New Oriental Education & Technology Group - Earnings Call - Q3 2019
April 23, 2019
Transcript
Speaker 0
For standing by for New Oriental's Third Fiscal Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.
I would like to turn the meeting over to your host for today's conference, Ms. Susie Zhao. Thank you. Please go ahead.
Speaker 1
Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter twenty nineteen earnings conference call. We have released our financial results for the period earlier today, which are now available on the company's website as well as on newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After prepared remarks, he 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 view 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. I will now turn the call over to Mr.
Yang. Stephen, please go ahead.
Speaker 2
Thank you, CeCe. Hello, everyone, and thank you for joining us on the call. We're very pleased to see continued acceleration of growth momentum in this quarter and to achieve top line growth of 28.9 in dollar terms or 36.1% in RMB terms, which exceeded our expectations. The positive growth was largely driven by the exceptional performance of our key business units, the K-twelve all subjects after school tutoring, once again demonstrating our quality product and service offerings and strong business fundamentals, which enable us to capture growing demand from the market. Total student enrollment, academic subject tutoring and test prep courses in this quarter increased by 82.3% year over year to approximately 1,570,600.
The significant increase in the number of student enrollment is primarily due to the division of the spring semester into two parts, a practice we adopted in November 2018 to comply with the latest regulatory requirements. Under this calculation method, fee enrollment and amount of the collected fee in the spring semester are both in parts and thus fall into separate quarters. More specifically, the first part of the spring semester was booked in the second quarter, while the second part is booked to end of this quarter Q3 and the following Q4. Historically, we collect the full amount of the tuition fees and recorded the student enrollments from the spring semester in the second quarter only. Furthermore, our U Can middle schoolhigh school all subjects after school tutoring business grew by approximately 37% in dollar terms or 44% in RMB terms.
Our POP Kids program achieved a growth approximately 41% in dollar terms or 49% in RMB terms. We're confident that we're well placed to continue expanding our market share over the long term through our assist list efforts, improving in teaching quality and enhancing learning experience for our customers. In the third quarter, we continued to make great strides in our planned acceleration in class lead expansion as we execute strategy. We added a net of 36 learning centers in existing cities and opened a new training schools in the city of Xining, as well as two teacher model schools in the city of Mianyang and Xinjiang. Altogether, this increased the total square meter of classroom areas by approximately 27% year over year and 6% quarter over quarter by the end of this quarter.
Cumulatively, we added about 14% new capacity in the first three quarters in the fiscal year. This growth is in line with our full year expansion plan of 20% to 25%. While regulatory changes brought new market dynamics, we're currently firmly on track with our expansion strategy. As we progress steadily with our expansion strategy, we also made thoughtful efforts to optimize our existing operations with the student first approach in mind in order to deliver high quality education service to our customers. Riding on the powerful drive from the preceding quarters, we continued our efforts and strategic investments in area including enhancements of courses and programs design, improvement of teaching capabilities and innovative applications of new technologies in our teaching process.
We're delighted to see hugely positive market feedback and results ever since we ramped up the use of the technology such as AI and data analytics to improve teaching quality and facilitate student oriented interactive learning. Our efforts in sustaining a healthy balance between capacity expansion and operating efficiency have also paid off in this quarter. Our non GAAP operating income increased by 40.2% year over year to approximately $113,800,000 and non GAAP operating margin rose by 120 basis points to 14.3% from 13.1% a year ago. The encouraging results were driven by better utilization of facilities and enhanced cost expenses efficiency. This gave us confidence in capturing new growth opportunities and scaling our business at higher efficiency.
We will continue to focus on revamping our business lines through a standardized modular and systematic approach, which will be integral our goal to maintaining a healthy pace of expansion and efficiency improvement. Let me now go through the details about pricing. Per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 24% year over year. I would like to bring to your attention that the lower than normal blended ASP is primarily due to the change in tuition fee collection schedule for our K-twelve business. To reiterate, we divided the spring semester into two parts starting from last November.
As such, the quarter only covered part of the student enrollments and tuition fees for the second part of the spring semester. Therefore, the blended ASP for this quarter appears to be lower than historical numbers. On the other hand, hourly blended ASP, which is GAAP revenue divided by total teaching hours increased by approximately 5% year over year in RMB terms. Here's the breakdown. The hourly blended ASP for the U Can business increased by 5%, POP Kids increased by 10% and Overseas Tax Prep increased by 9%, all year over year in RMB terms.
I will now go through the performance updates across the individual business lines. Our key revenue driver K-twelve after school tutoring business achieved a notable year on year revenue growth of 38% in dollar terms or 46% in RMB terms. This was driven by the robust student enrollment. Breaking it down, the U Can middle schoolhigh school business recorded a revenue increase of 37% in dollar terms or 44% in RMB terms for the quarter. So enrollments grew approximately 72% year over year for the quarter, which is primarily because of the aforementioned enrollment practice change for spring semester to comply with the latest regulatory requirements.
Our POP Kids program once again delivered outstanding results with revenue up significantly by about 41% in dollar terms or 49% in RMB terms for the quarter. Enrollment recorded remarkable growth at about 143%, which is primarily because of the aforementioned enrollment practice change for spring semester. In addition, a certain portion of the POP Kids enrollments were also deferred from Q2 to Q3 for the same reason. Our overseas test prep consultant business together recorded a revenue growth of about 11.4% in dollar terms or 17.6% in RMB terms year over year for the quarter. Finally, VIP Personal Life Class business recorded a revenue growth of about 24 in dollar terms or 31% in RMB terms year over year for the quarter.
Now let us move on to the updates on the progress we're making with our optimized market strategy. Consistent with our long term plan, we have been focusing on expanding our capacity through ongoing refinement and leveraging our onlineoffline integrated education system. Let me start with our offline business. This quarter, we added a net of 36 learning centers in existing cities and opened a new offline training school in the city of Xining and two dual teacher model schools in the city of Mianyang and Xinjiang. Altogether, this increased the total square meters of classroom area by approximately 27% year over year, 6% quarter over quarter and 14% year to date by the end of this quarter.
We started to pilot new dual teacher model dual teacher class model in select cities in July 2016 and by end of the Q3 twenty nineteen, we have deployed this offering in 38 existing cities for the POP Kids program and 29 existing cities for the U Can program and in nine new cities for both POP Kids and U Can business together. We constantly focus on maintaining our service quality, while further deepening our penetration into those markets we have tapped into. We're very encouraged to see our customer retention and scalability of our new model continuing to improve this quarter. Looking ahead, we will remain committed to this well proven strategy in the coming quarter and the fiscal year. Turning to the online business.
On the whole, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. We invested $25,200,000 in this quarter to improve and maintain our onlineoffline integrated education system. Most of the investments were reported under G and A expenses. I will first provide an update on our onlineoffline two way interactive education system. Since the launch of the U Can Visible Progress teaching system in September 2014, the interactive education system has been used in all existing cities.
We have launched the newly revamped POP Kids program Shuangyou, in most cities by the end of this quarter. Also, interactive education system has been gradually used in more and more cities. The interactive and education system for overseas test prep, including IELTS, TOEFL and SAT courses, was rolled out and tested in most major cities by end of Q3. At the same time, we also standardized our product offerings across 14 cities. I will now turn to coolern.com and other supplementary online education products.
New Oriental subsidiary Coolern, a leading online education service provider in China has completed its global offering of alternate shares, which comprise of international offering and Hong Kong public offering. Huiren commenced trading its shares on the main board of the Stock Exchange of Hong Kong Limited on March 2839 under the stock code 1797. Moving forward, Koolearn will disclose its broadical financial results under International Financial Reporting Standards. And after the listing, its financial results will continue to be consolidated into New Oriental's financial records. With the goal of tapping into the market opportunity in the pure online education space, QooLearn continued to invest more resources into executing new initiatives in online K-twelve after school tutoring business in fiscal year twenty nineteen.
This includes content development, teachers recruiting and training, sales and marketing, R and D and other necessary cost and expenses to drive the growth of the new online programs. With this strategic investment, we're able to reach more strength in low tier cities in an interactive and scalable approach. We believe this will keep koolearn.com to gain more market share in online education area and drive up top line growth. Now let me walk you through the other key financial details for the third quarter. Operating cost and expenses for the quarter were $700,900,000 representing a 25.2% increase year over year.
Non GAAP operating cost expenses for the quarter, which excludes share based compensation expenses, were $683,000,000 representing a 27.2% increase year over year. Cost of revenues increased by 25.6% year over year to $337,500,000 primarily due to increase in teachers' compensation for more teaching hours and rental cost for increased number of schools and learning centers in operation. Selling and marketing expenses increased by 13.3% year over year to $87,500,000 primarily due to increase in brand promotion expenses and selling and marketing staff compensation. General and administrative expenses for the quarter increased by 29.1% year over year to $276,000,000 Non GAAP general and administrative expenses, which exclude share based compensation expenses, were $258,000,000 representing a 35.1% increase year over year. The increase was primarily due to increased headcount as the company grows network of schools and learning centers, as well as increasing R and D expenses and human resource expense related to the development of the company onlineoffline integrated education system.
Total share based compensation expenses, which were allocated to related operating costs and expenses decreased by 21.1% to $18,000,000 in the third quarter. Operating income for the quarter was $95,800,000 representing 64.1% increase year over year. Non GAAP operating income was $113,800,000 representing 40.2% increase year over year. Operating margin for the quarter was 12% compared to 9.4% in the same period of prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter, was 14.3% compared to 13.1% in the same period of the prior fiscal year.
Gain from fair value change of long term investments for the quarter was $6,500,000 Net income attributable to New Oriental for the quarter was $97,400,000 representing 42.5% increase from the same period prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.62 and $0.61 respectively. Non GAAP net income attributable to New Oriental for the quarter was $108,900,000 representing a 19.4% increase from the same period of prior fiscal year. Non GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.69 and $0.69 respectively. Net operating cash flow for the third quarter was approximately $114,100,000 Capital expenditure for the quarter was $83,600,000 which were primarily attributable to the opening of 59 facilities and renovations at the learning centers.
Turning to the balance sheet. As of February 2839, New Oriental had cash and cash equivalent of 8 and $44,900,000 In addition, the company had $96,700,000 in term deposits and $1,792,700,000 in short term investments. Deferred revenue balance, which is cash collected from registered students for the courses and recognized proportionally as revenue as these instructors are delivered at the end of the third quarter, was $1,191,800,000 an increase of 10% from $1,083,800,000 at the end of the 2018. The lower than normal growth is due to the adoption of the new accounting standard starting from June 2018, meaning part of our deferred revenue in Q3 was reclassified to accrued expenses and other current liabilities to reflect estimated sales returns and loans. The change of tuition fee collection for K-twelve after school tutoring, course, was also contributed to the growth slowdown.
In terms of the outlook for the next quarter, we remain committed to our optimized marketing strategy. Before I go into the details of our guidance, I would also like to reiterate our overarching goals and our strategy as well as the challenge and opportunities we anticipate. First, we will continue to expand our offline business. Our plan to increase capacity by around 20% to 25% remain unchanged, which includes operating of new learning centers and the expansion classroom area of some existing learning centers for K-twelve business. Moreover, we will also continue to roll out our dual teacher model schools in new low tier cities in certain provinces.
Second, we will continue to leverage our investments in onlineoffline with standardized teaching system for our offline language training and test prep offerings, especially for our K-twelve business and overseas test prep business. We will keep pace in the investment and we believe that total spending in absolute dollar terms in fiscal year twenty nineteen will increase moderately year over year. Investment execution of the new initiatives remains key to our strategy, which includes product content development, teachers recruiting and training, R and D as well as sales marketing activities for our pure online K-twelve business. Third, our top priority continues to be optimizing the utilization of facilities and controlling costs and expenses across the company so as to drive continued margin improvement and operational efficiency. In the previous fiscal year, we expanded our overall capacity by approximately 40% year over year, with expansion being more concentrated in the second half of the year.
The new facility built last year are being ramped up more efficiently than we expected. For the fourth quarter, we anticipate a continued improvement in non GAAP operating margin of the offline business, especially compared to the prior fiscal year. This improvement is expected to lift off the margin pressure resulting from our investments in koolearn.com and other supplementary pure online education products. On the whole, we expect our overall non GAAP operating margin to maintain flattish year over year in the fourth quarter. With newly introduced policy related to the after school tutoring institutions being implemented on a city by city basis, we continue to foresee certain degree of the uncertainty while the current impact so far is in line with our expectations.
As a leading education service provider in China, we're firmly supportive of these reforms, which will improve the market standards and foster healthy growth in the industry. As always, we're committed to provide high quality education service and contributing to our creation of the sustainable market. We do not expect to see material negative impact on our growth opportunity nationwide, Although we do expect to see incremental administrative costs and expenses as a result of the implementation of the policy in certain cities. Finally, the recent RMB depreciation against the U. S.
Dollar will also impact our earnings in dollar terms for the 2019. Finally, I would like to emphasize that we have great confidence in the fundamentals of our business. It's our firm belief that New Oriental will maintain its strong business foundations and continue to sustainably capture growth opportunities in the market and deliver long term value for our shareholders. Regarding the near term guidance for the 2019, we expect total revenue to be in the range of $820,600,000 to $840,600,000 representing year over year growth in the range of 70% to 20%. It's now taking into consideration the impact of potential changes in exchange rate between renminbi and U.
S. Dollars, projected revenue growth rate is expected to be in the range of 23% to 26% for the fourth quarter. The estimated exchange rates used to calculate expected revenue for the 2019 is 6.65%. The historical exchange rates used to calculate revenue for the 2018 was 6.33 This forecast will take into account several factors, firstly, the industry seasonality of our core business, which historically tends to result in a slower growth in Q4, especially compared to Q3. Secondly, we have moved one week of K-twelve tutoring classes from March to June to ensure our teachers have enough time to complete license procedures.
Therefore, the revenue related adjustments will be recognized in the 2020. Lastly, the adoption of new accounting standards has caused a larger portion of the revenue from our overseas consulting business being recognized in Q3 instead of Q4, which is peak season for business line. I must mention that these expectations reflect 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
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, you. Your first question comes from the line of Talan Zhao from Deutsche Bank. Please ask your question.
Speaker 2
Hi, Stephen. Hi, Sisi. Thanks for taking my question. Steve just mentioned about the 4Q guidance and that there will be so one week of the class will be postponed to the next quarter. So can you quantify how much the impact will be for the fourth quarter revenue growth?
Thanks. Okay. Yeah. To comply with the policy requirements, we have moved about one week of the K-twelve class from in March to June. So the postpone will negatively impact the revenue by 3% roughly 3% of the total revenue in Q4.
But we'll take it back in the Q1 from the Q1 twenty twenty. Okay? So this is the first reason. Second is the overseas consulting business. Typically, the Q4 is the peak season for the overseas consulting business.
However, starting from this fiscal year, we adopt a new accounting standard. So which results in the Q3, we reported in RMB terms, we reported 32% revenue growth in Q3. And don't forget, in last year Q4, we had 44% year over year growth in RMB terms. So that means the last year Q4 compared to the Q4 the year before last year. So we had a hard comparison in the coming Q4.
But if you add back the numbers from the about two factors back, the revenue growth in Q4 should be over 30%. And the last point I just want to reiterate that the fundamentals of our business, especially for the K-twelve business and the overseas test prep, the other business has no change. So we will maintain the strong business foundations and continue to create the value to the shareholders. Thanks, Stephen. That's very Thanks.
Okay. Thanks, Your
Speaker 0
next question comes from the line of Alex Liu from China Renaissance. Please ask your question.
Speaker 2
Thanks, Steven and Sisi. Just one question. Could the management talk about share more color on the pro form a deferred revenue growth for this quarter, especially after adjusting the currency issues, after adjusting the payment schedule as well as the accounting standard change? Thank you. Okay.
The deferred revenue balance was increased by 10% in dollar terms year over year. But the lower than normal growth is due to the adoption of the new accounting standard. It means that part of our deferred revenue in Q3 was reclassified to the accrued expenses and other liabilities. So this impact is about 7% to 8%. And second reason, the change of the tuition fee collection for K-twelve business also the it's another net fee impact of the deferred revenue balance.
So this impact is roughly 6% to 7%. And also you should I suggest you add back of the 7% of the RMB depreciation. So the pro form a deferred revenue growth in the at the end of the Q3 will be over 30%.
Speaker 3
Okay. Thank you.
Speaker 2
Thanks, Alex. Okay. Thanks, Alex.
Speaker 0
Your next question comes from the line of Mariana Ku from CLSA. Please ask your question.
Speaker 4
Thank you, management. I just have a quick question on looking a little bit further, I guess for FY 2020, how should we think about online investment that in Q4 you just mentioned that we should expect flattish margins, but like looking a year kind of forward, how should we think about that? Thank you.
Speaker 2
Okay. Yes, in the fiscal year twenty twenty, firstly, I want to keep the same guidance of the top line growth of the fiscal year twenty twenty. So the top line growth, our guidance will be somewhere around 30% in RMB term year over year. So we don't want to change. And also in new year, we do believe we have the margin expansion because we will see more option leverage because this year we opened 20% to 25% the new expansion that the top line growth over the for the next year will be roughly 30%.
So we do have the leverage. And online investments, this year I think the for the whole year, the onlineoffline integration investments will be $95,000,000 to $100,000,000 And next year, we guided to 110,000,000 to $120,000,000 This is the onlineoffline integration investment.
Speaker 4
Thank you.
Speaker 2
Thanks.
Speaker 0
Your next question comes from the line of Terry Wang from Blue Lotus. Please ask your question.
Speaker 5
Hi, management. Thanks for taking my call. I have one question about the utilization rate. Management give us more color on the utilization rate, how much room for the utilization rate to improve going forward?
Speaker 2
Okay. You know in this quarter Q3 the utilization rate is up by 200 bps. So I think this is the key driver of the margin expansion of this quarter. And going forward, even for the coming quarter and coming New Year, we believe you will see the higher utilization rates in the coming quarters, because I think it's easy to make math to do a math just to compare the top line growth with the expansion plan. So 30% top line growth compared to the 20% to 25% expansion plan.
And so we do have the leverage on the higher utilization rates. Thank you. Okay. Thanks.
Speaker 0
Your next question comes from the line of Tian Hou from T. H. Capital. Please ask your question. Hi, Stephen, Cece.
The question is how much capacity do you plan to add in the new fiscal years?
Speaker 2
Okay. Thanks Tian. That's a great question. We well, the expansion plan for this fiscal year fiscal year 2019 will be 20% to 25%. We have already opened 14% in the first three quarters of this fiscal year.
So for the whole year 20% to 25%. And next year fiscal year 2020, I think we keep the same guidance of the as we guide in the fiscal year 2019. It will be 20% to 25 expansion plan.
Speaker 5
I think the market is still
Speaker 2
lot of the the a lot of the opportunity for us, for the big players like us. Mhmm. Mhmm. We'll we'll open 20 to 25% new capacities in the coming year. Mhmm.
Okay? Mhmm. Thanks. Yeah.
Speaker 0
Thank you. Thank you, Steven. Your next question comes from the line of John Wang from Macquarie. Please ask your question.
Speaker 6
Thank you. So my question is, so Steven mentioned that the retention rate for all lines of business is kind of improving. So can you share more colors on the retention rate of different business lines? And also, what is going the retention is going to improve in the coming quarters or next fiscal years? Thanks.
Speaker 2
Yeah. Actually, we have seen the student retention rate is guiding higher for both POP Kids and U Can business. And for the POP Kids, the retention rate for this quarter is close to 90% and U Can business middle school, high school is over 75%. So it's 75% to between 75% to 80%. And we'll keep going forward.
Since we started to invest on the onlineoffline the new product and we have seen the retention rates getting up. And keep and going forward, I think we will see higher student retention rates going forward. And this is I think this is the shows that our investments in the last three years are worth it start to bear fruit from the investments we made in last three years. Okay. Thanks.
Thanks.
Speaker 0
Our next question comes from the line of Lucy Yu from Bank of America. Please ask your question.
Speaker 2
I'm sorry, I can't hear you very clearly.
Speaker 1
It's regarding online loss. So how much online loss was booked this quarter and how about next quarter and 2020?
Speaker 2
Sorry, we can't disclose the numbers of the cooler for this quarter. And I think that till the coming July, so in the next earnings call, we'll disclose the cooler numbers.
Speaker 1
Okay. Do you have any guidance for 2020? How much would that be comparing to 2019?
Speaker 2
Yes. But I do believe the margin drag from the online part from cooler in the second half of the year will be lower than the first half of this year.
Speaker 0
Thank you.
Speaker 2
Thank you.
Speaker 0
Your next question comes from the line of Alex Xie from Credit Suisse. Please ask your question.
Speaker 5
Hi, management. Thank you for taking my questions. So I would like to ask about what will the enrollments growth for POP Kids and U Can look like if we exclude the impacts from the change of tuition fee collection schedule? And my second question is what are our plans for the summer promotion in the coming summer of this calendar year? Thank you.
Speaker 2
Okay. The significant increase in the number of enrollments is very good because of the change of the class. And so I think the normal where the enrollments for the POP Kids program in the Q3 was 40% to 45%. This is the real student enrollment. And for The UK, the enrollment growth was somewhere around 40%.
And but it's still a great progress. And so if you combine with the enrollment growth with the 5% to 10% price increase, you'll the top line growth. Okay? And your second question is about summer promotion. As I mentioned in the last earnings call, last year we got the over 700,000 summer promotion enrollment in last year Q1.
And this year, I think we will make a change of the summer promotion strategy. We will care more about the student retention rates than last year. And as I mentioned in the last earnings call, we raised the summer promotion class price from RMB200 last year to RMB400 this year. And so I think it's better for us to identify who are the real customers after the summer promotion. So we do believe the retention rate after the summer promotion will be higher than last year.
Speaker 5
Thank you.
Speaker 2
Thanks.
Speaker 0
Your next question comes from the line of Leon Chik from JPMorgan. Please ask your question.
Speaker 6
Hi, congrats on the results. Just wondering on your other income of $24,100,000 which was down more than 30% from the previous quarter, just wondering what's the main reason? Thanks.
Speaker 2
I think the main part of the other income is the interest income. So I suggest that you see the year over year growth and because of the different cash balance. And typically, the average interest rates of the interest income is a little bit lower than last year. Thanks. Thanks, Lian.
Speaker 0
Your next question comes from the line of Chun Choi from Daiwa. Please ask your question.
Speaker 7
Good evening, guys. Just a quick question on operating margin. I think you mentioned on your prepared remarks, non GAAP operating margin went up by two twenty basis points this quarter. So looking ahead, I think management did say 17 to 18% in a couple of years' time. So if you look at fiscal year twenty twenty and 2021, is that something that we could achieve?
And can you elaborate what are going to be the key metrics? Is it going to be utilization rate improvement or better improvement from the online business? So which will be the main factor behind the margin improvement? Thank you.
Speaker 2
I think the margin is related to the two factors. Number one is the expansion plan. Number two is online investments, the other investments. And so in the fiscal year twenty twenty, we expect the margin expansion year over year. And we don't want to change our mid long term margin guidance to the 17%.
This is non GAAP operating margin in mid long term.
Speaker 0
Your next question comes from the line of Edwin Chen from UBS. Please ask your question.
Speaker 5
Thank you. Congrats, David and Sisu on the great results. Just a couple of questions. Number one, on your guidance operating margin guidance for next quarter flattish year on year. Has this considered the impact you mentioned of one week pushback of the revenue bookings from March to June?
And the second question is on your income tax rate. I noticed that the tax rate in the third quarter has been much higher than a year ago. And just wondering what's your guidance of the tax rate for the fourth quarter as maybe a sustainable tax rate for FY 2020? Thank you.
Speaker 2
Yes, the guidance of the margin in the coming quarter, we got the margin flattish. And I think partially it's related to the revenue impact. But it's just for the Q12 business, just simplified the one week revenue in Q4, but we'll make it up in the Q1. So and yes, as I said, of the margin guidance for the next year, we do feel positive of the margin expansion for the next whole year. And the tax rate, yes, in the Q3 in this quarter, the tax rate was 22%.
As you know, we have fair value gain impact. So if you take it out, the tax rate was 18.5%. I think the reason that the tax rate steady move up is because we lose some benefits of this some our tax efficient these structures, because some high-tech companies and when we set up, we have a certain period of the tax preference. And when they expire, the tax rates tend to go up. So our guidance for the whole year of the ETR will be somewhere between 18% to 19%.
Okay. Thank you. Thanks, Edwin.
Speaker 0
Your next question comes from the line of Natalie Wu from CICC. Please ask your question.
Speaker 8
Hey, Steven. Thanks for the opportunity. This is Yuzhu on behalf of Natalie. We have two questions. So first one is on your offlineonline business.
Can you maybe provide some color on what kind of synergy should we expect between those two business going forward? And second question is on your class duration shift. Noticed some cities, for example Shanghai, will use the two point five hour course duration to replace the previous three hour courses. Wonder what would be the scale of this change and how should we think about the impact on margin? Thanks.
Speaker 2
Yes. The offline and online business center actually, when we started to make a reform since two years ago for the domestic test prep first. And we pushed almost all the large scale classes into pure online because it's focused to the domestic test prep students, mostly for the college students or university students. But in offline, we're still providing small sized class, because divided the students by two parts. For those for some students, they have the full ability to control themselves to study pure online, okay, they do it online.
But for some students, they still need the offline classes, because they don't have enough ability to study online. So we have seen some synergy between the offline and offline business. But don't forget the market is huge enough okay, for both the online part and offline part. Even though we were the leading player in the market, one of the leader player in the market, our market share for both offline and online are very small. So I think the cannibalization between the offline and online will be very small and we will see more and more synergy between the offline business and online business.
And the class duration actually we started to pilot this program two years ago in Beijing school to change the one course of three hours to one session of the course from the three hours three hours is 100% offline to two hours offline class combined with thirty minutes online classes. And the thirty minutes online class is related to the homework or some contents that for the students can do it by themselves online. So I think this great for us to make the higher utilization rate of the classrooms. So it does work and I think it's successful for the Beijing school. And in the other cities, we will do it more and more to provide more and more onlineoffline integrated classes going forward.
Speaker 8
Great. Thanks. Very helpful.
Speaker 2
Thank you.
Speaker 0
Your next question comes from the line of Eric Yu from CCBI. Please ask your question.
Speaker 3
Hi, good evening, Steven and CC. Thanks for taking my question. I have two questions. One is regarding to the operating margin. This quarter you reverted the previous two quarters margin contraction and achieved the margin expansion of 100 bps.
I'm just wondering what's the major reasons behind that? And for next quarter, is that because you are still quite conservative? So at this moment you maintain a flat margin outlook? The second is for the top line. For the fourth quarter revenue guidance, you guided even in renminbi terms, it seems the growth rate a bit slower than previous three quarters, which is all above 30 percentage year over year.
So I'm wondering, is that because of seasonality or because of accounting issues?
Speaker 2
Thank you. Okay. Your first question is about margin. This quarter we got the 120 bps up for the non GAAP operating margin. I think there were two reasons.
The first one is we don't have a leverage on the utilization rates, because expansion plan in the first March was only 14%. Actually, saw it since the first half of this year. So don't forget, we set up most of the new learning centers in the second half of last year. So in the Q3 and Q4, we do have more leverage than the first half of this year. And secondly, you saw our selling and marketing expenses increased only by 13%.
And we do believe we will have the leverage on the selling and marketing expenses as a percentage of the revenue going forward. And the margin guidance, yes, since last earnings call we guided this week, your guys the margin will be flattish in the Q3 and we got 120 bps up finally. But we want to change our actual guidance over the Q4, still the margin flattish. You.
Speaker 7
Thank you.
Speaker 2
Top line growth. Okay. Your last question. Actually, typically, the Q4 typically seasonality in terms of the seasonality, the Q4 revenue growth is lower by two percent compared to Q3. So this is the normal.
So this is the first reason. Combine the two reasons I explained to answer my first question in this earnings 3% of the class change from Q3 to Q4 and 3% from the overseas consulting, the accounting new treatment. So if you add all the back, the revenue growth will be over 30%. So I think it's normal. Okay.
Thank you. Got it. Thank you.
Speaker 0
Our next question comes from the line of Christine Cho from Goldman Sachs. Please ask your question.
Speaker 9
Hi, Stephen and Cece.
Speaker 10
I have two quick questions. So one, just on the OP margin increase, so if you just decompose that between offline and online, could you give us some color there in terms of this quarter? And then secondly, we noticed that a lot of the learning centers that you've added this year was mostly in the existing cities. If you think about the future expansion plans, will it be actually shifting towards more new cities or will it still be kind of the existing cities that you will be initially targeting? And just kind of a mix between the offline versus online in terms of thinking about expansion into these newer lower tier cities as well?
Thank you.
Speaker 2
Okay. Second question first. Going forward, even for the fiscal year 2020, I think we will expand more learning centers in existing cities. And we do have a plan to open like several new cities, but most of the new learning centers we set up will be happened in the current cities, in the existing cities. Because even in Beijing, we're the top tier cities, we do have a lot of room to open more learning centers.
And the OP margin I'm sorry, I can't disclose the detail for the online net profit. But what I can say is the operating margin expansion for the offline part is higher than the overall margin expansion.
Speaker 10
Okay. Thank you.
Speaker 2
Is it clear, Kristen? Okay. Thank you.
Speaker 5
Yes. Okay. I'm sorry.
Speaker 2
Okay.
Speaker 0
Your next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.
Speaker 9
Hi, Stephen and Sisi. I have a question on the overseas consulting fee consulting income. So what the can you give more color on the consulting income number of last quarter fourth quarter last year? And what are the more color on how did the accounting policy changed so that will impact your guidance? And what whether the accounting policy will also change the cost recognition in the P and L in next quarter as well?
And also secondly, can you what the growth outlook for overseas test prep business in this year and the next year? Thank you.
Speaker 2
Okay. Thanks, Sheng. We don't disclose the detailed numbers of the overseas consulting business. But like I said, overall, the revenue contribution from the overseas consulting business for the whole year is about 8% to 9%. So this is revenue contribution.
But typically, in the Q4, the revenue contribution from the overseas consulting business is a little bit more than the other quarters. And the accounting standard changes, before the 06/04/2018, the overseas consulting revenue is recognized when most of the revenue is recognized when the contract is completed. Under the new revenue accounting standard, we reported revenue according to the several benchmarks by milestones. So that means we report the revenue earlier than before based on the new accounting standard. And yes, this is the answer for your question about the overseas consulting
What's your next question? The second question?
Speaker 9
Second question is about overseas test prep growth outlook in this year and the next year.
Speaker 2
Okay. Yes. Typically, we expect the overseas the overseas Tesla business in the coming Q4 in RMB terms will be growth by 10% to 15% in RMB terms. For the next year, the guidance will be similar, 10% to 15% in RMB terms.
Speaker 9
Thank you. And may I ask the accounting policy change on consulting revenue, will it impact your cost recognition as well?
Speaker 2
No, there's no impact for the cost side.
Speaker 9
Okay. Thank you. Thank you very much, Thank
Speaker 2
you, Zhongshan.
Speaker 0
Our next question comes from the line of Manu Liu from DBS. Please ask your question. Hi, management. Actually my question was asked by someone before, so can you speak mine?
Speaker 2
I'm sorry, I can't hear you very clear. Please repeat again.
Speaker 0
Okay. Can you hear me now?
Speaker 2
Yes, please speak a little louder. Go ahead, please.
Speaker 0
Hi. Yes, can you hear me now?
Speaker 2
Yes, sounds better.
Speaker 5
Yes. Go ahead.
Speaker 0
Yes. Actually, yes, my question was asked by someone else before, so can you skip my question?
Speaker 2
Okay. Okay. Thank you.
Speaker 0
Okay. Thank you. Our next question comes from the line of Allen Deng from IRA. Please ask your question.
Speaker 11
Hi, management. Thank you very much. And can I ask you when the what is the current and biggest disease that involve in the management view? Is it policy? Is it going to be competition or what kind of means that it's probably representing from achieving 30% top line growth and margin expansion for next year?
Speaker 2
I'm sorry, can you repeat again? I can't hear you very clearly. Your question is about what the policy or can you repeat again?
Speaker 11
What is the biggest risk that management is thinking about at this moment for next year potential of missing the 30% top line growth and margin expansion target?
Speaker 2
It going I think for the management concern, we always have two kinds of the risks. The first one is regulation for the both the overseas test lab and the K-twelve business. And so this is the first part of the risk. Secondly, we do have the human resource risk. Even though we spent a lot in the last three years to build up a new education system, but we still rely on the talent people to run business especially for the locals who have.
So there's a risk for the human resources. Two risks, regulation and human resources. Okay. Thank you.
Speaker 0
We are now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Stephen 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.
Speaker 0
Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.