Good evening and thank you for standing by for New Oriental’s First Fiscal Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. After the 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. Please go ahead..
Thank you. Hello, everyone and welcome to New Oriental’s first fiscal quarter 2017 earnings conference call. Our financial results for the period were released earlier today and are available on our 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 US 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 obligations to update any forward-looking statements, except as required under applicable laws.
As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr. Yang. Stephen, please go ahead..
Thank you, Sisi. Hello everyone and thank you for joining us on the call. We are off to a strong start for fiscal year 2018, and in the first quarter we’ve laid down a solid basis on which to (inaudible) during the rest of the fiscal year. Net revenues in the first quarter increased to $661.2 million, which is 23.8% growth.
In dollar term, we are 25.9% if computed in RMB. Net income increased by 12.3% and total student enrollment in academics subjects tutoring and test prep courses went up by 15.6% year-over-year to approximately 1,532,900 in the first quarter.
To further tap in to the booming private education market and fully extend our leadership in the market, we also added a net of 43 learning centers in 22 existing cities and rolled out dual-teachering model school in the city of Zhongshan.
Altogether, this added a total of approximately 116,700 square meters of classroom area, representing approximately 8% capacity expansion over the previous quarter and 31% growth year-over-year. In the first quarter, we remained focus on our well-proven ‘Optimize the Market’ strategy.
This means we are continuing to expand our offline business while also investing in the O2O Two-way Interactive Education System. As just mentioned, our business has started the year with a better than expected revenue growth and this is mainly driven by the substantial increased in student enrollment in the recent two quarters.
Even with the discount of the revenue due to the large scale summer promotion, our key revenue driver, K-12 all-subjects after-school tutoring business has so far achieved a revenue growth of about 35% in dollar terms or 38% in RMB terms year-over-year.
The enrollment growth rate of K-12 business in the recent two quarters is at a very increasing 35% year-over-year.
The growth in our K-12 business can be broken down in to the outstanding performance from our U-Can middle-school and high school, after-school children business and POP kids program, each of which achieved impressive growth respectively.
The key area of focus for the first quarter was our summer promotion campaign, which were accelerated and made larger than last year, with aims to capture as much monkey share as possible and acquire long-term loyal student customers. The large scale promotion offering low priced experimental courses was launched in a total of 38 cities this year.
On this note, I would also like to mention our deferred revenue balance, meaning cash collected from the students for courses and recognized professionally as revenue as the instructions were delivered was $930 million at the end of the first quarter, an increase of 41.5% as compared to $657.1 million at the end of the same period last year.
This shows that the promotion was very well received and is generating long term benefits. The low cost of trial-course enrollment for the summer reached 554,000, which more than doubled compared to the same period last year. I would like to reiterate that we do not include this promotion enrollment in our reported enrollment.
Compared with the last year, this year we’ll retain higher portion of students who went down to enroll in (inaudible) classes for the autumn. This will boost its revenue and drive profit throughout the whole fiscal year of 2018.
At the same time, the cut in teachers’ labor, a facility rental resulting from the summer promotion are negatively impacting our operating margin by about 2% in the first quarter. That said, we are not expecting material impact our operating margin from the summer promotion throughout the whole fiscal year.
Overall, we are really pleased with this outcome. We believe the summer promotion will continue to be successful and an effective strategy to optimize our market shares in the fast flowing K-12 after-school tutoring market.
As these students move from grade seven to grade 12, the continuing improvement in retention rate and customer loyalty will drive revenue growth in the next three to six years. These investments will set a solid foundation for stronger growth in long term and further strengthen our leadership in the market.
I will now turn to pricing, per program blended ASP, which is cash revenue divided by total student enrollments increased by about 8% year-over-year in dollar or 10% in RMB terms. VIP business recorded a cash revenue of 32% during this quarter.
Starting from the third quarter last year we began to concentrate the registration for U-Can VIP classes in June and December, which are the first month over the first and third fiscal quarter respectively, instead of spreading them evenly throughout the year. This decision is designed to streamline the registration process.
As a result of the adjustment, we saw a large year-on-year increase of enrollment of U-Can VIP class in this quarter. Over the long run, we expect a slower growth of our VIP business compared to our overall revenue growth, which will continue to track down blended ASP.
Hourly blended ASP which is GAAP revenue divided by total teaching hours increased by approximately 4% year-over-year in RMB terms. To provide a breakdown of hourly blended ASP in RMB terms, please note that U-Can increased by 1%, POP Kids increased by 3% and overseas test prep program increased by 10% year-over-year.
We remain firmly optimistic about of our topline performance, which we expect will be supported by the continuous improvement of retention rate of existing customers and the ability to acquire new customers.
Not to mention, the summer promotion capacity expansion had a short-term impact on our operating margin, but this important investment will help build our long-term growth. In terms of the details, operating margin for the quarter decreased by 420 basis points and net margin decreased by 240 basis points year-over-year.
We believe that this is a short-term dilution that will generally balance out as the year progresses. But we will provide some additional important thoughts on this at the end of the call today. Now lets move on to the first quarter performance across our individual business lines.
Our revenue driver of K-12 all-subjects after-school tutoring business achieved a revenue growth of about 35% in dollar term or 38% in RMB terms year-over-year, driven by enrollment growth in the recent two quarters of about 35% year-over-year.
Breaking down, the U-Can middle and high school all-subjects after-school business reported a revenue increase of about 35% in dollar term or 37% in RMB terms. Still enrollment was approximately 22% year-over-year for the quarter.
Our POP Kids program again delivered outstanding results, with revenue up interesting by about 36% in dollar term or 38% in RMB terms for the first quarter. Enrollment went up about 23% for the quarter.
Our overseas test-prep and consulting business together reported revenue growth of about 16% in dollar terms or 18% in RMB terms year-over-year for the first quarter. Finally, VIP personalized class business reported revenue growth of about 32% in dollar term or 34% in RMB term year-over-year for the first quarter.
Next, I will provide some update on the progress we are making with our optimized marketing strategy. We have been focusing on expanding our capacity by investing in the build out of our O2O integrated education system and this continues to produce very promising results.
Starting with our core offline business; in the first quarter we added a net of 43 learning centers in 22 existing cities and rolled out one dual-teacher model school in the city of Zhongshan.
Altogether, this added a total of approximately 116,700 square meters of classroom area, representing approximately 8% capacity expansion over the previous quarter and 31% year-over-year.
In order to capture growth opportunities in low-tier cities, we continue to rollout our dual-teacher model schools and expand our business in to remote areas in China.
We started to follow the new dual-teacher model in select cities in July 2016 and by the end of the first quarter, we have tested this new offerings in over 30 existing cities and seven new cities, and we are pleased with the increased market penetration in the markets we have tapped in to.
With this encouraging results, we’ll continue to deploy the strategy in the rest of the fiscal year. With respect to our online business, we invested $14.4 million in the first quarter to improve and maintain our O2O integrated education system. This has been an area of focus since 2014. Most of the investment was recorded in to G&A expenses.
With high customer retention rates and additional new customers we believe the investments will bring continuing long term benefits. I will first talk about O2O two-way interactive education system, on the whole, we aim to extend New Oriental’s traditional offline classroom teaching offerings to online education services.
This is an important front on which we set ourselves apart from other key players in the market. For the booming market and our advanced O2O product services, we are poised to gain market share and strengthen our performance going forward.
Since its launching of U-Can Visible Progress Teaching system in September 2014, the interactive education system has been used in all existing cities. We also revamped our POP Kids English program in all existing cities by end of the first quarter.
The Interactive Education System for overseas test prep program including IELTS, TOEFL and SAT courses were rolled out and tested in about 20 cities by the end of the first quarter. Now I will talk about our online education ecosystem.
We have seen consistent growth in our Koolearn.com learning platform and other supplementary online education products. Koolearn.com generates net revenue of $20 million, representing 42% increase in dollar terms or 44% in RMB terms year-over-year in the first quarter.
The number of paid users increased by about 45% year-over-year in the quarter and cumulative registered users reached 17.7 million. Koo.cn our online broadcast open platform achieved about 662,200 registrations in the first quarter. DONUT learning apps recorded over 68.9 million downloads by quarter end.
Our Le Ci app recorded about 6.6 million users by quarter end. Now let me walk you through the other key financial details for the first quarter. Operating cost and expenses for the first quarter was $500.1 million, representing a 31.1% increase year-over-year.
Non-GAAP operating cost expenses for the quarter, which excludes share based compensation expenses were $497.0 million representing 30.6% increase year-over-year.
Cost of revenues increased by 32.9% year-over-year to $270.2 million, primarily due to increase in teachers compensation for more teaching hours and number of schools and learning centers in operation.
Selling and marketing expenses increased by 26.4% year-over-year to $73.9 million primarily due to increase in brand promotion expenses and selling and marketing staff’s compensation. General and administration expenses for the quarter increased by 30.4% year-over-year to $156.0 million.
Non-GAAP general and administrative expenses, which excludes share based compensation expenses were $152.9 million, representing a 28.7% increase year-over-year, primarily due to increased headcounts as the company expands its network of school learning centers by about 17% year-over-year.
Total share based compensation expenses which were allocated to relate operating cost and expenses increased by 254.8% to $3.1 million in the first quarter. Operating income for the quarter was $161.1 million, an increase of 5.6% compared to $152.6 million in same period of the prior fiscal year.
Non-GAAP income from operations for the quarter was $164.2 million, a 7.0% increase compared to non-GAAP income from operations of $153.5 million in the same period in the prior fiscal year. Operating margin for the quarter was 24.4% compared to 28.6% in the same period of the prior fiscal year.
Non-GAAP operating margin which excludes share based compensation expenses for the quarter was 24.8% compared to 28.7% in the same period in the prior fiscal year. Operating margins were naturally affected by the increase in cost expenses mainly due to the capacity expansion in the recent two quarters and the bigger scale summer promotion.
Net income attributable to new rental for the quarter was $158.4 million, representing a 12.3% increase from the same period in the prior fiscal year. Capital expenditures for the quarter were $54.1 million, and this was primarily attributable to the opening of one new school and 74 new learning centers and renovations at existing learning centers.
Turning to the balance sheet, the deferred revenue balance which is cash collected from registered students for courses are recognized professionally as revenue as per instructions delivered at the end of the first quarter of 2018 was $930 million, an increase of 41.5% as compared to $657.1 million at announced in the first quarter of the year 2017.
Before moving on to our expectations for the second quarter, I would like to take a moment to reiterate our over-arching goals for the year which we aligned on fiscal year 2017 year in the conference call.
During the fiscal year of 2018, we will continue to execute our optimized market strategy and build on the success we achieved through this approach. We’re optimistic and confident that we have the right strategy in place and that it will continue to drive the business in a way that creates long term value for our shareholders.
In terms of our priorities, first, we will continue to expand our offline business. We aim to add around 20% new learning centers and expand classroom area of some existing learning centers to cater to our business in existing cities.
And we also plan to introduce to four new cities where we exactly identify as markets for the most business opportunities. In addition, we will continue to roll out our dual-teacher model schools to about five to 10 new low-tier cities in China.
Second, we will continue to leverage our investments in our O2O integration and initiatives in online education offerings, in particular we will continue our focus on products with finance and maintenance for the O2O system to cater to our business.
Meanwhile, we will continue to revamp and will add our O2O standardize teaching system by overseas test-prep business. We will continue to make investments, but we believe that the total spending in absolute dollar terms in fiscal year 2018 will be similar will increase moderately, compared with the present fiscal year.
Third, we will continue to focus on driving up utilization of our facilities and controlling cost to drive operational effectiveness and deliver long term bottom line growth.
However, even while we are focused on this, it is important to point out that the utilization rate of our facilities declined in the first quarter of 2018 versus the same period last year, due to the capacity expansion we have been driving in the last few months.
Also as mentioned earlier in the call, this excess capacity as well as the short term impact on the margins from our aggressive summer promotion this year also had a slight defining effort.
In fact on the overall margins in the first quarter we clearly believe the pressure on margins will lessen and reverse throughout the remainder of the fiscal year.
Given the extensive acceleration of revenue growth and anticipated boost in facility utilization in the coming quarters, we will keep you updated on this as we move through the fiscal year. In any event, what is most important is that our expansion strategy and recent incentives should drive additional revenue growth and market share in the long run.
We expect a significant return on the investments we have made and believe this will also deliver long term value for the customers and shareholders.
Looking at the near term and our expectation for the second quarter, we expect total net revenues to be in the range of $447.0 million to $560.7 million, representing year-over-year growth in the range of 31% to 35%. Lastly, I must mention that these expectations reflect new rental clearance and preliminary view which is subject to change.
At this time point, I will take your questions. Operator please open the call for this..
[Operator Instructions] your first question comes from the line of Alvin Jiang from Deutsche Bank. Your line is open..
I have two quick question, first one is to your margin.
Could you give us more color on the margin or EPS outlook for the full year?.
I think this is a question of summer promotion and excess capacity expansion in like two quarters has the short-term related to the impact of our operating margin for this quarter. But we think the important investments we make will help build out long term growth of the top line and deliver long term value for our customers.
And we currently believe the pressure on margins will lessen and reverse in the rest of this fiscal year.
Actually if you see the margins in the next 12 months, what I mean in the Q2, Q3, Q4 and Q1 next year in the next 12 months, you will see the more optimum leverage because I think of the Q1 is because we did large scale summer promotion and the capacity expansion.
So going forward in the mid to long-term margin guidance, we will keep the same view as I guided before. So is my answer clear..
Got it. And my second question is on the guidance, the second quarter guidance is very strong.
Could you also give us a breakdown of different business lines underlying this strong revenue guidance?.
In the Q2 guidance, I think in different lines, first one is U-Can middle school high school, the top line growth will be 45% to 50% year-over-year, POP-Kids over 50%, overseas test-prep 12% to 15% growth year-over-year. Demand for test-prep will be increased by 10%, and the only drag is for our add-on English. I think it will be down by 10% to 15%.
And overseas consulting business we expect the growth rate will be 25%, pure online what I answered the Koolearn.com will grow 40% to 50% year-over-year..
Your next question comes from the line of Ivy Luo from Macquarie. Your line is open..
My first question is on the capacity, so we do see that we lifted our guidance from 10% to 15% to 20% capacity increase. Just wondering how much of it is actually coming from the new learning center opening, because we said the capacity increased 31% year-over-year, but based on the number of learning center it actually increased 16% or 17%.
So just wondering exactly like how many learning centers we plan to open in fiscal ’18. That’s my first question..
In terms of the capacity expansion, we have two parts, the first is we are raising our expansion plan of the new learning center opening to 20%. That means we plan to open 20% new learning centers for the whole year. And also we will add 10% of the class room area of the existing learning centers.
So if you plus the 20% with the 10% you will get 30%, the capacity expansion. I wanted to say something about our change of the expansion plan. We think the market is very good. So we raised our expansion plan to meet the requirement or demand of the market. Second, I think we are quite confident about our O2O product.
So the expansion is controlled this time and we won’t repeat the over expansion mistakes we made several years ago. So this time we are doing this I think is because of the (inaudible) with the manageable market. And I think we will control the cost..
And my second question is still on the margin pressure and I guess utilization. So will you be able to breakdown like how much of the margin pressure in this quarter is coming from summer promotion and how much is from the new center opening i.e.
the utilization rate and when would we expect the utilization rate of the newly opened learning center to ramp up to our average..
The non-GAAP opening margin decreased 390 basis points in the Q1. And in that 200 bps comes from the summer promotion. And another like 1.8 0 180 basis points down comes from the new learning opening. Actually we opened 94 new learning centers less net ads in last two quarters.
And I think since Q2, what I mean is in the next quarter we will see the operating leverage over higher utilization rate of the new learning center opening. And as such we control the expansion by the management and we only allow the schools or the cities where the high growth rate and high margins to open more learning centers.
For example, in Wuhan and Guangzhou and Beijing we opened more learning centers like before. So in the rest of the year we expect the utilization rates will go up going forward..
Just to clarify, so utilization rate on a full year basis should be up year-over-year. That’s what we are expecting here..
I think it’s too early to say because we have deepest of the utilization rate in Q1. But as I said in the rest of the year the run rate will go up. So we’ll keep you updated on this as we move through the fiscal year..
Your next question comes from the line of Fan Liu from Goldman Sachs. Your line is open..
This is [Saif] asking question on behalf of Fan. We’ve a couple of questions. So the first one, would you mind sharing with us your latest utilization rate and also the breakdown between old learning centers and new learning centers that you opened within the past one year..
I think the first quarter our utilization rate in this quarter was down by 1% to 2% because we opened 94 learning centers in the last two quarters and also we have the larger scale summer promotion and we don’t charge the common price to customers. So this is the utilization rates of this quarter..
And in terms of the breakdown between the old and new learning centers that were opened over the past one year.
Is that possible to disclose?.
We have 800 to 900 learning centers so we don’t disclose the utilization rates by different learning centers..
One more question is, could you also please share with us your enrollment and revenue group figures for Beijing, Shanghai and Guangzhou and Shenzhen as well..
I just want to share with you the K-12 after-school tutoring business. In the last trailing 12 months, the revenue growth of K-12 business in Beijing was 39% and Shanghai was 36%, and the top five cities Beijing, Shanghai, Xi’an etcetera was 40%. So the top five cities contributed 45% to 46% of total revenue..
Your next question comes from the line of Jin Yoon from Mizuho Securities. Your line is open..
I think in the past you said Stephen that the retention rate amongst summer users for this summer was better than the years past.
Can you just talk about the timing of this retention in terms of how it should flow going forward? Should we expect quite a bit of the retention to happen one or two quarters after the promotional period or an you just talk about the timing of that retention.
And second of all, on the first question that was asked, are you saying that full year margin should be higher this year than last. I just wanted to make sure that I clarify that..
Jin your first question is about the retention rate of the summer promotion. Actually, I think we got hired during that retention rate of the promotion this year is close to 50% and last year the same number was 40%. So we got improvement. 40% last --..
But can you talk about the timing of that though? Like when should we expect that retention rate to come in, is that right after the summer or is that a step function involved with that?.
Actually it happened already. After the summer promotion the student has already enrolled for the autumn class..
That’s the retention quarter-over-quarter. So from summer course to the autumn course, and going forward..
And Jin going forward you should be interested in the student retention rate after the autumn or even next spring. I can share with you the last year numbers. 90% of the summer promotion students we got last year, which enrolled in autumn of course is our current student. So the retention is rather higher than on average.
So going forward we believe that retention rate obviously coming from the summer promotion will be higher. And the effect is because of the margins..
I’d just like to clarify.
I just wanted to make sure that full year margins this year should be higher than margins last year on a full year basis?.
We just passed one quarter and we got 380 basis points down of the operating margin. And as I said in the rest of the year, we will make it up, the margins. So I think it’s too early to say.
But what I can say is, we do believe the margin expansion in the rest of the year, and so I think that we’ll keep you updated on that as we move throughout the year..
Your next question comes from the line of Tian Hou from T.H. Capital. Your line is open..
Stephen and Sisi, congratulations on a good quarter and your strong guidance, and I think it is time for you guys to actually start your expansion because the markets need it. So one thing I would be a little bit concerned is the management capacity.
So the expansion of the learning center is just not like the fiscal location, but has to be run by people, students have to be taught by teachers. And so in those kind of much faster expansion how do you resolve the quality of teaching? So that’s my question..
I think this is a very good question. As I said, even when we were raising the expansion, the new learning center opening. But I think we do believe we have the ability to manage the teaching quality.
First one – and maybe I mentioned earlier, new rental is becoming one more centralized that means the office is managing the teaching quality and the content and the teacher quality. And it’s quite better than before, and I just want to say we just opened 20% new learning centers combined with the 10% new classroom area. I think it’s not overviewed.
The 30% is okay for us, and the key is we are quite confident about the teacher compensation. We pay that in the market to be our teachers. We were quite confident about the teachers’ quality themselves..
Another question is, I think a lot of investor or analysts are concerned about margins. I’m not quite concerned about margins because I really think you guys learned it from post 2008, that kind of expansion.
So I wonder this kind of expansion compared with last time expansion, what’s the difference for your KPIs when you’re managing those teachers or [Shaodong’s] performance..
Okay. Six or seven years ago we would triple all our learning centers in 3.5 years, we call it for overview (inaudible). At that time, the KPI - 80% the local school had KPI came from the topline growth. So that meant only 20% would relate to the margin. But now it’s quite balanced.
50% of the school health KPI comes from the topline growth and 50% comes from the operating margin expansion. So it’s quite balanced, and we are quite confident about the KPI system which the local school has. The tools the local school has do care about not only the topline growth, but also the margin, the teaching quality and so on..
Stephen one last question, so in the past how long does it take you for the full ramping up of a learning center. How long does it take you today to ramp up a new learning center..
Actually I remembered several years ago, typically I took 12 months that means one year to get the breakeven point, I think the learning center opening. But now I think the deteriorating is coming forward. So typically on average it takes five to eight months of the specific running center to get to breakeven point.
That means we rent half of the learning center more quickly than before..
Your next question comes from the line of Alex Liu from Daiwa. Your line is open..
Just for the benefit of the audience, would you mind reminding us again the medium to long term margin guidance, and how soon should we expect the company to achieve this medium to long term margin guidance?.
I think in the last earnings call or the earnings call before last one, I am sure the long term margin guidance is to get 17% to 18% in the next 24 years.
I think we’ll keep the same margin target now, because even though we opened 94 learning center in the last two quarters, we were quite confident to fill them in to the new learning centers as quick as we can. So I think you will see the more after the leverage and high utilization rates going forward.
And this is our target to manage the local school. So actually I want to change mid to long term guidance of margin..
My second question is on overseas test preparation business? Would you mind reminding us the overseas test enrollment this quarter as well as the revenue growth and how should we think about the direction for the rest of the year?.
The enrollment was 14% in RMB terms for overseas test prep business, and the per programing enrollment decreased about 3% for this quarter.
But maybe you remember in order to improve the effect of the results of the training offered to the younger aged customers of the overseas test prep, we’ve doubled the class (inaudible) of TOEFL and IELTS or SAT programs in the last year and this change negatively impacted the enrollment by 8% to 9% year-over-year.
So the actual volume growth in this quarter of the overseas test prep is 3.5%.
Is it clear Alex?.
Your next question comes from the line of Lucy Yu from Bank of America/Merrill Lynch. Your line is open..
I’ve got a quick question on operating expenses i.e. adding up selling and distribution and other things together. This expense was growing at teens to around low 20s in the past several quarters. But this quarter it went up by 29%. I believe it’s largely related to your exploration of learning centers.
Could you please just give us some guidance on this expense, the growth outlook in the next few quarters?.
I think this is mainly due to the new learnings and opening in the quarter. But over the long run, going forward, I think as a percentage of the revenue the selling and marketing expense generally as a percentage of the revenue will go down, and so we still have them leveraged on the OPEX..
[Operator Instructions] Your next question comes from the line of Thomas Chong from Credit Suisse. Your line is open..
I’ve a quick question about the full year revenue growth, and keeping the strong set of second quarter guidance, should we expect the revenue growth acceleration to be better than previously expected?.
Yes, we raised our annual guidance for the whole year or fiscal year 2018. And I think the [run-up] growth of this year will be around 30%. That means 25% comes from the volume growth and 5% to 6% to 7% comes from the price increase.
Actually the key driver is the K-12 business and that’s why we decided to open more learning center – more kids will have learning centers in the past two quarters. And also we are seeing the highest student retention rate and also we have the ability to acquire new customers because of a better quality of product.
So that’s the reason we raised the level of guidance for the whole year..
Your next question comes from the line of Mark Li from Citi. Your line is open..
I want to ask for the learning density for your existing city. Actually how many learning centers do you think you have over the medium term? I wonder maybe for the top cities like Beijing, Shanghai, Shenzhen and also maybe the tier two cities..
Actually in the existing cities, I think we are in the 66 cities already and we have nine learning centers now growing. And I think the maximum learning center may be in the next couple of years. The maximum should be 1500, 1200 because for example in Beijing we have 90 learning centers here.
But I think the maximum learning centers we can stack in to in Beijing will be 150. And also we have lot of cities where the population is over 2 million and we’ve now got in to. But I think that most of the new cities we are doing the business positively going forward. So the markets back.
And on the market share in the K-12 business, even though we are (inaudible) the leading player, but our market share is below 2%. So it’s a long way to go. And virtually – actually since last year we have been seeing the markets booming at the K-12 after-school tutoring business. And that’s why we accelerate the learning center opening..
How about the tier-two city, do you think how many learning center its possible?.
Actually we don’t have the statistics. What I can say is that it’s a long way to go. For example like the tier two or tier three cities the maximum learning center should be 50 to 70. But now we are only half that is 20 or 30 learning centers..
Your next question comes from the line of Wayne Wang from HSBC. Your line is open..
I have a question on Koolearn part. We are delighted to see the growth rate accelerating in revenue and number of users. So can the management share with us the margin profile for this business currently or future outlook and also what kind of progress we have made so that – that makes the growth accelerating in the revenue and users..
In terms of the Koolearn the margin is 10% to 15%, and maybe Sisi you can share the more accurate numbers. But going forward I think the common growth of the Koolearn.com should be 40% to 50% or even better. And I think Koolearn is one of the few players of the pure online platform in the Chinese market that can make money.
So we do believe the Koolearn.com will do a better job going forward..
Your next question comes from the line of Johnny Wong from Jefferies. Your line is open..
I’m Stephen [Cici]. Thank you very much for taking my question. My question is about the summer promotions. It seems that for the last few years there has been an acceleration in the summer promotion.
Wondering if this will be a continuing trend and do you think that will negatively affect the margins in the next few years in our fiscal year first quarter..
Actually we got more than doubled some of the promotions enrollment of this year, compare to last year, because I think we believe that some of the promotions is successful in an effective way to (inaudible) international market share and to meet the fast growing market demand.
In terms of the margin impact, we have the 2% negative impact on the margins in the first quarter. But over the one end of the whole year one of the material impact on the margins because we are seeing higher retention rate in autumn and we expect the higher retention rates in the rest of the year of the students come from the summer promotions.
So the rest of the year the margins will make the margin dilution in the first quarter..
Your next question comes from the line of [Sheryl Yang] from BICC. Your line is open..
I have three questions, the first one is regarding your dual-teacher classes.
What’s the current retention rate and utilization rate under this model, and what’s your future expansion plan regarding this model in fiscal 2018 and beyond that? And how long does it take to reach breakeven for the dual-teacher model and how long to collect the investment under this model?.
Actually the retention rate of the dual-teacher model, we checked the pilot of the dual-teacher model one year ago. So it’s too early to say. But what I wanted to say is that the retention rate of the student is 50% to 60%. I think it is better than we expected.
And in terms of the expansion plan in this fiscal year ’18, we plan to open five to 10 new cities for the dual-teacher model. And I think we will open more learning centers in different cities on the dual-teacher model for POP-Kids and U-Can.
But I think it’s still too early to say, we can get something worth from the investments of the dual-teacher model. Because with (inaudible) we carve out the teacher’s institute and some [current] response of the new product, and we open the learning center rather carefully.
So that’s why we only open (inaudible) and [eastern] city only has one learning center of the dual-teacher model in the last year..
And my second question is that we noticed that (inaudible) has set up a [temple] reemphasizing this emergent acquisition strategy. So given you have been quite as conservative this year, shall we expect to see more investment to be carried out by EDU and what types of company would you be interested in..
Actually we are still in process and planning of the [fans]. But I think going forward for an out company, I think we will look at some of the pure online companies were offline schools were the kindergartens. But if we find the potential sanity between the targeted company and us, I think we will buy.
And also we care about valuation and we care about the cooperation between us, that’s it..
And my last question is about the competition landscape.
Can management please share your views on current market competition in K-12 and in overseas test prep market?.
As I said, even though we are leading player in the market, but our margin share is quite small that’s below 2%. So the competition is still better and I think my view is, if we have the qualified teachers and the good product, I think we should take more market share, one small player. So it’s a long way to go.
And the overseas test prep competition – yeah I think we dominate the market of overseas test prep, because we run the business for about 24 years already, but still a long way to go. And in last quarter if you remembered our topline growth of the overseas test prep was 17%. This year 14% in RMB term, year-over-year growth.
So we still have a lot of room to get improvement of the overseas test prep business..
What’s your view on the [GD] work?.
What was that? I’m sorry.
What’s the question?.
I was trying to ask the question on this GD (inaudible)..
I don’t want to make comments on our competitors. All I can say is the market is there and we care about the improvement of our teaching quality and we just want to provide better services to the students. I think if we do things right, we will take more market share from the small players in the market..
Your next question comes from the line of Alison Lee from CLSA. Your line is open..
I am asking on behalf of Marian. Just one quick question on the dual-teaching although again. I just wanted to confirm how many cities are you testing the dual-teaching model on and is there any metric that you could share on the student performance by using this model compared to the traditional class room..
Actually we started in to seven new cities already, and also we have 30 learning centers in existing cities to perform the dual-teaching model. And even though it’s too early to say, but so far so good. The response of the parents and students are good.
And in the low-tier cities I think the students had less opportunity to take the good teachers classes. So we are providing the good teachers from the hub city like Beijing, Shanghai and Wuhan and to build half of the better classes in to the low tier cities. So I think it’s a great opportunity for us to do the business in the low tier cities..
So seven cities already and in 30 learning centers..
Yeah..
Your next question comes from the line of Nicole Lung from (inaudible) Securities. Your line is open..
Just one quick question, could you (inaudible) quarterly student enrollment because you’re saying that the last quarter was (inaudible) 15% and compared to the other new (inaudible) about 23% could you elaborate about that.
And also that do you expect your student enrollment in Q2?.
Actually since last year we’ve started to bundle the winter and spring courses registration in Q2. And in summer and autumn courses registration in Q4. So that’s why we reported 37% year-over-year enrollment growth in Q4 last quarter. And 15.6% year-over-year enrollment was in this quarter. So the combined enrollment was 25%.
And going forward I think the trend will continue. So that’s why I got you the volume growth. I think in the coming Q2 the topline growth will be 31% to 35%. And I think 25% to 31% comes from the volume growth or enrollment growth. And others will be the pricing (inaudible)..
We are now approaching the end of the conference call. I will now turn the call over to the New Oriental CFO, Mr. Stephen Yang for his closing remarks. Please go ahead..
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..
Thank you. Ladies and gentlemen that does conclude our conference for this day. Thank you for your participation, you may all disconnect..