Sisi Zhao - Director-Investor Relations Stephen Zhihui Yang - Chief Financial Officer.

Thomas Chong - Credit Suisse Limited Sheng Zhong - Morgan Stanley Jin Yoon - Mizuho Securities Asia Limited Natalie Wu - China International Capital Corporation Wendy Huang - Macquarie Group Mariana Kou - CLSA Limited Mark Li - Citi Research Tian Hou - T.H. Capital, LLC Lucy Yu - Bank of America Merrill Lynch.

Ladies and gentlemen, thank you for standing by. And welcome to the New Oriental Third Fiscal Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session.

[Operator Instructions] I must advise that this conference is being recorded today, Tuesday, April 24, 2018. I'd like to hand the conference over to your first speaker for today, Ms. Sisi Zhao. Thank you. Please go ahead..

Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter 2018 earnings conference call. Our financial results for the period 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, the 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're pleased to continue our strong momentum in driving top line growth for the third quarter of fiscal year 2018. Net revenues in the third quarter increased to $618.1 million, which is 41.2% growth, once again beating our expectations.

Specifically, strong top-line growth was driven by recent increase in student enrollments in academic subjects tutoring and test prep courses in the last two quarters. Starting from the last fiscal year, we bundled winter and spring courses registration in Q2 in summer and autumn courses registration in Q4.

This year, we delivered a very strong 43% year-over-year enrollment growth in the second quarter. Following the powerful drive in the second quarter, student enrollment continued to grow by 7.7% year-over-year in the third fiscal quarter.

It's also worth noting that this year's much later Chinese New Year has caused student enrollment in the last weeks of third quarter to fall into beginning of the fourth quarter. Nonetheless, the combined enrollment growth for the second and third quarter together reached 30% even with the impact of Chinese New Year.

In this regard, we're very encouraged to see outstanding result in terms of the enrollment in cash proceeds from students' registration in the first eight weeks of the first fiscal quarter, which grew year-over-year by approximately 40% and 65% respectively.

In the third quarter, we remain committed to sustaining a healthy balance between top-line and bottom-line growth as we execute our well-proven Optimize the Market strategy.

Following a strong track record in the previous three quarters, we continue to make great strides in our planned acceleration in capacity expansion across cities with superior growth potential and higher operating efficiency.

In this quarter, we added a net of 47 learning centers in 23 existing cities, opened two new schools in cities Lianyungang and Yancheng, and launched the three dual-teacher model schools and eight learning centers in the cities of Jiaozuo, Dongguan and Haikou.

Put together, our total square meters of classroom area by the end of this quarter expanded by approximately 41% year-over-year. We also continued to strengthen our online and offline integrated standardized teaching system in the K-12 business.

We deployed the standardized teaching system in our overseas test prep business in some of the larger cities in China.

Moreover, we continue to invest in our pure online education platform, Koolearn.com, which delivered a year-over-year revenue growth of approximately 63% in this quarter, with registered users and paid users up by approximately 88% and 70% respectively.

With solid support in resources and a series of new initiatives being rolled out, our online K-12 after-school tutoring business reported a robust year-over-year revenue growth of approximately 176%.

The results boosted our confidence in making strategic investments to capitalize on the booming online education market and drive up our top line growth. The encouraging results for the third quarter was mainly driven by the significant increase in student enrollment in the second and third quarters as mentioned a moment ago.

Our K-12 all-subjects after-school tutoring business accelerated its growth momentum in the third quarter, leading to a significant year-over-year revenue increase of 51%.

Furthermore, our U-Can middle and high school all-subjects after-school tutoring business also recorded revenue growth of approximately 51%, while the POP Kids program grew by approximately 50% year-over-year. I will now turn to pricing.

Per program blended ASP, which is cash revenue divided by total enrollments, increased by about 12% year-over-year in dollar terms.

Hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 13% year-over-year in dollar terms, to provide a breakdown of hourly blended ASP, please note that U-Can increased by 13%, POP Kids increased by 11% and overseas test prep program increased by 18% all year-over-year in dollar terms.

Meanwhile, our sustained efforts to push ahead with our capacity expansion strategy, contributed to a short-term headwind in the margin for this quarter, which we contained at a reasonable level.

Non-GAAP operating margin for our language training and test prep business declined 140 basis points year-over-year, a trend in line with that of the previous quarter.

We anticipate that the margin pressure will gradually lessen and be lifted off over the fourth fiscal quarter and the coming fiscal year, as we remain focused in enhancing our operational efficiency, utilization of facilities and cost control as the business expands.

Looking ahead, we're confident that the downward pressure in margin will continue to ease throughout the remainder of the fiscal year. More importantly, as the business expands it will also benefit from greater economies of scale, as we continue to make strategic investments.

We believe that with our well-proven expansion strategy, our strategic vision and investments will continue to create sustainable long-term value for our customers and shareholders. Now, let us move on to third quarter performance across our individual business lines.

Our key revenue driver K-12 all-subjects after-school tutoring business achieved revenue growth of about 51% year-over-year and enrollment growth of about 13% year-over-year. The combined enrollment growth of K-12 after-school tutoring business for the second and third quarter was 38%.

Breaking it down, the U-Can middle school/high school business recorded the revenue increase of about 51% for the third quarter. Student enrollment grew 17% year over year for the quarter. Combined enrollment growth for the second and third quarter was 37%. Our POP Kids program revenue was up by 60% in dollar terms. Enrollment grew by 7% year-over-year.

Combined the enrollment growth for the second and third quarter was 39%. Our overseas test prep, consulting business together recorded a revenue growth of about 24% year-over-year in the third quarter. Finally, VIP personalized classes business reported revenue of about 34% year-over-year for the quarter.

Next, I'll provide some updates on progress we are making with our optimized market strategy. In consistent with our long-term plan, we have been focusing on expanding capacity by investing in the build-out our O2O integrated education system. And this continues to produce very promising results. We will start with our offline business.

In the third quarter of fiscal year 2018, we added a net of 47% learning centers in 23 existing cities, opened two new schools in the cities of Lianyungang and Yancheng, and rolled out three dual-teacher model schools and eight learning centers in the cities of Jiaozuo, Dongguan and Haikou.

Altogether, our total square meters of classroom area by the end of the quarter expanded approximately 41% year-over-year. In order to capture the growth opportunities in low-tier cities in China, we continued to roll out our dual-teacher model schools, expand our business into remote areas of China.

We began to pilot the new dual-teacher model class in select cities in July 2016 and by the end of the third fiscal quarter 2018, we have deployed new offering in over 35 existing cities for the POP Kids program, in 25 cities for U-Can program and 13 new cities for both POP Kids and U-Can/K-12 business together.

We're delighted to see higher market penetration in those markets as a result of our strategy. We also saw improved customer retention and scalability brought by this new model. With this promising result, we will continue to deploy this strategy in the remainder of the year.

Turning to our online business, we invested $19.3 million in third quarter to improve and maintain our O2O integrated education ecosystem. Most of the investments were recorded under G&A expenses. I will now provide some updates on our O2O Two-way Interactive Education System.

Since the launching of the U-Can Visible Progress Teaching System in September 2014, the interactive education system has been deployed in all existing cities. We've launched a newly revamped POP Kids program in most of the cities by the end of the third quarter of fiscal year 2018.

The interactive education system have also been gradually implemented in an increasing number of cities across China. The interactive education system for overseas test prep including IELTS, TOEFL and SAT courses, was rolled out and tested in most of major cities by the end of the third quarter.

At the same time, we also standardized product offerings across seven cities including Shenzhen, Xiamen, Changsha, Hefei, Nanjing, Suzhou and Hangzhou. Now, I will walk you through our progress in Koolearn.com business line, and other supplementary online education products.

Koolearn.com generated net revenue of $24.8 million, representing a 63% increase year-over-year in the third quarter. The number of paid users increased about 70% year-over-year in this quarter, and cumulative number of registered users reached $20.9 million.

Our online K-12 after school tutoring business achieved impressive year-over-year growth of approximately 176%. Our DONUT learning apps reported over 78.3 million downloads by the end of third quarter of fiscal year 2018. Our Le Ci app reported above 7.4 million users by the end of third quarter of fiscal year 2018.

To capitalize on this huge market opportunity online education space, we invested more resources in executing new initiatives in our online K-12 after school tutoring business.

This includes constant development, teachers reporting and training, sales and marketing, and other essential cost expenses contributing to driving the growth of our new online programs. With this program, we are able to reach more students in low tier cities in interactive and scalable manner.

We believe this will help Koolearn.com gain new market share in the online education space and to help our top-line growth. Now, let me walk you through the other key financial details for the third quarter. As mentioned earlier, the business once again delivered outstanding year-over-year increase in net revenue and growth in the third quarter.

Due to the expansion capacity, operating costs and expenses for the quarter were $559.7 million, representing 47.2% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which exclude share-based compensation expenses, were $536.9 million, representing a 44.3% increase year-over-year.

Cost of revenues increased by 46.5% year-over-year to $268.8 million, primarily due to the increase in teachers' compensation for more teaching hours and rental cost for the increased number of schools and learning centers in operation.

Selling and marketing expenses increased by 38.2% year-over-year to $77.2 million, primarily due to increases in brand promotion expenses and compensation selling and marketing staff. General and administration expenses for the quarter increased by 51.7% year-over-year to $213.7 million.

Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $190.9 million, representing a 43.9% increase year-over-year, primarily due to increased headcount as the company expanded its network of schools and learning centers, as well as increases in R&D expenses and human resources expenses related to the development of our online and offline integrated education ecosystem.

Operating income for the quarter was $58.4 million, a 1.5% increase from $57.5 million in the same period of the prior fiscal year. Non-GAAP income from operations for the quarter was $81.2 million, a 23.4% increase from $65.8 million in the same period of the prior fiscal year.

Operating margin for the quarter was 9.4%, compared to 13.1% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was 13.1%, compared to 15% in the same period of the prior fiscal year.

Net income attributable to New Oriental for the quarter was $68.4 million, representing a 1.1% increase from the same period of the prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.43 and $0.43, respectively. Net operating cash flow for the third quarter of 2018 was approximately $108.2 million.

Capital expenditures for the quarter were $60 million, which were primarily attributable to the opening of five new schools and 66 new learning centers and renovations at existing learning centers. Turning to the balance sheet.

At the end of the third quarter, the deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered.

At the end of the third quarter of fiscal year 2018, was $1,083.8 million, an increase of 42.5% from $760.5 million at the end of the third quarter of fiscal year 2017.

Before moving on to our expectations for the fourth and final quarter of fiscal year 2018, I would like to take a moment to reiterate our overarching goals and priorities and our optimized market strategy. In terms of our priorities, first, we will continue to expand our offline business and consistent with our long-term plan.

We aim to add around 20% new learning centers and expand classroom area of some existing new learning centers and K-12 business in existing cities, and we also plan to enter two to four new cities, which we identify as the market with greatest business opportunities.

In addition, we will continue to roll out our dual teach model schools in over 10 new low-tier cities in China. Second, we will continue to leverage our investment in our O2O integration and initiatives in online education offerings.

More specifically, we'll continue our focus on product requirements and maintenance for the O2O system for K-12 business. Meanwhile, we will continue to revamp and roll out our O2O standardized teaching system for our overseas test prep business.

Furthermore, we will continue to invest and executing the new initiatives, which include constant development, future reporting and training, as well as sales and marketing the online K-12 after school tutoring business on our Koolearn.com platform.

Third, we'll continue to make strategic investment, and we currently believe the total spending in absolute dollar terms in fiscal year 2018 will increase moderately compared with prior fiscal year. Looking at the near-term and our expectations for the fourth quarter.

We expect the total net revenues to be in the range of $661.4 million to $680.9 million, representing year-over-year growth in the range of 36% to 40%. Lastly, I must mention that this expectation reflects 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. Thank you..

Thank you. Ladies and gentlemen, we now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Thomas Chong of Credit Suisse. Please ask your question..

Hi. Thanks, Stephen and Sisi, and congratulation for a very solid quarter. I have a couple of questions. The first question is about the margin trend.

Can management comment about how we should think about the margin trend in Q4 and FY 2019 as we continue to improve the operating efficiencies? Can we expect the margin pressure, basically to be behind us, starting from Q4? And my second question is about the online education initiative.

Given the facts that our online education is with a triple-digit growth, very solid momentum, is there any target or separate disclosure on this line in coming years, and also, target for FY 2019? And my final question is about the regulatory one.

In particular, do you we see any regulations that we need to pay attention in the near future? Thank you..

Okay. Thank you, Thomas. Your first question is about the margin trend. Yeah, I think the non-GAAP operating margin in this quarter declined by 190 bps. And I must mention that within it, the non-GAAP operating margin for the language training and test prep program business declined by 140 bps. This part has contributed 85% of total revenue.

And don't forget we started to exclude the capacity expansion since the Q4 last year. So by the end this quarter, the total square meters of classroom area was increased by 41%. So the classroom rental in this quarter increased by 60% in dollar term. And so, I think this is the key factor to drag the margin.

And going forward, we believe the margin pressure will lessen in Q4 due to the facts, acceleration of revenue growth and higher learning center utilization. Especially, we do believe the non-GAAP operating margin for the language training and test prep business in Q4 will be up year-over-year. This is Q4.

And in the mid and long-term, I think we gave the same view as I gather before. We get all these top-line growth and margin expansion, so we will focus on the same strategy going forward. Our target, the margin target is to get to 17%, 18% in next three years. And your second question is for online.

Yeah, the pure online platform, Koolearn.com, and then the top-line growth in this quarter was increased by 63%. And within it, the online K-12 business in Koolearn.com reported very strong year-over-year growth of 176%. So we have very good start.

And yeah, I think since next - since this quarter, we will start to report the year-over-year growth of the pure online K-12 business with numbers. And I think we will invest more of the pure online like the content development and teacher training and also the - like marketing and sales.

Okay, in terms of the regulation, we have noticed the government has carried out some special programs to strengthen all the after-school tutoring market, like they're cancelling some unlicensed paper-based exams in nine-year compulsory education period.

And also, the government is strict checking the business license or education license in some learning centers.

As a public company, New Oriental, we do comply with the government regulations and we believe these actions taken by the government are neutral to positive sign to New Oriental, because I think it's a great opportunity for us to consolidate the market, to take more market share from the competitors. Okay.

Is it clear, Thomas?.

Thank you. Yeah. Definitely clear, Stephen..

Sure, thanks. Thanks..

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

Hi, congratulations for the good result. I actually have three questions. The first one is we have a very fast capacity expansion and that is 41% year-on-year in terms of square meter.

So with the whole guidance of full year 30% year-on-year growth, how do we expect the fourth quarter capacity expansion? And can you give some outlook on the FY 2019's capacity expansion? And second one is the U-Can business, U-Can business grown very strong in this quarter. This is actually even stronger than POP Kids.

So can you add some more color of the U-Can's growth? And the last one is, our guidance and deferred revenue in RMB terms looks have slightly year-on-year - the growth have slightly year-on-year declined. So can you give some color about this revenue and deferred revenue guidance - deferred revenue? Thank you..

Okay. Yeah, as for the - thank you, Sheng Zhong - as for the expansion plan, yeah, I think we have already opened 145 learning centers in the first three quarters of this fiscal year. And in the Q4, we plan to open 40 to 60 new learning centers.

So for the year-over-year growth, for the whole year 2018, I think the net expansion - capacity expansion will be a little bit over 30%. Yeah, maybe it's somewhere between 32%, 33%, that's the net capacity expansion year-over-year. So this is the expansion for the Q4. And we set up a lot new learning centers this year.

So next year, we budget 20% to 25% expansion plan. In the next year, the first target for us is to fill the students into the learning centers we set up this year. So this is our expansion plan for the fiscal year 2019, the next year. Okay, the next question, well, the U-Can, yeah, we did very good in the Q3 of the U-Can business.

I think there are three reasons. The first one is the U-Can online/offline integrated system, we call the Visible Progress Teaching System, VPS, this system has been deployed in all the existing cities. And I think the feedback from parents and students are much better than expected. So it's slightly higher student retention rate.

And finally, I think - don't forget, almost all the new learning centers we set up in the last trailing 12 months were K-12 - was K-12 business related. So it's another key driver of the U-Can business world. And your last question is about the deferred revenue.

Yeah, the deferred revenue in dollar term in, I think, end of Q3 it sounds a little bit lower than we expect. But don't forget, this year's the Chinese New Year is late. So the much later Chinese New Year have caused student enrollment in the last week of third quarter to fall into the beginning of the fourth quarter.

That means the first week of the fourth quarter. And as mentioned earlier, in the first eight weeks of the fourth quarter, the enrollment grew by 40% and the cash revenue in dollar term was increased by 65% year-over-year. So it's some like the delay.

But I think that if you look at the numbers, like the enrollment where the cash revenue combined with Q2, Q3 and first eight weeks of the Q4, I think the trend is good. We still have very solid strong momentum in the K-12 business, okay.

Is it clear?.

Yeah, thank you very much, very, very helpful..

Okay. Thank you..

Yeah, but I got a follow-up of the….

Okay. Go ahead..

Sorry, a small follow-up about - you mentioned the retention is improving.

So do we have some number of the retention rate?.

Okay. I think the K-12, yeah, let's say it separately. The POP Kids program, the retention rate is 84%, so it's getting higher. And as well as the U-Can business, the retention rate is 75%. I mean, it's 5% to 10% higher if you compare the number to the last year. Okay. Thank you..

Great. Thank you very much..

Thank you, Sheng Zhong..

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

Hi, guys. So let can we talk about the margins for 2018, so you talk about capacity expansion being 20% to 25% next year, and a very significant revenue upside as well. So should we expect of the three year margin guidance that you gave to 17% to 18%, the big jump would be next year given the fact that we see drop margins.

So we should expect pretty significant - should we overall expect the huge step-up function on margin heading into next year. And is the capacity expansion going to be more front-end loaded or back-end loaded first half versus second half? And then one final thing is your summer seasonality is coming up pretty soon.

How should we look at the summer enrollment programs for this summer in terms of a promotional activity versus last summer? Thanks guys..

Okay. Yeah, I think the margin for the next fiscal year, what I mean is the fiscal year 2019, will be up by 100 bps. And I think, because of the result the three year target is to get 17% to 18%, I think the margin will be expanded step like that in the three year, okay.

As for the summer promotion, yeah, last year the summer promotion enrollment was over 0.5 million. And this year, I think the summer promotion student enrollment will be more than that of last year. And I don't know the numbers, because it's too early, but I think the numbers will be more than last year.

But this year, we care more about the student retention rate. Last year, the retention rate after the summer promotion in autumn was about 50%. This year, I think we are targeting to be 55% to 60% student retention rate. This is our target.

Okay, Jin?.

Great. Thanks, guys..

Thank you..

Thank you. Our next question comes from the line of Natalie Wu of CICC. Please ask your question..

Hi, thanks for taking my question. Couple of questions here.

First one, how much of your current classroom space square meter is attributable to the K-12 related business? And secondly, what's the ForEx exchange rate assumption underlying your guidance? On constant currency basis, what's the actual growth expectation your guidance implies? And lastly, how much of your online revenue is contributed by the K-12 business, excluding U-Can business currently? And among that what percentages live broadcasting versus prerecorded? And also, it would be great, if management can update us about the retention rate for the live broadcasting process? Thank you..

Okay. You have a lot of questions now, Natalie. The first one is the how many learning centers where we have the - to the K-12 business.

Sisi, would you take the question?.

Yeah, we have roughly about 600 learning centers including having the K-12 business. So you can - and this year almost all the new openings, new adds are - for K-12 business, so you can get the percentage..

Okay. Yeah, and your last question is about the pure online K-12 after school tutoring business in Koolearn.com. This quarter, we got a very, very strong top line growth, it was 176%. I think, most of the revenue of the Koolearn.com comes from the college system. We did business for more than 10 years.

And we just started the business of the K-12, the online business between two to three years ago. So I think the revenue contribution is small, but total cash grow very, very fast. I think, since this quarter, we will report numbers going forward, so it's a very good numbers.

What's your second question about what, Natalie?.

About the foreign exchange rate assumption underlying your guidance?.

Well, I think the exchange rate benefit in the Q4 will be 8% to 10%. So the Q4, we use the exchange rate of 6.3049 and last year Q4, we used the exchange rate of 6.8884. This is our exchange rate, we're using to the forecast, okay..

Great, very helpful. Thank you, Stephen and Sisi..

Thank you..

Thank you. Our next question is from Wendy Huang of Macquarie. Please ask your question..

Thank you, Stephen and Sisi. Congratulations on the solid results. My first question is about your price increase.

Can you share with us about your plan for the next fiscal year? And also, in terms of the capacity expansion, you just mentioned, it's going to be about 20% to 25%, assuming that there will be a ramp up period for the new learning centers? So we expect this 20% to 25% capacity expansion rate to be translated into revenue growth rate in one to two years out? And also lastly, can you give us more color behind the margin expansion, you just mentioned that you expected for the next coming year? Thank you..

Okay. As for the price increase, this quarter the price increase - I think, it's the 12% in dollar term, because we benefit a lot from the exchange rate. So in RMB term, the price increase were 6% this quarter. And for the next fiscal year, I think, we plan to increase of the price by 5% to 8% of the K-12 business.

I think, the POP Kids business is higher than the U-Can, maybe POP Kids 7% to 8% price increase, U-Can 5% to 6%. This is what I said is that only in RMB term. And for the oversea test prep, I think the price increase will be 10% in RMB term year-over-year for the next fiscal year.

And - so in terms of the expansion plan, we're budgeting 20% to 25% capacity expansion, and the first priority for the next year will be ramp up the learning centers we set up this year. And - but the top line will be over 20% to 25%.

I think, for the next fiscal year, the top line growth will be somewhere around 30%, so we do have the leverage on the operating efficiency. And I think we will see the higher utilization rate in the fiscal year 2019.

And the margin - yeah, we do believe the margin expansion will be happened in fiscal year 2019, because we do have the leverage on the comp expansion side in the fiscal year 2019, because we think the Q4 last year, we opened a lot of learning centers in last trailing 12 months, even including the Q4 - in the coming Q4.

And - but I think, this is a good trade-off, because at this meantime, we are more confident about our product and services. So - and then, we're seeing the highest student retention rate. So this is our thinking logic to make the decision to expand the expansion. I think, this is a long-term business.

So we'll - I think, we will rather to see the new rental take more market share going forward, I think this is a very good trade-off, and numbers help the result. Even though, we made the margin headwinds in short-term, but education is a long-term business, I think this is good for us in long-term.

We just - we would rather to create more value to the customers and even for the shareholders. Okay, thank you..

Thank you..

Thank you. Our next question is from Mariana Kou of CLSA. Please ask your question..

Hi, management, thanks for taking my question. Congratulations on a strong set of results. My question is more - I guess, more on the longer term, just wondering for the learning centers that we are opening recently, because now we are about 1,000 now.

Just wondering, if you could give us a little bit more color in terms of the ramp up that we're seeing, say, for the learning centers we opened in the past six months versus stores that we opened like a year-ago? Like, are we seeing any difference in terms of utilization, retention or even margins across kind of new - like different cities and just in terms of the regular kind of ramp up pattern.

I guess, the second question is on the longer-term margin, I think, we're maintaining the 17% to 18% outlook.

Would it be possible to give us a little bit more color on how much of that we are expecting to be driven from K-12 like continue to catch up in margins to overseas test prep? Or are we also expecting overseas test prep also to continue to see margin expansion? Thank you..

Yeah, in terms of the new learning center ramp-up pace, I think, we're seeing the - we spend the short-term for a time to get a breakeven point of new learning centers. So in last six months typically - in last trailing 12 months, I think, typically, it spends five to eight months to get a breakeven point of learning centers.

In the second year, the margin of the new learning center will be like 10% to 15% for the year. The year three, the margin will be over 20%, and it get towards [ph]. So it's - if you compare of the time to get a breakeven point now with the several like two to three years ago. I think we spend - we take five to six months to get a breakeven point.

Typically three years - spend like one year to get a breakeven point. And your second question is about the long-term margin, and I think, we do believe all the business lines, the margin will be expanded. And don't forget, if - I think the margin expansions related to the how many learning centers we set up for the year.

So if the top line growth exceed the expansion, the learning center, I think, we do have the leverage. But most of the margin expansion will come from the K-12 business, because the K-12 business have the potential top line growth and also it's contribute more and more revenue going forward. It's about, let's say, 55% to 60%.

Going forward, it's going to be a bit more. Okay, thank you..

Thank you..

Thank you. The next question comes from the line of Mark Li of Citi. Please ask your question..

Hi, management, congratulations.

So I want to ask actually it's - what is the breakdown of our guidance in the revenue for the next quarter between different operations? And also, I want to know actually I think the non-GAAP margin decline of about 190 bps, it's better than the previous guidance? So I want to know what is the difference during the quarter, actually result in the margin a bit? Thanks..

Okay. The breakdown of the guidance, I think, I can show you the K-12 business, okay, in the Q4, the U-Can business, I think, the top line growth of the U-Can business will be around 60%. And the POP Kids, the growth rate will be over 60%. And the overseas test prep and consulting business together, the top line growth will be over 20%.

So this is a breakdown of the guidance for Q4. And yeah, we - I think the margin in the Q4 was a little bit better than we expected. I think, it's mainly because we ramped up the new learning centers more quickly than we expected. I think, this is a key reason.

But don't forget, even in this quarter, the rental in dollar term, because rental in dollar term was increased by 60%, because we started to set up the learning centers in last year Q4. So we still have the hard comparison in this quarter. But in Q4, in next year, I think it's much easier for us. Okay. Thank you..

Thanks, Stephen. Just a quick follow-up, I think the test prep actually delivered pretty good recent performance. Can you share about the strategy like for the recent better performance? Thanks..

Yeah, actually, there were several reasons for the overseas test prep. The first one, we change the local school health KPI. We put the overseas test prep enrollment into the local school health KPI.

So you mean - what I mean is this year they can high the number, they can make up the enrollment growth of the - obviously, test prep by the K-12 business. The K-12 business is much easier.

And second, we started to roll out the online/offline integrated program as we did for the overseas test prep as we did in U-Can and POP Kids, as more and more cities will start to use the new online/offline integrated product. More students of the overseas test prep are high school students, so they get used to the new style product.

So I think, yeah, I think it's better than expected. And third, new rental - the overseas test prep was a reasonable business focusing rental. But like several years ago, we had super large classes, and now it changed to the small class format. So we needed teachers make some change of the class and we're doing it.

So I think going forward, overseas test prep, well, we expect the top-line growth will be 10% to 15%. It's not good enough. We do hope the actual numbers will be over our expectations for overseas test prep. Thank you. Thanks, Mark..

Thanks. Thank you..

Okay..

Thank you. Our next question is from Tian Hou of T.H. Capital. Please ask your question..

Hi, Sisi, Stephen..

Hi, Tian..

The question is related to the Internet education or Koolearn.com. So what is the differentiation between the courses on the Internet and offline? So how can we avoid the cannibalization [ph] situation if there is any? That's my question..

I think - yeah, Tian. I think the target of our Koolearn.com, what I mean is the - in terms of the customer target, we are focused on the low-tier cities. This is different. I think the - well, we're targeting these customers in the low-tier cities. Even there, there are no new rental offline schools. So this is the first part.

Second, I think the online, of course, it's a little bit cheap than the offline classes. So we give the choice, made by the customers, by the students and parent. So they can choose the both - or either the online courses or the offline courses or combined. So we owe them to the customers.

But as the price difference, you know the price of the online course is just like one-third of the offline courses. And going forward, I think we will try more new subjects, especially in the K-12 business. What I mean is even more subjects or more like the program. Okay..

Great. Thank you. That's all..

Thank you, Tian. Go ahead..

Thanks. Thank you. Our next question is from Lucy Yu of Bank of America Merrill Lynch. Please ask your question..

Hi, Stephen. I just got two questions here. One is could you please share with us the utilization rate for this quarter, as well as for the third quarter of last year? And secondly, regarding your online strategy, imagine that we're focusing on the lower-tier cities where you do not have any learning centers.

So it will be out of our existing student base. How much student acquisition cost do you expect we'll incur to get new student into your system? Thank you..

Okay, the utilization rate this quarter, the Q3 to compare the utilization rates this quarter to Q3 last year, it was down by 100 bps. So last year it was 22%, this year it's 21%. And I think it's due to the expansion plan. But going forward, I think we will see the higher utilization rates.

And the online strategy, yeah, the online there is - the online education, there is no boundary. So we're targeting the low-tier cities. But we are open to the students in the current - in the existing cities. So give the customer opportunity to choose the class as they want.

But we don't release versus the - capitalization of the - between the offline and online. And, yeah, because for some students, if they don't have the fully, like the full ability to control themselves to study pure online, they can choose our offline classes. So it depends on the customer choice, okay..

Okay. Thank you..

Okay. Thanks..

Thank you. [Operator Instructions] There are no questions at this time. Please continue. We have a question from Andrew Lian [ph] of RHB Asset Management. Please ask your question..

Hello, management. Hello, Stephen.

I just want to ask about the student acquisition costs for third quarter 2018 and how does it compare on year-on-year basis?.

I think the student acquisition cost is very low. If you - even though we are at the - the total, overall selling margin expenses is 12% to 13% of total revenue. But within that's only 4% is our target, it's the pure - the marketing expenses. So it's very low. And, yeah, you see the marketing expenses increased by 38%. I think I'm right.

So we do have leverage on the selling and marketing expenses as a percentage of the revenue, okay. And we just rely on the word of mouth and brand recognition of New Oriental. So we don't need to spend a lot on the students - customer acquisition cost, okay. Thanks..

I understand. I just want to ask about the trend in the per-unit cost of student.

Is it trending up or is it trending down?.

You mean the price increase will be 5% to 8%.

You asked about the online or for the offline?.

Both. Maybe if you can break down online and offline, it will be great.

In terms of - I just want to know the trend, where does the student acquisition cost, the per unit student acquisition cost is going up or going down?.

I think the per student acquisition cost will go down..

Will go down, okay..

Yeah, yeah, thanks..

Thank you. Our next question is from Mark Li of Citi. Please ask your question..

Hi, Stephen. I have a follow-up question. So regarding the latest regulation, actually what do you think we need to - like any area we need to focus on in the upcoming time like a curriculum or anything? Thanks..

Actually, as I said, as a public company, we do comply with government regulation. So I don't think we will make material changes, because firstly we don't perform any unlicensed paper-based exams for any subjects to recruit students before. And I think we don't need to do something special to comply with the regulations. Okay..

Got it. Thanks..

Okay. Thanks..

Thank you. And this is the end of our Q&A session. And I will hand over the call to our presenters..

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. Thanks..

Thank you. Ladies and gentlemen, this does conclude the conference for today. Thank you for participating. You may now all disconnect..