New Oriental Education & Technology Group Inc (EDU) 2019 Q1 法說會逐字稿

Hello, everyone, and welcome to New Oriental's First Fiscal Quarter 2019 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, he then 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 Yang, please go ahead.

Thank you, Sisi.

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

We are very pleased to start the fiscal year 2019 with the year-over-year acceleration of our top line growth.

Net revenues seen in the first fiscal quarter 2019 increased by 30.1% to $859.8 million.

Student enrollments in academic subjects tutoring and test prep courses in the first fiscal quarter went up by 13.2% year-over-year, approximately 1.7 million student enrollments.

Our current number is up, 1,735,300, guided by our successful Optimize the Market Strategy.

We've continued to expand our offline business, while also investing in our online and offline integrated education system.

In this quarter, we added a total of 19 new facilities, which include 18 new learning centers in existing cities and 1 new training school in the city of Yiwu.

Altogether, the total square meters of classroom area, by end of the quarter, increased approximately 34% year-over-year and 3% quarter-over-quarter.

Our strategic capacity expansion is on the right track to capture market opportunities in cities with a robust growth momentum and remains the important focus in fiscal year 2019.

We will also continue to focus and improve the utilization rate and investing in enhancing teaching quality in line with our long-term strategy.

Our business has started the year with an accelerated revenue growth even with the discounted revenue due to the large-scale summer promotion.

Our key revenue driver, K-12 all-subjects after-school tutoring business achieved remarkable year-over-year revenue growth of 49%.

This is largely driven by our solid performance in student enrollments in the recent 2 quarters, which has a year-over-year increase approximately of 34% in the fourth fiscal quarter of 2018 and first fiscal quarter of 2019.

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

One of the key areas of focus for the first quarter was our summer promotion efforts.

Similar with the last few years, we conducted a summer promotion campaign to rapidly acquire grade 7 student customers before the start of the first year at secondary school.

The large-scale promotion offering low-price experiential courses was launched in a total of 39 cities.

Once again, the promotion was very well received by the market.

The low-cost trial course enrollments for this summer reached 762,000, which is an increase of 37.5% year-over-year.

Note that these promotion enrollments were not included in our reported enrollments.

More importantly, 54% of students recruits from the summer promotion campaign were successfully retained to our full-price courses for the autumn semester, which is 5% more than that of last year.

This will certainly boost our revenue and drive profit growth throughout the whole fiscal year 2019.

Overall, we believe the summer promotion is generating long-term benefit and will continue to be a successful and effective strategy to capture as much market share as possible and acquire long-term loyal student customers in the K-12 after-school tutoring market, as these students move from grade 7 to grade 12 to continue improvement in retention rate and customer loyalty will further drive revenue growth in the next 3 to 6 years.

These investments 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 enrollments increased by about 14% year-over-year, partially due to the longer summer course hours.

Hourly-blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 3% 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% -- by 9%, POP Kids increased by 4% and overseas test prep program increased by 10% year-over-year.

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

The goal of our expansion remains at adding approximately 20% to 25% in overall capacity for the full year 2019 through opening new learning centers in existing cities and rolling out dual-teacher model schools in new cities.

All the while, we will continue to uphold the balance between our strong growth momentum and cost control in most efficient manner with constant efforts in further improving utilization rate.

As for our offline language training and test prep business, the cost pressure in this quarter from our large-scale summer promotion and our online business investment had a short-term impact on our operating margin, but as mentioned, this important investment will help set foundation for and further generate long-term growth.

In terms of the details, non-GAAP operating margin for offline language training and test prep business decreased by approximately 110 basis points year-over-year in this quarter.

As we continue to see ramping up of the new facilities, we believe the short-term margin pressure for offline business would generally balance out as the year progresses.

For our Koolearn.com pure online educational platform, we will continue making investments in new initiatives in K-12 after-school tutoring business to capture the huge market opportunity in remote areas in China.

Even though, with the short-term margin pressure from these investments, we are confident that our efforts in building out our ecosystem integrating both offline and online education will deliver sustainable long-term value for our customers and shareholders.

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

As mentioned, our key revenue driver, K-12 all-subjects after-school tutoring business achieved

revenue growth of about 49% year-over-year, driven by the solid enrollment growth in the recent 2 quarters of about 34% year-over-year.

Breaking down, the U-Can middle and high school all-subjects after-school tutoring business recorded a revenue increase of 49% for the quarter.

Student enrollment grew approximately 18% year-over-year for the quarter.

Our POP Kids program delivered outstanding results with revenue up significantly by about 48% for the fourth quarter.

Enrollments went up about 12% for the quarter.

Our overseas test prep and consulting business together recorded revenue growth of about 5% year-over-year for the quarter.

This comparatively slower growth for this quarter is mainly due to the change of the revenue recognition of our consulting business upon the adoption of the new revenue accounting standards, starting from June 1 2018.

VIP personalized class business recorded the revenue growth of about 34% year-over-year for the quarter.

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

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

Starting with our core offline business, in the first quarter, we added a net of 18 learning centers in existing cities and opened a new training school in the City of Yiwu.

Altogether, the total square meter of classroom area by the end of the quarter increased approximately 34% year-over-year and 3% quarter-over-quarter.

To further tap into the booming private education markets and fully strengthen our leadership, we started to pilot our new dual-teacher model in selected cities in July 2016.

By the end of the first quarter of the 2019, we have tested the adoption of the new model in 40 existing cities for POP Kids program, in 28 existing cities for U-Can program and in 10 low-tier cities for both POP Kids and U-Can K-12 programs.

It's encouraging to see increasing market penetration and significant retention in those markets we have tapped into.

The scalability of the new model is also continuing to improve and started to bear fruit.

With this proven result, we are confident that our dual-teacher model will carry on the strategy in the fiscal year of 2019.

With respect to our online business, we invested $22.7 million in the first quarter to improve and maintain our online and offline integrated education ecosystem.

Most of -- which has been an area of focus since 2014, most of the investments were reported under G&A expenses.

With the high customer retention rates and the acquisition of new customers, we are positive that our investments will bring sustainable and long-term benefits.

I will first talk about online and offline two-way interactive education system.

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

With the booming market and our advanced online and offline integrated product service, we're poised to get 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 deployed in all existing cities.

We have launched the newly revamped POP Kids program, Shuang You, in most of cities by the end of the first quarter in fiscal year 2019.

At the same time, the interactive education system has been readily used in increasing number of cities.

The interactive education system for overseas test prep including IELTS, TOEFL and SAT courses was rolled out and tested in most major cities by the end of fiscal year -- the first fiscal quarter 2019.

At the same time, we've also standardized the product offerings across 14 cities.

We also made great progresses in the Koolearn.com business line and other supplementary online education products.

To capture the huge market opportunity in online education area, we continue to invest in more resources executing new initiatives in online K-12 after-school tutoring business in fiscal year 2019.

This includes constant development, teacher recruitment and training, sales and marketing, R&D and other cost incentives that are necessary to drive the growth of new online programs.

With these programs, we are able to cover more students in low-tier cities in our interactive and scalable approach and gain further market share in online education space.

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

Operating cost expenses for the first quarter was $700.4 million, representing a 40.0% increase year-over-year.

Non-GAAP operating cost expenses for the quarter, which excludes share-based compensation expenses, were $686.4 million, representing a 38.1% increase year-over-year.

Cost of revenue increased by 36% year-over-year to $367.4 million, primarily due to increase in teachers' compensation for more teaching hours and rental cost for increased number of schools and learning centers in operation.

Selling and marketing expenses increased by 34.4% year-over-year to $99.3 million, primarily due to increases in brand promotion expenses and selling and marketing staff's compensation.

General and administrative expenses for the quarter increased by 49.8% year-over-year to $233.7 million.

Non-GAAP general and administrative expenses, which exclude the share-based compensation expenses, were $219.7 million, representing a 43.7% 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 ecosystem.

Total share-based compensation expenses, which were allocated to related operating cost and expenses, increased by 345.3% to $13.9 million in the first of fiscal quarter of 2019.

The substantial increase was primarily due to the grants of total 1.5 million restricted shares units of the company to employees and directors in October 2017, with graded vesting over 3 years.

Operating income for the quarter was $161.3 million, an increase of 0.2% compared to $161.1 million in same period of the prior fiscal year.

Non-GAAP income from operations from -- for the quarter was $175.3 million, a 6.7% increase compared to non-GAAP income from operations of $164.2 million in the same period of prior fiscal year.

Operating margin for the quarter was 18.8% compared to 24.4% in the same period of prior fiscal year.

Non-GAAP operating margin, which excludes the share-based compensation expenses for the quarter, was 20.4%, compared to 24.8% in the same period of -- in the prior fiscal year.

Operating margins were affected by the increase of -- in the cost and expenses, mainly due to the cost pressure from the larger-scale summer promotion and continued heavy investments in our online education platform in this quarter.

Loss from fair value change of long-term investment for the quarter was $47.0 million.

Please note that this resulted from the adoption of the new financial instruments accounting standard starting from June 1, 2018, which means the company will measure its long-term investments as fair value with gains or losses reported through the income statement.

On the other hand, approximately $97.9 million of accumulated other comprehensive income for the available-for-sale equity securities as of May 31, 2018 was reclassified into retained earnings.

Net income attributable to New Oriental for the quarter was $123.2 million, representing a 22.2% decrease from the same period of the prior fiscal year.

Basic and diluted earnings per ADS attributable to New Oriental were $0.78 and $0.77, respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $184.1 million, representing a 14% increase from the same period of prior fiscal year.

Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $1.16 and $1.16, respectively.

Net operating cash flow for the first quarter of 2019 was approximately $231.5 million.

Capital expenditures for the quarter were $62.4 million, and these were primarily attributable to the opening of 1 new school and 65 facilities and renovations at the existing learning centers.

Turning to the balance sheet.

The deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as revenue as the instructions are delivered at the end of the first quarter of 2019 was $1,146.7 million, an increase of 23.3% as compared to $930 million at the end of the first quarter of fiscal year 2018.

On this note, I also want to mention that as a result of adopting of new revenue accounting standards from June 1, 2018, a $66.0 million of deferred revenue was reclassified to accrued expenses and other current liabilities, which represents the estimated amount of the tuition that may be refunded in the future if students withdraw from the course.

Before moving on to our priority for the second quarter, I would like to take a moment to reiterate our overarching goals and our Optimize the Market Strategy as well as the challenges and opportunities we anticipate in future: first, we will remain determined to expand our offline business.

Our goal remains adding around 20% to 25% capacity, including new learning centers and expanding classroom areas of some existing learning centers for K-12 business in existing cities.

We also plan to further roll out dual-teacher model schools to about 10 new low-tier cities in the year.

Second, we will continue to leverage our investments in online and offline integration for our offline language training and test prep offerings.

As always, we will focus on product refinement and maintenance for the online and offline integrated education system for K-12 business and continue to revamp and rollout our online and offline integrated standardized teaching system for overseas test prep business.

We believe that expanding in absolute dollar terms in fiscal year 2019, we will increase moderately compared to the previous fiscal year.

In addition, we will continue our investments in new initiatives including constant development, future recruiting and training as well as sales and marketing in pure online K-12 after-school tutoring business on our Koolearn.com platform.

Third, our top priority will continue to focus on improving the utilization of facilities and controlling cost across the entire company, so that we are able to improve our margins and enhance operational effectiveness of our offline core business.

Fourth, as the Chinese government continues to enhance regulatory oversight, we expect China's after-school tutoring market to further consolidate.

We believe the regulatory efforts will bolster a positive environment with improved market standards and enhance the teaching quality, supporting the healthy growth of the market in the long term.

As the leading education service provider in China, our company is fully supportive of this reforms, and we are committed to providing high-quality education service and doing our shares to build out a sustainable and robust market.

At this stage, we do not foresee any material impact of the regulatory reform on our top line growth, while our administrative cost and expenses may increase in the short term.

Finally, the recent RMB depreciation against the U.S. dollar will also impact our earnings in dollar terms for the second quarter of 2019.

Again, I would like to emphasize that the fundamentals of our business remains strong, as we believe with our Optimize the Market Strategy being the focus as always, we are confident that New Oriental will continue to capture sustainable growth opportunities in the market and deliver long-term value for our shareholders.

Looking on the near term and our expectations for the next quarter, we expect total net revenues in the second quarter of fiscal year 2019 to be in the range of $568.5 million to $586.4 million, representing year-over-year growth in the range of 22% to 26%.

If not, considering the impact of the potential changes in exchange rates between RMB and the U.S. dollars, the projected revenue growth rate is expected to be in the range of 27% to 31% for the second quarter of fiscal year 2019.

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

Before I conclude, I also want to take a moment to address our efforts to enhance our shareholder value.

As you may have seen in today's press release, our Board of Directors has authorized the purchase of up to $200 million of the company's common shares during the period from October 29, 2018 through May 31, 2019.

The share repurchase program is planned to be implemented in line with market conditions and funded from the company's available cash balance.

Our Board of Directors will review the share repurchase program periodically and may authorize the adjustment of its terms and size accordingly.

These initiatives, once again, underline our determination to deliver value for our shareholders and reiterate our confidence in the long-term prospect for our business.

At this point, I'll take your questions.

Operator, please open the call for this.

Thanks.

(Operator Instructions) Your first question comes from the line of Jin Yoon from New Street Research.

Stephen, you guys mentioned -- you just mentioned about costs associated with the regulatory environment impacting SG&A.

What exactly are those costs and how much of that cost is actually reoccurring costs going forward?

And are you still comfortable with that 100 basis points upside in your margins for this year?

Okay.

The question about the regulation, the most recent regulation that the State Council issued the circular 80 in late August.

So what I said, the incremental cost and expenses, I think, most of them is related to the, like, the classroom rental and some incremental teacher cost.

But if -- I think, we're still in process of the communication with the local government in each cities.

So it's early -- it's too early to slate the accurate number, but I don't think it will be a big number.

So we do have the impacts on the margins from the new regulation, but it's not a big deal.

And yes, we -- the Q1 margin, so it's because the non-GAAP operating margin has declined by 440 bps and, partially, it's because of the large -- the -- scale of the summer promotion.

And the promotion enrollment was 38% higher than that of the last year and -- but the retention rate is good.

So for the offline business, I think, the margin pressure will generally balance off as the rest of the year.

And for the online, yes, we're starting to invest a lot since the 2-pointer goal, like the HR cost, IT cost and marketing expenses.

So it's a great opportunity for us.

So it's worth it to spend more money on that.

But it's a margin drag.

Yes, it's a margin drag.

And -- so this year, it's a margin pressure year and -- but for the mid- and long-term margin guidance, we keep a positive view of the margin expansion in the next year and the year after.

So this is my view of the margin, okay?

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

I noticed that the net add-on facility is only like 19 compared with the 60 sites new openings this quarter.

So may I know the major consideration behind the closing down of the learning centers during the past quarter?

And should we think about it in the upcoming quarters?

Okay, Natalie, I don't think it's a slowing down of the expansion.

Typically, the Q1 is not the peak season to open the new learning centers.

Don't forget, we opened almost 40% new square meters last year.

So we don't change the whole year, the new -- the whole year expansion guidance, it's 20% to 25%.

So typically, we open the most learning -- new learning centers in second half of the year, because it's prepared for the new coming year.

So for the whole year, 20% to 25% expansion.

We don't want to slow down our expansion plan, okay?

Steven, but what I mean is that you mentioned that the CapEx that you spent is majorly for the 65 new openings in the past quarter, right?

But if we look at the net add, it's only 19, 1-9.

So just wondering the major consideration behind the 46 closing down of the learning centers in the past year?

Okay.

Natalie, we have 1,100 learning centers.

Some learning centers we rent for 5 or even 10 years.

So some of them, let's say, the 4% or 5% of the learning centers, some learning centers expire the terms.

So it's not regulation related?

It's not regulation related, okay?

Your next question comes from the line of Thomas Chong from Crédit Suisse.

I have 2 quick questions.

The first one is about revenue trend.

Should we expect to 40% year-on-year growth for our revenue growth for FY '19 in RMB terms?

And should we expect that to be reacceleration in terms of the revenue?

And my second question is a follow-up for the first question.

Stephen, when you're talking about FY '19 is a margin pressure year, have you seen any direction in terms of the margin trend?

And how should we think about the absolute amount of online investments in FY '19?

Okay.

The revenue guidance, yes, we would give the guidance of the -- in RMB term, range is 27% to 31% year-over-year growth in Q2.

So for the whole year, fiscal year '19, we -- we're going to change our guidance as we guided before.

So the whole year revenue growth will be -- in RMB term will be around 30% year-over-year.

And most of the growth will come from the K-12 business, currently.

So this is the -- my answer of the -- of your question about the top line growth.

And for the margins, yes, we meet with margin pressure in the Q1 because the large -- the promotion and also the heavy online investments in the Q1.

And I mention continuously, going forward, I think we will spend the big amount in the online platform, so this is a margin drag.

But on the other hand, the -- as I said, the total expansion plan in this year will be 20% to 25%, but the top line growth will be 30%.

So we do have a leverage on the utilization rates.

And the -- this is the margin expansion -- the factor.

But as I said, we do have some negative impact from the new regulations, so this is also a margin drag factor.

So that's what I said, this is a margin pressure year, okay?

(Operator Instructions) Your next question comes from the line of Tian Hou from T.H. Capital.

So the question is really related to -- I don't really want to focus on margin issue.

I want to focus on the growth issue.

So I think the growth is really great.

And when we reviewed the company website, we also saw some new program, which we didn't see before.

One of program -- one of the program is called [SLIM].

And so I really want to ask the company, once you added a new program, we saw some welcome enrollment by students and students' parents.

So how the -- what's the company's plan in the future?

One, is it to continue to roll out such a healthy content?

Second, what are some other healthy content are in the pipeline of the company's education inventory?

That's my question.

Okay.

We're keeping focusing on the development of new products.

Yes, you have seen in our website the [SLIM] courses.

It's a high-end courses for the -- not only for the English, but also for some nonacademic courses, like the programming and some -- like the science courses.

So I think our purpose is to provide all kinds of the subjects, not only for the academic-only courses to the Chinese kids.

I think that this is the market demand.

And the parents need us to provide more and more courses besides the traditional ones.

And we are keep focusing to develop more and more new courses.

And it's still in the early phase.

So revenue contribution is small, but its growth is extremely fast.

So I think, going forward, maybe in the next year or the year after, it will generate more and more revenue contribution from the new courses.

Okay?

Your next question comes from the line of Mark Li from CIGI (sic) [Citigroup].

I want to know for this quarter, have we already incurred any margin pressure due to the regulation or do you expect the regulation margin pressure to emerge in the future quarter?

And also I noticed the POP Kids growth seems to be a bit slowing down compared to U.K. and despite like a lower base.

So may I know, like, any reasoning or any strategy going forward?

Okay.

Let me answer the second question first.

POP Kids, I think the growth rate is good.

And in some quarters, because of the timing difference in some quarters, POP Kids is better.

Some quarters, the U-Can is better.

So in general, the K-12 business together is booming, so the run rate growth is good.

And yes, in the Q1, I don't think that we have the material impact from the new regulation of the -- in terms of the margin.

And going forward, as a fact, there might be some incremental costs and expenses of the coming quarters in the -- in this -- in the last fiscal year.

But what I'm saying is it's just a short-term impact.

Maybe it will impact like the 2 quarters -- 1 or 2 quarters.

But I don't think that it will impact us in the next fiscal year or the year after, okay?

That's just one time.

Your next question comes from line of Mariana Kou from CLSA.

My question is actually more on the -- I guess, the share repurchase program and also the competitive landscape, given the regulation changes.

Would management be kind of open to consider other opportunities, where now with the smaller players might be actually getting into a tougher situation to actually be compliant with all the regulations?

Would there be opportunities available for market leaders like yourself to absorb some of the smaller players?

Or would you actually consider sticking to more organic growth and kind of expanding yourselves?

Yes.

So I think it's a great question.

The government continues to enhance the regulatory oversight.

And as a leading education provider, absolutely, we will -- we fully support the government reforms.

And I think it's a great opportunity for big players like us.

We -- I think we will keep doing to provide the best service in the whole market.

So I think it's an opportunity for us to take more market share from the small players.

Maybe you will read some news historically, some small players, they can do the business in the proper way.

So -- and we have seen some students in the last 6 months, the students from the small players originally, to join our classes.

So this is what we have seen in the last 6 months.

And I think it's a great opportunity for us.

And yes, as we announced this afternoon, the Board of Directors approved the $200 million share buyback program.

I think this is underlying our determination of the -- to deliver values to the shareholders and to show our confidence of the long-term prospects for the shareholders.

So this is to show our conference of the future -- in the future, okay?

This is the whole logic of the share buyback.

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

Stephen, would you mind giving us some breakdown of the non-GAAP operating margin contraction this quarter?

It has been down by 450 basis points.

How much of that is coming from summer promotion?

How much is from online investment?

And how much is from the consulting business due to the timing of revenue recognition?

And how should we expect the margin for the following quarters given these 3 drivers?

Okay.

The -- within the margin decline, 110 bps comes from the offline business.

This is the core business.

Within this, it's mainly due to the summer promotion and some rental cost.

We set up most of the learning centers in the second half of the last year.

And so all the others is come from the online business, oversea consulting and other business.

So this is a breakdown of the margin, okay?

And going forward, I think, for the offline business itself, we do have the leverage on the core business, the offline business.

So we do believe in the rest of the year, the margin of the core business will be flattish or a little bit down, okay?

So it's -- I think it's a good sign of the margins because we started to fill the students into the learning centers that were set up last year.

So it's a good news.

And for the other business, I think it's a great trade-off because if we do the -- if we think the online business is a great opportunity, it's worth it to spend more on the online platform, okay?

And -- but the one other thing for this quarter, for the overseas consulting business, typically, Q1 is not a peak season for the overseas consulting business.

And then we adopt the new accounting standard the -- since the first quarter.

So we lost, like, $1.1 million revenue of the Q1.

We will report it into the return, but it's just one time.

I think the full whole year, the overseas consulting business, it will be -- the margin will be flattish, and the top line growth will be 20%.

This growth is actually normal, okay?

Thanks.

And, Stephen, just to clarify, you mentioned that for the offline business for the full year, you are expecting flattish or slight takedown margins.

So the online will also negatively impact the margin as well, whereas the consulting business is likely to be largely flattish.

So is it fair to say that for the full year, we are expecting non-GAAP operating margin to contract this year?

Yes.

If we are -- we need maybe one more quarter to guide the whole year margin.

It's just 1 quarter past.

Your next question comes from the line of John Choi from Daiwa.

Just quickly follow-up on the margin part.

Stephen, you mentioned that it's going to be, more or less, flat to slightly down this year for the offline because if we look at the utilization rate had been picking up and as we go into the second half this year, with less -- as you said, you are adding about 20%, 25% and top line is growing 30%, so where is this drag coming from?

Is it more from the regulatory front?

Or is it because of other factors that we haven't really seen more or G&A or operating expenses that has to be factored in towards more on the second half this year?

If you could give us a little bit more color on that, that'll be great.

Yes.

My answer to your question is that if -- I said, if you take all the impacts from the new regulation, I think the margin of the core business will be extended in this year.

But we have to take some incremental cost and expenses from the new regulation.

So it's -- absolutely, it's a negative impact of the margins, okay?

So if you combine the core business -- the normal condition combined with the new regulation impact is the result of the margin.

Is it clear?

Yes.

That's great.

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

My question is regards to the revenue for the first quarter.

We see that the overall revenue growth was about -- was 30%, whereas our enrollment was about 13%.

Can you clarify, is the difference between that the increase in ASPs?

And if so, I mean, it does seem to be quite a large increase in ASP.

Okay.

Johnny, I think that you know -- I suggest that you combine the enrollment of the Q4 and this quarter, and Q1, together.

The 2 quarters together, the enrollment growth was 28.4%.

So I think it's in line with the revenue growth.

The revenue growth is 30%.

So the price is just in line with our guidance, the price increase.

For the K-12, this is 5% to 8% price increase and the overseas test prep, 10% increase.

It's just we don't want to change our price guidance.

Yes.

Just to remind everyone that we have the registration window in May -- in April and May, allowing existing customers to register both the summer course and autumn semester's course.

That's why -- so the Q4 borrowed a lot of enrollments from Q1.

That's why we suggest everyone to combine these 2 quarters together to calculate the actual trend -- the normal trend for enrollment, match the revenue growth, okay?

Yes, thanks Sisi.

But I want to add one point.

It's due to the new regulation.

No advanced tuition fees of more than 3 months may be collected.

So we have already changed the tuition fee collection payment terms to meet new regulation requirements.

So in the new quarter and the year after, you -- I think that you will not see the up and down of the timing difference of the student enrollments in different quarters, okay?

Your next question comes from the line of Tianli Wen from Blue Lotus.

I have one question regarding company expansions dedicated on new city.

How many cities that the company is planning to enter this year?

And how many of them are like second-tiered city?

And how many are third or lower-tiered city?

Okay.

I think most of the new cities we set up in the -- in this year, we will use the dual-teacher model.

We covered almost 70 cities already.

So in the most of low-tier city, I think the best way for us to take the market share is to use the dual-teacher model.

So we plan to open 10 new cities by dual-teacher model in the -- in this year.

This is our plan to set up the new cities.

Okay?

Your next question comes from the line of Julia Pan from UOB.

First, can you please give us some update on the latest new learning center approval situations in the major regions?

Do you see any withholding on approvals?

And also do you maintain your guidance of 20% to 25% capacity expansion for FY '19?

And second is to follow up on the regulation that schools can only collect the money before -- 3 months before the class starts.

How is -- so how do we look at the deferred revenue growth going forward?

And how is the impact on your retention rate and also maybe on the interesting income as well going forward?

Okay.

We opened 18 new learning centers in this quarter.

So in the past quarter, we're -- what I'm saying is that, since the new regulation until now, we didn't meet any difficulties to apply for the new license in the current cities.

So -- and we want to change.

As I said, we'd want to change our expansion plan and still 20% to 25% expansion plan within this fiscal year.

And yes, as I said, we changed our -- the students' payment terms.

Actually, we don't need to make change for the summer and the winter courses.

Typically, the course is within 3 months.

But for the spring and autumn courses, we have to change.

Typically, we divide the 1 course to 2 payment terms.

But I think the retention rate will be not impacted because, for our POP business, the retention rate is very high.

So for POP Kids program, the retention rate is close to 90%.

And typically, for example, in the autumn or the spring, the student just take up one-semester courses.

Typically, it lasts to 3.5 months or 4 months.

So I don't think it will impact our, like, retention rates, okay, during the spring and autumn semester.

Okay?

Your next question comes from the line of Andrew Orchard from Nomura.

Can give us more color on the specific regulation that is most impacting your cost?

I know you talked about rental, for example.

So is it things like having to allocate more spaces?

Is that part of the pinpoint?

Or is there anything else that is really meaningful that we should be noticing?

And the other quick question is on the long-term margin guidance.

I think you mentioned before that 17% to 18% in 2 to 3 years' time.

Are you still standing by the long-term guidance?

I don't want to change my long-term margin guidance.

It's just we postponed 1 year, okay?

So we won't -- because, this year, we have to meet the requirement of the new regulations and some online management.

So I don't want change my guidance of the long-term margin.

And yes, for the new regulations, that's maybe some -- the incremental rental or the future cost.

For example, for -- within the new regulation, all the teachers for Chinese, Math, English, Physics, Chemistry and Biology courses, the teachers need to have the teaching qualifications.

And based on our statistics, 50% of our teachers have the qualifications.

I think the reason that the other half, they don't have the qualifications is because, historically, we push all the teachers to take the exam.

And thus, in some province, the government need to the teachers take exams in their birthplace.

It's really hard for us -- for our teachers to take the exams.

But now, the -- almost all the cities have changed, make the reform of the exams.

So if New Oriental gave the working certificate to the government, that will allow us -- our teachers to attend the test.

So in the coming new test, almost all of the -- our teachers with a license will attend test.

And we believe the pass rate would be very high, okay?

But I can't say, 100% of our teachers will get a license.

So if, I said, if, some teachers cannot get the license, we will move them from the teacher position to the teaching assistant position or we will change some teachers.

There might be some incremental cost, okay?

But we do believe we have the high level of the whole industry to meet the government requirement.

Okay?

Is it clear?

Yes.

Your next question comes from the line of Edwin Chen from UBS.

Just one quick question.

What's the growth for online in the first quarter and our guidance for online growth in the rest of the year?

And also you mentioned that in the first quarter, we spend some, I forgot the number, investment online, but I think it's mostly on G&A.

Do we have a budget for the rest of the year or each of the quarter how much we plan to spend online on G&A and maybe as general and marketing expenses to drive that online growth pace?

Okay.

As for the Koolearn, we have already filed the A1 in the Hong Kong market, so we can't disclose the numbers.

Sorry -- I'm sorry, Edwin.

And as for the margin impact, I think we will continuously invest in the online and other businesses going forward, so it's still a margin drag.

But I don't think -- in the rest of the year, I don't think we will suffer from the same level of the negative impact as the Q1.

So the -- you will see the margin will balance out in the rest of the year, okay?

But as I said, this year is the margin pressure year.

But we do believe the margin expansion in the coming new year, in fiscal year '20 or the year after, okay?

Considering the online expansion, right, so lower margin?

Yes.

There's still a margin drag because we will spend money.

But it's online business.

It's not our core business.

It's worth it to spend more money to acquire new customers, okay?

It's a huge market.

Yes.

And also could you remind me the utilization and the retention rates for K-12 business in the first quarter, please?

Okay.

The utilization rate was down by 50 bps in the Q1 year-over-year because the learning center opening in the last 2 to 3 quarters.

And -- but we do believe the utilization rates would get the improvements in the future.

And the retention rate in the POP Kids is close to 90%, the retention rate is still getting higher.

In the U.K., 75%, the retention rate.

There are no further questions at this time.

I would like to hand the conference back to today's presenters.

Please continue.

Okay.

Again, thank you for joining us today.

If you have any further questions, please do not hesitate to contact me or any other Investor Relations representatives.

Thanks, again.

Thanks.

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

Thank you for participating.

You may all disconnect.