New Oriental Education & Technology Group - Earnings Call - Q3 2018
April 24, 2018
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the New Oriental Third Fiscal Quarter twenty eighteen 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 that this conference is being recorded today, like Tuesday, 04/24/2018. I would like to hand the conference over to your first speaker for today, Ms.
Izzi Zhao. Thank you. Please go ahead.
Speaker 1
Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter twenty eighteen earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions.
Before we continue, please note that the discussion today will contain forward looking statements made under the Safe Harbor provisions of The U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.
A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr.
Yang. Stephen, please go ahead.
Speaker 2
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We're pleased to continue our strong momentum in driving top line growth for the 2018. Net revenues in the third quarter increased to $618,100,000 which is 41.2% growth, once again beating our expectations. Specifically, the strong top line growth was driven by a significant increase in student enrollment in academic subjects tutoring and test prep courses in the last two quarters.
Starting from the last fiscal year, we bundled winter and spring courses registration in Q2 and summer and autumn courses registration in Q4. This year, we delivered a very strong 43% year over year enrollment growth in the second quarter. Following the powerful drive in the second quarter, student enrollments continued to grow at 7.7% year over year in the third fiscal quarter. It's also worth noting that this year's much later Chinese New Year has caused student enrollments in the last week of third quarter to fall into the beginning of the fourth quarter. Nonetheless, the combined enrollment growth for the second and third quarters together reached 30% even with the impact of Chinese New Year.
In this regard, we're very encouraged to see outstanding results in terms of the enrollments and cash proceeds from students registration in the first eight weeks of the first fiscal quarter, which grew year over year by approximately 4065% respectively. In the third quarter, we remain committed to sustaining a healthy balance between top line and bottom line growth and we execute our well proven Optimize the Market strategy. Following a strong track record in the previous three quarters, we continued to make great strides in our planned acceleration in capacity expansion across cities with superior growth potential and higher operating efficiency. In this quarter, we added a net of 47 learning centers in 23 existing cities, opened two new schools in the city of Liaoyingang and Yanqiao and launched three dual teacher model schools and eight learning centers in the city of Jiaozuo, Dongguan and Haikou. Put together, our total square meters of classroom area by the end of this quarter expanded by approximately 41% year over year.
We also continue to strengthen our onlineoffline integrated standardized teaching system in the K-twelve business. We deployed the standardized teaching system in our overseas test prep business in some of the larger cities in China. Moreover, we continue to invest in our pure online education platform, coolearn.com, which delivered year over year revenue growth of approximately 63% in this quarter, with registered users and paid users up by approximately 8870% respectively. With solid support in resources and a series of new initiatives being rolled out, our online K-twelve app school tutoring business reported a robust year over year revenue growth of approximately 176%. The results boost our confidence in making strategic investments to capitalize on the booming online education market and drive up our top line growth.
Our encouraging results for the third quarter was mainly driven by the significant increase in student enrollments in the second and third quarters as mentioned a moment ago. Our K-twelve all subjects after school tutoring business accelerates growth momentum in the third quarter, leading to a significant year over year revenue increase of 51%. Furthermore, our U Can middlehigh school all subjects after school tutoring business also recorded revenue growth of approximately 51%, while POP Kids program grew by approximately 50 year over year. I will now turn to pricing. Per program blended ASP, which cash revenue divided by total enrollment increased by about 12% year over year in dollar terms.
Hourly blended ASP, which GAAP revenue divided by total teaching hours increased by approximately 13% year over year in dollar terms. To provide a breakdown of our blended ASP, please note that U Can increased by 13%, POP Kids increased by 11% and the overseas test prep program increased by 18% all year over year in dollar terms. Meanwhile, our sustained efforts to push ahead with our capacity expansion strategy contributed to a short term headwind in the margin for this quarter, which we contain at a reasonable level. Non GAAP operating margin for our language training and test product business declined 140 basis points year over year, a trend in line with that of the previous quarter. We anticipate that the margin pressure will gradually lessen and be lifted off over the fourth fiscal quarter and the coming fiscal year.
As we remain focused enhancing our operational efficiency, utilization of facilities and cost control as the business expands. Looking ahead, we're confident that the downward pressure in margin will continue to ease throughout the remainder of the fiscal year. More importantly, as the business expands, it will also benefit from greater economies of scale as we continue to make strategic investments. We believe that with our well proven expansion strategy, our strategic vision and investments will continue to create sustainable long term value for our customers and shareholders. Now let us move on to third quarter performance across our individual business lines.
Our key revenue driver, K-twelve all subjects after school tutoring business achieved revenue growth of about 51 year over year and enrollment growth of about 13% year over year. The combined enrollment growth of K-twelve after school tutoring business for the second and third quarter was 38%. Breaking it down, the U Can middle schoolhigh school business reported a revenue increase of about 51% for the third quarter. Student enrollments grew approximately 17% year over year for the quarter. The combined enrollment growth for the second and third quarter was 37%.
Our POP Kids program revenue was up by 50% in dollar terms and enrollment grew by 7% year over year. Combined the enrollments growth for the second and third quarter was 39%. Our overseas test prep and selling business together recorded revenue growth of about 24% year over year in the third quarter. Finally, VIP personalized classes business recorded revenue of about 34% year over year for the quarter. Next, I'll provide some updates on progress we are making with our Optimize Market strategy.
In consistent with our long term plan, we have been focusing our expanding capacity by investing in the build out our ultra integrated education system and this continues to produce very promising results. We will start with our offline business. In the 2018, we added a net of 47 learning centers in 23 existing cities, opened two new schools in the city of Lianyungang and Yancheng and rolled out three dual teacher model schools and eight learning centers in the city of Jiaozuo, Dongguan and Haikou. Altogether, our total square meters of classroom area by the end of the quarter expanded approximately 41% year over year. In order to capture the growth opportunities in low tier cities in China, we continue to roll out our dual teacher model schools, expand our business into remote areas of China.
We began to pilot a new dual teacher model class in select cities in July 2016. And by the end of the third fiscal quarter twenty eighteen, we have deployed new offering in over 35 existing cities for the POP Kids program, in 25 cities for the U Can program and 13 new cities for both POP Kids and U Can K-twelve business together. We're delighted to see higher market penetration in those markets as a result of our strategy. We also saw improved customer retention and scalability brought by this new model. With these promising results, we will continue to deploy this strategy in the remainder of the year.
Turning to our online business. We invested $19,300,000 in the third quarter to improve and maintain our ultra integrated education ecosystem. Most of the investments were reported under G and A expenses. I will now provide some updates on our O2O 2A interactive education system. Since the launching of the U Can Visible Progress teaching system in September 2014, the interactive education system has been deployed in all existing cities.
We launched the newly revamped POP Kids program Shuangyou in most cities by the end of the 2018. The interactive education system has also been gradually implemented in an increasing number of cities across China. The interactive education system for overseas test prep, including IELTS, TOEFL and SAT courses was rolled out and tested in most major cities by the end of the third quarter. At the same time, we also standardized product offerings across seven cities, including Shenzhen, Xiamen, Changsha, Hefei, Nanjing, Suzhou and Hangzhou. Now I will walk you through our progress in coollearn.com business line and other supplementary online education products.
Coollearn.com generated net revenue of $24,800,000 representing a 63% increase year over year in the third quarter. The number of paid users increased about 70% year over year in this quarter and cumulative number of registered users reached 20,900,000. Our online K-twelve after school tutoring business achieved an impressive year over year revenue growth of approximately 176%. Our dominant learning apps recorded over 78,300,000 downloads by end of the 2018. Our LUTs app recorded about 7,400,000 users by the end of 2018.
To capitalize on the huge market opportunity in online education space, we invested more resources in executing new initiatives in our online K-twelve after school tutoring business. This includes content development, teachers recruiting and training, sales and marketing and other essential costs and expenses contributing to driving the growth of our new online programs. With these programs, we're able to reach more students in low tier cities in an interactive and scalable manner. We believe this will help koolearn.com gain new market share in the online education space and drive our top line growth. Now let me walk you through the other key financial details for the third quarter.
As mentioned earlier, the business once again delivered outstanding year over year increase in net revenues and growth in the third quarter. Due to the expansion of capacity, operating cost expenses for the quarter were $559,700,000 representing 47.2 percent increase year over year. Non GAAP operating cost expenses for the quarter, which excludes share based compensation expenses, were $536,900,000 representing a 44.3% increase year over year. Cost of increased by 46.5% year over year to $268,800,000 primarily due to increase in teachers' compensation for more teaching hours and rental cost for the increased number of schools and learning centers in operation. Selling and marketing expenses increased by 38.2% year over year to $77,200,000 primarily due to increase in product promotion expenses and compensation for selling and marketing staff.
General and administrative expenses for the quarter increased by 51.7% year over year to $213,700,000 Non GAAP general and administrative expenses, which excludes share based compensation expenses, were $190,900,000 representing a 43.9% increase year over year, primarily due to increased headcount as the company expands network schools and new learning centers, as well as increase in R and D expenses and the human resource expenses related to the development of our onlineoffline integrated education system. Operating income for the quarter was $58,400,000 a 1.5% increase from $57,500,000 in the same period of prior fiscal year. Non GAAP income from operations for the quarter was $81,200,000 a 23.4% increase from $65,800,000 in the same period of prior fiscal year. Operating margin for the quarter was 9.4 compared to 13.1% in the same period of prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter, was 13.1% compared to 15% in the same period of prior fiscal year.
Net income attributable to New Oriental for the quarter was $68,400,000 representing a 1.1% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.43 and $0.43 respectively. Net operating cash flow for the 2018 was approximately $108,200,000 Capital expenditures for the quarter were $60,000,000 which were primarily attributable to the opening of five new schools and 66 new learning centers and renovations of existing learning centers. Turning to the balance sheet. At the end of the third quarter, the deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions delivered at the end of the 2018 was and 83,800,000 an increase of 42.5% from $760,500,000 at the end of 2017.
Before moving on to expectations for the 2018, I would like to take a moment to reiterate our overarching goals and priorities and our optimized market strategy. In terms of our priorities, first, we will continue to expand our offline business in consistent with our long term plan. We aim to add around 20% new learning centers and expand classroom area of some existing learning centers and K-twelve business in existing cities. And we also plan to enter two to four new cities, which we identify as the markets with greatest business opportunities. In addition, we will continue to roll out our dual teacher model schools in over 10 new low tier cities in China.
Second, we will continue to leverage our investments in our O2O integration and initiatives in online education offerings. More specifically, we will continue our focus on product refinement and maintenance for the O2O system for K-twelve business. Meanwhile, we will continue to revamp and roll out our O2 standardized teaching system for our overseas test prep business. Furthermore, we will continue to invest in executing the new initiatives, which include content development, teacher recruiting and training, as well as sales marketing in online K-twelve after school tutoring business on our koolearn.com platform. Third, we will continue to make strategic investments and we currently believe that total spending in absolute dollars terms in fiscal year twenty eighteen will increase moderately compared with the prior fiscal year.
Looking at the near term and our expectations for the fourth quarter, we expect the total net revenues to be in the range of $661,400,000 to $680,900,000 representing year over year growth in the range of 36% to 40%. Lastly, I must mention that these expectations reflect NewRental'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 you.
Speaker 0
You. Ladies and gentlemen, we'll now begin our question and answer session. Our first question comes from the line of Thomas Song of Credit Suisse. Please ask your question.
Speaker 3
Hi, thanks Stephen and Sisi and congratulations for a very solid quarter. I have a couple of questions. The first question is about the margin trend. Can management comment about how we should think about the margin trend in Q4 and FY twenty nineteen as we continue to improve the operating efficiencies? Can we expect the margin pressure basically to behind us starting from Q4?
And my second question is about the online education initiative. Given the fact that our online education is going at triple digit growth, very solid momentum, is there any target or separate disclosure on this line in coming years and also target for FY 2019? And my final question is about the regulatory front. In particular, do we see any regulations that we need to pay attention in the near future? Thank you.
Speaker 2
Okay. Thanks, Thomas. Your first question is about the margin trends. Yes, I think the non GAAP operating margin in this quarter declined by 190 bps. And I must mention that within it, the non GAAP operating margin for the language training and test prep program business declined by 140 bps.
This part is contributed 85% of total revenue. And don't forget, we started to execute the capacity expansion since the Q4 last year. So by the end of this quarter, the total square meters of classroom area was increased by 41%. So the classroom rental in this quarter increased by 60% in dollar term. And so I think this is the key factor to drive the margin.
And going forward, we believe the margin pressure will lessen in Q4 due to the acceleration of revenue growth and higher the learning center utilization. Especially, we do believe the non GAAP operating margin for the language training and test prep business in Q4 will be up year over year. This is Q4. And in the mid and long term, I think we keep the same view as I guided before. We care about the top line growth and margin expansion.
So we will focus on the same strategy going forward. Our target the margin target is to get to 17% to 18% in next three years. And your second question is about online. Yes, the online platform, poolearn.com, the top line growth in this quarter was increased by 63%. And within that, the online K-twelve business in koolan.com reported very strong year over year growth of 176%.
So we have a very good start. And I think next I think this quarter we will start to report the year over year growth of the pure online K-twelve business numbers. And I think we will invest more of the pure online like the content development and teacher training and also the like marketing sales. Okay. In terms of the regulation, we have noticed that government has carried out some special programs to strengthen all the after school tutoring market like the canceling some unlicensed paper based exams in nine year compulsory education period.
And also, the government strict checking the business license or education license in some learning centers. As a public company, New Oriental, we do comply with the government's regulations and we believe these actions taken by the government are neutral to positive sides of New Oriental because I think it's a great opportunity for us to consolidate the market to take more market share from the competitors. Okay. Is this clear, Thomas? Thank you.
Yes. Thank you, Thanks.
Speaker 0
Thank you. Our next question comes from the line of Zhen Zhong of Morgan Stanley. Please ask your question.
Speaker 4
Hi, congratulations for the good result. I actually have three questions. The first one is we have a very fast capacity expansion and that is 41 year on year in terms of square meter. So with our guidance of full year 30% year on year growth, how do we expect the fourth quarter capacity expansion? And can you give some outlook on the FY19 capacity expansion?
And second one is the business grow U very strong in this quarter. This is actually even stronger than POP Kids. So can you add some more color of the U Can's growth? And the last one is our guidance and deferred revenue in RMB terms looks have a slightly year on year the growth have slightly year on year decline. So can you give some color about this revenue and deferred revenue guidance deferred revenue?
Thank you.
Speaker 2
Okay. Yes, as for the thank you, Zhongsheng. As for the expansion plan, I think we have already opened 100 learning and 40 centers in first three quarters of this fiscal year. And in the Q4, we plan to open 40 to 60 new learning centers. So for the year over year growth for the whole year 2018, I think the net expansion capacity expansion will be a little bit over 30%.
Maybe somewhere between 30 to 33%. That's the net capacity expansion year over year. So this is an expansion for the Q4. And we set out a lot new learning centers this year. So next year we budget 20% to 25% expansion plan.
In the next year, the first target for us is to fill the students into the learning centers we set out this year. So this is our expansion plan for the fiscal year 2019, the next year. Okay. The next question is for the U Can. Yes, we did very good in the Q3 of the U Can business.
I think there were three reasons. The first one usually the UCan onlineoffline integrated system we call the Visible Progress Teaching System, BTS. This system has been deployed in all the existing cities. And I think the feedback from parents and students are much better than expected. So it strikes the higher student retention rate.
And finally, I think, you know, don't forget we almost all the new learning centers we set up in the last trailing twelve months were K-twelve business related. So it's another key driver of U Can business growth. And your last question is about the deferred revenue. Yes, the deferred revenue in dollar term in at the end of the Q3, it sounds a little bit lower than we expected. But don't forget, this year's the Chinese New Year is late.
So the much later Chinese New Year has caused student enrollment in the last week of third quarter to fall into the beginning of the fourth quarter. That means the first week of the fourth quarter. And as mentioned earlier, in the first eight weeks of the first quarter, the enrollment grew by 40% and cash revenue in dollar term was increased by 65% year over year. So it's some like delay. But I think if you look at the numbers, like the enrollment or the cash revenue combined in Q2, Q3 and first eight weeks or the Q4, I think the trend is good.
We still have a solid strong momentum in the K2R business.
Speaker 4
Yes. Thank you very much. Very, very helpful. Yes.
Speaker 5
But just a follow-up
Speaker 4
of the sorry, a small follow-up about you mentioned the retention rate is improving. So, do you have some number of the retention rate?
Speaker 2
Okay. I think the K-twelve, yes, let's say it separately. The POP Kids program, the retention rate is 84%. So it's getting higher. And as well as the U Can business, the retention rate is 75%.
I think it's 5% to 10% higher if you compare the number to the last year. Thank you.
Speaker 4
Great. Thank you very much.
Speaker 2
Thank you, Zhongsheng.
Speaker 0
Thank you. Our next question comes from the line of Jin Yoon of Mizuho. Please ask your question.
Speaker 6
Hi, So, Liz, can you talk about margins for 2018? So, you talk about capacity expansion remaining 20% to 25% next year and a very significant revenue upside as well. So should we expect of the three year margin guidance that you gave to 17% to 18%, the big jump would be next year given the fact that we see trough margins. So we should expect pretty significant so should we overall expect a huge step up function on margins heading into next year? And is the capacity expansion going to be more front end loaded or back end loaded first half or second half?
And then one final thing is your summer seasonality is coming up pretty soon. How should we look at the summer enrollment programs for this summer in terms of promotional activity versus last summer? Thanks guys.
Speaker 2
Okay. Yes, I think the margin for the next fiscal year, what I mean the fiscal year 2019 will be up by 100 bps. And I think because as I said, the three year target is to get 70%, 18%. I think the margin will be expensed step back in next three years. Okay.
As for the summer promotion, yes, last year the summer promotion enrollment was over 5,000,000. And this year, I think the summer promotion student enrollment will be more than that of last year. And I don't know the numbers because it's too early, but I think the numbers should be more than last year. But this year, we care more about the student retention rate. Last year, the retention rate after the summer promotion in autumn was about 50%.
This year, I think we're targeting to be 55% to 60% student retention rate. This is our target. Okay, Jin?
Speaker 6
Great. Thanks guys.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Natalie Wu of CICC. Please ask your question.
Speaker 7
Hey, thanks for taking my question. Couple of questions here. First one, how much of your current classroom space square meter is attributable to the K-twelve related business? And secondly, what's the ForEx exchange rate assumption underlying your guidance? Or on constant currency basis, what's the actual growth expectation your guidance implies?
And lastly, how much of your online revenue is contributed by the K-twelve business excluding U Can business currently? And among that, what percentage is live broadcasting versus prerecord? And also, it would be great if management can update us about the retention rate for the live broadcasting classes? Thank you.
Speaker 2
Okay. A lot of questions from Natalie. The first one is the Hengming learning centers, well, we have to do the K-twelve business. Sue will take the question.
Speaker 1
Yes. We have roughly about 600 learning centers including having the K-twelve business. So you can and this year almost all the new openings, new ads are for K-twelve business. So you can get the percentage.
Speaker 2
Okay. Yes. And your last question is about the pure online K-twelve after school tutoring business in koolearn.com. This quarter we got a very, very strong top line growth. It was 176%.
I think most of the revenue of the koolearn.com comes from the college expense. We did the business for more than ten years. And we just started the business, the K-twelve pure online business things two to three years ago. So I think the revenue contribution is small, but don't forget it's growing very, fast. I think things be this quarter we will report numbers going forward.
So it's very good numbers. What's your second question what? About
Speaker 7
the foreign exchange rate assumption underlying your guidance?
Speaker 2
I think the exchange rate benefit in the Q4 will be 8% to 10%. So the Q4 we used the exchange rate of 6.3049. And last year Q4, we used the exchange rate of 6.8884. This is our exchange rate we're using to be to the forecast.
Speaker 7
Great. Very helpful. Thank you, Stephen.
Speaker 0
You. Our next question is from Wendy Huang of Macquarie. Please ask your question.
Speaker 8
Thank you, Stephen and Sisi. Congratulations on the solid results. My first question is about your price increase. Can you share with us about your plan for the next fiscal year? And also in terms of the capacity expansion, you just mentioned it's going to be about 20% to 25%, assuming that there will be a ramp up period for the new learning centers.
So should we expect this 20% to 25% capacity expansion rate to translate into a revenue growth rate in one to two years out? And also lastly, can you give us more color behind the margin expansion you just mentioned that you expected for the next coming year? Thank you.
Speaker 2
Okay. As for the price increase, this quarter the price increase, it's the 12% in dollar terms because we benefit a lot from the exchange rate. So in RMB terms, the price increase was 6% this quarter. And for the next fiscal year, I think we plan to increase the price by 5% to 8% of the K-twelve business. I think the POP Kids is a little bit higher than the U Can, maybe POP Kids 7% to 8% price increase, U Can 5% to 6%.
This is what I said is all in RMB terms. And for the overseas test prep, I think the price increase will be 10% in RMB term year over year for the next fiscal year. And in terms of the expansion plan, yes, we're budgeting 20 to 25% capacity expansion. And yes, the first priority for us next year will be ramp up the learning centers we set up this year. And but the top line will be over 25%.
I think for next fiscal year, the top line growth will be somewhere around 30%. So we do have a leverage on the operating efficiency and I think we will see the higher utilization rate in fiscal year twenty nineteen. And the margin, yes, we do believe the margin expansion will be happened in fiscal year twenty nineteen because we do have a leverage on the cost expense side in fiscal year 'nineteen because we think the Q4 last year, we opened a lot of learning centers in the last three and twelve months, even including the Q4 in the coming Q4. And but I think it's a good trade off because at this time we are more confident about our product and services. So and we're seeing the higher student retention rates.
So this would be our thinking logic to make the decision to expand the expansion. I think it's a long term business. So I think we would rather to see the New Oriental take more market share going forward. I think it's a very good trade off and numbers tell us the result. Even though we made the margin headwinds in short term, but education is a long term business.
I think it's good for us in long term. We just we would rather to create more value to the customers and even for the shareholders. Okay. Thank you.
Speaker 8
Thank you.
Speaker 0
Thank you. Our next question is from Mariana Ko of CLSA. Please ask your question.
Speaker 8
Hi, management. Thank you for
Speaker 9
taking my question. Again, congratulations on a strong set of results. My question is more, I guess, on the longer term. Just wondering for the learning centers that we are opening recently because now we are at about 1,000 now. Just wondering if you could give us a little bit more color in terms of the ramp up that we are seeing, say, the learning centers we opened in the past six months versus those that we opened like a year ago?
Like are we seeing any difference in terms of utilization, retention or even margins across the kind of like different cities and just in terms of the regular kind of ramp up pattern? I guess the second question is on the longer term margin. I think we are maintaining the 17% to 18% outlook. Would it be possible to give us a little bit more color on how much of that we are expecting to be driven from K-twelve like continue to catch up in margins to overseas test prep or are we also expecting overseas test prep also to continue to see margin expansion? Thank you.
Speaker 2
Yes. In terms of the new learning center ramp up case, I think we're seeing the we spend the short term, the short time to get a breakeven point of the new learning centers. So in the last six months typically, in the last trailing twelve months, I think it's typically spent five to eight months to get a breakeven point of the learning centers. So in the second year, the margin of the new learning center will be like 10 to 15%. And in the third year, the year three, the margin will be over 20% and it's getting matured.
So if you compare the time to get a breakeven point now with the several like two or three years ago, I think we spent we saved five to six months to get a breakeven point. Typically, years ago, it's been like one year to get a breakeven point. And your second question is about the long term margin. And I think we do believe the older business lines the margin will be expanded. And don't forget, if I think the margin expansion is related to the learning centers we set up for that year.
So if the top line growth exceeds the expansion, the learning center, I think we do have to leverage. But most of the margin expansion will come from the K-twelve business because the K-twelve business has the potential top line growth and also it contributes more and more revenue going forward. Now it's about let's say 55% to 60%. Going forward, it's contributing more. Okay.
Thank you.
Speaker 0
Thank you. You. Next question comes from the line of Mark Li of Citi. Please ask your question.
Speaker 10
Hi, management. Congratulations. So I want to ask actually is what is the breakdown of our guidance in the revenue for the next quarter between different operations? Also I want to know, actually, I think the non GAAP margin decline of about one and ninety bps is better than the previous guidance. So I want to know what is the difference during the quarter that actually result in the margin beat?
Thanks.
Speaker 2
Okay. The breakdown of the guidance, I think what I can tell you the K-twelve business, okay, in the Q4, the U Can business, I think the top line growth of U Can business will be around 50%. And the POP Kids, the growth rates will be over 60%. And overseas test lab and consulting business together, the top line growth will be over 20%. So this is a breakdown of the guidance of Q4.
And yes, we I think the margin in the Q4 was a little bit better than we expected. I think it's mainly because we ramp up the new learning centers more quickly than we expected. I think this is the key reason. But don't forget, even in this quarter, the rental in dollar term the classroom rental in dollar term was increased by 60% because we started to set up the learning centers in last year Q4. So we still have the hard comparison in this quarter.
But in the Q4 and next year, think it's much easier for us. Thank you.
Speaker 10
Thanks, Steven. Just a quick follow-up. I think the test prep actually delivered pretty good recent performance. Can you share about the strategy like for the recent better performance? Thanks.
Speaker 2
Yeah. Actually, there were several reasons for the overseas test prep. The first one, we changed local school health KPI. We proved the overseas test prep enrollment into the local school health KPI. So, what I mean is this year they can't hide the numbers, they can't make up the enrollment growth of the overseas test prep by the K-twelve business.
The K-twelve business is much easier. And second, we started to roll out the onlineoffline integrated program as we did for the overseas test prep, as we did in U Can and POP Kids. As more and more cities, we start to use the new onlineoffline integrated product. Even more students of the overseas test prep are high school students. So they get used to the new style product.
So I think, yes, I think it's better than we expected. And third, New Oriental, the overseas test prep was a regional business of New Oriental. But several years ago, we had super large classes and now we changed to the small class format. So we need teachers make some change of the class and we're doing. So, I think going forward, overseas prep, well, we expect the top line growth will be 10% to 15% and it's not good enough.
We do hope the actual numbers will be over our expectations for the overseas test prep. Thank you. Thanks, Mark.
Speaker 10
Thanks. Thank you. Okay.
Speaker 0
Thank you. Our next question is from Tian Hou of D. H. Capital. Please ask your question.
Hi, Sisi, Steven. The question is related to the Internet education or kuwun.com. So what is the differentiation between the courses on the Internet and offline? So how can we avoid the cannibalization situation, if there is any? That's my question.
Speaker 2
Yes, Tian. I think the target of our cooler.com, what I mean is the in terms of the customer target, we are focused on the low tier cities. This is different. I think the we're targeting these customers in the low tier cities. Even there, there's no new rental or offline schools.
So this is the first part. Second, I think we are the online course is a little bit cheap than the offline classes. So we give the choice made by the customers, by the students and parents. So they can choose both either the online course or the offline course all combined. So we are open to the customers.
But as the price difference, till now the price of the online courses are just like one third of the offline courses. And going forward, I think we will try more new subjects especially in the K-twelve business. What I mean is in more subjects or more like the program.
Speaker 4
Great. Thank you.
Speaker 2
Thank you, Ken. Thank
Speaker 0
you. Our next question is from Aruzu Yu of Bank of America Merrill Lynch. Please ask your question.
Speaker 1
Hi, Steven. So I got two questions here. One is, could you please share with us the utilization rate for this quarter as well as for the third quarter of last year? And secondly, regarding your online strategy, you mentioned that you're focusing on the lower tier cities where you do not have any learning centers. So it will be out of our existing student base.
How much student acquisition cost do you expect will incur to get new student into your system? Thank you.
Speaker 2
Okay. The utilization rate this quarter, the Q3, if you compare the utilization rate this quarter to Q3 last year, it was down by 100 bps. So last year it was 22%, this year it's 21%. And I think it's due to the expansion plan. But going forward, I think we will see the higher penetration rates.
And the online strategy yeah, I think the online there's the online education, there is no boundary. So we're targeting the low tier cities, but we're open to the students in the current in the existing cities. So we give the customer opportunity to choose the class as they want. But we don't believe there's a cannibalization of the between offline and online. And yes, because for some students, if they don't have the fully like the full ability to control themselves to study pure online, they can choose our offline classes.
So, it depends on the customer choice.
Speaker 7
Thank you.
Speaker 2
Okay. Thanks.
Speaker 0
Thank you. There are no questions at this time. Please continue. We have a question from Andrew Lan of RHB Asset Management. Please ask your question.
Speaker 5
Hello management. Hello Stephen. I just want to ask about the student acquisition costs for third quarter twenty eighteen and how does it compare on year on year basis?
Speaker 2
I think the student acquisition cost is very low. Even though we are the total overall selling and marketing expenses is 12% to 13% of total revenue, but within that only 4% is the out of pocket, it's the pure marketing expenses. So it's very low. And yes, you see the marketing expenses increased by 38%. I think I'm right.
So we do have a leverage on the selling and marketing expenses as a percentage of the revenue, okay? We just rely on the word-of-mouth and brand recognition of NewRental. So we don't need to spend a lot on the student's customer acquisition cost, okay? Thanks.
Speaker 5
Understand. I just want to ask about the trend in the per unit cost of student, is it trending up or is it trending down?
Speaker 2
You mean the price increase will be 5% to 8%? You asked the question about the online or the offline?
Speaker 5
Both. Maybe if you can break down online and offline, that would be great. In terms of I just want to know the trend, whether the student acquisition cost, the per unit student acquisition cost is going up or going down?
Speaker 2
The per student acquisition cost will go down.
Speaker 5
Will go down. Okay.
Speaker 2
Yes. Thanks.
Speaker 0
Thank you. Our next question is from Mark Li of Citi. Please ask your question.
Speaker 10
Hi, Stephen. I have a follow-up question. So regarding the latest regulation, actually, what do you think we need to prepare like any area we need to focus on in the upcoming time like curriculum or anything? Thanks.
Speaker 2
Actually, as I said, as a public company, we do comply with government regulation. So I don't think we will make material changes because firstly we don't perform any unlicensed paper based exams for all the for any subjects to recruit students before. And I think we don't need to do something special to comply with the regulations.
Speaker 10
It. Thanks.
Speaker 2
Okay. Thanks.
Speaker 0
Thank you. And this is the end of our Q and A session. And I'll hand over the call to our presenters.
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. Thanks.
Speaker 0
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.