New Oriental Education & Technology Group Inc (EDU) 2015 Q4 法說會逐字稿

Ladies and gentlemen, good evening and thank you for standing by for New Oriental's fourth fiscal quarter and fiscal year 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, Miss Sisi Zhao, New Oriental's Investor Relations Director.

Miss Zhao, please proceed.

Thank you.

Hello, everyone, and welcome to New Oriental's fourth quarter and fiscal year 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 head from Stephen Yang, New Oriental's Chief Financial Officer.

After his prepared remarks, 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 and 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 Stephen.

Stephen, please.

Thank you, Sisi.

Hello, everyone, and thank you for joining us.

I'm pleased to be able to provide an overview on both the fourth quarter and full fiscal year 2015 which we ended on a quite positive note.

We concluded the final quarter of the fiscal year with a continued steady recovery in both topline growth as well as student enrollments.

We believe this highlights the strength of the business as well as our success in driving forward the growth strategy we launched in early fiscal year 2015.

Introduced in the first quarter this year, our "Optimize the Market" strategy is allowing us to focus on maintaining a balance between topline and bottom-line growth as well as building out our online and offline integrated education ecosystem.

Our decision has proven right and our investments are beginning to pay off.

I'd like to sum up our key achievements in fiscal year 2015 by citing three key areas.

First, we made good progress in expanding our footprint.

We successfully further penetrated our existing markets where we see the greatest growth potential to drive up margin.

We added learning centers and expanded others, increasing our offerings in cities with the most potential.

Second, we had very good success with adding to and upgrading our major products which then in turn had a positive impact on revenue growth.

As one example, with respect to K-12 all-subjects after-school tutoring business, we continued to upgrade this and it has become the key revenue driver.

It achieved gross revenue growth about 15% for the fiscal year and also had a significant enrollment increase.

For further detail note that our U-Can program which is part of the business achieved more than 22% revenue growth for the full fiscal year.

This was achieved despite the negative impact from the uncertainty of the Gaokao reform at the beginning of fiscal year 2015.

Third, we made great strides in furthering our integrated ecosystem and pushing forward into the online space.

We are making a lot of progress in developing an online presence and one that will be well integrated with our offline offerings.

We believe our offering offline/online integrated program is more advanced than anything else that's being offered in the marketplace as it truly addresses the needs of both students and teachers.

This will surely further set us apart from our peers going forward.

Among all of our offerings in this area, our new POP Kids English program was a shining star during the fiscal year.

Since its launch in the second quarter we have registered two consecutive quarters of positive revenue growth and student enrollments have significantly picked up.

Judging by the very positive feedback from students and the market, we expect the product to achieve double-digit revenue growth in fiscal year 2016.

Also, the other business line of O2O systems, U-Can Visible Progress Teaching system, expanded its reach to more than 40 cities by the end of this year.

With a superior O2O integrated ecosystem, we'll be more able to increase customer stickiness, improve our pricing power and eventually we'll create new revenue streams through the provision of value-added learning services.

So as you can see, we had a busy year and although we did face challenges, particularly at the start of the fiscal year, we made great progress pushing forward our overall "Optimize the Market" strategy.

Also I want to take a minute to address our efforts to enhance shareholders' value during fiscal year 2015.

As we reported when announcing the third quarter, we completed a share repurchase program in March 2015, in an eight month period we repurchased nearly 3m ADS for an aggregated consideration of $59.4m.

Further to this, as you will have seen in today's press release, our Board of Directors has approved a special cash dividend of $0.40 per ADS to be paid on October 7, 2015, which will be another $63m capital return to shareholders funded by the surplus cash on the Company's balance sheet.

We are pleased that even while investing for long-term growth in both 2015 and 2016, we are able to deliver direct value back to our shareholders via buybacks and dividends.

Now let me turn to a short overview for the fourth-quarter revenue results.

Revenue was up by 14.4% year over year to $328.8m and was mainly driven by the enrollment recovery.

Total enrollments for the fourth quarter increased almost 35% year over year.

As we said in the previous call, the Chinese New Year holiday occurred later than usual in 2015, delaying enrollment for spring classes and resulting in a shift from third quarter to fourth quarter.

And also students chose to enroll in the summer class earlier than before resulting in a shift from the first quarter of fiscal year 2016 to the fourth quarter of fiscal year 2015.

Our key revenue driver K-12 all-subjects after-school tutoring business grew almost 21% year over year to about $164m, contributing 48% of our revenues for the quarter.

The U-Can business saw an increase of about 27% in gross revenue and a significant 65% growth in enrollment.

As discussed earlier, we started a new customer loyalty program to encourage repeat business in the fourth quarter.

This resulted in deferred revenue of about $5.3m, which is expected to be recognized within two years without any additional expenses associated with such revenue.

So if, including this, our topline growth would have been 16.2%.

As mentioned, the dampening effect on revenue will just be temporary.

Starting in April 2015 the company decided to narrow the scope of the program to include only K-12 business for select cities.

That said, we expect the dampening impact to reduce starting in the first quarter of fiscal year 2016.

With respect to the key factors in pricing, on an apple-to-apple basis, which is GAAP revenue divided by total teaching hours, ASPs increased by about 10%.

Breaking it down, on an hourly basis blended ASP for U-Can increased 5% to 10% and ASP for overseas test prep program increased about 15%.

For our POP Kids we're focusing on gaining the market share and capturing potential growth right now, so we continued the strategy of not increasing ASPs much until we gain further penetration into the market.

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

As mentioned, our K-12 all-subjects after-school tutoring business continued to have strong momentum.

We recorded gross revenue growth of 21% year over year for the fourth quarter and 15% for the fiscal year.

With improved offerings for POP Kids and our advanced teaching methods, we expect K-12 to continue to drive our business growth.

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 27% year over year for the quarter and 22% for the fiscal year.

Student enrollments grew significantly, around 65% year over year for the quarter and 29% year over year for the fiscal year.

And for the fourth quarter, our new POP Kids program business continued its steady recovery, with gross revenue growth of 6% and enrollment growth as much as 48% year over year.

This is an outstanding result as we have achieved two consecutive quarters of positive revenue growth following our revamp of this program.

Our overseas test prep and consulting business achieved growth of more than 14% year over year for the fourth quarter and 11% for the fiscal year.

Finally, revenue growth of VIP personalized classes increased significantly by 31% year over year in the fourth quarter and increased 19% for the fiscal year.

Now let me get to some more specifics on progress we made in the fourth quarter and fiscal year with our "Optimize the Market" strategy.

Let me first touch on our core offline business.

In the fourth quarter we further expanded in existing markets adding a net of two learning centers.

For fiscal year 2015 as a whole, we added a net of 21 learning centers, bringing out total learning centers to 724 and expanded certain existing learning centers by adding a total of over 11,000 square meters of additional classroom area.

As for our online business, we invested roughly $12m in the fourth quarter and $39m for the fiscal year to continue to drive this forward.

There are many untapped opportunities in the online education market in China and we're preparing ourselves to provide students and teachers with the best and most interactive resources and truly enhance our value for customers.

We believe no one in the China education services market is better positioned than us to capture this market growth.

Before I go into details of progress we made during the quarter and the year, 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 of our business lines.

The second level is our pure online learning platform, Koolearn.com, a supplementary online educational product 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 education offerings.

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

We launched the U-Can Visible Progress Teaching system into over 30 cities in September 2014 and it reached more than 40 cities by the end of the fiscal year 2015.

This is a unique online platform that helps students to study at class in a measurable and enjoyable manner.

It's one of the key offerings that set us apart from our peers in the market.

As said earlier, as we roll out the newly revamped POP Kids English program, Shuang You, our POP Kids program reported 6% revenue growth and drastically increased 48% enrollment in the fourth quarter.

The new program is designed to provide the most interactive learning resources and create more personalized learning experience based on students' own study records and interests.

38 cities in China are using this new program and more to come because pushing out the improved offerings is our focus in 2016.

We have full confidence that these advanced POP Kids offerings will strengthen New Oriental's brand awareness in the highly competitive education service market in China and help us capture extra growth.

The O2O two-way interactive education system for the domestic test prep program was being used in 6 cities by the end of this quarter.

And we are testing the O2O overseas test prep program in 7 cities so far.

For the second level of our online education ecosystem, we have seen continued growth in Koolearn.com and other supplementary online educational products.

In the fourth quarter Koolearn.com generated net revenue of $9.1m, representing a 26% increase year over year.

The number of registered users increased more than 67% year over year and the number of paid users increased over 138% year over year.

The number of cumulative registered users has reached more than 10.7m.

Koo.cn, our own live broadcast open platform for both New Oriental and third-party teachers achieved about 515,900 registrations in the fourth quarter.

DONUT, a series of game-based mobile learning applications for children recorded over 22.5m downloads in the fourth quarter, up from [17m] (corrected by company after the call) in the third quarter.

Le Ci, an English language vocabulary training application we launched in late 2014 for mobile phones and tablets app, reported over 2.4m users by the end of the fourth quarter.

This more than doubled from the results we had for the third quarter.

Turning to the third level of our online education ecosystem, we have invested in select online education companies with minority stakes and we are constantly looking for new opportunities that will not only complete our own offerings but also support our goal to achieve O2O integration.

In December 2014, we made an investment in Golden Finance, the largest finance training school in China, providing both offline and online test prep courses including, CFA, ACCA, CMA and CPA as well as some corporate training programs.

As at the end of the fourth quarter, the school was opening in 4 cities.

Later in March 2015, we made investments in RoboRobo, the largest robot-making education company in China targeting young learners aged from 4 to 15.

By the end of this fourth quarter, it had about 50 self-owned centers and over 70 franchised learning centers in 9 cities in China.

Together with our previous investments in kouyu100.com, Alo7.com, Tarena and Juesheng.com, we're in the process of building our O2O integrated education ecosystem and create more opportunities to partner with other new online education companies to enhance our product offerings and strengthen our leading position in China's private education market.

Now, let's quickly look at some of the key financial metrics for the fourth quarter.

Operating costs and expenses for the quarter were $306.3m, a 17.7% increase year over year.

Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $301.1m, a 17.4% increase year over year.

Cost of revenues increased by 20.8% year over year to $137.5m, primarily due to the increased teachers' compensation for more teaching hours and product R&D costs of our pure online education platform Koolearn.com.

Selling and marketing expenses increased by 3.3% year over year to $53.3m, primarily due to the increase in selling and marketing staff's compensation.

General and administrative expenses for the quarter increased by 21.7% year over year to $115.4m.

Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $110.4m, a 21.4% increase year over year, primarily due to increases in R&D expenses and HR expenses related to the development of our online and offline integrated ecosystem.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 32.1% to $5.2m in the fourth quarter of 2015.

Income from operations for the quarter decreased by [26.9%] (corrected by company after the call) to $22.5m.

Income from operations would have been about $27.8m, if not for the accounting effect for the Company's new customer loyalty programs.

Non-GAAP operating income decreased by 20.2% to $27.7m for the quarter.

Operating margin for the quarter was 6.8%, compared to 10.7% in the same period of the prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was 8.4%, compared to 12.1% in the same period of the prior year.

Net income attributable to New Oriental for the quarter was $35.2m, representing a 17.9% decrease from the same period of the prior year.

Capital expenditures for the quarter were $11m, which were primarily attributed to opening 26 new learning centers and renovations at existing learning centers.

Turning to the balance sheet.

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 fiscal year 2015 was $501.2m, an increase of 31.6% as compared to $380.8m at the end of the fiscal year 2014.

I'd like to talk a bit about our overall outlook for fiscal year 2016.

During fiscal year 2016 we will continue to implement the "Optimize the Market" strategy to further build out improved foundations we have laid over the past year.

As part of this we will have four key areas of focus.

We will continue to expand our offline business, we aim to enter 3 to 4 new cities where we identify the most growth potential and open 30 to 40 new learning centers for our K-12 after-school tutoring business in existing cities that are driving both revenue growth and margin expansion.

We will continue to invest heavily as we did in fiscal year 2015.

Fiscal year 2016 will also be an investment year as we work to fully build out our integrated offline and online ecosystem.

We will continue to invest spending about $50m in the fiscal year.

We can see that this investment is essential to help strengthen our market dominance and we're fully confident that all of these efforts will bring higher growth and sustainable profitability in the long term.

We will focus on additional quality improvements for all of our offerings.

We will hire better and more senior management, teachers, R&D and IT staff for our offline business, upgrade content, and be innovative with our products.

This is to ensure we have the premium offering in the Chinese market.

To achieve this we expect the total compensation for school heads, business line managers and key R&D and IT managers will increase by more than 30% year over year.

We will drive further operating efficiencies.

We remain keen on improving operational efficiency and cost control across the organization, so we'll continue to focus on this.

With this strategy as our guide for the year, we expect to achieve double-digit annual revenue growth.

At the same time, the strategic investments will continue to temporarily dampen our overall operating margin and we believe our fiscal year 2016 operating margin will be slightly lower than in fiscal year 2015.

This being said, we would like to highlight that our operating margin for our offline business has been experiencing steady recovery over the past three quarters.

With respect to the first quarter of fiscal year 2016 specifically, we anticipate total net revenue to be in the range of $441.3m to $457m, representing year-over-year growth in the range of 12% to 16%.

About $5.3m revenue will be deferred resulting from the Company's customer loyalty programs.

If not considering that, the projected revenue growth rate is expected to be in the range of 13% to 17%.

All in, we are excited about our future and believe we are taking all the right steps and are on the right track to achieve sustainable profitability over the long term and to consistently create value for our shareholders.

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

At this point we will take your questions.

Operator, please begin.

(Operator Instructions).

Vivian Hao, Deutsche Bank.

Hi, management.

This is Eileen, Eileen Deng, asking questions on behalf of Vivian Hao.

We have a question regarding the POP Kids.

We note that the segment enrollment growth was quite encouraging.

So we would like to get management's explanation of the forward-looking trend for fiscal year 2016.

Okay, the student enrollment for POP Kids is quite strong, and I think it's mainly driven by our good O2O products, so the students will give us very positive feedback for our products.

So we are taking market share now.

And going forward, I think for the next whole year, I would like to guide the student enrollment for the POP Kids about the 10% to 15%, with the price increase to 5% to 8%.

I think the revenue of POP Kids will grow by 15% to 20% next year.

Does that answer your question?

Yes, thank you.

I'll get back to the queue for my next question.

Thanks.

Okay, thank you.

Cynthia Meng, Jefferies.

Thank you, management.

We have one question.

Is the lower gross margin a result of lower pricing or more it's because of the increasing mix shift towards K-12 business?

I think the gross margin was decreased by 2% this quarter, and the first reason is that we spent more teaching hours in this quarter.

That means the VIP class contributes the percentage of the total revenue more than our small and big classes.

This is the first reason.

The second reason is for pure online company, Koolearn.com.

They spent $2m to $3m more than we expect before this quarter.

So that, they are the two reasons that dragged the GP margin.

But going forward, I think the gross margin will keep flat, or a little bit be lower in the next fiscal year.

I think the positive reason for the -- the positive thing for the gross margin is to -- for our rental expenses, it's only increased by like the 10%.

It will be lower than the revenue growth.

And even though we kept VIP class by 30% of the total revenue, and the fact is the VIP class, the revenue of the VIP class contributed more and more.

So the next year, I think teaching hours will be a little bit more than this year.

So I think the gross margin will be flat or a little bit lower, slightly lower.

Okay, thank you.

Does that answer your question?

Yes.

Thank you.

Alice Yang, Macquarie.

Hi, Sisi and Stephen.

Thanks for taking my question.

This is Alice from Macquarie.

I have a question about your 2Q guidance.

As the cash enrollment grows around 35% year on year in this quarter, so I assume most of them will be realized and accounted as revenue in the next quarter, given on average three-month cost span.

I don't know whether it's right.

If it's right, then why are you guiding relatively speaking a conservative 2Q revenue growth, is only 12% to 15%?

Is that the ASP sort of reason?

Thanks.

Okay, Alice, the student enrollment is quite strong, which is increased by 34% this quarter.

I think it's mainly due to the timing difference.

We have two reasons.

The first one is that the Chinese New Year for this year is late, so that's why the student enrollment growth for the last quarter was flat, was zero growth.

And the other one is that more and more K-12 business students choose to enroll summer class earlier than before.

So even with this timing difference, student enrollment is really quite strong, but on an apples-to-apples basis, I think the student enrollment is increased by like 8% to 10%, and with a price increase of 5% to 10%.

That's why we guided the revenue of the first quarter by 12% to 16%.

Does it answer your question?

Sure.

I just want to clarify one point.

When you say if we compare an apples-to-apples basis, enrollment increased by 8% to 10%, so what does it mean, apples-to-apples comparison, 8% to 10%?

I think you should exclude the timing difference, like the Chinese New Year and the early enrollments in Q1 so you can compare like the three quarters in total.

Oh, I understand.

Got you.

Thanks.

Yes.

Anne Shih, Brean Capital.

Hi, Steve and Sisi.

Thanks for taking my call.

So could you provide some color on the underlying dynamics of your overall average selling price?

It just looks like it dropped considerably this quarter.

And what trends can you anticipate going forward, I guess, by the different segments?

I know you've touched on the overall.

I think that your question is about the price increase.

On an apples-to-apples basis, we calculate the ASP by the GAAP revenue divided by the total teaching hours.

So the apples-to-apples ASP increase is about 5% to 10% in this quarter, and going forward, the numbers will be the same.

The ASP will be increased by 5% to 10% overall.

Any sort of very different kind of dynamics in each of the different segments, or were you seeing generally a strong ASP growth in all of the products?

Well, it means the overall ASP increase will be like between 5% to 10%, but for individual business lines, for the overseas test prep, the ASP increase will be over 10%.

And for the U-Can, the ASP increase will be at 6% to 10%.

And for POP Kids, the increase -- the price increase will be at 5% to 10%.

And for the adult English, the price increase will be at 5% to 10%.

So overall, it's 6% to 10%.

Okay, that's very helpful.

Thank you.

Okay, thank you.

Fan Liu, Goldman Sachs.

Hi, Stephen and Sisi.

Congratulations on a solid result.

So it's very encouraging that K-12's enrollment grew by 57% year on year this quarter.

Will the management share with us the drivers behind, i.e., which grades or which subjects or which regions witnessed the outperformance?

And if excluding the effect of late CNY timing, what did the normalized growth look like?

And also, we also know that revenue growth of the overall business, K-12 and the POP Kids, all lagged the enrollment growth accordingly.

So could the management share with us the reason behind this?

Is this more attributable to the decrease in paid course hours of the students?

How should we think about the trend going forward?

Thank you.

Okay.

And our K-12 business grew very strong in this quarter, and I think the main driver for -- in terms of the grades, I think the U-Can is much better than POP Kids, and the U-Can got the student enrollment growth by more than 60%.

And I think for the subjects, the non-English class grew faster than the English classes.

Yes, if -- as I said earlier, if we compared to the student enrollments and price apple to apple, the student enrollment growth will be at the 15% to 20% for the K-12 business, with the price increase about 5% to 10%.

So I think going forward, the K-12 business will get the revenue above 20% going forward.

And maybe you have heard like some class with very low price in the market, but it's only for the science class for the Grade One and [Grade Seven] (corrected by company after the call), so it's a small number of the total classes.

And so the overall price for the price increase for the K-12 business is 5% to 10% on apples-to-apples basis.

Does it answer the question?

Actually, so the revenue growth of the overall business and also K-12 and POP Kids are all lower than the enrollment growth, so the ARPU is decreasing, so what's the reason behind that?

Because all-in rates are still growing, so for ASP, it still grows by 5% to 10%.

Then what's the reason behind the ARPU decrease?

Is that because of the decrease in paid course hours of the students?

I think that apparently you see the price decrease for the K-12 business is -- the first reason is the timing difference, like the late Chinese New Year and people enrolled in summer classes earlier.

And the second reason is the -- in the summer, we will arrange some short-term classes compared to last year, so that's why you'll see the price difference.

But like I said, on an apples-to-apples basis, the hourly rate of the price will be increased by 5% to 10%.

Okay, got it.

Thank you.

Okay, thank you.

Leon Chik, JPMorgan Hong Kong.

Yes, hi.

Thanks.

Congrats.

The question is, if all these enrollment growth and all these enrollment numbers you're talking about, and even for the full-year enrollment of 2,896,400 student enrollment, do these include like online, pure online and very low ASP non-physical courses?

Or are these all live courses for your enrollment?

Hi, Leon.

Our enrollment is only calculated for our offline student enrollment, not calculated the online and very low ASP students.

So the huge -- for U-Can, for instance, the huge difference between your apples-to-apples 8% to 10% and your actual 65% enrollment growth, that's just purely all of this timing difference?

There's no other reason?

As I said, firstly it's the timing difference.

The second is that, in the summer, we have some short-term classes.

So I think to the ASP, the ASP change is structural, were some mix shifts.

So let's just say for the summer courses, and I'm enrolling in the end of May, right, I would be counted as an enrollment, even though the sales and the short courses start -- is mostly in the 1Q?

Is that how it works?

Like, if I sign up on May 29, I'm counted as one enrollment, even though the course is mostly in 1Q?

Is that how it works?

Yes.

Almost all the short-term classes will happen in 1Q, in the summer classes.

Okay, but if I signed up 4Q, you just count it in 4Q, right?

Yes.

If you sign in 4Q, we record the enrollments in Q4, but we record the GAAP revenue in the coming Q1.

Oh, okay, that's how you get this huge difference.

Okay, that's fine.

Okay, thanks.

Yes.

Thank you.

Okay, thank you.

Tian Hou, TH Capital. .

Hi, Stephen and Sisi.

One question is related to your loyalty program, and you put that in place a couple quarters ago, so the purpose was that it's really to increase the renewal rate, so I wonder what do you see today, compared with the time before you put this program in place?

That's the question.

Yes, I think the -- okay, go ahead, please.

One more question.

So there is one thing.

In the market, I think that there is a very tremendous uncertainty among investors, which is a lot of Chinese companies go private.

However, some companies, when they go private, they either purposely lower the price or whatever they do, so what that makes investors concerned.

If everything goes -- Chinese company planning to go private and purposely lower the price, then no one will ever buy China stock, right?

So definitely is not good thing, so I would like to have a clear answer from the management, what's your plan for your stock?

So two questions.

Thank you.

The first question is about the loyalty program.

We launched the loyalty program in last October, and we -- in March, we narrowed down from the -- all the subjects to K-12 business only.

And after the execution of the customer loyalty program, we are seeing the student retention rates guide higher by 1% to 2%.

So the loyalty program helps us to strengthen the stickiness of our students, and so going forward, I think the loyalty program will help us.

And for your second question, yes, we are seeing a lot of United States, Chinese ADRs announcing privatization plan this year, and plans to be re-list in Asia markets someday.

But New Oriental has no plan to privatize.

Our goal of the whole company is to focus on the business and create shareholder value continuously in the long term.

That's very helpful.

Thank you.

Okay, thank you.

Alvin Jiang, Morgan Stanley.

Hi, Sisi and Stephen.

Thank you for taking my questions, and congratulations on a strong quarter.

I have a quick question on the competition.

Do you think the price war in tier-one cities, especially in the after-school tutoring market, is going worse this summer?

Because I noticed there are a lot of attractive promotions from both you and your competitors, like online "one-yuan class" or "fifty-yuan class".

Do you have any special concern and this kind of price war will impact the margin in the long term?

Thank you.

Okay.

There is a lot of noise about the price war, someone called the price war recently.

And maybe you have heard the New Oriental provides the very low price with like the RMB50 or RMB10 in the market.

But it's only for the grade one and grade six, and for some cities, in the science class, like the math or like the chemistry.

So I think the purpose of this is to attract more students to try our new O2O products.

But the total number is quite small.

It's very small.

So I don't think it will hit the margin, because I think the impacts are very tiny.

Okay, thank you.

Does that answer the question?

Yes, thank you.

It's very helpful.

Okay.

Jialong Shi, Credit Suisse.

Hi.

Good evening, Stephen.

Thanks for taking my call.

My question is actually somewhat related to a previous question.

I read from Chinese media which quoted your Chairman, Michael Yu, as saying New Oriental may consider to spin off some of your business segments in the future and list those segments, business segments, separately in Chinese, Asian market.

So I just wondered, what are the business segments that most likely get listed in Chinese, Asian market?

Thank you.

Okay.

Thanks, Jialong.

As I answered Tian's question, New Oriental has no plan to privatize and go public in A-share markets, and also, we don't have any plan to spin off any subsidiaries to go public till now.

So that's my answer.

Okay, and can I ask another follow up relating to your K-12 program?

I just wondered if you guys provide any sort of breakdown of your U-Can revenue by top three cities and their respective growth rates?

You mean this quarter or going forward?

For Q4.

I'm sorry.

For Q4.

For Q4, okay.

Right.

The middle school, high school student enrollment is increased by 68%, and the GAAP revenue is increased by 28%.

You cannot calculate just the GAAP revenue divided by the student enrollment to calculate the ASP.

Right.

So what is the revenue breakdown by top three cities?

What are the top three cities for U-Can?

Oh, the cities, the Beijing accounts for 24%, 25% of the total revenue.

And the second one is Shanghai.

Shanghai is 7% of the total revenue.

The third one is Xi'an.

Xi'an is 5% of the total revenue.

5%.

So this is for U-Can.

5% for Xi'an.

So this is for U-Can, right?

Yes.

So what are the growth rates?

Not only for U-Can, but overall business also.

Oh, for the overall business.

So what is the growth rate -- what is the growth rate for you -- sorry, what is the breakdown for U-Can program, the top three cities?

We don't disclose the revenue growth rates by cities, so -- but I can -- can I disclose by the K-12 business by cities?

Sure.

Sure.

That would be great.

Okay.

Beijing is 24%, the first one, and the second one is -- I think it's Shanghai.

The second one is -- the second one is Xi'an.

It accounts for 8% of the total revenue of K-12 business.

The third one is Shanghai.

Shanghai is 5% for K-12 business.

I don't have the number of the U-Can business.

I see, I see.

So I just wonder, what are the growth rates for each of these three cities?

For the K-12 business, Beijing is increased by more than [20%] (corrected by company after the call), and Xi'an grew by 30%.

It did a very good job.

And Shanghai increased by [4%] (corrected by company after the call), because of the low base number.

Okay.

Yes, thank you very much.

Okay, thank you.

Andrew Orchard, Nomura.

Hi.

Thanks for taking my question.

I have a question with regards to your enrollment outside of the K-12.

And I think based on my calculations, we saw your test prep and English adult enrollment pick up this quarter, and that's I think been a reversal of the trend that we've seen over the last few quarters.

Can you give us some disclosure on why that's been the case?

Thanks.

The answer is mainly the timing difference.

So overall, if you look at the numbers going forward, the student enrollment of the adult English and domestic test prep will be decreased by 15% year over year.

With the ASP increased by 5% to 10%, the GAAP revenue will be decreased by 10%.

But we have the same situation in the last three years in a row.

Got it.

And 15% downwards for the next quarter, or this current quarter?

For the next quarter, yes, 10% to 15% down year over year, student enrollment.

Okay.

Okay, thank you.

Thank you.

We are now approaching the end of the conference call.

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

Again, thank you for joining us today.

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

Okay, thank you.

Thank you, everybody.

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

Thank you for participating.

You may all disconnect.