New Oriental Education & Technology Group Inc (EDU) 2008 Q4 法說會逐字稿

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

At this time, all participants are in 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, Ms.

Sisi Zhao, New Oriental's senior Investor Relations Manager.

Please proceed.

Hello, everyone, and welcome to New Oriental's fourth fiscal quarter and fiscal year 2008 earnings conference call.

Our earnings results were released earlier today, and are available on the Company's website as well as on news wire services.

Today, you will hear from Michael Yu, our Chief Executive Officer, and Louis Hsieh, our Chief Financial Officer.

After their prepared remarks, both Michael and Louis will be available to answer questions.

Before we continue, please note that the discussion today will contain forward-looking statements, made under the Safe Harbor provisions of the US Private Security Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties.

As such, our results may be materially different from the view 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 CEO, Michael Yu.

Michael, please?

Okay, Sisi.

Hello, and good morning or good evening to everyone on the call.

Thank you for joining us today.

It's my pleasure since last time to review with you our fourth quarter and full fiscal year 2008 results.

Overall, 2008 was a great year for us with your help and with the fourth quarter contributing to our impressive overall growth.

I would like to spend some time taking you through the highlights and some key developments from the last quarter, why (inaudible) and our plans for the future.

As we have mentioned during previous calls, the fourth quarter is typically a seasonally slow quarter in terms of revenue as there is a focus on the year-end examinations in schools.

It is also a time when we increase our marketing efforts to encourage enrollment, during the summer holiday season, which is typically our busiest time of the year.

I am pleased to report that we delivered strong results despite a slowdown in enrollment in May, following the Sichuan earthquake, as well as the potential negative impact on Beijing schools business from the upcoming Olympic Games.

With healthy revenue growth in all of our key business segments, we exceeded the high end of our revenue guidance by around $6.8 million.

With over 300,000 total enrollments during the quarter, New Oriental student enrollments for fiscal year 2008 exceeded a record 1.270 million students, up about 19% year-over-year.

And the fiscal year net revenue exceeded a record $200 million for the first time in our history.

During the quarter, we continued to grow our New Oriental U-Can all-subjects middle and high school training program after its initial launch in the end of third fiscal quarter.

Our U-Can program targets students ages 13 to 18 who are preparing to take the college entrance examination in China, or in Chinese gaokao, for the first time.

And also, for those looking to improve their grades in subject areas, such as Chinese, mathematics, physics, chemistry, and others.

The test preparation market for the gaokao remains very fragmented and continues to grow, and we've accomplished strong enrollment figures despite an enrollment slowdown in May following the Sichuan earthquake.

In the fourth quarter, we rolled out our U-Can programs in 21 cities throughout China, with the enrollment of more than 7,000 in non-English subject classes.

We are confident that U-Can, also with English language training and overseas test preparation, will drive New Oriental's growth in the years ahead.

In addition to the launch of our U-Can program, in the third fiscal quarter we announced the acquisition of a 60% stake in Mingshitang, a Beijing-based private school that specializes in tutoring students who need to retake the gaokao.

This strategic move extends the New Oriental brand to a large non-English test preparation market, moderates some of the seasonality of our business, and offers many content and resource synergies with our U-Can program.

In June and in the first two weeks of July 2008, ending July 13, we rolled out our gaokao retaker training business with a total [uncapped] enrollment of over 900 students for only two weeks, actually.

For the first fiscal quarter of 2009, we plan to open another campus in Beijing, and we expect to significantly increase our gaokao retake enrollment.

The demand for quality private education in China continues to grow, and one of our key strategies for the years to come was to rapidly expand our leading nationwide network for further capture, strong demand for our programs and services, especially in the kids' education market.

In fiscal year 2008, we exceeded our target and opened a total of 77 facilities, consisting of six schools and 71 new learning centers.

In the fourth fiscal quarter, we opened a total of three new schools in the cities of Lanzhou, Huangshi, Ningbo, and a net 23 new learning centers.

We remain confident that although these investments have impacted G&A and marketing expenses in the short term, our accelerated growth strategy will generate handsome returns in the future quarters and the future years.

Another of our continuing key strategy is to enhance our program and service offerings through strategic partnerships with leading international content developers.

In the second fiscal quarter we announced our partnership with Heinle ELT to launch a line of custom learning material tailored to New Oriental iEnglish brand conversational English language classes, and via our Koolearn.com on-line learning platform.

Recently, we formed a strategic partnership with Intuto Ltd., a New Zealand-based e-learning solution provider, to co-develop and update custom learning materials tailored to our existing International English Language Testing System, or IELTS, courses.

These partnerships, as well as initiatives like those with Nokia, Dynamic Education International and Coca-Cola in China, are important to New Oriental's future growth and market position as the leading education provider in China.

While we achieved record results in several areas in fiscal year 2008, we are looking forward to many more new opportunities in 2009.

Of course, not without difficulties.

We will continue to look for strategic partnerships and acquisitions that will add to our diversified offerings and deliver continual financial performance to our shareholders.

We are at the same time responsible for New Oriental's (inaudible) and of our shareholders.

And now, we will turn the call over to Louis Hsieh, who most of you are familiar with, to discuss the quarter's financial performance.

Louis, (inaudible).

Thank you, Michael.

Hello to everyone on the call.

Thank you for joining us today.

Before I get into the numbers, I would like to speak briefly on the challenges facing New Oriental because of the recent earthquake and the Olympics that are upcoming in Beijing.

As we noted in our press release and Michael touched on earlier, student enrollment in the fourth fiscal quarter decreased slightly from the previous year, primarily due to three reasons.

One, earthquake relief rightfully took priority over personal endeavors, such as test preparation and studying.

Two, Beijing faces uncertainties surrounding housing, transportation, and travel logistics for the summer of 2008 as the city prepares to host the Olympic Games.

And three, Q4 '08 is a difficult comparison to Q4 '07 in terms of student enrollment, due to the Chinese New Year holiday in 2007, which pushed those enrollments normally recorded in the third fiscal quarter of 2007 into the fourth fiscal quarter of that year.

In early June, we issued a release announcing that we remain confident in the long-term success of the business, despite the impact of the May 12 earthquake in Sichuan and the 2008 Olympic Games in Beijing, and despite these challenges, we are pleased to announce that we beat our top-line guidance by delivering 62.5% top-line growth.

As we stated in our press release, in early June, we were hopeful of a rebound in student enrollment and revenues.

Recently, we have witnessed a strong recovery of student enrollment and revenues in June and in the first two weeks of July, ending July 13.

Cash proceeds, which are the tuition fees paid by students in cash when they register for classes, and recognized proportionately as revenue as instructions are delivered, for the past six weeks ending July 13, 2008, were approximately $60 million, an increase of approximately 50% from the $40 million in the corresponding period of 2007.

The Beijing school has also rebounded in the same six-week period, with cash proceeds approximately up 47% to $14.6 million.

New Oriental school in Chengdu, the city closest to the Sichuan earthquake, is fully operational, with six learning centers, and has also recovered in the past six weeks, with cash proceeds up approximately 32% to $1.4 million as compared to the year ago period.

In fact, we saw strong demand for our programs and services throughout our nationwide network of schools and learning centers.

Now, I will walk you through the contribution to our fourth fiscal quarter results and financial highlights.

Please note that certain figures I'm about to read are non-GAAP, including all measures that are given, including share-based compensation.

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

The fourth fiscal quarter 2008 net revenues were $40.2 million, an increase of 62.5% over the fourth fiscal quarter of 2007.

Revenues from our education program and services, comprising our language training and test preparation courses and primary/secondary education programs, rose 60.9% year-over-year, driven by the increase in number of language training and test preparation courses.

Student enrollment in language training and test preparation for the fourth fiscal quarter 2008 dropped 2.8% year-over-year to 305,200 from 314,000 in the fourth quarter of fiscal year 2007.

The main reason, as discussed earlier, can be accounted for -- the decrease and the slowdown in May following the Sichuan earthquake; the slowdown in the Beijing school due to uncertainty surrounding housing, transportation, and travel logistics for the summer of 2008 as Beijing prepares to host the Summer Games; and a difficult year-over-year comparison to the fourth fiscal quarter 2007, when student enrollments were up 31.5% to over 314,000 last year.

These enrollments would normally -- much of these enrollments would have occurred in the third fiscal quarter for 2007, but it was pushed into the fourth fiscal quarter due to the late timing of Chinese New Year.

Chinese New Year last year was on February 18.

This year, Chinese New Year is more normal, at February 7, and next year it will be January 26.

So students typically will come in two weeks after Chinese New Year to begin enrolling in classes.

Well, last year we had a surge in March, which accounted for the high number in last year's number, 314,000.

So those are the three main reasons why the enrollment figure decreased by 2.8% year-over-year.

Overall operating costs and expenses for the quarter were up 43.2% year-over-year.

Of these, cost of revenue increased by 50.9% year-over-year, mainly due to the increased number of courses offered to a larger school base and a greater number of schools and learning centers in operation.

Selling and marketing expenses increased 49.9% year-over-year, mainly due to the headcount for the selling and marketing department, which includes registration certification personnel, increased by over 330 from the year ago period, as the Company added 77 new schools and learning centers in fiscal year 2008.

General and administrative expenses increased 32.5% year-over-year due to the increased headcount of the Company's further expanding its business.

Excluding share-based compensation expense, non-GAAP operating income for the fourth quarter was $2.5 million compared to a loss of $1.2 million in the year ago period.

GAAP operating loss for the quarter was $0.2 million, a 94% decrease from a loss of $3.5 million in the year ago period.

Excluding share-based compensation expense, operating margin for the quarter was 6.3%, compared to negative 4.9% in the corresponding period of last year.

GAAP operating margin for the quarter was negative 0.5% compared to negative 14.1% in the corresponding period of last year.

This increase is primarily due to the improved operating efficiency and revenue compared to the growth in operating expenses.

Capital expenditure for the quarter was $2.5 million, which was primarily used for the three new schools and the net 23 learning centers that we added in the quarter.

Total share-based compensation expense for the quarter was $2.7 million.

Excluding share-based compensation expense, non-GAAP net income increased to $4.5 million, an increase of 513% from the fourth fiscal quarter 2007.

GAAP net income for the quarter was $1.8 million, compared to a net loss of $1.5 million in the year ago period.

Excluding share-based compensation expense, non-GAAP basic and diluted earnings per share, ADS, were $0.12 and $0.12, respectively.

GAAP basic and diluted earnings per ADS were $0.05, respectively.

Each ADS represents four common shares.

Moving to our balance sheet, our total cash and cash equivalents as of May 31, 2008, were $208.4 million, as compared to $230.1 million as of the February 29, 2008 quarter.

Net operating cash flow for the quarter was $23.9 million.

The decrease in cash was due to the Company's share buyback program of 1 million ADS, which was announced on February 14, 2008.

We're pleased to announce that the Company has completed the 1 million ADS share buyback program.

The deferred revenue balance at the end of the quarter was $59.2 million, an increase of 37%, compared to $43.2 million at the end of fourth quarter, 2007.

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

Student enrollments in language and test prep grew 19.1% year over year, to 1.271 million, from approximately 1.068 million in the year ago period.

Net revenues were up 51.6% year over year, to $201 million.

Excluding share-based compensation expense, non-GAAP net income was up 75.9% year-over-year to $54.1 million.

GAAP operating income was up 73.8% year-over-year to $45.3 million -- excuse me, non-GAAP operating income was up 75.9%, not non-GAAP net income.

Non-GAAP operating margins went from 23.2% for the fiscal year ended May 31, 2007 to 26.9% for the fiscal year ended May 31, 2008.

GAAP operating margins went from 19.7% for the fiscal year ended May 31, 2007 to 22.6% for the fiscal year ended May 31, 2008.

Non-GAAP net income was up 73.7% year over year to $57.8 million.

GAAP net income was up 71.4% year over year to $49 million.

Excluding share-based compensation expense, or non-GAAP, basic and diluted earnings per share was $1.54 and $1.48, respectively.

GAAP basic and diluted earnings per ADS was $1.31 and $1.25, respectively.

I will now read you New Oriental's financial guidance for the first fiscal quarter, 2009.

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 revenues in the first fiscal quarter of 2009, that runs from June 1, 2008 to August 31, 2008, are expected to be in the range of $103.8 million to $109.5 million, representing year-over-year growth in the range of 28% to 35%, respectively.

This preliminary forecast could be negatively impacted by the Beijing Olympic Games, which will take place August 8 through 24, during the middle of New Oriental's August term, due to the potential travel and transportation logistics disruptions in Beijing, and potential distractions as the nation and the world enjoy the Beijing Olympic Games.

Now let me hand the call back to Michael for his final thoughts.

Michael?

Well, once again, thank you for participating in our earnings call for the fourth quarter and the fiscal year 2008, and at this point, we are happy to take your questions.

(OPERATOR INSTRUCTIONS).

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

Please proceed.

Good evening.

My question is related to the number of new schools and learning centers that you're targeting to open in fiscal '09, and then as a follow-up to that, would you expect a commensurate number of new adds to your selling and marketing department, as was the case in fiscal '08, at about, what was it, 330?

I think I said mostly it should be the same as 2008, I think.

We are going to open new schools, new learning centers also in the fiscal year 2009, approximately around 50 new learning centers and schools, maybe among them four to five new schools, and then 45 to 50 new learning centers.

By doing that, we should add some more G&A expenses, and also a new marketing [increase], but this is within the control, I think.

So would we expect less than that 330 then, Michael?

How much is that?

I think it was 330 last year.

Would we expect a lesser amount than that?

Can you give us a sense of around how many you will add?

Mark, it's Louis.

We would expect less than that if we only open 50 learning centers.

So it would probably be, I don't have the exact, I think 's around -- it would be probably, my best guess is it would be between 250 and 280.

Okay, great.

And then one other question I want to just follow up with.

Regarding the rebound that you talked about, in the last six weeks.

Would you characterize that rebound as also applying to U-Can, as well as English language and test prep, or was there any one area that benefited more so than the other?

Thank you, and I'll turn it over.

I think U-Can is hard to predict, because this is our first year doing it.

Right?

So, it's not clear, but the rebound is basically, it's been an accelerating rebound from the second week in June.

So the strongest week we had was the first week in July, where the Company had a record revenue, cash revenues of over RMB100 million, which is the first time in our history.

That's right.

Right.

The previous record was RMB62 million.

I don't have any guess or estimation about U-Can, but U-Can should be -- have a -- because it's not -- actually, it's not a rebound, U-Can is our new program, so we don't have any numbers from last year.

But since the students studying English language and the test preparation is rebounding back so quickly, I can expect that U-Can's student number will increase, too.

Great, thank you.

Your next question comes from the line of Catherine Leung.

Please proceed.

Hi.

Congratulations on a very strong quarter and a very strong full year.

I just have one question.

Can you just -- given that the Company is preparing some additional measures in relation to the Olympics for the first quarter, such as diverting some classes to other cities outside of Beijing and the larger scale launch of U-Can for the summer, can you help us understand how we should think about the margins for the first quarter?

Right now, we are probably not going to be diverting classes outside of Beijing.

Our Beijing schools remain open.

So, you see that in our announcement where we have increased revenues in the last few weeks by 47% year over year, so we're not diverting.

We did increase sales and marketing expense during the summer to advertise that our schools are open.

So I would expect margins in line with last year, if not with a slight improvement, due to price increases as well as to more students and better utilization.

Okay.

I don't know exact numbers, Catherine, but it would probably be about 100 basis points.

Better by about 100 basis points?

Yes.

Okay.

On an operating margin basis, or on --

That will probably go both for gross margins and operating margins.

Okay.

And related to that, do you have a little bit more clarity on your tax rate for the next year?

We know it's going up.

So, I think last year we were probably in the 7%, 8% range.

Next year we're probably -- we're guiding the Street around 11%.

So our taxes are going up, our interest income is going down, that's what's going to hurt the net income line the most.

All right.

Thank you.

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

Please proceed.

Thank you.

My first question is (technical difficulty) margin trend going forward.

I was wondering, with the increasing mix of revenue from Kids English and all-subject training, could you comment on how the significant growth in these areas will impact your overall growth margin going forward, let's say in the next year or so?

Given that ASP profile and the class size of the businesses are a little bit different from your traditional classes.

Yes, Adele, there's a lot of moving parts in the ASP and on the margin side.

What's happening in our Company is that, yes, Kids and U-Can are coming out and they are typically lower ASP than overseas test prep or others.

But the issue that is happening is that our classes are moving to smaller sizes, so our average size class is decreasing by about 30% a year.

This has been the case for two years now, which means that students are signing up for smaller classes and paying much higher ASPs.

That's why if you look at our numbers, you'll see that in RMB terms, ASPs went up 18% in the quarter.

So our margins will increase as ASPs rise, and they'll -- this product mix change I think will have a negative impact on our margins, but it will be more than offset by the beneficial effect of more students, better utilization of facilities, and in general just the fact there's more students per class.

So, price increases and better utilization will more than offset the product mix toward Kids and U-Can enrollment.

Okay.

That's very helpful.

Do you, what's the percentage of total revenue that comes from Kids English right now?

Is there a (inaudible) number you can share with us?

Give me one second and I will find that for you.

Kids English represents approximately about 20%, 25%, a little bit over 25% of revenue.

I see.

Okay, thank you.

But it's the fastest -- it's growing over 50% a year, in a normal year.

Right.

And most of your learning centers that you're opening right now are for Kids English, is that right?

Yes, half or a little bit more than half.

But many of the learning centers actually are mixed, so they come in Kids, High School and Adults.

About 40% are pure Kids English learning centers.

And then 60% are mixed; Adult and Kids learning centers are together.

I see.

Okay, great, thank you.

Thank you.

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

Please proceed.

Hi, just a follow up on that question.

So can you help us, Louis, understand the variance here?

The revenues were up 50% on decreased unit volume.

You suggested ASPs were up 18%.

What accounts for the rest of it?

Is it exchange rate?

The ASPs are up over 18% in RMB terms.

So when you translate it back to US dollars, it's over 28%.

Okay?

The other thing is there's a backlog.

If you recall, from Q3, there is a 105% increase in deferred revenue, year over year.

I think it was $35 million.

$23 million was used up in Q4, but $12 million will flow into Q1.

So we had a very strong backlog that flowed into Q4 from Q3, which is how we got the 62% revenue increase.

Right, but that's still attached to students, I presume.

So what's the -- how did -- explain the difference between what you're counting as enrollment.

Enrollment are just the new students coming in?

Yes, so we have two systems, right?

The revenue that we record as revenue, GAAP revenue, many of the enrollments actually came in the quarters before.

So that's why you guys look at deferred revenue as a key measure of our backlog.

So last quarter, we had a record, a 105% increase to $35 million in backlog.

More than two-thirds of that revenue was recognized in Q4, but they don't show up as student count in Q4.

So is there some measure of student days that would represent sort of a unit volume measure in the current quarter?

We don't have that calculation because we have so many different kinds of programs, and they all have different price points, so --

I'm trying to understand the notion of an impact from the Olympics.

If you have the enrollments up through July, I presume that what would happen would be that students simply would stop coming to classes, right?

So that wouldn't show up, presumably, in enrollments, or at least -- I mean enrollments would be affected during that period, but to the extent that students don't show up for classes and you're not recognizing revenues, is there some metric where we would see that?

No, no, we recognize the revenues.

What happened during the earthquake was that the earthquake happened on May 12.

By then, the students had already enrolled.

So they will get counted whether they come to class or not, through the end of the month.

So when the class finishes, that revenue will be counted.

Now, many of those students, for hardship reasons, will ask for a deferral into the summer, and of course, in affected areas, we will grant that.

So then that revenue would be pulled from Q4 and moved into Q1.

So if the students show up or don't show up, the revenue will be counted, because they paid for the class, as long as the money is not refunded.

Then when the class is finished, that revenue will be recorded.

Okay.

So then, just to the final follow-up then, to get to the low end of your guidance range of 38% revenue growth in the first fiscal quarter, what would need to happen in terms of, from now, what would that imply for what's going on during the Olympics, in the worst case scenario?

During the summer, we run two terms.

We run one that starts in late June and one that starts in early August.

It would mean that the early August -- the late June term has started, we're in the middle of it.

So we know the enrollments there are strong, but we expected it.

Remember?

We told you guys that we would front-load this summer.

So then the key is whether the August term, that starts on August 1, the Olympics come in the middle of that, whether the enrollments will drop off for the August term.

And that we won't know for the next two weeks because a lot of students are signing up now for the second half of the summer.

So it would have to be that the second half of the summer drops, or that because of some logistical change in Beijing where students can't get to class, we have a rebate system where we will give them their money back if they can't get to class for no fault of their own, but because of travel restrictions.

So those are the two risks for the second half of the summer.

Okay.

I'll get back in the queue, thank you.

Does that make sense?

Yes.

I was really going forward to understand, if there was some way to understand what the worst case scenario assumes in terms of enrollment drop off.

Well, the worst case scenario already -- I can tell you that we've booked, we have more revenue today than we did last summer already.

So the key is what the second term looks like, and we will know that in the next two weeks.

But by the first week in August, almost all the revenue for the summer is done.

And then the enrollments that come into the last three weeks in August actually flow into Q2, which is the quarter that starts September 1 and ends November 30.

So the next two weeks will tell us if we're going to hit the low end of the number, the 28%, or the higher end at 35%.

Right, but the statement in the press release said, here's the range, but it could be at risk because of the Olympics.

Right.

And I'm trying to understand what that means.

Well, let's say the worst case scenario.

The security, the police say no students can come into Beijing, and our learning centers are closed for the August term.

That means we have to refund all the money for the August term.

But I know that through the last week, we have more revenue than we did last year, which is RMB611 million.

Okay, so in that kind of circumstance, the 38% would still be at risk.

Right.

No, but don't forget, that's only in Beijing, too.

The other cities remain wide open.

Yes.

No.

I understand, that's why again --

But Beijing is still -- last year was 34% of our revenue, this year will still be about 28% of our revenue.

And the summer in Beijing is the busiest time period.

I understand, I'm just trying to understand whether the lowest, whether the bottom end of your range encompasses the worst case scenario, or if there's conceivably something worse.

There is conceivably something worse, but it wouldn't be much worse than that.

All right.

Understood.

Your next question comes from the line of Scott Schneeberger of Oppenheimer.

Please proceed.

Okay, thanks.

I guess, I want to ask -- I believe you guys worked this summer at getting the message out and with a little bit more marketing spend with regard to the Olympics in Beijing, and just letting the country and the students of the country know what you were doing logistically.

Could you please talk about one, your spending, related to that, and what type of return you hope or think you'll get on that?

And two, what you're seeing in general with advertising costs?

You had been seeing some year-over-year inflation mentioned a few months ago, just want an update on that.

Thanks.

Yes, on our costs, our marketing dollars, we spent, I think it was about RMB10 million, to market throughout the country, letting everybody know the Beijing school was open and also promoting U-Can and other programs.

This summer, an additional RMB10 million, which is about $1.4 million.

I don't know what return we'll get, but we can see very -- you can see in the numbers for Beijing school that the demand over the last six weeks has been quite strong, and that demand actually has been accelerating in the last two weeks.

So the message is getting out, and I think Beijing will be okay for the summer, assuming the August term is not materially impacted.

The reason -- one of the reasons for spending the money for marketing, is that originally people thought they were not allowed to come to Beijing to study, like for the first two months.

And then the Beijing government -- the government said that if you can manage your students then all the schools can be open in Beijing, especially in June to July.

And we are not very sure about August yet, but I think that the policy works the same.

So we have to do some marketing to tell the people all over China, to tell them that our Beijing school, we are open as normally, as ever.

That's one of the reasons we spent more on marketing since then, than last year.

Thank you, and what are you seeing out there, as far as pricing being put to you for advertising?

I think advertising prices are still going up, especially before the Beijing Olympic games, but they haven't gone up as much this year as they did last year, from the anecdotal evidence I get from the schools themselves.

Okay, thanks.

And then kind of shifting gears, I believe that the gaokao test results should already be back from the test taken about a month ago.

Do you have pass rates out, national pass rates, for the provinces that took the test on time?

We -- you mean for our students, or in general?

In general, so you can get an idea of how that may affect --

I think it's kind of set by the government, so I think it'll probably be -- the pass rates will be the same.

For four-year colleges, it'll probably be 2.5 million, 2.7 million students, out of 10.4 million who took it.

And for another 2 million to 2.5 million who will go to associate degree programs, two- or three-year programs.

So a little bit over half the students will pass the gaokao.

But don't forget, Scott, that there's two factors in the gaokao, right?

Many of the students of the 2.5 million or 2.7 million who get into four-year colleges will decide not to go, because they want to go into a tier one.

They didn't get into a tier one school.

And many of the students who got into the associate degree programs will sit out one more year and try again to get into a four-year college.

So that is the 3 million students who are retakers.

Okay, thanks very much.

Yes, so it's pretty much set by the number of degrees that are granted by -- that are allowed to be granted by the government, and that number's probably going up 3% to 5% a year.

(OPERATOR INSTRUCTIONS)

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

Hi, guys.

Want to get a sense for what your assumptions or what your thinking is around your main costs.

So employees, rent, things like that, as you look out to the current quarter, but also thinking about the fiscal year coming up, are you still kind of in that same inflationary position to the same extent you have been?

Or are things getting easier for you, from that perspective?

Well, I think we're probably in the same state we were in last year, so -- but we have been increasing our prices overall, but much of that is due to the fact that the students are opting for smaller classes.

So I think the inflationary environment you made -- inflation in China has actually gone down in the last quarter.

If you look at the numbers it's down to 7.1% from 8.7%, two quarters ago.

So our rent -- our two biggest cost items are typically teachers' salaries and rent, and I think we raised teachers' salaries about 10% this year, and we did it once, we haven't done it since then.

And rent, it's the same issue, we sign five year leases.

As we move into less expensive cities, the inflation's not as big an issue, and because we sign longer term leases, we're able to pass the costs through in price increases about the same rate, if not higher than our rent increases are going up.

Okay, and then on a related topic, as you think about teacher compensation, or just employee compensation, how do you think about the near term trends on stock based compensation?

The near term trend on compensation -- you will see stock compensation as we said two quarters ago, that it would approach $3.5 million to $4 million a quarter, and you'll see that in the next quarter.

We had another round of stock based -- it was only 65,000 shares around two weeks ago, so it'll show up in the August quarter.

And then it'll begin to tail off, as I told you guys in the winter quarter, as the '06 options grant -- it was a big grant -- fall away because they are fully vested.

So you will see stock based comp go to about $3.5 million, stay there for two quarters, and then begin to drop over the next couple years.

Okay, great, thanks.

Thank you.

Your next question comes from the line of Chenyi Lu of Brean Murray, please proceed.

Hey, this is Chenyi.

I have a question regarding the gaokao opportunity.

Can you discuss the gaokao opportunity in the 2009-2010 as to potential revenue in terms of total revenue of the Company?

Separately, I also have a question regarding the marketing expense.

Do you plan to spend heavily also this year, to promote the gaokao and the Kids English?

Just wanted to see the marketing expense trending you see.

Yes, that's a good question, I think it's -- on the gaokao we have budgeted for 2009, about 50,000 enrolments.

If each one pays about $100 per enrollment, that would give us $5 million, and we will probably do very close to $270 million, $280 million, in revenue.

So that will account for a little bit less than 2% of our revenue.

Yes, much less, so $5 million out of about $270 million.

We would hope, and we haven't forecasted for '10, we would hope that that number would go up between 50% and 100% the year after.

As far as marketing spend, it was about -- a little bit over 12% of net revenue in 2008.

We expect that number to stay about the same, if not decrease a little bit in 2009.

Great, thank you.

Next we have a follow up question from the line of Adele Mao.

Please proceed.

Thank you.

My follow-up question's related to Mingshitang.

It looks like the upcoming school year, you guys are offering gaokao retakers not only the boarding program, but also there's a non-boarding program.

What is your target enrollment for both programs, and whether non-boarding program is actually being hosted in your existing facility?

Yes, I think we have over 900 enrollments already, Adele, in the first couple weeks, and we would target about 1,200 boarding students, so that means -- Mingshitang, don't forget, last year had a little bit less than 800, it was full.

And for non-boarding students or short term, we'd expect very close to 1,000 enrolments.

But their ASP is much lower, it's about $130, $140, versus the $2,000 plus for boarding students.

So Mingshitang's revenue -- I'm sorry?

Non-boarding revenue and non-boarding ASP is actually in the hundreds of US dollars?

Yes, RMB800, about RMB900, so it's about $150 to $125, yes.

Is there any target enrollment for non-boarding programs?

Yes, enrollment is about -- well, for short-term classes, is with the non -- the target is about 900 students.

Okay, so these are not year-long courses that go from September to May?

No, these are short-term, these are cram courses.

I see, okay, great, thank you.

If I show you some of the synergies, we'll use some of the Beijing school facilities for the short-term students.

Okay, thanks.

So Adele, I think the logical follow-up is that we would expect Mingshitang revenue to probably double, a little bit more from last year's number, which is about RMB13 million in revenue.

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

Hi, Louis and Michael.

Can you take me through two things?

One is your guidance for share based compensation in 2009 and '10.

And second part is, I was wondering actually, during the Olympic period, do the students actually go back to their home town?

They probably can only find new (inaudible) rather than any other competitors, in terms of the (inaudible) test preparation, so are you seeing any market share gains during this period, or were you expecting market share gains during this period?

Well, I think we really expect market share gains every year.

(inaudible) I think we will see market share gains, regardless if they study in Beijing or in other cities.

But don't forget the ASPs in other cities, except for Shanghai, will typically be a little bit lower than Beijing.

So we actually prefer them to study in Beijing.

Okay.

And how about share based comps?

Share based comp, as I say, is $2.7 million this quarter, will probably be $3.5 million next quarter, $3.5 million the quarter after, and then will drop to probably $3 million or so the quarter after, and then begin to slowly decrease.

Okay.

I don't have a full '10 number, because I don't know the '09 grants yet.

Yes.

But you can expect it be about $12 million to $14 million a year, for 2009.

Okay, thank you.

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

Please proceed.

Hi, thank you very much for --

(inaudible), James.

Thank you for taking my question.

On the 18% ASP growth, could you shed a little bit of color around that in terms of what is the same class ASP growth versus the impact of shift to smaller class sizes?

And also, are you able to raise prices by a teens percentage, right across the board, or is it more skewed toward overseas test preps versus the domestic?

I think overseas test prep has always had a little bit more pricing power, so it's a little bit higher.

The apples-to-apples comparison still hasn't changed.

For most classes, it's about 10% year-over-year.

So there is a significant shift to what we call VIP English, or small class test prep and English courses.

So a lot of these students will pay RMB600, RMB700, or $100 an hour -- sorry, for one class, it's a couple hours for small session classes.

So that's what's skewing the ASP calculation.

So it looks like it's about -- so overseas test prep is a little bit higher than 10% price increases, but the same year-over-year class, the same size, the same school, is about 10% to 11%, 12%.

And then the difference is going to be, because there is a higher percentage from overseas test prep, and a bigger and bigger number is coming from the product mix change to smaller classes.

And they do not diminish our margin numbers that you've seen in the '08 numbers.

This has been a shift for two years now, and our margins keep improving.

Right, thank you.

Thank you.

Next, we have a follow up question from the line of Catherine Leung of Citi, please proceed.

Hi, I was just wondering if you can share a little bit more color on your expansion of U-Can, and (inaudible) how many enrollments you are seeing for the summer?

And anecdotally, [because] I understand [the ease in] recruiting students, is there anything significant overlap between the U-Can students and your existing students?

Or are you getting new students coming in specifically to New Oriental for U-Can?

I'm just trying to understand because U-Can is a newer business line for you and the brand has historically not been associated with non-English or non-test-prep courses.

I think we're still getting many if not most of our enrollments from students who take English from New Oriental, and then will take an additional one or two other classes.

U-Can is rolled out now in 21 cities, but most of these are not at scale.

So Beijing, I think of the 7,000 students last term, Beijing probably was one-third of them.

Because U-Can has been piloted in Beijing for a longer period of time, so we will expect the other schools to catch up soon.

Of the 7,000 enrollments last quarter in U-Can, 2,700 came from Beijing.

So more than one-third.

And then in the other cities, it's just being rolled out now, so it's not -- it's been in Beijing for a couple quarters now, so we'd expect the other cities like Shanghai to begin to pick up over the course of the year.

Our second biggest enrollment -- because they also -- they're near Beijing and they start early, was Tienjing.

Tienjing had enrollments of almost 1,600 students over last quarter.

So as we roll out into these cities with more and more resources, you'll see the numbers from Shanghai and other big cities pick up.

Okay.

Can I understand, is the expansion a little bit restricted by how fast and how comprehensive you can develop the content?

Because there is some variance among the gaokao among the various provinces, and s you mentioned before, I think the science content is a little bit more complicated.

So is there some restriction in terms of how fast you're able to develop the content that is limiting somewhat the growth in the other cities as well?

I think it is just that it's going to take us time, because in every city we need to market the U-Can brand.

Then to be honest, our school heads are quite busy with their other programs, so we need to motivate them to spend more resources and time to market U-Can, and to train teachers for that process.

Yes, that's right.

So it will take some time.

I mean, it'll probably take a couple years before we're at scale in most of these cities.

And yes, we're still going to face challenges in specific provinces, because each test is a little bit different.

And so it will take us some time to get the local knowledge of the variations.

Okay, thank you.

That's why I think we're targeting only 50,000 enrollments in the first 12 months.

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

Please proceed.

Hello Michael, hello Louis, how are you?

Hi, Marisa.

I just have a pretty mundane question, on your revenue guidance for first quarter of FY 2009, what type of ForEx assumptions have you made?

Can you repeat that, please, Marisa?

Sorry.

The ForEx assumptions you've made when you made your first quarter guidance --?

Oh, I left it at the current exchange rate of 7.0157, which is what we translated the P&L into, in this earnings release.

The current rate is about 6.84, so the assumption I used was just the 7.0157.

As you know, I try to be conservative.

So I used the more conservative rate.

Right, okay.

But realistically, if the (inaudible) rate just stays where it is now, then you're basically too conservative on that.

Exactly, well (inaudible) we take a weighted average throughout the quarter, so that 7.0157 rate was a weighted average from April 1 through May 31 last quarter.

So as of June 1, it was already lower, the 6.9.

And you're right, so we will take a weighted average throughout the summer quarter to do the final calculation on our revenues.

So it is conservative by 0.1 per RMB per dollar.

Great, thanks.

Your next question is a follow-up from the line of Trace Urdan of Signal Hill.

Please proceed.

Hi, thank you.

I'm looking at the school and learning center openings and the first question I have is, are there any -- do you ever, or are there any in those numbers, any smaller tuck-under acquisitions of other schools as you move, or are they all organically opened?

These are all organically opened.

Okay, so --

But one thing Trace, is -- just so you know, is that we closed two learning centers in Beijing, so their lease has expired, so we actually added 25, we closed two, so it ended up net 23 for the quarter.

Okay, so -- then my follow-up question to that is -- what kind of lead time do you guys have in terms of opening up these centers?

There's always this big disparity between what you are able to open in the quarter, and what you have conservatively estimate you're going to be able to open in advance of the quarter.

I'm wondering what kind of visibility you have as you head into these quarters.

Well, we have a budget, right, and so we have a budget of 50 to 60 schools and learning centers for the year.

Now, the only disparity came up last year, because if you recall, right, two years ago in fiscal year '06, sorry, '07, we opened 19 schools and learning centers, so a total of 19 facilities.

We've never opened more than 35, so when I forecasted to you guys that we'd open 40, I didn't think we'd ever do it, but we opened 77.

So the school has -- the demand was that strong where they just kept opening them, but we've never opened more than 35 in a year, before that.

Because as you know, to open up real estate facility takes time, you have to find a location, you have to do tenant improvement and sign a lease, you have to hire personnel.

So it's a testament to our school heads and to our real estate teams that we were able to open 77.

Now I think we've learned from that and I think, since we have more schools and learning centers open, there's actually more schools operational.

You will see the learning center number go up, but yes, last year was probably a record number for at least the next couple years.

Okay, so what kind of --

So there is a disconnect, there's a disconnect, Trace, between a lot of times what the school heads are budgeted and what they can physically open.

Understood.

How far in advance do you typically need to contract the real estate and the startup costs in advance of opening a new center or -- ?

It usually takes, what, about three to six months to open up a learning center, three months is a good number and six months is probably a --.

Larger than (inaudible).

Yes, a conservative number.

Okay, fair enough.

And then I guess just as a follow-up question, I think I heard you state pretty clearly in the next two weeks you would have some additional information about what kind of level of travel restrictions are likely to take place around the Beijing Olympics.

Can we expect that you'll share that information with us when you have it?

Anything that's material we will probably -- if it's (inaudible) material we will probably put it in a press release.

But a lot of times the information's actually already out there.

People pick it up, the newswires will pick it up.

We do not expect the policy of the government to change dramatically from now.

The policy states that everybody can come to Beijing.

Of course, you have to show your identification card.

(inaudible) They check you are a good person, you're allowed to come into Beijing.

And all our students are good persons.

So actually they are allowed to come to Beijing during the Olympic Games, that's the policy today.

We don't know what is something that people cannot think about can happen.

Mostly, it should be like that for all through the Olympic Games, I think.

Okay.

(inaudible) if you come to Beijing you'll see that there's checkpoints at every road going into the city.

And so they --

Yes, how do they know if I'm a good person or not?

Well they can tell --.

(inaudible).

With your ID card they can tell if you've a criminal record.

I got [attacked] yesterday.

Yes, but you can see Michael actually got into Beijing though.

Even though I'm a bad person.

We are now approaching the end of the conference call.

I will now turn the call over to New Oriental's Chief Executive Officer, Michael Yu for closing remarks.

Okay.

Hello, everybody.

Thank you for attending this conference call and I thank you for all your questions.

And thank you for your concern and understanding about New Oriental.

We also -- anyway we'll try our best to do the management and to run New Oriental smoothly over the Olympic Games, and (inaudible) Olympic Games in China, and I'm sure both will be successful, the Games and New Oriental.

Thank you very much for attending.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.