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

Jin Yoon - New Street Research Natalie Wu - CICC Thomas Chong - Credit Suisse Tian Hou - T.H. Capital Mark Lee - CIGI Mariana Kou - CLSA Lucy Yu - Bank of America John Choi - Daiwa Johnny Wong - Jefferies Tianli Wen - Blue Lotus Julia Pan - UOB Andrew Orchard - Nomura Edwin Chen - UBS.

Hello, everyone, and welcome to New Oriental's First Fiscal Quarter 2019 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..

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are very pleased with the start of fiscal year of 2019. With the year-over-year accelerating our top-line growth net revenues in the first fiscal quarter of 2019 increased by 30.1% to $859.8 million.

Student enrollments in academic subjects tutoring and test prep courses in the first fiscal quarter went up by 13.2% year-over-year to approximately 1.7 million student enrollments. The accurate number is 1,735,300.

Guided by our successful "Optimize the Market" strategy, we continue to expand our offline business, while also investing our online offline integrated education system. In this quarter, we added a total of 19 new facilities, which includes 18 new learning centers in existing cities, and one new training school in the City of Yiwu.

Altogether, the total square meters of classroom area by end of the quarter increased approximately 34% and 3% quarter-over-quarter. Our strategic capacity expansion is on the right track to capture market opportunities in cities with the robust growth momentum and remains the important focus in the fiscal year 2019.

We will also continue to focus on improving utilization rate and investing in enhancing teaching quality in line with our long term strategy. Our business has started the year with an accelerated revenue growth even with the discount revenue due to the large scale summer promotion.

Our key growth driver, K-12, all subject to after-school tutoring business, achieved remarkable year-over-year revenue growth of 49%.

This is largely driven by our solid performance in student enrollment in the recent two quarters, which had a year-over-year increase of approximately 34% in the fourth fiscal quarter of 2018 and first fiscal quarter of 2019.

The growth in the K-12 business can be broken down into outstanding performance from the U-Can middle and high school after-school tutoring business and POP Kids program, each of which achieved in profit growth respectively.

Whatever key areas of focus for the first quarter with our summer promotion efforts, similar with the last few years, we conduct the summer promotion campaign to roughly acquire with student customers before they start the first year at secondary school.

The large scale promotion offering low prices experiential courses was launched in a total of 39 cities. Once again, the promotion was very well received by the market. The low-cost trial course environment for this summer reached 762,000, which increase of 37.5% year-over-year.

Know that these promotional enrollments were not included in our report of the enrollment. More importantly, 54% of student requests from the summer promotion campaign were successfully retained to our full-price courses for autumn semester, which is 5% more than that of last year.

This will certainly boost our revenue and drive profit growth throughout the first fiscal year 2019.

Overall, we believe the summer promotion is generating long-term benefit, and will continue to be a successful and effective strategy to capture as much market share as possible, and acquired long-term loyal student customers in the K-12 after-school tutoring market.

As these students move from grade 7 through to grade 12, for continual improvement in retention rate and customer loyalty, we'll further drive revenue growth in the next 3 to 6 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 blend ASP, which is cash revenue divided by total student enrollment, increased by about 14% year-over-year, partly due to the longer summer course hours.

Hourly blended 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 in RMB terms. Please note that U-Can increased by 9%, POP Kids increased by 4% and overseas test prep program increased by 10% year-over-year.

We remain firmly optimistic about our overall top-line performance, which we expect will be supported by continuous improvement of the retention rate of existing customers and ability to acquire new customers. The goal of our expansion remains at adding approximately 20% to 25% in overall capacity for the full year 2019.

Through opening new learning centers in existing cities and rolling out dual-teacher model schools in new cities. All the while, we will continue to uphold the balance between our strong growth momentum and cost control in mostly efficient manner with constant efforts in further improving utilization rate.

As per our offline language training and test prep business, the cost of pressure in this quarter from our large-scale summer promotion and our online business investment had a short-term impact on our operating margin. But that mentioned, this important investment will offset set foundation for and further generate long-term growth.

In terms of the details, non-GAAP operating margin for offline language training and test prep business decreased by approximately 110 basis points year-over-year in this quarter. As we continue to see ramping up of new facilities, we believe the short-term margin pressure for offline business were generally balance out as the year progresses.

For koolearn.com pure online education platform, we continue making investments in new initiatives in K-12 after-school tutoring business to capture the huge market opportunity in remote areas in China.

You know with the short-term margin pressure from these investments, we're confident that our efforts in building out of our ecosystem, the integrating both offline and online education, will deliver sustainable long-term value for our customers and shareholders.

Now, let's move on to the first quarter performance across our individual business lines. As mentioned, our key revenue driver, K-12, all subjects after-school tutoring business achieved revenue growth of about 49% year-over-year, driven by the solid enrollment growth in the recent two quarters of about 34% year-over-year.

Breaking it down, the U-Can middle and high school all-subjects after-school tutoring business reported a revenue increase of 49% for the quarter. Student enrollment grew approximately 18% year-over-year for the quarter. Our POP Kids program delivered outstanding results with revenue up significantly by about 48% for the first quarter.

Enrollments went up about 12% for the quarter. Our overseas test prep and consulting businesses together reported revenue growth of about 5% year-over-year for the quarter.

This comparatively slower growth for this quarter is mainly due to the change of the revenue recognition of our consulting business upon the adoption of the new revenue accounting standards starting from June 1, 2018. VIP personalized class business recorded revenue growth of about 34% year-over-year for the quarter.

Next, I will provide some updates on the progress we're making with our optimized market strategy. We have been focusing on extending our capacity by investing in the build-out of our online integrated education system. And this continues to produce very promising results.

Starting with our poor off-line business, in the first quarter, we added a net of 18 learning centers in existing cities, and opened a new training school in the City of Yiwu. Altogether the total square meter of the classroom area, by the end of the quarter, increased approximately 34% year-over-year and 3% quarter-over-quarter.

[Indiscernible] into the booming product education market and fully strong our leadership, we started to pilot our new dual-teacher model in selected cities in July 2016.

By the end of the first quarter of 2019, we have happened that the adoption of the new model in 40 existing cities for POP Kids program, in 28 existing cities for U-Can program, and in 10 cities for both POP Kids and U-Can K-12 programs. It's encouraging to see increasing market penetration and student retention in those markets we have passing into.

The scalability of the new model also continues to improve and started to bear fruit. With this prudent result, we're confident that our dual-teacher model will carry on the strategy in the fiscal year of 2019.

With respect to our online business, we invested $22.7 million in the first quarter to improve and maintain our online offline integrated education ecosystem, which has been an area of focus since 2014; mostly advancements were reported in the January expenses.

With the high customer retention rates and the association of new customers, we're positive that our investments will bring sustainable long term benefits. I will first talk about online offline fully interactive education system.

On the whole, we aim to extend New Oriental's traditional off-line classroom teaching offerings to online education services. With the booming market and our advanced online off-line integrated product service, we are poised to gain more market share and strengthen our host going forward.

Since the launch of U-Can Visible Progress Teaching System in September 2014, the interactive education system has been deployed in all existing cities. We have launched the newly revamped POP Kids program [indiscernible] in most of the cities by the end of the first quarter in fiscal year 2019.

At the same time, the interactive education system has been gradually used in increasing number of cities. The interactive education system for overseas test prep including IELTS, TOEFL, and SAT courses was rolled out and tested in most of the major cities by the end of fiscal year, for the first fiscal quarter of 2019.

At the same time, we also standardized product offerings across 14 cities. We also made great progresses in the koolearn.com business line and other supplementary online education products.

To capture the huge market opportunity in online education area, we continue to invest in more resources in executing new initiatives in online K-12 after-school tutoring business in fiscal 2019.

This includes constant development, teacher recruitment and training, sales and marketing, R&D and other cost expenses that are necessary to profit growth of new online programs.

With these programs, we're able to cover more students in low-tier cities in an interactive and scalable approach, and we gain further market share in online education space. Now, let me walk you through the other key financial details for the first quarter.

Operating costs and expenses for the first quarter were $700.4 million, representing a 40.0% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $686.4 million, representing a 38.1% increase year-over-year.

Cost of revenues increased by 36% year-over-year to $367.4 million, primarily due to increase in teachers' compensation for more teaching hours, a rental cost for increased number of schools and learning centers in operations.

Selling and marketing expenses increased 34.4% year-over-year to $99.3 million, primarily due to increases in brand promotion expenses and selling and marketing staff compensation. General and administrative expenses for the quarter increased by 49.8% year-over-year to $233.7 million.

Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $219.7 million, representing a 43.7% increase year-over-year, primarily due to increased headcount as the company expanded its network schools and learning centers, as well as the interest in R&D expenses and human resources expenses related to development of our online offline integrated education ecosystem.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 345.3% to $13.9 million in the first of fiscal quarter of 2019.

The substantial increase was primarily due to the grants of total of 1.5 million restricted shares units of the company to employees and director in October 2017 with the grades vesting over three years. Operating income for the quarter was $161.3 million, an increase of 0.2% compared to $161.1 million in the same period of the prior fiscal year.

Non-GAAP income from operations for the quarter was $175.3 million, a 6.7% increase, compared to non-GAAP income from operations of $164.2 million in the same period of the prior fiscal year. Operating margin for the quarter was 18.8% compared to 24.4% in the same period of the prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter was 20.4%, compared to 24.8% in the same period in the prior fiscal year.

Operating margins were affected by the interest of -- in the cost and expenses, mainly due to the cost pressure from the larger scale summer promotion and continuing having investments in our online education platform in this quarter. Last from fair value change of long-term investment for the quarter was $47.0 million.

Please note that, this has resulted from the adoption of the new financial instrument accounting standard starting from June 1, 2018, which means the company will measure its long-term investments, our fair value with gains or losses reported through the income statements.

On the other hand, approximately, I’m sorry, $97.9 million accumulated other comprehensive income for the available-for-sale equity securities as of May 31, 2018, was reclassified into return earnings.

Net income attributable to New Oriental for the quarter was $123.2 million, representing a 22.2% decrease from the same period of the prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.78 and $0.77 respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $184.1 million, representing a 14% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $1.16 and $1.16 respectively. Net operating cash flow for the first quarter of 2019 was approximately $231.5 million.

Capital expenditures for the quarter were $62.4 million, and these were primarily attributable to the opening of one new school and 65 facilities and renovations at existing learning centers. Turning to the balance sheet.

The deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as revenue as the instructions are delivered, at the end of the first quarter of 2019, was $146.7 million, an increase of the 23.3% as compare to $930 million, as I know, the first quarter of fiscal year 2018.

On this note, I also want to mention that as a result of adopting of new revenue accounting standards from June 1, 2018, a $66.0 million of fee for revenue was reclassified to accrued expenses and other current liabilities, which represents an estimated amount of the tuition that may be refunded in the future, if students withdraw from the course.

Before moving onto our priority for the second quarter, I would like to take a moment to reiterate our overarching goals and our optimized market strategy as well as the challenges, the opportunities we anticipate in the future. First, we remain determined to expand our offline business.

Our goal remains adding around 20% to 25% capacity, including new learning centers and expanding classroom areas of some of the existing learning centers for K-12 business in existing cities. We also plan to further rollout dual-teacher model schools to about 10 new low-tier cities in the year.

Second, we will continue to leverage our investments in online and offline tuition for outline language training test prep office. As always, we'll focus on product requirements and maintenance for the online offline two-way education system for K-12 business.

And continue to revamp and rollout our online offline two-way integrated standardized teaching system for overseas test prep business. We believe that spending in absolute dollar terms in fiscal years 2019 will increase moderately compared to the previous fiscal year.

In addition, we'll continue our investment in new initiatives, including content development, teacher recruiting and training, as well as sales marketing in pure online K-12 after-school tutoring business on our koolearn.com platform.

Third, our top priority will continue to focus on improving utilization facilities and controlling costs across the entire company so that we will able to import our margins and enhance officially effectiveness of our offline core business.

Four, as the Chinese Government continues to enhance regulatory oversight, we expect China's after-school tutoring market to further consolidate. We believe the regulatory efforts will bolster a positive environment with the improved market standards and enhance the teaching quality supporting the healthy growth of the market in the long-term.

As a leading education service provider in China, our company is fully supportive of these reforms, and we're committed to provide a high quality education service and doing our share to build-out a sustainable and rollout the market.

At this stage, we do not foresee any material impacts of the regulatory reform, our top-line growth, while our administrative costs and expenses may increase in the short-term. Finally, the recent R&D depreciation against the U.S. dollar will also impact our earnings in dollar terms for the second quarter of 2019.

Again, I'd like to emphasize that three fundamentals of our business remain strong as we believe with our optimized market strategy being the focus as always. We're confident that New Oriental will continue to capture sustainable growth opportunities in the market and deliver long-term value for our shareholders.

Looking on the near-term and our expectations for the next quarter, we expect total net revenues in the second quarter of fiscal year 2019, to be in range of $568.5 million to $586.4 million, representing year-over-year growth in the range of 22% to 26%.

It's now considering the impact of the potential changes in exchange rates between RMB and the U.S. dollar, the projected revenue growth rate is expected to be in the range of 27% to 31% for the same quarter of fiscal year 2019. I must mention that this expectation reflects New Oriental's current and preliminary view which is subject to change.

Before I conclude, I also want to take a moment to address our efforts to enhance our shareholder value. As you may have seen in today's press release, our Board of Directors has authorized the repurchase of up to $20 million of the company's common shares during the period from October 29, 2018 through May 31, 2019.

The share repurchase program is planned to be implemented in line with market conditions and funded from the company's available cash balance. Our Board of Directors will review the share repurchase program periodically and may authorize adjustments of its terms first and flag accordingly.

The initiative, once again annualize our determination to deliver value for our shareholders and reiterate our confidence in the long-term prospect for our business. At this time, I will take your questions. Operator, please open the call for this. Thanks..

Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jin Yoon from New Street Research. Please ask your question..

Hi, good evening, guys. Thanks for taking my question. Stephen, you guys mentioned -- you just mentioned about the costs associated with the regulatory environment impacting SG&A.

What exactly are those costs? And how much of that cost is actually reoccurring costs going forward? And are you still comfortable with the 100 basis points upsizing your margins for this year? Thanks..

Okay. The question about the regulation -- the law through recent regulation that the State Council issued in the Circular 80 is in late August. So what I said is the incremental costs and expenses, I think, most of them is related to the like the classroom rental and some incremental fee for costs.

But, I think, we're still within in process of the communication with the local government in cities. So it's early -- it's too early to say the accurate number. But I don't think it will be a big number. So we do have the impact on the margins from the new regulation. But it’s not a big deal.

And -- the Q1 margin, as you know, because the non-GAAP operating margin is declined by 440 bps, and partially it's because of the large -- the scale of the summer promotion. And this promotion enrollment was the 38% higher than that of last year, and then retention has grown.

So for the offline business, I think, the margin pressure will generally balance off at least the rest of the year. And for the online -- yes, we started to be invested a lot since the [indiscernible], like the HR costs or IT costs and marketing expenses. It’s a great opportunity for us. So it’s worthy to spend more money on that.

But it's a margin like -- it’s a margin like. And so this year is margin pressure here. And for the full and medium long-term margin guidance, we give positive view of the margin expansion in the next year and the year after. So this is my view of the margin. Okay. Thanks..

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

I noticed that the net add-on f facility is only like 19 compelled with 65 new openings this quarter. So may I know the major consideration behind the closing down of the learning centers during the past quarter? And should we think about it in the upcoming quarters? Thank you..

Okay. Natalie, I don’t think this is slowing down the expansion. Typically the Q1 is not the peak season to open the new learning centers. Don’t forget we opened almost 40% of new square meters last year. So we don't change the whole. year expansion guidance, it's 20% to 25%.

So typically we open most of the new learning centers in the second half of the year, because it’s prepare for the new coming year. So for the whole year, 20% to 25% expansion, we don't want to slowdown our expansion plan..

Thank you, Stephen. But what I mean is that you mentioned that the CapEx you spend is majorly for the 65 new openings in the past quarter, right? But if you look at the net add, it’s only 19 -- 1-9. So just wondering the major consideration behind the 40-46 closing down of the learning centers in the past ….

Okay. You know Natalie, we have 1,100 learning centers. Some learning centers we rent for 5 or even 10 years. So some of them, let’s say, very decent 4% to 5% of these learning centers -- some learning centers expire the terms. So ….

So it’s not regulation relatively..

It’s not -- it's not regulation related. Okay..

Your next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question..

Hi. Thanks management for taking my questions. I have two quick questions. The first one is about our revenue trend. Should we stick to our 30% year-on-year growth for our revenue growth for FY'19 in RMB terms? And should we expect that will be the acceleration in terms of the revenue? And my second question is a follow-up for the first question.

Hey, Stephen, when you're talking about FY'19, is margin pressure give? And you said any direction in terms of the margin trends. And how should we think about the absolute amount of online investment in FY'19? Thank you..

Okay. Yes, the revenue guidance -- yes, we give the guidance of the term rent is 27% to 31% year-over-year growth in Q2. So for the whole year, fiscal year '19, we don't want to change our guidance as we guided before. So the whole year, revenue growth will be -- in R&D term will be around 30% year-over-year.

And most of this growth will come from the K-12 business term. So this is my answer of your question about the top-line growth. And for the margin, yes, we meet with margin pressure in Q1 because of the larger promotion, and also the heavy online investments in the Q1.

And I mentioned continuously, going forward, I think, we will spend the big month in the online platform. So this is the margin drag. But on the other hand, as I said, the total expenses were in this year will be 20% to 25%. Some top line growth will be 30%. So we do have a leveraged on the utilization rate.

And the -- this is the margin expansion fee factor. But as I said, we do have some negative impact from the new regulations. So this is also a margin factor. So that's why I said this is a margin pressure here. Okay..

[Operator Instructions] Your next question comes from the line of Tian Hou from T.H. Capital. Please ask your question..

So the question is really related -- I don't really want to focus on margin issue. I want to focus on the growth issue. So I think the growth is really great. And when we review the company website, we also saw some new program, which we didn't see before, one of the program codes slim.

So I really want to ask the company, once you added a new program, we saw some welcome enrollments by students and the students' parents. So how the -- what's the company's plan in the future in the, one is to continue to rollout such a healthy content.

Second, what are some other healthy content are in the pipeline of the company's education inventory? That's my question..

Okay. We're keeping focusing on the development of new products. Yes, you have seen your life set, you know these lean courses as high-end courses for the -- not only for the English, but also for some non-academic courses like the programming and some -- like the science courses.

So I think our purpose is to provide all kinds of the subjects, not only for the academic only courses to the Chinese kids. I think this is the big market demand, and parents need us to provide more and more courses besides the traditional ones. And we are here -- are focusing to develop more and more new courses. And it's still in the early phase.

So the revenue contribution is small, but its growth is extremely fast. So I think going forward maybe in the next year or the year after, it will generate more and more revenue contribution from the new courses..

Your next question comes from the line of Mark Lee from CIGI. Please ask your question..

Hi management. Thanks for taking my question. I want to know, for this quarter, have we already incurred any margin pressure due to the regulation? Or do you expect the regulation margin pressure to emerge in the future quarter? And also, I noticed the POP Kids growth seems to be a bit slowing down compared to U-Can despite like a lower phase.

So may I know like any reasoning or any strategy going forward? Thank you..

Okay. Let me answer second question first. POP Kids, I think, the growth rate is good. And in some quarters, because of the timing difference in some quarters, POP Kids is better, some quarter the U-Can is better. So in general, the K-12 business together is booming. So the run-rate was good.

And, yes, in the Q1, I don't think that we have the material impact from the new regulation of the -- in terms of the margin. And going forward, as I said, there might be some incremental costs and expenses of the coming quarters in this -- in the rest of the fiscal year. But what I'm saying is that -- it's just a short term impact.

Maybe it will impact like the two quarters while the two quarters. So I don't think it will impact us in the next fiscal year or the year after. Okay. It's just one time..

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

Hi. Thanks management for taking my question. My question is actually more on the, I guess, the share repurchase program, and also the competitive landscape given the regulation changes.

Would management data open to consider other right opportunities where -- now with the small players might be actually getting into -- cover situation to actually compliance or regulations.

But would there be opportunities available for market leaders like yourself to absorb some smaller players? Or would you actually consider stepping to more organic growth and kind of expanding yourselves? Thank you..

Yes. I think that’s a great question. The governments continuously have regulatory oversight. And as a leading independent provider, as already we fully support the government reforms. And I think it’s a great opportunity for big players like us. I think we will keep doing to provide the best of service in the whole market.

So I think this is an opportunity for us to take more market share from small players. Maybe you do read some news historically, some small players, they can do the business in a proper way. So and we have seen some students in the last 6 months, the students from the small players originally to join our classes.

So this is what we have seen in the last 6 months, and I think with opportunity for us. And, yes, as we announced this afternoon, the Board of Directors approved the $200 million share buyback program. I think this is annualizing determination of the provider -- to deliver values to the shareholder.

And so we are confident of the long-term prospect for the shareholders. So this shows our confidence of the future -- in future. This is what the whole audit of the share buyback. Thanks..

Your next question comes from the line of Lucy Yu from Bank of America. Please ask your question. .

Hi Stephen. Would you mind giving us some breakdown of the non-GAAP operating margin construction this quarter? It has been down by 450 basis points.

How much of that is coming from summer promotion? How much is from online investment? And how much is from the consulting business due to the timing of revenue recognition? And how should we expect the margin for the following quarters given these three drivers? Thank you..

Okay. Within the margin decline, 110 bps comes from the offline business. This is our core business. Within this, it's mainly due to the summer promotion and some rental costs. We set up that most of the learning centers in the second half of the last year. And so that all the others is come from the online business overseas consulting other business.

So this is a breakdown of the margin. And going forward, I think, for the offline business itself, we do have the leverage on the core business, the offline business. So we do believe in the rest of the year. The margin of the poor business will be flattish or a little bit done, so I think there’s a good sign of the margins.

Because we started to feel students into the learning centers we set up last year. So it’s a good news. For the other business, I think, with trade off because -- if we think the online businesses is a great opportunity, it’s a worthy to spend more on the online platform.

But one other thing for this quarter, for the oversea consulting business, typically Q1 is not a peak season for the overseas consulting business. And then we adopt the new accounting standard seems to be the first quarter. So we lost like $141 million revenue of the Q1. We will report it into the returns, but this is just one time.

I think for the whole year, the overseas consulting business, the margin will be flattish, and the top line growth will be 20%. This growth is actually normal..

Just to clarify, you mentioned that for the offline business for the full year, you're expecting flattish or slightly down margins..

Yes..

So the online will also negatively impact the model as well where as the consulting business slightly to be largely flattish.

So is it fare to say that for the full year we are expecting non-GAAP operating margin to contract this year?.

We need maybe one more quarter to guide the whole year. It's just one quarter past..

Your next question comes from the line of John Choi from Daiwa. Please ask your question..

Good evening, guys. Thanks for taking my question. Just quickly a follow-up on the margin part. And Stephen, you mentioned that it's giving more or less, perhaps, slightly down this year for the offline.

Because if we look at the utilization rate at picking up and as we go into the second half of this year, with less, as you said you're adding about 20%-25%, and top line is growing 30%.

So where is this drag coming from? Is it more from the regulatory front? Or is it because of other factors that we haven't really seen more of G&A or operating expense that has to be factored in towards more in the second half this year? If you could give us a little bit more color on that, that will be great. Thank you..

Yes. My answer to your question is that, if, I said, if -- you take all of the impacts from the new revelation, I think, the margin for business will be expanded in this year. But we have to take some incremental cost expenses from the new regulation versus as always it's a matter of impact of the margin, okay.

So, if you combine the core business, the normal condition combined with the new revelation impact, but is the result of the margin.

Is it clear?.

Yes. That's great. Thank you..

Okay, thanks..

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

Hello. Thank you for taking my call, Sisi and Stephen. My question is regards to the revenue for the first quarter. We see that the overall revenue growth was about -- was 30%, whereas our enrollment was above 13%.

Can you clarify is the difference between that is it then the increase in ASPs? And if so, I mean, it does seem to be quite a large increase in ASP. Thank you..

Okay. Jonny, I think, I suggest that you combine the enrollment of the Q4 and fiscal '19 Q1 together. You know the two quarters together the enrollment was 28.4%. So I think this is in line with the revenue growth. The revenue growth is 30%.

So the prices are in line with our guidance, the pricing interest for the K-12 business 5% to 8%, a slight increase, and overseas price about 10% increase. It's just -- we don’t want to change our prior guidance..

Just to remind everyone that we have the registration window in May -- in April and May allowing existing customers who registered both the summer course and autumn semester's course. That's why, so the Q4 borrowed a lot of enrollments from Q1.

And that's why we suggest everyone to combine these two quarters together to calculate the actual trend -- the normal trend for enrollments to match the revenue growth. Okay..

Yes. But I want to add one point. Due to the new regulation, no advanced tuition fees of more than 3 months maybe collected. So we have already changed the tuition fees collection payment terms to meet new regulation requirements.

So in the new quarter and the year after, I think that you will not see the up and down of the timing difference of the student enrollment in different quarters..

Your next question comes from the line of Tianli Wen from Blue Lotus. Please ask your question..

Hi management. Thanks for taking my question. I have one question regarding company expansions relative on new cities. How many cities that company trying to enter this year and how many of them are like second-tier cities and how many are third or lower-tier cities? Thank you..

Okay. I think the most of the new cities we set out in this year, we will use the duty tomorrow. We covered almost 70 cities already. So in the most of low-tiered cities, I think, the best way for us to take market share is to use the dual-teacher model. So we planned to open 10 new cities by dual-teacher model in this year.

This is our plan to start with the new cities..

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

Thank you, management for taking my questions.

First, can you just give us some update on the latest new learning center approval situations in the major regions? Do you see any withholding on approvals? And also, do you maintain your guidance of 20% to 25% capacity expansion for FY'19? And then, I just want to follow-up on the regulation that schools can only collect money before -- 3 months before the course starts.

How do we look at the differed revenue growth going forward? And how is the impact on your retention rate and also maybe on the interest income themselves going forward? Thank you..

Okay. We opened 18 new learning centers in this quarter. So in the past quarter, what I'm saying is that since the new regulation till now, we didn't meet any difficulties to apply for the new license in the current cities.

So -- and we don’t want to change as of that, we don't want to change our expansion plan, and it's still 20% to 25% expansion plan within this fiscal year. And, yes, as I said, we changed our -- the students payments terms. Actually, we don’t need to make change for the summer and winter courses, typically, the courses within 3 months.

But for the spring and autumn courses, we have to change. Typically, we would divide the one port to two payment terms. But I think, the retention rate will be enough impacted because for our total business, the retention is very high. For example, POP Kids program, and the retention rate close to 90%.

And typically, for example, in the autumn or the spring, the students take up one semester course is typically lasts 3.5 months or 4 months. So I don’t think it will impact our -- like a retention rate during the spring and autumn semesters..

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

Can you give us more color on the specific regulation that is most impacting the costs? I know you talked about rental, for example.

So is it things like having to allocate more space? Is that part of the pinpoint? Or is that anything else that is really meaningful that we should be noticing? And the other question is on the long-term margin guidance. I think you mentioned before that 70% to 80% in 2 to 3 years time. I used to go standing by the long-term guidance? Thanks..

I don’t want to change my long-term margin guidance. It's just we hoped for one year. So we don’t' want to -- because this year that we have to meet the requirement of the new regulations and some online management. So I don't want to change my guidance of the long-term margin.

And from the new regulations, yes, that’s mainly from the incremental rental where the future costs, for example, for within the new regulation, all the future for Chinese, Math, English, Physics, Chemistry and Biology courses, the teachers need to have the teaching qualification.

And the based on our statistics, 50% of our teachers have the qualifications. I think the reason that the other half -- they don’t have the qualifications is because, historically we push all the teachers to take the exam. And thus, in some province, the government needs the teachers to take exams in their birthplace.

It’s really hard for us, for our teachers to take the exam. But now, almost all the cities have changed, make the reform of exams. So if the New Oriental gave the working certificate to the Government, they allow our teachers to attend the test. So in the coming new tests, almost all the -- our teachers with our license will attend test.

And we believe the pass rate would be very high, okay. But I can't say 100% of our teachers will get a license. So if -- I said if, some teachers cannot get the license, we will move them from the teacher position to the teaching assistant position or we will change some teachers. There might be some incremental cost there.

But we do believe, we have to be the high level of the whole industry to meet the government requirement. Thanks Andrew.

Is it clear?.

Yes. Thanks a lot..

Okay. Thanks..

Your next question comes from the line of Edwin Chen from UBS. Please ask your question..

Hey, Stephen and Sisi, thank you for taking the call, taking the questions. So just one quick question. What's the growth for online the first quarter and our guidance for online growth in the rest of the year? And also you mentioned that in the first quarter we spent some, I forgot the number, investment or online. But I think it is mostly on G&A.

Do we have a budget for the rest of the year or each of the quarter? How much we plan to spend online on G&A, and maybe as general and marketing expenses to drive that online growth case? Thank you..

Okay. So as per the koolearn, we have already filed the Avon in the Hong Kong market, so we can't disclose the numbers. Sorry. I'm sorry, Edwin. And for the margin impact, I think, we will continuously invest in the online and other business is going forward. So it's still our margins drag.

But I don't think, in the rest of the year, I don't think, we will suffer from the same level of the negative impacts of the Q1. So the -- you will see them -- the margin will balance out in the rest of the year.

But as I said, this year is the margin pressure year that we do believe the margin expansion in the coming New Year and fiscal year '19 or the year after..

Okay. Thanks.

Considering the online expansion right? Is that the overall money?.

Yes. It's still our margin, right, because we will spend money. But it's online business. It's not our core business. It is worthy to spend more money to acquire new customers. There's a huge market..

And also could you remind me the utilization and the retention rates for K-12 in the first quarter please?.

Okay. The utilization rate was down by 50 bps in the Q1, year-over-year, because the learning center opening in the last 2 to 3 quarters. And we do believe the utilization rates would get improvement, got some improvement in the future.

And the retention rate, it will be the POP Kids close to 90% the retention rate is still getting higher, U-Can at 75% the retention rate..

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

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

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