New Oriental Education & Technology Group - Earnings Call - Q2 2021

Transcript

Speaker 0

Good evening, and thank you for standing by for New Oriental's FY twenty twenty one Second Quarter Results Earnings Conference Call. At this time, all participants are in a listen only mode. After the 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. Susie Zhao. Thank you. Please go ahead.

Speaker 1

Thank you. Hello, everyone, and welcome to New Oriental's second fiscal quarter twenty twenty one earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on newswire services. Today, will hear from Stephen Yang, Executive President and Chief Financial Officer. After his prepared remarks, Stephen and I will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward looking statements made under the Safe Harbor provisions of The U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org. I'll now turn the call over to Mr.

Stephen. Stephen, please go ahead.

Speaker 2

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Although the impact of the pandemic continues to raise hurdles for business across the globe, we are pleased to announce a set of financial results in the second quarter of this year that are in line with our expectation. While reflecting strong signs of recovery in some of our business lines as certain cities began to pass through normalization. Total net revenue was $887,700,000 representing a 13.1% increase year over year, which is an encouraging result despite the challenges.

Our key revenue growth driver, K-twelve after school tutoring business achieved year over year revenue growth of approximately 26%. Our UK Middle School high school all subjects after school tutoring business continued its momentum with a growth of approximately 27%, while our top kids program recorded a growth of approximately 24%. Our industry leading OMO system has been vital in the previous quarters to ensure our classes run smoothly, and it has once again proved to be instrumental in this quarter. As is our operation with strong flexibility to help vast majority of our students migrate from online or online class back to offline learning centers, which have gradually resumed the service amid easing of the pandemic restriction measures. Encouraged by its effectiveness, we have been committed to expand the reach of our OMO system and are delighted to say that we have piloted OMO online course in vast majority of existing cities and 20 new surrounding satellite cities in autumn semester, attracting a promising number of new customers and students, while the OMO system contributed single digit to the overall revenue in this quarter.

With this ability to virtually reach both major and satellite cities across China, we have no doubt that it will grow rapidly in the coming quarters and become a major driver to our business growth in the future. Cost control has become a key feature in our operation as we aim to cushion the impact from pandemic. We focus on the cost effective strategies that would deliver strong return and outcome and avoid spending of strategies or promotions that would have little business impact. While online education is a growing trend in China, pure online platforms tend to require substantial spending on marketing promotion. Hence, with OMO system, we have been able to achieve constantly high number of enrollments with cost effective promotions because of our strong on the ground presence and online channels supplement each other, which enable us to more effectively recruit new customers and deliver better service to our students.

Total student enrollment in dynamic subject tutoring and test prep courses in the 2021 increased by 10.4% year over year to approximately 4,183,100, which is in line with our expectation. In terms of pricing, per program blended ASP, which is cash revenue divided by total student enrollments, increased by about 13 year over year in dollar terms. As for hourly blended ASP, which is GAAP revenue divided by total teaching hours, was flat year over year. To provide a breakdown of the hourly blended ASP, please note that UCAM classes increased by 8%. UCAM VIP increased by 5%.

POP Kids increased by 0.3%. And the overseas test prep program increased by 13%, all year over year in RMB terms. Comparing with our normal price increase of 5% to 8%, this quarter's already blended ASP flat was mainly because of the bigger decline of oversea test prep program, which already blended ASP was much higher than the other programs. Now I'd like to spend some time to talk about the quarter performance across our individual business lines in detail. As pandemic became largely under control in China, recovery momentum continued to pick up in this quarter across our business lines.

Our key revenue driver, K-twelve all subjects after school tutoring business, achieved year over year revenue growth of approximately 26% in dollar terms. Breaking it down, the U Can middle high school all subjects after school tutoring business recorded a revenue increase of approximately 27% for the quarter. SUI enrollment grew approximately 15% year over year for the quarter. POP Kids program delivered outstanding results, with revenue up by about 24% in dollar terms for the quarter. Enrollment increased by 14% for the quarter.

Our overseas related business, including test prep and consulting business, showed encouraging signs of recovery despite facing the most difficult challenge due to the cancellation of the oversea test exams and restrictions on travel, as well as the unpredictability of the pandemic situation in different parts of the world, raising the students' hesitance to study abroad. The overseas test prep business reported a revenue decrease of about 29% in dollar terms for the quarter, in comparison to a decrease of 51% in the last quarter. While the overseas consulting and overseas study tour business recorded revenue increase of about 6% in dollar terms year over year for the quarter, recovering from last quarter's 31% decrease. And finally, VIP personalized class business recorded the cash revenue increased by about 20% year over year in dollar terms for the quarter. We carried out capacity expansion in cities where we see potential for rapid growth and strong profitability in this quarter.

We opened five new offline training schools in the city of Langfang, Kunshan, Dongyang, Danyang, and Jiuzhiang. Altogether, this increased the total of classroom area by approximately 21% year over year, 4% quarter over quarter by the end of this quarter. This increase is in line with our expectation as we gradually ramp up our expansion efforts throughout the academic year to prepare us for recruiting more new student enrollment at the start of the following academic year. The expansion in our offline education network has also made sure that we are fully prepared for when the pandemic is over and our service can resume with strong presence across different Chinese cities. We rolled out a dual teacher class model for POP Kids program in 58 existing cities for UCAM program in 27 existing cities.

With satisfactory customer retention and scalability, we will continue to use the model to increase our market penetration in those markets we have tapped into. An outbreak of COVID has highlighted the importance and demand of online education. We have placed more resources in this area and invested $54,000,000 in this quarter to improve and maintain our OMO integrated education ecosystem. Our success in piloting the OMO system in around 20 new cellular cities through the nearby major cities this quarter is yet another testament of how this low cost but high return OMO business model can rapidly become one of the most far reaching education service in China. Leveraging the presence of the offline school and learning centers and brand visibility in major cities, we're able to reach nearby satellite cities and continue to bring in high number of enrollments without the need to spend a huge sum of money on promotion marketing.

More importantly, this is a model that we can easily and cost effectively replicate in different parts of China. Hence, we are very optimistic about the growth potential of our OMO system in the next few quarters. Apart from the OMO infrastructure, we have allocated part of the resources in advance of the teacher training program for our teachers to enhance their onlineoffline integrated teaching skills in response to growing demand. At the same time, we continue to upgrade our technology platforms and will broaden the usage of the online tools and content in our OMO system for all business lines throughout the whole network, as well as further develop the best teaching content and courseware to cater to onlineoffline integrated education method. It's important to highlight that one of the key aspects that's made our OMO system stand out from the industry is the localization of our teaching content.

OMO teaching material for each city are developed by the local schools rather than math produced centrally, which means our content is tailored with local ones and reference to help students understand the materials better and encourage them to be more engaged in classes. On the promotional front, the nature of OMO system enable us enable us to implement cross selling strategy whereby we promote the courses through the both online and offline channels, reaching the broader range of the customer from different locations. We're glad to see that our industry leading OMO ecosystem has not only successfully managed to cushion most of the impact on our service penetration caused by the pandemic, but we also see our customer retention rates remain stable, which further demonstrates our customer satisfaction and effectiveness of our online course through our OMO system. We believe these OMO initiatives will effectively boost the enrollments and speed up the recovery of business in the coming quarters. To capture the huge opportunity in the online education space, we continue to invest in more resources in executing new initiatives in online K-twelve after school children business in fiscal year twenty twenty one.

During the COVID, Cooler did a large scale market promotion by offering free large online live broadcasting class to the public and attracted several more several times more traffic than normal time. To capture this new market opportunity, Koole also added a meaningful number of customer service representatives and marketing staff to support the new initiatives in Q12 Tutor. These moves have consequently raised our spending on the marketing front, but we believe these are necessary and understandable measures as we find ourselves in a unusual situation. Our Dongfang Yubo, DFUB small size class currently enjoy a significant first mover advantage and stand to benefit from the increase in demand in low tier cities. Cooler large sized k 12 courses are able to offer the best in class learning experience through the investments.

We are upgrading the app and online platforms, introducing new education technologies and adding more new interactive features online classes. COOLER also continued to establish teaching training centers in other geographic locations to attract more qualified teachers and tutors and provide a systematic screening programs. At the same time, we will be very cautious in identifying high ROI marketing channels and evaluate their unit economics in real time, which will in return keep the average user acquisition cost at a relatively low level. We believe as a result of the improvements to operational teams as well as positive word-of-mouth promotion and brand loyalty, Koolearn will continue to quickly acquire new users while enhancing the student retention rate. Now I will turn the call over to Cece to walk you through the other key financial details for the second quarter.

Speaker 1

Okay. Operating cost expenses for the quarter were US919.8 million dollars representing a 21% increase year over year. Non GAAP operating costs and expenses for the quarter, which exclude share based compensation expenses were US9.4 million dollars representing a 20.4% increase year over year. Cost of revenue increased by 26.4% year over year to US453.7 million dollars primarily due to the increases in teachers compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation. Selling and marketing expenses increased by 23.9% year over year to US133.6 million dollars primarily due to the addition of a number of customer service representatives and marketing staff with the aim of capture the new market opportunity during COVID-nineteen period, especially for the new initiatives in K-twelve tutoring on our pure online education platform, qoolearn.com.

G and A expenses for the quarter increased by 13.5% year over year to US332.6 million dollars Non GAAP general and administrative expenses, which excludes share based compensation expenses, were US319.8 million dollars representing a 13.4% increase year over year. Total share based compensation expenses, which were allocated to related operating costs and expenses increased by 64.8 to US18.5 million dollars in the 2021. Operating loss for the quarter was US32.1 million dollars compared to an increase of US25.3 million dollars Non GAAP loss from operations for the quarter were US13.7 million dollars compared to an increase income of US36.5 million dollars Operating margin for the quarter was negative 3.6% comparing to 3.2% in the same period of the prior fiscal year. Non GAAP operating margin, which excludes share based compensations for the quarter was negative 1.5% compared to 4.7 in the same period of the prior fiscal year. Net income attributable to New Oriental for the quarter was US53.9 million dollars representing a 0.9% increase from the same period of the prior fiscal year.

Basic and diluted earnings per ADS attributable to New Oriental were $0.33 and $0.33 respectively. Non GAAP net income attributable to New Oriental for the quarter was US69.1 million dollars representing a 21.3% increase from the same period of the prior fiscal year. Non GAAP basic and diluted earnings per ADS attributable to New Oriental were US0.43 dollars and US0.43 dollars respectively. Net operating cash flow for the 2021 was approximately million dollars Capital expenditures for the quarter were US62 million dollars which was primarily attributable to the opening of 78 facilities and renovations at existing learning centers. Turning to the balance sheet.

As of 11/30/2020, New Oriental had cash and cash equivalents of US2643.2 million dollars as compared to US915.1 million dollars as of 05/31/2020. In addition, the company had US416.1 million dollars in term deposits and US3035.3 million dollars in short term investments. New Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered at the end of the quarter, 2021 was US1987.1 million dollars an increase of 26.5% as compared to US1570.4 million dollars at the end of the 2020. Now, I'll hand over hand back to Stephen to talk about outlook and guidance.

Speaker 2

Looking ahead into next quarter and the rest of fiscal year twenty twenty one, despite the continued challenge from pandemic and the concerns cover the new wave of outbreak emerging in China. We are more clear about the recovery trends of the company's near term financial performance and the market opportunity over the long run. Our strategic focus and investment approach this year aimed at improving product quality, increasing teacher salaries and enhancing our industry leading system, which fully reflects our ethos of focusing on the essence of education. In view of market competition and opportunity to take advantage of post COVID market consolidation, we firmly maintain a stable and balanced investment strategy that would improve the quality of our education service with aim to achieve a sustainable and long term growth as opposed to unhealthy short term growth that often requires excessive investment and higher cost to acquire customers. As such, we will continue to focus on the following key areas.

First, we will continue to expand our offline business. We aim to add around 20% to 25% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-twelve business in this fiscal year. We believe our capacity expansion will prepare us to further take market share from other players post COVID, as we believe some smaller players without strong financial position and online class capability may not be able to sustain its business during this period. We expect the industry will undergo a way for market consolidation upon the pandemic phase. The fact that we are a major player with a strong financial capacity and fresh offline facilities enable us to further strengthen our market leading position and penetration.

Second, we will continue to leverage our investments into digital technologies and introduce our OMO system in more offline language training and test offering, especially our K-twelve tutoring and overseas test prep key business. The usage of online tools and content in our OMO system for all business lines throughout the whole network will be enhanced. To uplift the whole OMO teaching experience, we will place more efforts in developing the best teaching content and courseware, and also developing more advanced training programs to our teachers. With all the above mentioned infrastructure in place, we will continue to pilot our OMO online initiatives in major cities with a high demand and higher operational efficiency and is surrounding satellite cities. We believe that our OMO initiatives will be one of the our growth engines to increase our customer acquisition post COVID.

And it can quickly replicate in different parts of China, enabling us to capture the market consolidation opportunity. This revamped new business model will also accelerate our margin recovery when the pandemic is over and further expand our long term margin target. Here, I have to highlight all of these OMO products are supported by our offline classes. They supplement each other in a hybrid format. All the teaching content and coursework materials, as well as the teachers are developed and originated from our existing offline centers and resources.

Furthermore, we will continue to invest in and implement new initiatives, including product to content development, teachers' recruiting training, R and D, as well as sales and marketing expenses in pure online K-twelve after school tutoring business on our coollearn.com platform. Third, our top priority will remain as the focus on controlling costs and reducing expenditures across the organization to minimize the negative impact from pandemic on our bottom line. We believe we will resume the expansion of overall non GAAP operating margin year over year as COVID-nineteen subsides gradually. Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong. Although we are facing various short term negative impacts from the pandemic, we have been increasing our investments in different strategies, and we remain optimistic of a brighter prospect of our business and believe our investments now will bring us fruitful returns in the long run.

Due to the concerns that a new wave of COVID-nineteen outbreak is emerging in North China, as of today, we have moved our offline classes to small sized online broadcasting classes through the OMO system in over 10 cities, including the major cities such as Beijing, Xi'an, and Thailand. Despite these challenges, our OMO system enable us to migrate classes between offline and online platforms swiftly and seamlessly. And therefore, the impact on our business will be cushioned should there be a significant outbreak. In the meantime, the unpredictability of the epidemic has also reminded us to plan ahead of the future as we continue to build new learning centers to ensure we will be ready to accommodate a large number of students with situations normalized. When looking ahead near term, our expectations for the next quarter, we expect total revenue to be in the range of $1,098,600,000 to $1,144,800,000 representing a year over year increase in the range of 19% to 24%.

To provide a breakdown of the expected top line growth for the key business units, K-twelve after school tutoring business is expected to grow in the range of 27% to 32%. Overseas test prep program is expected to decline 25 to 20%. Overseas study consulting and study tour business is expected to be declined 5% to 0%. And the growth of the coollearn.com pure online education platform is expected to accelerate all year over year in dollar terms. Despite the fact that our overseas test prep and consulting service for the second quarter flared better than the first fiscal quarter.

We still expect the overseas related business to continue to behave harder due to the pandemics around the globe. Caused by the cancellation of the oversea exams, suspension of the oversea schools, and restriction on travels. The negative impact on this oversea related business will affect the entire education industry in China, not only New Oriental, and may last over the coming one or two quarters. That said, we're pleased to see that China has been controlling the pandemic situation relatively well, which shed a more positive light on this domestically. To conclude, we are now taking all kinds of operational actions to boost the enrollment and the classroom utilization for the autumn semester and speed up the recovery of business after the resumption of the schools and learning centers.

We're confident that the demand for after school tutoring will gradually pick up and trend toward a normalized level gradually. I must mention that these expectations reflect our considerations of the latest epidemic situation as well as our current and preliminary view, which is subject to change. At this point, Cici and I will take your questions. Operator, please open the call for these. Thank you.

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 again after your first question has been addressed. To ask a question, please press star one and wait for your name to be announced.

To cancel your request, please press the pound or hash key. Your first question comes from the line of Tianhu of T. H. Capital. Please ask your question.

Speaker 3

Cici, Steven, congratulations on the good quarter. So in your opening remarks, you talk about the OMO and it also shows some positive results in your last quarter's earnings and your offline enrollment growth, revenue growth is much more higher than peers. So I wonder, can you elaborate how important OMO strategy is for you in fiscal twenty twenty one as well as next couple of years? And by the end of this year, this fiscal year or next fiscal year, what's the portion of OMO is going to be in your total enrollment or revenue? So, you know, basically, it's, you know, elaborate on your OMO strategy for the future.

Speaker 2

Yeah. Thanks, Chen. This is a great question. On the market front, actually, are seeing the great business opportunity originally because more and more players disappear from the market. And you know we put more efforts on our offline business combined with the OMO model.

And we have pilots of the market leading OMO model in vast majority of the cities and to set up the OMO business in '20 new satellite cities nearby the core city. And the key is I think the student retention rate and the satisfaction from the customers are better than we expected in the summer. So this quarter, the OMO contributes single digit to the overall revenue contribution. But we believe the OMO model will grow rapidly going forward and will be will become a major driver to our business growth. So that means the OMO will will help the top line growth of the our traditional the offline business.

And let me repeat the the the some advantage of the OMO model. K? You know, the OMO model typically has the lower customer acquisition this account. That means, you know, we still we do have the very strong the marketing teams. And so that means we don't need to spend crazy money on Internet or some like the channels, the online channels.

And second, I think it's very easy for us to replicate the OMO model in the other provinces in China. Third, I think our content of the OMO model are more localized than the typical super large online broadcasting classes. I think this is our advantage. And all the coursework, all the materials are reasonable from our local staff. So I think this makes the students love the our OMO courses more and and pull them to more engaged in in the classes.

And the last one is, you know, I do believe the OMO model will bring us the even the opportunity of the cross selling. You know, we can cross sell the OMO the online course and the the offline course each other. So, you know, I I actually there's too much time on the OMO model, but but I think that's very important. Chen, is it clear? Yes.

Speaker 3

Thank you so much, Steven.

Speaker 4

I do go to others.

Speaker 2

Yes. Yeah. I think the revenue In in fiscal year in next fiscal year will be more than than than that of this year. And I think that we we will see one or one or two more quarters to estimate the revenue contribution.

But I do believe the revenue contribution from the OMO model will will be a meaningful number next year. Thank you. K.

Speaker 3

Okay. Great. Thank you so much.

Speaker 2

Thank you, K. Your

Speaker 0

next question comes from the line of Mark Li of Citi. Please ask your question.

Speaker 5

Hi, Steven and Sisu, and thanks for the presentation. I I want to ask, at this point, could you give us some color for the f y twenty two guidance, like in terms of the revenue growth or the capacity expansion or the lower tier city penetration? Any any color would be helpful. Thank you.

Speaker 2

Yeah. I think the you know, I think we'd we have done very well to to run a business during the the the COVID, the hard time. And, you know, we we you know, we we expand our capacity by 25%. And and also, you know, we we raised the salary of the teachers during a hard time. And and I think that we are ready for the for the new year.

And so in the fiscal year 2022, I think the revenue growth will be booming. Okay? And in the fiscal year 2022, I believe the margin will be expanded because, you know, first first of all, you know, we have a low base this year. And second, you know, I do believe the the China will control the pandemic relatively well. And I do believe that most of the students can go back to our learning centers.

And some new cities, low new need low low tier city students can enjoy the service of our OMO model. And yeah. Mark?

Speaker 5

Sure. Thank you, Steven.

Speaker 2

Thank you, Mark.

Speaker 0

Just a quick reminder, if, you will ask question, please ask one question at a time. Thank you. Your next question is from Felix Liu of UBS. Please ask.

Speaker 3

Good evening, management, and congratulations on the results. My question is on COVID nineteen impact. I know your guidance of 15% to 24% revenue growth for the next quarter. Has that reflected in the current level of COVID nineteen lockdown? Or are we expecting, you know, potentially more cities to roll out similar measures?

And for this round of COVID nineteen, you mentioned that you're better prepared than last time. May I know, you know, will the new enrollment growth for the May be impacted, or are we okay with new enrollment growth this time? Thank you.

Speaker 2

Felix, you know, due to the concern that the new wave of the COVID nineteen outbreak in North China, I think we are today, we have moved the all the offline classes to online in over 10 cities, such as the the major city like Beijing, Xi'an, and and Taoyan. And all these cities in Northeast Dongbei region. And so, you know, I think the yeah. Well, I think there's a it appears the the negative impact. But the key is, despite the challenge, I think our OMO system enable us to migrate class between offline, online.

And I think this time, we prepare better, you know, 50 challenge compared to that of last year. And the one more point, you know, the q three, because of the late Chinese New Year holiday, the q three the cost scheduling will be negative impact to some extent. But anyway, even we face to the challenge of the new wave of COVID, I think the Q3 revenue growth will be accelerated than the Q2. And we're quite optimistic about the business performance in q four and next year. And the and the last one, you know, I want to add is we're using the the conservative way to make the guidance forecast because, you know, the the environment changes almost every day.

Thank you.

Speaker 3

Okay. Thank you very much.

Speaker 0

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

Speaker 5

Hi, management. Thank you for taking my questions. So my first question will be about OMO. Stated, you have mentioned you covered 20 satellite cities. May I ask how many core cities that that you want to cover 20 satellite cities?

And what will be your plan to expand in the next fiscal year for for this kind or no model to cover more satellite cities and core cities. And secondly, congratulation, Steven, on your new role as a guest executive's president. Would you please share with us what's the responsibility with this new role and and what your thoughts about the implication for the corporate governance about this new role? Thank you.

Speaker 2

Okay. Thank thank you, first of all. I think, you know yeah. I think I'm happy to take the role of the the executive, the president and the CFO. And, yeah, I believe I will spend more time on my job.

And but the good news for me, as you know, I have very strong teams. We worked together for so many so many years. And I think the the all the managers and my staff like CeCe will support me stronger than before. And also, you know, actually, since two years ago, I spent I spent some time on the operation side. I think there's some investors knew that.

So, you know, I love to spend more time with the business with the operational team because it makes me to to more familiar with the business and to give them the the the the better instructions and guidance. And, yeah, I think I was on my back to to do this new job and to create create more value to the shareholders and our customers. And the the, yeah, the OMO courses. The the OMO courses. Yeah.

I think, you know, we are we are we are running the seven provinces of the OMO model. We call this. We started from the Hangzhou in the Zhejiang province. And like the Shandong and Shanxi and Fujian, some of the key provinces followed. I think so far so good.

Actually, it was most of the the provinces performed better than we expected. So I believe they will do better going forward, and we will pilot the new OMO model in more provinces going forward. Thank you.

Speaker 5

Got it. Very helpful. Thank you. Your

Speaker 0

next question comes from the line of Sheng Zhong of Morgan Stanley. Please ask your question. Hi. Good evening. Thank you for taking my question.

Just one question about your your offline price. We you mentioned that it increased very strong. So wondering the reasons of the price increase, especially there are a lot of competition from the online. And, also, we see the small surprise small institutions, they also pry they provide price discount. Is it because you see the offline supply decreased post COVID nineteen or for for some other reasons that your pricing step strategy?

Thank you.

Speaker 2

Hi. Hi, Zhong Zhong. I think our price strategy has been very consistent. And, you know, this quarter's already blended ASP, you know, was flat was flat. And we raised the price of the UCAN program by 5%, by 8% and VIP UCAN VIP price increase was 5%.

Top case, we keep the same price. I don't think the online platform's competition will impact our the price strategy. I'm not sure you remember clear clearly or not. You know, we did the very good successful summer promotion half year ago. And during the summer, we we got more than 1,000,000, the summer promotion enrollment.

And, you know, we charged 400 RMB. You know, I think it's much expensive than the the the the other the the online players, you know, most of them are are providing were providing the free course for like the. And but, you know, our retention rates was over 60%. So, you know, I think the Chinese parents and students, they care more about the the teaching quality and the study result of their kids and rather than the price. So going forward, I think our price strategy will be consistent.

Speaker 0

Thank you. Thank you. Next question comes from the line of Lucy Yu of Bank of America. Please ask your question.

Speaker 4

Hi, Steven. I just got a very quick question. You mentioned that in the third quarter, there'll be some negative impact from cost scheduling. Could you please quantify that for us, please?

Speaker 2

Yeah. You know, technically, the, you know, typically, the the the late Chinese New Year will impact the the revenue by five to 6% because, you know, yeah. K 12 of of the k 12 business. Because, you know, last year, the first the first work first two courses in the spring semester, what happens in the q three. But this year, you know, we started all the courses in March.

K? So that means we sacrificed five to 6% revenue of the pop of of the POP Kids and UK, but it's just the the the onetime impact, just the timing difference.

Speaker 4

So, Ernesto, just to make sure that your guidance on the third quarter k 12 is 26 oh, sorry. 27 to 32%. So if we add in the five to 6% back, it should be, like, low thirties to high thirties kind of growth. Right?

Speaker 5

Yeah. Yes.

Speaker 0

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

Hi. Hi. Thank you. Thank you, Steven and Cece. So I know with your dual listing, you have built quite a substantial net cash position.

So could you give us some color as to your capital allocation strategy going forward? And then secondly, just very quickly, do you have any thoughts on your midterm guidance of 17 to 18% operating profit margin? Any any plans to revisit that? Thank you.

Speaker 2

Yeah. Christine, you know, the capital allocation, yeah, we raised money, you know, last year in November in Hong Kong's market from the the second listing. And we love to pay the capital allocation to investors. Historically, we did several times special dividends and several times share buyback. And the use of the money, I think we prefer to use the money to make some the potential valuable investments.

If we can find some potential synergy between the targeted company and us, we'll do it. But we will do it very carefully. And second, we'll we will love to pay the investors. K? And this is the your number one question.

Number two question is about the long term margin. Yeah. We don't wanna change our mid long term margin guidance. You know, I think the let me start with the the revenue first. I think the the revenue growth recovery is in the process.

And I think we still need one to two quarters to go back to the normal. And on the market front, you know, we're seeing the great opportunity everywhere because the small players disappear from the market. And I do believe it's a great opportunity for New Oriental going forward. So that's why we tend to firmly make more investment now. We make the learning center expansion by 20%, 25% during a hard time, we raised the teacher salary.

And we hired more ground marketing staff to do the ground promotion, which is more effective than the online channels. And also we spent some R and D on the OMO model. And so all the above, the the investment plus the negative impact from the overseas test prep and the cooler drives the margin in short time. But we're confident that we'll be able to deliver the continued margin expansion upon the pandemic phase. And that's why I said, I don't wanna change our mid long term guidance.

Thank you.

Speaker 0

Thank you so much. Your next question comes from the line of Alex Liu of China Renaissance. Please ask your question.

Speaker 5

Hi. Yeah. Thanks. I

Speaker 6

I think you kind of just answered my question, but actually my question was that in terms of margin, if you look at a non GAAP operating margin, think this quarter was still a slight decline year over year. But just how fast or specifically around what time should we expect the margin to bottom out, you know, in the next few quarters? Thank you.

Speaker 2

I think, you know, yeah, as I said, to answer the question from that, Christine, you know, last round. And because, you know, the I I think the rep we our revenue recoveries still need to get go back to normal, it still need maybe one or two quarters. You know the top line. It will be to draw like, to be a very bottom line. And and also, you know, we're we're we're in the investing phase to hire more to spend more on the teachers on the expansion.

And that's you know, I Especially for the for especially for the impact of the the the new wave of the COVID in North China like Beijing, Xi'an, and Taiwan, and all all province in Dongbei. I think it's will hit us a little bit in the q three. So I think it's just one time. You know? I I do believe the the the China will manage the the COVID relatively well in the going forward.

And I do believe will our performance in the q in the coming quarters and even in the in the next year will be better than the q two. Thank you.

Speaker 6

Okay. Thank you. I actually have a quick follow-up. Just on the teacher compensation, I think we changed the the teacher compensation structure a bit in the past past in this fiscal year. I'm just wondering how should we think about the teacher compensation growth in the next few quarters?

Is it fair to say that, you know, given we might be already past the time, you know, when the competition pressure on teacher compensation is already, you know, is most severe? You know, some of those online players.

Speaker 2

Yeah. I think it's great question. You know, the reason that we raised the teacher salary is not because of the competition from the online players. You know, the online players, they just need, like, a few few teachers. And we we have a lot of teachers.

And I think this decision was totally made by Michael. He think you know, he think you know, he he discussed a lot internally with all the managers and school has just raised the teacher's salary because this is our most advantage, not only for the short time, but also for the long time. Internally, we fully support Michael's position. Even during a hard time, our top line growth was negatively impacted to some extent, but we firmly raised the teacher salary. Think it will drag the margin because I think we pay the teachers higher.

We'll bring up the higher utilization rates and the student retention rates in the mid and long term.

Speaker 6

Great. Thank you.

Speaker 2

Yeah.

Speaker 0

We are now approaching the end of the conference call. I will now turn the call over to New Oriental's executive president and CFO, Steven 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 very much.

Speaker 0

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.