New Oriental Education & Technology Group Inc (EDU) 2008 Q2 法說會逐字稿

Good evening, and thank you for standing by for the New Oriental second fiscal quarter 2008 earnings conference call.

At this time, all participants are in a listen-only mode.

After management-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 like to now turn the call -- turn the meeting over to your host for today, Miss Sisi Zhao, New Oriental's Investor Relationship Manager.

Please proceed.

Hello, everyone, and welcome to New Oriental's second fiscal quarter 2008 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 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 uncertainties.

As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our public filings with SEC.

New Oriental does not undertake any 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?

Hello to all of you on the call and on the webcast, and thank you for joining us today.

I am pleased to report that New Oriental posted solid results for the second fiscal quarter of 2008, with strong top and bottom line growth.

I would like to take you through some of the highlights in the quarter before moving to the second quarter and six-month financials.

As you may know, our second fiscal quarter corresponds with the beginning of the Chinese school year and, as a result, is typically characterized by a sharp drop in enrolment from the summer quarter.

We are pleased to report that, despite seasonality, we experienced healthy revenue growth in all our key segments which led to a 42.4% year-over-year net revenue increase, and our net profits this quarter grew 77% over the same period a year ago.

During our second fiscal quarter, we continued our strategy of foregoing short-term profit in favor of rapidly expanding our leading nationwide network by establishing a net of 34 new schools and learning centers in the first half of our fiscal year 2008.

That's compared to 19 schools and learning centers for the entire fiscal year of 2007.

In order to staff our rapidly-growing physical network, we added over 900 teachers and staff in the first half of our fiscal year 2008.

In addition to increasing our G&A spending, primarily due to headcount increases, we also continued to rapidly increase our marketing spending which during the second quarter grew by approximately 50% year over year in order to drive strong student enrolment and revenue growth.

We expect to continue benefiting from this rapid expansion strategy in the quarters and years to come.

In the second quarter, we were able to beat top-line guidance and the main drivers behind our revenue growth was the strong rise in student enrolment for our leading Language Training and Test Prep courses -- in Overseas Test Prep courses, with a year-over-year increase of some 217,000 students to over 257,000 students in this year's second quarter.

Also driving revenue growth this quarter was enrolment in our Overseas Test Prep program and POP Kids' English program, which increased more than 30% and 50% respectively over the same period last year.

We continued our pilot program in mathematics in half a dozen cities, and are pleased to report we had over 3,800 enrolments in the fourth quarter; usually a slow period when students go back to school.

As the private education trend in China expands to students at younger ages, we are recognizing -- we have recognized the potential in providing families with full-time enrolment options for pre-school aged students.

In the first fiscal quarter we began our kindergarten business, and I am pleased to report that our first operational kindergarten opened officially during the second quarter in Beijing.

Looking forward, we expect the trend to continue, with families beginning their children's education at younger ages, and we plan to leverage our leading brand name in the English language to provide competitive options to this highly-fragmented area.

In general, Chinese parents are name-brand buyers and the education of their child or children is the top priority in their lives.

When selecting pre-schools for their one child, parents will typically consider the following criteria; known brand name, clean and safe environment, quality programs with English language training a definite plus (kids learn Mandarin at home, typically), convenience and price.

We believe that our New Oriental Star branded kindergartens will be an attractive offering as the -- in this competitive fragmented market.

As our enrolments continue to rise, we realize the importance of providing our growing number of students with course content that meets the highest standard.

Aside from devising -- developing content in-house, we constantly seek out collaborations with leading domestic and international content providers.

During the second quarter we announced two new strategic agreements with premier content providers, ETS and Heinle ELT, a part of Cengage Learning, formerly Thomson Learning.

Through our agreement with ETS, students enrolled in New Oriental's TOEFL Preparation course will now have access to ETS's online program, which further solidifies our dominant position in TOEFL Test Preparation.

And under our agreement with Heinle ELT, Heinle ELT will work with New Oriental's instructors to develop a line of localized English language training materials, including textbooks and video programs and Internet-based content, for use in New Oriental's iEnglish brand courses and by New Oriental's Koolearn online platform.

Also, we continue making good progress in upgrading our Beijing Elite learning centers with the DynEd software model.

As we announced last year, the upgrade in DynEd -- the upgrade to DynEd's international state-of-the-art English language training software in Elite English courses will provide teachers with a platform by which they can take -- they can track the progress of each student.

The software will also help reduce operating costs, as students will spend the first stages of their courses using the software and only at a later stage will teachers be needed for in-class instruction.

We expect to expand our Elite English with DynEd software in other cities in 2008.

Now, I will walk you through the contributions to our second fiscal 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 compensation expense.

You can find a reconciliation of these figures in the financial tables at the end of the press release.

Our second fiscal quarter 2008 total revenues were RMB240.6m, equivalent to $32.6m; an increase of 42.4% over the second fiscal quarter of 2007.

Revenues from our educational programs and services, comprising our Language Training and Test Preparation courses and primary and secondary education programs, rose 37.9% year over year, driven by an increase in new student enrolments in Language Training and Test Preparation courses.

Overall, operating costs and expenses for the quarter were up 43.3% year over year.

[Of these] cost of revenue increased by 35.5% (sic - see Press Release) year over year, mainly due to the increased number of courses offered to a larger student base and a greater number of schools and learning centers in operation.

Selling and marketing expenses increased 49.9% year over year due to the brand promotion expenses and headcount increases.

In addition, as you are aware, China's inflation rate has been rising for the last year, and we are feeling the effects of wage inflation for teachers and staff as we continue to compete for the best personnel.

G&A expenses increased 52.6% year over year, primarily due to increased headcount as the Company expands its network of schools and learning centers.

Operating margins for the quarter was negative 0.5% compared to positive 0.2% in the corresponding period of the previous year.

Excluding share-based compensation expenses, operating margin for the quarter was 5.8%, compared to 4.9% in the corresponding period of the prior year.

This increase was 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 was RMB15.3m, the equivalent of $2.1m.

Of this amount, approximately RMB2.4m was recognized as cost of revenue, RMB0.5m was recognized as selling and marketing expense and RMB12.3m is general and administrative expenses.

Net income for the quarter increased to RMB14.5m, the equivalent of $2m; an increase of 77% from the second fiscal quarter of 2007.

Net income, excluding share-based compensation expenses, increased to RMB29.8m, the equivalent of $4.0m; an increase of 83.6% from the second fiscal quarter of 2007.

Basic and diluted earnings per ADS were RMB39 -- RMB0.39, sorry, equivalent to $0.05, and RMB0.37, equivalent to $0.05, respectively.

Excluding share-based compensation expenses, or non-GAAP, basic and diluted earnings per ADS were RMB0.79, the equivalent of $0.11, and RMB0.76, the equivalent of $0.10, respectively.

Each ADS represents four common shares.

Moving to our balance sheet, our total cash and cash equivalents as of November 30, 2007 were RMB1,824.8m, the equivalent of $247.1m and an increase of 4.6 from August 31 -- 4.6%, sorry.

Capital expenditure for the quarter was RMB12.3m, equivalent to $1.7m.

Net operating cash flow for the quarter was RMB63.9m or the equivalent of $8.6m.

Financial results for the six months ended November 30, 2007.

Before I give guidance, I'd like to take a brief look at the comparison between the first six months of fiscal 2008 and the first six months of fiscal 2007.

Student enrolments in Language Training and Test Prep courses grew 25.8% year over year to 698,200, approximately.

Net revenues were up 42.5% year over year to RMB852.6m, the equivalent of $115.4m.

Net income was up 56.1% year over year to RMB270.5m, the equivalent of $36.6m.

Non-GAAP net income was up 59.6% year over year to RMB298.5m, the equivalent of $40.4m.

And our operating margins went from 30.2% in the six months ended November 2007 to -- 2006 to 31.4% in the six months ended November 30, 2007.

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

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

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

Total net revenue in third fiscal quarter 2008, that runs from December 01, 2007 to February 29, 2008, are expected to be in the range of RMB311.2m, the equivalent of $42.1m, to RMB326.5m, the equivalent of $44.2m, representing year-over-year growth in the range of 22% to 28%.

Please note that New Oriental's third fiscal quarter 2008 revenue growth will be especially challenging when compared with the third fiscal quarter 2007, which showed year-over-year net revenue growth of 51.3%.

The Company's third fiscal quarter 2007 benefited from the late timing of Chinese last year -- Chinese New Year in 2007 which fell in the third week of February 2007, allowing Chinese students an extended winter break and a longer period of time to study in Language Training and Test Prep courses.

This will not be the case in 2008, as Chinese New Year falls in the first week of February; a more typical date for the new -- lunar New Year celebrations.

In addition, many Chinese -- many schools throughout China, including those in Beijing, have decided to shorten the 2008 winter break for students by one week or more, in return for extending the 2008 summer break by a corresponding length of time.

This is in order to allow Chinese students time to study and enjoy the Olympic Games that will be in Beijing this summer.

Furthermore, we expect to see continuing margin pressure from wage inflation as we continue to rapidly grow our business.

We also expect stock-based compensation expenses to increase significantly, beginning next quarter, as we grant options in restricted shares to retain our talented teachers, school heads and management.

New Oriental typically grants options and restricted shares twice a year, in February and in August, and this year's grants are expected to be significantly larger than 2007, because the large batch of incentive shares were granted in early 2006, before our IPO, and those shares are subject to three-year vesting, which will conclude in the next year or so.

The grant in 2008 will, in part, replace the 2006 grant to retain our top management and teachers.

Notwithstanding these numerous challenges and factors, we continue to see surging demand for educational programs and services in the recent -- in the current quarter, and we expect to continue to execute on our strategy and continue to deliver strong growth in top and bottom line financial results for our shareholders, particularly in a non-GAAP basis.

As of Q2 2008, our deferred revenue balance is RMB278.8m, representing a 52.6% increase compared to the same fiscal quarter last year.

Deferred revenue balance, which appears on the current liabilities portion of our balance sheet, represents the course fees and school fees collected from students who will take the classes in subsequent quarters; essentially a measure of backlog and a good indicator of current demand.

Before moving on to your questions I also want to mention that, as far as we know, we have not as yet been negatively impacted by the economic down -- slowdown and related events in the United States, given that virtually all of our revenues are derived in the China market.

Moreover, we continue to benefit from the strengthening RMB, given that virtually all of our revenue are in RMB and are translated into U.S.

dollars for financial market reporting convenience.

In addition, the strengthening RMB helps our students who wish to study abroad, as it makes it less expensive for them.

Once again, thank you for participating in our earnings call for the second fiscal quarter 2008.

At this point, I am happy to take your questions.

(OPERATOR INSTRUCTIONS).

And your first question comes from the line of Mark Marostica from Piper Jaffray.

Please proceed.

Thank you, and good evening, Louis and Sisi.

Good evening, Mark.

I wanted to ask you a question about the big jump in revenue per enrolment this quarter.

I think it was up a little over 20% year over year.

What drove that jump, and perhaps if you could delineate between Test Prep and English language instruction it would be helpful?

I think, overall, the ASP increases were north of 15% this last quarter.

And in Overseas Test Prep it was higher than 15%, so it was the main -- it was the highest driver.

And also, as you know, Mark, we have continually been moving to smaller-sized classes, which means the ASP will naturally be higher because there is fewer students in the class and they're priced that way.

So those two factors together made ASP increases north of 15% for the current quarter.

As a follow up, would you expect that rate of ASP increase to affect the other quarters of the fiscal year?

We had always guided around 10%, 10% to 13% ASP growth, so we will continue to say probably, conservatively, 10% to 13%, although it seems that we have exceeded those numbers the last few quarters.

Great, thanks.

I'll turn it over and hop back in the queue.

Thank you.

Your next question comes from the line of Adele Mao from [Sec].

Please proceed.

It's Adele Mao from Susquehanna.

Could you -- Louis, could you discuss a little more in detail related to your marketing expense ramp-up, given the intensified competition out there?

What are the new marketing initiatives that you have put in place, and would you expect further ramp-up in marketing expenses in the quarters to come, particularly on -- before Olympic Games and when the high season -- the summer vacation season for students comes around?

That's a good question, Adele, thank you.

For New Oriental, the marketing expenses are several.

The increase is about 50% year over year, and that's really a result of adding personnel and also advertising in more cities.

Because at this time last year we were in about seven or eight fewer cities, as I recall, so we have to advertise in more cities.

The second thing is the advertising actually costs more this year.

Because of all the companies in China that are competing for the advertising space, and you're seeing a lot of companies IPO-ing in the advertising space in China -- from China.

Actually, the ad rates have gone up.

So that has naturally increased our marketing spend.

And then the factor that we've mentioned in the past has been that private equity has injected a lot of money in education companies, and several of them have listed in the United States as well, and they are also spending aggressively, using those funds to market.

So we need to meet those challenges by spending a lot on marketing ourselves.

And so if you saw it increase, not -- you wouldn't just -- advertising spend is also in headcount increases in the marketing team.

In addition, we are -- this quarter we don't expect as big a ramp-up in marketing spend versus last year.

Last year we spent about RMB38m in Q3.

We will spend more than that, but it won't be the same 50% increase.

Q4 traditionally, for us, is a very heavy marketing spend and we'd expect it to be another ramp-up in marketing because Q4, as you recall, is the March/April/May quarter and that sets up our summer quarter, June/July/August, which is our key -- our most important quarter.

So we will probably curb a little bit of the advertising spending in Q3 and ramp it up in Q4.

Now remember, part of the 50% increase in Q2 was because we were trying to drive the strong student growth for Q3, which is what we're in now.

So all that spending for Q2 is really meant to set up Q3, which is our second strongest quarter.

And you saw some of the benefits of that in our backlog, where you -- in the deferred revenue side, where it was up to $278.8m -- million RMB, up 52% year over year.

And remember, last year was a record year for us.

So it's paying off in student enrolments.

Great.

That's very helpful.

Thank you.

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

Please proceed.

Hello, thanks, it's Scott Schneeberger from Oppenheimer.

Just following up on looking ahead to the spend lines, you've mentioned that there's been wage inflation, so the cost of new hires, and you had a lot of new hires in the first half, I think 900, was putting some pressure on, and then obviously you just mentioned that advertising spend is creeping up.

And thanks for the second half discussion.

But are we going to see you creeping to new levels longer term, or do you think that you can drive the scale and compensate for this -- these inflations?

I think we've been quite successful in raising prices higher than our costs are going up, so we would expect to do that in the near term.

We don't know, of course, about the long term.

But in the near term we would expect, given that we do have some pricing power to increase ASPs at a higher rate than wages.

Wage inflation is between 6% and 10% a year and, as you know, we've been able to increase prices between 10% and 15% year over year, so we'd expect to continue to do that in the short term.

Thanks.

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

Please proceed.

Good evening.

Hello, Trace.

Hello, Louis.

I'm wondering if you could speak a little bit about the announcement you made regarding the introduction of Chinese language courses.

And I presume now you have all of the pieces necessary for the Chinese entrance exam Test Prep, and I wondered if you could maybe talk about your plans in that market a little bit?

That's a great question.

The Chinese language program that we have now is on our Koolearn site and it's mostly directed, actually, at foreigners who want to learn Chinese, or -- it's not as much the Chinese grammar yet.

So we expect to roll out Chinese grammar classes, targeted at the national entrance exam, over the next year.

In that market, Trace, we would hope to be more aggressive entering that market in the next year.

I would prefer to do it through acquisition, but we'll also go it alone if we can't find suitable acquisition targets that are willing to be acquired by New Oriental.

We believe that's a very lucrative market going forward.

We've already trained 200,000-plus high school students in the language -- the English portion of that and we just began to offer mathematics, as you know, the last couple of quarters.

And we're beginning to see good traction there.

We will offer Chinese language next year.

But we're still missing some of the other subjects, such as Chinese politics and history, some of the specialized subjects like in chemistry or physics or other subjects.

So the ideal way for us would be to acquire our way into that business.

Are there any well-scaled businesses in that market right now?

No, they're mostly local businesses.

Because of the way that the Chinese national entrance exam is set up, each province has a slight variation on that exam so there's strong local players.

It's just like most of the education markets in China; they're highly fragmented and very local.

So our ideal would be to acquire a leading player in several of the large markets and then to begin to consolidate that and build a brand around that and then to grow that business.

Right, thank you.

Thank you.

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

Please proceed.

Right, happy solar new year.

Could you just talk a little bit about the February stock grant and perhaps a very rough quantification in terms of the P&L impact and also in terms of the share count?

As you know, James, I'm not good at [black holes].

I don't know the P&L impact yet.

But I think what this stems from is that in January and February of 2006, before IPO, we had 8m shares, so about 2m ADS share -- massive grant to the employees, to about 350 people within Oriental, the top management on down to the teachers and school heads.

And then what happened was that they're three-year grants, so they expired at the end of this year.

So what we need to do is, in order to keep the people, we need to have another -- not quite as large a grant as in 2006, but a large enough grant.

And as you know, because of the performance of our stock price and the volatility, the stock-based comp charge is much higher now than when you were a private -- when we were a private Company.

So we would expect the stock-based comp over the next quarter, it will hit us in Q3, will be probably double, if a little bit not higher, than what it is today.

And today it's about $2m a quarter.

So we expect that to double.

And then the effects will be felt for a couple of years, because we're layering two years of stock grants together, and then they'll begin to subside a little bit in about 18 months from now.

Okay, thank you.

I don't know the exact quantification, James, but it will probably be well over -- it will probably double what the stock-based comp charge is today.

That's exactly what I needed.

No need to break out (inaudible).

But we're also moving to a combination of restricted shares and options, which will actually -- short term it will hit the P&L harder because restricted shares take the full value of the shares.

But they also -- they have a minimum impact on dilution.

And so we're -- the Board has made a -- has decided to go with a combination of restricted shares and options.

Right, thank you.

Your next question comes from the line of Brandon Dobell of William Blair.

Please proceed.

Hello, thanks.

Louis, maybe going back to the ASP question, you mentioned the Overseas Test Prep up a little bit more than 15% of ASPs.

If you could maybe disaggregate the benefit you guys saw from reducing the class sizes, how much of the year-over-year ASP increase in total was driven by that?

And the same kind of question, on the gross margin these days or on the rest of the operating expenses, how do I think about what the class size reductions are doing to other gross margins or operating expenses?

And how far along are you in that process of getting those class sizes down to -- into more manageable levels?

Good question, thanks, Brandon.

To be honest -- to be perfectly honest, the price impacts of year-over-year classes is about 10%, on average.

So it's exactly the same class, so the fact that we're -- our ASPs went up over 15% this quarter year over year.

Much of it's driven by the Overseas Test Prep side which was up well north of 15%, just very close to 20%.

And then the other -- the remaining impact is due to the smaller class sizes.

And we're going to begin to get data on the actual number of -- we're actually collecting it now, Brandon, on the number of classes that are of certain sizes.

So I don't have the exact reduction.

But I know that the -- overall, it's about 8% or 9% per year of classes are going to the smaller size format; basically, 20 or 30 students versus 50 to 70 students.

Okay, thank you.

Okay.

And on the gross margin impact, we would expect it to be slightly -- probably slightly negative to the gross margin, but not materially.

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

Please proceed.

Thank you.

Hello, good morning -- good evening, Louis.

Hello, Alex.

A couple of questions on your learning centers.

It looks like so far in this fiscal year you already add 34 learning centers.

Is there -- already exceeding the total number of last year.

Do you have some sort of updated target in terms of how many learning centers you want to get by the end of this fiscal year and as well as the schools?

And also in terms of those learning centers, what kind of learning centers they are.

And in the old -- a year ago probably your learning center more focused on the Test Preparation.

But are these new learning centers differently in terms of their configuration?

Or maybe they are more focused on the other side of business, like high school Kids' English or something like that?

That's a great question.

We have -- we've added 34 schools and learning centers this year.

I think 31 learning centers and three schools versus 19 -- in the first half, versus 19 for all of last year.

So you're right, [we've started that].

Our target, at the beginning of this year we challenged the school heads to open between 40 and 50 learning centers.

And we -- of course, we guided conservatively because we didn't think they'd be able to do it.

We guided 20, 25 learning centers for the year.

Now that we've already opened 31 in the first two quarters, and I think we'll continue to open aggressively, we will probably raise that target to the original 40 to 50 for the fiscal year, so over the next -- so another 15 or 16 schools and learning centers over the next two quarters.

And the school count remains the same.

We would expect to open four to six new schools.

We've opened three already in the first half, so one to three more in the second half of the year.

Now, on the composition of learning centers, it's a mix.

Some of the learning centers -- four of the learning centers in this quarter went into Shanghai, so it's not -- it's 25.

So it's -- and those are typically large learning centers with multiple purpose.

But the fastest growing number of learning centers will -- going forward will be kids.

And probably next year beginning it will be elite learning centers which are smaller.

So you're absolutely right that the configuration is smaller.

And they're meant to be closer -- located closer to areas where our students would be, particularly in the kids and high school area.

And these will be -- typically, the learning centers that are about three -- two to three stories and will have room for about 20 classrooms with a couple of large classrooms and the other ones smaller to accommodate 20 or 30 students.

Just a follow up then.

If this new configuration of the learning center -- are these new ones cost more or less than compared to your old ones?

They cost less because they're smaller.

But they're also being offset because, as you know, the price of rent -- the rent costs -- lease costs in China are going up, especially in places like Shanghai and in Beijing and others.

So, even though they should cost less because of rent inflation, they do cost a little bit less but not as much as we'd like.

So they're still going to cost $80,000 to $120,000 to set up.

Okay, thank you.

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

Please proceed.

Hello, good evening.

Thank you for taking my question.

Could you maybe discuss the impact of the Olympics and what you're doing to prepare?

I know you mentioned earlier your marketing spend in relation to the ramp-up to the Olympics.

But in terms of structuring your classes, maybe we could see some kind of shift of students taking the classes earlier rather than during the Olympics month.

And if so, would you see -- have more student volume concentrated in those two months of the first quarter of fiscal year '09?

And hence, would you need to increase your staff headcount, or your teacher headcounts to accommodate that type of capacity increase, or volume increase?

Yes, that's a good question and we're addressing it.

What it turns out is that the Beijing Government's helped us a little bit with this by lengthening the summer recess.

So the kids in Beijing will actually get out earlier by a week or so in June than they normally do.

So that -- so we're accommodating that by doing exactly what you said, Catherine, and offering more classes earlier in the quarter so that we'll have more classes in June and July than normal.

And we'll have fewer classes in August for the reason that the Olympics are in August.

So that's exactly what we plan to do.

The other thing that we've got some good news from the Beijing Government is, it appears that the traffic patterns, the streets won't be shut down and our classes will be allowed to continue to operate in Beijing during that time.

We're planning also to move our summer camps and our classrooms to areas that are not in high traffic patterns at the Olympic games.

So we'll move it to learning centers outside, in the outskirts of Beijing or in areas away from the Olympic stadium area.

Thirdly, we're going to shift some of our summer camps to other cities like Shanghai and others to stay out of the way, especially in August of the Olympic tourists and the traffic.

So we are doing -- we are taking a number of measures to address the Beijing Olympics.

And we're -- at this point, we're not -- we don't see a material negative impact from the Olympics, but it's still a bit early to tell.

Okay, thank you.

You have a follow-up question from Adele Mao from Sec.

Please proceed.

Louis, could you update us what your thoughts are with respect to acquisitions, particularly whether you continue to view the acquisition of a degree program a priority, and what type of multiples can we expect right now out there in the market?

Acquisition -- M&A is an area that we've been telling the investors in the -- and Wall Street that we'd like to pursue.

And we haven't -- to be perfectly honest, we haven't been as successful with it as we would hope.

And for a number of factors we've talked about in past calls, private equity funding, prices, etc.

And also to be perfectly fair, there is a -- in New Oriental we do seem to build a -- have a mentality to try to do it ourselves.

So we are still aggressively looking at M&A targets.

And I think the focus has moved to more in the -- to be honest, more in the GAWCOW area, or the national entrance exam that we believe is a market we'd like to address.

And also it continues to be in the four-year college area, where we would still like to buy one college in Beijing or Shanghai.

So those are our two immediate focuses and we're still looking at acquiring sort of competitors in many of the large cities as well.

But it sounds like we've been saying this for several quarters now.

We have not yet closed a significant M&A transaction.

I see.

Just -- could you just share with us -- you're looking at one college or university in Shanghai, Beijing.

Will this be general college university programs, or something more related to specialized vocational training, something with (inaudible)?

It's not a vocational.

The couple that we're looking at are four-year colleges, but they're smaller ones.

So they haven't -- they have capacity to grow probably 20% or 25% in student enrolments each of the next three to five years and they're growing and they're profitable.

So those -- the ideal one for us is to buy a four-year degree college that is focused more on business degrees and others but it's a full four-year program accredited by the government, but one that doesn't -- isn't at full capacity yet.

So, therefore, we have the flexibility to grow the business and so it's not dilutive to our shareholders.

So, ideally, that's what we're looking at and we have a couple of targets.

Okay, great.

But the valuations -- it always comes down to valuation.

It always comes down to valuation and we haven't agreed because, remember, when we buy a college it's much more expensive than buying a school because we need to buy the land and the buildings.

And so the price tag becomes quite high, day one.

And those land and those buildings don't really generate any revenue, right.

So, just like in our learning center model, we always prefer to lease than to buy, right.

So if we buy a school, we actually have to buy the buildings and the land.

So we're going to -- it's going to be a -- it makes it much less attractive.

Right, thank you.

(OPERATOR INSTRUCTIONS).

And your next question comes from the line of Anindya Chatterjee from Jefferies & Company.

Hello, good evening.

The question is after the number of new hires that you have done for your teaching staff, how many of those are for non-English training courses?

I don't have the breakdown, to be perfectly honest.

I know we added a net of 100 and so teachers this quarter and 350 or so in personnel, total for the quarter.

Many of those people are asking not (technical difficulty) on the teaching side.

Our sales and marketing is growing significantly and so is G&A as well to staff their learning centers in the schools.

And then we're also having -- growing teachers in other languages as well.

Okay, thanks.

But the net is -- I think of the 300 and something we added the last quarter, 124 or so were teachers, net teachers.

Okay, thanks.

Then I've, actually, a different question, follow-up question is, on the Beijing Olympics what is the best case and worst case scenario in terms of your costs and enrolment thinking in terms of impact of the Olympics?

Do you think advertisement costs would actually come down after the Olympics are over, or even wage specials would start delineating after the Olympics?

And on the other hand, do you think actually enrolment, despite the resetting of the summer break, the school breaks, do you think enrolments would actually suffer because of the Olympics?

We don't know, to be perfectly honest, right now.

I think the -- what we are hopeful that it won't, because if you think about it, the students need to take the classes.

So we don't think -- we believe that the Beijing Olympics will obviously not be a positive for our business.

But we don't think at this point -- and the information we get from the government is quite positive, that it won't be as big a disruption to our business.

And the government is actually helping us by moving the summer holiday this year earlier by one week, so -- don't forget, the Olympics is only two weeks.

So two weeks in August and we're getting one week back in June.

So it is a net difference of one week, if you think of it that way.

As far as the advertising costs and other disruptions, I don't know what advertising [dollars] will do after the Olympics.

Obviously, our colleagues at Focus Media and [Air] Media and others will tell you they're not going down after the Olympics, but I don't know.

I'm not -- I don't set the price.

I do think that our cost structure is not necessarily driven by the Beijing Olympics.

It's really -- the wage pressures are coming from the inflation in China.

If you remember, the last reported CPI increase in China was 6.9%, which is a 10-year high.

So we're suffering from the exact same inflation pressures that everyone else in China is, from materials to personnel to food etc.

So it's not -- but we've been very lucky in being able to cope with it by having some pricing power to increase our ASPs at a rate higher than our costs of salaries.

Thank you, Louis.

Thank you.

Your next question comes from the line of Brandon Dobell from William Blair.

Please proceed.

A quick follow up for you, Louis.

You mentioned deferred revenue up about -- I think about 53%.

I just wanted to make sure I understand that in the context of the revenue guidance -- I know there were some timing issues this quarter that skewed that a little bit, but how do we think about that deferred revenue guidance and how that -- the revenue on the balance sheet will flow through the income statement the next couple of quarters?

I think most of it will show up in Q3.

So we're really encouraged because of the amount of money we spend.

And, as you know, Brandon, we increased sales and marketing spending by 50% in Q2, the quarter we just reported.

And you'll see the benefits again in Q3, where deferred revenue was up from $169m a year ago or so -- 100 -- all the way -- sorry, $170m to almost 53% increase year over year.

So we're very encouraged by that number, because most of that revenue will be recognized in the current quarter, which is our Q3.

And in number of -- even last year we were saying that, given that last year Chinese New Year had an extra week and a half or two weeks, it was in the third week of February, we are expecting a very challenging quarter this year for Q3 because Last year was such a good quarter.

And then the government also decided to shorten the -- in Beijing and other cities, shorten the winter quarter by about a week and add it to the summer.

So all those things working against us, we were very, very pleased with the deferred revenue number that shows even higher growth than we've ever seen in this particular quarter.

Thanks.

So we were quite encouraged.

And so we guided at 22% to 28% which is about 3% lower than we normally would guide, but that's only because last year was so strong.

Got you, thank you.

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

Please proceed.

Hello, Louis.

Hello, Marissa.

Can we have a quick word on the composition of the other income item on your P&L, please?

Is there any particular reason that caused the item to increase quite a bit on a year-on-year basis?

It's interest income from the $247m we have.

Right, excellent.

And apart from that, there's no other item, like government subsidies or any unusual items?

No, no, nothing unusual.

Right, thank you.

We just have a -- we just have a lot of cash which I think will lead to the same question.

We want to buy companies.

If we can't, we need to return it at some point to the shareholders in the form of a share buyback or some other form.

Right.

Thanks.

Thank you.

At this time I'm showing you have no further questions.

I would like to now turn the call back over to Louis Hsieh for closing remarks.

Thank you very much.

I just want to thank everyone again for joining us today on the call.

If you have any further questions, please do not hesitate to contact myself or any of our investor relations representatives listed on the Press Release.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.