New Oriental Education & Technology Group Inc (EDU) 2009 Q2 法說會逐字稿

Good day, ladies and gentleman, and welcome to the Second Quarter 2009 New Oriental Education & Technology Group Earnings Conference Call.

My name is Dan and I'll be your coordinator for today.

At this time all participants are in listen only mode.

We will conduct a question and answer session towards the end of this conference.

(Operator Instructions).

As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's call, Ms Sisi Zhao, New Oriental Senior IR Manager.

Please proceed.

Hello, everyone, and welcome to New Oriental's Second Fiscal Quarter 2009 Earnings Conference Call.

Our second fiscal quarter earnings results were released yesterday and are available on the company's website as well as on newswire services.

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

After their prepared remarks, they 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 US 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 view expressed today.

A number of potential risks and uncertainties are outlined in our public filings with [IEC].

New Oriental does not undertake any obligation to update any forward looking statement, 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.

Now I will turn the call over to New Oriental's CEO, Michael Yu.

Michael, please.

Okay.

Thanks, everybody, for attending this conference call today because this is a really historic and auspicious day as Barack Obama is inaugurated as America's 44th President.

I actually am more than excited to want to go back home to listen to his speech, so this is a difficult time for me here to read off this script.

I can keep ahead with the same kind of mood maybe.

So no matter whether we are doing good or bad, it doesn't matter today, right.

Also, we have in China it's less than a week away from the Chinese New Year so I'm also eager to go back home with [my mother] to have the New Year's Eve.

I would also like to take this opportunity to wish everybody Happy Holidays, even though it's a Chinese holiday as you know.

As you know our second quarter is seasonally our lowest period as schools in Asia, the students are occupied with the beginning of the formal school year in September, taking their final examinations now.

Nevertheless, we are glad to the end of the Year of the Rat.

Last year is a Rat's Year, this year is a Bull Year.

Bull is a nice symbol actually, right, to go up for world economic situations.

I hope everybody can make money this year.

This is, but for New Oriental, we are glad to end this year with somehow satisfying results.

For me, for Louis here and maybe, hopefully for everyone else listening to me.

As you have seen from our Press Release, which is released the day before yesterday, we achieved a year-over-year revenue growth of 53.7%, exceeding the high end of our guidance by $1.4m.

This was driven by a strong growth in student enrollment particularly in our POP Kids English and U-Can, all subjects training businesses.

Two areas that I would like to further discuss with you.

If you have been following since our IPO, you know that we have had a strategic focus on reaching kids early and offering education programs for lifetime.

Our mission is to be the trusted lifelong education partner for Chinese students.

We believe the earlier we are able to begin contributing to a child's education, the more lifetime value in terms of revenue contribution and brand loyalty we are likely to receive from our students and his family, or her family.

For example, a POP Kids English student has a much higher probability of becoming a student of our U-Can program which is focused on middle and high school training, and later of our language training and test preparation courses offerings.

The immediate benefit of this strategy is that as the economic slowdown weakens, demand -- weakens demand and the margins out of adults, we are able to generate a strong growth in enrollments from the younger age groups.

And as Chinese parents place a value on education for their children, that is only behind food and [sharing] amount, this positions us well to withstand any significant economic downturn in China.

Today we are beginning to see strong results from both POP Kids English, from age five to 12 and the U-Can all-subjects training which attracts students in the 13 and 18 years range.

This past quarter, POP Kids English enrollments were up more than 43% year-over-year to over 56,000 during our second fiscal quarter.

For the first half of the fiscal year 2009, POP Kids enrollments were up over 51% to over 154,000.

And in November 2008 we entered into a partnership with the Sino-British Academic Exchange Center for Education Measurement or ICC Cambridge ESOL's sole representative in China for the Cambridge Young Learners English exam to administer the YLE exam to our students across mainland China.

Currently, we are administering the exam for our POP Kids English students in 13 cities.

New Oriental is the first and only language training school in China authorized by SBC to administer the exam on a national scale, which is before the usual exam administered by Government officials.

We are also pleased to report continued progress in our U-Can program which provides after school tutoring in all subjects in the preparation for the gaokao which is Chinese College Entrance Examination.

Our U-Can programs had enrollments in non-English courses for over 5,800 in the seasonally lowest second fiscal quarter and enrollments of over 22,000 for the first half of the fiscal year 2009.

We recorded over 143,000 enrollments for middle and high school English courses in the same period.

Furthermore, we expect a pickup in U-Can enrollments during the second half of the fiscal year 2009 ending in May as the gaokao examination is given once a year in June and students typically begin intensive preparation as the important exam nears.

We remain on our track to achieve our 40,000 or 50,000 enrollment target for U-Can non-English enrollments for fiscal year 2009.

Overall total student enrollment increased by 13.4% year-over-year to approximately 292,200 from approximately 257,700 in the same period of the prior fiscal year.

Finally, in the second fiscal quarter, we continued to execute on our expansion plans, completing acquisition of the two Tongwen schools in Changchun which is a city, a capital city in Jilin province.

That is [capital] school opening.

Also we opened a new school in the city of Nanning which is the capital city of Fuangxi and opening a net of more than 20 new learning centers in existing markets nationwide.

This brings our total number of schools and learning centers as of November 30, 2008 to 46 and 201 respectively, an increase of 25 facilities from 222 in the previous quarter.

We have now opened a net 40 learning facilities in the first half of the fiscal year 2009.

Five new schools, including the acquisitions of Mingshitang and the Tongwen schools which are both gaokao schools and a net [35] learning centers.

We are well on our way to meeting our target for fiscal year 2009 of four to six new schools and 40 to 50 learning centers.

Because we are well ahead of target, we can expect us to slow our learning centers growth for the remainder of the fiscal year ending in May, which will benefit our margin.

Well, I will finish and I will hand the call over to Mr.

Hsieh, our Chief Financial Officer, who will talk you through our financials over the quarter.

Thank you.

Hi, Louis.

Hi, Michael.

Thank you, everyone, on the call.

We at New Oriental wish all of you a happy, healthy and prosperous New Year in the Year of the Bull as Michael says, and we hope it is a prosperous bullish New Year.

As Michael stated, we had a great quarter despite the usual seasonality in our second quarter business.

These results are a testament to New Oriental's sound strategy and ability to grow our top and bottom line in both good -- good and bad economic times.

While I take you through the financials and highlights from the second fiscal quarter, please note that certain figures I refer to, that exclude share based compensation expense are non-GAAP.

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

As we have said in previous quarters, our business is best evaluated by monitoring four key measures.

First, student enrollment growth.

Second net revenue growth.

Third, non-GAAP operating income growth.

And fourth, our free cash flow generation.

So let's go through these key measures and the factors affecting them.

For the second fiscal quarter of 2009, we reported net revenues of $49.4m, a 53.7% increase year-over-year.

Net revenues from educational programs and services for the second fiscal quarter were $43.8m, a 56.5% increase year-over-year.

The growth was primarily driven by the increase in the number of student enrollments in language training and test preparation courses.

Total student enrollment in language training and test preparation courses in the second quarter increased by 13.4% year-over-year to approximately 292,200, up from approximately 257,700 in the same period of the prior fiscal year.

Given the strong enrollment in our seasonally strongest first fiscal quarter during the summer, we expected some abatement enrollment growth during the second fiscal quarter in the autumn.

We are pleased that actual enrollment growth abatement was moderate, bringing enrollments to over 837,700 for the first half of fiscal year 2009, up 20% year-over-year.

In fact, we have experienced a strong enrollment pickup for the first six weeks of the fiscal third quarter from December 1, 2008 to January 11, 2009 as compared with the same period in the prior year.

With enrollments up 34% to approximately 160,000 enrollments from approximately 118,000 a year ago period.

We believe this pickup in enrollments is attributable in part to the early timing of Chinese New Year which falls on January 26, 2009 this year, compared to February 7, 2008 last year.

Although we expect the student enrollment growth rate to abate from the 34% for the remainder of the third fiscal quarter, we are on track to achieve our target of between 1.475m to 1.5m student enrollments for fiscal year 2009, ending in May, up 16% to 18%, from approximately 1.271m enrollments in fiscal year 2008.

[Excluding] share-based compensation expense, non-GAAP operating costs and expenses for the quarter were $400 -- $44.2m, a 46.3% increase year-over-year.

Total operating costs and expenses for the quarter were $48.6m, a 50.4% increase year-over-year.

Cost of revenues increased by 39.9% year-over-year to $21.7m, primarily due to the increased number of courses and the greater number of schools and learning centers in operation.

Selling and marketing expenses increased by 62.9% year-over-year to $8.3m, primarily due to brand promotion expenses, particularly directed at U-Can, POP Kids English, VIP English and overseas test prep marketing campaigns.

Non-GAAP general and administrative expenses were $14.4m, a 43.4% increase year-over-year.

GAAP general and administration expenses for the quarter increased by 58.9% year-over-year to $18.6m, primarily due to increased headcount as the company expands its network of schools and learning centers.

Total share based compensation expenses, which were allocated to related operating costs and expenses, increased to $4.3m in the second quarter fiscal year 2009, from $2m in the same period of fiscal year 2008.

Stock based compensation should remain at approximately $4.3m during Q3 '09 and then drop below $4m in Q4 '09.

Non-GAAP income from operations for the quarter was $5.2m, a 170% increase from $1.9m in the previous period of the fiscal year -- prior fiscal year, sorry.

Non-GAAP operating margin for the quarter was 10.5% compared to 6% in the same period of the prior fiscal year.

GAAP operating margin for the quarter was 1.8% compared to a negative 0.4% in the same period of the prior fiscal year.

This improvement was primarily due to better operating efficiency as revenue growth outpaced the growth in operating costs and expenses.

Also affecting margins in the slightly softening demand for our adult comprehensive English as a result of the weak macro economy, with enrollment down 3.6% year-over-year to approximately 50,700.

However, revenue continued to grow in the category, up over 25% as a greater percentage of adult students selected more expensive smaller classes and VIP formats.

Furthermore, our strong growth of POP Kids enrollment of 43% and junior and high school English and U-Can enrollments of 23% year-over-year growth helped offset this decline.

Again, we believe that New Oriental is well positioned to withstand the economic downturn better than other players in the education industry, because as a well known education provider, our courses are a top priority for household spending.

Parents might sacrifice their own needs, but they are unlikely to sacrifice the education of their children.

Non-GAAP net income was $7.4m representing a 84.9% increase in the same period of the prior fiscal year.

Basic and diluted earnings per ADS including share based compensation expense, excluding share based - non-GAAP, was $0.20 and $0.19 respectively.

GAAP net income for the quarter was $3.1m, representing a 57.5% increase year-over-year.

Basic and diluted earnings per ADS were $0.08 and $0.08 respectively.

Capital expenditures for the quarter was $3.2m, which was primarily used to add the one school in Nanning and a net of 22 learning centers in the quarter.

As over November 30, 2008 New Oriental had cash and cash equivalents of $182.8m, as compared to $196.9m as of August 31, 2008.

In addition, we had $86.5m in term deposits at the end of the quarter.

Net operating cash flow for the second quarter of fiscal 2009 was $5.3m.

The deferred revenue balance at the end of the second quarter of fiscal year 2009 was $52.7m, an increase of 39.5% as compared to $37.7m at the end of second quarter of -- fiscal quarter, 2008.

Moving to the revenue guidance.

We expect our total net revenues in the third quarter of fiscal year 2009 from December 1, 2008 to February 28, 2009 to be in the range of $65.5m to $67.5m, representing year-over-year growth in the range of 36.2% to 40.3% respectively.

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

Since our reporting currency is US dollars, and our operating currency is renminbi we have benefitted from currency translation gains during periods when the RMB appreciates against the US dollar.

In the past several quarters when the RMB consistently appreciated against US dollar by 8% to 10% year-over-year, our revenue growth for financial reporting purposes benefited from such appreciation.

But given the current trend in the third and fourth fiscal quarters 2009 as the RMB/US dollar exchange rate has stabilized our currency translation gains will shrink accordingly.

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

At this point we are glad to take questions.

(Operator Instructions).

Your first question comes from the line of Chenyi Lu from Brean Murray.

Please proceed.

Good morning.

I have a question regarding the gross margin.

This quarter the gross margin edges up by 450 basis points year-over-year, which is pretty good, so can you give us a sense as to the gross margin trend going forward in fiscal 2009?

Do you still expect to be flat year-over-year?

Chenyi, good morning.

We would expect the gross margin to be roughly flattish, if not slightly up, but less than 100 basis points.

And the reason is because we have a product mix change towards more POP Kids English classes which will have a slightly lower gross margin than overseas test prep or other test prep course.

At the same time, we have been successful in increasing prices which will also help the gross margin line.

So I think those two offsetting effects of a shift towards smaller classes, particularly of POPs English classes, offset by increased ASP where our costs aren't going up as much as our price increases are, will counter balance and we should end up -- last year we finished the year with 61.6% gross margin, this year we expect a similar number.

Okay.

And there's one more question regarding ASP.

Can you tell me what's the ASP percent change year-over-year and what's the guidance for 2009?

If you can, also for 2010?

Thank you.

Yes, I think for the fiscal quarter just ended our ASP increase on a blended average was 13% in RMB terms and 24% in US dollar terms.

I believe the ASP increase, because we will begin to lose the benefit of the US dollar translation number into RMB, our ASP increases for next year will be in the range of 10% to 13% in RMB terms and if the US dollar stabilizes at the same 6.83 level, also 13% in -- 10% to 12% in US dollar terms.

Great.

Thank you.

Very good quarter.

Appreciate it.

Thank you.

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

Please proceed.

Thank you for taking my questions, and a good quarter given the environment.

Can you update us on headcount trends after you had the big hiring splurge the previous quarter?

And can you also breakdown the interest and other income line on the P&L which looks unusually large this quarter?

Yes.

Thanks, James.

On the headcount side we grew to 9,346 people at the end of fiscal year -- November 30, up from 9,089 in the previous quarter.

So we grew headcount by about 250 in the quarter, which is actually light given we added 25 -- we added 22 net learning centers and added three schools including absorbing the 100 or so employees from Tongwen schools.

So most of the hires were actually teachers.

So our teacher count went -- it was actually in fact the total increase can be attributable to teachers.

We had 4,106 teachers at the end of Q1, we had 4,467, or 350 more at the end of Q2.

So we are getting -- we were very good at managing costs in Q2 and so most of the hires are teachers.

And those teachers are going to be used in Q3 when we are very busy again for the winter holidays when students get a month off for Chinese New Year.

So that's the primary purpose.

As far as the other line items, your question is that interest was, I believe was flat year-over-year at about $4m, if I read correctly.

We have an $800,000 gain on the others because we had a deal with World Association Press, a long term contract and at the end of the contract there was $800,000 left in that contract that we don't have to pay them because the contract expired.

So we took it back in the others line for this quarter.

Great.

Thank you.

You're welcome.

So it's a onetime benefit.

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

Please proceed.

Hi, good evening.

Congratulations also on a very solid quarter.

I have three questions.

My first question is the first half of fiscal year '09 you've added 40 facilities which seems to be high relative to the full year guidance (technical difficulty) facilities previously given for full year '09.

So how should we think about the impact to the margins for the third quarter considering that you're now carrying a higher fixed cost base?

I think that fixed cost base will hurt margins in Q3 a little bit.

So we're going to -- because we have, obviously the 22 learning centers won't be full immediately.

So that's why Michael mentioned in his opening that we will probably slow down the number of learning center openings for the rest of the year and we're already well within our target of 40 to 50 for the year.

So, we're at 35 so we should make that easily.

We will continue opening kids learning centers and some VIP and maybe a couple adults, but we will slow that growth down.

But it will have a negative impact on Q3 margins because we're carrying a higher fixed cost ahead of the revenue coming in.

Okay.

And the second question is I think taking a longer term look at the company's expansion strategy.

So given that expansion aids revenue growth but may initially be margin dilutive before the school reaches breakeven, and considering that pricing growth has been an important driver for margin expansion, to what extent, or is there any relationship between expansion plans and how this would depend on ASP growth trends?

I don't think so.

I think the ASP growth trends have been from two sources.

We typically raise prices 10% to 12% year-over-year for like-to-like classes.

The other benefit comes from the US dollar translation which we will lose, but don't forget our costs are all also all in RMB as our revenues are, so there's actually a neutral effect on our margin structure.

And so actually the price increases of 10% to 12% is higher than the Chinese inflation rate currently and is higher than our costs are going up.

So we will get some margin benefit going forward.

Even as we open up more and more schools and learning centers in the years to come, we are opening them up in cities that are demographically attractive and so the margin structure is very comparable to most of the other facilities we've been opening in the past, with the exception of Beijing and Shanghai which has much higher margins.

Okay.

But the strategy just moves on, there's no change in that strategy.

All right, okay.

And the last question is kind of following up on James' question on gross margin.

So considering that the number of part-time teachers actually increased sequentially, which I understand, correct me if I'm wrong, I understand that the part-time teacher costs are included in the cost of goods so at the gross level.

Can you help us understand a little bit where the cost reduction was from in the second quarter on a sequential basis?

Is this mainly from dismissing some of the administrative staff and if so, it seems like the proportion of administrative staff costs seems to be quite high relative to the overall cost base.

I think last year, Catherine, if you recall in Q2 we also opened up a lot of learning centers.

And so those learning centers have another year now to mature.

And so the utilization across the network, every year is getting better and better, which improves the gross margin line.

Right, so utilization and price increases together are going to drive up the gross margin side.

And what's going to drive down the gross margin side is going to be if we expand too many learning centers or if the students don't fill the seats.

And so it's the smaller class sizes that will drive down the gross margin line and the shift towards POP Kids English enrollment.

But the price increases and the utilization more than offset that in Q2 of this year, versus Q2 of last year.

Right.

Sorry, I think I may not have been very clear with the question.

I was actually more looking towards on an absolute basis, so we're looking at about $16m or about $17m sequential decline in cost of revenues.

So does -- considering that part-time teacher count actually went up -- most of this cost reduction is from lower administrative staff costs and if so, is it correct to assume that administrative staff costs is actually about 40% of the cost of revenues?

No, I think the lower cost in cost of goods because the POP Kids English teachers are actually paid at a lower level than the overseas test prep teachers.

So as POPs becomes a bigger part of the mix, those teachers are actually in the G&A line.

And the majority of their compensation is in the G&A line, not in the gross margin line.

Right, okay.

Right, and so as more revenues, 20% of the revenue comes from kids English, the gross margin -- it will improve our gross margins.

I see, I see.

Okay, that makes sense now.

Thank you.

No more questions?

She left the question queue.

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

Please proceed.

Thank you.

I just wanted to get a clarification on the softness you mentioned, Louis, in regards to adults.

Was that specific to Q2 or did you actually see that softness continuing in the first half of Q3.

That's a great question and that's what I went to check this last week.

We have seen an increase in Q3 so we think the softness was due to Q2 specifically.

But we are not, adult English has always been growing in the single digits in enrollment, so it is slowing a little bit from historical trend but it is up in the first six weeks of this quarter versus last year.

Whereas in the second quarter it was down 3.6% for the whole quarter.

Got it.

So (multiple speakers) it is quarter specific.

Okay.

And then in regards to the acceleration in enrollment growth in the first half of the February quarter.

Was that fairly broad-based across all the sectors or segments of your business or was there any one or two segments that seemed to be driving that acceleration?

I think from the early data we have the acceleration in student counts is mostly driven by our three growth drivers which is, Kids English is the fastest growing, middle, high school and U-Can is second and overseas test prep is growing also in the teens.

So we've seen a bounce back in all three of the growth drivers.

The domestic test prep continues to grow in the high single digits and adults is growing in single digits.

Okay, great.

That's across all our product lines.

And then one last question.

I do recall that you received high tech tax status across a number of your business units that you were requesting that status.

Can you give us a sense what that means for the tax rate this year?

And then as you look into next year how we should be modeling the tax rate.

Yes.

I think we would model this year at about 11.8% for calendar year '09 and probably 11% for calendar year '10.

Okay, great.

Thank you.

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

Please proceed.

Thanks.

Good evening.

Just following up on the strong start to fiscal third quarter.

You allude to an abatement later in the quarter.

Could you talk a little bit about the timing within the quarter?

Maybe a little bit about deferred revenue as well?

And of the number that you've seen in deferred revenue, how much of that will hit in the fiscal third quarter?

Thanks.

Yes, we have about $52m to $53m in deferred revenue coming into Q3.

Actually this is one of the quarters where deferred revenue, much of it hits this quarter.

So even though it was lighter than previous quarters at only 40% growth, 70% to 75% -- about 75% of that revenue will hit this quarter.

So we estimate $39m of the $53m will come into this quarter.

So it's natural that if we have a light deferred revenue number coming into the quarter we'll see strong enrollment in the quarter.

It's just delayed enrollments.

But we did benefit from the third quarter, the 34% rate is too high and we think it's driven, because Chinese New Year is earlier this year, it's two weeks earlier, about 12 days earlier.

So students will obviously come and enroll in advance of the classes.

So -- but this year the Chinese New Year is actually longer than normal.

So it's similar to last year where it was about -- a little bit over four weeks.

So we do expect very strong revenue growth for the whole quarter.

And that's why we guided with 36% to 40% growth for the quarter.

Just following up a bit on a previous question.

It sounds like fairly broad-based but could you talk geographically as well?

Is a lot of this bounce back in Beijing perhaps from people who delayed from the Olympics?

Yes, I think Beijing is actually doing really well.

Beijing was up 35% last quarter and the early numbers from Beijing this quarter are well up over 30% to 35% in revenue again.

So Beijing has bounced back nicely from the Olympics.

If there is a -- if there's a slowdown, Shanghai is slowing down a little bit but last year grew 60% so it's unsustainable.

We have a slowdown in some other cities like Guangzhou but that's more management specific.

So we had a school head change.

So, overall the new schools and the network is growing in line with expectations, or higher.

So our business is still clicking on all fronts.

Great, thanks.

Shifting gears a little bit.

Last year, at the beginning of the calendar year you had an increase to staffing salary.

Do you anticipate something similar this year and what type of headwind might that pose?

I assume not as much as what you're seeing in pricing growth, but if you could elaborate there.

Thank you.

The Board just approved on Monday, yesterday, a 3% to 5% staff salary increase.

Great.

So it will be 3% to 5%.

That doesn't include management.

Management doesn't get reset until Q1, so until the summer.

So this applies to the staff.

Okay.

Thanks then.

Nice work.

Thank you.

Your next question comes from the line of Gordon Lasic from Robert W.

Baird.

Please proceed.

Hi, thanks for taking my question.

First, just quick housekeeping.

Can you run through the enrollments for each segment?

I know that adults was down 3.6% and kids was up.

What was the middle and high school?

And then what was the overseas test prep for the quarter?

I can give you approximations because we don't disclose all that data.

But for overseas test prep the amount was over 53,000 enrollments for the quarter.

You can also email Sisi and she'll give you these numbers, Gordon, if it's easier.

Domestic test prep was 85,000 -- over 85,000.

Adult comprehensive was 50,700, more than that.

High school was almost 31,000, 30,900 and change.

Kids was 56,600 and then -- those are the major ones.

Can you talk a little bit about what matriculation are you seeing from Kids to U-Can to adults.

I mean you talked about the Kids is performing the best right now.

Can you give us any sort of metrics as how much more likely are kids likely to enroll in the U-Can once they're enrolled in the kids program?

Anything you're seeing there?

Yes.

We don't have hard actual numbers but we know from anecdotal evidence that many of the students who are 12 or 13 in our POPs Kids English class, their parents will ask us about the next level and we'll direct them to the U-Can programs.

So don't forget, U-Can is brand new this year but they have been consistently, for the last several years, enrolling in middle and high school English.

So there is a high correlation, yes, I would guess -- and this is an estimate, that it's well over 50% that will move on.

If they're 11 or 12 year old children that will move on into our English for middle and high school kids.

Okay.

Then we'll begin to cross-sell those middle and high school kids into other subjects like Math and Chinese and Physics and Chemistry.

So that's the whole strategy, remember, of being a trusted education partner for Chinese kids, starting as early as possible, somewhere between 5 and 12.

And then they stay with us all the way through college and graduate school.

And then for U-Can, how many non-English courses have you rolled out currently and then how is that trending versus expectations?

How many do you expect to have by the end of the year?

We are rolled out in over 20 cities now and so we have a full curriculum in all six or seven classes for each grade level in the big cities.

So we would expect a basically critical mass of rollout by Q1 of this year, so the next two quarters and we would expect to turn a profit in Q1, during the summer of 2009.

So two quarters from now.

And as far as -- we are on track with enrollment.

We had forecasted 40,000 to 50,000 enrollments at the beginning of the year and we're at 22,000 for non-English classes for the first half of the year.

And we're going into the busy period.

Q3 and Q4 the gaokao is given in the first week of June, so Q3 and Q4 is when students study in earnest for that exam.

Okay.

Then just one final question.

Could you give us a rough percentage of how many of your schools and learning centers are currently profitable?

By our estimates, you talked about that learning centers are profitable after the first year.

So would that, 60% to 65% of learning centers, would that be a good number to approximate?

Yes, we don't measure profitability by learning center, we measure it by school, which means by city.

And every one of our cities that is open longer than one year, or longer than 18 months, is profitable.

In fact, I don't know of any that is not operating profitable.

So we don't measure it by specific learning center because it's all under one P&L by city.

Okay and that -- so, every city longer than 18 months?

Yes.

In fact I almost want to say every city is profitable on an operating basis.

Okay.

Thank you.

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

Please proceed.

Hi.

I would like to check with you how many students are included in this quarter coming from Tongwen and what's your plan in terms of growing the business here?

Yes.

Tongwen has accounted for almost none, it's like 100 students this quarter, for Q2.

Their business really starts in Q3 and Q4.

So they expect probably 1200 or 1300 enrollments for Q3 and Q4 together.

But these are higher ASP, right, Mark?

These are, some are retakes -- I mean they're (inaudible) but they're going to be higher than the $100 it costs but they usually sell the whole five classes in one.

So it's really, if it's 1200 who take five classes it's really 6000 enrollments.

Okay.

And in terms of growing the business of Tongwen are you thinking about just purely in Changchun are you taking this brand to other cities?

Or are you looking at other acquisitions in other cities at this moment?

Our initial thought is to look at different new acquisitions in each city because we don't want to try to build a brand in the retakers school in each city.

Now Tongwen isn't really a retakers school as much but Mingshitang is.

So we would prefer to acquire a retakers school in profitable cities and not probably build it from scratch.

Now U-Can is different.

We will roll out U-Can nationwide with our own New Oriental brand.

Okay.

And in terms of teachers' numbers, since you mentioned that you see a lot of growth in the kids' English and those teachers in kids' English actually are full time teachers.

So are you, in terms of teachers breakdown are you still guiding that half/half in terms of fulltime and part-time, or what's the breakdown at this moment?

Part-time teachers are still a little bit higher than fulltime.

It's like, 2000 are fulltime and 2400 are part-time.

I think it's -- we always prefer part-time teachers if we can because then we don't have to absorb the cost when they're not teaching.

So we will probably keep it -- there will still probably be more part-time than fulltime but they're both growing as our student enrollments grow.

And since you have very strong growth in kids' English, can I check with you how much revenue does kids' English contribute to your business?

And in terms of profit it is higher than the revenue contribution or lower?

We don't break it out separately but it's probably in line, so it's about 20%.

Okay.

And can I check with you, the last question here is, how much, what's the profitability of U-Can program in this quarter?

U-Can program will be profitable in Q1.

So we're still building the program and we're spending a lot of money marketing it.

But U-Can, don't forget, U-Can has the potential to be much more profitable than kids' English and almost as profitable as overseas test prep because it's much larger.

If you think about kids' English, the average kids' English class has 17 or 18 students.

The average U-Can class, because it's not just language training can have 50 or 100 students eventually.

So it has a much higher ability to scale that class and be more profitable than kids' English, when it's more mature.

Okay.

Thank you.

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

Please proceed.

Thanks.

A quick question on the acquisition landscape or just expansion in general.

Would you guys consider going outside of China perhaps to Hong Kong, Singapore or even Malaysia to look for similar opportunities that you've grown in China right now?

Or do you just -- you're solely focused on staying in China?

Well, our primary focus will be on China given that the largest English school in Japan went bankrupt and the largest English school in Hong Kong just went bankrupt.

I think we'd have a hard time teaching English to Singaporeans who think their English is better than Americans.

Right, right.

I think we will probably stick with China but we're always on the outlook for --

Yes, for other countries actually.

Yes, other countries.

We know, you know, a lot of other countries but nowadays we are focusing on China because the market in Chinese is big, even though the (inaudible) is growing like about 30% to 40% every year, but we are only occupying about around 5% of the total market actually.

So our expertise is in China, know-how is in China.

So at least for 2009, the present year we are going to focus mostly in China even though I, personally myself, have traveled to Taiwan and Hong Kong and South Korea to look into their training patterns.

But don't forget, Brandon, every province we go into, new province, has a population probably bigger than South Korea.

So it's almost like a new country for every province you go into.

Yes.

Okay.

Then to a certain extent you talked about the acceleration enrollment in December and early January.

As you look at the next couple of quarters, especially around the holiday or heading into next summer, given the macroeconomic backdrop, what gives you guys the confidence that Q2 trends will be repeated, or that you'll see an acceleration or that there's -- that you're not just seeing more timing driven acceleration in enrollments versus just an overall slowdown, particularly in your overseas test prep or adult English?

Do you expect that to really reverse given what's going on with your macro environment or do you have confidence that you guys can continue to grow at a decent pace?

I think we will continue to take market share in all our main product groups, program groups.

So I believe in overseas test prep we will grow equal to or faster than the market.

Now overseas test prep grew at a torrid pace last year with enrollments up 26% to 27% nationwide.

So that's unsustainable in the long term.

But overseas test prep we had the benefit of being able to raise prices.

So that business will continue.

In kids' English, as Michael said, we're only several percent of the market so we have a long runway ahead of us.

The momentum has just (inaudible) for kids' English actually and the structure also.

Yeah we're right at the hockey stick phase for kids' English, so that will continue to grow.

And middle school is the same thing.

We're at the level where we're beginning to really hit our stride in that area.

And parents won't sacrifice on that spending.

So the one vulnerable area is the adult comprehensive English and we mentioned that we have so far in the first six weeks of this quarter we've seen a pickup versus last year, whereas we saw a drop in Q2.

So we're confident, or at least, you know, somewhat confident that that trend is reversing, but we're not going to see tremendous growth there anyway.

Okay.

In the overseas test prep business, is it still safe to assume that you're taking share within IELTS as compared to TOEFL?

And if that's the case, how do you break out what the relative driver for the growth is in that segment?

I.e.

is IELTS a lot more important to the overall growth rate in overseas test prep?

Are they equal?

I'm just trying to gauge how important market share is in IELTS for you.

TOEFL and IELTS contribute actually equally to New Oriental's revenue and maybe profit, I (inaudible) because we do not divide that.

Looking forward, TOEFL and IELTS will still continue growing because they're the most -- mostly because like high school students are now more -- most of them are taking TOEFL and IELTS to better prepare them to go abroad to [United States] or the United Kingdom to be undergraduate students.

We see a decrease for students who are in the University to prepare for graduate schools to the United States because we predict a decrease of scholarships in the United States.

But this will be compensated by the high school students so we still see, I don't know whether we can call it strong but a good growth or increase in the number of students who are taking TOEFL and IELTS so our revenue growth in IELTS because high school students are taking more and more, most of them are taking these two kinds of examinations.

Most will be equally I think because some of the students are trying to go to the United States and some of them are going to [Commonwealth] countries.

So we are still optimistic with these two projects.

Yes.

And just one more point on that, Brandon, is that, if you look at the affordability index, the South Korean won has gotten hammered against the US dollar and the euro.

The RMB has actually strengthened noticeably against the euro and the English pound in the last six months, which makes it much cheaper for Chinese students to go to the UK and to Australia.

And the fact that because other countries are struggling financially to send students there it actually opens up more spots for Chinese students.

Okay.

Then a final question for you, Louis.

As you look at your cost base and the number of schools you have now being so large, how do we look at rent as a percentage of the overall operating expenses?

And do you have the opportunity to go back and renegotiate a lot of those leases just given how tough the real estate environment has been in China the last year or so?

I think our cost structure is going to, is favorable and will get more favorable because I believe that rents are stable.

And we sign five years or more leases that we're not seeing rent increases like we did in past years.

So even if we don't renegotiate leases, as we go to new learning centers the market rent has not gone up and is probably going on the downside.

So we have leverage on the rent.

Rent is about 20% of revenue, 18% to 20% of revenue.

It's pretty constant.

So I think -- and I think it's the same thing on the labor front side, is that last year we raised salaries 10%, this year it's less than 5%.

Right, okay.

Thanks a lot.

And our price increase will stay the same.

Yes.

Okay.

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

Please proceed.

Yes, hello.

I just have a quite technical question.

For third quarter of your financial year, what type of translation rate are you using for the renminbi to the US dollar in your revenue guidance?

Yes, I'm using 6.83.

You have the easiest question of the night.

Thanks, Marisa.

Yes, I always come to the end of the conference call.

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

Please proceed.

Hi, I've got a couple of questions.

First, I just want to follow up on an earlier question regarding kids' English.

If I take this quarter's enrollment of 56K, that is about 19% to 20% of the total enrollment for the quarter.

And I think you mentioned earlier that the revenue contribution for kids' English is about 20%.

Shouldn't the revenue contribution for kids' English be much higher because your ASP for kids' English is higher than your corporate average?

Actually no, the ASP for kids' English is lower, slightly lower.

(Inaudible)

Yes.

It's about $110, where our average is about $125 to $130, per class.

I see, okay.

And my second question, given your cash balance of $270m or about $7 in cash per share, would you consider buying back shares at current levels?

We discuss this all the time with the Board.

We don't have another buyback program in place yet.

As you know, Adele, we are challenged because of the fact that most of our cash is in RMB and we have to pay a tax if we translate it into US -- move it to US dollars, there's a 10% tax imposed by the Chinese Government.

So that is one factor.

We just purchased 1m ADSs last year which finished in July at an average price of $63.

So we have done one purchase already.

We consider it all the time but we have not we don't have immediate intention to start a new program yet.

Okay.

And what's your percentage of cash that is currently in RMB?

About 200m of it is in RMB and 70m is in US dollars.

Okay.

That's all I have, thank you.

Thank you.

(Operator Instructions).

You have a follow-up question from the line of Catherine Leung from Citigroup.

Please proceed.

Hi.

I was just wondering whether you'd be able to tell us the revenue contribution from Mingshitang for this quarter?

I assume that it has turned breakeven so reversing the loss from the previous quarter?

Yes.

I actually apologize, I don't have that handy.

Do you have the contribution?

Hold on.

Very small.

Yes, I think the cash revenue of Mingshitang in the quarter was about $3m -- almost $3m, is that right?

No, no Q2 sorry.

It's very small.

Q2 is a slow quarter for Mingshitang, it's about $200,000, it's very small.

They expect bigger, more revenue in Q3 and Q4.

About $0.25m almost.

Okay.

Mingshitang (inaudible) this year.

(Inaudible) has got number one and number two students who's taking a final examinations in [gaokao] area this year.

Both of them are in Mingshitang actually.

But, Catherine, you understand Mingshitang last quarter had cash revenue of $3m and that revenue is actually recognized through the whole year.

So they have an additional $250,000.

So it's $3.2m so far this year, total.

Okay?

So that will be recognized over the course of nine months not, but most of the enrollments come in the summer.

They'll pick up some more enrollments in Q3 as people begin to realize they need help for the gaokao.

And they also are going to do some short term training.

So they have 1500 students who came in short term courses like U-Can during the summer.

And they'll have another program in the winter and also in Q4.

So they use some of Beijing school's facilities for those purposes.

Yes.

So there's a lot of strategic benefit to it.

And I was really mistaken, the total revenue so far is over $3.2m for the year.

Okay, thanks.

And sorry, just the last question, in terms of the tax rate.

Will there be any type of write back on the tax provision?

I know that it the [difference] is not very significant?

Yes, we already took it back.

So it came into Q2 already.

So we'll be at 11% -- we'll be at 12% for calendar year '09 and we'll be at 11% for calendar year '10 as we forecast right now.

Okay.

Thank you.

Thank you.

At this time you have no further questions in queue.

I would now like to turn the call back over to Mr.

Michael Yu, CEO, for closing remarks.

Well, not much words now actually.

Thank you for joining us today, a special day, I hope everybody will enjoy today because most of you are waiting for the historical speech by Obama, not by me.

So if you have any further questions please do not hesitate to contact myself or any of our Investor Relations representatives like Sisi Zhao or just to call Louis.

He's ready to take your questions.

Michael has one foot out the door, he's going home to watch the speech.

Yes, I'm eager to actually.

This is, I have to catch this historical moment.

Thank you, everybody.

Thank you, everyone.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.