New Oriental Education & Technology Group - Earnings Call - Q3 2017

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the New Oriental Third Fiscal Quarter twenty seventeen Earnings Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, 04/24/2017. I would now like to hand the conference over to your first speaker today, Ms.

Sisi Zhao. Please go ahead.

Speaker 1

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

Stephen Yang. Please go ahead, Stephen.

Speaker 2

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We're pleased to report another strong quarter, during which we achieved both accelerated top line growth and continued solid bottom line performance this quarter. Net revenues increased to $437,800,000 which is an increase of 26.2% in U. S.

Dollar terms and 33.4% in our functional currency RMB, beating the high end of our expected range. Net income was $67,600,000 representing a 39.6% increase year over year. As you know, accelerating revenue growth through capturing opportunities across our diversified business model has been a key priority for us. Substantively, the strong top line growth was attributable to a significant increase in student enrollment in the recent two quarters. It's worth noting that in this year, we started to bundle winter and spring courses registrations in Q2 and summer and autumn courses registration in Q4.

As a result, we saw extremely strong year on year growth of student enrollment in Q2 and Q4 versus moderate growth in Q1 and Q3. We recorded a 56% year over year enrollment growth in the second quarter, followed by 5.9% year over year growth in the third quarter. The combined enrollment growth for the second and third quarter reached 32%. It's also encouraging to see a continuous strong momentum in enrollments and RMB cash proceeds from student registration in the first seven weeks of the fourth fiscal quarter, which grew by approximately thirty seven percent and thirty nine percent year over year. Our key revenue driver K-twelve all subjects after school tutoring business reported the revenue growth of approximately 41% in U.

S. Dollar terms and 49% in RMB terms. The combined enrollment growth of K-twelve after school tutoring business for the second and third quarter was 45%. This was mainly supported by U Can business and the revamped POP Kids program, which achieved revenue growth of 3652% in U. S.

Dollar terms respectively. This quarter, we remain focused on strong execution of the Optimize Market strategy, which means we're continuing to expand our offline business while also investing in the old world two way interactive education system. In the third quarter, we added a net of 10 learning centers in existing cities, opened a new kindergarten in Beijing, adding a total approximately 71,100 square meters of classroom area, which represents approximately 6% capacity expansion. We started to pilot a new dual teacher model class the new dual teacher class model in select cities in July 2016, utilizing online live broadcasting to reach students in the low tier cities with access to high quality teacher resources from high tier cities. In the third quarter, we rolled out three dual teacher model schools in the city of Kaifeng, Changzhou and Qinhua Dao.

We have begun to see increased market penetration in more remote areas. Turning to pricing. Per program blended ASP, which is cash revenue divided by total student enrollments, increased by approximately 10% year over year in U. S. Dollar terms or 17% in RMB terms.

The increase is mainly due to a higher than normal cash revenue growth of 32% in VIP business in U. S. Dollar terms or 39% in RMB terms during this quarter. Starting from this quarter, we began to concentrate the registration for U Can VIP classes in June and December, the first month of the first fiscal quarter and the third fiscal quarter respectively, rather than spreading evenly throughout the year with an effort to streamline the registration process. As a result, we saw very large year on year increase in enrollments for UQ and VIP classes in this quarter.

In the fourth fiscal quarter and over the long run, we expect that growth of our VIP business will be slower than our overall revenue growth. Also, in order to improve the effectiveness and results of our training offer to younger age customers for overseas test prep, we doubled the class length of TOEFL and ELSE program targeting middle and high school students since this fiscal year. Hourly blended ASP, which GAAP revenue divided by total teaching hours, increased by approximately 3% year over year in RMB terms. To provide a breakdown of hourly blended ASP in RMB terms, please note that U Can increased by 1%, POP Kids increased by 10% and Overseas Tax Fire program increased by 10% year over year. On margin front, we continue to make great progress by improving operational efficiency and utilization of facilities and controlling cost within the company.

Operating margin increased 90 basis points and net margin increased 140 basis points year over year. The continued strong bottom line performance demonstrates the result of our commitments in creating sustainable long term value for our customers and shareholders. Now let's move on to third quarter performance across our individual business lines. Our key revenue driver, K-twelve or subjects after school tutoring business achieved year over year revenue growth of 41% in U. S.

Dollar terms or 49% in RMB terms and enrollment growth of about 9% year over year. Breaking it down, the U Can middle school, high school, all subjects, all after school tutoring business recorded a revenue increase of 36% in U. S. Dollar terms or 44% in RMB terms. Student enrollments grew by 10% year over year.

Our POP Kids program revenue was up by 52% in U. S. Dollar terms or 60% in RMB terms and enrollment grew by 8% year over year. Our overseas test prep and consultant business together reported revenue growth of 9% in U. S.

Dollar terms or 15% in RMB terms year over year. Finally, VIT Personal Life Plus business recorded cash revenue growth of 32% in U. S. Dollar terms or 39% in RMB terms year over year. Next, I'll provide some updates on the progress we have continued to make with our Optimize Market strategy.

We have been focusing on maintaining a healthy balance between top line and bottom line growth, while investing in the build out of our O2O interactive integrated education system and this continue to work well. Starting with our core offline business. As mentioned earlier, we added a net of 10 learning centers in existing cities, opened a new kindergarten in Beijing and three dual teacher model schools in the city of Kaifeng, Changzhou and Qinhua Dao. Altogether, we added a total of approximately 71,100 square meters of classroom area, representing 6% capacity expansion. For the whole year 2017, we plan to add 70 to 80 new learning centers for K-twelve business in all of our existing cities.

We moderately scaled up the new learning center opening plan over the course of the year as we want to be better positioned to benefit from positive market dynamics. We also plan to enter three or four new cities where we identify markets with most business opportunities. We also plan to pilot the newly initiated dual teacher class model in around 20 existing cities and enter five to seven new cities, all specifically targeting lower tier markets. Regarding our online business, we invest approximately $15,000,000 in the third quarter to improve and maintain our ultra integrated education ecosystem. Most of the investments were recorded under G and A expenses.

We have been devoted to this online business build up since 2014 with an increase in customer retention rates and addition of new customers. We fully believe this is transforming our business and investments will bring continued long term benefits. Before I go into the details, just a quick recap of our three levels of online platform. The first level, also the core of our online system, is an O2O two way interactive education system across all of our business lines. The second level is our pure online learning platform, a supplementary online education product and the New Oriental brand.

The third level of our ecosystem is for New Oriental to take minority shareholdings in online education companies that complement our online education offerings. Starting with O2O2A interactive education system, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. This is also an important factor that sets us apart from other key players in the market. With advanced O2O product services, we're poised to gain more market share and improve brand recognition going forward. Since its launch in September 2014, U Can Visible Progress Teaching System, our interactive education system has been successfully rolled out across all existing cities in our nationwide school network and this expansion drove positive performance.

Our newly revamped Pop Kids English program has also expanded its coverage to 54 cities by the end of the third quarter. The interactive education system has been gradually used in more and more cities. The O2O system for the domestic test program was being used in five cities for some classes by the end of third quarter. And since its launch in the 2016, the interactive education system for overseas test prep program, including ELT, TOEFL and SAT courses, was rolled out in seven cities by the end of third quarter. For the second level of our online education ecosystem, we have seen consistent growth in our pure online learning platform and other supplementary online educational products.

As you may have known, we announced in March that Beijing New Oriental Xuncong network technology company, which operates our online education platform, coolearn.com, has received approval of the listing of Xuncong shares of the National Equities Exchange and quotations in China. We believe this could help better strengthen its operation and further improve our online service offering. In the third quarter, koolearn.com generated net revenue of $15,000,000 representing an increase of 19% in U. S. Dollar terms or a 26% increase in RMB terms.

The number of paid users increased significantly this quarter approximately 92% year over year. The number of cumulative registered users in this quarter has reached 15,800,000. Ku. CN, our own live broadcast open platform for both new rental and third party teachers, achieved around 470,700 registrations in the third quarter. Doughnut, a series of game based mobile learning apps for children, recorded over 56,300,000 downloads by quarter end.

LeiFi, an English language vocabulary training app for mobile phones and tablets app, recorded over 5,800,000 users by quarter end. For the third level of our online education ecosystem, we invest in select online education companies with a minority stake and we continue to look 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 were $380,300,000 representing a 24.9% increase year over year. Non GAAP operating costs and expenses, which exclude share based compensation expenses, were $372,100,000 representing a 24% increase year over year.

Cost of revenues increased by 26.5% to $183,800,000 primarily due to increase in teachers' compensation for more teaching hours. Selling and marketing expenses increased by 24.2% to $55,900,000 primarily due to increase in brand promotion expenses. G and A expenses for the quarter increased by 23% to 140,900,000 Non GAAP general and administrative expenses, which excludes share based compensation expenses, were $132,600,000 representing a 20.4% increase year over year. This is primarily due to increased headcount as the company expands network of schools and learning centers by about 10% year over year. Total share based compensation expenses, which were allocated to related operating costs and expenses increased by 86% to $8,300,000 Operating income for the quarter was $57,500,000 a 36 percent increase from $42,300,000 in the same period of prior fiscal year.

Non GAAP income from operations was $65,800,000 a 40.7% increase from $46,700,000 in the same period of prior fiscal year. Operating margin for the quarter was 13.1% compared to 12.2% in the same prior period of the prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter was 15% compared to 13.5% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $67,600,000 representing a 39.6% increase from the same period of prior fiscal year. Capital expenditures for the quarter were $24,000,000 and this was primarily attributable to the opening of four new schools and 30 new learning centers and renovations of existing learning centers.

Turning to the balance sheet. At the end of third quarter, the deferred revenue balance was cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered was $760,500,000 an increase of 29.9% as compared to $585,300,000 at the end of 2016. Before talking about our expectations for the fourth quarter, I wanted to take a moment to reiterate our overarching goals for the year, which we outlined on twenty sixteen Q4 and full year conference calls. During fiscal year twenty seventeen, we will continue to focus our Optimize the Market strategy. With the current success achieved, we're confident that we have the right strategy in place and that will continue to drive additional progress and help us create long term value for all shareholders.

To give you more specifics, first, we will continue to expand our offline business. In fiscal year twenty seventeen, we plan to add 70 to 80 new learning centers for K-twelve business in existing cities. This is higher than our initial targets provided ahead of fiscal year and we're raising this because we are seeing a growing momentum for our K-twelve business due to the combination of our broad product portfolio, solid market demand and effective operation. We also plan to enter three or four new cities where we identify markets with the most business opportunities. Further, we plan to implement the newly initiated dual teacher model class model in around 20 existing cities and enter five to seven new cities subsistently targeting low tier market.

Second, we will continue to invest in our O2O integration and initiatives in our online education offerings, promoting the strongest products possible in the marketplace in order to continue to take more market share. While investments will continue, we believe that the total spending will begin to stabilize this year compared to the large annual incremental increases in the last two fiscal years when we were building a foundation. Third, we will continue to have a top priority on improving utilization of facilities and controlling cost and expenses across the company to drive the continued margin expansion and profitability. Looking at the near term, in terms of the 2017, we expect total revenues to be in the range of $465,100,000 to $479,900,000 representing year over year growth in the range of 18% to 22%. The projected growth rate of net revenues in our functional currency RMB is expected to be in the range of 25% to 29% for the fourth quarter.

Lastly, I must mention that these expectations reflect New Rental'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. Thank

Speaker 0

Our first question comes from the line of Tian Hou from T. H. Capital. Please ask your question.

Speaker 3

Good evening, Cici and Steve. Congratulations on a good quarter. My question is related to two questions. One is related to your expansion. And previously, you were planning to open like thirty, forty new learning centers.

And as what you just said, you're going to pretty much double it. And I wonder if that's what's that going to be what's the impact going to be on your margin? And are we going to maintain our margin? Or the margin is going to be impacted a little bit? That's the first question.

Second question, I mean, not long ago, in Shanghai, I think the government has some kind of a policy, you know, like students to stay in the school a little bit longer. So that reduced their time to go to off school tutoring program. And do you see any impact from that? So that's two questions.

Speaker 2

Okay. Thanks, Tien. Your first question is about our extension plan. Yes, we raised the new learning center opening this year. Originally, we plan to set up thirty, forty new learning centers.

But we're seeing the our K-twelve business, the growing momentum is very good. And also we're seeing the growing market demand and we're quite confident about our new K-twelve product not only Mhmm. Also in top kit. So we decided to open more learning center. Even though we opened seventy, eighty new learning centers within this year, that means the 10% Mhmm.

Expansion. So capacity expansion. It's not Mhmm. That hold the margin. And in office, we're seeing the market expansion Mhmm.

By 110 bps or or 100 bps in this year. And also next year, I think we will still open 10% more learning centers. And we expect the margin should be improved by 50 to 100 bps up in next fiscal So this is the question for you the answer for your question about the expansion plan. The second question is about our yes, saw the policy change in Shanghai several months ago. But till now, we don't have we haven't seen any negative impact of our business.

Typically, the students spend thirty or forty hours a week in public schools. The students only spend four six hours a week with New Oriental. So I don't think we give a lot of burden to students. We help the students to study in more efficiency and to teach them the better study method. So till now, I don't see any negative impact of our business.

And do you see our business, the trend is very good. That's it.

Speaker 4

Yes. Thank you.

Speaker 3

Okay. That's all my questions. Thank you.

Speaker 2

Okay. Thanks, Tian.

Speaker 0

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

Speaker 4

Hi, management. Thanks for taking my question. So you have mentioned that in the first seven weeks of fourth quarter, the enrollment grew by 37% year on year. May I know if this is related to registration for summer courses only or summer and autumn courses combined? And also, could you please share with us the utilization and then the retention rate this quarter?

Thank you.

Speaker 2

Okay. Yeah, in the first seven weeks of the fourth quarter, we're seeing 37% growth in enrollments. Yes, I think most of these new enrollments in the first seven weeks of the fourth quarter is what we reported the GAAP revenue in Q4 and Q1. So we changed we make a change of the time window for the student enrollment registration in K-twelve business this year. So that means you will see the two windows of the whole year.

The first one is in autumn. That means in November. And the second is in May. So you will see more and more student enrollment growth in the rest of the time of the Q4. And the utilization rate, yes, this year is 21%.

So that means we're seeing the 200 bps up compared to 19% utilization rate in last year. And going forward, we expect the utilization rates will go up continuously. And the what's your retention rate? Our retention rate, yes. And for in terms of the K-twelve business, the retention rate is 75% to 80% this year.

Last year was 65% to 70%. So that means the 10% improvement this year. Okay.

Speaker 4

Thank you. Very helpful.

Speaker 2

Okay. Thanks. Thank

Speaker 0

you. Our next question comes from the line of Wendy Huang from Macquarie. Please ask your question.

Speaker 5

Hi, Steven. Hi, Sisi. This is Ivy asking on behalf of Wendy. So I just first want to clarify on that this year we combine our enrollment. So basically spring was spring and summer sorry, basically 4Q and 1Q and 2Q and 3Q.

So when did it exactly started to start basically in the second quarter fiscal year twenty seventeen, so that this quarter is the first quarter that we're seeing the moderate 6% enrollment growth because of the combination? And my second question is on our there's a net loss that's attributable to the minority shareholding. Is that from Koolearn? And for Koolearn after now it's listing on the new third board, what's our strategy going forward to continue push forward the pure online learning? That's my two questions.

Thank you.

Speaker 2

Okay. Yes, we started to bundle winter and spring courses registration in Q2. So this was the first time. And we will do the same thing in Q4. That means the summer and autumn courses registrations will happen in Q4.

Because we're seeing our classes are popular from students, so they want to enroll into the class as early as they can. So that means you will see very strong year over year growth on enrollments in Q2 and Q4 versus moderate growth in Q1 and Q3. But I suggest your guys to combine the student enrollment growth in two quarters or maybe three quarters. So I suggest you combine the Q2 and Q3 and first seven weeks of the enrollment in a row together so you can gather more reasonable student enrollment trends. And, yeah, this is the answer for your first question.

What's your second question?

Speaker 6

No. It's on the

Speaker 0

yeah. Okay.

Speaker 2

That's a it's it's some yeah. That's have several subsidiaries, West, the Max and the others are extra. Some companies still in loss and so but the MI is not a big deal, it's not a big number. And as for the cooler.com, our pure online platform, yes, it's at least in third world market. And I think it will help the cooler.com to develop more rapidly.

And going forward, I think we expect top line growth of cooler.com will be 30% or 40% year over year. And you will see the margin improvement of poolearn.com. Okay.

Speaker 6

Thank you.

Speaker 2

Thank you.

Speaker 0

Thank you. Our next question comes from the line of Alvin Zhang from Deutsche Bank. Please ask your question.

Speaker 7

Hi, management. This is Marima asking on behalf of Alvin Zhang. First, congratulations on another strong quarter. And we have two questions here. The first one is, we know that some cities have launched this year's summer promotion campaigns.

So can management share some feedback of the promotion? And what will be the impact on our financial results? Second question is, we noticed the margin improvement is quite strong this quarter. So can management give us some color on the margin growth next quarter or even the quarter going forward? Thank you.

Speaker 2

Okay. Yes. We did large scale promotion in last summer in order to rapidly acquire grade seven students in 27 cities. And I think it's very successful because in this fiscal year 2017, the summer promotion generates 3% or 4% incremental revenues and there's no margin impact on that. And this year, I think we will do more summer promotion.

We plan to conduct a summer promotion this year in about 30 cities or more. And the I think the top priority of summer promotion this year, well, I mean our job is to get higher retention rates. So we're quite confident that the retention rate in the coming autumn will be higher than that of last year. And so we hope the summer promotion will bring more and more new student enrollment and three or 4% or maybe 5% new student run incremental revenues in fiscal year twenty eighteen. And I think yes, as we did in last year, there's no margin impact.

What I mean is no negative impact on margins.

Speaker 7

So the second question is on the margin.

Speaker 2

Okay. Margin. Yes. We're happy to see the margin improvement. And in the coming quarter, we expect the margin improved continuously.

And as I shared with your guys several quarters ago, our margin target is to get 17 to 18% operating margin GAAP operating margin in that three, four years. And this year, I think the operating margin for the whole year should be somewhere between 14 to 14% or 14 to 6%. And so I think the margin will be improved gradually in next whole year or in next three years. Okay.

Speaker 7

Thank you.

Speaker 2

Thank you.

Speaker 0

Thank you. Our next question comes from the line of Ms. Cheryl Yang from CICC. Please ask your question.

Speaker 8

Good evening, Stephen and Sisi. Thanks for taking my question and congratulations for the strong quarter. I have two questions. Could you please share more detailed pipeline to roll out your dual teacher model in the next quarter and in the fiscal year of 2018? And the second question is, could you please help us to break down the operating margin by segment?

And what's the target for the next quarter and the fiscal year 2018? Thanks.

Speaker 2

Okay. As for the dual teacher model, we powered the dual teacher model in five cities, three new cities combined with the two cities we opened last quarter. And also on the other hand, we in 20 learning centers in existing cities to part of the dual teacher model. And our plan is to open, I think, five to eight or five to 10 new cities in the next full year to open the learning centers to run the dual teacher model. And anyway, will see more and more exclusive cities run the dual teacher model.

The operating margin by segment, the operating margin what I said all what I said before the head office expenses, overseas test prep margin is about 30% and U Can business, the op margin is 25%. And the POP Kids the operating margins for POP Kids improved a lot in last two years and now it's between 15% to 20%. And next year, I think you will see the margin improvement in all business lines. So, this is our target.

Speaker 8

Very helpful. Thank you.

Speaker 2

Thank you.

Speaker 0

Thank you. Our next question comes from the line of Terry Chen from HSBC. Please ask your question.

Speaker 9

Hi. Thank you, Steve and Sue for taking my questions. You talked about a capacity expansion acceleration. So I'm just wondering what kind of cities are we targeting to enter? And also what's our strategy in the maybe next three to five years?

Are we entering expansionary mode for next three years? Thank you.

Speaker 2

Okay. We plan to enter three or four new cities by opening the offline schools in this year. And next year I think though almost the same number three to four new cities. So we will enter into the low tier cities. But even though I think if you see our the chart where the data's, I think there's a lot of cities we can enter into because there are more than 100 cities with the population more than 2,000,000 we're not in.

So I think but we will do it very carefully just to open like the three or four new cities every year. But don't forget next year we will open more and more cities by the pure dual teacher model. So that means we're seeing the very good momentum in our K-twelve business. And also we have the best teachers and best content. So we will open more cities and learning centers.

But the key is we care about margin. So we won't let the new learning centers and the cities drag the margin. This is our top priority in terms of the strategy.

Speaker 9

Yes. Thank you very much. Just a quick follow-up on your summer promotion strategy. So you talked about doing this promotion in 30 more cities and the goal is to have higher retention rate this year. So I'm just wondering what kind of enrollment you're targeting for this year.

Last year, have 200,000, right? So what kind of enrollment number do you think would be achievable for this year?

Speaker 2

We don't have the specific budgets on the summer promotion enrollment. But I think we should get more students compared to the 20,000 enrollments in last summer promotion. But as I said earlier, I think we care about the retention rates. While we learned a lot from the last year, we have more that means we have more experience. So we pushed the local school help to get more student retention rate for summer.

This is our first top priority job this year.

Speaker 9

Great. Thank you, Stephen.

Speaker 2

Okay. Thank you, Terry.

Speaker 0

Thank you. Our next question comes from the line of So Zhao from Credit Suisse. Please ask your question.

Speaker 6

Hi, management. Thank you for taking my question. I've got several questions here. The first of all, like on the margin expansion, can management give us some outlook on the gross profit margin specifically? Because we noticed the absolute COGS picked up a bit this quarter on a Q on Q basis versus the previous year.

So when we talk about margin expansion, does it mainly come from operating cost savings or GPM has more upside? The second question is regarding the change of your enrollment window. Would that affect your marketing strategy? So this because the sales and marketing expenses seem to have some operating leverage this quarter. So just wondering how would the change of enrollment window affect the expenses spread out?

And the third question is on the enrollment growth in your top five cities versus the others. Can management give us some colors? Thank you.

Speaker 2

Okay. The gross margin, I think going forward you will see the gross margin will be flattening or improve a little bit. So we have some leverage on the rental or the teaching cost. So the GP margin will be flattening or improve a little bit going forward. And the selling and marketing expenses, I think it's not related to the enrollment registration window changed because we now we rely on word-of-mouth, not the selling and marketing activities.

So you will see the more and more leverage on the selling and marketing expenses as a percentage of the revenue going forward. And the top five cities, I think the question is about revenue contribution or the enrollment contribution?

Speaker 6

Yes. If you could mention both that would be great.

Speaker 2

Okay. Yes, the revenue contribution, top five cities the biggest one Beijing, so 24% to 25% revenue contribution. And the other the second Shanghai is 7%. And the third one Guangzhou and Xi'an and Wuhan. This is the top five cities.

So it's contribute except besides Beijing, each city contributes three to 7% revenue contribution each. It. Hello, it's clear.

Speaker 10

Okay. Thank you.

Speaker 9

Yes. Thank you.

Speaker 6

Yes, it's clear. Thank you.

Speaker 0

Thank you. Our next question comes from the line of Mr. Alex Liu from Daiwa. Please ask your question.

Speaker 11

Thanks, Stephen. A quick question on the overseas test prep business. I think the business itself has been more or less stable over the past few quarters. I'm just thinking about considering the fact that we are undergoing some revamp on the course content and structures for that business. Just how should we think about it this segment's enrollments and revenue growth in the next two years?

Speaker 2

Okay. Actually, the student enrollment is up by 1% of overseas test prep and two quarters supply. So this is a good news for us. And actually the cash revenue in Q3 is up by 21%. What it means, the cash revenue in RMB terms.

So it's a good start. And yes, we're revamping the new O2O product on overseas test sites as we did in last two years POP in Kids and U Can. So the new products will be more interactive, more diagnostic. I think it's more suitable for the younger age students, the young age students. So in the coming quarter, I think the student enrollment for overseas test prep will be flattening or low single digit growth.

And with the price increase, the revenue will grow by 10%. But for the next whole year, I think we're confident that the overseas test prep business will grow by 10% to 15% or more, because first the first launch of the new auto product with it was on l. S. So we did what have been done well on ELSE, one of its Yasi courses. So we're doing the same thing for TOFO SAT and GRE and GMAT.

So this is the reason why we feel confident about the future of the overseas test business. But don't forget, we also have the overseas consulting business. In this quarter, the GAAP revenue of the overseas consulting business was 30% year over year growth. So I suggest that you guys combine the overseas consulting business with the overseas test product business. And our CEO, Joe Osher, ran overseas consulting business in the last seven, eight years.

He and the whole management team have done a great job. So going forward, I think the top line growth of the overseas consulting business will grow very well. Thank you.

Speaker 11

Thank you.

Speaker 0

Before we proceed, let me remind our participants that are still in a Q and A queue. We would limit for time constraint, we would limit one question per person. So we would open the next line for Ms. Lucy Yu from Merrill Lynch. Please ask your question.

Speaker 4

Hi, management. Congratulations on a solid quarter. Just a quick question on dual teacher. Could we please learn some color on the revenue contribution from dual teacher classes as well as the margins? Is it a suitable time to share more color with us?

Thank you.

Speaker 2

Thanks, Luci. It's a great question. But we're so far so good. What it is for the dual teacher model, it's too early to make prediction of the revenue contribution because we just opened five new cities and 20 new learning centers 20 learning centers in existing cities. So it's too early to say.

So maybe in next six nine months, I will tell you the revenue contribution of the dual teacher model.

Speaker 4

Just one quick follow-up. So how many classes can one teacher take on average at the moment?

Speaker 2

Till now, as I said in the last earnings call, in last November, we successfully pilot a class in POP Kids that one teacher can phase to 39 classes at the same time. But this is the best. But on average, the one teacher can phase to 15 to 20 classes at the same time. So that means in the low tier cities, the students like to take the class of the top teacher from Beijing or Shanghai, the top cities. So this is very good for them.

And so and if the one teacher can fit to so many class at the same time, I think the margin of the dual teacher model should be higher than the offline classes. Thank you.

Speaker 4

Okay. Thank you very much.

Speaker 2

Okay. Thanks.

Speaker 0

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

Speaker 12

Hi. Congrats. Just a simple question. I think your stock based comp is up 80%. Just wondering like the main reasons why.

Thanks.

Speaker 2

We issued the restrictors to the management this fiscal year in last November. So we report most of the share based compensation in Q3 and Q4. So this is the reason that you'll see the stock based compensation increased by 88%.

Speaker 12

Okay. Thanks. Thanks.

Speaker 0

Thank you. Our next question comes from the line of Eric Yu from CCBI. Please ask your question.

Speaker 12

Hi. Good evening, Steven and Tim. Thank you for taking my question. My question is regarding to the revenue growth breakdown. Your top line growth by like 33% in terms of renminbi and for K-twelve it grew by like 46.

I was wondering if we divided by like ASP growth and also the enrollment of utilization growth and new learning center. What's the contribution of this three? And I know there's a fourth quarter ahead, but could you give some color of these three factors for next year and maybe color on next year's top line growth? I was thinking if excluding the renminbi depreciation effect, would maintain like over 30% year over year for next year. Thank you.

Speaker 2

Okay. Yeah. I think there's a I suggest that your guys use the hourly rate as I said earlier as the ASP. So the hourly rate in Q3 was increased by three

Speaker 12

Okay. But what

Speaker 2

you give Yes, volume growth is 29.5%. So if you combine the two parts together, you get the 34% growth in RMB term. And going forward, think we will increase the price. What I mean is the in terms of the hourly rate, the price increase will be 5% to 8%. This is our strategy.

And the others will be the volume growth. But most of the revenue growth come from the organic growth. That's why you would receive the margin expansion. And so going forward in the next fiscal year what I mean in fiscal year twenty eighteen, I think we will execute the same strategy as we did in this year. So most of the revenue in the next year will come from the organic growth.

Think it's too early to give the guidance of the next year, but you'll see the very good student enrollment trends in this quarter and the Q4. So maybe I think in next quarter, we will give you the guidance of the next whole year. You'll see the good trends anyway. Okay.

Speaker 12

Okay. Okay. I just want to follow-up on for the existing schools and learning centers, which are opened like for two one or two years before, what's the utilization rate of them? Is there some still much upside from the equal centers?

Speaker 2

Yes. We yes, we that's why yes, you know the utilization rate overall is only 21% to 22% currently. So the maximum of the utilization rates will be somewhere between 30% to 35%. So there will be a lot of room to improve. This is the key margin improvement driver.

Speaker 12

Okay. Thank you.

Speaker 2

Okay. Thanks.

Speaker 0

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

Speaker 4

Thank you management. I think most of the questions have been asked. I just have another small question on dividends. I know we previously discussed that we don't want to have a regular dividend that would cause some withholding tax impact. But should we expect that this would still be something management would consider on an annual basis would view that because of the huge cash build out we already have on the balance sheet?

Speaker 2

Okay. Thank you, Miranda. A great question. I think the question is for me. And our policy is the that every July our Board will discuss the what the next year policy, the dividend policy.

And also we need one more quarter to see how much cash we generate in the whole last fiscal year. And but don't forget in last three, four years we paid three times special dividends and did several times share buyback. So we have shown the investor slowly. And so we almost paid $350,000,000 to $400,000,000 in total in last four or five years. And so please wait for three more months and we will discuss in Board meeting in July.

Okay. Thank you.

Speaker 4

Thank you.

Speaker 9

Thanks.

Speaker 0

Thank you. We don't have any further question at this time, sir. So you may continue.

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.

Speaker 0

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.