New Oriental Education & Technology Group - Earnings Call - Q4 2020
July 28, 2020
Transcript
Speaker 0
Good evening and thank you for standing by for New Oriental's FY twenty twenty Fourth Quarter Results Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.
I would now like to turn the meeting over to your host for today's conference, Ms. Susie Zhao. Thank you. Please go ahead.
Speaker 1
Thank you. Hello, everyone, and welcome to New Oriental's fourth fiscal quarter twenty twenty earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on newswire services. Today, you will hear from Stephen 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 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. Despite the outbreak of COVID-nineteen pandemics starting from March posted continuing pressure on all businesses across the globe, including ours. We are pleased to report a set of financial results in the first fiscal quarter of this fiscal year that is in line with our expectation. Total net revenue was $798,500,000 a slight decrease of 5.3% in dollar terms or 1% in RMB terms.
A mix of results amongst various business lines were reported, which I will elaborate each of them shortly. Total student enrollments in academic subjects tutoring and test prep courses in the 2020, decreased by 6.2% year over year to approximately 2,585,600. The lower than normal increase in the number of student enrollments is primarily due to the outbreak of the COVID-nineteen, which has made new customer acquisition in the quarter much more challenging, while the enrollment for the summer and autumn classes have also been delayed. In terms of the bottom line performance, for the entire fiscal year of 2020, we managed to deliver an extension of non GAAP operating margin of 70 basis points year over year to 12.9% compared to 12.2% for the prior fiscal year. However, for the 2020, due to the negative impact from pandemic on our top line performance and the increased spending from offering free classes to promote our cooler K-twelve larger classes with the aim of taking more market share, our gross margin recorded for the quarter was 51%, down 500 basis points year over year.
Our non GAAP operating margin for the quarter was 4.1%, down eight ten basis points year over year. And non GAAP net margin for the quarter was 6.1%, down by five twenty basis points year over year. In order to minimize the negative impact caused by the COVID-nineteen pandemic to our bottom line, we actively adjusted our operational strategy and made more efforts on cost control and reducing expenditures, especially for business lines facing bigger negative impact in the near term. We believe that our continuous efforts will sustain us from the crisis and hopefully that the adverse effect on our business from the pandemic will subside gradually. Per program blended ASP, which is cash revenue divided by total student enrollment, decreased by 14.8% year over year in dollar terms.
As for hourly blended ASP, which is GAAP revenue divided by the total teaching hours, decreased by approximately 3.5% year over year in RMB terms. To provide the breakdown of the hourly blended ASP, please note that U class increased by 0.2%. U Can VIP classes increased by 3.5%. POP Kids increased by 6.4%. And Oversity Test Drive program increased by 16.1%, all year over year in RMB terms.
Comparing with the normal price increase of 5% to 8%, this quarter's already blended ASP decrease was lower than normal level, mainly because of the bigger decline of the overseas test prep program and the U Can VIP personalized classes business, which already blend the ASP are much higher than the other programs, as well as the usage of the coupons as we provided to the customer to support the migration from offline class to online OMO class during the winter. Now, I would like to spend some time to talk about fourth quarter performance across our individual business line in detail. And then this unprecedented period, we see a mix of the results amongst each of the business lines. Our key revenue driver, K-twelve after school tutoring business, achieved year over year revenue growth of approximately 4% in dollar terms or 8% in RMB terms. Breaking it down, the UCAM middle school high school all subjects after school tutoring business reported a revenue increase of approximately 1% in dollar terms or 5% in RMB terms for the quarter.
SILI enrollments grew approximately 0.1% year over year for the quarter. Excluding VIP one on one business, U Can small class business grew by approximately 15% in dollar terms or 20% if measured in RMB. Our POP Kids program delivered outstanding results, with revenue up by about 10% in dollar terms or 14% in RMB terms for the quarter. Enrollment decreased by 9% for the quarter, though as the outbreak of the COVID-nineteen has caused the challenges on acquiring new customers in the quarter, while the enrollments for the summer and autumn classes have been delayed. Our overseas test prep related business, including test prep and consulting business, faced the most difficult challenges due to the cancellation of the overseas exams, suspension of the overseas schools, and restriction on travels.
The overseas test prep business revenue declined by approximately 52% in dollar terms or 50% if measured in RMB. However, despite the challenges, the consulting business grew by approximately 6% in dollar terms or 11% in RMB terms. And finally, VMP, personalized classes business, recorded revenue decline of about 36% year over year in dollar terms or 34% in RMB terms year over year for the quarter. Our summer promotion strategy also delivered outstanding results. We offered low priced experiential courses for multiple subjects in total for about 69 cities, targeting entry grades of primary and secondary school students' customers before they start this new school year.
The promotion price is similar to last year at around RMB400. Even though we launched the summer promotion campaign almost one month later than we did last year due to the pandemic situation, the summer promotion remains very well received by the market. We're pleased to see that the promotion enrollments we brought in before the start of the summer holiday by mid July this year achieved a 20% increase comparing the same period of last year, reaching 986,000 enrollments. The encouraging results have proven that such sound and highly profitable strategy enable us to capture and increase our market share in high growth K-twelve after school tutoring market. Also, puts us in a more favorable position during this market consolidation period, as certain players may lack financial or digital capabilities to sustain their operation during these challenging times.
As these students move to the higher grades, we expect the continued improvement in retention rates and customer loyalty will drive revenue growth in the next three to six years. We continue to be guided by our optimized market strategy in this quarter and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability. This quarter, we added a net of 44 learning centers in existing cities, opened a new training school in the city of Weihai, as well as four dual teacher model schools in the city of Hebi, Hsinchai, Zhumadian, and Xuchang. Altogether, this increased the total square meter of classroom area by approximately 26% year over year, 5% quarter over quarter by the end of this quarter. Despite such challenging times, we didn't put our expansion plan on hold as we wanted to ensure that we are fully prepared when the pandemic is over.
And our service will resume with strong presence across different Chinese cities. As the outbreak of COVID-nineteen has highlighted the importance and demand of online education, we have placed more resources in this area and invested $36,000,000 in the quarter to improve and maintain our OMO integrated education ecosystem. The investments also supported the migration of our offline class to small sized online class during the pandemic. Apart from the OMO infrastructure, we have allocated part of the resources in advanced training programs for our teachers to enhance their online and offline integrated teaching skills in response to the growing demand in the market. At the same time, we continue to upgrade our technology platforms and will broaden the usage of the online tools and content in our OMO system for all business lines through the whole network, as well as further develop the best teaching content and courseware to cater on onlineoffline integrated education methods.
We're glad to see that our industry leading OMO ecosystem has not only successfully managed to cushion most of the impact our service and operation caused by the pandemic, but we also see the refund rates from the cancellations have been stabilized at a normal level as we entered into the spring semester. While our customer retention rates from winter to spring semester and from spring to summer semester were trending higher than the same period last year, which further demonstrated that our customer satisfaction and effectiveness of our online course through our OMO system. To further tap into the huge market opportunity in online education, we continue to place more resources in COOLER in executing new initiatives in our K-twelve online after school tutoring business in fiscal year twenty twenty. This includes content development, teachers recruiting and training, sales and marketing, R and D, and other necessary cost expenses to drive the growth of the new online programs. With these programs, we're able to reach out to more students in low tier cities in an interactive and scalable approach.
We believe this will help coollearn.com to gain new market share in the online education space and drive up top line growth. In the past quarter, Cooler did a large scale market promotion by offering three large sized online live broadcasting classes to the public and attracts several times more traffic than normal time. Cooler also added a meaningful amount of customer service representatives and marketing staff to support the new initiatives in K-twelve tutoring. These moves have raised our spending on the marketing front, but we believe those are necessary and understandable measures as we find ourselves in a euro pandemic situation. The two teacher class model has been offered for POP Kids program in 48 existing cities, U Can program in 29 existing cities, and for both POP Kids and U Can get wealth business in 10 new cities.
We're glad to see the model has proven to be successful as there is increased market penetration in those markets we have tapped into. We also saw improved customer retention and scalability. With these proven results, we will continue this strategy going forward. Now let me walk you through the other key financial details for the fourth quarter. Operating costs and expenses for the quarter were $788,200,000 representing a 2.9% increase year over year.
Non GAAP operating cost and expenses for the quarter, which exclude share based compensation expenses, were $765,900,000 representing a 3.5% increase year over year. Cost of revenue increased by 5.3% year over year to $391,100,000 primarily due to increased teachers' compensation for more teaching hours and a higher rental cost for the increased number of the schools and learning centers in operation. Selling and marketing expenses increased by 11.4% year over year to $118,000,000 primarily due to the addition of a number of customer service representatives and marketing staff with the aim of capturing the new market opportunity during the pandemic, especially for the new initiatives in Q12 tutoring, our pure online education platform, corean.com. General and administrative expenses for the quarter decreased by 3.3% year over year to $279,200,000 Non GAAP general and administrative expenses, which exclude share based compensation expenses, were $261,000,000 representing a 1.3% decrease year over year. Total share based compensation expenses, which were allocated to related operating costs and expenses, decreased by 13.5% to $22,300,000 in the 2020.
Operating income was $10,300,000 and 86.7% decrease from $77,000,000 in the same period of the prior fiscal year. Non GAAP operating income for the quarter was $32,500,000 a 68.3% decrease from $102,700,000 in the same period of the prior fiscal year. Operating margin for the quarter was 1.3% compared to 9.1% in the same period of prior fiscal year. Non GAAP operating margin, which excludes share based compensation expenses for the quarter, was 4.1% compared to 12.2% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $13,200,000 representing a 69.5 decrease from the same period of prior fiscal year.
Basic and diluted earnings per ADS attributable to New Oriental were $0.08 and $0.08 respectively. Non GAAP net income attributable to New Oriental for the quarter was $48,500,000 representing a 49% decrease from the same period of prior fiscal year. Non GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.31 and $0.3 respectively. Net margin for the quarter was 1.7 compared to 5.1% in the same period of the prior fiscal year. Non GAAP net margin for the quarter was 6.1% compared to 11.3% in the same period of prior fiscal year.
Net operating cash flow for the 2020 was approximately $108,500,000 Capital expenditures for the quarter were $89,700,000 which were primarily attributable to opening of 73 facilities and renovations at existing learning centers. Turning to the balance sheet. As of 05/31/2020, New Oriental had cash and cash equivalents of $915,100,000 compared to $14,200,000 as of May 3139. In addition, the company had $284,800,000 in term deposits and $2,318,300,000 in short term investments. New Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered at the end of the 2020, was $1,324,400,000 an increase of 1.8% from $1,301,100,000 at the end of the fourth quarter of prior fiscal year.
We are now approaching to the new fiscal year. Despite the continued challenges from the COVID-nineteen pandemic, I expect to remain we're still optimistic towards the company's business in the long run, and we'll continue to focus on the following key areas. First, we will continue to expand our offline business. We aim to add around 20% to 25% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-twelve business. We believe it will prepare us for further take more market share from other players post COVID, as we believe some small players without strong financial position and online class capability may not be able to sustain its business during the higher period.
And we expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with strong financial capacity and a fresh offline facility enable us to further strengthen our market leading position and penetration. Second, we will continue to leverage our investments into digital technologies and introduce our OMO system in more offline language training and test offerings, especially for our K-twelve business. The usage of online tools and the contents in our OMO system for all business lines throughout the whole network will be enhanced. To uplift the whole OMO teaching experience, we will place more efforts in developing the best teaching content and courseware, and also developing more advanced training programs to our teachers.
For some who might not be very familiar with our OMO business model, allow me to spare a few minutes now to elaborate the four key OMO strategies we have in place. Number one, the online system is mainly used to supplement the offline classes we had in existing cities with a hybrid format. Number two, for the cities we have a presence but might not have enough learning centers to cater all our customers. Our OMO system enables us to reach out to more students and customers. Number three, for some provinces where we don't have centers in all of the cities, our OMO system allows us to reach out to students of the surrounding satellite cities.
Number four, we offered a series of complementary low cost experimental online classes for people and students to experience our classes hoping to attract new customers. Here, I have to highlight that all of these OMO products are supported by our offline classes. They supplement each other as teaching content, courseware, materials, as well as our teachers and technology developed and originated from our existing offline centers and resources. We believe that the above mentioned OMO initiatives will be one of our growth engines to increase our customer acquisition post COVID and enabling us to capture the market consolidation opportunity. This revamped new business model will also accelerate our margin recovery in the rest of the year and further expand our long term margin target.
Furthermore, we will continue to invest in and implement new initiatives, including product content development, teachers recruiting and training, R and D, as well as sales marketing in Q12 after school tutoring business on our coollearn.com. Third, our top priority will remain as to focus on controlling costs and reducing expenditures across the company to minimize the negative impact from the pandemic on our bottom line. We believe we will resume the expansion of overall non GAAP operating margin year over year as COVID-nineteen subsides gradually. Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong. Although we are facing various short term negative impacts from the pandemic and we have been increasing our investment in different strategy, we remain optimistic of a brighter prospect of our business and believe our investments now will bring us fruitful returns in the long run.
We're certain that with New Oriental's leading brand, superior education products and system, and the best teachers' resources, we have the ability to take further market share in China's huge after school tutoring market and deliver long term value for our customers and shareholders. When looking at the near term and our expectations for the next quarter, we have factored in various considerations, including the one month delay of National Gaokao and Zhongao, the delayed enrollments for summer and autumn classes this year in many major cities, and the shortening of the summer holiday in many major cities by one to two weeks. Summer courses in July and August will be trimmed down to three to four terms only, which we typically have four to five terms historically. As well as the recent reemergence of the COVID-nineteen cases in cities such as Beijing has delayed the resumption of both public schools and our tutoring schools in these areas. Inevitably, all these unprecedented situations have caused a lower visibility on our business performance data for the summer quarter.
Hence, we take most conservative approach to make our forecast for Q1 'twenty one. We expect total revenue to be in the range of 9 and $11,200,000 to $953,500,000 representing a year over year decline in the range of 15% to 11% in dollar terms. If not taking into consideration of the impact of potential change in exchange rate between RMB and US dollar, the projected revenue decline rate is expected to be in the range of 14% to 10% for the 2021. To provide a breakdown of the expected top line growth for key business lines, K-twelve all subjects after school tutoring business is expected to grow 3% to 7%. Overseas test prep program is expected to decline 55% to 61%.
And overseas study consulting business is expected to decline 7% to 11% all year over year in RMB terms. We also expect the overseas related business, overseas test drive and consulting service, will continue to decline due to the pandemics around the globe caused by the cancellation of the overseas exams and suspension of the overseas schools and restriction on travels. The negative impact on those overseas related business will affect the entire education, overseas test prep related industry in China, not only New Oriental, and may last over the coming one or two quarters. That said, in contrast, China's effective control of the pandemic situation has shed a more positive light on our business domestically. We are pleased to see that we have gradually resumed our offline operation in over 90% of cities that we are in, and the vast majority students in these cities have successfully migrated back to our learning centers from OMO online classes.
We have also seen significant pickup in the year over year trend of student enrollment and cash proceeds from students in July this month for the summer quarter, which is a positive sign of recovery. To conclude, we are now taking all kinds of the operational actions to boost enrollments and classroom utilization for the summer and autumn semester and speed up recovery of business after the resumption of the schools and learning centers. We're confident that demand for after school tutoring business will pick up gradually in the summer and in the rest of the fiscal 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 for these. Thank you.
Speaker 0
Thank you so much. The question and answer session of this conference call will start in a moment. And our first question comes from the line of Penny Wong from HSBC. Penny, your line is now open.
Speaker 3
Hi, good evening, Steven and Sisi. Thank you for taking my questions. So in terms of the revenue guidance, the outlook, it seems a little bit soft, right? Can you help us to understand the assumptions behind? And then also, I think that we are talking about like the recovery is already ongoing.
And I think that's a very interesting point, as Stephen mentioned, since like last quarter call that about the consolidation of the market. So just want to see if there's any numbers that you can quantify as far on the industry side, say, I don't know, like number of centers or number of institutions, something like along the line to help us better to understand whether like how much the consolidation has been progressing. Thank you so much.
Speaker 2
Yes. Thank you, Benny. Yes. Due to the less visibility of the performance data for the summer quarter, yes, we are using the most conservative way to make the forecast of the Q1. I think there were several key reasons.
Number one, we have the shortening by one to two weeks in summer holiday. Typically, we had five terms of the summer courses within summer vacation, one summer vacation. But now, we only have the 3.5 terms. And also, the Gaokao and Zhongtao were delayed by one month, so that means the enrollment window for the summer had to be postponed by at least one month. And number two, the recent emergency of the COVID-nineteen in Beijing and Hebei province last week in Dalian and Ummunuchi.
And I think the impact us again. But I must mention that the Beijing in the summer, I think it's really hard for us to make the new to acquire the new student enrollment for the summer. So, if you take out the Beijing, the impact, all the other schools, the kids who are 12 business will grow by 11%. So, yes. And the last one is the overseas test drive related business.
All the exams are canceled and the students cannot travel and the volatile the China and United States, the two countries relationship. So, we'll just wait. And, yes, there's so many reasons. But I think we are confident about the future, because so far, 90% of cities most of the students of the 90 cities we are in went back to our learning centers. And we do believe we can take more market share from the consolidation potentially, because, yeah, we have seen a lot of small players disappear from the market.
I don't have the numbers, but yeah, it is what it is. And that's why we opened 26% expansion last year in fiscal year twenty twenty. And we plan to open 20% to 25% expansion in fiscal year twenty twenty one. So I think this shows us the confidence to take more market share from the small players.
Speaker 1
Yes. And I also want to add that the successful results by far for the summer promotion also indicated the potential opportunity to keep taking market share from smaller players that are facing much bigger challenges during the pandemic period than us. Our summer promotion increase total volume increase by far is already 20% increase year over year. And it's very likely that when we finish the whole summer, the total enrollments will be even increased higher than that. So these are all indicators for the potential opportunity for market consolidation for us.
Speaker 3
Thank you. Thank you, Cici and Stephen. Just a quick follow-up. In terms of the summer promotion course prices, how does it compare to last year as well?
Speaker 2
Yes. We got 986,000 enrollments to the mid July, and it's close to one So, that means we got the 20% year over year growth, and we keep the same price at RMB400, and we believe the retention rate will be higher than last year. So we do hope we can get the 5% higher of the retention rate after the summer promotion. So it's a we did a very good job. And we do believe that those students we got from the summer promotion this year will stay with us for three or six more years.
Speaker 3
Thank you. Thank you. That's very helpful. And I think the situation is quite understandable too. Thank you.
Speaker 2
Thank you, Vinny.
Speaker 0
Thank you so much. From each caller. And your next question comes from the line of Jin Yu from New Street Research. Your line is now open.
Speaker 4
Hey, good morning, good evening, everyone. Steven and Cece, thanks for taking my question. I guess my question is related to your capacity expansion of 20% to 25%. With that guidance that you gave, some of these segments that you're seeing underperformance in, things like overseas test prep, have you moved capacity over from these underperforming, I guess, segments to your better performing segments already? And is the capacity expansion already accounting for the shift in capacity that you're potentially seeing in your classrooms already, going from less performing to more performing type of classrooms?
And so if, I guess the reason I ask that is that the cost of capacity expansion, if it's net of a lot of this, I guess, shift capacity already, should we expect the actual capacity expense, the cost of it, to be materially less than what we've seen in the past? Thanks.
Speaker 2
Yeah, we set up the expansion plan by 20% to 25% in fiscal year 'twenty one, as we did. It's the same as we did in last year. Yeah, and yeah, we do have the plan to make a shift of the some non performing learning center to close down or to move it from the overseas test prep to K-twelve business. But with all the numbers in, I think we will keep the same guidance of the expansion plan by 20% to 25%, because we do believe post COVID, we do have a lot of the market potential to take more market share from the small players and to fill more students into the new learning centers. And even after the COVID-nineteen happened in January and February, after that, in the last three, four months, opened nine we're 10% new learning centers.
I think we are quite ready, prepared for the new market consolidation opportunity. Jin?
Speaker 4
Got it. Thanks, Steven.
Speaker 2
Thank you, Jin.
Speaker 0
Thank you so much. And your next question comes from the line of Zhu Sheng Kao from CICC. Your line is now open.
Speaker 4
Hey, Steven. This is Sam for the opportunity. So I think I have a relatively longer term question. So imagine a situation given the sustained COVID-nineteen threat, where maybe structurally a higher and meaningful portion of your enrollment will be from online, either in your pure online form or OMO form. How do you think this will impact your margin profile in the long term?
Thank you.
Speaker 2
Okay. Yeah, I think it's a question. I think going forward, we care more we care both the online and the OMO. I think, in terms of the revenue contribution, OMO class will continue to be our primary business model. But, we learned a lot from the pandemic.
And I think we started to bear fruit from the heavy investment in the last two to three years of the OMO model. And as I said, we're seeing the higher student retention rates and the customer satisfaction and the student retention rates are higher than the same period of last year. So, going forward, I think we will do more and more on our OMO system. And the key is the system, that means build the barrier entry higher for the whole industry. We have the most advanced OMO system, And going forward, I think the OMO system will bring us more student enrollment, and it will drive the margin up by our new OMO model.
And the pure online cooler, the cooler is only four to 5% of our total revenue. But in the last quarter, we did very good the summer promotion. And also, started to spend more money especially on the R and D and on the teacher training, something like that. And we spent a little bit more money on the marketing as well. But we do believe we can take more market share from even from the very heavy competition among the big players.
But we do we will have a good future for the cooler. So we have to add the growth engine, OMO and the cooler, the pure online platform.
Speaker 4
Understood. Understood. Very helpful. Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you so much. And your next question comes from the line of Mark Li from Citi. Mark, you may now ask your question.
Speaker 5
Hi, Stephen and Sisu. Thanks for your sharing. I want to ask for this quarter, we have seen like in the P and L, the gross margin impacted by a few factors you mentioned, like online, also the revenue. And then also coupled with the higher selling expense, etcetera, you're also explaining the driver. May I know in a short term view, let's say, in the next few quarters, how would we think these drivers to move?
And how about like in the coming few years, more medium term, like which part of the P and L you think you have a better upside improvement? Thanks.
Speaker 2
Yeah. You know, it's a hard time for especially for last quarter, for the Q4, and maybe in Q1, you saw our guidance. But, you know, we're doing the two things at the same time. Number one, we are focusing on the cost control, so and reduce the expenditures across the company to minimize the negative impact of the COVID-nineteen. So this is number one.
And number two, we do believe the revamped OMO model will accelerate our margin recovery in the rest of the year and further expand our margin profile going forward. So as for the Q1 fiscal year twenty twenty one, the Q1 margin, we believe the margin decline in Q1 will be narrowed down compared to Q4 last year, compared to this quarter. And we're confident that we'll be able to deliver continued margin expansion after the pandemic is over. For fiscal year twenty twenty one, we expect the margin will be recovered in the second half of the year, especially. And the near and long term, we want to change our guidance of our mid and long term margin guidance.
The non GAAP operating margin in mid and long term should be somewhere around 17%. But I must mention that with more and more OMO model we add into our learning centers, I do believe someday we will raise our mid and long term margin guidance, okay, because of the new model. Thank you, Mark.
Speaker 5
Okay. Thank you very much, Steven.
Speaker 0
Thank you so much. And your next question comes from the line of Felix Liu from UBS. Felix, your line is now open.
Speaker 4
Hi, thank you management for taking my question. My question is on the online side. Definitely, I'm very happy to see some positive progress there. So could you maybe share with us how well the traffic for Cool Learn pertaining to summer? And also for the online, I noticed the OMO model as well as your new teacher is penetrating fairly successfully into lower tier cities.
So how would you balance that with the DFW brand that Cool Learn runs that runs similar on paper similar business models? Thank you.
Speaker 2
Yes. During the last quarter, Cool Learn did a large scale of market promotion by offering the free large sized online classes. And I think that we attract several times more traffic than that of last year. But I'm afraid I am not I think that I don't think I can say something in detail or numbers in detail of the quarter, because they haven't knocked their results. But what I can say is, we do believe we did a very good job in last quarter of the promotion after the COVID-nineteen.
And we spent more money on the R and D and the teachers' trading side as well as the marketing side. But I do believe we will I think I do believe the ARPU will get the healthy the fab top line growth and the provided the better quality product to the students going forward.
Speaker 4
Thank you, Stephen. And also, how would you balance the OMO with the TWD going forward, say, from a longer term perspective?
Speaker 2
Yes. I think there is a two way we're using our same time. Koolearn is 100% online, okay? And the OMO is the leverage offline resources to our online platform that help us to reach out more through enrollment. But all the OMO class, coursework, content, and even the teachers are originated from our offline learning centers and schools.
And so I know in some cities, maybe there might be internal competition in the same city by the cooler and our OMO model. But I think the market is huge enough. So we care more about taking more market share from the others. So I do believe the cannibalization between the two parts will be very minimal. Okay, Alex?
Speaker 4
Okay. Thank you very much for the color. This is great. Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you so much. And your next question comes from the line of Chien X Hou from T. H. Capital. Chien, your line is now open.
Speaker 6
Hi, Steven, Cece. Thank you for picking up picking my question. It's regarding the OMO. OMO is a very effective tool to you know deliver the courses in the area hard to reach or you know, deliver the courses when we have this epidemic. So when we mix them together and so what's the result?
What is the impact to the gross margin I expect to be positive? And what is the impact on that? Also when students taking the class onlineoffline will there be a price difference for the onlineoffline? And also, you know, we are entering into a new physical year. Is the price going to be higher than last year?
So that's the question. Thank you.
Speaker 2
I think the OMO model will bring us more revenue compared to the traditional way. So this is number one. Number two, you know, I think the OMO model, I think the students and parents love the new OMO model. You know, they think that the new model is, you know, probably is better than the traditional one. So it drives the retention rate up and the learning center utilization rate up.
So to some extent, we can save some classroom rentals. So it will drive the margin up going forward by the OMO model. The second On the price. On the price. We charge the same for the OMO classes with the traditional offline classes.
And we will use the same strategy going forward. Know, yeah, this quarter, the prices are a little bit worse because of the coupons, because of the one on one business impact of the ASP. But, you know, going forward, I think the hourly rate, our ASP, will be increased by 5% to 8%, as normal. So we don't want to change our price strategy going forward. It will be very stable.
Speaker 6
Okay. Thank you, Steven. Thank you.
Speaker 0
Thank you so much. And your next question comes from the line of Alex Yee from Credit Suisse. Alex, your line is now open.
Speaker 4
Hi, Steven and Sisu for taking my questions. So firstly, a very quick question. You have shared the guidance for Q3 next quarter will be about 3% to 7% growth. Then what about the difference between POP Kids and U Can U Can VIP in your assumptions for the next quarter? And then and also secondly, if we assume the pandemic in Beijing and other cities were well controlled before the start of the next academic year, What's your expectations for the recovery pace of the K-twelve business in the rest of the fiscal year?
When do we expect the business to get to the normal growth rates in FY21?
Speaker 2
Alex, you know, revenue guidance in the coming Q1, you know, as I said, we are using the most conservative way approach to make the forecast because of the uncertainty. And even within this week, our enrollment window is still opening. So it's delayed by one to two months. And the different business lines, you know, the U Can program, I think in the Q1, in most conservative way, the revenue growth will be 7% to 8%. And I think the VIP business in Q1 should be recovered, should be better than we did in Q4, because I think that the parents will push their kids to study more to make that up for the last quarter.
And the POP Kids, I think the revenue growth will be somewhere around 5% to 6%, what I'm saying is in RMB terms. And the recovery pace, I think, yeah, as I said, 90% of our cities, our learning centers were reopened in the last one or two months. And I think the trend will be better. And I do believe we'll do better and better in step by step in fiscal year 'twenty one. And so I think, yeah, I just want to persuade your guys to be a little bit more patient.
In the Q1, there's some uncertainty like the Beijing or the Hebei province. But going forward, I do believe our K-twelve business will be recovered step by step, especially for the Q2, Q3 and Q4.
Speaker 1
Yes. Actually, share more details with you, for the Q1 guidance for K-twelve, because of the second round of newly identified COVID-nineteen cases in Beijing, put more pressure on the recovery of Beijing city. So the new customer acquisition in Beijing are facing bigger challenges than other cities that have already resumed the offline operation. So if you take out Beijing, all the other cities, K-twelve, if you look at our forecast in Q1, the trend year over year growth trend are similar to Q4. So I think the business are already started to recover for the K-twelve business.
Yeah.
Speaker 2
Yeah. And I do believe the our Beijing school will reopen our learning centers in September. Okay?
Speaker 4
Sure. Thank you. Very helpful.
Speaker 2
Thank you. Thank you very much.
Speaker 0
Thank you so much. And your next question comes from the line of John Choi from Daiwa Capital Markets. John, your line is now open.
Speaker 7
Hey guys, thanks for taking my question. I have a quick question on your overseas business, including test prep and consulting. I know it's a very difficult time due to the uncertainty and also pandemic going globally. But do you think this the recent COVID situation will have like an impact, like a more of a long term fundamental impact on your overseas test prep business? I know, obviously, next quarter, you guys guided a pretty conservative figure.
But I'm just wondering for the remaining part of this year and also in the long term, how should we think about this business? Thank you.
Speaker 2
The oral Tidecuffer business, we saw the significant decline in Q4, and we gave the conservative guidance of the Q1. And because of the COVID-nineteen and cancellation of the exams, like the TOEFL GRE out, and suspension of the overseas schools and the restrictions on travel. But we have seen in some cities like Beijing, and then eight to nine cities, the IELTS and the TOEFL test will be reopened in this month. We know we read this news, and we do hope our overseas test prep related business can be recovered step by step. But it's a very hard time because of the volatile China and United States relationship between the two countries.
So some students and parents choose to hold to hold the time to make the final decision to study abroad or not. But I do believe our business can be recovered step by step. It depends on the students in China know the exact time of the overseas the college and universities will be reopened, and all the exams can be reopened, something like that. And, yeah, but you know, it's a hard time. We just wait and see.
Okay? Thank you. One more thing is, you know, the overseas test prep business, know, I think in the Q4, revenue contribution of the overseas test prep was only 5.6%. And we do believe, because of the hard time, the revenue contribution in the Q1 from the overseas test prep should be below 10%. So the revenue contribution from the overseas test lab will be smaller and smaller.
Thank you.
Speaker 0
Thank you so much. And your next question comes from the line of Sheng Zhong from Morgan Stanley. Your line is now open. Hi,
Speaker 8
thank you for taking my question. Just one question about the K-twelve growth. As you mentioned, the trend outside Beijing is similar way in Q1, is similar way in Q4. But the actually, the summer holiday is shortened and the period is only about 70% of the normal summer holiday. If they take this into account, So, can we say that in the summer holiday, the K-twelve real growth in during the summer season is actually high teens to mid to high teens?
Thank you.
Speaker 2
To some extent, in pro form a basis, because, yes, you're correct, Zhongsheng, we have the 30% time loss of the summer holiday. And the as for the pro form a basis, I think the top line growth of the K-twelve business the actual the real top line growth of the K-twelve business should be over 10%. And I do believe in the quarters after, like Q2 and Q3, Q4, I think I do believe the K-twelve business, the growth will go back to normal as we did in last year, unless the bad things come back again like the COVID-nineteen in some major cities. Thank
Speaker 8
you very much.
Speaker 2
Thank you, Zhong Zhong.
Speaker 0
Thank you so much. And your next question comes from the line of D. S. Kim from JPMorgan. Your line is now open.
Speaker 9
Hi, thank you, Stephen and Sisi for taking my question. Quick one from me, on VIP only. I think I may have missed this all year, but can you remind us how much did the VIP revenue drop in fourth quarter in dollar term or renminbi and what's implied in the guidance? And the follow-up from here would be that, I'm just wondering why this segment is so bad into the summer still. Is this just a function of high price and like people are reluctant to convert to online or spending less because less cash flows and whatnot?
Or is there anything else more structural, I. E, how much of this VIP drag is structured in your view versus temporary and cyclical setback? Thank you.
Speaker 2
Yeah, the VIP business, you know, the U Can VIP business in Q4 was down by 21% year over year. I think it's easy to understand the parents and the kids' toys. You know, they pay you a lot of money, and we move the offline class to online. And some students choose to postpone their study plan by one on one business in Q4. But in the Q1, based on our I think the one on one business recovered very quickly, especially after especially in June.
We have seen a lot of new student enrollments enroll our VIP classes to prepare for the Gaokao and Zhongkao. So I do believe the VIP business will be recovered step by step.
Speaker 9
Thank you. May I just follow-up? How much of the so when you say recovery, are we talking about year over year growth or still down but much less than what we saw?
Speaker 2
Year over year growth. I don't believe we will get UCAM reactive business grow in the coming Q1 year over year.
Speaker 9
Thank you very much. Thank you very much. So that answers my earlier question that the downturn is more temporary and cyclical than structural. Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you so much. And your next question comes from the line of Alex Liu from China Renaissance. Alex, your line is now open.
Speaker 4
Thanks, Sisi and Steven. So my first question is on the OMO strategy. Specifically, noticed some small class courses in fall semester are now 100% online. So we obviously know Tao has a pure online business within its Peiyoung segment. So I was just wondering, so when you're talking about OMO, how should we think about the importance of pure online small class program within U Can and POP Kids in the longer term?
And a quick follow-up, how should we think about the revenue growth across different segments in the fiscal year 2021? Thank you.
Speaker 2
Yeah. You know, the pure online, know, it's a know, Koolearn is a pure online platform. But the OMO is the more supplemental tool to our offline business. But yeah, you are right. In last quarter, in Q4, we moved 100% of the offline class to online.
But afterwards, 90% of our students went back to our offline learning centers. But we will put more and more we will keep some, like, online elements going forward. And so, yeah, as I said, both the pure online and the OMO site, all the market is huge enough for both part of the potential growth. And as I said, I think the competition, internal competition, will be very small. So, yeah.
And what's the second question?
Speaker 0
Revenue growth for fiscal year twenty
Speaker 6
twenty one.
Speaker 4
Yeah, so the revenue growth in 2021 across twenty I twenty
Speaker 2
think, this time is very special. And even for the Q1 guidance, we spent a lot of time. And as I said, we are still in the student enrollment window in this week and next week. So, I will post the question to the next quarter's earnings call. But I do believe our business will be recovered step by step, especially for the since the Q2, and I think all the business will be recovered as normal.
Speaker 4
Yeah, I understand. Thank you very much.
Speaker 2
Thank you, Alex.
Speaker 0
Thank you so much. And your next question comes from the line of Tommy Wong from China Merchant Security. Tommy, your line is now open.
Speaker 10
Okay, thank you. Hi, Stephen and Stacy. I just have a general question. If you look at the overall market, we can see a lot of the online players like Youdao and GSX, share price has done really, really well. And when I look at your selling expenses, it seems has not really increased a lot.
I was kind of expecting to increase a little bit for the fourth quarter, but actually hasn't increased. I'm kind of concerned, are we not being aggressive enough? And maybe if you can talk about your sales and marketing kind of breakdown between OMO and versus coolant and what's your strategy going forward? I'm just kind of concerned that we're not being aggressive. Thank you.
Speaker 2
Yes. I think we spent a little bit more money on the coolant.com in last quarter. We did the first I think we did the first time the free course for the large size class in the spring semester. But as I said in the last several last earnings call, we don't want to spend crazy money on marketing side. We would rather spend more money on the R and D and the teachers' training and some like the core product development.
But, yeah, I know there are some players who spend a lot of money on the marketing side, but I think the market is huge enough. And we are special because we have the number one education brand name in China. And I think the Koolearn can benefit from our New Oriental brand name to acquire the new student enrollment. This is very unique.
Speaker 10
Okay, thank you. And
Speaker 2
also, our cooler.com, we have the DFUB, the small sized online broadcasting classes. These are very special. And I think we are one of the few players can do the small size pure online classes. And I think the business model does work. We testified in the last two to three years, and it's grown very fast and yeah, that's it.
Is it clear?
Speaker 10
Thank you. Thank you.
Speaker 2
Thank you very much.
Speaker 0
Thank you so much. We are now approaching the end of the conference call. I will now turn the call over to the new Oriental CFO, Mr. Stephen Yang, for any 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. Thank you.