New Oriental Education & Technology Group - Earnings Call - Q3 2016

Transcript

Speaker 0

Ladies and gentlemen, good evening, and thank you for standing by for New Oriental Fiscal Quarter twenty sixteen 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 call 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. Cece Chow, New Orient's Investor Relations Director. Ms. Chao, please proceed.

Speaker 1

Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter twenty sixteen 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. Stan, please.

Speaker 2

Thank you, Sisi. Hello, everyone, and thanks for joining us on the call. We're pleased to report another quarter with solid results. The fiscal second half year is traditionally the peak season for our K-twelve all subjects after school tutoring business as national exams for college, high school entrance and final exams for all grades approaching. During the third quarter, we did exceptionally well on the top line, with revenue up 20.6% year over year to $346,900,000 and total enrollment up 25.2% to 755,100.

If not including the impact from the RMB depreciation, our revenue growth would have been 26.4%. Our continuing intensive efforts to introduce the new O2O two way interactive education system proved to be a satisfactory investment of time, capital and resources. We're pleased by the growth in our K-twelve all subjects after school tutoring business, which consistently has been delivering strong growth with revenue up 35% and enrollment up 31% year over year in the third quarter. By the end of third quarter, our newly revamped TOP Kids program experienced a revenue increase of 40% and new products reached 50 cities, up from 44 in the second quarter. U Can visible progress system that is being used in all 54 existing cities has been enjoying growing recognition from both parents and students.

To add to that, the current market conditions are favorable to us as we are seeing Chinese parents are more inclined to invest in education with the economy slowing down slightly. With all of this, we have been able to bring in more new customers and more customers are choosing to stay with New Oriental. To further leverage the success achieved by the O2O system, we expanded the investment to integrate education further to other key business lines. In March, we officially launched the IELTS Interactive Education System, which is the O2O solution for our overseas test prep business in three major cities in China. We're definitely committed to build out our O2O system going forward and to maximizing its profitability.

Turning to pricing. Per program blended ASP slightly decreased by 1% year over year. On an apple to apple basis, which is GAAP revenue divided by total teaching hours, hourly blended ASP increased by about 1%. A breakdown of the hourly blended ASP, UCAM was flat, POP Kids increased about 5%, and overseas test program increased about 4% year over year. The slowdown of overall hourly blended ASP growth is mainly due to the shifting of revenue from overseas test drive business with higher ASP to The UK and POP Kids classes.

Also, this growth rate will calculate in U. S. Dollar terms. So the RMB devaluation has negatively impacted our ASP growth by about 5%. We are pleased with the expansion of the operating margin in the third quarter, which was achieved through constantly improving operational efficiency and stringent cost control.

During the third quarter, operating income increased by 32.6% year over year and operating margin increased by 110 basis points to 12.2% from 11.1% a year ago. To be sure, we will continue to drive efficiency and bring value to our customers, which will ultimately create sustainable long term growth for our business. Now let me walk you through our performance across individual business lines. Our K-twelve all subjects after school tutoring business achieved gross revenue growth of about 35% year over year for the third quarter and enrollment growth of about 31%. Breaking it down, the U Can middle schoolhigh school all subjects after school tutoring business achieved a gross revenue increase of about 33% year over year.

Student enrollments grew approximately 31% year over year. Our POP Kids program continued to generate real momentum with gross revenue significantly up about 40% and enrollment up 31% year over year. Our overseas test prep and consulting business achieved revenue growth of more than 7% year over year. Finally, revenue for VIP personal life class business increased approximately 22% year over year. Next, I will provide some updates on ongoing execution for our optimized market strategy that requires healthy balance between top line and bottom line growth, while investing heavily in the build out of our ultra integrated education system.

In the third quarter, we opened a new school in the city of Zhuhai, the fastest growing city on the Southern Coast Of China. We also added a net of six learning centers and expanded certain existing ones, adding approximately 10,000 square meters of classroom area. For the rest of the fiscal year, we will continue with our expansion plan and additional capacity in cities with the greatest potential for both growth and profitability. We believe that we have sufficient capacity to support our business for the rest of the fiscal year, which as mentioned earlier is the peak season for New Oriental. Turning to our online business, We invested US13 million dollars in refining our O2O system and pure online learning platform in the third quarter, most of which were reported under cost of goods sold and G and A expenses.

We are managing it well within the RMB50 million investment plan for the fiscal year, which we previously indicated is our target this year. The success of our O2O system is not only driving our revenue growth in K-twelve business, but also proven to be effective in other business lines. Customer retention rates increased and new customers are coming in due to excellent market feedback. Before I go into the details about our online business, just to quickly recap the three levels of our online platform. The first level, also the core of our online system is an O to O two way interactive education system across all of our business lines.

The second level is our pure online learning platform, the supplementary online education products and the New Rental brand. The third level of our ecosystem is for New Oriental to take minority shareholdings in online education companies that complement our own online education offerings. Let's start with O2O two way interactive education system, which extends New Oriental traditional offline classroom teaching offerings to online education services. Solid progress was made on all fronts. U Can Visible Progress Teaching System, our interactive education system has been used in all 54 existing cities by the end of the quarter.

POP Kids program, including our new product Shuanyu in Chinese pronunciation, had another strong quarter with revenue up approximately 40%. This is a record high since the revamp in 2014, and enrollment was up more than 31% year over year. By the end of third quarter, it has expanded its reach over 50 cities in China, and we expect the growth trend to continue for the rest of the year. The O2O system for the domestic test prep program was being used in facilities by quarter end. And since its launch in the second quarter, the O2O system for overseas test prep program has been introduced and is now being used in three cities.

For the second level of our online education ecosystem, we have seen healthy growth in our pure online learning platform and other supplementary online education products. In the third quarter, hoolearn.com generates net revenue of US12.7 million dollars up 24.7% year over year. The number of paid users increased over 71% year over year. The number of cumulative registered users has reached more than 12,800,000 to reach more than 12,800,000, I'm sorry. To add to this great result, the operator of our CoolRing platform received an investment of US50 million dollars from affiliate of Tencent Holding Limited.

We made the announcement in February and you may find more details there. Ku. Cn, our own online broadcast open platform for both New Oriental and third party teachers, achieved over 756,300 registrations. Donuts, a series game based mobile learning apps for children, recorded over 38,200,000 downloads. Leqi, an English language vocabulary training app for mobile phones and tablets app, reported about 3,800,000 users by quarter end.

For the third quarter of our online for the third level of our online education ecosystem, we invest in select online education companies with a minority stake and we keep looking for new opportunities that will not only complete our own offerings, but also facilitate our own O2O integration. Now let me walk you through the other key financial details for the third quarter. Operating costs and expenses for the quarter were $304,600,000 a 19.1% increase year over year. Non GAAP operating costs and expenses for the quarter, which excludes share based compensation expenses, were $300,200,000 a 19.2% increase year over year. Cost of revenues increased by 15.1% year over year to $145,000,000 primarily due to increase in teachers' compensation for more teaching hours.

Selling and marketing expenses increased by 8% year over year to $45,000,000 primarily due to increase in brand promotion expenses and selling and marketing staff compensation. General and administrative expenses for the quarter increased by 30% year over year to $114,600,000 Non GAAP general and administrative expenses, which excludes share based compensation expenses, were $110,100,000 a 30.8% increase year over year, primarily due to increase in R and D expenses and human resources expenses related to the development of RO2O integration. Total share based compensation expenses, which were allocated to related operating costs and expenses increased by 12.5% to $4,400,000 in the third fiscal quarter. Operating income for the quarter was $42,300,000 a 32.6% increase compared to $31,900,000 in the same period of prior fiscal year. Non GAAP income from operations for the quarter was $46,700,000 a 30.4% increase compared to non GAAP income from operations of $35,900,000 in the same period of prior fiscal year.

Operating margin for the quarter was 12.2% compared to 11.1% in the same period of the prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter was 13.5% compared to 12.5% in the same period in the prior fiscal year. Net income attributable to NewRental for the quarter was $48,400,000 representing a 16.8% increase from the same period of prior fiscal year. Capital expenditures for the quarter was US19.4 million dollars and this was primarily attributable to the opening of 20 new learning centers and renovations at existing learning centers. Turning to the balance sheet.

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 third quarter was $585,300,000 an increase of 37.8% as compared to $424,900,000 at the end of the 2015. Before we move into Q and A session, let me go through our expectations for the fourth fiscal quarter. We expect total revenues to be in the range of US378.1 million dollars to US391.3 million dollars representing year over year growth in the range of 15% to 19%. If not including the impact from the recent RMB depreciation, the projected revenue growth rate will be in the range of 20% to 24% for the 2016. Also, of you may be aware that starting in May, China's tax reform of replacing business tax with VAT, value added tax, will expand to the customer service sector.

As a result, some business units of Urental may need to start paying 6% VAT for their gross revenues instead of three or 5% business tax, which is what we have been doing during past years. For the fourth quarter of this fiscal year, the impact will be minimal as it only affects one month. We expect that the negative impacts on our top line to be around 1% for the fourth quarter. This was already factored in the revenue guidance I just shared. This forecast reflects New Oriental's current and preliminary view, which is subject to change.

At this point, I will take your questions. Operator, please open the call for this.

Speaker 0

Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. Your first question comes from the line of Julie Pan from Macquarie.

Please go ahead.

Speaker 3

Hello, Steve and hello. Thank you for taking my question. Congratulations for another strong quarter. I have two questions. First one is we see an encouraging improvement in margins in this quarter with only 7% increase of learning centers.

And we do believe the margins improvement to continue. But do you think you can expand your learning centers in a faster pace in this stage given your market share in China and even in Beijing is still low at single digits? My second question is that is about POP Kids. POP Kids shares a really strong growth in this quarter of 40%. Do you think the faster growth in POP Kids than EU concession to continue?

And what do you think the main driver behind this other than the O2O injection? Thank you.

Speaker 2

Okay. Thank you, Julia. Your first question is about expansion plan. Yes, we opened seven new learning centers in Q3. And I think in the coming Q4, we plan to set up 10 to 15 new learning centers to prepare for the new fiscal year.

And in yes, I think the K-twelve market is huge. So in next fiscal year, I think we'll plan to we plan to open thirty, forty new learning centers, but compared to the seven twenty learning centers we have in hand, it's account for only three to five percent. So it will now drag the margin. And I think it will continue we will see the margin expansion continuously because of the business leverage. And this is my answer for the first question.

Also I want to add one point. Last year we spent last fiscal year we spent $39,000,000 on investment for O2O and pure online. And this year, we spent million dollars So last year and this year are the peak for the investments. Next year, I think we can cut some expenditures for the investments. So this is another variable for the margin expansion.

And your second question is for POP Kids. Yes, we did a very strong quarter in Q3. And I think besides the auto product, which is the popular among the parents and students, and I think the trends will continue. So going forward, I just want to guide the POP Kids program grow by, let's say, the 25% to 30% year over year growth. And another reason is, as I mentioned earlier, you know, the K-twelve market in China is huge, very fragmented.

And I think the big player like New Oriental will take more market share from small players. That's my answer. Is this clear?

Speaker 0

Thank you. Our next question comes from the line of Zoe Zhao from Credit Suisse. Please go ahead.

Speaker 4

Hi management, congratulation on a strong quarter. I have two questions. One is, can you please provide an update on the upcoming summer promotion plan? And the second one is, can you update us with the utilization rate given that our gross profit margin has been improving, but then it seems that our VIP revenue growth is also pretty strong this quarter. Yes, that's my question.

Thank you.

Speaker 2

Okay. The first question about price strategy. As you have some of you have heard, we have some class with very low price in the market. But I think we will start to provide the lower price summer math class for grade seven since several years ago in Beijing. And the purpose of this is to attract more students to trial classes.

I think this strategy turns out to be successful. I think this is one of the reasons why the Beijing K-twelve business performed well in past three or four years. So we will continue do that in Beijing this summer and spread other core cities. I think we upon this, we expect to accelerate the market consolidation. As the small players can afford that.

And in terms of the impact for the margins in the coming Q1, I think the impact will be minimal, because the students enrollment for the low price, it comes for only small parts of the total enrollment. So the impact will be minimal. And your second question about the utilization rate. In the third quarter, our utilization rates continue to go up. Now we 20%.

Last year was 18 about 18%. So that means 200 bps up. And I think going forward, we will see the utilization rate going up. Because last thing about that, if we open the learning centers new learning centers about 3% to 5% compared to the learning centers we have, it will not drag the margin. So that means we will see more students fit in the current classroom.

So most of the growth going forward will be the organic growth. Does it answer your question?

Speaker 0

Thank you. And our next question comes from the line of Tian Heng from T. H. Capital. Please ask your question.

Speaker 5

Hi, Sisi, Steven. The question is related to your upcoming plan for the Xuecheng to be listed in local market. Can you give a little bit color on this upcoming local listing and how U. S. Investor is going to benefit from such listing?

Speaker 2

Thanks, Tim. I think, yeah, I know we talked about cooler and potential listing as we mentioned in February's announcement. But what I can say is we're still in the planning phase. So we still need more time to work with the other groups. So it's too early to say.

But in my opinion, I think the if the we put the Kuen to the list in China market, it will give us the more the strong more strong brand name, and we can raise some money. And I think more Chinese people will know who learn. That's the benefit. Mhmm.

Speaker 5

Okay.

Speaker 0

Thank you. Our next question comes from the line of Fan Liu from Goldman Sachs. Please go ahead.

Speaker 6

Hi, Steve. Hi, Sisi. Thank you for taking my questions. So just two quick questions. Number one is about your is that possible would you mind sharing with us the utilization and also the margin profile for each segment?

I mean, including our overseas test preparation and also U Can and the POP Kids. And also the second question is about your revenue growth in Beijing and Shanghai this quarter. Would you mind to share with us as well? Thank you.

Speaker 2

Okay. Thank you, Fang. The In terms of the operating margin of different business lines, the overseas test prep, the operating margin before the head office overhead is about 30%. And for The U Can, the operating margin is about 25% or a little bit more than 25%. And for POP Kids, now it's 1314%, the operating margin before the head office overhead.

But it's at least 200, 300 bps up compared to last year. You know, we were seeing the higher utilization rates for POP Kids. And so this is the key operating margins for the different business lines. And your second question is about Beijing, the revenue growth in Shanghai. Beijing

Speaker 1

Yes, Beijing's revenue growth is about 22% this quarter, 20% plus and Shanghai is around 14%, 15%.

Speaker 2

Yes.

Speaker 7

Okay.

Speaker 2

Thank you, Fan.

Speaker 0

Thank you. Our next question comes from the line of Anshu from Breen Capital. Please ask your question. Ms. Shu from Green Capital, your line is open.

Please ask your question. Thank you. We'll move on to the next question. The line comes from Alvin Zhang from Deutsche Bank. Please go ahead.

Speaker 8

Hi, Stephen, congratulations on the strong quarter. I have a quick question on the retention rate. You mentioned that the retention rate improved a lot in this quarter. Can you give us more color on the numbers on that? Thank you.

Speaker 2

Thanks, The retention rate in this quarter is about more than 70. So I think somewhere between 70% to 75%. And so compared to last year, last year the number was 60% to 65%. So it's improved a lot. And because I think the new auto products especially for the K-twelve business when the students start to use the new version products, I don't think they will go they will stick with us where they keep stay with us.

So that's why we are seeing the higher retention rates compared to last year. And going forward, you will see the retention rates go higher in the future.

Speaker 8

Great. Thank you.

Speaker 2

Thank you.

Speaker 0

Thank you. Our next question comes from the line of Ed Shee from Breathe Capital. Please go ahead.

Speaker 9

Hi, Steven. Sorry about that earlier. Thanks for taking my questions. You mentioned that the O to O investments should decline in fiscal twenty seventeen. Wondering if there is kind of a specific level that you're thinking of and what will it be focused on in terms of the spending?

I also have a follow-up question from earlier in the call on pricing. I think this year the strategy for K-twelve was on gaining enrollments, but average pricing was kept more stable with plans for I think pricing power to be flexed next year. Is this still the target? And what's the likely growth we can probably see on average even with the summer promotions in Q1? Thank you.

Speaker 2

Okay. In terms of the investment for the O2O and purely online, we spent $15,000,000 this year and next year, I think we can cut some expenses for this. Let's say the 45,000,000 or $40,000,000 because I think mostly we'll keep all almost all the IT stuff and content writers going forward. But I think in next year, we don't need the third party services. We bought a lot this year and last year.

So next year, I think we can cause some of this kind of the expenses. And in terms of your pricing, question, This year, we use the different price strategy. For example, for K-twelve business, we only increased the price by no more than 5% year over year, not like several years ago. We increased the price by eight to 10% several years ago. And but this year as I said, we're still in the rolling out the new product.

So we use the very what it means, we only increase the price by only 5%. Next year, I think our price strategy will be a little bit more aggressive compared to this year. So our targets for the price increase will be 6% to 8% in the next year. That's my answer. Thank you.

Speaker 9

Thank you.

Speaker 0

Thank you. Our next question comes from the line of Leon Chik from JPMorgan. Please ask your question.

Speaker 10

Hey, hi. Thanks for taking the question. Just simple one, how did your GPM go down so much in 3Q? Basically, cost of goods sold went up slower than sales. Like we didn't see that in the second quarter, so we're just wondering if there's anything special in the third quarter.

Thanks.

Speaker 2

Thanks, Leon. It's a great question. The Q3 and Q4 are the peak season for K-twelve business. So I think the revenue in the Q3 are the revenue growth in Q3 is better than we expected. And yes, I think you will see the cost leverage here in especially for rental, we just increased the new learning centers by selling.

And for the current learning centers, the rental fee increased about only 5% year over year. So the rental increased by the high single digits. And also we are seeing the higher utilization rates. That means the one teacher are teaching more students within the same class. So that's why we are seeing the OP margin improvement.

Yeah. I think I think going forward

Speaker 10

Okay.

Speaker 2

The OP margin yeah. The OP margin will will still go up. Continue. Yeah.

Speaker 10

So just basically normal operating stuff. Nothing no special stuff. Right? Just regular Yeah. Regular.

You know, scale advantage.

Speaker 2

Yeah. Yeah.

Speaker 10

Okay. Thanks. Okay. That's it.

Speaker 2

Thanks, Leo.

Speaker 0

Thank you. Our next question comes from the line of Mariana Koh from CLSA. Please ask your question.

Speaker 11

Hi, management. Congratulations again on the really strong set of results. I just have a quick follow-up, I think, on the question just now. On the cost side, could you actually remind us what the, I guess, the fixed and variable component for the teaching cost and what type of trends are you seeing in terms of cost increases for teachers?

Speaker 2

Yeah, you know the teachers' compensation is divided by two parts. The first part, let's say the 60% are the fixed ones, so it depends on the level of the different teachers. And the second part, let's say the 40% are the teachers bonus as relates to the retention rate, the utilization rate, and the evaluation from students. So that's the percentage of the teacher compensation. So I don't know if it's clear to answer

Speaker 11

this one. But are we seeing but are we seeing really like, what sort of salary increase that we're seeing double digit type of increases that's expected from teachers?

Speaker 2

Yeah. We increased the teacher salary by eight nine percent year over year. So it's very Yeah.

Speaker 1

Alright. Thank you.

Speaker 11

Yep. Okay. Thanks.

Speaker 0

Thank you. Our next question comes from the line of Claire Chao from Morgan Stanley. Please go ahead.

Speaker 7

Hi management. Thanks for taking my question. I have two questions. The first one is related to the pricing strategy. As you mentioned that you may spread the low price strategy to other cities.

Could you give us some more color on this? What could be the potential P and L impact in the coming fiscal year when this low price strategy is more widely rolled out? And I have a follow-up.

Speaker 2

Okay. Thank you, Clari. It's a great question. Yeah, as mentioned, we will launch the low price class for only for grade seven and for math or maybe some cities for Chinese. But even though we launched this, I don't think it will we will have the negative impact for the margins for the next whole year.

Maybe yes, maybe will have some negative impact for Q1, but very minimal. For the next whole year, I think on contrary, the margin will be higher by doing this. Because we just give the one time discount for this kind of the students for one time. So after one time, since the second time, think more than like 60%, 70% of the students will take class with paying the normal price. So it will still get the we will get the higher utilization rates.

So for the next year, it's no margin dilution by this.

Speaker 7

Yes. Actually, I would

Speaker 1

add that actually based on current retention rate for our K-twelve business and also we have plenty of capacity for our K-twelve business now. So basically after Q1, most of the students who we attracted in Q1 will stay with the system for the rest of the year like Q2, Q3, Q4 courses. And that will increase the utilization of our overall business, which will contribute a lot to margin expansion actually. Okay.

Speaker 7

Understood. Thank you. And my second question is, I think Stephen mentioned that we have seen increasing word-of-mouth referral in the quarter. So just wondering, is it possible to share some data on this? And what magnitude of operating leverage can we expect from sales and marketing line?

Thanks.

Speaker 2

Sorry, we don't disclose the referral rates to the investors, but definitely it goes up. And that's why yes, you have seen the selling and marketing expense increased only 8% in Q3. And in Q1, Q2, the selling and marketing expense growth rate was zero. So going forward, I think the selling and marketing expense will increase below 10%.

Speaker 7

Got it. That's very clear. Thanks.

Speaker 2

Okay. Thank you.

Speaker 0

Thank you. Our next follow-up question comes from the line of Zoe Chao from Credit Suisse. Please go ahead.

Speaker 4

Hi, management. I have a follow-up question on the overseas business. Can management break down the overseas test prep versus the overseas consulting business? And also, I'm wondering what's the margin, the operating margin for the consulting business? Thank you.

Speaker 2

Okay. The overseas test prep business contributes 28% of our total revenue. And overseas consulting business contributes eight to 9% of our total revenue. And in terms of the margin of the overseas consulting business, it's about 20%. And I think the margin will go up a little bit higher next year, going forward in next three, five years, because we will see more leverage there.

20% margin for overseas consulting. That's my answer. Thank you, Zoe.

Speaker 0

Thank you. Our next follow-up question comes from the line of Tian Ho from T. H. Capital. Please go ahead.

Speaker 5

Yes, Steven. So the follow-up question is related to online education. So how fast can online education to grow in the next year or so? So that's one. Number two is the summer camp.

So in the past two years, you guys did have some issues with the summer camp. So what about this year? Is this issue totally gone with the company?

Speaker 6

That's your question.

Speaker 2

Okay. I think our pure online company, Koolearn, I think going forward, the revenue growth will be, let's say, the 35% to 50% year over year. It depends on the timing or the different orders. And so but in general, also faster than the offline business. For the summer cap, yeah, we had a very bad summer cap business numbers two years ago.

So but last last year, I think the summer cap business was okay. We will have the bad numbers because, you know, even before last year, there was the uncertainty of policy changes, but now it it is very, very clear for for the Gaokao with warm. So there's no impact for the coming summer for for summer process. Yeah. Okay.

Speaker 5

Okay. Thank you, Steven.

Speaker 2

Okay. Thank you, Tian.

Speaker 0

Thank you. Our next question comes from the line of Andrew Ouchi from Nomura. Please go ahead.

Speaker 8

Hi, Yang Zhong and Sisi. Thanks for taking my question. Two questions. Number one, on the VIP performance, you're still growing quite fast at 22%. But I guess with the whole business growing even faster, can you give us a sense of what the revenue proportion from VIP is this quarter versus the same quarter last year?

And then the other question is on the IELTS interactive system. Given that you're just rolling this out, but in the longer term, are you also expecting that this interactive system will help you raise ASP for your OUTS classes? Because I I expect that OUTS retention rate is generally quite low due to the nature of the courses. So those are my two questions. Thanks.

Speaker 2

Okay. On the VIP business, the VIP business of this quarter of Q3 contributes 29% of the total revenue. And last year was same, 29%. So you know, as mentioned several quarters ago, the management just wants to cap the VIP business, the 30% of total revenue. You know, our focus our focus is on the class business.

So going forward, I think the VIP contribution will still be within the 30% of the total revenue. And for the new ALS product we launched in March, I think we used the same methodology for the O2O product we used in K-twelve business. You know, more and more young whether it's the high school students or junior high school students are taking our IELTS class. So this deal needs to be online elements to help them to study more efficiency in the offline classes. So I think it will help us to increase the price because, you know, nobody else in the market has this kind of product.

So I think going forward, we'll still increase the price by five to 10% an apple to apple basis.

Speaker 0

Thank you. We are now approaching the end of the conference call. I will now turn the call over to New Oriental CFO, Mr. 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.