Good evening and thank you for standing by for New Oriental’s Second 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..

Thank you. Hello everyone and welcome to New Oriental’s second 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. This was a very gratifying quarter for us. We achieved accelerated and better than anticipated topline growth and our bottom line growth was up significantly.

Net revenues increased to $341.2 million versus the same period last year, which is an increase of 22.7% US dollar terms and 30.2% in our functional currency RMB. Underlying and driving business revenue growth has secured impressive 56% increase in our total unit student enrollment driven by growing customer acquisition and retention rates.

This growth combined with excellent cost control, led better than expected bottom line growth. Quarterly operating income increased by 102.1% compared to the same period last year and net income increased by 76.1% year-over-year.

Our key revenue driver, K-12 all-subjects after-school tutoring business achieved growth of approximately 45% and exceptionally high enrollment growth of approximately 78% year-over-year.

This was mainly a results of significant student enrollment growth of both the U-Can business and the revamped POP Kids program, which expanded 75% and 81% respectively. The high enrollment growth demonstrates how we are benefiting from strong brand recognition as we endeavor to consolidate the market in large cities.

With that said, we're optimistic about the prospects for exploring new opportunities for expansion in existing and new cities. We continue to focus on strong execution of optimized market strategy, which means we're continuing to expand our off-line business, while also investing in O2O two-way interactive education system.

During the second quarter, we made great progress across the Board in building out our successful and now well proven diversified business model.

We added net of 15 learning centers in existing cities, opened a new school and new learning center in the City of Yantai, adding a total of approximately 30,000 square meters of classroom area, which represents approximately 3% capacity expansion.

Also, as mentioned on the last call, we stated to pilot a new teaching model in select cities in July 2016. This is a dual teacher class model and which will utilize online live forecasting to enable the students in the lower tier cities to access the better learning experience from our high-quality teachers based in high Tier cities.

In the second quarter, we rolled out the dual teacher model school in the City of Tai'an Shandong Province. With this strategy, we expect to increase our market penetration in more lower tier markets with quality education and hope to capture some very exciting growth opportunities there.

Turning to pricing, per program blend ASP decreased by approximately 11% year-over-year in U.S. dollar terms or 6% in RMB terms. On an apple-to-apples basis, which is GAAP revenue divided by the total teaching hours, hourly blended ASP in RMB terms increased by approximately 2% year-over-year.

To provide a breakdown of hourly blend ASP in RMB terms, U-Can increased by 2%, Pop Kids increased by 8% and oversea test prep program was up 7% year-over-year.

The decrease of per program blend ASP is mainly due to the shift of revenue mix from the oversea test prep business with higher ASP to the K-12 business, slowdown of VIP business, which has higher ASP and a huge increase in early registration by customers for our POP Kids spring semester courses.

On the margin trend, we have made great progress of dramatically improving operational efficiency, improving utilization facilities and controlling cost within the organization.

The strong bottom-line performance further improves effectiveness of our optimized market strategy and also reinforces our confidence and the ability to build long-term value for our customers and shareholders. Now let’s move on to the second quarter performance across our individual business lines.

Our key revenue driver K-12 all-subjects after school tutoring business achieved year-over-year revenue growth of 45% in U.S. dollars terms or 54% in RMB terms and exceptionally high enrolment growth of 78% year-over-year.

Breaking it down, the U-Can middle school high school all-subjects after-school tutoring business reported revenue increase of 43% in dollar terms or 52% in RMB terms. Student enrollments grew differently by 75% year-over-year. Our Pop Kids program revenue was up by 49% in U.S.

dollar terms or by 58% in RMB terms and enrollment growth was exceptionally high at 81%. Our overseas test preps and consulting business reported revenue growth of 2% in U.S. dollar terms or 9% in RMB terms year-over-year. Finally, VIP personalized classes business increased 10% in U.S. dollar terms or 17% in RMB terms year-over-year.

Now next, I'll provide some updates on the progress we have continued to make with our optimized market strategy. We have been focusing on maintaining a healthy balance between top-line and bottom line growth, while investing in the build-out of our O2O integrated education system and this continues to work well.

Starting with our core offline business, as mentioned earlier, we added a net of 15 learning centers in existing cities, opened a new school and new learning centers in the City of Yantai and opened a dual teacher model school in the city of Tai'an.

Altogether, we added a total of approximately 30,000 square meters of classroom area, representing about 3% capacity expansion. For the whole fiscal year 2017, we plan to add 50 to 60 new learning centers for K-12 business in all existing entities. We also plan to enter two or three new cities where we had 25 markets with greatest growth potential.

We also plan to pilot a newly initiated dual teacher class model in approximately 18 to 20 existing cities and enter five to seven new cities, all specifically targeting lower tier markets. Regarding our online business, we invested approximately $13.7 million in the second 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 buildout since 2014, with an increase in customer retention rates and addition of new customers. We fully believe this is transforming our business and the investments will continue to bring continue in the long-term brand benefits.

Before I go into 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 educational products in the New Oriental brand.

The third level of our ecosystem is for 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's traditional offline classroom teaching offerings to online educational services.

This is also an important factor that sets us apart from other key players in the market. With advanced O2O product services, 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 expanded its coverage to 54 cities by the end of second quarter. The interactive education system has been gradually used in more and more cities. The O2O system for the domestic test program was being used in five cities for more -- for some classes by the end of the second quarter.

And since its launch in the second quarter of fiscal year 2016, the Interactive Education System for overseas test prep program including IELTS, TOEFL and SAT courses will slow out in seven cities by the end of the second 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 second quarter, Koolearn.com generated net revenue of $17.6 million representing an increase of 33% U.S. dollar terms or a 41% increase in RMB terms.

The number of paid users increased significantly about 33% year-over-year. The number of cumulative registered users in this quarter has reached 15 million. koo.cn, our online broadcast open platform for both New Oriental and third party teachers achieved 570,300 registrations in the second quarter.

DONUT, a series of game-based mobile learning app for children recorded over 51.3 million downloads at quarter end. Le Ci, an English language vocabulary training app for mobile phones and tablets approximately, reported over 5.5 million users at 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, but also facilitate our O2O integration. Now I will walk you through the other key financial details for the second quarter.

Operating costs and expenses were $341 million, representing an 18.2% increase year-over-year. Non-GAAP operating cost and expenses, which excludes share-based compensation expenses were $338.9 million representing a 19.5% increase year-over-year.

Cost of revenues increased by 21.7% to $163.4 million primarily due to increase in teacher's compensation for more teaching hours. Selling and marketing expenses increased by 18.2% to $52.2 million primarily due to increases in brand promotion expenses and selling and marketing staff's compensation.

General and administration expenses for the quarter increased by 13.9% to $125.4 million. Non-GAAP general and administrative expenses, which excludes share-based compensation expenses were $123.3 million, representing a 17.3% increase year-over-year.

Total share-based compensation expenses, which were allocated to related operating cost and expenses decreased by 56.5% to $2.2 million. Operating income for the quarter was $0.2 million compared to a loss of $10.4 million in the same period of last fiscal year.

Non-GAAP income from operations was $2.4 million compared to non-GAAP loss from operations of $5.4 million in the same period of prior fiscal year. Operating margin for the quarter was 0.1% compared to a negative 3.7% in the same period of prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter was 0.7% compared to a negative 1.9% in the same period of the prior fiscal year. Net income attributable to New Oriental for the quarter was $10.4 million representing a 76.1% increase from the same period in the prior fiscal year.

Capital expenditures for the quarter were $21.2 million and this was primarily attributable to the opening of two new schools and 36 new learning centers and renovations at existing learning centers.

Turning to the balance sheet, at the end of the second quarter, the deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally, as revenue as the instructions delivered was $764.7 million, an increase of 30.4% as compared to $586.5 million at the end of the second quarter of fiscal year 2016.

Before talking about our expectations for the third quarter, I wanted to take a moment to reiterate our overarching goals for the year, which we outlined on the 2016 Q4 and the full year conference call. During fiscal year 2017, we will continue to focus our optimized market strategy.

With the current success achieved, we're confident that we have the right strategy in place and that is we'll continue to drive additional progress and help us create long-term value for all customers and shareholders. To give you more specifics, first we will continue to expand our off-line business in fiscal year 2017.

As mentioned a few minutes ago we plan to add 50 to 60 new learning centers for K-12 business in existing cities.

This is higher than our initial target provided ahead of fiscal year and we're rising this because we are seeing a growing momentum for our K-12 business due to the combination of our broad product portfolio, solid market demands and effective operation.

We also plan to enter two or three new cities where we identify as markets with the most business opportunities. Further we plan to implement the newly initiative to our teacher class model in around 18 to 20 existing cities and enter five to seven new cities specifically targeting lower tier market.

Second, we’ll continue to invest in our O2O integration and the initiatives in online education offerings, promoting the strongest of products possible in the marketplace in order to continue to take market share.

While investments will continue, we believe that total spending will begin to stabilize this year compared to the large annual incremental increases in the last two fiscal years, when we were building the foundation.

Third, we will continue to have the top priority on improving utilization of facilities and the controlling cost across organization to drive continued margin expansion and profitability.

Looking at the near term, in terms of the first quarter of fiscal year 2017, we expect total net revenues to be in the range of $408.7 million to $421.8 million, representing year-over-year growth in the range of 18% to 22%.

To project growth rates of revenue in our functional currency Renminbi is expected to be in the range of 25% to 29% for the first quarter. Lastly, I must mention that these expectations reflect New Oriental's current and preliminary view which is subject to change. At this point, I will take your questions. Operator, please open the call for this..

The question-and-answer session of this conference call will start in a moment. [Operator Instructions] Our first question comes from the line of Terry Chen from HSBC. Please go ahead..

Thank you, Stephen especially for taking my questions and congratulations on the solid results. I have a question on enrolment growth. So, in the second quarter, Company overall enrolment growth accelerated to 56% and the K-12 enrolment growth accelerated to 78%.

I'm just wondering what's driving the faster enrolment growth here and what do you think will be the trend in the next few quarters?.

Okay. Thank you, Terry. It's a great question. The Q2 -- in Q2, the student enrolment was very strong and I think there were three reasons. The first, the high rates of the enrolment demonstrates we're benefiting from its strong brand recognition and also we start to consolidate the market in the big cities.

And the second reason, the first reason that means the market demands were strong and also we have the good, the best the brand name. And second reason for the high enrolment growth is the student enrolment growth come from the new customers and also the higher retention rate.

I think this means that we have successfully rolled the new O2O product and I think the parents and students and the kids are buying in the new product.

And the last reason for the student enrolment, strong student enrolment is the students choose to enroll the class earlier than before and so we're seeing a huge increase in early registrations for the Pop Kids spring semester courses. So, I think in terms of the trend, I think the trends will be good.

We're happy to see the very strong student enrolment for the overall business especially with the K-12 business.

Is this clear, Terry?.

Yes, yes. Very clear. So you mentioned that there's earlier registration this year from students. As we understand that, your enrolments are booked on a cash basis, right? So, you had a higher enrolment growth in the second quarter translating to even higher revenue growth in the coming quarter..

Yes, that's why you see our guidance -- I remember in the last conference call, again we mentioned the top line growth, I think truly in my view, I think the topline growth will be a little bit better than we expected several months ago and as you know the Q3 and Q4 will be the peak seasons for the K-12 business. So, I think the trend is very good..

Okay. Great. Thank you, Stephen..

Okay. Thank you, Terry..

Thank you. Our next question comes from the line of Jin Yoon from Mizuho Securities. Please ask your question..

Hello, good evening, guys. A couple of questions. First of all, if you look at your COGS, it's been up 22%, and then you attributed part of that due to increasing teaching hours; and your enrollment is up more than 50%. So, your incremental -- if y0ou could help me think this through.

If you looked at your incremental enrollment growth and incremental COGS, does that mean that your utilization rates are improving faster than what we originally anticipated because the fact that the cost is not going up with enrollment? So, is that one way to look at it? And the other thing is how much of your enrollment is actually fueled by the new school and incremental learning centers opening? Thanks, guys..

Okay. I think the first question is about cost and enrolment growth. Yes, I think you're correct. We’re seeing the utilization rate is going up and yes, so little bit better than we expected several months ago, because, I think the teacher's salary will be increased by less than 20% to 25% in our RMB term going forward.

But I think the topline growth will be better, will be bigger than the teacher salary increases.

So, that’s why you see the utilization rate going up and your second question is about -- so can you repeat your second question?.

Yes. The second question was how much of your enrollment growth is incremental contribution from the new school and the learning centers..

Yes, we only opened 18 new learning schools and learning centers in this quarter and if you look at the number of the first six months within this fiscal year, we opened 41 new learning centers. So, the expansion is only 7% to 8%, but our enrolment is much stronger.

So, I think most of the enrolment growth come from the organic growth from the existing cities, that's why I said our utilization rate will go up and it's less than the margin expansion. Okay..

Got it. Great, thanks guys..

Okay. Thank you..

Thank you. Our next question comes from the line of Tian Hou from T.H. Capital. Please go ahead..

Hi Stephen and Sisi. The question is how many learning centers do you expect to open in the new fiscal year and where those new learning centers could be. So how much the seat capacity will be increased by opening those learning centers..

Okay. Thanks Tian. Till now we haven’t furnished the New Year budget for new fiscal year, yes fiscal year 2018. But I think we're -- till now I can say we raised the new learning center numbers, but it's in our control.

We will open 50 to 60 new learning centers within this fiscal year and next year, I think we will open a little more, but as of now we will care about margins. We will control how many learning centers we set up and also, we care about margin.

So, going forward, I believe most of new student -- most of the enrolment will come from the current learning centers..

So, I was trying -- the price has some kind of inflation.

So, are you going to increase your price also?.

Yeah. We will increase the price within reasonable mode. In this quarter, we increased the hourly rate by 2% to 3% in RMB term and going forward Q3, Q4 will be peak seasons for K-12 business. So, we will increase the price by 5% to 8% in RMB term going forward. And even in the next fiscal year, I think we will yield the same price strategy..

Okay. That's all my question. Thank you. Congratulation..

Okay. Thanks Tian..

Thank you. Our next question comes from the line Alvin Jiang from Deutsche Bank. Please ask your question..

Hi, Stephen and Sisi, thank you for taking my questions. I have two quick questions. The first one is a housekeeping question.

What is the utilization rate in this quarter and what's the year-on-year improvement? And meanwhile what's driving the ASP decline, seems even for K-12 business itself enrollment growth is faster than revenue growth, but you just mentioned the ASP for K-12 is actually increasing. How should we understand this trend? I have another follow-up..

Okay. As for the question for utilization rate, this quarter the utilization rate is 20% to 21% and we were seeing the 200 Bps up compared to the same period of last year. And going forward you will see the higher utilization rate. And for the question about ASP, in this quarter the per program blend ASP decreased by 6% in RMB term.

I think there were several reasons. The first, K-12 business grew faster than the oversea test prep business and typically the K-12 business has lower ASP.

And also, the second reason is there is a huge increase in early enrolment by customers who are POP KIDS experience semester courses, that means the timing difference; first, we control the VIP revenue contribution. In this quarter, the revenue from VIP course only increased by 10%. So, it's dragged the price down.

So, that's all the three reasons to explain your question about the price..

Got it. My second question is on the policy risk, here is the thing according to the news report, Shanghai Government is talking about filling up the K-12 Q3 market and also help to reduce burden on young kids.

So, do you think they will make potential impact to your business?.

Alvin, I think yes, I read the news from the newspaper and till now I don’t want to explain to you guys about the impact of the new policy. But this is not the first time that the Chinese Government said in public to less burden of the students.

I think for the Chinese students, typically they spend the whole maybe 10 or 12 years to prepare for gaokao, and gaokao is still there. So, that I said I think a way to select people and for the kids and students are competing to the like the four-year college seat and also if they get the good report on their study, they will have a better future.

And also, I want to add one more thing that the market share, even we are the market leader, our market share is just 1% to 2%. So, it’s not big deal. And also, typically the students spent maybe 35 or 40 hours like 30 to 40 hours in the public schools every week. But the kids only spend two or three or four hours with the new rental.

So, it’s not a big amount of time..

Okay. Thank you..

Thank you..

Thank you. Our next question comes from the line of Wendy Huang from Macquarie. Please go ahead..

Thank you and congratulations on the very solid results. First I just want to double check and confirm with you that it seems that your guidance implies no impact at all from the division's net publicity of your overseas test and consulting business..

Yes, I think in Q3 -- in the coming quarter, our overseas test prep and overseas consulting business will still grow firstly by 8% to 10% going forward and yes, you said about the Reuters' report.

I think all of our business operations are governed by enrollment policies and we've designed procedures to guide against any endorsed behavior by employees and going forward I think we will continue to convert our optimal core business in accordance with our policy standards.

And going forward I think the growth of our business of overseas test prep in consulting business will be good and such the market of overseas test prep market, it doesn't grow as well as several years ago. So, even the total market growth by single digit. So, our growth is just in line with the market.

And I think what we need to do is to do better for our O2O for the overseas test prep product and we in fact will do better for overseas test prep business going forward and I think it’s better than we did last year okay..

Thank you. And also, you mentioned earlier that you have the aggressive target to dual-teacher model in 18 to 20 existing cities. So, do you expect to achieve the target by the end of this fiscal year? And also, we're just very process speed of launching out.

How should we assess the financial impact and also the enrolment impact from this dual-teacher model rolling out? Thank you..

The dual teacher model, I think so far, the feedback from the parent and kids are very good from the dual teacher learning centers and even in the second quarter, this quarter we roll out a new teacher model in the new City of Tai'an and also we opened more than 10 learning centers in existing cities.

And so, we plan to pilot the dual teacher model in 18 to 20 new cities by the end of this fiscal year.

And yes, as I said, we do have the plan till now to tell you how many new dual teacher model learning centers we'll set up next year, but I think we will open more because in terms of the financial model, typically end of the dual-teacher model, one teacher in 10 or maybe 20 class at the same time.

So, I think when the model gets matured, we expect margin will be higher than the offline classes, but it's too early to say the revenue contribution of the margins because it contributes only a few, only a little amount of the revenue contribution. So, let's say maybe I can tell you -- I will tell you the answers maybe six months later. Okay..

Thank you. Our next question comes from the line Fan Liu from Goldman Sachs. Please go ahead..

Hi Stephen and Sisi. Congratulations on another strong quarter. So, do you mind share with us your total headcount of teachers right now and also as we can see that you're having a very strong momentum to improve the margin. So, will you insist on your '17 to '18 GAAP margin, operating margin in the next three to five years.

Is that -- is there any possibility to raise this margin? Thank you..

Okay. The headcount by the end of the quarter end -- of this quarter end the headcount was 39,000 and that means we add 2,400 headcount within the first half of this fiscal year and within the headcount we have to mentioned [70] 800, the teachers and this is the headcount question and what's your second question and….

Your margin guidance is that, yes..

I think you will see the margin expansion within this fiscal year and going forward, our target is to get 17% to 18% in the next four years and I don’t want to change my guidance of the margin expansion. So, our margin will go up gradually in the next two to three years. Okay..

Thank you. Our next question comes from the line of Mariana Kou from CLSA. Please go ahead..

Thanks management and congratulations on the strong set of results. I think my question is bit of a follow-up on enrolment figures and also ASPs. I'm just wondering, I think the implied enrolments suggest for the overseas and other businesses excluding -- so everything other than K-12 is down about teens.

So just wondering have we had, have we done any estimate on how fast we have to grow the K-12 enrolment number to really offset operating deleverage impact? I think we talk obviously on of course that the operating margin overseas is quite significantly higher than K-12. That's my first question..

This is a good question. K-12 business will be definitely the running driver. Yes, you're correct, the K-12 business, the margin of K-12 business is a little lower than the overseas test prep, but for the K-12 business itself, the margin is going up.

So, I think the revenue contribution, the last revenue contribution of overseas test prep will be offset by the K-12 margin expansion. So, anyway overall you will see the margin expansion.

Is it clear?.

Yes, yes thanks. I think my second question is more housekeeping. I think the tax rate has jumped up quite significantly this quarter and then the share-based comp has declined quite sharply.

Could you give us some color on what to expect for the coming quarter or for the full year in terms of the tax rate and the share-based comp?.

Okay, the tax rate in this quarter was 14% and I will guide the tax rate for the whole fiscal year '17 will be somewhat at 14.5% to 15%. This is my guidance for the tax rate and I think the tax rate will steadily move up going forward.

And your second question is about share-based compensation, this quarter we reported $2.2 million of the stock-based compensation. Typically, last year we issued the share to the higher management and key staff in July, but this year we issued the shares to those guys in November.

So, we report the share-based compensation in this quarter, but going forward in the Q3 and Q4 we will report more share-based compensation. So, for the all share-based compensation in this fiscal year will be somewhere between $20 million to $24 million for the whole year..

Thank you, Stephen..

Okay. Thanks Mariana..

Thank you. Our next question comes from the line of Zoe Zhao from Credit Suisse. Please go ahead..

Thank you, management for taking my question. I have two questions. One is, can you update us on each segment's operating margin? And the second question is, since that we recorded a gain of around $2 million attributable to the minority interest, but just looking at the size of [Shinchon] this quarter, December seems to be very high.

So, do we have any other investment associated with this number? Thank you..

Okay. The operating margins are different, this is why it's up. For the overseas test prep, the operating margin before -- always the operating margin is before the head office expenses. The overseas test prep is 30% and the domestic and English the margin is 25%. And for the U-Can, the margin is 25% and the Kids is 14% to 15% the operating margin.

And the online, your second question, yes, I think most of the online come from the Koolearn.com because we just hold let's say the 65% to 70% of total shares of Koolearn. So, there's online there and going forward it will be there. Okay..

Thank you. Our next question comes from the line of Claire Cao from Morgan Stanley. Please ask your question..

Hi Stephen and Sisi. Thanks for taking my question. Could you share with us what's the revenue contribution from Beijing and Shanghai in the quarter and also what's the current revenue growth rate for the two cities? Thanks..

The contribution from Beijing this quarter is 24%, it's 24% and Shanghai is 6% and the revenue growth of Beijing School in this quarter is 24%. As you know it's overall growth rate of Beijing School and the Shanghai School growth by 34% in the Q2.

Is that fair?.

Okay. Thanks..

Okay. Thanks..

Thank you. Our next question comes from the line of Zhao Yang from CICC. Please go ahead..

Hi good evening, management. Thanks for taking my questions and congratulations for the strong quarter. I have one question regarding your present strategy for the dual teacher model. I noticed on your website that most of the courses are priced lower than 1,000.

Are you planning for offering discount on purpose or are you going to keep this pricing strategy for dual teacher model going forward?.

Okay. Yes, as for the pricing strategy for dual teacher model, we're still in the piloting phase. So, for the first or second rounds of the student enrolment, we give the students some discount, but going forward, I think anyway, I think the price of the dual teacher model should be a little bit lower than the offline classes.

But I think it's too early to say the price strategy for the dual teacher model. But as I said even though the price, the dollar -- as for the dollar amount, the price is lower than the offline classes, the margins will be higher than the offline classes because one teacher can settle so many students at the same time..

Okay. Got it.

Stephen, you mentioned one teacher can take multiple classes, can you shed with us more color on how many classes that the teacher can take at current stage?.

Okay. It's a wide range, typically one teacher can take five to 10 classes at the same time, but I can share with you that in some cities we're seeing that one teacher can take 20 or 30 classes at the same time and....

Okay. Thank you..

I think going forward, the model is something like that one teacher can take 10 to 20 classes at the same time. Okay..

Thank you. Our next question comes from the line of Lucy Yu from Merrill Lynch. Please go ahead..

Hi management, I got two questions here. First of all was that new administration of U.S. and U.K. do you see any risk to our overseas related business, i.e. the test, prep and consulting? Because I saw on news that U.K. home office is planning on cutting the overseas students by half.

So, will that affect our business? And secondly, it’s a follow up on the open margin question asked earlier, could you give us the open margin for each segment in the second quarter of last year? Thank you..

Okay. Yes, for the first question, to be frankly I haven’t -- the revenues of the U.K. change of policy for the foreign students. So, I don’t want to make a change of my guidance of the overseas test prep business. I think our overseas test prep business will grow by 5% to 10% going forward in our midterm.

And the operating margin by – last segment, typically we don’t disclose the quarterly operating margin by segment. So, that's it..

So, can we say that they're improving year-over-year?.

Yes..

Or they are largely stable?.

Yes, that's why you see the overall margin, the operating margin improved by 380 Bps. So, the [older] business implies our expansion, yeah. Okay..

Okay. Thank you..

Thank you..

Thank you. Our next question comes from the line of Alex Liu from Daiwa. Please go ahead..

Hi. Thank you, Stephen. I was wondering, was the sort of rough contribution of the students that we retained from the past summer promotion to the past quarters U.K.

enrollment, can we get some ideas here?.

Okay. We made a big summer promotion in the summer and in some big cities like Beijing, Wuhan and Shanghai, the retention rate is approximately 50%. So, I think this is okay for us. That means the 50% of students will stay with New Oriental and even in the Q3 the retention rate will get to the normal level, lastly for the U.K.

business and our average retention, student retention rate is somewhere between 70% to 75% for the retention rate for the summer promotions is okay for me for the company..

Okay. I have a follow-up here, just wondering I think we have increased the phase of expansion a bit. I’m just wondering are we thinking about increased the medium term capacity increase targets of 5% to 10% maybe to perhaps low teen level in the coming three to five years..

Yes, we raised our expansion plan several months ago, before the start of the fiscal year, I got your advice that we will open 30 to 40 new learning, 40 to 50 new learning centers at that time, but we increased it little bit.

We plan to open 50 to 60 new learning centers because the market demand is so strong and also, we're quite confident about the product, the new O2O product, but as I said some minutes ago, we will control how many learning centers we set up. It will now direct margin, we hope that our margin will go up. Okay and....

Okay. Thank you..

Yes, that's it. Okay. Thank you..

Thank you. Our next question comes from the line of Eric Qiu from CCBI. Please go ahead..

Thanks. Good evening Stephen and Sisi. Thank you for taking my questions. Congratulations on very solid results. My question is firstly related to the enrolment number growth because this number above 50 is much higher than the previous like nine quarters on average.

So, I was wondering is it more because of the summer campaign and with this like above 40 or 50 enrolment growth continue in the next several quarters.

My second question is related to the online, you released some data about the Koolearn.com's enrolment and the registered user growth, since that growth was less than the enrolment growth for our offline classes, so I'm wondering if the percentage contribution from the online was actually decreasing, how we look at this business going forward? Thank you..

Okay. Yes, the enrolment, I will tell you that, all the enrolment numbers we tell you is not included in offline enrolment with the price into 300 RMB. So, I think yes, the 78% growth for enrolment is quite high, but partially we're seeing the huge enrolment.

It's early registration for the POP Kids program, students chose to enroll the class earlier than before. That means some students have already enrolled for the Spring classes. So anyway, the student enrolment trend will be good. But I don’t think we can continue to get 70% to 80% enrolment growth in the quarter.

And yes, the online, your second question is about online. I don’t change my guidance for the pure online Koolearn.com, the revenue guidance. I think the revenue growth will be somewhere between 40% to 50% going forward for the Koolearn.com..

Okay..

Thank you..

Thank you. We are now approaching the end of the conference call. Let me now turn the call over to New Oriental's CFO, Mr. 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, again..