New Oriental Education & Technology Group - Earnings Call - Q3 2015

Transcript

Speaker 0

Ladies and gentlemen, good evening and thank you for standing by for New Oriental's Third Fiscal Quarter twenty fifteen 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 call over to your host for today's conference, Ms. Sisi Zhao, New Oriental's Investor Relations Director. Ms. Zhao, please proceed.

Speaker 1

Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter twenty fifteen earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on newswire services. Today, you will hear from Louis Xie, New Oriental's President and Stephen Yang, New Oriental's new Chief Financial Officer. After their prepared remarks, Louis and 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 Louis Hsieh.

Speaker 2

Thank you, Cece. Hello, everyone, and thanks for joining us today. As announced earlier today, after almost ten years serving as Rio Taranto's CFO, I and our Board of Directors have decided it was time to transition this role to Mr. Stephen Yang. I am delighted to congratulate Stephen on his new position as our CFO.

Since I hired him in 02/2006, Steven and I have worked closely together for more than nine years and I am confident that he will make significant contributions to the company in his new position. I will remain President of the company and will continue to be a member of the Board of Directors focusing on overall corporate strategy and online education initiatives. I want to express my sincere gratitude to Michael Yu and our Board of Directors for the opportunity. It has been a great privilege and honor to serve as Newanto's CFO the past decade. I would also like to thank Newanto's more than 33,000 teachers and staff for their dedication through good times and challenging ones.

We have accomplished a great deal growing revenues for approximately RMB90 million in fiscal year two thousand and six to almost RMB1.2 billion, a nine year CAGR of about 37 and net income CAGR of over 55% to over $215,000,000 This tremendous financial performance has been reflected in New Oriental share price. Since our successful IPO on the New York Stock Exchange in September 2006, pricing at $15 per ADS, our share price has risen to almost $100 closing last night at $24.68 and accounting for a four for one stock split. I believe New best days lie ahead as China's preeminent private education services leader. Finally, I want to thank New shareholders and equity research analysts for your tremendous support these past many years. And I look forward to continuing our professional relationship.

Now, I would like to pass the CFO baton over to NewAntho's new CFO and my good friend, Steven Yang. Steven, please.

Speaker 3

Thanks very much, Louis. I would like to thank Michael Yu, Lu Xie and our Board members giving me this great opportunity. All of you have been giving me full support and trust during the past nine years and I look forward to working with you continuously as we move forward. Turning to a summary of our third quarter results. We are pleased that we complete another solid quarter with revenue up by 13.1% year over year to US287.7 million dollars This increase was mainly driven by strong performance of our K-twelve all subjects after school tutoring business, which grew 22% year over year to approximately US143 million dollars contributing almost half of our revenues.

One of our key segments, the U Can business, saw an increase of approximately 29% in gross revenue and 12.4% enrollment growth. As we discussed in the second quarter, the company has started to implement new customer loyalty programs to encourage repeat business And for the third quarter, this resulted in deferred revenue about US3.7 dollars which is expected to be recognized within two years without any additional expenses associated with such revenues. So if including this, our top line growth would have been 14.6%. As mentioned, this will be just temporarily dampening our revenue. After six months of implementation, the company has decided to narrow down the scope of the loyalty programs to K-twelve only starting in the month of April.

By doing so, we will be better able to capture the benefit of this program because K-twelve enjoys much higher rollover rates than any other business lines. That said, we expect the impacts of loyalty programs on quarterly revenue will be reduced, which will be reflected in the performance in the 2016. Turning back to the business performance. One of most exciting news for the quarter is that our revamped POP Kids program has continued to turn around with gross revenue growth about 7% and enrollment growth of 16%. This is the first time we experienced revenue growth since its nationwide rollout in the second quarter.

Our new offerings have reached 36 cities so far across our national school network and market feedback has been very encouraging. In the first six weeks of the fourth fiscal quarter, the POP Kids program reported over 30% growth enrollments and almost 40% growth in cash receipts versus the same period last year. We will continue to roll out our new POP Kids offerings in fourth quarter and we expect to see further pickup on both gross revenue and enrollments. Total enrollments for the third quarter were flat year over year, but this was mainly due to the timing of the Chinese New Year in 2015, which we addressed in the earnings call for the second quarter. The holiday occurred later this year, delaying enrollments for spring classes and resulting in a shift to the fourth fourth quarter, there has been a significant 35.8% uplift year over year enrollments and a 43% increase year over year in cash receipts or cash collects in advance for enrollment.

Therefore, looking at aggregate third fiscal quarter and first six weeks of the fourth quarter will be most accurate to understand the business trends. The total enrollments for the period of the third fiscal quarter and the first six weeks of our fourth quarter increased by 9.5% year over year. For the same reason, we reduced class hour in some cities to fit in two terms of the courses within the winter break. Shortened class length has tightened our ASPs, with overall growth of 2.2% year over year. However, if you look at on an apple to apple basis, ASPs increased by 5% to 10%.

Breaking it down, on an hourly basis, blended ASP for POP Kids increased by 5% and U Can program grew between 5% to 10%. Now let me walk you through our performance across individual business lines. Our K-twelve all subjects after school tutoring business continued to be our key revenue driver and we recorded gross revenue growth of 22% year over year for the third quarter. During the quarter, this contributed to almost half of revenue, even higher than 41% in the second quarter as this business were getting into this peak season. Breaking down a bit further, U Can middle school, high school all subjects after school tutoring business achieved a gross revenue increase of approximately 29% year over year.

Student enrollment grew approximately 12.4% year over year and slowdown of growth were due to the timing of Chinese New Year of twenty fifteen as explained earlier. And for third quarter, the growth of our revamped POP Kids program business has turned positive for the first time since its rollout in the second quarter, with gross revenue growth of approximately 7% and enrollment growth of 16%. With the new and better offerings, we are well positioned to realize further growth in the K-twelve business. I would also like to add our new POP Kids program has already been well received by the students and markets and we expect such positive performance to accelerate in the coming quarters. As we enter into fiscal twenty sixteen, this will sure help New Oriental to further differentiate ourselves in the competitive market in China.

Our overseas test prep and consulting business together achieved revenue growth of more than 10% year over year for the third quarter. Finally, the VIP personalized class business recorded a continued revenue growth of 10% year over year in third quarter. Turning to the balance sheet. New Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as instructions are delivered at the end of the third quarter was US424.9 million dollars an increase of 11.4% as compared to the US381.4 million dollars at the end of the 2014. Now let me provide some updates on the ongoing execution for optimized market strategy.

Starting in fiscal twenty fifteen, we shift our operating focus to maintaining a healthy balance between top line and bottom line growth, while capitalizing the on the substantial growth of China to make solid progress on our fronts, which is laying down a good foundation for fiscal twenty sixteen. As previously emphasized, as part of this strategy in 2015, we're in an investment mode, upgrading the infrastructure, the optimizing resource in the existing cities. The fourth quarter is halfway done as we speak and we are preparing for the new fiscal year and by then we should be in a very good position to meet the increasing market demand and also capture the growth potential that we've identified. Let me first talk a little bit about the core of our business and our focus on further driving offline initiatives. In the third quarter, we further expanded in existing markets as we opened 20 new schools and learning centers and closed 11, adding a net of nine.

In 2015, we added a net of 19 learning centers, bringing our total learning centers to seven twenty two and expand some existing learning centers by adding a total of over 5,900 square meters of the additional classroom area. Going into the fourth quarter, we aim to open five to 10 new learning centers in cities that are driving both revenue growth and margin expansion. For fiscal twenty sixteen, we will continue to open new learning centers in existing cities and we'll also explore the opportunities in two to four in three to four new cities or schools where we see strong growth potential. Looking at online side of our strategy, we have been a pioneer in the mobile Internet online education in China and never ceased to improve the progress in all possible ways in R and D advancements and also integration. Another vision of ours is to build the largest digital digitized content library for K2 college educational courses and tools in China.

For the third quarter, we spent about 8,000,000 to $9,000,000 mostly of which were recognized as cost and G and A expenses. For full fiscal 2015 year, the investments in online education is expected to amount to 30,000,000 to $35,000,000 Before I go into the details of the progress we made during the quarter, just a brief recap of all three levels of our online platform. The first level, also the core of our online system is an O2O, two way interactive education system across all our business lines. The second level is our pure online learning platform, coolearn.com, and supplementary online education products and other New Oriental brand. The third level of our ecosystem is for New Oriental to take minority shareholdings in online education companies and complement our own online education offerings.

Let's start with O202A interactive education system, which we rolled out and upgraded in the first quarter across all major product lines aiming to extend New Oriental's traditional offline classroom teaching offerings to online education service. We launched the U Can Visible progress teaching system into over 33 cities in September 2014. This is an online platform that supports after class self learning and we expect this to help us better return customers. The system is now being used in more than 40 cities and we expect total 50 cities by the end of fiscal twenty fifteen. As said earlier, we achieved a turnaround to revenue growth in the newly revamped POP Kids English program, Shuangyou, which offers interactive learning resource and multi culture experience based on students' own interest.

The new program has now reached over 35 cities and we expect this to continue to expand and contribute to our revenue growth. We have also been good results from the launch of the O2O2A interactive education system for the domestic test prep program. The program has extended its coverage to six cities for the third quarter. In March, we launched the pilot for the O2O for overseas test prep and target official launch by the end of the fourth quarter. For the second level of our online education ecosystem, we have seen substantial growth in koolearn.com and other supplementary online education products.

In third quarter, koolearn.com generated net revenue of $10,200,000 representing a 39% increase year over year. The number of registered users has increased more than 200% year over year and now the number of cumulative registered users has reached more than 10,300,000. Ku. Cn, our all live broadcast open platform for both students and third party teachers achieved about 256,800 registrations in the third quarter. DONNET, a series of game based mobile learning applications for children, renewed its record of over 12,000,000 download sets in the second quarter to more than 17,000,000 by the end of the third quarter.

Lezi, an English language vocabulary training application, we launched in late twenty fourteen for mobile phones and tablet app, records over 1,146,300 users by end of the third fiscal quarter. This is an increase of more than 40% compared to the second quarter. Turning to the third level of our online education ecosystem. We have invested in select online education companies with a minority stake and we continuously search for new business opportunities that will not complete our own offerings, but also support our goal to develop a comprehensive onlineoffline integrated ecosystem. Our investments include kouyu.com, aio7.com, Terina and zhuishong.com, all of which are excellent in their own niche markets.

Last but not least, it's clear that our business is right on track as we laid out for the fiscal year 2015. Also, as we mentioned in the past, 2015 is an important investment year and during the third quarter our operating margin and net margin faced with a short term pressure, which is within our expectation and as discussed previously. We do believe that these efforts are necessary as we are eyeing the massive potential in the market and enable us to solidify our market leading position. Now let's take a quick glance at some of the key financial metrics for third quarter in addition to the financials we mentioned in the beginning of the call. Operating costs and expenses for the quarter were US256.3 million dollars a 14.6% increase year over year.

Non GAAP operating cost expenses for the quarter, which excludes share based compensation expenses, were US251.9 million dollars a 15.3% increase year over year. Cost of revenue revenue increased by 17% year over year to US126.1 million dollars which is in line with our revenue growth. Selling and marketing expense increased by 10% year over year to US41.7 million dollars primarily due to the increase in selling and marketing staff compensation. General and administrative expenses for the quarter increased by 13.4% year over year to US88.5 million dollars Non GAAP general and administrative expenses, which excludes share based compensation expenses, US84.2 million dollars a 15.8% increase year over year, primarily due to 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 decreased by 16.7% to US4.5 in million the 2015.

Income from operations for the quarter increased by 2.4% to US31 $400,000 Income from operations would have been approximately $35,100,000 if not for the accounting effects of the company new customer loyalty programs. Non GAAP operating income decreased slightly to $35,900,000 for the quarter. Operating margin for the quarter was 10.9% compared to 12% in the same period of the prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter was 12.5% compared to the 14.2% in the same period of 2.6% decrease from the same period of prior fiscal year. Capital expenditures for the quarter were US16.9 million dollars which were primarily attributable to the opening of the 20 new learning centers and renovations at existing learning centers.

Now let me go we expect total net revenue in the 2015 to be in the range of US322 million dollars to US33.5 million dollars representing year over year growth in the range of 12% to 16%. Approximately US5 dollars revenue, representing about 2% of year over year growth will be deferred results from the company's customer loyalty programs. If not considering this impact, product revenue growth rate is expected to be in the range of 14% to 18%. This forecast reflects New Oriental's current and preliminary view, which is subject to change. At this point, Louis and I will take your questions.

Operator, please begin.

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 one question at a time for each caller. The first question comes from Fan Liu from Goldman Sachs. Please ask.

Speaker 4

Hi, Louis, Steven and Sisi. Thank you for taking my question. Would you mind sharing with us more color around your investment plan on online education initiatives and the potential impact on your margins in the fourth quarter and fiscal year twenty sixteen. How should we expect the margin trend in the coming quarters? And also can I quickly confirm with you that if we combine quarter and the first six weeks, the revenue growth should be 9.5% year on year growth?

Thank you.

Speaker 3

Yes. Thanks. I'll answer the second question from you. If you combine the student enrollments in third quarter and with the first six weeks in the fourth quarter, the student enrollments will be increased by 9.5%. And for our online initiatives, I think the most important part is our OTO initiatives.

In the almost the past year, we rolled out our new revamped POP Kids program successfully. And you can see the number in Q3, our GAAP revenue for the POP Kids was up by 7%. And we're going forward, we're doing the same thing as you can in overseas test prep. And we spent US8 million to US9 million dollars on the online and online outro things in the third quarter. And we will spend the same amount in the fourth quarter.

But in the next whole fiscal year, what I mean is in 2016, we hope we spent not as much as this year. So that means it will help to improve the margins of next fiscal year. Does it answer your question?

Speaker 4

Thank you. Thank you, Stephen.

Speaker 3

Okay.

Speaker 0

The next question comes from Alice Yang from Macquarie. Please ask your question.

Speaker 4

Hi, this is Luis and Stephen. This is Alice from Macquarie. Thank you very much for taking my question and congratulations for a solid quarter and Stephen for a new position. Question is also related to the pure online part. So can you share with us what is the online revenue as a percentage of total revenue in this quarter?

And how do you see the trend going forward, say, in fiscal year twenty sixteen or 2017? How do you differentiate your online versus offline courses? I mean, will you have any kind of concern or any kind of potential cannibalization between the two going forward? Thanks.

Speaker 3

Okay. Thanks, Alice. And our pure online revenue with mr.cooler.com, the GAAP revenue of the Q3 was up by 39%. So it's much faster than our offline business. And I think going forward, it will contribute more than before.

And because the full sum like the big class non mission critical test prep takers, for example, for the domestic and overseas test prep, we on purpose, we moved the students from offline to online. And so the online revenue is booming. So it's the online revenue is account for the 4% to 5% of the total revenue. And in the next fiscal year, it will be more than this year. So I think the difference between the online and offline classes is the first difference is the age.

I think that for the adult students where the college students are suitable for the pure online study. But for the K-twelve, most of them is suitable for study offline. And so we moved most of the short term non mission critical offline class from offline to online. So you will see the pure online revenue growth faster than our offline classes in the future. Okay.

Speaker 4

Thank you very much. Very, very quick follow-up. Say for example in fiscal year twenty sixteen or 2017, do you think that the online revenue will contribute like high single digit percentage of total revenue? You have that one?

Speaker 3

Yes. Haven't finished the budget yet, but I think the trends will go up. So in the next two to three years, I think the percentage of the online revenue will meet high single digits, maybe the 78% or 9% of the total revenue.

Speaker 4

Thank you. Thank you very much. Great. Okay.

Speaker 0

The next question comes from Ella Ji from Oppenheimer. Please ask your question.

Speaker 5

Good evening management. Louis, thank you for everything you've done for New Oriental. We will miss you. And Stephen, congratulations on your new role. I have two questions.

The first question is relating to your POP Kids program. Since that you have seen such a strong enrollment performance with the program, could you talk about your thoughts on price increases in future quarters? And secondarily, also relating to your total OpEx spending, I noticed the dollar amount for both sales and marketing and G and A declined sequentially from fiscal 2Q. Could you give us some colors why you spent less money than last quarter? And how should we think about the dollar amount spending for the fourth quarter?

Thank you.

Speaker 3

Okay. Thank you, Ella. And the first question about the POP Kids, the ASP. And yes, you're right, a little bit more difficult to for the for increase the ASP for the POP Kids, because the class is not mission critical. But we successfully rolled out the new revamped product.

So it makes us differentiate with any other competitors. And our strategy is to seek the market share first. And so we just keep the ASP increase rates by only five percent. But we still have the price power. That means we I think we need more students to take the new product classes as early as they can.

And after they get hooked, we can continue as before to increase price. So this year, you will see the price of the POP Kids increased by only 5%. And next year, I think the percentage will be a little bit higher than this year. And secondly, your second question is about the our OpEx of online. We spent US8 million to US9 million dollars in Q3 and it's divided by two parts.

And we spent like the half of them we record we reported the half of them in the cost. So you can see our cost increased a lot than before. And most of them the R and D expenses, HR like the IT people would report in the DGI. So that's the fact. Does it answer your question?

Speaker 5

Sure. Then how about the dollar spending level for the fourth quarter?

Speaker 3

I think the amount is almost same as this quarter. So we'll keep spend 8,000,000 to $9,000,000 OpEx for online.

Speaker 5

Okay, got it. Let me just have a quick follow-up relating to your sales and marketing spending. Since you've rolled out some product last by end of last year such as Yuda, we have not observed strong promotions relating to such online product. And as you will roll out more products throughout calendar year 2015, how should we think about your sales and marketing spending for the online products?

Speaker 3

Yes. Youda is quite new. So in kind of the test launch within English and a little bit math, so it has not been blown across the QQ and VCN. So we didn't do a lot of the promotions for the EUDA. And the aim for us is to put all the subjects in it.

It will be a long term program. So I think it's just like the cooler.com. Once the products got mature, we doubled paid users in the we doubled paid users in Q3. And once we feel the product we utilize mature and accurate, we will use the Q2 and Weixin channel besides our own ones to block and we will spend more on marketing expenses. So I think our strategy for the marketing is the product first and then the marketing promotions.

Speaker 5

Got it. Thank you. Thank you, Stephen. Very helpful.

Speaker 2

Thank you, Ella. Thank you, Ella for your compliment. I'll miss you too.

Speaker 0

The next question comes from Tian Hou from D. H. Capital.

Speaker 6

Hi, Louis. So thank you for working with us and let us know your new venture. And Steve, congratulation on your new role. And the question is related to actually not this quarter we're in, but rather related to your summer quarter. And last year, I do remember the summer quarter was kind of hit by multiple negative factors such as the misunderstanding of the English examination policies as well as your summer boarding school.

And now we're approaching the summer and those issue may be reached again. So I wonder what could be the situation this year?

Speaker 3

Okay. Thanks Tim. And for the summer, this just now is April, so it's a long way to go. But I hope that these I think that in the coming summer, we will not meet the same policy problem with the same with last year. I think we'll like it this year.

And for the dorm classes, I don't think we'll hope the numbers will go up, but I think the dorm class revenue will kept to be flat with the last year. And yes, you're right for the Q1, our Q2 twelve business is the Q1 is now the peak season. But I think we will do as much as we can to get more student enrollments. And so but I think the think about the student enrollments of the first six weeks in the Q4, we are in a good trend. So I hope the trends will keep going forward.

So we can I don't know the detailed number in the coming Q1, but I hope it's not it's much better than Q1 last year?

Speaker 7

Okay. Thank you, Stephen.

Speaker 3

Okay. Thanks, Tian.

Speaker 0

The next question comes from Jianlong Xu from Credit Suisse.

Speaker 8

Hi. Good evening management. Thanks for taking my call. Congratulations on the solid results. I have a quick follow-up.

I think Stephen just mentioned the normalized enrollment growth would be 9.5% if we combine Q3 and the first six weeks in Q4. I just wonder if management can provide more colors on the normalized enrollment growth rate for your different tutoring programs. And also given the strong momentum in your K-twelve program, just wonder what will be the revenue growth rate you guys are looking at for next fiscal year? Thank you.

Speaker 3

Okay. Thanks, Jialong. Right now our growth is going to be driven by three parts, the U Can, the POP Kids and overseas test prep with overseas consulting. So, let me start with the U Can. The U Can has increased by about 30% in Q3 and still the enrollment is up by 12%.

So if we add back the first six weeks in Q4, it would have been a significant growth with more than 30%. So in the long term, our U Can will be the future of new rental. The student enrollment growth rates will be above 20% at least. And for the POP Kids, we roll out the new products successfully. And the kids for the three months and six weeks, the enrollment was up by 20%.

So in the long term, it will have the almost same like growth student enrollment growth rate as you can, maybe a little bit lower than you can. And for the overseas test prep, the student enrollment growth will be flat, because the whole market doesn't grow as fast as before. And but I think the good news for us is the more and more Chinese parents rather to send their kids to study abroad in their younger age. So it's not like before. That means more and more young kids will take our overseas test prep program and it will help us to improve the ASP because the ASP for the SAT and TOEFL Junior is much higher than the GRE and GMAT.

And overall, the revenue of the overseas test prep will be 10% or 10% to 15% in the future and with zero student enrollment increase with ASP increased by 10%. But if we combine the overseas test prep with the overseas consulting business, the overseas consulting business was booming in the last four, five years. And going forward, the business of overseas consulting will be increased at least 25%. So the business line overseas will be increased by at least 15%. The only drag of our business is adult English and domestic test prep, but it was declined by 10% in last three years in a row.

Anyway, and we moved most of the students, the big class of the domestic classes to from offline to online. So overall, if you see the company as a whole and the overall student enrollment growth will be probably around 8% to 10%. And the price increase, I think it will be like between the 5% to 10%. If you break that out, the U Can will be the ASP for U Can will be increased by 5% to 10% and for POP Kids 5%.

Speaker 8

So

Speaker 3

that's why we guide the revenue increase by like the 15% to 20% in the future.

Speaker 0

The next question comes from Leon Chuk from JPMorgan.

Speaker 9

Hi. Congrats on the results. Just couple of quick questions. First on the U Can enrollment growth is 12%. Can I just confirm the enrollment does not include pure online students?

Speaker 3

Yes. Not include the pure it's just the pure offline student enrollment And of 12

Speaker 9

I guess it works up to around 15% or so ASP growth because your sales was up 29%. So what's the breakdown between tuition increase and just students taking more courses? Is it about half half?

Speaker 3

Yes. But we increased the price for U Can. It's about eight to 9%. And yes, so you know it's a tiny difference of the Chinese New Year. So the trend is so apple to apple comparison the basis, the student enrollment was up by 20% and the price increase is by eight to 10%.

You Okay. See Okay. You. Okay. Thanks.

Speaker 0

The next question comes from Trey Surdin from Wells Fargo. Please ask your question.

Speaker 10

Yes. Thank you. I wonder if you could talk about the POP Kids ASP in a little bit more detail. And specifically, I'm interested in understanding what the trend is in class hours on a year over year basis.

Speaker 3

Thanks, Chris. Good question. And we almost finished the rollout of the new product of the POP Kids. And the new POP Kids hats use the I think it's a successful strategy to so the I think the strategy is to go after the market share first and increase the price later. So we will control the ASP increase of this fiscal year.

What I mean is in the coming Q4 and maybe within the coming Q1 within the 5%. But after that, we will increase the price of POP Kids above 5%. It will be about 10% year over year.

Speaker 10

Right, right. But my question isn't about the pricing, because you described that before. It has to do with what the average number of class hours per student is because that trend was down the prior quarter. And I'm wondering if that's still the case and when you would expect that trend to level out?

Speaker 3

Okay. Yes. In the two quarters before we changed some of the class hours for some cities. So from the like the half year class per course to three months. I think the trend will be continued, it will not the big changes as before.

So I think the length will be keep stable in the future.

Speaker 10

Just so I understand. So the shorter length program, which requires more repeated renewals on the part of the families, That's part of the news that's part of the new rollout. Am I correct about that?

Speaker 3

Yes, yes. You're correct.

Speaker 10

Okay. So will that so will we see that trend stabilize then in the first quarter of next year?

Speaker 3

For the second quarter

Speaker 10

of next year? Yes.

Speaker 3

The cost lines will be stable, because we almost finished the old the old school reforms, the initiatives of the product of POP Kids. So the trend will stable, the class lines.

Speaker 10

All right. Thank you.

Speaker 3

Okay. Thanks, Chris.

Speaker 0

The next question comes from Alvin Jiang from Morgan Stanley. Hi, Louis, Steven, Sisi. Thank you for taking my question. My question is on investments. As you mentioned, this year will be investment year, especially for those online initiatives.

So what's your plan for next few years? And do you have some kind of targets? So after achieving those targets you will consider to slow down such investments?

Speaker 3

Yes. Thanks. That's a good question I think. And yes, this year is the investing year for online and we almost finished the O2O reform for the POP Kids and we are doing for UK and overseas test prep all the business lines. And in the yes, we spent US30 million to US35 million dollars in OpEx for online.

The next year, I think the number of investments will be as same as this year or a little bit less, because this year we hired a lot of IT people and content writers and we cannot fire them after the job. So they will follow-up they will do a lot of follow-up jobs. And but this year we spent some money on the third party IT service from outside the company. So next year we don't need that part. So I think in the next year the total spending will be a little bit less than this year.

Speaker 0

Thank you. The next question comes from Allen Li from Deutsche Bank. Please ask your question. Hi, management. This is Allen asking on behalf of the Vivien Hao.

My question is regarding the partnership with Tencent. So could management give us more color on the what kind of the support we should expect from Tencent this year? And in addition to the Yoda, will we roll out more products with Tencent this year. Thank you.

Speaker 3

Okay. We did a joint venture last year and launched EUDA. And I think the first step of the cooperation between New Oriental and Tencent. And as you know, we have the best content and teachers and they have the most abundant distribution channels. And so we are exciting to seek further cooperation between us.

And I think you will see some announcements in the future, but it's too early to say because it's incompetential. And for the UDA, as I said earlier, because it's only have the subject of English and a little bit more in math. So we just want to put all these subjects, all grades, the answers into the UDA and then we will use the like the Beijing or the QQ to blow out the products. So I think the Tencent will help us to distribute our new products online.

Speaker 0

Okay. Got it. Thanks.

Speaker 3

Thanks.

Speaker 0

The next question comes from Clara Fram from Jefferies. Please ask your question.

Speaker 7

Hi. Thank you for taking my question. I've got two questions. First is, I guess the ASP growth this quarter was better than last two quarters. Is it due to the late Chinese New Year that's why there were less enrollment this year that ended up with a 13% increase in ASP.

So I'm just wondering what would be the ASP growth like if we do it on a normalized basis? And what is the ASP growth expected in the next quarter? And my next question is on your operating profit margin. It's better than expected. And in particular, we see that the selling and marketing expenses in absolute value was less than last quarter.

And if we look at it as a percentage of revenue on a year on year basis, it's also down 0.4 percentage points. I'm just wondering what is the reason behind the lower selling and marketing expenses this quarter? And what should we expect going forward? Thank you.

Speaker 3

Okay. I'll answer the second question first. For the selling expenses,

Speaker 0

I

Speaker 3

think the first reason for the selling expense is now to increase so much is because we just opened six learning centers net in Q3. So that means we don't need so much the marketing expenses for the new learning centers. The second one is, we almost finished the O2O reforms for the POP Kids. So that's don't need so much marketing expenses. Once we roll out the overseas test prep in The U.

We will spend a little bit more, but not as much as the like the two or three quarters before as the POP Kids, because more and more students and parents will know the product, the quality of them than the older versions. Your first question is about the POP Kids, the ASP. And I think you make a misunderstanding about our the ASP, because I think the GAAP revenue is 13% in Q3 and the enrollment is flat, but the cash revenue of the Q3 will be also flat. So the ASP of the Q3 will be flat. But as I said earlier, if you add it back over the first six weeks, the ASP will be like 4% to 5%.

It's on purpose. So in coming Q4, I think the ASP will be lying between 5% to 10%. And next year will be much higher than this year.

Speaker 4

Thank you.

Speaker 3

Okay. Thanks.

Speaker 0

We are now approaching the end of the conference call. I will now turn the call over to New Oriental's President and CFO, Steve Yang for his

Speaker 3

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 representatives. Thanks.

Speaker 0

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