New Oriental Education & Technology Group - Earnings Call - Q2 2019
January 22, 2019
Transcript
Speaker 0
Good evening, and thank you for standing by for New Oriental's Second Fiscal twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.
I would now like to turn the meeting over to your host for today's conference, Ms. Cici Zhao.
Speaker 1
Thank you. Hello, everyone, and welcome to New Oriental's second fiscal quarter twenty nineteen earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions.
Before we continue, please note that the discussion today will contain forward looking statements made under the Safe Harbor provisions of The U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.
A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr.
Yang. Stephen, please go ahead.
Speaker 2
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are very pleased to see our overall business continue strong momentum and achieve top line growth of 27.8% in dollar terms or 33.6% in RMB terms as we concluded for the 2019. The positive growth was largely driven by the remarkable year on year revenue growth of 38% in dollar terms or 44% in RMB terms in our key business units, the K-twelve all subjects after school tutoring business. This result reflects our solid, high quality product portfolio and sustained market demand.
Total student enrollments in dynamic subject tutoring and test prep courses increased by 23.6 year over year to approximately 2,320,800 for the 2019. In addition, this is followed by a very strong enrollment and cash revenue momentum in the first seven weeks of the third fiscal quarter. In this quarter, our UCAM middle high school of subjects after school tutoring business grew by approximately 39% in dollar terms, or 46% if computed in RMB. And POPCAVE program achieved a growth of approximately 35% in dollar terms or 41% if computed in RMB, which are hugely positive results. As we continue to implement our well proven optimized market strategy, we also made some progress in our capacity expansion plan in this quarter.
We added a net of 24 learning centers in existing cities and opened a new training school in the city of Jinhua. Altogether, this increased the total square meters of classroom area by approximately 30% year over year and 5% quarter over quarter by the end of the quarter. We're steadily on track with our expansion plan and are pleased to see increased market penetration rates in the market we have expanded into. With these proven results, we will continue to implement our expansion plan guided by our long term strategy. Historically, the second quarter is the slowest quarter in the fiscal year.
However, in this quarter, we continue to see the positive ramping up of the new facilities we built in the previous fiscal year, which is highly encouraging. Our non GAAP operating margin and utilization rates in offline language training test drive business remained flattish year over year in the second quarter. Going forward, we will remain focused on improving our operational efficiency and ensuring consistently high quality of education across all business lines through a standardized modular and systematic approach. We believe that, altogether, this will enable us to leverage our existing capability to capture growth opportunities and generate sustainable long term value for our customers and shareholders. I will now turn to pricing.
Program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 13% year over year in dollar terms or 9% in RMB terms. Please note that the lower than normal blended ASP is primarily due to the change in the tuition fee collection schedule for our K-twelve business courses. This year, we split the spring semester into two parts: The number of students recruited and the amount of the fee collected during the quarter only covered the first half of the spring semester. Prior to the change, we've historically collected the full sum of the tuition fee for spring semester in the second quarter. Therefore, our blended ASP for the 2019 appears to be lower.
To provide a breakdown of the hourly blended ASP, the UCAM increased by 5%, POP Kids increased by 8%, and the Overseas Test Drive program increased by 8%, all year over year in R and D terms. Now let me move on to the second quarter performance across our individual business lines. As mentioned, our key revenue driver, K-twelve after school business, achieved revenue growth of 38% growth in dollar terms or 44% in RMB terms year over year, driven by the solid performance in student enrollment, which saw a year over year increase of about 26% in the quarter. Breaking down, the UCAM Middle School high school of subjects after school tutoring distance recorded a revenue increase of 39% in dollar terms or 46% in R and D terms for the quarter. Student enrollment grew approximately 34% year over year for the quarter.
Our POP Kids program delivered remarkable results, with revenue up significantly by about 35 in U. S. Dollar terms, or 41% in RMB terms for the quarter. Enrollment went up about 19% for the quarter. The lower than normal enrollment growth is due to the delayed registration for classes in certain cities in compliance with new industry regulation stating that tuition fees will not be collected more than three months before the course starts.
Our overseas test prep and consultant business together recorded a revenue growth of about 8% year over year for the quarter. Finally, our VIP personalized plus business recorded a cash revenue growth of about 17.6 year over year for the quarter. Next, I will provide some updates on the progress we are making with our Optimize Market strategy. We have continued to focus on expansion of capacity through constant refinement and leveraging our onlineoffline integrated education system in the k 12 business nationwide. And our overseas test prep business in some larger cities in China.
This continued to produce very encouraging results, beginning with our core offline business. In the second quarter, we added a net of 24 learning centers in existing cities and opened a new training school in the city of Jinhua. Altogether, the total square meters of classroom area by the end of the quarter increased approximately 30% year over year and 5% quarter over quarter. To further tap into the booming private education market and fully strengthen our leadership position, we started to pilot our new dual teacher model in selected cities in July 2016. By the end of the second fiscal quarter twenty nineteen, we have tested adoption of the new model in 40 existing cities for POP Kids program, in 28 existing cities for UCAM program, and in 10 new cities for both POP Kids and UCAM programs.
We're happy to witness increasing market penetration and customer retention in this market we have tapped into. The scalability of the new model also continues to bear fruit. With these proven results, we will continue to deploy the strategy in the coming periods. With respect to our online business, on the whole, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. With a booming market and our advanced onlineoffline integrated product service, we're poised to gain more market share and strengthen our position going forward.
I will first provide an update on our onlineoffline integrated standardized teaching system for our offline language training and test prep offerings. Starting from this fiscal year, we initiated a pilot program to standardize our teachers' teaching process by using our system to train teachers with modularized digital content and methodology in our U Can middle school high school tutoring business. As a result, we saw a remarkable increase of customer retention rates, which is the most important measurement of our teaching quality and effectiveness. With proven positive results, we will spare no effort in leveraging standardized modular and systematic approach to our whole operating process across all this line. We invested $23,700,000 in the second quarter to optimize and maintain our onlineoffline integrated education system, which has an area of focus since 2014.
Most of the investments were recorded under G and A expenses. We will continue our focus on improving overall operational efficiency and profitability by making full use of the strength in technology and operational teaching system to capture the new business opportunities. Since the launching of the UCAM Visible Provide teaching system in September 2014, the interactive education system has been implemented in all existing cities. We have launched newly revamped POP Kids English program from You in most cities by the end of second quarter in fiscal year twenty nineteen. At the same time, the interactive education system has been gradually used in an increasing number of the cities.
The interactive education system for overseas test prep program, including IELTS, TOEFL, and FAT courses, was rolled out and tested in most of the major cities by end of the second quarter of this year. At the same time, we also standardized product offerings across 14 cities. We also made some progress in the cooler.com business line and other supplementary pure online education products, With the goal of capturing huge market opportunity in the pure online education space, we continue to invest more resources to execute new initiatives in our online K-twelve after school tutoring business in fiscal year twenty nineteen. These efforts include content development, teacher recruitment and training, R and D, sales marketing, and other cost expenses that are necessary to drive the growth of these new online programs. With these programs, we are able to reach more students in low tier cities in an interactive and scalable approach to further strengthen our market share in the online education space and drive up our top line growth.
Now let me walk you through the other key financial details for for the second quarter. Operating cost and expenses for the quarter were $627,300,000 representing a 30.6% increase year over year. Non GAAP operating costs and expenses for the quarter, which exclude share based compensation expenses, were $613,700,000 representing a 30.3% increase year over year. Cost of revenue increased by 32.1% year over year to $300,100,000 primarily attributable to the increase in teachers' compensation for more teaching hours and rental costs for increased number of the schools and learning centers in operation. Selling and marketing expenses increased by 27.1 year over year to $91,600,000 primarily due to increase in brand promotion expenses and selling and marketing staff compensation.
General and administrative expenses for the quarter increased by 30.3% year over year to $235,600,000 Non GAAP general and administrative expenses, which exclude share based compensation expenses, were $222,000,000 representing a 29.4% increase year over year, primarily due to increased headcount as the company expands network of schools and learning centers, as well as the increase in R and D expenses and human resources expenses related to the development of our onlineoffline integrated education system. Total share based compensation expenses, which were allocated to related operating costs and expenses, increased by 47% to $13,700,000 in the 2019. Operating loss for the quarter was $28,600,000 an increase of 118.5% year over year. Non GAAP operating loss for the quarter was $14,900,000 a 295.7 percent increase year over year. Operating margin for the quarter was negative 4.8% compared to negative 2.8% in the same period of prior fiscal year.
Non GAAP operating margin, which excludes share based compensation expenses for the quarter, was negative 2.5% compared to negative 0.8% in the same period of the prior fiscal year. Loss from fair value change of long term investment for the quarter was $35,100,000 Please note that this has resulted from the adoption of new financial instruments accounting standards starting from 06/01/2018. Net to us, a trip to New Oriental for the quarter was $25,800,000 compared to an income of $4,300,000 Basic and diluted loss per ADS attributable to New Oriental was $0.16 and $0.16 respectively. Non GAAP net income attributable to New Oriental for the quarter was $23,000,000 representing a 69.2% increase from the same period of prior fiscal year. Non GAAP basic diluted earnings per ADS to New Oriental were $0.14 and $0.14 respectively.
Net operating cash flow for the 2019 was approximately $168,800,000 Capital expenditures for the quarter was $43,100,000 which were primarily attributable to the opening of 48 facility and renovations at existing learning centers. Turning to the balance sheet. As of the November 3038, New Oriental had cash and cash equivalents of $842,900,000 compared to $833,100,000 as of August 3138. In addition, company had $94,600,000 in term deposits, dollars 1,700,700,000.0 in short term investments. The deferred revenue balance, which is cash collected from registered students for courses recognized proportionally as revenue and as the instruction are delivered at the end of the 2019 was $1,250,300,000 an increase of 9.9% as compared to $1,137,300,000 as of the 2018.
As mentioned earlier, the lower than normal growth is due to the change in our fee collection schedule, meaning that in this quarter, we only collected fees for the first half of spring semester. Looking ahead into the next quarter and the rest of the fiscal year twenty nineteen, we will continue with our optimized market strategy to build upon the success we have achieved through the approach. I would also like to take a moment to reiterate our overarching goals and our strategy, as well as the challenges and opportunities we anticipate in the future. First, we will continue to expand our offline business. We aim to add around 20% to 25% capacity, including new learning centers and expanding classroom area of some existing learning centers for k 12 business in existing cities.
In addition, we will continue to roll out our dual teacher model schools to a number of new low tier cities in certain provinces for the whole year. Second, we will continue to leverage our investments in onlineoffline integrated standardized teaching system for our offline language training and test prep offerings, especially for our k 12 business and the overseas test prep business. We will continue to make investments, and we believe that total spending in absolute dollar terms in fiscal year twenty nineteen will increase moderately compared with the previous fiscal year. Furthermore, we will continue to invest and execute new initiatives, including product content development, teachers recruiting and training, R and D, as well as sales marketing in the pure online K-twelve after school tutoring business on our coollearn.com platform. Third, our top priority will remain as focused on optimizing utilization of facilities and controlling costs across the organization to drive continued margin expansion and improve the operational efficiency.
In the previous fiscal year, we expanded our overall capacity by approximately 40% year over year, with the expansion being more concentrated in the second half of last year. The new facilities built last year are being ramped up more efficiently than we expected, we expect our non GAAP operating margin of the offline land retrainment test drive business to expand in the second half of this fiscal year, especially compared to the previous fiscal year. This improvement is expected to cover the margin pressure resulting from our online investments in the coollearn.com business line and other supplementary pure online education products. On the whole, we expect our overall non GAAP operating margin to flatten year over year in the second half of the fiscal year compared to the year over year decline in the first half. We continue to foresee a degree of uncertainty around the implementation of newly introduced policy leading to the after school tutoring institutions.
The current impact so far is in line with our expectations. And as the leading education service provider in China, our company is firmly supportive of these reforms, which will improve market standards and foster healthy growth of the industry. As always, we're committed to provide high quality education services and contributing to a creation of sustainable market. At this stage, the reforms are currently being implemented on a city by city basis With our market leading position and the robust business conditions, we do not expect to see material negative impact on our growth opportunities nationwide. Although we do expect to see incremental administrative costs and expenses as a result of the implement of the policies in certain cities.
Finally, the recent RMB depreciation against the US dollar will also impact our earnings in dollar terms for the 2019. Finally, I would like to emphasize we have great confidence in the fundamentals of our business, which we believe will remain strong. As we continue to optimize market strategy, we're certain that New Oriental will continue to capture sustainable growth opportunities in the market and deliver long term value for our shareholders and customers. Regarding the near term guidance for the 2019, we expect total revenue to be in the range of $769,900,000 to $793,200,000 representing year over year growth in the range of 25% to 28% in dollar term. If not taking into consideration the impact of the potential changes in exchange rates between RMB and the US dollars, the projected revenue growth rate is expected to be in the range of 32% to 36% for the 2019.
I must mention that these expectations reflect neurons of current and preliminary view, which is subject to change. At this point, I will take your questions. Operator, please open the call, please.
Speaker 0
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 questions one at a time from each caller. If you have more than one question, please request to join the Your first question is from Felix Liu from UBS. Please ask. Hi, management.
Congratulations on the the very good results and the guidance. Just some bookkeeping questions from me. Could you provide a capacity guidance for the third quarter and the full year as well as the margin guidance for those periods? And just out of I noticed that in the recent two quarters, the growth of the POP Kids English program has slowed down relatively compared to The U Can. Could management provide more color on that?
That's it. Thank you.
Speaker 2
Okay. Yes, the capacity expansion, we opened the expansion of this quarter quarter on quarter was 5%. So plus the 3% quarter on quarter in the first quarter, we got it we opened 8% more in the first half of this fiscal year. And for the whole year, we keep the same guidance of the expansion plan as we guided before, 20% to 25% of the expansion plan. And the margin guidance, the overall non GAAP operating margin of this quarter is down by 170 basis points year over year.
Even though the second quarter is a slower quarter in the fiscal year, actually our non GAAP operating margin for the core offline business was flattish in this quarter. And don't forget, in the previous fiscal year, we opened more learning centers in the second half of the last fiscal year. When I left you the total expansion was 40%. So I think you will see more and more operating leverage in the second half of this fiscal year. So that means in the Q3 and Q4 together, you will see the margin expansion for our core business.
And which I think is expected to cover the margin pressure resulting from our online investments for cooler.com and the other the online the product. On the whole, the total the overall non GAAP operating margin for the second half of the year will be flattish year over year. Okay. This is my the margin guidance for the second half of last year for this year. And going forward, I think we will pay more attention on the as they focus on the optimized the utilization facilities and the control of cost and expenses as we need it.
And so as for the mid long term margin guidance, we keep the positive view of the margin expansion in the next year and the year after, okay? And POP Kids, yeah, you know, I think the trend for the POP Kids program is good. And you have seen our guidance for the Q3. And we believe you will see very strong growth for pockets program in the Q3 and Q4 going forward. Thanks, Fut.
Speaker 0
Okay. Thank you. Thank you very much.
Speaker 2
Thank you.
Speaker 0
Your next question comes from the line of Thomas Chong from Credit Suisse. Please ask. Hi, Stephen and Sisi. Congratulations on a strong set of results. I have a quick question regarding regulations.
Can management provide some general updates about the regulations these days and how we should think about the outlook? Thank you.
Speaker 2
Okay. Thanks, Thomas. It's a good question. You know, in terms of the regulation, actually, are fully I must mention that we are fully supportive of the government's reforms and their implementations. And we're committed to doing our part in fostering the healthy growth in the whole sector.
As newly introduced policy in the market are currently being carried out by city by city basis, as I mentioned in the prepared remarks. And we continue to foresee some a certain degree of the possible changes and some incremental expenses in the short term. This impact so far is in line with our expectations, and going forward, we expect the impact will be in line with our expectations. And the three things were I want to add to the regulation related things. The first one is teacher's license.
You know, we are still in process of the push all the teachers to pass the exams of the teacher license exam, and we're seeing the high passing rates for the last exam. And we're fully committed to our efforts to ensure that all the teachers hold the qualifications as required. And the capacity, as I mentioned earlier, you know, we keep the same guidance of the expansion plan, 20% to 25% year over year in the whole year fiscal year 2019. And but we do have the negative impact for the deferred revenue balance in the Q2, but it's because we changed the spring semester course into the two parts. So in this quarter, we recruited students and collected the tuition fee for the first part.
And second, we changed the registration window in some cities, especially for POP Kids program, were delayed from November originally to December. So that means we moved some the cash revenue of POP Kids from Q2 to Q3. So therefore, you'll see the deferred revenue balance was only increased by 10%, but it's temporarily. It's just the timing difference. And we have seen the very strong cash revenue and enrollment growth in the first seven weeks of the third quarter.
So I think the trend is very good.
Speaker 0
Thank you, Steven.
Speaker 2
Okay. Thanks, Thomas.
Speaker 0
Your next question is from Tian Hu from TH Capital. Please
Speaker 3
ask. Hi, Cece and Steven. Congratulations So on the good I have one question related to your deferred revenue. So deferred revenue is was growing 10%. So I believe even compared with the last quarter twenty twenty three, the quarter before forty something seems low.
So is that really is that because the government policy prevent company from collecting fees more than three months before. So if so, on the pro form a base, what is the deferred revenue growth would be?
Speaker 2
Okay. Thanks, Tian. As mentioned, the student enrollments in tuition fee collection in our spring, the courses are delayed due to the new regulations. That tuition fees should not be collected more than three months ahead of the courses. So we changed two things.
The first one, starting from this year, we divide the spring semester into two parts. In Q2, we recruit the students and collect the tuition fee for the first part. Second, we moved some registration window for POP Kids program in some cities from Q2 to Q3. However, so therefore, the deferred revenue for the quarter was affected and reported a slower growth by 10%. However, when we look at the growth, our pro form a basis as you have, it's in line with the growth momentum, because you know the pro form a as a pro form a basis, the deferred revenue increase is approximately 40%.
This is a pro form a basis. So and going forward, think the delayed effect, the delayed effect will influence us for one year, especially for Q2 and Q3, Q2 and Q4. But for but I don't think it will impact our GAAP revenue, okay, and it's only for one year. Thanks, Tian.
Speaker 3
That's clear. Thank you, Stephen. That's all my questions.
Speaker 2
Okay. Thanks, Tian. Right.
Speaker 0
Again, if you wish to ask question, please press star one, and please be advised to limit your question into one. Your next question is from Terry Wang from Blue Lotus. Please ask. Hi, management. Congratulations for a strong quarter.
I have one question here about the low tier city expansion. How many k twelve learning center open in 2019 will be in the lower tier city? And could management also provide more update on the lower tier city penetration? Thank you.
Speaker 2
Yeah. As I guided before, we keep the same the extension guidance of the 20% to 25% in for overall the company. And actually, our strategy of the open more learning centers is the we firstly we see the performance of last year, whether it's high tier or low tier. But we believe we set up most of the learning centers in tier two and tier three. And so for the low tier cities, you know, as I said, we will open more learning centers by the dual teacher model in low tier cities.
K? What what I mean is the tier five or or tier five cities. K? Thank you. Thank you.
Speaker 0
Your next question is from Jin Yoon from New Street Research. Please ask.
Speaker 4
Hey, good evening guys. I guess just on your just a quick question on your margins in the second half. I know, Stephen, you said that margins are going to be looking flattish in the second half of the year. I'm just trying to kind of gauge what the upside opportunity is given the fact that online investment is largely front end loaded. It looks like capacity expansion will start to significantly tail off in the second half of the year.
And given the demand environment, why wouldn't we see in that scenario, why wouldn't we see actually a positive margin upside rather than just a flat margin? So can you just kind of give us the drivers in terms of where we could see actual margins trending lower outside of online investments as well as capacity expansion? Thanks.
Speaker 2
Okay. Thanks, James. A good question. As for the margins, you know, in the second half of the year, I think we will see more and more operating leverage by the by freely more students into the learning centers we set up in the last two to go year. So definitely you will see the higher utilization rates for our core business for the both The UK and overseas test prep.
And so it's absolutely, it's a margin expansion, but it will be offset to some extent by the online investment. But I think you will see more leverage on the offline business margin expansion. So, you know, our guidance for the second half of this year, the margin will be flattish, so we hope the results will be better than we expected expectations currently.
Speaker 4
Okay, great. Thanks, Steven.
Speaker 2
Okay, thanks, Jean. Your
Speaker 0
next question is from Natalie Wu from CICC. Please ask.
Speaker 5
Hi. Good evening, Steven and CICC. Thanks for taking my question, and congratulations on a very solid quarter. My question is regarding the summer promotion. Actually, I saw the you have set the minimum hourly price limit for the sum of promotion program in some media report recently.
So just curious what's your consideration behind that? And will you cut the promotion scale accordingly? It would be great if you can share some of your thoughts behind that, as well as your summer promotion plan this year. Also, secondly, if I may, as we know that some small institutions are forced to shut down in this roundup of the regulation. So just wondering, did you see some students coming from those institutions to join your program?
And if yes, for this flow or the crowd out phenomenon, is it more prominent for the primary, middle, or high school? Thank you.
Speaker 2
Okay. The your first question is about summer promotion. You know, so far, we haven't finished our work plan for the this year's summer promotion. But in this year, we're quite sure that we care more about student retention rates from the summer promotion. So yeah, as you said, we set up the new price strategy for the summer promotion.
In the last year, typically, we charged only RMB50 to RMB200 per course in last summer. And this year, we decided to increase the summer promotion courses price from RMB250 to RMB400. And I think it will help us to get the higher student retention rate after the summer promotion. And, you know, we started the summer promotion several years ago, and the result has to be it works. And going forward, I think we'll use the same strategy of the summer promotion, because we I think it's a good way to take more market share from the huge market.
But going forward, even for this year, we'll care more and more about the student retention rate. Okay? So that means it's that we care more about the healthy growth. The yeah. Your second question is about the regulations, think.
You know, the yeah, we are seeing some small players were kicked out of the market by the new regulations. And we have seen certain students join us, you know, because, you know, some students tell us. And I think, you know, our job is doing our job in a proper way. We'll provide best quality service to the parents and the students, And we are happy to see the higher student retention rates. I think this is very good, the result of our investment for the last two to three years.
So the and I think the market demand is always there and we will do it our we will do it in our proper way by ourselves. And our job is to provide the best of service to The UKs and to take more market share from from the market. Okay? Thanks.
Speaker 5
So for the strength of your the for your guidance, is it partly just because of that?
Speaker 2
I think it's because of two parts. Firstly, you know, the the I think we believe the retention rate of the the retention rate will be higher going forward in the in Q3. And second, you know, because, you know, we saw a lot of learning centers in last fiscal year, and we're seeing the the learning centers was filled by the students. So so I think the the the the guidance is is based on our current estimation, and I think the trend is good.
Speaker 5
Okay. Got it. Thank you.
Speaker 2
Thank you. Your
Speaker 0
next question is from John Wong from Macquarie. John, you may ask now.
Speaker 2
Yes. Thank you for taking my questions and congratulations on the solid results. So as we're seeing a flattish sales and marketing cost as a percentage of revenue, can management show some colors on whether this trend will continue? And what are we we are doing differently to improve the efficiencies on the sales and marketing expenditures? Thanks.
Okay. If you separate the selling and marketing expenses into two parts, offline and online, actually we believe that we have the more leverage on the offline business in terms of the selling and marketing expenses. So I think you will see more and more leverage on the selling and marketing expenses for our core business. And for the online, we don't want to choose the burning money way to take more market share. But you know, for the online, online market is huge, so we have to spend a little bit more than before on the marketing expenses.
So overall for the company, as a percent of the selling and marketing expenses, as a percent of the revenue, I think it will be flattish. Think we will have a little bit more leverage on the selling and marketing expenses. Sure. Thanks. Thanks.
Speaker 0
Your next question is from Christine Cho from Goldman Sachs. Please ask.
Speaker 6
Hi, thank you, Steven and Cece, and congrats on the quarter. Quickly, I think this quarter you mentioned that the change in tuition collection optically made the per program blended ASP look lower than usual. But on an apple to apple basis, can you confirm the trends are actually quite similar or even on accelerating trend versus the last quarter? And also, could you just elaborate on the pricing potential going forward?
Speaker 2
Okay. Yeah. This quarter, we changed some of tuition fee change. So that's why we suggest to your guys to see the hourly rates And the hourly blended ASP of U Can was increased by 5%, POP Kids 8% increase, and overseas has 58%. I think it's in line with our price strategy as we guided the street.
And going forward, we'll use the same price strategy. You know? We know we have the price power in hand, but we we want to increase the price too aggressively. K? I think the five to 8% will be reasonable.
K?
Speaker 7
Thank thank you.
Speaker 2
Thank you.
Speaker 0
Your next question is from Lucy Yu from Bank of America Merrill Lynch. Please ask.
Speaker 8
Hi, Steven. I remember you gave full year revenue guidance of 30% in RMB term. So if we're using the higher end of your third quarter guidance, which is which is around 36%, That implies fourth quarter, your RMB revenue will only grow at 24%, which is a significant slowing down from third quarter. So are you considering rising up your full year guidance on revenue growth? Thank you.
Speaker 2
Thank you, Lucy. Yeah. I think this is Matt's question. Yeah. I think for the whole year, our top line growth in RMB term year over year will be 30% plus.
Okay. Yeah. I mean, our year over year growth.
Speaker 1
Okay. Also, second question is on
Speaker 8
the margin. You mentioned second half margin will be largely flattish with offline improving, offsetting online losses. Can you give us a bit more color on how much offline margin expansion are you expecting in the second half? Thank you.
Speaker 2
I think the offline business in the second half of the year, the offline business margin expansion will be higher than one with one with the basis points. Okay? So it's roughly number. Okay? And yeah.
That's it. Yeah.
Speaker 8
100 basis point. Right?
Speaker 0
Yeah. Okay. Thank you.
Speaker 2
Market pension for offline business. Yeah.
Speaker 1
Sure. Thank you. Yeah.
Speaker 0
Your next question is from John Choi from Daiwa Capital Markets. Ask.
Speaker 9
Hey, Stephen and Sisi. Thanks for taking my question. I have a couple of questions here. On the first, on your because now you guys have to change the collection period, will that have a change in your deferred revenue on the seasonality going forward in the coming quarters? And how should we think about that type first?
And second question is on your online business. Now I know you have been investing a lot. When should we start seeing some inflection point? I know, like you said in the second half, off line is going to be more or less offsetting. But as we go into fiscal year twenty twenty, should we be expecting more of acceleration from the scale we're seeing for off line margin expansion that should be offsetting more on the online, or should we be continuing to expect that online will have a further drag to the profitability?
Thank you.
Speaker 2
Okay. Yeah, the deferred revenue, I think because of the delayed effect of the fee collection will influence our deferred revenue for one year since this quarter, and especially in Q2 and Q4. So I think in the coming quarter, Q3, the deferred revenue will be negatively impacted a little bit. Okay? And Q4, it will be negatively impacted in the at the end of the Q4.
This is the impact of the deferred revenue. But we will not have a I think it will not impact the the gap revenue growth because it's just a timing difference. And, yeah, the I think your your second question is about the margins. Yeah. You know, in the second half of the year, I think the top line growth will be very strong.
And if you compare the top line growth with the expansion plan, you will see the leverage. And we do believe we will have more leverage on the selling and marketing expenses and G and A expenses for core business, even though we spend more on the online platform or the other pure online product. But if we do, it will be offside by the online margin expansion. K? On the core on the core business margin expansion.
K?
Speaker 0
K. Your next question is from Johann Song from Industrial Securities. Please ask.
Speaker 8
Hi. Good evening, Steven and Sisi. Thank you for taking my question. I have one question about, can you break down the number of the new net new learning centers opened this this this quarter, which is 25? How many are new opened and how many are closed?
And there are some blacklisting learning centers in the February 2008. How how long will this mini centers reopen after renovation? Thank you.
Speaker 2
Okay. We we opened we opened 48 new learning centers in q two and closed down 23 learning centers. So the net increase was 25. K? And I think most of the learning centers which were closed down as the regular closed down.
K? For some, like, the leasing contractor. Yeah. And we opened we opened 48 and closed down 23. So we Will this 25
Speaker 8
reopen or just closed down forever?
Speaker 2
Just to close down. 20
Speaker 1
Yeah. It's typically a replacement of some old learning centers that lease term expired, and we typically move around. So close down the old one and open a new one. Yeah.
Speaker 8
Okay, thank you. Thank you very much.
Speaker 2
Thanks.
Speaker 0
The next question is from Johnny Wong from Jefferies. Johnny, please ask.
Speaker 10
Hi. This is Steven. Thank you for taking my call. Well, a lot of my questions have been answered, but can you just one for me. Can you please elaborate on the type of promotions that we are doing in terms of online business, what is working and what's not, and whether or not we have some sort of target for a acquisition cost per student?
Thank you very much.
Speaker 2
Thanks, Johnny. I think your question is about the student acquisition. For our offline business, the student acquisition costs were low as a percentage of the revenue. Typically, the out of pocket selling and marketing expenses is just 4% of total revenue. And we just rely on the word-of-mouth because NewRental is the best the household brand name in China and we rely on the word-of-mouth.
Okay? Almost every almost, you know, a lot of people in China, parents and kids, Newan's name. And for for for the for the online business, is quite new and the market is huge. And I think some some students and parents, they do know NewRental is doing the online business. So we prefer to spend more on the selling and marketing expenses to to acquire new students.
But, you know, this I think, you know, we will use the the the the this way by a reasonable way. K? We don't like to burn the money to acquire the new students. We care more about the teaching quality and content development rather than the marketing activities. Yeah.
Speaker 10
Okay. Thank you.
Speaker 2
Alright. Thank you, Johnny.
Speaker 0
Your next question is from Sheng Zhong from Morgan Stanley. Please ask.
Speaker 7
Thank you. So, I have two questions. One is about the enrollment. We know that the there was some collection fee here we changed. So, if we look at enrollment, what's the guidance for next quarter and and second half?
And and secondly is you are executing the share repurchase purchase plan. So can you give some updates on this? Thank you.
Speaker 2
Okay. Enrollments, you know, the as I said, the lower than normal enrollment in this quarter is due to the delayed registration for in some cities from Q2 to Q3. It's not from November And to because of the new regulations, and it's that the tuition fees should not be collected from the more than three months ahead of the class start. But we have seen a very, very strong enrollment growth and cash revenue growth in the first seven weeks of the third fiscal quarter. So, you know, I don't know the I don't want to give the guidance of the enrollment growth.
It's really hard for me, but we do believe in the second half of the fiscal year, the enrollment growth will be very strong, okay? And your second question is about the share repurchase plan. Yeah, we announced the $12,000,000 share repurchase plan, and we are still in process. We are buying the shares in the open market, and it's still in process. Okay?
It will be ended it's planned to be ended at at the end of the this fiscal year, May 31. Okay?
Speaker 7
Thank you.
Speaker 2
Thank you, Zhong qing.
Speaker 0
Your next question is from Tawan Zhou from Deutsche Bank. Please ask.
Speaker 10
Hi, Steven. Hi, Sisi. Thanks for taking my questions. I've got two. The first is since you mentioned about not going aggressively online investment, do you have a target of like online enrollment or online revenue as a percentage of total?
And second question on the margin, it seems like you're quite bullish on second half margin. So on the offline business, is this because of the retention rate in the new learning centers are gradually, you know, going up? Thanks.
Speaker 2
Thanks, Simon. Your first question about the enrollment growth of the online platform. I'm sorry. I can't say too much about the enrollment growth because, you know, we we filed the a one for our coolant.com in Hong Kong markets. So I can't say too much detail in the numbers.
But but I can say that the enrollment growth is very strong. Okay? And the the margin guidance over the second half year, you know, the overall margin guidance for the second half of the year for the whole company is flattish. Actually, it's not bullish, just the flattish. You know?
Compared to the first half year margin dilution, it's just the flattish. Okay? Okay. So I think this is reasonable because, you know, last year, we opened 40% new learning centers, and this year, we we bear fruit. And going forward, even for the next year, we'll see more leverage on the on on the margins for the new year next year.
Okay. Thanks, Tyler. Thanks, Steven. Thanks.
Speaker 0
Your next question is from Charlotte Lee from Citi. Please ask.
Speaker 7
Thank you, Steven, for taking my question. I'm asking questions on behalf of Mark Li. And first, I want to congratulations on the solid results. I have two small questions. First is, can you give us the revenue growth in top five cities and in lower tier cities in the last quarter?
And also, may I know the current share for you in top cities? And do you have a target achieve more shares in, say, midterm or long term? Thank you.
Speaker 2
Yeah. I think the top five cities, the revenue growth of the K-twelve business in last trailing twelve months is 31% to 32% in RMB terms. Okay? This is our disclosure. And actually, I think you saw the very great the very good momentum of the K-twelve business.
Actually, we are taking more market share in most of the cities, whether it's high tier or low tier.
Speaker 7
Thank you.
Speaker 2
Thanks.
Speaker 0
The next question is from James Weir from USS. Please ask. Hi there. Good evening. I wonder if you could comment just again on regulation, particularly as it relates to the Internet and the online learning.
It seems we were picking up signals that the government was looking at increasing regulation on that side now that they've dealt with offline. And the second question was just on wage costs. We've seen this kind of licensing program come in place. I wonder, is that putting additional upward pressure on wage costs now that the license the teachers have the license? Are asking for higher wages?
Speaker 2
Thanks, James. You know, we haven't we have we have now seen the new regulations for the online education. So, yeah, it's it's what it is. Okay? There's no new regulation on the online education sector.
And the wages inflation, yeah, as I mentioned, you know, I think New Oriental, we provided we the highest level of the wages to teachers in the market. And typically, our the teachers' utilization every year is eight to 9%. So we don't need to pay too much or too more the wage inflation in terms of the new regulations. Okay? And our wages inflation strategy will be stabilized.
Okay? Thanks. Okay. Good.
Speaker 0
Alright, Tup. Thank you.
Speaker 2
Thank you.
Speaker 0
We are now approaching at the end of the conference call. I will now turn the call over to New Oriental's CFO, Stephen Yang, for his closing remarks.
Speaker 2
Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you.