Good evening and thank you for standing by for New Oriental’s First Fiscal Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Please go ahead, Ma’am..

Thank you. Hello everyone and welcome to New Oriental’s first fiscal quarter 2017 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 Stephen Yang, Chief Financial Officer.

After his prepared remarks, Stephen will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.

As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded.

In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr. Stephen Yang. Please go ahead, Stephen..

Thank you, Sisi. Hello everyone, and thank you for joining us on the call. We're off to a great start for fiscal year 2017. More specifically, we had very strong top line growth and exceeded our original guidance for the first quarter. Net revenues increased by 16.5% year-over-year to $534.1 million.

The growth was bolstered by the improvement in customer acquisition and retention rate and largely driven by healthy 31.2% increase in student enrolment. It worth noting that, net revenues increased by 23.7% year-over-year in our functional currency RMB.

You have likely heard us mention previously that the first quarter is traditionally our biggest quarter, although with a lower year-over-year growth rate, even given us historical trend, our performance was really quite strong in many areas compared to the prior year.

For instance, we're pleased to see the continued good momentum in our key revenue driver, the K-12 all-subjects after-school tutoring business that delivered a strong revenue growth of about 28% in US dollar terms or 26% in RMB terms year-over-year in the first quarter, driven by exceptionally high enrollment growth of about 46% year-over-year.

This mainly led us about 8% student enrolment growth of both U-Can business and revamped POP Kids program with 44% and 49%.

As we remain focused on our well-proven optimize market strategy, we continue to focus on extension of our offline business, while also investing in also two way interactive education system, which we believe is and it will continue to be a key d differentiator to set us apart from competitors and help us further penetrate in markets.

During the first quarter we opened a new school and added a net of 22 learning centers in the existing cities. In total, we added approximately 49,000 square meters of classroom area, extending capacity by 4%.

In addition, we started to pilot new teaching model, namely the dual [ph] teacher classes in selective existing and new cities in July 2016 by utilizing online live forecasting technology, our high quality teachers space in high tutor cities can reach students in low tier market with on site support from teaching assistance sitting in the remote classroom with students.

We plan to implement a dual teacher class model in around 10 out of 55 existing cities in our nationwide school network. We expect to enter five to eight new cities specifically in low tiers market by opening new teacher model learning centers in fiscal year 2017.

To complement this offline expansion, we continue to role off the sophisticated O2O integrated education system, including new POP Kids program U-Can Visible Progress Teaching system in all existing cities. We firmly believe that the strategic investment we made will propel our future growth.

Turning to pricing, program blend ASP decreased by about 14% over-over-year, which represents a decrease of 8% in RMB term. On an apple-to-apples basis, which is GAAP revenue divided by the total teaching hours. Hourly blended ASP in RMB terms increased by about 1% year-over-year.

To provide a breakdown of the hourly branded ASP in RMB term, please note that U-Can increased about 1%, Pop Kids increased about 5% and oversea test prep program increased about 6% all over year-over-year.

The decrease of per program blend ASP is mainly due to the shifting of revenue mix from the oversea test prep business with higher ASP to the K-12. Together we have a huge increase of enrollment for this current U-Can classes during the summer promotion we offered. Meanwhile, it’s encouraging to see the continuous improvement of operating margin.

Despite the promotion cost, the operating margin for the first quarter increased by 30 basis points to 28.6% from 28.3% a year ago, even while we invested quite heavily in customer acquisition and loyalty development via our summer promotion, which I will talk about in some detail later in my remarks.

The margin expansion was largely driven by improved utilization of facilities and effective cost control within the company. We will manage to achieve higher efficiency in our operations in fiscal year 2017. It’s allowing us to reinvest in the business, you know while protecting margins and this is very important.

This also highlights our management team’s ability to manage the business, knowing that what levers to pull, when to drive overall performances. Now, let's move on to performance across our individual business lines.

Our key revenue driver K-12 all-subjects after school tutoring business achieved a record growth of about 28% in US dollars terms or 36% in RMB terms year-over-year for the first quarter, driven by an exceptionally high enrolment growth of about 46% year-over-year.

Breaking it down, the U-Can middle school high school all-subjects after-school tutoring business experienced revenue increase of about 23% in US dollar terms or 31% in RMB terms year-over-year. Student enrollments grew about 44% year-over-year for the quarter.

Our Pop Kids program has delivered a strong performance with revenue up by about 39% in US dollar terms or by 48% in RMB terms during this quarter and enrollment growing significantly by about 49% Our overseas test preps and consulting business together reported revenue growth of about 2% in US dollar terms or 8% in RMB terms year-over-year.

Finally, VIP personalized class business achieved cash revenue growth of about 11% in US dollar terms or 18% in RMB terms year-over-year. Now, I will provide some updates on the progress we have continued to make with our well-proven optimize market strategy.

We have been focusing and maintaining a healthy balance between top-line and bottom line growth, while investing in the build-out of our O2O integrated education system. We have encouraging results that has been achieved. We are confident that this strategy has laid a solid foundation on which we'll build a sustainable long-term growth.

With respect to our core offline business, in the first quarter we opened a new school in the city of Baoding. We added a net of 22 learning centers and expanded some existing ones, adding a total of approximately 49,000 square meters of classroom area.

As for our online business, we invested about $10.8 million in the first quarter to improve and maintain our O2O integrated education ecosystem. Most of the investments were reported under G&A expenses.

We have been devoted to this online business build out since 2014 and our hard works has been rewarded with increase in customer retention and the addition of new customers. We fully believe this is transforming our business and investments now bearing tangible fruit, have seen well worth it.

Before I go into the details, just a quick recap of the three levels of our online platform. The first level also the core of our online system is an O2O Two-Way Interactive Education System across all of our business lines. The second level is our pure online learning platform and supplementary online education products and the New Oriental brand.

The third level of our ecosystem is the New Oriental to take minority shareholdings in online education companies that complements our own online education offerings. Starting with O2O Two-Way Interactive Education System, we aim to expand New Oriental traditional offline classroom teaching offerings to online education services.

This is also an important factor that sets us apart from other key players in the markets. With advanced O2O product service, we are poised to gain more market share and improve brand recognition going forward.

Since its launch in September 2014, U-Can Visible Progress Teaching system, our Interactive Education System has been successfully rolled out across all 55 existing cities in our nationwide school network and this expansion drove positive performance.

Our newly revamped POP Kids English program Shuang You has also gradually expanded its coverage to 53 cities by the end of the first quarter. The Interactive Education System has been gradually used in more and more cities. The O2O for domestic test prep program was being used in five cities for some classes by the end of the first fiscal quarter.

And since its launch in the second quarter of fiscal year 2016, the Interactive Education System for oversea test prep program including IELTS, TOEFL and SAT courses will slow out in seven cities by the end of this quarter, an increase of 4 cities from last quarter.

For the second level of our online education ecosystem, we have seen consistent growth in our pure online learning platform and other supplementary online education products. In the first quarter, Koolearn.com generated net revenue of $14.2 million, representing an increase of 45% year-over-year.

The number of paid users increased significantly about 37% year-over-year. The number of cumulative registered users has reached to 14.2 million. koo.cn, our own online broadcast open platform for both New Oriental and third party teachers achieved over 624,700 registrations in the first quarter.

DONUT, a series of game-based mobile learning apps for children recorded over 47.5 million downloads by quarter end.

Le Ci, an English language vocabulary training app for mobile phones and tablets app recorded over 4.8 million users by quarter end For the third level of our online education ecosystem, we invest in select online education companies with a minority stake and we continue to look for new opportunities that will not only complete our own offerings that also facilitate our O2O integration.

I wanted to spend a couple of minutes now talking about the key initiatives we executed in the first quarter, to further progress our efforts to consolidate the markets and gain as much share as possible, we conduct a large scale promotion this summer in order to rapidly acquire grade 7 [ph] students customers before we start the first year of secondary school.

To do so, we offered a low price prudential courses for multiple subjects in Beijing and Shanghai and maths courses in approximately 25 other cities. The promotion was very welcome by the market and brought in about 204,000 enrollments for the first quarter of 2017, which was not included in our reports enrollment for the quarter.

We're very pleased with outcome and we also expect the students we retain out of the promotion for further full price class will boost revenue and profit growth throughout the whole fiscal year.

Because of the promotion our operating margin was negatively impacted by about 1% in the first quarter, though the operating margin for the first quarter still increased by 30 basis points to 28.6% from 28.3% a year ago.

However, due to a higher utilization of facilities in the rest of the year, we don't expect that there will be a material impact on operating margin throughout the whole fiscal year. It’s important to note that this is proving a successful strategy to quickly increase market share in the high growing K-12 after-school tutoring market.

As this student move from the seven through K-12 we believe that the continuing improvement in retention rates and hopeful result in customer loyalty will drive revenue growth in the next 3 to 6 years. Now, let me walk you through the other key financial details for the first quarter specifically.

Operating costs and expenses for the first quarter were $381.5 million, representing a 16.1% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses were $380.6 million, representing a 17.1% increase year-over-year.

Cost of revenues increased by 18.5% year-over-year to $203.4 million, primarily due to increases in teachers' compensation for more teaching hours. Selling and marketing expenses increased by 18.4% year-over-year to $58.5 million, primarily due to increases in brand promotion expenses and selling and marketing staff's compensation.

General and administrative expenses for the quarter increased by 11.2% year-over-year to $119.7 million. Non-GAAP general and administrative expenses, which exclude share-based compensation expenses were $118.8 million, representing a 14.3% increase year-over-year.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 76.5% to $0.9 million in the first fiscal quarter of 2017. Operating income for the quarter was $152.6 million, an increase of 17.5% compared to $129.8 million in the same period of prior fiscal year.

Non-GAAP income from operations for the quarter was $153.5 million, a 14.9% increase compared to non-GAAP income from operations of $133.6 million in the same period of prior fiscal year. Operating margin for the quarter was 28.6%, compared to 28.3% in the same period of the prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter was 28.7%, compared to 29.1% in the same period in the prior fiscal year. Net income attributable to New Oriental for the quarter was $141.1 million, representing a 9.7% increase from the same period in prior fiscal year.

Capital expenditures for the quarter were $25.4 million, and this was primarily attributable to the new opening of 45 new learning centers and renovations at existing learning centers.

Turning to the balance sheet, differed revenue balance which is cash collects from registered students for courses and recognized proportionally as revenue as the instructions delivered, at the end of the first quarter of 2017 were $657.1 million, an increase of 28.4% as compared to $511.7 million at the end of the first quarter of fiscal year 2016.

Before talking about our expectations for the second quarter, I wanted to take a moment to reiterate our overarching goals for the year, which were outlined on our last conference call. During fiscal year 2017, we will continue to focus on our optimized market strategy.

For the current success achieved we are confident that we are moving in the right direction and wish to drive additional progress and success. To give you more specifics, first, we will continue to expand our offline business.

In fiscal year 2017, we plan to add 40 to 50 new learning centers for K-12 business in existing cities and we also plan to enter two or three new cities, while we identify those markets were the most business opportunities.

We also plan to implement a newly initiative to our future class model in around 10 existing cities and enter five to eight new cities specifically targeting low tier markets. Second, we will continue to invest in our O2O integration and initiative in our online educational offerings. In particular, we will focus on product refinement and maintenance.

We will continue to make investments, but we believe that the total spending will begin to stabilize this year, compared with huge annual incremental increase over the last two fiscal years.

Third, we will continue to have a top priority on improving utilization of facilities and controlling cost across the company to drive continued margin expansion. By executing all of these three, we believe that we will deliver strong results and create long-term value.

In terms of the second quarter of fiscal year 2017, we expect total net revenues to be in the range of $324.6 million to $335.1 million, representing year-over-year growth in the range of 17% to 21%.

To protect its growth rate of revenue in our functional currency RMB it’s expect to be in the range of 23% to 27% for the second quarter of fiscal year 2017. Lastly, I must mention that this expectations reflect New Oriental's current and preliminary view which is subject to change. At this point, I will take you questions.

Operator, please open the call for this. Thank you..

Thank you. [Operator Instructions] First question comes from the line of Terry Chen from HSBC. Please ask your question..

Hi. Good evening and good morning, everyone. Thank you, Stephen and Sisi for taking my questions, and congratulations on a solid results. I have some questions, I saw in your 2Q revenue guidance, I think the numbers are better than expectation.

Can management give more color on your expectations into the different business lines of yours and given the strong 2Q numbers, will management consider to raise the full year revenue guidance? Thank you very much..

Okay. Thank you, Terry. As for the guidance for the second quarter, you know, we are very happy to see the very strong student enrolment in Q1, what I mean, as the cash revenue and student enrolment in Q1, end of the first half of the second quarter.

And also you know we did very successful summer promotion in the Q1 and I think the retention rates will be higher. And I think the key growth driver in Q2 and also for the rest of the year, the K-12 business will be the key top line growth driver, and so most of the revenue growth will come from the K-12 business.

And you can also look at the deferred revenue balance at the end of the Q1. We have the 28% to 29% deferred revenue balance increase by the end of the Q1. And going forward what I mean for the whole fiscal year 2017, I think the top line growth for the whole year for overall business will be somewhere at 24%, 25% year-over-year growth.

Is it clear?.

Yes.

So 24%, 25% is in Renminbi terms, is it correct?.

Yes, in Renminbi term. You know, it’s really to predict the exchange rates changes going forward. So I just won't give the guidance in RMB terms..

Yes. Sure, sure. Very clear.

So I just have one very quick follow-up, what's the actual retention rates of your summer course students?.

We have 200,000 student enrolments for lower prices summer promotion courses. This is the number..

Yes.

So what's the actual retention rate, can you share with us?.

Yes. Based on the student enrollment account in big cities like Beijing and Wuhan we had the retention rate of about 40% to 50%..

Okay. Great. Thank you, Stephen..

The next question comes from the line of Wendy Huang from Macquarie Securities. Please ask your question..

Thank you. My question is about the margin improvement [ph] you mentioned earlier that this quarters operating margin is mostly attracted by like one to two point side the promotions, should we actually view this as more like a one quarter terminology, how should we look at the margin trend for the rest of FY in a longer term? Thank you..

Okay. We're happy to see the operating margin improvement by a 30 Bps in the first quarter of this year. Despite we spent $11 million on the online investments and also we have the very huge summer promotion and we – because it’s not very small, so - but despite we spent a lot in first quarter, but we finally we got the margin improvements in Q1.

But you know, I don’t want to guide the margin – operating margin in fiscal year 2017. But going forward, our target is to get 17%, 18% operating margin in next three, four years.

And also you know, we are going forward in the rest of the fiscal year I think the management will manage the business very strictly and also I think we have a lot of business leverages. So – and also we will control to cost very strictly. And so hopefully we expect the operating margin will be a little bit higher, compared to last year. Okay..

Thanks, Stephen..

Okay. Thanks..

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

Stephen, Sisi, I have a question related to your summer promotion program, you have been doing that for two years, and that the first time you did in Beijing and this time you did in many more cities. So even though its two years on a row, however, those two years are different.

So I wonder what have you learned from those kind of promotion programs in this quarter, and what are some area you do believe this promotion program are very you know, good, and what are some area you believe you can do better or improve, so that’s the question?.

Okay. Tian, actually we started the summer promotion in Beijing six year – five or six years ago. It’s not two years and this year you know, since the two years ago, we met a lot on the O2O product. So now we are very confident about our product.

That's why we make the decision to spread the summer promotion from Beijing only to over 27 cities in this summer.

And because of the promotion, I think its very important to know that - I think it’s a very successful strategy, because a quick way to take the market share from competitors and from those students who enroll the summer promotion classes.

I think we believe that the continued improvement in the retention rate and hopefully the result in customer loyalty will drive the very strong top ling growth in next three – in next whole year - in the whole year, or next three or six years. I think this the demand pattern of the summer promotion program.

And no, I think the promotion was very welcome by the market. And you know its broad 200,000 student enrolment and I think it will give us the 2% to 3% or may be 2% to 4% incremental revenue growth in the rest of the year. So it will help the top line growth.

Is it clear?.

Yes. Thank you..

Okay. Thanks, Tian..

Yes..

The next question comes from the line of Zoe Zhao from Credit Suisse. Please ask your question..

Hi, management. Congratulations on a very strong quarter. I have two questions. One, could management share with us your current utilization rate and the operating margin of difference segments.

And the second question is regarding your dual teacher model, what's the different - difference in our strategy from our competitor and what are the margin expectation on this initiative? Thank you..

Okay. In terms of the utilization rates, now the utilization rate is about 20% and - but we have the 200 Bps up compared to last year. And going forward we expect the utilization rates will go up because you know the extension, we plan extend 5% to 10% capacity in class area, but our student enrolment will get may be 25% to 30% year-over-year growth.

So we expect the utilization rate go up going forward.

And the dual teacher model, I think we are still in process of piloting future rates, and its very easy to understand just the star, what grew teachers will stay in the high tier cities and we have the - something like the high grade model and we have one or two teacher assistance in the classroom in those tier cities to support the teaching cycle.

And I think it’s too early to say the operating margin of this model because it’s too early. And we will pilot the program by two to three quarters. I think I would tell you, if it’s the time, I would tell you that operating margin predication. Okay..

Sure. Thanks a lot. Sorry, may have a quick follow up on our SBC expenses, what is our share based compensation cost, a lot lower than previous quarters? Thank you..

Okay. You know, we have not issued the incentive shares of this fiscal year to our management and key staff till now. Last year we issued a share to them in July that’s why you see these SBC amount different and we plan to issue the shares to management and key staff in one or two months.

So you will find more SBC share based compensation expenses report during the rest of the fiscal year..

Thank you..

Thanks..

The next question comes from the line of Alex Liu from Divo [ph] Please ask your question..

Thanks management for this opportunity. My first question is on capacity, I think if my calculation is correct on a year-on-year basis it seems the company has speed up the learning centre area growth in this quarter. I was wondering what's the management thoughts on accelerating capacity growth for this year and next year.

And if the management can add some color on where are we adding those capacities? Thank you..

Okay. We added 22 learning centers in first quarter and if you calculate the cost from area, we expensed 4% in capacity in this quarter. And I think it’s in line with our budget.

We plan to open 40 to 50 learning centers in the whole fiscal year and we opened 22 in Q1 and I think the whole – I think in whole year we have opened of 40 to 50 new learning centers and that means 5% to 8% classroom area of capacity expansion..

Okay. Thank you..

Okay. Thanks..

The next question comes from the line of Natalie Wu from CICC. Please ask your question..

Hi, good evening, Stephen and Sisi. Thanks for taking my question. So couple of questions, the first one is regarding POP Kids, so what's the driving force behind the continuing trend in the growth rate of POP Kids, were the 10 lasting to the future quarters.

And the second one is actually in the past month we have witnessed the teachers salary raise from our competitor in the K-12 area out of competition issue, so just wondering will you guys follow in the salary rates and if yes, will this impact your margin profile in longer terms? Thank you..

Okay. Yes, we had very strong quarter, both the enrolment growth and revenue growth in POP Kids program. You know, we will largely in online, offline integrate program name the Shuang You last year and now I think we were seeing it starts to bear fruit from the new event product.

And most of the revenue growth comes from the enrollment growth and going forward, what I mean, in the rest of this fiscal year and also for the next two to three years, I think the top line growth of TOP Kids will be very strong. And combined with You-Can business, the K-12 business will be the key driver of the top line growth in the company.

And your second question is about salary inflation of teacher. You know, typically apple-to-apple basis what I mean, is the hourly rate, the hourly rate for the teachers salary we increased it 8% to 9% year-over-year, its quite stable.

And also, things last year we started to give more teaching hours to the new – to the good teachers to help them to earn large than before in New Oriental we hope them to stay longer with New Oriental. So going forward, I think the teachers salary – the increase of teacher’s salary will be in line with the top line growth.

Is it clear?.

Great, greet. Thank you, Stephen. Actually I mean, I have a very quick question regarding the summer promotion program this year….

Okay….

So can you with us some color on how many courses per student take on average in the summer promotion program this year and how many courses will student take in the autumn session normally, may be in large cities like Beijing and Wuhan?.

Okay. In the summer promotion the students on average to take two to three courses at a same time in - like in big cities in Beijing and Wuhan and in Beijing Shanghai and also going forward in the autumn classes typically the students take two courses at the same time on average.

Is it clear?.

Great. Very helpful. Thank you..

Okay. Thanks..

Yes, very clear..

Okay..

The next question comes from the line of Fan Liu from Goldman Sachs. Please ask your question..

Hi, management, congratulations on your solid result. So I have a quick question about your headcount number, could you please update us the latest headcount number and also among which how many teachers and how many are training assistance.

And also do you have obtained for the headcount increase, especially in light of your expansion in your dual class model?.

Okay. The headcount – the total headcount, including the staff and teachers at the end of the Q1 was 38,600 and also we had 19,800 full time teachers and more then 70% are full time teachers. And the headcount, you know, based on the budget we plan to increase the total headcount by 5% to 10% in the fiscal year '17.

And in terms of dual teacher model, you know, we just pilot the program and we plan to open the 10 learning centers in existing cities and also we will open in five to eight new cities, but it won't need so many teachers..

Just a quick follow up, so do you have a goal for I mean, you have a target for student to teacher ratio, you want to achieve for list to your class model, dual teacher class model?.

We do have the target till now, because I told you that we are still in process of pilot. So – and also within the company we don’t calculate that Bps, we calculate the student retention rates and utilization rate..

Okay. Understood. Thank you..

Thank you..

The next question comes from the line of Mariana Kou from CLSA. Please ask your question..

Thanks, management for taking my questions. Again congratulations on a strong set of results. I also have two questions. My first one is on pricing, I think you mentioned Stephen just now that ASP per hour is up about 1%, but U-Can 5% for POP Kids and about 6% overseas.

Just I am wondering if you could comment that will it be just a little bit below the historical levels that what are you planning to do for the rest of the year in terms of pricing?.

Okay. Yes, first, I think the K-12 this is a scoring factor than the oversea test prep and as our English business. So typically the K-12 business have the lower ASP than the oversea test prep. And also within the K-12 business, because of our business the other cites are growing factor than Beijing and Shanghai.

So this can offer the revenue mix direct down the oral ASP per program. And second, we have huge increase in the enrollment for discounted U-Can classes. Besides the summer promotion, we made some discounted classes in You-Can for the summer courses.

And things to autumn and also in the rest of the year the price will go back to normal level, so you know, the summer - the summer term is the first term of the whole fiscal year. And in the rest of the year, I think the price of the - the price strategy of the company will be as same as last year or maybe a little bit higher than last year.

Overall we will increase the price on hourly basis by 5% to 8% in the rest of the year..

Yes, thanks.

Just to follow up a little bit on that, so would this be fair to say that since POP Kids seems to be growing fast in terms of ASP and I think the margins that you previously talked about in other calls that margins are still a bit lower for POP Kids, should we expect operating margins for U-Can POP Kids to narrow?.

I think both the U-Can POP Kids program the margin will be higher than last year because we expect the higher utilization rates for both U-Can and POP Kids..

All right. Okay, thanks.

I guess, another small question to add on the dual teacher program that we've been talking about, could you actually comment in terms of lead times, should we expect, I know we don’t have a exact schedule and when I believe all the targets, but in terms of just lead time should we expect like whole month of training before you role out this program, so we should expect some sort of margin pressure the quarter before you exceptionally role it out?.

No, I don’t think so. I think we don’t have to margin, I don’t have the – we have the margin the next margin impact for teacher model, because we just pilot the program like the eight or ten learning centers. But we have – some under 50 learning center. So it’s a very – I think the amount is immaterial..

All right. Good to know..

Okay..

Thanks..

The next question comes from the line of Andrew Orchard from Nomura. Please ask your question..

Hi, Stephen and Sisi. Thanks for taking my question and congrats on a good set of numbers. Couple of questions from me, first, can you give us some additional color on the utilization, especially for U-Can and POP Kids. I know earlier you mentioned overall utilization is about 20% - 200 basis points, how about specifically in these two business areas.

And then secondly, for the dual teacher model, are you expecting any meaningful increased in CapEx as a result of building out some of business structure? Those are my two questions. Thanks..

Okay. Andrew, we don’t disclose the utilization rates by difference business lines. Personally I think the utilization rates for U-Can and POP Kids is just as the same as the utilization rate for the whole the company.

And like I said, before going forward the utilization rate will go higher because of the - you will see the higher enrolment growth going forward.

And in terms of the dual teacher model, yes, we will a little bit more CapEx, but as I said we just set up less savings 5 to 10 new learning centers in the new cities and so compared to the $60 million, $70 million the CapEx for the whole company is not a big number, its not big deal.

And last year the CapEx was $64 million, $65 million and this year in fiscal year '17, we plan to extend 75 – somewhere at $75 million in the CapEx..

Got it. Thank you..

Okay. Thanks, Andrew..

The next question comes from the line of Johnny Wong from Jefferies. Please ask your question..

Hello, management. Thanks for taking my question and congratulations on a very nice set of results.

Most of my questions have been asked, but I just have one question to clarify, we mentioned that we spent extra $11 million on promotion, does that mean that this number will fall off for rest of the year in terms of the hit to the P&L? Thanks very much..

Okay. I just want to clarify the number, you know, where as that, is that we spent $11 million, the accurate number is $10.8 million on the online investment for the first quarter and based on the budget we plan to spend a same amount in this fiscal year – as same as we spent last year. So we plan to spend $54 million in this year.

And for the summer promotion, yes, we spent on teacher salary and maybe some rental for the summer promotion and its – we have the – not just impact for operating margin for Q1 by 1%, so may be it’s a 5 – we spend $5 million to $6 million on the summer promotion on the cost and expense side. Okay..

Thank you..

Okay. But it’s one time for the summer promotions, one time cost and expenses..

The next question comes from the line of Claire Cao from Morgan Stanley. Please ask your question..

Hi, management. Thanks for taking my questions.

Can management remind us what level of the retention rate do you need to achieve for the summer promotion scores to be value [indiscernible] And my second question is regarding, I understand this might be a little bit too early, but given the dynamics in the market this year, what should we think about the summer promotion strategy as we enter into next year given the massive headcount quite promotional and [indiscernible] Thanks?.

Okay. The retention rate, the overall retention rate for K-12 business in the company in New Oriental is about 75%, last year it was somewhere at 65%. Yes, for the summer promotion the retention rate like I said in the big cities like Beijing, Wuhan, the retention rates is 40% to 50%. And that’s it.

And for the – what's your second question?.

Next year?.

Next year, oh, yes, I think we will summarize what we done in for the summer promotion and I think it’s too early to say what we plan for next year. But I think we will do the same thing next year. But I don’t know the amount, or the specific plan of next year. It’s too early.

I think the great way – I think there is great way or method to take [indiscernible] share from competitors and also to make the market consolidation based on the summer promotion rate.

Is it clear?.

Yes, sure..

The next question comes from the line of Jin Yoon from Mizuho Securities. Please ask your question..

Hi. Good evening, guys. I think on your prepared remarks or the press release, you mentioned that you guys launched the O2O education for the overseas test prep.

Given the fact that those students have typically a shorter shelf life than your typical K-12, can we expect meaningful price increases is the overseas test prep business going forward and it’s launched in seven cites in China, where do you expect that to be in the next quarter or two? Thanks..

Yes. Okay, you know, we are seeing Chinese parent similar kids who study abroad in younger age, that means most of the - our oversea test preps students - are high school – who are doing a high school students. So we still need the same O2O product.

And we launched the new O2O product up out in March and going forward we will launch more and more new product like the TOEFL, SAT or GRE. And you know, the whole market of the overseas test preps doesn’t grow as much as before because I think the world cannot take more Chinese students and I think the whole market growth with more single digit.

But based on our the new O2O product and also if you remember the earnings call in the last Q1, Michael the founder of the company that he will spend more time on the products we form over overseas test prep. So I think we are confident to be the top line growth of the oversea test prep.

In terms of the pricing, we see interest to price, we plan to increase the price of oversea test prep by 8% to 10% going forward. And half of them 4% or 5% are apple-to-apple price increase.

The other part, another 50% is come from the product mix, typically the SAT or TOEFL junior class both kind of class a much expensive than the GRE and GMED and GMAT classes..

Perfect. Thank you..

Okay. Thanks..

The next question comes from the line of Terry Chen from HSBC. Please ask your question..

Hi, thank you for taking my call again.

I have a question on your investment philosophy, we have $1.9 billion cash, and I think the cash will continue to pile up given our strong free cash flow, so I am just wondering how much will you deploy for acquisition investment and any possibility for us to do a overseas expansion in the future?.

I think the first thing, the cash we'll be looking on an M&A and investments, this is our first priority and as you saw with spent $90 million in last two years on investments of O2O pure online.

And in terms of the M&A, I think we'll look at the company like there are vertical pure online companies, which have the good content, were good channels, or were they good at some sub specific subjects, I think we will – we'll buy some minority shares from them and but the extension we have we will consider the potential, like the top inflation [ph] between the target company and the New Oriental, this is our logic of investment.

But what I want to say is, we will do it very comfortably..

Okay.

Okay, in just preference, do we prefer to make a strategy investment by acquiring minority stake in third party companies or do we prefer to do a full acquisition?.

I think this is quite often for our wheel, most of the M&A going forward will be the minority share holding volume. But if we find in some companies have the potential synergy between the targeted company and New Oriental maybe we will buy the – likely 100% shares..

Okay. Great. Thanks, Stephen..

Thanks..

We are now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Stephen Yang for his closing remarks..

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..

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