New Oriental Education & Technology Group - Earnings Call - Q3 2020
April 21, 2020
Transcript
Speaker 0
Good evening and thank you for standing by for New Oriental's FY twenty twenty Third Quarter Results 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. Sisi Zhao. Thank you. Please go ahead.
Speaker 1
Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter twenty twenty 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 Yao, 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. Before we kick off the call, I would like to firstly convey our deepest condolences to the people who have sadly passed away and to their loved ones during this global health crisis. We would like to express our sincere gratitude to medical staff around the world for their dedication and commitment in these difficult times. Thank you.
Let us all play our part and stay healthy. Together, we can overcome the challenge. In response to the outbreak of the COVID nineteen, New Oriental has immediately transferred more than 1,000,000 students to online programs through New Oriental cloud based classrooms. We have also actively assumed social responsibility by donating 20,000,000 in cash to Hubei province and providing fully small sized offline courses to the children of nearly 20,000 medical staffs, as well as providing the public with tens of millions of free high quality educational resources that can benefit over 10,000,000 people, including students of all levels, parents, teachers, and entrepreneurs. Back to our business.
We are very pleased to report a set of the encouraging financial results in the third fiscal quarter of this year, delivering a top line growth and continue the preparing margin expansion. And continue the operating margin expansion, despite COVID nineteen pandemic posting negative impact to all those industries across globe. Total revenue growth was $923,200,000 representing a growth of 15.9% in dollar terms or 18.7% if computed in RMB. Net revenues from education programs and services for the first fiscal quarter were $845,700,000 representing a 16.3% increase year over year. The growth was mainly driven by k 12 after school tutoring courses, which achieved a year over year revenue growth of approximately 24% in dollar terms or 27% if compared to the RMB.
We continue to be guided optimized market strategy in this quarter and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability. This quarter, we added a net of 110 learning centers in existing cities, opened two new training schools in the city of Zhangjiajong and Nanjing. Altogether, this increased the total square meters of classroom area by approximately 30% year over year, 11% quarter over quarter, and 21% comparing with the end of the fiscal year twenty nineteen. Total student enrollment in academic subjects tutoring and test prep courses in the 2020 increased by 2.3% year over year to approximately 1,606,000. The lower than normal increase in the number of student enrollment is primarily due to a bigger portion of the enrollment for the winter semester falling into the second fiscal quarter because of the earlier timing of Chinese New Year this year compared with the last year, as well as the higher than normal cancellation for winter classes.
The outbreak of COVID nineteen have also caused challenges on acquiring the new customers in the second half of the quarter, while the enrollment for classes in q four and summer classes have also been delayed. At the same time, we continue to our efforts in improving and maintaining our online offline OMO standardized classroom teaching system, especially during the outbreak of COVID nineteen. Although offline classes have been transferred smoothly to online classes since the February, and we are very encouraged to have received the positive feedback from our customers. We also continue to make strategic investments into our new initiatives in k 12 tutoring, our pure online education platform, koolearn.com, to leverage our advanced teaching resources in lower tier cities and those in remote areas. Following last quarter's strong bottom line performance, we once again achieved year over year operating margin expansion in this quarter.
During the quarter, we recorded non GAAP operating income of $134,800,000 compared to $113,800,000 in the same period of last year. Non GAAP operating margin rose by 30 basis points year over year to 14.6 and non GAAP net margin rose by two forty basis points year over year to 16.1%. The continued operating margin expansion is mainly driven by the better leverage in cost of rental and related operating expenses, just as we consistently improved the utilization of facilities the before the outbreak of the COVID nineteen. The net margin expansion is also due to the VAT exemption approval by the government during the pandemic, and the net loss of Kooler subsidiary undertaken by the non controlling interest to shareholders. We're confident that we will able to deliver continued margin expansion after the pandemic is over and generate sustainable long term value for our customers and shareholders.
Per program blended ASP, which is cash revenue divided by total fee enrollment, increased by about 2.7% year over year in dollar terms. As for hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 3% year over year in earning terms. To provide the breakdown of the hourly blended ASP, please know that U Can middle school high school program increased by 4%, POP Kids increased by 6%, and overseas test prep program increased increased by 7%, all year over year in RMB terms. Comparing with our normal price increase of 5% to 8%, this quarter's hourly blended ASP increased towards 2% to 3% lower than normal level, mainly because of the discount we provided to the customer to support the migration from offline class to online, as well as the bigger slowdown of the VIP personalized class business. At the same time, to to show gratitude to the medical staff who traveled to Wuhan to offer help, we offered special complimentary classes to their children.
This has inevitably contributed a slight decrease of the ASP. Now let's move on to the third quarter performance across our individual business lines. As mentioned earlier, our key revenue driver, k 12 all subjects after school tutoring business, achieved year over year revenue growth of 24 in dollar term or 27% in RMB terms. Breaking it down, the U. School high school all subjects after school tutoring business recorded a revenue increase of approximately 23% in dollar terms or 26% in R and D terms for the quarter.
The enrollment grew approximately 23% year over year for the quarter. Our top kids program delivered outstanding results with the revenue up by about 26% in dollar terms or 29% in RMB terms for the quarter. Enrollment decreased by 23% for the quarter, but declined due to the bigger portion of the enrollment for the winter semester falling to the second fiscal quarter because of the earlier timing of the Chinese New Year this year compared with last year. The overseas test prep business reported revenue decrease of 14% in dollar terms or 12% in RMB terms for the quarter. The consulting business recorded revenue growth of about 27% in dollar terms or 13% in RMB terms year over year for the quarter.
Finally, VIP personalized class business recorded revenue growth of about 10% year over year in dollar terms or 13% in RMB terms year over year for the quarter. Next, I will provide some updates on progress we're making with our optimized market strategy. Beginning with our offline business this quarter, as mentioned earlier, we added a net of 11 110 learning centers in business cities, opened two new training schools. Altogether, this increased the total square meters of classroom area by approximately 30% year over year, 11% quarter over quarter, and 21% compared with compared with the the end of the fiscal year 02/2019. Expansion in our offline education network have also made sure that we are fully prepared for when the pandemic's over, and our service can resume with the the strong presence across the different Chinese cities.
The two teacher class model has been introduced into the target to us program in '48 in three three, and both top tier and new can, it's to three seven new cities. The initiatives supported increased market penetration in those markets we have tapped into. We also saw improved customer retention and scalability of the new model. With this proven result, we will continue this strategy in the rest of the year. On the digital technology front, we invested $40,000,000 in this quarter to improve and maintain our OMO education ecosystem.
And as the outbreak of the COVID nineteen has highlighted the importance of the demand of online education, the investment also supported the migration of our online classes to small sized online of the of the offline class to small size online live broadcasting class during the pandemic. Apart from the OMO infrastructure, we have allocated the part of the resources for teacher training to ensure they are all well equipped equipped to be managing the online classes. As a result, the OMO ecosystem manages to cushion the most of the impact on our service and operation caused by pandemic, mostly less than for recorded and the G and A expenses. Furthermore, we also made stable progress in the pureonlinepoor.com business line other supplementary online education products, which is experiencing growth growing market demand. More resources are investing to the executing the new initiatives in online k 12 after school tutoring business in the full year 2020.
Investment includes account and development, teachers recruiting training, sales marketing, r and d, and other necessary cost and expenses to drive the growth of the new pure online programs. With these programs, we are able to reach out more students in both your cities in an interactive and scalable manner. We believe this will help koolearn.com to gain new market share in the online education space and drive top line growth. In addition, during COVID nineteen pandemic, Koolearn did a large scale market promotion by offering three large sized online live broadcasting classes to the public and attracted several times more traffic than normal time. To capture the new market opportunity, Cooler also added a meaningful amount of the customer representatives and marketing staff to support the new initiatives in k twelve tutoring.
This move have consequent comfortably raised our spending on the market front, but we believe these are necessary and understandable measures as they found ourselves in an unusual pandemic situation. Now let me walk you through the other key financial details for the third quarter. Operating costs and expenses for the quarter were $806,000,000 representing a 15% increase year over year. Non GAAP operating costs and expenses for the quarter, which exclude share based compensation expenses, were $788,400,000 representing a 15.4% increase year over year. Cost of revenue increased by 18.1% year over year to $398,600,000 primarily due to increase in teachers' compensation for more teaching hours and a higher rental cost for the increased number of schools and learning centers in operation.
Selling and marketing expenses increased by 35.2% year over year to 118,200,000, primarily due to a significant increase of the promotion expenses and number of the customer service representatives and marketing staff for the new initiative in k 12 tutoring on prune.com. General and administrative expenses for the quarter increased by 4.8 year over year to $289,100,000 Non GAAP g and a expenses, which exclude share based compensation expenses, were $273,300,000 representing a 5.9% increase year over year. Total share based compensation expenses, which were allocated to related operating costs and expenses, decreased by 2.4% to $17,500,000 in the 2020. Operating income was $117,300,000 representing a 22.4% increase year over year. Non GAAP income from operations for the quarter was $134,800,000 representing an 18.5% increase year over year.
Operating margin for the quarter was 12.7% compared to 12% in the same period of prior fiscal Non GAAP operating margin, which excludes share based compensation expenses for the quarter was 14.6% compared to 14.3% in the same period of prior fiscal year. Net income attributable to New for the quarter was $137,700,000, representing a 41.4% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.87 and $0.86, respectively. Non GAAP net income attributable to New Oriental for the quarter was $148,500,000 representing a 36.4% increase from the same period of prior fiscal year. Non GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.94 and $0.93 respectively.
Net margin for the quarter was 14.9% compared to 12.2% in the same period of prior fiscal year. Non GAAP net margin for the quarter was 16.1% compared to 13.7% in the same period of prior fiscal year. Net operating cash flow for the 2020 was approximately $39,700,000 Capital expenditures for the quarter were $103,200,000 which were primarily attributable to the opening of 27 facility facilities and renovations at existing learning centers. Turning to the balance sheet. As of the 02/29/2020, NewRental had cash and cash equivalents of $1,057,100,000 as compared to $1,414,200,000 as of the 05/31/2019.
In addition, the company the company has $269,200,000 in term deposit and $2,241,000,000 in short term investments. New Oriental's deferred revenue balance, which is cash collected from the the registered students for courses and recognized proportionally as the revenue as the instructions are delivered at the end of the February 2020 was $1,375,000,000, an increase of 15.4 as compared to $1,191,800,000 at the end of the 2019. Looking ahead to the fourth quarter of this fiscal year, despite the the continuing challenges from the COVID nineteen pandemic, we're still optimistic towards the company's business, and we'll continue to focus on the following key areas. First, we will continue to expand our offline business. We still aim to add around 20 to 25% capacity including new learning centers and expanding across of the some existing learning centers for business in existing cities.
We believe our capacity expansion will support us to hold more students in our facilities in the coming summer, which will very likely be shortened by one or two weeks due to the delayed start of the second semester of all public schools in China to combating the academics. More importantly, it will prepare us to further make to further take market share from our other players after COVID nineteen subside gradually as some small players without strong financial position and online class capability may not be able to sustain sustain their business during the period and will be forced to cease operations. The factory industry will will undergo a wave of market consolidation upon the pandemic phase. The fact that we're a major player with strong financial capacity and fresh offline facilities allow us to further strengthen our market leading position and penetration. In addition, we'll continue to roll out our dual teacher model schools to a number of new low tier cities in certain province for the whole year.
Second, we'll continue to leverage our investments into digital technologies and reintroduce our OMO systems to more offline language training and test offerings, especially for our business and overseas test lab business. We will broaden the usage of the online tools and content in our OMO system for business lines throughout our whole network. We'll continue to invest in developing the fastest teaching content and courseware to cater to online offline education methods. At the same time, we will provide more advanced training programs to our teachers and enhance their online offline integrated teaching skills. We will continue to make lessons, and we believe the total spending in absolute dollar terms in fiscal year twenty twenty will increase compared to compared with the previous fiscal year.
Furthermore, we will continue to invest in and execute new initiatives, including product and content development, teachers recruiting training, r and d, as well as assist marketing in pure online k 12 after school business on our koolearn..com platform. As mentioned earlier, during the COVID nineteen pandemic, Koolearn encountered several times more traffic than normal times by offering free online live broadcasting classes to the public during the winter and spring season. Cool Learn also added a meaningful amount of customer service representatives and tutors. This near term investment enhanced our competitive advantage to capture the new online education market activity. Third, our top priority will remain as the focus on controlling costs and reducing the expenditures across the company to minimize the negative impact from COVID-nineteen pandemic on bottom line.
Although we expect the margin decline year over year in the fourth quarter of fiscal year twenty twenty, we believe we can still maintain non GAAP operating margin for the full year of fiscal year twenty twenty at a similar level as last year and achieve extension of non GAAP net margin for the full year of 2020 compared with year over year decline last year to fiscal year. Finally, the recent RMB depreciation against the US dollars must cause impact on earnings in dollar terms for the fourth quarter fiscal year twenty twenty. Finally, I would like to emphasize we have great confidence in the fundamentals of our business. Although we are facing the negative impact from the pandemic for the near term, we remain optimistic of the brighter prospects of our business over the long run. We're certain that with the new rental leading brand, superior education products and systems, and best of future resources will keep taking market share with the the leading position in China's huge after school tutoring market and deliver long term value for our shareholders and customers.
Looking at the near term and our expectation for the next quarter, we expect the total revenue to be in the range of $774,000,000 to $808,106,200,000.0 dollars representing year over year decline in the range of 8% to 4%. If not taking into the consideration the impact and potential change in exchange rate between RMB and US dollar, the projected decline of revenue is expected to be in the range of 4% to 0% for the 2020. To provide a breakdown of the expected top line growth for key business lines, k to 12, all subjects after school tutoring business is expected to grow around 10 to 11% or 18 to 19% excluding VIP one on one business. Overseas test drive program is expected to decline around 45%, and overseas study consulting business is expected to grow 12% to 13% all year over year in RMB terms. We expect the significant decline of the overseas test labs business and slowdown of the overseas study consulting business is due to the outbreak of the COVID nineteen pandemic around the globe starting from March with the cancellation of the overseas exams, suspension of the overseas schools, and restriction on travel.
We expect the negative impact over this overseas related business will affect the entire education industry in China, not only in New Oriental, and will last over the coming one to two quarters. That's that. In contrast, China's effective control of the pandemic situation has shed a more positive light on our business domestically. We're optimistic we're optimistic over the trend of the k 12 at the school business. Abstract from the public news that 30 provincial level government, that's the 88% of total, have to bounce the public school resumption plan.
We're confident that demand for the after school tutoring business will pick up after the resumption of the schools, and the short term impacts from the school, our changes and short term summer holidays will be manageable. The estimated exchange rate is the takeaway expected revenue for the '20 is 7.07. The historical exchange rate used to calculate revenue for the fourth quarter of the fiscal year twenty nineteen was 6.76. I must mention that this expectation reflects the new rental's current preliminary view, which is subject to change, especially in the pandemic period. At this point, I will take your questions.
Operator, please open the call for this. Thank you.
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, please request to join the question queue again after your first question has been addressed. Your first question comes from the line of Mark Li from Citigroup. Please ask your question.
Speaker 3
Steven and Sifu. Can you hear me? Yes,
Speaker 2
Mark. Please go ahead.
Speaker 3
Hi. Thanks for the explanation. I want to ask I noticed for our overseas test prep, the next quarter's pressure is pretty big. Can you share with us what what's your estimate for the short term or the one off task impact for the q four? And I see for TOEFL, etcetera, they are still not offering China to have the stay at home test.
So what do you think that impact will last for the overseas test prep and consulting segment? Thank you.
Speaker 2
Hi. Thanks, Mark. Yeah. Yeah. The the overseas test prep business recorded revenue decline of about 14% in dollar terms this quarter.
Actually, it's 12% in RMB terms year over year decline in in q three. And and the q four, you know, I think the, you know, the pandemic, you know, spread a lot of countries, the Western countries now. So it will impact our overseas test lab business in q four. So we we guided to top line growth of the overseas test lab business increased by about four 45% year over year in q four. But we believe the q four will be the worst time.
And and upon the the pandemic phase, I think the the situation will be better in the fiscal year twenty one. And so this is my expected expectation for the over detect lab. And over the consolidation, yeah, we do we do the very good. We do very good in q three. And, also, even we have the negative impact from the q four, but we still guide the the top line growth of the overseas consulting business grow by 12% in RMB terms in q four.
And, yeah, that's it. I think the the the reason is is is very easy to understand because, you know, we have seen the cancellation of the overseas exams like TOEFL, ELSE, and GRE, and substantially the overseas schools and and the restriction on the travel. So, yeah, we hope the pandemic can pass can can can can pass very quickly so we can make recovery of our overseas related business. And, Mark?
Speaker 3
Thank you, Steven. May I quickly follow-up? Do you have any rough estimate that what percent of your overseas test prep student are, like, a short term or or what percent is a longer term student?
Speaker 2
I think for the for the short term, I think the third yeah. We we in in the q four, I think we'll remove 35 to 40% enrollment. That's just a four four hour hour test lab. Long term, it's really hard for for me to make a prediction. But I I think that once the epidemic disappear, I think, most of the Chinese students will still choose to study abroad after the pandemic is over.
Thank you, Steven. Okay. Thanks, Mark.
Speaker 0
Your next question comes from the line of Charlotte Way from HSBC. Please ask your question.
Speaker 4
Hi. Sorry. This is Binnie Wong here. Thank you for taking my questions. And, Sisi, Steven, can you hear me well here?
Speaker 2
Yes. Very clear.
Speaker 4
Okay. Thank you.
Speaker 5
Yeah. Go ahead, Ben.
Speaker 4
Good. Thank you. Thank you. Okay. Good.
So, actually, I just wanna follow-up here. I think you mentioned a very good point that about the consolidation angle. So how should we see about in terms of during this, like, the the crisis that we are seeing? Right? Are there any actually, like, closure of some of the small smaller ones?
And are they mostly the online ones or the offline ones? And so for us to think about, like, longer term, how we should see our market share gains from here? And then a second question here is also that I think you talked about that in terms of our online growth is of course doing very well given the current situations. And is it also that if we are thinking about our user acquisition, right, because in the past, our recruitment for the online students has also been relying on some of our local resources. Would that make our strategy also modified a bit so that we can accommodate because this situation might still prolong for some time?
And having said that, do you think we are seeing the trough already with second quarter growing a single digit growth? Do you think this is the trough we should expect? Thank you.
Speaker 2
Okay. Yeah. Let me answer your first question about the market consolidation opportunity. Yeah. As the disease subsides gradually, I think there will be a potential opportunity for the of the market consolidation for especially for the big players.
You know, we have seen a lot of small players. You know, they face a severe impact that may cause some of them to shut down their business. So, you know, New Oriental as a as for as one of the leading players in market. So we are well prepared to take the more market share after the the pandemic's over. Yeah.
That's why we we we still open the new learning centers in in new cities and existing cities. And, also, you know, in the in the in the, you know, we successfully moved all all the the offline students to online, you know, in since later February. So I think the small player cannot to copy us. So that's why I said it's a great opportunity for the bigger bigger players like the New Anthem. And the the best, yeah.
The the the the pure online, you know, cool. Yeah. We just send a little bit more money in q three and and, yeah, a little bit more in q four in the coming quarter to acquire new enrollment because, you know, the pandemic when the pandemic come, I think it's a good great opportunity for the the big online player. So yeah. I think, you know, anyway, you know, we got a lot of the the enrollment during the pandemic.
And I think, you know, the money we spent is working and is understandable. I think even though we spent a lot in q three, but we still got the margin expansion for the or for the overall of the company. So Yeah. That's it.
Speaker 4
Okay.
Speaker 2
So I think going forward, I think, yeah, the the situation will be benefit us, the big player, like us. K. Thank you.
Speaker 4
Okay. And just a quick follow-up here, Steven, if I may. In terms of the summer promotion campaign upcoming in terms of the students new students acquisition. How do you see your summer promotion campaign plan for this year will be? And then do you think into May, the single digit growth should be the trough we are seeing?
The worst would be should be over?
Speaker 2
Yeah. I think you yeah. This is a great question. You know, last year, we did a very successful summer promotion where I remember we got 820,000 summer promotions enrollment, And the the retention rate was 59% last year in the autumn. And this year, I think we will use the three following strategies.
Number one, we care more about the retention rate. K? And number two, we will use the more and more live model in the summer Okay. Promotion campaign because, you know, the the because of the short the short term of the summer vacation period. So we we will lose one or two weeks.
So we will provide more and more or more classes for the summer promotion campaign. And number three, the last one is we will raise the price again as we did in last year. I think it it will bring up the more valuable customer for for the more loyalty. So I think it's still a good way to take more market share from the market, especially from the small players by the summer promotion. So we will need to do it.
And the good news for us is, you know, we we started we have already started the summer promotion enrollment window for for the grade for grade grade four and grade six to them. And then so far, the numbers are good. K? Mhmm.
Speaker 4
Okay. Okay. Thank you. Yeah. Thanks.
Thank you, Steve. Okay. Thank you, Steve.
Speaker 2
Thanks again.
Speaker 0
Your next question comes from the line of Jo Sun from T. H. Capital. Please ask your question.
Speaker 6
Yes. This is Tian. So the question is regarding the expansion plan. So, know, I can envision is pretty tough given the whole nation's feel very cautious on any offline gatherings. And a lot of place have not yet 100% open yet.
So how do you carry out the expansion plan? So that is the first question. So second question is related to I do see a lot of, you know, online education guys. It puts a lot of money, you know, in advertising system. So what is our defensive plan in that front?
Thank you, Steven.
Speaker 2
Okay. Yeah. The after the expensive plan, yeah, we added a network of one to 12 learning centers in this quarter. You know, most of the learning centers we set up in this quarter happened in in the first two months in December and January. And the total cost in error increased by 21% this for the first three quarters comparing with the the end of last fiscal year time.
So I think it's it's in line with our expansion plan. And we believe the class expansion will support support us to to take more students from the from the market, especially from the snow players and in the coming summer. You know, in the summer, I think which will very likely to be shortened by one or two weeks. So that means that more learning symptoms we have so we can provide more seeds to the kids in the coming summer and the time afterwards. And we're I I I one more thing is, you know, I think, you know, we feel confident about our business going forward.
So, you know, we don't wanna change our extension plan going forward. I think the the pandemic will will pass away maybe next quarter. So next year, we will still expand the the capacity by 20 to 25%. So we don't wanna change our guidance of the expense expense plan next year. And the second question is about the online spending.
Yeah. We we did the the large scale, the promotion for the winter and the spring courses for the large size class of the k pop business in our core.com. Because we I think we once the pandemic happens in China, we saw the great opportunities. So and we were confident that we can provide the best service in the competition. So I don't think that the spend spending your money is a defensive way from us.
I think, on the contrary, I think it's a good opportunity for us to take more market share from the, player. So that's it. Thank you, Kim.
Speaker 6
Thank you. Thank you. Okay.
Speaker 0
Once again, we will take one question at a time from each Your next question comes from the line of Yujong Gao from CICC. Please ask your question.
Speaker 7
Oh, hey. Thanks for the opportunity. Think my question is focused on reactivity longer term. So, obviously, given the outbreak, you need some of your students to the online small class model. I'm wondering if you are thinking about keeping this model.
And in other words, in the future, when we talk about capacity expansion, you actually may not need that much learning center versus before the outbreak. And whatever capacity expansion target we have for next year, should we think, that your enrollment growth may may probably outgrow your capacity expansion, please? Thanks.
Speaker 2
Yeah. Because of the lockdown and travel restrictions, you know, last two to three months, you know, we we carefully moved all the offline class to online in all the students, to all the students. And the overall feedback from the customers are are very positive have been very positive. And, however, I think go going forward, offline classes will continue to be our primary business model. You know, in the last two, three months, the situation was very special because the kids and their parents, they they can't go outside from home, and the the parents can see, but their kids is studying with the computer.
So if the pandemic is over, we I think that most of the students will choose the the offline class. You know, we made a survey in a big city, and the survey results told us that ninety five percent student parents prefer to going back to the learning center for after school treatment study when the virus situation stabilizes. And but I think for the pure online players like the Kura or the other key players, it's a it's a great opportunity as well because the market is so huge for both the online and the offline player. So I think that going forward, the big players will take more and more small market share from the small player. This is the key point.
And so we we we going forward, we will use the two ways the the development strategy, online and diploma. K? This is our strategy going forward. K?
Speaker 7
Okay. Very helpful. Yeah. Very, very clear. Very helpful.
Just very, very quick follow-up. Wondering if you have heard anything from government on when we could resume offline teaching activities.
Speaker 2
I'm sorry. I I can't hear you very clearly. You don't cancel.
Speaker 7
So so if we have heard anything from government on when could we resume our phone teaching activities?
Speaker 2
Sisi, can you hear your drone very clearly?
Speaker 1
No. Yuzhong, your your line is not very clear. Can you say that again?
Speaker 2
I suggest you drop off the line first. Okay? And, back to the queue and ask
Speaker 1
again. Next one. Okay.
Speaker 2
Okay. I'm sorry,
Speaker 0
Your next question comes from the line of Lucy Lucy Yu from Bank of America. Please ask your question.
Speaker 8
Hi, Steven. This is thanks for taking my question. My question is on the fourth quarter revenue guidance for k 12. You mentioned it will grow at, like, 10 to 11%. So that's a moderation from the previous quarter.
Could we know your back end assumption regarding this moderation? Whether it's due to pricing or lower enrollment? Is it enrollment related? Why is that? Is it just because the new enrollment has not been done very well after Chinese New Year, or there are some other regions reasons?
Thank you.
Speaker 2
Okay. Yeah. The q four will be a little bit hard. In the k four business, growth will be around 10 to 11%, And this is the overall k twelve business growth. And if you take off the one on one business, the small size class k 12 business, small size class business growth will be growth will be 18 to 19% in RMB terms year over year.
So that means the one on one business the one on one business will be down by 55% in q four. You know, I think some students don't like to take the relatively expensive class one on one class online. So this is the reason. And secondly, you know, I think the retention rate is not a problem. Here in in the screen, in in this quarter, the retention rate is still getting higher compared to last quarter.
And the drop off rate is lower than in in in in March and April, it's lower than than the February. But the problem we are facing is the the the acquiring of new student enrollment. You know, the China has been locked down for for two to three months. So it's really hard for us to acquire new student enrollment for the for the second half of the the q four and even for the summer. So it's a hard time.
But the good news for us is we're happy to see the schools in China. What what I mean, the public schools in China are going to reopen gradually. In this month, we're in early May. I think we are optimistic towards our k 12 business for the summer classes. And, yeah, that that's the my, like, for the q four k four rapid growth.
Speaker 8
Thanks, When public school resume their offline activity, some regions said they will utilize the Saturday to make up the missing classes. So will that impact our class scheduling? So is this in your 10 to 11% growth assumption already or not?
Speaker 2
We we we we have been well prepared for the rescheduling of the public school, the the study schedule. So we can move some classes from Saturday to Sunday where we can use some of the the the working day, evening time to provide classes. Good news for us, we we can use the the OMO OMO model to to provide the classes. K?
Speaker 8
So it has been baked into your 10 to 11% assumption already. Right?
Speaker 2
Yeah. Yeah. We we we still need some fee. We we still need some time, but but I think it's not a a big problem for us. K?
Speaker 8
Okay. Thank you so much.
Speaker 2
Yeah. Okay. Thank you, Lucy. Your
Speaker 0
next question comes from the line of Christine Cho from Goldman Sachs. Please ask your question.
Speaker 4
Hi. Thank you, Steven and Sisi. Just a quick question. So the is there any impact from the one month delay in the Gaokao for your business and the magnitude or any color would be great. Thank you.
Speaker 2
Yeah. We we know that Gaokao will be delayed by one month, but I don't think it will impact our business. On the on the contrary, I think the the delay of the Gaokao will help the our one on one business a little bit because we we we have to one more month before the Gaokao. So there is no big no big negative impact to our old business. K?
Speaker 4
Okay. Thank you.
Speaker 2
Thank you.
Speaker 0
Your next question comes from the line of Alex Liu from China Renaissance. Please ask your question.
Speaker 9
Thanks, Steven. This is I actually have two quick questions both online. I think we first, we noticed the the noncontrol loss increased a lot this quarter. So, obviously, that was mainly related to Poolearn. So so I was wondering, you know, how should we think about the margin implications in the in the next fiscal year from the online investment side?
That's the first question. And second question, given, you know, we have both quite aggressive growth targets for online online and offline, And how should we how should we think about the management's keep how how does the management manage and benefit balance the conflict of interest, you know, between online and offline growth? Thank you.
Speaker 2
Okay. Yes. I think the yeah. We we we we did so the coolant did a large scale market promotion in q three and the in March. Yeah.
That's in q four. So we spend a little bit more money. And, yeah, you'll just show the the MI, the big number MI in the q three q three numbers. So q four, it will be a little bit bigger. But I think in the fiscal year '20, the numbers will be lower than this year.
So it will be less. And I think it's mainly due to the pandemic. It's the the the opportunity for the online industry comes. And so, yeah, we did a lot on the on the free course of the super large classes. So that's what we're doing, and we're doing it's working and are necessary.
And yeah. That's it. The yeah. I think your second question is about the cannibalization or the balance between the the offline, online. I think the cannibalization between the EDU and cooler for the online offline will be minimal will be minimal because, you know, the market is huge.
But see the see the other hand, you know, a lot of small players die in the market. They they they disappear from the market. So there's a lot of room for big players. And I think the students will you can divide the students by into two groups. And for the small part of the student, they can study through online.
Most of the students, they choose to to they still need to be to to take the offline classes. So the market is huge for both sides, Kula and EDU. So the competition internally will be very minimal. And our first job for both sides, EVU and cooler, are taking more market share as much as they can going forward in the market. K?
Alex?
Speaker 9
Okay. Just to clarify, so so you were saying the next quarter online loss will be basically smaller comparing to comparing to February.
Speaker 2
So next quarter, it will yeah. The the the next quarter of q four, the net loss of the cooler will be bigger. But next fiscal year will be smaller. Yeah. Fiscal year twenty one will be smaller.
Okay.
Speaker 9
Very clear. Thank you.
Speaker 2
Thank you, Alex.
Speaker 0
Your next question comes from the line of Felix Liu from UBS. Please ask your question.
Speaker 5
Hello, Steven. This is thank you very much for taking my question. My question is mostly on the summer. So first, we we we're probably seeing one to two weeks of shorter summer break. So could you let us know how that will impact our scheduling in terms of the the k 12 segment?
And also for the overseas test prep, I know summer is typically the the peak season in that segment. So what is our expectation in overseas test prep in summer? Are exams being logged back in summer, or could could it be further delays? Thank you.
Speaker 2
Yeah. It's really hard to to make a forecast of the overseas test prep because, you know, almost all these schools in in our space and and UK are are are still closed. So and we do hope the the the pandemic's over as early as it can. And so, yeah, we know the q one will be fixed even for the overseas test plan. That's you know, I think we will prepare the well internally, but it's really hard for us to make a prediction for the impact from the pandemic of the overseas test therapy in the coming summer.
Okay? And, yeah, the k 12 business this summer. Yeah. I think that the the summer vacation will be shortened by one or two weeks in the coming summer. And so there are several things we can do.
Actually, we have done. We we have we have a we we have done. And number one, I think we will use one more OMO model OMO model. If you, you know, we can take we can if now let's say if we can open the learning centers in the summer that we can provide one more online course combined with the offline course. And we can save to some class classroom areas.
And so this is this is the first one. And secondly, you know, we can make some the class rescheduling or or make the class size a little bit bigger compared to last year to acquire the more and more new student enrollment in the coming summer. So I think I think it's okay for the coming summer. I'm optimistic for the business of the consumer.
Speaker 5
I see. I see. Thank you. Thank you very much for sharing sharing the color. I'm glad we're making good update, good progress in in the summer for AST.
Thank you very much.
Speaker 2
Okay. Thank you, Anne. Thanks. Your
Speaker 0
next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.
Speaker 4
Thank you for taking my question. It's about the margin outlook in the fourth quarter. So it looks like we have a lot of pressure in the fourth quarter on the margin given the full year is flat. So I was wondering if you can provide some color on the breakdown of of your color contract pressure according to the including I think maybe you opened more learning centers and overseas tech prep is also faced some pressure. So can you please give more color on the breakdown and what we should expect for for the for the coming coming year?
Yeah. Thank you. You know,
Speaker 2
we we we we guided that the top line growth in RMB terms in q four will be flattish in RMB terms. So but, anyway, you know, we we we have to face the the high rental because, you know, you look at the expansion in the last three quarters. And also, you know, typically, we the selling and marketing expenses and g m a will be increased in the q four, so it will drive the margin in the q four. But I think it's just one time. K?
And we know our you know, even though for for nowadays, our top priority for for our job is to focus on controlling costs and and reducing the expenses across the company. So to minimize the negative impact from the the pandemic. And yeah. And we are confident that we will be able to deliver to continue margin expansion after the pandemic is over. So in fiscal year twenty one, we'll we still expect the margin expansion.
And as well, we don't want to change our near long term margin guidance of the 17%. This is a non GAAP OP margin in the near long term. Okay? Thank you, Chongqing.
Speaker 4
Thank you, Steven.
Speaker 2
Okay. Thank you.
Speaker 0
Your next question comes from the line of John Choi from Daiwa. Please ask
Speaker 10
Hi, Cecilia. Hi, Steven. Thanks for taking my question. My question is more about the you know, after the pandemic, what have you guys really learned? Because you said 95% of the students wanna go back to offline.
After the pandemic, you know, do you think you'll be able to expand, like, you know, for spending per student? And in terms of based on the, experience or the user feedback, what are the areas that, you know, EDU has to further spend? That's that's my question. Thank you.
Speaker 2
So besides the the number one brand name, education brand name in China, you know, yeah, this is. And, you know, we you know, three, four years ago, we spent a lot money and time on the on the concept development on the product itself. So it makes us you know, we'll see all the students from offline to online one day, just after the during the Chinese New Year holiday when the when the pandemic became. So going forward, I think we'll build the value entry higher. K?
And to make to make us to provide better and better quality product and also to help our teachers to improve their teaching quality. And and so I think the pandemic anyway, it's a it's a bad thing. That is a great opportunity for for for for New Oriental because, you know, we can take more market share from the small players going forward. And yeah. And in the next two I think even in fiscal year twenty one and maybe the year after, we will use more and more OMO model.
K? So let's assume going forward next year, if your child takes a course of new rental, so maybe 80% of his class will be happened offline, 20% will be happened online. K? I think the the the kids love it and parents love it. Is it clear?
Speaker 10
Just a quick follow-up on that. If you do more OMO, how would that impact to our our margins? Would that be more of in the long run? Thank you.
Speaker 2
OMO, I think that's roughly the OMO model in margins should be higher than the pure offline business. Because, you know, we can save some cost in rental, and we can we can be yeah. This is because, you know you know, as I said, we will open 2025% expansion plan. But after the pandemic, I think the 25% would bring us more and more student enrollment. And we can provide the the online, offline, the online online courses to them.
So, yeah, we can send some classroom rentals. And I think the it will help us to drive the student retention rate up. K? Because, you know, I think the OMO model is better than the traditional offline course, so the people love it. K?
Are they clear?
Speaker 0
Okay. Your next question comes from the line of Alex Shi from Credit Suisse. Please ask your question.
Speaker 2
Okay. Hi. This is the last one. Thank you for taking yeah. Yeah.
Yeah. Thank you, Steve and Anthony, for taking my questions. So so my first quest my first question is, can you elaborate more about our our VIP business? How how much is VIP contribution in UK and and POP Kids? And and secondly, would you please share a bit more about our full year margin guidance?
So you mentioned the FY '20 margin should be flat through FY 2019, if I'm correct. So what's the implication for fourth quarter margin? Thank you. Yeah. I think the VIP business, you know, there's a few of the one on one business within the POPCAD.
So the within the U Can business would be the one on one business is 25 to 30% of total revenue of U Can. And margin yeah. The I think the our margin in q four will be dropped because of the pandemic. But as I said, it's one time. And, yeah, I think the worst case of the the whole year margin of the non GAAP operating margin will be flattish year over year.
But, you know, we we got we got the the VAT exemption. You know, this is a benefit from the government policies. So we recorded the VAT exemption in the other income, and also we recorded the MI, the ACI, noncontrolling interest in the the below the operating level. So I think the the net non GAAP net margin of the whole year will be still expanded, k, in fiscal year twenty. But, anyway, it's it's it's one time impact from the pandemic.
This is the margin impact. So So going forward, fiscal year twenty one, I believe the margin will be expanded again. So it will go back to normal trend. Okay? Thank you, Alex.
Thank you. Thank you.
Speaker 0
We are now approaching the end of the conference call. I will now turn the call over to New Oriental CFO, Steven Yang, for his closing remarks.
Speaker 2
Again, thank you for joining us today. If you if you have any further questions, please do not hesitate to contact me or any of our investor relationship representatives. Thank you.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.