Good evening, and thank you for standing by for New Oriental’s Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. [Operator Instructions]. Today’s conference is being recorded. If you have any objections, you may disconnect your line now. I would now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao. Thank you.

Please go ahead, ma’am..

Thank you. Hello, everyone, and welcome to New Oriental’s fourth 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, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr. Stephen Yang. Please go ahead, Stephen..

Thank you, Sisi. Hello, everyone and thank you for joining us on the call. We’re very pleased to conclude the fiscal year 2018 with sustained acceleration ofour top-line growth, as well as sustained enrollments. Net revenues in fiscal year 2018 increased by 36% to $2,447.4 million.

Total student enrollments in academic subjects tutoring test prep courses in the fiscal year 2018 increased by 30.3% to approximately 6,329,500.

For the year 2018, we added a total of 226 new facilities, which include 200 new learning centers in existing cities, 11 off-line training facilities in three new cities, 14 dual-teacher model facilities in six low-tier cities, and one kindergarten.

Altogether, our total square meters of classroom area by the end of fiscal year, has expanded by approximately 40% year-over-year. Strategic expansion was an important focus in fiscal year 2018, which yielded very positive results.

In the fourth quarter, we continue to execute our Optimize the Market strategy and stepped up our capacity expansion efforts in cities with robust growth momentum, supported by our highly efficient operational capabilities. This enables us to seize tremendous market opportunities with our standardized online and off-line integrated education system.

As we continue to expand our capacity, we remain focused by improving utilization rate and investing, enhancing teaching quality in line with our long-term strategies. Net revenues in the fourth quarter increased to $701.0 million, which is a 44.1% growth year-on-year. Once again, delivering outstanding results exceeding our target.

In the fourth quarter, our student enrollments were up approximately 44.9% during the period. The top-line growth was driven by the continued momentum of our K-12 after-school tutoring business achieving a revenue growth of approximately 52% year-over-year. During the quarter, we added a net of 81 learning centers in around 37 existing cities.

Total student enrollments in academic subjects tutoring and test prep courses increased by 44.9% year-over-year to approximately 2,058,000 for the fourth quarter of 2018. To give you a better outstanding of the growth in enrollment, I will now talk about our summer promotion efforts.

Similar with the last few years, we’d once again conduct the promotion this summer to readily secure [indiscernible] student customers before the start of their first year of secondary school. We offered low price experiential courses for multiple subjects in total of about 48 cities.

Once again, the summer promotion was really well received by the markets. The promotion enrollment were brought in before the start of the summer holiday in early July of this year, reached 736,000, representing over 32% increase comparing with the same period of last year.

Please note that we do not include this promotion enrollment in our reported enrollments. On the whole, we are very pleased with this outcome. And this year, we will become even more focused in returning a larger portion of students following the promotion, which will boost revenue and drive profit growth throughout the whole fiscal year 2019.

It’s equally important to note that due to a higher utilization of facilities in the rest of the year. we don’t expect a material impact on our operating margin throughout the whole fiscal year.

We’re confident that our summer promotion will continue to be successful on a highly profitable strategy to gradually increase market share in the high-growth K-12 after-school tutoring market.

As these students move from grade 7 through to grade 12, the continual improvement in retention rates and customer loyalty will drive revenue growth in the next three to six years. I will now turn to pricing. Per program blend ASP, which is cash revenue divided by total student enrollment, increased by about 0.5% year-over-year.

Hourly blend ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 3% year-over-year in RMB terms, to provide a breakdown of hourly blended ASP, please note that U-Can program increased by 3%, POP Kids program increased by 3% and overseas test prep program increased by 16% all year-over-year in RMB terms.

We’re very encouraged by the fact that operating margin in our language training and test prep business in this quarter, remains confident year-over-year, even with the increase in our overall capacity by approximately 40% year-over-year. Showing that margin price range for the three quarters have eased off.

Looking ahead into fiscal year 2019, we aim to add approximately 20% to 25% new teaching facilities in existing cities mainly in our K-12 after-school business.

In addition, we will continue to expand our business into remote areas in China through the rolling out of dual-teacher model schools and new initiatives in our pure online K-12 after-school tutoring.

We will continue to uphold the healthy balance between our strong growth momentum with our efforts in improving the utilization rate of our facilities and approach cost control in mostly efficient manner. With these strategies in place, we are confident in our efforts in delivering sustainable long-term value to our customers and shareholders.

Now, let us move on to the fourth quarter performance across our individual business lines. Our key revenue driver, K-12 all subjects after-school tutoring business achieved revenue growth of about 52% year-over-year in dollar terms, driven by the significant growth in our enrollments by about 52% year-over-year.

For the entire fiscal year, the K-12 business saw a revenue increase of about 46%. Breaking it down, the U-Can middle and high school all-subjects after-school tutoring business reported their revenue growth increase of about 47% for the fourth quarter and 44% for the fiscal year.

Student enrollment grew approximately 53% year-over-year for the quarter and 37% for the fiscal year. Our POP Kids program revenue delivered outstanding results with revenue up by above 65% for the fourth quarter and 51% for the fiscal year. Enrollments went up by about 50% for the quarter and 39% for the fiscal year.

Our overseas test prep and consulting businesses together reported revenue growth of about 33% year-over-year in the fourth quarter and 23% for the fiscal year. Finally, VIP personalized class business recorded revenue growth of about 40% year-over-year for the quarter and 32% for the fiscal year.

Next, I’ll provide some updates on progress we are making with our optimized market strategy. And consistent with our long-term plan, 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. We will start with our off-line business.

In the fourth quarter of fiscal year 2018, we added a net of 81 learning centers in 37 existing cities. For fiscal year 2018, we added a total of 226 new facilities, including 200 new learning centers in existing cities, 11 off-line training facilities in three new cities, 14 dual-teacher model facilities in six low-tier cities, and the kindergarten.

We've seen growth opportunities we see in the low-tier cities. We continue to roll out our dual-teacher model schools and expand our businesses into remote areas in China.

We began to pilot the new dual-teacher model class in select cities in July, 2016 and by the end of the fiscal year 2018, the new offerings has been tested in our POP Kids programs in over 35 [ph] existing cities and 12 new cities for both business lines. We’re delighted to see increased market penetration in the market we’re investing in.

With this new model, we were also able to achieve enhanced customer retention rates and scalability. The results are deeply encouraging and we’ll continue to implement this strategy in the coming new fiscal year.

Regarding our online business, we invested $23.5 million in the first quarter and $75.9 million in total for the fiscal year 2018 to improve and maintain our O2O integrated educational ecosystem. Most of the investments were reported under G&A expenses. Now, I will walk you through some updates on our O2O Two-way Interactive Education System.

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

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

Meanwhile, we also standardized product offerings across seven cities including Shenzhen, Xiamen, Changsha, Hefei, Nanjing, Suzhou and Hangzhou. We also made strides in the koolearn.com business line and other supplementary online educational products. Now, let me walk you through the other key financial details for the fourth quarter.

Operating costs and expenses for the quarter were $644.4 million, representing a 48.3% increase year-over-year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation expenses, were $622.2 million, representing a 46.2% increase year-over-year.

Cost of revenue increased by 50.3% year-over-year to $299.5 million, primarily due to increase in teachers’ compensation for more teaching hours and rental cost for increased number of schools and learning centers in the operation as we continue to facilitate our capacity expansion strategy.

Selling and marketing expenses increased by 52.4% year-over-year to $101.0 million, primarily due to increase in brand promotion expenses, and the compensation for the selling and marketing staffs. General and administrative expenses for the quarter increased by 44.4% year-over-year to $243.9 million.

Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $221.7 million, representing a 38.6% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 147.6% to $22.2 million in the fourth fiscal quarter of 2018.

Operating income for the quarter was $56.6 million, a 9.2% increase from $51.8 million in the same period of the prior fiscal year. Non-GAAP income from operations for the quarter was $78.8 million, a 29.6% increase from $60.8 million in the same period of the prior fiscal year.

Operating margin for the quarter was 8.1%, compared to 10.7% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was 11.2%, compared to 12.5% in the same period of the prior fiscal year.

Net income attributable to New Oriental for the quarter was $65.1 million, representing a 17.4% increase from the same period of the prior fiscal year. Both basic and diluted earnings per ADS attributable to New Oriental were $0.41.

Non-GAAP net income attributable to New Oriental for the quarter was $87.3 million, representing a 35.6% increase from the same period of the prior fiscal year. Both non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.55. Net operating cash flow for the fourth fiscal quarter of 2018 was approximately $294.7 million.

Capital expenditures for the quarter were $54.4 million, which were primarily attributable to the opening of 96 learning centers and renovations at existing learning centers. Turning to the balance sheet.

At the end of the fourth quarter, the deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered, was $1,270.2 million, an increase of 46.6% from $866.6 million at the end of the fourth quarter of fiscal year 2017.

Before moving onto our priority for the fiscal year 2019, I would like to take a moment to reiterate our overarching goals for the future and our optimized market strategy. To give you more specifics on our areas of focus. First, we will continue to expand our off-line business in consistent with our long-term plan.

We aim to add around 20% to 25% new learning centers and expand classroom area of some existing learning centers for K-12 after-school tutoring business in the existing cities. Meanwhile, we also plan to further roll out our dual-teacher model schools in low-tier cities in China.

Second, we will continue to leverage our investments in our O2O integration and the initiatives in our pure online education offerings. As always, we will focus on product refinement and maintenance for the O2O system for K-12 business and continue to revamp and roll out our O2O standardized teaching system for our overseas test prep business.

We believe the total spending in absolute dollar terms in fiscal year 2019 will increase moderately compared with the prior fiscal year as we are continuing our investments in new initiatives, including content development, teacher recruiting and training as well as sales and marketing expenses in online K-12 after-school tutoring business on our koolearn.com platforms.

Third, our top priorities remain including utilization of facilities and controlling costs across the entire company to enhance our margins and operational effectiveness.

Looking at the near term and our expectations for the next quarter, we expect total net revenues in first quarter of fiscal year 2019 to be in the range of $829.9 million to $850 million, representing year-over-year growth in the range of 26% to 29%.

Traditionally, our overseas test prep business has a relatively large contribution to the overall business in the first quarter compared to the rest of the year, thus, the overall year-over-year growth rates for the first quarter tends to be the slowest as compared to the other quarters.

In view of this, we anticipate an upward trend to emerge throughout the whole fiscal year and not to mention that these expectations reflect New Oriental’s current and premium yield, which is subject to change. At this point, I will take your questions. Operator, please open the call for this. Thank you..

Sure sir. [Operator Instructions]. We have our first question coming from Jin Yoon from New Street. Please go ahead. Ask your question..

Hi. Good morning guys.

So, on your Koolearn filings, it’s said that you guys plan to rapidly expand the K-12 enrollment, I’m just kind of wondering what this means in terms of marketing investments this year, if that’s in line with your previous commentary regarding guidance, regarding the way where the investment cycle is going to hit? And at the same time, how should we see the 25% capacity expansion kind of hit throughout the year in terms of the weighting of that as well versus first half and the second half? Thanks guys..

Okay. Thanks, Jin. Let me answer your second question first. In terms of the expansion, yeah – we don’t forget, we added 226 learning centers this year and we got the 40% growth of the classroom area year-over-year this year. So, we made a lot this year. And next year, based on our current budget, we believe the expansion plan in 2019 will be 20% to 25%.

I think first, the priority for the next fiscal year will be the job of that will fill the students into the learning centers we set up this year. And I think in the first half of the year and second half of the year, I think the learning center number, we’ll set up in the next year, will be average.

And yeah – and for your first question about, yeah, Koolearn has submitted the application for the listing out of main board in Hong Kong stock market. So at this stage, we can’t say too much about Koolearn things. And so we can’t comment on the numbers of the Koolearn.

And in terms of the investments of the online, I think we will keep in that on the online items such as the content development, teacher recruiting and some marketing staffs.

And because we started to bear fruit from the investment we made in recent years and we know the online, mostly, the O2O and pure online, our first priority after our all our jobs. And we think – I think the student like the online way to learn something and – but on the other hand, the off-line business is still important as a matter of fact.

So, we carry the two parts at the same time, okay, Jin?.

Great. Thank you, guys..

Thanks..

Thank you. We have our next question coming from the line of Tallan Zhou from Deutsche Bank. Please go ahead..

Hi, management. I have a question on the guidance. The first quarter guidance growth appeared to slow down on a quarter-to-quarter basis. But actually, it’s higher than first quarter last year. I just want the management to elaborate a little bit on – for example, the currency change and for example, product mix, K-12 versus non-K-12? Thanks..

Okay, it’s a great question, Tallan. And yes, our Q1 2019 guidance year-over-year growth is in the range of 26% to 29% in dollar terms. Actually, I think, it’s very good, our guidance, because don’t forget that our overseas test prep courses has a relatively large constitution in the first quarter compared to the rest of quarters of the year.

So, if you look back numbers, the top-line growth in the Q1 2018, was only 23.8%, if I’m right, in dollar terms year-over-year. But we have a 36% year-over-year growth for the whole fiscal year of 2018. Even if you take out the exchange rates impact, the whole year growth rate is 500 bps higher than the Q1 growth.

So, we expect the upward trend to emerge for the Q1, even for the whole year. So we don’t look at the growth, we would suggest to you guys, don’t look at the Q-on-Q growth, and you should make your analysis of the year-over-year growth. And yes, I think in the coming quarter, the K-12 business will be the key revenue driver as same as this year.

And the K-12 business growth in the dollar terms will be 45% to 50%. This is the key driver. And yeah, we’re seeing the exchange rates change recently. And so that’s why we said in our – the earnings release that we use the 6.6672 as the exchange rate, RMB terms – RMB terms versus U.S.

dollar terms and that’s it, okay, Tallan?.

Thanks, Stephen..

Okay. Thanks, Tallan..

We have the next question coming from Thomas Chong from Credit Suisse. Please go ahead..

Hi, thanks Stephen and Sisi for taking my questions. I have a quick question about our strategy in FY 2019, focusing on efficiency improvement.

Can management comment about how we should think about the margin trend in online and the potential drag in online – marketing expansion in off-line and margin expansion from online this year? And my second question is about – could we see any potential utilization between online and off-line? Thank you..

Okay. The margin question, I think this quarter, we got the one is 30 bps down of the non-GAAP operating margin. But the key I want to mention is that we’re seeing the off-line business, the school business and test prep and K-12 business, the margin was sluggish year-over-year.

So even we’re still seeing the 40% expansion plan in this year – in this quarter. So that means we’re starting to execute with capacity expansion in the same Q4 last year. So the margin pressure in the Q4 has eased off.

And going forward, I think, we do believe the non-GAAP operating margin for the language training and test prep business, we call the school business in the coming new year will be up year-over-year due to the expansion, acceleration of the revenue growth and higher utilization.

And importantly, the online business market – after that, we can’t make more comments on the number of quarter because the – we submit the application form in the Hong Kong main board. But what I can say is the last year, fiscal year 2018; we invested $75 million for both O2O and the online, pure online.

And this year, we’re budgeting the $80 million to $90 million in total. This is our budget of the online investment.

So, I can’t say the detailed numbers of the margin drag of the online, but the off-line business, you’ll definitely see the margin expansion going forward, okay?.

Thank you..

Thanks..

Thank you, sir. We have the next question coming from the line of Lucy Yu from Bank of America. Please go ahead..

Hi, Stephen. I’ve got one question on the margin.

Given that the summer promotion enrollment seems to be better than your previous expectation, is it fair to say that although on a full-year basis non-GAAP operating margin is going to expand on the first quarter; there still might be some pressure on the margin front given the summer promotion? And also, are you still comfortable with your full-year margin guidance of 100 basis points improvement?.

Okay. Even we got the 740,000 summer promotion enrollment last year, that number was 0.5 million. But this year, we increased a little bit over price of the summer promotion. So, we know there will be a little bit margin drag from the summer promotion into Q1. But for the whole year, there is no material impact of the margins by the summer promotion.

So, we keep seeing our guidance of the whole year, fiscal year 2019. We don’t want to change the guidance. Okay, thank you..

Okay. Thank you..

Thank you. We have the next question coming from John Choi from Daiwa. Please go ahead..

Thanks guys for taking my question. I have sort of a follow on your summer promotion. Could you give us a little bit more color? It’s been pretty strong you said, the enrollments’ been going to more than 740,000. What particular within subjects have been strong? And at the same time, I recall that you guys are aiming for higher retention rate.

Obviously, you should – that should lead to a better growth going forward. So, any color on that will be highly appreciated. And secondly on – following up on, Stephen, your comment on the expense side, you said that you’re going to see a moderate increase here.

So, just to see on a like-for-like basis versus last year operating expenses revenue – or operating expense percentage growth versus this year, should we be seeing a lot less, and hence, that will be kind of the – one of the – also another key factors of margin expansion? Thank you..

Okay. The summer promotion, yeah, as I said, we got 32% of the summer promotion enrollment growth and we – this is now the first of the year. And we’ve tested it several years ago and – but this year, we care more about the retention rates. So, we believe these student retention rates, after the summer promotion, which will be happened in the autumn.

the retention rates will be higher than last year by 5% to 10% higher. So, that’s why I said we care more about the higher student retention rate. And we do believe that summer promotion will continue to be successful in an impactful way to take more margin share year, because the whole margin moved very fast.

And this students moves from grades 7 to grade 12, so we can keep them as much as we can. And last year, after the autumn for the summer promotion student enrollment, 90% are still with us in winter and after. So that means this is a smart way to take more market share. So, this will be my answer for the question about summer promotion.

And expenses, yeah, I think we spent a $75 million in this year. And next year, we’ll budget – yeah, the $90 million, and – but we would like to spend more from $75 million to $90 million, because the investments we spent the last three years took together is over $150 million the last three years.

But we were seeing the feedback of these parents and customers are very good, and we’re seeing the student retention rates getting higher to over 85%.

So that means that we bear fruit of the investment, so we prefer to invest more, going forward, okay? And yeah, if we spend like $90 million, we still have the leverage on the margin side, okay? Thanks..

We have the next question coming from Tianli Wen from Blue Lotus. Please go ahead..

Hi, management. I had one question regarding the online business. Right now, the online education had 72% revenue from the university education and 13% from the K-12 business. So, is the bidding markup between these two businesses are a bit different? And what is our strategy to expand the K-12 market need in the future? Thank you..

Okay. Yeah. As I said, I can make more comments on the online, the koolearn.com. But you’re right, historically, the market has that – overseas has that the adult business contributes more the revenue of the koolearn.com, but K-12 is the future.

So, in the last several quarters, we made a lot of efforts for the pure online K-12 business, because the market is huge, huge even for the off-line or the online market. So we will focus more on the K-12 pure online business. Okay..

Thank you..

The next question comes from Sheng Zhong from Morgan Stanley. Please go ahead..

Hi, Stephen, Sisi. My question, first one, is about our capacity expansion in FY 2019. You mentioned that you were at penetration to lower-tier city.

So, in terms of our capacity, how we should look at the split between Tier 1 and 2 cities versus lower-tier city? And you have on the dual-teacher model, so we do use some more dual-teacher model to cover the lower-tier cities. so for now, with our margin and retention, this operating metrics for our dual-teacher model. Thank you..

Yes. In terms of the expansion plan, as I said, we plan to add 20% to 25% in the coming new year. And I think we will use the same strategy as we used in the fiscal year 2018.

Well, the truth, the good performance boost to open more learning centers, whether it’s high tier or low tier, and in the low tier and even for the new cities, I think the most learning centers, we set up – will be rolled out the dual-teacher model.

And the dual-teacher model, the school, where it’s at and – but because of the low base, the revenue contributions is rather low. So – and I think it’s still early to say the margin of the dual-teacher model, because it’s too early.

But logically, in the future, I think the margin of the dual-teacher model would be higher than the off-line business, because the one teacher can save to – so many students at the same time.

And all of the other costs are similar, okay? This is the margin trend of the dual-teacher model, okay?.

Thank you.

Can I add one more question, very quick one?.

Okay, go ahead..

Yeah. Thank you. You have a redeemable non-controlling interest of around $200 million this quarter..

Yeah..

So what is this?.

Okay. Your question is about the NCI.

I think, yeah, the part of the reason of the koolearn.com and some other companies, but it’s not a material number, okay?.

Okay. Thank you..

Thanks..

Hello. Hi.

is it Edwin?.

Yes..

Yeah. You can go ahead and ask your question. We’re contacting operator now. So it seems that the operator got cut off. So you can ask your question. Go ahead..

All right..

Hope you hear..

Yeah..

Go ahead..

Hi Stephen and Sisi. Congrats on the strong results and the good guidance for the first quarter. Just wanted to get some updates on the operating metrics, for example, the retention rates and the capacity utilization in the fourth quarter, especially for the K-12.

And also, regarding your guidance for the first quarter, how much have you priced in for the overseas prep business growth in the first quarter?.

Okay..

I admit – I think you mentioned that K-12 is like 40%, 50%, but I missed that point. Just – can you reiterate? Thank you..

Okay. I think yeah, in the coming Q1, the guidance, because, well, this is – the growth rates will be 45% to 50%, and the overseas test prep, I think the growth rate will be single-digit.

It's closer to 10% year-over and typically, we don't give the guidance of the student retention rates and the utilization rates in the new quarter, but I think the trend is going up. We're seeing the – in the last – with so many quarters, the student retention rates for both the top case and U-Can program have been – got higher.

So based on the trends, I think we do believe the student retention rates in the coming quarter will be higher year-over-year. And utilization.

And in terms of the utilization – can you hear me?.

Sorry, go ahead. Sorry, go ahead..

Okay. In terms of the utilization rate, I think, yes in the Q1, we will slow down a little bit to the expansion plan because we set out the 40% new expansion in the fiscal year 2018. And so the first job in the coming quarter or the whole coming new year is to fill the students into the online learning centers.

But anyway, we will set up the 20% to 25% new learning centers in the coming new year. The top-line growth in the coming new year will be 30% year-over-year. This is my current estimation. And so we do have leverage on the utilization rates, going forward, even for the Q1 and the whole year..

Yeah, understood. Just to follow-up, what's the utilization and the retention for the fourth quarter, the quarter just passed, can you give us some updates for, yeah….

Okay. The student retention rate for the K-12 business, together, the retention rate was 84% in the Q4, yes. You see, this is the trend that's guiding up. And utilization rates – in the Q4, the utilization rates is 21%. It's similar compared to the last of year Q4, okay? And we have to count the margin slashes of the school business..

Okay. Thank you. Yeah. Thank you. Thank you so much..

Okay..

Your next question comes from the line of John Wong [ph]..

Hi. This is Wendy Huang from Macquarie. So I just wanted to clarify the 20% to 25% capacity expansion guidance. And you mentioned this is just the capacity expansion for the existing students, right? So what would be the overall capacity expansion that show if we include the dual-teacher model and new students and others.

And also given that the annual growth rate will be slowest in Q1, but it's full year, how should we expect the margin trend in the coming Q1? Thank you..

Okay. Yeah, I’d like to clarify that the 20% to 25% is the net expansion plan for overall business. It includes everything.

This is our budget, whether the – it includes everything, okay, off-line business, dual-teacher model and everything, okay? And the Q1, yeah, as I said, the – I think we do believe the non-GAAP operating margin of the language training and the test prep and the K-12 business, the margin will be up or at least flattish in the Q1 – in the coming Q1, okay? But we do have the – some drag for the other business.

But – so I think for the whole year, you will see the margin expansion for the whole year, okay?.

Sorry, the flattish for the overall or just for the off-line for Q1 division?.

The off-line is flattish to up of the school business, okay?.

What would be the blended margin for the Q1 then?.

I think the margin of the Q1 based on our current estimation, this will be slightly down, okay?.

Okay. Thank you, Stephen..

Okay. Thanks..

Our next question comes from the line of Julia Pan from UOB. Please ask your question..

Yeah. Thanks management for taking my question. Just a quick one. I noticed that you have a really strong growth in your deferred revenue, which is somewhat 47%.

I'm just wondering what would be the major gap between your deferred revenue growth and your guidance of 26% to 29% of next quarter's guidance? And another question is regarding your VIP business. You mentioned that – I guess, you mentioned that VIP business recorded over 40% year-on-year growth.

I'm wondering, do you see maybe factor growth in the premium after-school tutoring market. And also, do you see maybe your standardized operation in the VIP business could include the – maybe traditional considering it's the lower margin VIP business? That's my question. Thank you..

Okay. Yeah. Your first question is about the deferred revenue balance. But I think that I mentioned in the last earnings call, since the Q2 last year, we started to bundle the winter and the spring courses registration in Q2, and the summer and some autumn courses registration in Q4.

So, I think this is the reason that to explain the gap of the higher deferred revenue growth with the top line growth of the coming Q1. So this is my answer for the first question.

What's your second question?.

Your VIP business..

Okay, we saw very strong, the VIP business growth in this quarter, 40%. But anyway, the growth rate is lower than the small sized class. So going forward, I think the revenue contribution from the VIP business will be limited.

What I mean is the – going forward, the small sized and large sized class, the growth rates will be higher than the VIP business. But I think if you not make analysis of our VIP business, the margin of the VIP business itself is getting higher, okay? Thanks..

Okay. Thank you..

Our next question comes from the line of Eric Qiu from CCBI. Please ask your question..

Good evening, management. Thank you for taking my question. I just want to ask about the relationship between the enrollment and the revenue. Since this year, 2018, the student enrollment is 30% year-over-year, while the revenue growth was 36%. So, this was a bit different from the last two years, while the revenue growth were behind of the enrollment.

So I'm just wondering to ask the relationship of it. Thanks..

Yeah. So, historically, our revenue growth is higher than enrollment growth, thus, the – let's say, the hourly rate increases similar with our per program ASP increase. But last one to two years, as we keep rolling out our new programs and we're seeing that the class months changed for both POP Kids and U-Can program.

So that's why if you do the calculation by dividing the cash revenue, divided by enrollment, the ASP per program, ASP increase is lower, because the shortened program month. So that's one key reason for different programs. It happened for both POP Kids and U-Can programs.

It do varies by quarter, and also, please pay attention that our enrollment calculation is based on cash basis. But the revenue growth, GAAP revenue growth is based on accrual basis.

So it's different, okay?.

I suggest you guys to make that analysis of the enrollment and GAAP revenue in yearly basis..

Yeah..

If you look at the numbers, seeing long-term, that will be okay..

Okay. Thank you. One follow-up question.

So for the revenue growth, can you elaborate about like how much was it from the first or second tier cities while the others from the low tier cities, and also the prospects?.

For the kids enrollment business, the top five cities, the revenue contribution for the top five cities was 43% in this quarter. But even for the top five cities, we got 40% top line growth in this quarter.

So what I mean is even in first tier or second tier cities, the big cities, they're still getting the higher growth year-over-year, okay?.

Okay. Thank you..

Okay..

Our next question comes from the line of [indiscernible]. I mean I remind everyone to ask one question per person. Thank you. You may ask your question now..

Hi, management.

Just wanted to ask the impact of higher – in terms of the gaokao, in terms of the English test change, where students are allowed to take three English tests in terms of their gaokao exams, what is that impact on your English courses for your K-12 business segments?.

Yeah. I think it’s a neutral to positive impact to us because the new policy allows the students to take more the test of the gaokao English. So typically, the time students take at least twice to try to get higher scores, so it produce more retakers for us.

So I think we will have the positive impact from the new policy, okay?.

Understand, sorry.

Just a follow-up question, I just want to understand the utilization rate in the top five cities for your K-12 and also the lower tier cities in terms of the revenue contribution, are you able to provide this statistic?.

We don't disclose the utilization rates by cities, but what I can say is the higher tier cities, the utilization rate is higher than the lower tier cities, okay?.

By how much or around….

Sorry, we don't disclose due to the market because we have plenty of cities, okay?.

Understand, understand. Okay, thank you very much, management..

Thanks..

Your next question comes from the line of Jeffrey Chan from CLSA. Please ask your question..

Hello, thank you for taking my question. I would like to ask, can you walk us through the share option expense guidance for the next fiscal year and the quarterly split of this number? Thank you..

Okay. I think this year, the stock-based compensation for the whole year was $57 million. Next year, I just don't want to guide this stock-based compensation.

Similar numbers compared to this year, okay?.

Sorry, I missed it.

Just – can you repeat it, sorry?.

This year, it's $57.4 million.

Next year, same number, okay?.

Okay. Thank you, management..

Thanks..

There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue..

Again, thank you for joining us today. If you have any questions, please do not hesitate to contact me or any of the Investor Relations representatives. Thanks, again..

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