New Oriental Education & Technology Group Inc (EDU) 2015 Q1 法說會逐字稿

Ladies and gentlemen, good evening.

And thank you for standing by for New Oriental's first fiscal quarter 2015 earnings conference call.

(Operator Instructions).

Today's conference is being recorded.

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

I would now like to turn the call over to your host for today's conference, Ms Sisi Zhao, New Oriental's Investor Relations Director.

Ms. Zhao, please proceed.

Thank you.

Hello, everyone.

And welcome to New Oriental's first fiscal quarter 2015 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 and Stephen Yang, New Oriental's Vice President of Finance.

After their prepared remarks, Louis and Stephen 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 statement except as required under applicable law.

As a reminder, this conference is being recorded.

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

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

Louis, please?

Thank you, Sisi.

Hello, everyone, and thanks for joining us today.

For the first fiscal quarter of 2015 we recorded $394m in net revenue, slightly up 1.4% year over year.

The lower-than-expected revenue growth was mainly due to several challenges we detailed quite extensively last quarter.

Among these was the uncertainty about the implementation of the new policies relating to the English test for Gaokao, or the Chinese College Entrance Exam.

And this at the end was the main cause for the softer than planned performance.

Due to the uncertainty around the implementation of the newly introduced policy, sign-ups for our English summer camp and dorm tutoring classes for middle and high school students for the first fiscal quarter were severely weakened, and there was a decline of approximately 30% in revenues of this business.

Second, we are also revamping our POP Kids English program.

As we expected this impacted enrollments and revenues in this business line for the first fiscal quarter as schools held off on marketing and promotion around this until we complete the rollout of the new program.

The growth of our POP Kids program was therefore hindered, and revenue down by 9% year over year.

Third, related to the uncertainty about the Gaokao English test, we also saw a much-larger-than-expected 31% decrease in adult comprehensive English enrollments in the quarter as some middle and high school students also take that program.

As you will recall, we took the confluence of factors that impact the revenue, as I just mentioned, into account when we gave our top line expectations for the first quarter.

But unfortunately we underestimated the extent of the near-term impact.

However, I would like to emphasize that many of these were non-recurring challenges and here are the reasons why we are fairly certain we can put them behind us as we move forward into the balance of the fiscal year 2015.

First, the new Gaokao guidelines was announced by the government last month, which has not only provided clarity on how the reform will be carried out but also spelled out the opportunities we are poised to capture.

On one hand, the score of the English test remains unchanged, and that is at 150 points which is the same as the score of math and Chinese.

This was clear -- this has cleared the doubt that the English subject test would be a less important portion of the total Gaokao score.

And the exam is not going to be less difficult as rumor had it.

On the other hand, students will be allowed to take the English exam twice and select the better score to be included in their total Gaokao score.

And this is expected to boost the demand for our U-Can middle and high school all-subjects after-school tutoring business.

In addition, more provinces will be using the standardized English test for these students in the future, which is good news for New Oriental as we can leverage our nationwide standardized teaching content.

Just to provide a little bit more detail on the reform, the pilot program has begun in Shanghai City and Zhejiang province as we speak targeting the students that are starting year one of high school this year.

So three years later in 2017 the students will take the experimental new college entrance exam.

According to the schedule the new college entrance exam will be rolled out nationwide by the year 2020.

What is important here is that the uncertainty of whether the English subject will be underweight has been pushed aside.

For the long term, we certainly believe that the reform will benefit New Oriental, especially the multiple administrations of the English portion of the Gaokao.

Second, the new POP Kids program will be rolled out across the school network in the second fiscal quarter of 2015.

We are excited about the integrated online and offline learning capabilities that we've built into the new version.

And we are hopeful to reverse recent declines in the important business segment.

We are very confident that the POP Kids performance will improve again from the second half of fiscal year 2015 once this new product is out in the market.

Third, we have continued to extend our penetration rate in existing markets by adding to capacity in cities where we are experiencing rapid growth and strong profitability.

In the first fiscal quarter we added a net of eight learning centers and expanded some existing learning centers by adding a total of 3,800 square meters of additional classroom area.

For fiscal 2015 we plan to continue to add learning centers across the country.

We will continue to focus on the cities or areas where we see the best opportunities and can optimize resource allocation.

I will discuss this in a few minutes when we move to the update on our growth strategy.

Now, let me address the performance across our individual business lines.

Our K-12 all subjects after school tutoring business recorded gross revenue growth of 3.6% year over year for the first fiscal quarter.

Breaking it down U-Can, middle and high school all-subjects after-school tutoring business achieved a gross revenue increase of about 9% year over year for the first fiscal quarter.

If we take out the impact of the English summer camp and dorm tutoring classes for middle and high school, due to the uncertainty about the implementation of the new policies relating to Gaokao, other U-Can business actually performed well with over 22% year-over-year growth in the first fiscal quarter.

And as mentioned, our POP Kids program is experiencing a slower growth as we are still in the process of revamping the entire program across the network.

We are all very excited about the rollout in next quarter, as we are confident that this business will improve in the second half of fiscal 2015.

Overall, the K-12 after-school segment is and will continue to be our fastest growing segment and a major revenue driver going forward.

This is rapidly growing segment in China's education sector and New Oriental has been very successful in capturing a huge share in this important market.

Our overseas test prep business recorded revenue growth of approximately 7% year over year in the first fiscal quarter.

And our overseas study consulting business recorded revenue growth of approximately [1%] (corrected by company after the call).

Finally, for the first fiscal quarter VIP personalized classes business recorded stable revenue growth of about 15% year over year, which is consistent with the ratio we are trying to achieve for the next few quarters.

Before I introduce our updated going forward strategy I would like to walk you through our past strategies, Occupy the Market and Harvest the Market and then talk about where we are going and where we will be focused in the future.

As you will recall we were focused on implementing the Occupy-the-Market strategy from 2008 to August 2012.

During that time we more than tripled the number of learning centers to almost 750 learning centers, and entrenched our market leadership position growing to three to four times larger than any of our tens of thousands of competitors in China.

In November 2012, we shifted to Harvest-the-Market strategy to substantially improve profitability and our utilization at learning centers.

In the last couple of years these two strategies helped the company grow and perform very well at various stages in the evolution of the business.

More specifically, these initiatives allowed for aggressive growth of both revenues and profitability respectively given well-timed strategies and areas of focus.

Further, as a result of New Oriental's achieved business milestones by the end of the recent concluded fiscal year 2014, a period in which the company achieved $1b in revenues for the first time, and recorded high net income of $200m -- above $200m, again multiple times larger than our competitors in China.

Meanwhile, we started introducing an online education strategy aiming to establish an online and offline integrated education ecosystem a few quarters ago.

And this has been designed to improve the learning experience for our students and drive cross-selling opportunities for our business.

It's encouraging to see that these online education initiatives have been working very well in the last few quarters with users up 180% year over year, and online enrollments up over 50% in the first fiscal quarter.

With all the successes that we've achieved, we believe it is now time to shift to a more comprehensive and balanced go-forward strategy to optimize market opportunities and achieve a sustainable and balanced growth overall.

Therefore, starting in fiscal year 2015 we will launch the Optimize-the-Market strategy transitioning to a focus on maintaining a healthy balance between top- and bottom-line growth as well as meeting the growing demands for online education services in China.

The new strategy consists of two components, offline strategy and online strategy.

For the offline strategy going forward New Oriental will focus on maintaining a healthy balance between top- and bottom-line growth as well as increasing penetration rates of better performing cities.

With the online strategy we will continue to -- the process of establishing a fully integrated online/offline education ecosystem with the potential to drive growth in online channels across all our existing business lines.

Starting with the offline part of this strategy, we are now shifting our focus to equally drive both top- and bottom-line growth going forward.

Entering the new phase and refocusing again on the top line we have already begun extending our penetration rate in existing markets by adding capacity in cities where we are experiencing rapid growth and strong profitability.

In the first fiscal quarter, we added a net of eight learning centers and expanded some existing learning centers by adding a total 3,800 square meters of additional classroom space.

As we are eyeing the huge market potential in some existing cities, we will be carefully selecting cities where we are both driving both revenue growth and margin expansion.

Following that, we aim to open 30 to 40 new learning centers or expansion of existing learning centers this fiscal year, while the new expansion will be targeted at where we see the best opportunities.

We are confident that New Oriental's market leadership position combined with strong execution of the new strategy will ensure a healthy balance between top- and bottom-line growth in the next few quarters and in the long term, excluding this quarter, which we believe is an unusual non-recurring event due to the policy impact and the POP Kids revamp as I mentioned earlier.

Now let's take a look at the online side of the go-forward strategy.

As you all know from recent quarterly discussions, we've embarked on an online path and have achieved significant milestones already.

This is a very exciting segment for New Oriental, as demand for online education services is on a surge in China.

With the potential to drive growth across all existing business lines and to open up opportunities for new market entry, we will continue to aggressively invest and drive the development of our online strategy with an investment of $25m to $30m this fiscal year.

Based on our premium brand recognition, high quality education resources, extensive teaching experience and nationwide scale with comprehensive data of student information, I would like to highlight again that we believe no other company is better positioned that New Oriental to benefit from the growth of online education.

We also firmly believe that our fully integrated online/offline education ecosystem will help continue New Oriental's strong performance going forward.

As set up and describe a few quarters ago, the ecosystem consists of three levels.

The first level is the O2O two-way interactive education system across all of our business lines.

This will be the core of our online education system.

The second level is our pure online learning platform Koolearn.com and supplementary online education products under the New Oriental brand.

The third level of our ecosystem is for New Oriental to take minority shareholdings in online education companies that complement our own online educational offerings.

These three levels of the ecosystem are experiencing encouraging progress in the fiscal quarter that I'm excited to share with you now.

Let's start with the O2O interact -- two-way interactive education system, as it's the core element of the ecosystem and we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services.

Able to work across multiple devices, the system consists of a series of online education modules that enable us to improve the quality of the learning while helping students study with enjoyment via the internet.

The theory of O2O behind the system is that students can get interactive experience through learning progress including communicating with teachers and other students and complete the online modules recommended based on their own learning habits and needs.

As we discussed in the last earnings call, we've rolled out and upgraded a pilot program of the O2O two-way interactive education system in the first fiscal quarter across all major product lines, enabling online-based learning resources, sharing individualized exercises and tests, supplementary micro-video teaching and interactive services.

We believe that the new approach will better retain customers, increase our pricing power and become a great revenue contributor in the long run.

In September 2014 we launched the revamped U-Can all-subjects after-school tutoring program called U-Can Visible Progress Teaching System into over 30 cities.

With the broadened network, the online offering to support after school -- after class self-learning under the strong business stream and will earn more credits from the customer and retain the market leadership position.

To spread the success of this system we also plan to roll out the O2O two-way interactive education system for overseas test preparation and domestic test preparation courses in the third fiscal quarter of 2015.

And our other update is the POP Kids side.

In the second fiscal quarter of 2015 we aim to fully launch the newly revamped POP Kids English program called Shuang You.

It is on track as we planned.

At the time enrolled students for the new POP Kids offering will have access to the interactive learning and resources and multi-cultural experiences based on their own interests and characteristics.

Turning to the second level of our online education ecosystem, we continue to invest in Koolearn.com and other supplementary online education products including online education platforms, technology content and mobile applications.

This will help the company reach more students.

In the first fiscal quarter, we generated net revenue of $7.4m in Koolearn.com representing a 37.5% increase year over year.

Our platform offered over 2,000 online courses and over 9.6m cumulative registered users by the end of the first fiscal quarter.

This has encouraged us to continue our endeavor towards online education.

In August 2014 we launched Koo.cn, our own live broadcast open platform for both New Oriental and third-party teachers.

This platform currently offers more than 100 courses and achieved over 102,300 registrations in the first fiscal quarter.

Additionally our DONUT, or D, O, N, U, T is a series of game-based mobile learning applications for children recorded over 9m downloads by the end of the first fiscal quarter.

This product is now used in about 80 kindergartens and training institutions.

Besides improvements in the Koolearn.com offering, I would also like to share with you some success we've achieved in developing other supplementary online education products and services under the New Oriental brand, either independently or in majority held positions with other companies -- partnerships with other companies.

Le Ci, an English language vocabulary training application we launched last quarter for mobile phones and tablets recorded over 436,000 users by the end of first fiscal quarter.

The application provides a personalized learning curve to memorize vocabulary and has penetrated positive -- sorry, has generated positive feedback from the market.

Also it's encouraging to see that our "OKAY" program, an online education platform for primary and secondary schools that we introduced in July last -- this year has been used in several public high schools in China -- by several public schools in China.

Separately, regarding the strategic partnership with Tencent Holdings Ltd that we developed for unique mobile-based English language learning offerings, we are excited to see that the first product is under development and will be promoted through Tencent's online channels and New Oriental's offline network once ready to launch.

Now turning to the third level of our online education ecosystem, we have invested in select online education companies with a minority stake.

Our investments include Alo7.com a company providing customized digital course content for children, and Tarena, a public company providing IT professional services education in China.

Another investment is for Juesheng.com, an education service platform connecting users and service providers in overseas study consulting, test preparation training and tutoring areas.

The platform connects the users and service providers very well.

It will allow us to access to more -- some useful data such as student preferences and market information.

We think these investments are a good way to leverage the power of our brand in our learning resources by partnering with exciting young companies that have interesting business models or services that complement our own offering.

They will also further support New Oriental's efforts to develop a comprehensive online and offline integrated ecosystem.

All of this said, we believe it is clear that New Oriental will drive new initiatives for both the core offline and developing online businesses going forward.

We believe that this Optimize-the-Market strategy is a more comprehensive balanced go-forward strategy to balance revenue growth and profitability in a fully integrated online and offline education ecosystem will optimize, to extend our clear leadership position in China's education market.

Now I'd like to turn the call over to Stephen Yang, our VP of Finance to provide more financial detail on our performance of the first quarter and describe our outlook for the upcoming quarter.

Stephen?

Thank you, Louis.

Hello, everyone.

Now I would like to take a quick glance at some of the key financial metrics for the first fiscal quarter, in addition to financials we mentioned in the beginning of the call.

Selling and marketing expenses for the first fiscal quarter increased 16% year over year to $49.5m primarily due to the increase in selling and marketing staff compensation.

General and administrative expenses for the quarter increased 9.7% year over year to $85.5m.

Total headcount at the end of August 2014 stood at about 32,300, addition of about 2,300 from the same time last year.

Quarterly operating income decreased 18.4% year over year to $110.5m.

Operating margin for the quarter amounted to 28.1% compared to 34.9% in the same period of the prior fiscal year.

And non-GAAP based operating margin for the quarter was 28.8% compared to 36.2% in the same period last year.

Net income attributable to New Oriental for the quarter was $112.4m, down by 11.2% year over year.

Basic and diluted earnings per ADS attributable to New Oriental were $0.71 and $0.71 respectively.

Capital expenditure for the quarter were $12.2m compared to $8.6m in the same period of the prior fiscal year, and were primarily attributable to opening of 26 new learning centers and renovations at older existing learning centers.

We generated approximately $139.7m operating cash flow for the quarter, compared to $167.4m in the period a year ago.

Now let me go through our expectations for the second fiscal quarter of 2015 before we move into the Q&A session.

We expect total net revenue in the second fiscal quarter of 2015 to be in the range of $235.4m to $243.7m, representing a year-over-year growth in the range of 13% to 17%.

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

At this point, Louis and I will take your questions.

Operator, please begin.

(Operator Instructions).

Ellis Lau, Macquarie.

Hi, Louis, Stephen and Sisi.

Thank you for taking my question.

My first question is about the recent enrollment growth and the ASP trend.

We all understand that the relatively poor performance in the first quarter was affected largely by the uncertainty from English test policies in Gaokao.

As now the policy uncertainty is largely lifted, then what's your current view for the future enrollment growth and price trend?

And if it's possible, is there any revenue guidance for the whole fiscal year 2015?

Thanks a lot.

Thank you.

Good question.

I think the recent trend, August was quite good.

September and October are okay.

So that's why we guided about 15% top-line growth for this quarter.

We expect similar or higher growth for the next two quarters, so Q3 and Q4 of next year, as our new programs, the POP Kids and the U-Can businesses basically get seasonally strong in Q3 and Q4, so we expect better performance going forward.

For the full fiscal year, because of the Q1 quarter, it will be less than we've done in the past, but going forward, we expect somewhere around 15% or higher growth in each quarter going forward, and hopefully next year, we won't encounter these policy changes, and with this revamp of the POP Kids, this should last us for a couple of years.

So we don't expect the confluence of factors to occur next year.

As far as enrollment, we would expect that if our POP Kids enrollment revamp is successful, we'll find out later this quarter and into next quarter, we would expect revenue growth, especially in K-12, to pick up again into the over 10% range for K-12, and for the whole company as a whole, around 5%, because we're still seeing declines in adult English and domestic test prep.

So we expect around 5% overall enrollment growth going forward, not counting this first fiscal quarter.

And also, we'll probably see 8% to 10% price increases, and a shift toward smaller classes will add a couple percentage points.

So that's why we're targeting growth of about 15% going forward.

Okay, thanks, Louis.

Very helpful.

And I just have a very quick follow-up.

It's about the POP Kids, revamped POP Kids.

We see that there is a little bit of delay in the launch of revamped POP Kids.

Can you share with us something more about the current progress of those courses?

Yes.

There was a slight delay.

We were hoping to get it out this quarter.

It's going to probably be at the end of this quarter, so that's why we would expect better growth in Q3 and Q4 as it's fully rolled out.

It's difficult to roll out across 50 cities, and so it's taking more time than anticipated.

And because of the technical difficulties, given the IT needs of the new program, it is taking a little bit more time, so we want to hopefully get it out to almost all the cities by the end of this fiscal quarter, meaning end of November, and have it ready in Q3 and Q4.

So it is slightly delayed.

Okay, understand.

Thank you.

Thank you very much.

Very helpful.

Thank you.

Philip Wan, Morgan Stanley.

Hi, Louis.

Thanks for taking my questions.

In this quarter, I figure that the other revenue dropped about 8%, but in the earlier remarks, you also mentioned consulting dropped 30%, so could you give us some color on what is causing this drop this quarter?

Which part of the drop, Philip?

The other revenue, booked as other revenue?

Stephen, do you want to take that?

I think part of it is -- you want to take that?

Okay.

I'll take the question.

I think, Philip, your question is about the overseas consulting business.

It was only increased by 7% in Q1, but you know, as you know what I mean as the same as last year.

The Q3 and Q4 are the peak seasons for the overseas consulting business, so Q1 is really a low season for the overseas consulting business.

So I think for the trend in the whole year, we still hope the total revenue increase -- what I mean, the growth rates of the overseas consulting will be above 25% to 30%.

Yes, Philip, the cash revenue number I gave you at 30% is the cash taken in, but it gets recognized mostly in Q3 and Q4, as the kids get into colleges.

So there's a time delay.

All right, thank you.

Does that make sense?

Yes, sure.

So most of the revenue will actually get recognized in May, once the kids have their acceptances letters.

Right.

Could you share with us, you mentioned $25m to $30m spending for the technology online.

So how much did you spend in Q1?

Well, it's going to be proportional.

It's hard for us to break it up separately, because everything we do now has an online component, so we kind of give up.

It's all built into G&A and capital expenditures, but it's a recognition since last year that everything needs to have an IT component.

So IT is basically pervading all our products.

There's really -- online and offline are becoming blended, and so the IT cost that we're experiencing and the recent R&D development is what accounts for the $25m to $30m additional cost, compared to all our D&A now.

Yes, Philip.

I'm Stephen.

Maybe I can give you, the December months will be -- the R&D expense in Q1.

We spent $7m to $8m in Q1.

It's on track for $25m to $30m.

Yes, yes.

That's helpful.

Thanks, Louis and Stephen.

Ella Ji, Oppenheimer.

Good evening, Louis, Stephen and Sisi.

My first question is also relating to your full-year growth outlook.

So I understand that you are seeing rebound enrollment for fiscal 2Q, but as we enter fiscal 3Q, which is winter break, which usually you will have some -- just there is some little bit maybe dorm-based studying, how do you expect that growth will be?

It's too early to tell yet, Ella, but the summer quarter was heavily impacted by the uncertainty about the policy regarding English, and now that it's been clarified more or less, English will remain with equal weight with Chinese and not underweight, and that English will be given twice a year, starting in a couple years, we believe that the dorm-based classes will not be impacted by 30%, as it was in Q1.

But in general, dorm-based classes have been slowing for a couple years, but not to this level.

So we would expect dorm-based classes to be slightly down or equal with last year, and we're hopeful that it may be some increase, because the students who didn't come in during the summer quarter may want to do it during the winter quarter.

So it's too early to tell.

We haven't seen the enrollments come in on those.

Got it.

Thank you.

And then relating to your POP Kids, so along with your school rollout nationwide, can you talk about your sales and marketing budget for that?

Are we expecting to see some sales and marketing increases in the coming quarters?

Stephen, you want to take that?

You have the budget.

No.

I think that we will spend a little bit more selling and marketing expenses in POP Kids, the new rolling-out program.

A little bit, but not much, in the Q2 and Q3.

I think it's been well telegraphed to the market that these programs are coming.

Our competitors have been bashing us, saying that we have old content, so I think a lot of the parents know that the new program is coming.

Got it.

Thank you.

Trace Urdan, Wells Fargo Securities.

Thank you.

Louis, you referenced in your prepared remarks the strategies of first expanding the markets and then harvesting the markets, and I think that I heard you describe now a more balanced strategy going forward.

In each of these phases, one of the challenges that you seem to have had has been having the right incentives with local managers, and I'm wondering how to think about that in the context of this new strategy going forward, whether you've made any changes and whether you feel comfortable that all the folks that are managing the centers locally are onboard with what you're planning.

That's a great question, Trace.

Yes, in the old days, meaning like four or five years ago, we used to incentivize school heads, where their bonus component of their compensation was more or less about 75% related to revenue growth, and so that's why we experienced very rapid revenue growth of 35% to 40% for many years, as we expanded into new cities and added learning centers.

And then when we started harvesting the market two years ago, we flipped it on its head and did 75% or so targeted at profit and operating statistics, instead of revenue.

And so we saw the effect of 500, 600-basis-point improvement in operating margin last year to 17.3% on the cap basis.

Now, for this year, starting June 1, we have done it more or less 50-50, so we're hoping that the same effect will take hold, and then the school heads will balance, as we've asked them to do, profit and revenue targets.

So they'll be incentivized half revenue and half profitability measures.

Okay, thank you.

And then I wondered if you might also just -- I know you spoke extensively about your online strategy, but I wondered if you could take a step back and talk more broadly about what your intention is here.

Because I think that one of the perceptions is that you have so many different things going on, and I wonder if the brand power that you have in the marketplace is diluted across all of these different efforts that you're making online.

I wonder if you could speak to that a little bit and why you've chosen that strategy of having so many different online things happening at once.

Yes.

That's also a very good question.

I think our key core strategy is to offline, online integrate the whole ecosystem, so basically to make it easier for kids and make children much more productive in the courses.

And so that's the key -- and that's where most of the revenue will come from.

You won't see it, because it'll be built into the course fees.

So the O2O integration is the key.

The rest of the investments are in pure online model with Koolearn is because that's where the market is going.

The third part, of taking minority investments, is because we don't know when and if the next disruptive technology will come from.

So we're trying to take almost a machinegun approach and trying to hit all the points that related to K to college, and somewhat a little bit to professional training, because we think that's a good area for online education.

We're trying to cover our bases, Trace, and looking at partnerships as a way to grow in this area, because we don't know how it's going to shape out.

Do the local managers feel any level of anxiety with respect to the online activities, and do they have any kind of share in the revenue that comes from the supplemental online offerings?

They do get a share of the supplemental ones for the O2O offerings, because it's built into their courses.

They don't get a share of the Koolearn revenues, in that that's a separate subsidiary of New Oriental.

But I think as the local school heads I don't feel so much anxiety.

I think there's been a lot of hype about online education, a lot of investment going in and a lot of talk, but there really hasn't been anything yet where there's a lot of revenue and profit being generated.

So it's mostly talk right now, but we can't take any chances, so we have to have our hands in as many different pies as we can.

Okay, thank you.

Vivian Hao, Deutsche Bank.

Vivian, are you there?

As a reminder, the line of Vivian Hao is now opened.

Hello?

Hi, sorry.

Can you hear me?

Hey, Vivian.

Hi, Louis.

Hi, thank you for taking my question.

Sorry about this.

My first question is, could you please give us a guidance or indication of where we should be looking at the margins in terms of operating margins for this year and next year?

We understand for this year, probably the business will see deleveraging from the disappointing first-quarter results.

And also, what is the margin trend or our target for the future years?

I do have a follow-up question regarding that.

Thank you.

Thank you, Vivian.

Yes, I think the operating margin for Q1 was 600 basis points below that of last year, or more.

It was almost 35%, down to 28%, 29%.

So, yes, it'll be difficult for us to catch up for this fiscal year.

But Q2 margin should be better than last year, and Q3 and Q4, as well, should be better than last year, assuming we're successful in our POP Kids rollout and the other programs perform as expected.

And we did 17.3% GAAP operating margins last year.

In the long term, we would expect still to get to over 18% as time goes on, once some of the spending begins to turn into revenue in the online sector, as well.

So we would expect future years to be for sure better than this year, and this year slightly down from last year.

Last year was 17.3%.

Probably this year, we'll be down, 15% to 16%, and then next year should go back up.

Okay, that's very helpful.

Yes.

We're still targeting 18% higher for the --

Right, understood.

Yes.

So my second question, probably a tough one.

I guess some of the market understands this might be a one-off thing because of the policy change, but probably from my perspective, it looks like it's more structural, that we may not have recurring -- reacceleration of dorm students in some of the higher-margin segments.

Those see deceleration over quite some period of time.

What gives us the confidence that we can reaccelerate our business and see margin improvement going forward?

Well, I don't think we're reaccelerating.

We had one quarter where last year we grew 19%.

This year, we're forecasting, even not counting this disappointing quarter -- we're only forecasting 15%.

So we are decelerating, and it's because we're off a much larger base.

It's because -- you just mentioned the dorm-based classes are a structural issue and adult English is a structural issue.

So what gives us confidence that we will continue to grow at 15% or so is because our K-12 business, especially U-Can business, is growing over 20%.

It's over 30% of our business.

Kids is about 16%, 17% of our business.

If we take out the last couple quarters, it's also growing over 20%.

And then overseas test prep and overseas study consulting are growing 15% to 22% or so.

So that's what gives us confidence.

Together, those three groups, K-12, including U-Can and POP Kids and also overseas test prep and study consulting is about over 80% of our revenue.

And so if we can get those right, the ones that are dragging us down are becoming a less and less large piece of the business.

And also, as you mentioned earlier, Vivian, it's correct.

Structurally, we're getting so big here, $1.51b in revenue, we're three times, four times larger than anybody else, any of our competitors.

It is harder to grow off that base.

Okay.

This is very helpful.

Thank you.

Tian Hou, T.H. Capital.

Hi, Louis, Stephen, Sisi.

My question is related to your business seasonality and the impact of the softer seasonality.

For the summer season, the Q1, you have this camp, summer camp, or boarding school, so it looks like this part of the business has become a big, big negative to your business growth, drag down the quarter.

And certainly, Q2, we see a much better year on year compared with Q1.

However, as we're going forward, next year, we'll have another Q1, and we'll have another -- the boarding school, and so how do you see the future of this part of the business.

Is there any way to prevent this part of the business from becoming a big negative again?

If so, how?

If you can't prevent it, what's some other alternatives do you have to actually drive the company as a whole to grow further and while you offset the decline of the boarding school?

Thank you, Tian.

That's a good question.

We've been facing these kind of challenges for years, right, with adult English.

And so as you recall, eight or nine years ago, adult English was 30% of our business.

Now it's down to 10%.

The dorm-based classes for the summer used to be a third to 40% of our revenue, and now they're down to around 20%, so it's the same thing of every year it becomes less and less important in our business mix, as our faster-growing businesses, like All Subjects U-Can non-English and overseas test prep and others continue to grow in kids.

So I think we'll outgrow it.

The other thing is that this year is particularly bad, so it actually will have easier comparisons next year because of the policy changes.

So once the policy changes have been clarified, we don't expect the same 30% drop next year.

And plus, we'll adjust our costs accordingly, so we won't be expecting as much in the summer camps.

That's very helpful.

Thank you.

So I think this year was particularly bad.

Policy changes and pandemics, remember, are the two biggest risks to our business.

So we've seen this kind of thing happen before with policy changes, where we have one year where it's quite negative, and then the next year it bounces back.

But I agree with you wholeheartedly that over time, dorm-based classes will become less important as the students study throughout the year.

And that's also a function of the increase in competitiveness of other schools across the country, as we highlighted last quarter, right?

People used to pay the extra money to come to Beijing and Shanghai because New Oriental -- it was viewed that New Oriental classes were so much better than the local offerings.

Well, now, after five or six or 10 years, the local offerings are getting better, and so it's not as necessary to send your children to Beijing and Shanghai for the summer.

We understand that.

It's similar to what happened to adult English seven, eight years ago, and we managed through that quite well.

Okay.

That's why we're always looking for new revenue streams, right, Tian?

We're looking for online.

We're looking for the continued growth of non-English U-Can and POP Kids.

Another question is related to the joint venture or joint effort with Tencent, regarding the online education.

You guys have seen -- made an announcement last quarter, and three months have been passed, so do you want to share some update to us?

Yes, I can't tell you the specific programs, because I'll get in trouble if I do, but we have three different applications lined up.

And we expect a beta or a version of the program to come out hopefully early next year is the target.

It may be delayed a month or two, but right now, the teams are fervently working on the applications, and so we would hope to announce something or beta test something early next year.

Okay.

Okay, that's very helpful.

That's all my questions.

Thank you.

Thank you, Tian.

Fei Fang, Goldman Sachs.

Hi, Louis, Stephen, Sisi.

Thanks for taking my question.

Can you give us an update on the share buyback program?

Sure.

I think for the first couple months, we bought back about $35m to $40m, so far, I believe.

I think the average price is somewhere in the $21-something, so where the current price is.

Our share buyback is ahead of schedule.

We said up to $120m over nine months.

In two months, we've bought back about a third of it.

Understood, thanks.

You're welcome.

Charles Cartledge, Sloane Robinson.

Hi, Louis, Sisi, Stephen.

Just there hasn't been, I don't think, any granularity given as to the size of revenue and cost for the summer camp and dorm-tutoring classes.

So you've told us today that is or was 20% of total revenue.

Do you think you could just elaborate on the revenue and cost element?

Because I guess these results will have fallen short of Street forecasts in part because it's very hard for anyone to know how much -- you did tell us that revenues are going to be down 30%, but we don't know whether costs were flat in that division, for example, which would have obviously increased the margins --

I think the analysts and -- yes, for the analysts and for investors like you, Charles, I think Sisi can send something out on that.

I don't have the exact breakdown in front of me.

Sisi, can you prepare that for the analysts?

Okay.

That would be great.

Yes.

Okay.

I'll follow up.

For the dorm, especially the U-Can summer camp.

Thank you.

That's a good point, Charles.

Thank you.

Thank you very much.

We are now approaching the end of the conference call.

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

Thank you, operator.

Again, thank you for joining us today.

If you have any further questions, please do not hesitate to contact me or any of our investor relations representations.

Thank you.

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

Thank you for your participation.

You may all disconnect.