New Oriental Education & Technology Group - Earnings Call - Q2 2015
January 20, 2015
Transcript
Speaker 0
Ladies and gentlemen, good evening and thank you for standing by for New Oriental's Second Fiscal Quarter twenty fifteen Earnings Conference Call. At this time, all participants are in 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 call over to your host for today's conference Ms. Cixi Chow, New Oriental's Investor Relations Director. Ms. Cao, please proceed.
Speaker 1
Thank you. Hello, and welcome to New Oriental's second fiscal quarter twenty fifteen 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 Louis Xie, New President and Chief Financial Officer and Stephen Yang, New Oriental's Vice President of Finance. After their prepared remarks, Lucas and Stephen will be available to answer your questions.
Before we continue, please note that the discussion today will contain forward looking statements made based on 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 Investor Relations website at investor.neworiental.org. I will now turn the call over to New New Oriental's President and CFO, Louis Xie.
Louis?
Speaker 2
Thank you, CeCe. Hello, everyone, and thanks for joining us today. I apologize if I sound Have a sore throat. So you have to excuse my voice.
During the second quarter, revenue increased 13.4% compared to 1.4% in the previous quarter. This increase and accelerated recovery was mainly driven by strong performance of student enrollments in academic subjects, tutoring and test preparation courses, which grew a total of 10% year over year to approximately 621,500. One of the key segments one of our key segments, UCAN business saw an increase of approximately 40% in student enrollments. This is encouraging and second quarter is traditionally slow for our business and we have moved past moving away from the uncertainty surrounding the Gaokao reform, which we discussed in detail last quarter. I would also like to add that beginning in the middle of the second quarter, the company decided to implement a new customer loyalty program to encourage repeat business and this has resulted in deferred revenue of about $4,100,000 which is expected to be recognized within two years without additional expenses associated with such revenues.
So if including this, our top line growth wouldn't have been as high as 15.4%. This is common practice in the education service market in China as it may as a way to retain customers. We consider this necessary for us to sustain customer loyalty and maintain competitiveness. Under the new program, when customers purchase academic subjects tutoring and test preparation courses, they will be able to earn points that are worth 2% to 5% of their total spending, which can be used to pay for the tuition fees over the next two years. For now, this is temporarily dampened quarterly revenue.
This revenue deferred are expected to be recognized when the points are redeemed and the associated classes are taken or when the points expired after two years without additional expenses associated with such revenues. So essentially that revenue will fall to the EBIT line 100% over the course of two years. Also in the second quarter, as scheduled, we started to roll out the revamped POP Kids program and our new offerings have reached 35 cities across our nationwide school network. Our efforts are starting to pay off as POP Kids recorded sequentially strong revenue performance and enrollment growth of more than 13%. For the 2015, we will continue with the rollout and expect to see a reverse of revenue decline.
To accommodate the late timing of Chinese New Year, which will fall on February 1935, we reduced class hours in some cities to fill in two terms of courses within the winter break, which hurt our ASPs. Overall growth of ASPs was 2.4% year over year. Breaking it down, ASP of U Can decreased by 9% year over year due to class length reductions of 20% to 30%. ASP of POP Kids program was flat as we shortened class length. On an hourly basis, blended ASPs grew between 510% depending on business line and location.
Now I'd like to walk you through our performance across individual business lines. Our K-twelve all subjects after school tutoring business continued to be our key revenue driver with recorded gross revenue growth of 16% year over year for the second fiscal quarter. U Can middle and high school all subjects after school tutoring business achieved a gross revenue increase of approximately 32% year over year. Student enrollments grew approximately 40% year over year. As mentioned before, the POP Kids program has previously been experiencing slower growth due to the rebound process.
As we started the nationwide rollout of the second quarter, we have been sequentially seeing improvement in revenue performance. Revenues declined slower to 4% compared to a decrease of 9% in the previous quarter. Enrollment growth was also strong reaching more percent. We expect the strong momentum of our K-twelve after school business will continue, which is important as we move toward peak season in the second half of the fiscal year. With the newly revamped POP Kids program, we are confident that the K-twelve after school tutoring business will continue to lead our growth in both revenues and enrollments.
As a market pioneer with such strong brand recognition and innovative capabilities, we are well positioned in the ever growing education services market in China. Our overseas test prep and consulting businesses together achieved revenue growth of more than 16% year over year for the second fiscal quarter. Finally, the VIP personalized classes business recorded a continued strong revenue growth of 18% year over year in the second fiscal quarter. Turning to the balance sheet. Niuinto's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionately as revenues as the instructions are delivered, at the end of the second fiscal quarter twenty fifteen was $440,700,000 an increase of 21.2% compared to 363,700,000.0 at the end of the 2014.
Now, I will turn the call over to Stephen Yang, our VP of Finance to discuss strategy execution progress and key financials. Stephen?
Speaker 3
Thank you, Louis. Hello, everyone. As mentioned previously, starting at the beginning of the fiscal year, we embarked on the new strategy of optimized markets transitioning to a focus on the competitive balance between top line and bottom line growth as well as meeting at the growing demand for online education service in China. We continue to be at the forefront of the mobile Internet online learning with a significant investments in R and D, ultra integration and largest digitalized content library for K2 college education course and tools in China. During the quarter, we made significant progress in the effort overall and we're quickly building out our onlineoffline integrated educational ecosystem.
Let me first talk a bit about the core of our business and our focus on further driving our offline initiatives. As we are focused again on aggressively increasing the top line, we continue to our effort to penetrate existing markets where we can optimize resources. In the second quarter, we opened 15 new schools and learning centers and closed 13, adding a net of two. In 2015, we added net of 10 learning centers. In December, we added net of eight learning centers.
We have added a net of 18 new learning centers year to date, bringing our total learning centers at end of the calendar year 2014 to 07/21, and expanded some existing learning centers, adding a total of about 2,000 square meters of classroom area. This was a result of careful selection of areas that are driving both revenue growth and margin expansion. Turning to the execution of our core strategy. Again, I can't emphasize enough the great potential we see in mobile internet online education market in China and more importantly, our hard work, investments in new phase of online audience business will further distance us from existing competitors who lack the financial resources and scale to make such investments feasible. We're making solid progress in all three levels of our online platform.
The first level, our online system is an ultra two way interactive education system across all of our business lines. The second level is our pure online learning platform koolearn.com, complementary online education products and the New Oriental brand. The third level of our ecosystem is for New Oriental to take knowledge shareholdings in online education companies that complement our online education offerings. Now let me get into the details of what we achieved on each level. As mentioned before, we invest about 25,000,000 to $30,000,000 in this fiscal year and for the second quarter.
We spent about $9,000,000 which were recognized as operating costs and expenses. Let's start with O2O two way interactive education system, which we rolled out and upgraded since the fourth quarter across all major product lines and extend new income traditional offline classroom teaching offerings to online education services. We launched the U Can Visible Progress teaching system into over 30 cities in September. This is an online platform that support after class self learning and we expect this to help us better retain customers. By the end of the third quarter, we target expansion to 50 cities.
As said earlier, in the second quarter, we successfully rolled out the newly revamped top kids themes program, Shuangyu, which offers multicultural experience based on the students' own interest. It has started to gain traction and boost our student enrollment and revenue. In the second quarter, we also rolled out Ultra two way interactive education system for domestic test prep program. We see the opportunity when we thought it was right timing and now it's being used in. Cities.
In the third quarter, we will roll out O2O for overseas test prep program. From the second level of our online education ecosystem, we've achieved a great outcome with our continued investment in coollearn.com and other supplementary online education products. In the second fiscal quarter, coollearn.com has generated net revenue of $11,100,000 representing a 56 increase year over year. The number of registered users has increased to 52% year over year and now cumulative registered users has reached over 9,900,000 by the end of the fiscal quarter. HuDAOCN, our own live broadcast open platform, both new rental and third party teachers, achieved about 172,700 registrations in the 2015.
Doumet, a series of game based mobile learning applications to children, achieved record of 12,000,000 downloads by the end of the second quarter. LuoQi, an English language vocabulary training application, we launched in the 2014 for mobile phones and tablets apps, recorded over 818,200 users by end of the second fiscal quarter. As announced in December, we partnered with Tencent and launched a mobile app named Youda. This is an exciting initiative as it brings together China's most respected brand in kindergarten to college private education and its largest and most successful Internet company. This is another step that we made on the path to transforming how students in China learn academic curriculums and we hope to create more best in class mobile learning solutions for students in China.
Turning to the third level of our online education ecosystem, we have invested it selects online education companies with minority stake and we never see to set full business opportunities that we can leverage so as to enhance Nuendo's products and services. In December 2014, we made an investment in kouyu100.com, an online platform where our K-twelve students can practice our English. It's currently being used by approximately 1,400 elementary schools and mid schools in more than 50 cities, with about 1,600,000 registered users and 130,000 paid users. Together with our previous investment in al07.com, terina and zuisheng.com, we'll build a more comprehensive online education system that is enabling us to provide fresh and interesting learning experience to our students. All this said, I think it is clear that the company has been working vigorously to drive both the core offline and developing online business.
It's very encouraging that our highest potential business lines maintain healthy growth in the second quarter and we made so much progress in building out our integrated educational ecosystem in this year's strategic transition. Fiscal twenty fifteen is an important investment year. And while this will have an impact on our annual operating margin and net income, we do believe that these efforts achieve sustainable growth and long term profitability. Now, let's take a quick glance at some of the key financial metrics for the second fiscal quarter. In addition to the financials we mentioned in the beginning of the call, operating costs and expenses for the quarter were $249,200,000 a 20% increase year over year.
Non GAAP operating costs and expenses for the quarter, which excludes share based compensation expenses, were US243.9 million dollars a 20.6% increase year over year. Half revenues increased by 17.6% year over year to US114.6 million dollars primarily due to the increase in teachers' compensation, which is in line with the revenue growth. Selling and marketing expenses increased by 20.1% year over year to US44.2 million dollars primarily due to increased selling and marketing staff compensation and brand promotion expenses. General and administrative expenses for the quarter increased by 23.2% year over year to $90,400,000 Non GAAP general and administrative expenses, which excludes share based compensation expenses, were $85,800,000 a 25.6% year over year, primarily due to the headcount increase. Total share based compensation expenses, which were allocated related to operating costs and expenses decreased by 0.8% to $5,300,000 the 2015.
In this fiscal quarter, we encountered a loss from operations of US13 million dollars compared to income of $700,000 in the same period of prior fiscal year. Loss from operations would have been approximately million dollars if not for the accounting effect of the company's new customer loyalty programs. Non GAAP loss from operations for the quarter was $7,600,000 compared to non GAAP income from operations $6,000,000 in the same period of the prior year. Operating margin for the quarter was negative 5.5% compared to 0.3% in the same period of the prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter was negative 3.2% compared to 2.9% in the same period of the prior fiscal year.
Net income attributable to New rental for the quarter was US2.4 million dollars representing a 44% increase from the same period of the prior fiscal year. Capital expenditures for the quarter were $15,200,000 which were primarily attributable to the opening 15 new learning centers and renovations at older existing learning centers. Now let me go through our expectations for the 2015 before we move into Q and A section. We expect total net revenue in the 2015 to be in the range of $279,800,000 to $290,000,000 representing year over year growth in the range of 10% to 14%. There were some specific factors impacting our guidance.
First, approximately RMB5 million revenue representing about 2% year over year growth were deferred resulting from the company's new customer loyalty plan. Second, the recent depreciation of renminbi against the U. S. Dollar negative impact revenue growth by about 2% to 3%. If not considering the above mentioned impacts, the product revenue growth rate is expected to be in the range of the 15% to 19%.
The above forecast reflects New Oriental's current preliminary view, which is subject to change. At this point, Louis and I take your questions. Operator, please begin.
Speaker 0
Thank you, Mr. Yang. Ladies and gentlemen, the question and answer session of this conference 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. If you have more than one question, please request to join the question queue again after your first question has been addressed.
And the first question comes from the line of Jin Yoon of Mizuho Securities Asia. Please ask your question.
Speaker 2
Hey, good evening, Louis and the team. Can I start off with the loyalty program? Just kind of wondering what your thought process is? Why start the program now? Is this largely due to competition?
Or is there other external facts that really leads to this? And really at the end of the day when we look at EU historically, the company has kind of always prided itself having higher quality, higher caliber product that could continue to raise prices. With the loyalty program, does that kind of change the how the company sees business going forward from historical levels. Can you just kind of elaborate on the loyalty program? Thanks.
Sure. Thanks, Jin. I think the loyalty program was sort of we started it piloted it in a couple of cities in September. And then we began to and it was quite successful. So we rolled it out across the network in October.
So middle October, so it's only been going on for a few months. And you're right, part of it is due to competition. It's also become a common practice in China. And I think it's probably long overdue for us to have a loyalty program, because remember, our students start with top kids at age five or six, let's say for six years. And they've always asked us for bundled breaks and this kind of stuff.
Speaker 3
And so it makes sense
Speaker 2
for us to as we offer more classes like math and Chinese for young kids to offer them some kind of discount as they sign up for more classes and they stay with us over a longer period of time. And then and the key is to get them in seventh grade, so they'll because that's another transition period from fifth grade to seventh grade, also in tenth grade as they go into or not even when they go into high school. So we wanted to the marketing department decided that there's something we wanted to do to keep student retention high and also to sort of follow the norm of the market where a lot of companies do offer these loyalty programs. And so we were probably disadvantaged by not doing it. So part of it is the increased competition.
Part of it is because we are seeing our fastest growth in the K-twelve secondtor and these kids usually stay with us for multiple years. So we want to create some stickiness by offering them loyalty this kind of loyalty program where they get a discount and the longer they stay with us the more discount they get.
Speaker 0
Thank you. And the next question comes from the line of Alice Yang of Macquarie. Please ask your question.
Speaker 4
Hi, Louis, Sisi and Steven. Thank you very much for taking my question. My question is about the O2O integration initiatives, especially the revamped pockets. Can you share with more color on the full year FY 2015 growth of the POP Kids segment? If you can break into enrollment growth and ASP growth that will be great.
And whether you can share some of your view about how you balance the ASP for the growth when your price is not very much cheap versus the volume growth, especially in the less penetrated market? Thank you very much.
Speaker 2
Thank you. Good question. For the POP Kids program, we just started rolling out the new program this last quarter. So it's in 35 cities, but it's probably only in about 25% to 30% of the total amount of POP Kids learning centers. So it's not fully rolled out yet.
But it's really encouraging. The enrollment growth is accelerating. So we did 13% enrollment growth last quarter. And in the first five weeks of this quarter enrollment growth is already 19%. And we're going into the next two weeks, which is the fastest growth period for us.
Because remember Chinese New Year is late this year, February 19 versus February 8 last year. So the peak season for enrollment as kids get out school now will be the next two weeks. So if we continue this trend, the POP Kids enrollment is actually doing very well. And I would just like to add that U Can is also doing exceptionally well. Enrollment's up over 26% in the first five weeks.
So we were seeing accelerated enrollment increase in K to 12. On ASPs, we are taking the strategy of not increasing ASPs as much, especially in this third quarter where we are rolling out a new program in POP Kids and we are trying to squeeze two terms in before the Chinese New Year February 19 because it's so late. So the term is a little bit shorter. So we're trying to so the prices won't be look like as much of an increase. But we're still increasing on an hourly basis between 5% to 10% and then higher for overseas test prep.
So it's not much we're still increasing prices at above market rates and above what our competitors are. But you're right. I think it's a game that we want to get more enrollment, especially enrollments in seventh grade and ninth grade and tenth grade when they're transitioning to junior high and they're transitioning to high school because then they have the best chance to stay with us for two to four years. And the idea is that the loyalty program will also create some stickiness in that regard.
Speaker 4
Helpful. So you mean that ASP growth will be somewhere around 5% to 10% on average for full year FY 2015?
Speaker 2
Yes. So we're still raising prices on hourly basis about 5% for POP Kids and up to 7% or 8%, 9% for UCAM. And then overseas is still over 10%. So the pricing fees aren't quite as aggressive as past years, but we're also seeing a nice spike in enrollments because remember we had that terrible Q1 during the summer. And so we're still kind of recovering.
We're rolling out a new POP Kids program. So the more early enrollments we get, the more people will see how good the program is. And with the loyalty program hopefully stay with us for many years. So it's kind of an integrated strategy to retain customers to get more new customers and introduce them to our new O2O offerings.
Speaker 4
Understand. Very helpful. Thank you.
Speaker 0
Thank you. And the next question comes from the line of Vivien Hau of Deutsche Bank. Please ask your question.
Speaker 5
Hi, Luisa, Cici and Stephen. Thank you for taking my question. First of all, I have a follow-up question regarding the new loyalty program. Can you introduce what is the current redemption rate and also the average redemption period for such program? And also do you have any plan to retain this program permanently?
Or is it just for a certain period of time? And I do have a second question, sorry about this. It's regarding the hiring plan you Given the surge in G and A expenses, what is the total headcount we have? And also what is the additional headcount by function and also by segments for this quarter?
Thank you.
Speaker 2
Okay. I think Stephen can tell you the breakdown, but the headcount is at 32,500 at the end of quarter, which is about 2,500 more than last year, of which 600 of them were teachers. So the G and A and S and M headcount did go up by about 1,900, which is a lot. The growth but don't forget we've added so far twenty eighteen learning centers net. And so we've added expanded the capacity as well.
But a lot of the headcount increase is related to the O2O integration and the new programs. I think the headcount will not go up by as much in the next couple quarters, but it will go up due to new center openings. So I think it'll probably go about is 5,000, 600,000 reasonable? Yes. 33,000 is sort of the original goal for the end of this fiscal year.
On the loyalty program, Vivian, the current plan is to keep it in place permanently, especially the early our retention rate last quarter, which is usually a slow quarter, Q2 was about was over 65%. So it's a good retention rate. But we don't know how much is going to be gained yet because the loyalty program just went into effect in October. The beginning redemption, begin to keep track of that starting in this third quarter coming up. But the idea is that the longer the student stays with us and the more classes they take, the more discount they get.
So it starts at 2% and moves to 5% depending on how long the student stays with us. And the key is that, it's revenue like the RMB4.1 million that came in this last quarter, only a half a quarter. That RMB4.1 million is a direct revenue. If we added it, it would have been 15.4% on the growth side. But all RMB4.1 million falls straight to EBIT over time, because the costs are already accounted for in COGS.
We delivered the classes, right? And so it's pure revenue and pure operating margin operating income. So that's why it's not apples to apples comparison with last year or in the past. So we're beginning to start this new one. So after one year, we expect about RMB 20,000,000 to RMB 25,000,000 of this deferred revenue about RMB 5,000,000 to 6,000,000 per quarter.
And then it evens up. So next year's comparison will be sort of apples to apples. It will be a neutral effect. And then the second year, it should have a positive effect as some of these redemption points expire and they're recognized right away. So they were recognized as revenue and as profit right away.
So I think as you'll see a CECL this year, the revenue is dampened and the operating margin is dampened operating was dampened by about $15,000,000 which is three quarters worth. And then next year, it should be a sort of a neutral effect as you begin the year over year comparisons will be the same program. In And the second year, as the initial step begins to expire, you'll see a slight bump up in the second year in revenue and in net in income. But we intend to keep it permanently assuming it's successful.
Speaker 5
Right. This is very helpful. Just a very quick clarification. So this is deferred revenue. When they flow in as recognized as revenue on P and L, we should be expecting some positive impact to operating margins, right?
Speaker 2
Correct. So right now, it's going be negative for this year. So about RMB15 million negative for this year, if you take RMB5 million a quarter, because we just started it after first quarter. And then next year, because of the compared to year over year where they're all the rate is in place, will be kind of a neutral effect. And then the second year, we'll have a slight positive effect.
But the key to recognize is that this deferred revenue is real revenue. Its classes are already delivered, revenue that won't be refunded and it will just pass to the bottom line just at a later date.
Speaker 5
Got it. Very helpful. Thank you.
Speaker 0
Thank you.
Speaker 2
Thank you.
Speaker 0
And the next question comes from the line of Philip Ng of Morgan Stanley. Please ask your question.
Speaker 6
Hi. Thanks for taking my question. Just a follow-up question on your guidance. Given that you mentioned enrollment is rebounding including POP Kids and an ASP is also growing. I know that there's a couple of factors affecting this with the royalty program and the currency impact.
But the guidance 10% to 14% still a bit soft, seems to be soft. Could you talk about the overall enrollment trend the past two months? And then also given the weaker first half, what is your expectation on the full year margin? That's my question. Thank you.
Speaker 2
Okay. Thanks Philip. I think on the last two months trend is quite good. So we had 10% enrollment growth last quarter, which a lot of it will flow in this quarter. And then we it's hard to tell what this quarter will look like because of the eleven day difference between Chinese New Year last year and this year.
Last year was February 8. So we already passed our peak period for last year already week wise. This year is February 19. We were entering the peak period the next two weeks. So if you take if you don't take that last week into account, enrollments were up over 10%.
But you have remember that enrollments in U Can and POP Kids, the hours are being shortened a little bit because we're trying to cram two terms into winter break before Chinese New Last year, we didn't try to do that. And so they're a little bit shorter. So but the average hourly increase is still 5% to 10%. That's what we didn't we tried to explain in the script itself. Okay.
So there's still price increases and enrollments are actually still going growing very fast. So POP Kids will enjoy very strong positive revenue increase as well as enrollment increase this quarter. And U Can well over 30%. So they're both doing very well. The weakness is in the adult English.
It's down about 30% in enrollments year over year. So that's the weakness sector and domestic test was it's the old legacy businesses. And overseas is down a little bit in enrollments this quarter. So that but like I said, it's too early to tell because the next two weeks are the key weeks for this year because the kids are getting out of school now and they're signing up for the winter term over
Speaker 3
the next two weeks, it will be
Speaker 2
the peak time. So we're quite encouraged. As far as margin goes, Philip, last year we did 17.3% operating margin. This year we had guided before 14% to 15%. But with the new loyalty program, you take that down about one to 1.5 percentage points due to about $15,000,000 this year.
So we probably guide somewhere we don't like to get straight guys, the lower risk program is new, but probably somewhere without the loyalty program about 13 to 14%, so down one percentage point. And then with the loyalty program, we'll probably look more like 12% to 13%. So with that that's why I want to separate with or without loyalty program, because otherwise it's not a fair comparison. But don't forget, this includes over $30,000,000 of spend this year on the new online initiatives. And then we expect that to really bear fruit in the second half of this year and into next year.
We won't have the same $30,000,000 increase next year. So most of the expenses are coming in this year as we roll out O2O across the whole network.
Speaker 6
Okay, I just want to make sure I get it right. So including everything royalty program investment, so you're targeting around 12 percent to 13% this year
Speaker 3
for full year?
Speaker 2
Yes, with everything built in, which is equivalent to 13 about 13.5% to 14.5% pre loyalty program.
Speaker 6
Okay. I see what
Speaker 2
you mean.
Speaker 6
Thank you.
Speaker 2
Okay. Thank you, Philip.
Speaker 0
Thank you. And the next question comes from the line of Ella Ji of Oppenheimer. Please ask your question.
Speaker 4
Thank you for taking my question. First, I have a quick follow-up regarding the loyalty program. Just want to make sure, Louis, you said that the order points, are they going to expire after one year? Is that what you said?
Speaker 2
Two years. Two years. Two years. Probably after two years. Yes, Ella.
So that's why you'll see this year where there's lot of revenue that's built up that will be either redeemed in the next two years or it will expire and we'll recognize it all. That's why in the second year the points that aren't redeemed will get recognized. That's why you see a bump up in the second year.
Speaker 4
Right. Okay.
Speaker 2
That revenue will be collected and it will fall 100% to the operating line.
Speaker 4
Right. Got it. And regarding your new program your new product with Tencent, you talk about expected progress in the calendar year 2015? And how much more support should we expect from Tencent, especially from Tencent's And do you think New Oriental will also need to spend more in sales and marketing to help promote product?
Speaker 2
Yes. That's a good question. EUDA is new, so it's in kind of test launch with English. So right now, it's a soft launch. It hasn't been blown out across QQ or Weixin yet.
That's we're waiting to add the math module. So that will happen in the next few months. And also we're testing it to make sure it's more accurate. The question and answering program is more accurate. And so we're continually improving it.
But we want to do a soft launch to get it out in the marketplace, so students begin to test it and help us improve it. This will be a long term program that will include not just English and math, but hopefully all the subjects from Gaokao. So it will become we believe it will become the go to program for kids middle and high school for sure. And Tencent is behind it. We will require additional investment.
And you'll it come in, in the quarters ahead. But I think you should stay tuned. We're actually very excited about this and I think so is And you'll see a number of announcements from us in the near future on our cooperation. But we can't go into detail.
Speaker 1
Is right. Point I want
Speaker 2
to try to make, Ella, this is the beginning of our cooperation. This is not a one and done. This is a long term cooperation.
Speaker 0
Thank you. And the next question comes from the line of Trace Urden of Wells Fargo Securities. Please ask your question.
Speaker 7
Thanks very much. So, Louis, my understanding was that with POP Kids, the plan was following the upgrade that you were going to have much more pricing power. And now it sounds like you've revised expectation. And so I'm looking at that data point combined with the fact that you chose this quarter to introduce the loyalty program. And I'm wondering if you were now seeing pressure in the market in the consumer market that and whether or not you believe that that's sort of temporary related to the economic conditions in China right now or whether this is something related to growth in the large markets and approaching saturation?
And if this is sort of an environment that's going to pass or something we can expect long term?
Speaker 2
That's a good question, Jeff. I think for us, the kids business has always been the most competitive on the POP Kids. And the reason is because as you know, you're not studying for a mission critical exam like the GAL Cal or the Zong Cal or the SAT. So pricing has always been a little bit more difficult. And that's why the POP Kids class is only about RMB 1,000 versus a U Can class is more than 2,400, right, for the same length of time.
So it's because of the mission criticalness of the class itself. And so POP Kids has always been more competitive. And for us, we've always been at the high end of the pricing point. And we have probably lost some market share as a lot of competitors come in because we it's not a hugely differentiated product. But what we've done with this new relaunch is we now have a differentiated product.
We have the best program out there that's interactive and has interactive Blackboard. It's far better than everything out there. And I think it's for us, we want to introduce it to as many students as we can early because of the repeat business that it generates where they come in for many years. And so this is an aggressive push on our part, especially given that POP Kids was declining for three quarters in a row to get market share by getting more students in. The market is not shrinking.
The Pop Kids market is still growing. It's growing nicely. It's just that we had an old offering and we weren't aggressively promoting it. Now we have a new offering, the best offering in the market and we're aggressively promoting it. And we believe with the loyalty program, it will keep students coming back.
They'll have incentive and we won't be that much more expensive than the other offerings. Part of the shift also traces because we have a new pop kids head as you know that came in about four or five months ago. And his philosophy and he knows better than I do is to go after market share first and then raise prices as the students get hooked on your product basically. There's really nothing else out there that's comparable. Maybe Disney's program, but that's two or three times our price.
Speaker 7
Do you are you so okay. That's the answer to my second question. Right. So I guess given that you're no longer POP Kids is no longer the price leader in the market?
Speaker 2
It is still the price leader, but I mean Disney has always been higher than us, right? But they're only in a few markets and they're at a ridiculous price point. Okay. I mean, we're at POP Kids at about US150 dollars to US200 dollars They're at in the thousands. So there's a large there's a huge discrepancy where we can still raise prices.
But I think for us right now, given that we saw three consecutive quarters of decline and now we have the best product in the market in our price category, we want to get market share first. And it's been successful, right? We saw a 13% increase in enrollments and we stemmed the decline revenues. This quarter and just in the first five weeks, we're already seeing almost 20% increase in enrollments. That's unheard of even for POP Kids in the last couple of
Speaker 7
years. Okay.
Speaker 2
So the new program And U is doing the same thing. We haven't been as aggressive in U Can pricing this last quarter and you saw a huge spike 40 enrollment, 32% in revenues because their courses are shorter. And you can see a continuation in this third quarter. We're already in the first five weeks before the peak season, enrollment's already up 26%.
Speaker 7
Okay.
Speaker 0
Thank you.
Speaker 3
Thank you, Chris.
Speaker 0
And the next question comes from the line of Ken Ho of TH Capital. Please ask your question.
Speaker 4
Hello, Steve and Cici. My question is related to what you guided earlier this year regarding your OTO investment at about RMB20 million to RMB30 million. So I wonder how you guys are using this RMB20 million to RMB30 million? Why are you investing in this part of money? So how much of that are like a onetime investment?
How much of that is going to go into next year? So I try to figure out how much of that will disappear next year to improve your margin.
Speaker 2
Okay. Steven has a better idea of the breakdown. But my only comment on this is that you know Michael, whatever budget he sets, he usually overspends. So I think it'll be higher than $20,000,000 probably closer to 30,000,000 $35,000,000
Speaker 4
Yes.
Speaker 2
You know the breakdown. Yes.
Speaker 3
Jun. We spent US9 million dollars on overall and online things, the expenses in Q2. And we will keep spend the same as months like the RMB8 to RMB10 million in next two quarters. By the end of this fiscal year, I think we almost will finish the key step of the overall and the investments. So the next year, you will not see the so much expense as the same as this year.
Speaker 4
The And
Speaker 3
external cost, more than half of them we spent in the staff compensation, because we had more and more people for the IT people to do the outdoor things. And the others we spent in the likely the silver or the other equipments. And for the pure online for our coolant.com, we spent like the RMB1 million for the selling expenses for the new product. That's the all spent.
Speaker 2
Okay.
Speaker 4
Cash.
Speaker 1
Hello?
Speaker 3
Yes. Ahead.
Speaker 4
Hi, Lu. So you guys have a lot of cash on your balance sheet. And certainly you guys must think about how to use it. I wonder what's the plan in that front?
Speaker 2
Well, I think cash the first idea or the first use will be looking at business partnerships and M and A and also just to make sure that we get this O to O and we're the leader in the online education space and the onlineoffline integrated space and the mobile learning space. That's our first priority. Excess cash beyond that, we will be using what we've been doing is buying back shares. So we spent about RMB40 million so far in the first four months, three or four months buying back shares in this current program. And then every year after the fourth quarter, we look at how much cash flow we generated and we'll either try to pay a dividend or do a share So we turn some capital to investors depending on the needs of our business and how much excess cash we generated.
Speaker 4
That's very helpful. That's all my questions. Thank you.
Speaker 0
Thank you.
Speaker 4
Thanks.
Speaker 0
And the next question comes from the line of Jialong Xu of Credit Suisse. Please ask your question.
Speaker 8
Hi. Good evening management. Thanks for taking my question. First of all, quick follow-up on the previous question. Louis, you just mentioned you will probably consider paying cash dividend or continue to do this share buyback for the coming fiscal year.
So if you guys were to pay dividends, what is target payout ratio you may consider? So can you give any guidance?
Speaker 2
Yes. Don't have a target payout ratio. But last year we paid about million dollars something in the dividend. So you can calculate about RMB0.35 or so a share and it was up about 16% from the year before that. This year we're doing a buyback form.
But next year it depends on how much we'll generate less cash this year than we did last year because of the investment. And it's not my decision, we don't have a set payout ratio, but the Board does consider it each year and actually admit in multiple board meetings throughout the year on return of capital. We know it's a big issue among U. S. Stocks these days.
So we're very sensitive to it. And know me, I'm always pushing to return capital back to the shareholders.
Speaker 8
Okay. I guess a quick clarification on your dividend policy. I understand for the current fiscal year, you guys already have a share buyback program, which is still effective. So is it fair to say for the current fiscal year, probably you guys won't have any dividend to announce even by Q4?
Speaker 2
I think that's fair. I think by Q4 being May, so it's only in a few months. So I think as we'll make the decision after Q4, so we'll probably make it sometime around the July board meeting. That's what we did last year and the year before.
Speaker 8
Understand. So we finished the fiscal year and we do
Speaker 2
the budgeting for the next year.
Speaker 8
I see. I see. Very clear. Yes, I have another question about your coolant program. And your coolant appeared to do very well in the past quarter.
Excuse me. Just wonder what is the key competitive stage for Kulin compared to other online learning platforms, those platforms operated by Internet companies? And what sort of revenue contribution do you expect to generate from Koolearn by end of next fiscal year? Thank you.
Speaker 3
Yes. As we said in the script, the coolant.com, the revenue growth was very strong in the Q2 as well as above the 6% year over year. And in last year, the revenue of cooler.com accounts for the 2% of the total revenue. But in the Q2, it generally the revenue account for the 5% of the total revenue. So we are very happy to see that the revenue of the cooler get more and more growth.
So we hope the next year the revenue of the cooler will get the growth rate by about 50% year over year.
Speaker 0
And the next question comes from the line of Clara Fan of Jefferies. Please ask your question.
Speaker 1
Hi, hello. Thank you for taking my question. I just want to clarify. I mean, for the last quarter, we see that enrollment is recovering, while ASP is quite soft. And you mentioned that the ASP on an hourly basis is increasing by around 5% to 10%.
But even on an absolute basis, are we seeing a softer ASP growth compared to what we have expected before, especially after we introduced some loyalty programs? Thank you.
Speaker 2
Yes. I think the intention that Michael and the marketing team and we agree with is to go after enrollment growth in the short term, especially as we roll out O to O. We believe that our program is superior far superior to anything else in the marketplace. So we want as many students to try it as we can, because we think we'll get them hooked. So the short term plan is to reduce the amount of increase in the ASP.
So we'll still increase it by about 5% to 10%, but it won't be as aggressive as in past years, because we want to get the students on this new onlineoff line integrated system. Once they get on there, we believe that along with the loyalty program, will create incredible stickiness. And that also Michael has spent a lot of time improving our content and improving our teaching quality. So that's where our focus has been. So we believe that that combined with the technology advantage we have and a loyalty program and the brand name will is a winning strategy for us.
So you're correct, Claire, that we have slowed down the amount of ASP increase, but it's still quite healthy at five to 10%. It's just not as high as 10% to 12% like in the past.
Speaker 0
Thank you. And the next question comes from the line of Fei Fang of Goldman Sachs. Please ask your question.
Speaker 2
Hi, Louis. This is Steven. Can you update us on your expansion plan for 2015? How many centers would you like to add this year? Which segment would you focus on?
And which cities would you add the capacity? Thank you. Okay. Thank you, Fei. I think we've opened 10 as of the first two quarters, but we opened eight in December alone net.
So we were up at 18 now. So I would expect this to be somewhere between thirty and forty, but probably at the lower end of 30 to 40. So right on schedule with our 30 to 40 target we announced last quarter, but probably not at the high end of that. And most of the learning centers are kids K to 12 and overseas centers. So they're kind of mixed use.
So we're not really opening in adult centers and given that's a declining business. And we're opening it in mostly in cities that have high profit margin. So it still includes cities like Beijing and Shanghai and some of the larger cities that some people may think it's saturated, but it's not. And then also high profit second tier cities like Changsha, Xian, some other cities Wuhan that are doing quite well.
Speaker 3
You.
Speaker 0
And our next question comes from the line of Jin Yu of Mizuho Securities Asia.
Speaker 2
Hey, just a follow-up question. Even after the loyalty program and the rebates that you provide, do you know how competitive your pricing is in select in your top tier cities? And if the pricing gap is still there between you and competitors, does that mean that the potential rebates could go higher going forward? Thanks. Hey, Jun, I think, yes, right now is we will adjust the rebate depending on market conditions.
Our initial shot is 2% to 5%. So the longer the more years and the more cost you take with us, the loyalty program goes up, starts at 2% and moves towards five percent of your total purchase. So it does go up right now. We always can adjust it higher or lower depending on market conditions. Right now, we're priced probably 2520%, 25% above our competitors in most classes.
So that includes U Can, POP Kids overseas, we're probably 25% higher than our competitor most of our competitors. We think that will continue to hold, because we usually are the ones who initiate the price increases and they usually fall in behind us. So we think unless something changes, the price gap will continue to be enforced. But we think the difference now is that we believe the quality gap will expand. So our quality and our Internet tools and our mobile learning system will be better than anything else that our competitors can offer.
So not only do we have a pricing gap that's the same, but we'll have a higher quality gap. That's the goal. With that higher quality gap, we'll get more customer loyalty. And then at that point, we'll probably consider raising the price more aggressively.
Speaker 0
Thank you. And the next question comes from the line of Charles Kulich Ette of Watts Sloan Robinson. Please ask your question.
Speaker 2
Hi, Louis, Stephen and Sisi. Thanks for taking the question. About three quarters ago, some of the debate or the conversation was about occupancy. I was wondering if you could notwithstanding the fact that you calculate it and maybe it's worth reminding people how you calculate it. But I'll be interested in seeing how that's developed over the last few quarters please.
Thank you. Thanks, Charles. The utilization rate has continued to go up. It's probably up 2% year over year. But now we're adding more capacity.
So that may not be the case in Q3, because we added eight learning centers in last month alone. So we'll keep you posted, but the utilization rate is definitely up over the last two years, about two percentage points from when we were at seven forty three learning centers and we were kind of fat and bloated. So I think is that you will continue to see the utilization rate go up, but maybe not quite 2% a year because of the more aggressive expansion plan this year versus the contraction plan of last year. So we're definitely seeing more students filling the seats. Then the fact Charles that we're not being as aggressive on price, I think we'll also increase the utilization rate as well.
And the new programs are attracting as I the enrollment growth is picking up. So we the new programs are attracting a lot more students. So you should see pretty good utilization rate increases, but not quite as it was when we were reducing learning centers.
Speaker 0
Thank you. And the last question of this question and answer session is a follow-up question from the line of Trace Urdon of Wells Fargo Securities. Please ask your question.
Speaker 7
Thanks very much. Louis, there was some coverage in December about plans to reform the Gaokao, this idea of sort of deemphasizing Gaokao in favor of other measures of student achievement. I wonder if you could put that into some context for us whether you think that's going to go forward? What it means? And whether it creates any opportunities for other types of sort of student support for you guys?
Speaker 2
Yes. I think there's a debate every year, Tracy. You're right. You'll see a lot of writings about how it's unfair that one test determines a child's future. So you always hear that kind of rhetoric.
At the end of the day, in a country with 9,000,000 to 10,000,000 high school graduates, there's no fair way to assess people for higher education for the limited spot. If China started looking at teacher recommendation letters, the teachers would be the richest people in China, right? So there's no fair way that you really can't argue with other than objective test. So all the rhetoric that happens usually the Gaokao still remains the main factor. In fact, they've gotten rid of all the other stuff, right?
Like they got rid of all the points you get for the Olympic map and that's what's killing tau in Beijing and in the Olympic side, right? And they've gotten rid of all the other external factors. They've actually made the Gao Ka even more important. And then of course, this year they talked about reducing the English points and they backed off from that. So English is the same as it was in past years.
And they even helped us by saying you can take the English test twice in Shanghai and then soon over the whole country. So not only did they come back, they actually come back even stronger for English. So I think there's talk every year of this, but there's no one's come up with a fair system that people will accept other than the standardized test.
Speaker 7
Okay. That's helpful. Thank you.
Speaker 3
Okay.
Speaker 0
Thank you all. We are now approaching the end of this conference call. I will now turn the call over to New Oriental's President and CFO, Mr. Louis Xie for his closing remarks. Mr.
Xie, please go ahead.
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 very much. Ladies
Speaker 0
and gentlemen, that does conclude our conference for today. Thank you for your participation.