New Oriental Education & Technology Group Inc (EDU) 2012 Q1 法說會逐字稿

Good evening, and thank you for standing by for New Oriental's first quarter of fiscal year 2012 earnings conference call.

After management's prepared remarks, there will be a question-and-answer session.

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

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

Hello, everyone, and welcome to New Oriental's first quarter of fiscal year 2012 earnings conference call.

Our financial results for the period were released earlier today and are available on the Company's website as well 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 1995.

Forward-looking statements involve inherent risks and uncertainties.

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

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

Thank you, Sisi.

Hello, everyone, and thanks for joining us.

I'll start today with an overview of the business highlights from the last quarter and then quickly review some of the key financial indicators.

We're starting the fiscal year on a really strong footing, with an exceptional set of results for the first quarter.

As you know, over the last few quarters we have set ourselves the challenge of striking the ideal balance of increasing profit while continuing to invest for growth, and I think our results for the quarter really speak to the success of achieving the right mix.

New Oriental continues to grow at a stellar rate, with revenues increasing by 41.4% year over year to $272m.

Combined with this, our efforts to control spending continue to bear fruit, enabling us to increase net income by 45.8% (sic -- see press release) to $90.7m.

At the same time, we recorded improved gross margin of 65.9%, up 40 basis points, and a very healthy operating margin at 34.8%, up 50 basis points.

For the last 12 months, our results are very impressive, with revenue growth of over 48% to over $637m; enrollment growth of approximately 17.6% to almost 2.2m students; GAAP net income growth of over 58% to over $130m -- sorry, 56% to [$130m]; GAAP net profit margin of about 20.4%; and non-GAAP net income growth of approximately 48% to over $148m; and finally, non-GAAP profit margin of 23.3% over the trailing 12 months.

Underpinning these excellent overall performances were really strong results across each of our key business segments.

Overseas test preparation programs recorded year-over-year enrollment growth of more than 19% to about 107,800 students, and year-over-year gross revenue growth of over 48% to over $92m.

We continue to see particularly strong demand for our TOEFL, IL, GRE, GMAT and SAT test prep classes.

The K-12 all-subjects after-school tutoring business recorded year-over-year enrollment growth of more than 24% to over 436,600 students, and year-over-year gross revenue growth of over 50% to over $94m.

This is particularly heartening given that the summer quarter is not the peak season for K-12 all-subjects tutoring.

Rather the six months before the Gaokao and Zhongkao tests, which are administered in June of each year, namely the winter and spring quarters typically are stronger K-12 and test prep demand -- sorry, test prep tutoring demand.

And, once again, we see very rapid growth in our VIP personalized classes.

Year-over-year enrollment growth increased more than 46% to about 21,200.

And year-over-year cash revenue growth was over 65% to over $42m.

Finally, our Vision Consulting Overseas Study Consulting business had another great quarter, with year-over-year gross revenue growth of approximately 110% to $13.4m.

We are extremely pleased with the rapid growth of our smaller class size offerings, particularly in the VIP sector.

These are premium offerings at a premium price so our ability to get traction here quickly really speaks to the strength of the New Oriental brand and the high quality of our courses.

I want to highlight though that these smaller classes obviously have lower margins.

So as our product mix shifts, our overall operating margins will be negatively impacted.

In addition, as Beijing and Shanghai are now less than 50% of our revenue, many of the other schools as a whole are growing faster than Beijing and Shanghai, our margins will also be negatively impacted as Beijing and Shanghai traditionally have enjoyed higher growth in operating margins.

These negative impacts can be offset in large part over time by higher ASPs, higher learning center utilization rates and economies of scale advantages that New Oriental enjoys.

While we continue to emphasize the importance of expense control, I want to make clear that we are very committed to investing in our existing business and taking advantage of growth opportunities, in particular in several young and fast-growing markets in the K to College area.

In the last quarter, we continue to invest in four major areas that we believe will position New Oriental for continued success.

First, let's look at the network expansion efforts.

It's important to remember that with our after-school programs, overseas consulting services and online education offerings, we are operating at relatively new -- in relatively new but hugely promising markets.

New Oriental is in 49 cities right now, but we have to remember that China has over 200 cities with more than a population 100 -- above 1m inhabitants, where incomes are growing quickly and more and more people are looking to expand their supplemental education options.

So it's really -- we have just barely begun to scratch the surface of this addressable market.

As we look to capitalize on this, we are cognizant of the fact that being an early mover and achieving scale quickly creates high barriers to entry advantages.

This is a highly competitive market environment, so we continue to open new centers in attractive markets to ensure that we stay ahead of our competitors.

Over the last quarter we opened two new schools in the cities of Tangshan and Urumqi, along with a net of 20 learning centers in about 15 existing cities.

That gave us a total of 55 schools and 433 learning centers in 49 cities as of August 31, 2011.

Let me just note that this number excludes the one school and 20 learning centers that we acquired from Newave Education in September 2010.

Just in case you missed the discussion in the earnings release, we've taken legal action against Newave, claiming breach of contract, and will update you on proceedings as and when appropriate.

Looking forward, we plan to open around 100 to 110 new learning centers this year.

Most of the learning centers will be dedicated to Kids, U Can and VIP courses.

So it will be typically be much smaller than traditionally multi-use learning centers.

The second area of investment I want to highlight is a very exciting new initiative, an entirely new product offering call Maxen.

Maxen provides intensive after-school training courses targeting students four to 17 years old and with eight to 15 student class format sizes, modeled closely after the US and UK education system.

In essence, with Maxen we are offering the best of both worlds; students can get an intensified US standard English education in a US standard learning environment, but one doesn't have to leave China.

Currently we're offering English language courses for one.

Over time we expect to add modules in other subjects, such as math, world history and government and others, to round out the learning experience and help Chinese students become truly bilingual, bicultural global citizens.

Maxen is aimed at two audiences in particular.

The first group of kids who are planning to study abroad, either for high school of university, by taking Maxen programs before they go abroad, they can ensure that they have both the language skills and the cultural competence and awareness to compete with their international peers.

The second target group is kids who want to really master the English language and who are looking for the best possible learning environment to achieve that.

I'm not talking about simple Mickey Mouse English training.

Maxen is an intensive, rigorous, very high-quality program that produces students who are completely comfortable, both linguistically and culturally in Chinese and English-speaking environments.

Today we have five Maxen centers in four cities across China.

They're very high-end facilities with top-quality teachers, audio video and IT equipment systems and the best in world class course materials.

We're very excited about Maxen because we believe that parents are looking for programs like Maxen to help train their kids to be productive, savvy, employable graduates who can function seamlessly in a bilingual and bicultural manner.

As a result, an international standard education is increasingly seen as a vital asset in China's highly competitive jobs market.

So as more families reach for income levels where they can afford to give their students a better education, we expect demand for Maxen program to grow quickly.

Also Maxen dovetails perfectly with our existing overseas test prep and overseas study consulting businesses.

These are obviously synergies and cross-selling opportunities here and we expect to see the benefits from that.

The third area of investment that I would want to flag is Dajie.com.

Last quarter we made an investment of $2m for a 5% equity stake in Dajie.

Dajie is a recruitment website targeting Chinese college graduates.

It was started in 2008 and has about 8m registered users with about over 10,000 company corporate customers.

Much like Maxen, there are substantial potential synergies for New Oriental and Dajie.com, especially when you consider how engaged we are with college students nationwide through our language and test prep courses and materials.

And finally, in terms of investment, I want to stress how important we believe it is to continue devoting resources to teacher training and course development.

We build an unrivalled reputation as the premium education brand in China for K to College and this enables us to charge a premium price for our products.

But this is a competitive market and we need to keep working hard to ensure that we stay out in front.

So last quarter we continued to increase investment in teacher training programs, curriculum and materials development and K-12 classes to ensure that our content is to provide the very best product offering in the market.

Before I move on, I'd like to spend a couple of minutes to talk about overall enrollment, which grew by 14.6% year over year.

The picture here is very healthy, but I do want to stress three underlying issues that hampered overall enrollment growth and prevented this picture from even being brighter.

First, as you know, the summer quarter is traditionally not the peak season for our K-12 classes.

Most students sign up for courses in fiscal Q3 and Q4, the winter and spring quarters as they get closer to exam time.

So we usually see the strongest growth in new K-12 enrollments in the second half of the fiscal year.

Second, we have continued to see a decline in enrollments for our adult English classes in the first quarter, with enrollments declining 12% year over year to approximately 97,200.

As I mentioned in the last quarter call, the overall market for adult English education in China is gradually slowing, so we expect this gradual decline in enrollments to be a long-term trend.

Young people are getting better English education in their schools and, of course, they are getting top-quality after-school training at New Oriental learning centers as well.

So looking down the line, down the road, there will be fewer adults needing English instruction because they will have already reached a proficient English level by adulthood.

This is not necessarily bad news though because we are actually benefiting from the fact that these people are joining our classes at a younger age and are staying in our system much longer.

And the third factor affecting enrollments this quarter is an unexpected drop in registrations in the Northeast region for New Oriental.

We've observed in the cities of Harbin, Dalian, Shenyang and Changchun several -- overall enrollment has dropped by 18% year over year to approximately 59,400 in Q1.

We've pinpointed some management issues as a root of the poor performance so we recently replaced the school heads in each of the four cities and we're working very closely with the new management to get things back on track.

It will take a little time to build momentum, of course, but we've got good people in place and the senior management team is paying a lot of attention to fixing this problem.

So we're hopeful that we'll be able to turn things around quickly.

Before I turn to the financials, let me quickly say a few words about the macro environment in China, because this is one area we have been getting a lot of questions from investors.

There seems to be a lot of discussion about a potential economic slowdown in China, and certainly there are plenty of economic challenges facing both China and international markets.

But what I can tell you is that as of this time, New Oriental's business continues to be very healthy and we do not see signs of a retrenchment.

As evidence of this, I can point to our deferred revenue balance, which stood at $175m as of the end of August.

That's an increase of 74% from the year-ago period.

I also want to highlight here the education spending is traditionally much more resilient than other discretionary spending items -- categories in China.

During the last downturn in China caused by the financial crisis in 2008 and early 2009, New Oriental actually continued to experience very robust growth, with revenue growth of approximately 46% to $292m for our fiscal year ending May 2009.

So we are very confident in the medium- to long-term outlook for our business.

Turning now to the financials.

The detailed financial results for this quarter and fiscal year are available in our press release, which was issued earlier today.

So I just want to highlight the most important indicators.

Net revenue from education programs and services for the fiscal first quarter were $251.9m, representing a 39.3% increase year over year.

The growth was mainly driven by increase in the number of student enrollments in academic subjects, tutoring and test preparation courses and higher average selling prices resulting from price increases and students selecting more expensive smaller class options.

Total student enrollments in academic subjects, tutoring and test preparation courses in the first quarter of fiscal year 2012 increased by 14.6% year over year to approximately 807,700 from approximately 704,500 in the same period of the prior fiscal year.

Sales and marketing spending remain under control, rising just 22% to $28.5m, or just 10.5% of revenues, down from 12.1% in Q1 of last year.

In fact, direct promotional expenses increased just 17% to $15.1m or just 5.5% of revenues, compared to a revenue growth of 41.4% for the quarter.

General and administrative expenses for the quarter increased by 52.8% year over year to $56m.

This is in part due to headcount increases as a result of expansion in our network and as mentioned earlier, as well as the fact that this summer we had more temporary staff onboard working in our summer camps on summer programs than ever.

I'll also add one point here is that for the G&A expense, we actually accrued almost all of the management bonuses for the whole year during the second -- during the fiscal quarter for the summer, so that means that for the rest of the year there won't be much accrual left.

So basically we paid for the rest of the bonuses in Q1.

Net income attributable to New Oriental for the quarter was $90.7m, representing a 45.5% increase from the same period of the prior fiscal year.

Non-GAAP net income attributable to New Oriental for the quarter was $97.5m, representing a 44.9% increase from the same period of the prior fiscal year.

On that note, I turn to our outlook for the second fiscal quarter of 2012.

We expect net revenue to be in the second quarter of fiscal year 2012, September 1, 2011 to November 30, 2011, to be in the range of $124.4m to $129.1m, representing year-over-year growth in the range of 30% to 35%.

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

At this point I will take your questions.

Operator?

The question-and-answer session of this conference call will start in a moment.

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

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

Your first question comes from Chenyi Lu from Cowen and Company.

Please ask your question.

Thank you.

I have a question regarding the G&A.

This quarter it's been really high, so can you give us a view in terms of the G&A sense for this year, and also overall operating margin?

Thank you.

Sure, Chenyi.

I think our operating margin for the quarter was up 50 basis points, year over year.

The spending was high, for the reasons I mentioned.

It is that we have invested heavily in some new programs, like Maxen.

Maxen, each learning center costs over $400,000.

It will take two years to be profitable, so that's already $2m that we have already put in, in the last couple of quarters.

Other investment is that we have invested heavily in teacher training resources.

So, in order to maintain our advantage over our competitors in teacher quality and content quality, we have expanded our teacher trainers from 50 to 150 teacher trainers, so we're really taking teacher training very seriously.

In addition, our content management staff -- we want to make sure we have the best K-12 content in China, and a lot of that is self-developed.

So, that number we had carved back to about 180 over the last couple of quarters, we have now raised that back to 280 people.

So this is an investment in the long-term success of New Oriental, because we must have the best content and the best teachers.

And finally, investment, we -- because the quarter was so strong profit-wise, I thought it prudent to go ahead and take a lot of the management bonus allocate -- accruement now instead of spreading that over the full year.

And so most of the management bonuses which aren't paid out until next June have already been accrued in this quarter.

So, without those type of charges the G&A margin would have been much higher, and then the operating margin would have been what you guys probably have modeled, which is 36% to 37%.

So there is nothing wrong with our business.

It's just that we thought it prudent, given the profits and the revenue were so strong, that we take some of the expenses now.

And, Louis, what's your view for the G&A margin, going forward?

(multiple speakers).

Well, I think the margin for the year, we have predicted net GAAP operating margin of 18% to 19%.

I think we'll still get to the lower end of that, about 18%, 18.5%, so I don't think we're off track on that.

Okay, great.

Thank you.

Thank you.

Your next question comes from Philip Wan from Morgan Stanley.

Please ask your question.

Hi, Louis.

Thanks for taking my question.

I have a follow-up question on your G&A expenses.

You mentioned that part of that increase was due to the investment in Maxen.

Could you share with us do you have any budget, or the investment for this year, for Maxen?

For example, how many cities do you want to venture into?

And your updated CapEx budget for this year.

Thank you.

Yes.

For Maxen, for the rest of this year we expect to open a couple more centers, so we'll be at seven or eight centers by December of this year.

And then the investment of each one is about $400,000, so we'll spend another $800,000 to $1m.

Also, the current operations will continue to lose a little bit of money, so, in the second -- most of the new centers, by this time next year, will be profitable.

So we need about a couple more quarters of heavy spend in this area.

Right.

So, I remember last quarter you mentioned that this year, for CapEx, it may be about $30m.

Are we expecting more of that?

Yes.

I would expect CapEx -- that was before we decided to go into Maxen.

Sure.

So I would expect that number to be $35m to $38m for existing centers and new centers.

Now that doesn't include if we decide to buy buildings or we go to new initiatives.

That also doesn't include the equity investment in Dajie.com and things like that.

I see.

Sorry, last question from me.

What is the expected gross margin or operating margin for the Maxen centers?

For the next when?

For the Maxen learning centers.

Well, Maxen, we're working on it now.

I don't like to give that number because it's a work in progress.

I can tell you we used to be eight to 15 students per class.

Right now we have about 250 enrollments already.

They pay about $1,500 to $2,500 per year.

And so the breakeven, or profitability, for each learning center is about 18 months to two years, or a little bit longer, because there's heavy investment up front in super-high-end audio-video equipment and things like that.

So that's the business model.

But you have to remember that the market opportunity here is huge.

The number of Chinese students who want to study abroad -- our SAT business is growing at 50% to 80% a year.

So we are -- soon there will be over 100,000 Chinese kids who want to study abroad for high school or college.

And they need to take English very early.

So we're talking about multi-year and New Oriental has, we believe, the best offering in this space, by far.

We eventually will teach not just English but mathematics, as well as world politics and history, to give them a global view.

And the second group is just parents who really don't want just a Mickey Mouse English program, just a simple -- kids playing around.

They want a serious English program for multi-years for their children, and Maxen meets that need perfectly.

So I think it's going to be quite a fast grower.

It's going to grow very rapidly but it needs time, just like U Can did.

It takes a couple of years.

All right.

Thanks, Louis.

Your next question comes from Eugene Yeoh from Deutsche Bank.

Please ask your question.

Hi, Louis.

It's Eugene.

Just wondering if you can elaborate on the problem in the Northeastern part of China a little bit more.

Is it something that's specific to New Oriental, or is it something that's pervasive within the industry?

Thanks.

I think it's specific to New Oriental.

We've had some management issues here for a few years now.

We had -- we did make a mistake.

We had -- one of these four schools was doing very well, so we thought the School Head was so good we moved him to a different school.

He didn't do as well in that second area.

But we have had problems in this region for a couple of years now, so, over the last couple of quarters, we've actually replaced all four of these School Heads.

And, as you know, it takes us time to fix these problems.

A new School Head will usually take one or two years.

And so the decline last quarter was actually much more pronounced than we thought.

We don't have a very strong competitor in this region, so this is really just an execution issue within New Oriental, and we're working hard to fix it.

But, Eugene, you've always known, and I think most of our investors know, that the biggest challenge we face is finding good School Heads, and so that has always been our biggest challenge.

Yes, thanks.

Your next question comes from Mark Marostica from Piper Jaffray.

Please ask your question.

Yes, thank you.

Louis, I wanted to ask you about the trend that you saw with respect to learning center utilization in the quarter, and if you could give us a sense of how that utilization looked at your UK-En centers as well as the other centers as well.

That would be helpful if you could.

I think our utilization continues to improve, Mark.

But, as I said in the call initially, the summer is not the peak season for middle and high school, because your students will take a break after studying for the Gaokao and Zhongkao in June.

And so I think, as -- the summer is more a test-prep season and an English language season than an all-subjects middle high school season.

But the utilization ramps up fine.

Obviously, we have some issues in the Northeast.

Shanghai is not growing as fast as I would like.

Beijing is doing exceptionally well.

So it's a mixed bag across the different regions.

Most of our cities are doing exceptionally well with demand well above expectation, but then there is other cities that are lagging.

But if you put it all together, demand remains on track, I would say, except for the Northeast region.

And then a follow-up question on ASPs.

Can you give us a sense of what ASP increases you have seen and what you expect ASP increases to look like for the rest of the year?

ASPs for the quarter, blended, were up about 22%, year over year, so it's about $285 per course now.

ASPs in the VIP sector were up 15% year over year.

So we still have a lot of pricing power, but we raised prices in the Kids area and it probably impacted demand a little bit.

We didn't get the exceptional growth that we typically expect.

And so we raised prices about 18% in Kids this last quarter.

So we are cognizant of not raising prices too fast too soon.

But in the test prep area we have significant pricing power.

In the Kids area, probably less.

In the VIP area, we believe we have significant pricing power as well.

So we will begin to use it, hopefully, judiciously.

We don't want to raise prices too fast.

Thank you.

Your next question comes from Catherine Leung from Goldman Sachs.

Please ask your question.

Hi.

I was wondering if you could elaborate on where you think you are in terms of investments for the VIP personalized business?

I think we're early, Catherine, which is -- the demand for this VIP business is exploding in China, so I think we're early.

That's why I said that, of the learning centers, the 100 to 110, probably 20 or more of those will be just VIP centers.

So, we're seeing explosive demand for one-on-one to one-to-five tutoring, so we're very early.

When you play these learning centers out, they actually become quite profitable.

So, after two or three years they easily have over 20% operating margin.

So it's just that because we have such a large number that are new, the overall margin is still 115% right now, but, when you have a big base of three year old or older VIP learning centers, they're going to be very profitable.

I think the picture here is gross margins over 60% and operating margins over 20% in this sector.

Has there been anything in -- whether it's just competitive dynamics, or the strength of the VIP demand, has anything changed over the past three months that would have led you to change your expansion or investment plans for the remainder of the year?

No.

Actually, in the VIP sector we're actually opening up a lot more centers than we wanted to, and that's why you saw me increase that number from 80 to 100, this time, to 100 to 110.

So I think the VIP remains quite strong across the country.

I think we're in a little bit different position than our competitor in this space.

I think our competitor built a lot of centers before the IPO, just everywhere, and now they're having trouble filling them.

Ours is different.

We didn't build enough centers, so now we're struggling to catch up with centers to make sure we have good coverage in the major cities.

So we were strategically a little bit different.

Thank you.

Your next question comes from Amy Junker from Robert W.

Baird.

Please ask your question.

Good morning, Louis.

I just wanted to follow up on the teacher training.

I'm wondering if you could provide a little more color on what drove the decision to invest more there?

Were you seeing a dip in student-teacher satisfaction scores?

Is there anything --?

No, not at all.

I think it's that we made -- new Oriental succeeds by not taking a short-term view.

So we know that every year we need a net of 3,000 to 3,500 new teachers.

And, in order to do a good job in doing that, we need a lot of teacher-trainers, a lot of teachers' teachers.

And our -- 50 or 60 just wasn't enough.

So we realized that, in order to maintain the quality across the whole country, and in addition to our video teaching system, we really needed to improve the course materials and the teaching training system.

And it also helps retain teachers as well.

And so we've tripled the size of our teaching -- training staff in the last year, to make sure that they continue to provide the best teacher-training for teachers, provide the best course materials for our students.

And also to maintain ongoing teacher retraining, to make sure that they're current in their studies.

And also to make sure the teachers are happy.

So we've basically almost doubled our content management staff again, from about 150 to 170 all the way to 280, approaching 300.

And we've increased our teachers' teachers from 50 to 150 in the last couple of quarters.

I think this is, long term, what we need to do to make sure our content and teachers are the best in China.

Thank you.

And can you just remind us how many courses per quarter or per year the average teacher teaches, and where you think that could ultimately go over time?

Is it at the right number where it should be now?

Well, for the one-on-one teachers, which is the metric that has been out in the market, our teachers teach about five students a quarter, and they can potentially teach seven or eight.

So I think there's still slack there.

But the issue is, as we ask students to pay a premium for New Oriental, we must give a higher level of service.

We must have better content and courses.

We must have better teachers.

And so we're doing that by investing in training and in content.

Great, thanks.

Yes.

So I don't really care if they teach five, or they teach seven or teach eight.

Yes, we'll make more money if they teach eight, but they also may become too tired.

So our key is to make sure -- is to have constant monitoring of the teachers, to make sure that the students are happy in their courses and are learning the materials and are reporting that their teachers are doing an excellent job.

Your next question now comes from Ella Ji from Oppenheimer.

Please ask your question.

Thanks.

Hi, Louis.

A few follow ups.

First, how much does Northeast cities represent (technical difficulty)?

Northeast what?

Can you repeat the question, Ella?

Sorry.

How -- can you hear me now?

Yes, go ahead.

How much do the four Northeastern cities represent, as a percentage of your revenue?

The four cities in the Northeast, if I look at them now, they were -- hold on a second.

They were about 5% of our total revenue.

Okay.

But their enrollments went down, from 72,400 last year to 59,000 this year.

I expected them to rise, so they should have done over 80,000 enrollments and instead we got 59,000.

That 20,000, 25,000 delta is most of the problem.

All right.

So the revenues for the quarter were about $13m out of $272m, so they were about 5% of revenue.

Okay, thanks.

Okay.

And I missed a bit of your early part of comments.

I have a question about your VIP revenue.

It represents about 15% of your total revenue for this quarter.

It's a little below your last year's 20%.

No, our VIP revenue was $42m -- yes, out of $272m.

That's correct.

Right.

It's a little -- 15%, it's a little below the 20% for the last year.

Is it just the seasonality, or is there anything --?

Seasonality.

Don't forget the summer is the peak season for overseas test prep, right?

Right.

So VIP revenue was up 65%, year over year.

It actually outgrew everything else.

So it's just seasonality --?

Right.

So that's the seasonal factor.

Right.

Recently, we've heard that the competition in the VIP market is more intense than ever, and there is competition coming from not only public but also some private companies.

So, could you elaborate on that?

Is it going to change any of your operational strategy for the year?

Well, no.

I think we just need to stay ahead of everybody else by having better teachers and better content.

That's why we're investing in it.

We haven't seen a slowdown, right?

Our enrollments were up over 46%, year over year.

Our revenue is up over 65%, year over year.

We face intense competition in all our business segments.

I don't think VIP is anything different.

And I think, for us to continue to have very high growth in this area, -- we took a business that was $3m four years ago, and this year it will be very close to $200m, just five years later.

So we don't see a slowdown in this area.

Okay, great.

Thank you.

Your next question comes from [Tom Dill] from William Blair.

Please ask your question.

Hi, Louis.

Hi, Tom.

How is your market share in IELTS going?

I don't have the exact number, but our IELTS enrollments were up 19% and revenue was up -- let me see here -- for the quarter, enrollments were up 19% and revenue was up 55% in this area.

So I think we do what we always do, we take share.

So I don't know what it is, but it's well over 20%, probably almost 25% of the total market for IELTS now.

And we are by far the highest in revenue in IELTS.

I know that Global Education says they are, but that's because they have -- 90% of their revenue is from franchisees.

But I think -- we are all self-owned.

And our revenue from IELTS in the quarter was almost $20m, just from one quarter, so it's growing rapidly.

The enrollment growth was 19%.

The revenue growth was 58%.

So we haven't seen a slowdown at all.

We've seen an acceleration.

Okay.

And then, is there an opportunity to consolidate the overseas consultant base?

I don't need to buy something where I've already beaten them.

The time to consolidate was three years ago.

Got you.

All right, thank you.

Yes.

Your next question comes from Chao Wang from Merrill Lynch.

Please ask your question.

Thanks for taking my questions.

Just, Louis, how do you see the competition from international school on your overseas test preparation.

And will New Oriental expand into that area?

Thanks.

From international schools?

What do you mean?

Do you mean Kaplan?

Yes.

No, no, no, I mean international boarding school.

We have one in Beijing.

We have an international boarding school in Beijing.

I think they are two different businesses, right?

What a lot of -- our Maxen program is not a boarding school.

It's not a degree-granting school or anything like that.

So I think what we're trying to do is -- we believe there is a new market in China for parents who want truly bilingual, bicultural, children.

They don't want their children moving to the US when they're 10 or 11 for junior high.

They want to wait until high school or college, but they want to make their children prepared to go overseas.

They don't want to go to international school in China, either, because in these schools the children don't learn Chinese well enough.

So I think it's that there's a -- it creates a market, and a big market, for families who want their children to grow up in China, to be Chinese-educated, but to be very competitive in English and world history and things like that with their international peers.

That's what we offer.

Our overseas test-prep business is not really affected by international schools.

They don't have -- they can't hold a candle to us.

As far as SAT, we have probably 70%, 80% of the market in China.

And then, for obviously TOEFL we're 70% or more.

In GRE, GMAT, it's very similar.

So I don't think we -- we faced the threat from international schools for 15, 20 years, also from Kaplan and Princeton Review, but none of them can really hold a candle to our market share.

If more students go to international board school, the demand for your overseas test preparation program would be weakened?

And also --.

It would be strengthened, because, for them to go to international boarding schools, they have to take the SSAT, they have to take TOEFL Junior, they have to take the SATs.

Those are everything we provide.

And they're going to want to take Maxen before they go.

You don't just go to an overseas school without English experience or without English training.

And so what we're doing is, -- we don't care what age they go, they're going to spend several years in New Oriental before they go.

Okay.

Right, thanks.

Don't forget, we're helping them to go overseas.

We're not competing with the overseas schools; they're our partners.

The more demand that international schools create in China, the better for us, because those Chinese students don't just walk -- don't go to those new schools without any English experience or without any experience about world history.

What we want to do is we want to be that bridge.

We want to make sure that, when they get to the -- we want to help them take the test prep, apply to those schools, and when they get in, they're well-prepared to take on the challenges of international curriculum.

Okay, I understand.

Your next question now comes from Jennifer Childe from Credit Suisse.

Please ask your question.

Hi, Louis.

I have a question about the enrollment momentum with regard to English and non-English subjects, in terms of European POP.

And my second question is, I saw that your online paid users numbers have been declining from 2010 to 2011.

Can you share with us your strategy in terms of the online segment?

Thanks.

Yes.

I think the paid users have been coming down a little bit, but the revenues are way up.

So the revenues went from CNY13m to CNY25m, so the revenues are up 90% year over year.

Yes, but the registered number -- the registered users are going up, but paid users, actually, are going down.

Correct.

But the paid users are paying more money.

So what I'm saying is that the revenue from our online programs went up 90% year over year, to CNY25m, so over $5m, last quarter.

So, what we're trying to do is offer higher-priced, higher-quality content to the paid users.

So, that's our strategy.

You can't make a lot of money, even online, at $30 per class.

You have to be closer to $80 to $100.

So we're saying, well, we'll lose the low end and we'll pick up the high end, and that's what we're doing across our programs, right?

You look at our English programs.

We're losing the low end and we're picking up the high-middle end and the high end, so that's just part of our overall strategy.

As far as our English enrollment for the quarter, kids in middle school are doing just fine.

Adults is slowing, as we mentioned already, and that's normal.

Our other subjects are doing very well, so our math, physics, chemistry, biology, are doing very well.

Can you give some numbers?

Well, we gave it.

The enrollments were up 24%.

The revenue was up over 50% for the year -- year over year.

Now, don't forget that summer is not a peak season for that, so the numbers were actually quite good.

Sisi can give you the specific breakdowns.

I don't want to have to take a lot of time doing that here.

Okay.

Can I ask one more question, about Maxen?

Sure.

Can you tell us about the rationale behind the Maxen?

Is that like the VIP shop for POP?

It's the high-end POP.

So we -- don't forget we have POP, which is for middle-class and for upper-middle-class families.

It's very serious English.

And then we have the VIP, which is one-on-one.

That's the gold standard, right?

But we didn't have something in the middle.

This was the program that we were considering going into partnership with Disney four years ago, four or five years ago, before the IPO -- actually, five years ago now, -- where it was for seven to 12 people -- young kids, and then they learn English with classrooms that have audio-video blackboards, right?

So it's very high-end content.

It's spectacular.

And so this is the business we have been looking into for a while, because we had a hole in our product offerings.

But we decided that English is just not enough.

Parents want not just serious English, speaking about English grammar, but also they want math and world geography and history and things like that.

So we're beginning to put together a course offering after school that helps meet the needs of these parents who want their children to be completely bilingual and bicultural.

So that was the genesis of Maxen, that there was a part of the market for kids English that we weren't addressing well.

We addressed the middle class and the high-end and one-on-one VIP English, but we didn't get these seven to 15 person classrooms.

Okay, got it.

Thanks.

Your next question comes from [Dou Yin Chung] from Nomura Securities.

Please ask your question.

Hi.

Thanks, and congratulations on the awesome quarter.

I'm just wondering if you can elaborate a little bit on your headcount for the quarter, the divide between support staff and teachers, as well as for your full-time and part-time?

Okay.

I've got to find the sheet.

For the quarter -- we finished the quarter at 24,500-and-change people, and that was up from -- last quarter we had 22,000.

So we added 2,000 people in the quarter, 2,300.

But 1,000 of them will come off, so they're the temporary workers we talked about.

So, more than 1,000 will come off, but then we'll hire some more people in Q2 so the number will probably stay relatively flat.

As far as teachers go, we have 13,500 now, up from 11,700 last quarter, so we've added 1,800 teachers in the last quarter.

That's why we need to keep training more teachers.

Of the teachers, let me see -- of the teachers, part-time teachers were 7,100, right, and full-time teachers were 6,300.

Great, thank you.

Okay.

So, like I said, that was -- when I talked about G&A expense, it blew out because we had -- our summer programs are very popular and we had to hire a lot of -- more than usual temporary workers.

I see.

And so a lot of them -- so it took the headcount to 24,500.

1,000 or more of them will drop off this quarter.

I see.

But because of continuous hiring teachers for the winter in the spring, the numbers will probably stay about the same.

I see.

So in the -- (multiple speakers).

Sorry.

But it's a big improvement over last year.

We had 3,800 during the summer, so it's really better.

Winter and spring do you also expect to hire temp teachers?

Or is that just for (multiple speakers).

No, winter is probably more.

The summer is -- a lot of them are for summer camps and things like that, and so it's --.

Okay.

So we actually have them -- and so the good thing is we hire them on a temporary basis, which is good.

The winter and the spring we need more teachers, because that's the peak season K-12 for (multiple speakers).

Okay.

And that's going to be permanent?

Yes.

Okay, got you.

Thank you.

your next question comes from [Jessica Zhang] from Flowering Tree Investments.

Please ask your question.

Hi, Louis.

Hey, Jessica.

Hi.

I've got a couple of questions.

Yes.

Louis, can you talk about -- just to follow up over the last question -- can you talk about what is our full-year guidance for the total number of teachers you will hire this year, and also the total number of staff you plan to hire this year?

I don't have guidance.

I've never provided that kind of guidance.

But, if I'm at 24,500, I should probably be close to 28,000 by the end of the fiscal year is my top-of-my-head estimate.

For teachers.

If we had 13,500 teachers and we added 1,800, we did add about 3,500, so it will probably be about 15,000 to 15,500 teachers by the end of the fiscal year.

And in terms of staff?

A lot of those were for one-on-one teachers, because the one-on-one business is growing so fast.

Right.

And what about staff?

Staff will be -- well, staff will grow from 11,000 or so, by 1,000 or 2,000.

For every teacher -- three teachers we hire, we hire about two staff, so it's -- there will be about 15,500 teachers and about 12,500 other staff.

So it will be about 28,000 or so by the yearend is my guess.

(multiple speakers)

Okay.

So how much (multiple speakers) by the addition of the teachers you've just guided?

I didn't have the last-year number.

What?

So the addition of this year, -- I didn't have how many teachers do you have last year?

So what is -- can you give me the addition, in terms of total number of teachers?

Let me look at last year.

Translate through what you've just guided.

Do you have the last-year numbers, Sisi?

I don't have the last-year numbers in front of me.

Right, okay.

So you said -- by the end of this year, how many teacher -- I'll look it up, I guess -- how many teacher are we going to have?

By Q1 of last year we had 10,100 teachers, so we added 3,500 year over year.

Okay.

So that's what I said.

If we had 11,700 at the end of Q4, we should add 4,000 teachers, so we'll be right around 15,500.

I see.

So -- got it.

Okay.

So that number is -- that's the best estimate I can give you right now.

Got it.

Yes.

Thanks, Louis.

And the second question is regarding the Maxen.

Sorry, I couldn't get in the call earlier.

Can you just quickly talk about how many centers you are looking to open and how many staff we're looking to hire associated with that particular effort?

I didn't hear that.

Can you repeat that, please?

Let me say we opened 22 in the quarter, actually 20 learning centers in the quarter plus two new schools.

We'll open about 100 for the year, so we'll open another 80 or so over the next three quarters.

Probably another one or two new cities as well, so new schools.

Okay, so that's in terms of learning centers.

Sorry, I was talking about the whole new effort that we're trying to do, where this high-end POP (multiple speakers).

Maxen, we expect to have -- we have five now.

Yes, okay.

We expect to have seven or eight by yearend, December, and then we're going to evaluate the business from there.

We're not going to open a lot more, because I want to -- these are expensive, and, number two is they have long paybacks.

They take almost two years.

So I want to get -- we're in four cities.

Right.

We'll probably be in five or six cities by the end of this year, and then what I want to see is I want to see them -- how fast they grow before we expand these.

Got it.

And how many teachers and staff that we are going to hire, associated with that Maxen?

Each learning center has typically about 15 to 20 staff.

That doesn't include teachers.

So just put 15 as each one.

Okay.

So we have about 100 staff and probably another 100 teachers.

Got it.

So, sorry, 200 are at Maxen right now.

Okay, great.

Thanks, Louis.

Thank you.

No more questions?

Great.

Well, thank you, everybody, for joining us today on the call.

We look forward to talking to you soon.

Bye-bye.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation.