New Oriental Education & Technology Group Inc (EDU) 2021 Q1 法說會逐字稿

Good evening, and thank you for standing by for New Oriental's FY 2021 First Quarter Results Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. If you have any objections, you may disconnect at this time.

I'd now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao.

Hello, everyone, and welcome to New Oriental's First Fiscal Quarter 2021 Earnings Conference Call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire Services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions.

Before we continue, please note that the discussion 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 involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our public filings with SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org.

I will now turn the call over to Mr. Stephen Yang. Please go ahead, Stephen.

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Although the impacts of the pandemic continues to raise hurdles for business across globe, we're pleased to kick off the fiscal year with a set of encouraging financial results in the first quarter of this year that is in line with our expectation, while showing signs of the recovery in some of our business lines as the markets begin its path to normalization.

Total net revenue was $986.4 million, representing an 8% decrease year-over-year, which is better than we guided in the previous quarter. Net revenues from education programs and services for the first quarter were $935.6 million, representing a 6.1% decrease year-over-year. Our U-Can middle school/high school all-subjects after-school tutoring business showed a positive light with a growth of approximately 9%, while our POP Kids program reported a growth of approximately 4%.

Our industry-leading OMO system has been vital in the previous quarters to ensure our service run smoothly, and it has once again proved to be instrumental in this quarter. As it provides our operation with strong flexibility to help vast majority of our students migrate from OMO online classes back to offline learning centers, which have gradually resumed service and made the easing of the pandemic restriction measures. Encouraged by its effectiveness, we have put more focus on executing our OMO strategy, including piloting the OMO online courses in around 20 existing cities and attracted a promising number of new customers in the summer quarter.

Total student enrollments in academic subjects tutoring and test prep courses in the fourth (sic) [first] quarter of 2021 increased by about 13.5% year-over-year, to approximately 2,961,100. The lower-than-normal increase in the number of student enrollments is primarily due to the delayed enrollment for summer and autumn classes and shortening of the summer holiday in many major cities by 1 or 2 weeks this year, as well as the delayed resumption of the offline operation in cities such as Beijing due to the reemergence of the COVID-19 cases before the summer holiday.

A key highlight in this quarter is the highly successful summer promotion campaign. Despite the challenge of a shortened summer holiday, we're delighted to see the total promotion enrollment reached 1,079,000, a 31% increase year-over-year, accompanied by improved student retention year-over-year.

In terms of the pricing, per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 10% year-over-year in dollar terms. As for hourly blended ASP, which is GAAP revenue divided by the total teaching hours, decreased by approximately 2% year-over-year. To provide the breakdown of the hourly blended ASP, please note that U-Can classes increased by 2%, U-Can VIP courses increased by 3%, POP Kids decreased by 1% and overseas test prep programs increased by 7%, all year-over-year in dollar terms.

Comparing with our normal price increase of 5% to 8%, this quarter's hourly blended ASP decrease was mainly because of: firstly, a bigger decline of overseas test prep program, which hourly blended ASP was much higher than other programs; secondly, the piloting of promotional OMO online courses in some major cities with discounted price in summer; and thirdly, a bigger portion of the enrollments on promotional courses to encourage students to register for more subjects.

Now I would like to spend some time to talk about the quarter performance across our individual business line in detail. As pandemic gradually fades in China, encouraging signs of recovery have started to emerge across our business lines with significant jump in student enrollments. Our key revenue driver, K-12 after-school tutoring business, achieved year-over-year revenue growth of approximately 8% in dollar terms. Breaking it down, the U-Can middle school/high school all-subjects after-school touting business recorded a revenue increase of approximately 9% in dollar terms for the quarter. Student enrollment grew 23% year-over-year for the quarter.

Our POP Kids program recorded a revenue increase of about 3.5% in dollar terms for the quarter. Enrollment increased by 17% for the quarter. Our overseas related business, including test prep and consulting and study tour business, continue to face the difficult challenges due to the cancellation of the overseas exams and restrictions on travel, while the unpredictability of the pandemic situation in different parts of the world has made the students hesitant to study abroad.

The overseas test prep business recorded a revenue decrease of about 51% in dollar terms for the quarter. While the overseas consulting and overseas study tour business recorded revenue decrease of about 31% in dollar terms year-over-year for the quarter. And finally, VIP personalized class business recorded cash revenue decline of about 10% in dollar terms year-over-year for the quarter.

We're pleased to see that our summer promotion strategy delivered outstanding results. We offered low price experiential courses for multiple subjects in a total of about 70 cities, targeting with certain secondary school and Grade 3 primary school student customers before they start their new school year. The promotion price is similar with that of last year at around RMB 400. It's very encouraging that even we launched this summer promotion almost 1 month later than last year because of the huge challenge from the pandemics on our daily operation, the summer promotion remains very well received by the market.

The complete promotion enrollments we brought in this year recorded a 31% increase year-over-year, reaching 1,079,000 enrollments. The encouraging results indicated the opportunity of the market consolidation as the COVID-19 pandemic fades and certain players may lack financial and digital capabilities to sustain their operations. It was well-proven that under this strategy, we are able to better identify and retain customer with higher loyalty. Please note that these promotion enrollments are not recorded in our current reported enrollment.

Going into the autumn semester, we have retained about 60% of the students following the promotion, which will boost the revenue and margin recovery throughout the whole fiscal year 2021. And we do not foresee any negative impact of the promotions on operating margin throughout the whole fiscal year. As these students move to the higher grade, the continual improvement in retention rate and customer loyalty will drive the revenue growth in the next 3 to 6 years.

We continue to be guided by our optimized market strategy in this quarter and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability. This quarter, we opened 7 new offline training schools in the city of Hangzhou, (inaudible). Altogether, this increased the total square meter of classroom area by approximately 23% year-over-year, 1% quarter-over-quarter by the end of this quarter.

This slight increase is in line with our expectation, as we tend to achieve a more modest growth in capacity in the first quarter of the year and ramp up our expansion efforts in the latter part of the year to prepare us for recruiting more new student enrollments at the start of the following academic year.

The expansion in our offline education network has also made sure that we are fully prepared for when pandemic is over, and our service can resume with a strong presence across different China cities. We rolled out our dual-teacher class model for POP Kids program in 46 existing cities, for U-Can program in 28 existing cities, and for both POP Kids and U-Can K-12 business in 10 new cities by end of this quarter.

We're happy to see increased market penetration in those markets we have tapped into. We also saw the improved customer retention and scalability of this new model. With this proven result, we will continue this strategy in the rest of the year. As the outbreak of COVID has highlighted the importance and demand of online education, we have placed more resources in this area and invested $39 million in the quarter to improve and maintain our OMO-integrated education ecosystem and after COVID -- outbreak of the COVID-19 has highlighted the importance and demand of the online education.

Apart from the OMO infrastructure, we have allocated part of the resources in advanced training programs for our teachers to enhance their online/offline integrated teaching skills in response to the growing demand. At the same time, we continue to upgrade our technology platforms and will broaden the usage of online tools and content in our OMO system for all business lines throughout the whole network, as well as further develop the best teaching content and courseware to cater to online/offline integrated education method.

We're glad to see that industry-leading OMO ecosystem has not only successfully managed to cushion most of the impacts on our service operation caused by the pandemic, but we also see the customer retention rate from spring to summer semester and from the summer to autumn semester were trending higher than the same period last year, which further demonstrated our customer satisfaction and effectiveness of our online courses throughout the OMO system. We believe those OMO initiatives will effectively boost the enrollment and speed up the recovery of business in the rest of the year.

To capture the huge market opportunity in the online education space, we continue investing more resources in executing new initiatives in our online K-12 after-school tutoring business in fiscal year 2021. During the COVID-19 pandemic, Koolearn did large-scale market promotion by offering free large size online live broadcasting classes to the public and attracted several times more traffic than normal time. To capture this new market opportunity, Koolearn also added a meaningful number of customer service representatives and marketing staff to support the new initiatives in K-12 tutoring.

This move has consequently raised our spending on marketing front, but we believe these are necessary and understandable measures as we found ourselves in an enduring pandemic situation. Our Dongfang Youbiao small size class currently enjoy a significant first-mover advantage and stand to benefit from the increasing demand in low-tier cities. Koolearn large size K-12 courses are able to offer the best-in-class learning experience through the investment in upgrading the app and online platforms, introduced new education technologies and adding more interactive features on online courses.

Koolearn also continued to establish teaching training centers in other locations to attract more qualified teachers and tutors to provide systematic training programs. At the same time, Koolearn has dedicated a significant amount of investment to marketing and service enhancements in the past 2 quarters to attract customers during the peak of pandemic.

But we expect spending to be normalized in the coming quarters -- in the coming quarter, as we will be cautious in identifying higher ROI marketing channels and evaluate their unit economics in real time, which will, in return, keep the average user acquisition cost at a relatively low level. We believe as a result of the improvement of operational teams as well as positive word of mouth promotion and brand loyalty, Koolearn will continue to quickly acquire new users, while enhancing the student retention rates.

Now let me walk you through the other key financial details of the quarter. Operating cost and expenses for the quarter were $836.1 million, representing a 1.3% increase year-over-year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation expense, were $820.2 million, representing a 0.7% increase year-over-year. Cost of revenue increased by 5.6% year-over-year to $464.9 million, primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation.

Selling and marketing expenses increased by 15.5% year-over-year to $116.9 million, primarily due to the additional number of customer service representatives and marketing staff with the aim of capturing the new market opportunity, especially for new initiatives in K-12 tutoring on our pure online education platform, Koolearn.com. General and administrative expenses for the quarter decreased by 10.5% year-over-year to $254.3 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $242.6 million, representing an 11.3% decrease year-over-year.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 43.7% to $15.8 million in the fiscal first quarter of 2021. Operating income was $150.3 million, representing a 38.9% decrease year-over-year. Non-GAAP income from operations for the quarter was $166.1 million, representing a 35.4% decrease year-over-year. Operating margin for the quarter was 15.2% compared to 23.0% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 16.8% compared to 24% in the same period of prior fiscal year.

Net income attributable to New Oriental for the quarter was $174.7 million, representing a 16.4% decrease from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $1.10 and $1.09, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $184.5 million, representing a 19.8% decrease from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $1.16 and $1.15.

Net operating cash flow for the first quarter of 2021 was approximately $391.6 million. Capital expenditures for the quarter were $95.2 million, which were primarily attributed to the opening of 42 facilities and renovations at existing learning centers. Turning to the balance sheet. As of the August 31, 2020, New Oriental had cash and cash equivalents of $1,047.6 million, as compared to $915.1 million as of May 31, 2020. In addition, the company had $291.8 million in term deposits, $2,778.4 million in short-term investment.

New Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered, at the end of the first quarter of fiscal year 2021 was $1,563.1 million, an increase of 17.5% as compared to $1,330.7 million at the end of the first quarter of fiscal year 2020.

Looking ahead into the next quarter and the rest of the fiscal year 2021, despite the continued challenge from the COVID-19 pandemics are expected to remain, we are more clear about the recovery trend of the company near-term financial performance and the market opportunity over the long run. Our strategic focus and the investment approach this year aim at improving product quality, increasing teacher salaries and enhancing our industry-leading system, which fully reflects our ethos of focusing on the essence of education.

In view of market competition and opportunities to take advantage of post-COVID market consolidation, we firmly maintain a stable and balanced investment strategy that would improve the quality of our education service with aim to achieve sustainable and long-term growth as opposed to unhealthy short-term growth that often requires excessive investments and higher cost to acquire customers.

As such, we will continue to focus on following key areas. First, we will continue to expand our offline business. We aim to add around 20% to 25% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-12 business in this fiscal year. We believe our class expansion will prepare us to further take market share from other players post-COVID as we believe some small players without strong financial position and online class capability may not be able to sustain their business during the period. We expect the industry will undergo a wave of market consolidation upon the pandemic fades. The fact that we are a major player with a strong financial capability and fresh offline facility enable us to further strengthen the market-leading position and penetration.

Second, we will continue to leverage our investments into digital technologies and introduce our OMO system in more offline language training and test offerings, especially for the K-12 business and overseas test prep key business. The usage of the online tools and content in our OMO system for all business lines throughout the whole network will be enhanced. To uplift the whole OMO teaching experience, we'll place more efforts to developing the best teaching content and courseware and also developing more advanced training programs to our teachers. With all the above-mentioned infrastructure in place, we'll continue to pilot our OMO online initiatives in some major cities with high demand and higher operational efficiency.

We believe that our OMO initiatives will be one of our growth engines to increase our customer acquisition post-COVID and enabling us to capture the market consolidation opportunity. This revamped, new business model will also accelerate our margin recovery in the rest of the year and further extend our long-term margin target. Here, I have to highlight that all of these OMO products are supported by our offline classes. They supplement each other in a hybrid format. All the teachers -- all the teaching content, courseware, materials as well as our teachers and technologies are developed and originated from our existing offline centers and resources.

This integrated system continue to broaden our customer base as it enable us to reach students in satellite cities as well as the cities where we have fewer learning centers to cater in our -- to cater all our customers. Furthermore, we will continue to invest in and implement new initiatives, including product content development, teachers recruiting training, R&D as well as the sales and marketing in pure K-12 after-school tutoring business, our Koolearn.com platform.

Third, our top priority will remain as to focus on controlling cost and reducing expenditures across the company to minimize the negative impact from pandemic on bottom line. We believe we will resume the expansion of the overall non-GAAP operating margin year-over-year as COVID-19 subsides gradually. Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong. Although we are facing various short-term negative impact from the pandemic and we have seen increasing our investment in different strategy, we remain optimistic of the brighter prospects of our business and believe our investments now bring us fruitful returns in the long run.

As the pandemic situation and restriction measures begin to ease in China, the timely reopening of all schools and our offline learning centers in September, the start of the new fiscal year, it's deemed to be a massive boost for our business. We believe this will enable us -- enable our recovery to pick up the momentum, which will likely to be reflected in the results in the coming quarters. We are certain that with New Oriental's leading brand, superior education products and system and the best teacher resources, we have the ability to and further into market share in China's huge after-school tutoring market and deliver long-term value for our shareholders.

When looking at the near term and our exceptions for the next quarter, we expect total revenue to be in the range of $863.7 million to $887.3 million, representing a year-over-year increase in the range of 10% to 13%. To provide the breakdown of the expected top line growth for key business lines, K-12 business is expected to grow around 25%, overseas test prep program is expected to decline 30% to 35%, and overseas study consulting and study tour business is expected to be -- to decline 0% to 5%, all year-over-year in dollar terms.

We also expect the overseas related business, including overseas test prep and the consulting service, will continue to decline due to the pandemic around the globe, caused by the cancellation of overseas exams, suspension of the overseas schools and restriction on travels. The negative impact on this overseas related business will affect the entire education industry in China, not only for New Oriental and may last over the coming 1 or 2 quarters.

That said, in contrast, China's effective controlled pandemic situation has shed a more positive light on our business domestically. We're pleased to see that we gradually resumed our offline operation in all cities that were in by mid-September. And vast majority of the students in these cities have successfully migrated back to our learning centers from our OMO online classes.

To conclude, we are now taking on all kinds of the operational actions to boost the enrollment and platform utilization for the autumn semester and speed up the recovery of the business after the resumption of the schools and learning centers. We're confident that the demand for after-school tutoring will gradually pick up and trend toward normalized level in the rest of this fiscal year. I must mention that these expectations reflect New Oriental's current and preliminary view, which is subject to change.

At this point, I will take your questions. Operator, please open the call for this.

(Operator Instructions) Your first question comes from the line of Tian Hou from T.H. Capital.

Congratulations on a good quarter and guidance in those kind of a challenging time. So the question is related to the margin. The gross margin on a year-on-year basis was down pretty significant. So I wonder how much is caused by the overseas business. And going forward, what's the gross margin is going to trend?

Tian, yes, the gross margin was down by roughly 6% year-over-year this quarter. I think the first reason is that the revenue was down by 8% in this quarter year-over-year. And in this quarter, we still raised the salary of the teachers and -- because we think the teacher's quality is the core competence of the education business. So as we did in last several years, we raised the teacher salary. And also, we acquired the top teachers from the other small players during the pandemic.

And the rentals, I think, during the COVID-19 period, we still expanded our capacity in the areas where -- in the cities that we feel the comfort to drive the potential growth in the future. And this quarter, the year-over-year expansion was 23% at the quarter end. So it drives the gross margin down. But I think it's just one time, okay. Because as I said, our business is in the process of the recovery, and we have already gave the guidance of the Q2. And within it, in the Q2 guidance, the K-12 business will be increased by 25%. So I believe the GP margin recovery will be happened in the second quarter.

Our next question comes from Felix Liu from UBS.

Congratulations on a good result given the challenging environment. My question is on utilization. I understand that a lot of the offline classes have resumed in most of the cities. So could you give us some color on where the utilization is like currently? And how is the trajectory going forward?

Yes. It's -- Felix, it's a little bit hard for us to disclose the utilization rate because we're still -- during the -- we're still in the time of the pandemic. For example, in Beijing school -- our Beijing school, we opened the -- all the learning centers in mid-September. That means we lost almost 10 to 15 days in September. And during the whole summer, I think some of our learning centers were not open. So it's really hard for us to disclose the utilization right now. And I think we will disclose the utilization rates in, I think, the Q2 or Q3. And -- but we do believe the utilization rates will get higher and higher after the pandemic is over. Because typically, our revenue growth is higher than the expansion plan. So I think that means, we do have the leverage on the learning center utilization. So this is the near long-term trend, Felix.

Our next question comes from Jin Yoon from New Street Research.

Just wanted to talk about overseas test prep. Your guidance kind of suggests, obviously, the bottom is in, in terms of slight improvement from last quarter's numbers. Can you just kind of talk about if that's really the case or if we're seeing a kind of a seasonal head fake? And then -- and on the other -- the second question I have is, I think, we're seeing a massive testing in Qingdao, approximately like 9 million people or something, I think, just hit the press. Just wanted to see how big that -- revenue from that city is in case there is a second wave in that particular city.

Jin, yes, the overseas test prep, yes, the revenue decline of this quarter of Q1 was 51%, but we give -- we have already give the guidance of the Q2. The overseas test prep will be down by 30 -- somewhere around 35%. So the things turns to be better in Q2 because we have seen some like the TOEFL or GRE test were reopened in China in different cities. And -- but anyway, I think the -- our overseas test prep business will be negatively -- to some extent, to be negatively impact by the COVID. And -- but the Q1 this quarter will be the -- was the worst. And I believe the overseas test prep business will be recovered step by step. So this is my answer forecasting about the overseas test prep.

And Qingdao, yes, we know what happened in Qingdao since last week. And so far, we don't get any notice from the government of the shutdown of the schools. So that means our learning centers in Qingdao are still open now. But anyway, we will meet the requirement of the government. But during the -- I think during the peak time of the COVID-19 times, I think, we have the ability to move all the offline courses to online. We tested in -- for 2 months of the pandemic. And so I don't think it will negatively impact our revenue of Qingdao. Anyway, Qingdao is not -- the revenue contribution from Qingdao is very small, Jin.

Our next question comes from Mark Li from Citi.

I want to ask...

I'm sorry. I can't hear you very clearly.

Is it better now?

Mark, I can't hear you.

Is it better now? Hello?

I think the line has some problem. Try it again. (foreign language)

Mark, can you come closer to the mouthpiece, please?

Operator, my line is fine. So just raise your voice, okay.

Okay. I just want to ask how is our FY '21 guidance? Could you share the latest guidance for the full year with us? And also our OP margin target, if we have any change on the timing to reach that?

Okay. Yes. Actually, we have already gave the guidance of the Q2 and by 10% to 15%. And actually, the business is not fully recovered in Q2, the autumn quarter. Beijing school was reopened in mid-September. And we expect revenue growth in the coming Q3 and Q4 will be better than Q2 because of the more recovery of our business and easy comparison of this year. The COVID-19 started since the last year Q3. So we do believe our top line growth performance in Q3 and Q4 will be better than Q2. Okay.

And margin guidance, yes, I think, Q2, the next quarter, the margin -- we believe the margin decline in Q2 will be -- continue to narrow down compared to this quarter, to Q1. And we're confident that we will be able to deliver the continued margin expansion after the pandemic is over, especially in Q3 and Q4. And we don't want to change our mid- long-term margin guidance. Mark, is it clear?

Our next question comes from Alex Xie from Crédit Suisse.

So my first question is about the breakdown of your next quarter K-12 revenue guidance. So I think in the August quarter, it's very unusual that POP Kids was a little bit slower than the U-Can business. And what about the next quarter? And the second question is about the rollout of your OMO business model. I think I read from the news report that you launched the pure online small class model in your Hangzhou school and received very positive feedback from the province-wide students. Would you please share more color on that? And what's the time for the further rollout?

Yes. Your first question about the -- Alex, can you repeat your first question again?

Sure. Sure. So I noticed that in the August quarter, the POP Kids business was a little bit slower than the U-Can business. And what about the next quarter? Within the 25% growth, what about the difference between POP Kids and U-Can?

Yes. I think next quarter, the Q2, I think the growth rates of the U-Can business will be a little bit higher than the POP Kids business growth. Because the U-Can business is more mission critical. So for the middle school/high school students, they tend to study more, especially after the COVID-19. So that's why the growth of the U-Can business grows higher than the POP Kids business.

And -- yes, the OMO, it's a great question, the OMO. Yes. Actually, when we started the OMO business 3 years ago for our Beijing school U-Can business, but after the COVID-19 we strengthened the development of our OMO. Because during the COVID-19, almost all of our students took the courses pure online. But after the COVID-19, vast majority of our students goes back to the offline learning centers, but would choose some percentage of the online course for both part of the students. And also for some new satellite cities, we started to roll out the new OMO model.

Yes. I think Hangzhou is a very good case. And this is the first year that the Hangzhou school did the OMO model. So Hangzhou school acquired a lot of the new customers of the great turn students from the satellite cities around Hangzhou. So I think it's a very good start, and we will roll out in more and more cities and provinces. Okay. And one more thing is the retention rate of the OMO model in Hangzhou school, I think, after the summer, it's over 50%. So I think it was a very good sign for the steady results of the OMO model. So we will do it more and more in more cities. Sisi, you want to add something?

Yes. We're -- as Stephen emphasized earlier in the prepared remarks, actually, we have piloted this OMO model in around 20 cities already, just in the summer, only recovers -- resumed the offline operation from the summer. And then we have already testified this model in several cities, key cities. And the feedback is good. So that's continued to be the key strategy going forward. Yes.

Our next question comes from Sheng Zhong from Morgan Stanley.

My question is on the OMO as well. So I want to understand more about how to operate this OMO model. So for the local who has -- what is key KPI for OMO? And so if -- so how will he balance to open new learning centers or push more OMO into recent cities? Or is this because you have pure online as well or is pure online well mainly focused on the surrounding cities?

Yes. Zhong Sheng, I think it's a great question. We set up the KPI of the school head. We -- I think the KPI of the school heads divided by 2 parts. The tradition -- number one, the traditional offline business. And second is the new OMO model. So 2 different KPI. And I think it's easy to understand the local school have made the decision. For those areas that we are aware, we do have the learning centers, I think, we only do the OMO, okay? And we will still use our -- the learning centers to acquire the new student enrollment.

And -- but for the areas where we don't have the learning centers or for the new cities we don't have the learning center there, the OMO will be first deployed. And -- but, as I said in the prepared remarks, all the content and cost were -- and teacher resources, even the teacher training system of the OMO model are originated from the local cities, okay? But the head office will give the fully support to the different areas and different cities.

So we will roll out this OMO model by -- to more cities going forward. And I do believe the OMO model will contribute more and more revenue going forward. And yes, one more thing add. And we don't want to spend crazy money on marketing expenses for the OMO model. So I think the student acquisition cost for the OMO model will be very low. I think it will be same as the -- our traditional offline business.

Our next question comes from the line of Lucy Yu from Bank of America Securities.

So I would like to ask a question on dual-teacher. Stephen, you just mentioned that when we penetrate into new cities, actually, OMO will be the first choice. So how about dual-teacher model? Are we still going to roll that out? And as far as I can understand that previously, before OMO roll out, we were using the dual-teacher to penetrate into lower tier cities. So now this -- what's offered choice in terms of business model in the new cities? And secondly, you mentioned that in dual-teacher model we have seen improving probability and retention. So we -- so could we share more number on the capability and the retention of dual-teacher business model?

Yes. I think go forward, the OMO model will be the first choice we run the business in the new cities, especially for the low-tier cities. But we are doing well for the dual-teacher model. We opened more and more the new cities by the -- of the POP Kids and U-Can program. But going forward, we will focus more of the model that the teachers in the head office will cut the dual-teacher model class to the low-tier cities. Typically, it's focused on the top students in the high-tier and low-tier cities. So we have the 2-way to run the business in the low-tier cities, OMO and dual-teacher model.

Our next question comes from Alex Liu from China Renaissance.

First on teacher compensations, how fast should we think about the teacher compensation growth going forward? Especially some online players are rather aggressive in terms of teacher paying out. And second question is that regarding the strong summer enrollment growth. I was just wondering if there are any specific reasons behind or any specific sort of observations in the summer. Why we did so well this year? And how much of the growth is coming from small player exiting the market?

Alex, I think the teacher salary -- yes, we think the teachers' quality is the core competence of the education business. So we raise the teacher salary by 8% to 9% every year. Even with faced with the challenge during the period of the COVID, we still did the same thing. I don't think the teacher salary increase will drive the margin. On the contrary, paying the teacher more will bring up the high-quality or high-quality feedback from the customers, students and parents and drive the utilization rate up and the revenue up. So I think we pay more the teachers will help the GP margin performance better, near term and long term. So I think this is our strategy for the teachers.

And yes, these -- yes, and the second question is about the summer enrollment. Yes, I think in the spring semester, we met some problems on acquire the new customers because of the COVID. We couldn't see the students and parents face-to-face. But during the December quarter, most of our learning centers will reopen. So we can give the -- like the study advisers to the parents and kids face-to-face.

And as for the competition environment, yes, we know some small players disappeared from the market. So I think it's a great opportunity for the big players, like us, to take more market share from the market post-COVID. And the numbers, especially since the second half of July, the cash revenue and the enrollment numbers was booming. And so that's why we gave the guidance of the K-12 business growth in second quarter will be somewhere around 25%. And I do believe the enrollment growth and the revenue growth in Q3 and Q4 will be even better.

Our next question comes from D. S. Kim from JPMorgan.

Congrats on a good set of results and very good guidance. Actually, most of my questions have already been answered. So maybe I can just follow-up on OMO. Can I double check, when you say this new piloting OMO, are you referring to pure online localized curriculum classes, like pure online? And if so, can I check what's the size of the each class, ASP gap with the similar offline courses? And if there's any difference in offering, i.e., this OMO is more for the weekdays versus weekend or more for short-term courses? Or it's really just same as our offline offerings?

We're doing the new OMO model by 3 ways. Number one, the large classes. That means the large classes. And this is typically -- majority of the classes happen online. And I think the price of the -- of that part of the course, I think, it's 20% to 30% lower than our normalized classes. Secondly, the OMO small size class is a hybrid class and is offline and online -- the integrated classes.

And the last one -- number three, is some like very short-term courses. I think the typical purpose of those part of the business is the -- is to acquire the new student enrollment, is very short-term courses. And we ask the famous teachers to record the courses. And I think this is kind of the way to ask the marketing way. So we have the 3 ways. Anyway, OMO is still in the early stage. I think so far, so good, and we'll do more going forward. So in next quarter, even the rest of the year, the earnings call, I will share more information with you.

Our next question comes from Tommy Wong from China Merchants Securities.

Congrats on the strong results. Just a quick question. I guess we don't have a lot of time left. Can you comment about the secondary listing in Hong Kong? And potentially, we need more funds to compete on the online space. All these other guys, TAL, Yuan Fu Dao, Zuoyebang, they're all burning a lot of money. And if you want to play in this game, we have to kind of participate. So just wondering the secondary issue, bring some more money and play the game. Just wondering what's your thought on that.

We are not in a right position to make comments on secondary listing. And the money, yes, as I said, our strategic focus and investment approach this year, and not only this year, but also the mid and long term, okay, is aimed at improving the product quality, increasing the teacher salary and enhancing our system. I think these are the essence of the education. So we know there is a huge opportunity in the market, especially after COVID. We firmly maintain the stable and balanced investment strategy, and we want to spend pretty money on marketing and get -- and help this short-term growth. So this is our strategy, not only for now, but also for the mid- and long term.

Our next question comes from Liping Zhao from CICC.

My question is about the capacity expansion. How should we expect the impact of this pandemic on your capacity expansion plan, especially for your K-12 business? And any chance we can see an accelerated expansion during the market consolidation?

We aim to add around 20% to 25% new capacity in the fiscal year '21. And so last year, we planned to open 20%. Finally, we opened 26%. And this year, we made the same plan. And anyway, I think there's a great opportunity for us to take more market share. So we will open 20% to 25% new capacity to acquire new student enrollment. And also, we do have the OMO model. And so the 2 ways, the new capacity expansion and OMO, will bring us new customers in the whole fiscal year '21. And yes, the -- our strategy of the expansion is very stabilized.

Next question comes from Felix Liu from UBS.

I just want to have a follow-up question on already for revenue balance. I noticed that the growth in deferred revenue is a lot stronger than our Q2 revenue guidance. May I know the reason behind?

Because the pandemic fades in China, especially in the summer. And so as I said, since the second half, the July and the revenue and enrollment growth was booming. And so that's why we got the higher deferred revenue balance at this quarter end. And I think in Q2, the -- we're still in the process of the recovery. I think even in the Q3 and Q4, you will see even higher enrollment and top line growth of the -- especially for the K-12 business. Because I believe we are taking the market share from the small players. And also -- and we do believe we will have the even higher student return rates going forward because we invest a lot since last -- since 4, 5 years ago. And we do believe we are providing the -- one of the best product in the market. So I think the recovery will happen step by step and more backloaded, Q3 and Q4.

We are now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Mr. Stephen Yang, for his closing remarks.

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.