, they are changing.

So as one of the top players in the new type of the [old style] of tutoring, old style tutor English products, firstly actually, it's a very good product.

And compared to the timing, before we don't invest in and now we have acquired 100%, the only difference is they have significantly lowered down their new classroom acquisition costs. That's why you can see last year there's still around a 10% to 15% loss-making position. But coming to today, it's almost break even.

So we are very confident with more time, the synergy between these two companies will be more significant, and we are more than confident to say the profit margin of Firstleap will be around 10% to 20% in two to three years' timeframe.

But I also agree with you. Compared with Peiyou small class business, the margin is definitely lower than that. But the good thing we need this product to try to increase our product portfolio, increase our top-line revenue, and the actual number perspective, both the revenue and profit will be beneficial with this new business; and we are still confident that Firstleap will continue the growth momentum to grow faster than company average and become a very important profit contributor to my Company in two to three years' time.

Tian Hou

That's very helpful. And the second question is, in this quarter's earnings, and below the line, there are some gains from selling your [previous] investment. And I realize you guys made many investments in the last two years and you are in the process of getting rid of some of them and then making money. So I wonder, going forward, how should we see this part of the business activity? Is that going to be ongoing-based, or is that going to be pretty concentrated? How do we see that?

Rong Luo

Yes. Okay. We start to make an investment actually maybe by the end of the year 2013, and in the past three years, we invest on a significant number of deals. And as I mentioned in the previous quarter's earning call, as we're starting from last year Q2/Q3, we start to classify the deals we have invested, and we will treat them differently. And now, we have seen wage slip development and a very good churn of the [companies][ we have invested, and we have seen bigger and bigger [trends]. Some of them they have the very good synergy with us. Then, we have increased their stake from minority to share - to a controlled stake.

For some of them, they are doing quite well, but actually, they are still a little bit far from my K-12 business. We are happy to actually sell our stakes to the other people, which is also a very good way to concentrate our focus in L-12 area. Because we invest a significant amount of deals in the past, so we can foresee in the coming quarters, we can see more and more deals we will start to get some capital gains.

I cannot guarantee which quarter, how many deals we have over there, but the only thing I can say is for the deals we have high synergy, I will continue to increase my stake. For the deals where they are doing well but it's a little bit far from my core business, I - we will leverage the timing to sell a stake and to get more capital gain over there. I will let you guys - post you about any progress we have made over here.

Tian Hou

So, Luo, just one question. How much does the capital gains happened in last quarter?

Rong Luo

It's around $1 million to $2 million.

Tian Hou

Okay. Thank you. That's all my questions.

Rong Luo

Thank you.

Operator

And next question from the line of Fan Liu from Goldman Sachs.

Fan Liu

I have two quick questions. Number 1 is that I understand that after this summer you will replace your pre-recorded courses by the live broadcasts, broadcasting courses for all the grades and then the high [school] grades. So may I know how we should think about the margin profile for this live broadcasting segment compared to other segment? And also, the second question is that about Beijing's enrolment growth and also revenue growth. I recall at last quarter, it's around 25% in RMB terms. So would you mind sharing with us what it looks like this quarter? Thank you.

Rong Luo

Thank you, Liu Fan. Can I clarify the second question first? Do you mean my Beijing revenue growth or my --? I'm sorry. I didn't quite follow that, the second question.

Fan Liu

Yes. So actually, just the enrolment growth, so revenue growth in Beijing.

Rong Luo

Okay. I got you. Because of the competitive reasons, we didn't disclose the Beijing enrolment and revenue growth since two quarters ago. But the only thing I can say is Beijing has recovered and regained the growth much better and faster than what we expect. So with the new measures in place, we are more than confident to say Beijing will continue its growth momentum in the coming quarters, and even the coming one/two years.

For the online school, thank you so much. You are one top few people who carry my Xueersi online school's website [indiscernible]. Starting from this summer term, yes, we have transformed our Xueersi online school from the pre-recorded content to online, to live online. And that is a very important change because we believe the live is a very important way, and maybe very halfway to increase the value of online school.

So I can share with you some of the numbers there. The online price - actually, the live online price, live class price actually is around 2 to 3 times higher than the pre-recorded content. And enrolment perspective, before, we treat - if one student enroll in my online school for one year we treat him as one enrollment.

Now we have changed their learning behavior from one year to four terms, which is similar to my small class business. So based on the preliminary numbers we can see, it's more likely the margin of the live class platform will be better than pre-recorded content. But again, summer is the first season for us to do that.

Now we're under the change of shifting the students who are - who get used to the pre-recorded content now, they have to go with the live platform. So in the short term, it's hard to keep - it's hard to estimate the impact for the margins, but right after summer, in the longer term definitely, the live class platform margins is much better than the pre-recorded contents.

Fan Liu

Thank you, Rong Luo.

Rong Luo

Thank you, Liu Fan.

Operator

And next question from the line of Mariana Kou from CLSA. Please ask your question.

Mariana Kou

I have actually two questions. I think my first one is really just I think from our discussion on firstly having a lower margin but higher growth. And also, your comment just now that the online business is shifting from pre-recorded to live business is also at a pretty early stage, so we are not too sure on the margins. Would it be fair to say that like non-GAAP, OP margin this year on a year-on-year basis will probably be under pressure? And then, more of a longer-term basis, do you think that, say, in three years we'll be able to get back to what we used to be seeing, say, for 20% type of non-GAAP OP margin level? That's my first question.

Rong Luo

Okay. For the margin question, again, as I mentioned earlier, for the new quarter, yes, we're under pressure because of the factors I've mentioned on the call. And one year, I still need to wait for some class results because we are seeing very positive number over there, so we should have some chance to make up a little bit.

For the Firstleap, they are improving their profitability, even though they are still lower, but they are only around 5% of my business. So I think maybe when we come into summer, I have much - maybe, much clearer visibility on the operating margin and profit margin and profit margin during this year.

And coming to the total three years' time, it's also very difficult to say whether we will go back to 20%/21% margin or not, but the only thing I can share is all the investments we have made in online and O2O, actually, they are paying off now. We are seeing the numbers are going up very quickly.

So in margin perspective, in profit perspective, I think we are quite confident in two to three years' time we will perform much better than what we expect, and we are still confident the Company is right on the track. And the online, O2O can give us a lot of ways to be scalable, not only the physical learning centers. So that is the [indiscernible] I can share with you guys.

Mariana Kou

Thanks. My second question is a small question. I think some of your competitors talked about the change of tax regime from business taxes to VAT. How would that impact your business? If there's any - maybe on the top line and bottom line, if there's any impact, if you could just share with us. Thanks.

Rong Luo

Yes. I think start from May, the VAT will be introduced to customers, [circles] like us, replacing the business tax. So from then on, our top line - I'm sorry for that. So from then on, I think our business will be subject to around 6% of the VAT for gross revenues instead of 3% business tax.

So given the timing, I think there is very minimal impact in revenue for Q1, but in the long run, the impact will be around 2% to 3%, because most of my revenue actually coming from school.

But from a bottom-line perspective, actually, we still treat this policy as positive because we can use our invoices from rental and selling investments to deduct the tax. So what I can say is, in the bottom line perspective, I treat it as neutral to my business.

Mariana Kou

Thank you, management. That's very helpful.

Rong Luo

Thank you.

Operator

And you have a question from the line of Leon Chik from JP Morgan. Please ask your question..

Leon Chik

Just one question. I think selling expenses has not really changed as a percentage of sales, and your competitor has been able to cut it basically using online to offline in order to cut traditional advertising and also online advertising. So is there any scope for you guys to cut your selling and marketing once online, once your O2O is mature? Thanks.

Rong Luo

Thank you, Leon. Where we are different from them is, actually, we don't have any marketing advertisements, online advertisements over there. All the numbers in the sales magazine actually are people. So our investment is in the IP platform, product management. So I think in the coming year, because in O2O initiatives we have invested a huge number of product and technology over there, people over there, now we shift our focus to invest more on teacher and teacher assistant side. So we probably can see the sales and marketing will be more stable, and all of this will be in line with my brand new growth; maybe even a little bit higher.

So we are quite confident of this. For online and online O2O initiatives, they will bring us a much bigger space in the coming two to three years, and help us to be scalable all over the country. So in the long run, again, I will still maintain my investment level in O2O and online initiatives. The only difference is before we invest more in sales and marketing and G&A, now we invest more in the cost side because we have more classrooms. We have more teachers and teacher assistants over there. So in general, that's still a very good investment, and we believe they will be more meaningful in the coming quarters and next year.

Leon Chik

Thank you.

Operator

That's the last question. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may all disconnect.

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