New Oriental Education & Technology Group Inc (EDU) 2009 Q4 法說會逐字稿

Good evening, and thank you for standing by for New Oriental's fourth fiscal quarter 2009 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 the -- your host for today's conference, Ms.

Sisi Zhao, New Oriental's Senior Investment Relations Manager.

Please proceed.

Hello, everyone, and welcome to New Oriental's fourth fiscal quarter 2009 earnings conference call.

Our fourth fiscal quarter earnings results were released earlier today and are available on the Company's website as well as on newswire services.

Today you will hear from Louis Hsieh, New Oriental's President and Chief Financial Officer.

After his prepared remarks Louis will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1994.

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 obligation to update any forward-looking statements, except as required under applicable law.

As a reminder, this conference is being recorded.

In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org.

I will now turn the call over to New Oriental's President and CFO, Louis Hsieh.

Louis, please.

Hello, everyone, and thank you for taking the time to join today's call.

Overall, it was a solid year for us and it's my pleasure to take you through our fourth fiscal quarter and fiscal year 2009 financial results.

Before getting into the numbers, I'd like to take a few minutes to discuss some of the quarter and yearly highlights.

As many of you know, the fourth quarter is typically a seasonally slow quarter for us as -- in revenue terms, as students focus on year-end examinations and we ramp up our marketing efforts for the seasonally strong summer quarter.

Despite seasonality, however, this year we were able to beat the high end of our guidance by nearly $6m to deliver fourth quarter net revenue growth of 48% year-over-year.

This strong top line result was primarily due to the approximately $55.4m in deferred revenue balance, which is cash collected from registered students for courses and recognized proportionately as revenues and instructions are delivered.

At the end of the third quarter fiscal year 2009 healthy Q3 deferred revenue was driven by stellar student enrolment, which increased 31% year-over-year to approximately 351,700.

It is common for New Oriental to record slower enrolment growth in a quarter following exceptional student enrolment growth like we experienced in Q3 '09.

In the fourth fiscal quarter total enrolments in Language Training and Test Prep increased by more than 8% year-over-year, to approximately 330,200 enrolments, which brought enrolments for the full fiscal year to over 1.5m; a 19.5% increase over fiscal year 2008 and exceeding the high end of our fiscal year enrolment target.

Such healthy enrolments led us to deliver year-over-year net revenue of $292m -- $292.6m; a 45.6% increase over fiscal year 2008.

And with our disciplined approach to cost and operational efficiency we were able to achieve solid bottom line results as well, with non-GAAP EPS at $2.09 per ADS, up over 35 year-over-year.

As many of you know, New Oriental's long-term vision is to be the trusted educational partner for Chinese students throughout their lifetimes.

And, as we're seeing, our leading brand recognition and consumer trust gives us the ideal platform to accomplish this by developing lines of new businesses beyond our core Language Training and Test Prep classes.

Our reputation for quality also brings with it a strong pricing power.

In the fourth fiscal quarter blended ASP was up over 13% from the year-ago period, due to a significant part to the market-driven shift to smaller class sizes and the US dollar depreciation versus the RMB in the year-ago comparable period.

Beyond the power of the New Oriental brand, it is important to keep in mind the scale of the potential market for our services.

Take Kids English.

Mainland China has over 130m children between the ages of five and 12 and, therefore, eligible for our POP Kids English program.

Past aged 12 there are approximately 120m middle and High School-age students in mainland China, who are eligible to take English classes as well as our U-Can all-subjects training and Overseas Test Prep.

It is important to mention that students will typically enroll in more than one course per year.

And the vast majority of school-age students who enroll in New Oriental's POP Kids and middle and High School courses will continue in New Oriental for multiple years, thus, creating steady, recurring revenue streams with minimal associated student acquisition costs.

Considering we have enrolments of nearly 308,000 in POP Kids English for the fiscal year 2009, and over 283,000 for fiscal year 2009 in our middle and High School English and U-Can all-subjects training, it's clear that there is a massive potential on -- untapped in this market.

What's more, the healthy growth of Kids English, despite a weak macro environment, enrolments for the year grew 50% year-over-year and revenue grew more than 60%, shows that the demand for our POP Kids English program is relatively inelastic to economic conditions.

As we continue to expand using our scalable hub and spoke model, we expect the demand for our services to keep growing rapidly within these age groups.

Many of you already know that one of the reasons we have been able to grow so successfully over the past several years is our strong management team and disciplined approach to cost.

Michael Yu is not only an excellent Chairman and CEO, at his core he is a teacher and a role model for Chinese students throughout the country.

He recently came back from his 2009 dream tour, in fact, which visited over 30 cities this year, including several that were inaccessible last year as a result of the devastating earthquake in Sichuan Province in May 2008.

And, supporting Michael, we have in place a team of extremely experienced managers, including our COO, Chenggang Zhou, and our Senior Vice President, Xiangdong Chen, both of whom are teachers and who have been with New Oriental more than 10 years a piece.

Together, New Oriental's management team's collective vision and dedication to our New Oriental brand has allowed for smooth transitions into new areas, while retaining our expertise and our traditional strengths.

We believe that by creating a dynamic performance and challenging workplace for our teachers and staff, we can facilitate a high-quality educational experience for our students of all ages.

Looking at the first quarter and fiscal year 2010, we are optimistic.

It is still early in the quarter, but already we have seen strong momentum in our Overseas Test Prep, POP Kids English and Middle School and U-Can program enrolments.

This is particularly significant, given that June and early July of last year were exceptionally strong for student enrolments, making year-over-year comparisons very difficult.

Because of the Beijing Olympics last August we expanded our programs in the first half of the summer, while contracting them in the second half of the summer 2008 to permit students to enjoy the historic Olympic Games.

In other words, we fun-loaded the summer last year.

For New Oriental to see strong early demand in June and early July against these challenging -- this challenging backdrop is particularly encouraging.

While we believe our model is relatively isolated from weak economic conditions, given the value Chinese parents place an education for their children -- child or children, we are also encouraged by the gradual turning up of the global economy.

As consumption picks up we expect New Oriental will be a beneficiary, especially in our adult English business, which many of you know has been hardest hit by the global economic crisis.

With our solid brand, scalable business model, strong management team and focus on execution, we are very excited for what 2 --- FY 2010 has in store.

With that, I will turn to our financial results for the fourth fiscal quarter 2009.

Please note that certain figures I will refer to, that exclude share-based compensation expense, are non-GAAP.

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

For the fourth fiscal quarter 2009 we reported net revenue of $59.4m, representing a 47.9% increase year-over-year.

Net revenues from educational programs and services for the fourth fiscal quarter was $51.3m, representing a 45.7% increase year-over-year.

The growth was mainly driven by the increase in the number of student enrolments in Language Training and Test Preparation courses.

Excluding share-based compensation expense, non-GAAP operating costs and expenses for the quarter were $52.4m, a 39% -- 39.4% increase year-over-year.

GAAP operating costs and expenses for the quarter was 6.9 -- $56.9m, a 50 -- 41% increase year-over-year.

Cost of revenue increased by 45.9% year-over-year, to $25.8m, 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 36.8% year-over-year, to $10.3m, primarily due to expanded headcount in the selling and marketing department and increased brand promotion expenses.

Non-GAAP general and administrative expenses were $16.8m (sic -- see press release), a 30.7% increase year-over-year.

GAAP general and administrative expenses for the quarter increased by 37.4% year-over-year, to $20.9m, primarily due to increased headcount as the Company expanded the network of schools and learning centers.

Total share-based compensation expenses which were allocated to related operating costs and expenses increased to $4.5m in the fourth quarter of fiscal 2009, from $2.7m in the same period of the prior fiscal year.

Approximately $746,000 of the increase was due to a year-end adjustment to account for the lower-than-expected forfeiture rate in fiscal year 2009, meaning fewer New Oriental employees who received stock-based compensation awards left the Company and forfeited their unvested awards than anticipated.

Non-GAAP income from operations for the quarter was $7m, a 175% increase year-over-year, from $2.5m in the same period of last year.

And GAAP income from operations was $2.5m for the quarter, compared to a loss of $200,000 in the same period of fiscal 2008.

Non-GAAP operating margin for the quarter was 11.7%, compared to 6.3% in the same period of the prior fiscal year.

GAAP operating margin for the quarter was 4.2%, compared to a negative 0.5% in the same period of the prior fiscal year.

This rise was primarily due to the increased operating efficiency as revenue growth outpaced the growth in operating cost and expenses.

Non-GAAP net income was $7.1m, representing a 58.0% increase from the same period of the prior fiscal year.

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

GAAP net income for the quarter was $2.6m, representing a 49.8% increase from the same period of the prior fiscal year, and diluted earnings per ADS was $0.07 and $0.07 respectively.

Capital expenditures for the quarter was $2.9m, which is primarily due as we added one school and a net of 12 new learning centers during the quarter.

As of May 31, 2009, New Oriental had cash and cash equivalents of $254.8m, as compared to $224.0m as of February 28, 2009.

In addition, the Company had $59.8m in term deposits at the end of the quarter.

Net operating cash flow for the fourth quarter of fiscal year 2009 was approximately $28m.

The deferred revenue at the end of the fourth quarter of fiscal year 2009 was $74.8m, an increase of 26.3% as compared to the $59.9 -- $59.2m at the end of the fourth quarter of fiscal year 2008.

Deferred revenue, where students enroll in paper courses to be completed in future quarters, as many of you know, is essentially a measure of backlog for New Oriental.

Before I give guidance, I'd like to take a brief look at the comparisons between fiscal year 2009 and fiscal year 2008.

Student enrolments in language and -- Language Training and Test Preparation grew 19.5% year-over-year, to 1.519 -- 1,519,500 from approximately 1,271,700 in the prior fiscal year ending May 31, 2008.

Net revenues were up 45.6% year-over-year, to $292.6m.

Excluding share-based compensation expense, non-GAAP operating income was up 43.6% year-over-year, to $77.7m.

GAAP operating income was up 34.4% year-over-year, to $60.9m.

Non-GAAP operating margin went from 26.9% for the fiscal year ending May 31, 2008, to 26.5% for the fiscal year ending May 31, 2009.

GAAP operating margin went from 22.6% for the fiscal year ending 2008 to 20.8% for the fiscal year ending May 31, 2009.

Non-GAAP net income was up 34.6% year-over-year, to $77.8m.

Non-GAAP basic and diluted earnings per ADS for the fiscal year ending May 31, 2009 was $2.09 and $2.03 respectively.

GAAP net income was up 24.5% year-over-year, to $61m.

GAAP basic and diluted earnings per ADS for the fiscal year ending May 31, 2009 was $1.64 and $1.59 respectively.

Moving on to the revenue guidance, we expect our total net revenues in the first fiscal quarter of 2010, from June 1, 2009 to August 31, 2009, to be in the range of $146.6m to $152.6m, representing year-over-year growth in the range of 24% to 29% respectively.

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

Since we report currency in US dollars, our reporting currency -- our operating currency, however, is RMB.

We have benefited from currency translation gains during the period when renminbi appreciates against the US dollar.

In the last several quarters when the RMB consistently appreciated against the US dollar by 5% or 10% year-over-year, our revenue growth for financial reporting purposes benefited from such appreciation.

But, given the current trend, since the fourth fiscal quarter 2009, RMB/US dollar exchange rate has stabilized and currency translation gains have been shrinking accordingly.

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

At this point, I would like to take questions.

In order to be fair to all callers who wish to ask a question, we will take one question at a time from each caller.

If you have more than one question, please request to rejoin the queue again after your first question has been addressed.

(Operator Instructions).

And our first question will come from the line of Catherine Leung with Citigroup.

Please proceed.

Hi, Louis and Sisi.

Well, my one question is about recording -- sorry, regarding the summer quarter, I'm sure we're all wondering whether you'd be able to share with us more color on how June and July have trended so far in terms of cash revenue collection.

And, given that this summer quarter will be more back-end loaded compared to last year, how do you think this has impacted or affected your revenue facility?

Thank you.

Thank you, Catherine, that's an excellent question.

Our June quarter -- our June month and first two weeks in July were quite strong, with revenue growth, together, well over 25%, so the bottom -- well over the bottom of our range.

And don't forget, last year, what happened was June and first two weeks in July we front-loaded all the courses due to the fact that the summer Olympics were coming in August.

Because of that, we had extremely difficult comparisons.

The last three weeks' enrolments have been exceptionally strong, so we are very encouraged because the back half of the summer we're going to also offer a full suite of courses, and they're going to have easy comparisons versus last year when we didn't offer as many classes, given the Beijing Olympics was coming.

So, because of that, you're absolutely right, we don't have as much visibility going into the second half of the summer because, last year, it was so front-end loaded.

But, because of that, we were probably a little bit conservative in our guidance.

But the short answer is our first half has been above our expectations as far as enrolments and revenue.

But, don't forget, we came into this quarter with only a 26.3% increase in deferred revenue, which is lower than last year's growth.

So, because of that, we expected a strong June and a strong early July.

The next two or three weeks will determine the summer and what the growth rate will be because, last year, we -- our demand began to fall significantly in the second half of July and all through the month of August.

This year we don't expect that fall-off.

All right.

Thank you, that was very helpful.

Thank you.

And your next question will come from the line of Jeff Lee with Signal Hill.

Please proceed.

Good morning, Louis.

Good morning.

Could you please talk about your pricing strategy and comment on your decision to hold prices for large lecture classes?

What kind of prices do you think you'll be able to implement going forward?

And how much is the economic situation?

How much is competition weighing in the pricing?

Thank you.

That's an important topic.

I think for New Oriental we made the decision to hold prices in many large cities, particularly for large class sections in Overseas Test Prep and others, probably primarily due to the economic crisis, meaning that we wanted to make sure the students could afford our program and services.

So, we did that.

What we did, though, is we increased prices in the small class format, so we still expect pricing increases for the year to be in the range of 8% to 10%.

Also don't forget, Jeff, there is still the continuing move to smaller class sections, and so for the students who come in are picking the smaller class format.

But because we've raised prices in the smaller class format, margins are actually quite a bit better, so it's going to help our margin structure.

I think the net wash is the holding of the prices relatively flat year-over-year for large classes will end up being a negative on the margins.

But I think because of our growth rates and because we've been keeping costs under control, we still expect the margins to be quite healthy.

Okay, thank you.

Your next question will come from the line of Mark Marostica with Piper Jaffray.

Please proceed.

Yes, thank you.

Hi, Louis, on that very point, margins.

Clearly, this quarter, I think, was one of the first in the last four that you actually saw leverage on each of the class lines, G&A, selling, promotion and the cost of education services.

And I'm curious whether or not there was anything in those line items this quarter that was more one-timeish in nature at all, or was this the beginning of a new trend that we should see play out in the coming quarters?

Well, I think it's a trend you'll see play out in the coming quarters because, last year, if you look at the numbers -- if you look at non-GAAP operating cost and expenses, they were actually in line with last year, so this year and 2008 were very comparable.

It was the stock-based compensation that ran.

As you know, Mark, stock-based compensation should begin to trail off, especially beginning in Q3 of this year or the February quarter, as the '07 stock options basically are fully vested.

So I think it's -- a lot of it was due to stock-based comp because we had a large grant in 2007 that expires in February of 2010.

Other than that, I think the margins were comparable to last year.

And we started in the whole a couple of percent because of the Beijing Olympics.

So that means that for Q2, Q3 and Q4, if you combine those three, we actually saw an improvement in the margins.

And we don't see anything coming down the pipeline now.

Our cost structure is -- we believe, is in line.

So we would expect some margin expansion.

The only thing that may affect margins on the negative side is the fact that we're not increasing prices as fast as we did last year.

So we'll wait to see how that plays out.

If we -- it's one of those things.

If we don't raise prices as much, we should see stronger enrolment growth, which means that at the end of the line we should see, hopefully, the same or more in the bottom line, which is what we're shooting for.

Okay.

Thank you.

Thank you.

And your next question will come from the line of Amy Junker with Robert W.

Baird.

Please proceed.

Thanks.

Good morning, Louis.

Just a follow-up on the pricing.

Can you -- do you expect that those price freezes will be short-term or do you think extended throughout the year?

How long do you think that that's going to last?

And you commented that you thought that that would lead to better enrolments.

Are you seeing evidence of that so far.

We're definitely seeing enrolments as -- better evidence of that on the enrolment side, so I think that's clear.

The -- on the -- how long we're going to do this pricing structure, I don't know for sure because we -- don't forget, we review pricing every quarter.

My -- if I had to -- if you force me to an answer, I would say this is temporary, so that we will continue to increase prices in future quarters, maybe not as fast as historically where we've been increasing 12% or 15% but, certainly, in the guided 8% to 10% range.

Great.

And just as a follow-up of that, with respect to margins with all of these moving parts, at least for the fiscal first quarter so far, would you expect to see pretty healthy margin improvement?

I think in the past you talked about 100 to 200 basis points of gross margin improvement in all of 2010.

Is that something that's achievable given these pricing moves?

We still expect 100 to 200 basis points in fiscal year 2010, the whole year.

I think in Q1 -- as you know, Q1 margins are typically much higher than the rest of the year.

So, given we implemented this pricing structure this quarter, we may not get the full 100, 200 basis points in Q1.

So I think it depends on what we do in the Q2, Q3, Q4 periods as far as pricing.

But I would still expect margins to be still -- gross margins to improve by at least 100 basis points over the course of the year.

And I think we'll get even more operating efficiency on the bottom line, given that stock-based comp has come down.

And given that we expanded very rapidly last year to build U-Can, our all-subjects Middle School and High School program, and this year we're going to begin to leverage that benefit.

As student enrolments increases in those courses, we don't have to spend much more on adding teachers because we're just filling up classrooms.

Great.

Thank you.

Thank you.

And our next question will come from the line of James Mitchell with Goldman Sachs.

Please proceed.

Great, thanks for taking the question.

It looks like the POP Kids English business continues to grow at a very rapid pace, despite becoming a double-digit proportion of your overall business.

Could you talk about the scope for further growth in POP Kids English?

And also when we look at the current enrolment growth of 50% year-on-year, could you disaggregate that into what's happening within existing cities versus opening POP Kids English in new cities.

Okay.

That's a great question, James.

POP Kids English is a relatively new program, despite the fact it has 308,000 enrolments already in fiscal year 2009.

The program's only five, six years old.

So we expect continued growth across the country.

The only city that we don't expect as fast a growth would be Wuhan because that's where POP Kids English started.

So we're seeing rapid growth in the major cities such as Beijing and Shanghai, and others.

So we expect POP Kids to continue to grow.

We have 308,000.

We would expect well over 400,000 enrolments for fiscal year 2010.

And we are probably modeling 35% to 40% enrolment growth, plus another 10% pricing increases.

So we'd expect revenue from this category to be well over 45%.

And we're also seeing not quite as fast in enrolment growth, but we're raising prices in the U-Can in the Middle School sections.

So we still expect revenue growth from that section to be 30% to 40% off a 283,000 student base.

That also will be nationwide.

So we are not -- it's not -- we haven't saturated any city in Middle School and High School English in U-Can.

And we're only probably close to maturity in one city, which is in Wuhan in China on the Kids side.

Overseas Test Prep is the other growth driver, and that continues to be quite healthy.

Our indications are June and July demand have been above our expectations.

I think last year we grew about 11% in enrolments.

In the first half of this summer we're already well over 17% in enrolment growth in overseas which, as you know, is our most profitable segment.

Sure.

Thank you.

Yes.

Thank you.

And our next question will come from the line of Paul Keung with Oppenheimer.

Please proceed.

Yes, hi, Louis.

Switching gears from revenue and margins, looking at your Gaokao business, what's interesting is one of your big competitors has actually done about seven or eight acquisitions so far, and you're seeing a lot more consolidation happen.

I'm curious if you feel like you may need to pick the pace of that in order to make sure you don't lose some key assets out there in Gaokao space.

Yes, that's a good question.

M&A has always been a difficult thing -- issue for us, just given that we tend to be quite conservative in what we're willing to pay, as you know, Paul.

I think we have a lot of competitors in Gaokao.

We're a relatively new entrant as well.

But because we had 283,000 enrolments in our middle and High School English in U-Can last year, and we had 58,000 enrolments in U-Can in our first year, non-English subject enrolment, we still expect that to grow to between 90,000 and 100,000 for this year.

And if we do 100,000 at an average of about $150 a student, that's a $15m business.

That makes us the largest Gaokao business, we believe, school in China.

So we will obviously look at acquisitions, but any acquisitions we make are relatively small and so the growth will still come from organic growth.

We acquired Mingshitang in Tongwen schools.

Mingshitang has about 1,200 full-time students last year, boarding students, for the Gaokao re-takers business, and it had another several -- 4,000 or 5,000 short-term students.

New Oriental across the country in our 30 cities generated 58,000 just in our first year and we expect, like I said, that to grow 70% to 90% this year.

And so we're expecting to grow the vast majority of our Gaokao business organically.

Okay, thanks.

Thank you.

And our next question will come from the line of Hao Hong with Brean Murray.

Please proceed.

Hi, Louis.

I just wanted to ask a quick question on your forward guidance.

I remember that in the first quarter, financial year 2009, there was about $4m revenue was deferred into the second quarter.

So if we normalize your first quarter 2009 sales and then use your current guidance divided by the normal revenue in first quarter 2009, for some reason I only get about 20% to 24% year-on-year growth.

And that actually represents one of the slowest growths in the last two years.

I'm just wondering whether my understanding is correct and (multiple speakers) your view on this.

Yes.

I think what I would do is we're going to come into the quarter with $75m of deferred revenue, of which probably $55m will be recognized this quarter, so right away we're at $55m.

Let's say, just for calculation purposes, assume that our target's $150m.

That means that between June and July we need to generate $95m, Hao, to hit our target.

If we get $150m, we're at 20 -- we're about 27% growth year-over-year, 28% growth year-over-year.

So that's the way I would look at it.

And I think the early indications are that we should be in that range.

June and July have tracked -- together have tracked well above 25%, which is the bottom of the range.

Sure.

Okay, does that make sense?

So I think cash revenue, especially -- to give you an idea, last year we had one week, our first week ever in the third week of June where we had revenue of CNY111m in one week.

Before that one week, the largest we ever had was CNY65m.

This year we -- this -- the last three weeks in New Oriental's enrolments --- actually, the last four weeks, three weeks have been over CNY100m in revenue.

But that's very strong, given how tough the comparisons are year-over-year.

Last year we -- in the first half we had -- we saw very strong enrolments in June and July and we saw a dramatic tail-off in August.

We don't expect that tail-off this year.

Okay.

Thank you.

Thank you.

And our next question will come from the line of Brandon Dobell with William Blair.

Please proceed.

Hi, Louis.

Thanks.

I wonder if you could give us some color on your forward expectations for the number of schools and learning centers, as well as CapEx in fiscal 2010.

That's a good question.

CapEx for 2009, we spent $14.6m.

That's to add a net of 70 facilities, including maintenance CapEx on the other 200 facilities that we had coming into the year.

Going forward in fiscal year 2010, ending May 31, we would expect to add maybe two new cities.

We're going to slow down the number of city growth, and we'll add about 50 to 55 learning centers.

So the total new facilities will be about 55 to 57, bring our total [of] 325 to 327.

CapEx for that we would expect to be somewhere in the range of $15m to $17m.

But primarily half of it is for new school openings and learning centers.

The other half is for maintenance CapEx on the existing facility base, which is growing quite large, as you know, to 270.

Right.

Of the 50-plus centers, how should we think about the split between Kids and -- standalone Kids and mixed use centers?

Probably it'll be one-third Kids' centers, around 15 to 20 Kids' centers, and the rest will be mixed use.

Okay.

And then if you look at the four or five big cities for you guys, how should we think about capacity expansion, as well as just organic same-store or same-network growth within, let's say, Beijing and Shanghai?

Well, Beijing is doing exceptionally well.

Shanghai, as you know, had challenges with Q3 of '09 which we hope are largely behind us, with the scheduling problems.

So we would expect, of the centers, Beijing should continue to grow.

Shanghai, to be honest, overbuilt last year.

So Shanghai should not grow too many more centers, maybe a couple of Kids' centers.

The other cities, Wuhan will not grow that many centers.

So the primary increase in centers will be in the other large cities outside the big four.

So it'll be probably in [Chengdu], in Tianjin, all the other big cities within China, and also the newer cities as we -- the '03 and '05 -- sorry, the '05 -- '04, '05 and '06 and '07 schools.

So I think they will be weighted toward the newer schools, the newer cities, not the older cities.

But I think we would still see significant enrolment growth in the large cities, especially in the Kids and Middle School area.

Okay.

And then a final question for you.

We've seen a number of headlines about increased or improved consumer spending in China in recent months.

Has that trickled into the adult business for you guys, or if that's still primarily financial services related and you haven't seen too much impact yet.

Adult English remains slow, to be perfectly honest.

But slow still means 10% revenue growth.

So we are still seeing probably flat to slightly down enrolments year-over-year in Adults, but we expect revenue growth to be well over 10% in the Adult category still.

So we are encouraged, though.

I think the -- as the economy begins to rev up again we would expect more hiring in the financial services, which is because the stock market's doing well, as well as multinationals.

I think that will drive our Adult business hopefully to increase again year-over-year.

We're not counting on Adults to drive our growth, as you know.

As long as Adults and Domestic Test Prep can grow 10%, 15% a year in revenue, we're quite happy.

The growth above that is going to come from Overseas Test Prep, Kids and Middle and High school.

Okay, great.

Thanks a lot.

Thank you.

(Operator Instructions).

Our next question will come from the line of Marisa Ho with Credit Suisse.

Please proceed.

Yes.

Hello, Louis.

Could you take us through the ASP movement for your key product areas during the fourth fiscal quarter, please?

During the fourth fiscal quarter, yes, I can take a look at it.

I need to pull out my chart.

The ASP growth in Overseas Test Prep for the fourth fiscal quarter was, I'll give you round numbers, was about 20% year-over-year growth in ASP.

Domestic Test Prep was about 2% in pricing growth.

Adult English was about 20% increase in average blended ASP.

In the Middle School and high, in U-Can, the ASP was up about 18%, 17%, 18%.

And for Kids, the ASP was up, was relatively light, around 3%.

And these are in renminbi terms?

These are in US dollar terms.

US dollar terms.

Just subtract 2%.

Yes, thank you.

So, overall, last quarter we were up 13.6%.

If you take it in renminbi terms, it was 10.8% increase in ASP growth.

Right.

Can we also confirm the ForEx assumption you've used for your first quarter guidance?

I just used the US dollar number from last year.

So the assumption is the current CNY6.83 that the RMB is against the US dollar.

Right.

Thank you.

You're welcome, Marisa.

And our next question will come from the line of Adele Mao with Susquehanna International.

Please proceed.

Morning, Louis.

Just related to the earlier question on capacity expansion, could you give us an update in terms of the ramp up in capacity utilization, especially for the new centers opened in fiscal year 2008?

I remember you guys had 77 centers open in 2008 and 63 [just] in total for 2009.

That's right.

And my second question is I think you mentioned 50 to 55 learning centers, plus two schools, to be opened in next fiscal year.

So what's your target total capacity at the end of fiscal year 2010?

Thank you, Adele.

On the first question I think is that we have plenty of capacity, given that we've added 140 new schools and learning centers in two years, basically doubling them, more than doubling the number of facilities.

So we went from 130 two years ago to 270.

As you know, it takes between three and five years to fill up a learning center to about 70%, 80% capacity.

So that means that half our network is less than two years old, facilities-wise.

Now the capacity of those facilities is smaller than the existing schools.

But that means that we have plenty of capacity.

The only quarter that we're challenged for capacity typically is in the summer quarter, this quarter, and only in Beijing.

But, luckily for us, Beijing has a lot of colleges and universities.

And so what happens is those dorms are empty and we can lease them at affordable rates during the summer.

So capacity is really never an issue for New Oriental currently.

The reason we opened up learning centers across the country is to make it easier for our students to get to our classes.

Because, remember, behind the brand of a school convenience is the second criteria that parents look at when they pick a school for their kids.

They don't want to drive more than half an hour, and I don't blame them, given the traffic jams in China.

So this is more a convenience reason why we open learning centers than a capacity issue.

So we believe, with the second question you asked, with the 57 -- 55, 57 facilities for the year, we still have plenty of capacity.

And it will help us to reach -- to basically fill in our geographic footprint in certain cities where there has been spokes, so we can get better geographic coverage within certain cities.

So it's not so much that we need the capacity.

It's because we want to make it more convenient for our students to get to.

Okay.

That's very helpful.

Thank you.

Thank you, Adele.

And our next question will come from the line -- as a follow-up from the line of Hao Hong with Brean Murray.

Please proceed.

Hi, Louis.

I just want to ask whether there's any one-off revenue items in your fourth quarter revenue numbers.

No, there's absolutely no one-off things.

The only one-off thing was on the expenses which was the -- we had to book an additional $746,000 in comp --- in GAAP compensation -- stock-based comp awards, which I didn't expect.

And that's because our forfeiture rate went down, so it's actually a good thing.

That means there's fewer people leaving New Oriental than we expected.

Usually, in a typical year, 10% to 17% of the people who receive stock-based awards, the stock would be forfeited.

So we assume, given historical numbers, a historical forfeiture rate.

That rate happened to be too high, which means that fewer people actually left New Oriental than we expect this year, which is actually a good thing.

That means -- which shows you that the job market isn't as robust as it was in past years, that fewer people left New Oriental or were better employed, I don't know.

I would doubt it's the second one.

So I would expect that -- and that's why we had the extra $0.75m in stock-based comp [to adjust] for the fact that fewer people left New Oriental, so that's an actual number.

So I think it's the other side.

If we had that $750,000, our net income would have been $3.3m.

It would have almost doubled year-over-year from the $1.8m last year.

So it was actually the other side.

The expenses had a one-off.

Right.

And also a quick question on your margin.

Now that your U-Can business and the POP Kids business is growing very fast, but I remember these businesses are operations with lower margins.

And also if you change your classes to smaller classes format to maintain your ASP, top of my head, because of your fixed cost structure, I believe that the smaller classes are actually less profitable than the large classes.

So I'm just wondering this kind of growth pattern and strategic change in class format, how is that going to affect your view that you can deliver a 1% to 2% margin improvement in the next couple of years?

That's a good question.

I think I would take issue with your assumption that U-Can is not as profitable.

U-Can has a pricing that's increasing rapidly, and its enrolments are going to almost double, hopefully, this year, in 2010.

So U-Can has a price point, US dollar, that's going up significantly.

So I would -- and also all the small classes we are raising prices in order to more equalize the margin with large classes.

So, yes, you're correct, though, that large classes will have better margins.

But the shift -- the market-driven shift is for smaller classes.

But because we spent a lot of money the last year, year and a half, expanding to 140 facilities, plus we've hired a lot of teachers in the last two years, we are well positioned.

We went from 3,200 teachers a year ago to 5,200 teachers now.

We're well positioned to not have to add as many teachers going forward, and yet we still expect the enrolment growth, meaning that we're going to get higher utilization in our classes, meaning more students per class.

And even our small classes are going to have 62% to 65% gross margins, or higher.

So that's still well above our average of 61.6% last year.

So even if we did all small classes and -- it's the books and the other revenue that drives our margin down.

So if we did all small classes we'd still have 65% gross margins, which is 400 basis points -- 300 basis points above where we're at today.

Sure.

Thanks, Louis.

Thank you.

And our next question will come from the line of Candy Huang with Nomura.

Please proceed.

Hi, Louis.

Two questions.

First is about your next -- your financial year '10 the enrolment growth guidance.

And second is can you elaborate more on the Shanghai -- the volume growth in Shanghai and Beijing, because I recall that Shanghai is -- the enrolment growth slowed down, and not only because of the timing of the opening scheduled, the school, but also the slow economy.

So can you elaborate more on the third quarter -- actually, in the beginning of third quarter the enrolment growth in Shanghai in particular?

Thanks.

Thank you, Candy.

Beijing is doing exceptionally well.

So Beijing is more than making up.

Shanghai is slow, so you're absolutely correct, but Shanghai is slow mostly in the Adult side.

And so Kids continues to grow rapidly in Shanghai.

Overseas Test Preps is doing okay in Shanghai.

And U-Can is doing very well in Shanghai in High School.

So it's the Adult sector that has been consistently slowing in Shanghai.

And that is probably due to competition and also due to the economy of last year.

We are beginning to see stabilization in Shanghai and a continued increase.

But don't forget, last year Shanghai had very tough comparisons.

Shanghai grew over 60% in 2008 and it still ended up growing over 25% for all of 2009, which is still very good growth, but given it's our second largest school.

But it was out -- Beijing has outdone Shanghai in fiscal year 2009.

And we are hopeful that Shanghai will resume its growth weight.

But, yes, 25% growth in our second largest city is still very healthy.

It's just not what Shanghai is used to, of 50% plus growth.

So we would expect Shanghai to continue to grow between 20% and 30% for this year.

We're hoping for the upper end of that range.

Okay.

And you're talking about 20% to 30%.

Is that the enrolment or the revenue growth?

The revenue growth.

Enrolment growth for the year, that was your first question, we've guided probably 10% to 15% enrolment growth, plus another 10%-plus in pricing power.

So we expect -- we would guide revenue for 2010 fiscal year to be between 25% and 30% growth.

Now, as you know, Candy, this is the same guidance we give every year.

And the last two years, as you know, we grew 41% two years ago and 46% this last year.

If you put it in RMB terms, which is what I go by, we grew 41% 2008 and 35% in 2009.

So we beat the top of our guidance this year by 5%.

And so what I expect over the next three to four years is for us to be able to grow 25% to 30%, starting at the upper end of that and moving down to the lower end of that over time, as the large numbers hits us.

Okay.

Thank you.

Thank you, Candy.

And our next question is a follow-up question from the line of Marisa Ho with Credit Suisse.

Please proceed.

Hi, Louis.

Could you talk about your expectations for selling and marketing expenses in the New Year?

And also do you have a guidance for us for SBC in FY '10?

Yes, very good questions both.

On sales and marketing, last year it was 13.2% of revenue, so it was up 0.6%, from 12.6% the year before.

This year we would expect it to be somewhere between 13.2% and 14%.

So we don't expect it to go above 14%.

And it will probably be not much of an increase over that.

But we've gotten more out of G&A.

So G&A made up the difference on SBC -- sorry, on sales and marketing.

Now, stock-based comp is where we expect a benefit.

Last year we recorded $16.8m in stock-based comp.

Because the '07 options expire in third quarter this year, we expect stock-based comp to drop to between $14m and $14.5m.

So that's going to be a $2.5m to $3m reduction year-over-year, despite revenue increases and the like.

So that will be another about $0.07 per share.

Thank you.

We are now approaching the end of the conference call.

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

Well, thank you, everyone.

We very much appreciate you taking the time to attend our call.

By the way, I was surprised that no-one asked about the share repurchase program, but we can get into that with the analysts later on.

Thank you everyone for joining us this morning and this evening, and this afternoon if you're in Europe.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day, everyone.