New Oriental Education & Technology Group - Earnings Call - Q1 2021
October 13, 2020
Transcript
Speaker 0
Good evening and thank you for standing by for New Oriental's FY twenty twenty one First Quarter Results Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, Today's there will be a question and answer conference call is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to your host for today's conference, Ms.
Cici Zhao.
Speaker 1
Hello, everyone, and welcome to New Oriental's first fiscal quarter twenty twenty one 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 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. Stephen Yang.
Please go ahead, Stephen.
Speaker 2
Thank you, Cici. Hello, everyone, and thank you for joining us on the call. Although the impact of the pandemic continues to raise hurdles for business across the globe, we are pleased to kick off the fiscal year with a set of encouraging financial results in the first quarter of this year that is in line with our expectation. While it's showing signs of the recovery in some of our business lines as domestic markets began its path to normalization, total net revenue was $986,400,000 representing an 8% decrease year over year, which is better than we guided in the previous quarter. Net revenues from education programs and services for the first quarter were $935,600,000 representing a 6.1% decrease year over year.
Our U Can middle schoolhigh school all subjects after school tutoring business showed a positive light with a growth of approximately 9%, while our POP Kids program reported a growth of approximately 4%. Our industry leading OMO system has been vital in the previous quarters to ensure our service runs smoothly, and it has once again proved to be instrumental in this quarter, as it provides our operation with strong flexibility to help the vast majority of our students migrate from OMO online classes back to offline learning centers, which have gradually resumed service amid the easing of the pandemic restriction measures. Encouraged by its effectiveness, we have put more focus on executing our OMO strategy, including piloting the OMO online courses in around 20 cities and attract a promising number of new customers in the summer quarter. Total student enrollments in dynamic subjects tutoring and test drive courses in the 2021 increased by about 13.5% year over year to approximately 2,961,100. The lower than normal increase in the number of student enrollments is primarily due to the delayed enrollment for summer and autumn classes and shortening in the summer holiday in many major cities by one or two weeks this year, as well as the delayed resumption of the offline operation in cities such as Beijing due to the reemergence of the COVID-nineteen cases before the summer holiday.
A key highlight in this quarter is the highly successful summer promotion campaign. Despite the challenge of the shortened summer holiday, we're delighted to see the total promotion enrollment reached 1,079,000, a 31% increase year over year, accompanied by improved student retention year over year. In terms of pricing, per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 10% year over year in dollar terms. As for hourly blended ASP, which is GAAP revenue divided by the total teaching hours, decreased by approximately 2% year over year. To provide a breakdown of hourly blended ASP, please note that U classes increased by 2%, U Can VIP courses increased by 3%, POP Kids decreased by 1%, and overseas test prep programs increased by 7% all year over year in dollar terms.
Comparing with our normal price increase of 5% to 8%, this quarter's hourly blended ASP decrease was mainly because of, firstly, a bigger decline of overseas test prep program, which already blends the ASP, was much higher than other programs secondly, the piloting of promotional OMO online courses in some major cities with discounted price in the summer And thirdly, a bigger portion of the enrollments are promotional courses to encourage students to register for more subjects. Now, I would like to spend some time to talk about the quarter performance across our individual business line in detail. As the pandemic gradually faced in China, encouraging signs of recovery have started to emerge across our business lines with significant jump in student enrollments. Our key revenue driver, K-twelve after school tutoring business, achieved year over year revenue growth of approximately 8% in dollar terms. Breaking it down, the U K Middle School high school all subjects after school tutoring business recorded a revenue increase of approximately 9% in dollar terms for the quarter.
So enrollments grew 23% year over year for the quarter. Our POP Kids program recorded a revenue increase of about 3.5% in dollar terms for the quarter. Enrollment increased by 17% for the quarter. Our related business, including test prep and consulting and study tour business, continued to face the difficult challenges due to the cancellation of the overseas exams and restrictions on travel. While the unpredictability of the pandemic situation in different parts of the world has raised students' hesitance to study abroad.
The overseas test labs business recorded a revenue decrease of about 51% in dollar terms for the quarter, while the overseas consulting and overseas study tour business recorded revenue decrease of about 31% in dollar terms year over year for the quarter. And finally, VIP personalized core class business recorded a cash revenue decline of about 10% in dollar terms year over year for the quarter. We're pleased to see that our summer promotion strategy delivered outstanding results. We offered low priced experiential courses for multiple subjects in a total of about 70 cities, targeting Grade seven secondary school and Grade three primary school student customers before they start their new school year. The promotion price is similar with that of last year at around RMB400.
It's very encouraging that even we launched the summer promotion almost one month later than last year because of the huge challenge from the pandemic on our daily operation, the summer promotion remains very well received by the market. The complete promotion enrollments we brought in this year recorded a 31% increase year over year, reaching 1,079,000 enrollments. The encouraging results indicated the opportunity of the market consolidation as the COVID-nineteen pandemic fades and certain players may lack financial and digital capabilities to sustain their operations. It was well proven that under this strategy, we are able to better identify and retain customers with higher loyalty. Please note that these promotion enrollments are not recorded in our current reported enrollment.
Going into the autumn semester, we have retained about 60% of the students following the promotion, which will boost revenue and margin recovery throughout the whole fiscal year 2021. And we do not foresee any negative impact of the promotions on operating margin throughout the whole fiscal year. As these students move to the higher grades, the continued improvement in retention rates and customer loyalty will drive revenue growth in the next three to six years. We continue to be guided by our Optimize the Market strategy in this quarter and carried out capacity expansion in the cities where we see potential for rapid growth and strong profitability. This quarter, we opened seven new offline training schools in the city of Changzhou, Huaia, Taizhou, Yixin, Wuhu and Jiaxing.
Altogether, this increased the total square meter of classroom area by approximately 23% year over year, 1% quarter over quarter by the end of this quarter. This rise increase is in line with our expectation as we intend to achieve a more modest growth in capacity in the first quarter of the year and ramp up our expansion efforts in the latter part of the year to prepare us for recruiting more new student enrollments at the start of the following academic year. The expansion in our offline education network has also made sure that we are fully prepared for when pandemic is over, and our service can resume with a strong presence across different Chinese cities. We rolled out our dual teacher class model for POP Kids program in 46 existing cities, for U Can program in 28 existing cities, and for both pockets of U Can K-twelve business in 10 new cities by end of this quarter. We're happy to see increased market penetration in those markets we have tapped into.
We also saw the improved customer retention and scalability of this new model. With these proven results, we will continue this strategy in the rest of the year. As the outbreak of COVID has highlighted the importance and demand of online education, we have placed more resources in this area and invested $39,000,000 in the quarter to improve and maintain our OMO integrated education ecosystem and as the outbreak of COVID-nineteen has highlighted the importance and demand of online education. Apart from the OMO infrastructure, we have allocated part of the resources in advanced training programs for our teachers to enhance their onlineoffline integrated teaching skills in response to the growing demand. At the same time, we continue to upgrade our technology platforms and will broaden the usage of online tools and content in our OMO system for all business lines throughout the whole network, as well as further develop the best teaching content and courseware to cater to onlineoffline integrated education method.
We're glad to see that industry leading OMO ecosystem has not only successfully managed to cushion most of the impact on our service and operation caused by the pandemic, but we also see the customer retention rates from spring to summer semester and from the summer to autumn semester were trending higher than the same period last year, which further demonstrated our customer satisfaction and effectiveness of our online courses throughout the OMO system. We believe those OMO initiatives will effectively boost enrollment and speed up the recovery of business in the rest of the year. To capture the huge market opportunity in the online education space, we continue investing more resources in executing new initiatives in our online K-twelve after school tutoring business fiscal year 2021. During the COVID-nineteen pandemic, Koolearn did large scale market promotion by offering three large sized online live broadcasting classes to the public and attracted several times more traffic than normal time. To capture this new market opportunity, Koolearn also added a meaningful number of customer service representatives and marketing staff to support the new initiatives in K-twelve tutoring.
These moves have consequently raised our spending on marketing front, but we believe these are necessary and understandable measures as we find ourselves in a usual pandemic situation. Our Dongfangyu for small sized class currently enjoys a significant first mover advantage and stands to benefit from the increasing demand in low tier cities. Cooler and large sized K-twelve courses are able to offer the best in class learning experience through the investments in upgrading the app and online platforms, introducing new education technologies and adding more interactive features on online courses. Cooler also continued to establish teaching training centers in other locations to attract more qualified teachers and tutors to provide systematic training programs. At the same time, Koolearn has dedicated a significant amount of investment to marketing and service enhancements in the past two quarters to attract customers during the peak of the pandemic.
But we expect spending to be normalized in the coming quarters as we will be cautious in identifying high ROI marketing channels and evaluate the unit's economics in real time, which will, in return, keep the average user acquisition cost at a relatively low level. We believe as a result of the improvement of our official teams as well as positive world- mouth promotion and brand loyalty, Hoolearn will continue to quickly acquire new users while enhancing the student retention rate. Now let me walk you through the other key financial details of the quarter. Operating costs and expenses for the quarter were $836,100,000 representing a 1.3% increase year over year. Non GAAP operating cost expenses for the quarter, which exclude share based compensation expenses, were $820,200,000 representing a 0.7% increase year over year.
Cost of revenue increased by 5.6% year over year to $464,900,000 primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation. Selling and marketing expenses increased by 15.5% year over year to $116,900,000 primarily due to the addition of number of customer service representatives and marketing staff with the aim of capturing the new market opportunity, especially for new initiatives in K-twelve tutoring our pure online education platform, coollearn.com. General and administrative expenses for the quarter decreased by 10.5% year over year to $254,300,000 Non GAAP G and A expenses, which exclude share based compensation expenses, were $242,600,000 representing an 11.3% decrease year over year. Total share based compensation expenses, which were allocated to related operating costs and expenses, increased by 43.7% to $15,800,000 in the 2021. Operating income was $150,300,000 representing a 38.9% decrease year over year.
Non GAAP income from operations for the quarter was $166,100,000 representing a 35.4% decrease year over year. Operating margin for the quarter was 15.2% compared to 23% in the same period of prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter, was 16.8% compared to 24% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $174,700,000 representing a 16.4% decrease from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were 1.1 and $1.09 respectively.
Non GAAP net income attributable to New Oriental for the quarter was $184,500,000 representing a 19.8% decrease from the same period of the prior fiscal year. Non GAAP basic and diluted earnings per ADS attributable to New Oriental were $1.16 and $1.15 Net operating cash flow for the 2021 was approximately $391,600,000 Capital expenditures for the quarter were $95,200,000 which were primarily attributable to the opening of 42 facilities and renovations at existing learning centers. Turning to the balance sheet. As of 08/31/2020, New Oriental had cash and cash equivalents of $1,047,600,000 as compared to $915,100,000 as of 05/31/2020. In addition, the company had $291,800,000 in term deposits, 2,778,400,000.0 in short term investments.
New Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions delivered at the end of the 2021, was $1,563,100,000 an increase of 17.5% as compared to $1,330,700,000 at the end of the 2020. Looking ahead into the next quarter and the rest of the fiscal year twenty twenty one, despite the continued challenge from the COVID-nineteen pandemic, are expected to remain. We are more clear about the recovery trends of the company's near term financial performance and the market opportunity over the long run. Our strategic focus and investment approach this year aim at improving product quality, increasing teacher salaries and enhancing our industry leading system, which fully reflects our ethos of focusing on the essence of education. In view of market competition and opportunities to take advantage of post COVID market consolidation, we firmly maintain a stable and balanced investment strategy that would improve the quality of our education service with aim to achieve sustainable and long term growth as opposed to unhealthy short term growth that often requires excessive investments and higher costs to acquire customers.
As such, we will continue to focus on the following key areas. First, we will continue to expand our offline business. We aim to add around 20% to 25% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-twelve business in this fiscal year. We believe our class expansion will prepare us to further take market share from the other players post COVID, as we believe some small players without strong financial position and online class capability may not be able to sustain their business during the period. We expect the industry will undergo a wave of market consolidation upon the pandemic phase.
The fact that we are a major player with a strong financial capability and fresh offline facility enable us to further strengthen the market leading position and penetration. Second, we will continue to leverage our investments into digital technologies and introduce our OMO system in more offline language training and test offerings, especially for the K-twelve business and overseas test prep key business. The usage of the online tools and content in our OMO system for all business lines throughout the whole network will be enhanced. To uplift the whole OMO teaching experience, we'll place more efforts in developing the best teaching content and courseware, and also developing more advanced training programs to our teachers. With all the above mentioned infrastructure in place, we'll continue to pilot our OMO online initiatives in some major cities with high demand and higher operational efficiency.
We believe that our OMO initiatives will be one of our growth engines to increase our customer acquisition post COVID and enabling us to capture the market consolidation opportunity. This revamped new business model will also accelerate our margin recovery in the rest of the year and further expand our long term margin target. Here, I have to highlight that all of these OMO products are supported by our offline classes that supplement each other in a hybrid format. All the teaching content, coursework, materials, as well as our teachers and technologies are developed and are regionally from our existing offline centers and resources. This integrated system continues to broaden our customer base as it enables us to reach students in satellite cities as well as the cities where we have fewer learning centers to cater all our customers.
Furthermore, we will continue to invest in and implement new initiatives, including product content development, teachers recruiting and training, R and D, as well as the sales and marketing in pure K-twelve after school tutoring business on our koolearn.com platform. Third, our top priority will remain as the focus on controlling costs and reducing expenditures across the company to minimize the negative impact from pandemic on bottom line. We believe we will resume the expansion of the overall non GAAP operating margin this year over year as COVID-nineteen subsides gradually. Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong. Although we are facing various short term negative impacts from the pandemic and we have been increasing our investment in different strategies.
We remain optimistic of the brighter prospects of our business and believe our investments now bring us fruitful returns in the long run. As pandemic situation and resolution measures begin to ease in China, the timely reopening of all schools and our offline learning centers in September, the start of the new fiscal year, is seemingly to be a massive boost for our business. We believe this will enable our recovery to pick up the momentum, which will likely to be reflected in the results in the coming quarters. We're certain that with New Oriental's leading brands, superior education products and system and the best teacher resources, we have the ability to further into market share in China's huge after school tutoring market and deliver long term value for our shareholders. We're looking at the near term and our expectations for the next quarter.
They expect total revenue to be in the range of $863,700,000 to $887,300,000 representing year over year increase in the range of 10% to 13%. To provide the breakdown of the expected top line growth for key business lines, K-twelve business is expected to grow around 25%. Overseas test drive program is expected to decline 30% to 35%, and overseas study consulting and study tour business is expected to decline 0% to five percent, all year over year in dollar terms. We also expect the overseas related businesses, including overseas test labs and consulting services, will continue to decline due to the pandemic around the globe caused by the cancellation of overseas exams, suspension of the overseas schools and restriction on travel. The negative impact on this overseas related business will affect the entire education industry in China, not only for New Oriental, and may last over the coming one or two quarters.
That said, in contrast, China's effective control of the pandemic situation has shed a more positive light on our business domestically. We're pleased to see that we gradually resume our offline operation in all cities that we are in by mid September and the vast majority of the students in these cities have successfully migrated back to our learning centers from our OMO online classes. To conclude, we are now taking on all kinds of operational actions to boost the enrollments and classroom utilization for the autumn semester and speed up the recovery of the business after the resumption of the schools and learning centers. We're confident that the demand for after school tutoring will gradually pick up and trend toward normalized level in the rest of this fiscal year. I must mention that these expectations reflect New Oriental's current and preliminary view, which is subject to change.
At this point, I will take your questions. Operator, please open the call for this.
Speaker 0
Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. Your first question comes from the line of Tian Hou from TH Capital. Please go ahead.
Speaker 3
Good evening, Stephen, Cici. Congratulations on a good quarter and the guidance in those kind of
Speaker 4
a challenging time. So the question is related
Speaker 3
to the margin. On the gross margin, on a year on year basis, it was down pretty significant. So I wonder how much is cost by the overseas business? And going forward, what's the gross margin is going to trend? Thank you.
Speaker 2
Hi, Tian. Yes, the gross margin was down by roughly 6% year over year this quarter. I think the first reason is that the revenue was down by 8% in this quarter year over year. And in this quarter, we still raised the salary of the teachers. And because we think the teachers' quality is the core competence of the education business, so as we did in the last several years, we raised the teacher salary.
And also, we acquired the top teachers from the other small players during the pandemic. And the rentals, I think during the COVID-nineteen period, we still expanded our capacity in the areas where in the cities that we feel the comfort driving potential growth in the future. And this quarter, the year over year expansion was 23 at the quarter end. So, it's driving the gross margin down. But I think just one time, because as I said, our business is in the process of the recovery, and we have already given the guidance of the Q2.
And within it, in the Q2 guidance, the K-twelve business will be increased by 25%. So I do believe the GP margin recovery will be happened in the second quarter.
Speaker 0
You. Our next question comes from Felix Liu from UBS. Please ask your question.
Speaker 5
Good evening, management, and congratulations on a good result given the challenging environment. My question is on utilization. I understand that a lot of the offline classes have resumed in most of the cities. So, could you give us some color on what the utilization is like currently? And how is the trajectory going forward?
Thank you.
Speaker 2
Felix. It's a little bit hard for us to disclose the utilization rate because we're still in the time of the pandemic. For example, in Beijing school, our Beijing school reopened all the learning centers in mid September. That means we lost almost ten to fifteen days in September. And during the whole summer, I think some of our learning centers were not open.
So, it's really hard for us to disclose the utilization rates now. And I think we will disclose the utilization rates I think, Q2 or Q3. But we do believe the utilization rates will get higher and higher after the pandemic is over, because typically, our revenue growth is higher than the expansion plan. So, I think that means we do have leverage on the learning center utilization. So, this is the near and long term trend, Felix.
Speaker 0
Thank you. Our next question comes from Gene Yoon from New Street Research. Please go ahead.
Speaker 6
Hi, good evening. Just wanted to talk about overseas test prep. Your guidance kind of suggests obviously the bottom is in, in terms of slight improvement from last year's last quarter's numbers. Can you just kind of talk about if that's really the case or if we're seeing a kind of a seasonal head fake? And then and on the other the second question I have is, I think we're seeing a massive testing in Qingdao of approximately like 9,000,000 people or something like that, I think, just hit the press.
Just wanted to see how big that revenue from that city is in case there is a second wave in that particular city?
Speaker 2
Hi, Jin. The overseas prep, yes, the revenue decline of this quarter to Q1 was 51%, but we have already given the guidance for the Q2. The overseas test prep will be down by somewhere around 35%. So, the things turn to be better in Q2. And because we have seen some the TOEFL or GRE test were reopened in China in different cities.
But anyway, I think overseas test drive business will be negatively, to some extent, to be negatively impacted by the COVID. But Q1 this quarter was the worst. And I do believe the overseas test drive business will be recovered step by step. So, is my answer for the question about the overseas test lab. And Chengdu, yes, we know what happened in Chengdu since last week.
And so far, we don't get any notice from the government of the shutdown of the schools. So that means our learning centers in Qingdao are still open now. But anyway, we will meet the requirements of the government. But, I think during the peak time of the COVID-nineteen times, I think we have the ability to move all the offline courses to online. We tested in fact for two rounds of the pandemic.
And so, I don't think it will negatively impact our revenue of Qingdao. Anyway, Qingdao is not the revenue contribution from Qingdao is very small.
Speaker 0
Thank you. Our next question comes from Mark Li from Citi. Please go ahead.
Speaker 7
Hi, Yi Sun and Su Su. Thank you for taking my question.
Speaker 2
I want to ask I'm sorry, I can't hear you very clearly.
Speaker 7
Hi, Stephen. It better now?
Speaker 2
Sorry. Hi, Mark. I can't hear you.
Speaker 7
Hi. Is the person now? Hello?
Speaker 2
I think the line has some problem. Try it again.
Speaker 0
Mark, can you come closer to mouthpiece, please?
Speaker 1
This is Roy, okay?
Speaker 7
Okay. I just want to ask how is our FY 'twenty one guidance? Could you share the latest guidance for the full year with us? And also our OP margin target, if we have any change in the timing to reach that? Thank you.
Speaker 2
Okay. Yeah. Actually, we have already given the guidance of the Q2 by 10% to 13%. Actually, the business is not fully recovered in Q2, the autumn quarter. Beijing school was reopened in mid September.
And we expect the revenue growth in the coming Q3 and Q4 will be better than Q2 because of the more recovery of our business and easy comparison of this year. You know, the COVID-nineteen started since last year Q3. So, we do believe our top line growth performance in Q3 and Q4 will be better than Q2. Margin guidance, yes, I think, actually Q2, the next quarter, the margin we believe the margin decline in Q2 will continue to narrow down compared to this quarter, the Q1. And we are confident that we will be able to deliver the continued margin expansion after the pandemic is over, especially in Q3 and Q4.
And we don't want to change our long term margin guidance. Mark, is it clear?
Speaker 0
Thank you. Our next question comes from Alex Chiu from Credit Suisse. Please ask your question.
Speaker 8
Hi, Stephen and Sister. Thank you for taking my questions. So my first question is about the breakdown of your next quarter K-twelve revenue guidance. So I think in the August, it's very unusual that POP Kids was a little bit slower than U Can business and what about the next quarter? And the second question is about the rollout of your OMO business model.
I think I read from the news report that you launched the pure online small class model in your Hangzhou School and we received very positive feedback from the province wide students. Would you please share more color on that and what's the time for the further rollout? Thank you.
Speaker 2
Your first question about the Alex, can you repeat your first question again?
Speaker 8
Sure, sure. So I noticed that in the August, the POPGI business was bit slower than U Can business. And what about the next quarter? We think the 25% growth, what about the difference between Pop Cheese and U Can?
Speaker 2
Yes. I think next quarter, Q2, I think the growth rate of the U Can business will be a little bit higher than the POP Kids business growth, because the U Can business is more mission critical. So, for the middle school, high school students, they tend to study more, especially after the COVID-nineteen. So, that's why the growth of the U Can business grows higher than the POP Kids business. And yes, the OMO, it's a great question.
The OMO yes, actually, we started the OMO business three years ago for our Beijing school U Can business. But after the COVID-nineteen, we strengthened the development of our OMO because during COVID-nineteen, almost all of our students took the courses pure online. But after the COVID-nineteen, vast majority of our students go back to the offline learning centers. But, we choose some percentage of the online course for those part of the students. And also, for some new satellite cities, we started to roll out the new OMO model.
Yeah, I think Hangzhou is a very good case. And this is the first year that Hangzhou School did the OMO model. So, Hangzhou School acquired a lot of the new customers of the grade 10 students from the satellite seas around Hangzhou. So, I think it's a very good start. And we will roll out in more and more cities and provinces.
And one more thing is, the retention rate of the OMO model in Haojo school, I think after the summer, is over 50%. So, I think it was a very good sign for the study result of the OMO model. So, we will do it more and more in more cities. Cif, do want to add something?
Speaker 1
Yes. As Stephen emphasized earlier in the prepared remarks, we have piloted this OMO model in around 20 cities already just in the summer, only recovered resumed the offline operation from the summer. And now we have already testified this model in several cities, key cities. And the feedback is good. So that's continued to be the key strategy going forward.
Okay.
Speaker 0
Thank you. Our next question comes from Sheng Zhong from Morgan Stanley. Please go ahead.
Speaker 4
Hey, good evening. Thank you for taking my question. My question is on the OMO as well. So I want to understand more about how to operate this OMO model. So for the local school hat, what's key KPI for OMO?
And so if so how will he balance to open new learning centers or push more OMO into existing cities? Or is this because you have Qiu online as well, or this Qiu online will mainly focus on the surrounding cities? Thank you.
Speaker 2
Zhongsheng. I think it's a great question. We set up the KPI of the school head. I think the KPI of the school hat is divided by two parts. Number one is the traditional offline business, and second is the new OMO model.
So, two different KPI. And I think it's easy to understand the local schools have made the decision. For those areas that we are aware we do have the learning centers, I think we only do the OMO. And we still use the learning centers to acquire the new student enrollment. But for the areas where we don't have the learning centers or for the new cities, we don't have the learning centers there, the OMO will be first choice.
But as I said in the prepared remarks, all the content and courseware and teacher resources, even the teacher training system of the OMO model are originated from the local city. But, the head office will give the full support to the different areas and different cities. So, we will roll out the OMO model to more cities going forward. And I do believe the OMO model will contribute more and more revenue going forward. And, yes, one more thing to add.
We don't want to spend crazy money on marketing expenses for the OMO model. So, I think the student acquisition cost for the OMO model will be very low. I think it will be the same as our traditional offline business.
Speaker 0
Thank you. Our next question comes from the line of Lucy Yu from Bank of America Securities. Please ask your question.
Speaker 4
Thank you, Steven and Sisi. So I would like to ask a question on dual teacher. Steven, you just mentioned that when we penetrate into new cities, actually OMO will be the first choice. So how about dual teacher model? Are we still going to roll that out?
And as far as I can understand that previously before OMO rollout, we were using the dual teacher to penetrate into lower Tier three. So now there is what's our first choice in terms of business model in a new city. And secondly, mentioned that in dual teacher model, we have seen improving profitability and the retention. So, could you share more number on the profitability and retention of dual teacher business model? Thank you.
Speaker 2
Yes. I think that going forward, the OMO model will be the first choice we run the business in the new cities, especially for the low tier cities. But, we are doing well for the dual teacher model. We opened more and more the new cities of the POP Kids and U Can program. But, going forward, we will focus more on the model that the teachers in the head office will cap the dual teacher model class to the low tier cities.
Typically, it's focused on the top students in the high tier and low tier cities. So, we have the two ways to run the business in the low tier cities, OMO and dual teacher model.
Speaker 0
Thank you. Our next question comes from Alex Liu from China Renaissance. Please go ahead.
Speaker 9
Thanks, Stephen for taking my questions. First on teacher compensation, how fast should we think about the teacher compensation growth going forward, especially some online players are rather aggressive in terms of teacher paying out? And second question is that regarding the strong summer enrollment growth, I was just wondering is there any specific reasons behind or any specific sort of observations in summer? Why we did so well this year and how much of the growth is coming from small player exiting the market? Thank you.
Speaker 2
Alex, I think the teacher's salary, yes, we think the teacher's quality is the core competence of the education business. So, raised the teacher salary by 8% to 9% every year. Even we faced the challenge during the period of the COVID, we still did the same thing. I don't think the teacher salary increase will drag the margin. On the contrary, paying the teacher more will bring us the high quality or high quality feedback from the customers, students and parents, and drive the utilization rate up and the revenue up.
So, I think we pay more the teachers will help the GP margin performance better near term and long term. So, I think this is our strategy for the teachers. And the second question is about the summer enrollment. I think in the spring semester, we met some problems on acquiring the new customers because of the COVID. We couldn't see the students and parents face to face.
But during the summer quarter, most of our learning centers were reopened. So, we can give the study advice to the parents and kids face to face. Actually, the competition environment, we know some small players disappeared from the market. So, I think it's a great opportunity for the big players like us to take more market share from the markets post COVID. And the numbers especially since the July, the cash revenue and the enrollment numbers were booming.
And so, that's why we gave the guidance of K-twelve business growth in second quarter will be somewhere around 25%. And I do believe the enrollment growth and the revenue growth in Q3 and Q4 will be even better. Thank you.
Speaker 0
Thank you. Our next question comes from D. S. Kim from JPMorgan. Please ask your question.
Speaker 10
Hello, sir. Hi, Sisi. Congrats on a good set of results and very good guidance. Actually, most of my questions have already been answered. So maybe I can just follow-up on OMO.
Can I double check when you say this new piloting OMO, are we referring to pure online localized curriculum classes like Peiyou online? And if so, can I check what's the size of each class ASP gap with the similar offline courses? And if there's any difference in offering, I. E, this OMO is more for the weekdays versus weekend or more for short term courses or is really just same as our offline offerings?
Speaker 2
We're doing the new OMO model by three ways. Number one, the large classes. That means the large classes. Is typically, And, majority of the classes are happening online. And I think the price of that part of the course, I think it's 20% to 30% lower than our normalized classes.
Secondly, the OMO small sized class is a hybrid class. It's offline and online integrated classes. The last one, number three, is some very short term courses. I think the typical purpose of those parts of the business is to acquire the new student enrollment as very short term courses. And we asked the famous teachers to record the courses.
And I think it's kind of the way to ask the marketing way. So, we have the three ways. Anyway, the OMO is still in the early stage. I think so far so good, and we'll do more going forward. So, in next quarter or even the rest of the year of the earnings call, I will share more information with you.
Thank you.
Speaker 0
Thank you. Our next question comes from Tommy Wong from China Merchant Securities. Please go ahead.
Speaker 11
Hi, thank you management and Stephen. Congratulations on the strong results. Just a quick question, guess we don't have a lot of time left. Can you comment about the secondary listing in Hong Kong and potentially we need more funds to compete on the online space, all these other guys, TAL, ZhuoYipong, they're all burning a lot of money. And if we want to play in this game, we have to kind of participate.
So just wondering the secondary issue, bring some more money and play the game. Just wondering what's your thought on that? Thank you.
Speaker 2
We're not in a right position to make comments on secondary listing. The money, Yeah, as I said, our strategic focus and investment approach this year, not only this year, but also the mid and long term, is aimed at improving the product quality, increasing the teacher salary and enhancing our system. I think these are the essence of the education. So, we know there is a huge opportunity in the market, especially after COVID. We firmly maintained a stable and balanced investment strategy.
And we want to spend pretty good money on marketing and get healthy short term growth. So, this is our strategy, not only for now, but also for the near and long term. Thank you.
Speaker 0
Thank you. Our next question comes from Liping Chao from CICC. Please go ahead.
Speaker 4
Hi, Stephen. Thanks for taking my questions. My question is about the capacity expansion. How should we expect the impact of this pandemic on your capacity expansion plan, especially for your K-twelve business? And any chance we can see an accelerated expansion during the market consolidation?
Thank you.
Speaker 2
We aim to add around 20% to 25% new capacity in the fiscal year 'twenty one. And so, last year, we planned to open 20%. Finally, we opened 26%. And this year, we made the same plan. Anyway, I think this is a great opportunity for us to take more market share.
So, we will open 20% to 25% new capacity to acquire new student enrollments. And also, we do have the OMO model. And so, the two is the new capacity expansion and OMO will bring us to new customers in the whole fiscal year 'twenty one. And yes, our strategy of the expansion is very stabilized. You.
Speaker 0
Thank you. Our next question comes from Felix Liu from UBS. I
Speaker 5
just want to have a follow-up question on our deferred revenue balance. I noticed that the growth in deferred revenue is a lot stronger than our Q2 revenue guidance. May I know the reason behind? Thank you.
Speaker 2
Because of the pandemic phase in China, especially in the summer. And so, as I said, since the July, the revenue and enrollment growth was booming. And so, that's why we got the higher deferred revenue balance at this quarter end. And I think in the Q2, we're still in the process of the recovery. I think even in the Q3 and Q4, you will see higher enrollment and top line growth, especially for the K-twelve business, Because I do believe we are taking the market share from the small players and also and we do believe we will have even higher student retention rate going forward because we invest a lot since four or five years ago.
And we do believe we are providing one of the best products in the market. So, think the recovery will happen step by step and more back loaded Q3 and Q4. Thank you.
Speaker 0
Thank you. We are now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Mr. Stephen Yang, for his closing remarks.
Speaker 2
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.
Speaker 0
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.