New Oriental Education & Technology Group - Earnings Call - Q4 2018
July 24, 2018
Transcript
Speaker 0
Good evening, and thank you for standing by for New Oriental's Fourth Quarter and Fiscal Year twenty eighteen Earnings Conference Call. At this time, all participants are in listen only mode. After the 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 your line now.
I would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead, ma'am.
Speaker 1
Thank you. Hello, everyone, and welcome to New Oriental's fourth fiscal quarter twenty eighteen earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions.
Before we continue, please note that the discussion today will contain forward looking statements made under the Safe Harbor provisions of The U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.
A number of potential risks and uncertainties are outlined in our public filings with the SEC. 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.
Stephen Yang. Please go ahead, Stephen.
Speaker 2
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are very pleased to conclude the fiscal year twenty eighteen with sustained acceleration in our top line growth as well as student enrollments. Net revenues in fiscal year twenty eighteen increased by 36% to $2,447,400,000 Total student enrollment in academic subjects tutoring and test prep courses in fiscal year twenty eighteen increased by 30.3% to approximately 6,329,500. For the year 2018, we added a total of two twenty six new facilities, which include 200 new learning centers in existing cities, 11 offline training facilities in three new cities, 14 dual teacher model facilities in six low tier cities and one kindergarten.
Altogether, our total square meters of classroom area by the end of the fiscal year has expanded by approximately 40% year over year. Strategic expansion was an important focus in fiscal year twenty eighteen, which yielded very positive results. In the fourth quarter, we continue to execute our Optimize the Market strategy and stepped up our capacity expansion efforts in cities with robust growth momentum, supported by our highly efficient operational capabilities. This enables us to seize tremendous market opportunity with our standardized online and offline integrated education system. As we continue to expand our capacity, we remain focused on improving utilization rate and investing in enhancing teaching quality in line with our long term strategy.
Net revenues in the fourth quarter increased to $701,000,000 which is a 44.1% growth year on year, once again delivering outstanding results exceeding our target. In the first quarter, our student enrollments were up approximately 44.9% during the period. The top line growth was driven by the continued momentum in our K-twelve after school tutoring business, achieving a revenue growth of approximately 52% year over year. During the quarter, we added a net of 81 learning centers in around 37 cities. Total student enrollments in dynamic subject tutoring and test prep courses increased by 44.9% year over year to approximately 2,058,000 for the 2018.
To give you a better understanding of the growth in enrollment, I will now talk about our summer promotion efforts. Similar with the last few years, we once again conducted the promotion this summer to regularly secure grade seven students' customers before they start their first year of secondary school. We offered low price experiential courses for multiple subjects in a total of about 48 cities. Once again, the summer promotion was very well received by the market. The promotion enrollment we brought in before the start of the summer holiday in early July this year reached 736,000, representing over 32% increase comparing with the same period of last year.
Please note that we do not include this promotion enrollment in our reported enrollments. On the whole, we're very pleased with this outcome. And this year, we will become even more focused in retaining a larger portion of students following the promotion, which will boost revenue and drive profit growth throughout the whole fiscal year 2019. It's equally important to know that due to 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 are confident that our summer promotion will continue to be a successful and highly profitable strategy to rapidly increase market share in the high growth K-twelve after school tutoring market.
As these students move from grade seven through to grade 12, the continued improvement in retention rate and customer loyalty will drive revenue growth in the next three to six years. I will now turn to pricing. For program blended ASP, which is cash revenue divided by total student enrollment, increased by about 0.5% year over year. Hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 3% year over year in RMB terms. To provide a breakdown of the hourly blended ASP, please note that U Can program increased by 3%, POP Kids program increased by 3% and Overseas Test Prep program increased by 16% all year over year in RMB terms.
We're very encouraged by the fact that operating margin in our language training and test prep business in this quarter remains constant year over year, even with the increase in our overall capacity by approximately 40% year over year, showing that margin pressure in previous three quarters has eased off. Looking ahead into fiscal year twenty nineteen, we aim to add approximately 20 to 25% new teaching facilities in existing cities, mainly our K-twelve after school business. In addition, we will continue to expand our business into remote areas in China through the rolling out dual teacher model schools and new initiatives in our pure online K-twelve after school tutoring. We will continue to uphold the healthy balance between our strong growth momentum with our efforts improving the utilization rates of our facilities and approach cost control in the most efficient manner. With these strategies in place, we're confident in our efforts in delivering sustainable long term value to our customers and shareholders.
Now, let us move on to the fourth quarter performance across our individual business lines. Our key revenue driver, K-twelve all subjects after school tutoring business achieved revenue growth of about 52% year over year in dollar terms, driven by the significant growth in our enrollments by about 52% year over year. For the entire fiscal year, the K-twelve business saw a revenue increase of about 46%. Breaking it down, the UCAM middle school high school all subjects after school tutoring business recorded a revenue growth increase of about 47 for the fourth quarter and 44% for the fiscal year. Student enrollments grew approximately 53% year over year for the quarter and 37% for the fiscal year.
Our POP Kids program revenue delivered outstanding results with revenue up by about 65% for the first quarter and 51% for the fiscal year. Enrollments went up by about 50% for the quarter and 39% for the fiscal year. Our overseas test prep and consulting business together reported revenue growth of about 33% year over year in the first quarter and 23% for the fiscal year. Finally, VIP personalized class business recorded revenue growth of about 40% year over year for the quarter and 32% for the fiscal year. Next, I will provide some updates on progress we are making with our Optimize Market strategy.
In consistent with our long term plan, we have been focusing on expanding our capacity by investing in the build out of our ultra integrated education system and this continues to produce very promising results. We will start with our offline business. In the 2018, we added a net of 81 learning centers in 37 existing cities. For fiscal year twenty eighteen, we added a total of two twenty six new facilities, including 200 new learning centers in existing cities, 11 offline training facilities in three new cities, 14 dual teacher model facilities in six low tier cities and kindergarten. Similar growth opportunities we see in the low tier cities, We continue to roll out our dual teacher model schools and expand our businesses into remote areas in China.
We began to pilot the dual new dual teacher model class in select cities in July 2016 and by the end of the fiscal year 2018, the new offerings have been tested in our top kids program in over 35 existing cities, in our UK program in 26 existing cities and 12 new cities for both business lines. We're delighted to see increased market penetration in the markets we're investing in. With this new model, we were also able to achieve enhanced customer retention rates and scalability. The results are deeply encouraging and we'll continue to implement this strategy in the coming new fiscal year. Regarding our online business, we invested $23,500,000 in the first quarter and $75,900,000 in total for fiscal year twenty eighteen to improve and maintain our O2O integrated education ecosystem.
Most of the investments were reported under G and A expenses. Now I will walk you through some updates on our O2O two way interactive education systems. Since the launching of our U Can Visible Progress Teaching System, VPS, in September 2014, the interactive education system has been deployed in all existing cities. We launched the newly revamped Top Kids English program Fengyu, our interactive education system in most cities by the end of the fourth quarter in fiscal year twenty eighteen. It has also been gradually implemented in an increasing number of cities across China.
The interactive education system for overseas test prep program, including IELTS, TOEFL and SAT courses was rolled out and tested in most major cities by end of the fourth quarter. Meanwhile, we also standardized product offerings across seven cities, including Shenzhen, Xiamen, Changsha, Hefei, Nanjing, Suzhou and Hangzhou. We also made strides in the coollearn.com business line and other supplementary online education products. Now let me walk you through the other key financial details for the fourth quarter. Operating costs and expenses for the quarter were $644,400,000 representing 48.3% increase year over year.
Non GAAP operating costs and expenses for the quarter, which exclude share based compensation expenses, were $622,200,000 representing a 46.2% increase year over year. Cost of revenue increased by 50.3% year over year to $299,500,000 primarily due to increase in teachers' compensation for more teaching hours and rental costs for increased number of schools and learning centers in operation as we continue to facilitate our capacity expansion strategy. Selling and marketing expenses increased by 52.4% year over year to 101,000,000 primarily due to increase in brand promotion expenses and compensation for the selling and marketing staff. General and administrative expenses for the quarter increased by 44.4% year over year to $243,900,000 Non GAAP general and administrative expenses, which excludes share based compensation expenses were $221,700,000 representing a 38.6% increase year over year. Total share based compensation expenses, which were allocated to related operating costs and expenses, increased by 147.6 to $22,200,000 in the 2018.
Operating income for the quarter was $56,600,000 a 9.2% increase from $51,800,000 in the same period of prior fiscal year. Non GAAP income from operations for the quarter was $78,800,000 a 29.6% increase from $60,800,000 in the same period of prior fiscal year. Operating margin for the quarter was 8.1 compared to 10.7% in the same period of prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter, was 11.2% compared to 12.5% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $65,100,000 representing a 17.4% increase from the same period of prior fiscal year.
Both basic and diluted earnings per ADS attributable to New Oriental was $0.41 Non GAAP net income attributable to New Oriental for the quarter was $87,300,000 representing a 35.6% increase from the same period of prior fiscal year. Both non GAAP basic and diluted earnings per ADS attributable to New Oriental was $0.55 Net operating cash flow for the 2018 was approximately $294,700,000 Capital expenditures for the quarter was $54,400,000 which were primarily attributable to the opening of 96 learning centers and renovations at existing learning centers. Turning to the balance sheet. At the end of the fourth quarter, the deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered, was NT1270.2 million dollars an increase of 46.6% from 866,600,000 at the end of the 2017. Before moving on to our priority for fiscal year twenty nineteen, I would like to take a moment to reiterate our overarching goals for the future and our optimized market strategy.
To give you more specifics on our areas of focus. First, we will continue to expand our offline business in consistent with our long term plan. We aim to add around 20% to 25% new learning centers and expand classroom area of some existing learning centers for K-twelve after school tutoring business in existing cities. Meanwhile, we also plan to further roll out our dual teacher model schools in low tier cities in China. Second, we will continue to leverage our investments in our O2O integration and initiatives in our pure online education offerings.
As always, we will focus on product refinements and maintenance for the O2O system for K-twelve business and continue to revamp and roll out our O2O standardized teaching system for overseas test prep business. We believe the total spending in absolute dollar terms in fiscal year twenty nineteen will increase moderately compared with the prior fiscal year as we continue our investments in new initiatives including content development, teacher recruiting and training as well as sales and marketing expenses in online K-twelve after school tutoring business on our koolearn.com platforms. Third, our top priority remains improving utilization of facilities and controlling costs across the entire company to enhance our margins and operational effectiveness. Look at the near term and our expectations for the next quarter. We expect total net revenues in 2019 to be in the range of 8 and $29,900,000 to $815,000,000 representing year over year growth in the range of 26% to 29%.
Traditionally, our overseas test drive business has a relatively large contribution to the overall business in the first quarter compared to the rest of the year. Thus, the overall year over year growth rates for the first quarter tends to be as lowest as compared to the other quarters. In view of this, we anticipate an upward trend to emerge throughout the whole fiscal year. I must mention that these expectations reflect New Oriental's current and premium view, which is subject to change. At this point, I will take your questions.
Operator, please open the call for beef. Thank you. Sure, sir.
Speaker 0
The question and answer session for this conference call will start in a moment. In order to be fair to all the 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. We have our first question coming from Jin Yoon from New Street.
Speaker 2
Please go ahead. Ask your question.
Speaker 3
Hi, good morning guys. So on your Cool Learn filings, said that you guys plan to rapidly expand the K-twelve enrollments. I'm just kind of wondering what this means in terms of marketing investments this year, if it's in line with your previous commentary regarding guidance, regarding the weight of where the investment cycle is going to hit. And at the same time, how should we see the 25% capacity expansion kind of hit throughout the year in terms of the weighting of that as well versus first half versus second half? Thanks, guys.
Speaker 2
Okay. Thanks, Jin. Let me answer your second question first. In terms of the expansion, yes, we don't forget, we added two twenty six learning centers this year and we got the 40% growth of the classroom area year over year this year. So we made a lot this year.
And next year based on our current budget, we believe the expansion plan in 2019 will be 20% to 25%. I think the first priority for the next fiscal year will be the job of that we fill the students into the learning centers we set up this year. And I think in the first half of the year and second half of the year, I think the learning center number we set up in next year will be average. And for your first question about, yeah, we Koolearn has submitted the application for the listing on the main board in Hong Kong stock market. So at this stage, we can't say too much about cooler things.
And so we can't comment on the numbers of the cooler. And in terms of the investment of the online, I think we will keep invest on the online items such as the content development, teacher recruiting and some marketing staff. And because we started to bear fruits from the investment we made in recent years. And we know the online, both the O2O and pure online are our first priority of all our jobs. And we think I think the students like the online way to learn something.
But on the other hand, offline business is still growing very fast. So we carry the two parts at the same time. Great.
Speaker 3
Thank you, guys.
Speaker 4
Thanks.
Speaker 0
Thank you. We have our next question coming from the line of Talan Chao from Deutsche Bank. Please go ahead.
Speaker 2
Hi management. I have a question on the guidance. The first quarter guidance growth appeared to slow down on a quarter to quarter basis, but actually it's higher than first quarter last year. I just want management to elaborate a little bit on, for example, the currency change and for example, product mix K-twelve versus non K-twelve? Thanks.
Okay. It's a great question, Tyler. And our Q1 twenty nineteen guidance year over year growth is in the range of 26% to 29% in dollar terms. Actually, I think it's very good guidance, because don't forget that our overseas test prep courses has a relatively large contribution in the first quarter compared to the rest the quarters of the year. So if you look back the numbers, the top line growth in the Q1 twenty eighteen was only 23.8, if I'm right, in dollar terms year over year.
But we had a 36% year over year growth for the whole fiscal year of 2018. Even if you take out exchange rate impact, the whole year growth rate is 500 bps higher than the Q1 growth. So we expect the upward trend to emerge for the Q1, even for the whole year. So when you look at the growth, we suggest you guys don't look at the Q on Q growth and you should make your analysis of the year over year growth. And I think in the coming quarter, the K-twelve business will be the key revenue driver same as this year.
And the K-twelve business growth in the dollar term will be 45% to 50%. This is the key driver. And yes, we're seeing the exchange rates change recently. And so that's why we said in our the earnings release that we use the RMB6.6672 as the exchange rate RMB terms versus U. S.
Dollar terms. And that's it. Okay, Helen?
Speaker 5
Thanks. Thanks, Stephen.
Speaker 2
Okay. Thanks, Tyler.
Speaker 0
We have the next question coming from Thomas Chong from Credit Suisse. Please go ahead.
Speaker 6
Hi, thanks Stephen and Sisi for taking my questions. I have a quick question about our strategy in FY 2019 focusing on efficiencies improvement. Can management comment about how we should think about the margin trend in online and the potential drag in online margin expansion in offline and margin drag from online for this year? And my second question is about do we see any potential cannibalization between online and offline? Thank you.
Speaker 2
Okay. The margin question, I think this quarter we got the 130 bps down of the non GAAP operating margin. But the key I want to mention is that we're seeing the offline business, the school business and test prep and K-twelve business, the margin was flattish year over year. So even with we're still seeing the 40% of the expansion plan in this year in this quarter. So that means we started to execute the capacity expansion since the Q4 last year, so the margin pressure in Q4 has eased off.
And going forward, think we do believe the non GAAP operating margin for the language training and test prep business, we call the school business in the coming year will be up year over year due to the expected acceleration of the revenue growth and higher utilization. And in terms of the online business margin, as I said, we can't make more comments on the number of the quarter because of the we submit the application form to the list in Hong Kong main board. But what I can say is that, last year fiscal year twenty eighteen we invested $75,000,000 for both O2O and the online the pure online. And this year we're budgeting the 80,000,000 to $90,000,000 in total. This is our budget of the online investments.
So I can't say the detailed numbers of the margin drag of the online. But the offline business, you'll definitely see the margin expansion going forward.
Speaker 6
Thank you.
Speaker 2
Thanks.
Speaker 0
Thank you, sir. We have the next question coming from the line of Lucy Yu from Bank of America. Please go ahead.
Speaker 7
Hi, Steven. I got one question on the margin. Given that the summer promotion enrollment seems to be better than your previous expectation, is it fair to say that although on a full year basis, non GAAP operating margin is going to expand, but on the first quarter there still might be some pressure on the margin front given the summer promotion? And also are you still comfortable with your full year margin guidance of 100 percentage 100 basis point improvement?
Speaker 2
Okay. Even with regard to the 740,000 summer promotion enrollments, last year that number was half million. This year we increased a little bit of the price of the summer promotion. So we know there will be a little bit margin drag from the summer promotion in the Q1, but for the whole year there is no material impact of the margins by the summer promotion. So we keep the same guidance of the whole year fiscal year 2019.
We don't want to change the guidance. Okay. Thank you.
Speaker 7
Okay. Thank you.
Speaker 0
Thank you. We have the next question coming from John Choi from Daiwa. Please go
Speaker 8
Thanks guys for taking my question. I just have a follow-up on your summer promotion. Could you give us a little bit more color? It's been pretty strong. You said the enrollment has been more than 740,000.
What particular within subjects have been strong? And at the same time, I recall that you guys are aiming for a higher retention rate. Obviously, should that to lead to a better growth going forward? So any color on that will be highly appreciated. And secondly, following up on Stephen, your comment on the expense side, you said that you're going to see a moderate increase here.
So just to see on a like for like basis versus last year operating expense percentage growth versus this year, should we be seeing a lot less and then hence that will be kind of the one of the also another key factors of margin expansion? Thank you.
Speaker 2
Okay. Yes, the summer promotion, yes, as I said, we got 32% of the summer promotion enrollment growth. And we this is now the first year and we've tested several years ago. So but this year, we care more about the retention rates. So we believe the student retention rates after the summer promotion, which will be happening in autumn, the retention rates will be higher than last year by 5% to 10% higher.
So that's why I said we care more about the higher student retention rate. And we do believe the summer promotion will continue to be a successful and effective way to take more market share because the whole market grew very fast. And these students moved from grade seven to grade 12, so we can keep them as much as we can. And last year after the autumn for the summer promotions during enrollment, 90% are still with us in winter and after. So that means this is a smart way to take more market share.
So this is my answer to your question about the summer promotion. Expenses, yes, I think we spent $75,000,000 in this year. And next year we'll budget the $90,000,000 and but we would like to spend more from $75,000,000 to $90,000,000 because of the investments we spent in last three years together it's over $150,000,000 in the last three years. But we're seeing the feedback of the parents and customers are very good and we're seeing the student retention rates getting higher to over 85%. So that means that we bear fruit of the investment.
So we prefer to invest more going forward. Yes, if we spend like the $90,000,000 we still have the leverage on the margin side. Thanks.
Speaker 0
We have the next question coming from Terry Wong from Blue Lotus. Please go ahead.
Speaker 9
Hi management. I had one question regarding the online business. Right now, the online education has 72% revenue from the university education and 13% from the K-twelve business. So is the business model between these two business had a big difference? And what is our strategy to expand the K-twelve online business in the future?
Thank you.
Speaker 2
Okay. Yes, as I said, I can make more comments on the online thecooler.com. But you're right, historically the domestic test prep and overseas test prep, the adult business contribute more the revenue of the coollearn.com. But K-twelve is future. So in the last several quarters, we made a lot of efforts for the pure online K-twelve business, because the market is huge, even for the offline worthy online market.
So we will focus more on K-twelve pure online business. Thank you.
Speaker 0
The next question comes from Sheng Zhong from Morgan Stanley. Please go ahead.
Speaker 10
Hi, Stephen, this my question. First one is about our capacity expansion You mentioned that you will add penetration to lower tier cities. So in terms of our capacity, how we should look at the split between Tier one and two cities versus lower tier cities. And you have a dual teacher model.
So we do use more dual teacher model to cover the lower tier cities. So for now, what our margin and retention, these operating metrics for our dual teacher model? Thank you.
Speaker 2
Yes. In terms of the expansion plan, as I said, we plan to add 20% to 25% in the coming New Year. And I think we will use the same strategy as we used in the fiscal year 2018. We will choose the good performance schools to open more learning centers, whether it's high tier or low tier. And in the low tier, even for the new cities, I think the most learning centers we set up will be rolled out the dual teacher model.
And the dual teacher model is growing very fast. But because of the low base, the revenue contribution is rather low. And I think it's still early to say the margin of the dual teacher model because it's too early. But throughout the way in the future, I think the margin of the dual teacher model should be higher than the offline business because the one teacher can face to so many students at the same time. And all the other costs are those similar.
This is the margin trend of the dual teacher model.
Speaker 10
Thank you. Can I add one more question? Quick one. You have a redeemable yes, thank you. You have a redeemable non controlling interest of around RMB200 million this quarter.
So what is this?
Speaker 2
Okay. Your question is about the NCI. I think, yes, as the part of the reason of the coolern.com and some other companies, but it's not a material number.
Speaker 10
Thank you.
Speaker 2
Thanks. Hello? Hello, operator? Go ahead.
Speaker 1
Hello. Hi. Is it Edwin?
Speaker 2
Yes.
Speaker 1
Yes, you can go ahead ask your question. We're contacting operator now. So it seems that the operator got cut off. So you can ask your question. Yes.
Go ahead.
Speaker 4
Yes, sure. Hi, Stephen. Congrats on the strong results and good guidance for the first quarter. Just want to get some updates on the operating metrics, for example, retention rates and the capacity utilization in the fourth quarter, especially for the K-twelve? And also regarding your guidance for the first quarter, how much have you priced in for the overseas as part business growth in the first quarter?
I think you mentioned the K-twelve is like 40%, 50%, but I missed that point. Just can you reiterate?
Speaker 2
Thank you. I think, yes, in the coming Q1, the guidance, the K-twelve business, the growth rate will be 45% to 50%. And the overseas test prep, I think the growth rate will be single digit. It's close to 10% year over year. And typically, we don't give the guidance of the student retention rates and the utilization rates in the new quarter.
But I think the trend is going up. We're seeing the last so many quarters, the student return rates for both the POP Kids and U Can program have been got higher. So based on the trends, I think we do believe the student retention rates in the coming quarter will be higher year over year. You will have Yes, different sure. And Can you hear me?
Speaker 4
Sorry, go ahead. Go ahead.
Speaker 2
Okay. In terms of the utilization rate, I think, yeah, in the Q1, we'll slow down a little bit the expansion plan, because we set up the 40% new expansion in the fiscal year 2018. And so the first job in the coming quarter or the whole coming New Year is to fill the students into the old learning centers. But anyway, we will set up 20% to 25% new learning centers in the coming New Year. That's the top line growth in the coming New Year will be 30% year over year.
This is my current estimation. And so we do have to leverage on the utilization rates going forward even for the Q1 and the whole year. Yeah. Thank you. Understood.
Just to follow-up, what's the utilization and
Speaker 4
the retention for the fourth quarter, the quarter just passed? Can you give
Speaker 2
us some updates for Okay. The student retention rate for the K-twelve business together, the retention rate was 84% in the Q4. Here you see the trend is getting up. And utilization rates, in the Q4 the utilization rate is 21%, it's similar compared to the last year Q4. Okay.
And it's caused the margin flattish of the school business. Okay. Thank you. Thank you. Thank you so much.
Speaker 11
Your next question comes from the line of John Wong. Please ask your question.
Speaker 8
Okay.
Speaker 12
Hi, this is Wendy Huang from Macquarie. First, I just want to clarify on your 20% to 25% capacity expansion guidance. And you mentioned this is just the capacity expansion for the existing cities, right? So what would be the overall capacity expansion ratio if we include the dual teacher model and new cities and others? And also given that the revenue growth rate will be the slowest in Q1 versus full year, how should we expect the margin trend in the coming Q1?
Thank you.
Speaker 2
Okay. Yeah. I must clarify that the 20% to 25% is the net expansion plan for overall business. It includes everything. This is our budget.
Whether the it includes everything, okay, offline business, dual teacher model and everything, okay. And the Q1, yes, as I said, the I think we do believe the non GAAP operating margin of these the language training and the tech rep and the K-twelve business, the margin will be up or at least flattish in the Q1 in the coming Q1. But we do have some drag for the other business. I think for the whole year, you will see the margin expansion for the whole year.
Speaker 12
Sorry, the flattish for the overall or just for the offline for Q1?
Speaker 2
The offline is flattish to up of the school business. What
Speaker 12
would be the blended margin for the Q1?
Speaker 2
Think the margin of the Q1 based on our current estimation, this will be slightly down.
Speaker 7
Thank you, Stephen. Thanks.
Speaker 11
Our next question comes from the line of Julia Pan from UOB. Please ask your question.
Speaker 7
Thanks, Meng Chen for taking my question. Just a quick one. I noticed that you have a really strong growth in your deferred revenue, which is almost 47%. I'm just wondering what would be the major gap between your deferred revenue growth and your guidance of 26% to 29% of next quarter's guidance? And another question is regarding your VIP business.
You mentioned that I guess you mentioned that VIP business recorded over 40% year on year growth. I'm wondering, do you see maybe a faster growth in the premium after school tutoring market? And also do you see maybe your standardized operation in VIP business could improve the maybe traditional consider as lower margin VIP business?
Speaker 12
That's my question. Thank you.
Speaker 2
Okay. Yes, your first question is about deferred revenue. Yes, we saw very high growth of the deferred revenue balance. But I think I mentioned in the last earnings call, since the Q2 last year, we started to bundle the winter and the spring courses registration in Q2 and the summer and some autumn courses registration in Q4. So I think this is the reason that to explain the gap of the higher deferred revenue growth with the top line growth of the coming Q1.
So this is my answer for first question. What's your second question?
Speaker 7
Your VIP business.
Speaker 2
Okay. Yes, we saw very strong the VIP business growth in this quarter of 40%. But anyway, the growth rate is slower than the small sized class. So going forward, I think the revenue contribution from the VIP business will be limited. What I mean is going forward, the small sized and large sized class, the growth rates will be higher than the VIP business.
But I think if you not make another sort of our VIP business, the margin of the VIP business itself is getting higher.
Speaker 7
Thanks. Okay. Thank you.
Speaker 11
Our next question comes from the line of Eric Qiu from PCPPI. Please ask your question.
Speaker 13
Good evening, management. Thank you for taking my question. I just want to ask about the relationship between the enrollment and the revenue. Since this year 2018, the student enrollment is 30% year over year, while the revenue growth was 36. So this is what bit different from two years the last two years, while the revenue growth fall behind of the enrollment.
So I just wondering to ask the relationship of it. Thanks.
Speaker 1
Yes. So historically, our revenue growth is higher than enrollment growth. That's the basically the hourly rate increase is similar with our per program ASP increase. The last one to two years as we keep rolling out new programs and we're seeing that the class months changed for both POP Kids and U Can program. So that's why if you do the calculation by dividing the cash revenue divided by enrollments, the ASP per program ASP increase is lower because the shortened program length.
So that's one key reason for different programs it happened for both POP Kids and You Can program. It do varies by quarter. And also please pay attention that our enrollment calculation is based on cash basis. But the revenue growth GAAP revenue growth is based on an accrual basis. So it's different.
Okay. So I you
Speaker 2
guys to make the analysis of the enrollment and GAAP revenue in yearly basis. If you look at the numbers in a long term, that will be okay. Okay. Thanks.
Speaker 13
Okay. Thank you. One follow-up question. So for the revenue growth, can you elaborate about like how much was from the first or second tier cities while the others are from the low tier cities and also the prospects? Thank you.
Speaker 2
For the K-twelve business, the top five cities, the revenue contribution for the top five cities was 43% in this quarter. But even for the top five cities, got 40% top line growth in this quarter. So what I mean is even in the first tier or second tier cities, the big cities, they're still getting the higher growth year over year.
Speaker 4
Thank you.
Speaker 11
Our next question comes from the line of Andrew Lam from Thompson Asia. May I remind everyone to ask one question per person? Thank you. You may ask your question now.
Speaker 14
Hi management, just want to ask the impact of higher in terms of the Gaokao, in terms of the English test change where students are allowed to take three English tests in terms of their Gaokao exams, what is that impact on your English courses for your K-twelve business segments?
Speaker 2
Yes, I think it's a neutral to positive impact to us because the new policy allows students to take more the test of the Gaokao English. So typically the Chinese students take at least twice to try to get higher scores. So it's produced more retakers for us. So I think we will have the positive impact from the new policy.
Speaker 14
Understand. Okay. Sorry, just a follow-up question. I just want to understand the utilization rate in the top five cities for your K-twelve and also the lower tier cities in terms of the revenue contribution? Are you able to provide this statistic?
Speaker 2
We don't disclose the utilization rates by cities. But what I can say is the higher tier cities, the utilization rate is higher than the low tier cities.
Speaker 14
By how much or around Sorry,
Speaker 2
we don't need to disclose to the market because we have 30 cities.
Speaker 14
Understand, understand. Okay, thank you very much management.
Speaker 2
Thanks.
Speaker 11
Your next question comes from the line of Jeffrey Chan from CLSA. Please ask your question.
Speaker 5
Hello, thank you for taking my question. I would like to ask, can you walk us through the share option expense guidance for the next fiscal year and the quarterly split of this number? Thank you.
Speaker 2
Okay. I think this year the stock based compensation for the whole year was $57,000,000 Next year, I just want to guide these stock based compensation similar numbers compared to this year. Sorry, I missed it just now. Can you repeat this? This year it's $57,400,000 Next year same number.
Speaker 5
Okay. Thank you management.
Speaker 2
Thanks.
Speaker 11
There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.
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 again.
Speaker 11
Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.