New Oriental Education & Technology Group Inc (EDU) 2008 Q1 法說會逐字稿

Good evening and thank you for standing by for New Oriental's first fiscal quarter 2008 earnings conference call.

(OPERATOR INSTRUCTIONS).

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 first fiscal quarter 2008 earnings conference call.

Our first 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 Louis Hsieh, our CFO.

After his prepared remarks, 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 provisions of the U.S.

Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainty.

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 obligations 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 CFO, Louis Hsieh.

Louis, please.

Thank you, Sisi.

And thank you for everyone who has joined today's call.

I am pleased to begin by mentioning that the end of New Oriental's first fiscal quarter of 2008 also marked the close of a very successful first year as a public Company.

On behalf of our Chairman and CEO, Michael Yu, and everyone at New Oriental, we have to thank all of our investors, research analysts, partners, supporters and especially our students for the tremendous success we have enjoyed in our first year as a public Company.

It is typical for New Oriental to see its strongest results in terms of student enrolment and revenue generation in our first fiscal quarter as many Chinese students take advantage of the summer vacation to enroll in our classes.

This year's Q1 was no different.

With strong growth in student enrolment in our leading language training and test preparation courses, POP Kids in middle and high school English courses driving healthy revenue growth in all our key segments, substantially exceeding our own forecast.

Looking forward, we expect that enrolments in our test preparation courses will continue to be a major driver of our earnings growth.

We will continue to leverage our leadership in this area to expand our offerings with courses that prepare students for an even greater range of domestic and international, academic and professional tests.

We are very optimistic about the potential we see for growth in China's primary and secondary school private sector market which is just emerging in China, and we are already building upon our strong reputation to take a leading position.

We expect to use continued growth in the POP Kids English for middle and high school English enrolment in the quarters ahead.

We were pleased with the increase in student enrolment we are seeing at our existing schools and learning centers.

And we are also expanding our leading nationwide network, as demand for private education in China continues to grow.

So in the first fiscal quarter we opened two new schools, one in Jingzhou, within Hubei province, and one in Dalian in [Liaoning] province and 17 additional learning centers and one bookstore, both in large cities throughout China.

Our hub and spoke business model allows us to recognize the value of leveraging on the ground school management network to assist in the development of new schools and learning centers as we increase our presence in large Chinese cities.

Our other business lines, notably on-line, bookstores and international consulting also grew from the same period last year, largely because of increased course offerings and the fact that our first fiscal quarter is peak season for book sales and enrolments in our international summer camps.

We will continue to develop these areas and explore opportunities for value-creating partnerships with international content providers.

Before moving into our first quarter financials, I would like to add that as the Chinese economy continues to develop rapidly, private education providers are increasing their efforts to meet the surging demand for English language education and test preparation services.

We are confident in New Oriental's continued role as the industry leader as the largest private education provider in China with a well recognized and a proven business model.

We feel we are in an excellent position to continue benefiting from the market opportunities before us.

Recently, many of our competitors have successfully raised capital from private equity funds and other sources and are aggressively spending on marketing programs.

To respond to this challenge, New Oriental plans to increase our marketing spending in order to continue gaining market share and to grow more rapidly than the overall language training market in China.

Now I will walk you through the contribution to our first quarter results and some financial highlights.

Please note that certain figures I will talk about are non-GAAP, including all measures that are given excluding share based competition expense.

You can find a reconciliation of these figures in the financial tables at the end of our Press Release.

Our first fiscal quarter 2008 total net revenue increased by 42.5% year over year, to CNY612m; U.S.

equivalent $81.1m from CNY429.3m in the first quarter of fiscal year 2007.

Revenue from our educational programs and services, comprising of our language training and test preparation courses and primary and secondary education programs, rose 40.4% year over year driven by increases in new student enrolments and language training and test preparation courses.

We also saw increased revenue from books and other education materials and services which [rose] 93.8% to CNY33.8m; the equivalent of $4.5m from the year-ago period.

Total operating costs and expenses for the quarter were CNY343.2m, the equivalent of $45.5m; a 37.7% increase year over year.

Of these, selling and marketing expenses increased 29.5% year over year, to CNY46.3m, mainly due to higher expenses to promote the brand in our expanding network of schools and learning centers which extends to 35 cities at the end of the quarter.

General and administration expenses were CNY102.8m, the equivalent of $13.6m; a 37.5% increase from the same period last year, mainly as a result of expansion of our school network.

Operating margin for the quarter was 43.9%, compared to 42.0% in the year ago period.

Excluding share based compensation expenses, or non-GAAP, operating margins for the quarter would have been 46.0%, compared to 43.3% in the corresponding period of prior year.

This increase is primarily due to the improved operating efficiency as revenue growth outpaced the growth of operating costs and expenses.

Total share based compensation expenses for the quarter were CNY12.7m, the equivalent of $1.7m.

Of this amount, approximately CNY872,000 was recognized as cost of revenue, CNY446,000 was recognized as selling and marketing expense and CNY11.4m as G&A expense.

Net income for the quarter increased by 55.1% year over year to CNY256.0m, the equivalent of $33.9m, up from CNY165.1m in the first quarter of fiscal year 2007.

And net income, excluding share based compensation expenses, non-GAAP, increased by 57.4% year over year to CNY268.7m, the equivalent of $35.6m.

Basic and diluted earnings per ADS were CNY6.86, the equivalent of $0.91, and CNY6.56, the equivalent of $0.87 respectively.

Excluding share based compensation expenses, non-GAAP, basic and diluted earnings per ADS were CNY7.20, the equivalent of $0.95, and CNY6.89, the equivalent to $0.91 respectively.

Each ADS represents four common shares.

Common shares used in calculating basic and diluted earnings for ADS in the first quarter of fiscal year 2008, as compared to the first quarter of 2007, increased due to a 34.5m common shares equivalent, or 8.62m ADSs issued and sold by the Company as an initial public offering in September 2007 -- 2006, sorry.

And approximately 2.4m new common shares equivalent -- to equivalent 600,000 ADSs issued and sold by the Company in its following offering of February 2007.

Net operating cash flow for the first quarter of fiscal year 2008 was CNY212.4m, the equivalent of $28.2m.

Moving to our balance sheet.

Our total cash and cash equivalents as of August 31, 2007 was CNY1,743.9m, the equivalent $231.1m; an increase of 11.5% from the end of fiscal year 2007 [and for] the May 31 quarter.

I will now read you New Oriental's financial guidance for the second fiscal quarter 2008.

Please note that the forward outlook statements are based on our current expectations.

These statements are forward looking and the actual results may differ materially.

New Oriental expects its total net revenues in the second quarter of fiscal year 2008, September 1, 2007 to November 30, 2007, to be in the range of CNY211.2m, the equivalent of [$28.0m] (sic - see Press Release), or CNY224.2 -- sorry, to CNY224.8m, the equivalent of $29.8m, representing year-over-year growth in the range of 25.0% to 33.0% respectively.

This forecast reflects New Oriental's current and preliminary view, which is subject to change.

Once again, I want to thank you for participating in our quarterly earnings conference call.

At this point I am glad to take questions.

The question and answer session of this conference call will begin in a moment.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Catherine Leung, Citigroup.

Please proceed.

Hello, good evening Louis and Sisi.

Congratulations on a very strong quarter.

My first question is we continue to see revenue and student enrolment both accelerate.

Could you please elaborate on where we are seeing this accelerating growth come from?

Is it from the more established tier one cities or from the geographic expansion into the tier two and tier three cities?

Thanks.

I have a follow-up question, so I'll probably jump back into the queue.

Thanks.

Okay.

Thank you, Catherine.

A very good question.

We are seeing strong demand across all our major program and services.

So both in tier one and, what you call, tier two cities [we call all] large cities in China, we are seeing very strong growth.

And that goes all the way from overseas test preparation to POP Kids English to middle school to ELITE and even adult comprehensive English was a [leggard] last year beginning to pick up.

So you can see, as we expand our network we added 17 learning centers and two schools.

We added 19 facilities in one quarter.

We're seeing very strong demand across all our major products.

And you see the other business services also are growing at almost 90%, the other revenue category.

And you can see that in our student growth which surged 30.5% year over year, which is I think the highest quarter we have ever had.

Okay.

Thank you.

Your next question comes from the line of Paul Keung from CIBC.

Please proceed.

[Technical difficulty].

My question is, you had some comments earlier about the increased competition and the number of the [private players] being well funded and your response is [similar markings] but this is [QSS2] twofold.

One is is that -- that also suggests that you see a little less efficiency from a [markings] standpoint.

And two, [do you think at] some point [that would have] an impact on the ability to sustain price increases?

Okay.

Those are good questions.

I don't know if ineffective of the marketing campaign.

So what you are seeing is we're still spending -- like last quarter we spent less on sales and marketing as a percent of revenue than we did in the prior year.

But what we are seeing is in the major cities, because of the competitors that are coming in because of private equity money and other sources, they're spending a lot of money on marketing.

So we feel to maintain our market share and increase the share we're taking in these cities, we would like to respond by spending a large marketing campaign [as well].

It has not, so far, diminished our capacity to raise prices, as you have seen by our revenue growth and our student increases.

So in that sense it is not -- we have not felt those effects yet.

But I don't know what will happen in the quarters and years to come.

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

Please proceed.

Nice job on the quarter, Louis.

Thanks, Mark.

Question regarding, actually, a follow up to the last question.

As you look out to the remaining quarters in the fiscal year, should we expect the same type of leverage on selling and promotion, G&A and cost of revenue as we saw in the first quarter, in other words, year-over-year improvement on a quarterly basis?

Yes, I think what we expect to see is basically -- it should improve year over year, except for Q3.

Because don't forget Q3 last year we had an exceptional year -- quarter because Chinese New Year was late that year so we had an extra 10 days of classes -- a week or 10 days of classes.

So except for that, we would expect that we will continue to get operating leverage in our cost structure, even though sales and marketing expenses are going to be higher.

They should still hold as the guidance we gave, which is around 10% to 12% of total revenues.

So we would expect -- as you can see this quarter, we trended up marginally; we had higher gross margins than last year's overall.

We'll begin to see some leverage effect.

So on an apples to apples, which means quarter -- year-over-year comparison, the number should still begin to trend up, except for Q3 which is the December, January, February quarter.

Because Chinese New Year this year I think will come earlier, so we won't have the benefit of last year.

Thanks.

I'll hop back in the queue.

Thanks, Mark.

Your next question comes from the line of Adele Mao from Susquehanna Financial Group.

Please proceed.

Thank you.

Louis, given your brand awareness in test prep and English language training you are able to raise prices year over year.

Have you seen pricing pressure in new growth areas, such as Kids' English, where you're -- or your ELITE English, where your competitors are more -- have been an early entrant in those areas?

Yes, I think in general -- that's a good question, Adele.

In general, we have the most leverage on price increases in overseas test prep.

I think in the Kids' area it is more competitive because there's so many schools, so we do feel that.

And ELITE is the same thing.

We were -- we're not the first entrant in this space but we continue to grow the business very nicely.

So we do face more price pressures in those two areas.

But overall, we are seeing surge in demand and we are still able to increase prices at a level that we're very comfortable with.

Okay.

Thank you.

Your next question comes from the line of Alex Xu from Brean Murray.

Please proceed.

Thanks.

Hello, Louis.

Congratulations on the quarter.

Just a quick one on the student enrolment.

This quarter, obviously, very strong, both year over year and sequentially.

Number one, what's the driver behind [them] on the year-over-year basis?

And secondly, has this strong number changed your view in terms of long-term student growth on year-over-year basis?

I think in the past you are talking about 10% to 15%, but in the past two quarters you basically blow out the numbers on growth.

So anything changed on the long term outlook on that?

Thanks.

Yes, I think we're getting more confident in our growth on the student count.

So I think I originally guided for this year 15% to 18% or so in -- about 15% in student actual enrolment growth.

I think, given that we grew 30.5% in Q1 alone and that's probably 30% of our revenue, we'd expect to be able to grow students probably in the low 20s percent range; similar to last year.

Because if you look at the deferred revenue you'll see that Q2 is actually only 11% up year -- from the same level last year.

So basically, a lot of the students enrolled this summer so that's why we saw the exceptional growth.

Q2 is trending very -- is trending fine.

As you said, we increased our guidance.

But the student count, many of the students in Q2 actually enrolled in Q1.

That's why you saw the surge of 30.5%, which is the highest ever for our fiscal quarter which is June, July, August.

Thank you.

Does that answer your question, Alex?

Yes, thank you.

Okay.

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

Please proceed.

Hello, good morning, or good evening for you.

Hello, Trace.

Hello.

I notice that you entered the mass market and I wondered if you could tell us a little bit more about that and, specifically, how large you see this market being and whether this is the first step towards putting in more into the test prep business for the Chinese university entrance exams.

It absolutely is.

And so Math is the next logical one for English language.

Math and Chinese language are the three key subjects for the Gaokao, [which is] the Chinese equivalent of the SAT or ACT exam.

So we are -- we have begun to develop our Chinese language programs directed for Chinese students to help them prepare for that -- for those tests.

So it absolutely is correct.

As far as the Math market, we are targeting -- we have only rolled it out in only a few cities.

So the 4,800 enrolment you saw this summer is only about, I think, it's six or seven cities and only in limited learning centers because we don't have the teachers yet to teach Math across our network.

In fact, Math wasn't even rolled out in Shanghai this summer because they were just too busy with English.

So, we think it's -- we'll never be as big a market as the English language.

But it's a nice incremental revenue source because it's the same students.

If they come to our school for English, they might as well take Math and Chinese and other courses while they're here to save them the time in enrolment of going to other schools.

And don't forget the Gaokao market is huge; the Chinese SAT --

That's what I wanted to ask about.

Are Chinese students accustomed to spending money out of pocket to prepare for that exam?

Well, many of them are.

It is prepared for in the senior high schools in China.

But as you know, in any -- just like in any other country, students are looking for an edge.

So they are willing to pay for supplemental training in this area.

It's such an important test to their future.

That's the sole determinator of which school or which college they get into.

And given how competitive the landscape is - there's 10m kids who take the Gaokao every year for only 3m spaces - there is only a 30% chance to get in.

And don't forget, Trace, those 7m who don't get in, many of them will spend one more year full-time studying for the SAT or the ACT exam for the next year.

So that is another huge market.

Got it.

Thank you.

Your next question comes from the line of Chris Shutler from William Blair and Company.

Please proceed.

Hello, Louis.

How are you?

Hello, good Chris, thanks.

Maybe you could talk just for a second about the recent Ministry of Education mandate that graduate enrolments only grow by 5%.

I'm just wondering what kind of impact you expect that to have on your business?

Thanks.

I think, right now the only graduate exam that we -- you're talking about graduate schools, right Chris?

Yes, that's [correct].

Okay.

The only the graduate exams that we really prepare students for is the CT6 exam right now; Chinese English level [6].

It's a very small part of our business.

And if that's the case, I actually believe that means that more Chinese students, if they want a graduate degree, will have to go overseas which is exactly our bread and butter, right.

That's our most profitable product line, which is overseas test preparation.

Okay.

I don't think it should have much impact on our current business.

Okay, fair enough.

And then just one question on M&A, if you don't mind.

I know that you've talked a lot in the past about a bunch of different opportunities there.

But one area -- is there one area in particular that you might be looking at particularly hard right now?

And what are your current thoughts on the vocational school market?

Vocational, we are looking to go into that area in the next 12 to 18 months.

We have been doing a lot of work on the BD side in that area.

As far as M&A targets, the primary focus will be buying up competitors in large cities.

And that goes across our product [lists], from Kids' English to other language training [in] other areas.

So that will be our number one focus is buying competitors that we can pick up in large markets.

Second, we'll be looking at complementary businesses, so maybe vocational or other areas that we don't currently have the domain expertise.

And then we're also -- one thing that's not in here, but in Q1 we actually bought a kindergarten.

So in Beijing -- it's a very small kindergarten.

It's immaterial to our earnings.

But it's a first step to get a license because kindergarten is a very -- private kindergarten is a very profitable business in China.

And because of our English brand name, it's a great synergy.

Parents will send [it] to New Arundel just for their brand name.

So we think -- and the ASPs are much higher.

They are between -- anywhere from CNY15,000 to CNY40,000 a year for private kindergarten.

So that's an area we would like to get into.

And as you recall, it's an area that's not as heavily regulated as Grades 1 through 9, which is -- and also colleges.

Right, okay.

How quickly do you anticipate actually being able to ramp-up in that market?

I think this will take a while, because you require a separate license in each city you operate, just like our schools.

And sometimes in each district you operate you need a separate license so we have -- and they usually take some time to get.

So that's why we've bought a school that has a very small one, [it has] 50 to 100 students right now.

And we are now launching the name New Oriental Star as our brand name for nursery school and kindergarten age kids.

Because if you think about it, the thing that parents care about is that those kids are in a prestigious kindergarten and they're learning English and they're in a very clean environment, and that's what we hope to provide.

Okay, I'll turn it over, thanks.

Thank you.

Your next question comes from the line of Art Bacomb from Oppenheimer.

Please proceed.

Hello, Louis.

Just two quick questions, just regarding competitors.

You alluded to more spending that you're seeing from private equity related competitors.

I'm wondering if you could talk about who they are and how aggressive they are?

And then, secondly, as you talk about the greater degree to which they're advertising and marketing, what are the things that you're specifically doing where they are most active with regards to your marking and advertising?

Thank you, Art.

I'll give you a couple of examples.

[Carlisle], who own Wall Street English, is -- I think it's a rumor in the market that they're probably eyeing some kind of offering, and so you can see that their advertising spend, it's a very high-end side, is accelerating in large cities, particularly in Shanghai and Beijing where they face a lot of stiff competition in the high-end side, and also from our ELITE English, so we're doing the same thing.

We'll begin to roll out and we're going to advertise more aggressively to get a piece of that very competitive market; that's what we're talking about.

Your second question related to market strategy, is that right, Art?

Yes.

On the marketing strategy we would like to market to all levels, but I think where there's more competition is going to be in the English Language for Kids and in very high-end side.

So the market is obviously targeted mostly to Kids and in ELITE English segment.

I think in test preparation we're very comfortable with our market position.

Great, thank you.

Thank you.

Your next question comes from the line of Mark Chang from Merrill Lynch.

Please proceed.

Hello, Louis.

Hello, Mark, how are you?

Good.

Well, one question.

I think on your balance sheet you've now got about CNY1.7b and you just mentioned that you did a small acquisition.

And you've been talking about looking for acquisition in the past, and is there any update on that?

And will you be considering paying out any dividends if you keep accumulating such a big amount of money on your balance sheet?

Yes, I think right now we have several specific targets that we are aggressively pursuing [the] M&A side.

And as I mentioned earlier, they really relate to competitors in large cities and also in domain knowledge like kindergarten.

We didn't have that license in that domain knowledge when we bought it.

So it wasn't very expensive, but it's a first step for us.

And then like in areas in Gaokao, we want to go into the Chinese SAT, it's a highly fragmented market.

So those are areas that don't have the full domain knowledge yet but we'd like to make some acquisitions there.

So those are -- as far as the cash goes, we have about CNY230m on our balance sheet.

I don't want to pay a dividend.

If I did anything I'd probably -- my suggestion would be to buy back shares.

But we get a lot of resistance, as you know, from our large investors, who think that our float is not -- we do not have enough liquidity as it is in our float.

So we're looking to deploy that money in buying acquisitions where we would probably use more cash than shares, if any shares at all.

Okay.

Thank you.

Thanks.

Your next question comes from the line Anindya Chatterjee from Jefferies and Company.

Please proceed.

Hello, Louis.

Congrats for the good numbers.

I wanted to know more about your acquisition strategy, particularly when it comes to four year colleges, (inaudible) talked earlier [which is] more than four year colleges.

And also on the Gaokao provider, isn't it true -- where do you think you're going to be if you take a one year view?

What was the second question, sorry?

As being involved in acquisition strategy on expansion on complementary businesses, and particularly four year colleges have been Gaokao providers.

I think -- many of the analysts know my view on four year colleges.

I've never been a big -- I'm only one voice, so let me say that upfront, of the Board and of the management, so I'm just one of many -- one of five Board Members and Michael is the key decision maker as the CEO and Chairman.

But I personally don't like the four year private college business in China because of the current regulatory stream and the system that's in place for revenue.

The degrees are controlled, basically, by the Government which in a system where they dole out the degree.

So it's a very competitive market and I don't believe it is as profitable as some of the other businesses that we are in today.

So that's just my opinion; it's not necessarily the view of the whole Company.

And as far as acquisitions, as you said, we have a lot of cash and most of the targets we're looking at are much smaller than we are.

So they take time to digest because these are companies that [don't] necessarily the most sophisticated, don't have all their books being lined up.

But as a public Company we need to look at the particular financials for these companies in order to report them to you guys.

So the due diligence process in this area takes much longer than for a company that has a good set of books and it takes time.

So we are definitely pursuing targets, but like I said it could be competitors again, it will be domain knowledge, like Gaokao, like kindergarten, like areas that we don't have our own, like vocational.

Thanks.

Okay.

(OPERATOR INSTRUCTIONS).

Your next question comes from line of Marisa Ho from Credit Suisse.

Please proceed.

Yes.

Hello, Louis.

Great quarter; congratulations.

Thank you.

Looking at your enrolment, they have actually been tracking very much ahead of your original expectations.

And you also mentioned that competition could be feeding up and you want to make sure that you maintain your increase in your market share.

What are these actually doing to your organic growth line for the rest of the year?

I think that we were pleasantly surprised by the surge in enrolments, but 30.5% is way too high.

So out there I said I think some of those students that enrolled during the summer will actually go into Q2, so you'll see a slowdown in Q2 enrolments, but that doesn't mean -- you see our revenue guidance for Q2 is well above what you normally would guide, so you see that we are pretty confident on Q2, the quarter we're in now.

But I think 30% student growth is too high; we're more confident with a low 20.

As far as the organic growth, you can see that we opened 17 learning centers, which is an all-time high for us, and we opened two new cities.

So we're seeing surging demand across our major pipelines, especially in Overseas Test Prep, and especially in POP Kids' English.

And now some of those learning centers we're opening are in the high-end side, ELITE and VIP English, as well as in Adult Comprehensive English.

This is the strongest quarter of growth for Adult Comprehensive English.

Student enrolments were up over 18% which is very, very good for that sector.

Last year it was growing about 5%.

So we're seeing strong demand across our major product groups.

Your next question comes from the line of Leah Hao from Goldman Sachs.

Please proceed.

Hello, good morning.

Can you hear me?

Yes, I can hear you, Leah.

Hello, Louis, how are you?

Just a quick question.

Given your continued geographic expansion, can you give us an idea of your citation rate [for] your facility right now?

Break it down by tier one versus tier two and what's your outlook for the remaining quarters?

Okay.

I think, as you know, we don't really tract utilization but during the summer most of our tier one, the larger cities, were very full, so I don't know if they were full capacity, but they were very full.

The quarter we're in now and the rest of the year they will not be fully utilized because students don't have the two months off as they did in the summer.

So Q3 will see a nice bump-up normally because the one month Chinese New Year holiday.

Q2 that we're in is usually slow and Q4 is slow.

But at the beginning of the year we have guided revenue growth of about 20% to 25% that we're comfortable with.

I think we're very comfortable to take that up, well of the 25%, probably closer to the 30% as you see in the numbers.

If our first quarter grew 42%, and 0.5% of revenue, it's 40% of our revenue, it doesn't take a genius to work out that our growth, assuming the rest of the quarters are reasonable, will be probably be high 20s or low 30s.

Great, thank you.

Your next question comes from the line of [Zueh Woo] of Deutsche Bank.

Please proceed.

Hello, Louis.

Congratulations on the first quarter.

Thanks you, Zueh.

Okay.

One of your biggest competitors Global [S] is actively implementing its franchise [tools plan], so do you have any plans in the near future about implementing the franchise tools?

We've never franchised in the big cities and we did that on purpose because one of our core competitive strengths is our brand and the ability to have a similar experience across different cities.

When you franchise you lose control of the quality of teacher and teachers are key to students' education experience.

So we believe that if you lose that control, you can't really manage your brand.

This is not like a McDonalds or a Starbucks, where everything looks exactly alike.

And the key to teaching is the content, the brand and the teachers.

And we believe when you franchise you lose control of the teachers and also you will lose control, to some degree, of the look and feel of the school.

New Oriental Schools, many of them look very similar, and so they're the same high quality and we believe franchising is not an optimal model if you want to build a very strong brand name.

Okay.

Thank you.

Your next question comes from the line of Catherine Leung of Citigroup.

Please proceed.

Hello.

Could you please update us on your geographic expansion plans?

I know that the last time we talked, we talked about scaling back the geographic expansion and focusing more on the tier one, kind of the larger cities, increasing the number of learning centers there.

And what type of impact on margins do you foresee this strategy to have?

Thank you.

I think we still aren't going to grow in that many new cities, Catherine.

As you know, we grew 19 facilities but only two new cities, right.

So the focus is exactly what we told you, which is we're basically going to add learning centers in the existing cities because the demand is there.

So we only added -- during the quarter we added basically learning centers in many of the big cities, both tier one and tier two cities.

I haven't got the exact breakdown but we ended up with about 17 learning centers across, probably 15 or 16 cities.

But in every big city, the top eight cities -- let me count here, one, two three -- five or six of the top cities all had a new learning center this summer.

The strategy hasn't really changed.

We would like to focus more on adding learning centers in existing cities than to just to grow out into new cities.

So we grew two cities.

We're probably, as we had already forecasted, four to six cities for the year, but the learning center count will probably expand.

We'll probably take that number up because of the success of the first quarter to probably over 30 learning centers this year, up from the 25 we had originally guided.

Okay, thanks.

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

Please proceed.

Louis, in regards to your expansion of the learning center footprint, I'm curious if you could give us a sense of the economic value of the learning center model again; time to breakeven and operating margin profile and that sort of thing.

Thanks.

I think, in general, in an established city the learning center is very profitable.

It will cost us typically between -- the cost's gone up a little bit; let's say $80,000 to $130,000 to lease the building or several floors of a large building.

We'll hire some staff and put in the desks [and the TVs].

The model is such that that investment will be paid for and return to full invested capital is probably three to six months.

So it's a highly profitable model, the learning center model, for us.

That's part of the reason we get operating leverage because we don't get as much operating leverage in the school level as you do in the learning center model.

The thing about a learning center model, we don't have to hire another school head, we don't have to hire a marketing team, there's no registration system there and there's no bookstores or any other kind cost there.

There are effectively empty classrooms that the teachers travel from the schools to teach at and so they're much more profitable for us than opening a new school.

For costing, I don't exactly have one for each school.

You see, it depends on the city it's operating in, but they're all typically, when they're a year or two in, they should easily be 25% operating margin, if not much higher.

Okay, thank you.

(Inaudible) 30%.

Your next question comes from the line of Adele Mao of Susquehanna Financial Group.

Please proceed.

Louis, we've seen some new initiatives from New Oriental recently, for example, a rollout of ELT Advantage courses that offer English Teacher Certification.

Could you just tell us how fast programs like this may ramp-up and whether this initiative could be a meaningful revenue driver for fiscal 2008?

It's a good question Adele.

We launched our ELT Advantage with Thomson Learning.

What ELT does is that it gives the [TEFL] Certificate to English Teachers, so that's the International Standard for, I think, it's Cambridge University for English Teachers across the world.

China hasn't already TEFL yet, so New Oriental being the largest English teaching school based only in China, Thomson wanted to partner with us to build that standard, that certification for English Teachers.

So we find at this point working on a pilot with Thomson to get many of our teachers TEFL certified.

We believe that the marketing advantage in the market today for teachers to say that they have a TEFL certification in objective international standard for English Teachers.

If that catches on we will be the exclusive provider of ELT Advantage in China for several years.

So it will not have a meaningful impact on '08 earnings but we're optimistic that '09/'10 it will being to have more impact and it will give us a marketing advantage as we recruit students into our classes because our teachers, many of them will be TEFL certified, if not all of them, at some point.

That's great.

So you envision a nationwide rollout into '09 and ['08] and I assume programs like this should help smooth out your seasonality, correct?

Right.

This is what it is, is that I believe there is six or eight, I can't remember, different modules and teachers can study them online.

So this is done on our Koolearn site this is one of our online programs.

They take the course and they pass the test.

Every test they pass they get a certificate to say they passed this module.

And that's the certificate that gives them a marketing advantage in other countries outside of China, that says that this teacher is proficient in English and has been certified by TEFL, the international standard for English Teachers.

So we believe -- the marketing management believe it will give us some revenue and will help us recruit more students.

Great.

Thanks a lot.

(OPERATOR INSTRUCTIONS).

Your last question will come from Trace Urdan from Signal Hill.

Please proceed.

Hello, Louis.

I just wanted to come back and make sure that I understood something that you had said earlier when you were talking about acquisition strategy.

Does it now -- you suggested that four year degree granting schools that are heavily regulated are a less attractive business and less interesting to you now?

I said that's my view.

But at the same time we would like to buy one, so Michael has already stated in the first quarter he would like to acquire one college to give us the degree granting ability.

And also in Beijing or Shanghai we can get a lot of benefits from it because we can use that campus for our summer camps.

Again, this summer we spent millions of U.S.

dollars on temporary space in Beijing and Shanghai for our summer camps.

So we would like to get a campus and also we'd like to get the degree granting ability to help with our vocational training [in] our online programs.

It helps us with even more partnerships with international renowned educational institutions.

Is there a minimum size associated with what kind of property you would acquire?

Well, I think we would -- it doesn't make sense to acquire anything that has fewer than, probably 2,000 or 3,000 students at a minimum, and I think anything over -- there's not that many private colleges that are over 10,000 or 15,000 students.

So in the 3,000 to 10,000 students range is probably the right size.

I was asking because I was very surprised when I learned that [Chinacast] had successfully got an MOI on the [Wuhan] Media and Communications College.

And it struck me that you guys would probably be a much more likely acquirer of choice, and I wondered if that was because that asset was too small for you, or too regional, or too vocationally specific?

Maybe you could comment on that.

We had -- the targets that make the most sense to me at right now, we have a -- obviously we have a limited staff on business development as acquiring competitors and acquiring suitable vocational knowledge versus the four year college.

If we bought a four year college we wouldn't be interested in Wuhan.

We'd only be interested most likely, Michael and the Board's thinking, in Beijing or Shanghai where we can really use that physical facility as well the fact that private tuition and the revenues are a little bit higher in those cities.

Got it.

Okay.

Thanks.

So Wuhan, for a college, would probably not be the most desirable target for us.

Your next question comes from the line of Anindya Chatterjee from Jeffries and Co.

Please proceed.

Hello, Louis.

Just wanted to get some more clarity on the guidance.

This time your actuals have turned out to be significantly better than you initial guidance.

What caused this?

Was it enrolments that picked up later, just to throw light on your guidance and (inaudible) in that process.

Yes, I think if you recall, the full revenue number was calling for about a 35% growth this summer.

The full revenue number on our balance sheet at the end of Q4 was about 35% higher than the year-ago period.

So we thought that if things [all go well] then we will grow about 35%.

It turned out that we had a surge in demand this summer, where we received Test Prep and Kids in middle school, it's just across the spectrum.

So it was unanticipated.

Don't forget, last year our Q1 was a record quarter for us.

It was the best ever in New Oriental's history, and to able to exceed that by 42% and 55% on profit, I just couldn't in good conscious try to forecast that, okay, so.

In going forward though, because given that it's 40% of revenue and easily 15%, 20% of our profits in a year, it makes sense than just the law of numbers will tell you that we should be able to grow students in the lower 20s on a conservative basis and revenues in the high 20s to low 30s without having to stretch -- or, it wouldn't be a stretched target for us, basically.

It was a very surprising quarter; it really surprised the whole management team.

Great.

Thank you.

We are now approaching the end of the conference call.

I will now turn the call over to New Oriental's Chief Financial Officer, Louis Hsieh, for his closing remarks.

Well, I think I just want to thank everyone for the opportunity just to give our Q1 guidance.

And like I said, we are very pleased with our results this quarter.

We see we have very strong demand across our major programs and services and we're quite optimistic about our outlook.

And we want to thank you all for your support and, like I said, we've very pleased with our performance in our first year as a public Company.

Thank you very much and we look to forward to seeing you in person in conferences as we travel.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.