New Oriental Education & Technology Group Inc (EDU) 2019 Q3 法說會逐字稿

Good evening, and thank you for standing by for New Oriental's Third Fiscal Quarter 2019 Earnings Conference Call.

(Operator Instructions) Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

I'd like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao.

Thank you.

Please go ahead.

Thank you.

Hello, everyone, and welcome to New Oriental's Third Fiscal Quarter 2019 Earnings Conference Call.

We have released our financial results for the period earlier today, which are now available on the company's website as well as on newswire services.

Today, you will hear from Stephen Yang, Chief Financial Officer.

After prepared remarks, he 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 view expressed today.

A number of potential risks and uncertainties are outlined in our public filings with the SEC.

New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

As a reminder, this conference is being recorded.

In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website.

I will now turn the call over to Mr. Yang.

Stephen, please go ahead.

Thank you, Sisi.

Hello, everyone.

Thank you for joining us on the call.

We're very pleased to see continued acceleration of growth momentum in this quarter and to achieve top line growth of 28.9% in dollar terms or 36.1% in RMB terms, which exceeded our expectations.

The positive growth was largely driven by the exceptional performance of our key business units, the K-12 all-subjects after-school tutoring, once again demonstrating our quality products and service offerings and strong business fundamentals, which enable us to capture growing demands from the market.

Total student enrollment in academic subjects tutoring and test prep courses in this quarter increased by 82.3% year-over-year to approximately 1,570,600.

The significant increase in the number of student enrollment is primarily due to the division of the spring semester into 2 parts, a practice we adopted in November 2018 to comply with the latest regulatory requirements.

Under this calculation method, student enrollment and the amount of the collected fee in the spring semester are both in parts and thus fall into separate quarters.

More specifically, the first part of spring semester was booked in the second quarter, while the second part is booked end of this quarter Q3 and the following Q4.

Historically, we collected the full amount of the tuition fees and recorded as student enrollments from the spring semester in the second quarter only.

Furthermore, our U-Can middle school and high school all-subjects after-school tutoring business grew by approximately 37% in dollar terms or 44% in RMB terms.

Our POP Kids program achieved a growth of approximately 41% in dollar terms or 49% in RMB terms.

We are confident and well-placed to continue expanding our market share over the long term through our ceaseless efforts in improving in teaching quality and enhancing learning experience for our customers.

In the third quarter, we continue to make great strides in our planned acceleration in capacity expansion as we execute our well-proven Optimize the Market strategy.

We added a net of 36 learning centers in existing cities and opened a new training school in the city of Xining as well as 2 dual-teacher model schools in the cities of Mianyang and Xinxiang.

Altogether, this increased the total square meter of classroom areas by approximately 27% year-over-year and 6% quarter-over-quarter by the end of this quarter.

Cumulatively, we added about 14% new capacity in the first 3 quarters in fiscal year.

This growth is in line with our full year expansion plan of 20% to 25%.

While regulatory changes brought new market dynamics, we're currently firmly on track with our expansion strategy.

As we progress steadily with our expansion strategy, we also made thoughtful efforts to optimize our existing operations with a student-first approach in mind, in order to deliver high-quality education service to our customers.

Riding on the powerful drive from the preceding quarters, we continued our efforts and strategic investments in area including enhancements of courses and programs design, improvement of teaching capabilities and the innovative applications of new technologies in our teaching process.

We are delighted to see hugely positive market feedback and results.

Ever since we ramped up the use of the technology such as AI and data analytics to improve teaching quality and facilitate student-oriented interactive learning.

Our efforts in sustaining a healthy balance between capacity expansion and operating efficiency have also paid off in this quarter.

Our non-GAAP operating income increased by 40.2% year-over-year to approximately $113.8 million, and non-GAAP operating margin rose by 120 basis points to 14.3% from 13.1% a year ago.

The encouraging results were driven by better utilization of facilities and enhanced cost and expenses efficiency.

This gave us confidence in capturing new growth opportunities and scaling our business at higher efficiency.

We will continue to focus on revamping all business lines through a standardized, modular and systematic approach, which will be integral to our goal of maintaining a healthy pace of expansion and efficiency improvement.

Let me now go through the details about pricing.

Per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 24% year-over-year.

I would like to bring to your attention that the lower-than-normal blended ASP is primarily due to the change in tuition fee collection schedule for our K-12 business.

To reiterate, we divided the spring semester into 2 parts starting from last November.

As such, the quarter only covered part of the spring enrollment and tuition fees for the second part of the spring semester.

Therefore, the blended ASP for this quarter appears to be lower than historical numbers.

On the other hand, hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 5% year-over-year in RMB terms.

Here is the breakdown.

The hourly blended ASP for the U-Can business increased by 5%, POP Kids increased by 10% and overseas test prep increased by 9% year-over-year in RMB terms.

I will now go through the performance updates across the individual business lines.

Our key revenue driver, K-12 after-school tutoring business, achieved a notable year-on-year revenue growth of 38% in dollar terms or 46% in RMB terms.

This was driven by the robust student enrollment.

Breaking it down, the U-Can middle school and high school business reported a revenue increase of 37% in dollar terms or 44% in RMB terms for the quarter.

Student enrollments grew approximately 72% year-over-year for the quarter, which is primarily because of the aforementioned enrollment practice change for spring semester to comply with the latest regulatory requirements.

Our POP Kids program, once again, delivered outstanding results with revenue up significantly by about 41% in dollar terms or 49% in RMB terms for the quarter.

Enrollment reported remarkable growth at about 143% which is primarily because of the aforementioned enrollment practice change for spring semester.

In addition, a certain portion of the POP Kids enrollment were also deferred from Q2 to Q3 for the same reason.

Our overseas test prep and consulting business together recorded the revenue growth of about 11.4% in dollar terms or 17.6% in RMB terms year-over-year for the quarter.

Finally, VIP personalized class business recorded the revenue growth of about 24% in dollar terms or 31% in the RMB terms year-over-year for the quarter.

Now let us move on to the updates on the progress we're making with our Optimize the Market strategy.

In consistence with our long-term plan, we have been focusing on expanding our capacity through ongoing refinement and leveraging our online/offline integrated education system.

Let me start with our off-line business.

This quarter, we added a net of 36 learning centers in existing cities and opened a new off-line training school in city of Xining and 2 dual-teacher model schools in the city of Mianyang and Xinxiang.

Altogether, this increased the total square meters of classroom area by approximately 27% year-over-year, 6% quarter-over-quarter and 14% year-to-date by the end of this quarter.

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

And by the end of the Q3 2019, we have deployed this offering in 38 existing cities for the POP Kids program, in29 existing cities for the U-Can program and in 9 new cities for both POP Kids and the U-Can business together.

We consistently focused on maintaining our service quality while further deepening our penetration into those markets we have tapped into.

We're very encouraged to see our customer retention and scalability of our new model continuing to improve this quarter.

Looking ahead, we will remain committed to this well-proven strategy in the coming quarter and the fiscal year.

Turning to the online business.

On the whole, we aimed to extend New Oriental's traditional off-line classroom teaching offerings to online education services.

We invested $25.2 million in this quarter to improve and maintain our online/off-line integrated education system.

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

I will first provide an update on our online/off-line 2-way interactive education system.

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

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

Also, the interactive education system has been gradually used in more and more cities.

The interactive education system overseas test prep including IELTS, TOEFL and SAT courses was rolled out and tested in most of the major cities by the end of Q3.

At the end of the time -- at the same time, we also standardized our product offerings across 14 cities.

I will now turn to Koolearn.com and other supplementary online education products.

New Oriental's subsidiary, Koolearn, a leading online education service provider in China, has completed its global offering of ordinary shares, which comprised of an international offering and a Hong Kong public offering.

Koolearn commenced the trading of shares on the Main Board of The Stock Exchange of Hong Kong Limited on March 28, 2019, under the stock code 1797.

Moving forward, Koolearn will disclose its periodical financial results under International Financial Reporting Standards.

And after the listing, its financial results will continue to be consolidated into New Oriental's financial records.

With the goal of tapping into the market opportunity, in the pure online education space, Koolearn continued to invest more resources into executing initiatives in online K-12 after-school tutoring business in fiscal year 2019.

This includes content developments, teachers recruiting and training, sales and marketing, R&D and other necessary cost and expenses to drive the growth of the new online programs.

With these strategic investments, we're able to reach more students in low-tier cities in an interactive and scalable approach.

We believe this will help koolearn.com to gain more market share in online education area and drive up top line growth.

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

Operating cost and expenses for the quarter were $700.9 million, representing a 25.2% increase year-over-year.

Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $683.0 million, representing a 27.2% increase year-over-year.

Cost of revenues increased by 25.6% year-over-year to $337.5 million, primarily due to increase in teachers' compensation for more teaching hours and rental cost for increased number of the schools and learning centers in operation.

Selling and marketing expenses increased by 13.3% year-over-year to $87.5 million, primarily due to the increase in brand promotion expenses and selling and marketing staff's compensation.

General and administrative expenses for the quarter increased by 29.1% year-over-year to $276 million.

Non-GAAP general and administrative expenses, which excludes share-based compensation expenses, were $258 million, representing a 35.1% increase year-over-year.

The increase was primarily due to the increased headcount as the company grew its network of schools and learning centers as well as increase in R&D expenses and human resources expenses related to the development of the company online/off-line integrated education ecosystem.

Total share-based compensation expenses, which were allocated to related operating cost and expenses, decreased by 21.1% to $18 million in the third quarter.

Operating income for the quarter was $95.8 million, representing 64.1% increase year-over-year.

Non-GAAP operating income was $113.8 million, representing a 40.2% increase year-over-year.

Operating margin for the quarter was 12.0% compared to 9.4% in the same period of prior fiscal year.

Non-GAAP operating margin, which exclude share-based compensation expenses for the quarter was 14.3% compared to 13.1% in the same period of prior fiscal year.

Gain from fair value change of long-term investments for the quarter was $6.5 million.

Net income attributable to New Oriental for the quarter was $97.4 million, representing 42.5% increase from the same period prior fiscal year.

Basic and diluted earnings per ADS attributable to New Oriental were $0.62 and $0.61, respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $108.9 million, representing a 19.4% increase from the same period of prior fiscal year.

Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.69 and $0.69, respectively.

Net operating cash flow for the third quarter was approximately $114.1 million.

Capital expenditures for the quarter were $83.6 million, which were primarily attributable to the opening of 59 facilities and renovations at the learning centers.

Turning to the balance sheet.

As of February 28, 2019, New Oriental had cash and cash equivalents of $844.9 million.

In addition, the company had $96.7 million in term deposits and $1,792.7 million in short-term investments.

Deferred revenue balance, which is cash collected from registered students for the courses and recognized proportionally as revenue as the instructions are delivered, at the end of the third quarter was $1,191.8 million, an increase of 10% from $1,083.8 million at the end of the quarter of fiscal 2018.

The lower-than-normal growth is due to the adoption of the new accounting standard starting from June, 2018, meaning part of that deferred revenue in Q3 was reclassified to accrued expenses and other current liabilities to reflect estimated sales returns and allowance.

The change of tuition fee collection for K-12 after-school tutoring course also contributes the growth slow down.

In terms of the outlook for the next quarter.

We remain committed to our Optimize the Market strategy.

Before going into the details of our guidance, I would also like to reiterate our overarching goals and our strategy as well as the challenges and opportunities we anticipate.

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

Our plan to increase capacity by around 20% to 25% remains unchanged, which includes operating of new learning centers and the expansion of classroom area of some existing learning centers for K-12 business.

Moreover, we will also continue to roll out our dual-teacher model schools in new low-tier cities in certain provinces.

Second, we will continue to leverage our investments in online/off-line integrated standardized teaching system for our offline language training and test prep offerings, especially for our K-12 business and overseas test prep business.

We will keep pace in the investments, and we believe that the total spending in absolute dollar terms in fiscal year 2019 will increase moderately year-over-year.

Investment execution of the new initiatives remains key to our strategy, with include product content development, teachers recruiting and training, R&D as well as sales and marketing activities for our pure online K-12 business.

Third, our top priority continues to be optimizing the utilization of facilities and controlling cost and expenses across the company so as to drive continued margin improvements and operational efficiency.

In the previous fiscal year, we expanded our overall capacity by approximately 40% year-over-year, with the expansion being more concentrated in the second half of the year.

The new facilities built last year are being ramped up more efficiently than we expected.

For the fourth quarter, we anticipate continued improvement in non-GAAP operating margin of the off-line business, especially compared to the prior fiscal year.

This improvement is expected to lift off the margin pressure resulting from our investments in Koolearn.com and other supplementary pure online education products.

On the whole, we expect our overall non-GAAP operating margin to maintain flattish year-over-year in the fourth quarter.

With newly introduced policy relates to the after-school tutoring institutions being implemented in cities by city basis, we continue to foresee certain degree of the uncertainty, while the current impact so far is in line with our expectations.

As a leading education service provider in China, we're firmly supportive of these reforms, which will improve the market standards and bolster a healthy growth in the industry.

As always, we're committed to provide high-quality education service and contributing to a creation of the sustainable market.

We do not expect to see material negative impact on our growth opportunity nationwide.

Although we do expect to see incremental administrative cost and expenses as a result of the implementation of the policies in certain cities.

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

Finally, I would like to emphasize that we have great confidence in the fundamentals of our business.

It's of our firm belief that New Oriental will maintain a strong business foundation and continue to sustainably capture growth opportunities in the market and deliver long-term value for our shareholders.

Regarding the near-term guidance for the fourth quarter of fiscal year 2019, we expect total revenue to be in the range of $820.6 million to $840.6 million, representing year-over-year growth in the range of 17% to 20%.

It's not taking into consideration the impact of potential changes in exchange rates between Renminbi and U.S. dollars.

The projected revenue growth rate is expected to be in the range of 23% to 26% for the fourth quarter.

The estimated exchange rates used to calculate expected revenue for the fourth quarter of fiscal year 2019 is 6.65.

Historically, exchange rates used to calculate revenue for the fourth quarter of fiscal 2018 was 6.33.

This forecast takes into account several factors including, firstly, the industry seasonality of our core business, which historically tends to result in a slower growth in Q4, especially compared to Q3.

Secondly, we have moved to 1 week of K-12 tutoring classes from March to June to ensure our teachers have enough time to complete licensing procedures.

Therefore, the revenue related to adjustments will be recognized in the first quarter of fiscal year 2020.

Lastly, the adoption of new accounting standard has caused a larger portion of the revenue from our overseas consulting business being recognized in Q3 in past year of Q4, which is the peak season for this business line.

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 these.

(Operator Instructions) Your first question comes from the line of Tallan Zhou from Deutsche Bank.

Stephen just mentioned about the 4Q guidance and then there will be so 1 week of the class will be postponed to the next quarter.

So can you quantify how much the impact will be for the first quarter revenue growth?

Okay.

Yes.

To comply with the policy requirements, we have moved about 1 week of the K-12 classes from -- in March to June.

So the postpone will negatively impact the revenue by 3%, roughly 3% of the total revenue in Q4, but we'll take it back in the Q1 -- from the Q1 2020, okay?

So this is the first reason.

Second is the overseas consulting business.

Typically, the Q4 is the peak season for the overseas consulting business.

However, starting from this fiscal year, we adopt a new accounting standard, so which results -- in the Q3, we reported, in RMB, we reported 32% revenue growth in Q3.

And don't forget, in last year Q4, we had a 44% year-over-year growth in RMB terms, so that means the last year Q4 compared to the Q4 the year before last year.

So we had a hard comparison in the coming Q4.

But if you add that number from the above 2 factors back, the revenue growth in Q4 should be over 30%.

And the last point I just want to reiterate that the fundamentals of our business, especially for the K-12 business and the overseas test prep, the other business, has not changed.

So we will maintain the strong business foundations and continue to create the value for the shareholders.

Your next question comes from the line of Alex Liu from China Renaissance.

Just one question.

Could the management talk about -- share more color on the pro forma deferred revenue growth for this quarter, especially after adjusting the currency issues, after adjusting the payment schedule as well as the accounting standard change?

Okay.

The deferred revenue balance was increased by 10% in dollar terms year-over-year, but the lower than the normal growth is due to the adoption of the new accounting standard.

It means that part of our deferred revenue in Q3 was reclassified to be accrued expenses and other liabilities.

So this impact is about 7% to 8%.

And second reason, the change of the tuition fee collection for K-12 business also is a similar negative impact of the deferred revenue balance.

So this impact is roughly 6% to 7%.

And also, you should -- I suggest you to add back of the 7% of the RMB depreciation.

So the pro forma deferred revenue growth in the -- at the end of the Q3 will be over 30%.

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

I just had a quick question on -- looking a little bit further, I guess, for FY '20 and how should we think about online investments?

I think, Q4, you just mentioned that we should expect flattish margins, but like looking at year kind of forward, how should we think about that?

Okay.

In the fiscal year '20, firstly, I want to keep the same guidance of the top line growth of the fiscal year '20.

So the top line growth our guidance will be similar around 30% in RMB term year-over-year, so we don't want to change.

And also, in the new year, we do believe we'll have the margin expansion because we will see more operating leverage, because this year, we opened 20% to 25% the new expansion.

The top line growth over the -- for the next year will be roughly 30%.

So we do have the leverage.

And online investments, this year, I think, for the whole year, the online/off-line integration investments will be $95 million to $100 million.

And next year, we guided $110 million to $120 million.

This is the online/off-line integration investments.

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

I had one question about the utilization rates.

Could management give us more color on the utilization rate?

How much room for the utilization rate to improve going forward?

Okay.

In this quarter Q3, the utilization rates is up by 200 bps.

So I think this is the key driver of the margin expansion of this quarter.

And going forward, for the coming quarter and coming new year, we believe you will see the high utilization rates in the coming quarters because I think it's easy to make math -- to do a math just to compare the top line growth with the expansion plan, okay?

So 30% top line growth compared to the 20% to 25% expansion plan, and so we do have the leverage on the higher utilization rates.

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

The question is, how much capacity do you plan to add in the new fiscal years?

Okay.

Thanks, Tian.

This is a great question.

We -- the expansion plan for this fiscal year, fiscal year '19, will be 20% to 25%.

We have already opened 14% in the first 3 quarters of this fiscal year.

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

And next year, fiscal year '20, I think we keep the same guidance of the -- as we guide in the fiscal year '19.

It will be 20% to 25%, that's the expansion plan.

The market still has a lot of -- lots of the opportunity for us, for the big players like us.

We will open 20% to 25% new capacity in the coming years, okay?

Your next question comes from the line of John Wang from Macquarie.

So my question is, so Steven mentioned that the retention rate for all lines of the business is kind of improving.

So can you share more colors on the retention rate of different business lines?

And also, what is the retention is going to improve in the coming quarters or next fiscal years?

Yes.

Actually, we have seen the student retention rates is guiding higher for both POP Kids and U-Can business.

And for the POP Kids, the retention rate for this quarter is close to 90% and U-Can business, middle school, high school is over 75%.

So it's 75% to -- between 75% to 80%, and it'll keep going forward.

Since we started to invest on the online/off-line, the new product, and we have seen these retention rates getting up.

And going forward, I think we will see higher student retention rates going forward.

And this is -- I think this is the -- it shows that our investments in the last 3 years, it start to bear fruit from the investments we made in the last 3 years.

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

I have got a question involving the online business, Koolearn.

So how much online loss did Koolearn make this quarter?

And what's the guidance for next quarter?

I'm sorry, I can't hear you very clearly.

It's regarding the online loss.

So how much online loss was booked this quarter and how about next quarter and 2020?

Sorry.

We can't disclose the numbers of the Koolearn for this quarter.

And I think till the coming July, so in the next earnings call, we will disclose the Koolearn numbers.

Okay.

Do you have any guidance for 2020?

How much would that be comparing to 2019?

Yes, I do believe the margin slide from the online part, from the Koolearn in the second half of the year will be lower than the first half of this year.

Your next question comes from the line of Alex Xie from Crédit Suisse.

So I'd like to ask about what will the enrollments growth for POP Kids and U-Can look like if we exclude the impacts from the change of tuition fee collection schedule.

And my second question is what are our plans for the summer promotion in the coming summer of this current year.

Okay.

Yes.

The significant increase in the number of enrollments is very good because of the change the class.

And so I think, the normal where the enrollments for the POP Kids program in the Q3 was 40% to 45%, this is the real student enrollment, okay?

And for the U-Can, the enrollment growth was somewhere around 40%.

But it's still great, the progress.

And so if you combine with the enrollment growth with the 5% to 10% price increase, we'll get the top line growth, okay?

And your second question is about summer promotion, yes.

As I mentioned in the last earnings call, in the last year, we got over 700,000 summer promotion enrollments in last year Q1.

And this year, I think we will make a change of the summer promotion strategy.

We will care more about the retention rate than last year.

And as I mentioned in the last earnings call, we raised the summer promotion class price from RMB 200 to -- last year to RMB 400 this year.

And so I think it's better for us to identify who are the real customers after the summer promotion.

So we do believe the retention rates after the summer promotion will be higher than last year.

Your next question comes from the line of Leon Chik from JPMorgan.

Congrats on the results.

Just wondering on your other income of $24.1 million, which was down more than 30% from the previous quarter, just wondering what's the main reason.

I think, the main part of the other income is the interest income.

So I suggest that you see the year-over-year growth and because of the difference cash balance.

And typically, the average interest rates of the interest income is a little bit lower than last year.

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

Just a quick question on operating margin.

I think you mentioned on your prepared remarks, non-GAAP operating margin went up by 120 basis points this quarter.

So looking ahead, I think management did say 17% to 18% in couple of years' time.

So if we look at fiscal year '20 and '21, is that something that we could achieve?

And can you kind of elaborate what are going to be the key metrics, is it going to be utilization rate improvement or better improvement from the online business?

So which will be the main factor behind the margin improvement?

I think, the margins relates to be 2 factors.

Number one is the expansion plan.

Number two is the online investments, okay, the online investments.

And so in the fiscal year '20, we expect the margin expansion year-over-year, and we don't want to change our main long-term margin guidance to the 17%.

This is non-GAAP operating margin in main long-term.

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

Congrats, Stephen and Sisi, on the great results.

Just a couple of questions.

Number one, on your guidance, operating margin guidance for next quarter flattish year-on-year, had this considered the impact you mentioned of 1-week push back of the revenue bookings from March to June?

And the second question is on your income tax rates.

I noticed that the tax rates in the third quarter has been much higher than a year ago.

And I'm just wondering what's your guidance of the tax rate for the fourth quarter and maybe (inaudible) tax rate for FY '20?

Yes.

The guidance of the margin in the coming quarter, we guided the margin flattish.

I mean, partially, it relates to the revenue impact.

But it's just for the K-12 business, we just sacrificed the 1 week's revenue in Q4, but we'll make it up in the Q1.

So -- and yes, as of the margin guidance for the next year, we do feel positive for the margin expansion, for the next whole year.

And the tax rates, yes, in Q3, in this quarter, the tax rate was 22%.

We have a fair value gain impact.

So if you take it off, the tax rates was 18.5%.

I think the reason that the tax rate steadily move up is because we'll lose some benefit of our tax efficient structures because some high-tech companies and what we were set up, we have a certain period of the tax preference.

And when they expire, the tax rates tend to go up.

So our guidance for the whole year of the ETR will be somewhere between 18% to 19%.

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

This is (inaudible) on behalf of Natalie.

We have 2 questions.

So first one is on your off-line/online business.

Can you maybe provide some color on what kind of synergy should we expect between those 2 business going forward?

And second question is on your class duration shift.

I noticed some cities, for example, Shanghai, where you use the 2.5 hour course duration to replace the previous 3 hour courses.

Wonder what would be the scale of this change and how should we think about the impact on margin?

Yes.

The off-line and online businesses actually when we started to make a reform I think 3 years ago for the domestic test prep first, and we pushed almost all of the large-scale classes into pure online because it's focused to the domestic test prep students, mostly for the college students or university students.

But in the off-line, we are still providing small-size class because we divided the students by 2 parts.

For some students, they have the full ability to control themselves to study pure online, okay, we do it online.

But for some students, they still need the off-line classes because they don't have the enough ability to study through online.

So we have seen some synergy between the off-line and the online business.

But don't forget, the market is huge enough, okay, both -- for both the online part and off-line part.

Even though we're the leading player in the market, one of the leader player in the market, our market share for both off-line and online are very small.

So I think the cannibalization between the off-line and online will be very small, and we will see more and more synergy between off-line business and online business, okay?

And the class duration, actually, we start -- we're starting to pilot this program 2 years ago in Beijing school to change the 1/4 of 3 hours -- 1 session of the course from the 3 hours -- 3 hours 100% off-line to 2 hours off-line last combined with the 30 minutes online classes.

And the 30 minutes online class is related to the homework where some contents that for the students can do it by themselves online.

So I think that's great for us to make the higher utilisation rates of the classrooms.

So it does work.

And I think it's successful for the Beijing school.

And in other cities, we'll do it more and more to provide more and more online/off-line integrated classes going forward.

Your next question comes from the line of Eric Qiu from CCBI.

I have 2 questions.

One is regarding to the operating margin.

This quarter, you reverted the previous 2 quarters margin contraction and achieve the margin expansion of 100 bps.

Just wondering what's the major reasons behind that?

And for next quarter, is that because you are still quite conservative, so at this moment you maintain a flat margin outlook?

The second is for the top line.

For the fourth quarter revenue guidance, you guided even in Renminbi terms, it seems the growth rate is a bit slower than previous 3 quarters, which is all above 30 percentage year-over-year.

So I'm wondering is that because the seasonality or because of accounting issues?

Okay.

Your first question is about margin.

This quarter, we got the 120 bps up for the -- on the operating margin.

I think this is -- there were 2 reasons.

The first one is we do have a leverage on the utilization rates because the expansion plan in the first 3 quarters was only 14%.

And actually, we have -- we thought -- we thought things the first half of this year.

So don't forget, we setup most of the new learning centers in the second half of last year.

So in the Q3 and Q4, we will have more leverage than the first half of this year.

And secondly, you saw our sales and marketing expenses increased only by 13%, and we do believe we will have the leverage on the sales and marketing expenses as a percentage of revenue going forward.

And the margin guidance, yes, since last earnings call, we guided this with -- the margin will be flattish in the Q3 and we got 120 bps up finally, but we don't want to change our guidance for the Q4, but still remain flattish.

Okay, top line growth, okay, your last question.

Actually typically, the Q4, typically, the seasonality -- in terms of the seasonality, the Q4 learning is lower by 2% compared to Q3.

So this is the normal, okay?

And so this is the first thing.

Combine the 2 reasons I explained at the end of my first question in the earnings call, 2% of the class change from Q3 to Q4 and 3% from the oversees consulting, the accounting new treatment.

So if you add it all back, the revenue growth will be over 30%.

So I think it's normal.

Our next question comes from the line of Christine Cho from Goldman Sachs.

So I had 2 quick questions.

So one, just on the OP margins increase, so if you just decompose that between off-line and online, could you give us some color there in terms of this quarter?

And then, secondly, we noticed that a lot of the learning centers that you've added this year was mostly in the existing cities.

If you think about the future expansion plans, will it be actually shifting towards more new cities?

Or will it still be kind of the existing cities that you will be initially targeting?

And just kind of the mix between the off-line versus online in terms of thinking about expansion into these newer -- lower-tier cities as well?

Okay.

Second question first.

Going forward, for the fiscal year '20, I think we will expand more learning centers in existing cities.

And yes, we do have a plan to open like new cities, but most of the new learning centers we setup will be happen in the existing cities.

Even in Beijing, where the top tier city, we do have a lot of room to open more learning centers.

And the OP margin -- I'm sorry, I can't disclose the detail for the online net profit, but what I can say is the operating margin expansion for the off-line part is higher than the overall margin expansion.

Is it clear, Christine?

Okay.

Your next question comes from the line of Sheng Zhong from Morgan Stanley.

I have a question on the overseas consulting fee -- consulting income.

So can you give more color on the consulting income number of last quarter -- fourth quarter last year and what the more color on how did the accounting policy changed so that will impact your guidance?

And whether the accounting policy will also change the cost recognition in the P&L in next quarter as well?

And also secondly, can you -- what the growth outlook for overseas test prep business in this year and the next year?

Okay.

Thanks, Zhong Sheng.

We don't disclose the detailed numbers of the overseas consulting business.

The way I can say is, overall, the revenue contribution from the overseas consulting business for the whole year is about 8% to 9%, okay?

So this is revenue contribution.

But typically, in the Q4, the revenue contribution from the overseas consulting business is a bit more than the other quarters.

And the accounting standard changes, before the Q4 2018, the overseas consulting revenue is recognized when most of the revenue is recognized but when the context really.

And of the new revenue accounting standard, we reported revenue according to the several benchmarks by (inaudible) so that means we report the revenue earlier than before based on the new accounting standard.

And yes, this is the answer for your question about the overseas consulting and to the other question, what?

What's your next question?

The second question?

Second question is about overseas test prep growth outlook in this year and the next year.

Okay.

Yes.

Typically, well, we expect the overseas business -- the overseas test prep business in the coming Q4, in RMB terms, will be growth by 10% to 15% in RMB terms, okay?

And for the next year, the guidance will be similar, 10% to 15% in RMB terms.

And may I ask the accounting policy change on consulting revenue.

Will it impact your cost recognition as well?

No.

There is no impact for the cost side.

Our next question comes from the line of Manyi Lu from DBS.

Actually, my question was asked by someone before, so I can skip mine.

I'm sorry, I can't hear you very clearly.

Please repeat it again.

Okay.

Can you hear me now?

Yes, please speak a little louder, okay?

Go ahead, please.

Yes, can you hear me now?

Yes, sounds better.

Go ahead.

Yes.

Actually, my question was asked by someone else before.

So I can skip my question.

Okay, okay.

Thank you.

Our next question comes from the line of Alan Deng from Aira.

Can I ask you when the -- what is the current biggest risk that in your view -- in the management view?

Is it policy?

Is it going to be competition?

Or will you kind of view that as probably preventing from achieving 30% top line growth and margin expansion for next year?

I'm sorry.

Can you repeat it, again?

I can't hear you very clearly.

Your question is about, what, the policy or can you repeat it again?

What is the biggest risk that management is thinking about at this moment that makes a potential from achieving the 30% top line growth and margin expansion target?

Is it going to be policy, or is it going to be competition?

I think for the management concern, we always have 2 kinds of risks.

The first one is regulation for the -- both the overseas test prep and the K-12 business.

And so this is the first part of the risk.

Secondly, we do have the human resource risk even though we spent a lot in the last 3 years to build up the new education system, but we still rely on the talent people to run business, especially for the local school head.

So there is a risk for the human resources.

2 risks, regulation and human resources, okay?

We are now approaching the end of the conference call.

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

Again, thank you for joining us today.

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

Thank you.

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

Thank you for participating.

You may all disconnect.