New Oriental Education & Technology Group - Earnings Call - Q1 2020

Transcript

Speaker 0

Ladies and gentlemen, good evening and thank you for standing by for New Oriental's First Fiscal Quarter twenty twenty Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Ms. Cece Zhao.

Speaker 1

Thank you. Hello, everyone, and welcome to New Oriental's first fiscal quarter twenty twenty 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 news services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen and I 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, webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr.

Yang. Stephen, please go ahead.

Speaker 2

Thank you, Sisi. Welcome, everyone, and thank you for joining us on the call. We are very pleased to begin fiscal year twenty twenty with a robust top line growth, which exceeded the high end of our expected range in R and D terms. For the 2020, New Oriental reported net revenue of $1,071,800,000 representing a growth of 24.6% or 29.7% if measured in RMB. Net revenues from educational programs and services for the quarter were $996,500,000 representing a 25% increase year over year or 30% if measured in RMB.

Our key growth driver, K-twelve, after school tutoring business reported significant increase in student enrollment. Together with the overwhelming responses received from the summer promotion campaign, both segments made great contributions to this quarter's outstanding performance. In the 2020, we continued to implement our well proven optimized market strategy and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability. During this quarter, we added a net of seven learning centers in existing cities. The total square meters of classroom area by the end of the quarter increased approximately 24% year over year and 3% quarter over quarter, in line with our expansion plan.

Our total student enrollment, academic subjects tutoring and test prep courses in the 2020 increased by 50.4% year over year to approximately 2,609,200. On this point, please note the higher than normal increases in the number of student enrollments is primarily due to the split of the autumn autumn semester into two sections, a change we adopt to meet the latest regulatory requirements since November 2018, which means student enrollments for each half of the autumn semester were calculated separately. To explain, the number of student recruitment and fees collected for the first half of the autumn semester were both in previous quarter, while those for the second half were both in both current reported first quarter as well as the following second quarter. Prior to the change, we historically collected the full sum of the tuition fees and recorded the student enrollments for autumn semester in the fourth quarter of the prior fiscal year. Meanwhile, we also continue to deepen our online merge offline standardized classroom teaching system, and in particular, roll out an innovative interactive courseware for the POP Kids program in some main cities, creating more interactive and high quality learning experience for our students.

We also made further strategic investments into dual teacher model classes and new initiatives for pure online K-twelve tutoring through coollearn.com. With our core competency in both offline and online education service, we're confident to capture these substantial business opportunities in low tier cities and remote areas in China moving forward. Furthermore, we would like to take this opportunity to highlight the success of our summer promotion campaign, as briefly mentioned earlier. Similar with the previous years, we offered low cost offline trial courses for multiple subjects across most of our existencies during the summer period, targeting students before they begin secondary school. The largest scale promotion this year was launched in 43 cities, and we're very encouraged to see that even with a doubled average promotion price compared to last year, our total promotion enrollments reached 820,000, an 88% increase year over year, accompanied by improved student retention rates year over year.

Please note that these promotion enrollments were not included in our reported enrollments. Overall, 59% of students recruited from the summer promotion campaign were successfully retained as customers for our full price courses for the autumn semester, which is 5% higher than the rate last year. We're confident that this will boost our revenue and drive positive growth throughout the whole of fiscal year twenty twenty. We have firm belief in our summer promotion strategy in generating long term benefits and foresee this to continue to be a successful and effective strategy to rapidly capture market share and acquire long term loyal student customers in K-twelve after school tutoring markets. As these students move from grade seven through grade 12, we expect the continued improvement in retention rates and customer loyalty will further drive revenue growth in the next three to six years.

These investments lay down a solid foundation for stronger growth in the long term and further cement our leadership in the market. Another highlight of the 2020 is our year over year operating margin expansion, which is compounded by a strong bottom line performance. Our non GAAP operating income increased by 46.8% year over year in dollar terms to approximately $267,200,000 while non GAAP operating margin rose by 360 basis points to 24% from 20.4% a year ago, attributable to a strong utilization rate and operational efficiency in addition to our one off summer promotion drive. We'll continue to focus on furthering this improvement, and we are confident in our ability to deliver stable and positive margin expansion this year and create sustainable long term value for our customers and shareholders. I will now turn to pricing.

Per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 13% year over year. We like to note that the lower than normal blended ASP is primarily due to the change in tuition fee collection schedule for our K-twelve after school tutoring courses. As explained above, the number of the students we recruited and the amount of fees collected during the quarter only reflect the second half of the autumn semester. Therefore, our blended ASP for the 2020 appears to be lower. Hourly blended ASP, which GAAP revenue divided by the total teaching hours, increased by approximately 5% year over year in RMB terms.

Breaking down our hourly blended ASP, the UCAN middle schoolhigh school rate increased by 7%, POP Kids increased by 9%, and overseas test prep program increased by 7%, all year over year in RMB terms. Now we will move on to the first quarter performance across our individual business lines. Our key revenue driver, K-twelve all subjects after school tutoring business, achieved year over year revenue growth of 35% in US dollar terms or 40% in RMB terms. To provide a breakdown of the growth, U Can middle school high school all subjects after school tutoring business reported revenue increase of 33% in dollar terms or 38% in RMB terms for the quarter. Student enrollment grew approximately 55% year over year for the quarter.

Our POP Kids program delivered outstanding results with revenue up about 38% in dollar terms or 44% in RMB terms for the quarter. Enrollment was up about 70% for the quarter. The overseas test drive business recorded a revenue increase of 5% in dollar terms or 10% in RMB terms for the quarter. Our consulting business recorded revenue growth of about 23% in dollar terms or 28% in RMB terms year over year for the quarter. Finally, VIP personalized classes business recorded revenue growth of about 19 year over year in dollar terms or 24% in RMB terms year over year for the quarter.

Next, I'll provide some updates on the progress we're making with our optimized market strategy. In terms of offline expansion, as mentioned earlier, this quarter we added a net of seven learning centers in existing cities. Altogether, they increased the total square meters of the classroom area by approximately 24% year over year and 3% quarter over quarter by the end of this quarter. Our dual teacher model has been proven successful. It has been introduced into the POP Kids program in 46 existing cities and the UCAM program in 30 existing cities and for both programs in seven new cities, further deepening our market penetration in both markets we have tapped into.

The model also supported further improvement in our customer retention and scalability of the new model. With these proven results in mind, we will continue this strategy in the coming quarters. On the digital technology front, we invested $30,000,000 in the first quarter to improve and maintain our online merge offline standardized classroom teaching system. Most of our investments were recorded to enter G and A expenses. In particular, we would like to highlight the implementation of our digital interactive courseware for POP Kids program in some major cities.

The digitally enabled courseware strengthens and standardized our teaching and learning quality, boosted classroom efficiency, and delivers improved student experience and satisfaction, which also means higher stickiness of our enrollment student customers. Furthermore, we also made stable progress in the pure online corem.com business line and other supplementary online educational products, which is experiencing growing market demand. More resources are invested into the executing new initiatives in online K-twelve after school tutoring business in fiscal year twenty twenty. The investment includes content development, teachers recruiting and training, sales and marketing, R and D, and other necessary cost expenses to drive the growth of new pure online programs. With these programs, we're able to reach more students in low tier cities in an interactive and scalable manner.

We believe this will help coollearn.com to gain new market share in our online education area and drive up top line growth. Now let me walk you through the other key financial details for the first quarter. Operating cost expenses for the quarter were $825,600,000 representing a 17.9% increase year over year. Non GAAP operating costs and expenses for the quarter, which excludes share based compensation expenses, were $814,600,000 representing an 18.7 increase year over year. Cost of revenue increased by 19.8% year over year to $440,200,000 primarily due to increase in teachers' compensation for more teaching hours and rental cost for the increased number of schools and learning centers in operation.

Selling and marketing expenses increased by only 1.9% year over year to $101,200,000 General and administrative expenses for the quarter increased by 21.6% year over year to $284,200,000 Non GAAP G and A expenses, which exclude share based compensation expenses, were $273,500,000 representing a 24.5% increase year over year. Total share based compensation expenses, which were allocated to related operating costs and expenses, decreased by 20.8% to $11,000,000 in the 2020. Operating income was $246,200,000 representing a 52.6% increase year over year. Non GAAP income from operations for the quarter was $257,200,000 representing a 46.8% increase year over year. Operating margin for the quarter was 23% compared to 18.8% in the same period of the prior fiscal year.

Non GAAP operating margin, which excludes the share based compensation expenses for the quarter, was 24% compared to 20.4% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $209,000,000 representing a 69.6% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $1.32 and $1.31 respectively. Non GAAP net income attributable to New York Oriental for the quarter was $230,200,000 representing a 25% increase from the same period of prior fiscal year. Non GAAP basic and diluted earnings per ADS attributable to New Oriental were $1.45 and $1.44 respectively.

Net operating cash flow for the 2020 was approximately $364,600,000 Capital expenditures for the quarter were $64,300,000 which were primarily attributable to opening of 43 facilities and renovations at the existing learning centers. Turning to the balance sheet. As of 08/31/2019, New Oriental had cash and cash equivalents of $973,200,000. In addition, the company had $351,600,000 in term deposit and $2,010,700,000 in short term investments as of August 3139. Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as per instructions delivered, at the end of the 2020 was $1,330,700,000 an increase of 16% as compared to $1,146,700,000 at the end of the 2019.

The lower than euro increase was due to the change of the tuition fee collection schedule for K-twelve business in complying with the latest regulatory requirements. This change was implemented during the 2019. Before moving on to our priority for the second quarter, I would like to take a moment to reiterate our broader goals and our optimized market strategy. First, we will continue to focus on expansion of our offline business. We aim to add around 20% of capacity in fiscal year twenty twenty, which includes new learning centers and growing Class one area for of some existing learning centers for K to 12 business mainly.

In addition, we will continue to roll out our dual teacher model schools to a number of new low tier cities in certain provinces for the whole year. Second, we will continue to leverage our investments in the digital technologies front, extending new features of our OMO system to more offline language training and test prep offerings, especially for our K-twelve tutoring our overseas test prep key business. We will continue to make such investments, and we believe that the total spending in absolute dollar terms in fiscal year twenty twenty will increase moderately compared with the previous fiscal year. Furthermore, we will also continue to invest in and execute new initiatives, including product content development, teachers recruiting and training, R and D as well as sales marketing, our pure online K-twelve tutoring business on our koolearn.com platform. At this point, I would like to reiterate that we believe the strong growth in our offline business will offset the online investment expenses on our bottom line.

Third, our top priority will remain as the focus on optimizing the utilization of facilities and controlling costs and expenses across the organization to drive continued margin expansion and increase the operational efficiencies. The new facilities built in fiscal year twenty eighteen and 2019 are being ramped up at a more efficient level. We expect our non GAAP operating margin of the offline language training and test prep to continue to expand in the rest of the fiscal year twenty twenty. With a strong operating leverage consistently improved utilization rate, our robust offline business growth will be able to cover the margin pressure from our online investments. On the whole, we expect our overall non GAAP operating margin to improve year over year in fiscal year twenty twenty compared to the year over year decline last two fiscal years, reflecting a healthy growth trend.

Finally, the recent RMB depreciation against the U. S. Dollars will also impact our earnings in dollar terms for the '20 and same quarter of the 2020. 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 the 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 2020 to be in the range of $753,600,000 to $771,000,000 representing a year over year growth in the range of 26% to 29% in dollar terms.

The projected growth rate of revenue in our functional currency RMB is expected to be in the range of 30% to 33% for the 2020. The exchange rate used to calculate expected revenue for the 2020 is 7.11, while historical exchange rate used to calculate revenues for the 2019 was 6.9. 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 with Sisi. Operator, please open the call for this.

Speaker 0

If you wish to ask a question, please press star one on your telephone now, and please wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Mark Li from Citi. Please ask your question.

Speaker 3

Hi management. Congratulations for the very strong results. My question is, think the non GAAP operating margin up three sixty bps is a very good surprise. Do you have any analysis for the breakdown of these bids? Because it's quite a bit higher than the previous guidance.

Thanks.

Speaker 2

Okay. Yeah. The our non GAAP operating margin rose by three sixty basis points year over year in this quarter. I think it is much better than we expected three months ago. And I think the our efforts to keep a healthy balance between the capacity expansion and the operating efficiency have paid off in this quarter.

And I think there were three reasons. The first one is you have seen this strong utilization rate in this quarter because our expansion plan our expansion capacity this quarter is only 3% quarter over quarter. But we got in our midterm, we got the 29.7% revenue growth. And number two is we have the cost control within the company. And number three, the last one is we have the one off summer promotion drive of course, because we raised the price from 200 per course on average last year to RMB400 this year.

So it's helped the margin expansion. And I think from the one off, the summer promotion positive impact will be somewhere around 100 basis points. And so all the others only comes from the operating leverage and high utilization rates. And keep going forward, I think we within the rest of this fiscal year, we're confident that we will have the margin expansion in the rest of the year because as I guided the in the last earnings call, our expansion plan this year is somewhere around 20%. But our top line growth for the whole year will be 30% year over year growth.

So we believe we'll have more leverage on the rental side and the SG and A side as well. Thanks, Mark.

Speaker 3

Thanks. So may I understand if the first reason is bigger than the second and bigger than the third? Is it in this sequence for the help?

Speaker 2

Yes. Yes. So, yeah, as I said, the the major or the main, the margin driver comes from the the better utilization rates and the operational efficiency. Okay.

Speaker 3

Okay. Thank you.

Speaker 2

Thanks, Mark.

Speaker 0

Your next question comes from the line of Yujong Gao from CICC. Please ask your question.

Speaker 4

Hey, Steven and Sisi. Thanks for the opportunity. Quick question on your k to 12 segment. So for the whole year, could you have some color on your margin guidance? And basically, on your offline and online, how is your offline contributing margin expansion?

Well, how will the online driving margin? Maybe if you can quantify this a little bit, that'll be a really help. Thanks.

Speaker 2

Okay. As I got it, you know, you know, this quarter, we we we got a very good results of the margin expansion, three sixty basis points margin expansion this quarter. For the whole year, yes, we do believe we have the margin expansion in the rest of the year. And yes, most of the margin expansion comes from the offline business, especially for the K-twelve business. And yes, I think the online part of the online site is still a drag.

But I think the drag will be offset by the offline business margin expansion. I don't have the detailed numbers because we just have the one quarter path. But for the whole year, as a whole, the company as a whole, the whole margin will be extended in the fiscal year 2020. Okay, thanks.

Speaker 0

Your next question comes from the line of of New Street Research. Please ask your question.

Speaker 5

Hey, good evening everyone. Thanks for taking my question. Steven, think you mentioned on the prepared remarks that on a teaching hour basis that pricing was up 5% if I heard that correctly. I guess for the rest of the year, how should we expect that? Should we with the utilization continue to ramp and demand environment being strong, should we see that number accelerate throughout the year?

Thanks.

Speaker 2

Yes. The price question first. I think on hourly rate basis, overall, the price for this quarter was increased by 5% in RMB terms. And so within that 7% of the U Can business, the price increased 9% of the top case percent price increase. And going forward, I think we don't want to change our price strategy.

So in the rest of this fiscal year, the price increase for the whole business overall will be 5% to 10% in RMB terms year over year. And yes, we have seen more leverage operating leverage for the first quarter. And we do believe you will see more leverage in the rest of the year. And yes, as I get my answer to the first question, we do believe we'll see more leverage in the rest of the year. And but yes, I think that I won't give the detailed guidance for the margins for Q2 and the rest of the year.

But we believe we'll have the margin expansion, the upside. Your

Speaker 0

next question comes from the line of Sheng Chang from Morgan Stanley. Please ask your question.

Speaker 6

Thank you for taking my question. I want to have more color of your margin guidance or about the operating expense. I think, Stephen, you mentioned that in first quarter, there were more spending on the team and the products. So the G and A cost is a bit similar while the sales and marketing is lower. So if we look ahead, say in coming in the coming winter and the next summer season, do you expect more spending on the sales marketing than the coolant product is more ready?

And so in this case so what's your guidance or outlook of the sales marketing spending in the second half of this year? Thank you.

Speaker 2

Yes. This quarter, our selling and marketing expenses increased only by 1% in dollar terms year over year. And this is our strategy as our original plan. Within the core, I think we continue to invest more resources or money on the product and teachers recruitment and training and content development as well as good marketing. But we will spend a reasonable marketing expenses within Cooler and platform in a reasonable way.

And we don't want to use the burning money way to acquire students as we did in the offline business. And also for on the other hand, for our offline business, I think if I'm not sure if remember it clearly, last quarter, our selling and marketing expenses didn't increase a lot. So I do believe we will have more leverage on the selling and marketing side going forward. And yeah, that's my answer. And and also, we if I think I think for the GNA and cost of that, like the rentals, we do have the more leverage going forward, yeah, as we did in the selling and marketing side.

Speaker 6

Thank you.

Speaker 2

Thanks, Kungsheng.

Speaker 0

Your next question comes from the line of Binnie Wong from HSBC. Please ask your question.

Speaker 7

Hi, good afternoon, management. Thank you for taking my questions. So my question is actually on the growth in the top tier cities. So we see that there's also intensive competition, right? So how do you see that the trend in terms of your market share gains in those top tier cities?

And also if we look at the next quarter growth outlook, right, excluding the FX impact, it's actually still quite strong. So can you help us to understand how much of that is driven by your enrollment growth? And then how do you see that the trend going forward? And also give us kind of like your update in terms of your vision on your online education strategy as well. Thank you.

Speaker 2

Okay. I can share with you one number. The top 10 cities in last trailing twelve months, the revenue growth for the top 10 cities was 36% in RMB terms year over year. And I think we are seeing the good trend. Actually, we're seeing the revenue acceleration almost all the cities.

So go back to your question about the guidance. And for the Q2, we give the guidance of the top line growth by 30% to 33% in RMB terms year over year growth. And within it, most of the growth will come from the K-twelve business. For U Can, high school, I think the growth in the second quarter will be 45% plus year over year in the second quarter. And for the top kids, the growth will be somewhere around 50%, percent year over year.

And overseas test prep business growth will be somewhere around 10%. So if calculate the total the overall growth will be somewhere around 33%. Okay? And what?

Speaker 1

The enrollment is the key driver for the revenue growth.

Speaker 2

Yes. The the the price increase will be somewhere between 5% to 10%. Most of the growth comes from the will come from the the enrollment growth. And I don't believe, the retention rate of the after the summer promotion was 59% from the summer promotion and it's 5% higher than the number of last year. So we do believe most of most of these students will stay with us for at least one year or hopefully three to six years.

So it will help the enrollment growth in rest of the year. Okay? Thank you.

Speaker 7

Okay. Thank you so much. Very clear.

Speaker 2

Thank you.

Speaker 0

Your next question comes from the line of Alex Liu of China. Please ask your question.

Speaker 4

Hi. Thanks, Steven. Thanks for taking my questions. Very strong quarter. Two quick questions.

First, I think you guided around 20% full year fiscal year capacity growth. Well, I think this quarter, you're doing 24% year on year growth. Does that imply some kind of a deceleration, into the second half this fiscal year? And second, I think we just passed through a very fierce, super competition summer for online. I'm just wondering whether this aggressive promotions has impacted New Oriental's offline business in in any way.

Thank you.

Speaker 2

Okay. The capacity question. Yes. We have the seasonality of the expansion quarter by quarter. If we go back to the last year, the extension, we set up most of the learning centers in the second half of the fiscal year.

So this year, we will use the same strategy. So we it's back loaded within the same fiscal year. And the reason that we open more learning centers in the second half of the year is because we prepare for the coming new summer. And so we want to change the guidance of the expansion plan as the 20% expansion plan for the whole year, back loaded. And, yes, online computer is a great question.

I think, firstly, the market is so huge. Even though we are one of the market leader, our offline business, the market share is only 2%, somewhere around 2%. So the market is huge enough. And so far, we haven't seen any negative impact from the recent aggressive online education competition. And in fact, we are in the revenue acceleration runway in the offline business side.

Even though we have seen some players to spend a lot on the online education, on the marketing, selling and marketing expenses. But the key is to we after we raised the price, we doubled the price of the summer promotion, we still got the 820,000 enrollments, which is 8% of the increase compared to last year. And the retention rate is higher than we expected, 59% is a good result. But our strategy is we care more, we care both offline business and online business growth. And so that means we will have two growth engines, offline and online.

So the online, as I said, we are still in process of the investment period to spend more money and time on the R and D and product development and the teachers' training or staff training. And so the online is part of the New Oriental's future. But we don't want to but, you know, on the on the other hand, the offline business business, I think we're doing good for the offline business. K? So we have two growth engines in the future.

K? Thank you.

Speaker 4

Okay. Thank you.

Speaker 0

Once again, in order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. Your next question comes from the line of Tian Hou from T. H. Capital.

Please ask your question.

Speaker 7

C. C, Steven, congratulations on a good quarter. So the question is related to your offline dual teacher model. So you know, if you do you know expand school by school will be somehow slower and but if you do the dual teacher and can actually accelerate it the growth. So I wonder in your future plans, how many the expansion will come from the dual teacher expansion And also dual teacher, how much it's contributed to the margin expansion?

So that's the question. Thank you.

Speaker 2

Hi, Tian. It's a great question for the dual teacher model. We have tested the dual teacher model in 46 existing cities for the POP Kids and 30 cities for the U Can business and in seven low tier cities for both POP Kids and U Can business. And we're happy to see the increased market penetration in the low tier in those markets in the low tier cities. So we plan to open 10 to 15 more new cities business with a dual teacher model, okay, in next twelve months And so the offline business so, theoretically, the margin of the dual teacher model should be higher than the offline business.

So going forward, throughout throughout the week, I think the the dual teacher model business will help the margin be extension for the whole company. Thank

Speaker 0

you. That's the question.

Speaker 2

Thanks, Jen.

Speaker 0

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

Speaker 8

Hi, Steven. This is thanks for taking my question. Steven, you just mentioned that in the second quarter, U. K. Is about to deliver 45% plus growth with POP Kids delivering 50%.

So actually, the growth rate is accelerating from the first quarter. So my understanding is that the better than expected retention rate from summer promotion might have something to do with the acceleration. Is my understanding correct?

Speaker 2

Yes. Because number one, we we had a very strong the retention rates from the after the summer promotion. This is number one reason. Number two is, you know, we have seen the the the student retention rate for the normal classes, both UCAM and POP Kids are are are driving up. So it testifies the the that New Oriental is providing better service and products to the customers, students' customers.

So the better the student retention rates and the higher retention rates from the summer promotion. And lastly, we opened more learning centers in Q1 and Q2. And also, we are ramping up the learning centers we set up in the last two years. So that means we will fill more students into the current learning centers. Okay?

It help us to to to get, like, the revenue acceleration in q two in the coming quarter. Okay?

Speaker 8

Thank you. May I please follow-up with the retention rate for normal class this quarter? And how is that comparing to the previous quarter?

Speaker 2

Okay. The the U Can middle school, high school business, the the retention rate in in this quarter is close to 80%. And POP Kids is close to 90%, the retention rate. So compared to last year, we got the 3% to 5% higher rate year over year. Thank you.

Speaker 1

Thank you very much.

Speaker 2

Thanks.

Speaker 0

Your next question comes from the line of Christine Cho of Goldman Sachs. Please ask your question.

Speaker 6

Thank you. Congratulations on Steven Cici. I just have one question. So it seems like even pretty mature cities like Beijing, it's off to a very good start this year. What are some key drivers behind this acceleration?

Thank you.

Speaker 2

I think, yeah, we yeah. As for the it's not only for Beijing school did very good results, but also for the also for the the other big cities. And I think, you know, since this is a long story. You know, we started to invest on the new products since three years, three, four years ago. And so this we start to bear fruit of these historical investments.

And also we used to renew the new revamped POP Kids program, the product. Compared to before, it's more interactive, more adaptive for the kids. So the kids and their parents love the new product than we expected. So it helped us to get a better student retention rate. And so, anyway, we do believe the the the the big cities, even with the high base number, we do believe the they can get a healthy growth in the future going forward.

K? Thank you, Christine.

Speaker 0

Your next question comes from the line of Felix Liu from UBS. Please ask your question.

Speaker 9

Hello, Steven. Congratulations on the strong quarter and thank you for taking my question. I think you mentioned that biggest reason for the margin expansion this quarter is the utilization improvement. So may I know what is the current utilization level and how much upside do we expect going forward? Thank you very much.

Speaker 1

Yes. This quarter, the overall utilization is 212% improvement compared with last year. So the key driver is U Can and POP Kids K-twelve business. So the learning centers are ramping up faster than before and utilization got improved.

Speaker 2

You. Going forward, I think we will see higher utilization rates in the rest of the year because you can I think it's a simple math? You can suggest that your guys compare the top line growth with the expansion plan. So that means we fill more students into the existing learning centers. This is the math.

Speaker 9

Great. Thank you very much.

Speaker 0

Next question comes from the line of Alex Shen from Credit Suisse. Please ask your question.

Speaker 2

Hi, management. Thank you for taking my questions. So I asked about if we exclude the impact from the regulation changes in tuition fee collection, what will be the student enrollment growth for U Can and Pop Kids? Thank you. For this quarter?

Speaker 1

Yes.

Speaker 2

I think the for the K-twelve business, if you take out the the impact of the regulation, I think the enrollment growth for for the for the u for the UK and POP Kids together will be somewhere around 3030% to 35%. This is the real enrollment growth. K? Pro form Thank a you. Okay.

Thanks. Your

Speaker 0

next question comes from the line of Tommy Wong from China Merchants. Please ask your question.

Speaker 3

Hi. Thank you. Thanks for taking my question. You mentioned a lot about the success in the retention rate improvement this year. Can you share with some of anecdotal maybe strategies or at the learning center level what kind of efforts did the teacher made or any kind of special programs that you know led to such a good result maybe just a little bit of anecdotal evidence?

Thank you.

Speaker 1

Yes. Actually for product side, we keep rolling out our onlineoffline merged standardized teaching system to the whole network. And also we invested money and also our teaching resources to refine the standardized product. For example, like POP Kids, right, this year from the summer we rolled out our new courseware to make the class more interactive. And also very, very important new feature of the new courseware is that our teachers can save a lot of time and the teaching quality can be improved because it's more and more standardized teaching process.

And also by interactive features, new features, students are more interested in the class and also the effectiveness and stickiness of the customer are also improved and is shown by the numbers in those cities are using the new product. So that's one new feature of the whole standardized system. And going forward, we'll keep investing in having more and more new features, new services, better services to our customers. So that's one key driver. And also like teachers, because their service quality also got improved, our training process for teachers are getting more and more standardized because the product is standardized.

So for example, like starting from last year, last summer, we train our U Can teachers using the new module rise new system to train our teachers, new teachers to help those teachers to improve the teaching quality in short period of time. And also the teaching overall teaching quality got improved a lot. So that's the benefit that we can get from the standardization of the teaching products.

Speaker 2

Think about that, we raised the price, we doubled the price of the summer promotion this year, then we still got the 8% enrollment growth. Yes. From the RMB200 per course to this year RMB400 per course. You know, the 400 is something, is some money. So I think the strategy for us is that it's better for us to identify who are the real customers and also we do believe we are providing better quality services and products to the customer students.

Speaker 0

Okay.

Speaker 3

Thank you and congrats on the strong results. Thank you. Thank you.

Speaker 2

Thank you very much.

Speaker 6

Thank you.

Speaker 0

We are now approaching the end of the conference call. I will now turn the call over to New Oriental CFO, Steven Yang, for his closing remarks.

Speaker 2

Thank you all again 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.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.