New Oriental Education & Technology Group Inc (EDU) 2013 Q1 法說會逐字稿

Good evening and thank you for standing by for New Oriental's first quarter of fiscal year 2013 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 disconnect at this time.

I would now like to 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 2013 earnings conference call.

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

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

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

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

Forward-looking statements involve inherent risks and uncertainties.

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

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

New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

As a reminder, this conference is being recorded.

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

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

Louis, please?

Thank you Sisi.

Hello, everyone, and thank you for taking the time to join us today.

We at New Oriental would like to take a moment to wish all of you on the US East Coast well, as Hurricane Sandy approaches.

Please stay inside, stay dry and stay safe.

Now back to business.

We are pleased that we maintained strong top-line growth in the first quarter against tough comps from a year ago, when revenues were up 41% and net debt income was up 45% year over year.

We continued expansion into rapidly-growing second- and third-tier cities, and strengthened our market-leading position.

And we've shown tremendous versatility in terms of the reach of our network and variety of our program offerings, and ability to ramp up utilization in our new facilities and locations.

We continue to be resilient in the slowing macro economy in China, and the New Oriental brand name is as strong as ever.

Our focus going forward will be on better management of our crucial network expansion to ensure we are growing in a profitable manner.

A key part of this is moving from our Occupy the Market strategy, which allowed us to double centers in just over two years, from 367 to 726 as of August 31, 2012.

We are now shifting to a Harvest the Market strategy that focuses on increasing utilization at learning centers and driving profitability.

More on this in a moment.

The results of the quarter were a bit disappointing.

Total revenues increased 25.6% -- sorry, 25.8% year over year, to $336m.

And we added a net of 62 learning centers, largely in high-growth, lower-tier cities.

Enrollment growth was 11.3%, which is slightly lower than anticipated.

We believe that part of the enrollment softness can be attributed to a slowdown in Beijing and Shanghai schools, as the China macro economy slowdown affects consumer discretionary expenditures like education, even though education is a more-resilient-than-normal consumer discretionary category.

Furthermore, enrollments from our [Adult Comprehensive English] (Company corrected after the conference call) actually declined almost 20% year over year, from about 97,000 last year to 78,000 this past quarter.

Finally, the negative media coverage and negative publicity in the aftermath of the baseless and false allegations made by short seller of Muddy Waters on July 18 certainly hurt our reputation and contributed to student enrollment softness.

The good news is that New Oriental has been the subject of very positive Chinese media coverage, after we filed our Annual Report on Form 20-F on October 12, and a clean auditor's opinion from Deloite Touche Tohmatsu, and -- no historical accounting or financial restatement.

The Special Committee's investigation led by independent counsel Simpson and Thacher, who was assisted by Big Four forensic auditor Ernst and Young, and leading PRC counsel commerce and finance, concluded no substantive basis for the main Muddy Waters allegations.

Now that we have been effectively exonerated, media coverage has been much more positive, and we're confident that there won't be any long-term impact on New Oriental's reputation which, for years, has been second to none in the education sector.

Year-on-year net income growth was just 5.7%, which was very disappointing.

This was partly the result of poor performance in Beijing and Shanghai, as well as investment in our network expansion.

And we incurred significant expenses related to the SEC investigation and defending ourselves against the Muddy Waters unfounded allegations.

In the first fiscal [quarter of 2013] (Company corrected after the conference call) we were still focused on building our presence in high-growth, lower-tier cities, and we are pleased that the new centers we have in these areas are making an immediate contribution to the top line.

Revenue from second- and third-tier cities grew 35% in Q1, which gives a sense of both the speed of our expansion and how quickly we have been able to utilize new learning centers.

As I have mentioned before, the new additions are predominantly smaller centers of 500 square meters or less, which tend to come online quicker and are generally profitable within a year.

Our aim is to be the number one or number two player in language and test prep, focusing on K-12, in all our locations where we operate.

And in order to build this kind of position we've had to move quickly to achieve critical mass.

At the same time, other education players have been slowing down their network expansion, which gave us an even greater imperative to cement our position.

We now have a presence in 49 cities across China, which is far ahead of any of our competitors.

And we are confident that this will ensure long-term leadership in the sector, as we transition to our Harvest the Market strategy.

As I've mentioned, bottom-line performance was disappointing this quarter.

Our expansion obviously explains part of this but there are a few other factors at play here.

First, our performance in Beijing and Shanghai was relatively weak; revenue growth in these two cities was only 12%, which is partly -- which is modest for us.

Operating margin was actually down year on year.

What's happening is that many students who used to travel to New Oriental schools in Beijing and Shanghai during their holidays are now attending New Oriental schools in their local cities, where margins are typically lower.

So the decline in performance of Beijing and Shanghai, while a reflection of our success in building our national network, is also having an impact on the bottom line in the short term.

Another factor was the various expenses related to the SEC investigation and to defending ourselves against Muddy Waters' accusations.

And you also have to factor in [demand] has put great strains on management bandwidth and resources, and the negative impact it has on our reputation.

Now that we've been effectively exonerated, media coverage has been much more positive; we are confident that this long-term will have no impact on New Oriental's reputation.

We do expect the burden to carry into the second quarter.

Across Q1 and Q2 we estimate that we have incurred somewhere between $8m and $10m in expenses, as a result of the SEC and Muddy Waters issues.

So combined with our recent network expansion, this is going to put further pressure on our bottom line next quarter.

We are confident that the current size of the network positions us for leadership in all our markets in which we operate.

So we feel that this is a right time to shift from our Occupy the Market approach to what we call a Harvest the Market strategy.

The purpose is to make sure we are really driving bottom-line results by improving utilization of the centers that we have, refraining from new business lines that require large upfront investment.

And finally we will strive to control costs much more effectively than we have in the past.

We're confident this strategy will result in better bottom-line results from Q3 onwards.

That means starting in December of this year.

We of course need to continuously invest in technology -- in teaching staff, but we will look in other areas of G&A, particularly broader headcount where we can -- where we will cut some headcount going forward.

Now to quickly look at the performance of our various business units this quarter.

Overseas test prep remains strong again, growing around 31%.

And our K-12 all-subjects after-school tutoring business grew to 34% on the top line year over year.

Overseas and K-12 after-school tutoring are growing strongly in most of our cities where we have a presence.

We expect these two businesses will continue to be our key growth drivers in the quarters ahead.

The standard of our offerings speaks for itself.

In this year's Gaokao or college entrance examination, four New Oriental students achieved the number-one score in their respective provinces, and three others achieved the highest scores in their respective cities.

This is the second year running and it's a statement to New Oriental's superior product we are offering.

VIP was once again a fast-growing segment, with cash revenues growth about 85% year over year this quarter.

Our unrivaled brand and reputation put it in a great position to continue benefiting us for the long term.

Domestic test prep and adult English, as mentioned earlier, were a drag -- continued to be a drag.

Revenue was flat in both segments and we experienced continued slowing.

CET4 enrollments actually declined 20% year over year, from 97,000 to 78,000.

That's the English exam for college students, which affected enrollments by 2.5 percentage points.

Vision Consulting Overseas Study Consulting outperformed yet again this quarter, with revenues growing approximately 55%.

I flagged last quarter that studying overseas is becoming a realistic aspiration for more and more families and our pedigree makes us the clear choice for this kind of consulting business.

Of course there's an obvious link here with our overseas test prep business, so we expect these two areas to continue to grow in tandem.

Before we move [and indeed run] into the key financial metrics, I want to update you on a couple more recent developments.

As mentioned in the press release, we have reached an agreement to sell ELITE English to its head for $5.5m.

This is part of our effort to dispose of loss-making businesses and focus on more profitable growth segments.

On the Muddy Waters allegations, we feel exonerated and vindicated by the findings of the Independent Committee of the Board, meaning that there's no substantive basis for Muddy Waters' claims against New Oriental.

And the SEC investigation, as you know, we were informed by the SEC and their staff they had no objection to the consolidation of our VIE, variable interest entity into the Company's consolidated financial statements.

And also no objection to the consolidation of our schools into New Oriental China, or into our wholly-owned subsidiaries in China.

We subsequently filed our 20-F on October 12.

The SEC no objection is based on our representations being correct that we've made to them.

We are glad to have these issues behind us and we're focused on managing the growth of our business going forward.

Before we move on in the Q&A, I want to give you a brief roundup of key metrics for the quarter.

Total student enrollments last quarter increased by 11.3% year over year, to around 899,000, from about 808,000 in the same period of the prior fiscal year.

Operating margin for the quarter was 30.2% compared to 35.7% in the same period of the prior fiscal year.

Non-GAAP operating margin, which excludes the impact of share-based compensation expenses for the quarter, was 32.2%, compared to 38.2% in the same period in the prior fiscal year.

General and administrative expenses for the quarter increased by 42% year over year, to $76.6m.

Non-GAAP general and administrative expenses, which excludes share-based compensation, were $69.9, a 48.1% increase year over year.

This was primarily due to increased headcount from the continued network expansion, and investigation-related expenses accrued in the quarter.

We opened a net of 62 learning centers in the quarter, opening 89 centers and closing 17.

And -- sorry, closing 27, 19 of which came from the disposal of ELITE English.

And we also invested further in new content and program developments and improving teaching quality.

Moving on to the coming quarters, we are pleased with the progress we've made in deepening our presence, in cementing our lead position in the cities where we operate.

There should be some impact going forward from the macro slowdown, although it will be minimal, as families show continued willingness to maintain their education spend.

We anticipate some overhang from the SEC and Muddy Waters-related expenses, I mentioned earlier, which will affect near-term profitability.

But from Q3 onwards we expect improved bottom-line performance as our Harvest the Market strategy takes hold.

We are confident our investment strategy has put us in a prime position for sustained long-term market leadership.

Turning to our guidance for the second fiscal quarter, we expect total net revenues in the second quarter of fiscal year 2013 to be in the range of $165m to $171.8m -- sorry, $171.6m, representing year-over-year growth in the range of 25% to 30%.

This forecast takes into account slower growth in Beijing and Shanghai in the macroeconomic situation.

At this point, I will take your questions.

Operator?

We will now begin the question and answer session.

(Operator Instructions).

Your first question comes from the line of Philip Wan, with Morgan Stanley.

Hi, Louis, Sisi, thanks for taking my question.

My first question is about your profitability going forward.

You mentioned that the Company is going to be focused on profitability, but I wonder how does that impact your expansion strategy or your VIP business, which is less profitable with tougher competition?

And then I also -- a follow-up question.

Thank you.

Sure, great questions, Philip.

I think for -- what we will plan to do is open up much fewer learning centers.

If you think about it, we opened up 177 last year, net.

We opened up 89 this quarter minus the 27 that we disposed of.

It's still a heavy spend.

Our headcount increased by 10,000 year over year from 24,000 to 34,000.

So how do we get to profitability?

We stop expansion of most learning centers, so you'll see a drastic decrease in the rate of growth starting in December 1. So we're finishing up what we call the occupy-the-market strategy, where we basically make sure we are number one or number two in each of our 49 cities, for all schools that have been operating for at least six years.

So we are well on track in that regard.

The other thing is our competitors have not been inclined to follow -- to challenge us in many of these cities, we don't need to continue to invest heavily.

So one way is that we will slow down learning center growth, whereas we don't expect much impact on revenue growth.

The VIP business continues to grow well and, as I've told you guys in the past, our VIP margins are much higher than any of our competitors, for several reasons.

One is that half of our enrollments are actually one to five, so it's not one to one.

One to five -- usually with the average price of $1,200 for three months, is $6,000 revenue.

Most of our competitors charge about $1,000 to $1,500 for six months.

So that $6,000 we get from the one to five is much higher margin.

Second is that we charge a higher price than our competitors anyway, so our average one-on-one or VIP enrollment pays us about $2,300.

So we have higher margins as a result.

And finally, about 15% of our VIP enrollments are actually overseas test prep enrollments, and their ASP also much higher, well over $4,000 on average.

So we think that the VIP business is not a low-margin business the way we run it.

And we will focus on increasing the utilization of our learning centers.

As you know, we have almost 400 -- or between 400 and 500 VIP learning centers now that offer VIP.

And those schools are heavily underutilized right now.

So the goal would be to begin to fill those utilization rates before expanding too much faster in VIP.

Your second question, Philip?

You mentioned there's an investigation-related expense incurred this quarter.

Could you disclose how much did you incur this quarter and then how much should we expect for this quarter or the remainder this year?

Yes, it's hard to say because the SEC enforcement investigation is still open even though it's been quite quiet on that front and, as they review our 20-F there hasn't been anything new.

We accrued about -- or a little bit over $5m in Q1, ending August 31.

And so, as we've said in the prepared remarks, we expect that to be somewhere between $8m and $10m before it's done.

That doesn't include any class action -- pending class action issues that have been sort of consolidated.

But given that we received pretty much a clean bill of health, I don't expect those to be material.

We also have $5m of D&O insurance that will pick up some of those costs related to the litigation charges.

Yes, so what will be the next step the investigation because the still open on the SEC's side?

So what is the Company going to do next, or should we just wait for any update from the SEC?

Yes, we're not doing anything actually.

I think our counsel had a call with the SEC Enforcement Division last week, and our -- they haven't asked for any documents from us since the Special Committee led by Simpson Thacher actually gave a report to the SEC Enforcement Division of their findings.

So that was on September 30.

Since then what we heard back is the SEC Enforcement Division is looking at our 20-F filings, and they have not asked for any more documentation, or not asked for any further information from us.

So we -- there's nothing we can do; we just leave it open until they are satisfied that things are okay.

All right, thanks, Louis.

Yes, thank you.

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

Thank you.

My first question is in regards to other businesses, Louis, that may be earmarked for potential closure or potential pulling back in size.

Could you give us a sense, outside of ELITE, what other areas might be not performing as well, where you might consider exiting those businesses?

Well, we wouldn't disclose that here in public forum, Mark.

Still, it's a very good question.

As you know over the last two years we've been closing businesses that have been underperforming, so ones that are loss making, like ELITE has contributed about $18m in revenue last year, but lost $400,000.

And we didn't see profitability coming this year as well, so we sold it off.

Other loss-making ventures included Mingshitang, the acquisition we made of the Gaokao re-taker school we disposed of last year.

We closed our bar and CPA exam school, which was not making money.

So we'll examine all our business lines and the ones that we don't think have a profitable future we'll close those to improve margins.

But I don't want to mention anything on air -- on tonight's call, or this morning's call for you guys.

Okay, I understand.

And then just a follow-up question.

As you consider the slowing growth scenario coming forward here and focus on fast-growing two-tier, three-tier cities, can you give us a sense of what operating margins could potentially look like?

And maybe a way to attack the question might be to talk about fully-loaded operating margins for mature centers older than a year.

I'm just trying to get a sense of organic operating margins ex the rapid growth that we've seen.

I think if you look at organically at our learning centers have been operating for more than two years, and that are relatively full, those operating margins are typically in excess of 20%, not counting corporate overhead.

Now, if you think about the expenses you need to continue to grow the business and to train teachers for the future, I think we are probably at about 12%, 13% in operating margins now, which is -- we -- as we believe is our low point.

And I think that we will sort of hit the nadir this quarter, ending November 30, this Q2, because the SEC investigation charges and others.

So we think that margins will turn around.

Our two- or three-year goal is to attain 16% to 18% operating margins, and we think potentially if we don't grow too rapidly, 20% is not unreasonable.

Okay, thank you.

[Yes].

Your next question comes from the line of Jin Yoon, with Nomura.

Hey, guys, good morning.

Louis, a couple of things.

You mentioned that slow growth -- growth is slowing in Beijing and Shanghai.

Can we assume that pricing in the near term may be a little bit muted, or how are you adjusting for pricing in the near term?

And I have a follow-up question regarding your P&L.

Thanks.

Yes, I think you'll find it ironic, but we probably plan to take up pricing.

So I think for Beijing and Shanghai the slowdown for the summer is a confluence of a couple of factors.

Beijing and Shanghai have more CET4 and 6 students.

That's the Chinese English level 4 and 6 exam that Chinese students, or many of them, have to take to graduate from Chinese colleges.

That test is getting easier for Chinese students, as their English ability increases, partly from New Oriental's kids' and middle-school programs.

And that's similar to what happened with adult English.

As Chinese students learn English as a child, they don't need to learn it again as adults.

So both those businesses have been slowing.

The slowdown was actually much more -- was much stronger than anticipated this quarter, with enrollments actually declining from 97,000 last year in CET4 and 6, down to only 78,000.

That in itself accounted for over 2% -- 2.5% or so in the student enrollment growth.

In Beijing and Shanghai, as you know, we have installed new school heads, just this last -- about two or three months ago.

They need time to turn around the situations.

But as part of our Harvest the Market strategy we actually are beginning to -- going to begin to increase prices, more aggressively, especially in the kids' English side and other offerings.

Because we believe we -- the results speak for themselves; we have a much more superior offering than our competitors.

And we are going to begin to tier the market where we are going to go after the high-end and the high-profit business, and we'll leave -- the middle- to high-end.

And we'll leave the lower end to the other 3,000 competitors or so that we have in China.

So it seems -- sounds ironic but, most likely, we'll begin to take up pricing to improve profitability, maybe sacrificing some enrollments in the process.

Got it.

And just to follow up, I may have missed this in your -- in the beginning of the call, but it looks like the 1Q '12, last year first-quarter P&L, was somewhat restated.

Is that just merely taking out ELITE English and just normalizing the business, or is there something (multiple speakers).

That's correct, that's correct.

No, no other restatement.

It's just that when we sell off ELITE it's not meaningful comparisons if you don't -- if you don't take them out from both.

But is there a reason why it wasn't taken out of the F'12, the Annual Report when you recently filed?

Oh, because the Annual Report is as of May 31, don't forget.

Oh, got it, okay.

(multiple speakers) we hadn't disposed of the unit yet until this quarter.

Got it, got it, okay.

It was just a timing issue.

So you may remember our fiscal year is May 31, so all filings on the 20-F speak as of May 31, except for recent developments.

Got it, thanks, Louis.

Sure.

(Technical difficulty) question comes from the line of Steve Zhang, with Macquarie.

Hi, Louis, thanks for taking my questions.

My first question is related to your presence in the 49 cities.

You mentioned that you want to slow down expansion in these areas.

So of the 49 cities, how many are you already number one and two, and what do you plan to do with the remaining cities that you are not number one or two in?

Well, we believe -- we can't obviously prove this, but just from our on-the-ground evidence we believe we are number one or number two in every city that we've been around for at least six years.

And the ones who haven't -- were not number one or number two is because we haven't been there six years yet.

So we know this model works and so we are going to continue to expand in those cities, but we -- the key focus will be utilization rates in existing learning centers.

We are also going to begin to close down learning centers that have not been profitable after two years, or you can see the trend that they are not going to be profitable any time in the near future; those we are going to begin to shut down.

And there will be staff reductions accordingly.

So if you think about revenue grew 26 -- 25.8% year over year, our headcount grew 40% year over year that's just not sustainable.

So we are going to take some actions to correct that.

Okay, but you've got no plans to exit any of these markets?

No, no, we have no plans exiting any of the 49 cities.

Okay.

And just as a follow up I just want to clarify a little more on your CET4 to 6 enrollments.

You had attributed of it, part of the enrollment decline to potentially the bad press you received after the Muddy Waters report.

Are you seeing any recovery in demand following filing of your 20-F this quarter?

Well we have seen a -- we just filed our 20-F on October 12.

The enrollments the last couple of weeks have been quite encouraging.

So we can already begin to see a build up into Q3 for our winter quarter, which is also our second most important quarter.

So we basically will just take all -- as much of the bad news as we can in Q1 and Q2, given that we have $8m to $10m in the SEC investigation and Muddy Waters charges then we will hopefully have a -- come out of this much stronger in Q3 and onwards.

Okay, thank you.

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

Hi, thank you.

So first I have a follow-up question regarding your price increase.

So historically your organic price increase has been in the range of 8% to 12%.

And how much should we expect going forward?

For this last quarter, let me see here, I believe pricing was up about -- let me (inaudible) it was about 13% to about $330, $335.

So I think for pricing we'll continue to take up pricing in overseas test prep in U Can.

And the big change will be probably a pick up pricing more on the Kids side where we've been reluctant too, because Kids is a more competitive sector and there is -- we use it as a loss leader in some sense to get students into our system in order to sort of monetize them at the middle high school and overseas test prep levels.

So I think as the model needs to be where we will lose some enrollments on the Kids side, but we'll pick up a lot of margin points as we raise the price in the Kids sector.

We believe we have a better offering, so we should take up pricing.

Sure.

Yes, so how much would the average pricing grow -- price growth be with your new plan?

Should we expect it to go up to 15 or even high teens?

Well, I think is -- like -- I would expect in certain categories for it to go up.

I think in -- typically we'll take up pricing between 10% and 12% as you mentioned, Ella.

It will probably be slightly higher than that be at maybe 12% to 14%.

But at the same time there is some drag from the fact that our growth in second-tier cities is faster, much faster now than our growth in Beijing and Shanghai that typically have higher ASPs.

So the blended ASP, as I've mentioned for three quarters now, may not reflect the true price increases we are taking because they are being influenced by more second-tier city enrollments which have a lower pricing point.

So on average you would expect somewhere between -- would probably widen the range from 10% to 12% to probably between 10% to 14% price increases.

Got it.

And then when you mentioned that you are going to move towards middle to high end of the market is it only for Beijing and Shanghai or for other lower-tier cities as well?

I think it's for all lower-tier cities as well.

I think, Ella, the price increase last quarter on a year-over-year basis was about 16% 17%.

So we are already beginning to do it.

Right, okay.

And then, Louis, historically you have been switching to this harvesting mode and then you quickly switched back to the growth mode.

So I am just wondering how long will this time -- how long will the harvesting mode be.

Is it only for maybe one year or is it for a long time?

I don't know the answer to that to be honest.

I think for now is when we look at our utilization rates they're not as high as -- because we've added in the last year in one quarter over 230 units, and over the last two years we've doubled our network in a little bit over two years.

So we need to increase the utilization in the number of learning centers.

I don't know how long that will last.

It depends on how quickly the centers fill up and as we get closer to our profit targets.

And then also the other side, it depends on demand, if demand is so strong then we will make the right decision for the long term and add centers that -- again at a more rapid pace.

Okay.

And then my last question is can you give us an update on how much Beijing and Shanghai Represents as a percentage of your total revenue now?

Well, typically for the summer it's usually a high number.

And this year it went down a couple of percentage points, but it's still about 41%, 42%.

But overall Beijing and Shanghai now are well under 40% for the whole year, so I believe that will actually be -- even be a lower number this year given that Q1 Beijing and Shanghai only grew 12% whereas the rest of the network grew over about 35%.

So I would believe -- I would think that number will kind of come down, last year it was about 37%, 38% of revenue.

That should come down this whole fiscal year.

The summer is usually higher because of the overseas test prep students who study in Shanghai and Beijing.

Okay, thank you for taking my questions.

Thank you, Ella.

Your next question comes from the line of Vivian Hao with Deutsche Bank.

Hi, thank you for taking my questions.

So apart from the adult English and domestic test prep decline do you think [like] from the revenue growth it looks like the overseas test prep enrollment probably is not as robust as previous years.

Do we take this as a structural slowdown or more on the macro side or other reason?

I think it -- we think in general the growth of overseas test prep will not be at the torrid pace as far as enrollment has been in the past.

Enrollments were about 6% for the quarter and revenues up 31%.

I think in general the world can only absorb a certain number of Chinese students, and the growth rate is just not sustainable at 20% plus number of students for the overseas increase year over year.

So I think in the long term it will be slightly lower.

But given New Oriental's pricing power and premium brand here I think revenue growth in this sector will still stay well above 25% year over year for the foreseeable future.

Okay.

But it seems like for the student who are going overseas for undergrad are still growing quite robust.

Just wondering how New Oriental will try to capture, what kind of strategy New Oriental will take to try to capture this growth.

Yes.

That's a good question, Vivian.

I think we dominate the SAT ACT test prep in China already.

We have probably a higher market share than all -- easily higher than all of our competitors combined in the college entrance exams for overseas study.

There is one downside, once they go overseas they usually don't need our services anymore.

So it's not -- it's a plus and a minus for us.

So we will continue to capture that by having the highest quality SAT and ACT and other provisions for test prep.

But I think is that, that sector I'm actually not too worried about.

Right, so for this faster growing test prep segment of SAT do we have a rough percentage of contribution to the total test -- overseas test prep revenue?

I don't have the enrollments for this past Q1, but typically we've been doubling in SAT enrollments and we probably have 70% or 80% of the China market in this category.

So if you -- so I would expect it to be -- continue to grow faster than TOEFL and IELTS which are growing about 10% a year.

I would expect SAT to continue to grow about well in excess of 20%, 25% a year in line with the market as the number of Chinese students increases who go overseas for college.

I don't have the exact enrollment breakdown of SAT for this quarter, we do it once a year.

Okay, thank you.

Thank you.

Your next question comes from the line of Jeff Meuler with Baird.

Yes, thank you.

I guess first a follow up to Ella's question, if a little under 40% of revenue has been coming from Beijing and Shanghai, do you have any estimate of what percentage of the company's profit has been coming from those two markets?

If you strip out corporate overhead it's probably closer to 60%, Jeff.

Okay.

And in Beijing and Shanghai what percentage of students or the revenue has historically been from students that do not live in those metro areas?

Well, typically what happens is about one-third of the revenue from the summer itself comes from what we call dorm students and students -- and some (inaudible) students from outside of Beijing and Shanghai travel there for their classes.

There is a reputation that Beijing and Shanghai have, and students want to come there and spend the summer there.

They think the teaching quality is better.

That percentage has -- for this summer we expected another 30% increase in sort of dorm-based study.

And we actually got almost no increase.

And that in itself accounts for the whole difference in Beijing and Shanghai.

And when we did research into this matter we found out that many of the students who were thinking about going to Beijing/Shanghai decided just to stay in their home cities because the view now over -- as New Oriental has established its premium teaching in these second, third tier cities is that it's not worth the extra expense and time to go to Beijing and Shanghai when you can get a very comparable if not the same education level at -- in your local city.

So, I think that, that's what hurts Beijing because it's a third of revenues for the summer and there was no growth there.

Okay.

And then I think you said you don't expect much impact on revenue growth from slowing the network expansion.

And then it also sounds like you're maybe narrowing your target market a little bit in terms of leaving the less profitable, lower price stuff for your competitors.

I guess just if you could maybe reiterate or clarify any that potential comment on revenue growth.

And if you're not expecting any negative impact relative to kind of the historical revenue growth is it just the taking up pricing more than you historically did that's offsetting that.

Or, I guess if you could just comment on that.

One thing we didn't really mention in the prepared remarks, it's been mentioned in past call is, Jeff, is that currency last year accounted for 6% of the revenue increase.

So if you strip out currency where it was flat year over year for Q1 there was no currency bump.

The revenue rate is right in line with what our forecast -- it was right in line, it's 25% to 30%.

If you strip out currency from last year's growth, it's only 32%.

So it's not much of a decline other than what happened in Beijing and Shanghai.

So I think is that revenue growth has never really been our problem as far as we rare -- I think we've only missed revenue guidance one time in seven years or six years plus as a public company.

So 24 quarters I think we only missed once and I think we only missed by $0.5m and that was because of a snow storm that blanketed China during the winter.

So I think in general is revenue is not our challenge, it's how to manage our business more profitably.

And the -- in the way we know how to do it, we just have to have the will and we have to force the school heads to do it which is to shut down unprofitable units, it's to increase utilization rates and it's to take up pricing.

We have that pricing power; we just have never really used it to the full extent we are capable of.

I guess I wasn't as much focused on this quarter as going forward, and just wondering if you can maintain this type of revenue growth on a constant currency basis, if you are slowing the learning center expansion and potentially walking away from some of the lower end business.

I believe we can (multiple speakers).

(Multiple speakers) or see some deceleration.

Yes, I believe we can.

I think Q1 was -- like I said it was -- assuming we can fix the -- we need a transition period of six months for new management in Beijing and Shanghai schools.

Assuming they can turn around those two schools, the rest of the network is growing over 35%.

So if we can just fix Beijing and Shanghai which we are devoting a lot of management resources to doing I don't think you'll see much of a revenue slowdown.

But I guess I'm confused there because I thought that you just said that Beijing and Shanghai that basically the whole difference versus the prior growth rates was that a third of summer revenue from dorm students was basically zero this year (multiple speakers).

Right, so it was zero growth so that means there won't be a drag next year will it?

Right, but I guess -- so -- but you're saying that Shanghai and Beijing that new management is working on fixing them but are there other issues besides the dorm students staying in their local markets that you guys have identified and can turnaround?

Well I think Beijing and Shanghai need to become more -- they can become even more profitable right, Jeff.

I think there is probably several unprofitable learning centers in Beijing that should be closed.

I think there's probably more headcount in Beijing and Shanghai than are necessary.

So I think there's ways to rationalize to monetize Beijing and Shanghai even more than they are currently being monetized.

Perfect.

That's helpful.

It doesn't mean -- basically Shanghai the growth is fine we think revenue should -- if you raise prices in those cities which I think we can do, if you rationalize the business so you have less headcount doing the same amount of work.

And if you increase the utilization rate in the existing learning centers I think Beijing and Shanghai's profitability should be much higher.

And I think that's (multiple speakers).

That's helpful, thank you.

That's the focus of the new management teams there.

Okay, thank you.

Your next question comes from the line of Pei Fang with Goldman Sachs.

Hi, Louis, thanks for taking my question.

Just relating to the [standard] editions in the past quarter, do you have any particular focus or any class format?

Have you added more class based or VIP programs given the new focus on harvest the market.

Then I have a follow up question, thanks.

I think the ones that opened in the quarter was a net of -- was a gross of 89 centers.

And I think we opened most of them VIP and U Can and Kids-related centers.

So they either do a combination of the three or they're a sub-set of the three, and I think that will continue.

But I think as I said before is that it doesn't make sense to keep opening up more and more centers without fully utilizing them.

So it takes them a year or two to get where they are quite profitable.

So I think the focus now is to now we'll open up a lot of centers is to begin to increase the utilization rates, even if it means we lose some students because we don't have center close to their homes.

I think also, Pei, right, as you close a couple of the non-profitable centers what's going to happen is those students who will remain in the New Oriental network will move to other centers and actually increase their utilization rates.

So there are some positives there too.

Also as you slowdown learning center growth you don't have the incremental headcount increase, because when a learning center is fully operational it's got 25 to 30 employees, even relatively small ones.

It starts off with 10, 10 to 12.

So if you don't have the learning center growth you don't have all these charges ahead of the revenue, which you also accrue to the bottom line.

I see, thanks.

My second question is on the recent policy change in Beijing regarding elementary school math and Olympic training program.

Do you foresee any impact on enrollment revenue?

I think it will have some impact on us but not -- obviously not the impact it has on TAL which is much more dependent on Olympic math than New Oriental is.

Math has been a new subject for us just a few years ago, and it's -- so it will have some impact on us.

I don't expect it to be as big for -- as compared to TAL.

Thank you.

Thanks.

Your next question comes from the line of Chao Wang with Merrill Lynch.

Hi, good evening, thanks for taking my question.

I have two questions, first one is regarding the VIP business.

So despite the weak macro it's still growing very strong.

So I'm wondering if it's because of the low base or because VIP students are less price sensitive.

And also within the VIP business do you see some business lines more sensitive to the economy than others?

Thank you.

Yes, I've heard this line of reasoning before, Wang Chao.

I think there is -- I mean it certainly probably has slowed down Xueda's growth rate.

For New Oriental our VIP revenue grew 85%.

It's only slowed down because the base is getting larger.

It's a $240m business already.

And I think given our trajectory and given Xueda's trajectory we'll become the largest VIP or one on one training school in China this year.

So we do see -- it could, but I think given New Oriental's reputation and given that as you said it's the high-end consumers that will purchase one on one if there are going to be less affected than most.

Although we've been saying for years that the luxury sector is more immune, but you are already seeing this luxury sector in China get hit by the recent slowdown.

I think the argument I would make is based on our enrollment increase we don't see much of a slowdown at all.

And that's partly because education is probably a much more important purchase than handbags or cars or things like that.

So we do -- we don't expect to see much -- I think our enrollments for VIP went up from 21,000 last year to 34,000 in the quarter.

So revenue -- enrollments were 59%, so I don't think there is much of a slowdown there.

And revenue was up -- sorry, enrollments were up 59% and revenues were up 85% and ASPs were up 15%.

Yes.

[I think] the growth is quite strong.

Yes.

So I don't -- I don't think it's hurt us yet much and if any.

Okay.

Like I said I think by revenue this year we'll become by far the largest given our growth trajectory in VIP we should pass Xueda revenues in this category.

So we'll be by far the largest one on one, the largest K - 12, the largest overseas test prep, so all our businesses will be the largest by far.

Okay.

Also since you have this VIP format across the board, so do you see some segments more impacted by the macro than any other segments?

I think we are still in a rapid growth phase of VIP, so if it is we are not seeing it.

Certainly overseas one on one is growing.

Clearly 1 to 5 is growing.

VIP is growing very, very fast in the middle and high school sectors as students prepare for the Gaokao exam and the Zhongkao.

And given our tremendous track record in these tests most VIP students, if they can afford it, will certainly come to New Oriental.

So we haven't -- like I said we -- I think it's the same question we really haven't seen the impact.

I think it's because partly because we are still growing so rapidly in the space, and because of our premium brand here.

This is the one category where parents if they are going to pick a brand New Oriental clearly stands out.

Okay.

Second question is on the share buyback.

So basically do you disclose the average price, buying back price?

I don't know the average price to be honest.

The management team after we heard those ridiculous allegations by Muddy Waters, we basically -- just a few days later we all said we are going to buy shares and we did.

And all the way until August 31, until the window closed we bought $33m, over $33m dollars of shares in New Oriental stock.

Probably if I had to guess the price would be somewhere between $12 and $14 somewhere in that area.

All right, thank you.

Your next question comes from the line of Tian Hou with TH Capital.

Hello, Louis.

I have two -- a couple of questions, one is the Elite program the one you disposed, will you give this quarter 1Q guidance was that part of the guidance?

Actually it was because we didn't know when we would close the disposal.

So actually part of the revenue slowdown is ironically because actually because we've been disposing of a lot of old businesses as well.

So, yes, Elite did about $18m in the last 12 months, but it lost $400,000.

And the long-term growth trajectory is not there.

As we said earlier as children learn English in China well they don't need to learn it again as adults and certainly not at the high end where Elite is clearly premium priced.

So I -- at that time we didn't know when we would close the disposal so it was actually included in the forecast even though it didn't -- we didn't could [as a business].

So how -- yes.

How much that could be if (multiple speakers).

Well, it was $4m or $5m is the revenue from Elite during the summer last year.

Okay.

So, another thing is about your ASP, so as you're growing your VIP program and Kids program, K-12 program particularly this VIP program I would imagine your average ARPU should -- supposed to grow and grow even in the pace much faster if not lower than before.

However, if you -- I look at your ASP and last year Q1 is more than 25% and 2011 in a similar pace on a year-on-year basis.

And this year and it's less than 10%.

I just wonder what contributed to that lower pace ASP.

The ASP for language and test prep programs increased 18% for the quarter year over year, Tian, so it's actually quite high.

It went from on average, let me see here, last year I believe it was $285 or so on average for the quarter last year and it was $335 this year.

So there is actually an 18% increase year over year.

And I think part of it -- the (multiple speaker) a big chunk of that is because of the shift for one on one.

But VIP this quarter accounted for only 23% of revenue.

So it's not actually -- it was this much higher than last year, but I think it's not going to -- we don't think it will go over 30%.

So it's probably had -- so what I mean by that is that VIP will continue to outgrow the other categories, but it won't have such a dramatic impact on ASPs as it has in the past because its growth rate will begin to slow a little bit as well.

It's had a dramatic impact on the ASPs on average for the last couple of years as it ramps up over 100% a year.

Okay.

So the other question is you had several disposals in the past and are there any plans to -- for upcoming disposals?

Well I think for us is we'll review the performance of our business sectors each year.

And we'll come together and we'll argue about which units to dispose of and which ones not to.

Personally, I think if businesses can't make money after three or four years after they start they should be closed, or if there is no long-term prospect of them being quite profitable we will close them.

And you saw that with the Bar and CPA exam, you saw that with the Gaokao re-taker school.

And so we do -- and you see it now with Elite.

So businesses that don't make money we will look at it and close down over time.

But I think as right now we don't have any plans to dispose of anything else currently.

And I couldn't tell you if we did.

Okay.

Okay, at least you can (multiple speakers).

Okay.

So the other thing is, is it possible for you to give us some kind of your enrollment allocation in each business line?

Yes, I think if you email Sisi Zhao, our IR Director, she can give you the information, Tian.

I don't want to spend a lot of time on the call on that.

You can feel like the growth rate is -- the enrollment growth is very, very healthy in the fastest growing area of middle and high school and Kids.

I think middle and high school enrollment was over 19% growth year over year and Kids was 20%, 22% growth year over year.

So you can see that the growth of this -- of the future New Oriental enrollment comes from K-12.

We have 1.4m K-12 students last year.

That number will be almost 1.7m this year.

If that's the case that means the rest of our enrollments are just flat.

So the growth in enrollments is driven by K-12 clearly.

And they continue to do well.

They are still going to grow revenues over 35% and enrollments around 20% year over year.

Okay that's great.

That's very helpful, Louis.

Thank you.

Thank you.

We are now approaching the end of the conference call.

I would now like to turn the call over to New Oriental's President and CFO Louis Hsieh for his closing remarks.

Again, thank you, everyone, for joining us today.

If you have any further questions please do get in touch with me or any of our investor relations representatives.

And we, like I said, we are very grateful to our investors who have been very supportive of us during this very difficult period.

And finally we just want to wish our friends and colleagues in the US East Coast, good luck and please stay safe.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.