New Oriental Education & Technology Group - Earnings Call - Q2 2018
January 23, 2018
Transcript
Speaker 0
Good evening and thank you for standing by for New Oriental's Second Fiscal Quarter twenty eighteen Earnings Conference Call. At this time, participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.
I would now like to turn the meeting over to your host for today's conference, Ms. Cece Zhao. Thank you. Please go ahead.
Speaker 1
Hello, everyone, and welcome to New Oriental's second fiscal quarter twenty eighteen 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 view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC.
Speaker 0
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
Speaker 1
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. We're pleased and encouraged by our results for the quarter. Net revenues in the second quarter increased to $467,200,000 which is 36.9% growth, ahead of our expectation. Accelerated top line growth attests to the strength of our business and our sound strategy to acquire and effectively return customers and expand capacity.
Total student enrollments in academics, subjects tutoring and test prep courses went up by 43% year over year to approximately 1,877,100 in the second quarter. To further tap into the booming private education market and further strengthen our leadership in the market, we also added a net of 34 learning centers in 19 existing cities and expanded into the cities of Yinchuan, Shaoxing and Huzhou with our dual teacher model classes implemented in six new schools and learning centers. In addition, we acquired kindergarten in Hong Kong, extending the geographic reach of our quality education offerings. Altogether, this boasted our total square meters of classroom area by a total of 38% year over year. In the second quarter, we remain focused on our well proven optimized market strategy.
We're steadily working our capacity expansion across cities where there is strong growth potential and where we could increase operating efficiency. We're making sound progress enhancing our online and offline integrated standardized teaching system in our K-twelve business, which contributes positively to our results in the second quarter. We're also rolling out standardized teaching system for overseas test prep business, such as IELTS, TOEFL and SAT programs in some of the large cities in China. Our business has sustained the strong momentum from the first quarter and yielded another strong top line performance in the 2018. This is mainly driven by the substantial increase in student enrollments.
Our K-twelve full subjects after school tutoring business augmented in the second quarter with the revenue up by around 47% and enrollment up by around 52% year over year, continuing from the very encouraging growth from the recent quarters. The growth in our K-twelve business can be broken down into the outstanding performance from our U Can middle schoolhigh schoolafter school tutoring business and POP Kids program, each of which achieved impressive growth respectively. Our efforts to acquire and retain loyal customers, while expanding our capacity is enabling us to capture greater market share and solidify our leadership position. Historically, the second quarter is the slowest quarter in the first in the fiscal year. However, we achieved improvement in the utilization of facilities compared to the previous quarter.
This helped lift the pressure off the margins as we remain committed to investing in capacity expansion. We're confident that the business is on the right track to regain grounds from the impact on the margin in the previous quarter. Even more encouragingly, in the second quarter, the year over year decline of gross margin narrowed to 70 basis points comparing to two eighty basis points in the previous quarter. The non GAAP operating margin is down by 150 basis points year over year, showing significant signs of recovery as compared to three ninety basis points in the previous quarter. We remain focused on driving both top line and bottom line growth through enhancements in cost efficiency and utilization of the facilities.
I will now turn to pricing. Per program blended ASP, which is cash revenue divided by total student enrollments decreased by about 3% year over year. A few factors lie behind the fall of the per program blended ASP. Firstly, our revenue mix shifted from the overseas test prep business to K-twelve after school business with lower ASP. Secondly, the high ASP VIP business slowed down in this quarter.
Starting from the third quarter last year, in an effort to streamline the registration process, we began to concentrate the registration for U Can VIP classes in the first month of the first and third quarters rather than spreading the registration evenly throughout the year. As a result, there was a high year on year increase of enrollments for U Can VIP classes in the first quarter, but lower than normal growth in the second quarter. Aside from the streamlining the registration, we also currently expect that our VIP business growth will be slower compared to our overall revenue growth in the long run, which will continue to have a dampening effect on blended ASP. Thirdly, the shortened plus length of our Beijing U program also dilutes the per brand blend ASP. We launched the pilot program for UCan classes in Beijing to adjust the length and format of each session from three hours in class teaching to two hours in class teaching, plus 0.5 per hour hours after class online learning.
The purpose of the adjustments is to improve student in class learning efficiency and enable them to enroll in more classes for more subjects. The pilot boosted the average number of classes enrolled per student. Hourly blended ASP, which is GAAP revenue divided by the total teaching hours, increased by approximately 6% year over year. To provide a breakdown of the hourly blended rate, please note that U Can increased by 6%, POP Kids increased by 5% and Overseas Test Drive program increased by 15% year over year. Looking ahead, we're confident that the decline in margin will continue to ease through the remainder of the fiscal year.
More importantly, as the business expands, we will also benefit from the greater economy of scale as we continue to make strategic investments, which will generate long term value to our customers and shareholders. Now, we will move on to the second quarter performance across our individual business lines. Our revenue driver K-twelve all subjects after school tutoring business achieved revenue growth of about 47% year over year for the second quarter, driven by enrollment growth of about 52 year over year. Breaking it down, the U Can middle school, high school all subjects after school tutoring business recorded a revenue increase of about 44.9% for the second quarter, student enrollments grew approximately 48.6% year over year for the quarter. Our POP Kids program again delivered outstanding results with revenue up significantly by about 50.8% for the second quarter.
Enrollment went up about 55.1% for the quarter. Our overseas test prep and consulting business together recorded revenue growth of about 21.1 year over year for the second quarter. Finally, our VIP personalized class business recorded a revenue growth of about 19.4% year over year for the second quarter. Next, I'll provide some updates on progress we're making with our optimized market strategy. We have been focusing on expanding our capacity by investing in the build out of our O2O integrated education system and this continues to produce very promising results.
We'll start with offline business. In the second quarter, we added a net of 34 learning centers in 19 existing cities and rolled out dual teacher model class in three new schools and three new learning centers in the city of Yinchuan, Shaoxing and Huzhou. In addition, we acquired one kindergarten in Hong Kong. Our investments increased the total square meters of classroom room area by the end of the quarter by approximately 38 year over year. In order to capture the growth opportunity in lower tier cities, we continue to roll out our dual teacher model schools, expand our business into remote areas in China.
We started to pilot the new dual teacher model class in select cities in July 2016. And by the end of the second quarter of this year, we have tested the new offering in over 13 existing cities and 10 new cities and we're pleased to see the increased market penetration in the markets we tapped into. We also saw improved customer retention and scalability of this new model. With these encouraging results, we will continue to deploy the strategy in the rest of the fiscal year. With respect to our online business, 18,700,000.0 was invested in the second quarter to improve and maintain our O2O integrated education ecosystem.
Most of the investments were recorded under G and A expenses. With high customer retention rates and acquisition of new customers, we believe the investments will ease significant return and bring sustainable and long term benefits. I will first talk about O2O2A interactive education system. Since launching of our U Can Visible Progress teaching system in September 2014, the interactive education system has been deployed in all existing cities. We launched the newly revamped POP Kids English program, Zhuangyou, in most of the cities by the end of 2018.
This interactive education system has also been gradually used in more and more cities across China. The interactive education system for overseas test prep program, including IELTS, TOEFL and SAT courses was rolled out and tested in most of the major cities by end of the Q2 fiscal year twenty eighteen. At the same time, we also standardized the product offerings in the city of Shenzhen, Xiamen and Changsha. Now I will walk you through our progress in koolearn.com and other supplementary online education products. Koolearn.com generated net revenue of $28,200,000 representing a 59.6% increase year over year in the second quarter.
The number of paid users increased about 23% year over year in the quarter. Qudao CN live broadcast platform achieved about 709,600 registrations in the second quarter. Donuts learning apps reported over 73,500,000 downloads by the quarter end. And LOO2 app reported over 7,100,000 users by quarter end. These developments aim to extend New Oriental's traditional offline classroom teaching offerings to online education services.
This is an important front on which we set ourselves apart from other key players in the market. With a booming market and our advanced O2O product services, we're poised to gain more market share and strengthen our hold going forward. Now, let me walk you through the other key financial details for the second quarter. As mentioned earlier, the business delivered outstanding year over year increase in net revenue and growth in the second quarter. Due to our expansion of capacity, operating costs and expenses for the quarter were $480,300,000 representing a 40.8% increase year over year.
Non GAAP operating costs and expenses for the quarter, which exclude share based compensation expenses, were $470,900,000 representing a 39% increase year over year. Cost of revenues increased by 39.1% year over year to $227,300,000 primarily due to increase in teachers' compensation for more teaching hours and number of schools' learning centers in operation. Selling and marketing expenses increased 38.2% year over year to $72,100,000 primarily due to increase in brand promotion expenses and selling and marketing staff compensation. General and administrative expenses for the quarter increased by 44.2% year over year to $180,900,000 Non GAAP general and administrative expenses, which exclude share based compensation expenses, were $171,600,000 representing a 39.2% increase year over year, primarily due to increased headcount as the company expanded its network of schools and learning centers, as well as the increase in R and D expenses and human resources expenses related to the development of our online and offline integrated education ecosystem. To further align with the of the company's internal and internal shareholders, the company granted a total of 1,500,000.0 restricted share units of the company to employees and directors in October 2017 with the greatest vesting over three years.
Because of the granting, the cost involved drove the total share based compensation expenses up by 330.2% year over year to $9,300,000 for the quarter. Operating loss for the quarter was $13,100,000 compared to an income of $200,000 in the same period of prior fiscal year. Non GAAP loss from operations for the quarter was $3,800,000 compared to an income of $2,400,000 in the same period in the prior fiscal year. Operating margin for the quarter was negative 2.8% compared to positive 0.1% in the same period of prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter was negative 0.8% compared to positive 0.7% in the same period of prior fiscal year.
Net income attributable to New Oriental for the quarter was $4,300,000 representing a 58.7% decrease from the same period of prior fiscal year. Turning to the balance sheet. As of November 3037, New Oriental had cash and cash equivalents of 8 and $18,100,000 compared to $641,000,000 as of May 3137. In addition, the company had $87,500,000 in term deposit and $1,522,800,000 in short term investments as of November 3037. New Oriental's deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as revenue as the instructions delivered at the end of the second quarter of the fiscal 2018 was $1,137,300,000 an increase of 48.7% from $764,700,000 in same period of prior fiscal year.
Before moving on to our expectations for third quarter, I would like to take a moment to reiterate our overarching goals and priorities in our Optimize the Market strategy. In terms of our priorities, first, we will continue to expand our offline business. We aim to add around 20% new learning centers and expand classroom area of some existing learning centers for K-twelve business in existing cities. And we also plan to enter two to four new cities where we identify as market with most business opportunities. In addition, we'll continue to roll out our dual teacher model schools to about five to 10 new low tier cities in China.
Second, we'll continue to leverage our investment in our O2O integration in online education offerings. In particular, we will continue our focus on product refinement and the maintenance for the O2O system for K-twelve business. Meanwhile, we'll continue to revamp and roll out our O2O standardized teaching system for our overseas test prep business. We will continue to make investments and we currently believe that total spending in absolute dollar terms in fiscal year twenty eighteen will increase moderately compared with the prior fiscal year. Third, we will continue to focus on driving up utilization of our facilities and cost control to drive operational effectiveness and deliver long term bottom line growth.
As already shown in the second and first fiscal quarter, we believe that the expected acceleration of the revenue growth and anticipate boost in the facility utilization in the coming quarters will mitigate the impact on the margins over the coming quarters. We will keep you updated as we move through the fiscal year. We're confident that our expansion strategy and recent incentives will drive additional growth of revenue and market share in a way that creates long term value for all shareholders. Looking at the near term and our expectations for the third quarter, We expect total net revenues to be in the range of $591,100,000 to $604,200,000 representing year over year growth in the range of 35% to 38%. Lastly, I must mention that these expectations reflect New Oriental's current and preliminary view, which is subject to change.
At this point, I'll 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. If you have more than one question, please request to join the question queue after your first question has been addressed. The first question comes from the line of Fan Liu of Goldman Sachs.
You may ask your question.
Speaker 3
Hi, Stephen and Sisi. So you added capacity by 38% year on year this quarter, faster than the previous quarter at 31%. May I know the rationale behind this acceleration? And also calling a question relating to your guidance, third quarter guidance, might know the ForEx you applied behind this third quarter guidance. Since if we exclude the impact from RMB appreciation, your third quarter guidance will imply around 29% year on year in the midpoint, actually lower than this quarter and around 34%.
May I know the reason behind this deceleration? Supposedly second half should accelerate versus first half. Thank you.
Speaker 2
Okay. Thank you, Fang. In terms of the expansion plan, yes, we added 41 learning centers, schools and learning centers in this quarter. And the total square meters of classroom area by the end of this quarter increased by 38% year over year. I think the reason that we raised the expansion plan is we are because we are seeing the growing momentum in our K-twelve business due to the solid market demand.
And that means we are more confident about our new O2O product as well and the effective operation as well. So for the whole year, we plan to add 20% new learning centers combined with the 10% new square meters we rent for the existing learning centers. Altogether 30%. And I think this will drive the potential growth going forward, not only for the second half of this year, but also for the next year. And in terms of the guidance, yes, the guidance, I think we're still seeing the revenue growth acceleration going forward.
But don't forget in the last year Q3, we had a very strong Q3. It's a little bit hard comparison that I think the kids love business will bring us very strong enrollment growth in the third quarter. And I think we will see the acceleration of the growth of top line in Q3 and also in Q4 as well. Thank you.
Speaker 0
The next question comes from the line of Ivy Liu of Macquarie. You may ask your question.
Speaker 4
Hi, Steven. Hi, Sisi. Thank you for taking my question. One of my question is just to follow-up on the revenue growth, because we do see like deferred revenue growth kind of accelerated to RMB49 from RMB42 last quarter. And so and the enrollment growth is really strong this quarter.
I think part of as you mentioned, part is like of our recruitment plan of trying to have the winter and the spring together. So just want to understand like how much does how much percentage does that part account for? And my second question is regarding the Hong Kong kindergarten that we acquired. Can management share more color on like what's the consideration? How many students does that actually have a margin drag?
Have we consolidated this? Just some color on the kindergarten that we acquired and the logic behind it. Thank you.
Speaker 2
Okay. Thank you, Abi. Let me answer your second question first. The kindergarten we acquired in Hong Kong is very small one. So it's not a big deal.
And in terms of the first question you asked about the revenue guidance, I think in the Q3 guidance, I think on the school level, what I mean the short term schools, the top line growth in the Q3 and the coming quarter will be very strong. So that's why I said we're still seeing the revenue acceleration of the growth. But in the Q3, we had a very strong quarter last year of the other business. So we had a very strong we had a little bit hard comparison for the Q3. And we a great deferred revenue balance growth in the quarter end.
And I think based on the historical data, 50% of the cash revenue we reported in the second quarter will be reported into the GAAP revenue in Q3. Okay. Is it clear? Maybe
Speaker 4
just to clarify, does that mean that in the total enroll if we just look at enrollment number, how much can we attribute it to maybe the spring quarter? Yes, the winter and spring like the Lianbao?
Speaker 2
Okay. Yes, I think we don't disclose like that, but I think the most of the enrollments where we have in hand are the winter classes during students. That means we report most of the cash revenue we report in Q2 into the Q3 of the winter courses.
Speaker 4
Okay. Thank you.
Speaker 2
Okay. Thank you, Ivy.
Speaker 0
Next question is from Natalie Wu of CICC. You may ask your question.
Speaker 4
Hi, good evening management. Thanks for taking my question. Two similar questions here. First one is that how do you view VIP kit model? Just wondering the how do management see the threat and opportunities related with that in longer term?
Will New Oriental launch any initiatives regarding that model? And second one is, what's the current utilization rate for different subjects? Will there be a large gap between these? And if yes, do you expect the gap to close? And how many years will the process take?
Thank you.
Speaker 2
Okay. Thank you, Natalie. I don't want to make comments on the VIPKids business model. But what I just want to say is that, I think most of their business is the online verbal English training model. And but we have already piloted the same pattern model since last quarter.
But I think we have the we're using a different way. First, us, the one teacher, the online teacher fits to three students at the same time. And we are open the online class for the our POP Kids students only. That means we're not open for the students outside New Oriental. And but for us, we have a lot of the POP Kids online the POP Kids enrollment.
So that means we don't have the acquisition cost to acquire student enrollment for online employees. And also we reflect the teachers and the curriculum by the system and contents. We're just a part of the program in Wuhan, Beijing only now. And what's your second question?
Speaker 4
Utilization. Okay. Utilization rate. Yes, for different subjects.
Speaker 2
I think we just disclosed the utilization rates for overall and the utilization rates of this quarter is about 20%. It's flattish compared to year over year. Even though we opened 41 learning centers in this quarter. And but I think we it becomes more fast or become faster and faster for us to put the students into the classroom quicker than before. So, I think going forward you will see the higher utilization rate for us.
Speaker 4
Okay. Just one more simple question. Can I know the average enrollment per student currently?
Speaker 2
At the same time, one student take two to three courses at the same time.
Speaker 4
Okay, great. Thank you, Stephen.
Speaker 2
Thank you.
Speaker 0
Your next question comes from the line of Mariana Ku of CLSA. You may ask your question.
Speaker 5
Hi. Thanks, Stephen and Cece. I think just to follow-up on the previous analyst question on the enrollment per student because you also mentioned just now in the ASP discussion that we are doing some piloting classes in Beijing to move like half an hour of the class online and kind of shorten the in classroom time to encourage more enrollment. So just wondering if and say like kind of longer term, if this kind of model works out, like what would we expect in a year's time the kind of optimal enrollment per student ratio or the courses per student? And the second question is on the dual teacher model.
Just wanted to see since now we have pretty kind of decent coverage of subsidies using the dual teacher model, just wondering if you have any early indication in terms of like the financial metrics, how that compares to traditional model and also on the learning outcome side. Are we seeing better or comparable results compared to the traditional model? Thank you.
Speaker 2
Yes, we started a pilot program in Beijing U Can program to change the class lines from three hours in class teaching to two hours plus thirty minutes online learning. But as a result, after the change in Beijing school, we saw the average number of enrolled classes per student increased from two classes to three classes. So I think think it's good for us to take more students and for and each of the students will take more classes at the same time. So I think going forward, we will spread it out to other cities, but it depends on the time. Okay.
And your second question is about the dual teacher model. Yes, we step into the 30 learning centers in existing cities for the dual teacher model. And also we have already opened 10 new cities to open the dual teacher model. So far so good. I think the student retention rate is better than we expected.
And also, think the one teacher can phase to like the ten twenty classes is successfully piloted in the last year. So in terms of financial model, I think the margin of the dual teacher model should be higher than the traditional class one, the classes, because the one teacher can fit to like the 200 or 300 students at the same time. And all the other costs are the same compared to the traditional classes. But it's too early to say, because we just pilot program things summer of last year and it's need more time to spread out to the more cities and more learning centers. Okay.
Thank you.
Speaker 0
The next question comes from the line of Jin Yuen of Mizuho. You may ask your question.
Speaker 6
Hi, good morning guys. A couple of questions. So perhaps you could give us some color how to think about margins for the next quarter and perhaps for the full year. Should gross margin headwinds remain similar to Q2 levels? And how should we think about G and A excluding O2O investments?
Should it be growing at similarly elevated levels? And then second question, Stephen, is perhaps you could give us kind of a breakdown on your revenue guide by different classes? That'd be super helpful. Thanks.
Speaker 2
Okay. Yes. I think the margin guidance, yes, as you know, though we opened 41 learning centers, schools and learning centers in Q2 and but operating margin is down by 150 bps in the second quarter. But don't forget the margin but don't forget our margin was down by three ninety basis points in the Q1, so it's a recovery. And going forward, we believe the margin pressure will lessen and reverse in the rest of the year, because I think we will we expect to see the acceleration of the revenue growth and also the higher facility utilization.
So in terms of the margin, I think in the rest of the year, the margin pressure will lessen and reverse. And but I won't change my guidance of the margin in the mid long term. So our op margin target is to get 17 to 18% in next three years. Yes, this year because we changed our expansion plan from 10% to 30%. So but I think this is a good choice for us because the market demand is there and the auto products is better than before for us.
So I think for the long term, it's a good way for us to take more market share from the other key players in the market. And the what's the second question? That's okay, Jun?
Speaker 6
The second question revenue can you kind of give us a breakdown of your revenue guide by classes?
Speaker 2
Okay. You mean the guidance? Okay. The overseas test prep 10% to 15% and the K-twelve business over 50% and the domestic test prep is 20%. I've said is the increase.
And the only drag down is the adult English. It will be down by 5% to 10%. And the pure online, yes, the koolearn.com, the revenue growth will be over 50% in Q3.
Speaker 6
Great. Thanks, guys.
Speaker 0
Okay. Thanks. Your next question comes from the line of Alex Liu of Daidwa. Please ask your question.
Speaker 7
Yes. Thanks, Stephen. I have two questions. So first, I just want to follow-up on Liu Fang's question. Wondering how long does the management think or intends to maintain such high speed of capacity growth?
And related, what makes you so confident on delivering profitability improvement given that we are still aggressively expanding? My second question is on POP Kids. It seems that I think we are getting more aggressive on non English subjects for POP. I was wondering what types of students we are targeting and how big you think this specific subject will be growing to? Just want to know your thoughts.
Thanks.
Speaker 2
Actually, only one third of the POP Kids revenue comes from these non English courses, math and Chinese, but it grows faster than the English courses. So going forward, I think the non English courses, the revenue grows faster than the English courses. Yes, that's for the top kids. And the expansion plan, And I think, yes, if you remember in the last two years, we just opened like 10% to 15% new learning centers every year. And this but don't forget, we just pilot the new auto product since two point five years ago.
So this year we raised our expansion capacity expansion from 10% to 30%. I think way for us to take more market share. Next year, we don't have the we haven't set up the budget, but I think we will open like the 20% to 2325% new learning centers in the next fiscal year, it depends on the market demand. But anyway, we're quite confident about our product and the market demand. It's a huge market.
Our market share is just below 2%. It's very it's too early. So that's why we raised our expansion plan this year. Thank you, Alex.
Speaker 7
Yes. Thanks.
Speaker 0
Thank you. The next question comes from the line of Tian Hu of TH Capital. Please ask your question.
Speaker 8
Hi, Stephen, Cici. Congratulations on a good quarter and also strong guidance. So since the company is entering into a relatively high speed expansion phase, so I wonder what's the company's plan for next two quarters in the fiscal year? How many new learning centers and do you plan to open in next two quarters? And also for next year and what kind of opening plan do you have?
So that's my question.
Speaker 2
Okay. Thanks, Tian. I think in the rest the fiscal year in Q3 coming Q3 and Q4, we plan to open 50 to 80 new learning centers in total in the next six months. So combined with 85 new learning centers we set up in the first half of the year, the total number will be 150 to 170. And next year, as I said in the last question, we haven't finished the budget of next year, but we expect to open like 20% plus new learning centers next year.
Speaker 7
But based
Speaker 2
on my current estimation, I think the new learning centers we set up for the next year will below 30% because we opened a lot this year. Yes,
Speaker 8
sure. We did open Thank a you. Your
Speaker 0
next question comes from the line of Lucy Yu of Bank of America. Please ask your question.
Speaker 8
Hi, Stephen. I've got one question on the revenue growth. In this quarter, your revenue grow at around 34% in RMB terms. Can you please break that down into firstly the retained student from summer promotions and other students? And also break down that by new learning center that has been opened within the past four quarters and the contribution from the mature learning center that has been opened over one year?
Thank you.
Speaker 2
Yes. Actually, had 554,000 summer enrollments in the summer. And the retention rates in autumn courses was close to 50%. So, it's the enrollment in the autumn class we got from the summer promotion. And but we yes, we don't have the details of the how many students from the new learning centers and how many students from the existing ones.
It's really hard for us to divide the students by two parts. But what I can say is, yes, we opened a lot of learning centers, it's drive these enrollments growth up and it spends less time for us to fill the students into the new learning centers. Typically, they learn for the new learning center, it typically takes five to eight months to get a breakeven fast. We think about how fast we can fill the students into the new learning centers. Okay.
Thank you.
Speaker 0
Your next question is from Thomas Chong of Credit Suisse. Please ask your question.
Speaker 9
Hi, Frank, Stephen and Sisi. I have a quick question about the revenue growth and contribution in Beijing, Shanghai, Guangzhou and Shenzhen. And then a quick follow-up is about the utilization. Can I ask the breakdown between the old and new learning centers in the past one year? Thanks.
Speaker 2
I think the top five cities, Beijing, Shanghai, Xi'an, Wuhan, Hangzhou, the top five K-twelve business revenue contribution cities contribute 46% of total revenue. And in last trailing twelve months, the growth rate was 37% in last trailing twelve months. This is a larger contribution from top five cities and the growth rate. Next
Speaker 0
question.
Speaker 2
Go ahead.
Speaker 0
Yes. The next question is from Sheng Zhong of Morgan Stanley. Please ask your question.
Speaker 4
Hi, Stephen. Thank you for taking my question. So my first question is about our deferred revenue. It has a very strong growth. And Stephen also said that the VIP enrollment policy has changed to first quarter and third quarter.
So may I take that to think that the deferred revenue has even stronger growth if we look at K-twelve? So maybe can you give more color on the breakdown of your deferred revenue growth this month this quarter? And second question is about our pilot program in Beijing. So you said that this is still not the time to expand to other cities. So may I understand what your key concern about to extend the program to other cities?
And maybe when you think or when you think it's more an appropriate time to expand this program to other cities and to like POP Kids? Thank you.
Speaker 2
Okay. With the deferred revenue balance, yes, I think the actual numbers, if we don't change the VIP registration window last year, I think the deferred revenue balance will be better than the 48% year over year growth. So I think, yes, you'll see the deferred revenue strong balance, the strong growth of the balance, I think it means we will have a very strong top line growth in the coming quarter Q3. And yes, within the deferred revenue balance, most of cash revenue we collect from those customers are the case to our business. And yes, we reached your second question is about the pilot program that we changed the class, the length of the class session in Beijing school.
But we just the pilot program in the summer. So I think that's good as I expected. So we need more time summarize the advantage of this program. I think we will do more and more in more cities. Okay.
Speaker 4
Thank you.
Speaker 2
Okay. Thank you.
Speaker 0
Next question is from Talan Zhao of Deutsche Bank. Please ask your question.
Speaker 10
Hi, Stephen. Most of the questions have been covered by previous analysts. So I have two follow-up questions. You mentioned about utilization rate remains pretty much same under such a high expansion on the capacity. And do I understand correctly that for mature learning centers, the utilization rate actually increased in this quarter?
And second quarter, so it's also a follow-up question on deferred revenue. Can you break it down by like how much will be collected from spring season or winter season? Thanks.
Speaker 2
Okay. I think the utilization rate, yes, for the mature learning centers, the utilization rates of facilities is still going up in this quarter. I think we have a lot of room for the mature learning centers to get improvement of the utilization rate. I think the reason that we can't guide higher utilization rates in this quarter is because we opened 85 learning centers, new learning centers in the last six months. But I think we will feel the students quick into the new learning centers quicker than before.
Within the deferred revenue balance, it's really hard for us to define the students in the winter class and the spring class. But, yes.
Speaker 1
Yes. But for your reference, the deferred revenue by end of Q2, about 47 percent of it will be recognized as GAAP revenue in Q3. So that's roughly how we talk about the deferred revenue guidance and deferred revenue number and the indicator for next quarter.
Speaker 2
You. Thank you. Thank you so much. Next
Speaker 0
question comes from the line of Wayne Wang of HSBC. You may ask your question.
Speaker 11
Thank you, Sisu, and thank you, Stephen, for taking my questions. So I have a question regarding to our capacity expansion plan in both high TCD and low TCD. And also, I just want to confirm that it seems that management has mentioned that in fiscal year twenty eighteen, our total spending will remain largely flat year on year. So what could be our like full year margin guidance? And also what's our full year plan for the O2O investments?
Thank you very much.
Speaker 2
Okay. As the capacity expansion, we are opening the learning centers in the 20 to 25 cities with a higher performance in last year. So this is our plan. And as I said, we will open 20% new learning centers combined with the 10% new square meters with rent for the current learning centers, altogether 30%. And the online investments, we spent $18,700,000 on the online investment this quarter.
It's a little bit higher than we expected. Actually, we're about $14,000,000 So that means we spent $5,000,000 more than we expected. But I think it's worthy, because we started to spend the online investment since two or three years ago. And we spent $57,000,000 in the last year and $39,000,000 in the year before last year. But I think the high investments of the online drive the higher student retention rate and also we require the new student enrollment and improve the teaching quality and feedback from the students and parents are much better than several years ago.
So that's why I said it's worthy. And we plan to spend 60,000,000 to $70,000,000 for the whole year on the online investment. It's a little bit higher than expected. Last year's $55,000,000 this year's 60,000,000 to $70,000,000 But I think it's worthy. And what's your question?
Speaker 11
So the second question is regarding to the full year margin guidance. So it seems previously we have talked that our total expanding in fiscal year twenty eighteen could be largely flat year on year. I'd like to like add more color on that.
Speaker 2
Yes. I think going forward in the rest of the year, we believe the margin pressure will lessen and reverse in Q3 and Q4. But I won't give the specific guidance for the margins in the rest of the year.
Speaker 11
Okay. Thank you.
Speaker 2
Next
Speaker 0
question is from Eric Kueh of CCPI. Please ask your question.
Speaker 9
Good evening, Steven and CCP. Thank you for taking my question. Two questions. One is you mentioned that top four cities account for 46 percentage of revenue. I was just wondering how many percentage of learning centers are in the top five cities?
And also how many cities have you been entered into and what do you think the potential number of the cities you may enter into eventually? And secondly is what's the utilization rate this quarter and what's the trend for the utilization rate? Thank you.
Speaker 2
Okay. Yes, I mentioned the top five cities contribute 46% of total revenue. So in the top five cities, I think the learning center number altogether, the Beijing is 105, Shanghai is 56 and Guangzhou is 32 and Xian is 25.
Speaker 8
Yes. Okay. This is the learning curve.
Speaker 1
I can send you the detail after Yes. The learning It's on our presentation. Yes.
Speaker 2
Okay. We are in 70 cities. And I think the our ultimate goal is to step into more than 100 cities. But most of the new cities, we will step into by the dual teacher model. Okay.
But don't forget, even in the current existing cities like in Beijing, we have the 100 learning centers in Beijing, but I think the maximum learning centers in Beijing will be over 150. So there's a lot of room to open more learning centers in the existing cities.
Speaker 0
And we will take the final question from Marilyn Mo of Indus. Please ask your question.
Speaker 8
Hi, Stephen. Good evening. And I have a follow-up question on margin. If I understand correctly, so for this quarter, our utilization rate is kind of flattish year over year. Indeed, the GAAP revenue per teacher hour is also up 6% year over year.
So what drives the gross margin dilution year over year for this quarter? And also for operating margin besides the investment in online, what other factors drive the margin dilution? I both talk about year over year, not quarter over quarter.
Speaker 2
Okay. Yes, I think within the G and A and selling expenses, I think besides the 18,000,000 of the online investments, I think the headcount was increased because we opened more learning centers schools in the last two to three quarters. So within the cost of that, because the rental is over 40% year over year increase year over year this quarter, don't forget we opened 120 new learning centers and more square meters in last three quarters. So at the quarter end, the square meters are 38% higher compared to last year. That's why we got the 4544%, 45% rental increase in this quarter.
Speaker 8
So the rental increase is 44% to 45% increase?
Speaker 2
Yes. But
Speaker 8
if our utilization rate is kind of flattish, that should be largely offset.
Speaker 2
Yes. So partly it's offset, but the new learning centers, we need more time to fill the students into the classrooms. So it's dragged the margin. But on the GP level, the gross margin level is just down by 70 bps down. So it's not a big number, okay.
Speaker 8
Okay. So still it's because of expansion. Okay. Thanks.
Speaker 2
Yes.
Speaker 0
We are now approaching the end of the conference call. I will now turn the call over to New Oriental CFO, Steven Yang for his closing remarks.
Speaker 2
Again, thank you for joining us today. If you have any further questions, please 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 and you may all disconnect.