New Oriental Education & Technology Group Inc (EDU) 2007 Q2 法說會逐字稿

Good evening and thank you for standing by for New Oriental's second fiscal quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. After management's prepared remarks there will be a question and answer session. 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, Miss Sisi Zhao, New Oriental's Investor Relations Manager. Please proceed.

Hello, everyone, and welcome to New Oriental's second fiscal quarter 2007 earnings conference call. Our second fiscal quarter earnings results were released earlier today and are available on the Company's website, as well as on newswire services.

Today you will hear from Michael Yu, our Founder, Chairman and Chief Executive Officer, and Louis Hsieh, our Chief Financial Officer. After their prepared remarks, Michael and Louis 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 Provision 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 entertain 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 http/investor.neworiental.org. I will now turn the call over to New Oriental's CEO, Michael Yu.

Hi, everybody. Good morning and good evening. This is Michael Yu speaking from Beijing. Thank you for joining us today.

I'm pleased to report that New Oriental posted strong results for the second fiscal quarter of 2007, as we exceeded the top of our revenue guidance by more than CNY10m or US$1.3m and has delivered net income of over US$1m.

As you may know, due to the beginning of the Chinese school year the second fiscal quarter in New Oriental is typically characterized by a sharp drop in enrolments from the summer quarter. End of last year we recorded a net loss, over US$1.1m for the period, so we are very excited and pleased about achieving a positive net income result this quarter.

During the quarter our revenue increased 33% from the same period in 2005 calendar year. Once again, the main driver behind our revenue growth was a strong rise in student enrolments from our leading language training and test preparation courses, which increased from 181,000 to over 217,000 year over year. While boosting our student enrolments is a key goal, we are also focused on leveraging our brand name and dominant market position to extend our leading nationwide network into under-developed markets across China.

During the second fiscal quarter we opened up two new schools. One is North Star in Beijing, marking New Oriental's entry into the fragmented professional certification test preparation market. The other is our second primary/secondary school in Taixing, which is nearby our Yangzhou school.

As our network expands and our sales base increases, we are constantly evaluating and improving our course content to ensure that it is of the highest standard. Aside from developing content in-house, we also look to link with premium content providers, both domestically and internationally, such as [Barry's], which is very famous in the United States, and the Cambridge University Press.

We continue to leverage our strength in our core businesses to develop complementary programs in language training and test preparation. As I have just mentioned, we have recently entered the market for professional certification test preparation. And in language training we are very excited about the potential for growth in our Elite English business, which targets a higher-income demographic than our traditional language courses.

In fact, you may have seen our announcement today that we've announced an agreement with DynEd, Dynamic Education, in the United States to license their award-winning English teaching software for our Elite English course. We believe that this will both enhance sales experience and give us a greater scalability in this business.

We are also seeing a wealth of opportunities in our other business areas, including Consulting, Content Distribution and Adult Education, which grew over 36% from the same period last year.

We are constantly exploring strategical relationships with premium education partners to help us fully leverage our online education user base and content distribution channels. And we look forward to developments in this space in the quarters to come.

With the rapid pace of development nationwide, it is extremely exciting to be involved in education in China today. We are very encouraged by the strong growth that we have been experiencing in our central business lines and we believe that, with our unparalleled network of schools and learning centers, broad product offerings and nationwide brand awareness, we are well positioned to play a crucial role in the development of private education in China for many years to come, as we have done for many years in the past.

Now I will turn the call over to Louis Hsieh, our CFO, to take you through the financials. Louis?

Finally. Thank you, Michael, and welcome to everybody on the call.

As Michael mentioned earlier, we delivered another set of strong quarterly results, demonstrating clearly -- demonstrated clearly by our positive net income position and improved operating margin. Now I will walk you through the contributions to our second fiscal quarter result and some financial highlights.

Please note that certain figures that I will talk about are non-GAAP based measurements that are given excluding share-based compensation expenses. You can find a reconciliation of these figures in the financial tables at the end of the press release.

Our second fiscal quarter 2007 total revenues were CNY169.0m or US$21.6m, an increase of 32.9% over the second fiscal quarter of 2006. Revenues from our Educational Programs and Services, comprising of language training and test preparation courses and primary and secondary education programs, rose 32.5% year over year, driven by an increase in new student enrolments in language training and test preparation courses. And we saw increased revenue from Books and Other Educational Materials and Services, which rose 36.4% to CNY17.1m or US$2.2m from the year-ago period.

Overall operating expenses for the quarter were up 22.9% year over year. Of these costs, the revenues increased by 40.5% year over year, mainly due to the increased number of courses offered to a larger student base and the greater number of schools and learning centers in operation.

Selling and marketing expenses increased 90.8% year over year, mainly due to an accounting reclassification and some Human Resource related expenses, some G&A for sales and marketing expenses. General and administrative expenses decreased 8.7% year over year, primarily due to the accounting reclassification described above, some Human Resource related expenses from G&A for sales and marketing. Without such accounting reclassification, general and administrative expenses would have increased year over year.

Operating margins for our quarter were 0.2%, compared to a negative 8.0% in the corresponding period of the previous year. Excluding share-based compensation expenses, operating margin for the quarter was 4.9% compared to a negative 8% in the corresponding period of the prior year. This increase was primarily due to the improved operating efficiency as revenue growth outpaced the growth in operating costs and expenses.

Total share-based compensation expenses for the quarter was CNY8.0m or equivalent US$1.0m. Of that amount, approximately CNY0.2m was recognized as cost of revenue, CNY0.1m was recognized as selling and marketing expense, and CNY7.7m as general and administrative expense.

Net operating cash flow for the quarter was CNY42.4m or U.S. dollar equivalent US$5.4m. Net income for the quarter increased to CNY8.2m or U.S. equivalent US$1.0m from a net loss of CNY8.7m in the second quarter of fiscal year 2006. And income attributable to holders of common shares excluding share-based compensation expenses increased to CNY16.2m or U.S. dollar equivalent US$2.1m.

Basic and diluted earnings per ADS were CNY0.23 or equivalent of US$0.03, and CNY0.22, equivalent to US$0.03. Excluding share-based compensation expenses, non-GAAP, basic and diluted earnings per ADS were CNY0.46 or equivalent of US$0.06 and CNY0.44, equivalent of US$0.06 respectively. Each ADS represents four common shares. Common shares used in calculating basic and diluted earnings per ADS increased in the second quarter of 2007 due to 34.5m new shares issued and sold by the Company in its September 7 initial public offering on the New York Stock Exchange.

Moving to our balance sheet, our total cash and cash equivalents as of November 30, 2007 -- 2006 were CNY1,166.5m, equivalent of US$148.8m, an increase of 295.5% from August 31. This jump was primarily due to proceeds from our September 7 initial public offering.

I am pleased to report that we have repaid all of our long-term debt, giving us a sound financial footing for the future.

Before I give guidance, I would like to take a brief look at the comparison between the first six months of fiscal year 2007 and the first six months of fiscal year 2006.

Student enrolment in language training and test preparation grew 23.6% year over year to 554,900 for the six-month period. Net revenues were up 31.8% year over year to CNY598.4m, equivalent of US$76.4m. Net income was up 135.7% year over year to CNY173.3m, U.S. dollar equivalent US$22.1m. And our operating margins went from 18.8% in the six months in November 2005 to 30.2% in the six months ended November 30, 2006. We are very pleased with these results.

I will now read you New Oriental's financial guidance for the third fiscal quarter of 2007. Please note that the following outlook statements are based on our current yields and expectations. These statements are forward looking and actual results may differ materially.

Total net revenue in the third fiscal quarter of 2007 that runs from December 1, 2006 to February 28, 2007 are expected to be in the range of CNY202m, U.S. dollar equivalent US$25.8m, to CNY212m, U.S. dollar equivalent US$27.1m, representing year-over-year growth in the range of 19.8% to 25.8%.

Now let me turn the call back to Michael for his closing remarks. Thank you.

Thank you. Once again, thank you for participating in our earnings call for the second fiscal quarter 2007. Now we will be happy to take your questions. Any easy questions?

[OPERATOR INSTRUCTIONS]. And your first question comes from the line of Mark Marostica of Piper Jaffray. Please proceed.

Good evening, everyone.

Good evening.

Hi, Mark.

My question relates to the overseas test prep business for the February quarter actually, and I'm wondering whether or not things are tracking to your expectations in that line of business.

You mean for the fiscal third quarter?

Correct.

It's a little bit early for us to answer that because we're only a month and a half in. And as you know, Chinese New Year is quite late this year; it's about two or three weeks later than normal. You can tell, though, from our deferred revenue line on our balance sheet that we had a deferred revenue number - I'm looking it up now - about CNY182m versus CNY140.7m a year ago. So that shows that we have a 30% increase in deferred revenue coming into Q3.

Okay, great. Also just one quick follow-up on the topic of teacher retention -- instructor retention. What was your experience in the November quarter on that front? And, again, was it bettor or worse than previous trends?

Right now, I have the net teacher adds for the quarter. And for the quarter we added a total of 166 net adds to teachers, both part-time and full-time teachers. So that means for the year we've added more than 300 teachers on a net basis. So our retention of teachers and additions of new teachers to the qualified teacher base continues to drive our business. So, we're very pleased with our teacher retention for now.

Okay, great. I'll turn it over to the next questioner.

Thank you, Mark.

Your next question comes from the line of Kit Low of Goldman Sachs. Please proceed.

Good evening. Thanks for taking my question. Just one question. In terms of the recent announcement about an hour ago on the Elite program, if you could help to shed some light on the revenue-generation potential of that business in terms of how quickly that business could ramp and what the margin would be expecting out of that, that would be great. Thank you.

Kit, we haven't -- we're not publicly disclosing our model for that but our Elite program is two or three years old in Beijing. We currently have five centers. And what we plan to do with the Elite business is to add the DynEd software so that it will increase our margins, as it's a computer-based teaching tool, and that it will reduce the amount of teacher time the students will take. That is also more scalable. So we will then, in the next two years, we will roll out the DynEd software into several Tier 1 large cities in China.

Right.

So we haven't given a revenue forecast for that but the Elite business has been growing for us at a nice clip the last couple of years. And we have five centers today and we plan to open many more in 2007.

Okay, great. Thank you.

Your next question comes from the line of Paul Keung of CIBC World Markets. Please proceed.

Hi, good evening.

Hi, Paul.

I guess the first question, I guess, you saw some good enrolment growth this quarter and also you opened some schools. I was also wondering on another component, the pricing. Were you able to put some good pricing increases through? And is there any resistance at all in the marketplace right now?

Our blended ASP increases were 10% year over year. Okay? It was a slight increase year over year, 10%. And versus Q1 there's a slight increase of less than 1%. Most of the price increases were taken in Q1. But the prices continue to hold and we're still able to increase prices, particularly in the overseas test prep market. So we were very pleased with the result that, even though prices are at higher levels than last year, our student enrolments still continue to climb at over 20%.

Great. So very little resistance. And the other question, I guess, is there is also some decent operating leverage this quarter. Is the operating leverage you saw this quarter indicative of what you'll be able to do in the back half of your fiscal year?

As you know, Q2 is traditionally our most challenging quarter, so we would expect better results in Q2 and Q3. Q3 is usually a slight pick-up because of the winter holidays and Chinese New Year holidays, where most of the students have one month off. So we would expect traditionally, seasonally, we'll have higher revenues and profits in Q3 than we did in Q2.

Okay, great. Thanks.

Your next question comes from line of [Lin Shu] of Lehman Brothers. Please proceed.

Hi, Michael and Louis, good evening. Thank you for taking my question.

Good evening.

Hi, hi. I'll just take the easiest question first. Well, I just wanted to get an idea about your original expansion strategy. We're understanding '05 and '06 you set up about 20 new schools in new cities. Could you please elaborate a little bit as to whether the developments in those new schools have been able to meet your expectations? And what do you see the market competition over there and market share New Oriental has made so far?

First, we are very satisfied with the new schools development because we opened new schools about two years ago, a year ago. Most of the new schools are performing very well and actually we have [some] expectations. And they are still developing very fast, so we expect somehow also a rapid growth for these new schools this year and next year.

And also we are planning to open some new schools actually in 2007, like some big cities that we haven't gone into yet, like we are opening schools now in [inaudible] in the summer. We are planning or thinking of opening some other schools in Tier 1 cities and also opening more learning centers, like [inaudible] that we are also -- we are [inaudible] kind of into both [inaudible] and high-end English training, like Elite trainer. So that's why we have a cooperation with Dynamic Education Software. And also we are focused on our China strategy on the student enrolment, try to increase it even more so that we will have a bigger increase in [inaudible] and even over those parents of those kids. Generally speaking, it's our new school development and our new strategies for our core business for this year and next maybe.

And then for the quarter we had a net add of six new learning centers. We added eight new learning centers and we closed two in Beijing due to expiring leases. So we have a net 121 learning centers as of November 30, including the 34 schools, versus the 115 we had at the August 31 timeframe.

Great. If we want to quantify the revenue [inaudible] effect, how would you compare the original expansion versus your high-end projects, like Elite Education?

Well, Elite revenue continues to grow, so it will still grow at higher than 30% year over year. So, as you know, our new schools are growing very rapidly. The 2005 calendar year class of 10 schools had revenue growth of 80% this quarter alone from the same quarter last year. And that's consistent with what happened -- that growth would happen over the summer as well. So it's been nice growth in the 10 schools opened in 2005. The new schools that opened in 2006 summer, the seven that opened in Q1, contributed about CNY2m in revenue to this quarter, so they're just getting started.

Okay, very helpful. I'll go back to the queue then. Thank you.

Your next question comes from the line of Brandon Dobell of Credit Suisse. Please proceed.

Hi, guys. Good evening.

Hi, Brandon.

Hi, Brandon.

How was Europe?

It was very exciting.

Are you in Europe?

No, that was last week. Thankfully back in snowy Chicago. Wonder if I could get a little bit of color on some of the major cost buckets that you think about, Louis and Michael - teacher training costs or teacher costs, advertising, rent expense, marketing expense, technology expense. Trying to get a feel for how those are trending, given the strength in the Chinese economy, if we should think about modeling those lines any differently going forward. Are there growth expectations for how you think about those costs or on a per-unit basis?

Yes. I think, in general, our rental costs in the big cities like Beijing and Shanghai as our leases expire are going up. At the same time, we are able to pass much of that through in price increases. So rents do go up but, because when we sign leases we typically sign for five or 10-year periods, we're somewhat covered from it. But we do have leases from five years ago that are expiring now, so we will be hit by that.

On teacher salaries, there is some pressure on teacher salaries but not significant compared to what we're able to increase in ASP. Having said that, the trend is also for smaller classes overall. So that, of course, will increase our teacher costs because it's spread over a smaller revenue base among -- in the [core path], even though the ASPs are higher.

Other costs, sales and marketing, we have more or less control over and we try to keep it around, as we told you, 8 to 10% of revenue. And G&A we've been able to control relatively well, given that our rapid expansion, our G&A costs have not gone up on apples-to-apples comparison with how fast we're growing.

Okay.

So overall that's why you're seeing operating leverage and profit increases in our business.

Okay. In a connected way then, as you think about the new Elite schools rolling out, how should we think about the rental costs, the future costs of those, perhaps? I know it's a much higher ASP. Could also think about the margin for those. If you're going into Tier 1 and Tier 2 cities, are those costs going to be materially higher or are those locations going to be co-located with your existing centers in those cities?

We have five centers in Beijing now, so the good thing for us -- the positives on it, one is the Dynamic Education software allows us to basically reduce the number of teachers and teacher hours cost, because some of the teaching is done with the computer-based software and so it reduces our teacher costs there. Rent is high because it's typically in commercial areas and large office buildings where a lot of professionals work, so rent is typically high. At the same time, the ASPs, we've been able to generate very high ASPs from Elite, where it's well over CNY13,000, CNY14,000 per student per six-month course, up to a one-year course.

So, even though the costs are higher, the ASPs are quite high and we've been able to get efficiencies from now using the DynEd software going forward. And we will expand -- as Michael mentioned earlier, we will expand Elite into other Tier 1 cities. And because these Tier 1 cities, like Shanghai or Guangzhou or others, are big, they typically will have higher ASPs.

Okay. Great. Thanks a lot.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Lin Shu of Lehman Brothers. Please proceed. Miss, please proceed.

Hello?

Your next question comes from the line of [Alberto Esterol of J-Hop]. Please proceed.

Hi, Michael and Lou. How are you?

Hi, Alberto. How are you?

I'm fine. Congratulations on a great quarter. This is my question. I just wanted from you, Lou, maybe some colors. If you compare the New Oriental evaluation, both from a PE and also from probably enterprise value over revenue standpoint, to U.S. peers, also Chinese companies similar in size and growth, and also to a couple of Singapore listed for profit education, you see EDU is trading at, I would say, probably a significant premium. Can you give me some colors on what you see as being the competitive advantage to explain this premium and how you see them going forward? Thank you.

Okay. You know we don't comment on our stock price or our PE ratios and things like that. However, our view is that our differentiator and what makes New Oriental a special, unique story really is our market position in China. We're the leading private education provider with the leading brand name. And the brand can't be duplicated by anyone in a short period of time. And so we are the largest -- we are in a market that is growing faster than the market that our peers are operating on in the United States.

We also face less large competitors. So, because China is a highly fragmented market, we're the largest player by a long shot in this space to face that competition. And I think that is my personal belief as to why the market has attributed a premium valuation to us.

Okay. Thank you very much.

Your next question comes from the line of Brandon Dobell of Credit Suisse. Please proceed.

Hi. Just a quick follow up. From a competitive perspective, anything that we should think about differently, especially in the three or four big cities that are a big portion of your revenue, going to the different products you offer domestic, international test prep and English?

And then, as you think about the Elite schools rolling out, anything competitively, in the different cities you're looking at, that we should think about in terms of modeling, the pricing or margins for that business?

Brandon, [the first thing], that the Elite [centers for] these big four cities that New Oriental has also schools there.

Right.

Actually, we are thinking of rolling our Elite English learning centers into these cities, like within these two years, because we have opened five centers in Beijing, Elite centers in Beijing. We are running them kind of successfully, actually. And now adding Dynamic Education software into it, we can save some money from the teachers costs. And also the scalability of combining the software from the teaching together will be somehow more powerful than just let teachers teach in the centers. So it is easier for us to go into other cities. And also in these facilities we are -- our brand name is very famous, so it is easier for us to go into new cities. [Inaudible].

I think we're going to go in -- lead, just like we did when we opened our schools, Brandon. And it's basically go after the largest most lucrative market first.

Okay. And then, from a different perspective, anything that may be changing underneath the surface, from a regulatory perspective, in terms of how the Chinese government might look at the post secondary opportunity, any movement there, to address some of the big gaps?

Actually, the government is discussing about some regulatory things about post secondary education in China. But, generally speaking, there's not -- they haven't decided what kind of regulation they're going to give us. But in my opinion maybe, even though they give some new regulations, the regulations will have no -- very little effect on New Oriental education. First is that we haven't gone into post secondary yet, even though we are thinking of doing that. Then secondly, that is because we have such a strong brand name here in China and also have good government relations. So we -- I think this will -- the new regulations, according to the development of China, should be good, not bad side -- bad effect, should be good effect on private education in China.

Okay. Thanks a lot.

Thank you.

Your next question comes from the line of James Mitchell of Goldman Sachs. Please proceed.

Good evening. Thank you for taking the call. You've had quite an impressive re-acceleration in your overseas test prep revenue, which looked a little bit mature a year ago, but now it's growing at over 50% a year. Are you still test prepping mostly for post-graduate Chinese going to the U.S., or has the business broadened out to other kinds of tests and other geographies?

Yes. Actually, the increase in the test preparation area is mostly because of two reasons. One is that still university students, when they finish their university studies, they want to go abroad to study. And whether they go to United States or go to U.K., they have to take overseas tests.

The other reason is that, actually, many Chinese parents are trying to send their kids, when their kids finish their high school, to study in undergraduate schools or universities in the United States or other English language countries. So this is kind of good for us to promote our overseas test preparation program for students. So, actually, more and more high school students are coming to want to study overseas tests, in order to get prepared to go abroad to study for their undergraduates, actually.

Right. The main limiting factor, or [gating] factor, on the growth, is it the number of visas that other countries are prepared to issue Chinese students, or is it the affordability of studying overseas?

I think mostly it is because of Chinese parents' affordability to send their kids to study abroad. Because, for all of these years, most English speaking countries have been friendly to Chinese kids, if these kids can pay their own money and if they have the qualification for studying in their countries.

So visas normally are relatively easy for Chinese to get, no matter to the United States or to other countries. Because these countries' educational institutions also believe that most of the Chinese students they have the ability to pay to study in their institutions.

Okay. Thank you.

Thank you.

Your next question comes from the line of Mark Marostica of Piper Jaffray. Please proceed.

Yes. Just another follow up. I appreciate the color on organic growth that you provided regarding the 10 centers that opened in '05. Also, tied to that, if possible, could you give us a sense for the performance of your centers in Tier 1 cities versus performance of centers in Tier 2 cities on a revenue basis, revenue growth basis, and on a profitability basis, relative to your original expectations?

I think -- it's a good question, Mark. I think for the schools, our first schools in 2004 or 2001 through 2000 -- Beijing all the way up to 2004, the profit -- the revenue grew just over 25% year over year. So even the big schools are still generating nice revenue gains on that side. But the two -- the mix of Tier 1 and Tier 2 cities are mostly Tier 1 cities.

Right.

All the schools in the Tier 2 side, we don't really break them out specifically. Our -- mostly the newer schools and they're -- right now they're still in a rapid growth phase. So most of the schools, when they're managed properly, will deliver what our expectations are, if not greater.

Okay. Thank you.

And your next question comes from the line of Lin Shu of Lehman Brothers. Please proceed.

Hi. I have a follow-up question on the Taixing school. I just wondered why did you choose to open a school in Taixing? It's very close to Yangzhou; it's in Southern China. Why didn't you pick a place in Northern China, so that you can cover the whole country? Why don't you take a more traffic-concentrated city, so that you can make it easier for students to go there for summer camps, etc.?

Actually, the reason that we open [professional] school there is because it is near Yangzhou, so that we can use the resources that are already -- we already have in Yangzhou school. The teachers, because we have experienced teachers in Yangzhou school, and the Taixing school is 40 minutes away by highway from Yangzhou. But in China primary schools, or secondary schools, are very local. So those students in Taixing will not come to Yangzhou to study but they know that we -- our Yangzhou school is running very well.

So we kind of have a cooperation with the local entrepreneurs [inaudible] campuses. And we use these campuses and we occupy pretty well of their total revenues from [the share]. But we don't have to spend money on renting the campus, so that has kind of saved us money. And so we only have to bear our teachers expenses and share some G&A [costs].

So that means that, like Yangzhou school, because we built up our own [building] center, we spend a lot of money on it, so the return is slow. But in Taixing school, if we can find enough students, the return will be very quick, because we don't have any investment in it. So that's why the reason, because we can use the teachers and we can use the teacher materials. And if anything happens, our teachers can go over to the other place in 40 minutes. And we don't need another principal of the school, the head of school, to manage that. The same head of school manage two schools. Actually, he manages relatively easily.

And Lin, with the addition of Taixing school, as Michael mentioned, we leverage off the same resources at Yangzhou. So it extends our capacity from 4,000 to 4,500 students to 6,000, with a relatively -- not much increase in headcount or resources. So it was really an opportunity that came our way that we thought was a good one to grab.

Okay. Understood. Thank you.

Thank you.

Your next question comes from the line of Robin Roberts of [inaudible] Phoenix Consultants. Please proceed.

Hi, Michael and Louis. Congratulations for a great quarter.

Thank you.

When I look at your performance in the past, you guys have really delivered and you delivered whatever you promised the investors since the IPO.

Thank you.

So you generate a lot of shareholder value. When I look forward, I am concerned about one factor that actually has nothing to do with your fundamentals; that's your lock up expirations. And just looking at your public documents, it looks like your float is about to double, once the lock up expires. And historically, when I look at the Chinese IPOs, about 36 companies, 32 of them suffered a significant stock decline right around the lock up expiration. And Louis, you are very experienced in capital markets. I am sure you have seen the same trading pattern. So I am just wondering, what actions are you planning to take to make sure EDU does not follow the same fate of other Chinese IPOs that have suffered significant stock decline right around lock up expiration?

That's a very good question. And we are taking steps, and those steps, because on advice of counsel we can't elaborate on those steps. But we are very well aware of the issue and it is a traditional [188-day] lock up that ends on March 7. So we are-- the management and Board are well aware, and we are taking steps to address that lock up issue, but I am prohibited by counsel from being more specific right now. So my advice is stay tuned and you'll realize what the steps are.

Okay. Thank you for that.

Thank you.

Your next question comes from the line of Trace Urdan of Signal Hill. Please proceed.

Hi. Good evening.

Hi, Trace.

I'm wondering if you might be able to -- clearly there's operating leverage, but given the accounting changes it's difficult to make it out separately as the sales and marketing and the G&A line. I'm wondering if you can help with that challenge at all. Is there a way to express those numbers as a percentage of revenue exclusive of the accounting change?

Yes. We've guided you guys that we think we can do -- the sales and marketing expense should be between 8 and 10% of revenue on an annualized basis. And the G&A, if you take -- the total G&A will be about 30%. If you take out the teachers' salary component of G&A, the real G&A, [inaudible] headquarters and other parts, should be about 17% of total revenue.

I'm just trying to understand where the leverage in the quarter was specifically, whether it was equally weighted on both of those lines or what.

Sales and marketing, if you take out the accounting change, the equivalent was about CNY15m. So, actually, sales and marketing went down from CNY11m a year ago to CNY10m this year. So the number's CNY25m because of the accounting change. The accounting change related to employees, reclassification of sales and marketing employees into sales and marketing was [appropriately] classified in G&A.

Right, understood.

And then G&A goes the other way. The real number, if you add CNY15m back to CNY57m, you get CNY72m. We had CNY64m a year ago. So you're just seeing about a 12 or 13% increase in real G&A. However, you're seeing a 32% increase in revenue.

Right, understood.

So that's where you're seeing the operating leverage, both on sales and marketing and on G&A.

Perfect. Okay. And then the second question I had was related to the planned changes in the Chinese corporate tax code and I'm wondering whether those are likely to impact your own tax rate in any way, and whether you believe the status of your special technology-related rates in some areas might come under review as a result of that change.

The -- from our understanding of the new unified tax structure, it shouldn't -- it doesn't affect the technology or the high-growth status of certain companies. That's the second part of your question.

The first part of your question, the rate will -- the corporate rate will go down from 33 to 25%. So, in that instance, that may help us in some areas.

Okay. So only help, in your estimation, not hurt your rate.

We don't know the full impact of it yet, but we don't see, unless there's a change in classification, that it will materially negatively impact us.

Okay. And can you comment -- there seems to be some rumors that it might be accelerated from the January 1, 2008 timeframe. Can you comment on that at all?

I don't know of any change in that. I know that it's being considered by the government in March and April this year. I don't know if they'll accelerate the implementation of it or not.

Okay, great. Thank you very much.

We are now approaching the end of the conference call. I would now like to turn the call over to New Oriental's Chief Executive Officer, Michael Yu, for his closing remarks.

Thanks, everyone. Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact myself or Louis or any of our Investor Relations representatives, Sisi Zhao and others. And I know that most of you have our contact information. So thanks again for joining us. Thanks for supporting us. Thank you a lot. And good evening and good morning again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.