New Oriental Education & Technology Group - Earnings Call - Q4 2017
July 25, 2017
Transcript
Speaker 0
Good evening, and thank you for standing by for New Oriental's Fourth Quarter and Fiscal Year twenty seventeen 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. Sisi Zhao.
Speaker 1
Thank you. Hello, everyone, and welcome to New Oriental's fourth fiscal quarter and fiscal twenty seventeen earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, you will hear from Stephen Young, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions.
Before we continue, please note that the discussion today will contain forward looking statements made under the Safe Harbor provisions of The U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.
A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr.
Yang. Stephen, please go ahead.
Speaker 2
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We're pleased to close fiscal year twenty seventeen with a set of solid financial results. This year, we have achieved both top line strong top line growth and bottom line performance. Net revenues in fiscal year twenty seventeen increased to approximately $1,800,000,000 which is an increase of 21.7% in U.
S. Dollar terms or 29.1% in RMB. Net income reached $274,500,000 and student enrollments went up by 33.3% year over year. During fiscal year twenty seventeen, we opened a total of four new schools, three new learning centers, and six dual teacher model schools in 10 new cities and added a net of 93 learning centers and one kindergarten in the existing cities. In total, we added 107 facilities, representing approximately 14% increase year over year.
This was important and profitable expansion. Throughout the fiscal year, we remain focused on strong execution of the Optimize Market strategy, which means we're continuing to expand our offline business while also investing in the overall two way interactive education system. Our business has been performing along a strong and solid trajectory, which is supported by our better execution and enhanced management. In short, this year, we experienced a strong growth momentum across our business lines. To give a quick overview, annual revenue for k to 12, all subjects after school tutoring business, our key revenue driver grew approximately 44.2%, if contributed in RMB, contributing 65% of total revenue.
This was mainly supported by the U Can business and the revamped POP Kids program, which achieved annual revenue growth of 4055% in RMB, respectively. It's worth noticing that in order to capture the growth opportunity in low tier cities, we continue to roll out our dual teacher model schools and expand our business into remote areas in China. We started to pilot the new dual teacher class model in select cities in July 2016. And in fiscal year twenty seventeen, we tested these new offerings in over 20 existing cities and six new cities, and we're happy to see increased market penetration in those markets we have tapped into. With this proven results, we will continue this strategy in next fiscal year.
In addition, we're in the process of launching the O2O standardized teaching system for our overseas test prep business, such as OWLs, TOEFL and SAT programs in some of the large cities in China. In terms of performance for the fourth fiscal quarter, this time of year is part of our peak season, and we performed quite well. Fourth quarter net revenues increased 23.2% to $486,400,000 with operating income up 39.7% and student enrollment up 36.9%. Breaking it up, U Can business recorded a fourth quarter revenue increase of 37% in RMB, and enrollment was up by approximately 50%. Our revamped POP Kids recorded fourth revenue increase of 55% in R and D and enrollment growth of 51%.
To give you a better understanding of enrollment growth, I would like to specifically mention our summer promotion efforts, which have been proven to be a very successful strategy in past years to further progress our ability to consolidate the market and gain as much market share as possible. Similar with last year, we have conducted a large scale promotion this summer to rapidly acquire grade seven students customers before they started the first year of secondary school. We offered low price experiential courses for multiple subjects in total of about 40 cities. The promotion was again well received by the market. The great selling enrollments we brought in before we start off the summer holiday in early July this year reached 417,000, more than double compared to the same period of last year.
I would like to reiterate that we do not include this promotion enrollment in our reported enrollment. We're very pleased with this outcome and expect to retain a high portion of students after this promotion, which will boost revenue and drive profit growth throughout the whole fiscal year 2018. It's equally important to note that due to a higher utilization of facilities in the rest of the year, we don't expect a material impact on operating margin throughout the whole fiscal year. We believe the summer promotion will continue to be a successful and effective strategy to quickly increase market share in the high volume K-twelve after school tutoring market. As these students move from grade seven through grade 12, the continued improvement in retention rate and customer loyalty will drive the revenue growth in the next three to six years.
Turning to pricing. Per program blended ASP, which is cash revenue divided by the total student enrollment, decreased by about 6% year over year in U. S. Dollar terms and is flat in RMB terms. The six percent decrease of per program blended ASP is mainly due to the shift of revenue mix from the overseas test prep business and slowdown of VIP business, which has a higher ASP.
Starting from the third fiscal quarter of this year, we began to concentrate the registration for U Can VIP classes in June and December, the first month of the first of fiscal quarter and third of fiscal quarter, respectively, rather than spreading it evenly throughout the year in order to streamline the registration process. As a result, we saw a very large year on year increase in enrollment for U Can VIP classes in the third quarter, but lower than normal growth in the fourth quarter. For the whole fiscal year 2017, VIP business recorded cash revenue growth of about 16%. Over the long run, expect that the growth of our VIP business will be lower will slower than our overall revenue growth, which will continue to drag down the blended ASP, hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 7% year over year in RMB terms. To provide a breakdown of hourly blended ASP in RMB terms, please note that U Can increased by 6%, POP Kids increased by 8% and Overseas Test Prep program increased by 12% all year over year.
On the margin front, we continue to make great progress by improving operational efficiency and utilization of facilities and controlling costs within the company. Operating margin for fiscal year twenty seventeen increased to 120 bps year over year. The continued strong bottom line performance demonstrates the result of our commitment in creating sustainable long term value for our customers and shareholders. Now let me move on to the fourth quarter performance across our individual business lines. Our key revenue driver, K-twelve, all subject to after school tutoring business, achieved year over year revenue growth of 34% in U.
S. Dollar terms or 42% in RMB terms. This was driven by a significant enrollment growth of about 51% year over year. For the whole fiscal year, k to 12 has a revenue increase of about 36% in US dollar terms or 44% in RMB terms. Breaking it down, the U Can middle school, high school or subjects after school tutoring business reported revenue increase of 30% in U.
S. Dollar terms or 37% in RMB terms for the fourth quarter and 32% in U. S. Dollar terms or 40% in RMB terms for the fiscal year. Student enrollment grew approximately 50% year over year for the quarter and 45% for the fiscal year.
Our HOT Kids program delivered outstanding results with revenue up significantly by about 47% in U. S. Dollar terms or 55% in RV terms for the fourth quarter and 47% in U. S. Dollar terms were 55% in RMB terms for the fiscal year.
Enrollment went up about 51% for the quarter and 49% for the fiscal year. Our overseas test prep and consulting business together reported revenue growth of about 13% in U. Dollar terms or 19% in RMB terms year over year for the fourth quarter and 6% in dollar terms or 13% in RMB terms for the fiscal year. Finally, VIP personalized glasses business reported its revenue growth of about 12% in U. S.
Dollar terms or 18% in RMB terms year over year for the fourth quarter and 16% in dollar terms or 23% in RMB terms for the fiscal year. Next, I will provide some updates on the progress we have continued to make with our optimized market strategy. We have been focusing on maintaining a healthy balance between top line and bottom line growth while investing in the build out of our auto integrated education system, and this continues to work very well. Starting with our core offline business, as mentioned earlier, we added nine to 47 learning centers in around 30 existing cities, opened two new schools and new learning centers in the city of Zhangzhou and Nanyang, and roll out dual teacher model schools in the city of Anjiang and Hangang. In fiscal year 02/2017, we opened four new schools, three new learning centers, six dual teacher model schools in 10 new cities, and added another 93 learning centers and one kindergarten in the existing cities.
Regarding our online business, we invested approximately $17,000,000 in the fourth quarter and $67,000,000 in total for the fiscal year to improve and maintain our ultra integrated education ecosystem. Most of the investments were recorded under G and A expenses. We have been devoted to this online business build out since 2014 with an increase in customer retention rates and addition of new customers. We fully believe this is transforming our business and the investments will bring continued and long term benefits. Before I go into details, just a quick recap of three levels of our on online platform.
The first level, also the core of our online system is our O2O two way interactive education system across all of our business lines. The second level is our pure online learning platform and supplementary online education products and the NewRental brand. The third level of our ecosystem is for NewRental to take minority shareholdings in online education companies that complement our online education offerings. Starting with the O two zero two way interactive education system, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. This is also an important factor that sets us apart from other key players in the market.
With advanced o two o product services, we're poised to gain more market share and improve brand recognition going forward. Since its launch in September 2014, U Can Virtual Program teaching system, our interactive education system, has been successfully rolled out across all existing cities in our nationwide school network. And this expansion drove a positive performance. Our newly revamped pop kids English program, also expanded its coverage reaching 54 cities by the end of the fourth quarter. The interactive education system has been gradually used in more and more cities.
And since its launch in the 2016, the interactive education system for overseas test prep program, including OUTS, TOEFL, and SAP courses, which will roll out intensities by the end of the fourth quarter. From the second level of our online education ecosystem, we have experienced consistent growth in our pure online learning platform and other supplementary online education products. In the fourth quarter, coolearn.com generated net revenue of $17,000,000 representing an increase of 30% in U. S. Dollar terms or a 38% increase in RMB terms.
The number of paid users increased instantly this quarter, approximately 69% year over year. The number of cumulative registered users in this quarter has reached 17,000,000. HuDAO CN, our own live broadcast open platform for both new rental and third party teachers, achieved around 634,500 registrations in the fourth quarter. Donut, a series of game based mobile learning apps for children, reported over 60,600,000 downloads by Cortland. Lutzu, an English language vocabulary training app for mobile phones and tablets app, reported over 6,200,000 users by Cortland.
For the third level of our online education ecosystem, we invest in select online education companies with a minority stake and we continue to move forward new opportunities that will not only complete our own offerings, but also facilitate our O2O integration. Now let me walk you through the other key financial details for the first quarter. Operating costs and expenses were $434,500,000 representing a 20.2% increase year over year. Non GAAP operating cost and expenses, which excludes share based compensation expenses, were $425,500,000 representing an 18.9% increase year over year. Cost of revenues increased by 21.9 to $199,300,000 primarily due to increase in teachers' compensation for more teaching hours.
Selling and marketing expenses increased by 11.7% to $66,300,000 primarily due to increase in brand promotion expenses and selling and marketing staff compensation. General and administrative expenses for the quarter increased by 21.8% to $169,000,000 Non GAAP general and administrative expenses, which excludes share based compensation expenses, were $160,000,000 representing an 18.4 increase year over year. This was primarily due to increased headcount as the company expands its network of schools and learning centers by about 14% year over year. Total share based compensation expenses, which were allocated to related operating costs and expenses, increased by 147 percent to $9,000,000 Operating income for the quarter was $51,800,000 a 39.7% increase from $37,100,000 in the same period of prior fiscal year. Non GAAP income from operations was $60,800,000 compared to $40,700,000 in the same period of prior fiscal year.
Operating margin for the quarter was 10.7% 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 12.5% compared to 10.3% in the same period of prior fiscal year. Net income attributable to NewRental for the quarter was $55,400,000 representing a 31.9% increase from the same period of prior fiscal year. Capital expenditures for the quarter were $26,500,000 and this was primarily attributable to the opening of four new schools and 70 new learning centers and renovations of existing learning centers. Turning to the balance sheet.
At the end of fourth quarter, the deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as revenue after the instructions were delivered, was $866,600,000 an increase of 34% as compared to $646,900,000 at the end of the 2016. Before talking about our priority for the fiscal year twenty eighteen, I wanted to take a moment to reiterate our overarching goals for the future. Similar to those we have seen outlining past conference calls. During fiscal year twenty eighteen, we have continued to focus on our optimized market strategy. With the current success achieved, we're confident that we have the right strategy in place.
And that is growth continue to drive additional progress and help us create long term value for all shareholders. To give you more specifics on our areas of focus. First, we will continue to expand our offline business. In fiscal year twenty eighteen, we aim to add about 10 to 15% new learning centers for K-twelve business in existing cities. And we also plan to enter two to four new cities, Huawei and data markets with the most business opportunities and receptivity to our offerings.
In addition, we will continue to roll out our dual teacher model schools to about five to 10 new low tier cities in China. Second, we will continue to leverage our investment in our O2O integration and initiatives in online education offerings. In particular, we will continue our focus on product refinement and maintenance for the O2O system for K-twelve business. Meanwhile, we will continue to revamp and roll out our O2O standardized teaching system for our overseas test drive business. We will continue to make investments but we believe that total spending in absolute dollar terms in fiscal year twenty eighteen will be similar with the previous fiscal year, which totals approximately $57,000,000 Third, we will continue to have a top priority on improving utilization of facilities and controlling costs across the company to drive the continued margin expansion and operational effectiveness.
Looking at the near term. In terms of the 2018, we expect total revenues to be in the range of 6 and $26,500,000 to $647,300,000 representing year over year growth in the range of 17% to 21%. If now taking into consideration the impact of potential change in exchange rates between RMB and U. S. Dollars, the projected revenue growth rate is expected to be in the range of 20% to 24% for the 2018.
Lastly, I must mention that these expectations reflect New Rentals' current and preliminary view, which is subject to change. At this point, I will take your questions. Operator, please now 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. Our first question is coming from the line of Alvin Zhang from Deutsche Bank. Please ask your question.
Speaker 3
Hi, Steven and his sister. Thank you for taking my questions. My first question is about revenue. Could you share with us your outlook for full year revenue growth? And shall we still expect revenue growth acceleration for the full year FY 'eighteen?
And my second question is about margin. Do you see margin pressure from the summer promotion class? And what's the margin outlook for Q1 and the full year FY 'eighteen? Thank you.
Speaker 2
Okay. Thank you, Evan. Your first question is about revenue, the guidance for fiscal year 'eighteen. Yes, we do believe that the top line growth in the coming fiscal year 'eighteen will be accelerated continuously if you compare it with the top line growth with the fiscal year 'seventeen. First, I think the we're still happy with the great growth momentum in the K-twelve business.
And also, we're doing the same thing, the O2O plus we've won in the overseas test prep as we did for the T-twelve. So we're quite confident that the top line growth of the overseas test prep business will be accelerated in the fiscal year twenty eighteen. And also don't forget, we are doing the big the large scale of the summer promotion. Till the early July, I think we we have already have already got the 417,000 summer promotion state enrollment. It's more than doubled compared to the those last year.
So we do expect the retention rates of those students will be higher than that of last year. So I think the yes, the the top line growth in the in fiscal year eighteen will be accelerated. And the the margin question, yeah, I don't think we have the margin pressure of the the summer promotion because, you know, as we did in last year, I think the retention rates of the the summer promotion students will be higher than last year. So there's no negative impact of the margin for the whole year. And so I think we'll continue our strategy of the optimize the market strategy.
And as I said earlier, we will open 10% to 15% new learning centers, and top line growth will be over 25% or or 30%. So I I think you will see the utilization rates will be will go up in the fiscal year twenty eighteen and drive the margin expansion as we did in fiscal year twenty seventeen and 2016.
Speaker 1
Alvin, I want to add a little bit on the revenue growth. So for those investors or analysts who I want to remind you that actually Q1 is our seasonally growth in terms of growth rates the slowest if you look at last several years revenue growth trend. So the peak season for our key growth driver K-twelve business peaked in the second half. So the rest of the year, the revenue growth will be higher than Q1. Okay?
Speaker 2
Yes. If you look at the growth Q by Q, quarter by quarter in fiscal year 'seventeen, Q1, the top line growth was 16.5%, Q2 22%, Q3, 26% and Q4, 23%. So the second half of the year will be the peak season of the K-twelve business. And also the overseas test prep and domestic test prep in Q1 will be the peak season, even though the growth rate will be better than this year. But if you compare the top line growth of the overseas test prep and domestic test prep with the K-twelve growth rate, this will be lower.
Okay.
Speaker 3
Thank you. This is helpful.
Speaker 2
Okay. Thank you, Thomas.
Speaker 0
Our next question is coming from the line of Abigail Liu from Macquarie. Please ask your question. I'll move on to the next question. Our next question is coming from the line of Jin Moon from Mizuho Securities. Please ask your question.
Speaker 4
Hi, good morning guys. A couple of questions. First of all, the learning centers and schools have the opening this quarter has far reaccelerated from the quarters past. I apologize if you answered this question on the prepared remarks already. But how should we see the trend going forward on that front?
Or is this just kind of a onetime seasonality impact? And number two, I know that you guys are overall diminishing, I guess, or putting less emphasis on the VIP classes. But these new incremental learning centers and schools that are opening, is there any VIP learning classes in them at all? Or is it just winding down on your existing schools? Okay.
Speaker 2
I think it's June. I think, yeah, in terms of the expense plan, yeah, we opened 52 learning centers in this quarter. Yeah. It's accelerated. Because, you know, I think we are seeing the growing momentum in our K-twelve business due to the the the rolling out the new auto product and also the solid market demand and and also and the effective operation as well.
So this is a but, you know, the the the extension is is I think this is controlled. So going forward in in fiscal year eighteen, I think we will open 10 to 15% new learning centers. This is net increase. And and I don't think it will drag margin. On on campus, I think the the enrollment growth and top line growth will be will be higher than the learning center opening.
So the margin will keep improved in the fiscal year twenty eighteen. And most of the new learning centers we opened for fiscal year eighteen will be kids 12 oriented. And, you know, most I I think, you know, we control in the IT business, and we hope we hope the the the big size class and small size class k 12 that's in in k 12 business will be the growth will be faster than the VIP business. Even during your last year, fiscal year sixteen, the VIP revenue contribution was was 29%. And this year, fiscal year seventeen was 28%.
So next year, think it should be lower a little bit.
Speaker 4
Got it. That's great color. Thanks, guys.
Speaker 2
Okay. Thank you.
Speaker 0
Our next question is coming from the line of Fan Liu from Goldman Sachs. Please ask your question.
Speaker 1
Hi, Stephen. Thanks for taking my question. Would you mind guide us what the utilization rate look like this quarter and also the retention rate this quarter? And also, would you mind adding some color on Beijing and the revenue growth for Beijing and Shanghai, I mean, in terms of the Q2 volume? Okay.
Speaker 2
In terms of the rate, this year, the retention rate is about 22%. And last year, it was 19% to 20%. And the utilization rate I'm sorry. The the utilization rate of this year is 22%. Last year, it was 19% to 20%.
So it improved by 20 bps. And going forward, in fiscal year 'eighteen, I think the you will see the utilization rate will go up going forward. And we're still in retention rate. For the pop kids return churn rate, it's the retention rate is over 85% compared to the 70% 75% last year. And for the U Can, the student retention rate is 70 well, 70%.
Last year, it was 60%. And, yeah, it will go up. And your second question is about the Beijing and Shanghai revenue growth for K-twelve business or work overall. Hi, Fang.
Speaker 1
K-twelve, Bennett. Okay. For K-twelve.
Speaker 2
Okay. The Beijing K-twelve business in Beijing in this quarter was 43%, Shanghai 40% growth in Q4 fiscal year twenty seventeen.
Speaker 5
Our
Speaker 0
next question is coming from the line of Tian Hou from DH Capital. Please ask your question.
Speaker 5
C. C, Stephen, congratulations on a strong quarter. I have a couple of questions. One is much bigger question about the market. It seems like just recently the demand for education shoots up.
And in the utilization from your result, we can see the utilization rate, retention rate and the school opens, every single matrix are all up. So I want to ask from your point of view, what do you see the market? And how do you see the demand? What are the main drivers? That's number one.
Number two is the dual model dual teacher model. So in what kind of circumstances you will open the dual teacher model? So that's the two questions. Okay.
Speaker 2
Yeah. The the market yeah. We're seeing the market demands very strong. So that's that's why we've accelerated learning center opening. Yeah.
We opened 50 well, 52 learning centers in in in one quarter. Because I think the market size of the K-twelve is huge. I think it's a 50 or $60,000,000,000 market. And and I think the growth potentially will be less than the 15% to 20% CAGR going forward. But even we are the the largest player in the market, our market share is still below 2%.
And also, don't forget, we spent a $100,000,000 in the last two, three years to build out our overall system. So we're quite confident that we have the best product and features in the home market. And this is the the key driver of the potential growth. And and and I want to add one point of the summer promotion. You know, since the several years ago let's say, the five years ago in Beijing first firstly, we we started to acquire the student with a low price in the summer in the summer for the first seven students.
And last year, we conducted a large scale in 27 cities to to to get 12,000 student enrollment in the summer promotion. And this year, I think we did more. So I think we and the retention rates will be higher than last year. So we'll we'll by this way, we can take more market share going forward. This is my opinion to the whole market.
And second is dual teacher model. I think in in some, you know, in some low tier cities, I think the best way for us to penetrate the market is to is to do the dual teacher model. You know, we opened six new cities in fiscal year seventeen, and we will open five to 10 new cities to in new cities to do the dual teacher model in the fiscal year eighteen. And it's a good way for us to share the top word start teachers teaching experience with the students in the low tier cities. And also, you know, yeah, as I said in the last earnings call, you know, in last November, we successfully passed that.
The one teacher can stay to 20 classes out of the 39 classes at the same time. So it's the best way for us to penetrate the low tier city market.
Speaker 0
Our next question is coming from the line of Alex Liu from Daiwa Capital. Please ask your question.
Speaker 6
Yes. Thanks, Sisi and Steven for this opportunity. I understand,
Speaker 3
I think the management seems to
Speaker 6
be quite positive on overall momentums on both enrollment and also utilizations next year. I'm just wondering in terms of the magnitude of the margin expansion in 2018, how should we think about it going forward? And also a quick question on overseas test prep. Is there any latest updates or metrics that you can share with us on the on the turnaround of this business? Thanks.
Speaker 2
Okay. I think we will keep the the the same tone of the margin guidance. You know, our target is to get 70 or 18 operating margin GAAP operating margin in next two to three years. You know, in the last two years, every year, we got the margin expansion by one or one thirty bps. And I think the trend will will be will be continuously in in in the fiscal year '18.
And, yeah, that's the margin guidance. And the overseas test prep, yes, if you see the top line growth of the overseas test prep in Q4 in this quarter, in RMB terms, the top line growth was 17%. But the whole year of the in the whole year of the fiscal year twenty seventeen, it was only 9%. So we I think we do see the top line growth acceleration for overseas Tesla since this quarter. And for the fiscal year twenty eighteen, I think the top line growth of the overseas test lab will be 10 to 15% year over year in RMB terms or maybe better.
I think we are doing the same onlineoffline integrated product as we did in 2012 for overseas test app. And because more and more younger the young students enroll into the overseas test lab class, and I think they like the new O2O product. And also, added the KPI. We added the overseas prep enrollment growth into the local school KPI. So this is the change of this year.
So it pushed the local school hubs to do more for the overseas test prep business. Okay?
Speaker 0
Yes, thanks.
Speaker 2
Thank you. Our
Speaker 0
next question is coming from the line of Joey Sal from Credit Suisse. Please ask your question.
Speaker 7
Hi, management. Thank you for taking my question. I have three questions. First of all, a follow-up on your previous comment. When you said like a revenue growth to accelerate in FY 2018, do you mean like in RMB term or U.
S. Dollar term? Second question is both. Okay. And then second question right.
Okay. Great. Yeah. Regarding the deferred revenue, it seems to be very strong this quarter. Could you share with us a percentage of the summer to autumn joint enrollment, I.
E. Shu Cholian Bao? And also, what's the cash revenue growth quarter to date? And then third question is, we've been seeing a very strong K-twelve revenue growth of 40% to 50% for over a year now. How much further do you think this momentum could continue into the years?
Thank you.
Speaker 2
Okay. You have lot of questions. For run for revenue, yes, the know, Q4 is the the big season of the the K-twelve enrollment for the summer and some of the in some of the autumn enrollment. So the the trends were strong. And and the the cash revenue yeah.
We we don't disclose the the first seven or eight weeks cash revenue this time, but I can say that it's it's it's the the I think that's strong as well because, you know, don't forget, the VIP registration peak season happened in June. We changed since last year. December and June are the the two peak season for the VIP enrollment growth. And what's the last question? Okay.
The k 12 business trends.
Speaker 7
Yeah. So yeah. How how how long further do you think this 40 to 50% revenue growth could continue into the years?
Speaker 2
Well, As I said, you know you know we're the largest player in the market, but our market share is below 2%. So it's a long way to go. And if we do the the right thing or if we are on right way, I think we can we can get the the same well, the the the same growth in our latest next three years because, you know, the market is so so strong. And I don't think the nobody else can can afford a $100,000,000 on the product as we did in in in the last two, three years. And also, you know, we New Oriental have been famous by well paid to the teachers.
So we have best teachers in the market. So the best product combined with Google teachers, we're quite confident about the top line growth in next three or five years. Thank you. Our
Speaker 0
next question is coming from the line of Ivy Law from Macquarie. Please ask your question.
Speaker 8
Thank you, Steven. Thanks, Sigdi, for taking my question again. I have two questions. One is just to follow-up on the summer promotion. So how many courses on average are we seeing each student get enrolled in for the summer courses?
And specifically for the summer courses, what's the retention rate that we're expecting for them to get into the autumn? And the second question is to follow-up on our the the our best teacher that we have and the teacher salary. So how what's the number of the teacher that we have right now? And what do we expect the teacher salary to increase going forward in FY eighteen? That's my two questions.
Thank you.
Speaker 2
Okay. This summer promotion. Yeah. You know, typically in the big cities like Beijing and Shanghai, in the big cities, these students are enrolled these summer courses for for two to three courses at the same time. So even in larger cities, some students choose from one subject.
So this is what what we're we're seeing. And for the yeah. Student retention rates of the summer promotion, you know, last year in big cities, the student retention rates in autumn after the summer promotion was 40%. And this year, we hope the retention rate in both cities will be over 50%. And the teacher salary, yeah, the we have 22,000 teachers in hand now.
And the teacher I think the headcount increase in the fiscal year 2018 will be five to 10%. This is this is the teacher headcount increase. And the teacher's salary inflation will be eight to 9% year over year. And the the but we give the good teachers more teaching hours. So that means the good teachers, the seller package will be impressed a lot.
Thank
Speaker 8
you. Very helpful. Thanks.
Speaker 2
Thank you.
Speaker 0
My
Speaker 3
question is on sales and marketing costs because we saw a drop in sales and marketing costs as a percent of revenue in the quarter. So I'm just wondering if that's because of what we did in last quarter in terms of the bundle enrollments and that's led to this relative drop in sales and marketing costs in the quarter. The other question I wanted to ask was on the divergence between your enrollment and revenue between the U Can and POP Kids businesses. Because with U Can, we saw enrollment growing faster than revenue, but POP Kids, was the other way around. So I wanted to know if there was anything particular that we should that we should pay attention to with regard to this.
Speaker 2
Okay. Yeah. The selling and marketing expense, you know, the the the marketing activity is not our priority to acquire students. I think, you know, we we rely on the the new auto product. So we don't need to spend a lot on the selling and marketing expenses, and not only for this quarter, but also for the for the whole year going forward.
So in the fiscal year twenty eighteen, I think we expect the as a percentage of revenue, the selling market the selling market expenses will be down as a percentage of the revenue. And enrollment growth. I think both of the both the UCan and POP Kids enrollment growth are pretty well. I think the trend is okay.
Speaker 1
Yeah. Actually, the the revenue the gap between the revenue growth and enrollment growth for UCan business this quarter is mainly because of the contribution from VIP revenue is lower lower than normal because of the preregistration in December. Okay.
Speaker 3
I see. And so that means that affects your you can more.
Speaker 2
Is that correct? Yes. Yes. Because there's there's no material VIP business in in process.
Speaker 5
Yeah.
Speaker 3
Thank you.
Speaker 2
Thanks, Andrew.
Speaker 0
Our next question is coming from the line of Lucy Yu from Bank of America. Please ask your question.
Speaker 9
Hi, management. Thanks for taking my questions. One quick question on the dual teacher model. You mentioned that one teacher can take around 39 classes at the same time. Is this an optimal or normalized number of classes that one teacher can take?
If that's the case, then what is the margin look like on that particular class of dual teacher? Thank you.
Speaker 2
Okay. Yes. We just tested the one teacher can fit to how many classes at the same time. You know, in November in last November, the one teacher can fit to 39 classes at same time maximum. But in last month, I heard from the my staff that the one teacher can fit to 80 classes for the PubMed classes.
So I don't know what is maximum numbers. But on average, I think the one teacher can fit to 20 classes at the same time. But, you know, it it will help the margin expansion because the one teacher can fit to, let's say, the 400 or 500 students because, you know, 20 or 25 students are fit in the one classroom. So one teacher can fit to 20, it will drive the margin and extension. So that's it.
This is the the business model for the dual teacher model.
Speaker 9
So it sorry. One follow-up. If, say, one teacher can take 20 classes at at the same time, how much does the margin look like?
Speaker 2
I think it's too early to say the margin because, you know, we just piloted the program since four quarters ago. And but I think going forward, if, to some extent, the margin of the dual teacher model should be 5% higher than the traditional offline classes. Is that clear?
Speaker 9
Yes. Thank you.
Speaker 2
Okay. Thanks.
Speaker 0
Our next question is coming from the line of Allison Lee from CLSA. Please ask your question.
Speaker 1
Hi, management. Thank you for taking my question. I'm asking on behalf of Mariana. I was wondering how is the Q1 trending in terms of enrollment for K-twelve and overseas prep and also like what's the ASP? And my second question is I just want to confirm what's the non GAAP EBIT margin for FY 2018?
I think you mentioned the margin before, but I just want to confirm the numbers. Thank you.
Speaker 2
So sorry, the voice is not very clear. I can't follow your second question. I think your question is about non GAAP operating margin. Okay. The K-twelve business, I think going forward in RMB terms, the top line growth will be 40% to 45% or maybe more.
And the less volume the price the hourly price increase will be five to 9% year over year. So the others will be the volume growth or the enrollment growth. And the non GAAP operating margin for yes, as I said, the non GAAP operating margin, our target is to get 18% to 19% in the next two to three years. What I said is non GAAP operating margin. So the margin will will be extended step by step as they did in the last two two years.
Okay. Thank you very much. Okay. Thanks.
Speaker 0
Our next question is coming from the line of Cheryl Yang from CICC. Please ask your question.
Speaker 9
Thanks, Stephen and Sisi for taking my question. Could you please share more color on your current growth, the revenue growth of overseas test prep that coming from U. S. Tests?
Speaker 2
We don't disclose the revenue contribution of The United States business line of overseas test prep. But what I can say is the overseas test prep business in United States is the biggest business throughout the overseas test prep. Because most of students choose to study in The United States. This is the biggest market.
Speaker 9
Got it. Thank you very much.
Speaker 0
Our next question is coming from the line of Wayne Wang from HSBC. Please ask your question.
Speaker 4
Hi, management. Thank you for taking my question. So my question is regarding to the coming revenue guidance. So as we have mentioned that the coming revenue guidance would be like Y o Y growth of, say, 20%. So you have mentioned that this kind of revenue growth has related with the relatively seasonality reason.
So may I ask whether like the summer promotion has some impact on the revenue growth as we actually don't generate much revenue from the our entry grade students as we are offering like free classes to those students. So what will be a normalized growth in the future? Like any color will be like very appreciated. And another question about tax rate, effective tax rate. It seems that in this quarter, the effective tax rate is relatively high.
So may what kind of tax rate we should expect in the coming quarters? Thank you.
Speaker 2
Yeah. I think you're right. This summer promotion, the price is very low. So it generates a little bit revenue gap rather than the q one. But in the rest of the year, because of the higher retention rate, I think the the will make up the revenue growth in the rest of the year.
And, yeah, tax rate, yeah, the the the tax rate was 15.3% in this year. And, yeah, the tax rate will certainly move up. I think next year, I got the tax rate will be in a range of 16% to 16.5%. This would be the ETR. Okay.
Thanks.
Speaker 4
Thank you very much.
Speaker 0
We're now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Mr. 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. Thanks.