Sisi Zhao - Investor Relations Director Louis Hsieh - President and CFO Stephen Yang - Vice President, Finance.

Jin Yoon - Mizuho Securities Asia Alice Yang - Macquarie Vivian Hao - Deutsche Bank Philip Wan - Morgan Stanley Ella Ji - Oppenheimer Trace Urdan - Wells Fargo Securities Tian Hou - T.H. Capital Jialong Shi - Credit Suisse Clara Fan - Jefferies Fei Fang - Goldman Sachs Charles Cartledge - Sloane Robinson.

Ladies and gentlemen, good evening. And thank you for standing by for New Oriental Second Fiscal Quarter 2015 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 second fiscal quarter 2015 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 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 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 will now turn the call over to New Oriental's President and CFO, Louis Hsieh.

Please, sir?.

Yeah. Thank you, Sisi. Hello, everyone, and thanks for joining us today. I apologies if I sound not clear, I have a sore throat. So you have to excuse my voice. During the second quarter revenue increased 13.4%, compared to 1.4% in the previous quarter.

This increase and accelerated recovery was mainly driven by strong performance of student enrollment in academic subjects, tutoring and test preparation courses, which grew a total of 10% year-over-year to approximately 621,500.

One of the key segments -- one of our key segment U-Can business saw an increase of approximately 40% in student enrollment. This is encouraging in the second quarter is traditionally slow for our business and we have moved path -- moving away from the uncertainty surrounding the Gaokao reform which we discussed in detail last quarter.

I would also like to add that beginning the middle of the second quarter, the company decided to implement a new customer royalty program to encourage repeat business and this has resulted in deferred revenue of about $4.1 million, which is expected to be recognize within two years without additional expenses associated with such revenues.

So in concluding this, our topline growth would have been as high as 15.4%. This is common factors in the education service market in China as it may -- is a way to retain customers. We consider it is necessary for us to sustain customer loyalty and maintain competitiveness.

Under the new program, when customers purchase academic subjects tutoring and test preparation courses, they will be able to earn points that are worth 2% to 5% of their total spending, which can be used to pay for their tuition fees over the next two years. So now, this is temporary dampening quarterly revenue.

This revenue deferred are expected to be recognized when the points are redeemed in the associated classes are taken or when the points expired after two years without additional expenses associated with such revenues. So, essentially that revenue will fall to the EBIT line 100% over the course of two years.

Also in the second quarter, as scheduled, we started to rollout the revamp POP Kids program and our new offerings have reached 35 cities across our nationwide school network. Our efforts are starting to payoff as POP Kids recorded sequentially strong revenue performance and enrollment growth of more than 13%.

For the second half of fiscal 2015, we will continue with the rollout, expect to see a reverse of revenue decline. To accommodate the late timing of Chinese New Year, which will fall on February 19, 2015, we reduced class hours in some cities to fill in two terms of courses within the winter break, which hurt our ASPs.

Overall growth of ASPs was 2.4% year-over-year. Breaking it down, ASP of U-Can decreased by 9% year-over-year due to class length reductions of 20% to 30%, ASP of POP Kids program was flat as we have shortened class length. On an hourly basis when ASPs grew between 5% and 10% depending on business line and location.

Now, I’d like to walk you through our performance across individual business lines. Our K-12 all-subjects after-school tutoring business continued to be our key revenue driver as recorded gross revenue growth of 18% -- 16%, sorry, year-over-year for the second fiscal quarter.

U-Can, middle and high school all-subjects after-school tutoring business achieved a gross revenue increase of approximately 32% year-over-year. Daily enrollments grew approximately 40% year-over-year. As mentioned before, the POP Kids program has previously been experiencing slower growth due to the revamp process.

As we started the nationwide rollout of the second quarter, we have been sequentially seen improvement in revenue performance. Revenues declined low to 4% compared to decrease of 9% in the previous quarter. Enrollment growth was also strong reaching more than 13%.

We expect the strong momentum of our K-12 after-school business will continue, which is important as we move toward peak season in the second half of fiscal year. With the newly revamp POP Kids program, we are confident that the K-12 after-school tutoring business will continue to lead our growth in both revenues and enrollment.

As we might be pioneered with the strong brand recognition and innovative capabilities, we are well-positioned in the ever growing education services market in China. Our overseas test prep and consulting businesses together achieved revenue growth of more than 16% year-over-year for the second fiscal quarter.

Finally, the VIP personalized classes business recorded a continuous strong revenue growth of 18% year-over-year in the second fiscal quarter. Turning to the balance sheet, New Oriental deferred revenue balance, which is cash collected from registered student for courses and recognized proportionally as revenues has been, instructions are delivered.

At the end of the second fiscal quarter 2015 was $440.7 million, an increase of 21.2%, compared to $363.7 million at the end of the second quarter fiscal year 2014. Now I'd like to turn the call over to Stephen Yang, our VP of Finance to discuss strategy, execution and progress and key financials.

Stephen?.

Thank you, Louis. Hello, everyone. As mentioned previously, starting at the beginning of the fiscal year, we embark on the new strategy of Optimize the Market transitioning to a focus on maintaining a healthy balance between topline and bottomline growth. as well as meeting the growing demands for online education services in China.

We continue to be at the forefront of the mobile internet online learning with the significant investment in R&D also installation of largest digitalized content library or call it as educational course and tools in China.

During the quarter, we made significant progress in effort overall and we worked quickly building out our online and offline integrated educational ecosystem. Let me first talk a brief about the four of our business and our focus on further driving our offline user kits.

As we focus again aggressively increasing the topline we continued our effort to penetrate existing markets where we can optimize resources. In the second quarter, we opened 15 new schools and learning centers and closed the 13, adding net of two. In the first two quarters of fiscal year 2015, we added net of the 10 learning centers.

In December, we added net of the eight learning centers.

We have added net of 18 new learning centers year-to-date, bringing our total learning centers at the end of the calendar year 2014 to 721, expand some existing learning centers, adding a total of about 2000 square meters of additional classroom area that are driving both revenue growth and margin expansion.

Turning to the execution of our growth strategy.

Again I can’t emphasize enough the great potential we see in mobile and joint online education market in China and more importantly, our hard work and investment in new phase online Oriental business will further distance us from existing competitors due to lack of financial resources and scale to make such investments difficult.

We are making solid progress in all three levels of our online in entire quarter. The first level [indiscernible] of our online system is an O2O two-ways interactive education system across all our business lines.

The second level is our pure online learning platform koolearn.com and supplementary online education products under the New Oriental brand. The third level of our ecosystem is for New Oriental to take minority shareholdings in our education companies that complement our own online education offering.

Now let me get into the details that we achieved on each levels. As mentioned before, we invested above $25 million to $30 million in this fiscal year and for the second quarter. We spent about $9 million which were recognized as operating costs and the expenses.

Let's start with the O2O two-way interactive education system which we’ve rolled out and upgraded since the fourth quarter across all major product lines and increased expenses in New Oriental traditional offline classroom teaching offerings to online education services.

We launched the U-Can Visible Progress Teaching System in over 30 cities since September last year. This is our online platform that support after class self-learning and we expect this to have us better retain customers. At the end of the third quarter, we target expansion to 50 cities.

As said earlier in second quarter, we successfully rolled out newly revamped POP Kids English program Shuang You which offers -- multi-cultural experience based on the students own interest. It has started to gain tractions in both our student enrollment and revenue.

For the second quarter, we also rolled out O2O two-way interactive education system for domestic test prep program. We ceased the opportunity where we thought it was the right timing and now it’s being used in five cities. In the first quarter, we rolled out O2O over two test app program.

For the second level of our online education ecosystem, we’ve achieved a great outcome with our continued investment in koolearn.com and other supplementary online education product. In the second fiscal quarter, koolearn.com has generated net revenue of $11.1 million representing a 56% increase year-over-year.

Remember the registered users have increase of 52% year-over-year and non-cumulative registered users have reached over 9.9 million by the end of the third fiscal quarter. Koo.cn, our own live broadcast open platform for both New Oriental and third-party teachers achieved about 172,700 registrations in the second fiscal quarter of 2015.

DONUT, a series of game-based mobile learning applications for children achieved a record of 12 million downloads by the end of the second quarter. Le Ci, an English language vocabulary training application we launched in fourth fiscal quarter 2014 for mobile phones and tablets app recorded over 818,200 users by the end of second fiscal quarter.

As announced in December last year, we partnered with Tencent and launched a mobile app named uDA. This is an exciting initiative as it brings together China’s most respected brand in 'Kindergarten to College private education and its largest and most successful Internet company.

This is another start that we made on the path of transforming how students in China will learn academic, tutorials and we hope to create more best-in-class mobile learning solutions for students in China. Turning to the third level of our online education ecosystem.

We have invested in the select online education companies with the minority stake and we never ceased to search for new business opportunities that we can leverage so that we have [numerous] [ph] products and services. In December 2014, we made investments in [indiscernible] an online platform where our K-12 students can practice our English.

It’s firmly being used by approximately 1,400 elementary schools and middle schools in more than 50 cities. We’ve about 1.6 million registered users and 130,000 paid users, together with our previous investment in Alo7.com, Tarena and Juesheng.com.

We’ve built more compensation online education system that is enabling us to provide fresh and interest to learning experience to our student. All of this said, I think it’s clear that the company has been working vigorously to drive both core offline and developing online business.

It is very encouraging that our highest potential business lines maintain healthy growth in the second quarter. And we’ve made so much progress in building out our integrated education ecosystem and this yields strategic transition.

Fiscal 2015 is an important investment year and while this will have an impact on our annual operating margin and net income, we do believe that this effort will bear fruit and help us to achieve the fulfillment of growth and long-term profitability.

Now, let’s take a quickly glance at some of the key financial metrics for the second fiscal quarter in addition to the financials we mentioned at the beginning of the call. Operating cost expenses for the quarter were $249.2 million, a 20.0% increase year-over-year.

Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were US$243.9 million, representing a 20.6% increase year-over-year. Cost of revenues increased by 17.6% year-over-year to US$114.6 million, primarily due to the increases in teachers’ compensation which is in line with the revenue growth.

Selling and marketing expenses increased by 20.1% year-over-year to US$44.2 million, primarily due to increases in selling and marketing staff’s compensation and brand promotion expenses. General and administrative expenses for the quarter increased by 23.2% year-over-year to US$90.4 million.

Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were US$85.8 million (sic) [US$85.5 million], representing a 25.6% increase year-over-year, primarily due to headcount increase.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 0.8% to US$5.3 million in the second fiscal quarter of 2015. In this fiscal quarter, we encountered a loss from operations of US$13 million, compared to an income of US$0.7 million in the same period of the prior fiscal year.

Loss from operations would have been approximately US$8.9 million is now for the accounting fact after accounting new customer loyalty programs. Non-GAAP loss from operations for the quarter was US$7.6 million, compared to non-GAAP income from operations of US$6.0 million in the same period of the prior year.

Operating margin for the quarter was negative 5.5%, compared to 0.3% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was negative 3.2%, compared to 2.9% in the same period of the prior fiscal year.

Net income attributable to New Oriental for the quarter was US$2.4 million, representing a 44% decrease from the same period of the prior fiscal year. Capital expenditures for the quarter were US$15.2 million, which were primarily attributable to the opening of 15 new learning centers and renovations at older existing learning centers.

Now, let me go through our expectations for the third fiscal quarter of 2015 before we move into Q&A section. We expect total net revenue in the third fiscal quarter of 2015 to be in the range of $279.8 million to $290 million, representing year-over-year growth in the range of 10% to 14%. There were some specific factors impacting our guidance.

First, approximately $5 million in revenue, representing about 2% year-over-year growth were deferred, resulting from the company's new customer loyalty plans. Second, the recent depreciation of Renminbi against the U.S. dollar and that impacts revenue growth by about 2% to 3%, if not considering the above mentioned impact.

The projected revenue growth rate is expected to be in the range of 15% to 19%. The above forecast reflects New Oriental's current and preliminary view, which is subject to change. At this point, Louis and I will take your questions.

Operator, please begin?.

Thank you, Mr. Yang. [Operator Instructions] And the first question comes from the line of Jin Yoon of Mizuho Securities Asia. Please ask your question..

Hey. Good evening, Louis and the team.

Can I start off with the loyalty program? Just kind of wondering what your thought process is, why is the current program now? Is it largely due to competition or is it other external factors are really niche for this? And really at the end of the day when we look at EDU historically, the company has kind of always piloted its entire higher quality, higher caliber product that could continue to raise prices.

With the loyalty program, did that kind of change how the company sees business going forward from historical norms? Can you just kind of elaborate on the loyalty program? Thanks..

Sure. Thanks Jin. I think the loyalty program was sort of -- we started it, piloted in a couple cities in September and then we began and it was successful. So we rolled out across the networks in October. So it’s already been going on for a few months and you are right. Part of it is due to competition. It’s also become a common practice in China.

I think it’s probably long overdue for us to have a loyalty program because remember, our students start with POP Kids at age five or six and stay for six years. And they are willing to ask us for bundled breaks and this kind of stuff.

And so it makes sense for us to, as we offer more classes like math in Chinese for young kids to offer them some kind of discount, as they sign-up for more classes and stay with us over a longer period of time.

And the key is to get them in seven grades, so they will pass another transition period from sixth and seven grade and also in ten grade, as they go into or actually when they go into high school.

So we wanted to, in the marketing department decided, it’s something we wanted to do to keep student retention high and also to sort of follow the norm of the market where a lot of companies do offer these loyalty programs. And so we were part of this event by not doing it. So part of it is the increased competition.

Part of it is because we are seeing our campus growth in the K-12 sector and these kids usually stay with us for multiple years. So we want to create some stickiness by offering them loyalty to discounted loyalty program where they get discount and the longer they stay with us, the more discount they get..

Thank you. And the next question comes from the line of Alice Yang of Macquarie. Please ask your question..

Hi, Louis, Sisi and Stephen. Thank you very much for taking my question. My question is about the O2O integration initiatives, especially the revamped POP Kids.

Can you share more color on the full year FY ’15 growth of the POP Kids segment, if you can break into enrollment growth and ASP growth that will be great? And whether you can share some of your view about how you balance the ASPs further growth, when your price is not very much cheap versus the comp volume growth, especially in the less penetrated market? Thank you very much..

Thank you. Good question. For the POP Kids program, we just started rolling out the new program this last quarter, so it’s in 35 cities but it’s probably only at about 25% to 30% of the total amount of POP Kids learning centers, so not fully rolled out yet. But it is really encouraging. The enrollment growth is accelerating.

So we did 13% enrollment growth last quarter and in the first five weeks of this quarter, enrollment growth is already 19%. And we are going into the next two weeks, which is the fastest growth period for us. Because remember Chinese New Year is late this year, it’s February 19th versus February 8th last year.

So the peak season for enrollment [indiscernible] now will be the next two weeks. So if we continue this trend, the POP Kid enrollment actually did very well. And I’d just like to add that U-Can also did exceptionally well because enrollment is up over 26% in the first five weeks. So we were seeing accelerated enrollment increase in K-12.

On ASPs, we are taking the strategy of not increasing ASPs as much, especially in this third quarter where we enrolled out a new program in POP Kids and we have kind of squeezed two terms in before the Chinese New Year, February 19th because it’s so late. So the terms a little bit shorter.

So we are trying to, so the prices won’t be, I reckon is much of an increase. But we are still increasing on hourly basis between 5% to 10% and then higher for overseas tests preps. So it’s not much. We are still increasing prices at above market rates and above what our competitors are.

But you are right, I think it’s a gain that we want to get more enrollment, especially enrollments in seventh grade and nine grade and ten grade, when they are transitioning to junior high and they are transitioning to high school because then they have the best check of stay with us for two to four years.

And the idea is that the loyalty program will also create some stickiness in that regard..

So, I want to ask another one.

Please?.

Go ahead..

So, yeah, very much helpful. So, you mean that ASP growth will be somewhere around 5% to 10% on average for full year FY ’15..

Yes. But we are still breaking parts on an hourly basis of about 5% for POP Kids and up to 7%, or 8%, or 9% for U-Can and then overseas is still over 10%. So the price increase aren’t as quite as aggressive as past years, but we were also seeing a nice spike in our enrollments because remember, we had that terrible Q1 during the summer.

And so we were still kind of recovering and we are rolling out a new POP Kids program. So the more early enrollments we get, the more people will see how good the program is and with the loyalty program, hopefully stay with us for many years.

So it’s kind of an integrated strategy to retain customers, to get more new customers and introduce them to our new O20 offerings..

Understand. Very helpful. Thank you..

Thank you. And the next question comes from the line of Vivian Hao of Deutsche Bank. Please ask your question..

Hi, Louis, Sisi and Stephen. Thank you for taking my question..

Hi, Vivian..

I, first of all, I have a follow-up question regarding the new loyalty program. Can you introduce what is the current redemption rate and also the average redemption period for such program? And also do you have any plans to retain this program permanently, or is it just for a certain period of time? And I do have a second question. Sorry about this.

It’s regarding the hiring plan you operate now, given the certain G&A expenses, what is the total headcount we have and also what is the additional headcount by function and also by segment for this quarter? Thank you..

Okay. I think Stephen can tell you the breakdown, but headcount is 32,500 at the end of the quarter, which is about 2,500 more than last year, of which 600 of them were teachers. So the G&A and S&M and headcount did go up by about 1,900 which is a lot.

The growth, predominantly, we guided so far of 18 million centers net and so we have to expand the capacity as well. But a lot of the headcount increase is related to the O2O integration and the revamp of new programs. I think that headcount will not go up by much in the next couple quarter, but it will go up due to new center openings.

So I think you’ll probably lower by 500, 600 reasonables..

Yes..

33,000 is the regional goal for the end of this fiscal year. On the royalty program, Vivian, the current plan it to keep it in place permanently, especially the early -- our retention rate last quarter, which is usually a slow quarter, Q2, was about -- was over 65%. So, it’s a good retention rate.

But we don’t know how much has been redeemed yet, because the Gaokao just went into effect in October. So the beginning redemptions will begin, as you tracked about, starting in this third quarter coming up. But the idea is that the longer the student stays with us and the more classes they take, the more discount they get.

So, start to 2% and moves to 5% depending how long the student stays with us. And the key is that it’s revenue, like the $4.1 million that came in this last quarter, only a half of quarter, that $4.1 million is direct revenue. If add it, it would have been 15.4% on the gross side.

But all $4.1 million fall straight to EBIT overtime, because the cost it accounted, in cost we delivered the classes, right. And so it’s pure revenue and pure operating market -- operating income. So that’s why it’s not apples-to-apples comparison with last year or in the past. So we are beginning to star this new one.

So after one year when we expect about $20 million to $25 million of this deferred revenue, about $5 million to $6 million per quarter and then it evens up, the next year’s comparison will be sort of apples-to-apples. So there will be a neutral effect.

And then the second year it should have a positive effect as some of these redemption points expired and they’re recognized right away. So they were recognized as revenue and as profit right away.

So I think as you will see it -- see some of it this year, the revenue is dampened and the operating margins dampened -- operating has dampened by about $15 million which is the three quarters’ worth, and the next year it should be sort of neutral effect. As we begin the year-over-year comparisons, it will be the same program.

And in the second year as the initial set begins to expire, you will see a slight bump up in the second year in revenue and then in operating income. But we intend to keep it permanently assuming it’s successful..

Right. This is very helpful. Just a very quick clarification.

So as the deferred revenue one if flowing as -- recognized as revenue on P&L, we should be expecting some positive impact to operating margins, right?.

Correct. So right now it’s going to be negative for this year, so about $15 million negative for this year if we could take $5 million a quarter because we just started it after the first quarter. And then next year because of the compare to year-over-year with their all – their rate is in place, they will become a neutral effect.

And then the second you will have a slight positive effect. But the key to recognize is that this deferred revenue is real revenue. If classes are already delivered, revenues won’t be funded and it will just pass through the bottomline just at the rate of date..

Got it. Very helpful. Thank you..

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

Hi. Thanks for taking my question. Just a follow-up question on your guidance. Given that you mentioned enrollment is rebounding, including POP Kids, and ASP is also growing, I know that there is couple factors citing this with the loyalty program and the currency impact.

But the guidance, 10% 14% still a bit soft since the bps are soft, could you talk about the overall enrollment trend, the past few months? And then also given the weaker first half, what is your expectation on the full year margin, that’s my question? Thank you..

Okay. Thanks a lot. I think the last two month’s trend is quite good. So we had 10% enrollment growth last quarter, which a lot of it will flow in this quarter. And then it’s hard to tell what this quarter will look like, because the 11 days difference that you had in your last year and this year, versus February 8th.

So we already past our peak period for last year already week wise. This year it’s February 19. We were entering the peak period the next two weeks.

So if you don’t take the last week into account, enrollments were up over 10%, but you had number that enrollments in U-Can and POP Kids, the hours have been shortened a little bit because of higher -- two terms into winter break before time, last year we didn’t try to do that. And so that they are little bit shorter.

But the average hourly increase is still 5% to10% and that’s what we tried to explain in this script itself, okay. So there are still price increases and enrollments are actually still growing very fast. So POP Kids will enjoy very strong positive revenue increase as well as enrollment increase this quarter and U-Can well over 30%.

So they are both doing very well. The weakness is in the adult English, it’s down about 30% in enrollments year-over-year. So that’s the weakness factor in the value terms. It’s the old legacy business and overseas is down a little bit in enrollments this quarter.

But like I said, it’s too early to tell because the next weeks are the key weeks for this year because if you’re looking at a score now and the sign up for the winter term over the next two weeks, it will be the peak time, but we are quite encouraged. As far as margin goes, we are still up. Last year we did 17 points, it was in operating margin.

This year we had got to be 14% to 15%. But with the new loyalty program, it will take that down about 1 to 1.5 percentage points, so it is up $15 million this year.

So it will be -- we probably got somewhere, but we don’t like to get straight at it, because the lower we are going to knew, but probably somewhere without the loyalty program about 13 to 14, but it’s down 1 percentage point. And with the loyalty program, we will probably look more like 12% to 13%.

So with that, that’s why I want to start with or without loyalty program because otherwise it’s not a fair comparison, but don’t forget this includes over $30 million of spend this year on the new online initiatives.

And then we expect that to really bear fruit in the second half of this year and into next year if we want to have the same $30 million increase next year. So most of the expenses are coming in this year as we roll out O2O across the whole network..

Okay. Just want to make sure I get it right.

So including everything loyalty from investment, so you are targeting around 12% to 13% this year for full year?.

Yes. With everything built in, which is equivalent to about 13.5% to 14.5% pre-loyalty program..

Okay. Thank you..

Okay. Tank you, Philip..

Thank you. And the next question comes from the line of Ella Ji of Oppenheimer. Please ask your question..

Thank you for taking my question. First, I have a quick follow-up regarding the loyalty program.

Just want to make sure, Louis, you said that the order points, are they going to expire after one year? Is that what you said?.

Two years..

Two years, okay..

They will expire after two years, Ella. So that’s why you will see this year there is lot of revenue to build up that will be either redeemed in the next two years or it will expire and will recognize at all. That’s why in the second year the points in our redeemed will get recognize, that’s why you see a bump up in the second year..

Right, okay..

But then revenues have been collective and it will fall a 100% to the operating line..

Right, got it.

And regarding uDA, your new product with Tencent, can you talk about your expected progress in the calendar year '15 and how much more support should we expect from Tencent, especially from Tencent channels? And do you think your rental will also need to spend more in sales and marketing to help promote uDA product?.

Yeah. That’s a good question. uDA is new so in kind of test launch with English. So right now, it’s a soft launch. It hasn’t been blown out across QQ or Weixin yet. We are waiting to add the math module so that will happen in the next few months. And also we are testing it to make sure it’s more accurate, the question answering program is more accurate.

And so we are continuing improving it, but we want to do a soft launch to get it on the market, so students begin to test it and help us to improve it. This will be a long-term program that will include not just English and math, but hopefully all the subjects from Gaokao.

So it will become -- we believe it will become we go to program for kids, middle and high school for sure. And Tencent is behind it, we will require additional investment and you will see it come in, in the quarters ahead. But I think you just stay tuned, we are actually very excited about this and I think so is Tencent.

And you will see a number of announcements from us in the near future on our corporation. But again, we are going to go and do test..

Okay. All right. Okay..

This is -- at this point, I want to make Ella. This is the beginning of our corporation. This is not went and done. This is a long-term corporation..

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

Thanks very much.

So, Louis, my understanding was with POP Kids, the plan was, following the upgrade, that you’re going to have much more pricing power and now it sounds like you’ve revised that expectation? And so, I’m looking at that data point combined with the fact that you chose this quarter to introduce the loyalty program? And I’m wondering if you were now seeing pressure in the market -- in the consumer market that and whether or not you believe that that sort of temporary related to the economic conditions in China right now or whether this is something related to growth in the large markets and approaching saturation and if this is sort of an environment that’s going to pass or something we can expect long-term?.

It’s a good question, Trace. I think for us the Kids business has always been the most competitive on the POP Kids and the reason is because as I -- as you know, if -- you’re not studying for admission critical exam like the Gaokao, the [Indiscernible], the SAT.

So pricing has always been a little bit more difficult, that’s why the POP Kids class is only about a RMB1,000 versus a U-Can classes more than RMB2,400, right, for the same length of time. So it’s because of the admission criticalness of this class itself and so POP Kids has always been more competitive.

And for us, we have always been at the high-end of the pricing point and we have probably lost the market share as a lot of competitors come in, because we -- is not a hugely differentiated product. But what we’ve done with this new re-launches, we now have a differentiated product.

We have the best program out there that’s interactive, it has interactive blackboard, it’s far better than everything out there. And I think it’s for us, we want to introduce it to as many student as we can early because of the repeat business that it generates, where they come in for many years.

And so this is aggressive portion in our part, especially giving the POP Kids was declining for three quarters in a row to get market share by getting new -- more students in. The market is not shrinking. The POP Kids market is still growing. It’s growing nicely. It just that, we had an old offering and we won’t aggressively promoting it.

Now we have the new offering, the best offering in the market and we’re aggressively promoting it. And we believe with the loyalty program it will keep students coming back. They’ll have incentive and we won’t be that much more expensive than the other offerings. Part of the shift also, Trace, is because we have a new POP Kids head as you know.

They came in about four or five months ago and he -- his philosophy and he knows better than I do is to go after market share first and then raise prices as the student get hooked on your product basically, because there is really nothing else out there that’s comparable, maybe busiest program but that’s two or three times our price..

Do you -- are you, so, okay, that. I guess you answered my second question..

So first [indiscernible] get market share and then raise price..

Right.

So, I guess, given that you no longer -- POP Kids no longer the price leader in the market?.

It is still the price leader, but I mean, Disney has really been higher than us, right. But they’re owing a few market and they are at the ridiculous price point..

Okay..

I mean, we’re at, POP Kids is about US$150, US$200. They are at in a $1000. So there is a large -- there is a huge discrepancy where we can still raise prices. But I think for us right now, given that we saw three consecutive quarters of decline and now we have the best product in the market in our price category.

We want to get market share first and it’s been successful, right. We saw 13% increase in enrollment and we spend the decline in revenue. This quarter and just in the first five weeks we’re seeing almost 20% increase in enrollments, that’s unheard off for POP Kids in the last couple of years..

Yeah. Okay..

So the new program is taking hold and in U-Can is doing the same thing. We haven’t been as aggressive in U-Can pricing this last quarter and you saw a huge spike 40% enrollment, 32% in revenues, because their courses are shorter and you can see continuation in this third quarter.

We’re already in the first five weeks before the peak season, enrollments already up 26%..

Okay..

Okay. Thank you, Trace..

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

Hi, Louis, Stephen and Sisi. The question related to what you guided earlier this year regarding your O2O investment at about $20 million to $30 million.

So I wonder how you guys are using this $20 million to $30 million? Why are you investing in this part of money? So how much of that are like one-time investment? How much of that is going to low into next year? So I tried to figure out how much of that will disappear next year to improve your margin?.

Okay. Stephen has a better idea of that breakout. But my only comment on this is that you know, Michael, whatever budget he said will be over spent. So I think it will be higher than $20 million, partly closer to $30 million, $35 million..

Yeah..

You know the breakout..

Yeah. Hi Tian. We have spend US$9 million on overall and online things, the expenses in Q2. And we will keep spend the -- I think as amount like $8 million to $10 million in next two quarters. By the end of this fiscal year, I think, we almost will finish the key spend of the overall and the expense.

So the next year you will not see so much expense as you’re seeing at this year. And for the expense in the cut, more than half of them we spend in the staff compensation because we heard more and more people for the IT people to do the overall things. And the others we spend in the -- likely similar or the other equipments.

And for the pure online for our koolearn.com, we spend like $1 million for the selling expenses for the new product, that’s the overall expense..

Okay. That’s helpful. And also you guys have a lot of cash. Hello….

Go ahead..

Hi Louis. So you guys have a lot of cash on your balance sheet. And certainly, you guys did not think about how to use that.

I wonder, what’s the plan in that front?.

Well, I think the cash, the first idea or the first use will be looking at business partnerships and M&A and also to make sure that we get this O2O and we’re the leader in the online education and the online-offline integrated space in the mobile learning space. That’s our first priority.

Excess cash beyond now we will be using what we’ve been doing is buying back shares, so we spent about $40 million so far in the first four month, three or four month buying back shares in this coming program.

And then every year after the fourth quarter, we look at how much cash we generated and we’ll either try to pay dividend or do share buyback or return some capital to investors depending on the need of our business and how much excess cash we generated..

That’s very helpful. That’s all my question. Thank you..

Thank you Tian..

Thank you. And the next question comes from the line of Jialong Shi of Credit Suisse. Please ask your question..

Hi. Good evening, management. Thanks for taking my question. First of all, a great follow-up on the previous question. Louis, you just mentioned, you will probably consider paying cash dividend or continue to do this share buyback for the coming fiscal years.

So if you guys were to pay dividends, what is your target payout ratio you are making -- can you give any guidance?.

Yeah, we don’t have a target payout ratio but last year we paid about 50 million something in the dividend so you can calculate. It’s about $0.35 or so a share and it’s up about 16% from a year before that.

This year we are doing a buyback but next year it depends on how much -- we generated less cash this year than we did last year because of the investment. It’s not my decision. We don’t have a payout ratio but the board is considerate each year and actually in multiple board meetings throughout the year a return of capital.

We know it’s a big issue among U.S. proxy bid. So we are very sensitive to it. And you know me I am always pushing to return capital back to the share holders..

Okay, I guess a quick clarification on your dividend policy. I understand for the current fiscal year, you guys already have a share buyback program which you expected.

So is it fair to say for the current fiscal year you probably -- you guys won’t have any dividend to announce even by Q4?.

Yeah. I think that’s fair. I think by Q4 we may. So it’s going in the few months. So I think as we’ll make the decision after Q4. So we’ll probably make it some time around the July board meeting as we did last and the year before..

Understand….

So we finished the fiscal year. So we did the budgeting for the next year..

I see, I see. Very clear. Yeah I have another question about your Koolearn program and your Koolearn appear to be very well in the past quarter. Excuse me.

Just wonder, what is the key competitive stage for Koolearn compared to other online learning platforms, especially those platforms operated by Internet companies? And what sort of revenue contribution would you expect to generate from Koolearn by end of next fiscal year? Thank you..

Yeah. As we said in the script, the Koolearn.com, the growth -- the revenue growth was very strong in the Q2, about the 6% year-over-year and last year the revenue of Koolearn.com accounts for the 2% of the total revenue. But in the last -- in the Q2, it’s generated -- the revenue accounts for the 5% of the total revenue.

So we are very happy to see that the revenue of the Koolearn gets more and more growth. So we hope the next year, the revenue of the Koolearn will get the growth rate by about 50% year-over-year..

[Operator Instructions] And the next question comes from the line of Clara Fan of Jefferies. Please ask your question..

Thank you for taking my question. I just want to clarify. I mean for the last quarter, we see that enrollment is growing while ASP is cracked up and you mentioned that ASP on a hourly basis is increasing by around 5% to 10%.

But on an absolute basis, are we seeing a softer ASP growth compared to what we have expected before, especially after we introduced some loyalty programs? Thank you..

Yes. I think the intention of with Michael and the marketing team and we agree with is to grow out the enrollment growth in a short term, especially as we roll out O2O. We believe that our program is superior -- far superior than anything else in the marketplace. So we want as many students to try it as we can, because we think we’ll get them hook.

So the short-term plan is to reduce the amount of increase in the ASP. So we’ll still increase it by about 5% to 10%, but it won’t be as aggressive as in past years, because we want to get the students on this new online, offline integrated system.

Once they get on it, we believe that along with the loyalty program, it will create incredible stickiness. And that also Michael has spent a lot of time improving our content and improving our teaching quality. So, that’s where our focus has been.

So we believe that that compare with the technology advantage we have and the loyalty program and the brand name is the winning strategy for us. So you are correct, Clara, that we have slowed down the amount of ASP increase, but it’s still quite healthy at 5% to 10%, which is not as high as 10% to 12% like in the past..

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

Hi, Louis, Sisi, Stephen. Can you help us with your expansion plan for 2015, how many centers would you like to add this year which will focus on and which cities would you add the capacity? Thank you..

Thank you, Fei. I think we’ve opened 10 as of the first two quarters, but we opened eight in December alone net. So we were up at 18 now. So I would expect that to be somewhere between 30 and 40, but far at the lower end of 30 to 40. So right on schedule, we’re about 30 to 40 target we announced last quarter, but probably not at the high end of that.

And most of the learning centers are Kids K-12 and overseas centers. So they are kind of mix to use. So we are not really opening adult centers given that’s the declining business. And we are opening it in most of the cities that have higher profit margin. So this still includes cities like Beijing and Shanghai and some of the largest cities.

Some people may think it’s saturated, but it’s not, and then also high profit second tier cities, like Tangshan, Shiyan, and some other cities, Wuhan that are doing quite well.

Does that answer your question?.

Yes. Thank you for answering..

Thank you. And the next question comes from the line of Jin Yoon of Mizuho Securities Asia. .

Hey, just a follow-up question. Do you want to add to the loyalty program from the release that you provide? Do you know how competitive your pricing is in select -- in your top tier cities? And if the pricing gap is still there between you and competitors, does that mean that the potential rebate to go higher going forward? Thanks..

Yes. I think Jin -- I think yes, right now as we go and adjust the rebate depending on market conditions, our initial shot is 2% to 5%. To go long enough, the more years and the more classes you take with us, the loyalty program goes up, start to 2% and moves toward 5% of your total purchase. So it does go up right now.

We always can adjust it higher or lower depending on market conditions. Right now, we’re priced probably 25 -- 20% to 25% above our competitors in most classes. So that can give U-Can, Pop Kids overseas will probably represent higher than our most of our competitors.

We think that we’ll continue to hold because we use the other ones to initiate the price increases and they usually follow us, behind us. So, we think unless there have been changes that price gap will continue to be in force. But we think the difference now is that we believe the quality gap will expand.

So our quality and our Internet tools in our mobile learning system will be better than anything else that our competitors can offer. So, not only will we have a pricing gap that looks same but we will have a higher quality gap, that’s a goal.

So with a higher quality gap, we’ll get more customers rolled in and at that point, we will probably consider raising the price more aggressively..

Thank you..

And the next question comes from the line of Charles Cartledge of Sloane Robinson. Please ask your question..

Hello, Stephen. I’m C.C. Thanks for taking the question. About three quarters ago, some of the debates or the conversation was about occupancy. I was wondering if you could notwithstanding the fact that you calculate it, maybe it’s worth reminding people how you calculate it.

But that will be interesting to seeing, how that’s developed over the last few quarters, please? Thank you..

Thanks Charles. The utilization rate has continued to go up. It’s probably up 2% year-over-year. But now we are adding more capacity, so that may not be the case in Q3, because we added eight learning centers in last month alone.

So, we’ll keep you posted but the utilization rate is definitely up over the last two years, about 2 percentage points from when we were at 743 learning centers and we were kind of backend loaded.

So, I think is that you will continue to see the utilization rates go up but maybe not quite 2% a year, because of the expected -- the more aggressive expansion plan this year, which is the contraction plan of last year. But we’re definitely seeing more students filling the seats.

And in fact, Charles, that we are being as aggressive on price, I think we will also increase the utilization rate as well. And the new programs are attracting, as I said the enrollment growth is picking up. So we -- the new programs are attracting lot more students.

So you should see pretty good utilization rate increases, but not quite as it was when we were reducing very fast..

Thank you..

And the last question of this question-and-answer session, just a follow-up question, from the line of Trace Urdan of Wells Fargo Securities. Please ask your question..

Thanks very much. Louis, there was some coverage in December about plans to reform the Gaokao, this idea of sort of deemphasizing Gaokao in favor of other measures of student achievements.

Wonder if you can put that into some context for us, whether you think that’s going to go forward, what it means and whether it creates any opportunities for other types of, sort of students support for you guys?.

Yeah. I think there is a debate every year. Trace, you are right. We received a lot of writings about how it’s unfair that one test determines a child’s future. So you always hear that kind of retract.

At the end of the day, in a country with 9 million to 10 million high school graduates, there is no fair way to assess people for a higher education for the limited spot. But if China’s started looking at future recommendation letters, the teachers would be the richest people in China, right.

There is no fair way that we really can argue with other objective tests, so all the retract that happens usually, the Gaokao still remains the main factor. In fact, it’s gotten rid of all the other stuff, right. They got rid of all the points you get for the Olympic map and that’s what killing town in Beijing and in the Olympic side, right.

It’s got rid of all the other external factors. They’ve actually made the Gaokao even more important.

And then of course earlier this year, they talked about reducing the English points and they back off from that, so English is the same as it was in past year and even helped us by taking the English test twice in Shanghai than Shuang You over the whole country. So not only they come back, they actually come back even stronger for English.

So, I think there is talk every year of this but there is no -- no ones come up with a fair system that people will accept other than the standardized test..

Okay. That’s helpful. Thank you..

Okay..

Thank you all. We are now approaching the end of this conference call. I will now turn the call over to New Oriental's President and CFO, Mr. Louis Hsieh, for his closing remarks. Mr. Hsieh, please go ahead..

Okay. 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 very much..

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all now disconnect..