New Oriental Education & Technology Group Inc (EDU) 2015 Q3 法說會逐字稿

Ladies and gentlemen, good evening, and thank you for standing by for New Oriental's third 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 third 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 Stephen Yang, New Oriental's new Chief Financial Officer.

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 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 Louis Hsieh.

Thank you, Sisi.

Hello, everyone, and thanks for joining us today.

As announced earlier today, after almost 10 years serving as New Oriental's CFO, I and our Board of Directors have decided it was time to transition this role to Mr. Stephen Yang.

I am delighted to congratulate Stephen on his new position as our CFO.

Since I hired him in 2006, Stephen and I have worked closely together for more than nine years, and I am confident that he will make significant contributions to the Company in his new position.

I will remain President of the Company and will continue to be a member of the Board of Directors, focusing on overall corporate strategy and online education initiatives.

I want to express my sincere gratitude to Michael Yu and our Board of Directors for the opportunity.

It has been a great privilege and honor to serve as New Oriental's CFO the past decade.

I would also like to thank New Oriental's more than 33,000 teachers and staff for their dedication through good times and challenging ones.

We have accomplished a great deal, growing revenues from approximately $90m in fiscal year 2006 to almost $1.2b, a nine-year CAGR of about 37% and net income CAGR of over 55% to over $215m.

This tremendous financial performance has been reflected in New Oriental's share price.

Since our successful IPO on the New York Stock Exchange in September 2006 pricing at $15 per ADS, our share price has risen to almost $100, closing last night at $24.68 and accounting for a four for one stock split.

I believe New Oriental's best days lie ahead as China's preeminent private education services leader.

Finally, I want to thank New Oriental's shareholders and equity research analysts for your tremendous support these past many years.

And I look forward to continuing our professional relationship.

Now I would like to pass the CFO baton over to New Oriental's new CFO and my good friend, Stephen Yang.

Stephen, please.

Thanks very much, Louis.

I would like to thank Michael Yu, Louis Hsieh and our Board members for giving me this great opportunity.

All of you have been giving me full support and trust during the past nine years and I look forward to working with you continuously as we move forward.

Turning to a summary of our third-quarter results, we are pleased that we complete another solid quarter, with the revenue up by 13.1% year over year to $287.7m.

This increase was mainly driven by strong performance of our K-12 all-subjects after-school tutoring business, which grew 22% year over year to approximately $143m, contributing to almost half of our revenues.

One of our key segments, the U-Can business, saw an increase of approximately 29% in gross revenue and 12.4% in enrollment growth.

As we discussed in the second quarter, the Company has started to implement new customer loyalty programs to encourage repeat business.

And for the third quarter, this resulted in deferred revenue of about $3.7m, which is expected to be recognized within two years, without any additional expenses associated with such revenues.

So including this, our top-line growth would have been 14.6%.

As mentioned, this will be just temporarily dampening our revenue.

After six months of implementation, the Company has decided to narrow down the scope for loyalty program to K-12 only, starting in the month of April.

By doing so, we will be better able to capture the benefit of this program because K-12 enjoys much higher rollover rate than any other business lines.

That said, we expect the impact of loyalty programs and quarterly revenue will be reduced, which will be reflected in the performance in the first quarter of fiscal year 2016.

Turning back to the business performance, one of the most exciting news for the quarter is that our revamped POP Kids program has continued to turn around, with gross revenue growth about 7% and enrollment growth of 16%.

This is the first time we experienced revenue growth since its nationwide rollout in the second quarter.

Our new offering has reached 36 cities so far across our national school network, and market feedback has been very encouraging.

In the first six weeks of the fourth fiscal quarter, the POP Kids program reported over 30% growth in enrollment and almost 40% growth in cash received versus the same period last year.

We will continue to roll out our new POP Kids offerings in the fourth quarter and expect to see further pickup on both gross revenue and enrollments.

Total enrollments for the third quarter were flat year over year, but this was mainly due to the timing of the Chinese New Year in 2015, which we addressed in the earnings call for the second quarter.

The holiday occurred later this year, delaying enrollments for spring classes and resulting in a shift to the fourth quarter.

In the first six weeks of the fourth quarter, there has been a significant 35.8% uplift year over year in enrollments and a 43% increase year over year in cash receipts or cash collected in advance for enrollment.

Therefore, looking at the aggregated third fiscal quarter and the first six weeks of the fourth quarter will be most accurate to understand the business trend.

The total enrollments for the period over the third fiscal quarter and the first six weeks of our fourth quarter increased by 9.5% year over year.

For the same reason, we reduced the class hour in some cities to fit in two terms of the courses within the winter break.

Shortened class length has dampened our ASPs, with overall growth of 2.2% year over hear.

However, if you look at it on an apple-to-apple basis, ASPs increased by 5% to 10%.

Breaking it down, on an hourly basis, blended ASP for POP Kids increased by 5% and U-Can program grew between 5% to 10%.

Now, let me walk you through our performance across individual business lines.

Our K-12 all-subjects after-school tutoring business continued to be our key revenue driver and we recorded a gross revenue growth of 22% year over year for the third quarter.

During the quarter, this contributed to almost half of our revenues, even higher than 41% in the second quarter, as this business were getting into the peak season.

Breaking it down a bit further, U-Can middle and high school all-subjects after-school tutoring business achieved a gross revenue increase of approximately 29% year over year.

Student enrollments grew approximately 12.4% year over year.

And slowdown of growth were due to the timing of the Chinese New Year of 2015, as explained earlier.

And for the third quarter, the growth of our revamped POP Kids program business has turned positive for the first time since its rollout in the second quarter, with gross revenue growth of approximately 7% and enrollment growth of 16%.

With the new and better offerings, we are well positioned to realize further growth in the K-12 business.

I would also like to add our new POP Kids program has already been well received by the student market and we expect such positive performance to accelerate in the coming quarters.

As we enter into fiscal 2016, this will for sure help New Oriental to further differentiate ourselves in the competitive market in China.

Our overseas test prep and consulting business together achieved a revenue growth of more than 10% year over year for the third quarter.

Finally, the VIP personalized class business recorded a continual revenue growth of 10% year over year in the third quarter.

Turning to the balance sheet, New Oriental deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered, at the end of the third quarter was $424.9m, an increase of 11.4%, as compared to the $381.4m at the end of the third quarter of fiscal year 2014.

Now let me provide some updates on the ongoing execution for the Optimize the Market strategy.

Starting in fiscal 2015, we achieved our operating forecast to maintaining a healthy balance between top-line and bottom-line growth, while capitalizing on the substantial growth in China's online education market.

We continued to make solid progress on all fronts, which is laying down a good foundation for fiscal 2016.

As previously emphasized, as part of this strategy in 2015, we are in an investment mode, upgrading the infrastructure and optimizing resource in the existing cities.

The fourth quarter is halfway done as we speak and we are preparing for the new fiscal year.

And by then, we should be in a very good position to meet the increasing market demand and also capture the growth potential that we have identified.

Let me first talk a little bit about the core of our business and our focus on further driving our offline initiatives.

In the third quarter, we further expanded in the existing markets as we opened 20 new schools and learning centers and closed 11, adding a net of 9. In the first three quarters of fiscal 2015, we added a net of 19 learning centers, bringing our total learning centers to 722, and expand some existing learning centers, adding a total of over 5,900 square meters of the additional classroom area.

Going into the fourth quarter, we aim to open 5 to 10 new learning centers in cities that are driving both revenue growth and margin expansion.

For fiscal 2016, we will continue to open new learning centers in the existing cities and will also explore the opportunities in three to four new cities or schools where we see strong growth potential.

Looking at the online side of our strategy, we have been a pioneer in mobile Internet online education in China and never cease to improve and progress in all possible ways, in R&D advancements and O2O integration.

Another vision of ours is to be the largest digitized content library for K-College educational courses and tools in China.

For the third quarter, we spent about $8m to $9m, mostly of which were recognized as cost and G&A expenses.

For full fiscal 2015 year, the investment in online education is expected to amount to $30m to $35m.

Before I go into the details of the progress we've made during the quarter, just a brief recap of all three levels of our online platform.

The first level, also the core of our online system, is an O2O two-way interactive education system across all our business lines.

The second level is our pure online learning platform, koolearn.com, and supplementary online education products and other New Oriental brand.

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

Let's start with O2O two-way interactive education system, which we rolled out and upgraded in the first quarter across all major product lines, aiming to extend New Oriental's traditional offline classroom-teaching offerings to our education services.

We launched the U-Can Visible Progress Teaching System into over 30 cities in September 2014.

This is an online platform that supports after-class self-learning, and we expect this to help us better return customers.

The system is now being used in more than 40 cities and we expect a total of 50 cities by the end of the fiscal 2015.

As said earlier, we achieved a turnaround to revenue growth in the newly revamped POP Kids English program, "Shuang You", which offers interactive learning resources and multi-culture experience based on students' own interest.

The new program has now reached over 35 cities and we expect this to continue to expand and contribute to our revenue growth.

We have also seen good results from the launch of the O2O two-way interactive education system for the domestic test prep program.

The program has extend its coverage to six cities for the third quarter.

In March, we launched a pilot for the O2O for overseas test prep and target an official launch by the end of the fourth quarter.

For the second level of online education ecosystem, we have seen a substantial growth in koolearn.com and other supplementary online education products.

In third quarter, koolearn.com generated net revenue of $10.2m, representing a 39% increase year over year.

The number of registered users has increased more than 200% year over year, and now the number of cumulative registered users has reached more than 10.3m.

Koo.cn, our own live broadcast open platform for both students and third-party teachers, achieved about 256,800 registrations in third quarter.

"Donut", a series of game-based mobile learning applications for children, renewed its records of over 12m download set in the second quarter to more than 17m by the end of the third quarter.

"Le Ci", an English-language vocabulary training application we launched in late 2014 for mobile phones and tablet app, recorded over 1,146,300 users by end of the third fiscal quarter.

This is an increase of more than 40% compared to the second quarter.

Turning to the third level of our online education ecosystem, we have invested in select online education companies with a minority stake and we continuously search for new business opportunities that will not only complete our own offerings, but also support our goal to develop comprehensible online/offline integrated ecosystem.

Our investments included kouyu100.com, Alo7.com.

Terena and Juesheng.com, all of which are excellent in their own niche markets.

Last but not least, it's clear that our business is right on track as we laid out for the fiscal year 2015.

Also, as we mentioned in the past, 2015 is an important investment year.

And during the third quarter our operating margin and net margin faced with short-term pressure, which is within our expectation and as discussed previously.

We do believe that these efforts are necessary as we are eying the massive potential in the market and enable us to solidify our market leading position.

Now let's take a quick glance at some of the key financial metrics for the third quarter, in addition to the financials we mentioned in the beginning of the call.

Operating cost and expenses for the quarter were $256.3m, a 14.6% increase year over year.

Non-GAAP operating cost expenses for the quarter, which excludes share-based compensation expenses, were $251.9m, a 15.3% increase year over year.

Cost of revenue increased by 17% year over year to $126.1m, primarily due to the increase in the teachers' compensation for more teaching hours, which is in line with our revenue growth.

Selling and marketing expenses increased by 10% year over year to $41.7m, primarily due to the increase in selling and marketing staff's compensation.

General administrative expenses for the quarter increased by 13.4% year over year to $88.5m.

Non-GAAP general administrative expenses, which excludes share-based compensation expenses, were $84.2m, a 15.8% increase year over year, primarily due to increasing R&D expenses and human resources expenses related to the development of our online and offline integrated education system.

Total share-based compensation expenses, which were allocated to related operating cost and expenses, decreased by 16.7% to $4.5m in the third quarter of 2015.

Income from operations for the quarter increased by 2.4% to $31.4m.

Income from operations would have been approximately $35.1m if not for the accounting effect of the Company new customer loyalty program.

Non-GAAP operating income decreased slightly to $35.9m for the quarter.

Operating margin for the quarter was 10.9%, compared to 12% in the same period of the prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 12.5%, compared to 14.2% in the same period of the prior fiscal year.

Net income attributable to New Oriental for the quarter was $41m, representing a 2.6% decrease from the same period of the prior fiscal year.

Capital expenditures for the quarter were $16.9m, which were primarily attributed to the opening of 20 new learning centers and renovations at existing learning centers.

Now let me go through our expectations for the fourth quarter before we move into the Q&A session.

We expect total net revenue in the fourth quarter of 2015 to be in the range of $322m to $333.5m, representing year-over-year growth in the range of 12% to 16%.

Approximately $5m, representing about 2% of year-over-year growth, will be deferred resulting from the Company's customer loyalty program.

If not considering this impact, the projected revenue growth rate is expected to be in the range of 14% to 18%.

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

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

Operator, please begin.

(Operator Instructions) [Tian Yu], Goldman Sachs.

Hi Louis, Stephen and Sisi.

Thank you for taking my question.

Would you mind sharing with us more color around your investment plan on the online education initiative and then the potential impact on your margins in the fourth quarter and the fiscal year 2016?

How should we expect the margin trend in the coming quarters?

And also, can I quickly confirm with you that if we combine the third quarter and the first six weeks, the revenue growth should be 9.5% year-on-year growth?

Thank you.

Yes.

Thanks.

I'll answer the second question from you.

If you combine the student enrollments in the third quarter and with the first six weeks in the fourth quarter, the student enrollments will increased by 9.5%.

And for our online initiatives, I think the most important part is our O2O initiative.

In the -- almost the past year, we rolled out our new revamped POP Kids program successfully, and you can see the number in Q3.

Our GAAP revenue for the POP Kids was up by 7%.

And going forwards, we're doing the same thing as U-Can and overseas test prep.

And we spent $8m to $9m on the online and offline [corrected by the company after the call] O2O things in the third quarter.

And we will spend the same amount in the fourth quarter, but in the next whole fiscal year, what I mean is in 2016, we hope we spend not as much as this year.

So that means it will help to improve the margins of next fiscal year.

Does it answer your question?

Thank you.

Thank you, Stephen.

Okay.

Alice Yang, Macquarie.

Hi, Louis and Stephen.

This is Alice from Macquarie.

Thank you very much for taking my question, and congratulations for a solid quarter and Stephen for a new position.

My question is also related to the pure online part.

So can you share with us, what is the online revenue as a percent of total revenue in this quarter?

And how do you see the trend going forward, say in fiscal year 2016 or 2017?

How do you differentiate your online versus offline costs?

Will you have any kind of concern or any kind of potential cannibalization between the two going forward?

Thanks.

Okay, thanks, Alice.

Our pure online revenue, with at least Koolearn.com, the GAAP revenue of the Q3 was up by 39%.

So it's much faster than our offline business.

And I think going forward, it will contribute more than before, and because the big class, non-mission-critical test prep takers, for example, for the domestic and overseas test prep, on purpose, we moved the students from offline to online.

And so the online revenue is booming.

So but the online revenue accounts for the 4% to 5% of the total revenue, and in the next fiscal year, it will be more than this year.

So I think the difference between the online and offline classes is -- the first difference is the age.

I think that for the adult students or the college students, are suitable for the pure online study.

But for the K-12, most of them is suitable for study offline.

And so we moved most of the short-term, non-mission-critical offline classes from offline to online.

So you will see the pure online revenue grows faster than our offline classes in the future.

Okay.

Thank you very much.

A very, very quick follow up.

Say, for example, in fiscal year 2016 or 2017, do you think that the online revenue will contribute like high-single-digit percent of total revenue?

Do you have --

Yes.

We haven't finished the budget yet, but I think the trends will go up.

So in the next two to three years, I think that the percentage of the online revenue will meet high single digits, maybe the 7%, 8% or 9% of the total revenue.

Thank you.

Thank you very much, great.

Ella Ji, Oppenheimer.

Good evening, management.

Louis, thank you for everything you've done for New Oriental.

We will miss you.

And, Stephen, congratulations on your new role.

I have two questions.

The first question is relating to your POP Kids program.

Since that you have seen such a strong enrollment performance with the program, could you talk about your thoughts on price increases in future quarters?

And secondarily, also relating to your total OpEx spending, I noticed the dollar amount for both sales and marketing and G&A declined sequentially from fiscal 2Q.

Could you give us some colors why you spent less money than last quarter, and how should we think about the dollar amount spending for the fourth quarter?

Thank you.

Okay, thank you, Ella.

And the first question, about the POP Kids and the ASP, and yes, you are right.

I think it's a little bit more difficult for increase the ASP for the POP Kids, because the class is not mission critical.

But you know we successfully rolled out the new revamped product.

So it makes us differentiate with any other competitors, and our strategy is to seek the market share first, and so we just keep the ASP, increase rates by only 5%.

But we still have the price power.

That means we -- I think we need the more students to take the new product classes as early as they can.

And after they get hooked, we can continue as before to increase the price.

So this year, you will see the price of the POP Kids increase by only 5%, and next year, I think the percentage will be a little bit higher than this year.

And secondly, your second question is about our OpEx of online.

We spent $8m to $9m in Q3, and it's divided by two parts.

And we spent like the half of the -- we reported the half of them in the cost, so you can see our cost increased a lot than before, and most of them, the R&D expenses, like the IT people we report as the cost.

So that's the facts.

Does it answer your question?

Sure.

Then how about the dollar spending level for the fourth quarter?

I think the amount is almost the same as this quarter, so we will keep spending $8m to $9m on our OpEx for online.

Okay, got it.

Let me just have a quick follow-up relating to your sales and marketing spending.

Since you've rolled out some products by end of last year, such as uDA, we have not observed strong promotions relating to such online product.

As you will roll out more products throughout your calendar year 2015, how should we think about your sales and marketing spending for the online products?

Yes, uDA is quite new, so in kind of the test launch with English and a little bit math, so it has now been launched across the QQ and WeChat, so we didn't do a lot of promotions for the uDA.

And the aim for us is to put all the subjects in it.

It will be a long-term program, so I think it's just like the Koolearn.com.

Once the products got mature, we double paid users, like we doubled paid users in Q3, and once we feel the product uDA has matured and accelerate, we will use the QQ and wechat channel besides our own channel, and we will spend more on marketing expenses.

So I think our strategy for the marketing is the product first and then the marketing promotions.

Fair enough.

Thank you, Stephen.

Very helpful.

Thank you, Ella.

And thank you, Ella, for your compliment.

I'll miss you, too.

Tian Hou, TH Capital.

Hi, Louis.

So thank you for working with us, and let us know your new adventure.

And, Stephen, congratulations on your new role.

And the question is related to actually not this quarter we're in, but rather related to your summer quarter.

And last year, I do remember the summer quarter was kind of hit by multiple negative factors, such as the misunderstanding of the English examination policies, as well as your summer boarding school.

And now we're approaching summer, and those issues may be raised again.

So I wonder, what could be the situation this year?

Okay, thanks, Tian.

And for the summer, it's just now it's April, so it's a long way to go, but I hope these -- I think that in the coming summer, we will not meet the same policy problems with last year.

I think we'll be lucky this year.

And for the dorm classes, I don't think that we will hope the numbers will go up, but I think the dorm class revenue will kept be flat with last year.

And yes, you're right, for the Q1, our K-12 business, the Q1 is not a big season, but I think we will do as much as we can to get more student enrollments, but I think, about the student enrollments of the first six weeks in the Q4, we are in a good trend.

So I hope the trend will keep going forward, so we can -- I don't know the detailed numbers in the coming Q1, but I hope it's much better than Q1 last year.

Okay.

Thank you, Stephen.

Okay, thanks, Tian.

Jialong Shi, Credit Suisse.

Hi.

Good evening, management.

Thanks for taking my call.

Congratulations on the solid results.

I have a quick follow up.

I think Stephen just mentioned the normalized enrollment growth would be 9.5%, if we combine Q3 and the first six weeks in Q4.

I just wonder if management can provide more colors on the normalized enrollment growth rate for your different tutoring programs.

And also, given the strong momentum in your K-12 program, just wondered what will be the revenue growth rate you guys are looking at for next fiscal year.

Thank you.

Okay, thanks, Jialong.

Right now, our growth is going to be driven by three parts, the U-Can, the POP Kids and overseas test prep with overseas consulting.

So let me start with U-Can.

The U-Can is increased by about the 30% in Q3, and student enrollment is up by 12%.

So if we add back the first six weeks in Q4, it would have been a significant growth with more than 30%.

So in the long term, our U-Can will be the future of New Oriental.

The student enrollment growth rates will be above 20% at least.

And for the POP Kids, we rolled out the new products successfully, and the kids for the three months and six weeks, the enrollment was up by 20%.

So in the long term, it will have the almost same student enrollment growth rate as U-Can.

Maybe a little bit lower than U-Can.

And for the overseas test prep, the student enrollment growth will be flat, because the whole market doesn't grow as fast as before.

But I think the good news for us is the more and more Chinese parents rather to send their kids to study abroad in their younger age.

So it's not like before.

That means more and more young kids will take our overseas test prep program, and it will help us to improve the ASP, because the ASP for the SAT and TOEFL Junior is much higher than the GRE and GMAT.

And, overall, the revenue of the overseas test prep will be 10% or 10% to 15% in the future, and with zero student enrollment increase, with the ASP increase by 10%.

But if we combined the overseas test prep with the overseas consulting business, you know the overseas consulting business was booming in the last four or five years.

And, going forward, the business of the overseas consulting will be increased at least 25%, so the business line of overseas will be increased by at least 15%.

The only drag of our business is adult English and domestic test prep, but it was declined by 10% in the last three years in a row anyway.

And we moved most of the students, the big class of the domestic classes, from offline to online.

So, overall, if you see the Company as a whole, and the overall student enrollment growth will be probably around 8% to 10%, and the price increase, I think it will be like between 5% to 10%.

If when you break out, the ASP for U-Can will be increased by 5% to 10%, and for the POP Kids, 5%.

Thank you for the --

So that's why we guide the revenue increase by like the 15% to 20% in the future.

Thank you for the color.

Thank you.

Leon Chik, JPMorgan.

Hi.

Congrats on the results.

Just a couple of quick questions.

First of all, on the U-Can enrollment, growth of 12%, can I just confirm the enrollment does not include pure online students?

Yes, not much include the pure -- this is just the pure offline student enrollment of 12%.

And I guess it works up to around 15% or so ASP growth, because your sales was up 29%.

So what's the breakdown between tuition increase and students taking more courses?

Is it about half-half?

Yes, but we increased the price for U-Can just about 8% to 9%, so it's the timing difference of the Chinese New Year.

So the trend, apple-to-apple comparison, the basis, the student enrollments was up by 20%, and the price increase is by 8% to 10%.

So it's U-Can --

Oh, okay.

So (inaudible).

Yes, right.

Okay, thank you.

Okay, thanks.

Trace Urdan, Wells Fargo.

Yes, thank you.

I wondered if you could talk about the POP Kids ASP in a little bit more detail, and specifically, I'm interested in understanding what the trend is in class (inaudible) on a year-over-year basis.

Thanks, Trace.

Good question, and we almost finished the rollout of the new product of the POP Kids, and the new POP Kids had used the -- I think the successful strategy to -- so I think the strategy is to go after the market share first, and we increase the price later.

So we will control the ASP increase of this fiscal year.

What I mean is in the coming Q4, and maybe within the coming Q1, within the 5%.

But after that, we will increase the price of POP Kids about 5%.

It will be about the 10% year over year.

Right, right.

But my question isn't about the pricing, because you described that before.

It has to do with what the average number of class hours per student is, because that trend was down in the prior quarter, and I'm wondering if that's still the case, and when you would expect that trend to level out.

Yes, in the two quarters before, we changed some of the class hours for some cities, so from like the half-year class per course to three months, and I think the trend will be continued.

But it will not the big changes as before.

So I think the class length will be kept stable in the future.

Just so I understand, so the shorter length program, which requires more repeated renewals on the part of the families, that's part of the new rollout.

Am I correct about that?

Yes, yes.

You're correct.

So will we see that trend stabilize then in the first quarter of next year?

Yes.

I think the trend will --

For the second quarter of next year?

Yes.

The class length will be stable, because we almost finished all the 020 reforms, the initiatives of the product of POP Kids, so the trend will be stable, the class length.

All right, thank you.

Okay, thanks, Trace.

Alvin Jiang, Morgan Stanley.

Hi, Louis, Stephen, Sisi.

Thank you for taking my question.

My question is on investment.

As you mentioned, this year will be investment year, especially for those online initiatives, so what's your plan for the next few years, and do you have some kind of target, so after achieving those targets, you will consider to slow down such investments?

Yes, thanks.

That's a good question, I think.

And yes, this year is the investing year for online, and we almost finished the O2O reform for the POP Kids, and we are doing for U-Can and overseas test prep, all the business lines.

Yes, we spent $30m to $35m in OpEx for online, but next year, I think the number of investments will be the same as this year or a little bit less.

Because this year, we hired a lot of IT people and content writers, and we will keep them after the job, so they will follow up.

They will do a lot of follow-up jobs.

But this year, we spent some money on the third-party IT service from outside the Company, so next year, we don't need that part, so I think in the next year, the total spending will be a little bit less than this year.

Okay, thank you.

Allen Li, Deutsche Bank.

Hi, management, this is Allen, asking on behalf of Vivian Hao.

My question is regarding the partnership with Tencent.

So could management give us more color on what kind of the support we should expect from Tencent this year?

And in addition to the uDA, will we roll out more products with Tencent this year?

Thank you.

We did a joint venture last year and launched uDA, and I think the first step of the cooperation between New Oriental and Tencent, and as you know, we have the best content and teachers, and they have the most abundant distribution channels.

And so we are excited to seek further cooperation between us, and I think you will see some announcements in the future, but it's too early to say, because it's in confidential.

And for the uDA, as I said earlier, because we only have the subject of the English and a little bit more in math, so we just want to put all these subjects, all grades, the question-and-answers into the uDA.

And then we will use wechat or the QQ to roll out the products.

So I think the Tencent will help us to distribute our new products online.

Okay, [sorry].

Thank you.

Thanks.

Clara Fan, Jefferies.

Hi.

Thank you for taking my question.

I've got two questions.

First is I guess the ASP growth this quarter was better than last two quarters.

Is it due to the late Chinese New Year, that's why there was less enrollment then ended up with a 13% increase in ASP?

So I'm just wondering, what would be the ASP growth like if we do it on a normalized basis?

And what is the ASP growth expected in the next quarter?

And my next question is on your operating profit margin.

It's better than expected, and in particular, we see that the selling and marketing expenses in actual amount, it was less than last quarter.

And if we look at it as a percentage of revenue, on a year-on-year basis, it's also down 0.4 percentage points.

I'm just wondering what is the reason behind the lower selling and marketing expenses this quarter, and what should we expect going forward?

Thank you.

Okay.

I'll answer the second question first.

For the selling expenses, I think the first reason for the selling expenses not to increase so much is because we just opened six learning centers net in Q3.

So that means we don't need so much marketing expenses for the new learning centers.

The second one is we almost finished the O2O reforms for the POP Kids so that we don't need so much marketing expenses.

Once we roll out like the overseas test prep in the UK, we will spend a little bit more, but not as much as the two or three quarters before as the POP Kids, because more and more students and parents will know the product, the quality of the products much better than the older versions.

Your first question is about the POP Kids, the ASP, and I think that you may misunderstand about the ASP, because I think GAAP revenue is 13% in Q3.

And the enrollment is flat, but the cash revenue of the Q3 will be also flat.

So the ASP of the Q3 will be flat, but as I said earlier, if we add it back over the first six weeks, the ASP will be like 4% to 5%.

It's on purpose.

So in the coming Q4, I think the ASP will be lying between 5% to 10%.

And next year, it will be much higher than this year.

Thank you.

Okay, thanks.

We are now approaching the end of the conference call.

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

Again, thank you for joining us today.

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

Thanks.

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

Thank you for participating.

You may all disconnect.