New Oriental Education & Technology Group - Earnings Call - Q4 2019
July 23, 2019
Transcript
Speaker 0
Good evening and thank you for standing by for New Oriental's Fourth Fiscal Quarter and Fiscal Year twenty nineteen Earnings Conference Call. At this time, all participants are in listen only mode. After management prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.
I would like to turn the meeting over to your host for today's conference, Ms. Cece Jiao. Thank you. Please go ahead.
Speaker 1
Thank you.
Speaker 0
Yes, thank you. Hello everyone and welcome to New Oriental's fourth fiscal quarter and fiscal year twenty nineteen 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. New Oriental does not undertake any obligation to update any forward looking 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 are very pleased conclude fiscal year twenty nineteen on a strong note with robust growth in the top line as well as improvement in operating margin. In fiscal year twenty nineteen, we reported net revenue of $3,096,500,000 representing a 26.5% increase year over year or 31.4% if computed in RMB. Total student enrollments, academic subjects tutoring and test prep courses in fiscal year twenty nineteen increased by 32.4% to approximately 1,382,700.
During fiscal year twenty nineteen, we added a total of 152 new facilities, which includes 141 new learning centers in existing cities, nine offline training facilities in six new cities, and two dual teacher model facilities in two low tier cities. Altogether, our total square meters of classroom area by the end of the fiscal year has expanded by approximately 24% year over year. We also continue to strategically deepen our investments into the dual teacher model classes and new initiatives for K-twelve tutoring in our pure education platform, coollearn.com. With innovative application technology in our education services, we are well placed to continue to capture new business opportunities in low tier cities and remote areas. In the fourth quarter, we continued to execute our well proven optimized market strategy and focused our efforts in improving utilization in facilities and controlling cost expenses.
This has enabled us to tap into tremendous market opportunities with our standardized online offline integrated education system. As we continue to expand our capacity, we remain focused on improving utilization rates, investing in enhancing teaching quality in line with our long term strategy. In the 2019, we reported revenue of $842,900,000 representing a 20.2% increase year over year or 28.4% if computes in RMB. Net revenue from education program and services for the fourth quarter were $717,000,000 representing a 25.1% increase year over year or 33.6% if computed in RMB. The growth was mainly driven by increase in student enrollment in K-twelve after school tutoring courses.
Total student enrollments in academic subjects tutoring and test prep courses in the 2019 increased by 33.9% year over year to approximately $2,756,000 I will now turn to pricing. Program blended ASP, which is cash revenue divided by total student enrollments, decreased by about 18% year over year. Please note that the lower than normal blended ASP is primarily due to the change in tuition fees collection schedule for our K-twelve after school tutoring courses. We split the autumn semester into two parts, similar to what we did in the spring semester. The total the number of the students recruited and the amount of the fee collected during the quarter only cover the first half of the autumn semester.
This is different from the past. We historically collected the full sum of the tuition fee for autumn semester in the fourth quarter. The change in tuition collection schedule therefore means our blended ASP for the 2019 appears to be lower. Hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 10% year over year in RMB terms. To provide a breakdown of the hourly blended ASP, UCAN middle schoolhigh school increased by 10%, POP Kids increased by 12%, and the Oversea Test Lab program increased by 7% all year over year in RMB terms.
Our solid progress in fiscal year twenty nineteen is in line with our expansion plan and our emphasis on improving our operational efficiency. We would like to highlight that we once again delivered another year over year operating margin expansion in this quarter. During the quarter, our non GAAP operating income increased by 30.3% year over year to approximately $102,700,000 And non GAAP operating margin rose by 100 basis point to 12.2% from 11.2% a year ago. As we enter fiscal year twenty twenty, we will continue to leverage our onlineoffline integrated education system across all business lines and improve efficiency using standardized, modularized and systemized operating processes. We're confident that we will be able to deliver continued margin expansion and generate sustainable long term value for our customers and shareholders.
We will we will also like to take the chance to talk about our recent summer promotion strategy, which has delivered outstanding results. In consistent with the last few years, we launched the summer promotion this year to rapidly secure grade seven students' customers before they start their first year of secondary school. We offered low priced experiential courses for multiple set subjects in total of about 43 cities. We're extremely pleased to see that even with an increase in our promotion price from around RMB200 to around RMB400, the summer promotion remains very well received by the market. In fact, the promotional enrollments we brought in before the start of the summer holiday in early July this year saw a 4% increase comparing the same period of last year, reaching 765,400 enrollments.
Under this strategy, we're also able to better identify and retain customers with higher loyalty. And overall, we are pleased to see the higher positive outcome. Please note that these promotion enrollments are not recorded in our reported enrollments. Looking ahead, this year, we will become even more focused on efforts in retaining a larger portion of students following the promotion, which will boost revenue and drive profit growth throughout the fiscal year 2020. We do not foresee any negative impact of the promotions on operating margin throughout the whole fiscal year.
We're confident that the summer promotion will continue to be a sound and highly profitable strategy to rapidly increase and secure 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 six years. 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 year over year revenue growth of 29% in dollar terms or 37% in RMB terms. We should highlight that, as we have mentioned in last quarter's earnings call, we moved one week of K-twelve tutoring classes from March to June to ensure our teachers have enough time to complete the licensing procedures.
Therefore, our K-twelve tutoring revenue in this quarter saw a degree of impact from the arrangement. The revenue related to the adjustment will be recognized in the 2020. Breaking it down, the U Can middle schoolhigh school all subjects after school tutoring business recorded a revenue increase of about 27% in dollar terms or 36% in RMB terms for the quarter. Student enrollments grew approximately 24% year over year for the quarter. The lower than normal enrollment growth is due to delayed registration for classes in certain cities in compliance with the new industry regulation stating that the tuition fees will not be collected more than three months before the class starts.
Our POP Kids program continues to provide outstanding results with revenue up by about 31% in dollar terms or 40% in RMB terms for the quarter. Enrollment was up about 56% for the quarter. The overseas test prep business recorded a revenue increase of 13% in dollar terms or 21% in RMB terms for the quarter. The consultant business recorded revenue growth of about 2% in dollar terms or 9% in RMB terms year over year for the quarter. As we mentioned in the last quarter's earnings call, the adoption of the new accounting standards has led to greater portion of the revenue from the overseas consulting business being recognized in Q3 instead of Q4, which is peak season for the business line.
Finally, VIP personalized class business recorded the cash revenue growth about 14% year over year in dollar terms or 21% in RMB terms year over year for the quarter. Next, I will provide some updates on the progress we're making with our optimized market strategy.
Speaker 3
In consistent with our long term plan, we have been focusing on expanding our capacity by investing in the build out of our online and offline integrated education system, and this continues to produce very promising results. We
Speaker 2
will start with our offline business. In the 2019, we added a net of 65 learning centers in existing cities and opened three offline training schools and one learning centers in the city of Baozhou, Changshu, and Yuzhou. Altogether, this increased the total square meters of classroom area by approximately 24% year over year and 9% quarter over quarter by the end of the quarter. Since July 2016, we started to pilot a new dual teacher model class in select cities. By the end of the 2019, the new offering has been tested in the POP Kids program in 37 existing cities and the UCAM middle schoolhigh school program in 29 cities and in both top kids, U Can K-twelve business in nine new low tier cities.
We're encouraged to see increased market penetration in those markets we have tapped into as a result of the offering. We also saw maintain the customer retention rates and improved scalability generated by the model. We will continue to execute the strategy in the coming new fiscal year given these proven results. Moving on to the online part. We invested $31,500,000 in the quarter to improve and maintain our offline to offline integrated education ecosystem and a total of $103,100,000 for the full fiscal year 2019.
Most of the investments were recorded under G and A expenses. Now I will walk you through some updates on the onlineoffline two way interactive education system. Since the launching of the U Can Visible Progress teaching system in September 2014, the interactive education system has been used in all existing cities. We have launched the newly revamped POP Kids English program Shuangyou in most of the cities by end of the Q4 fiscal year 'nineteen. Also, the interactive education system has been gradually used in more and more cities.
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 Q4 fiscal year 'nineteen. At the same time, we also standardized our product offerings across 14 major cities. We also made strides in the coollearn.com business line and other supplementary online education With the goal of tap into the huge market opportunity in the online education space, we continue to deepen our investment of resources into executing new initiatives in our online K-twelve after school tutoring business during the fiscal year 2019. This includes investments into content development, teachers recruiting and training, sales and marketing, R and D and other costs and expenses necessary to drive the growth of the new online programs. These programs have enabled us to cover more students in both low low tier new cities and higher tier cities covered by our offline business interactive and scalable approach through these programs.
We're confident that this will help coollearn.com gain new market share in the online education market and drive up top line growth. Now let me walk you through the other key financial details for the fourth quarter. Operating cost expenses for the quarter were $765,900,000 representing an 18.9% increase year over year. Non GAAP operating costs and expenses for the quarter, which exclude share based compensation expenses, were $740,200,000 representing a 19% increase year over year. Cost of revenue increased by 24% year over year to $371,200,000 primarily due to increase in teachers' compensation for more teaching hours and rental costs for the increased number of schools and learning centers in operation.
Selling and marketing expenses increased by 4.8% year over year to $105,900,000 General and administrative expenses for the quarter increased by 18.4% year over year to $288,800,000 Non GAAP general and administrative expenses, which exclude share based compensation expenses, were $264,400,000 representing a 19.2% increase year over year. This increase was primarily due to the increased headcount as the company grew its network of schools and learning centers, as well as the increase in R and D expenses and human resources expenses related to the development of company's onlineoffline integrated education system. Total share based compensation expenses, which were allocated to related operating costs and expenses, increased by 15.9% to $25,700,000 in the 2019. Operating income was $77,000,000 a 36% increase from $56,600,000 in the same period of the prior fiscal year. Non GAAP operating income for the quarter was $102,700,000 a 30.3% increase from $78,800,000 in the same period of prior fiscal year.
Operating margin for the quarter was 9.1% compared to 8.1% in the same period of prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses and the changes from fair value change of the long term investment for the quarter was 12.2% compared to 11.2% in the same period of the prior fiscal year. That means our margin expansion was 100 bps up in this quarter. Net income attributable to the
Speaker 0
for the quarter was $43,200,000 representing a 33.5% decrease from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to
Speaker 2
New New Oriental were $0.27 and $0.27 respectively. Non GAAP net income attributable to New Oriental for the quarter was $95,100,000 representing an 8.9% increase from the same period of last year. Non GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.6 and $0.6 respectively. Net operating cash flow for the 2019 was approximately $326,900,000 Capital expenditures for the quarter were $65,300,000 which were primarily due to the opening of 104 learning centers and renovations at the existing learning centers. Turning to the balance sheet.
As of May 3139, New Oriental had cash and cash equivalents of $1,157,100,000 compared to $983,300,000 as of May 3138. In addition, the company had $365,700,000 in term deposits and $1,668,700,000 in short term investments. New Oriental's deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as revenue as the instruction delivered at the end of the 2019 was $1,301,100,000 an increase of 2.4% from $1,270,200,000 at the end of the 2018. Due to the company's adoption of new accounting standard starting 06/01/2018, as of the end of the 2019, dollars 76,100,000.0 of deferred revenue was reclassified to the accrued expenses and other current liabilities, representing the estimated amount of the tuition collected that may be refunded in the future if students withdraw from a course before completing all classes. In addition, the lower than euro increase was due to the change of tuition fee collection schedule in compliance with the latest regulatory requirements.
Heading to the new fiscal year, we will continue to execute the optimized market strategy. The approach has consistently supported us to achieve success in the last several years, and we're well placed to capture a wider range of the market opportunities. To give you more specifics on our areas of focus for fiscal year twenty twenty. First, we will continue to expand our offline business. We aim to add around 20% capacity, including new learning centers and expanding classroom areas of some existing learning centers for K-twelve business in existing cities.
In addition, we will continue to roll out our dual teacher model schools to a number of new low tier cities in certain provinces throughout the year. Second, we will continue to leverage our investments in onlineoffline integrated standardized teaching system for our offline business, especially for our K-twelve tutoring and overseas test prep business. We will continue to make investments, and we believe that the total spending in absolute dollar terms in fiscal year twenty twenty will increase moderately compared with the last fiscal year. Furthermore, we will continue to invest in and execute the initiatives, including the product content development, teachers recruiting and training, R and D as well as sales marketing in pure online K-twelve after school tutoring business, our koolearn.com. Third, our top priority will remain as the focus on optimizing utilization of facilities and controlling cost expenses across the business to drive continued margin expansion and increased operational efficiency.
We have solid confidence to deliver continued non GAAP operating margin expansion and enhanced operational efficiency for the coming fiscal year. As new facility disputes in fiscal year twenty eighteen and 2019 continue to be ramped up and utilized efficiently. To improve utilization, we'll cover the margin pressure resulting from our investments in the cooler.com as well as the other pure online education products. In short, we expect our overall non GAAP operating margin to expand year over year in the 2020 and for the whole fiscal year. With newly introduced policy related to the after school tutoring institutions being implemented on city by city basis, we continue to comply with the regulatory requirements closely and cooperatively.
Administrative costs that incurred as a result of new policy have been in line with our expectation and have been digested within fiscal year twenty nineteen. As such, we do not currently see material impact on the business. As a leading education service provider in China, we're firmly supportive of these reforms, which will improve market standards and foster healthy growth of the industry. We are committed to provide high quality education service and contributing the creation of the sustainable markets. Finally, the recent RMB depreciation against The U.
S. Dollar will also impact our earnings in dollar terms for the 2020. Finally, I would like to emphasize that we have great confidence in the fundamentals of our business, which is set to remain strong. As we continue our optimized market strategy, we're certain that New Oriental will continue to capture sustainable growth opportunities in the market and deliver long term value for our customers and shareholders. Looking at the near term and our expectations for the next quarter, we expect total revenue to be in the range of $1,050,500,000 to $1,075,500,000 representing a year over year growth in the range of 22% to 25%.
If not taking into consideration the impact of the potential change in the exchange rates between RMB and U. S. Dollar, the projected revenue growth rate is expected to be in the range range of 26% to 29% for the 2020. The estimated exchange rate used to calculate expected revenue for the quarter of fiscal year twenty twenty for the 2020 is 6.8851. The historical exchange rates used to calculate the revenue for the 2019 was 6.6757.
This forecast has taken into account the factor that traditionally, our overseas test prep business has 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 rate in the first quarter tends to be slowest when compared to the other quarters. With this, we anticipate the upward trend to emerge throughout the year. I must mention that these expectations reflect New Oriental's current and preliminary view, which is subject to change. At this point, I will take your questions.
Operator, please open the call
Speaker 0
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. If you wish to ask a question, please press star one on your cell phone and wait for a name to be announced. If you wish to cancel request, please press the pound or hash key. Please note there will be a short pause as the questions are being collated.
Your first question comes from the line of Alex Chi from Credit Suisse. Please ask your question.
Speaker 4
Hi, Steven and Sisi. Thank you for taking my questions and congratulations on very strong results. So I'd like to ask for management's expectations about FY twenty twenty in terms of both revenue growth and margins after delivering a strong Q4? Have we become more optimistic about FY20 than before? And secondly, I think for this quarter, the revenue growth of overseas and test prep and consulting business, I think exceeded expectations.
And what's the reason behind such outperformance? These are my two questions first. Thank you.
Speaker 2
Okay. Okay. Thanks, Alex. You know, the this quarter, the revenue growth was 28.4% in RMB terms year over year. So it was a very strong quarter.
And even though we have the lower than euro Q twelve revenue because we moved the one week revenue from March to June. So that means we will record the one week more revenue in the coming Q1 rather than this quarter. And some overseas consulting revenue, that means we record based on the accounting change, the accounting policy change, we we record the the sum revenue of of the overseas consulting revenue in q three in q three rather than this this quarter. But, you know, we we we still get the very strong quarter. So in the fiscal year twenty, I think we you know, as we guided before, we we guided the streets, the our top line growth in RMB term year over year in fiscal year twenty will be over 30%.
So this is our official guidance for the fiscal year twenty top line growth. I think this is because of the three reasons. Number one is the we're seeing the highest student retention rate. And number two is, you know, you you saw we expanded 24% new square meter classroom area in fiscal year twenty, and we plan to open another 20% new classroom area in the fiscal year twenty. And number three, we will get a very strong performance from the summer promotion enrollment.
And I as for the margin, yeah, you guys see another strong quarter of the margin expansion. And in the q in in the q one fiscal year twenty and the whole year, as I said before, you know, we guided the the still got the margin expansion in the q one fiscal year twenty and for the whole year because, you know, we have more leverage, operating leverage from the operation. And so this is my answer to your first question. Second question, overseas test lab. Yeah, this quarter, our overseas test lab business recorded revenue growth of about 13% in dollar terms or 21% in RMB terms.
I think this is much better than we did in the last three quarters of this fiscal year 'nineteen. I think this is a result of our product reform for overseas test prep classes. Because we have we are seeing more and more the young students to take our TOEFL SAT courses. And so we're rolling out the new onlineoffline integrated products as we did in the K-twelve for business for the overseas test prep. So I think going forward, our overseas test prep business will achieve a positive result in fiscal year twenty.
Okay? Thank you.
Speaker 0
Oh, actually, please note that the revenue guidance for next fiscal year is in RMB term. Okay?
Speaker 2
Yeah. RMB term over 30% year over year. Okay?
Speaker 3
Thank you,
Speaker 4
Alex. So thank you. May I just have a follow-up about our summer promotion? Because I think our expectations for FY20 is actually quite strong. But I think for the in terms of number of summer promotion enrollments, it seems that absolute amount of increase in the number of enrollments is not that high as before.
So what are our expectations for the retention rate or have we changed the strategy to grow our business in this year?
Speaker 2
Yeah. Consistent with the last few years, we we launched the summer promotion this year. And even we raised the price from 200 RMB last year to 400 RMB this year, We're still seeing the strong enrollments from the summer promotion. So far, we brought the enrollments from the summer promotion of about seven and sixty five thousand, which is a 4% increase compared to last year. And so this year, I think the strategy change we made of the summer promotion is to for us, we are able to better identify who are the real customers and retain the customers, more customers after the summer promotion.
So we believe the retention rates after summer promotion this year will be better, higher than last year, definitely. Okay.
Speaker 4
Thank you. Thank you very much. It's very clear.
Speaker 0
Your next question comes from the line of Tian Hou from TH Capital. Capital. Please Please ask ask your your question. Question. Tian Hou, your line is open.
You may ask your question.
Speaker 1
Sorry, I was silent myself. Hi, Sisi and Steven. Congratulations on a good quarter. I also have two questions. One is related to online education.
We see the competition of the online education in China sort of heated up and we saw a lot of advertising, offline advertising, online advertising. And so edu is also one of the online education vendors. I wonder what is the strategy for edu to further develop your online education's brand awareness and as well as revenue market share? That's number one. I'm going to give you the second question also, which is, it seems like your tone for next fiscal year is much more optimistic than last year.
So what are the drivers behind those optimistic tone for this fiscal year? Thank you.
Speaker 0
Okay.
Speaker 2
Thanks, Tian. Your first question is related to the online education. With the goal to tapping into the market opportunities in the pure online sector, I think we continue to invest. But we would rather spend more money on the content development, R and D, and teachers recruiting and training. And also, we we will spend some money on the on the marketing and selling marketing expenses.
But, you know, I think the spend on the marketing will be reasonable because we won't use the burning money way to acquire students as we did in the our offline business historically. So this is our online strategy. K? And your the or your your number two question is about the the the the guidance. Okay?
The guidance. Yeah. You
Speaker 1
know Yeah.
Speaker 2
Actually actually, in this quarter, we we got very strong numbers. And and I think, you know, in in the fiscal year nineteen, we we opened 24% new learning centers in in a square meter size. And it brought us more student enrollment, and we would be the top line guidance again this quarter. And we're seeing the higher student rate. So I think this is the result of the invest on the product since several years ago.
And so I think we are more confident about our products. That means we're providing better quality service to students compared to before. And second, you know, even even though we we we raised the price of the summer promotion versus but we still got the full numbers, and we believe the retention rates Mhmm. After the summer promotion will be higher. And and if you look at the the competition environment, I don't think it changed.
So our job is to provide the best service as we did before going forward and to take market share as much as we can going forward. K?
Speaker 1
Thank you. Thank you. Congratulations again. Thank
Speaker 2
you. K.
Speaker 0
Your next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.
Speaker 1
Hi, Stephen and Sisi. Congratulations on the good results. So I want to follow-up your revenue outlook of 30% year over year growth more than 30% year over year growth. Can you give us a breakdown of the growth expectation for the different business lines? And also, you are also very confident about the margin expansion.
Can you give me can you give us more color on the margin magnitude margin expansion magnitude if possible? Thank you.
Speaker 2
Okay. The breakdown of the different the old business lines. I think the Q4 business will be the key revenue driver in fiscal year twenty. So we got it. We we got the the top line growth of the Q4 business growth will be 40%, somewhere around 40% year over year.
All all what I'm saying is in RMB terms. Okay? The overseas test prep, I think the top line growth will be 10 plus year over year. Okay? And the domestic test lab, I think the the growth rate will be somewhere between 15% to 20% in RMB terms.
And I'm sorry. I can't give the the detailed guidance of the the pure online, thecoollearn.com. But I think the the revenue will be strong. And overseas consulting, I think the top line growth will be somewhere around 20% 15 to 20%. So this is my guidance by different business lines.
K? And margin. Yeah. So I think we do believe we'll have the more optimal leverage going forward because we I gave the guidance, a top line guidance of 30% over 30% in fiscal year twenty. That's, you know, last year and fiscal year twenty nineteen, we opened 20 the expansion was 24%.
And last year, you know, in fiscal year eighteen, we opened a lot of learning centers. I think so. It was over 40%. So I think the the first job in fiscal year twenty for us is to fill more students into the learning centers we set up in last two years. And in fiscal year, as I said, we plan to expand 20% new learning centers, but the top line growth will be over 30%.
So you will see more leverage going forward. So that's why I gave the margin expansion guidance for this new new fiscal year '20.
Speaker 1
Sure. Thank you very much.
Speaker 2
Yeah. Yeah. As well, we we do have the more operating leverage on the selling and marketing expenses and and G and A. If you if you saw the numbers of this this quarter, you know, our selling and marketing expenses just increased by low single digit. Okay.
Speaker 1
Thank you.
Speaker 2
Yeah. Okay. Thank you.
Speaker 0
Your next question comes from the line of Terry Wang from Blue Lotus. Please ask your question.
Speaker 4
Hi, management. Thanks for taking my call, and congratulations for a solid quarter. I have one question here. We see the gross margin down 1.3% year over year. Could management provide more color on that?
Thank you.
Speaker 2
Okay. Yes. Thanks, Terry. I think the margin was down by 130 bps. I think this is mainly due to the lower than euro revenue this quarter.
As I said, we moved the one week revenue from Q4 to Q1.
Speaker 0
Because of regulation?
Speaker 2
Yes, because of the regulation. And this quarter, it's onetime impact of the overseas consulting revenue. So I think but we do have some the fixed cost of the teachers and staff cost in Q4. But I do believe we will have the gross margin expansion in the coming new quarter. Okay?
Thank you. Thank you.
Speaker 0
Your next question comes from the line of Alex Liu from China Renaissance. Please ask your question.
Speaker 5
Hi, thanks, Steven and Sisi. Questions. First, I think given the recent regulations, which basically limits the the competition and the mission selection for middle school, do we see any positive spillover effect for our middle and high school tutoring business going forward? And second question is on the financial questions. We see the net the noncontrolling loss was actually expanding a bit this quarter sequentially and year on year.
That is is that something related to the the loss of Kuler, or or is that something from other business?
Speaker 2
Thanks. Okay. My my my my second question for cluster two. Yes. There was some impact from the kooler.com.
Yeah. The NCI. And to the regulation Okay. And the the regulations, you know yeah. There's some regulation since the last year.
But, you know, our our attitude is to we're fully supported the government reforms and and the implementation. Actually, for the offline side, you know, the the regulations is carrying carried out on city by city basis. But, you know, we we do not foresee any material impact from the regulations. And and and on the contrary, we fully support the regulations from the government because, you know, I think it's it's good for the whole industry. And so we're doing our jobs and to provide better service to the students and to provide better products and to to give to to give the the better feedback from the parents and kids.
So this is our target. So I I think, you know, I think this is a good timing for us to to take more market share by providing the the better products and product. So this is our attitude to the policy. Okay. Thank you.
Thank you, Steven. Okay. Thank you, Alex.
Speaker 0
Your next question comes from the line of Jim Yoon from New Street Research. Please ask your question.
Speaker 6
Hi, good evening. Hey, thanks for taking my questions guys. Just a couple from me. On the summer program, with the pricing increase, has there been a change in content in relation to that pricing increase? That's my first question.
And then what percentage of the, I guess, the summer program or the programs today that you see is coming from the dual teacher program? How should we expect that for the fiscal twenty twenty going forward? And then my second question is related to your FX. Not sure if I calculated this right, but I think my FX estimate in the prior quarter was a little bit different than what you guys provided. Hence, there was probably somewhere like a 300 basis point impact to FX according to my numbers and which impacted revenues upwards of $20,000,000 I'm just wondering if there was something different about FX in the quarter or is it something that I was just kind of mistaken myself?
Anyhow, any color on that would be great. Thanks, guys.
Speaker 2
Yes. And yeah. You know, the the I think we keep the the almost the same the price strategy. You know, this quarter, the the hourly rate for all business lines is worth 10%. And, we raised the price by a reasonable price.
And going forward, I think our price increase will be 5% to 10% year over year in the fiscal year 'twenty. And we made change of the product for both the UCAM and POP Kids. We spent a lot since two or three years ago. And even in the last two and twelve months, we update our product for the POP Kids product. And that means we add more and more the online offline elements to our offline classes.
So the kids in our classes are are taking better classes than before. And but, you know, as I said, we'll we'll keep the same price strategy. You know, this this is our price strategy. And the exchange rate, you know, the q four the this quarter, we used the 6.7601. And last year, q four, we used the 6.3287.
So this is the exchange rates we use to calculate the revenues. And in the in the coming new quarter, the q one twenty, we use the 6.8851 compared to the last year q one, 6.6757. So this is all the numbers we're using. Okay? Great.
Thank you, Is it clear? Thank you, Okay.
Speaker 4
Thank you.
Speaker 0
Your next question comes from the line of Christine Cho from Goldman Sachs. Please ask your question.
Speaker 7
Hello, Steven, Sisi. Congratulations. I think quickly on the tax rate this quarter, I noticed it was a bit higher than usual. Was there any specific that you would highlight regarding that? And then in terms of looking at FY '20, what would be your expected tax rate?
Speaker 2
Okay. Thanks, Christian. It's a good good question. You know, in this quarter, the gap effective tax rate was 27%. It seems to be high.
There are two reasons. Number one is if you take out the loss from the fair value change, the ETR was 20%. So this is number one reason. Number two reason, most of our software are high-tech entities have a certain period of tax holiday. When they expire, the tax rates tend to go up.
And but, you know, I think but but, you know, this quarter, I think it's it's very special. So going forward, we expect the gap ETR in fiscal year twenty twenty will be somewhere between 20% to 23%. And because we don't believe we will have such a big fair value loss in fiscal year twenty as we had in fiscal year nineteen. On the contrary, if we got a fair the fair value gain in fiscal year twenty, the ETR will be lower. Okay.
Speaker 7
Thank you. That's very clear.
Speaker 2
K.
Speaker 0
Your next question comes from the line of Felix Liu from UBS. Please ask your question.
Speaker 8
Hello, Steven. This is congratulations on the strong results. One more question on me on the margin. So I'm just wondering if if there is any drag from the online business regarding to the year on year GPM decline. Thank you.
Speaker 2
Okay. Yeah. We we we invest on the the the online platform, kulen.com. But as I said, we expect the non GAAP operating margin for of the offline core business continue to be expanded in the coming fiscal year 2020. So I think this margin improvement is expected to be cover the margin pressure from the online side.
So as I said, in short, overall margin, we expect our overall non GAAP operating margin to expand in the next quarter, the q one and the whole fiscal year '20. K.
Speaker 8
Thank you. Thank you for the positive Thank
Speaker 2
you. Okay. Thank you.
Speaker 0
Your next question comes from the line of Natalie Wu from CICC. Please ask your question.
Speaker 9
Hey, Steven. This is thanks for the opportunity. This is Yudrami from Natalie. Maybe we have we have two larger questions. On your k to 12 revenue by the vast several major cities, we noticed Beijing still achieved solid growth despite the fierce competition and the high penetration rate.
And also several other cities seems to demonstrate tremendous growth. So can management share with us so by ranking of importance, what are the key success factors behind the store strength and specifically the factors for Beijing? And the second question is, we noticed that pure online player have been spending heavy to use it for user acquisition this summer. So do you see the rising penetration of online execution where you short for medium term? Why our codering is still a bit smaller compared with others that somehow impact our offline growth?
Thanks a lot.
Speaker 2
Yeah. What I can disclose for the for the the the revenue facilities, what I can say is in last trailing twelve months, our top 10 cities, the K-twelve revenue growth was 37% in RMB term year over year. So you can see the strong momentum. And going forward in fiscal year twenty, I think for the top 10 cities, we can still get the at least the same gross number, k, in fiscal year twenty. So, actually, we don't care more about the competition.
I think the con competition environment has no change, and competition is always there. And your second question is about the the online acquisition cost. You know? Yeah. We as I said, to answer the the as I said before, you know, our investments for for the online for the online platform, cooler.com, I think most of our expenses were spending will spend on the r and d and content development and teachers recruiting and training.
And, yeah, we we will spend the marketing and selling marketing expenses in a reasonable reasonable scale. And, yeah, this is our our strategy. And if you look at the historical, what happens in in the past, you know, New Orientalist, you know, we didn't like to spend too much more on the marketing because, you know, I I think we we we rely the more we rely more on the word-of-mouth because we have the the nationwide brand name in China. K? Thank you.
Speaker 9
Okay, Tony. Thanks.
Speaker 2
Okay. Thank you.
Speaker 0
Your next question comes from the line of Mark Li from Citi. Please ask your question.
Speaker 3
Hi, management. Thanks for the time. May I ask, actually, given the positive margin development we have, is there could you remind us our medium term margin target? Is there any change? Thanks.
Speaker 2
Thanks, Mark. Great question. As I said, we got the margin expansion in fiscal year twenty, and we want to make any change of the mid long term margin guidance. Our mid long term margin guidance will be 70%, the margin guidance. So there's no change.
Okay?
Speaker 3
Okay. Thanks.
Speaker 2
Thank you, Mark. Your
Speaker 0
next question comes from the line of John Wang from Macquarie. Please ask your question.
Speaker 10
Thanks, Steven and Susu for taking my question. So my question is that it seems that the quarter over quarter capacity expansion speed up a little bit. Does that mean we are facing less regulatory pressures on the opening new learning centers? And also, can management show some color on the utilization rate currently and going forward? So if considering not moving one week's lesson to the next quarter, is the utilization rate going to be higher?
Thanks.
Speaker 2
Yeah. You know, the expansion quarter on quarter in q four was 9%. I think it's not related to the regulations. It's just on track compared to our budget because, you know, we we need to open more learning centers to prepare for the new summer and the whole and and the New Year. So if you combine the the new square meters we we opened in first three quarters will be 9% this quarter.
So we got a 24% for the whole year fiscal year nineteen. And, yeah, this is just on track. And what's your second question?
Speaker 10
The second question is on the utilization rate.
Speaker 2
Oh, you guys are I'm sorry. The utilization rate this quarter was 21 to 22. I think that's 100 bps to 200 bps up compared to the same period of the last fiscal year. And I think the math is very simple. We the the expansion was 24% for fiscal year twenty nineteen, but we got the thirty one thirty one percent top line growth in RMB terms year over year in fiscal year twenty nineteen.
And next year, as I said, we our expansion plan will be somewhere around 20% and top end growth in RMB term will be over 30%. So I think we believe the utilization rates will will go up going forward. Okay. Thank you. Thanks.
Speaker 0
Your next question comes from the line of Lucy Yu from Bank of America. Please ask your question. Hi, Steven. This is I got one question for FY 2019. How much has rental and tutor cost increased Y o Y for the fiscal year?
And secondly, on the selling and distribution expense for the fourth quarter is only up by like 5% in US dollar term. How should we expect this cost item to grow in FY 2020? Thank you.
Speaker 2
Sisi, can you can you check the numbers of the rental and teacher?
Speaker 0
Yes. For full year, the staff cost increased about 27, 28%, and rental is roughly about 25 to 26%
Speaker 2
This is dollar. In US dollar term. Dollar term. K. This is a whole year number.
Whole year. Oh, okay. We we we we performed better in the second half of the than the first half. K. And selling marketing expense.
I think this is yeah. You're right. We we the selling marketing expenses just increased by 5% in the q four. And as I said, we don't want to spend too much money on the selling marketing. We're we're on the student acquisition cost, and we care more about the word-of-mouth.
And and also we we we have diverse strong performance from the summer promotion. So we don't need to spend so much on the marketing expenses. And going forward, I believe we have the more operating leverage from the selling and marketing side in fiscal year twenty. Okay.
Speaker 1
Thank you.
Speaker 2
Thank you. You, Lucy.
Speaker 0
Your next question comes from the line of John Choi from Daiwa. Please ask your question.
Speaker 3
Thanks, Steven and Sisi for taking my questions. Quickly, I'll follow-up on the margin side. Seems that you mentioned sellers and marketing, you guys will see pretty decent operating leverage. But on the G and A, should we be expecting also decent leverage? And then if you combine gross profit margin, as you mentioned, for Offline will continue to expand, it seems to me that the operating margin expansion is likely to accelerate versus this coming fiscal year versus what the recent cohort we're seeing.
And just quickly, there's been a lot of education startups and also investments around what are our plans in terms of investing into this ecosystem? Thank you.
Speaker 2
Yeah. And yeah. I think the you will see more leverage from the selling, marketing and and g and a expenses going forward. But, you know, the the gross margin in the fiscal '20, I believe it will be flattish or up a little bit. K?
So and yeah. And our our, yeah, our money. I think we're we're we're looking at some new start ups for especially for the online education site. And if we can we can find the potential synergy between New Oriental and the target companies, we'll buy it or make investments. Okay.
Thank you. Hello?
Speaker 0
Yes. Your next question comes from the line of Johnny Wong from Jefferies. Please ask your question.
Speaker 3
Hi, Steven and Sissy. Thank you for taking my question and congratulations. My question relates to the summer promotion. You said that we are seeing very good enrollment, 765,000. Is there a can you give us a breakdown between approximate breakdown between online and offline?
Is that mainly offline or is that mainly online students? And also, I know we've had very good conversion rates in the past, over 50%, if I remember correctly. What type of target conversion rate are we seeing? Thank you very much.
Speaker 2
Yeah. Hey, Johnny. It's a great question. I think that the 765,000 summer promotion enrollment, as I said, is pure offline summer promotion enrollment. We don't count any online summer promotion enrollment.
K? Is it clear? And last year yeah. You're right. Last year, we got a 54% retention rate after the summer promotion in in autumn last year.
And we do believe we can get higher student retention rates after this year's summer. K? Think about that. We raised the price of the summer promotion from 200 to 400. And I think it's much better for us to identify the real customers and to enhance the customer loyalty.
So that's why we believe the retention rates will be higher this year. Thank you. Johnny, is it clear? Thank you. Thank you, Johnny.
Okay.
Speaker 0
Your next question comes from the line of Lillian Wong from HSBC. Please ask your question.
Speaker 1
Question has been answered. Thank you.
Speaker 0
Okay. We are now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Stephen Yang, for his closing remarks.
Speaker 2
Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relationship representatives. Thank you.
Speaker 0
Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.