New Oriental Education & Technology Group - Earnings Call - Q3 2021

Transcript

Speaker 0

Good evening and thank you for standing by for New Oriental's FY twenty twenty one Third Quarter Results Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I'd now like to turn the meeting over to your host for today's conference, Ms. Sissy Zhao. Thank you. Please go ahead.

Speaker 1

Okay. Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter twenty twenty one earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, you will hear from Stephen Yang, Executive President and Chief Financial Officer.

After his prepared remarks, Stephen and I 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 the public's 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, c c. Hello, everyone, and thank you for joining us on the call. With the pandemic largely controlled in China, albeit a small wave of outbreak in the northern part of the country, our business navigated the challenges and saw strong momentum in recovery. We're pleased to announce a set of financial results in the third quarter of this year that exceeds our expectation. Total net revenue was $1,190,000,000 dollars representing a 29% increase year over year, which is a very encouraging reflection affirming the business strategy that we have taken during the difficult period.

Our key growth driver, k 12 all subjects after school tutoring business, achieved year over year revenue growth of approximately 37%. Our UCAM middle school, high school all subjects after school tutoring business continued its momentum with a growth of approximately 35%, while our POP Kids program recorded a growth of approximately 40%. Our overseas related business, despite being under continued pressure due to the uncertainty of the pandemic situation and travel restrictions around the globe, showed strong resilience. Although the overseas test prep recorded revenue decrease of about 12% for the quarter, it is a result that is better than we expected. While the overseas consulting and study tour business recorded a revenue increase of about 11% year over year, which is a very positive result.

Our industry leading OMO system has been our core strategy since the start of the pandemic early last year, and it has once again proved to be instrumental in this quarter. The possibility of the exact COVID-nineteen outbreaks in certain part of China means strong flexibility in migrating students between online and offline classes is absolutely crucial during the challenging period. And our OMO system has been the answer to that. The small wave of COVID nineteen outbreak in around '20 cities in Northern China once again highlighted the importance of OMO as they enable us to respond swiftly and migrate offline class to online, avoiding disruptions of the student class and learning progress. At the same time, in other cities where the pandemic is largely controlled, vast majority of the students migrated from the online classes back to offline learning centers.

Encouraged by its effectiveness, we have been committed to expand the reach of our OMO system and are delighted to say that we have piloted the OMO online courses in vast majority of existing cities and around 25 new surrounding satellite cities in the winter semester, attracting a promising number of new customers. The OMO system effectively boosted the enrollment and revenue with a low customer acquisition cost and is becoming the new driver to our business growth. And it has solicited an increased contribution to the company's overall revenue this quarter. Total student enrollment in academic subjects tutoring and test prep courses in the 2021 increased by 43% year over year for approximately 2,296,800, which is in line with our expectation. In terms of pricing, per program blended ASP, which is cash revenue divided by total student enrollment, increased by about 7% year over year in dollar terms.

As for hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by 7% year over year and is in line with our normal price increase of about five to 8%. To provide a breakdown of hourly blended ASP, please know that UCAM classes increased by 5%. UCAM VIP increased by 1%. POP Kids increased by 4% and Overseas Test Prep program increased by 12%, all year over year in RMB terms. Now I would like to spend some time to talk about this quarter's performance across our individual business lines in detail.

When pandemic became largely under control in China, recovery momentum continued to pick up in this quarter across our business lines. Our key revenue driver, K-twelve all subjects after school tutoring business achieved year over year revenue growth of approximately 37% in dollar terms. Breaking down, the U Can middle schoolhigh school business reported a revenue increase of approximately 35% in dollar terms for the quarter. So enrollments grew approximately 56% year over year for the quarter. Our POP Kids program delivered outstanding results with the revenue up by about 40% in dollar terms for the quarter.

Enrollment increased about 61% for the quarter. Our overseas related business, including test prep and consulting business, showed encouraging sign of the recovery despite facing the most difficult challenges due to the cancellation of the overseas exams and the restriction on travel, as well as the unpredictability of the pandemic situation in different parts of the world, rising student hesitance to study abroad. The overseas test prep business recorded the revenue decrease above 12% in dollar terms for the quarter, in comparison to a decrease of 29% in the last quarter. While the overseas consulting and overseas study tour business recorded revenue increase about 11% in dollar terms year over year for the quarter, continuing its recovery momentum from last quarter's 6% increase. And finally, VIP personalized class business recorded cash revenue increase of about 36% year over year for the quarter.

We continue to carry out our capacity expansion this quarter as we opened one new offline training schools in the city of Hangzhou. This increased the total square meters of classroom area by approximately 17% year over year, 7% quarter over quarter by the end of this quarter. The increase is in line with our expectation. As we gradually ramp up our expansion efforts throughout this academic year to prepare us for recruiting more new student at the start of the following academic year. The expansion in our offline education network has also made sure that we are fully prepared for when the pandemic is over.

And our service can resume with strong presence across different Chinese cities. We rolled out two teacher class model for POP Kids program in 58 existing cities for UCAM program in 27 existing cities. With satisfactory customer retention and scalability, we will continue to use this model to increase our market penetration in both markets we have tapped into. An outbreak of COVID-nineteen has highlighted the importance and demands of online education. We have allocated more resources to this space and invested $59,000,000 in the quarter to improve and maintain our OMO integrated education ecosystem.

Our success in piloting the OMO system in around 25 new satellite cities through nearby major cities this quarter is yet another testament of how this low cost but high return OMO business model can rapidly become one of the most far reaching education service in China. We're very optimistic about the growth potential for our OMO system in the next few quarters. Apart from the OMO infrastructure, we have allocated part of the resources to advance the training programs for our teachers to enhance their onlineoffline integrated teaching skills in response to the growing demand. At the same time, we continue to upgrade our technology platforms and will broaden the usage of the online tools and content in our OMO system for all business lines throughout the whole network, as well as further develop the best teaching content and courseware to cater to onlineoffline integrated education methods. We're glad to see that our industry leading ecosystem has not only successfully managed to cushion most of the impacts by the pandemic, but we also see our customer retention rates remain stable.

Furthermore, it's effectively boosted the enrollments, and we believe it will continue to play a huge part of the recovery of business in coming quarters. To capture the huge market opportunity in online education area, Koolearn invested more resources in executing new initiatives in online K-twelve after school tutoring business since the second half of last fiscal year and added a meaningful amount of customer service representatives and marketing staff. These moves has consequently raised our spending on marketing front in this fiscal year. And our Dongzhangyu both North Side class currently enjoy a significant first mover advantage and stand to benefit from the increasing demand in low tier cities. Cooler large sized K-twelve courses are able to offer the best in class learning experience through the investment in upgrading app and online platforms, introduce the new education technologies and adding more interactive features to online classes.

Cooler also continue to establish teaching training centers in other locations to attract more qualified teachers and tutors and provide systematic training programs. A significant amount of the investment has been allocated to marketing and service enhancement in the past quarters to attract customer during the peak of the pandemic. But the spending started to normalize from this quarter as we are very cautious in identifying high ROI marketing channels. We focused on improving operational efficiency and emphasizing the word-of-mouth promotion for English programs with existing brand name advantages, which will in return keep the average user acquisition cost at a relatively low level. We believe Poolearn will continue to quickly acquire new users while enhancing students retention.

Now, I would like to turn the call over to Ms. Cixi Zhao. Please go ahead, Cixi.

Speaker 1

Yeah. Now let me walk you through the key financial details for the third quarter. Operating costs and expenses for the quarter were US1089 million dollars representing a 35.1% increase year over year. Non GAAP operating costs and expenses for the quarter, which excludes share based compensation expenses, were US1074.6 million dollars representing a 36.3% increase year over year. Cost of revenue increased by 35.3% year over year to 539,500,000.0 US dollars, primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increasing, number of schools and learning centers in operation.

The increase in teachers' compensation would also put us in a greater position in keeping teaching talents, who are the most important assets in industry. Selling and marketing expenses increased by 32% year over year to to 156,100,000.0 US dollars represent primarily due to the addition of marketing staffs with the aim of executing our OMO strategy to capture the new market opportunity post COVID. G and A expenses for the quarter increased by 36.1% year over year to US383.4 million dollars Non GAAP G and A expenses, which exclude share based compensation expenses, were US383.3 million dollars representing a 40.3% increase year over year. Total share based compensation expenses, which were allocated to related operating costs and expenses decreased by 17.8% year over year to $14,400,000 Operating income for was 101,500,000.0 US dollars, representing a 13.5% decrease year over year. Non GAAP operating income for the up for the quarter was US115.9 million dollars representing a 14% decrease year over year.

Operating margin for the quarter was 8.5% compared to 12.7% in the same period of the prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter was 9.7% compared to 14.6% in the same period of the prior fiscal year. Net income attributable to New Oriental for the quarter was US151.3 million dollars representing a 9.9 increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $09 and $09 respectively. Non GAAP net income attributable to New Oriental for the quarter was US163.2 million dollars representing a 9.9% increase from the same period of the prior fiscal year.

Non GAAP diluted earnings per ADS attributable to New Oriental were $0.10 and $0.1 respectively. Net operating cash flow for the 2021 was approximately 23,300,000. Capital expenditure for the quarter were 105,800,000.0 US dollars, which were primarily attributable to opening of 142 facilities and renovations, at existing learning centers. Turning to the balance sheet. As of 02/28/2021, New Oriental had cash and cash equivalents of 1,569,800,000.0 US dollars as compared to 915,100,000.0 US dollars as of the as of 05/31/2020.

In addition, the company had $1,147,800,000 term deposits, dollars 3,360,700,000.0 in Oriental's deferred revenue balance, which is cash collected from registered students for the courses and recognized proportionally as revenue as the instructions were delivered at the end of the 2021 was 1,865,700,000.0 US dollars, an increase of 35.7% as compared to 1,675,000,000 US dollars, at the end of the third quarter of fiscal year twenty twenty. Now I will hand over to Steven to walk you through our outlook and guidance.

Speaker 2

Looking ahead into the next quarter of fiscal year twenty twenty one, we're more clear about the recovery trend of the company's near term financial performance and the market opportunity over the long run. Our strategic focus and investment approach this year aimed at improving the product quality, increasing the teachers' compensation, and enhancing our industry leading system, which fully reflects our ethos of focusing on the essence of education. In view of the market competition and opportunity to take advantage of the post COVID market consolidation, we firmly maintain a stable and balanced investment strategy that will improve the quality of our education service with aim to achieve a sustainable and long term growth as opposed to unhealthy short term growth that often requires excessive investments and higher cost to acquire customers. As such, we will continue to focus on the following key areas. First, we will continue to expand our offline business.

We aim to add around 20% capacity, including the new learning centers and expanding classroom area of some existing learning centers for K-twelve business in this fiscal year. We believe our capacity expansion will prepare us to further take market share from other players post COVID as we believe some small players without a strong financial position and online class capability may not be able to sustain their business during the period. We expect that industry will undergo a way for market consolidation upon the pandemic phase. The fact that we are a major player with a strong financial capacity and fresh offline facilities enable us to further strengthen our market leading position and penetration. Second, we will continue to leverage our investments into digital technologies and introduce our OMO system in more offline language training and test offerings, especially for our K-twelve tutoring business and oversea test prep key business.

The usage of online tools and content in our OMO system for all business lines throughout the whole network will be enhanced. To uplift the whole OMO teaching experience, we'll place more efforts in developing the best teaching content and courseware, and also developing more advanced training program for our teachers. With all the above mentioned infrastructure in place, we will continue to pilot our OMO online initiatives in major cities with high demand and higher operational efficiency in its surrounding satellite cities. We believe that our OMO initiatives will be one of our growth engines to increase our customer acquisition post COVID as it can quickly replicate in different parts of China, enabling us to capture the market consolidation opportunity. This revamped new business model will also contribute to our margin recovery when the pandemic is over and further expand our long term margin target.

Here, I have to highlight that all these OMO products are supported by our offline classes. They supplement each other in a hybrid format. Third, during the peak of the pandemic, we saw the necessary needs to ramp up the spending on different areas of the business aimed aimed at migrating the challenges from the pandemic. Now the the business now that the business gradually recover to a normal level, going forward, we will closely monitor the rise of the cost expenditure across the company to improve overall operational operating efficiency. Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong.

We have been increasing our investments in different strategies and we remain optimistic of the brighter prospects of our business and believe our investments now will bring us a foot forward returns in the long run. When looking at the near term and our expectations for the next quarter, we expect total revenue to be in the range of 1,101,900,000 to $1,141,800,000, representing year over year increase in the range of 38% to 43%. To provide the breakdown of the effects of top line growth for key business lines, K-twelve business is expected to grow in the range of 45% to 50%. Overseas test drive program is expected to grow at around 30%. Overseas study consulting and study tour business is expected to be flattish, and the growth of the poolearn.com pure online education platform is expected to be accelerated all year over year in dollar terms.

To conclude, we're now taking all kinds of the official actions to boost the enrollments and classroom utilization for the spring semester and speed up the recovery of the business after the resumption of the schools and learning centers. We're confident that the demand for after school tutoring business are gradually picking up and in the process of trending towards a normalized level. I must mention that these expectations reflect our considerations of the latest pandemic and regulatory situation, as well as our current and preliminary view, which subject to change. At this point, I will take your questions. Operator, please open the call for this.

Thank you.

Speaker 0

Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. To ask a question today, please press star one on your telephone and wait for your name to be announced.

If you wish to cancel your request, please press the pound or hash key. Your first question comes from Felix Liu from UBS. Please go ahead.

Speaker 3

Good evening, management. Thank you very much for taking my questions, and congratulations on the strong quarter. My question is on regulation. I know during the the past few months, the regulator has made some, you know, relatively strict comments on the after school tutoring regulations. So could you share some color about your take on potential regulation direction?

Will there be any, you know, tightening in terms of new learning center license, ASP, as well as after school tutoring scheduling? Thank you very much.

Speaker 2

Felix, it's a good question. You know, actually, the government's intention to tighten after the after school tutoring business policy is not a surprise to us. As you know, it has been discussed for a long time since 02/2018. And we believe the the regulation's efforts will foster a positive environment for the whole market to improve the market standard and enhance the the average teaching quality of the whole market. And and I think I and I think, you know, we are aligned with the government policy and also full and fully committed to work together with the government to build a better the the education market in China.

I think the reform details are yet to be announced. So now we are unable to provide a full analysis on our business impact. But at this stage, we do not foresee any material impact on top line. And we do expect some the admin cost may increase in a short a short term to meet the the new requirement. You know, as the largest provider, you know, New Oriental, I think we we have this strong capital to be compliant with the the potential reform, the policy reform.

And at the same time, we expect the China's after school tutoring market to further con be consolidate. And we have the preparation for this, and we're ready to further take more market share from the other players. Felix?

Speaker 0

Thank you. Our next question comes from Mark Li from Citi. Please ask your question.

Speaker 4

Hi, management. Congratulations on the very strong results. May I ask for the upcoming summer promotions, what's our plan or any target that we can share? Especially, I see maybe with the rising synergy with our OMO model. Thank you.

Speaker 2

Yeah. You know, we we started to to do the summer promotions four or five years ago. And last year, you know, we got over 1,000,000 student enrollments from the summer promotion campaign, and the retention rates after the summer was somewhere around 60%, you know, as was the the good number. And and this year, I think we will be we will do the same thing. You know?

And we do expect the summer promotion enrollment will be booming in the coming summer, and we believe the the retention rate after summer will be higher than that of last year. You know, typically, we are we got this we got this student enrollment from the summer promotion. You know, typically, we charge $405,100 RMB per course. Actually, it's just it's it's not a free course, just like some of the the discounted courses. And I think the the summer promotion will bring us the whole year, the the enrollment growth, and it will not hit the margin for the whole year.

Mark?

Speaker 0

Thank you. Our next question comes from Candice Chen from Daiwa. Please go ahead.

Speaker 5

Hi, Cece and and Steven. Thank you for taking my question, and congratulations on this very strong set of results. So my question is regarding the OMO. So can you share with us the revenue contribution of OMO currently? And also, what would be the percentage of OMO contribution in long run as you expect?

And how would be the long term margin profile for for OMO? Thank you.

Speaker 2

You know, while the OMO model only contributed single digits to the overall revenue this quarter, but, you know, with the with the the ability to virtually reach both major and satellite cities across China in some province, I think it will grow rapidly in the coming quarters and become the major driver to the to our business growth. You know, we expect the the revenue contribution from the OMO next year will be somewhere around 10%. And the margin profile of the OMO model, theoretically, the OMO model, the margin of the OMO model should be a little bit higher than the traditional offline classes. But, you know, we just started the OMO model since the last year, so we still need more time to testify the business model and and the margin profile. But so far, so good.

I think the the progress of the OMO business, you know, is a expect to is better than expected. And and the OMO model will contribute more and more revenue going forward in the in the in the next fiscal year and the in in in the next two to three years.

Speaker 0

Thank you. Our next question comes from Tian Hou from T. H. Capital. Please ask your question.

Speaker 3

Hi, Cici, Steven. Congratulations on a strong quarter. So I see the overseas recover pretty nicely. And, also, some data shows even though this year was, like, you know, pandemic. However, the students applied to overseas school.

The number of that was really high. So, you know, I I wonder, you know, what's the going what's the outlook for the overseas testing and consulting this part of the business? What's the outlook for that? You know, what do you see from from today's data? Thank you.

Speaker 2

Thanks, Tian. You know, I think the the overseas test drive overseas related business, you know, recovery, you know, is coming. And, you know, rep revenue decline of the overseas test prep this quarter was 12%. You know, last quarter, the revenue decline was 29%. And two quarters ago, the revenue decline was 50% in dollar terms.

So it showed the encouraging sign of the recovery of the overseas test drive business. And and we gave the guidance we gave the guidance in the q four. The overseas test prep business will be increased by somewhere around 30%, 30%. So if the so I think the the you will see the even the higher the recovery of the overseas test prep business. And, yeah, I I I know we had the low base last year.

But, anyway, I think this we're in the process of the the the recovery of the of the overseas Tesla business. And the consulting business, know, this quarter, we we we got the increase by 11%. And next year, we guided the revenue growth, but consultant business will be flattish. You know, typically, q four will be the the the the the high season of the overseas consultant business. But, you know, during the hard time, I think the performance of the overseas test drive and consultant business, I think it's much better than we expected several quarters ago.

And next year, I believe the overseas revenue business will grow to some extent for the for the fiscal year 2022. Thank you, Tian. Thank you, Tian.

Speaker 0

Thank you. Our next question comes from Sheng Zhong from Morgan Stanley. Please ask your question.

Speaker 6

Hi. Thank you for taking my question. So my question is looking at Beijing,

Speaker 2

I think

Speaker 6

the the learning center's reopening is slightly slow. So any color on this government approval process? What are the key items they are doing the inspection now? And do you think so based on this, what's your do you have a capacity expansion plan for next year can can be shared with us now? Thank you.

Speaker 2

So far, you know, we opened almost all the learning centers except for Beijing City. And in Beijing, we we have over one learning centers in Beijing, but we we open we open single digit learning centers now. And and but, you know, we expect the more we will open more learning centers reopen more learning centers in Beijing. And the this year, you know, we we plan to open 20% of the capacity. You know, first of three quarter, we opened a 17%.

And the next year, so far, we haven't finished our budget of next year of the expansion plan. So I think the next earnings call in the next quarter, I will share with you our expansion plan. And so far, we wanna change our expansion plan for the next year, but we we we still need more time to finalize our budget of next

Speaker 0

Yeah. Joshan, in addition to

Speaker 1

the Beijing situation, you know, I want to remind you all that, because we have the OMO system so that we have all the students, doing the spring course online, very smoothly, actually, even with the closure of offline learning centers, but still all the students can take their classes online. And the retention is very stable. And also, overall, since the pandemics, we're seeing Beijing's situation is harder than other cities and revenue declined. But, you know, the reported Q3 quarter and forecast Q4 quarter, Beijing's revenue trend is better, getting better and better.

Speaker 7

Okay.

Speaker 0

Right. Thank you. Our next question comes from Alex Hsieh from Credit Suisse. Please ask your question.

Speaker 8

Hi, management. Thank you for taking my questions, and congratulations on very strong set of results. So just please comment on the margin trend in in the next quarter and also for the for the next fiscal year. Since since I think we have a low base in the fourth quarter of last fiscal year? Thank you.

Speaker 2

Yeah. I think that the running growth recovery is in the process. This is the first. And on the market front, I think, you know, we do have the I think we have the the the bridge the business opportunity in the market front. And but, you know, we are doing the several the the investment now, actually, since the two quarters ago.

You know, we we make the learning center expansion by 20% this year, and we firmly raised the teacher salary twice this year. And, also, we spent more money on the r and d for the OMO. And, also, we hired more Deepgram marketing team to do the marketing activities. So but but I think the all the above mentioned investments will make us the fully prepared for the future. So I think it will I think it will impact the margin for short short term.

But I I still believe the margin decline for the q four will be narrowed down compared to this quarter. And we're confident confident that we are able to deliver the margin expansion after the pandemic's over. And we don't want to change the mid long term margin guidance. Thank you.

Speaker 0

Right. Thank you. Our next question comes from DS Kim from JPMorgan. Please ask your question.

Speaker 9

Hi. Good evening, sir, and congrats on the strong bid across the board. Maybe before I start my question, can I just follow-up on your point that when you say margin decline would be narrowed versus this quarter, are you referring to last year or pre COVID level? And I and I have my own question after this.

Speaker 2

I mean, it's a year over year comparison.

Speaker 9

Year over year. Okay. Thank you, sir. Thank you. My question is regarding Koolearn, and there seems to be some reports locally that there are some business adjustment at that entity according to some media.

And could you help us understand what's the key change in priority here plus potential margin impact? Say, for instance, Kularen has been making about 40 plus million US dollar operating losses every quarter in the past five, six quarters. But shall we expect the absolute size of the losses from 40,000,000 plus to narrow into fiscal year twenty twenty two, or shall we only think about the margin improvement, not the absolute size of the losses? Thank you again.

Speaker 2

Diaz Kim, you know, I I can't say too much about the detailed numbers of the cooler, but I can share with you our strategy. You know, cooler has spent more money on the r and d and marketing in the past quarters. But, you know, we started to control the marketing the marketing activeness and money in this quarter. And going forward, I think we will be very cautious on the market spending. K?

And, you know, as I said, our strategic focus is to invest more money on to improve the teaching quality. We're training the teachers. We're hiring the talent people rather than the heavy spending on marketing. So we call this as the the the essence of the education. And so I I do believe the the revenue of the cooler of next quarter will be accelerated.

And the margin drag from the cooler to the EDU will be smaller and smaller going forward. K. Thank you.

Speaker 0

Thank you. Our next question comes from Lucy Yu from Bank of America Securities. Please ask your question.

Speaker 7

Thank you, Steven. I have a follow-up question on the margin. So in the fourth quarter, we have a relatively lower base And especially with the k 12 start to grow, like, 45 to 50%, should we expect some operating leverage on the k twelve side? At least the k twelve margin should be improving. Right?

So what is actually dragging the margin to be lower than the same period of last year? Thank you.

Speaker 2

Yeah. We, know, we believe we have the leverage on the k twelve business because of the, you know, the business recovered very, very fast. And but but as I said, you know, with this, we're doing some of the investments for the future, like the teach the raising the teacher salary and open more learning centers and also to invest more on the OMO model. You know, we hire, you know, the minimum number of the the marketing staff to to do the brand promotion. And so I think you still need maybe more time to to see the margin expansion, maybe one more quarter.

But I do believe the margin profile in the q four will be better than this quarter than q three. Lucy?

Speaker 0

Thank you. Our next question comes from Jessie Xu from Nomura. Please ask your question.

Speaker 7

Good evening, management. Thank you for taking my question, and congratulations for a very strong quarter and also very strong revenue guidance for 4Q. My question is also regarding offline normalization in Beijing. I wanna understand what is our base scenario here, and what about the worst scenario? And if Beijing learning centers cannot be opened before summer, what will be what will be impact to our summer promotional campaign?

Thanks.

Speaker 2

You know, so far, we finished the 17% expansion in the first three quarters of this fiscal year. So we we still need two to 3% new capacity in q four to to gather point of the to gather number of the the 20% capacity expansion. I think we are we are prepared for the the capacity. The capacity is prepared for the coming summer promotion. And don't forget, we have the OMO model compared to last year.

You know? Our OMO model is much better than than than that of last year. And, you know, I I think we will do some of the summer promotion by the OMO model. I think the online elements will help us to do the summer promotion, you know, rather than the the the traditional typical 100% offline to the the format.

Speaker 0

Thank you. Our next question comes from Christine Cho from Goldman Sachs. Please ask your question.

Speaker 7

Thank you so much. Congrats on a solid results this quarter, Stephen and Cece. Seems like the capacity growth this quarter of 17% looks a bit softer. And, it seems like you're targeting around 20% growth, which seems to be kind of the low end of the 20 to 25% midterm target. Just wondering if this is temporary, or are there any lasting considerations such as, for example, like, OMO expansion plans or any regulatory concerns that you have here?

Thank you.

Speaker 2

You know, yeah, we we we aim to add around 20% capacity expansion for the whole year, fiscal year twenty twenty one this year. And and last year, we expanded 26% new learning centers. You know, typically, we ramp up the learning center from zero to 100%, you know, by three to four years. So that means we have enough the capacity to roll to ramp up. And, also, you know, since the last year, we moved some classroom area of the overseas test rep to k 12 business because, you know, we suffered we suffered the the the the negative impact from the overseas test rep business.

And I think it will help us to prepare for the potential, the growth of the K-twelve business.

Speaker 0

Right. Thank you. So we are now approaching the end of the conference call. I will turn the call back to New Oriental's executive president and CFO, mister Steven Yang, for his closing remarks.

Speaker 2

Again, you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representative. Thank you.

Speaker 0

Right. Thank you. So that does conclude our conference for today. Thank you for participating. You may all disconnect.