Sisi Zhao - IR Director Louis Hsieh - President and CFO Stephen Yang - VP of Finance Michael Yu - Chairman and CEO.

Jiong Shao - Macquarie Philip Wan - Morgan Stanley Trace Urdan - Wells Fargo Fei Fang - Goldman Sachs Tian Hou - TH Capital Leon Chik - J.P. Morgan Clara Fan - Jefferies Kenny Lou - Flowering Tree.

Ladies and gentlemen, good evening. And thank you for standing by for New Oriental Fourth Quarter and Fiscal Year 2014 Earnings Conference Call. At this time, all participants are in 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 call over to your host for today’s conference, Ms. Sisi Zhao, New Oriental’s Investor Relations Director. Ms. Zhao, please proceed..

[Thank you]. Hello, everyone. And welcome to New Oriental’s fourth fiscal quarter and fiscal year 2014 earnings conference call. Our financial results for the periods were released earlier today and are available on the company’s website, as well as on Newswire services.

Today, you will hear from Louis Hsieh, New Oriental’s President and Chief Financial Officer and Stephen Yang, New Oriental’s Vice President of Finance. After their prepared remarks, Louis and 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 maybe 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 statement 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'll now turn the call over to New Oriental's President and CFO Mr. Louis Hsieh.

Louis, please?.

Thank you, Sisi. Hello, everyone, and thanks for joining us today. I am pleased to report that we are closing on our fiscal year 2014 with a good set of results which underlines very strong performance in fiscal year 2014. Last fiscal year has been an important one for New Oriental as we completed our (inaudible) in the harvest the market strategy.

And I'm delighted to the success of the strategy shift is clear to see. Specifically in 2014, we exceeded $1 billion in revenue for the first time through the major milestone from New Oriental and just as importantly, we recorded a new record high of more than $200 million in net income for the full fiscal year up over 58% over fiscal year 2013.

Our fiscal year 2014 GAAP operating income increased by 61% to over U.S.$197 million and our GAAP operating margin improved by 450 basis points to 17.3%, easily beating our original target of 15% to 16%. Looking at the fourth quarter our performance was solid.

On the top-line we recorded respectable revenue growth of 20% driven primarily by 4% year-over-year increase in senior enrollment and academic subject tutoring and test preparation courses as well as increase in average selling price.

The top-line increase is healthy particularly when we actually ended the year with 703 schools and learning centers, 23 fewer than a year ago period.

Starting in the fourth fiscal quarter 2014 we again began to expand our network by adding a net of 3 learning centers and also adding more than 9,300 square meters of additional classroom area by adding 10 of our existing learning centers.

Moving into fiscal year 2015 we plan to expand our penetration rate into existing markets by adding capacity incentives where we are experiencing rapid growth and strong profitability.

Looking at the bottom-line in the fourth fiscal quarter we continue to achieve dramatic improvement, operating income increased 26.3% year-over-year to $30.8 million and net income rose 52.2% year-over-year to $42.9 million.

You will recall that we continuously recorded strong margin and solid bottom-line results throughout the last several quarters, these consistent improvements are obviously very encouraging and again underlying we are benefiting from organic growth as well as efficiency initiatives we have worked hard to implement as we have lost (inaudible) market strategy.

Overall we are very encouraged by our financial performance for this quarter and for the full fiscal year 2014.

Looking ahead we expect to encounter some short-term headwinds in the first half of fiscal 2015 that will dampen growth somewhat nevertheless we remain confident that -- and we are well positioned for sustained strong performance in the long-term. First our online strategy is ramping up quickly.

And we believe that New Oriental is as I hope the ability to answer the growing need in China for online education services, given our brand strength, depth and experience in Chinese education sector. Online education is a major focus for us and we will invest heavily in R&D and marketing in this area.

Moreover we are the market leader in the burgeoning online K-College education market in China with approximately 9.2 million registered users and growing rapidly. Now I'd like to turn the call over to Stephen Yang, our VP of Finance to provide more detail on our performance in the fourth fiscal quarter and our outlook for the coming quarter.

Stephen?.

Thank you, Louis. Hello everyone. Our K-12 all subjects after school tutoring business achieved gross revenue of 15% year-over-year for the fourth fiscal quarter and 20% for the full fiscal year 2014.

Breaking this down further, our U-Can middle and high school all subjects after-school tutoring business performed extremely well with gross revenue rose of above 19% year-over-year for the fourth fiscal quarter and 23% for the full fiscal year. These very impressive results for U-Can were dampened somewhat by slower growth in our POP Kids offering.

While we are continuing to roll out a completely revamped program across our network, as we expected initiative has resulted in slightly slower enrollment growth as school hold out marketing and promotion along this business line until we complete the roll out of the new program.

The roll out should be completed by the second fiscal quarter and we are very excited about the new program. In particular, we think that the integrated online, offline learning capabilities and we're building to the new version which I will talk about shortly, a completely unique.

So, we are very confident that POP Kids performance will improve again from the second half of fiscal year 2015, once this new product is out in the market. Overall, the K-12 after-school tutoring segment is now our fastest growing segment which is very encouraging.

This is [roughly] growing segment in terms of education sector and New Oriental has been very successful in capturing huge share of the important market. However, bear in mind of this sheet in our business mix will have some effect on the seasonality of our business.

And I will discuss this in few minutes when I address our outlook.0 Our oversea test prep and our overseas study consulting business continue to perform well. We reported combined revenue growth of approximately 29% across the two lines for the fourth fiscal quarter and 22% for the full fiscal year 2014.

Finally, our VIP personalized class business reported about 18% cash revenue growth year-over-year for fourth fiscal quarter and 19% for the full fiscal year 2014. As mentioned last quarter, we have already achieved what we believe a very healthy revenue contribution from our VIP business.

So we are continuing to focus on maintaining this threshold in the quarters ahead while shifting marketing efforts to our larger size classes. As we talk about our business lines, I want to spend a couple of minutes to update you on some important progress we’re making with our online education strategy.

Demand on online education service growth in China, we see this as very exciting segment for New Oriental with the potential to drive growth across all of our existing business lines and to open opportunities for us to tap into new market segments.

We firmly believe that no other company is better positioned than New Oriental to benefit from the growth of our online education, given our premium brand position; high quality content; extensive teaching experience; and nationwide scale.

To fully leverage our strength, to build out our online based offerings, we’re now working on developing a fully integrated online, offline learning ecosystem around the New Oriental brand. This ecosystem will consist of three elements. The first element is our online based learning system providing O2O integration across all of our business lines.

This will be the core of our online education system. The second element is our online learning platform Koolearn.com and other online products and service as New Oriental brand.

And finally, the third element of our ecosystem is for New Oriental to technology shareholdings in our education companies that complements our own online education offerings. Let me talk about some of the very encouraging progress we made over the last quarter in building out these three elements and expanding our online education offering.

Let’s look first our O2O two-way interactive education system. We introduced this system on last quarter’s call. As mentioned, this is the intent to be the core elements New Oriental’s online offline education offering.

This system is entirely proprietary and works across multiple classes; this consists of serious online education modules and supports classroom teaching, lets students track their progress and learn by themselves as class and to [facilitate] interaction between students, teachers and parents.

Simply this platform enables us to harness the power of internet to improve the quality of learning, level of the service and improvement that students get from studying with New Oriental, our goal is to plan the students studying with us and use the system and to get supplemental information during our in classroom lessons and learn them from home in their own time and check their learning progress, do homework and complete online modules that the system recommends to improve their learning, interact with teachers and other students and also access our module programs and information in our best way based learning resource to serve their own individual learning needs.

We're very excited with the progress we are making in a pilot test of O2O two-way interactive education system that is currently underway and we expect to roll this out and our two major products in fiscal year 2015.

By the end of this fiscal year, we expect that this functionality will be standard across all our business lines which will be clear and obviously (inaudible) for New Oriental end markets. We believe that the new system will increase customer stickiness.

improve our pricing power and overtime create new revenue streams through the provision of value added learning services.

I would like to point out here that the first of business line to get fully inspirational, this system will be our newly revamped POP Kids program, which will be call Shuang You at the second quarter of fiscal year 2015 and in this new POP Kids offering will get access to this functionality as standard.

We are very excited O2O, we're piloting and improved version allowing U-Can all-subject after-school children program in several large cities.

The new program named U-Can Visible Progress Teaching System will feature full integration of O2O Two-way Interactive Education System and is expected to be rolled out across other major markets during the first half of fiscal year 2015.

Furthermore the O2O Two-way Interactive Education System will also be implemented in the overseas test prep and domestic test prep courses in the second quarter of the fiscal year 2015.

Turning to the second layer of our online education ecosystem we’ll continue to invest in our exclusively online platform koolearn.com and other supplementary online educational products including online education platforms technology, content and mobile applications. Looking first at koolearn.com.

We continue to quickly see traction here, where now over 2,000 online courses in language training overseas and domestic test prep and vocational education with over 9.2 million cumulative registered users by the end of fiscal year 2014 and about 177,700 paying users in fiscal year 2014.

This is very encouraging and reflects how our efforts to leverage New Oriental's expertise and resources for the koolearn.com platform are bringing rewards.

For example Koolearn.com recently launched a online test prep program which features live broadcasts of a series of New Oriental's most popular offline test prep classes achieved over 264,400 registrations in the second half of the fiscal year 2014.

We are also pleased to see that koolearn.com DONUT game-based mobile learning applications for children aged 2 to 8 reported over 8 million downloads by the end of the fiscal year 2014 and koolearn.com has reached agreements for DONUT applications to be used in about 20 major kindergartens at September 2014.

We are continuing to explore ways to build out products and service on Koolearn.com platform and have made some exciting progress last year.

For example, in 2014 Koolearn.com ATA Incorporated, a leading provider of computer based testing and testing related service in China, established a joint venture company to provide online vocational training and exam prep course in China.

Working together we plan to leverage New Oriental's expertise in exam preps and training and ATA Incorporated experience in assessment deliveries, student resources, learning tools, software and other technical resources which is very exciting.

Alongside Koolearn.com we are very pleased with the progress we're making in developing other supplementary online education products and services under the New Oriental brand, either independently or majority-held partnerships with other companies.

With the new strength of our brand and unmatched quality and depth of our learning resource enables us to produce very high quality online learning content and we're making good progress here. In May of this year, we launched an English language vocabulary training application Le Ci for mobile phones and tablets.

This application helps users memorize new English words and actually use the techniques developed by New Oriental's Chairman and CEO, Michael Yu. It's very encouraging to see that application has already recorded over 310,000 users in the two months since it was launched.

Separately, in July we are launching new online education platform called OKAY for primary and secondary schools. This platform can track and analyze students after-class self-learning progress, and automatically push customized content that can improve student learning efficiency.

We developed this platform in cooperation with 130,000 teachers from 49 public schools in China specifically designed to support learning activities in primary and secondary platforms. Overtime we'll be working what (inaudible) we encourage adoption of this system which we see as a potential growth area.

However, we're very excited to announce that we have developed a strategic partnership with Tencent Holdings Limited which as you know is one of China's leading Internet companies.

Working with the Tencent we will research and develop unique mobile based English language training learning offerings that will build on New Oriental's deep resources in terms of content and educational research and Tencent's technological expertise and rivals online penetration and marketing reach.

The first product is expected to be launched by the end of 2014 and will be promoted throughout Tencent online channels and our offline networks. Now looking at the third element of our ecosystem strategy.

As we look to develop our comprehensive online and offline education system we're now exploring investment opportunities with select online education companies.

Currently we plan to focus on acquiring minority shareholders in online education companies that have business model and technologies that are complementary to New Oriental online educational strategy.

We think that this is a great way to leverage, to power our brand, our learning resources by partnering with exciting young companies that have interesting business models and service to complement our offerings. Online education is obviously a very exciting segment in China and one where New Oriental is ideally positioned to benefit.

So we will continue to invest here to capture market opportunities as we move into fiscal year 2015. Let’s look quickly as some of the key financial metrics for the fourth fiscal quarter. Selling and marketing expenses for the fourth fiscal quarter increased 14.9% year-over-year to $51.7 million mainly due to brand promotion expenses.

General and administrative expenses for the quarter increased 5.2% year-over-year to $94.8 million. Total [accounts] at the end of May 2014 stood at about 41,600, addition of about 900 from the same time last year. As we highlighted earlier quarterly operating income increased to 26.3% year-over-year to US$30.8 million.

Operating margin for the quarter amounted to 10.7% compared to 10.2% in the same period of the prior fiscal year. On non-GAAP basis operating margin for the quarter was 12.1% compared to the 13.1% in the same period last year.

Capital expenditures for the quarter were US$8.9 million compared to US$7.7 million in the same period over the prior fiscal year and primarily due to the operating of 24 new learning centers and renovations at all our existing learning centers.

We generated approximately US$93.6 million operating cash flow for the quarter to US$102.6 million in the year ago period. Moving on I’d like to spend the couple of minutes talking about our expectations for the fiscal quarter of fiscal year 2015.

We expect total net revenue in the [first] quarter of fiscal year 2015 to be in the range of US$412 million to US$427.5 million compared to our report net revenue for the first quarter of fiscal year 2014. Our project year-over-year revenue growth for the first of fiscal quarter 2015 will be into the range of 6% to 10%.

This represents somewhat slower rate of the dollar than euro. But I do want to highlight some important mitigating factors including our (inaudible). First and foremost, in line with our harvest the market strategy, we have strictly controlled or pay for expansion over the last of fiscal year.

As a result we are actually entering the first fiscal quarter of 2015 with the natural 23 few more schools and learning centers than we have in the first fiscal quarter of 2014.

So this will obviously affect enrollment top-line growth, but it’s important to remember that this also means that growth in the coming quarter will be primarily organic driven largely by improved utilization and our existing schools and learning centers. And we think this is very healthy trend.

The second factor is ongoing rollout of the revamped POP kids program which will impact enrollments and revenues in this business line in the first of fiscal quarter.

As I mentioned earlier, we expect the rollout to be fully completed in the second quarter of the fiscal year 2015 and we anticipate an improvement manage enrollment starting from the second half of the fiscal year 2015.

This first factor influencing our expectation has continued to decline in enrollment for our legacy business line of adult English and domestic college English test prep. We’ve talked the trend before whereby the success of our K-12 businesses is pulling demand away from the adult English classes.

We are now bringing the students into our program earlier in their learning lifecycle which means that by the time they need to take overseas and domestic exams, they are better prepared and have less need for our language training services.

Fourth, we expect to see a certain amount of uncertainty around the implementation of newly introduced policies relating to the English test for the Gaokao or college entrance exam. These policies (inaudible) in formats and content with revised English exam to be introduced in the coming years.

We will be implementing on our province by province basis. As such at this stage, it’s unclear what changes each province will introduce to the exam. And so we expect to see some impact on domestic test prep class as a result.

Fifth, with the very notable shift in the seasonality of our business, as I mentioned earlier, our K-12 after-school tutoring business is experiencing rapid growth and now one of the most important business lines.

However, we experienced the greatest demand for this device during the school term which means the second, third and fourth fiscal quarters and we actually see something over the slack period when schools are closed during the first fiscal quarter.

Traditionally the summer quarter what has been the peak period for our test prep classes, but now we are seeing that some of our peak demand is shifting from summer to the late winter and spring quarters. We expect that this will be a long-term trend, so bear in mind in the coming quarters.

Sixth, we are seeing intensified local competition in the second and third tier cities in the K-12 after-school tutoring segment. This is not surprising, considering the huge success we have in this business line and the obvious demand in the market for this service.

For example, we did some one-off promotions for our U-Can summer courses in certain cities with price cut above 10%. In the short term, the competitive environment in this market will have some impact on our enrollments and pricing power.

However, over time, we're very confident that the strength of New Oriental offering will clearly differentiate us from our competitors in those markets, in particular our integrated online, offline service which as I mentioned, we plan to start rolling out this year will be a very obvious differentiator that our competitors simply won't be able to match.

Seventh, the Chinese economy continues to slow. As we have highlighted before, this will impact discretionary consumer spending, though we expect demands for educational service to remain resilient. And finally, we expect recent depreciation of renminbi against U.S. dollar will have a certain impact on our results for the first fiscal quarter of 2014.

Having said all this, let me emphasize once again, that we believe that the fundamentals of our business are stronger than ever, as we continue our harvest the market approach and execute our strategy to more tightly integrate our offline, online offerings.

We are confident that New Oriental will continue to capture obvious growth opportunities in the market, extend our clear leadership position in China's education market, and deliver sustainable long-term growth. Before I conclude I want to take a minute to address our efforts to enhance shareholder value.

As you will have seen in today's press release, our Board of Directors have authorized the repurchase of up to $120 million of the company's shares during the period from July 28, 2014 through March 31, 2015. We expect to implement the share repurchase program in a manner consistent with the market expectations and the interest of the shareholders.

And we plan to fund this program from the company's available cash balance. Our Board of Directors will reveal the share repurchase program periodically and may authorize adjustment of its terms and size accordingly.

And this is once again in line our determination to deliver value to our shareholders and we're confident in the long-term prospects for our business line. At this point Louis and I will take your questions. Operator, please begin..

Thank you. (Operator Instructions). Your first question comes from the line of Jiong Shao from Macquarie. Please ask your question..

Hi.

Can you hear me okay?.

Yes, go ahead Jiong..

Okay, sorry. Thank you for taking my question. Your result on the enrollment of first quarter, sorry if I missed it and for the whole year you talked about the guidance and revenue in Q1 and I was hoping you can comment on (inaudible) revenues for the whole year after the more of a challenging first half.

And related to that (inaudible) senior managing departure in the Beijing I was hoping you can comment on that as well. Thank you..

I don’t think I heard it all clearly Jiong. But I think you related to the revenue. One thing I want to make clear to the investors on the call and the analyst is that if you look at our numbers in April we did a very good April month as far as cash revenues were up 26%. May was actually not too bad. It was up 13%.

What happened in June is what caused the guidance to be adjusted for this quarter is that in June we saw a 7% decline in revenues we’ve never seen that before. So, and also we saw a 10% decline in enrollment during the June month last month. July was getting to do a little bit better so things are picking up again.

So, that’s why the guidance was revised down. Now if you look at last year, we grew 15.7% during the summer quarter but in RMB terms we only grew about 12.7%, so with a 3% bump from the RMB. This year is going to be the opposite, we will lose 1% or 2% from decline in the strength of the RMB. So that's why, that factor is in there.

Yet another change in our business that we, so once we saw the slowdown in June we immediately start (inaudible) all the score head to find out why there is a decline in our enrollments.

What we could come up with so far we are trying to fix this, one of the big changes is the fact that the new Gaokao exam, the rumor is that the Gaokao exam is that they are making the English section much easier. And so parents aren't so impressed to get their children into summer English bootcamps anymore.

And so we've seen a huge dropoff in the number of summer camp enrollments and also adult copy under English enrollments. So those have English uses declined 15% they declined 30% so far this quarter. And in the summer camps for U-Can English and middle to high school English has declined about 25-26% for the summer and we have never seen that before.

And so that's why we have the reason in there about the Gaokao and all of the quality change has caused a decline in our summer camp. I also think that as the quality and the competition intensifies in tier-two and tier-three cities, students don't feel the need to spend the money that kind of Beijing or Shanghai to learn English.

And so that's why all those reasons are tied together. The seasonality of our business is shifting towards '12 which is the peak season in Q3 and Q4, which is the return in spring and not the summer. So we've seen summer has been challenged for the last couple of years, but this year is particularly challenged.

And the other reason we gave which we mentioned last quarter is the relaunch of our POP Kids program and that is taking longer than we expected, so we expected a launch reason in Q1 its now launching in Q2 which is the November quarter.

So that's another reason and so we have seen a dramatic dropoff in kids enrollment in fact POP Kids enrollments were down year-over-year by 4% that has never happened either.

They were actually up in the first half of the year during the last two quarters have been again the fall, and we think this because the uncertainty over English and also because of the re-launching of program people we haven’t spent a lot of money on marketing in this area.

So that’s a long way to answer your question Jiong I don’t know if I got all of it because you didn’t come in very clear..

Okay, sorry Louis, thanks. I was also hoping you can comment on your guidance for the enrollment growth for the first quarter and for the whole fiscal year next year and your revenue….

Yeah, I think originally….

For the full fiscal year..

Okay, originally we wanted we were talking about 20%, 18, 22, 23% in revenue growth in the whole year well, obviously Q1 we didn’t get off to a good start in June with revenues down 7%, enrollments were down 10%. So we are revisiting our guidance now and wanted to see how the launch of the Kids English program goes off.

Right now our growth is going to be driven by U-Can and by overseas test prep, and so those two. So we are hopeful that second half will be much better than the first half of this fiscal year. Because of the slack in June we are not going to be as aggressive in enrolling out new learning centers.

So had 24 learning centers during the quarter, last quarter but we ended up moving nine of them so there were relocations and 12 we actually closed 12 which we didn’t expect to close out many. So we would expect we are revisiting the whole budget for the learning center openings depending on demand. So I don’t want to give a concrete forecast.

We expect Q2, Q3 and Q4 revenue growth are definitely better than Q1. So I would think this will be the low and this is sort of what happened last year as well. Q1 was 15.7%, Q2 was 26%, Q3 was, I think 16%, 17%, Q4 was 20% last year. So, I think that trend as Stephen mentioned the K-12 is our fastest growing business, it's 44% of our business now.

Overseas test prep and study consulting is 39%, together 83%. I think as we have been saying for couple of years as adult English becomes less important it will have a less of the impacts on the summer quarter, but we didn't expect like I said the kid summer camps to fall so dramatically.

But from our schools as we are hearing as a lot of parents are deciding not to send their kid so far to Beijing or Shanghai instead keeping them in a local province. And I think that's partly due to better and stronger competition in tier two and tier three cities. Remember we get a five year head started earlier.

We are early in this area now competition is coming in. And secondarily is that I think the economy in China is not as strong as in the past. And it's quite expensive to send kids to Beijing and Shanghai.

And again we reemphasize the third point is that certainly over the Gaokao and the rumor is the Gaokao English section become less important and will become easier. As given parents do [intellectual testing] that they get their kids in summer camp, English food camp.

So, I think those are the -- we'll be come up with from talking to all the school heads over the last month and a half.

So, on the guidance, I think revenue will be [the same lower in] Q1, I would expect much better revenue growth in Q2, Q3 and Q4, but we are not clear on that -- if I want to wait a few more weeks to see what the revenue looks like before we sort of guide for the whole year. Sorry about that Chao..

Okay. No, that's okay. Thanks..

Okay. Thank you..

Thank you. And your next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question..

Hi, Louis, Stephen and Sisi. Thanks for taking my question. My question is about your margin. Given a soft top line growth in Q1 how should we look at the margin for Q1 as far as the full year trend? Thank you..

Yes I was hoping to get slight margin improvement originally in the budget for fiscal year 2015. But obviously you are correct to look at the slow revenue in Q1 will hurt our margin. So I would -- I am going to differ for one quarter at the margin question until I see how things shape out over the next several of weeks.

We're going to become more aggressive on the marketing side to try to establish this quarter as well as also the future quarters to come. Also we're investing heavily in the online business that you heard from our call tonight.

In addition we're beginning with the partnership with ATA we're going to enter the professional training side on the online basis. We're entering obviously a partnership with Tencent, we expect worldwide a number of new products that will require lot of investment in the online side. So looking at that heavily online both R&D and marketing.

I think if there is -- we expected sort of market margin neutral to have slight increase in the core business but that's now in jeopardy obviously because the revenues are going to come in short on the first quarter..

A follow on your online strategy. Since like there are lots of different things going on at the same time, would you share with us which one or two initiatives are mission critical that you must accomplish? And also if you can add some color on the financial budget obviously related to online that would be great. Thank you..

Okay. The most mission critical part of the online strategy is the O2O integration. So that’s the roll out of the new POP program which also a similar roll outs for UK and obviously tests across our whole network.

And that’s the whole online offline integration where a student can learn on the mobile devices, can take their exams to interact with teachers and social network with their peers. So that’s the key rollout. The other ones are all more long-term initiatives.

So what an ATA we expect that they have a wealth of knowledge about the professional test takers. And we’re an expert in contact. So we want to leverage together our partnership to develop sort of professional training testing materials in the finance and accounting area and law in civil service exams and other IT and professional capacities.

So that’s the more longer-term initiative. Same thing with Tencent; our partnership there we’re going to roll out new technology products and courses and so that’s going to be done in a collaborative time, which will take some time. So we’re setting up teams to do that as well.

We also believe this year in DONUT and Koolearn are probably the second most important as we want to get more classes and more of our ecosystem up and running.

So O2O in the ecosystem where we allow students to learn in the new environment as long as also the young kids the DONUT and those are the ones that have immediate mission critical impact over the next year, they are the ones more long-term.

As far as [spend] goes we’re looking at probably $20 million to $30 million was original budget for online spending this year both in IT and R&D which is certainly more than last year, it’s as Michael said it was 15% or 17% more than last year?.

Yes, 16%..

Yes, 16% more than last year, so it’s a significant bump. And that will also obviously be margin dilutive. But like I said we’re not going to go back to the rapid expansion days where margin falls 200, 300 basis points a year.

That's why we're going to spend our forecast of number of learning centers until we get to figure out, how we drive up to demand get this kids program rolled out quicker..

Right..

As you guy know we let go or POP school head. So there is a way to not even change as well as a launch of a new program. So it wasn't executed obviously as well as [into the life]..

Alright. Thanks Louis..

Thank you. And your next question comes from the line of Trace Urdan from Wells Fargo. Please ask your question..

Thank you. I wonder if you could describe the economic impact of O2O. What that, just what the economics involved at the top-line and the margin line.

And then maybe related to that, Louis if you could just comment on, you’ve got all these different online initiatives going on five years from now what implication does this have for revenue and margins the online activity that you're seeing, at what point does it become kind of relevant to the P&L and how should we think about that?.

Thanks Trance. Yes, I think we have a lot of initiatives going on now. I don't know what happens five years from now, but onlines are up 3% to 4% of our revenue today, but we expect obviously rapid growth from the online initiatives that we're undertaking today.

So I think that we would like to get it probably at least 15% to 20% of revenue in five to seven years. Now as far as the, sorry what was the first part of your question, I'm sorry I missed that I had to start….

I am trying to understand what the economic impact of that is.

So specifically with O2O since that’s something that that is just immediately relevant, but than even more broadly, if you're talking 15% to 20% of revenue, how much of that is replacing revenue and how much of it is incremental revenue, and what kind of margins you expect to have on that revenue?.

Well, the O2O is not part of online revenue, so it’s mission critical because it sets our programs well above other competitors’ programs. So the ability O2O will be integrated into the offline business, but not a significant online component. It won’t be -- the revenue won’t broken out separately Trace.

So for instance, like a POP Kids class today will cost $180, $200; we expect at least a 30% to 40% premium when we roll out the O2O program, the new program that has online, offline features. So it will be much more expensive offering because it’s much more effective in teaching kids and helping kids to learn.

It may actually end up having a negative impact on enrollments because of the cost but it will have a positive impact as far as margins and as far as revenue in the kids sector. So it’s hard for us to make forecast given the program is delayed by a few months. So I want to suspend that forecast until we get the program rolled out in the big cities..

Okay, thank you..

Thanks. But the most important one is O2O for us and ecosystem because from those platforms a lot of offline, online revenue will be combined together and they will give us higher margin as well as higher revenue even if it needs not as rapid enrollment increase..

Thank you. And your next question comes from the line of Fei Fang from Goldman Sachs. Please ask your question..

Hi Louis, Stephen and Sisi thanks for taking the question. Can you talk a little bit about the share buyback how would you plan to finance the repurchase and how much of your current net cash is parked onshore versus offshore and also should we bake in, I mean withholding tax to our numbers? Thank you..

Right now, we have probably one-third or one -- little bit may be more is offshore cash. And the rest will be done in sort of onshore, offshore loan. So, we will-- so right now we're not required to book the 10% withholding..

Great. Also full of question here on the POP Kids program and also the difference between POP Kids, old POP Kids program and the new kind of Shuang You program.

What exactly is the upgrade here? What's the difference in terms of user functionality and should we expect the meaningful pick up in the segment’s revenue contribution after the second quarter? Thank you..

I mean, we're certainly hopeful that it will -- the pickup will be quite rapid beginning in the second and third quarter of this year. The difference is that the old program was more paper and pen with blackboard, the old way of learning.

The new program has a lot of interactive blackboards; has allowed the students to do their work from tablet devices and mobile phones and PCs. And the teachers will -- why don’t you answer, you know the program obviously..

Yes.

The new POP program, actually the teachers can use software to teach students in class and also in the classroom they have interactive whiteboard to be more interactive and more interesting learning process and also have a platform integrates the communication between teacher and students and parents and also encourage to -- recommend homework and also after school practice and prepare with students and more interesting..

Yes, it's what we've been saying over the last two quarters. We allow parents to more closely monitor the children’s progress. And that certainly will be much more effective in working because it can work from any device anywhere and also the classroom the environment will be much more fun.

Because it won't be just boring, listening to your teacher pronounce words but you will be listening characters and watching the interaction between the students and teacher and the programs. So they’re being rolled out now. We expect to charge obviously premium for this.

And so we would expect higher margins from this product assuming that the consumers adopt it in a big way..

Got it. Thanks very much..

Thank you. And your next question comes from the line of Tian Hou from TH Capital. Please ask your question..

Hi Louis, Steve and Sisi. I have a question related to your Internet education. So you've mentioned, you guys (inaudible) mentioned Tencent. So I wonder if you could give us some details.

I guess I would like to know what kind of course are you going to put online and when are you going to launch it and how you plant to target and how many additional students do you think those online classes will reach and what's the relationship of online course with your existing offline course.

So all those details; I would like to have as many details as possible. Thank you..

I think yes, I mean we said in the press release what we can on a competitive basis say. The idea is to form a long-term partnership that will launch many programs. The beginning ones, what I can tell you will be applications. There won't be full courses initially -- there will be more application base.

So the new ways of -- new sort of applications that will draw students and I can't tell you what they will be specifically for competitive reasons. As far as launch date, we are targeting late this year, early next year for the first programs to come out.

And then we like I said, both sides have invested significant amount of money into this cooperation. And so we have the team is working seriously to develop these programs. So, this is a long-term initiative; it’s not going to have any short-term impact on our revenues.

But I think it’s part of the things we need to do to get our technicals into all of online education, so that we’re everywhere. So, the same way is the partnership with ATA to get professional training. It is an area I think is perfect for online and we want to be the leader in the space.

And so we will leverage their knowledge and their day-to-day of professional test takers and our content strength. We invested in [Terina] for that reason as well to get active and professional content of professional training.

So you’ll see that’s similar to what Tencent and Alibaba have been doing in the internet world to see us reach our technicals into many areas of online education and find out the ones that we can make difference and grow our online business, so we are by far the market leader. But don’t expect any short-term results..

Okay. So, one more question related to expansion and the competition. So as the company’s expansion like a new learning center slowdown and I would imagine the demand for the children service is not slowed down.

So, in the lower tier cities if EDU are not going there yet, I would imagine a lot of local vendors are going to start their own tutorial service, so how do we deal with that? So, on one hand, we can’t expand too much and but the other hand if we don’t expand, we’re going to have some new smaller competitors here and there.

So how do we win such kind of competition going forward? How do we deal with that?.

Yes, that’s a great question Tian. I think our strategy in the kids sector is to be at the high-end. So I think that we always stay in competition in every market we enter into, city, geography or product. Our strategy has always been to be at the high-end.

So I think the competitors come into lower tier cities and other areas and they will be, they will pick most of the lower end of the market and the mid end of the market and we'll play at the high-end. So that's all, we still want to grow, if the city is doing well and the product, we will add learning tests.

The 9,300 square meters capacity is equivalent to 7 million centers. So actually we added 10 million centers for the quarter in Q4. The reason I'm slowing down in Q1 is because, we didn't expect a huge drop off in enrollments in June.

I mean so we're beginning to rethink it because I don't want to get driven, our capacity and the margins have to fall then. And its partly because of the delay in the rollout of the kids program. Not integration, we have a lot of IT that these go into this we're going to 50 cities.

The other problem we have honestly, it's a demit is that there is a lot of PE money flying into in the online education sector. And so beginning to trying to hire away a lot of our people and so it's a problem that I know it's been demit in here and not expected for a long time and now the education sector, I mean online education sector as well.

So we are struggling to find in that qualified IT people to help us with these rollouts. Give you away by PE, by huge valuations for PE, from Private Equity Funds..

Okay. So that is tough situation. At least….

We will play, we will go after the kids market, but we'll go after the high-end, then we have middle of the high-end..

Okay. That's very help Louis. So that's all my questions..

Thank you very much. (Operator Instructions). Next moving on to the next question coming from the line of Leon Chik from J.P. Morgan. Please ask your question..

Hi, thanks for taking my question. My question is you mentioned the changing - is taking money or parents taking money away from the English classes are there any other courses that benefit from parents allocating their money maybe K-12 or math or physics? Yes that’s my question thanks..

Well I think what’s happening is that they are not, we used to get a lot of students in U-Can to come to our summer camps middle and high schools kids have started English camps, we saw like a 25% drop off this summer which is unexpected and when we asked these school heads what’s going on with the summer camp, the answers came back to what we said is that a lot of parents are uncertain because the Gaokao is being rumored to be easier in English the future one, also if you are allowed to take multiple administration in the English they are not so impressed to do English boot camp in one quarter, you get more than one chance at it.

And so those are I think who will benefit from that will be obviously the science and math classes if they are going to allocate the money anyway for the quarter even Chinese as well but Chinese have been reemphasized right on the Gaokao we’re the leader in Chinese prep but we were famous for the English summer camps and we have seen a huge dropoff there as well as in the adult English as well.

So those are the two biggest impacts to our business along with the POP Kids the revamp. So it’s something on the Gaokao where we don’t know until the provinces come out with their concrete rules, we are currently in the state of flex.

We think long-term, it will help us, because book for multiple administrations for the Gaokao, but in the short term because of uncertainty parents don't want to spend a lot of money to send their kids to Beijing and Shanghai for starting this boot camp.

And I think it's, I also believe that if you read the all the local press is that the economy is slowing in China, real estate debt prices are falling. So you don't have it much discretionary income as they may have had in the past couple of years..

So, potentially if you do have a benefit in these Science, Math or Chinese classes, I mean that's like second and third quarter right?.

Yes, I think the students still have to do the studying. So, they will come back, but the parents don't want to spend the money, when there is a lot of uncertainty. As what happens to us whenever there is a new SAT coming out or a new GRE or something. When there is uncertainty at the beginning, people wait until there is more it's crystallized.

And I think is that, and New Oriental doesn't have the most sensitive offers, because everyone knows they are going through a product refresh. So, there is a lot of reasons why parents they want to wait a quarter or so.

It's not depressing as where it was English was such a important, if the government is been effective in trying to downplay the importance of English over the last six months it's in all over the press..

Okay. Thank you..

Thank you. And your next question comes from the line of Clara Fan from Jefferies. Please ask your question..

Hi, thank you for taking my question.

I got a question on the ASP growth for first quarter of fiscal year '15, previously we mentioned about 10% to 15% ASP growth, but with a lot of O2O investment that we are doing on top of, in addition to POP kids that you raised the price by 30% to 40% I guess the order one is U-Can were also increasing in the same O2O business.

So would we be raising ASP by not more than before as well, that’s my question. Thank you..

Yeah I mean I think at this point our budget is still to raise prices about 10% to 12% on an apples-to-apples basis. As the new products come out if they are adapted well the price will go up there, probably at a rate of 10% to 12%. Like the all-in-all English program is starting out at a much higher price point..

Okay. Thank you..

Obviously demand is now -- demand is now strong as we expected it to be we won't raise price as much. .

And just one follow up question on us investing on so many online initiatives would that potentially kind of (inaudible) offline business? Thank you..

I think it will and we fully expect it to and we're ready for it. That’s exactly what we expect to happen and like I said we would rather capitalize our own business than have somebody else do it to us. So but it wont effect as much the kids business.

I don't think it would actually affect the SAT business that much either the overdue test prep where it will be, it will be in new areas. I think it will effect the professional services area which we want to go into. We believe it will, it will affect mostly professional education and adult education and our ability with business is slowing anyway.

So we would rather cannibalize it ourselves than have somebody else do it. So we're very poised and we expect it to happen..

Thank you..

Yeah, the trade off is a bigger reach, right? You reach a lot more students and at also higher margins because online business cost is much to deliver the services..

Okay. And your next question comes from the line of Kenny Lou from Flowering Tree. Please ask your question. .

Hi Louis. Thanks for taking my question.

Hello? Can you hear?.

Please go ahead..

Yes. Go ahead..

Yes. So, actually the follow-up question on previous question about the ASP.

So just now you mentioned about the competition in the second and third tier cities from the local territory centers, so can you just give us like breakdown on like so far what you see in terms of the enrollment in ASP for the three tier business segment the overseas test, prep, U-Can and POP Kids for the fiscal year so far?.

Yes. For the overseas test prep we expect that the year continue by zero to 5% growth and (inaudible) 10% to 12%. So I think it’s going pretty standard for overseas test prep. U-can probably similar although Stephen did mention we had a one-time promotion, 10% price get market share in Beijing and that was very effective.

So, we do have vacation promotions there, but I think U-Can price to continue to rise 10% to 12% next year. Now one thing we didn't mention in the call earlier, what we decided that New Oriental students again outperformed everybody on the Gaopao as far as award wins.

We had 12 Gaopao students who scored 1, 2, or 3 in the Provincial city that means 37% for the last four years and I think our competitors want to matched up. So, the results sort of speak for themselves. On the Kids side as where we obviously have the issue right now.

So, enrollments are down in the first quarter pricing is up about 5% so far this first quarter. But we’re not spending a lot of money marketing it, because it's not a -- that's a big program. So we are marketing the new program as it rolls up. So it's not going as top, yeah. Okay..

How much U-Can went down in the Q1 so far?.

Well U-Can is not down Kids is down..

Okay, Kids is down.

So Kids is down, U-Can should not be down, I don't have a number for Q1 yet..

Okay. Because you mentioned that the U-Can English camp....

It was down by 10% for the month of June, but we have never seen that before..

Okay..

But mostly, it's in the Kids, in the adult English. So the adult English, we expected but not a 29% decrease in the revenues. So mostly in adult English in Kids, it's not in U-Can and overseas test prep. So if we can fix Kids and go back to same old part of adult English which is fine, so we need to get Kids right and then I think it'll be fine..

So the so called semi-English U-Can business that you are talking about is in Kids segment or the U-Can segment?.

It is a Kids and yeah, it's boot camp for kids and middle school kids. So yeah it does over a little bit in U-Can. The day school U-Can is doing fine, it is just a summer camps for students travel in there. So the broadbased classes for U-Can English are down 28% of revenue for the first seven weeks of the quarter that’s your answer.

But the day school class for U-Can is up 22%. And the overall revenue for U-Can is up 10% for the first six weeks and its beginning to pick up in July as well. So this is weekend in May, we have 14% backlog in deferred revenue, June was down that July is backup.

So that's why we're guiding 6% to 10% for the quarter, don’t forget we lose 1 to 2 percentage points because RMB depreciation as well. So it’s not as dramatic of slowdown as on RMB terms as it is on U.S. dollar terms..

Sure..

Okay. So Q1 has been the last three or four years always been slower revenue because of the slowdown; that’s a big quarter for adult English. Adult English means CT4 and college level English.

That’s always been declining and we have been telling you for years it’s going to decline because of the as we teach kids English, they don’t need to learn as adult anymore. We cannibalized our own business for the last 10 years..

Yes, but adult English in terms of percentage of revenue is lower right, even though….

Seven or eight years ago, or seven years ago when IPOed, it was 25%-30% of revenue, now it’s down to 10%-12% of revenue.

So like you said, at some point it won’t matter but this year for some reason in June it was down 28% which is a lot, it is 15% and that’s partly we think -- 28%, that’s partly because we think it’s the fact that this whole thing of English being the emphasize and especially this like the CT4 as that isn’t important exam anymore.

So the college kids aren’t taking English during the summer. They have been learning it for 10 years as kids, so they don’t need to learn it as adults anymore..

Okay, got you. Thank you..

Okay. So our future going forward, the one we have to think is kids, overseas test prep remains healthy, U-Can remains healthy. If we get kids going that’s 83% of our revenue. And those get over 20%, so we need to get the kids rolled out correctly.

And as long-term we are -- we want to add growth drivers like online and also professional training, online professional training..

Okay. Thank you very much. We are now approaching the end of the conference call. I will now turn the call over to New Oriental President and CFO, Louis Hsieh for his closing remarks..

Again, thank you everyone 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..

Ladies and gentlemen that does conclude the conference for today. Thank you for participation. You may now disconnect. Have a nice day..