New Oriental Education & Technology Group Inc (EDU) 2017 Q2 法說會逐字稿

Good evening and thank you for standing by for New Oriental's second FY17 earnings conference call.

(Operator Instructions).

Today's conference is being recorded.

If you have any objection, 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.

Thank you.

Hello, everyone, and welcome to New Oriental's second FY17 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 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 view 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.

This was a very gratifying quarter for us.

We achieved accelerated and better than anticipated top-line growth, and our bottom-line growth was up significantly.

Net revenues increased to $341.2 million versus the same period last year, which is an increase of 22.7% in US dollar terms, and 30.2% in our functional currency, RMB.

Underlying and driving this revenue growth, we secured impressive 56% increase in our total student enrolments, driven by growing customer acquisition and retention rates.

This growth combined with excellent cost control plus better than expected bottom-line growth.

Quarterly operating income increased by 102.1% compared to the same period last year, and net income increased by 76.1% year-over-year.

Our key revenue driver, K-12 all-subjects after-school tutoring business, achieved growth of approximately 45% and exceptionally high enrolment growth of approximately 78% year-over-year.

This was mainly a result of significant student enrolment growth of both the U-Can business and the revamped POP Kids program, which expanded 75% and 81% respectively.

The high enrolment growth demonstrates how we are benefiting from strong brand recognition as we endeavor to consolidate the market in large cities.

With that said, we're optimistic about the prospects for exploring new opportunities for expansion in existing and new cities.

We continue to focus on strong execution of the "Optimized the Market" strategy, which means we are continuing to expand our offline business while also investing in the O2O two-way interactive education system.

During the second quarter, we made great progress across the board in building out our successful and now well-proven diversified business model.

We added net of 15 learning centers in existing cities, opened a new school and a new learning center in the city of Yantai, adding a total of approximately 30,000 square meters of classroom area, which represents approximately 3% capacity expansion.

Also, as mentioned on the last call, we started to pilot a new teaching model in select cities in July 2016.

This is a dual-teacher class model under which we utilize online live broadcasting to enable the students in the lower-tier cities to access the better learning experience from our high-quality teachers based in high-tier cities.

In the second quarter, we rolled out the dual-teacher model school in the City of Tai'an, Shandong Province.

With this strategy, we expect to increase our market penetration in more lower-tier markets with quality education, and hope to capture some very exciting growth opportunities there.

Turning to pricing, per program blended ASP decreased by approximately 11% year-over-year in US dollar terms, or 6% in RMB terms.

On an apple-to-apple basis, which is GAAP revenue divided by total teaching hours, hourly blended ASP in RMB terms increased by approximately 2% year-over-year.

To provide a breakdown of hourly-blended ASP in RMB terms, U-Can increased by 2%, POP Kids increased by 8%, and the Overseas Test program was up 7%, all year-over-year.

The decrease of per program blend ASP is mainly due to the shift of revenue mix from the overseas test prep business, with higher ASP to the K-12 business, slowdown of VIP business, which has higher ASP, and a huge increase in early registration by customers for our POP Kids spring semester courses.

On the margin front, we have made great progress by dramatically improving operational efficiency, improving utilization of facilities, and controlling costs within the organization.

The strong bottom-line performance further proves effectiveness of our "Optimize the Market" strategy, and also reinforces our confidence in the ability to build long-term value for our customers and shareholders.

Now let's move on to the second quarter performance across our individual business lines.

Our key revenue driver, K-12 all-subjects after-school tutoring business achieved year-over-year revenue growth of 45% in US dollar terms, or 54% in RMB terms, and exceptionally high enrolment growth of 78% year-over-year.

Breaking down, the U-Can middle school/high school all-subjects after-school tutoring business recorded a revenue increase of 43% in dollar terms, or 52% in RMB terms.

Student enrolments grew significantly by 75% year-over-year.

Our POP Kids program revenue was up by 49% in US dollar terms, or by 58% in RMB terms; and enrolment growth was exceptionally high at 81%.

Our overseas test prep and consulting business recorded revenue growth of 2% in US dollar terms, or 9% in RMB terms year-over-year.

Finally, VIP personalized class business increased 10% in US dollar terms, or 17% in RMB terms year-over-year.

Now next, I will provide some updates on progress we have continued to make with our "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 O2O integrated education system, and this continues to work well.

Starting with our core offline business, as mentioned earlier, we added a net of 15 learning centers in existing cities, opened a new school and new learning centers in the city of Yantai, and opened a dual-teacher model school in the City of Tai'an.

Altogether, we added a total of approximately 30,000 square meters of classroom area, representing about 3% capacity expansion.

For the whole FY17, we plan to add 50 to 60 new learning centers for K-12 business in all existing cities.

We also plan to enter 2 or 3 new cities where we identify markets with the greatest growth potential.

We also plan to pilot a newly initiated dual-teacher class model in approximately 18 to 20 existing cities, and enter 5 to 7 new cities; more specifically targeting lower-tier markets.

Regarding our online business, we invested approximately $13.7 million in the second quarter to improve and maintain our O2O integrated education ecosystem.

Most of the investments were reported under G&A expenses.

We have been devoted to this online business buildout since 2014.

With an increase in customer retention rates and addition of new customers, we fully believe this is transforming our business.

And the investment will continue to bring continuing long-term benefits.

Before I go into details, just a quick recap of the three levels of our online platform.

The first level, also the core of our online system, is the "O2O Two-way Interactive Education System" across all of our business lines.

The second level is our pure online learning platform and supplementary online educational product in the New Oriental brand.

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

Starting with "O2O 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 O2O product services, we're 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 extended its coverage to 54 cities by the end of second quarter.

The interactive education system has been gradually used in more and more cities.

The O2O system for the Domestic Test Prep Program was being used in 5 cities for some classes by the end of the second quarter.

And since its launch in the second quarter of FY16, 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 the second 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 second quarter, Koolearn.com generated net revenue of $17.6 million, representing an increase of 33% in US dollar terms, or a 41% increase in RMB terms.

The number of paid users increased significantly, about 33% year-over-year.

The number of cumulative registered users in this quarter has reached 15 million.

Koo.cn, our own live broadcast open platform for both New Oriental and third-party teachers, achieved 570,300 registrations in the second quarter.

"DONUT", the series of game-based mobile learning apps for children, recorded over 51.3 million downloads by quarter end.

Leci, English language vocabulary training app for mobile phones and tablets apps, recorded over 5.5 million users by quarter end.

For the third level of our online education ecosystem, we invest in select online education companies with minority stake, and we continue to look for new opportunities that will not only complete our own offerings, but also facilitate our O2O integration.

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

Operating costs and expenses were $341 million, representing an 18.2% increase year-over-year.

Non-GAAP operating costs and expenses, which exclude share-based compensation expenses, were $338.9 million, representing a 19.5% increase year-over-year.

Cost of revenues increased by 21.7% to $163.4 million, primarily due to increases in teachers' compensation for more teaching hours.

Selling and marketing expenses increased by 18.2% to $52.2 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 13.9% to $125.4 million.

Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $123.3 million, representing a 17.3% increase year-over-year.

Total share-based compensation expenses which were allocated to related operating costs and expenses, decreased [by 56.6%] (corrected by company after the call) to $2.2 million.

Operating income for the quarter was $0.2 million compared to a loss of $10.4 million in the same period of last fiscal year.

Non-GAAP income from operations was $2.4 million compared to non-GAAP loss from operations of $5.4 million in the same period of prior fiscal year.

Operating margin for the quarter was 0.1% compared to a negative 3.7% in the same period of prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was 0.7% compared to a negative 1.9% in the same period of the prior fiscal year.

Net income attributable to New Oriental for the quarter was $10.4 million, representing a 76.1% increase from the same period in the prior fiscal year.

Capital expenditures for the quarter were $21.2 million, and this was primarily attributable to the opening of 2 new schools and 36 new learning centers, and renovations at existing learning centers.

Turning to the balance sheet, at the end of the second quarter, the deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instruction is delivered, was $764.7 million, an increase of 30.4% as compared to $586.5 million at the end of the second quarter of FY16.

Before talking about our expectations for the third quarter, I wanted to take a moment to reiterate our overarching goals for the year which we outlined on the 2016 Q4 and full-year conference call.

During FY17 we will continue to focus on our "Optimize the Market" strategy.

With the current success achieved, we're confident that we have the right strategy in place, and that is we'll continue to drive additional progress and help us create long-term value for all customers and shareholders.

To give you more specifics, first, we will continue to expand our offline business.

In FY17, as mentioned a few minutes ago, we plan to add 50 to 60 new learning centers for K-12 business in existing cities.

This is higher than our initial target provided ahead of the fiscal year, and we're raising this because we're seeing a growing momentum for our K-12 business due to the combination of our broad product portfolio, solid market demands, and effective operation.

We also plan to enter 2 or 3 new cities where we identify as markets with the most business opportunities.

Further, we plan to implement the newly initiated dual-teacher class model in around 18 to 20 existing cities and enter 5 to 7 new cities, specifically targeting lower-tier markets.

Second, we will continue to invest in our O2O integration and the initiatives in online educational offerings, promoting the strongest products possible in the marketplace in order to continue to take market share.

While investments will continue, we believe that total spending will begin to stabilize this year compared to the large annual incremental increases in the last two fiscal years when we were building a foundation.

Third, we will continue to have the top priority on improving utilization of facilities and the controlling costs across the organization to drive continued margin extension and profitability.

Looking at the near term, in terms of third quarter of FY17, we expect total net revenues to be in the range of $408.7 million to $421.8 million, representing year-over-year growth in the range of 18% to 22%.

The projected growth rate of revenue in our functional currency, renminbi, is expected to be in a range of 25% to 29% for the third quarter.

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.

(Operator Instructions).

Terry Chen, HSBC Global Research.

Congratulations on the solid results.

I have a question on enrolment growth.

So in the second quarter, Company overall enrolment growth accelerated to 56% and the K-12 enrolment growth accelerated to 78%.

I'm just wondering what's driving the faster enrolment growth here and what do you think will be the trend in the next few quarters?

Okay.

Thank you, Terry.

It's a great question.

In the Q2, the student enrolment was very strong and I think there were three reasons.

The first, the high rates of the enrolment demonstrate we're benefiting from the strong brand recognition, and also, we start to consolidate market in the big cities.

That means the market demand is very strong, and also we have the good -- the best -- the brand name.

The second reason for the high enrolment growth is the steady enrolment growth comes from the new customers and also the higher retention rate.

I think this means that we have successfully rolled out the new O2O product and I think the parents and students and the kids are buying in the new product.

And the last reason for the strong student enrolment, is the students choose to enroll the class earlier than before and so we're seeing a huge increase in early registrations for the POP Kids spring semester courses.

So I think in terms of the trend, I think the trends will be great.

We are happy to see the very strong student enrolments for the overall business, especially for the K-12 business.

Is it clear, Terry?

Yes, very clear.

So you mentioned that there's earlier registration this year from students.

As we understand that, your enrolments are booked on a cash basis, right?

So you had a higher enrolment growth in the second quarter translating to even higher revenue growth in the coming quarter.

Yes.

That's why you'll see our guidance.

I remember in the last conference call, again the method, the top-line growth, I think truly in my view, I think the top-line growth will be a little bit better than we expected several months ago.

And as you know, the Q3 and Q4 will be the peak seasons for the K-12 business.

So I think this trend is very good.

Okay.

Great.

Thank you, Stephen.

Jin Yoon, Mizuho Securities.

A couple of questions.

First of all, if you look at your COGS, it's been up 22%, and then you attributed part of that due to increasing teaching hours; and your enrollment is up more than 50%.

So your incremental -- if you could help me think this through.

If you looked at your incremental enrollment growth and incremental COGS, does that mean that your utilization rates are improving faster than what we originally anticipated because the fact that the cost is not going up with enrollment?

So is that one way to look at it?

And the other thing is how much of your enrollment is actually fueled by the new school and incremental learning centers opening?

Thanks, guys.

Okay.

Thanks.

The first question is about COGS and enrollment growth.

Yes, I think you are correct where still the utilization rate is going up; and, yes, so a little bit better than we expected several months ago.

Because I think the teachers' salary will be increased by less than 20% to 25% in RMB terms going forward, but I think the top-line growth will be bigger than the teachers' salary increases.

So that's why you see the utilization rate is going up.

And your second question is about -- sorry.

Can you repeat your second question?

Yes.

The second question was how much of your enrollment growth is incremental contribution from the new school and the learning centers?

Yes.

We only opened 18 new learning schools and learning centers in this quarter, and if you look at the number of the first six months within this fiscal year, we opened 41 new learning centers.

So the expansion is only 7% to 8%, but our enrollment is much, much stronger.

So I think most of the enrollment growth comes from the organic growth from the existing cities.

That's why I said our utilization rate will go up and it will lead to the margin expansion.

Okay?

Yes.

Got it.

Great.

Thanks, guys.

Tian Hou, T.H. Capital.

The question is how many learning centers do you expect to open in the new fiscal year and where those new learning centers could be.

So how much the seat capacity will be increased by opening those learning centers.

Okay.

Thanks, Tian.

Until now, we haven't finished the new year budget, new fiscal year, FY18.

But I think till now I can say we've raised the new learning center numbers but it's in our control.

We will open 50 to 60 new learning centers within this fiscal year, and next year I think we will open a little bit more.

But as you know, we care about margin.

We will control how many learning centers we set up.

So going forward, I believe most of the enrollment growth will come from the current learning centers.

So at China, the price has some kind of inflation.

So are you going to increase your price also?

Yes.

We will increase the price with a reasonable amount.

In this quarter, we increased the hourly rate by 2% to 3% in RMB terms.

And going forward, Q3 and Q4 will be peak seasons for the K-12 business.

So we will increase the price by 5% to 8% in RMB terms going forward, and even in the next fiscal year, I think we will use the same price strategy.

Okay.

That's all my questions.

Thank you.

Congratulations (multiple speakers).

Alvin Jiang, Deutsche Bank.

I have two quick questions.

The first one is a housekeeping question.

What is the utilization rate in this quarter, and what's the year-on-year improvement?

And meanwhile, what's driving the ASP decline?

It seems even for K-12 business itself, enrollment growth is faster than revenue growth, but you just mentioned that ASP for K-12 is actually increasing.

How should we understand this trend?

I have another follow-up.

Okay.

Yes.

As for the question for utilization rate, this quarter, the utilization rate is 20% to 21%, and we were seeing 200 bps [up] compared to the same period of last year.

And going forward, you will see the higher utilization rate.

And as for the question about ASP, yes, in this quarter, the per program blended ASP decreased by 6% in RMB terms.

I think there were several reasons.

The first, K-12, this grew faster than the overseas test prep business, and typically, the K-12 business has a lower ASP.

And also, the second reason is there is a huge increase in early enrollments by customers for our POP Kids spring semester courses.

That means there's a timing difference.

First, we control the VIP revenue contribution.

In this quarter, the revenue from VIP courses only increased by 10%, so it's dragged the price down.

So that's all three reasons to explain your question about the price.

Got it.

My second question is on policy risk.

Here's the thing.

According to some news reports, Shanghai Government is talking about to clean up the K-12 tutoring market and also help to reduce burden on young kids.

So do you think that will make any potential impact to your business?

Yes.

I read the news from the newspaper, and till now, I don't want to explain to you guys about the impact of the new policy.

But you know this is not the first time that the Chinese Government said in public to relieve burden of the students.

I think for the Chinese students, typically, they spend the whole maybe 10 or 12 years to prepare for gaokao, and gaokao is still there.

So gaokao, I think it's a way to select people, and kids and students are competing to the four-year college seat.

And also, if they get a good report on their study, they will have a better future.

And also I want to add one more thing.

That's the market share.

Even we are the market leader, our market share is just 1% to 2%, so it's not big deal.

And also, typically, the students spend maybe 35 or 40 hours, or 30 to 40 hours in the public schools every week, but the kids only spend two or three or four hours with New Oriental.

So it's not a big amount of time.

Thank you.

Wendy Huang, Macquarie.

Congratulations on the results.

First, I just want to double check and confirm with you that it seems that your guidance implies no impact at all from the recent negative publicity on your overseas test and consulting business.

Yes.

Is that the case?

Yes.

I think in the Q3, the coming quarter, our overseas test prep and overseas consulting business will still grow roughly by the 8% to 10% going forward.

And you said about the Reuters report.

I think that all of our business operations are governed by robust policies and we have designed procedures to guard against any unendorsed behavior by employees.

And going forward, I think we will continue to conduct our ordinary course of business in accordance with our policy standards.

And going forward, I think the growth of the business of the overseas test prep and consulting business will be good.

And the market of our overseas test prep market, it doesn't grow as well as several years ago, so even the total market grew by single digit, so our growth is just in line with the market.

And I think what we need to do is to do better for our O2O reforms for the overseas test prep product, and we in fact will do better for overseas test prep business going forward, and I think it's better than we did last year.

Okay?

Thank you.

And also, you mentioned earlier that you have the aggressive target to dual-teacher model in 18 to 20 existing cities.

So do you expect to achieve the target by the end of this fiscal year?

And also, we're just very [process] speed of launching out.

How should we assess the financial impact and also the enrolment impact from this dual-teacher model rolling out?

Thank you.

The dual-teacher model, I think that so far the feedback from the parents and kids are very good from the dual-teacher learning centers.

And, yes, even in the second quarter, this quarter, we roll out a new teacher model in the new city of Tai'an.

And also, we opened more than 10 learning centers in existing cities.

And so we plan to pilot the dual-teacher model in 18 to 20 new cities by the end of this fiscal year.

And, yes.

As I said, we don't have the plan 'til now to tell you how many new dual-teacher model learning centers we'll set up next year, but I think we will open more, because in terms of the financial model, typically, the end of the dual-teacher model when teachers face five or 10 or maybe 20 classes at the same time.

So I think when the model gets matured, we expect the margin will be higher than the offline classes.

But it's too early to say the revenue contribution of the margins because it's contributed only a little amount of the revenue contribution.

So I will tell you the answers maybe one year or six months later.

Okay?

Fan Liu, Goldman Sachs.

Congratulations on another strong quarter.

So would you mind share with us your total headcount of teachers right now?

And also, as we can see that you are in a very strong momentum to improve the margin, so will you still insist on your 17% to 18% GAAP margin, operating margin in the next three to five years?

Is there any possibility to raise this margin?

Thank you.

Okay.

The headcount; by the end of the quarter end, or this quarter end, the headcount was 39,000.

That means we add 2,400 headcount within the first half of this fiscal year.

And within the headcount, we have 19,800 teachers.

And this is for the headcount question.

And what's your second question?

Your margin guidance.

I think that you will see the margin expansion within this fiscal year, and going forward, our target is to get 17%/18% in actually four years.

And I don't want to change my guidance of the market expansion, so our margin will go up gradually in the next two to three years.

Okay?

Mariana Kou, CLSA.

Management, congratulations on a strong set of results.

I think my question is a bit of a follow-up on enrollment figures and also the ASP.

I'm just wondering.

I think you implied enrolment tickets for the overseas and other businesses are excluded, so everything other than K-12 is down about teens.

So I'm just wondering.

Have we done any estimates on how fast we have to grow the K-12 enrolment number to really offset the operating deleverage impact?

Because I think we talked previously on calls that the operating margins for overseas is quite significantly higher than K-12.

That's my first question.

This is a good, great question, because K-12 business will be definitely the revenue driver.

Yes, you are correct.

The margin of K-12 business is a little bit lower than the overseas test prep.

But for the K-12 business itself, the margin is going up.

So I think the revenue contribution, the last revenue contribution of overseas test prep, will be offset by the K-12 margin expansion.

So anyway, overall, you will see the margin expansion.

Is it clear?

Yes.

Thanks.

I think my second question is more housekeeping.

I think the tax rate has jumped up quite significantly this quarter, and then the share-based comp has declined quite sharply.

Could you actually give us some color on what to expect for the coming quarter or for the full year in terms of tax rate and the share-based comp?

Okay.

The tax rate in this quarter was 14% and I would like guide the tax rate for the whole FY17 will be somewhere at 14.5% to 15%.

This is my guidance of the tax rate and I think the tax rate will steadily move up going forward.

And your second question is about share-based compensation.

Yes.

This quarter we reported $2.2 million of the stock-based compensation.

You will still recall in last year we issued the shares to the high management and key staff in July.

This year, we issued the shares to those guys in November.

So we recorded less the share-based compensation in this quarter.

Going forward, in the Q3 and Q4, we will record more share-based compensation.

So for the old share-based compensation in this fiscal year, will be somewhere between $20 million to $24 million for the whole year.

Thank you, Stephen.

Zoe Zhao, Credit Suisse.

I have two questions.

One is, can you update us on each segment's operating margin?

And the second question is, since that we recorded a gain of around $2 million attributable to the minority interest, but just looking at the size of Xuncheng this quarter, December seems to be very high.

So do we have any other investment associated with this number?

Thank you.

Okay.

The operating margin, but the different business lines is up.

For the overseas test prep, the operating margin before -- always the operating margin is before the head office expenses.

The overseas test prep is 30%; and the domestic and adult English, the margin is 25%.

And for the U-Can, the margin is 25%; and the Kids is 14% to 15%, the operating margin.

And the online, your second question, yes.

I think most of the online comes from the Koolearn.com because we just hold let's say the 65% to 70% of total shares of Koolearn.

So there's online there, and going forwards it will be there.

Okay?

Claire Cao, Morgan Stanley.

Could you share with us what's the revenue contribution from Beijing and Shanghai in the quarter?

And also, what's the current revenue growth rate for the two cities?

Thanks.

The revenue contribution from Beijing this quarter is 24%, and Shanghai is 6%.

And the revenue growth of Beijing school in this quarter is 24%.

As you know, that's the overall growth rate of Beijing school.

And the Shanghai school grew by 34% in the Q2.

Okay.

Thanks.

Cheryl Yang, CICC.

Congratulations for the strong quarter.

I have one question regarding your pricing strategy for the dual-teacher model.

I noticed on your website that most of the courses are priced lower than $1,000.

Are you planning for offering this discount on purpose, or are you going to keep this pricing strategy for dual-teacher model going forward?

Okay.

Yes.

As for the pricing strategy for dual-teacher model, we're still in the piloting phase.

So, yes.

For the first or second rounds of these enrollments, we give students some discount.

But going forward, I think the price of the dual-teacher model should be a little bit lower than the offline classes.

But I think it's too early to say the price strategy for the dual-teacher model, but as I said, even though the price -- as for the dollar amounts, the price is lower than the offline classes.

The margins will be higher than the offline classes because one teacher can face so many students at the same time.

Yes.

Okay.

Got it.

Stephen, you mentioned that one teacher could take multiple classes.

Can you share with us more color on how many classes that a teacher can take at current stage?

Okay.

It's a wide range.

Typically, one teacher can face to 5 to 10 classes at the same time, but I can share with you that in some cities, we are seeing that one teacher can face to 20 or 30 classes at the same time.

Okay.

Thank you.

Yes.

I think going forwards, the model is something like that the one teacher can face to 10 to 20 classes at the same time.

Okay?

Lucy Yu, Merrill Lynch.

I've got two questions here.

First of all, with the new administration of US and UK, do you see any risk to our overseas-related business, i.e., the test prep and consulting?

Because I saw on news that UK Home Office is planning on cutting the overseas students by one-half, so will that affect our business?

And secondly, it's a follow-up on the OP margin question asked earlier.

Could you give us the OP margin for each segment in the second quarter of last year?

Thank you.

Okay.

For the first question, to be frankly, I haven't read the news of the UK change of policy for the foreign students so I don't want to make change of my guidance of the overseas test prep business.

I think our overseas test prep business will grow by 5% to 10% going forward in the medium term.

And the operating margin by segment, typically, we don't disclose the quarterly operating margin by segment.

So that's it.

So can we say that they're improving year over year?

Yes.

Or they are largely stable?

Yes.

That's why you see the overall margin, operating margin improved by 380 bps.

So I think all the business lines, [majority] are expansion.

Yes.

Okay.

Thank you.

Alex Liu, Daiwa.

I was wondering what's the rough contribution of the students that we retained from the past summer promotion to the past quarter's UK enrolment?

Can we get some ideas here?

Okay.

Yes.

We made a big summer promotion in the summer, and in some big cities like Beijing and Wuhan and Shanghai, the retention rate is approximately 50%, so I think it's okay for us.

That means that 50% of students will stay with New Oriental.

And even in Q3, the retention rate will go to the normal level.

Let's say for the UK business, our average retention, student retention rate, is somewhere between 70% to 75%.

So the retention rate for the summer promotions is okay for me for the Company.

Okay?

Okay.

I have a follow-up here.

I was just wondering.

I think we have increased the pace of expansion a bit.

I'm just wondering.

Are we thinking about increased -- the medium term capacity increase targets of 5% to 10%, maybe to perhaps low-teen level in the coming three years to five years?

Yes.

We raised our expansion plan several months ago.

Before the start of the fiscal year, I [guide] you guys that we will open 40 to 50 new learning centers at the time.

But we increased a little bit.

We plan to open 50 to 60 new learning centers because the market demand is so strong.

And also, we are quite confident about our products, new O2O products.

But as I said several minutes ago, we will control how many learning centers we set up.

It will not stretch the margin.

We hope that our margin will go up.

Okay?

Okay.

Thank you.

[Eric Chu, CCBI].

Congratulations on very solid result.

My question is firstly related to the enrolment number growth because this number above 50% is much higher than the previous nine quarters on average.

So I was wondering.

Is it more because of the summer campaign and will this above 40% or 50% enrolment growth continue in the next several quarters?

My second question is related to the online.

You released some data about the Koolearn.com, the enrolment and registered user growth.

It seems that the growth was less than the enrolment growth for our offline courses so I'm wondering if the percentage or contribution from the online was actually decreasing.

How are we look at this business going forwards?

Thank you.

Okay.

Yes, the enrolment.

I will tell you that all the enrolment numbers will tell you does not include the offline enrolment with the price under RMB300.

So I think, yes, the 78% for growth for K-12 enrolment is quite high but partly we're seeing a huge enrolment.

It's early registration for the POP Kids program.

Students choose to enroll the class earlier than before.

That means some students have already enrolled for the spring classes.

So anyway, the student enrolment trend will be good, but I don't think we can continue to get 70%/80% enrollment growth in the Q3.

And, yes, the online.

Your second question is about online.

I don't want to change my guidance for the pure online Koolearn.com, the revenue guidance.

I think the revenue growth will be somewhere between 40% to 50% going forward for the Koolearn.com.

Okay.

Thank you.

We are now approaching the end of the conference call.

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

Again, thank you for joining us today.

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

Thank you again.