New Oriental Education & Technology Group Inc (EDU) 2017 Q1 法說會逐字稿

Good evening and thank you for standing by for New Oriental's first fiscal quarter 2017 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 meeting over to your host for today's conference, Ms. Sisi Zhao. Please go ahead ma'am.

Thank you. Hello everyone and welcome to New Oriental's first fiscal quarter 2017 earnings conference call. Our financial results for the periods were released earlier today and are available on the Company's website as well as on newswire services.

Today you will hear from Stephen Yang, 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. 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 Mr. Stephen Yang. Please go ahead, Stephen.

Thank you Sisi. Hello everyone, and thank you for joining us on the call. We are off to a great start for fiscal year 2017. More specifically, we have very strong top line growth and exceeded our original guidance for the first quarter. Net revenues increased by 16.5% year-over-year to $534.1 million. The growth was bolstered by the improvement in customer acquisition and retention rates and largely driven by healthy 31.2% increase in student enrollments. It's worth noting that net revenues increased by 23.7% year-over-year in our functional currency RMB.

You have likely heard us mention previously that the first quarter is traditionally our biggest quarter, although with a lower year-over-year growth rate. Even given that historical trend, our performance was really quite strong in many areas compared to the prior year. For instance, we were pleased to see the continued good momentum in our key revenue drivers, the K-12 all-subjects after-school tutoring business that delivered a strong revenue growth of about 28% in US dollar terms or 36% in RMB terms year-over-year in the first quarter, driven by exceptionally high enrollment growth of about 46% year-over-year. This was mainly led by the significant student enrollment growth of both U-Can business and the revamped POP Kids program with 44% and 49%.

As we remain focused on our well proven "Optimize the Market" strategy, we continue to focus on the extension of our off-line business while also investing in 020, two-way interactive education system, which we believe is, and it will, continue to be a key differentiator to set us apart from competitors and help us further penetrate the market. During the first quarter, we opened a new school and added a net of 22 learning centers in the existing cities. In total, we added approximately 49,000 square meters of classroom area, expanding capacity by 4%. In addition, we started to pilot new teaching model, namely the dual-teacher classes in selected existing and new cities in July 2016. By utilizing online lab broadcasting technology, our high-quality teachers based in high tier cities can reach students in low tier markets with the on-site support from teaching assistants sitting in the remote classrooms with the student. We plan to implement the dual-teacher class model in around 10 out of 55 existing cities in our nationwide school network. We expect to enter 5 to 8 new cities specifically in low tier markets by opening new teacher model learning centers in fiscal year 2017. To compliment this offshore expansion, we continue to roll out sophisticated 020 integrated education system, including new POP Kids program and U-Can Visible Progress Teaching system in all existing cities. We firmly believe that the strategic investments we made will propel our future growth.

Turning to pricing, per program blended ASP decreased by about 14% year-over-year, which represents a decrease of 8% in RMB terms. On an apples to apples basis, which is GAAP revenue divided by total teaching hours, hourly blended ASP in RMB terms increased by about 1% year-over year. To provide a breakdown of hourly blended ASP in RMB terms, please note that U-Can increased about 1%, POP Kids increased about 5% and the overseas test prep program increased by about 6%, all year-over-year. The decrease of per program blended ASP is mainly due to the shifting of revenue mix from the overseas test prep business with higher ASP to the K-12 business together with the huge increase of the enrollments for discounted U-Can classes during the summer promotion we offered.

Meanwhile, it's encouraging to see the continuous improvements of operating margin. Despite the promotion costs, the operating margin for the first quarter increased by 30 basis points to 28.6% from 28.3% a year ago. Even while we've invested quite heavily in customer acquisition and loyalty developments via our summer promotion which I will talk about in some detail later in my remarks. The margin expansion was largely driven by improved utilization of facilities and the effective cost control within the Company. We are committed to achieve higher efficiency in our operations in fiscal year 2017. It's allowing us to re-invest in the business meanwhile protecting margins, and this is very important. This also highlights our management team's ability to manage the business, knowing what levers to pull when to drive overall performances.

Now let's move onto the performance across our individual business lines. Our key revenue driven K-12 all-subjects after-school tutoring business achieved a revenue growth of about 28% in US dollar terms or 36% in RMB terms year-over-year for the first quarter, driven by exceptionally high enrollment growth of about 46% year-over-year.

Breaking it down, the U-Can middle school, high school all-subjects after-school tutoring business experienced a revenue increase of about 23% in US dollars or 31% in RMB terms year-over-year. Student enrollment grew about 44% year-over-year for the quarter.

Our POP Kids program kept delivering a strong performance, with revenue up by about 39% in US dollar terms or by 48% in RMB terms during this quarter and enrollment growing significantly by about 49%.

Our overseas test prep and consulting business together reported revenue growth of about 2% in US dollar terms or 8% in RMB terms year-over-year.

Finally, VIP personalized class business achieved cash revenue growth of about 11% in US dollar terms or 18% in RMB terms year-over-year.

Now I will provide some updates on the progress we have continued to make with our well-proven program optimize the market strategy. We have been focusing on maintaining a healthy balance between top line and bottom line growth while investing in the build-out of our 020 integrated education system. With encouraging results that have been achieved, we are confident that this strategy has laid a solid foundation on which we'll build sustainable long-term growth.

With respect to our core off-line business, in the first quarter we opened a new school in the city of Baoding. We added net of 22 learning centers and expanded some existing ones, adding a total of approximately 49,000 square meters of classroom area.

As for our online business, we invested about $10.8 million in the first quarter to improve and maintain our 020 integrated education ecosystem. Most of the investments were recorded under G&A expenses. We have been devoted to this online business built-out since 2014 and our hard work has been rewarded with the increase in customer retention and the addition of new customers. We fully believe this is transforming our business and investments, now bearing tangible fruit, has been well worth it.

Before I go into the details just a quick recap of the three levels of our online platform, the first level was the core of our online system is the "020 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 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.

Starting with "020 Two-way Interactive Education System", we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. This is also an important factor that sets us apart from other key players in the market. With advanced 020 product service, we are poised to gain more market share and improve brand recognition going forward.

Since its launch in September 2014, "U-Can Visible Progress Teaching system", our interactive education system, has been successfully rolled out across all 55 existing cities in our nationwide school network. And this expansion drove positive performance.

Our newly revamped POP Kids English program, "Shuang You", has also gradually extended its coverage to 54 cities by the end of the first quarter. The interactive education system has been gradually used in more and more cities.

The 020 for domestic test prep program was being used in 5 cities for some classes by the end of the first fiscal quarter. And since its launch in the second quarter of fiscal year 2016, the interactive education system for overseas test prep program including IELTS, TOEFL and SAT courses was rolled out in 7 cities by the end of this quarter, an increase of 4 cities from last quarter.

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

In the first quarter, Koolearn.com generated net revenue of $14.2 million, representing an increase of 45% year-over-year. The number of paid users increased significantly about 37% year-over-year. The number of cumulative registered users has reached the 14.2 million.

Koo.cn, our own live broadcast open platform for both New Oriental and third party teachers, achieved over 624,700 registrations in the first quarter.

"DONUT", a series of game-based mobile learning apps for children recorded over 47.5 million downloads by quarter end.

"Le Ci", an English language vocabulary training app for mobile phones and tablets app recorded over 4.8 million users by quarter end.

For the third level of our online education ecosystem, we invest in selected online education companies with a minority stake, and we continue to look for new opportunities that will not only complete our own offerings but also facilitate our 020 integration.

I wanted to spend a couple of minutes now talking about the key initiatives we executed in the first quarter to further progress our efforts to consolidate the market and gain as much share as possible. We conducted a large-scale promotion this summer in order to rapidly acquire grade 7 student customers before they start the first year of secondary school. To do so, we offered low priced experiential courses for multiple subjects in Beijing and Shanghai and math courses in approximately 25 other cities.

The promotion was very welcomed by the market and brought in about 204,000 enrollments for first quarter of 2017, which was not included in our reported enrollments for the quarter. We are very pleased with the outcome, and we also expect the students we retained after the promotion for further full price classes will boost the revenue and profit growth throughout the whole fiscal year.

Because of the promotion, our operating margin was negatively impacted by about 1% in the first quarter, though the operating margin for the first quarter still increased by 30 basis points to 28.6% from 28.3% a year ago. However, due to a higher utilization of facilities in the rest of the year, we don't expect that there will be a material impact on operating margin throughout the whole fiscal year.

It's important to note that this is proving a successful strategy to quickly increase market share in the high growing K-12 after-school children market. As these students move from grade 7 through grade 12 we believe that the continual improvement in retention rate and hopeful resulting customer loyalty will drive revenue growth in the next 3 to 6 years.

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

Operating costs and expenses for the first quarter were $381.5 million, representing a 16.1% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $380.6 million, representing a 17.1% increase year-over-year.

Cost of revenues increased by 18.5% year-over-year to $203.4 million, primarily due to increases in teacher's compensation for more teaching hours.

Selling and marketing expenses increased by 18.4% year-over-year to $58.5 million, primarily due to increases in brand promotion expenses and selling and marketing staff's compensation.

General and administrative expenses for the quarter increased by 11.2% year-over-year to $119.7 million. Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $118.8 million, representing a 14.3% increase year-over year.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 76.5% to $0.9 million in the first quarter of 2017.

Operating income for the quarter was $152.6 million, an increase of 17.5% compared to $129.8 million in the same period of prior fiscal year. Non-GAAP income from operations for the quarter was $153.5 million, a 14.9% increase compared to non-GAAP income from operations of $133.6 million in the same period of prior fiscal year.

Operating margin for the quarter was 28.6% compared to 28.3% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was 28.7% compared to 29.1% in the same period in the prior fiscal year.

Net income attributable to New Oriental for the quarter was $141.1 million, representing a 9.7% increase from the same period in the prior fiscal year.

Capital expenditures for the quarter was $25.4 million, and this was primarily attributable to the opening of 45 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 to the instructions delivered, at the end of the first quarter of 2017 was $657.1 million, an increase of 28.4% as compared to $511.7 million at the end of the first quarter of fiscal year 2016.

Before talking about our expectations for the second quarter, I wanted to take a moment to reiterate our overarching goals for the year, which we outlined on the last conference call. During fiscal year 2017 we will continue to focus on our "Optimize the Market strategy. With the current success achieved, we are confident that we are moving in the right direction and we should drive additional progress and success.

To give you more specifics, first we will continue to expand our offline business. In fiscal year 2017 we plan to add 40 to 50 new learning centers for K-12 business in existing cities. And we also plan to enter 2 or 3 new cities where we identify as markets with the most business opportunities. We also plan to implement the newly initiative 8 teacher class model in around 10 existing cities and enter 5 to eight new cities specifically targeting low tier markets.

Second, we will continue to invest in our 020 integration initiatives in our online educational offerings. In particular, we will focus on products refinement and maintenance. We will continue to make investments, but we believe that the total spending will begin to stabilize this year compared with the huge annual incremental increase over the last two fiscal years.

Third, we will continue to have a top priority on improving utilization of facilities and controlling costs across the Company to drive continued margin expansion.

By executing all of these things, we believe that we will deliver strong results and create long-term value.

In terms of the second quarter of fiscal year 2017, we expect total net revenue to be in the range of $324.6 million to $335.1 million, representing a year-over-year growth in the range of 17% to 21%.

The projected growth rate of revenue in our functional currency RMB is expected to be in the range of 23% to 27% for the second quarter of fiscal year 2017.

Lastly, I must mention that these expectations reflect New Oriental's current and preliminary view, which is subject to change.

At this point, I will take your questions. Operator, please open the call for this. Thank you.

(Operator Instructions). Terry Chen, HSBC.

Hi, good evening and good morning everyone. Thank you, Stephen for taking my questions. And congratulations on the solid results. I have some questions; it's on your 2Q revenue guidance. I think the numbers are better than expectation. Can management give more color on your expectation into the different business lines of yours? And given the strong 2Q numbers, will management consider to raise the full year revenue guidance? Thank you very much.

Okay, thank you Terry. As for the guidance for the second quarter, you know, we are happy to see the very strong student enrollments in Q1, what I mean is the cash revenue and student enrollments in Q1 and the first half of the second quarter. And also, we did a very successful summer promotion in the Q1, and I think the retention rates will be higher. And I think the key growth driver in Q2 and also for the rest of the year the K-12 business will be the key top line growth driver. And so most of the revenue growth will come from the K-12 business.

And you can also look at the deferred revenue balance at the end of the Q1. We have the 28% to 29% deferred revenue balance increase at the end of the Q1. And going forward what I mean is for the whole fiscal year 2017, I think the top line growth for the whole year for overall business will be somewhere at 24%, 25% year-over-year growth. Is it clear?

Yes. So 24%, 25% is in RMB terms is this correct?

Yes in RMB terms. It's really difficult to predict the exchange rate changes going forward, so I just want to give the guidance in RMB terms.

Yes, sure very clear. So just one very quick follow up, so what's the actual retention rate of your summer course students?

We have 200,000 student enrollments for lower priced summer promotion courses. This is the number.

Yes, so what's the actual retention rate, can you share with us?

Yes. Based on the student enrollment accounts in big cities like Beijing and Wuhan we had the retention rate of about 40% to 50%.

Okay, great. Thank you Stephen.

Wendy Huang, Macquarie Securities.

Thank you. My question is about the margin trend. So you mentioned earlier that this quarter's margin, operating margin is negatively affected by marketing quantified by the promotions. Should we actually read this as more like a one quarter seasonality? How should we look at the margin trend for the rest of the advice in the longer term? Thank you.

Okay. We are happy to see the operating margin improvement by 30 bps in the first quarter of this year. Despite we spent $11 million on the online investments and also we had a very huge summer promotion and the cost, it's not very small. But despite we spent a lot in first quarter but finally we got the margin improvements in Q1. But I do want to guide the operating margin in fiscal year 2017. But going forward our target is to get 17%, 18% operating margin in next three to four years.

And also, going forwards in the rest of the fiscal year I think the management will manage the business very strictly. And also, I think we have a lot of business leverage. And also, we will control the costs very strictly. And so hopefully we expect the operating margin will be a little bit higher compared to last year.

Thanks Stephen.

Okay, thanks.

Tian Hou, TH Capital.

Hi Stephen, Sisi. I have a question related to your summer promotion program. You have been doing that for two years and the first time you did it Beijing and this time you did it in many more cities. So even though it's two year in a row however, those two years are different. So I want to know what have you learned from those promotion programs in this quarter and what are some areas you do believe this promotion program are very good and what are some areas you believe you can do better or improve? So that's the question.

Tian, actually we started the summer promotion in Beijing five or six years ago, it's not two years.

Oh, yes.

This year since two years ago we invested a lot on the 020 product. So now we are very confident about our product, that's why we made the decision to spread the summer promotion from Beijing only to over 27 cities in the summer.

Because of the promotion, I think it's very important to note that -- it's a very successful strategy because it's a quick way to take market share from competitors. For those new students who enrolled the summer promotion classes I think we believe that the continuous improvement in the retention rate, and hopefully the resulting customer loyalty, will drive the adverse strong top line growth in a whole year or next three or six years.

I think this is the main purpose of the summer promotion program and now I think the promotion was very welcomed by the market. You know it has brought in 200,000 student enrolments and I think it will give us the 2% to 3% or maybe 2% to 4% incremental revenue growth in the rest of the year so it will help the top end growth. Is it clear?

Yes, thank you.

Okay, thanks again.

Zoe Zhao, Credit Suisse.

Hi management and congratulations on a very strong quarter. I have two questions. Could management share with us your current utilization rate and the operating margin of different segments? The second question is regarding your dual- teacher model. What is the difference in our strategy from our competitor and what is the margin expectation on this initiative? Thank you.

In terms of the utilization rates, now the utilization rate is about 20% but we have the 200 bps up compared to last year. Going forward we expect the utilization rate will go up because of the expansion -- we plan to expand 5% to 10% capacity in classroom area. But you know our student enrolment will get maybe 25% to 30% year-over-year growth.

So we expect the utilization rate to go up going forward. The dual-teacher model, I think we are still in the process of piloting period and it's very easy to understand just with the star -- what good teachers who stay in the high tier cities. We have -- it sounds like a hybrid model and we have one or two teacher assistants in the classroom in those tier cities to support the teaching cycle.

I think it's too early to say the operating margin of this model because it's too early. When we pilot the program by two to three quarters I think I will tell you, if it's the time I will tell you the operating margin prediction.

Sure, thanks a lot. Sorry, may I have a quick follow up on our SBC expenses. Why is our share based compensation cost a lot lower than previous quarters? Thank you.

We have not issued these incentive shares of this fiscal year to high management and key staff until now. Last year we issued the shares to them in July, that's why you see these SBC amount difference. We plan to issue the shares to management and key staff in one or two months, so you will find more SBC share based compensation expenses reported during the rest of the fiscal year.

Thank you.

Thanks.

Alex Liu, Daiwa.

Thanks management for the opportunity. My first question is on capacity. I think if my calculation is correct that on a year-on-year basis it seems that the Company has speeded up the learning center area growth in this quarter. I was wondering what's the measurement though on the accelerating capacity growth for this year and next year? If the management can add some color on where are we adding those capacities? Thank you.

We added 22 learning centers in first quarter and if you calculate the classroom area we expanded 4% in capacity in this quarter. I think it is in line with our budget. We plan to open 40 to 50 learning centers in the whole fiscal year and we opened 22 in Q1 and in the whole year we will open 40 to 50 new learning centers. That means that 5% to 8% classroom, area classroom expansion.

Okay, thank you.

Okay, thanks.

Natalie Wu, CICC.

Hi, good evening Stephen and Sisi, thanks for taking my question. So a couple of questions, the first one is regarding the POP Kids, so what is the driving force behind the continuing strength in the growth rate of POP Kids? Will the trend last into the future quarters?

The second one is -- actually, in the past month we have witnessed the teacher's salary race, from your competitor in the K-12 area out of -- and competition issue. So I am just wondering will you guys follow in the salary race and if yes, what the impact -- will this impact your margin profile in longer terms? Thank you.

Yes, we had a very strong quarter, both the enrolment growth and revenue growth impact POP Kids program. We launched the new online and offline integrated program named "Shuang You" last year and now I think we are seeing it starts to bear fruit from the new revamped product.

Most of the revenue growth comes from the enrolment growth. Going forward what I mean in the rest of this fiscal year and also for the next two to three years, I think the topline growth of POP Kids will be very strong. Combined with the U-Can business, the K-12 business will be the key driver of the top line growth in the company.

Your second question is about salary inflation of teachers. Typically, on an apple to apple basis, what I mean is the hourly rate, the hourly rates for the teacher's salary, we increase it by 8% to 9% year-over-year, it's quite stable. Also, since last year we start to give more teaching hours to the new -- to the good teachers to help them to earn lots than before in New Oriental, we help them to stay longer with New Oriental.

So going forward, I think the increase of teacher's salary will be in line with the top line growth. Is it clear?

Great, thank you Stephen. Actually, may I have a quick question regarding the summer promotion program this year? So can you share with us some color on how many courses a student takes on average in the summer promotion program this year? How many courses would a student take in the autumn sessions normally, maybe in large cities like Beijing and Wuhan?

In the summer promotion the students on average take two to three courses at the same time in big cities like in Beijing and Shanghai. Also going forward in the autumn classes typically, the students take two courses at the same time on average. Is it clear?

Great, very helpful, thank you.

Okay, thanks.

Yes, very clear.

The next question comes from the line of Fan Liu from Goldman Sachs, please ask your question.

Hi management, congratulations on your solid result. So I have a quick question about your headcount number, could you please update the latest headcount number, also among which how many teachers and how many training assistants? Also, do you have a plan for a headcount increase especially in light of your expansion in your dual class model?

The total headcount including the staff and teachers at the end of the Q1 was 38,600. Also we had 19,800 full time teachers and more than 70% are full time teachers. The headcount -- based on the budget we plan to increase the total headcount by 5% to 10% in the fiscal year 2017.

In terms of the dual teacher model, we just piloted the program and we plan to open 10 learning centers in existing cities and also we will open 5 to 8 new cities but it won't need so many teachers.

Thank you, just a quick follow up, so do you have a goal for -- I mean you'll have a target for student to teacher ratio you want to achieve for this dual class model, two teacher class model?

We don't have a target until now because I told you that we are still in the process of pilot and also within the Company we don't calculate like this. We calculate the student retention rates and utilization rate.

Okay, understood, thank you.

Mariana Kou, CLSA.

Thanks management for taking my questions. Again, our congratulations on a strong set of results. As I have two questions, my first one is on pricing. I think you mentioned Stephen just now that ASP per hour is up about 1% for U-Can, about 5% for POP Kids, and about 6% all of these. I am just wondering if you could comment that whether this is a little bit below historical levels and what are you planning to do for the rest of the year in terms of pricing?

Yes, the first -- I think the K-12 business is growing faster than the overseas test preps and our English business. So typically, the K-12 business has the lower ASP than the overseas test preps. Also, within the K-12 business because our business in other cities are growing faster than Beijing and Shanghai, so this kind of revenue mix drags down the overall ASP per program.

Second, we have a huge increase in the enrolment for discounted U-Can classes. Besides the summer promotion, we made some discounted classes in U-Can for the summer courses. Since autumn and also in the rest of the year the price will go back to a normal level.

So you know the summer term is the first term of the whole fiscal year. In the rest of the year I think the pricing strategy of the Company will be the same as last year, well maybe a little bit higher than last year. Overall, we will increase the price on an hourly basis by 5% to 8% in the rest of the year.

Yes, thanks, just to follow up a little bit on that. So would it be fair to say that since POP Kids seems to be growing fast in terms of ASP and I think the margins as we previously talked about in other calls that margins are still a bit lower for POP Kids. Should we expect operating margins for U-Can and POP Kids to narrow?

I think both the U-Can and POP Kids program the margins will be higher than last year because we expect the higher utilization rate for both U-Can and POP Kids.

Right, okay, thanks. I guess another small question to add on, the dual teacher program that we have been talking about. Could you actually comment in terms of lead times should we expect -- I know we don't have the exact schedule of when we are going to roll it out and all the targets. But in terms of just lead time should we expect a couple of months of training before you roll out this program, so we should expect some sort of margin pressure the quarter before you exactly roll it out?

No, I don't think so. I think we don't have the margin -- I don't have the negatively margin impact for the dual-teacher model because we just piloted it for one -- by the eight or 10 learning centers. But we have 750 learning centers so I think the margin is immaterial.

All right, thank you, good to know.

Andrew Orchard, Nomura.

Hi Stephen and Sisi, thanks for taking my question and congrats on a good set of numbers, a couple of questions from me. First, can you give some additional color on the utilization especially for U-Can and POP Kids? I know earlier you mentioned overall utilization is about 20% and 200 basis points but how about specifically in these two business areas?

Then secondly, for the dual teacher model, are you expecting any meaningful increase in CapEx as a result of building out some of this infrastructure? Those are my two questions, thanks.

You know Andrew, we don't disclose the utilization rates by different business lines but in my personal view I think the utilization rates for U-Can and POP Kids is just as the same as the utilization rate for the whole company. Like I said before, going forward the utilization rate will go higher because of the -- you will see the higher enrolment growth going forward.

In terms of the dual teacher model we will have a little bit more CapEx. But as I said we've just set up let's say the 5 to 10 new learning centers in the new cities, and so compared to the $60 million, $70 million the CapEx for the whole company is not a big number, it's not a big deal. Last year the CapEx was $64 million, $65 million and this year, what I mean is in fiscal year 2017 we plan to spend somewhere at $75 million in the CapEx.

Thank you.

Okay, thanks Andrew.

Johnny Wong, Jefferies.

Hello management and thanks for taking my question and congratulations on a very nice set of results. Most of my questions have been asked but I just have one question to clarify. We mentioned that we spent an extra $11 million on the promotion. Does that mean that this number will fall off for the rest of the year in terms of the hit to the P&L? Thanks very much.

I just want to clarify the numbers. You know what I said is that we spent $11 million, the accurate number is $10.8 million on the online investments for the first quarter. Based on the budget we plan to spend the same amount in this fiscal year as -- same as we spent last year. So we plan to spend $54 million in this year.

For the summer promotion, yes, we spend some teacher salary and maybe some rental for the summer promotion and it's -- we have the negative impact for our operating margin for Q1 by 1%. So we spent $5 million to $6 million on the summer promotion on the cost and expense side.

Thank you.

Okay, but it's one time for the summer promotion, it's a one-time cost and expenses.

Okay, thank you.

Claire Cao, Morgan Stanley.

Hi management and thanks for taking my question. Can management remind us what level of retention rate do we need to achieve for the summer promotion course to be value accretive to New Oriental? My second question is regarding -- I understand this might be a little bit too early but given the dynamics in the market this year, what shall we think about the summer promotion strategy as we enter into next year, given the market has become quite promotional and these low price courses will probably become the main one?

The retention rate -- the overall retention rate for K-12 business in the Company, in New Oriental, is about 75%. Now last year it was somewhere at 65%. Yes, for the summer promotion, the retention like I said in the big cities like Beijing and Wuhan, the retention rate is 40% to 50% and that's it.

For the -- what was your second question?

Next year.

Next year, oh, yes, I think we will summarize what we have done for the coming summer promotion and I think it's too early to say what will be the plan for next year. But I think we will do the same thing next year but I don't know the amount for the specific plan of next year, it's too early. I think it's a great wave of taking market share here.

Thanks Stephen.

I think it's a great way or method to take more market share from competitors and also to make the market consolidation based on the summer promotion way. Is it clear?

Yes, sure.

Thanks.

The next question comes from the line of Jin Yoon from Mizuho Securities, please ask your question.

Hi, good evening guys. I think on your prepared remarks or the press release mentioned that you guys launched the O20 Education System for the overseas test prep. Given the fact that those students have a typically shorter shelf life than your typical K-12, can we expect meaningful price increases in the overseas test prep business going forward? It launched in seven cities in China, where do you expect that to be in the next quarter or two? Thanks.

Yes, okay, you know we are seeing the Chinese parents send their kids to study abroad in even younger age, that means most of the -- our overseas test preps students are at high school, we are doing the high school students. So they still need the same O20 product and we launched the new O20 product of IELTS in March and going forward we will launch more and more new products like the TOEFL, SAT or GRE.

The whole market of the overseas test preps doesn't grow as much as before because I think the world cannot take more Chinese students. I think the whole market grows with the low single digit. But based on our new O20 products and also if you remember the earnings call in the last of Q1, Michael, founder of the company that he will spend more time on the products reform overseas test preps.

So I think we are confident to see the top line growth of the overseas test preps. In terms of the pricing, we still increase the price. We are trying to increase the price of overseas test preps by 8% to 10% going forward. Half of them, when we add the 4% or 5% or apple to apple price increase, the other part, another 50% has come from the product mix.

Typically, the ASP on TOEFL junior class, those kinds of class are much more expensive than the GRE and GMAT classes.

Perfect, thank you.

Okay, thanks.

Terry Chen, HSBC.

Hi, thank you for taking my call again. I have a question on your investment philosophy. We have seen $1.9 billion cash, I think the cash will continue to pile up given our strong free cash flow, so I am just wondering how much will you deploy for acquisition investment and any possibility for us to do overseas expansion in the future?

Yes, I think it was -- the first big use of the cash we will be looking at M&A and investments. This is our first priority and as you saw, we spent $90 million in the last two years on investments of 020 and Pure Online. In terms of the M&A I think we will look at the companies like there is some vertical pure allied companies which have the good content or good channels or where they are good at some specific subject.

I think we will buy some minority shares from them. But the expansion we have we will consider the potential -- like the cooperation between the target company and New Oriental. This is our logic of investments. But what I want to say is we will do it very carefully.

In terms of preference -- do we prefer to make a strategy investment by acquiring a minority stake in sell party companies or do we prefer to do a full acquisition?

I think this is quite open for our view. Most of the M&A going forward will be the minority shareholding buying, but if we find some companies have the potential synergy between the target company and New Oriental maybe we will buy the -- like the 100 per cent shares of them.

Okay, great, thanks Stephen.

Thanks.

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