New Oriental Education & Technology Group Inc (EDU) 2018 Q1 法說會逐字稿

Good evening, and thank you for standing by for New Oriental's First Fiscal Quarter 2018 Earnings Conference Call.

(Operator Instructions) This 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, Ms. Sisi Zhao.

Thank you, please go ahead.

Thank you.

Hello, everyone, and welcome to New Oriental's First Fiscal Quarter 2018 Earnings Conference Call.

Our financial results for the period were released earlier today and are available on our 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 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. Yang.

Stephen, please go ahead.

Thank you, Sisi.

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

We're off to a strong start for fiscal year 2018, and in the first quarter, we laid down a solid basis on which to build during the rest of the fiscal year.

Net revenues in the first quarter increased to $661.2 million, which is 23.8% growth in dollar terms or 25.9% if computed in RMB.

Net income increased by 12.3%, and total student enrollments in academic subjects tutoring and test prep courses went up by 15.6% year-over-year to approximately 1,532,900 in the first quarter.

To further tap into the booming private education market and fully strengthen our leadership in the market, we also added a net of 43 learning centers in 22 existing cities and rolled out the dual-teacher model school in the city of Zhongshan.

Altogether, this added a total of approximately 116,700 square meters of classroom area, representing approximately 8% capacity expansion over the previous quarter and 31% growth year-over-year.

In the first quarter, we remain focused on our well proven Optimize-the-Market strategy.

This means we're continuing to expand our offline business while also investing in the O2O Two-way Interactive Education System.

As just mentioned, our business has started the year with a better-than-expected revenue growth, and this is mainly driven by the substantial increase in student enrollments in recent 2 quarters.

Even with the discount of the revenue due to the large-scale summer promotion, our key revenue driver, K-12 all-subjects after-school tutoring business, has so far achieved revenue growth of about 35% in dollar terms or 38% in RMB terms, year-over-year.

The enrollment growth rate of K-12 business in the recent 2 quarters is at a very encouraging 35% year-over-year.

The growth in our K-12 business can be broken down into the outstanding performance from our U-Can middle school high school after-school tutoring business and POP Kids program, each of which achieved impressive growth respectively.

The key area of focus for the first quarter was our summer promotion campaign, which we accelerated and made larger than last year, with aim to capture as much market share as possible and acquire long-term loyal student customers.

The large-scale promotion offering low-price experiential courses was launched in a total of 38 cities this year.

On this note, I would also like to mention our deferred revenue balance, meaning cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered, was $930 million at the end of the first quarter, an increase of 41.5% as compared to $657.1 million at the end of the same quarter last year.

This shows that the promotion was very well received and is generating long-term benefits.

The low-cost trial course enrollments for this summer reached 554,000, which more than doubled compared to the semester of last year.

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

Compared with the last year, this year we retained higher portion of students who went down to enroll in full price classes for autumn.

This will boost revenue and drive profit growth throughout the full fiscal year 2018.

At the same time, the cost in teacher's labor and facility rental resulting from the summer promotion are negatively impacting our operating margin by about 2% in the first quarter.

That said, we're not expecting material impact on operating margin from the summer promotion throughout the whole fiscal year.

Overall, we are very pleased with this outcome.

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

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

This investment will set a solid foundation for stronger growth in the long-term and further strengthen our leadership in the market.

I will now turn to pricing.

Per program blended ASP, which is cash revenue divided by total student enrollment, increased by about 8% year-over-year in dollar terms or 10% in RMB terms.

VIP business reported a cash revenue growth of 32% during this quarter.

Starting from the third quarter last year, we began to concentrate with registration for U-Can VIP classes in June and December, which are the first months of the first and third fiscal quarter respectively, instead of spreading them evenly throughout the year.

This decision is designed to streamline the registration process.

As a result of the adjustment, we saw a large year-on-year increase of the enrollments for U-Can VIP classes in this quarter.

Over the long run, we expect a slower growth of our VIP business compared to 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 4% year-over-year in RMB terms.

To provide a breakdown of the hourly blended ASP in RMB terms, please note that U-Can increased by 1%, POP Kids increased by 3% and overseas test prep program increased by 10%, all year-over-year.

We remain firmly optimistic about our top line performance, which we expect will be supported by the continuous improvement of retention rates of existing customers and the ability to acquire new customers.

As mentioned, the summer promotion capacity expansion have a short-term impact on our operating margin, but this important investment will help build our long-term growth.

In terms of the details, operating margin for the quarter decreased by 420 basis point and net margin decreased by 240 basis point year-over-year.

We believe that this is a short-term dilution that will generally balance out as the year progresses.

But we will provide some additional important thoughts on this at the end of the call today.

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

Our revenue driver, K-12 all-subjects after-school tutoring business, achieved a revenue growth of about 35% in dollar term or 38% in RMB terms year-over-year, driven by enrollment growth in the recent 2 quarters of about 35% year-over-year.

Breaking it down, the U-Can middle school and high school all-subjects after-school tutoring business reported a revenue increase of about 35% in dollar terms or 37% in RMB terms.

Student enrollment grew approximately 22% year-over-year for the quarter.

Our POP Kids program again delivered outstanding results, with revenue up significantly by about 36% in dollar term or 38% in RMB terms for the first quarter.

Enrollment went up about 23% for the quarter.

Our overseas test prep and consulting business together reported revenue growth of about 16% in dollar terms or 18% in RMB terms year-over-year for the first quarter.

Finally, VIP personalized class business reported a revenue growth of about 32% in dollar terms or 34% in RMB terms year-over-year for the first quarter.

Next, I will provide some updates on the progress we are making with our Optimize-the-Market strategy.

We have been focusing on expanding our capacity by investing in the build-out of our O2O integrated education system, and this continues to produce very promising results.

Starting with our core offline businesses, in the first quarter, we added a net of 43 learning centers in 22 existing cities and rolled out 1 dual-teacher model schools in the city of Zhongshan.

Altogether, this added a total of approximately 116,700 square meters of classroom area, representing approximately 8% capacity expansion over the previous quarter and 31% year-over-year.

In order to capture growth opportunities in low-tier cities, we continued to roll out our dual-teacher model schools and expand our businesses into remote areas in China.

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

And by end of the first quarter, we have tested this new offerings in over 30 existing cities and 7 new cities.

And we're pleased to see increased market penetration in the market we tapped into.

With this encouraging result, we will continue to deploy the strategy in the rest of the fiscal year.

With respect to our online business, we invested $14.4 million in the first quarter to improve and maintain our O2O integrated education system.

This has been an area of focus since 2014.

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

With high customer retention rates and acquisition of new customers, we believe the investment will bring continued and long-term benefits.

I will first talk about O2O Two-Way Interactive Education System.

On the whole, we aim to extend New Oriental's traditional offline classroom-teaching offerings to online educations services.

This is an important front on which we set ourselves apart from other key players in the market.

With the booming market and our advanced O2O product services, we are poised to gain more market share and strengthen our hold going forward.

Since the launch of "U-Can Visible Progress Teaching system" in September 2014, the interactive education system has been used in all existing cities.

We also will revamp our POP Kids English program in all existing cities by end of the first quarter.

The interactive education system for Overseas Test Prep program, including IELTS, TOEFL and SAT courses was rolled out and tested in about 20 cities by the end of the first quarter.

Now I will talk about our online education ecosystem.

We have seen consistent growth in our koolearn.com learning platform and other supplementary online education products.

Koolearn.com generated net revenue of $20 million, representing 42% increase in dollar terms or 44% increase in RMB terms year-over-year in the first quarter.

The number of paid users increased about 45% year-over-year during the quarter, and cumulative registered users reached 17.7 million.

Koo.cn live broadcast platform achieved about 662,200 registrations in the first quarter.

"DONUT" learning apps reported over 68.9 million downloads by quarter-end.

And "Le Ci" app reported about 6.6 million users by quarter-end.

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

Operating costs and expenses for the first quarter were $500.1 million, representing a 31.1% increase year-over-year.

Non-GAAP operating cost expenses for the quarter, which exclude share-based compensation expenses, were $497.0 million, representing a 30.6% increase year-over-year.

Cost of revenues increased by 32.9% year-over-year to $270.2 million, primarily due to increases in teachers' compensation for more teaching hours and number of schools and learning centers in operation.

Selling and marketing expenses increased by 26.4% year-over-year to $73.9 million, primarily due to increases in brand promotion expenses and selling, marketing staff's compensation.

General and administrative expenses for the quarter increased by 30.4% year-over-year to $156.0 million.

Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $152.9 million, representing a 28.7% increase year-over-year, primarily due to increased headcount as the company expanded its network of schools and learning centers by about 17% year-over-year.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 254.8% to $3.1 million in the first quarter.

Operating income for the quarter was $161.1 million, an increase of 5.6% compared to $152.6 million in the same period of prior fiscal year.

Non-GAAP income from operations for the quarter was $164.2 million, a 7.0% increase compared to non-GAAP income from operations of $153.5 million in the same period in the prior fiscal year.

Operating margin for the quarter was 24.4% compared to 28.6% in the same period of prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 24.8% compared to 28.7% in the same period in the prior fiscal year.

Operating margins were negatively affected by the increase in costs and expenses, mainly due to the capacity expansion in the recent 2 quarters and the bigger scale summer promotion.

Net income attributable to New Oriental for the quarter was $158.4 million, representing a 12.3% increase from the same period in the prior fiscal year.

Capital expenditures for the quarter were $54.1 million, and this was primarily attributable to the opening of 1 new school and 74 new learning centers and renovations at existing learning centers.

Turning to the balance sheet, the deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered, at the end of first quarter of 2018 was $930 million, an increase of 41.5% as compared to $657.1 million at the end of the first quarter of fiscal year 2017.

Before moving on to our expectations for the second quarter, I would like to take a moment to reiterate our overarching goals for the year, which we outlined on fiscal year 2017 year-end conference calls.

During the fiscal year 2018, we will continue to execute our Optimize Market strategy and build on the success we have achieved through this approach.

We're optimistic and confident that we have the right strategy in place and that it will continue to drive the business in a way that creates long-term value for our shareholders.

In terms of our priorities: First, we will continue to expand our offline business.

We aim to add around 20% new learning centers and expand classroom area of some existing learning centers for K-12 business in existing cities, and we also plan to enter 2 to 4 new cities where we identify as market with the most business opportunities.

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 investments in our O2O integration and initiatives in online education offerings.

In particular, we will continue our focus on products 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 but we believe that total spending in absolute dollar terms in fiscal year 2018 will be similar or increase moderately compared with the prior fiscal year.

Third, we will continue to focus on driving up utilization of our facilities and controlling costs to drive operational effectiveness and deliver long-term bottom line growth.

However, even while we are focused on this, it's important to point out that the utilization rates of facilities declined in the first quarter of 2018 versus the same period last year due to the capacity expansion we have been driving in the last few months.

Also as mentioned earlier in the call, this excess capacity as well the short-term impacts on margins from our aggressive summer promotion this year also had a slight dampening effect on the overall margins in the first quarter.

We currently believe the pressure on margins will lessen and reverse throughout the remainder of the fiscal year, given the expected acceleration of revenue growth and the anticipated boost in facility utilization in the coming quarters.

We will keep you updated on this as we move through the fiscal year.

In any event, what is most important is that our expansion strategy and recent incentives should drive additional revenue growth and market share in the long run.

We expect significant return on the investments we have made and believe this will also deliver long-term value for our customers and shareholders.

Looking at the near-term and our expectations for the second quarter, we expect total net revenues to be in the range of $447.0 million to $460.7 million, representing year-over-year growth in the range of 31% to 35%.

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) Your first question comes from the line of Alvin Jiang from Deutsche Bank.

I have two quick questions.

First one is to your margin.

Could you give us more color on the margin or EPS outlook for the full year?

I have a follow-up.

Okay.

The margin question.

I think this aggressive summer promotion and excess capacity expansion in last 2 quarters has a short-term negative impact our operating margins for this quarter.

But we think the important investments we make will help build our long-term growth of the top line and deliver long-term value for our customers.

And we currently believe the pressure on margins will lessen and reverse in the rest of this fiscal year.

Actually, Alvin, if you see the margin in the next 12 months, what I mean is, in the Q2, Q3, Q4 and Q1 next year, you will see the more operating leverage because I take off the Q1 as we did large-scale summer promotion and the capacity expansion.

So going forward, in the mid to long term margin guidance, I will keep the same view I've guided before.

So this is the margin question.

Is my answer clear?

Okay.

Got it, got it.

Yes, it's very helpful.

And my second question is on the guidance.

The second quarter guidance is very strong.

Could you also give us a breakdown of different business lines underlying this strong revenue guidance?

Okay.

Within the Q2 guidance, I think in different business lines, first one the U-Can middle school high school, the top line growth will be 45% to 50% year-over-year.

POP Kids over 50%.

Overseas test prep, 12% to 15% growth year-over-year.

Domestic test prep will be increased by 10%.

And the only drag is our Adult English.

I think it will be down by 10% to 15%.

In overseas consulting business, we expect the growth rates will be 25%.

Pure online, what I mean is the koolearn.com, will grow by 40% to 50% year-over-year.

Your next question comes from the line of Ivy Luo from Macquarie.

My first question is on the capacity.

So we do see that we lifted our guidance from 10% to 15% to 20% capacity increase.

Just wondering how much of it is actually coming from the new learning center opening?

Because we said that capacity increased 31% year-over-year, but based on the number of learning center, it actually increased 16% or 17%.

So just wondering exactly like how many learning centers we plan to open in fiscal 2018?

Yes, that's my first question.

Okay.

In terms of the capacity expansion, I think we have 2 parts.

Firstly, we are raising our expansion plan of the new learning center opening to 20%.

That means, we plan to open 20% new learning centers for the whole year.

And also, we will add 10% the classroom area of existing learning centers.

So if you plus the 20% with the 10%, you will get 30%, the capacity expansion.

And I want to say something about our change of the expansion plan.

First, the market is very good.

So we raised our expansion plan to meet the requirement or demand of the market.

Second, I think we're quite confident about our O2O products.

So the expansion is controlled this time.

And we won't repeat the overexpansion mistakes we made several years ago.

So this time we are doing this I think because of the adjustment to meet the demand of market, and I think we will control the cost.

Yes, that's it.

Yes.

Very helpful, very helpful.

And my second question is still on the margin pressure and I guess, utilization.

So will you be able to break down like how much of the margin pressure in this quarter is coming from summer promotion?

And how much is from new center opening, i.e., the utilization rate?

And when would we expect the utilization rate of the newly opened learning center to ramp up to our average?

Okay.

I think the non-GAAP operating margin decreased by 380, 390 basis points in the Q1.

And within this, 200 bps comes from the summer promotion.

And then, another 180 basis points down comes from the new learning center opening.

Actually, we opened 94 new learning centers, that's net add, in last 2 quarters.

And I think since Q2, what I mean, in the next quarter, we will see the operating leverage or higher utilization rate of the new learning center opening.

And as I said, we control the expansion by the management.

And we only allow the schools or the cities with high growth rates and high margins to open more learning centers.

For example, in Wuhan, in Hangzhou and Beijing, we open more learning centers than before.

Yes, so in the rest of the year, we expect the utilization rate will go up going forward.

Yes, okay?

Just to clarify, so utilization rate on a full year basis should be up year-over-year.

Is that what we are expecting here?

Well, I think this is too early to say because we have a decrease of the utilization revenue in Q1.

But as I said in the rest of the year, the utilization rates will go up.

So we'll keep you updated on this as we move through the fiscal year.

Your next question comes from Fan Liu from Goldman Sachs.

This is Sef asking question on behalf of Fan.

We've a couple of questions.

So the first one, would you mind sharing with us your latest utilization rate?

And also the breakdown between old learning centers and new learning centers that you opened within the past 1 year?

Okay.

I think, in the first quarter, our utilization rate in this quarter was down by 1% to 2% because we opened 94 learning centers in last 2 quarters and also we have the large-scale summer promotion, and we don't charge the common price to the customers.

So this is the utilization rates of this quarter.

Okay.

And in terms of the breakdown between the old and new learning centers that was opened over the past 1 year, is that possible to disclose?

We have 800, 900 learning centers.

So we don't disclose the utilization rates by different learning centers.

I'm sorry.

Okay.

No problem.

One more question is, could you also please share with us your enrollment and revenue growth figures for Beijing, Shanghai and Guangzhou and Shenzhen as well?

Okay.

I just want to share with you the K-12 business after-school tutoring business.

In last trailing 12 months, the revenue growth of K-12 business in Beijing was 39% and Shanghai was 36% and the top 5 cities, including Beijing, Shanghai, Xi'an, et cetera, was 40%.

So the top 5 cities contribute 45% to 46% of total revenue.

Okay?

Your next question comes from the line of Jin Yoon from Mizuho Securities.

I think in the past you said, Stephen, that the retention rate among summer users for this summer was better than the years past.

Can you just talk about the timing of this retention in terms of how it should flow going forward?

Should we expect quite a bit of the retention to happen 1 or 2 quarters after the promotional period?

Or can you just kind of talk about the timing of that retention?

And second of all, on the first question that was asked, are you saying that full year margin should be higher this year than last?

I just wanted to make sure that I clarify that.

Okay.

Thanks, Jin.

Your first question is about the retention rates of the summer promotion.

Actually, I think we got the higher student retention rate at the summer promotion this year, is close 50%.

And last year, this same number was 40%.

So we got an improvement.

Right.

Can you talk about the timing of that, though?

Like when should we expect retention rate to come in?

Is that right after the summer?

Or is that kind of a step function in...

Actually, that happened already.

Okay, got it.

After the summer promotion, the students has already enrolled for the autumn class.

Yes.

That's the retention Q-on-Q.

So it's from summer course to the autumn course.

Yes.

Got it.

Okay, perfect.

And going forward, I think to you, you should be interested in the student retention rates after the autumn or even next spring, I can share with you the last year numbers.

90% of the summer promotion students we got last year who enrolled in autumn courses are our current students.

So the retention is rather higher than on average.

So going forward, we believe the retention rate of the students coming from the summer promotion will be higher.

Okay?

Got it.

Got it.

And then...

And your second question is on margin?

Yes.

I just wanted to clarify, did you -- I just wanted to make sure are you saying that full year margins this year should be higher than margins last year on a full year basis?

We just passed the first quarter, and we got 380 bps down of the operating margin.

But as I said in the rest of the year, we'll make up the margins.

So I think this is too early to say.

But what I can say is, we do believe the margin expansion in the rest of the year.

And so I think we will keep you updated on this as we move throughout the year.

Your next question comes from the line of Tian Hou from T.H. Capital.

And I think it is time for you guys to actually start the expansion because the markets need it.

So one thing I would be little bit concerned is the management capacity.

So the expansion of the learning center is just not like the physical location, but has to be run by people, student has to be thought by teachers.

And so in those kind of much faster expansion, how do you resolve the quality of teaching?

So that's my question.

Thanks, Tian.

I think it is a great question.

As I said, even we're raising the expansion, the new learning center opening, but I think we do believe we have the ability to manage the teaching quality.

First one -- maybe I mentioned earlier, New Oriental is becoming more and more centralized.

That means, the head office is managing the teaching quality and the content and the teacher quality, and it's quite a better than before.

And I just want to say, we just opened 20% new learning centers combined with the 10% new classroom area.

I think it's not overbuilt.

The 30% is okay for us.

And the key is, we are quite confident about the teacher compensation.

We pay the best in the market to pay our teachers.

So we are quite confident about the teachers' quality themselves.

Okay?

Thanks.

Okay.

So another question is, I think a lot of investors or analysts are concerned about margin.

I'm not quite concerned about margin because I really think you guys learned from post-2008 that kind of expansion.

So I wonder, this time expansion compared with the last time expansion, what's the difference for your KPIs when you are managing those teachers or students' performance?

Okay, okay.

Yes, in 2008, 6, 7 years ago, we tripled our learning centers in 3.5 years.

We call this overbuilt appearance.

At that time, 80% of the local schools have KPIs, came from the top line growth.

So that means only 20% was related to the margin.

But now it's quite balanced.

50% of the schools have KPIs comes from the top line growth and 50% come from the operating margin expansion.

So it's quite balanced.

And we're quite confident about the KPI system we setup for the local school has.

We push the local schools to have to care about not only the top line growth, but also the margin, the teaching quality and so on.

Okay?

Go ahead, please.

So Stephen, one last question.

So in the past, how long does it take you for the full ramping up of a learning center?

How long does it take you today to ramp up a new learning center?

Yes, actually, I remember that several years ago, typically it took 12 months, That means 1 year to get the break-even point since the learning center opening.

But now I think the period is becoming short.

So typically, on average, it takes 5 to 8 months of the specific learning center to get the break-even point.

That means, we ramp up the learning center more quickly than before.

Your next question comes from the line of Alex Liu from Daiwa.

Just for the benefit of the audience, would you mind reminding us again the medium to long-term margin guidance?

And how soon should we expect the company to achieve this medium to long-term margin guidance?

Okay, Alex, yes, I think in the earnings call before the last one, I shared with you the long-term margin guidance is to get 17%, 18% in the next 3 to 4 years.

I think we'll keep same the margin target now because even though, we opened 94 learning centers in last 2 quarters, but we're quite confident to fill the students into the new learning centers as quick as we can.

So I think you will see the more optimal leverage and high-utilization rates going forward.

And this is our target to manage the local schools.

So yes, actually, I won't change my mid, long-term guidance of margin.

Okay?

Okay.

My second question is on overseas test preparation business.

Just would you mind reminding us the overseas test enrollment in this quarter as well as the revenue growth?

And how should we think about the direction for the rest of the year?

Okay.

The revenue growth was 14% in RMB terms for overseas test prep business and per program enrollment decreased by 3% for this quarter.

But maybe you remember that, in order to improve the effectiveness of the results of the training offered to the younger age customers of the overseas test prep, we doubled class lengths of TOEFL and IELTS or SAT programs in the last year.

And this change negatively impacted the enrollment by 8% or 9% year-over-year.

So the actual volume growth in this quarter of the overseas test prep is 3.5%.

Is it clear, Alex?

Your next question comes from the line of Lucy Yu from Bank of America Merrill Lynch.

Stephen, I've got a quick question on operating expenses, i.e., adding up selling and distribution and admin together.

This expense was growing at teens to around low 20s in the past several quarters, but this quarter, it went up by 39%.

I believe it's largely related to your exploration of the new centers.

Could you please give us some guidance on this expense that we are looking in the next few quarters?

Yes.

I think this is mainly due to the new learning center opening in this quarter.

But over the long run, going forward, I think as the percentage of the revenue, the selling marketing expenses and SG&A as the percentage of the revenue will go down going forward.

And so we still have the leverage on the OpEx.

(Operator Instructions) Your next question comes from the line of Thomas Chong from Credit Suisse.

I have a quick question about the full year revenue growth.

And given the strong set of a second quarter guidance, should we expect the revenue growth reacceleration to be better than previously expected?

Yes.

Thanks, Thomas.

Yes, we raised our revenue guidance for the whole year of fiscal year 2018.

And I think the revenue growth of this year will be around 30%.

That means 25% comes from the volume growth and 5% to 6%, 7% comes from the price increase.

Actually, the key driver is still the K-12 business, and that's why we decided to open more learning centers, more K-12 learning centers in the past 2 quarters.

And also, we're seeing the higher student retention rates.

And also we have the ability to acquire new customers because the better quality of product.

So that's the reason we raised the revenue guidance for the whole year.

Your next question comes from the line of Mark Li from Citi.

I want to ask for the learning center density for your existing city.

Actually, how many learning center do you think you have over the medium term?

I wonder maybe for the top cities like Beijing, Shanghai, Shenzhen and also maybe the cities in the Tier 2 cities?

Okay.

Actually, in the existing cities, I think we are in the 66 cities already, and we will have 900 learning centers now currently.

And I think the maximum learning center, maybe in next couple of years, the maximum should be 1,500 because for example, in Beijing, we have 90 learning centers here, but I think the maximum learning centers we can step into in Beijing will be 150.

And also, we have lots of cities with a population over 2 million, and we are now set into, but I think the most of the new cities we are doing the business by the dual-teaching model going forward.

So the market's big.

And our market share in the K-12 business, even though we are the leading player, our market share is below 2%, so it's a long way to go.

And actually, since last year, we have been seeing the markets booming of the K-12 after-school tutoring business.

And that's why we accelerate learning center opening.

How about the Tier 2 city?

Do you think how many learning center is possible?

Actually, we don't have the statistics.

But what I can say, it's a long way to go.

For example, like the Tier 2 or Tier 3 cities, the maximum learning centers should be 50 to 70.

But now we are only half at 20 or 30 learning centers.

Your next question comes from the line of Wayne Wang from HSBC.

I have a question on koolearn.com part.

So we are very glad to see the growth rate accelerating in revenue and new number of users.

So could management share with us the margin profile for this business currently, or future outlook?

And also what kind of progress we have made so that makes the growth accelerating in the revenue and users?

Okay.

In terms of the koolearn, the margin is 10% to 15%.

But going forward, I think the top line growth of the koolearn.com should be 40% to 50%, or even better.

And I think while koolearn is one of the few players of the pure online platform in the China's market can make money.

And so we do believe that koolearn.com will do better job going forward.

Your next question comes from the line of Johnny Wong from Jefferies.

My question is about the summer promotion.

It seems that for the last few years, there has been acceleration in the summer promotion.

I'm wondering if this will be a continuing trend.

And do you think that will negatively affect margins in the next few years in our fiscal year first quarter?

Okay.

Actually, we got more than doubled summer promotions enrollment of this year compared to last year because I think we believe that summer promotion is a successful and effective way to optimize the market share and to meet the fast-growing K-12 market demand.

And in terms of the margin impact, yes, we have the 2% negative impact on the margins in the first quarter.

But over the 1 year, what I mean for the whole year, we don't see the material impact on the margin because we're seeing the high retention rate in autumn, and we expect the high retention rates in rest of the year of the students come from the summer promotion.

So the rest of the year, the margin will make up the margin dilution in the first quarter.

Your next question comes from the line of Sheryl Yang from CICC.

I have three questions.

The first one is regarding your dual-teacher classes.

What's the current retention rate and utilization rate under this model?

And what's your future expansion plan regarding this model in fiscal 2018 and beyond that?

And how long does it take to reach break-even for the dual-teacher model?

And how long to collect the investment under this model?

Okay.

Actually, the retention rates of the dual-teacher model, we just pilot the dual-teacher model 1 year ago, so it's too early to say.

But what I would say is the retention rate of students is 50% to 60%.

I think this is better than we expected.

And in terms of the expansion plan, in this fiscal year 2018, we plan to open 5 to 10 more new cities for the dual-teacher model.

And I think we will open more learning centers in existing cities to roll out the dual-teacher model for POP Kids and U-Can.

�But I think it is still too early to say we can get something from the investments of the dual-teacher model because we do it very carefully, we cover all the teachers and students and parents' response of the new product.

And we open the learning center very carefully.

So that's why we only opened in 7 cities and each city only has 1 learning center of the dual-teacher model in last year.

And my second question is that, we noticed that EDU has setup a 10 billion fund reemphasizing this merger and acquisition strategy.

So given you have been quite conservative this year, shall we expect to see more investment to be carry out by EDU?

And what types of company would you be interested in?

Okay.

Actually, we're still in process of planning of the funds.

But I think going forward for our company, we'll look at some of the pure online companies, or offline schools or the kindergartens to buy.

If we find the potential synergy between the target company and us, I think we will buy.

And also we care about valuation, and we care about the cooperation between us.

That's it.

Okay?

Got it.

And my last question is about the competition landscape.

Can management please share your views on current market competition in K-12 and in overseas test prep market?

Yes.

As I said, I think even though we're the leading player in the market, our market share is quite small, below 2%.

So the competition is still there.

And I think my view is, if we have the qualified by teachers and the good product, I think we should take more market share from small players, so it's a long way to go.

And the overseas test prep competition, yes, I think we dominated the market of overseas test prep because we run the business for about 24 years already, but still a long way to go.

And in last quarter, if you remembered, our top line growth of the overseas test prep was 17%.

This year, 14% in RMB term year-over-year growth.

So we still have a lot of room to carry improvement of the overseas test prep business.

Yes, but what's your view on the GED org?

GED.

Well, I'm sorry.

Hello?

Can you hear me?

Yes, yes.

So what's the question?

I was trying to ask your views on this GED org?

I think I don't want to make comments on our competitors.

But what I'm going to say is, the market is there, and we care about the improvement of our teacher teaching quality.

And we just want to provide better services to the students, and that's it.

I think if we do things right, we will take more market share from the small players in the market.

Okay?

Your next question comes from the line of Alison Lee CLSA.

I'm asking on behalf of Mariana.

Just one quick question on the dual-teacher model again.

I just want to confirm how many cities are you testing the dual-teacher model on?

And is there any metrics that you could share on the student performance by using this model compared to the traditional classroom?

Okay.

Actually, till now, we started in 7 new cities already to roll out this dual-teacher model.

And also we have the 30 learning centers in existing cities to perform the dual-teacher model.

It's too early to say, but so far so good.

What I mean is the response of the parents and students are good.

And in the low-tier cities, I think the students have less opportunity to take the good teachers' classes.

So we're providing the good teachers from a hub city like Beijing, Shanghai, or Wuhan, to broadcast the better classes into the low-tier cities.

So I think it's a great opportunity for us for the business in low-tier cities.

Okay?

So 7 cities already and then 30 learning centers?

Yes.

Your next question comes from the line of Nicole Huang from FUH HWA Securities.

Just one quick question.

Could you elaborate a little bit more about your quarterly student enrollment because you are saying that the last quarter Y-o-Y is 15%.

And compared to the revenue growth, it is about 23%.

Could you just elaborate about that.

And also how do you expect the student enrollment in Q2?

Okay.

Actually, since last year, we started to bundle the winter and spring courses registration in Q2, and summer and autumn courses registration in Q4.

So that's why we recorded 37% year-over-year enrollment growth in Q4 last quarter, and 15.6% year-over-year enrollment growth in this quarter.

So the combined enrollment growth is 25%.

And going forward, I think the trend will continue, and so that's why I guide you the volume growth.

I think in the coming Q2, we guided the top line growth will be 31% to 35%.

And I think 25% to 27% comes from the volume growth or enrollment growth, and others will be the price increase.

Okay?

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.

Please go ahead.

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.

Thank you.

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

Thank you for your participation.

You may all disconnect.