New Oriental Education & Technology Group Inc (EDU) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the New Oriental Third Fiscal Quarter 2018 Earnings Conference Call. (Operator Instructions) I must advise you this conference is being recorded today, Tuesday, the 24th of April 2018.

I'd like to hand the conference over to your first speaker for today, Ms. Sisi Zhao. Thank you. Please go ahead.

Thank you. Hello, everyone, and welcome to New Oriental's Third Fiscal Quarter 2018 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 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 pleased to continue our strong momentum in driving top line growth for the third quarter of fiscal year 2018. Net revenues in third quarter increased to $618.1 million, which is 41.2% growth, once again beating our expectations. Specifically, the strong top line growth was driven by significant increase in student enrollments in academic subjects tutoring and test prep courses in the last 2 quarters.

Starting from the last fiscal year, we bundled winter and spring courses registration in Q2 and summer and autumn courses registration in Q4. This year, we delivered a very strong 43% year-over-year enrollment growth in the second quarter. Following the powerful drive in the second quarter, spring enrollments continued to grow by 7.7% year-over-year in the third fiscal quarter.

It's also worth noting that this year's much later Chinese New Year has caused student enrollments in the last weeks of third quarter to fall into the beginning of the fourth quarter. Nonetheless, the combined enrollment growth for the second and third quarter together reached 30% even with the impact of the Chinese New Year. In this regard, we are very encouraged to see outstanding results in terms of the enrollments and cash proceeds from student registration in the first 8 weeks of the fourth fiscal quarter, which grew year-over-year by approximately 40% and 65%, respectively.

In the third quarter, we remained committed to sustaining a healthy balance between top line and bottom line growth, and we execute our well-proven 'Optimize the Market' strategy. Following a strong track record in previous 3 quarters, we continued to make great strides in our planned acceleration in capacity expansion across cities with superior growth potential and higher operating efficiency.

In this quarter, we added a net of 47 learning centers in 23 existing cities, opened 2 new schools in cities Lianyungang and Yancheng, and launched 3 dual-teacher model schools and 8 learning centers in city of Jiaozuo, Dongguan and Haikou. Altogether, our total square meters of classroom area by the end of this quarter expanded by approximately 41% year-over-year.

We also continued to strengthen our online and off-line integrated standardized teaching system in the K-12 business and deployed standardized teaching system in our overseas test prep business in some of the larger cities in China. Moreover, we continue to invest in our pure online education platform, koolearn.com, which delivered a year-over-year revenue growth of approximately 63% in this quarter, with registered users and paid users up by approximately 88% and 70%, respectively.

With solid support in resources and a series of new initiatives being rolled out, our online K-12 after-school tutoring business reported a robust year-over-year revenue growth of approximately 176%. The results boosted our confidence in making strategic investments to capitalize on the booming online education market and drive up our top line growth.

Our encouraging results for the third quarter was mainly driven by the significant increase in student enrollments in the second and third quarters, as mentioned a moment ago.

Our K-12 all-subjects after-school tutoring business accelerated its growth momentum in the third quarter, leading to a significant year-over-year revenue increase of 51%. Furthermore, our U-Can middle high school all-subjects after-school tutoring business also recorded revenue growth of approximately 51%, while the POP Kids program grew by approximately 50% year-over-year.

I will now turn to pricing. Per program blended ASP, which is cash revenue divided by total enrollments, increased by about 12% year-over-year in dollar terms. Hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 13% year-over-year in dollar terms. To provide a breakdown of hourly blended ASP, please note that U-Can increased by 13%, POP Kids increased by 11% and overseas test prep program increased by 18%, all year-over-year in dollar terms.

Meanwhile, our sustained emphasis to push ahead with our capacity expansion strategy contributed to a short-term headwind in the margin for this quarter, which we contained at a reasonable level. Non-GAAP operating margin for language training and test prep business declined 140 basis points year-over-year, a trend in line with that of the previous quarter. We anticipate that the margin pressure will gradually lessen and be lifted off over the fourth fiscal quarter and the coming fiscal year, as we remain focused in enhancing our operational efficiency, utilization of facilities and cost control as the business expands.

Looking ahead, we're confident that the downward pressure in margin will continue to ease throughout the remainder of the fiscal year. More importantly, as the business expands, it will also benefit from greater economies of scale as we continue to make strategic investments. We believe that with our well-proven expansion strategy, our strategic vision and investments will continue to create sustainable long-term value for our customers and shareholders.

Now let us move on to third quarter performance across our individual business lines. Our key revenue driver, K-12 all-subjects after-school tutoring business, achieved revenue growth of about 51% year-over-year and enrollment growth of about 13% year-over-year. The combined enrollment growth of K-12 after-school tutoring business for the second and third quarter was 38%.

Breaking it down, the U-Can middle school, high school business reported a revenue increase of about 51% for the third quarter. Student enrollments grew approximately 17% year-over-year for the quarter. The combined enrollment growth for the second and third quarter was 37%. Our POP Kids program revenue was up by 50% in dollar terms. Enrollment grew by 7% year-over-year. The combined enrollments growth for the second and third quarter was 39%.

Our overseas test prep and consulting business together reported revenue growth of about 24% year-over-year in the third quarter. Finally, VIP personalized classes business reported revenue of about 34% year-over-year for the quarter.

Next, I'll provide some updates on the progress we are making with our Optimize the Market strategy. In consistent with our long-term plan, we have been focusing on expanding capacity by investing in the buildout of our O2O Integrated Education System, and this continues to produce very promising results.

We will start with our off-line business. In the third quarter of fiscal year 2018, we added a net of 47 learning centers in 23 existing cities, opened 2 new schools in the city of Lianyungang and Yancheng and rolled out 3 dual-teacher model schools and 8 learning centers in the city of Jiaozuo, Dongguan and Haikou. Altogether, our total square meters of classroom area by the end of the quarter expanded approximately 41% year-over-year.

In order to capture the growth opportunities in lower-tier cities in China, we continue to roll out our dual-teacher model schools, expand our business into remote areas of China. We began to pilot the new dual-teacher model class in select cities in July 2016. And by the end of the third fiscal quarter 2018, we have deployed new offering in over 35 existing cities for the POP Kids program, in 25 cities for the U-Can program and 13 new cities for both POP Kids and U-Can K-12 business together. We're delighted to see higher market penetration in those markets as a result of our strategy. We also saw improved customer retention and scalability brought by this new model. With this promising result, we will continue to deploy this strategy in the remainder of the year.

Turning to the -- our online business. We invested $19.3 million in the third quarter to improve and maintain our O2O integrated education ecosystem. Most of the investments were recorded under G&A expenses.

I will now provide some update on our O2O Two-Way Interactive Education System. Since the launching of the U-Can Visible Progress Teaching system in September 2014, the interactive education system has been deployed in all existing cities. We'll launch the newly revamped Pop Kids program, Shuang You, in most of the cities by the end of third quarter of fiscal year 2018.

The interactive education system has also been gradually implemented in an increasing number of cities across China. The interactive education system for overseas test prep, including IELTS, TOEFL and SAT courses, was rolled out and tested in most of the major cities by the end of the third quarter. At the same time, we also standardized the product offerings across 7 cities, including Shenzhen, Xiamen, Changsha, Hefei, Nanjing, Suzhou and Hangzhou.

Now I will walk you through our progress in koolearn.com business line and other supplementary online education products. Koolearn.com generated net revenue of $24.8 million, representing a 63% increase year-over-year in the third quarter. The number of paid users increased about 70% year-over-year in this quarter, and cumulative number of registered users reached 20.9 million.

Our online K-12 after-school tutoring business achieved impressive year-over-year revenue growth of approximately 176%. Our DONUT learning apps reported over 78.3 million downloads by end of third quarter fiscal year 2018. Our Le Ci app reported about 7.4 million users by the end of third quarter fiscal year 2018.

To capitalize on this huge market opportunity in online education space, we invested more resources in executing new initiatives in our online K-12 after-school tutoring business. This includes constant development, teachers' recruiting and training, sales and marketing, and other essentials cost and expenses contributing to driving the growth of our new online programs. With these programs, we're able to reach more students in low-tier cities in an interactive and scalable manner. We believe this will help koolearn.com gain new market share in the online education space and drive up top line growth.

Now let me walk you through the other key financial details for the third quarter. As mentioned earlier, the business once again delivered outstanding year-over-year increase in net revenue and growth in the third quarter. Due to the expansion of capacity, operating cost expenses for the quarter were $559.7 million, representing 47.2% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $536.9 million, representing a 44.3% increase year-over-year.

Cost of revenues increased by 46.5% year-over-year to $268.8 million, primarily due to increases in teachers' compensation for more teaching hours and rental cost for the increased number of schools and learning centers in operation.

Selling and marketing expenses increased by 38.2% year-over-year to $77.2 million, primarily due to increases in brand promotion expenses and compensation for selling and marketing staff.

General and administrative expenses for the quarter increased by 51.7% year-over-year to $213.7 million. Non-GAAP general and administrative expenses, which excludes share-based compensation expenses, were $190.9 million, representing a 43.9% increase year-over-year, primarily due to increased headcount as the company expanded its network of schools and learning centers as well as increases in R&D expenses and human resources expenses related to the development of our online and offline integrated education system.

Operating income for the quarter was $58.4 million, a 1.5% increase from $57.5 million in the same period of prior fiscal year. Non-GAAP income from operations for the quarter was $81.2 million, a 23.4% increase from $65.8 million in the same period of prior fiscal year.

Operating margin for the quarter was 9.4% compared to 13.1% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, were 13.1% compared to 15% in same period of prior fiscal year.

Net income attributable to New Oriental for the quarter was $68.4 million, representing a 1.1% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.43 and $0.43, respectively.

Net operating cash flow for the third quarter of 2018 was approximately $108.2 million. Capital expenditures for the quarter was $60 million, which were primarily attributable to the opening of 5 new schools and 66 new learning centers and renovations of existing learning centers.

Turning to the balance sheet. At the end of the third quarter, 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 the third quarter of fiscal year 2018 was $1,083.8 million, an increase of 42.5% from $760.5 million at the end of third quarter of fiscal year 2017.

Before moving on to expectations for the fourth and final quarter of fiscal year 2018, I would like to take a moment to reiterate our overarching goals and priorities in our Optimize the Market strategy. In terms of our priorities, first, we will continue to expand our off-line business in consistent with our long-term plan. We aim to add around 20% new learning centers and expand classroom area of some existing learning centers and K-12 business in existing cities. And we also plan to enter 2 to 4 new cities, which we identify as the markets with greatest business opportunities. In addition, we will continue to roll out our dual-teacher model schools in over 10 new low-tier cities in China.

Second, we'll continue to leverage our investments in our O2O integration and initiatives in online education offerings. More specifically, 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. Furthermore, we will continue to invest in executing the new initiatives, which include constant development, teacher recruiting and training as well as sales and marketing in online K-12 after-school tutoring business on our koolearn.com platform.

Third, we'll continue to make strategic investments, and we currently believe that the total spending in absolute dollar terms in fiscal year 2018 will increase moderately compared with the prior fiscal year.

Looking at the near term and our expectations for the fourth quarter. We expect the total net revenues to be in the range of $661.4 million to $680.9 million, representing year-over-year growth in the range of 36% to 40%. Lastly, I must mention that these expectations reflect New Oriental's current and preliminary view, which is subject to change.

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

(Operator Instructions) Our first question comes from the line of Thomas Chong of Crédit Suisse.

I have a couple of questions. The first question is about the margin trend. Can management comment about how we should think about the margin trend in Q4 and FY '19 as we continue to improve the operating efficiencies? Can we expect the margin pressure basically to behind us starting from Q4? And my second question is about the online education initiative. Given the fact that our online education won triple-digit growth, very solid momentum, is there any target or separate disclosure on this line in coming years and also a target of FY '19? And my final question is about the regulatory front. In particular, do we see any regulations that we need to pay attention to in the near future?

Okay. Thanks, Thomas. Your first question is about the margin trend. Yes, I think the non-GAAP operating margin in this quarter declined by 190 bps. And I must mention that within that, the non-GAAP operating margin for the language training and test prep program business declined by 140 bps. This part has contributed 85% of total revenue. And don't forget, we started to execute the capacity expansion since the Q4 last year. So by the end of this quarter, the total square meters of classroom area was increased by 41%. So the classroom rental in this quarter increased by 60% in dollar terms. And so I think this is the key factor that dragged the margin. And going forward, we believe the margin pressure will lessen in Q4 due to the expected acceleration of revenue growth and higher learning center utilization. Especially, we do believe the non-GAAP operating margin for the language training and test prep business in Q4 will be up year-over-year. This is Q4. And in the mid and long term, I think we keep the same wheel, as I guided before. We care about the top line growth and margin expansion. So we'll focus on the same strategy going forward. Our target, the margin target is to get to 17%, 18% in next 3 years. And your second question is about online. Yes, the pure online platform, koolearn.com, the top line growth in this quarter was increased by 63%. And within it, the online K-12 business in koolearn.com reported very strong year-over-year growth of 176%. So we have very good start. And yes, I think this quarter, we will start to report the year-over-year growth of the pure online K-12 business with numbers. And I think we will invest more of the pure online like content development and teacher training and also the -- like marketing and sales. Okay, in terms of the regulation, we have noticed that government has carried out some special programs to strengthen the after-school tutoring market like canceling some unlicensed paper-based exams in 9-year compulsory education period. And also, the government is strict checking the business license or education license in some learning centers. As a public company, New Oriental, we do comply with the government regulations. And we believe these actions taken by the government are neutral to positive side to New Oriental because I think it's a great opportunity for us to consolidate the market and to take more market share from the competitors. Okay, it's clear, Thomas?

Our next question comes the line of Sheng Zhong of Morgan Stanley.

I actually have 3 questions. The first one is, we have a very fast capacity expansion, and that is 41% year-on-year in terms of square meter. So with the whole guidance of full year 30% year-over-year growth, how do we expect the fourth quarter capacity expansion? And can you give some outlook on the FY '19 capacity expansion? And second one is the U-Can business. U-Can business grow very strong in this quarter. This is actually even stronger than POP Kids. So can you add some more color of the U-Can's growth? And the last one is our guidance. And deferred revenue in RMB terms have a slightly year-on-year -- the growth have slightly year-on-year decline. So can you give some color about this revenue and deferred revenue?

Okay. Yes, as for the -- thank you, Sheng Zhong. As for the expansion plan, yes, I think we have already opened 145 learning centers in the first 3 quarters of this fiscal year. And in the Q4, we plan to open 40 to 60 new learning centers. So for the year-over-year growth, for the whole year of 2018, I think the net expansion -- capacity expansion will be a little bit over 30%, yes, mainly somewhere between 30% to 33%. That's the net capacity expansion year-over-year. So this is expansion for the Q4. And we set up a lot new learning centers this year. So next year, we budget 20% to 25% expansion plan. In the next year, the first target for us is to fill the students into the learning centers we set up this year. So this is our expansion plan for the fiscal year '19, the next year. Okay, the next question for the U-Can, yes, we did very good in the Q3 of the U-Can business. I think there are 3 reasons. The first one is the U-Can online/off-line integrated system, we call the Visible Progress Teaching system, VPS, this system has been deployed in all the existing cities. And I think the feedback from parents and students are much better than we expected. So it drives the higher student retention rate. And finally, I think, don't forget, with almost all the new learning centers we set up in the last trailing 12 months were K-12 -- was K-12 business related. So it's another key driver of the U-Can business growth. And your last question is about the deferred revenue. Yes, the deferred revenue in dollar term, as you know, the Q3 is something little bit lower than we expected. But don't forget, this year's the Chinese New Year is late. So the much later Chinese New Year has caused student enrollment in the last week of third quarter to fall into the beginning of the fourth quarter, that means the first week of the fourth quarter. And as mentioned earlier, in the 8 -- in the first 8 weeks of the fourth quarter, the enrollment grew by 43%, and cash revenue in dollar terms was increased by 65% year-over-year, so some delay. But I think if you look at the numbers like the enrollment where the cash revenue combined the Q2, Q3 and first 8 weeks of Q4, I think the trend is good. We still have very solid, strong momentum in the K-12 business, okay?

Very, very helpful. Yes, but a follow-up of the -- sorry, a small follow-up about you mentioned the retention rate is improving. So do we have some number of the retention rate?

Okay. I think the K-12, yes, let's take it separately. The POP Kids program, the retention rate is 84%. So it's getting higher. And as well for the U-Can business, the retention rate is 75%. I think it was 5% to 10% higher if you compare the number to the last year, okay? Thank you.

Our next question comes from the line of Jin Yoon of Mizuho.

So can we talk about margins for 2018? So you talk about capacity expansion being 20% to 25% next year, and a very significant revenue upside as well. So should we expect of the 3-year margin guidance that you gave, the 17% to 18%, the big jump will be next year, given the fact that we see tough margins? So we should expect pretty significant -- should be overall expect a huge step-up function on margin heading into next year? And is the capacity expansion going to be more front-end loaded or back-end loaded first half versus second half? And then one final thing is your summer seasonality is coming up pretty soon. How should we look at the summer enrollment programs for this summer in terms of promotional activity versus last summer?

Okay. Yes, I think the margin for the next fiscal year, what it means the fiscal year '19, will be up by 1 bps. And I think because you know as I said, the 3-year target is to get 17%, 18%. I think the margin will expand step by step in the next 3 years. Okay. As for the summer promotion, yes, last year, the summer promotion enrollment was over 0.5 million. And this year, I think the summer promotion student enrollment will be more than that of last year. And I don't know the numbers because it's too early, but I think the numbers will be more than last year. But this year, we care more about the student retention rate. Last year, the retention rate after the summer promotion in autumn was about 50%. This year, I think we're targeting to be 55% to 60% student retention rate. This is our target, okay, Jin.

Our next question comes from the line of Natalie Wu of CICC.

Couple of questions here. First one, how much of your current classroom space square meter is attributable to the K-12 related business? And secondly, what's the ForEx exchange rate assumption underlying your guidance? On constant currency basis, what's the actual growth expectation your guidance implies? And lastly, how much of your online revenue is contributed by the K-12 business, excluding U-Can business currently? And among that, what percentage is live broadcasting versus prerecord? And also, it would be great if management can update us about the retention rate for the live broadcasting classes.

Okay. Lot of questions, Natalie. The first one is the how many learning centers we have due to the K-12 business. Sisi will take the question.

Yes, we have roughly about 600 learning centers, including having the K-12 business. So again -- and this year, almost all the new openings, new adds are for K-12 business. So you can get the percentage, yes.

Okay. And your last question is about the pure online K-12 after-school tutoring business in koolearn.com. This quarter, we got a very, very strong top line growth. It was 176%. I think most of the revenue of koolearn.com comes from the college students. We did business for more than 10 years. And we just started business the K-12 pure online business, I think, 2 to 3 years ago. So I think the revenue contribution is small, but don't forget it's growing very, very fast. I think this quarter, we will report numbers going forward, so it's very good numbers. What's your second question, Natalie?

About the foreign exchange rate assumption underlying your guidance.

So I think the exchange rate benefit in the Q4 will be 8% to 10%. So the Q4, we used the exchange rate of CNY 6.3049. And last year Q4, we used the exchange rate of CNY 6.8884. This is our exchange rate we're using to the forecast, okay.

Our next question is from Wendy Huang of Macquarie.

My first question is about your price increase. Can you share with us about your plan for the next fiscal year? And also, in terms of the capacity expansion, you just mentioned it's going to be about 20% to 25% assuming that there will be a ramp-up period for the new learning centers. So should we expect this 20% to 25% capacity expansion rate to translate into revenue growth rate in 1 to 2 years out? And also, lastly, can you give us more color behind the margin expansion you just mentioned that you expected for the next coming year?

Okay. As for us the price increase, this quarter, the price increase, I think it's 12% in dollar term because we benefit a lot from the exchange rate. So in RMB term, the price increase was 6% this quarter. And for the next fiscal year, I think we plan to increase the price by 5% to 8% for the K-12 business. I think the POP Kids is a little bit higher than the U-Can, maybe POP Kids 7% to 8% price increase; U-Can 5% to 6%. This is what I thought in RMB terms. And for the overseas test prep, I think the price increase will be 10% in RMB terms year-over-year for the next fiscal year. And in terms of the expansion plan, yes, we budget -- we're budgeting 20% to 25% capacity expansion. And the first priority for us next year will be ramp up the learning centers we set up this year. But the top line will be over 20% to 25%. I think for the next fiscal year, the top line growth will be similar somewhere around 30%. So we do have leverage on the operating efficiency. And I think we will see the higher utilization rate in fiscal year '19. And the margin, yes, we do believe the margin expansion will be happened in the fiscal year '19 because we do have leverage on the cost and expense side in fiscal year '19 because we think the Q4 last year we opened a lot of learning centers in the last trailing 12 months, even including the Q4, in the coming Q4. But I think it's a good trade-off because at this time, we are more confident about our product and services, and we're seeing the highest retention rate. So this is our thinking logic to make the decision to expand the expansion. I think this is a long-term business. So I think we would rather to see New Oriental take more market share going forward. I think this is a very good trade-off, and the numbers help result, even though we meet the margin headwinds in short term, but education is a long-term business. I think this is good for us in long term. We just, we would rather to create more value to the customers and even for the shareholders, okay. Thank you.

Our next question is from Mariana Kou of CLSA.

My question is more -- I guess, more on the longer term. Just wondering for the learning centers that we are opening recently, because now we are at about 1,000 now, just wondering if you could give us a little bit more color in terms of the ramp-up that we're seeing, say, for the learning centers we opened in the past 6 months versus stores that we opened like a year ago? Like, are we seeing any difference in terms of utilization, retention or even margins across the like different cities and just in terms of the regular kind of ramp-up pattern? I guess the second question is on the longer-term margin. I think we are maintaining the 17% to 18% outlook. Would it be possible to give us a little bit more color on how much of that we are expecting to be driven from K-12 like continue to catch up in margins to overseas test prep? Or are we also expecting overseas test prep also to continue to see margin expansion?

Yes. In terms of the new learning center ramp-up pace, I think we are seeing the -- we expect the short term for the time to get to breakeven point of the new learning centers. So in last 6 months typically -- in last trailing 12 months I think typically, it spent 5 to 8 months to get the breakeven point for learning centers. In the second year, the margin on the new learning center will be like 10% to 15%. For the third year, the year 3, the margin will be over 20%, and it gets much shorter. So if you compare the time to get to breakeven point now with the several, like, 2 or 3 years ago, I think we spent -- we saved 5 to 6 months to get to breakeven point. Typically it's 3 years -- it spends like 1 year to get to breakeven point. And your second question is about the long-term margin. And I think we believe all the business lines, the margin will be expanded. And don't forget, if the margin expansion is to relate to the how many learning centers we set up for that year, so if the top line growth exceeds the expansion, the learning center, I think we do have the leverage. But most of the margin expansion will come from the K-12 business because the K-12 business have the potential top line growth, and also it contributes more and more revenue going forward. Now it's about, let's say, 55% to 60%. Going forward, it's going to be a little bit more.

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

So I want to ask actually is what is the breakdown of our guidance in the revenue for the next quarter between different operations? And also, I want to know, actually, I think the non-GAAP margin decline of about 190 bps is better than the previous guidance. So I want to know what is the difference during the quarter that actually result in the margin bit?

Okay. Yes, the breakdown of the guidance, I think I can show you the K-12 business. Okay, in the Q4, the U-Can business, I think the top line growth of U-Can business will be around 50%. And the POP Kids, the growth rate will be over 60%. And the overseas test prep and consulting business together, the top line growth will be over 20%. So this is the breakdown of the guidance for Q4. And, yes, I think the margin in the Q4 was a little bit better than we expected. I think it's mainly because we ramp up the new learning centers more quickly than we expected. I think this is the key reason. But don't forget, even in this quarter, the rental in dollar terms, the classroom rental in dollar terms was increased by 60% because we started to set up the learning centers in last year Q4. So we still have the hard comparison in this quarter. But in the Q4 in the next year, I think it's much easier for us, okay.

Stephen, just a quick follow-up. I think the test prep actually deliver good recent performance. Can you share about the strategy like for the recent better performance?

Yes, actually, there were several reasons for the overseas test prep. The first one, we changed the local school KPI. We put the overseas test prep enrollment into the local school KPI. So you mean -- what I mean this year, they can't hide the numbers. They can't make up the enrollment growth of the overseas test prep by the K-12 business. The K-12 business is much easier. And second, we've started to roll out the online and off-line integrated program for the overseas test prep as we did in U-Can, POP Kids as more and more cities will start to use the new online/off-line integrated product. Most students of the overseas test platform are high school students. So they get used to the new style product. So I think -- yes, I think it's better than we expected. And third, New Oriental, the overseas test prep was a regional business of New Oriental. But several years ago, we have super-large classes. And now we changed to the small class format. So we need teachers to make some change of the class, and we're doing. So I think going forward, overseas test prep, well, we expect the top line growth will be 10% to 15%, and it's not good enough. We do hope the actual numbers will be over our expectation for the overseas test prep. Thank you. Thanks, Mark.

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

The question's related to the Internet education or koolearn.com. So what is the differentiation between the courses on the Internet and off-line? How can we avoid the cannibalization situation, if there's any? That's my question.

Yes, Tian, I think the target of our koolearn.com, what I mean in terms of the customer target, we are focused on the low-tier cities. This is different. I think we're targeting the customers in the low-tier cities even there, there's no New Oriental off-line schools, so this is the first part. Second, I think the online course is a little bit cheaper than the off-line classes. So we give a choice to customers, by the students and parents so they can choose the both -- either the online course or the off-line courses combined because we were open to the customers. But as with price difference, until now, the price of the online courses is just like 1/3 of the off-line courses. And going forward, I think we will try more new subjects, especially in the K-12 business. What it means is more subjects, more and more programs, okay.

Our next question is from Lucy Yu of Bank of America Merrill Lynch.

Stephen, I've got 2 questions here. One is, could you please share with us the utilization rate for this quarter as well as for the third quarter of last year? And secondly, regarding your online strategy, you mentioned that we're focusing on the lower-tier cities where you do not have any learning centers. So it will be out of our existing student base. How much student acquisition cost do you expect will incur to get new student into your system?

Okay. The utilization rate this quarter, the Q3, if you compare the utilization rate this quarter to Q3 last year, it was down by 100 bps. So last year it was 22%. This year, it's 21%. And I think it's due to the expansion plan. But going forward, I think we will see the higher utilization rate. And the online strategy, yes, I think the online, there's -- the online education, there's no boundary. So we're targeting the low-tier cities, but we're open to this division in the existing cities. So we give the customer opportunity to choose a class as they want. But we don't believe there's a cannibalization of the -- between the off-line and online. And yes because for some students, if they don't have the full ability to control themselves to study purely online, they can choose our off-line classes. So it depends on the customer choice, okay.

(Operator Instructions) There are no questions at this time. Please continue. We have a question from Andrew Lam of RHB Asset Management.

Just wanted to ask about the student acquisition cost for third quarter '18 and how does it compare on year-on-year basis?

I think the student acquisition cost is very low, even though we are -- the total overall selling and marketing expense is 12% to 13% of total revenue. But within this, only 4% is the pure the marketing expenses. So it's very low. And yes, you see the marketing expenses increased by 38%. I think I'm right. So we do have the leverage on selling and marketing expenses as a percentage of the revenue, okay? And we just rely on the word of mouth and brand recognition of New Oriental. So we don't need to spend a lot on the student customer acquisition cost, okay. Thanks.

Understand. I just want to ask about the trend in the per unit cost of student. Is it trending up or is it trending down?

You mean the price increase will be the 5% to 8%. You ask the question about the online or the off-line?

Both. Maybe if you can break it down online and off-line, it would be great in terms of -- I just want to know the trend whether the student acquisition cost, the per unit student acquisition cost is going up or going down.

I think the per student acquisition cost will go down.

Will go down. Okay, understand.

Yes. Thanks.

Our next question is from Mark Li of Citi.

I have a follow-up question. So regarding the latest regulation, actually, what do you think we need to -- like any area we need to focus on in the upcoming time like a curriculum or anything?

Actually, as I said, as a public company, we do comply with the government regulation. So I don't think we will make material changes because, firstly, we don't perform any unlicensed paper-based exams for any subject to recruit students before. And I think we don't need to do something special to comply with the regulations, okay.

And this end our Q&A session, and I will hand over the call to our presenters.

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.

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You now all disconnect.