New Oriental Education & Technology Group - Earnings Call - Q1 2019

Transcript

Speaker 0

Hello, everyone, and welcome to New Oriental's First Fiscal Quarter twenty nineteen 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 Yang, please go ahead.

Speaker 1

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are very pleased start our fiscal year twenty nineteen with a year over year acceleration in our top line growth. Net revenues in the first fiscal quarter twenty nineteen increased by 30.1% to $859,800,000 Student enrollments in dynamic subject tutoring and test prep courses in the first fiscal quarter went up by 13.2% year over year to approximately 1,700,000 student enrollment. Accurate number is 1,135,300.

Guided by our successful Optimize Market strategy, we continue to expand our offline business while also investing in our onlineoffline integrated education system. In this quarter, we added a total of 19 new facilities, which include 18 new learning centers in existing cities and one 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 an important focus in fiscal year twenty nineteen. We will also continue to focus on improving utilization rates and investing in enhancing teaching quality in line with our long term strategy.

Our business has started the year with accelerated revenue growth, even with a discounted revenue due to the large scale summer promotion. Our key revenue driver K-twelve all subjects after school tutoring business achieved remarkable year over year revenue growth of 49%. This was largely driven by our solid performance in student enrollment in the recent two quarters, which had a year over year increase approximately 34% in the 2018 and 2019. The growth in the K-twelve business can be broken down into the outstanding performance from U Can middle schoolhigh 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 the summer promotion campaign to rapidly acquire grade seven student customers before they start the first year of secondary school. The large scale promotion offering, low priced experiential courses was launched 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 increased to 37.5% year over year. Note that these promotion enrollments were not included in our reported enrollments.

More importantly, 54% of students recruited from the summer promotion campaign were successfully returned 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 benefits 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-twelve after school to market as these students move from grade seven through grade 12 to continued improvement in retention rate and customer loyalty will further drive revenue growth in the next three to six 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 the hourly blended ASP in RMB terms, please note that U Can increased by 9%, POP Kids increased by 4% and Overseas Test Drive program increased by 10% year over year. We remain firmly optimistic about our overall top line performance, which we expect will be supported by the continuous improvement of the retention rates 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 to 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 library training and test prep business, the cost of 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, these important investments 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 revamping up new facilities, we believe the short term margin pressure for offline business will generally balance out as the year progresses.

For our coollearn.com pure online education platform, we continue making investments in new initiatives in K-twelve after school tutoring business to capture the huge market opportunity in remote areas in China. Even with the short term margin pressure from these investments, we're confident that our efforts in building out our ecosystem and 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-twelve all subjects after school achieved revenue growth of about 49% year over year, driven by the solid enrollment growth in the recent two quarters of about 34% year over year. Breaking it down, the U Can middle and high school all subjects after school tutoring business reported 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 businesses together recorded revenue growth 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 standard starting from 06/01/2018.

VIP personalized class business recorded a 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 to Market strategy. We have been focusing on expanding 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 three percent 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 select cities in July 2016. By the end 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-twelve programs. It's encouraging to see increasing market penetration and student retention in those markets we have tapped into. The scalability of the new model also continued to improve and started to bear fruit.

With these proven results, we're 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 $22,700,000 in the first quarter to improve and maintain our onlineoffline integrated education ecosystem. Most of which has been an area of focus since 2014, most of the investments were reported under G and A expenses. With the high customer retention rates and the acquisition customers, we're positive that our investments will bring sustained long term benefits. I will first talk about onlineoffline two way interactive education system.

On the whole, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. With the booming market and our advanced onlineoffline integrated product service, we're poised to gain more market share and strengthen our hold going forward. Since the launch in U Can Visible Programs 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 Shuangyou in most cities by the end of the first quarter in fiscal year twenty nineteen. At the same time, the interactive education system has been gradually used in increasing number of cities.

The interactive education system for overseas test prep, including IELTS, TOEFL and SCT courses, was rolled out and tested in most major cities by end of fiscal year the first fiscal quarter twenty nineteen. At the same time, we also standardized product offerings across 14 cities. We also made great progresses in the cooler.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 in executing new initiatives in online K-twelve after school tutoring business in fiscal year twenty nineteen. This includes content development, teacher recruitment and training, sales and marketing, R and D and other cost expenses that are necessary to drive the growth of new online programs.

With these programs, we're 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 and expenses for the first quarter was $700,400,000 representing a 40% increase year over year. Non GAAP operating cost expenses for the quarter, which exclude share based compensation expenses, were $686,400,000 representing a 38.1% increase year over year. Cost of revenue increased by 36% year over year to $367,400,000 primarily due to increase in teachers' compensation for more teaching hours and rental costs for increased number of schools and learning centers in operation.

Selling and marketing expenses increased 34.4% year over year to $99,300,000 primarily due to increases in brand promotion expenses and selling and marketing staff compensation. General and administrative expenses for the quarter increased by 49.8 year over year to $233,700,000 Non GAAP general and administrative expenses, which exclude share based compensation expenses, were $219,700,000 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 the increase in R and D expenses and human resources expenses related to the development of our onlineoffline integrated education ecosystem. Total share based compensation expenses, which were allocated to related operating costs and expenses, increased by 345.3% to $13,900,000 in the 2019. The substantial increase was primarily due to the grants of total 1,500,000.0 restricted shares units of the company to employees and directors in October 2017 with grades resting over three years. Operating income for the quarter was $161,300,000 an increase of 0.2% compared to $161,100,000 in the same period of the prior fiscal year.

Non GAAP income from operations for the quarter was $175,300,000 a 6.7% increase compared to non GAAP income from operations of $164,200,000 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 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 in the cost of 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 investments for the quarter was $47,000,000 Please note that this resulted from the adoption of the new financial instrument accounting standard starting from 06/04/2018, which means the company will measure its long term investments at a fair value with gains or losses recorded through the income statement.

On the other hand, approximately $97,900,000 of cumulative other comprehensive income for the available for sale equity and securities as of May 3138 was reclassified into return earnings. Net income attributable to NewRental for the quarter was $123,200,000 representing a 22.2% decrease from the same period of the prior year 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 $184,100,000 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 2019 was approximately $231,500,000 Capital expenditures for the quarter were $62,400,000 and this was primarily attributable to the opening of one 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 represents proportionally as revenue as the instructions are delivered at the end of the 2019 was $146,700,000 an increase of 23.3% as compared to $930,000,000 as of end of the 2018. On this note, I also want to mention that as a result of adopting of new revenue accounting standards from 06/01/2018, a $66,000,000 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 priorities for the second quarter, I would like to take a moment to reiterate our overarching goals and our optimized market strategy as well as the challenges and opportunities we anticipate in the future.

First, we 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-twelve 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 refinements and maintenance for the onlineoffline integrated education system for K-twelve business and continue to revamp and roll out our onlineoffline integrated standardized teaching system for overseas test prep business.

We believe that expanding in absolute dollar terms in fiscal year twenty nineteen will increase moderately compared to the previous fiscal year. In addition, we'll continue our investments in new initiatives, including content development, teacher recruiting and training as well as sales marketing in pure online K-twelve after school tutoring business on our coollearn.com platform. Third, our top priority will continue to focus on improving utilization of facilities and controlling costs across the entire company so that we will be 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 the improved market standards and enhance the teaching quality, supporting the healthy growth of the market in the long term.

As a leading education service provider in China, our company is fully supportive of these reforms, and we're committed to providing high quality education service and doing our shares to build up sustainable and robust market. At this stage, we do not foresee any material impacts of the regulatory reform on our top line growth, while our administrative costs and expenses may increase in the short term. Finally, the recent R and D depreciation against the U. S. Dollar will also impact our earnings in dollar terms for the 2019.

Again, I would like to emphasize that the fundamentals of our business remain strong as we believe with our optimized market strategy being the focus as always, we're confident that New Oriental will continue to capture sustainable growth opportunities in the market and deliver long term value for our shareholders. Looking at the near term and our expectations for the next quarter, we expect total net revenues in the 2019 to be in the range of $568,500,000 to $586,400,000 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 U. S. Dollars, the projected revenue growth rate is expected to be in the range of 27% to 31% for the 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 repurchase of up to $20,000,000 of the company's common shares during the period from October 2938 through May 3139. The share repurchase program is planned to be implemented in line with market conditions and funded from the company's available cash balance.

Speaker 2

Our Board

Speaker 1

of Directors will review the share repurchase program periodically and may authorize adjustments of its terms and size accordingly. The initiative once again analyzed our determination to deliver value shareholders and reiterate our confidence in the long term prospects for our business. At this point, I'll take your questions. Operator, please open the call for this. Thanks.

Speaker 3

Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Jin Yoon from New Street Research. Please ask your question.

Speaker 4

Hi, good evening guys. Thanks for taking my question. Stephen, guys mentioned you just mentioned about costs associated with the regulatory environment impacting SG and A. What exactly are those costs? And how much of that cost is actually reoccurring costs going forward?

And are you still comfortable with the 100 basis points upside in your margins for this year? Thanks. Okay.

Speaker 1

The question about the regulation, the most recent regulation that the State Council issued the Super eight eighty 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 I think we're still in process of the communication with the local governments in each cities. So it's early it's too early to say 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, as you know, it's because non GAAP operating margin has declined by four forty 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 last year. And but the retention rate is good. So for the offline business, I think the margin pressure will generally balance out as the rest of the year.

And for the online, yes, we started to invest a lot since the two quarters ago, like HR cost, IT cost and marketing expenses. But it's a great opportunity for us. So it's worthy to spend more money on that. But it's a margin drag. Yes, And so this year is margin pressure here.

And but for the mid to 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. Thanks. Great.

Thanks guys. Your

Speaker 3

next question comes from the line of Natalie Wu from CICC. Please ask your question.

Speaker 5

Hi, good evening, Steven and Sisi. Thanks for taking my question. I noticed that the net add on facility is only like 19 compared with the sixty sixty five 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?

Thank you.

Speaker 1

Okay. I don't think it's a slowing down of the expansion. Typically, 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 want to change the whole year.

The whole year expansion guidance is 20% to 25%. So typically, open most 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.

Speaker 5

Thank you, Stephen. But what I mean is that you mentioned that the CapEx you've spent is majorly for the 65 new openings in the past quarter, right? But if we look at the net debt, it's only 19.9%. So just wondering the major consideration behind the 46 closing down of the learning centers in the past quarter? Okay.

Speaker 1

Natalie, we have 1,100 learning centers. Some learning centers we ran for five or even ten years. So some of them, let's say, the four or 5%, the learning centers some learning centers expire the terms. So it's

Speaker 5

not regulation related, It's not

Speaker 1

regulation related.

Speaker 5

Great. Got it. Thank you.

Speaker 1

Okay.

Speaker 3

Your next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question.

Speaker 6

Hi. Thanks management for taking my questions. I have two quick questions. The first one is about our revenue trend. Should we stick to our 30% year on year growth for our revenue growth for FY 2019 in RMB terms?

And should we expect there should be reacceleration in terms of the revenue? And my second question is a follow-up for the first question. Hey Stephen, when you're talking about FY 2019 is margin pressure here, Is there any direction in terms of the margin trend? And how should we think about the absolute amount of online investment in FY 2019? Thank you.

Speaker 1

Okay. Yes, the revenue guidance, yes, we give the guidance of the RMB terms range of 27% to 31% year over year growth in Q2. So for the whole year fiscal year 2019, we don't want change our guidance as we guided before. So the whole year revenue growth will be in our midterm will be around 30% year over year. And most of the growth will come from the K-twelve business apparently.

So this is my answer of your question about the top line growth. And for the margins, yes, we meet the margin pressure in the Q1 because of the larger the promotion and also the heavy online investments in the Q1. And then 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, 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 this is the margin expansion, the factor. But as I said, we do have some negative impact from the new regulation. So this is also a margin drag factor. So that's why I said it is a margin pressure here.

Speaker 6

Got it. Thank you, Stephen.

Speaker 1

Thanks, Thomas.

Speaker 3

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

Speaker 2

Hi, Stephen, Cece. Good evening. So the question is really related. 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 you know, when we review the company website, we also saw some new program which we didn't see before. One of the program is called SLIM. And so I really want to ask the company, you know, once you added a new program we saw some, you know, welcome enrollment by students and the students' parents. So how the what's the company's plan in the future?

You know, one is to continue to roll out such healthy content. Second, what are some other healthy content are in the pipelines of the company's education inventory? That's my question.

Speaker 1

Okay. We're keeping focusing on the development of new products. As 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 non academic courses like the programming and some like the science courses. So I think our purpose is to provide all kinds of subjects not only for the academic only courses to the Chinese kids. I think 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 the revenue contribution is small, but it's grown 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.

Speaker 2

Thank you. Okay.

Speaker 1

Thanks, Tian.

Speaker 3

Your next question comes from the line of Mark Li from CIGI. Please ask your question.

Speaker 7

Hi, management. Thanks for taking my question. 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 Can despite like a lower base.

So may I know like any reasoning or any strategy going forward? Thank you.

Speaker 1

Okay. Let me answer second question first. POP Kids, I think the growth rate is good. And in some quarters because of the timing difference some quarters POP Kids is better, some quarter The U Can is better. So in general, the K-twelve business together is booming.

So they run the growth script. And yes, in the Q1, I don't think we have the material impact from the new regulation of the in terms of the margin. And going forward, as I said, there might be some incremental cost and expenses of the coming quarters in the rest of the fiscal year. But what I'm saying is, it's just a short term impact. Maybe it will impact like two quarters, one or two quarters.

But I don't think it will impact us in the next fiscal year or the year after. It's just one time.

Speaker 7

Okay. Thank you.

Speaker 1

Thanks.

Speaker 3

Your next question comes from the line of Mariana Koh from CLSA. Please ask your question.

Speaker 8

Hi, thanks management for taking my question. 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 to 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 yourself? Thank you.

Speaker 1

Yes. I think it's a great question. The government continuously has the regulatory oversight. And as a leading education provider, absolutely we we fully support the government reforms. And I think it's a great opportunity for the big players like us.

I think we will keep doing to provide the best of service in the whole market. So I think this is an opportunity for us to take more market share from small players. Maybe you 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 six months, the students from the small players originally to join our classes. So this is what we have seen in the last six months.

And I think it's a great opportunity for us. And yes, as we announced this afternoon, the Board of Directors approved the $200,000,000 share buyback program. I think this is underlying our determination of the provide to deliver values to the shareholders and show our confidence of the long term prospects shareholders. So this will show our confidence of the future in future. This is the whole logic of the share buyback.

Thanks.

Speaker 8

Thank you, Stephen.

Speaker 3

Your next question comes from the line of Lucy Yu from Bank of America Merrill Lynch. Please ask your question. Hi, Stephen. Would you mind giving us some breakdown of the non GAAP property margin contraction this quarter? It has been down by four fifty 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 three drivers? Thank you.

Speaker 1

Okay. Within the margin supply, 110 bps comes from the offline business. This is a core business. But within it, it's mainly due to the summer promotion and summer rental cost. We set up most of the learning centers in the second half of the last year.

And so all the others come from the online business, overseas consulting and other business. So this is a breakdown of the margin. And going forward, I think for the offline business itself, we do have a 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 I think this is a good sign of the margins because we started to fill the students into the learning centers we set up last year. So it's 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 worthy to spend more on the online platform, okay? And but one other thing for this quarter, for the overseas consulting business, typically Q1 is now peak season for the overseas consulting business. And then we adopt the new accounting standard since the first quarter.

So we lost like $1,100,000 revenue of the Q1. We reported into the return earnings. But it's just one time. I think for the whole year, the overseas consulting business, the margin will be flattish and the top line growth will be 20%. It's gross as normal, okay?

Speaker 3

Hi, Thanks. Stephen. Just to clarify, you mentioned that for the offline business for the full year, you're expecting flattish or slightly down margins. So the online will also negatively impact the margin as well, whereas the consulting business is likely to be largely flattish. Is it fair to say that for the full year, we are expecting non GAAP operating margin to contract this year?

Speaker 1

Yes. Think we need maybe one more quarter to guide the whole year, Mario. It's just one quarter past.

Speaker 3

Yes. Sure. Thank you.

Speaker 1

Thanks.

Speaker 3

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

Speaker 4

Good evening, guys. Thanks for taking my question. Just quickly follow-up on the margin part that Stephen you mentioned that it's going be more or less flat to slightly down this year for the offline. Because if we look at the utilization rate has been picking up and as we go into the second half this year with less as you said, you're 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 and A or operating expense that has to be factored in towards more in the second half this year? If you could give us a little bit more color on that, that would be great. Thank you.

Speaker 1

Yes. My answer after your question is that if I said if you take out the impact from the new regulation, I think the margin of the core business will be expanded in this year. But we to take some incremental cost expenses from the new regulation. So it's fully it's a negative impact of the margins. You combine the core business, the normal condition combined with the new regulation impact that is the result of the margin.

Is it clear?

Speaker 4

Yes. That's great. Thank you.

Speaker 1

Okay. Thanks.

Speaker 3

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

Speaker 4

Hello. Thank you for taking my call, Sisi and Stephen. My question is regards to the revenue for the first quarter. We see that the overall revenue growth was about 30%, whereas our enrollment was about 13%. Can you clarify is the difference between that is it then the increase in ASPs?

ASPs? And if so, mean, it does seem to be quite a large increase in ASP. Thank you.

Speaker 1

Okay. Johnny, I think that I suggest that you combine the enrollment of the Q4 and this quarter and Q1 together, the two quarters together, the enrollment growth was 28.4. So I think this is 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-twelve business, 5% to 8% price increase and the overseas test drive 10% increase. It's just we don't want to change our price guidance.

Speaker 0

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 semesters course. That's why so the Q4 borrowed a lot of enrollments from Q1. That's why we suggest everyone to combine these two quarters together to calculate the actual trend, the normal trend for enrollment to match the revenue growth. Okay?

Speaker 1

Yes. Thanks, C. C. But I want to add one point. It's due to the new regulation, No advanced tuition fees of more than three 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, think that you will not see the up and down of the timing difference of the student enrollment in different quarters. Thanks.

Speaker 4

All right. Thank you very much.

Speaker 3

Your next question comes from the line of Terry Wang from Blue Lotus. Please ask your question.

Speaker 6

Hi, management. Thanks for taking my question. I have one question regarding company expansions trajectory on New City. How many cities that company plan to enter this year? And how many of them are like second tier city?

And how many are third or lower tier cities? Thank you.

Speaker 1

Okay. I think most of the new cities we set out in this year, we will use the dual teacher model. We covered almost 70 cities already. So in the most low tier cities, I think the best way for us to take market share is to use the dual teacher model. So we plan to open 10 new cities by dual teacher model in this year.

This is our plan to settle the new cities. Thank you. Thanks.

Speaker 3

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

Speaker 9

Thank you management for taking my question. First, could you please give us an 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 2019? And second is to follow-up on the regulations that schools can only collect money before three months before the class starts.

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 interest income as well going forward? Thank you.

Speaker 1

Okay. Yes. We opened 18 new learning centers in this quarter. So in the past quarter, what I'm saying is that since the new regulation till now, we didn't meet any difficulties to apply for the new license in certain cities. So and we don't want to change as I said, we don't 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, don't need to make change for the summer and winter courses. Typically, the course is within three months. But for the spring and autumn courses, we have to change. Typically, we divide the one course to two payment terms.

But I think the retention rates will be not impacted because for our K-twelve business, the retention rate is very high. For example, the POP Kids program and the retention rate is close to 90%. And typically, for example, in the autumn or the spring, these students take one semester courses, typically last three point five months or four months. So I don't think it will impact our retention rate during the spring and autumn semester.

Speaker 9

Thank you.

Speaker 1

Okay. Thanks, Julie.

Speaker 3

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

Speaker 4

Hi, evening. Thanks for taking my question. Can you 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 space?

Is that part of the pain point? 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 two to three years' time. Are you still standing by that long term guidance?

Thanks.

Speaker 1

I don't want to change my long term margin guidance. It's just we postponed one year, okay? So we want to because this year, we have to meet the requirement of the new regulations and some online investments. So I want to change my guidance of the long term margin. And for new regulations, yes, there's maybe some the incremental rental or the teacher 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 qualification. 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. But in some province, the government need the teachers take exams in their birthplace. It's really hard for us, for our teachers to take the exams.

But now almost all the cities have changed, made the reform of the exams. So if New Oriental gave the working certificate to the government, that will allow our teachers to attend the task. So in the coming new task, almost all our teachers with our license will attend the task. And we believe the pass rate will 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 a license, we will move them from the teacher position to the teaching assistant position or we will change some teachers. That might be some incremental cost. We do believe we have the high level of the whole industry to meet the government requirement. Okay. Thanks, Andrew.

That's clear?

Speaker 4

Yes. Thanks a lot.

Speaker 1

Okay. Thanks.

Speaker 3

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

Speaker 10

Hey, Steven and Sisu. Thank you for taking the call, taking the question. 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 spent some I forgot the number investment online, but I think it's mostly on G and 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 and A and maybe on selling and marketing expenses to drive that online growth, please? Thank you.

Speaker 1

Okay. As for the Koolearn, we have already filed the A1 in the Hong Kong market, so we can't disclose numbers. Sorry, I'm sorry, everyone. 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 impacts as the Q1. So you will see the margin will balance out in the rest of the year. But as I said, this year is the margin pressure year. We do believe the margin expansion in the coming new year and fiscal year 'twenty or the year after. Considering

Speaker 10

the online expansion, right? That's the overall margin.

Speaker 1

Yes. It's still a margin drive because we will spend money. But you know, it's online business. It's not our core business. It's worthy to spend more money to acquire new customers.

It's a huge market.

Speaker 10

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

Speaker 1

Okay. The utilization rate was down by 50 bps in the Q1 year over year because the learning center opening in the last two to three quarters. And but we do believe the utilization rates would get improvement in the future. And the retention rate, the POP Kids is close 90%, the retention rate. It's still getting higher.

And UK 75%, the retention rate.

Speaker 10

Thank you. Thanks.

Speaker 3

There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.

Speaker 1

Okay. 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 again.

Speaker 3

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