New Oriental Education & Technology Group Inc (EDU) 2017 Q4 法說會逐字稿

Good evening, and thank you for standing by for New Oriental's Fourth Quarter and Fiscal Year 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.

Thank you.

Hello, everyone, and welcome to New Oriental's Fourth Fiscal Quarter and Fiscal 2017 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 U.S. 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 the 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 would now turn the call over to Mr. Yang.

Stephen.

Please go ahead.

Thank you, Sisi.

Hello, everyone, and thank you for joining us on the call.

We're pleased to close fiscal year 2017 with a set of solid financial results.

This year, we have achieved both strong top line growth and bottom line performance.

Net revenues in fiscal year 2017 increased to approximately $1.8 billion, which is an increase of 21.7% in U.S. dollar terms or 29.1% in RMB.

Net income reached $274.5 million, and student enrollments went up by 33.3% year-over-year.

During fiscal year 2017, we opened a total of 4 new schools, 3 new learning centers and 6 dual-teacher model schools in 10 new cities and added a net of 93 learning centers and one kindergarten in the existing cities.

In total, we added 107 facilities, representing approximately 14% increase year-over-year.

This was an important and profitable expansion.

Throughout this fiscal year, we remained focused on strong execution of the Optimize the Market strategy, which means we're continuing to expand our off-line business, while also investing in the O2O Two-Way Interactive Education System.

Our business has been performing along a strong and solid trajectory, which is supported by our better execution and enhanced management.

In short, this year we experienced strong growth momentum across our business lines.

To give a quick overview, annual revenue for K-12 all-subjects after-school tutoring business, our key revenue driver, grew approximately 44.2% if computed in RMB, contributing 55% of total revenue.

This was mainly supported by the U-Can business and the revamped POP Kids program, which achieved annual revenue growth of 40% and 55% in RMB, respectively.

It's worth noticing that in order to capture the growth opportunity in low-tier cities, we continue to roll out our dual-teacher model schools and expand our business into remote areas in China.

We started to pilot the new dual-teacher class model in select cities in July 2016.

In fiscal year 2017, we tested this new offerings in over 20 existing cities and 6 new cities, and we're happy to see increased market penetration in those markets we have tapped into.

With these proven results, we will continue this strategy in next fiscal year.

In addition, we're in the process of launching the O2O standardized teaching system for our overseas test prep business, such as IELTS, TOEFL and SAT programs in some of the largest cities in China.

In terms of performance for the fourth fiscal quarter, this time of year is part of our peak season, and we performed quite well.

Fourth quarter net revenues increased 23.2% to $486.4 million, with operating income up 39.7% and student enrollments up 36.9%.

Breaking up, U-Can business recorded a fourth quarter revenue increase of 37% in RMB and enrollment was up by approximately 50%.

Our revamped POP Kids recorded fourth quarter revenue increase of 55% in RMB and enrollment growth of 51%.

To give you a better understanding of enrollment growth, I would like to specifically mention our summer promotion efforts, which have been proven to be a very successful strategy in past years.

To further progress our ability to consolidate the market and gain as much market share as possible, similar with last year, we have conducted large-scale promotion this summer to rapidly acquire grade 7 student customers before they start the first year of secondary school.

We offered low-price experiential courses for multiple subjects in total of about 40 cities.

The promotion was again well received by the markets.

The grade 7 enrollments we brought in before the start of the summer holiday in early July this year reached 417,000, more than double compared to the same period of last year.

I would like to reiterate that we do not include these promotion enrollments in our reported enrollments.

We're very pleased with this outcome and expect to retain a high portion of students after this promotion, which will boost revenue and drive profit growth throughout the whole fiscal year 2018.

It's equally important to note that due to a higher utilization of facilities in the rest of the year, we don't expect a material impact on operating margin throughout the whole fiscal year.

We believe the summer promotion will continue to be a successful and effective strategy to quickly increase market share in the high-growing K-12 after-school tutoring market.

As these students move from grade 7 through grade 12, the continued improvement in retention rate and customer loyalty will drive the revenue growth in the next 3 to 6 years.

Turning to pricing.

Per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 6% year-over-year in U.S. dollar terms and is flat in RMB terms.

The 6% decrease of per program blended ASP is mainly due to the shift of revenue mix from the overseas test prep business and slowdown of VIP business, which has a higher ASP.

Starting from the third fiscal quarter of this year, we began to concentrate the registration for U-Can VIP classes in June, December, the first month of the first fiscal quarter and third fiscal quarter, respectively, rather than spreading evenly throughout the year in order to streamline the registration process.

As a result, we saw very large year-on-year increase in enrollment for U-Can VIP classes in the third quarter, but lower than normal growth in the fourth quarter.

For the whole fiscal year 2017, VIP business recorded cash revenue growth of about 16%.

Over the long run, we expect that the growth of our VIP business will be slower than our overall revenue growth, which will continue to drag down blended ASP.

Hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 7% year-over-year in RMB terms.

To provide a breakdown of hourly blended ASP in RMB terms, please note that U-Can increased by 6%, POP Kids increased by 8% and overseas test prep program increased by 12%, all year-over-year.

On the margin front, we continue to make great progress by improving operational efficiency and utilization of facilities and controlling costs within the company.

Operating margin for the fiscal year 2017 increased 120 basis points year-over-year.

The continued strong bottom line performance demonstrates the results of our commitments in creating sustainable, long-term value for our customers and shareholders.

Now, let me move on to the fourth quarter performance across our individual business lines.

Our key revenue driver, K-12 all-subjects after-school tutoring business, achieved a year-over-year revenue growth of 34% in U.S. dollar terms or 42% in RMB terms.

This was driven by a significant enrollment growth of about 51% year-over-year.

For the whole fiscal year, K-12 had revenue increase of about 36% in U.S. dollar terms or 44% in RMB terms.

Breaking down, the U-Can middle school, high school all-subjects after-school tutoring business recorded revenue increase of 30% in U.S. dollar terms or 37% in RMB terms for the fourth quarter and 32% in U.S. dollar terms or 40% in RMB terms for the fiscal year.

Student enrollment grew approximately 50% year-over-year for the quarter and 45% for the fiscal year.

Our POP Kids program delivered outstanding results, with revenue up significantly by about 47% in U.S. dollar terms or 55% in RMB terms for the fourth quarter, and 47% in U.S. dollar terms or 55% in RMB terms for the fiscal year.

The enrollment went up about 51% for the quarter and 49% for the fiscal year.

Our overseas test prep and consulting business together recorded revenue growth of about 13% in U.S. dollar terms or 19% in RMB terms year-over-year for the fourth quarter, and 6% in dollar terms or 13% in RMB terms for the fiscal year.

Finally, VIP personalized classes business reported revenue growth of about 12% in U.S. dollar terms or 18% in RMB terms year-over-year for the fourth quarter and 16% in dollar terms or 23% in RMB terms for the fiscal year.

Next, I will provide some updates on the 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 very well.

Starting with our core off-line business.

As mentioned earlier, we added net of 47 learning centers in around 30 existing cities, opened 2 new schools and a new learning center in the city of Zhangzhou and Nanyang and rolled out dual-teacher model schools in the city of Anyang and Handan.

In fiscal year 2017, we opened 4 new schools, 3 new learning centers, 6 dual-teacher model schools in 10 new cities and added another 93 learning centers and one kindergarten in the existing cities.

Regarding our online business.

We invested approximately $17 million in the fourth quarter and $57 million in total for the fiscal year to improve and maintain our O2O integrated education ecosystem.

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

We have been devoted to this online business build-out since 2014.

With an increase in customer retention rates and the addition of new customers, we fully believe this is transforming our business and the investments will bring continuing and long-term benefits.

Before I go into details, just a quick recap of 3 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 education product under the New Oriental brand.

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

Starting with the O2O Two-Way Interactive education system.

We aim to extend New Oriental's traditional off-line 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 existing cities in our nationwide school network, and this expansion drove positive performance.

Our newly revamped POP Kids English program, "Shuang You", also expanded its coverage, reaching 54 cities by the end of the fourth quarter.

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

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 10 cities by the end of the fourth quarter.

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

In the fourth quarter, koolearn.com generated net revenue of $17 million, representing an increase of 30% in U.S. dollar terms, or a 38% increase in RMB terms.

The number of paid users increased significantly this quarter, approximately 69% year-over-year.

The number of cumulative registered users in this quarter has reached 17 million.

Koo.cn, our own live broadcast open platform for both New Oriental and third-party teachers, achieved around 634,500 registrations in the fourth quarter.

DONUT, a series of game-based mobile learning apps for children, reported over 60.6 million downloads by quarter end.

Le Ci, an English language vocabulary training app for mobile phones and tablets app, reported over 6.2 million users by quarter end.

For the third level of our online education ecosystem, we invest in select online education companies with a minority stake, and we'll 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 fourth quarter.

Operating costs and expenses were $434.5 million, representing a 20.2% increase year-over-year.

Non-GAAP operating costs and expenses, which exclude share-based compensation expenses, were $425.5 million, representing an 18.9% increase year-over-year.

Cost of revenues increased by 21.9% to $199.3 million, primarily due to increase in teachers' compensation for more teaching hours.

Selling and marketing expenses increased by 11.7% to $66.3 million, primarily due to increases in brand promotion expenses and selling, marketing staff's compensation.

General and administrative expenses for the quarter increased by 21.8% to $169 million.

Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $160 million, representing an 18.4% increase year-over-year.

This was primarily due to increased headcount as the company expanded its network of schools and learning centers by about 14% year-over-year.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 147% to $9 million.

Operating income for the quarter was $51.8 million, a 39.7% increase from $37.1 million in the same period of prior fiscal year.

Non-GAAP income from operations was $60.8 million, compared to $40.7 million in the same period of prior fiscal year.

Operating margin for the quarter was 10.7% compared to 9.4% in the same period of prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter was 12.5% compared to 10.3% in the same period of prior fiscal year.

Net income attributable to New Oriental for the quarter was $55.4 million, representing a 31.9% increase from the same period of prior fiscal year.

Capital expenditures for the quarter were $26.5 million, and this was primarily attributable to the opening of 4 new schools and 70 new learning centers and renovations at existing learning centers.

Turning to the balance sheet.

At the end of fourth quarter, the deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as revenue as the instructions are delivered, was $866.6 million, an increase of 34%, as compared to $646.9 million at the end of the fourth quarter of fiscal year 2016.

Before talking about our priority for the fiscal year 2018, I wanted to take a moment to reiterate our overarching goals for the future, similar to those we have been outlining on our past conference calls.

During fiscal year 2018, we have continued 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 it will continue to drive additional progress and help us create long-term value for all shareholders.

To give you more specifics on our areas of focus.

First, we will continue to expand our off-line business.

In fiscal year 2018, we aim to add about 10% to 15% new learning centers for K-12 business in existing cities.

And we also plan to enter 2 to 4 new cities, where we identify markets with the most business opportunities and receptivity to our offerings.

In addition, we will continue to roll out our dual-teacher model schools to about 5 to 10 new low-tier cities in China.

Second, we will continue to leverage our investment in our O2O integration and the initiatives in online education offerings.

In particular, we will continue our focus on product refinement and maintenance for the O2O system for K-12 business.

Meanwhile, we will continue to revamp and roll out our O2O standardized teaching system for our overseas test prep business.

We will continue to make investments that we believe that total spending in absolute dollar terms in fiscal year 2018 will be similar with the previous fiscal year, which totaled approximately $57 million.

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

Looking at the near term, in terms of the first quarter of fiscal year 2018, we expect total revenues to be in the range of $626.5 million to $647.3 million, representing year-over-year growth in the range of 17% to 21%.

If not taking into consideration the impact of potential change -- exchange rates between RMB and U.S. dollars, the projected revenue growth rate is expected to be in the range of 20% to 24% for the first quarter of fiscal year 2018.

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) Our first question is coming from the line of Alvin Jiang from Deutsche Bank.

My first question is about the revenue.

Could you share with us your outlook for full year revenue growth?

And should we still expect have revenue growth acceleration for the full year FY '18?

And my second question is on margin.

Do you see margin pressure from the summer promotion costs?

And what's the margin outlook for Q1 and for the year FY '18?

Okay.

Thank you, Alvin.

You first question is about revenue guidance of fiscal year '18.

Yes, we do believe that the top line growth in the coming fiscal year '18 will be accelerated continuously, if you compare it, with the top line growth with the fiscal year '17.

First, we still have the great growth momentum in the K-12 business.

And also, we're doing the same thing, the O2O platform, in the overseas test prep as we did for the K-12.

So we're quite confident that the top line growth of the overseas test prep business will be accelerated in the fiscal year '18.

And also, don't forget, we're doing the large-scale of the summer promotion through the early July.

I think we have already got 417,000 summer promotion student enrollment.

It's more than doubled compared to those of last year.

So we do expect the retention rates of those students will be higher than that of last year.

So I think the top line growth in fiscal year '18 will be accelerated.

And the margin question.

Yes, I don't think we have the margin pressure of the summer promotion, because as we did in last year, I think the retention rates of the summer promotion students will be higher than last year.

So there's no negative impact of the margin for the whole year.

And so I think, we'll continue our "Optimize the Market" strategy.

And as I said earlier, we will open 10% to 15% new learning centers and top line growth will be over 25% or 30%.

So I think you will see the utilization rates will go up in the fiscal year '18 and drive the margin expansion as we did in fiscal year '17 and '16.

Okay, Alvin, I want to add a little bit on the revenue growth.

So for those investors or the analysts -- I want to remind you that actually, Q1 is our seasonally grow -- in terms of growth rate, the slowest, if you look at last several years' revenue growth trend.

So the peak season for our key growth driver K-12 business peaked in the second half.

So the rest of the year, the revenue growth will be higher than Q1.

Yes.

If you look at the growth Q-by-Q, quarter-by-quarter, in fiscal year '17, Q1, the top line growth was 16.5%; Q2, 22%; Q3, 26%; and Q4, 23%.

So the second half of the year will be the peak season of the K-12 business.

And also, the overseas test prep and domestic test prep in Q1 will be the peak season.

Even though the growth rate will be better than this year, but if you compare the top line growth of the overseas test prep and domestic test prep with the K-12 growth rates, this will be lower.

Our next question is coming from the line of Ivy Luo from Macquarie.

I'll move on to the next question.

Our next question is coming from the line of Jin Yoon from Mizuho Securities.

Couple of questions.

First of all, the learning centers and schools have -- the opening this quarter have far reaccelerated from the quarters past.

I apologize if you answered this question on the prepared remarks already.

But how should we see the trend going forward on that front?

Or is this just kind of a onetime seasonality impact?

And number two, I know that you guys are overall diminishing, I guess, or putting less emphasis on the VIP classes.

But these new incremental learning centers and schools that are opening, is there any VIP learning classes in them at all?

Or is it just winding down on your existing schools?

Okay.

Thank you, Jin.

I think, yes, in terms of the exchange plan yes, we opened 52 learning centers in this quarter.

Yes, it's accelerated.

Because -- I think we're seeing the growing momentum in our K-12 business due to the rolling out of the new O2O product, and also, the solid market demand and effective operation as well.

So the expansion is, I think, is controlled.

So going forward in fiscal year '18, I think we will open 10% to 15% new learning centers.

This is net increase, and I don't think it will impact margin.

On CapEx, I think the enrollment growth and top line growth will be higher than the learning center opening.

So the margin will keep improving in the fiscal year '18.

And most of the new learning centers we opened for fiscal year '18 will be K-12 weighted.

And I think we control the VIP business, and we hope the growth of big-size class and small-size class in K-12 business will be faster than the VIP business.

So in last fiscal year '16, the VIP revenue contribution was 29%.

And this year, fiscal year '17, was 28%.

So next year, I think it should be lower, a little bit.

Our next question is coming from the line of Fan Liu from Goldman Sachs.

Would you mind guide us what the utilization rate look like mid-quarter and also the retention rate next quarter?

And also, would you mind adding some color on Beijing -- the revenue growth for Beijing and Shanghai, I mean, in terms of the future revenue?

Okay.

The utilization rate of this year is 22%.

Last year it was 19% to 20%.

So it's improved by 20 bps.

And going forward in fiscal year '18, I think you will see the utilization rates will go up going forward.

And student retention rate, for the Pop Kids retention rates is over 85% compared to 75% last year.

And for the U-Can, the student retention rate is more than 70%.

Last year, it was 60%.

And yes, it will go up.

And your second question is about the Beijing and Shanghai revenue growth for K-12 business or for overall?

Fan?

K-12 business.

Okay.

The K-12 business in Beijing in this quarter was [40%, Shanghai 29%] (corrected by Company after the call) growth in Q4 fiscal year '17.

Our next question is coming from the line of Tian Hou from T.H. Capital.

I have a couple of questions.

One is much bigger question about the market.

It seems like, just as, recently, the demand for the education shoots up and the utilization -- from your result, we can see the utilization rate, retention rate and the school opens, every single metrics are all up.

So I want to ask, from your point of view what do you see the markets?

And how do you see the demand?

What are the main drivers?

That's number one.

Number two is the dual model -- dual-teacher model.

So in what kind of circumstances you will open the dual-teacher model?

So that's the 2 questions.

Okay.

Yes, the market -- yes, we're seeing the market demand's very strong.

That's why we accelerate the learning center opening.

We opened 52 learning centers in one quarter because I think the market size for K-12 is huge.

I mean, it's a $50 billion or $60 billion market.

And I think the growth potential will be less than the 15% to 20% CAGR going forward.

But even we're the largest player in the market, our market share is still below 2%.

And also, don't forget we spent $100 million in last 2, 3 years to build out our O2O system.

So we're quite confident that we have the best product and teachers in the whole market.

And this is the key driver of the potential growth.

And I'll also add one point of the summer promotion.

Since several years ago -- let's say that 5 years ago in Beijing, firstly, we started to acquire the students with a low price in the summer for the grade 7 students.

And last year, we conducted a large scale in 27 cities to get 200,000 student enrollment in summer promotion.

And this year, I think we did more.

So I think the retention rates will be higher than last year.

So by this way we can take more market share going forward.

So this is my opinion to the whole market.

And second, the dual-teacher model.

I think, in some low-tier cities, I think the best way for us to penetrate the market is to do the dual-teacher model.

We opened 6 new cities in fiscal year '17, and we will open in 5 to 10 new cities to do the dual-teacher model in the fiscal year '18.

And that's a good way for us to share the top four-star teachers teaching experience with the students in the low-tier cities.

And also, as I said in the last earnings call, in last November, we successfully tested that the one teacher can speak to 39 classes at the same time.

So it's the best way for us to penetrate the low tier-city market.

Our next question is coming from the line of Alex Liu from Daiwa Capital.

I understand, I think the management seems to be quite positive on overall momentums on both enrollment and also utilizations next year.

I'm just wondering in terms of the magnitude of the margin expansion in 2018, how should we think about it going forward?

And also, quick question on overseas test prep.

Is there any latest updates or metrics that you can share with us on the turnaround of this business?

Okay.

I think we will keep the same tone of the margin guidance.

Our target is to get 17%, 18% operating GAAP operating margin in next 2 to 3 years.

In the last 2 years, every year, we got the margin expansion by 120, 130 bps.

And I think the trend will continue in the fiscal year '18.

And yes, that's the margin guidance.

And the overseas test prep, yes, if you see the top line growth of the overseas test prep in Q4, in this quarter in RMB terms, the top line growth was 17%.

But in the whole year of the fiscal year '17, it was only 9%.

So I think we do see the top line growth acceleration for overseas test prep in this quarter.

And for the fiscal year '18, I think the top line growth of the overseas test prep will be 10% to 15% year-over-year in RMB terms, or maybe better.

I think we're doing the same online/off-line integrated products as we did in K-12 for overseas test prep.

And because more and more young students enrolled into the overseas test prep class, and I think they like the new O2O products.

And also, we added the KPI.

We added the overseas test prep enrollment growth into the local school KPI.

So this is the change of this year.

So it pushed the local school heads to do more for the overseas test prep business.

Our next question is coming from the line of Zoe Zhao from Credit Suisse.

I have 3 questions.

First of all, a follow-up on your previous comment.

When you said like revenue growth to accelerate in FY '18, do you mean like in RMB terms or U.S. dollar terms?

Both.

Second question is -- both, okay.

And then second question -- right.

Okay, great.

Yes, regarding the deferred revenue, it seems to be very strong this quarter.

Could you share with us a percentage of the summer to autumn joint enrollment?

And also what's the cash revenue growth quarter to date?

And then third question is we've been seeing a very strong K-12 revenue growth of 40% to 50% for over a year now.

How long further do you think this momentum could continue into the years?

Okay.

A lot of questions.

For deferred revenue, yes, Q4 is the peak season of the K-12 enrollment for the summer and some of the autumn enrollments.

So the trend is very strong.

And the cash revenue -- yes, we don't disclose the first of 7 or 8 weeks' cash revenue this time.

But I can say that it's strong as well because don't forget, the VIP registration peak season happened in June.

We changed since last year.

December and June are the 2 peak seasons for the VIP enrollment growth.

And what's the last question?

Oh, the K-12 business trends?

Yes.

So how long further do you think this 40% to 50% revenue growth could continue into the years?

Yes.

As I said, you know we're the largest player in the market, but our market share's below 2%.

So it's a long way to go.

And if we do the right thing, or if we are on right way, I think we can get the same growth in at least next 3 years, because the market is still so strong.

And I don't think nobody else can afford $100 million on the products as we did in the last 2, 3 years.

And also, New Oriental has been famous by well paid to the teachers.

So we have the best teachers in the market.

So the best product combined with the good teachers, we're quite confident about the top line growth in next 3 to 5 years.

Our next question is coming from the line of Ivy Luo from Macquarie.

I have 2 questions.

One is just to follow up on the summer promotion.

So how many courses on average are we seeing each student get enrolled in for the summer courses?

And specifically, for the summer courses, what's the retention rate that we're expecting for them to get into the autumn?

And the second question is to follow-up our best teacher that we have and the teacher salary.

So what's the number of the teacher that we have right now?

And what do we expect the teacher salary to increase going forward in FY '18?

That's my 2 questions.

Okay.

The summer promotion, yes, typically, in the big cities like Beijing, Shanghai, in big cities, the students are enrolled at the summer courses for 2 to 3 courses at the same time.

But in low-tier cities, some students choose the one subject.

So this is what we're seeing.

And for the student retention rates of the summer promotion, last year in big cities, the student retention rate in autumn after the summer promotion was 40%.

And this year, we hope the retention rates in both cities will be over 50%.

And so the teacher salary, yes, we have 22,000 teachers in hand now.

And I think the headcount increase in the fiscal year '18 will be 5% to 10%.

This is the teacher headcount increase.

And the teacher salary inflation will be 8% to 9% year-over-year.

And we give the good teachers more teaching hours.

So that means the good teachers, the salary package will be increased a lot.

(Operator Instructions) Our next question is coming from the line of Andrew Orchard from Nomura.

My question is on sales and marketing costs because we saw a drop in sales and marketing costs as a percent of revenue in the quarter.

So I'm just wondering if that's because of what we did in last quarter in terms of the bundle enrollments?

And that's led to this relative drop in sales and marketing costs in the quarter?

The other question I wanted to ask was on the divergence between your enrollment and revenue between the U-Can and POP Kids businesses, because with U-Can we saw enrollment growing faster than revenue, but POP Kids was the other way around.

So I wanted to know if there was anything particular that we should pay attention to with regards to this?

Okay.

Yes, the selling and marketing expense, the marketing activity is not our priority to acquire students.

I think we rely on the new overall products.

So we don't need to spend a lot on selling and marketing expenses.

And not only for this quarter but also for the whole year going forward.

So in the fiscal year '18, I think we expect the selling and marketing expenses will be down as a percentage of the revenue.

And the enrollment growth, I think both the U-Can and POP Kids enrollment growth are pretty well.

I think the trend is okay.

Yes.

Actually the gap between the revenue growth and the enrollment growth for U-Can business, this quarter is mainly because of the contribution from VIP revenue is lower than normal because of the preregistration in December.

Okay.

And so that means that affects your U-Can more?

Is that correct?

Yes.

Yes.

Because there's no material VIP business in POP Kids.

Yes.

Our next question is coming from the line of Lucy Yu from Bank of America.

One quick question on the dual-teacher model.

You mentioned that one teacher could take around 39 classes at the same time.

Is this an optimal or normalized number of classes that one teacher can take?

If that's the case, then what is the margin look like on a particular class of a dual teacher?

Okay.

Yes, we just tested the one teacher can speak to how many classes at the same time.

In last November, the one teacher can speak to 39 classes at the same time, maximum.

But in last month, I heard from my staff that one teacher can speak to 80 classes for the POP Math classes.

So I don't know what is maximum numbers.

But on average, I think that one teacher can speak to 20 classes at the same time.

But it will help the margin expansion, because the one teacher can speak to let's say, 400 or 500 students, because 20 or 25 students sit in one classroom.

So one teacher can speak to 20.

It will drive the margin expansion, so this is the business model for the dual-teacher model.

All right.

Sorry.

One follow-up.

If say, one teacher can take 20 classes at the same time, how much is the margin look like?

I think it's too early to say the margin, because we just pilot the program since 4 quarters ago.

But I think going forward, if to some extent the margin of the dual-teacher model should be 5% higher than the traditional off-line classes.

Is that clear?

Yes.

Our next question is coming from the line of Alison Lee from CLSA.

I'm asking on behalf of Mariana Kou.

She's not here today.

I was wondering how is the Q1 trending in terms of enrollments for K-12 and overseas prep and also, what's the ASP?

And my second question is I just want to confirm what the non-GAAP EBIT margin for FY '18?

I think you mentioned the margins before, but I just wanted to confirm the numbers?

Sorry, voice is not very clear.

I can't follow your second question.

I think your question is about non-GAAP operating margin, okay.

The K-12 business, I think going forward in RMB terms, the top line growth will be 40% to 45% or maybe more.

And the hourly price increase will be 5% to 9% year-over-year.

So the others will be the volume growth or the enrollment growth.

And as I said the non-GAAP operating margin, our target is to get 18% to 19% in next 2 to 3 years, what I said is non-GAAP operating margin.

So the margin will be expanded as I said, as we did in last 2, 3 years.

Our next question is coming from the line of Sheryl Yang from CICC.

Could you please share more color on your current growth, the revenue growth of overseas test prep that's coming from U.S. test?

Sorry, we don't disclose the revenue contribution of the United States business line of overseas test prep.

But what I can say is the overseas test prep business in United States is the biggest business for the overseas test prep.

Because most of the students choose to study in the United States.

Yes.

This is the biggest market.

Our next question is coming from the line of Wayne Wang from HSBC.

So my question is regarding to the coming revenue guidance.

So as we have mentioned that the coming revenue guidance will be like Y-o-Y growth of 15%, 20%.

So you had mentioned that this kind of revenue growth is related with the relatively seasonality reason.

So may I ask whether like the summer promotion has some impact on the revenue growth, as we actually don't generate much revenue from the entry grade students as we are offering like free classes to those students?

So what will be a normalized growth in the future like?

Any color will be like very appreciated.

And another question about tax rate -- effective tax rate.

It seems that in this quarter the effective tax rate is little bit -- relatively high.

So what kind of tax rate we should expect in the coming quarters?

Yes, I think you're right.

The summer promotion is with low price.

So it generates generally very little GAAP revenue in the Q1.

But in the rest of the year because of the higher retention rates, I think, we'll make up the revenue growth in the rest of the year.

And yes, tax rate.

Yes, the tax rate was 15.3% in this year.

And yes, the tax rate will certainly move up.

I think next year, I got the tax rate will be in a range of 16% to 16.5%.

This is the ETR, okay.

We're 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.

Thanks.