New Oriental Education & Technology Group Inc (EDU) 2011 Q4 法說會逐字稿

Good evening and thank you for standing by for the New Oriental's fourth-quarter and fiscal-year 2011 earnings conference call.

At this time all participants are in a 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 now disconnect at this time.

I would now like to turn the meeting over to your host for today's call, Miss.

Sisi Zhao.

Please proceed.

Hello, everyone, and welcome to New Oriental's fourth fiscal-quarter and fiscal-year 2011 earnings conference call.

Our financial results were -- for this period were released earlier today and are available on the Company's website as well as our 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 (sic).

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.

Louis, please.

Thank you, Sisi.

Hello, everyone, and thanks for joining us.

Today I want to discuss some of the business highlights in the last quarter and give a quick overview of some of the key financial indicators for both the fourth quarter and the full fiscal year.

I'll keep today's discussion of the financials brief, at least to leave more time for questions.

Fiscal-year 2011 has been another solid year for New Oriental on all fronts and I'm very pleased to note that we are closing out this year with a stellar set of financial results.

Finally some real operating leverage improvement.

In the fourth quarter our revenues grew by 58.7%, while profits grew by 147.8% year over year.

GAAP operating margin improved about 340 basis points, to 7.6% for the quarter, and would be up more than another 100 basis points if you exclude the disposal loss from the divestment of Mingshitang School and Tomorrow New Oriental -- sorry, Tomorrow Oriental.

These impressive metrics are particularly pleasing because they really underscore the success of our strategy throughout the second half of fiscal year 2011 to harvest the benefits of our earlier expansion efforts and improve on bottom-line performance through expense controls.

As you know, in fiscal-years 2009, 2010 and the first half of fiscal-year 2011 we've placed a strong emphasis on network expansion to rollout our new U-Can All-Subjects Training program for middle and high school students and our VIP Services with one-to-maximum-five-students per class across China.

As a result, in the past three years we have grown schools and learning centers from 207 as of May 31, 2008 to 487 at the end of May 2011.

However, as I noted on last quarter's call, in the second half of fiscal 2011 we have shifted our focus toward raising operational efficiencies across the network and controlling costs.

So in the last quarter we expanded at a deliberately more moderate pace, opening three new schools in the cities of [Wuhan], [Xilian] and [Guayan], [adding] a net of 29 learning centers in existing cities.

That compares to 43 learning centers opened in the same quarter last year.

Despite this slower pace of expansion our fourth-quarter results show sustained rapid growth in revenues and profits, even against very challenging comps from the fourth fiscal quarter of 2010, where revenues were up 46%, net income up 119%, enrolments up 32% compared to the same period in 2009.

We achieved this by raising operational efficiencies through better learning center utilization, a process that feeds into our ongoing commitment to controlling expenses.

Look at marketing costs.

For example, as our recent quarter -- as our recently-opened facilities have become established in their local communities they can rely less on marketing and promotion and more on reputation and word of mouth to drive enrolments, which in turns allows reduced marketing costs.

In fact, selling and marketing expenses for the fourth quarter increased by less than 30% year over year and direct actual brand promotion expenses increased by just 14% year over year, while our top line grew over 58%.

At the same time, with more students in each classroom in these recently-opened schools we have been able to improve utilization and efficiency against fixed cost.

In line with this, we have also been able to successfully control headcount increases.

We added a net of about 780 employees this quarter compared with 2,200 in the same quarter of last year.

Most of the new additions were teachers as opposed to administrative staff.

We ended our 2011 fiscal year with about 22,100 total headcount, of which over 11,700 were teachers.

So even though we continued to keep spending down in the last quarter the success of our existing and recently-opened facilities is driving very strong growth across our businesses, particularly in our core business lines such as Overseas Test Preparation, U-Can All-Subjects Training and POP Kids programs.

Before I break up the data for each segment let me quickly address the seasonal effect on enrolment in the fourth fiscal quarter.

At 12% the pace of enrolment growth in the fourth fiscal quarter was moderate compared to the more than 30% growth we saw in the same period last year, so I do want to flag that this is caused by the timing of Chinese New Year.

As you well know, students tend to sign up for our spring classes after Chinese New Year holiday and after enrolling in their primary school studies.

So when Chinese New Year falls on a more traditional time period, of late January or early February, as it did this year, on February 3, the bulk of those spring enrolments are recorded in our third fiscal quarter.

But in a year when Chinese New Year falls as it did in 2010, on February 14, we record a spike in enrolments in the fourth quarter.

This means that a direct quarter-on-quarter comparison is less meaningful, but averaged out over two or three quarters enrolment growth is very healthy.

Now on to our business segments.

Looking to our Overseas Test Preparation programs, in the fourth quarter enrolments grew by 8% year over year to about 79,800 and gross revenue grew by 80% year over year.

This does not mean we raised ASPs by 72%.

This disparity is, in part, caused by the lag between enrolment and revenue recognition.

We record revenues when students actually take classes.

For some students who enrolled in classes during the third quarter, class attendance and revenue bookings occur in the fourth quarter.

So the strong revenue growth in the fourth fiscal quarter partly reflects the big increase in enrolments we saw in the third fiscal quarter.

For the whole fiscal year enrolments grew by over 23% to over 317,000 in Overseas Test Prep, and gross revenues grew by over 55% to over $166m.

Second, enrolment in our middle and high school U-Can All-Subjects Training program grew by over 36% in the fourth fiscal quarter to over 103,600, while gross revenue grew by over 70%.

For the whole fiscal year enrolments grew by about 30% to over 472,800 and gross revenues grew by over 66% -- sorry, 65% to about $116m.

Third, our POP Kids program enrolments grew by over 29% to over 134,400 and gross revenues grew by over 49% in the fourth fiscal quarter year over year.

For the full fiscal year enrolments grew by about 34% to over 581,500 and gross revenues grew by about 52% to over $77m.

We are particularly pleased by the acceptance of our new offerings for kids in mathematics, Chinese and art and music, which recorded 35,000 enrolments in fiscal-year 2011, much better than our original estimate of 15,000 to 20,000.

The success of our U-Can and POP Kids programs in the last quarter means that our K-12 All-Subjects After-School Tutoring business reached a major milestone of one million enrolments for fiscal 2011 on the back of enrolment growth of 32%.

At the same time, gross revenues grew by over 60% to approximately $193m.

In the fiscal year -- in this fiscal year we saw a slower pace of growth in the CET4 and CET6 English Test Preparation and Adult English business lines.

CET4 and CET6 Test Preparation enrolment decreased by 1% to about 384,300 and gross revenue grew by about 8% to about $41m.

Adult English enrolment decreased by about 12% to 243,300 in the fiscal year and gross revenue grew by about 15 -- 16%, to about $57m.

We have seen a gradual slowdown in these sectors over the past couple of years, not least because more students are getting a solid education in English at an earlier age, which means they have less of a need for private English classes as adults.

While we see some slowdown in these more mature sectors we have experienced rapid growth in newer business lines, such as K-12 After-School Tutoring, which more than offsets this slowdown.

In addition, there are two rapidly-growing business lines in particular that I want to highlight.

Firstly, our VIP Personalized Instruction programs which have class sizes for one teacher to a maximum of five students.

This segment is growing extremely quickly and we're very excited about the potential here.

In the fourth quarter enrolments were up over 37% year over year to 19,100, while cash revenue grew by 87%.

For the whole fiscal year the VIP segment recorded year-over-year enrolment growth of over 73% to over 63,500 and year-over-year cash revenue growth of over 154% to over $120m.

There is a huge and growing demand for more personalized services from learners in China because people are increasingly willing to spend more to get a more tailored, personalized learning experience.

New Oriental's ideally positioned here because these VIP services are, of course, more expensive than regular classes, so customers naturally gravitate toward our recognized premium brand because they understand the guarantee of quality that New Oriental offers.

Another fast-growing segment is Vision Consulting, our premier overseas consulting business, which saw revenue growth of over 119% to about $23m in fiscal 2011.

Vision Consulting offers a range of consulting advisory services to Chinese students who want to study overseas.

It's moving into a demographic sweet spot right now as a large number of Chinese families have attained income levels that allow them to send their child abroad for college or high school.

We believe that there's tremendous growth potential in this sector over the next three to five years as income levels continue to rise and more students look to study abroad.

And I think that our heritage as a leader in Overseas Test Preparation leaves us ideally positioned to take advantage of this highly attractive and lucrative market.

Finally, as you saw in today's press release, we've announced the disposal of two unprofitable subsidiaries, Mingshitang School and Tomorrow Oriental.

Mingshitang is a school for Gaokao re-takers in which we obtained a 50% equity interest in early 2008.

As part of the regular review of performance across all our facilities we made the decision to dispose of the equity interest to the principal of the school.

Out other school for Gaokao re-takers, Tongwen, is unaffected by this move.

Tomorrow Oriental is a software company that produces education software for New Oriental.

It was a wholly-owned subsidiary of New Oriental so we decided that it would be more effective for the company to operate independently, so we disposed of 100% of our equity interest to the General Manager.

We reported disposal losses of about $1.54m for these two transactions.

Turning now to the financials, the detailed financial results for this quarter and fiscal year are available in our press release, which are released earlier today.

Today I just want to highlight the most important indicators.

First, net revenue from educational programs and services for the fourth fiscal quarter were $120.4m, representing a 62.1% increase year over year.

The growth was mainly driven by the increase in the number of student enrolments in academic subjects, Tutoring and Test Preparation courses, as well as growth of over 20% in average selling price resulting from overall price increases and the fact that more students are selecting smaller, more expensive class options.

Net income attributed to New Oriental for the quarter was $14.3m, representing a 147.8% increase in the same period of the prior fiscal year.

Non-GAAP net income attributable to New Oriental for the quarter was $19.2m, representing a 113% increase in the same period of the prior fiscal year.

And for the 12 months ended May 31, 2011 net revenues from educational programs and services for the fiscal year ended May 31, 2011 was $508.4m, representing a 44.1% increase year over year.

Total student enrolments in academic subjects, Tutoring and Test Preparation courses for the fiscal year ending May 31, 2011 increased by 15.6% year over year to approximately 2,089,600, from approximately 1,807,700 in the fiscal year ending May 31, 2010.

Net income attributed to New Oriental for the fiscal year ended May 31, 2011 was $101.8m, representing a 30.8% increase year over year.

Non-GAAP net income attributed to New Oriental, which excludes share-based compensation expense and the disposal loss for the fiscal year ended May 31, 2011, was $118.4m, a 25.9% increase year over year.

2011 has been a milestone year for New Oriental despite the slow start, negatively impacted by the Shanghai World Expo last summer.

For the first time in the Company's history we exceeded two million student enrolments, $100m in annual net profit and $0.5b in annual revenue.

I would like to take a minute to travel down memory lane as New Oriental nears the fifth anniversary of our IPO listing on the New York Stock Exchange on September 7, 2006.

Let me give you just a few comparisons between then and now so you can see how far we have come and how we have built a successful track record over the past five years, five years during which we have had the same leadership, meaning the turnover in the -- no turnover in the Board, no turnover in senior management since the IPO.

Back in fiscal-year 2006 we had 75 schools and learning centers.

Five years later we have 487.

In fiscal-year 2006 we had student enrolments of 872,000.

Five years later we have 2.09 million, representing a CAGR of 19.5 -- 19.1% over five years.

In fiscal-year 2006 we recorded revenue of about $94.5m.

Five years later we achieved revenue of $558m, which is a five-year CAGR of 42.6%.

In fiscal-year 2006 we recorded GAAP net income of $6.1m.

Five years later GAAP net income reached $101.8m, which is a five-year CAGR of 75.8%.

Finally, the most important measure for investors.

On September 7, 2006 we priced our IPO at $15 per ADS, which is $3 above the mid point of the [off] filing range.

Today we trade at 8 times that, at circa $123.

That, my friends, is a successful long-term track record with the most stable experience management team in the industry.

Although past performance is no guarantee of future success, we are more confident than we have ever been in the strength and value of our household brand name and market-leading position as China's number-one education and training Company.

Moving into fiscal-year 2012 we are in an excellent position as the undisputed industry leader in Overseas Test Prep, K-12 After-School Tutoring and English language training, arguably the three most profitable markets in the fast-growing Chinese education and training market.

Looking at the next fiscal year, improving operational efficiencies balanced with reasonable expansion will be the priorities.

At the same time, we need to expand and enhance our dominant brand position by investing in content development, teachers' training programs and customer service systems.

On that note I turn to our outlook for fiscal first-quarter 2012.

We expect total net revenues in the first quarter of fiscal-year 2012, June 1, 2011 to August 31, 2011, to be in the range of $255.8m to $265.4m, representing year-over-year growth in the range of 33% to 38%.

For fiscal-year 2012 we estimate revenue growth in the range of 30% to 35% for the whole fiscal year and we plan to open a net of 80 to 100 new learning centers and schools.

Most of the new learning centers will be dedicated to Kids, U-Can and VIP courses, so will typically be smaller than the traditional mixed-used larger learning centers.

This forecast represents our current and preliminary view, which is subject to change.

Now, before I take questions I would like to make a statement on a separate unrelated topic to New Oriental.

Effective June 30, 2011 I resigned as an independent Board Director and Audit Committee Chairman of LDK Solar, New York Stock Exchange symbol LDK, for personal reasons.

During the post-earnings investor calls and meetings I will not answer any questions relating to LDK Solar.

At this point I will take your questions.

Operator.

(Operator Instructions).

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

Please proceed.

Yes, thank you and a good job on the quarter.

Thank you, Mark.

I would like to ask a question about your guidance as it pertains to margins.

With the outstanding margin leverage that we saw in the fourth quarter I'm curious how we should think about margins in the first-quarter and fiscal '12.

How much of that carries forward, given you're carrying a lower -- well, on a year-over-year basis a less number of new staff?

Yes, I think it's a good question.

I think we finished 2011 with [16.1%] gross margins and 17% GAAP fully-loaded operating margins and 20% net margins.

So I would expect 2012 to be slightly better than that.

I think we expect operating margins to be in the 18% to 19% range.

If we miss that operating margin number and there's no catastrophe it will probably be because we exceeded revenues by a substantial amount, because the fastest-growing businesses in POP Kids and VIP are slightly lower margin.

So either way it will end up being a good result.

If we miss margins it will probably be for a good reason that we're -- our fastest-growing businesses are lower margin, but that would mean that we'll beat on the EPS line.

So I would expect expanding margins especially in Q1, because Q1 last year was a disaster, so I would expect much better margin in Q1 than last year.

Remember it Mark, Q1 last year we had World Expo, also had one less week.

Because the Chinese New Year was late last year students got an extra week during winter holiday; they took that week away during the summer.

So we had really revenue growth of 29% and I would expect much better than that this year.

Great, just a follow up.

On the selling and marketing line you saw significant leverage and I think you alluded to, perhaps, a new approach to marketing now that your -- you have so many schools and learning centers in so many locations.

Having said that, I'm curious how you think about going to market in fiscal '12 and beyond.

Is there as a structural change afoot here, or can you talk more specifically about your approach?

I know I think you've talked in the past that roughly 40% or a good portion of your registrations in the larger cities do come through online.

Is there a lot of room left there to squeeze more leverage on the sales and marketing line?

Or can you give us some color on that?

It would be helpful.

Thanks.

I think, absolutely.

I think we've spent the last three years heavily marketing our U-Can program, Kids and VIP, so I think most people in China already know who we are and we're in most cities that matter.

So we will continue to market in newer cities that we open in.

But in general we'll probably focus marketing more online, more towards one on one, which is a faster growing program and also more probably nationwide campaigns.

I think at the same time the overall marketing budget -- as you saw marketing actually fell as a percent of revenue this year from last year, [it went] from 15.1% to 14.8% total.

Remember, less than half of that is actually -- actual brand promotion expenses.

The rest is actually headcount.

And so I think as -- going into 2012 you'll see brand promotion expense growing at a much slower rate than revenue you've seen the last two or three quarters.

So overall it will shift more online, the marketing, also more for nationwide campaigns, and more toward general New Oriental campaigns versus specific programs, because everybody knows now that we're the leader in K-12, we're the leader in VIP and we're the leader in Overseas Test Prep.

So it'll be just be more general campaigns.

As far as registrations online, we expect in the next few years that more than half our registrations in Beijing, Shanghai and the larger cities will be done online, which will help us to reduce staff -- registration staff.

That will be help in the leverage line.

Great, thank you.

I'll turn it over.

Thanks, Mark.

Our next question comes from the line of Ella Ji with Oppenheimer.

Please proceed.

Thanks, Louis, and congratulations on a strong quarter.

Thanks, Ella.

Just a follow up on the prior question.

Now since the initial growth investment in your U-Can and POP Kids in the last two years now is behind you, so could you talk about will there be any other major investments in FY '12 and forward that we should expect?

Yes.

For FY '12 there will be no new major initiatives.

And that's why I think is that -- that's why you can tell by the tone of our earnings release we're very confident 2012, that, barring some kind of catastrophe, it should be a very strong year for us.

And so you can see that we guided at 30% to 35%.

We normally guide much lower than that, at 25% to 30%.

So you see that we're very confident.

And that doesn't take into account any benefit from currency, so we should actually do even better than that.

But there'll be no new initiatives, Ella.

We're just going to focus on K-12, Overseas, Vision Consulting and VIP.

And at the same time, though, we will be trying to extend our best quality content by making it better, so we're going to invest in content development.

We're going to make our -- we're going to improve our teacher training program to reduce teacher churn and also to make sure our teachers are by far the best in the industry.

So our focus is on making the programs better through content and teachers and that's how we've always built our brand name.

Great, good to know.

And, switching gears, I want to talk about the decision on Mingshitang.

Could you provide a little bit more colors?

What are the problems?

Is it maybe acquisition integration or Company-specific operations, or is it relating to the Gaokao re-take Prep industry overall?

I think it's all of those, Ella.

I think Mingshitang loses about $400,000 or $500,000 for us each year, so it -- actually, maybe a little bit more than that.

So it gets rid of a loss-making operation for us.

And also -- actually, between the two they lose over $1.3m between Mingshitang and Tomorrow New Oriental -- Tomorrow Oriental, so it removes two unprofitable businesses from us.

Mingshitang got caught because it added a building the year we acquired it and then the re-takers market took a nose dive in Beijing because Beijing had a very high pass rate in 2009/2010.

And so Mingshitang has not been profitable for us since its acquisition in 2008, so we decided to -- Q4 is a good time for us to clean house, so we disposed of a couple less profitable entities.

So part is the re-taker market, part of it's the asset itself.

And the re-taker market is not a fast-growing business right now in China.

Then how about Tongwen?

You said it's not impacted, but could you just comment on that?

Tongwen it still profitable, it's still growing up in North-Eastern China, so if it's growing, it's profitable, we leave it.

Okay, good to know, thanks.

Thank you.

Our next question comes from the line of Philip Wan with Morgan Stanley.

Please proceed.

Hi, Louis, thanks for taking my question and congrats on a very strong quarter.

Thank you, Philip.

Sure.

I have a follow-up question on the margin outlook.

As the VIP is emerging as a key growth driver for the Company, could you update us how does the margin profile for VIP class compare to a non-VIP class in a relatively mature market?

And also how should we look at this trend going forward, given this strong pricing power?

Yes, VIP is a huge market and it's the fastest growing market in the education sector in China in my view.

We've gotten much better margins out of VIP the last -- every year we run this thing, so I think gross margins went from 41% to 54% year over year, this year, approximately.

So it's improving because we have significant pricing power.

So the average ASP has gone from about $1,300 to $1,900 in one year.

So I think we will continue to get margin improvement from this business, but it will -- still can't compare to one teacher, 150 students or 300 students in Overseas Test Prep, so we're still going to have lower overall margins.

The lower margin also comes from POP Kids; you didn't ask about that.

And that also is in the mid 50s as far as gross margins.

But if you look at the VIP business, Philip, below the gross margin line there's really not much expense, except for the customer service rep and some marketing expense.

So I think long term it has the prospects to be a very high-margin business with at least 20% to 25% operating margins, but shorter term it's not there yet.

Okay, understood.

And then my second question is, given the recent softness for the adult and also domestic test preparation, then how are we going to look at these two business going forward?

And any initiatives that New Oriental is going to [revamp] these two business, or just let it to be stable or [more loss making]?

I think these two businesses are very profitable for us.

They're large-class businesses, they're highly profitable but they don't require much cost, so we'll keep them.

The general market is slowing for these businesses.

We're doing such a good job in training K-12 students in English they don't need to learn it as adults anymore.

And there's another effect.

CET4 is getting cannibalized by TOEFL, which is actually good for us because we're the dominant provider of TOEFL Test Prep.

And the reason is that the Chinese market -- job market is quite competitive and so the CET4 exam, which is the English exam [required] from Chinese colleges, is not seen as sufficient any more.

A student can't distinguish himself by having a CET4 score, so many students are actually taking the TOEFL instead.

It's a much harder exam.

And so we make about $130 on a CET4 Test Prep.

We make about $700 on a TOEFL Test Prep.

So we don't mind this trend.

That's why you've seen a boom in TOEFL enrolments the last two years.

So we're just cannibalizing ourselves, which is fine.

Thank you.

And then my last question is we have seen a declining trend in terms of the test taker for the Gaokao in China and how are you going to see this affect the education business in China?

Well, we have such a small share of the market right now anyway, right?

OF the $24b After-School training market we only have $193m of it.

So I think we will continue to take a lot of market share.

We're in the first out or the first inning of this game, so we will continue to take market share.

I don't think the fact there's fewer takers will hurt us in the short term.

It may hurt us in the long term.

All right, that's helpful.

Thanks, Louis.

Thank you, Philip.

Our next question comes from the line of Chao Wang with Bank of America.

Please proceed.

Hi, thanks for taking my questions.

Firstly, just wondering how much of VIP business relates to U-Can and how much is related to Overseas business?

Thanks.

The majority of VIP is U-Can, so it's well over 50%.

VIP is now about 22%, 23% of our total revenue going into 2012, so it's gone from almost nothing to almost a quarter of our revenue.

So that's how fast it's growing.

And the dominant subject matter is U-Can, followed second by Overseas Test Prep, so, you're correct, it's part of the two categories.

Thanks.

My second question is that your fourth-quarter revenue exceeded the high end of your guidance by around 15%.

So since you provided guidance in end April, so is that mainly from the strong performance in May?

And, if so, it seems momentum is slowing down in next quarter.

Thanks.

I don't think momentum is slowing down.

81% deferred revenue growth is quite high.

And I can tell you that June cash revenues are very high.

So it's not slowing down.

I thought I'd made that very clear in the earnings release.

As far as why we beat the quarter, is that -- it's because the Gaokao is given in June so, actually, a lot of the one on one for the VIP students who came in, in Q3, so they enrolled in Q3, actually finished up all their courses before the Gaokao because they enrolled in one on one classes for the Gaokao exam.

So we saw a huge revenue spike in May as the VIP classes were finished in time for the Gaokao, which is the first week in June.

So that's why we saw a large -- we beat the quarter significantly.

I see.

That's very helpful, thanks.

Thank you.

And our next question comes from the line of Chenyi Lu with Cowen and Company.

Please proceed.

Great, thank you.

My first question is regarding the middle and high school.

I know that you talk about the POP Kids has lower gross margin.

Can you give us a view as to middle and high school including the All Subject and also the English program in terms of gross margin?

Yes.

I think gross margin is -- this area will be the second highest gross margin over time, second to Overseas Test Prep.

The average ASP in middle and high school is now over $350.

So it has characteristics of large class like Overseas Test Prep and high prices.

So I would expect gross margin in the middle and high school business to be well north of 65% to 67% in the next couple of years.

So this has the potential to be the second highest gross margin and operating margin business in Oriental, behind Overseas Test Prep.

So really that's why we're focusing on it.

Yes.

And so what is the gross margin right now for the middle and high school right now?

It's about 62% right now and it will move up as we get better utilization in the learning centers and as we continue to raise prices.

So I believe this number will go over 65%, 67%.

So the two that are really dragging that gross margin down is really Kids English, POP Kids, which is about 53%, 55% and VIP, which is 53% to 55%.

And those will also improve over time.

Okay.

And also the middle and high school also was --

It's already over 60%.

It's in the low 60s already, so it's above our own average gross margin of [50%].

Okay, great.

Thank you.

My next question; can you talk about your current school and learning center utilization rate?

Thank you.

Well, it's hard.

We actually don't have a perfect measure; that's why we don't disclose it.

Anecdotally I can tell you that Q1 is the closest we get to full.

So if you think of theoretically 75% as full capacity, because a school -- a learning center can't stay open 24 hours, or if there are some days when people are in school, theoretically, 75% is full.

During the summer we will probably hit 65% to 70% of full capacity, so that gives you a look of what happens when the learning centers are almost full.

During Q2, during the seasonally slow period, we only hit about 35%, so that's why the margins and the profit is much lower in Q2.

Q3 and Q4 we typically will be between 55% and 60% and so -- and the number has gone up at least 3% to 4% in the last year, especially the last two quarters, and that's you've seen the 350 point -- basis point improvement in operating margin.

And can you also argue that if you have more U-Can and POP Kids, right, that utilization rate during the off season will be also improved going forward as well?

That's correct.

The ironic thing is that, U-Can, the summer is not the stellar period; Q3 and Q4 are.

So it's usual.

So Q1, the summer, the biggest business for us is Test Prep -- Overseas Test Prep.

And so Q1 and Q3 is dominated by Test Prep.

Q4 and Q3 are dominated by U-Can.

And so it does smooth out our learning center and that's why you've seen over the last two or three years, as we open up the U-Can business, our utilization -- now we have three very profitable quarters instead of just one, and even Q2 is now profitable.

So you see that it has improved our overall utilization across the whole network, across the whole year.

Great.

One last question is regarding your sales marketing.

So that -- I think next year can we also say that we're going to improve -- as percentage of revenue going to improve year over year as well for fiscal year 2012?

Yes, I would expect it to go down.

It's 14.8% of revenue this year.

That includes headcount costs.

Actual promotion costs are only 7% of revenue.

So you can see that -- so it's coming down already.

But we had a business model change.

So Q1 of this year is the first time you'll get a real look at an apples-to-apples comparison with the new business model of having a 1,000 or so customer service reps.

This will be the -- Q1 will be the first year -- first time you'll see a real look at apples-to-apples comparison of sales and marketing.

Okay, great.

Thank you.

Thank you.

And our next question comes from the line of Amy Junker with Robert W.

Baird.

Please proceed.

Hi, thanks, Louis.

Can you just touch on enrolment expectations for the full year, your preliminary thoughts?

Is 15% reasonable or maybe what you're seeing so far?

Well, yes, that's a good question, Amy.

15% this year; we finished the year with 2.09m students, up 15.6%.

Don't forget we only had 9% enrolment growth in Q1.

If you take out Q1, and that was a Shanghai World Expo impacted quarter, we'll never get that back, the enrolment would have been 19%.

The enrolment was 19% last year.

The enrolment was 19% the year before.

So our historical four-year CAGR is 19% -- five-year CAGR is 19%.

So I would expect 2012, because it's off a much bigger base, to probably be in the range of 15% to 16%.

You won't see much of a slowdown from this year of 15.6%.

So we expect to add about 300,000 students over -- from 2.09m.

We should reach about 2.4m for the whole year.

Great, that's helpful.

And also, just on ASP growth, I know you've touched on this a bit in the call but, again, expectations going forward, given all the moving parts between adults, middle and high school and kids.

Where do you think you should expect to see that, given price increases and everything else?

You know that our guidance is 30%, 35% revenue growth.

So if you assume 15% to 16% enrolment growth you should expect probably 15% to 17% price increases and you'll get 33% to 34% revenue growth from that.

And I know this comes up all the time, but I'm going to ask it again.

Just in terms of the sustainability of price increases, clearly seeing strong growth in your VIP, are you -- but are you seeing any increased elasticity for demand for your traditional classroom offerings?

We still have significant pricing power.

We have restrained ourselves from using it.

So we -- it's still pretty inelastic as far as -- people will come to us because of our brand name and the only reason they won't pick us is if they can't afford it, but they'll go somewhere else.

So what we see is increasing -- as the wealth effect in China increases, like an Overseas Test Prep, it's almost inelastic.

We've been raising the prices 15% to 20% for five years with no effect -- with no virtually no effect in enrolments.

In most of our other programs the kid can find a lower-cost alternative by going to our bigger classes.

So we offer it for big classes that are affordable, smaller classes for the more wealthy and one on one for the very wealthy.

And so I see pricing power across the spectrum.

Is that a short answer to your question, Amy?

Great, thank you.

And then, last question, I'll turn it over, with respect to teacher economics.

Can you just talk about how many courses per quarter or per year, however you think about it, the average teacher will teach and do you see an opportunity for improvement there?

Where do you think that can realistically hit over time?

I think the easiest one to measure, the ones we track the most, are the one-on-one teachers because they're part time and they're so many of them.

And I think our one-on-one teachers are teaching between four and five students a quarter.

And I believe that -- so that's classes twice a week, so I believe we can reach seven or eight.

So there's significant improvement there in teacher utilization.

So I think both teacher utilization, classroom utilization and customer service reps we still have a significant slack that we can use up.

Thanks, Louis, appreciate it.

Thank you, Amy.

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

Please proceed.

Hi, Louis.

Hi, Brandon.

A couple of things on the number of centers.

Maybe if you could give us an idea of where you finished out the year in terms of the different types of centers, some expectations for next year in terms of are you going to be adding just POP Kids or maybe one on one?

And then, as you look out over maybe a couple-of-year period, how should the network of centers look in terms of, I guess what I'd call, co-locating different services you offer?

Could you anticipate each center having every type of service, or are you still going to keep Kids separate, those type of things?

I think it's moving towards the second which is keeping them more separate.

And so if you look at the migration of a typical city is that -- like Beijing, Shanghai right now we're adding small centers because we already have large centers where we need them.

And so we're only building small centers to pick up one or two high schools, or one or two elementary schools.

So they tend to be smaller, single-group schools.

If you talk about the second-tier cities, we're opening large learning centers, 2,000 square meter learning centers that are mixed use.

They have Kids, U-Can and colleges.

So it all depends on the local geography.

If there's a college, a couple of high schools and a couple of middle schools, we'll open a large mixed-use school.

If there's only two elementary schools there, we'll open just a Kids school.

So it all depends on what's in the locality as far as the make-up of the school system there.

So it's hard to say.

What I can tell you on an overall basis, we're opening up on average smaller schools and centers, especially in large cities, where we already have a big presence and we're opening up larger centers in second-tier cities where we don't have a big presence.

And also the fastest growing centers are Kids, U-Can and VIP centers and some of them are mixed use for all three, so one floor may be Kids, one floor U-Can and one floor VIP.

Okay.

And should we consider right around 50, 60 centers this coming year, or do you think it's going to be more like 70, 80 centers?

80 to 100 is what we forecast, but probably 30 or 40 of them will be small centers, so the net equivalent is about 70 or 80 larger traditional centers.

Right.

So the actual number will probably be closer to 80 to 100, but the size on average will be smaller, so it would be equivalent to a square footage out of about 80 learning centers.

Okay.

And in the VIP segment could you give us some color on the price point, comparing, let's say, a class with five students in it to one that's 10 or 20 students?

And then maybe --

Sure, I think --

If you could also compare those to what the competition might offer, especially in Beijing and Shanghai.

Sure.

In Beijing and Shanghai our five-person class costs $1,000 for 50 hours, or $20 an hour.

Our one-on-one class charge is $2,000, a little bit over $2,000, about $43 per hour.

Our competition charges about $20 to $23 per hour; it's about half of what we charge.

Okay.

Okay.

Great, thanks a lot.

Thank you, Brandon.

Our next question comes from the line of Fei Fang with Goldman Sachs.

Please proceed.

Hi, Louis.

This is Fei Fang from Goldman Sachs.

I have two questions on Catherine Leung's behalf.

Number one is what's your advertising budget plan for the summer, especially with the competition from local players?

Look at the -- I don't have the exact budget for the summer.

But for the whole year I would expect advertising to grow about 25%, whereas, revenue will grow about 35% or more.

Okay.

Okay, great.

So I think we spent about $82m or something this year, so you'd expect it go to about $100m for the whole year.

I don't know the exact breakdown, summer versus the other three quarters, I apologize.

Okay, great.

Second question is regarding your expansion plan over the summer.

To what extent has your 4Q results reflected the infrastructure buildup needed for the summer?

Well, we added 29 centers during the Q4.

So last year our mistake was adding 76 centers in Q4 and Q1.

That, plus the World Expo, plus the one shorter week, pretty much killed our summer.

So I think this year we hopefully were smart enough to learn from our mistakes; we added only 29 centers in Q4.

We'll probably add a handful of centers in Q1, but nothing like 33 like we did last year.

And so I think is that -- that's why I expect a very strong Q1.

We're a management team that's been here a long term, so when we make mistakes we try to learn from it the next year.

Okay, great, very helpful.

Thank you.

Thank you.

(Operator Instructions).

Our next question comes from the line of Eric Wen with Asset.

Please proceed.

Good evening.

Congratulations on a very good quarter.

I just had one follow-up question regarding deferred revenue.

Deferred revenue continued to grow very strongly during the quarter.

It's even setting a new high in terms of percentage of current revenue.

Can you first talk about how much -- where does the deferred revenue come from and whether it's different from the previous quarters?

And the second is how much of the deferred revenue is going to be recognized in the first quarter?

Thanks.

Yes, the $194m, the biggest bulk of that is this boom in VIP.

So these are people paying $2,000 for a class, a quarter in advance.

So that's why it's swelling up so much.

And so it's an 81% increase year over year.

It's a record high for us.

Of the $194m, I would expect about 55% to 58% of it to be recognized during this summer quarter.

So, of the $194m, I would expect somewhere between $110m and $115m to actually come into this quarter.

So we'll likely start this quarter with over 40% of our revenue in the bag.

Thanks.

Okay.

(Operator Instructions).

Our next question comes from the line of [Jessica Zhang] with Flowering Tree Investments.

Please proceed.

Hi, Louis.

Hi.

I got one question regarding our ASP trend during our fourth quarter.

Our top line grew 58.7% and our enrolment, if I'm not mistaken, it's 11.9%, so I guess our ASP grew about 40%.

No, that's not correct.

I think you mentioned a little bit --

Yes, that's not correct.

I want to correct that.

Because the enrolments are timed based on when a student enrolls, so we didn't have that many students enroll in Q4 because they all enrolled in Q3.

The revenue is different.

The revenue is recognized as classes are delivered, so you get a disconnect.

So the actual price increases for the Q4 was actually about 23% for the actual --

Okay.

So the students who enroll this Q4 actually paid on average 23% more than they did last year.

But most of that is because -- probably 8 percentages of that is because of the shift towards smaller classes.

So apples to apples prices probably went up about 15%.

I understand.

And, Louis, what is the percentage of the total revenue coming from VIP for the first quarter -- fourth quarter [last] year?

The fourth quarter, well, it's increasing, so it's up to about 23%.

I would expect VIP to become about 24%, 25% of our business in fiscal-year 2012, which is a big chunk, right?

It's a $120m now.

If we do $750m odd next year, a quarter of that means that it's going to be $180m to $200m -- almost $200m.

So that --

Right, right, right.

[Becomes a] very big business.

Absolutely.

Sorry, Louis, I was wondering for the fourth quarter do you have the number in terms of percentage of VIP contribution to the revenue for fourth quarter?

VIP, I can look it up if you really want it.

VIP contribution to -- VIP revenue in the fourth quarter was about $35m.

So, of the $137m, it accounted for one in -- you do the math.

$35m divided by $137m.

Right, okay.

But that was unusually high, to account for 25% of the revenue, only because that's the quarter that everyone used up their -- because of the Gaokaos in June, so that was the cram period.

So that was unusually high.

Right.

But you're saying next year we're looking around 25%, so it's similar --?

[I say that after] every quarter, so -- this is a business that's rocketing.

We went from $10m to $47m, to $120m in two years.

That's how fast this business has grown.

Right, right.

Great, great.

Thank you, Louis.

Thank you.

(Operator Instructions).

We have no further questions at this time.

I would now like to turn the call back over to New Oriental for any closing remarks.

Again, thank you for joining us today.

If you have any further questions please do not hesitate to contact me or any of our Investor Relations representatives.

Have a good day.

Thanks.

Thank you for your participation in today's conference.

This concludes the presentation.

Everyone may now disconnect.

So have a great day.