New Oriental Education & Technology Group Inc (EDU) 2020 Q4 法說會逐字稿

Good evening, and thank you for standing by for New Oriental's FY 2020 Fourth Quarter Results Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead.

Thank you. Hello, everyone, and welcome to New Oriental's Fourth Fiscal Quarter 2020 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 the 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. Yang. Stephen, please go ahead.

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Despite the outbreak of COVID-19 pandemic starting from March posed continuing pressure on all businesses across the globe, including ours, we're pleased to report a set of financial results in the fourth fiscal quarter of this fiscal year that is in line with our expectation. Total net revenue was $798.5 million, a slight decrease of 5.3% in dollar term or 1% in RMB term. A mix of results amongst various business lines were reported, which I will elaborate each of them shortly. Total student enrollments in academic subjects tutoring and test prep courses in the fourth quarter of fiscal year 2020 decreased by 6.2% year-over-year to approximately 2,585,600. The lower-than-normal increase in the number of student enrollments is primarily due to the outbreak of the COVID-19, which has made new customer acquisition in the quarter much more challenging, while the enrollment for the summer and autumn classes have also been delayed.

In terms of the bottom line performance, for the entire fiscal year of 2020, we managed to deliver an expansion of non-GAAP operating margin of 70 basis points year-over-year to 12.9% compared to 12.2% for the prior fiscal year. However, for the fourth quarter of 2020 due to the negative impact from pandemic on our top line performance and the increased spending from offering free classes to promote our Koolearn's K-12 large classes with the aim of taking more market share, our gross margin recorded for the quarter was 51%, down 500 basis points year-over-year. Our non-GAAP operating margin for the quarter was 4.1%, down 810 basis points year-over-year. And non-GAAP net margin for the quarter was 6.1%, down by 520 basis points year-over-year.

In order to minimize the negative impact caused by the COVID-19 pandemic to our bottom line, we actively adjusted our operational strategy and made more efforts on cost control and reducing expenditures, especially for business lines facing bigger negative impact in the near term. We believe that our continuous efforts will sustain us through the crisis and hopefully that the adverse effect on our business from the pandemic will subside gradually. Per program blended ASP, which is cash revenue divided by total student enrollments, decreased by 14.8% year-over-year in dollar terms.

As for hourly blended ASP, which is GAAP revenue divided by the total teaching hours, decreased by approximately 3.5% year-over-year in RMB terms. To provide the breakdown of the hourly blended ASP, please note that U-Can class increased by 0.2%, U-Can VIP classes increased by 3.5%, POP Kids increased by 6.4% and overseas test prep program increased by 16.1%, all year-over-year in RMB terms. Comparing with the normal price increase of 5% to 8%, this quarter's hourly blended ASP decrease was lower than normal level, mainly because of the bigger decline of the overseas test prep program and the U-Can VIP personalized classes business, which hourly blended ASP are much higher than the other programs as well as the usage of the coupons as we provided to the customer to support the migration from offline class to online OMO class during the winter.

Now I would like to spend some time to talk about fourth quarter performance across our individual business lines in detail. Amid this unprecedented period, we see a mix of the results amongst each of the business lines. Our key revenue driver, K-12 after-school tutoring business, achieved year-over-year growth -- revenue growth of approximately 4% in dollar terms or 8% in RMB terms. Breaking down, the U-Can middle school/high school all-subjects after-school tutoring business recorded a revenue increase of approximately 1% in dollar terms or 5% in RMB terms for the quarter.

Student enrollments grew approximately 0.1% year-over-year for the quarter. Excluding VIP one-on-one business, U-Can's small class business grew by approximately 15% in dollar terms or 20% if measured in RMB. Our POP Kids program delivered outstanding results with revenue up by about 10% in dollar terms or 14% in RMB terms for the quarter. Enrollment decreased by 9% for the quarter, though as the outbreak of the COVID-19 has caused the challenges on acquiring new customers in the quarter, while the enrollment for the summer and autumn classes have been delayed.

Our overseas test prep -- overseas-related business, including test prep and consulting business, faced the most difficult challenges due to the cancellation of the overseas exams, suspension of the overseas schools and restriction on travel. The overseas test prep business revenue declined by approximately 52% in dollar terms or 50% if measured in RMB. However, despite the challenges, the consulting business grew by approximately 6% in dollar terms or 11% in RMB terms. And finally, VIP personalized classes business recorded revenue decline of about 36% year-over-year in dollar terms or 34% in RMB terms year-over-year for the quarter.

Our summer promotion strategy also delivered outstanding results. We offered low-price experimental courses for multiple subjects in total of about 69 cities, targeting entry grades of primary and secondary school students, customers before they start this new school year. The promotion price is similar to last year at around RMB 400. Even though we launched the summer promotion campaign almost 1 month later than we did last year due to the pandemic situation, the summer promotion remains very well received by the market. We're pleased to see that promotion enrollments we brought in before the start of the summer holiday by mid-July this year achieved a 20% increase comparing the same period of last year, reaching 986,000 enrollments. The encouraging results have proven that such sound and highly profitable strategy enable us to capture and increase our market share in high-growth K-12 after-school tutoring market, also puts us in a more favorable position during this market consolidation period, as certain players may lack financial or digital capabilities to sustain their operations during these challenging times.

As these students move to the higher grades, we expect the continued improvement in retention rates and customer loyalty will drive 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 added a net of 44 learning centers in existing cities, opened a new training school in the city of Weihai as well as 4 dual-teacher model schools in the city of Hebi, Xingtai, Zhumadian and Xuchang. Altogether, this increased the total square meter of classroom area by approximately 26% year-over-year, 5% quarter-over-quarter by the end of this quarter. Despite such challenging times, we didn't put our expansion plan on hold as we wanted to ensure that we are fully prepared when the pandemic is over. And our service will resume with strong presence across different Chinese cities. As outbreak of COVID-19 has highlighted the importance and demand of online education, we have placed more resources in this area and invested $36 million in the quarter to improve and maintain our OMO-integrated education ecosystem. The investment also supported the migration of our offline class to small-sized online class during the pandemic.

Apart from the OMO infrastructure, we have allocated part of the resources in advanced training programs for our teachers to enhance their online and offline integrated teaching skills in response to the growing demand in the market. At the same time, we continue to upgrade our technology platforms and will broaden the usage of the online tools and content in our OMO system for all business lines through the whole network as well as further develop the best teaching content and courseware to cater online, offline integrated educational methods. We're glad to see that our industry-leading OMO ecosystem has not only successfully managed to cushion most of the impact our service and operations caused by the pandemic, but we also see the refund rate from the cancellations have been stabilized at a normal level as we entered into the spring semester. While our customer retention rates from winter to spring semester and from spring to summer semester were trending higher than the same period last year, which further demonstrated that our customer satisfaction and effectiveness of our online course through our OMO system.

To further tap into the huge market opportunity in online education, we continue to placing more resources in Koolearn in executing new initiatives in our K-12 online after-school tutoring business in fiscal year 2020. This includes content development, teachers recruiting and training, sales and marketing, R&D and other necessary cost expenses to drive the growth of the new online programs. With these programs, we're able to reach out to more students in low-tier cities in an interactive and scalable approach. We believe this will help Koolearn.com to gain new market share in the online education space and drive up top line growth. In the past quarter, Koolearn did a large-scale market promotion by offering free large size online live broadcasting classes to the public and attract several times more traffic than normal time. Koolearn also added a meaningful amount of customer service representatives and marketing staff to support the new initiatives in K-12 tutoring. These moves have raised our spending on the marketing front, but we believe those are necessary and understandable measures as we found ourselves in an enduring pandemic situation.

The dual-teacher class model has been offered for POP Kids program in 48 existing cities, U-Can program in 29 existing cities and for both POP Kids and U-Can K-12 business in 10 new cities. We're glad to see the model has proven to be successful as there is an increased market penetration in those markets we have tapped into. We also saw improved customer retention and scalability. With these proven results, we will continue this strategy going forward.

Now let me walk you through the other key financial details for the fourth quarter. Operating cost and expenses for the quarter was $788.2 million, representing a 2.9% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which exclude share-based compensation expenses, were $765.9 million, representing a 3.5% increase year-over-year. Cost of revenue increased by 5.3% year-over-year to $391.1 million, primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increased number of the schools and learning centers in operation.

Selling and marketing expenses increased by 11.4% year-over-year to $118.0 million, primarily due to the addition of a number of customer sales -- customer service representatives and marketing staff with the aim of capturing the new market opportunity during the pandemic, especially for the new initiatives in K-12 tutoring on our pure online education platform, Koolearn.com.

General and administrative expenses for the quarter decreased by 3.3% -- I am sorry, decreased by 3.3% year-over-year to $279.2 million. Non-GAAP general and administrative expenses, which exclude the share-based compensation expenses, were $261.0 million, representing a 1.3% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 13.5% to $22.3 million in the fourth quarter of fiscal year 2020.

Operating income was $10.3 million, an 86.7% decrease from $77 million in the same period of prior fiscal year. Non-GAAP operating income for the quarter was $32.5 million, a 68.3% decrease from $102.7 million in the same period of prior fiscal year. Operating margin for the quarter was 1.3% compared to 9.1% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was 4.1% compared to 12.2% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $13.2 million, representing a 69.5% decrease from the same period of prior fiscal year.

Basic and diluted earnings per ADS attributable to New Oriental were $0.08 and $0.08, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $48.5 million, representing a 49% decrease from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.31 and $0.30, respectively. Net margin for the quarter was 1.7% compared to 5.1% in the same period of prior fiscal year. Non-GAAP net margin for the quarter was 6.1% compared to 11.3% in the same period of prior fiscal year. Net operating cash flow for the fourth quarter of 2020 was approximately $108.5 million. Capital expenditures for the quarter were $89.7 million, which were primarily attributable to opening of 73 facilities and renovations at existing learning centers.

Turning to the balance sheet. As of May 31, 2020, New Oriental had cash and cash equivalents of $915.1 million compared to $1,414.2 million as of May 31, 2019. In addition, the company had $284.8 million in term deposits and $2,318.3 million in short-term investments. 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 fourth quarter of fiscal year 2020 was $1,324.4 million, an increase of 1.8% from $1,301.1 million at the end of the fourth quarter of prior fiscal year.

We are now approaching the new fiscal year. Despite the continued challenge from the COVID-19 pandemic, I expect to remain -- we're still optimistic towards the company's business in the long run, and we'll continue to focus on the following key items. 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. We believe it will prepare us to further take more 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 its business during the hard period. And we expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with strong financial capacity and fresh offline facility enable us to further strengthen our 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 our K-12 business. The usage of the online tools and contents 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 in developing the best teaching content and courseware and also developing more advanced training programs to our teachers. For some who might not be very familiar with our OMO business model, allow me to spare a few minutes now to elaborate the 4 key OMO strategy we have in place: number one, the online system is mainly used to supplement the offline classes we have in existing cities with a hybrid format; number two, for the cities we have a presence but might not have enough learning centers to cater our -- all our customers, our OMO system enable us to reach out to more students and customers; number three, for some provinces where we don't have centers in all of the cities, our OMO system allow us to reach out to students of the surrounding satellite cities; number four, we offered a series of the complementary low-cost experimental online classes for people and students to experience our classes, hoping to attract new customers.

Here, I have to highlight that all of these OMO products are supported by our offline classes. They supplement each other as the teaching content, courseware materials as well our teachers and technology development originated from our existing offline centers and resources. We believe that the above-mentioned 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 expand our long-term margin target. Furthermore, we will continue to invest in and implement new initiatives, including product content development, teachers recruiting and training, R&D as well as sales and marketing in K-12 after-school tutoring business on our Koolearn.com.

Third, our top priority will remain as to focus on controlling costs and reducing expenditures across the company to minimize the negative impact from the pandemic on our bottom line. We believe we will resume the expansion of 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 been increasing our investment in different strategy, we remain optimistic of a brighter prospects of our business and believe our investments now will bring us fruitful returns in the long run. We're certain that with New Oriental's leading brand, superior education products and system and the best teachers' resources, we have the ability to take further market share in China's huge after-school tutoring market and deliver long-term value for our customers and shareholders.

When looking at the near-term and our expectations for the next quarter, we have factored in various considerations including the 1-month delay of national gaokao and zhongkao, the delayed enrollments for summer and autumn classes this year in many major cities and the shortening of the summer holiday in many major cities by 1 to 2 weeks. Summer courses in July and August will be trimmed down to 3 to 4 terms only, which we typically have 4 to 5 terms historically as well as the recent reemergence of the COVID-19 cases in cities such as Beijing has delayed the resumption of both public schools and our tutoring schools in these areas. Inevitably, all these unprecedented situations have caused a lower visibility of our business performance data for the summer quarter. Hence, we take the most conservative approach to make our forecast for Q1 '21. We expect total revenue to be in the range of $911.2 million to $953.5 million, representing a year-over-year decline in the range of 15% to 11% in dollar terms. If not taking into consideration of the impact of potential change in exchange rates between RMB and U.S. dollar, the projected revenue decline rate is expected to be in the range of 14% to 10% for the first quarter of fiscal year 2021.

To provide a breakdown of the effects of top line growth for key business lines. K-12 all-subjects after-school tutoring business is expected to be grow 3% to 7%; overseas test prep program is expected to decline 55% to 61%; and overseas study consulting business is expected to decline 7% to 11%, all year-over-year in RMB terms. We also expect overseas-related business, including overseas test prep and consulting service, will continue to decline due to the pandemic around the globe caused by the cancellation of the overseas exams and suspension of the overseas schools and restriction on travel. The negative impact on those overseas-related business will affect the entire education, the overseas test prep-related industry in China, not only New Oriental, and may last over the coming 1 or 2 quarters.

That said, in contrast, China's effective control of the pandemic situation has shed a more positive light on our business domestically. We are pleased to see that we have gradually resumed our offline operation in over 90% of cities that we are in, and the vast majority students in these cities have successfully migrated back to our learning centers from OMO online classes. We have also seen significant pick-up in the year-over-year trend of student enrollment and cash proceeds from students in July, this month, for the summer quarter, which is a positive sign of recovery.

To conclude, we are now taking all kinds of operational actions to boost the enrollment and the classroom utilization for summer and autumn semester and speed up recovery of business after the resumption of the schools and learning centers. We're confident that demand for after-school tutoring business will pick up gradually in the summer and in the rest of the 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 these. Thank you.

(Operator Instructions) And our first question comes from the line of Binnie Wong from HSBC.

So in terms of the revenue guidance, the outlook, it seems a little bit soft, right? Can you help us to understand the assumptions behind? And then also, I think that we are talking about like the recovery is already ongoing. And I think that's a very interesting point, Stephen mentioned, since like last quarter call that about the consolidation of the market. So just want to see if there's any numbers that we can quantify as far on the industry side. Say, I don't know, like number of centers or number of institutions, something like along the line to help us better -- to understand whether -- like how much the consolidation has been progressing?

Thank you, Binnie. Yes, due to the less visibility of the performance data for the summer quarter, yes, we are using the most conservative way to make the forecast of the Q1. I think there were several key reasons: number one, we have the shortening, like by 1 to 2 weeks in summer holidays. Typically, we had 5 terms of the summer courses within the summer vacation, in 1 summer vacation. But now we only have 3.5 terms, and also the gaokao, zhongkao were delayed by 1 month. So that means the enrollment window for the summer had to be postponed by, what, at least, 1 month; and number two, the recent reemergence of the COVID-19 in Beijing and Hubei province, last week in Dalian and Urumqi. And I think it impact us again. But I must mention that Beijing, in the summer, I think it's really hard for us to make the new -- to acquire the new student enrollment for the summer. So if you take out the Beijing, the impact, all the other schools, the K-12 business will grow by 11%. So yes.

And the last one is overseas test prep related business. The -- all the exams are canceled, and these students cannot travel and the volatile China, United States, the 2 countries relationship. So we just wait. And yes, there are so many reasons. But I think we are confident about the future because so far, 90% of cities, most of the students of the 90 cities we're in went back to our learning centers. And we do believe we can take more market share from the consolidation potentially. Because, yes, we have seen a lot of small players disappear from the market. I don't have the numbers, but yes, it is what it is. And that's why we opened 26% expansion last year, in fiscal year '20. And we plan to open 20% to 25% new expansion in fiscal year '21. So I think this shows us the confidence to take more market share from the small players.

Yes. And I also want to add that the successful results by far for the summer promotion also indicated the potential opportunity to keep taking market share from smaller players that are facing much bigger challenges during the pandemic period than us. Our summer promotion increased, total volume increase by far is already 20% increase year-over-year. And it's very likely that when we finish the whole summer, the total enrollments will be even increased higher than that. So these are all indicators for the potential opportunity for market consolidation for us.

Just a quick follow-up. In terms of the summer promotion course prices, how does it compare to last year as well?

Yes. We got 986,000 enrollments till the mid-July, and it's close to 1 million. So that means we got a 20% year-over-year growth. And we keep the same price as RMB 400. And we believe the retention rate will be higher than last year. So we do hope we can get the 5% higher of the retention rate after the summer promotion. So we did a very good job. And we do believe that those students we got from the summer promotion this year will stay with us for 3 or 6 more years.

That's very helpful. And I think the situation is quite understandable, too.

(Operator Instructions) And your next question comes from the line of Jin Yoon from New Street Research.

I guess my question has -- is related to your capacity expansion of 20% to 25%. With the guidance that you gave, some of these, I guess, segments that you're seeing underperformance in things like overseas test prep, have you moved capacity over from these underperforming, I guess, segments to your better performing segments already? And is the capacity expansion already in -- already accounting for the shift in capacity that you're potentially seeing in your classrooms already going from less performing to more performing type of classrooms. And so if -- I guess the reason I ask that is that the cost of capacity expansion if it's net of a lot of this, I guess, shift in capacity already, should we expect the actual capacity spend, the cost of it to be materially less than what we've seen in the past?

Yes. We've set up the expansion plan by 20% to 25% in fiscal year '21, as we did, it's same as we did in last year. Yes, and we do have the plan to make a shift of some of the nonperforming learning centers to close down or to move it from the overseas test prep to K-12 business. And -- but with all the numbers in, I think we will keep the same guidance of the expansion plan by 20% to 25% because we do believe post-COVID, we do have a lot of market potential to take more market share from the small players and to fill more students into the new learning centers. And even after the COVID-19 happened in January and February, after that, in the last 3, 4 months, we opened 9 -- where 10% new learning centers. I think we are quite ready prepared for the new market consolidation opportunity.

And your next question comes from the line of Yuzhong Gao from CICC.

So I think I have a rather longer-term question. So imagine a situation, given the sustained COVID-19 threat, where maybe structurally higher -- the meaningful proportion of the enrollment will be from online, either pure online form or OMO form, how do you think this will impact your margin profile on the long term?

Okay. Yes, I think it's a great question. I think going forward, we care more -- we care both the online and OMO. I think in terms of the revenue contribution, OMO class will continue to be our primary business model. But we learned a lot from the pandemic. And I think we started to bear fruit from the heavy investment in the last 2 to 3 years of the OMO model. And yes, as I said, we're seeing the highest student retention rates and the customer satisfaction and the student retention rates are higher than the same period of last year. So going forward, I think we will do more and more on our OMO system. And the key is the OMO system, that means we build the barrier entry higher for the whole industry. We have the most advanced OMO system.

And going forward, I think the OMO system will bring us more student enrollment, and it will drive the margin up by the new -- our new OMO model. And the pure online, Koolearn, and Koolearn is just only 4% to 5% of our total revenue. But in the last quarter, it did very good, the summer promotion. And also, we started to spend more money on the -- especially on the R&D and on the teachers training, something like that. And we spend a little bit more money on the marketing as well. But we do believe we can take more market share from -- even from the very heavy competition among the big players. But we do -- we will have a good future for the Koolearn. So we have 2 early growth engines, OMO and the Koolearn, the pure online platform.

And your next question comes from the line of Mark Li from Citi.

Stephen, this is -- thanks for your sharing. I want to ask for this quarter, we have seen, like in the P&L, the gross margin is impacted by a few factors you mentioned like online, also the revenue, and then also coupled with the higher selling expense, et cetera, you're also saying the driver. May I know in a short-term view, let's say, in the next few quarters, how would we think these drivers to move? And how about like in the coming few years, more medium term, like which part of the P&L you think you have a better upside improvement?

Yes. It's a hard time for -- especially for last quarter, for the Q4, and maybe in the Q1, you saw our guidance. But we're doing the 2 things at the same time. Number one, we are focusing on the cost control, so -- and reduce the expenditures across the company to minimize the negative impact of the COVID-19. So this is number one. And number two, we do believe the revamped OMO model will accelerate our margin recovery in the rest of the year and further expand our margin profile going forward. So as for the Q1 fiscal year '21, the Q1 margin, we believe the margin decline in Q1 will be narrowed down compared to Q4 last year, compared to this quarter. And we are confident that we'll be able to deliver continued margin expansion after the pandemic is over. For fiscal year '21, we expect the margin will be recovered in the second half of the year, especially. And mid- and long-term, we want to change our guidance of our mid- and long-term margin guidance. The non-GAAP operating margin in mid- and long-term should be somewhere around 17%. But I must mention that with more and more OMO model we add into our learning centers, I do believe someday, we will raise our mid- and long-term margin guidance because of the new model. Thank you, Mark.

And your next question comes from the line of Felix Liu from UBS.

My question is on the online side. Definitely, I am very happy to see some positive progress there. So could you maybe share with us how well the traffic for Koolearn retained into summer? And also for the online, I noticed the OMO model as well as your dual-teacher is penetrating fairly successfully into lower-tier cities. So how would you balance that with the DFUB brand that Koolearn runs similar -- on paper, similar business models?

Yes. During last quarter, Koolearn did large-scale market promotion by offering the free large size online classes. And I think that we attract several times more traffic than that of last year. But I am afraid I have not seen -- I think -- I don't think I can say something in detail or numbers in detail of the Koolearn because they haven't announced their results. But what I can say is we do believe we did a very good job in last quarter of the promotion after the COVID-19. And we spend more money on the R&D and the teachers training side as well as the marketing side. But I do believe we will -- I think I do believe that our Koolearn will get the healthy top -- the fat top line growth and provide the better quality product to the students going forward.

And also, how would you balance the OMO with DFUB going forward, let's say, from a longer-term perspective?

Yes. The -- I think there is 2 ways we're using the same time. Koolearn is 100% online, okay? And the OMO is to leverage offline resources to our online platform that help us to reach out more student enrollments. So -- but all the OMO courseware, content, even the teachers, originated from our offline learning centers and schools. And so -- and I know even in some cities, maybe there might be like internal competition in the same city by the Koolearn and our OMO model. But I think the market is huge enough. So we care more about taking more market share from the others. So I do believe the cannibalization between the 2 parts will be very minimal. Okay. Felix?

Okay. This is great.

And your next question comes from the line of Tianxiao Hou from T.H. Capital.

It's regarding the OMO. OMO is a very effective tool to deliver the courses in the area hard to reach or deliver the courses when we have this epidemic. So when we mix them together, and -- so what's the result? What is the impact to the gross margin? I expect to be positive. And given -- what is the impact on that? Also, when students taking class online, offline, will there be a price difference for the online and offline? And also, we are entering into a new fiscal year. Is the price going to be higher than last year? So that's the question.

I think the OMO model will bring us more revenue compared to the traditional way, so this is number one. Number two, I think the OMO model, I think the students and parents love the new OMO model. They think that the new model probably is better than the traditional one. So it drives the retention rate up and the learning center utilization rate up. So to some extent, we can save some classroom rentals. So it will drive the margin up going forward by the OMO model. And the second...

The price.

Oh, the price. We charge the same for the OMO classes with the traditional offline classes. And we will use the same price strategy going forward. Yes, this quarter, the prices are a little bit worse because of the coupons, because of the one-on-one. The one-on-one definitely impacted the ASP. But going forward, I think the hourly rate, our ASP will be increased by 5% to 8% as normal. So we don't want to change our price strategy going forward. It will be very stable.

(Operator Instructions) And your next question comes from the line of Alex Xie from Crédit Suisse.

So firstly, a very quick question. You have shared the guidance for K-12 in next quarter will be about 3% to 7% growth. Then what about the difference between POP Kids and U-Can and U-Can VIP in your assumptions for the next quarter? And then -- and also, secondly, if we assume the pandemic in Beijing and other cities were well controlled before the start of the next academic year, what's your expectations for the recovery pace of the K-12 business in the rest of the fiscal year? When do we expect the business to get the normal growth rate in FY '21?

Yes, Alex, the revenue guidance in the coming Q1, as I said, we are using the most conservative way -- approach to make the forecast because of the uncertainty, and even within this week where our enrollment window is still opening. Okay? So it's delayed by 1 to 2 months. And the different business lines, the U-Can program, I think in the Q1 in most conservative way, the revenue growth will be 7% to 8%. And I think the VIP business in Q1 should be recovered, should be better than we did in Q4 because I think that the parents will push their kids to study more to make that up for the last quarter.

And the POP Kids, I think the revenue growth will be somewhere around 5% to 6%. What I am saying is in RMB term. And the recovery pace, I think, as I said, 90% of our cities -- our learning centers were reopened in last 1 or 2 months. And I think the trend will be better. And I do believe we will do better, better in Q -- in -- step-by-step in fiscal year '21. And so I think -- yes, I just want to persuade your guys to be a little bit more patient. In the Q1, there's some -- like some uncertainty like the Beijing where the -- Beijing or Hubei province. But going forward, I believe our K-12 business will be recovered step-by-step, especially for the Q2, Q3 and the Q4.

Yes. Actually, to share more details with you, for the Q1 guidance for K-12 because of the second round of newly identified COVID-19 cases in Beijing, put more pressure on the recovery of Beijing City. So the new customer acquisition in Beijing are facing bigger challenges than other cities that have already resumed the offline operation. So if you take out Beijing, all the other cities, K-12, if you look at our forecast in Q1, the trend -- year-over-year growth trends are similar to Q4. So I think the business already started to recover for the K-12 business. Yes.

Yes. And I do believe our Beijing school will reopen our learning centers in September. Okay?

And your next question comes from the line of John Choi from Daiwa Capital Markets.

I have a quick question on your overseas business, including test prep and consulting. I know it's a very difficult time due to the uncertainty and also pandemic going globally. But do you think the recent COVID situation will have like impact, like more of a long-term fundamental impact on your overseas test prep business? Obviously, next quarter, you guys guided a pretty conservative figure, but I'm just wondering for the remaining part of this year and also in the long term, how should we think about this business?

Yes. The overseas test prep business, we saw significant decline in Q4, and we gave the conservative guidance of the Q1 and because of the COVID-19 and cancellation of the exams like the TOEFL, GRE, IELTS and suspension of the overseas schools and the restriction on travel. And -- but we have seen, in some cities like the Beijing, and in 8 to 9 cities, the IELTS and TOEFL tests will be reopened in this month. We know -- we read this news. And we do hope our overseas test prep related business can be recovered step-by-step. But it's very hard time because of the volatile -- the China and United States relationship between the 2 countries. So some students and parents choose to hold their -- to hold the time to make the final decision to study abroad or not. So yes -- and -- but I do believe the -- our business can be recovered step-by-step. It depends on the students in China knows the exam -- exact time of the overseas, the college and universities will be reopened, and all the exams can be reopened, something like that. And yes, but it's a hard time. We'll just wait and see.

The one more thing is the overseas test prep business, I think in the Q4, the revenue contribution of the overseas test prep was only 5.6%. And we do believe because of the hard time, the revenue contribution in Q1 from the overseas test prep should be below 10%. So the revenue contribution from the overseas test prep will be smaller and smaller.

And your next question comes from the line of Sheng Zhong from Morgan Stanley.

Just one question about the K-12 growth. As you mentioned, the trend outside Beijing is similar with -- in Q1 is similar with Q4. But the -- actually, the summer holiday is shortened and the period is only about 70% of the normal summer holiday. If we take this into account, so can we say that in the summer holiday, the K-12 real growth in -- during the summer season is actually high teens to -- mid- to high teens.

To some extent in pro forma basis because, yes, you are correct, Zhong Sheng, we have the 30% time loss of the summer -- this summer holiday. And the -- yes, as for the pro forma basis, I think the top line growth of the K-12 business, the actual -- the real top line growth of the K-12 business should be over 10%. And I do believe in the quarters after, like Q2 and Q3, Q4, I think I do believe the K-12 business, the growth will go back to normal as we did in last year, unless the bad things come back again, like the COVID-19, in some major cities.

And your next question comes from the line of D. S. Kim from JPMorgan.

Quick one from me on VIP only. I think I may have missed this all here, but can you remind us how much did the VIP revenue drop in fourth quarter in dollar term or renminbi, and what's implied in the guidance? And the follow-up from here would be that I am just wondering why this segment is so bad into the summer still? Is this just a function of high price and like people are reluctant to convert to online or spending less because less cash flows and whatnot? Or is there anything else more structural, i.e., how much of this VIP drag is structured in your view versus temporary and cyclical setback?

Yes. The -- yes, the VIP business, the U-Can VIP business in Q4 was down by 21% year-over-year. I think it's easy to understand the parents and the kids towards -- they paid you a lot of money, and we moved the offline class to online and some students choose to postpone their study plan by one-on-one business in Q4. But in the Q1, based on our forecast, I think the one-on-one business recovered very quickly, especially after -- especially in June, we have seen a lot of new student enrollment -- enroll our VIP classes to prepare for the gaokao and zhongkao. So I do believe the VIP business will be recovered step-by-step, okay?

May I just follow-up? How much of the -- so when you say recovery, are we talking about year-over-year growth were still down, but much less than what we thought it would...

Year-over-year growth. I do believe we will get the U-Can VIP business grow in the coming Q1 year-over-year.

So that answers my earlier question that the downturn is more temporary and cyclical than structural.

And your next question comes from the line of Alex Liu from China Renaissance.

So my first question is on OMO strategy. Specifically, I know that some small class courses in fall semester are now 100% online. So we obviously know TAL has a pure online business within its K-12 segment. So I was just wondering, so when you're talking about OMO, how should we think about the importance of pure online small class program within U-Can and POP Kids in the longer term? And a quick follow-up. How should we think about the revenue growth across different segments in the fiscal year 2021?

Yes. The pure online, Koolearn is a pure online platform. But the OMO is the more supplemental tool to our offline business. But yes, you are right, in last quarter, in Q4, we moved 100% the offline classes to online. But afterwards, 90% of our students went back to our offline learning centers. And -- but we will put more and more. We will keep some, like, online elements going forward. And so yes, as I said, both the pure online and the OMO side, all the -- the market is huge enough for both parts as the potential growth. And as I said, I think the competition -- internal competition will be very small, okay? And so yes, and what's the second question?

Revenue growth for fiscal year 2021.

Yes. So the revenue growth in 2021 across different segments.

I think this time, it's very special. And even for Q1 guidance, we spent a lot of time. And as I said, we are still in the student enrollment window in this week and next week. So I will put the question to the next quarter's earnings call. But I do believe our business will be recovered step-by-step, especially for the -- since the Q2. And I think all the business will be recovered as normal.

And your next question comes from the line of Tommy Wong from China Merchants Securities.

I just have a general question. If you look at the overall market, we can see a lot of the online players like TAL and GSX, their share price has done really very well. And when I'm looking at your selling expenses, seems it has not really increased. I was kind of expecting to increase a little bit for the fourth quarter, but it actually hasn't increased. I'm kind of concerned, are we not being aggressive enough? And maybe if you can talk about your sales and marketing kind of breakdown between the OMO versus Koolearn and what's your strategy going forward? I'm just kind of concerned that we're not being aggressive.

Yes. I think we spent a little bit more money on the Koolearn.com in last quarter. We did the first -- I think we did the first time the free course for the large size class in the spring semester. But as I said, in the last several -- last earnings call, we don't want to spend crazy money on marketing side. We would rather spend more money on the R&D and the teachers training and some like the core product development. And -- but yes, I know that some players spend a lot of money on the marketing side. But I think the market is huge enough. And we are special because we have the #1 education brand name in China. And I think the Koolearn can benefit from the -- our New Oriental's brand name to acquire the new student enrollment. This is very unique.

And also our Koolearn.com, we have the DFUB, the small size online broadcasting classes. These are very special. And I think we are one of the few players that can do the small-size pure online classes. And I think the business model does work. We testified in the last 2 to 3 years. And its growth is very fast. And yes, that's it. Is it clear? Thank you very much.

Thank you so much. 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.