New Oriental Education & Technology Group Inc (EDU) 2016 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 2016 earnings conference call.

(Operator Instructions).

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 2016 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 Michael Yu, New Oriental's Chairman and Chief Executive Officer, and Stephen Yang, Chief Financial Officer.

After their prepared remarks, Michael 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 obligations 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 Michael.

Michael, please.

Thank you.

Thank you.

Hello, everybody, and thank you for joining us.

I'm happy that I'm on this call today.

I have decided that I will join the earnings conference call occasionally, providing me the opportunity to update our investors and supporters on important strategic initiatives and answer any questions you all may have.

As announced earlier today, the Company has decided to promote Chenggang Zhou to the position of President, effective on January 5, 2016.

At the same time, Louis Hsieh will step down as President, but he will remain on our Board of Directors and will serve as non-executive Senior Adviser to our Company.

We would like to congratulate Chenggang on his new position as our President.

He will focus on corporate strategy and oversee overall business development in China.

He has been with New Oriental for more than 15 years and has brought to us with his deep understanding of education services industry.

Actually Chenggang Zhou was one of my high school classmates, and I understand him a lot.

He has been with New Oriental for more than 15 years, first served as the Head of Shanghai School.

Actually he's the founder of Shanghai School.

And then he served as the Head of Beijing School.

And after that he served as Senior VP for all New Oriental Group.

And then he served as the CEO of Qiantu Overseas Consulting.

He's really a smart guy and has been helping me for all these 15 years for New Oriental's operations.

So we are confident that he will make a great contribution to our continuous success in the market.

In the meantime, I would like to thank Louis for all he has accomplished and the leadership he has provided during this important period of our business development in China.

I am pretty sure Louis is listening this conference and I really thank you for that, for 10 years accompanying us, for all these business decisions and the nice development of New Oriental in Chinese education area.

As our Chief Financial Officer, he led us through a very successful IPO on the New York Stock Exchange in 2006, and then he took on the role as President since 2009 to help us grow our business.

Going forward, Louis will remain on the Board and serve as Senior Adviser to New Oriental and also to me.

We thank Louis for his decade-long contribution to the Company and wish him all the best.

I'm also very happy to be here today specifically because we had a very strong first quarter, which is a strong reflection of our ability to continuously meet our promises for students and customers, by delivering products and services of the highest quality.

Also it has been a year since we embarked on the new strategy of "Optimize the Market," switching our focus to balancing between top line and bottom line growth as well as furthering our integrated ecosystem and pushing forward into the online space, building out our O2O programs.

We have had great success with this strategy, and our results today are testament to this.

As you can see, our hard work in executing this strategy is paying off.

To give you just a couple of high level examples, we opened two new schools in the cities of Wenzhou and Quanzhou, where we see the most potential.

Also our U-Can Visible [Progress] (corrected by company after the call) Teaching System is now being used in 52 cities across China.

And our newly-revamped POP Kids program continues to receive positive market feedback.

This is a very encouraging signal and it proves that we made the right decision to put so much effort into establishing the O2O ecosystem, which was still a very new concept in China not too long ago.

And now our new products are helping hundreds and thousands of Chinese students to progress much more quickly and effectively and efficiently.

Above all, we hope to create an enjoyable learning experience for the younger generation.

Before I go into the details for the first quarter, I would also like to say a few words about the surrounding economic environment in China, which has of course had a great deal of attention domestically and abroad.

I would like to point out that the softening Chinese economy is actually contributing a bit to our ongoing business recovery, which is quite the opposite of what people would normally expect.

Here is what you have to understand about Chinese parents.

When the economy is slowing down, they tend to enter into protection and preparation mode, meaning children will be facing a lot of competition in a few years, be it for the college entrance examination or for a job interview.

So he or she needs to be more equipped to tackle those challenges.

Better education is what parents immediately think of, and this is where New Oriental comes in.

With this reality as a benefiting factor, we will continue to work hard to create the best-in-class solutions for our students and teachers.

I would like to add another word, that Chinese parents have the habit of saving money for their kids for almost 18 years.

So, no matter the economy is going up or going down, it doesn't matter.

So, parents would like to pay the full tuition or full money for their kid's future.

So that's why that in New Oriental, it doesn't matter whether the economy is going down or up.

Parents are still paying money for their kid's education, no matter what happens in China.

The practice of Chinese parents is to save money for their kids.

It's not like United States parents, they use-- they rent from the bank.

So it's totally different.

So in addition, with the economic slowdown and the turbulence in China stock market, we do not expect as much wage inflation in the near future as private equity reduces the pace for the investment in online education startups, which is also good news for us.

Because if the investment in online education slows down, that means we have more time and more chances to find new opportunities in education areas.

So we -- by saying this, we expect also better retention of our school heads, teachers and other staff, because they do not have much opportunities outside already.

So, New Oriental is still the best brand name in China.

Now let's look in the details, in some details, at our quarterly performance, the first quarter of 2016.

During the first quarter we saw an ongoing recovery in both top line and the bottom line, with a healthy operating margin of 28.3%.

Revenue was up 16.4% year over year to $458.5m, and were mainly driven by the enrollment recovery, which increased 13.8% year over year to more than a million.

As Stephen mentioned last quarter, we are narrowing the scope of our loyalty program, so the impact on our revenue in the first quarter was minimal.

And we would expect the same for the upcoming quarters as well.

Our key revenue driver, the K-12 all-subject afterschool tutoring business, continued to excel.

And very excitingly, our newly revamped POP Kids program recorded a gross revenue increase of more than 30%.

This is a remarkable improvement from the single-digit growth over the past two quarters and we consider this a big achievement since the revamp a year ago.

With the positive market feedback, we expect this growth trend to continue for the rest of fiscal 2016.

In terms of pricing, per program blended ASP increased by only 3% year over year, which is the lowest over the past years.

On an apple-to-apple basis, which is GAAP revenue divided by total teaching hours, hourly blended ASP increased by 5% to 6%.

Breaking it down, on an hourly base, blended ASP for U-Can increased 5% and ASP for overseas test preparation program increased about 5%.

For our POP Kids, ASP increased about 7%, which is in line with our expectations as our priority at this stage is to get into the market and take domination before raising our prices.

Moving on to performance across our individual business lines, our K-12 all subjects afterschool tutoring business saw gross revenue grow over 29% year over year for the first quarter and enrollment growth up more than 23%.

U-Can middle and high school all subjects afterschool tutoring business achieved a gross revenue increase of 28% year over year, student enrollment grew 24% year over year.

For the POP Kids program business, as I said, saw increased momentum in the first quarter, with gross revenue up more than 30% and the enrollment up 23% year over year.

Our overseas test prep and consulting business achieved revenue growth of 10% year over year.

Finally, revenue for VIP personalized classes business increased 25% year over year.

Now let me turn to a discussion of our "Optimize the Market" strategy.

As we move into the second year of executing this strategy, we continue to reinforce a healthy balance between top line and bottom line growth, as well as building our integrated ecosystem.

Here are some updates on the progress we are making.

For the offline part, to start with our core offline business first, we added two new schools in the cities of Wenzhou and Quanzhou, which lie in the southeast part of China.

In order to optimize our resources and facilitate growth in the cities that can better drive up our operation margin, we closed a net of five learning centers, while expanding some existing learning centers, adding a total of about 11,000 square meters of additional classroom area.

To be sure, we are right on the track to reach the annual plan to open about 30 new learning centers for our K-12 business in fiscal year 2016 in existing cities and also enter four to five new cities where we see most growth potential.

For our offline part -- for our online part, as for online business, fiscal 2016 will be another investment year as we look to fully build out our O2O integrated education ecosystem.

Encouraged by the strong performance of U-Can and POP Kids, we are confident that these investments will enable us to further penetrate into the market and deliver sustainable growth.

As said before, we target to spend about $50m in fiscal 2016.

And for the first quarter we invested about $10m, most of which was recorded under G&A expenses.

Before I go into the details about our online business, just a quick recap of the all three levels of 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 and supplementary online education products under the New Oriental brand.

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

Let's start with O2O Interactive Education System which we rolled out and upgraded a year ago across all major product lines, in order to expand New Oriental's tradition of offline classroom teaching offerings to online education services.

This system continues to mature.

In the first quarter, U-Can Visible Progress Teaching System extended its coverage to all 52 cities in our network.

This rapid growth is a solid proof of how much our new products are being welcomed by our students and the market.

As said earlier, "Shuang You" our POP Kids English program picked up significantly this quarter, with revenue up to more than 30% and the enrollment up 23%.

By the end of the first quarter, 42 cities in China are using this new interactive program and we will gradually roll out in more cities in the rest of the year.

The O2O for the domestic test preparation program are being used in more than five cities now by the quarter-end.

And we have been testing the O2O for overseas test preparation programs in seven cities since May.

For the second level of our online education ecosystem, we have seen steady growth in our pure online learning platform and other supplementary online education products.

In the first quarter of this year, Koolearn.com generated net revenue of $9.8m, up 32% year over year.

The number of paid users increased over 150% year over year.

The number of cumulative registered users has reached more than 11.1m.

Koo.cn, our new live broadcast open platform for both New Oriental and third-party teachers, achieved almost 723,000 registrations in the first quarter.

DONUT, a series of game-based mobile learning apps for children, recorded over 28.2m downloads in the fourth quarter, up from 22.5m in the first quarter for fiscal year 2015.

Le Ci, an English-Chinese vocabulary training app for mobile phones and tablet app, recorded over 3m users by end of the first quarter of this year.

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

And we are constantly looking for new opportunities that will not only complete our own offerings but also facilitate our O2O integration.

Now I would like to turn the call over to Stephen Yang to provide more details on our financial performance as well as some information about our overall outlook.

Stephen, it's your turn.

Thank you, Michael.

Now let me walk you through the key financial details for the first quarter.

Operating costs and expenses for the quarter were $328.6m, a 15.9% increase year over year.

Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $324.9m, a 15.7% increase year over year.

Cost of revenues increased by 15.6% year over year to $171.7m, primarily due to increases in teachers' compensation for more teaching hours.

Selling and marketing expenses slightly decreased 0.3% year over year to $49.4m.

General and administrative expenses for the quarter increased by 25.9% year over year to $107.6m.

Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $103.9m, a 25.6% increase year over year, primarily due to increases in R&D expenses and human resources expenses related to the development of our O2O integration.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 35.6% to $3.7m in the first quarter.

Income from operations for the quarter increased by 17.5% increase to $129.8m.

Non-GAAP operating income increased 17.9% to $133.6m for the quarter.

Operating margin for the quarter was 28.3%, compared to 28.1% in the same period of the prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was 29.1%, compared to 28.8% in the same period of the prior fiscal year.

Net income attributable to New Oriental for the quarter was $128.5m, representing a 14.4% increase from the same period of prior fiscal year.

Capital expenditures for the quarter were $17.8m, which were primarily attributable to opening of 34 new learning centers and renovations of existing learning centers.

Turning to the balance sheet, deferred revenue balance, which is cash collected from registered students for the courses and recognized proportionally as revenue as the instructions are delivered, at the end of the first quarter was $511.7m, an increase of 28.3% as compared to $398.9m at the end of the first quarter of fiscal year 2015.

Now let me talk about our go-forward plans and expectations.

I wanted to first take a moment to reiterate our overarching goals for the year which we outlined on the fourth quarter's call.

During fiscal year 2016 we'll continue to implement "Optimize the Market" strategy.

As part of this, we will have the below key areas of focus.

We will continue to expand our offline business.

We'll continue to aim to enter four to five new cities where we identify the most growth potential, and open about 30 new learning centers for our K-12 after-school tutoring business in existing cities, that are driving both revenue growth and margin expansion.

Also, 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 O2O ecosystem.

We'll continue to invest, spending about $50m in the fiscal year.

We consider this investment 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 longer term.

Last but not least, 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.

As Michael mentioned earlier, we're seeing less pressure on wage inflation as economy slows down and private equity reduce the pace of the investments in online education startups.

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

At the same time, we're becoming more confident in our bottom-line performance as operating margin of our offline business has been experiencing steady recovery over the past four quarters and operating margin for the overall business also improved year over year in this reported quarter.

With respect to the second quarter specifically, we expect total net revenue to be in the range of $267m to $276.4m, representing a year-over-year growth in the range of 13% to 17%.

If not including the impact from the recent depreciation of renminbi against the US dollar, the projected revenue growth rate is expected to be in the range of 17% to 21% for the second quarter.

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

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

Operator, please begin.

(Operator Instructions).

Dick Wei, Credit Suisse.

Thank you for taking my question.

Good evening, Michael, Stephen and Sisi.

This is Dan Zhao calling on behalf of Dick Wei.

Could you share some color on the margin of each segment courses, like overseas test prep, U-Can and POP Kids?

I just wonder, with revenue contribution from K-12 keep rising, is there any impact on the margin trend?

Thank you.

Okay, I'll take the question.

I'm Stephen.

For the different margin for different business lines, for the overseas test prep, the margin, the operating margin for overseas test prep is about 30%.

And for the U-Can business, the operating margin for this business line is about 25%.

And for the POP Kids now, the margin's only 10%, but it's growing up very fast, because we're seeing more students filling in the classroom.

And yes, along with the K-12 business account for more and more percentage of the revenue, now it's 45%, and it's like 50% or more in the year after.

But we don't see, like the margin dilution by these things, because we're seeing more and more students filling in the classroom.

That means it will help us to improve the utilization rates up.

So I think the margin will go up, especially since the fiscal year 2017.

Because you know last year and this year, we are in the heavy investments, and we'll spend $50m in this year.

And so since next year, the margin will go up.

And I think next three or four years, the 17% or 18% is our target for the operating margin.

Thank you.

Thank you very much.

Okay.

Pardon me, sir.

Can we move to the next question?

Sure.

Okay.

Fan Liu, Goldman Sachs.

Thanks.

Hi, Michael, Stephen, Sisi.

Thank you for taking my question.

It's very great to have Michael in the earnings calls going forward.

Thank you.

And congratulations on the solid results.

So I have two quick questions.

The first one is regarding the overall industry landscape.

Do you think in the pre-K and K-12 market we can see the market leader with considerable market share, i.e.

above 20%, emerge in the medium or longer term just like what New Oriental has been able to achieve in the overseas test preparation area?

And also the second one is about the online education.

So, would you mind to share with us more colors about your U-Can Visible Process Teaching System?

What's -- from what kind of perspective, you will see online will add value to your offline facilities?

Thank you.

Yes.

Sure.

Looking forward for the next five years, I'm pretty sure that K-12 business for Chinese students will be our -- one of our main businesses.

Of course, overseas test preparation and consulting business will also be our main business.

But I can see that K-12 business will be growing faster, because this is a big market, much bigger market than overseas consulting -- overseas test preparation and consulting business.

And also New Oriental is new in this market actually.

We have just gone into this market for like about, mainly, for three years.

So I can see that, for the next three to five years, we can keep our growth in K-12 about 25% or even maybe, if we are doing much better, maybe up to 30%.

I'm pretty much confident on this actually.

So this is a very good business.

And also what I value this business, is that, because these kids are growing up from like about -- from 4 years old up to 18 years old, so I'm pretty sure that New Oriental has this strength on educating students and families about how to build up healthy personalities and characters for all these kids.

That's just, if you're from China, you pretty much know that this is my strength also.

And the second is the online business.

And after long-time consideration and of course independent thought, I'm pretty sure that even though there will be pure online business in China, and New Oriental also is venturing to all kinds of possibilities in this area, but I'm pretty sure by starting online businesses and offline businesses all over China, and of course all over the world actually, including starting the MOOC system and other systems, I'm pretty sure for New Oriental, the online business, the main part will be online and offline altogether.

That is it's a kind of synchronized or merge the business from offline to online and then from online to offline.

That's what you mentioned, the U-Can Visible Progress System is kind of this online and offline combined together, which you can see that students are so much interested in this because they are studying in the classroom but they can all use all these online gadgets and apps to see how their progress are made, and then how parents are viewed about their progress, and then how teachers evaluate their progress, and then intellectually assign the new studying content for them to finish offline and online altogether.

And after that, we can collect the big data, all of the students' studying habits, and then we can research the new products for students and new content for students.

So I'm pretty -- value this online and offline together business, I'm pretty sure if we can use online and offline business much better, then this kind of strategy can push New Oriental forward for the next five years.

Of course, I'm also value for online-only business, online studies.

Because like -- which are divided for students from 18 years old above, I'm pretty sure these 18 years above students were very conscious students, that is they want to study by themselves.

So, if they can save time and save money, they want to get online to study.

So, one of my focus nowadays is to -- some of my focus actually, very important focus are online business for those subjects above 18 years age for students, which I'm pretty sure we will have a great result.

Let me give you an example.

Like we have a domestic business for students studying English and then the graduate school entrance examination.

For this year, for the first quarter, actually we are combining online and offline together for students if they want to get online, they can get online freely and then if they want to get offline, they can get offline freely.

Before that, online group and offline group are two independent groups and they fight with each other.

But now they cooperate with each other, because I put these two groups into one group.

We can see a growth, a very, very good growth in domestic businesses nowadays in New Oriental.

I am not very sure how much the growth will be, but for the second quarter and the third quarter if we are still by the phone for our quarterly report, I am pretty sure I can give you a very good result for this.

So, I myself are pretty open for online and for all the technologies, for all the advanced ideas used in education and I'm pretty sure New Oriental is in the position to combine online and offline and in the end to develop those purely online businesses into the future.

So this online business and online -offline combined together will be a main part of New Oriental's business strategy in the next three to five years, but will be with a very good result, I'm pretty sure.

Thank you, Fan Liu.

Thank you, Michael.

It's very helpful.

Anne Shih, Brean Capital.

Hi, good morning.

Thanks for taking my question.

So just following up on what Michael just mentioned.

It sounds like the online business of course is a key part of the company's growth strategy.

Besides Koolearn and I understand this is still early, could you share the total revenue from these three online businesses?

And as this reaches a more meaningful contribution level, I was just wondering where perhaps the margins are falling out and would normalize longer term.

Thank you.

Thank you.

This is Stephen, I will take your questions.

And Koolearn, the GAAP revenue grew very fast, more than any other offline business.

The GAAP revenue of Q1 grew by more than 30% year over year and the margin is now only -- is just at the breakeven, because as we told you, we call this investment year and so the strategy what you're seeing for pure online platform is to go after the market share first, that's why you're seeing our paid users get 150% year-over-year growth.

But I think the margin of the pure online business in the next three to five years, it should be higher than the offline business because they don't have like the some rental expenses, they can save a lot of money on that.

And also -- the GAAP revenue of the Koolearn only contributed 3% of the total revenues, these are only small parts on the total business but it's growing very fast.

Does that answer your question?

Yes, let me add some of my ideas about pure online education.

Koolearn.com is only contributing 3% of our New Oriental total businesses.

I'm pretty sure that it will take some time, I don't know how many years it will take for the online business like Koolearn and koo.cn to have a significant contribution to New Oriental's total business.

The reason is that I think that people in China and all over the world it takes time also for people to recognize that online teaching methods or online learning contents sometimes will be much more efficient and effective than offline business.

So for the next several years I'm pretty sure that Koolearn.com and the koo.cn will be the fast or the fastest growing business part in New Oriental.

I'm pretty sure that they will grow about more than 30% every quarter or every year.

But still even though it grows more than 30% every quarter it will take a long time to become a significant part, contribution of New Oriental, because as a whole New Oriental business is also growing around like 15% to 20% every year.

But we still have to take a chance of this because maybe it will represent the future of education, not only in China but maybe all over the world.

And of course, I'm paying great attention to the offline and online combination.

We are still using Koolearn.com to use as a pure online business but also we are telling students that sometimes if you really want to study offline we are also ready for you here.

So I'm pretty sure that we are building up a chain of education business or ecosystem here in New Oriental.

So give us enough time I'm pretty sure you will see that we will have very good experience and results in pure online business and offline and online business combined together.

Thank you.

Thank you.

Tian Hou, TH Capital.

Hi, Michael, Stephen.

Congratulations on a good quarter and good to have Michael on the call.

Thank you.

So I have a couple of questions.

Yes, one is related to your loyalty program and since the time you started it has been going well and I wonder how do you actually measure the results of the loyalty program in terms of (spoken in Chinese) [meaning retention rate in English] (corrected by company after the call) and if you compare last quarter with a year ago and which is actually, it's really what has this loyalty program impact, one, didn't have this impact of this loyalty program.

So how do you see the difference in the (spoken in Chinese).

That's number one question.

Number two is, you have a lot of cash, certainly I didn't know you have this cash, the share repurchase program, but to better use the cash, there are lots of things for New Oriental, you can buy and so from past experience, your acquisition experience, you have some company acquired and then you also divested some company.

So in education area, in your area, what are the key for a successful acquisition, what are the key for not a successful acquisition?

For you, what's your goal or what do you want to do with your cash in terms of acquisition going forward?

That's two questions.

Okay, thanks, Tian.

I'll take the first question about the loyalty program and Michael will answer the second one.

And for the loyalty program, we launched the customer loyalty program since last October and now we've narrowed down the scope of the program to some schools' K-12 only since this April.

So the negative impact of this quarter is very minimal and since next quarter I think the impact will be positive.

Last Q2 we had 4m, that means the 2% of the total revenue of net impact for both bottom line and top line.

Now this Q2 I think the net impact will be only 1% of the total revenue, so we have a very easy comparison.

So I think it's good for both the top line and the margins.

And I think the situation will be continuous in the rest of the year.

So that's my question for your question about the loyalty program.

And I think Michael will answer the second question.

Yes, thank you, Tian.

First, let me express that my love about cash.

I really love cash in the Company no matter in good time or in bad time, cash is always the best thing for the Company to go forward.

As for cash we have especially those cash that has already been the net income for New Oriental and we would like to actually in due time to have buyback shares program and also to have the dividend program to give more money to give back to our shareholders.

Of course, on the basis that we don't have any more money to invest into new areas and also don't have any new acquisitions that you already mention.

I would like to use money except, besides to give money back to shareholders as in dividends, to use the money to do the investments and to do the acquisitions for a better future of the Company and for long-term development of the Company.

As for your questions, what is the key factors for a good acquisition and for a bad acquisition.

Let me tell you that as being in education for more than 20 years and since New Oriental have been an IPO for almost 13 years, in education, it is really difficult, let me tell you, to get a very good acquisition.

The reason for that is that education is a very low threshold business and everybody can rush into this business and also it's a very fragmented business that means that not everybody can do a good business in education areas.

You can see, like about a little more than five to six years ago, there were many people carrying cash to invest into education areas in opening learning centers.

There are about more than, I'm pretty sure thousands of those schools who opened the learning centers in China, but half of them are gone.

They disappeared because they lose money or they cheated parents out of their pockets and they cannot refund the money back to parents or students.

Then about two years ago there are also many investors like venture capital or angel capital who invested lot of money into online business and they valued very high the online business in education question because they think that online education business will be the future of education in China and all over the world.

But we can see that up till today, there are many, many online education business have been closed, because there is just no business model in this area.

And they said that they want to build a bridge between the parents and the teachers and then they said that there is no training education companies needed or school needed to train them, but up till today I have seen none of these companies has made any money out of this and most of them are losing big money.

I am pretty sure that there are many, many companies who will close their businesses within this year or the next year.

So for acquisitions in New Oriental, I'm pretty sure, I'm planning to acquire those companies or schools, will build up the ecosystem, the ecosystem of New Oriental education environment and also that the business which is especially the vertical businesses, even small business will add up values for New Oriental businesses.

And we have also invested in minority shareholding stocks for some companies, about like 10 of them up till today and every one of them are very successful to helping New Oriental in doing further business and we are helping them to do further business.

So for acquisition, a successful acquisition will be the acquisition that will be supplementary to our business and will add values to our business and will have the same cultural environment or same culture within the business.

And for a bad acquisition it's only for money, for revenue then after the acquisition those management teams go away and you do not have management to help manage this company and the company goes little by little and goes down.

So for me, my focus for the next several years will be on acquisitions, because this is the necessary path for New Oriental to become a great company.

But I will be very careful which kind of companies I'm going to acquire, but, Tian Hou, be pretty sure that I will be a person who can be called kind of an expert with expertise in China education.

So believe me, I will be trying my best to do everything right.

Thank you Michael.

That's very helpful.

Cynthia Meng, Jefferies.

Thank you.

I have two questions.

Is the higher gross margin as a result of higher pricing for the K-12 business?

If management can give some more color on that, that will be great.

Also we're wondering whether you could share with us how we can see the margin trajectory for this year and maybe talk about because of the add-on businesses that the new growth areas, how are you seeing the market trajectory going forward beyond this year.

Thank you.

Okay, I'll answer the question first for your margin question.

We are happy to see the margin improvement by the 20 bps in this quarter.

I think it's mainly due to that we've got much more revenue than expected at the first quarter.

And I don't want to give the detail guidance for this year margin, but I can say that we are seeing the business resilience during the economic downturns and the revenue growth is the trends were good.

So I think the bottom line trend will be also very good and we're quite confident about the long term margin expansion.

Last year and this year, our peak for the investments, we'll keep spending like $50m for the online investments.

So what I mean fiscal year 2017, I think our margin will definitely go up.

And to get 17% to 18% in the next three to four years.

What's your first question?

Let me answer the question.

Yes, for the margin projection, I'm pretty sure that the margin will go up like Stephen said, but not really in new growth areas, because new growth is in kind of a cultivation area, I'm pretty sure that we have to spend more money on these new areas that in the next few years will grow up and give us good margin.

But I'm pretty sure that the margin growth will be from actually let me see from like POP Kids, U-Can and overseas test prep, all those areas because what we are doing is a strategy to add more students in each classroom, to raise the teaching quality so that the teachers can attract more students to their classrooms.

This will raise our margin I am pretty sure over the next year or next several years.

But we will pay great attention to the new growth area, no problem.

For the high pricing, let me express my personal view.

I myself am very strongly against the high pricing policy in any education area, not only in New Oriental but in other areas.

So for this year you can see the number of students that rising in New Oriental is much faster than it was before.

The reason is that I'm emphasizing the teaching quality and every teacher brings more students into the classroom rather than raising each student's price for each class.

I'm very against about those rising price strategies, the high price projects or programs.

So I'm pretty sure that this first quarter have a good result, is not because of high pricing, it's because we have the right strategy to emphasize on the teacher's qualities and the teaching qualities and give teachers more salaries and bonus for their good teaching.

So this is what we will be insist on for the next even maybe forever I don't know, but I'm pretty sure this will be -- of course we will reasonably be raising our prices for each student, but this is not our main strategy.

The main strategy is to ask the teachers to give more -- the much better quality of teaching, so that we will attract more students and parents.

Thank you, Meng.

Thank you.

Leon Chik, JPMorgan.

Yes, Michael, Sisi.

I remember when I started covering you guys -- before there was a lot of drama last year and first quarter in terms of English, whether it's required or not in universities and then the English camps in the summer kind of went down a lot.

So the question is, is that basically like old news, been resolved and things are now at least stable and growing and there is like nobody worried about the uncertainties of English required in the Chinese universities.

Yes, thanks.

That's it.

Yes, let me tell you, actually English is always required, always needed by Chinese people and the Chinese parents.

But for New Oriental, like about a year ago we once had a department, project called English learning programs.

But we see that actually those students who are in Pop Kids English and U-Can middle school, high school program and also overseas or domestic, these students have divided themselves into different departments of New Oriental.

That is for those students from 4 years to 12, they were studying Pop Kids for English and up 12 to 18 they were studying U-Can, and above 18 they were studying domestic in universities.

So that's why we break up our English programs, ask those students to go to different aging groups to study English.

That doesn't mean that English is not needed for Chinese people.

So we can see actually a raise of students numbers in studying English in New Oriental but we nowadays we don't have a pure English studying department or pure English studying project in New Oriental because those kids have been divided into all different groups.

This is actually good for New Oriental because while they are studying English in the same age group, they also can choose to study maybe Chinese or mathematics or physics or chemistry, so that's why we can see a good raise in numbers of students in New Oriental in K-12 system.

So I think this is a good strategy.

As for Chinese people, those adults who want to learn English, we are now build up some pure English studying gadgets and apps for these people, like "Le Ci" who have students to study vocabulary, like vocabulary actually is my strength when I was in university and when I was teaching in New Oriental, but nowadays we do not ask the students to pay money to study in New Oriental for remembering vocabularies because this app "Le Ci" can help the students to remember all these words also.

So after they remember all those words, we invite the students come to New Oriental to listen to other studies, maybe grammar, while maybe to pass an examination like test preparations.

So this is more effective students.

On the one hand, the student feels that they have been saving money and on the other hand, they feels move effective because they can studying vocabulary for example, later maybe oral English or writing any time they want.

So English has never been an uncertainty in China.

Chinese people have never been more eager to study English than ever before because they know that their kids need English language proficiency in order to survive better in this world.

Thank you, Leon.

Okay, thank you.

[Julia Pan, Macquarie]

Hello, management, congratulations on the strong result.

I think Michael just answered my question for the dividend.

Thank you, Julia.

Thank you.

I noticed that there is $62.6m dividend payable in our balance sheet, does that mean we're going pay the special dividend on fourth quarter of fiscal 2016?

And another question, can you please give us some color on the overseas test segment, the enrollment growth and the revenue growth please?

Thank you.

Yes, we paid the dividends in October.

So I think you will see the numbers in the finance statement next quarter.

And for the oversea test prep in Q1, the GAAP revenue is up, increased by 9%.

Don't forget in the last quarter in the Q4, the GAAP revenue for overseas test preps was only 3%.

So I think the business is recovering.

And also we are doing the same thing as the U-Can and what we have done for the U-Can and the Pop Kids, we are rolling out the new O2O initiative -- new products for the oversea test preps.

And for the student enrollments, overseas test prep was down by 6%, but yes, I think the whole market doesn't grow very fast.

So in the long term I think the number, the student enrollment growth for the overseas test prep will be flat or a little bit depressed, so mostly the increase will come from the ASP increase for the oversea test prep.

Julia, let me add some points.

I myself am very interested in overseas test preparation, as you know that I'm from that area, New Oriental started from that area.

We can see that there is a slowing down of the number of students who want to go abroad to study because the number almost has reached the top, because not every family can afford for their kids to study overseas.

But I still feel regretting that New Oriental is not growing as fast as possible.

Of course one of the reasons is number of students is not growing all over China for overseas.

But another reason is that for those past two or three years we have paid a great attention to K-12 education, so we have put some of our resources in K-12, but from this year my personal attention and New Oriental's also some of the resources will come back to overseas test preparations because in my mind this is a great area to help Chinese people to have a bright future.

So for the rest of the year and for the next several years, you can see that we will also build up some great systems for students who are studying overseas.

And also I personally will put more of my attention in this area and maybe we'll do more next lectures and also some encouragement for students to study in this area.

So I'm pretty sure that the growth will not only come from the price increase even though we have space in this area to raise price, but I'm also pretty sure that by our efforts, more students will choose New Oriental to study for their test preparations and also choose New Oriental for their consulting overseas studies in universities.

So I'm expecting not only 10% increase in this area, I'm expecting for the next several years maybe more than 10%, I don't know how much but 10%, 15% is my expectation or even better than that.

That's not my promise, but that's what I want to say that's my efforts in this area because this is where we start out.

It's kind of like if you're familiar with Chinese history, it's like Yan'an in Chinese history for Communist party, we cannot lose that.

Thank you Michael, thank you, Steve.

Thank you, Julia.

Jin Yoon, Mizuho.

Hey, good evening, guys.

Just two follow up on your previous remarks.

I apologize in advance if I misunderstood, but you said that operating margins may be going up to 17%, 18% over the next few years, but you also followed that up and said that you don't believe that ASP increases meaningfully over that time.

So can you just kind of help me reconcile how you get up to 17%, 18% if ASPs are not necessarily increasing meaningfully and without a very significant reacceleration in revenue growth?

So do you expect a majority of that growth to come from online scalability as well as new student growth?

Trying to ballpark the -- how we reconcile the 17%, 18% margins with that meaningful ASP growth.

Thanks, guys.

Okay.

I think the key driver for the future margin expansion is the more utilization rates we'll get because we are seeing more and more students filling in the learning centers.

Yes, and look at this quarter, I think most of the 13% student enrollment growth comes from the organic growth.

We didn't open any new learning center this quarter.

And also, as Michael said during the whole China economy downturns, I think wage inflation will benefit us.

I don't think we will give as same as the latest inflation for these staff as before.

And also we still have this rental leverage for the margin expansion.

We sign the 5- or 10-year leasing contracts critically for the learning centers so the rental will be only up by 5% to 6% year over year.

So we also have this kind of leverage.

Yes.

Let me add, for the revenue growth in New Oriental, I'm pretty sure that our strategy is to attract more new students into New Oriental.

So the revenue growth mostly will be the number of students, more and more students will enter into New Oriental to study, and also the utilization of our existing facilities.

And also for the margin growth, I'm pretty sure we are optimizing all kinds of management procedures, especially with the help of the information system.

I'm pretty sure that more money will go to our teachers, so to push our teachers and encourage teachers to teach more quality lessons.

And at the same time, actually we are going to reduce the supporting staff members because the system is going up so that we can help more people for one person to do more jobs.

So that's why I'm sure that for the next several quarters and also for the next several years that the revenue will grow very healthily because we are expecting a number of students to come into New Oriental.

And the margin growth will also be fine because I'm expecting at least another increase every annual year for the net revenue -- net income.

The reason is that we are more effective and efficient doing our job every day.

That's also my intention.

Thank you, Jin Yoon.

Great.

Thanks, guys.

Dick Wei, Credit Suisse.

Hi.

Good evening, Michael, Steve and Sisi.

Thanks for taking my questions and congrats on a good quarter.

I have a question regarding Khan Academy.

I guess the free education is gaining more popularity in the US, particularly for the past year or so.

How should we think about the threat or the opportunities that poses to New Oriental if the free education system is getting popular in China?

I wonder if Michael has any thoughts on that.

Let me answer this.

My son, who is just studying Khan Academy every day.

But my son is from the United States, from Canada, so his English is very good.

So he has no difficulty listening to Khan Academy.

So Khan Academy, by translating to Chinese it needs to take some time.

But if it's translated into Chinese, it's -- is it China economy or Khan Academy.

Khan Academy, yes, like the free education, the Khan.

It is -- my answer is right, right?

Yes, that's correct.

Let me show you.

Actually I did some research here about American -- North American students and about Chinese students.

Chinese students are very, very much -- they don't like to study.

So most of Chinese students, about 90% of Chinese students are forced by their parents to study.

So if let them study conscientiously online, they're not going to have this patience and they cannot pay great attention to this.

We have tried a lot, like the best New Oriental teachers try to put it their classes, courses online for students to study, even for free.

By doing this we can see that there are much, much less students registered for studying than we expected.

So actually then we can find that for Chinese parents and for Chinese students, the best way for them to study for best results is to send these kids with a face-to-face teacher, no matter at home or in the learning center.

We can see also by our research that Chinese parents would very much like to send their kids to a learning center nearby with some -- of course if New Oriental is nearby, it's their best choice, I'm pretty sure.

But they will also choose some other learning centers by some schools because it's nearby for their convenience.

But the reason is that the teachers can supervise the student to study much more effectively.

And also the teachers can teach these students to study face to face.

So that's why I try my best to persuade New Oriental people to insist on face-to-face teaching tutoring, which proves up to today is a good strategy for us.

So I'm pretty sure Khan Academy, but the form of Khan Academy, it's not Khan Academy maybe itself, will have a very, very much less impact on Chinese students' learning habits than the impact maybe on United States students.

And also we are also building our current academy system, but it's very different.

We call it -- it's called a spot system, which is small private online lesson for students.

But the spot system is like this, the students have already learned some lessons in the classrooms with their teachers and they become like their teachers a lot.

So the teachers will tell students that there's some other content that I don't have any time to teach in the classroom.

So would you like to pay some extra money to listen to my online courses when you're at home?

Then most of the students will say yes.

So we have already been on this program for some -- maybe most of this year.

And we can see a success.

That means that above 80% of students have already studied in the classroom have already paid the money for their teacher's online courses.

This is what we call the New Oriental's specialized academy system actually.

So I want to tell you that this is a good system, but to have to combine with Chinese people's studying method, their kids' study habit.

We are venturing into this area almost every day.

I'm pretty sure that we will give you some maybe detailed report if you want.

Yes.

Great.

Thanks for that, Michael, for the explanation and for the details.

Thank you, Dick.

I'm pretty sure this is your second question, right?

Yes.

I apologize for calling in late.

Yes, I just wanted to catch up.

Thank you.

Yes.

Thank you.

Thank you.

Ladies and gentlemen, we are now approaching the end of the conference call.

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

Okay.

Again, thank you for joining us today.

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

Thank you.

Thank you, sir.

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

Thank you for participating.

You may all disconnect.