Good evening and thank you for standing by for New Oriental's Second Fiscal 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. After managements prepared remarks there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference Ms. Sisi Zhao..

Thank you. Hello, everyone and welcome to New Oriental's Second Fiscal Quarter 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. Yang. Stephen, please go ahead..

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are very pleased to see our overall business continue its strong momentum and achieve topline growth of 27.8% in dollar terms or 33.6% in RMB terms as we concluded the second quarter of fiscal year 2019.

The positive growth was largely driven by the remarkable year-on-year revenue growth of 38% in dollar terms or 44% in RMB terms in our key business units - the K-12 all-subjects after-school tutoring business. This result reflects our solid, high quality product portfolio and sustained market demand.

Total student enrollment in academic subjects tutoring and test prep courses increased by 23.6% year-over-year to approximately 2,320,800 for the second fiscal quarter of 2019. In addition, this was followed by a very strong involvement [ph] and cash revenue momentum in the first seven weeks of the third fiscal quarter.

In this quarter, our U-Can middle, high school all-subjects after-school tutoring business grew by approximately 39% in dollar terms or 46% if computed in RMB, and POP Kids program achieved a growth of approximately 35% in dollar terms or 41% if computed in RMB, which are hugely positive results.

As we continue to implement our wealth program optimized market strategy, we also made some progress in our capacity expansion plan in this quarter. We added a net of 24 learning centers in existing cities and opened a new training school in the city of Jinhua.

Altogether, this increased the total square meters of classroom area by approximately 30% year-over-year and 5% quarter-over-quarter by the end of the quarter. We're steadily on track with our expansion plan and are pleased to see increased market penetration rates in the markets we have expanded into.

With these proven results, we will continue to implement our expansion plan, guided by our long-term strategy. Historically, the second quarter is the slowest quarter in the fiscal year. However, in this quarter we continue to see the positive ramping up with new facilities we built in the previous fiscal year, which is highly encouraging.

Our non-GAAP operating margin and utilization rates in the offline language training and test prep business remained flattish year-over-year in the second quarter.

Going forward, we will remain focused on improving our operational efficiency and ensuring consistently high quality of education across all business lines through a standardized, modular, and systematic approach.

We believe that altogether, this will enable us to leverage our existing capability to capture growth opportunities and generate sustainable long-term value for our customers and shareholders. I will now turn to pricing.

Program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 13% year-over-year in dollar terms or 9% in RMB terms. Please note that the lower than normal blended ASP is primarily due to the change in the tuition fee collection schedule for K-12 business courses.

This year, we split the spring semester into two parts. The number of students recruited and amount of fees collected during the quarter only cover the first half of the spring semester. Prior to the change, we had historically collected the full sum of the tuition fee for the spring semester in the second quarter.

Therefore, our blended ASP for the second quarter of 2019 appears to be lower. To provide a breakdown of hourly blended ASP, the U-Can increased by 5%, POP Kids increased about 8%, and the overseas test prep program increased by 8%, all year-over-year in RMB terms.

Now, let me move on to our second quarter performance across our individual business lines.

As mentioned, our key revenue driver, K-12 after-school business, achieved revenue growth of 38% in dollar terms or 44% in RMB terms year-over-year, driven by the solid performance in student enrollment, which saw a year-over-year increase of about 26% in the quarter.

Breaking down, the U-Can middle school, high school all-subjects after-school tutoring business reported a revenue increase of 39% in dollar terms or 46% in RMB terms for the quarter. Student enrollment grew approximately 34% year-over-year for the quarter.

Our POP Kids program delivered remarkable results, with the revenue up significantly by about 35% in U.S. dollar terms or 41% in RMB terms for the quarter. Enrollment went up about 19% for the quarter.

The lower than normal enrollment growth is due to the delayed registration for classes in certain cities in compliance with the new industry regulation stating that tuition fees will not be collected more than three months before the courses start.

Our overseas test prep in K-12 [ph] businesstogether recorded a revenue growth of about 8% year-over-year for the quarter. Finally, our VIP personalized class business recorded a cash revenue growth of about 17.6% year-over-year for the quarter. Next, I will provide some updates on the progress we are making with our optimized market strategy.

With our continued to focus on expansion of capacity through constant refinement and leveraging our online/offline integrated education system in the K-12 business nationwide. In our overseas test prep business in some larger cities in China, this continued to produce very encouraging results.

Beginning with our core offline business, in the second quarter, we added a net of 24 learning centers in existing cities and opened a new training school in the city of Jinhua. Altogether, the total square meters of classroom area by the end of the quarter increased approximately 30% year-over-year and 5% quarter-over-quarter.

To further tap into the booming private education market and fully strengthen our leadership position, we started to pilot our new dual-teacher model in selected cities in July 2016.

By the end of the second fiscal quarter 2019, we have tested adoption of the new model in 40 existing cities for the POP Kids program, in 28 existing cities for the U-Can program, and in 10 cities for both POP Kids and U-Can programs. We're happy to win this increasing market penetration and customer retention in this market we have tapped into.

The scalability of the new model also continues to bear fruit. With this problem resolved, we will continue to deploy the strategy in the coming periods. With respect to our online business, on the whole we aimed to extend New Oriental's traditional offline classroom teaching offerings to online education services.

With the booming market in our advanced online/offline integrated product service, we're poised to gain more market share and strengthen our position going forward. I will first provide updates on our online/offline integrated standardized teaching system for our offline language training and test prep offerings.

Starting from this fiscal year, we initiated a pilot program to standardize our teachers teaching process by using our system to train teachers with modularized digital content and methodology in our U-Can middle school/high school tutoring business.

As a result, we saw a remarkable increase in customer retention rates, which is the most important of our teaching quality and effectiveness. With the proven positive to results, we will spare no effort in leveraging a standardized, modular and systematic approach for our whole operating process across all business lines.

We invested $23.7 million in the second quarter to optimize and maintain our online/offline integrated education system, which has been an area of focus since 2014. Most of the investments were reported under GIA expenses.

We will continue our focus on improving overall operational efficiency and profitability by making full use of the strength in technology and operational teaching systems to capture new business opportunities.

Since the launch of the U-Can Visible Progress teaching system in September 2014, the interactive education system we have implemented in all existing cities. We have launched a newly revamped POP Kids English program, Shuang You in most cities by the end of the second quarter in fiscal year 2019.

At the same time, the interactive education system has been broadly used in an increasing number of the cities. The interactive education system for overseas test prep program, including IELTS, TOEFL, and SAT, was rolled out and tested in most of major cities by the end of the second quarter of this year.

At the same time, we also standardized product offerings across 14 cities. We also made some progress in the koolearn.com business line and other supplementary pure online education products with the goal of capturing huge market opportunity in the pure online education space.

We continue to invest more resources to excluding new initiatives in our online K-12 after-school tutoring business in fiscal year 2019. These efforts includes content development, teacher recruitment and training, R&D, sales/marketing and other cost expenses that are necessary to drive the growth of these new online program.

With these programs, we are able to reach more students in low-tier cities in an interactive and scalable approach to further strengthen our market share in the online education space and drive our topline growth. Now, let me walk you through the other key financial details for the second quarter.

Operating cost and expenses for the quarter were $627.3 million, representing a 30.6% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which exclude share-based compensation expenses were $613.7 million, representing a 30.3% increase year-over-year.

Customer revenue increased by 32.1% year-over-year to $300.1 million, primarily attributable to the increase in teachers' compensation for more teaching hours and rental costs for the increased number of schools and learning centers in operation.

Selling and marketing expenses increased by 27.1% year-over-year to $91.6 million, primarily due to an increase in grant promotion expenses and selling and marketing staff compensation. General and administrative expenses for the quarter increased by 30.3% year-over-year to $235.6 million.

Non-GAAP general and administrative expenses, which exclude share-based compensation expense were $222.0 million, representing a 29.4% increase year-over-year, primarily due to increased headcount after the company expanded its network of schools and learning centers, as well as an increase in R&D expenses and a few more resource expenses related to the development of our online/offline integrated education system.

Total share-based compensation expenses, which were allocated to related operating costs and expenses increased by 47% to $13.7 million in the second fiscal quarter of 2019. Operating loss for the quarter was $28.6 million, an increase of 118.5% year-over-year.

Non-GAAP operating loss for the quarter was $14.9 million, a 295.7% increase year-over-year. Operating margin for the quarter was negative 4.8% compared to negative 2.8% in the same period of the prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was negative 2.5% compared to negative 0.8% in the same period of the prior fiscal year. Loss from fair value change of long-term investments for the quarter was $35.1 million.

Please note that this is the result of the adoption of new financial instrument accounting standards starting from June 1st, 2018. Net loss attributable to New Oriental for the quarter was $25.8 million compared to an income of $4.3 million. Basic and diluted loss per ADS attributable to New Oriental were $0.16 and $0.16 respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $23.0 million, representing a 69.2% increase from the same period of the prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.14 and $0.14 respectively.

Net operating cash flow for the second fiscal quarter of 2019 was approximately $168.8 million. Capital expenditures for the quarter were $43.1 million, which were primarily attributable to the opening of 48 facilities and renovations and existing learning centers.

Turning to the balance sheet, as of November 30, 2018, New Oriental had cash and cash equivalents of $842.9 million compared to $833.1 million as of August 31, 2018. In addition, the company had $94.6 million in term deposits, $1,700.7 million in short-term investments.

The deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instruction is delivered, at the end of the second quarter of 2019 was $1.250.3 million, an increase of 9.9% as compared to $1,137.3 at the end of the second quarter of fiscal year 2018.

As mentioned earlier, the lower than normal growth is due to the change in our fee collection schedule, meaning that in this quarter we only collected fees for the first half of the spring semester.

Looking ahead into the next quarter and the rest of fiscal year 2019, we will continue with our optimized market strategy to build upon the success we have achieved through the approach. I would also like to take a moment to reiterate our overarching goals and our strategy, as well as the challenges and opportunities we anticipate in the future.

First, we will continue to expand our offline business. We aim to add around 20% to 25% capacity, including new learning centers and expanding classroom area of existing learning centers for the K-12 business in existing cities.

In addition, we will continue to roll out our new two-teacher model schools to a number of low-tier cities in certain provinces for the whole year.

Second, we will continue to leverage our investments in online/offline integrated standardized teaching systems for our offline language training and test prep offerings, especially for our K-12 business and the overseas test prep business.

We will continue to make investments and we believe that total spending in absolute dollar terms in fiscal year 2019 will increase moderately compared with the previous fiscal year.

Furthermore, we will continue to invest in and execute new initiatives, including product content development, teacher recruitment and training, R&D, as well as sales marketing in the pure online K-12 after-school tutoring business, our koolearn.com platform.

Third, our top priority will remain our focus on optimizing utilization facilities and controlling costs across the organization to drive continuing margin expansion and increase operational efficiency.

In the previous fiscal year, we expanded our overall capacity by approximately 40% year-over-year, with the expansion being more concentrated in the second half of last year. The new facilities built last year are being ramped up more efficiently than we expected.

We expect our non-GAAP operating margin of the offline language training and test prep business to expand in the second half of this fiscal year, especially compared to the previous fiscal year.

This improvement is expected to cover the margin pressure resulting from our online investments in the koolearn.com business line and other supplementary pure online education products.

On the whole, we expect our overall non-GAAP operating margin to flatten year-over-year in the second half of the fiscal year compared to the year-over-year decline in the first half. We continue to foresee a degree of uncertainty around the implementation of the newly introduced policy relating to the after-school institutions.

The current impact so far is in line with our expectations, and as the leading education service provider in China, our company is firmly supportive of these reforms, which will improve market standards and foster the healthy growth of the industry.

As always, we're committed to provide high quality education service and contributing to a creation of sustainable markets. At this stage, the reforms are currently being implemented on a city by city basis.

With our market leading position and robust business foundation, we do not expect to see material negative impact on our growth opportunities nationwide. Although we expect to see incremental administrative costs and expenses as a result of implementing the policies in certain cities. Finally, the recent RMB depreciation against the U.S.

dollar will also impact our earnings in dollar terms for the third fiscal quarter of 2019. Finally, I would like to emphasize we have great confidence in the fundamentals of our business, which we believe will remain strong.

As we continue to optimize market strategy, we're certain that New Oriental will continue to capture sustainable growth opportunities in the market and deliver long-term value for our shareholders and customers.

Regarding the near term guidance for the third quarter of fiscal year 2019, we expect total revenue to be in the range of $769.9 million to $793.2 million, representing year-over-year growth in the range of 25% to 28% in dollar terms. This does not take into consideration the impact of the potential changes in exchange rate between RMB and U.S.

dollars. The projected revenue growth rate is expected to be in the range of 32% to 36% for the third quarter of fiscal year 2019. 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 calls, please..

[Operator Instructions] Your first question is from Felix Liu from UBS. Please ask..

Hi, management. Congratulations on the very good results and the guidance. Just some bookkeeping questions from me.

Could you provide capacity guidance for the third quarter and the full year, as well as the margin guidance for those periods? And, just out of - I noticed that in the recent two quarters, the growth of the POP Kids English program has slow down relatively compared to the U-Can. Could management provide more color on that? That's it. Thank you..

Okay.

Yeah, the capacity expansion, you know, we opened - the expansion of this quarter quarter-on-quarter was 5%, so, plus the 3% quarter-on-quarter in the first quarter, we opened 8% more in the first half of this fiscal year, and for the whole year, we keep the same guidance of the expansion plan as we guided before, 20% to 25% of the expansion plan.

And, the margin guidance, you know, the overall non-GAAP operating margin of this quarter is down by 170 basis points year-over-year.

Even though the second quarter is a slower quarter in the fiscal year, actually our non-GAAP operating margin for the quarter in the offline business was flattish in this quarter, and don't forget in the previous fiscal year, we opened more learning centers in the second half of the last fiscal year, and then lastly the total expansion was 40%.

So, I think you will see more and more operating leverage in the second half of this fiscal year. So that means in Q3 and Q4 together, you will see the margin expansion for our core business. And I think it's expected to cover the margin pressure resulting from our online investment for koolearn.com and the other – the online E [ph] product.

On the whole, the total non-GAAP operating margin for the second half of the year will be flattish year-over-year, okay. This is my - the margin guidance for the second half of last year and for this year.

And going forward, I think we will pay more attention on the - as we focus on the optimized utilization facilities and control the cost expenses as we needed. And so, as for the medium and long-term margin guidance, we keep the positive view of the margin expansion in the next year and the year after, okay.

And, POP Kids, I think that the trend for the POP Kids program is good, and you have seen our guidance for Q3 and we believe you will see the first round of growth for the POP Kids program in the Q3 and Q4 going forward. Thanks, Felix..

Okay. Thank you. Thank you very much..

Thank you..

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

Hi, Stephen and Sisi. Congratulations on the strong set of results. I have a quick question regarding regulations. Can management provide some general updates about the regulations these days and how we should think about the outlook? Thank you..

Okay. Thanks, Thomas. It's a good question. You know, in terms of the regulation, I'd say we are fully - firstly, I must mention that we are fully supportive of the government's reforms and their implementations, and we're committed to doing our part in fostering the healthy growth in the whole sector.

As newly introduced policies in the market are currently being carried out on a city-by-city basis, as I mentioned in the prepared remarks, and we continue to foresee some certain degree of the possible changes and some incremental expenses in short term.

This impact so far is in line with our expectations, and going forward we expect the impact will be in line with our expectations. And, three things I want to add to the regulation related things. The first one is the teacher's license.

We are still in the process of the – we push all the teachers to pass the exams of the teacher licenses plan, and we're seeing high passing rates for the last exam, and we're fully committed in our efforts to ensure that all the teachers hold the qualifications as required.

And, the capacity has been mentioned earlier, you know, we keep the same guidance of the expansion plan, 20% to 25% year-over-year in the whole-year fiscal year 2019. And - but we do have the negative impact for the deferred revenue balance in Q2.

Because we changed the spring semester course into the two parts, so in this quarter, we recruited students and collected tuition fees for the first part.

And, second, we changed the registration windows in some cities, especially for the POP Kids program, were delayed from November originally to December, so that means we moved some cash revenue of POP Kids from Q2 to Q3. So, therefore, you see the deferred revenue balance was only increased by 10%, but temporarily. It's just the timing difference.

And, we have seen the very strong cash revenue and the enrollment growth in the first seven weeks of the third quarter. So, actually, the trend is very good..

Thank you, Stephen..

Okay. Thanks, Thomas..

Your next question is from Tian Hou from T.H. Capital. Please ask..

Hi, Sisi and Stephen. Congratulations on the good quarter. So I have one question related to your deferred revenue. So deferred revenue is - was growing 10%, so I believe compared with last quarter's 23and the quarter before 40-something, it seems low.

Is that because of the government policy preventing the company from collecting fees more than three months before? If so, on a pro forma basis, what would the deferred revenue growth be?.

Okay. Thanks, Tian. As mentioned, splitting enrollments into tuition fee collections in our spring, the courses are delayed due to the new regulations. That tuition fee cannot be collected more than three months ahead of the courses. So we changed two things. The first one, starting from this year, we divided the spring semester into two parts.

In Q2, we recruited students and collected tuition fees for the first part. Second, we moved some registration windows for the POP Kids program in some cities from Q2 to Q3. However, so therefore, the deferred revenue for the quarter was affected and reported slower growth by 2%.

However, when we look at the growth on a pro forma basis, as you asked, it's in line with the growth momentum because the pro forma - as a pro forma basis, the deferred revenue increase is approximately 40%. This is a pro forma basis.

So - and, going forward, I think the delayed effect will influence us for one year, especially for Q2 and Q3 - Q2 and Q4, but I don't think it will impact our GAAP revenue, okay, and it's only for one year. Thanks, Tian..

That's clear. Thank you, Stephen. That's all my questions….

Okay. Thanks, Tian..

[Operator Instructions] Your next question is from Tianli Wen from Blue Lotus. Please ask..

Hi, management. Congratulations for a strong quarter. I have one question here about the low-tier city expansion. How many K-12 learning centers opened in 2019 will be in lower-tier cities, and could management also provide more updates on the lower-tier city penetration? Thank you..

Yeah. As I guided before, we keep the same expansion guidance of the 20% to 25% for overall the company. And actually, our strategy of opening more learning centers is firstly, we see the performance of last year, whether it's high-tier or low-tier, but we believe we set up most of the learning centers in tier 2 and tier 3.

And for the low-tier cities, as I said, we will open more learning centers by the two-teacher model in low-tier cities, okay. What I mean is the tier 5 cities, okay..

Okay. Thank you..

Thank you..

Your next question is from Jin Yoon from New Street Research. Please ask..

Hey, good evening, guys. I guess just on your – so quick questions on your margins in the second half. I know, Stephen, you said that margins are going to be looking flattish in the second half of the year. I'm just trying to kind of gauge what the upside opportunity is given the fact that online investments are largely front-end loaded.

It looks like capacity expansion will start to significantly tail off in the second half of the year, and given the demand environment, why wouldn't we see - in that scenario, why wouldn't we actually see a positive margin upside rather than just a flat margin? So, can you give us the drivers in terms of where we could see actual margins trending lower outside of online investments as well as capacity expansion? Thanks..

Okay. Thanks, Jin. Its good question. As for the margins, in the second half of the year, I think we will see more and more optimal leverage by prudently [ph] more students into the learning centers we set up in the last fiscal year.

So definitely, you will see a higher learning [ph] rates for our core - core business for the mostly U-Can and overseas test prep. And so, absolutely, it's a margin expansion, but it will be offside to some extent by the online investment. But, I think you will see more leverage on the offline business margin expansion.

So our guidance for the second half of this year - the margin will be flattish. So we hope the results will be better than we expected – expectations currently..

Okay, great. Thanks, Stephen..

Okay, thanks, Jin..

Your next question is from Natalie Wu from CICC. Please ask..

Hi. Good evening, Stephen and Sisi. Thanks for taking my question and congratulations on a very solid quarter. My question is regarding the summer promotion.

Actually, I saw that you have said the minimal hourly price limit for the summer promotion program in some media report recently, so, just curious what’s your consideration behind that, and will you cut the promotion scale accordingly? It would be great if you can share some of your thoughts behind that, as well as the summer promotion plan this year.

Also, secondly, if I may, as we know that some small institutions were forced to shut down in this route [ph] of the regulation, I was just wondering did you see some students coming from those institutions to join your program.

And, if yes, for this flow or the crowd-out phenomenon is it more prominent for the primary, middle or high school? Thank you..

Okay. Your first question is about summer promotions. So far, we haven't finished our work plan for this year's summer promotion. But, in this year we're quite sure of that. We care more about student retention rate from the summer promotion. So, yeah, as you said, we set up the new price strategy for the summer promotion.

Last year, typically, we charged only 50 to 200 RMB per course IN last summer, and this year, we decided to increase the summer promotion courses price from – like the 250 RMB to 400 RMB, and I think it will help us to get higher student retention rate after the summer promotion.

And we started the summer promotion thing several years ago, and the results had to be – it works, and going forward, I think we'll use the same strategy of the summer promotion because we - I think it's a good way to take more market share from the student market.

But, going forward, even for this year, we'll care more about the student retention rate, okay. So, we care more about the healthy growth. And your second question is about the regulations, I think.

We are seeing some small players were kicked out of the market by the new regulations, and we have seen certain students join us because some students tell us, and I think our job is doing our job in the proper way. We will provide the best quality service to the parents and the students, and we are happy to see the higher student retention rate.

I think this is very good - the result of our investment for the last two or three years. And, I think the market demand is always there, and we will do it in our proper way by ourselves, and our job is to provide the best service to these kids and to take more market share from the market. Okay, thanks..

So, for the strength of your - for your guidance, is it partly just because of that?.

I think it's because of two parts. Firstly, I think we believe the retention rates will be higher going forward in Q3. Second, because we set up a lot of learning centers in the last fiscal year and we're seeing the learning centers were filledd by the students. So, I think the guidance is based on our current estimation, and I think the trend is good.

Thanks..

Okay, got it. Thank you..

Thank you..

Your next question is from Jon Huang from Macquarie. Jon, you may ask now..

Yes. Thank you for taking my questions, and congratulations on the solid results. So, as we're seeing flattish sales and marketing cost as a percentage of revenue, can management show some colors on whether the strength will continue? And what are we doing differently to improve the efficiencies on the sales and marketing expenditures? Thanks..

Okay. If you separate the sales and marketing expense into two parts, offline and online, you know, actually, we believe we have more leverage on the offline business in terms of the sales and marketing expenses. So, I think you will see more and more leverage on the sales and marketing expenses for our core business.

And, for the online, we don't want to choose the burning money way to take more market share, but for the online, the online market is huge, so we have to spend a little bit more than before on the marketing expenses.

So, overall, for the company, as a percent of the selling and marketing expenses, as a percent of the revenue, I think it will be flattish. I think we will have a little bit more leverage on the selling and marketing expenses, okay..

Sure, thanks..

Thanks..

Your next question is from Christine Cho from Goldman Sachs. Please ask..

Hi. Thank you, Stephen and Sisi, and congrats on the quarter.

Quickly, I think this quarter you mentioned that the change in tuition collection optically made the per-program blended ASP look lower than usual, but on apple-to-apple basis, can you confirm the trends are actually quite similar or even an accelerating trend versus the last quarter? And also, could you just elaborate on the pricing potential going forward?.

Okay. This quarter, we changed - some of the tuition fees changed, so that's why we suggested you guys to see the hourly rate, and the hourly blended ASP of U-Can was increased by 5%, POP Kids 8% increase, and overseas had 8%. I think it's in line with our price strategy, as we guided the street. And, going forward, we will use the same price strategy.

We know we have the price power in hand, but we won't increase prices too aggressively. I think 5% to 8% will be reasonable..

Thank you..

Thank you..

Your next question is from Lucy Yu from Bank of America Merrill Lynch. Please ask..

Hi, Stephen. I remember you gave full year revenue guidance of 30% in RMB terms. So if wee using the higher end of your third quarter guidance, which is around 36%, that implies fourth your quarter RMB revenue will only grow at 24%, which is a significant slowing down from the third quarter.

So are you considering rising up your full year guidance on revenue growth? Thank you..

Thanks, Lucy. Yeah, I think that's a nice question. I think for the whole year, our topline growth in RMB terms year-over-year will be 30%-plus, in RMB terms, year-over-year growth..

Okay. Also, second question is on the margin. You mentioned second half margin will be largely flattish, so with offline improving offsetting online losses. Can you give us a bit more color on how much offline margin expansion are you expecting in the second half? Thank you..

I think the offline business - in the second half of the year, the offline business margin expansion will be higher than 100 basis points, okay. So it's a rough number, okay, and that's it..

But, 100 basis points, right?.

Yes, market expansion for offline business..

Sure. Thank you..

Your next question is from John Choi from Daiwa Capital Markets. Please ask..

Hey, Stephen and Sisi. Thanks for taking my question. I have a couple questions here.

First, on your - because now you guys changed the collection period, will that have a change in your deferred revenue on the seasonality going forward in the coming quarters, and how should we think about that’s my first? And, second question is on your online business. Now, I know you guys have been investing a lot.

When should we start seeing some inflection points? I know you said in the second half, offline is going to be more or less offsetting.

But as we go into fiscal year '20, should we be expecting more acceleration from the scale we're seeing for offline margin because that should be offsetting more on the online or should we continue to expect the online will have a further drag to the profit really? Thank you..

Okay. Yeah, the different revenue balance, I think because of the delayed effect of the fee collection will influence our deferred revenue for one year since this quarter, and especially in Q2 and Q4.

So I think in the coming quarter, Q3, the deferred revenue will be negatively impacted a little bit, okay, and in Q4 it will be negatively impacted at the end of Q4. This is the impact of the deferred revenue. But, we will not have a – I think it will not impact the GAAP revenue flow because it's just a timing difference.

And, I think your second question is about the margins. In the second half of the year, I think the topline growth will be very strong, and if you compare the topline growth with the expansion plan, you will see the leverage. And we do believe we will have more leverage on the selling and marketing expenses and G&A expenses for our core business.

Even though we spend more on the online platform or the other online products, but it will be offset by the online margin expansion, okay, on the core business margin expansion, okay?.

Your next question is from Joanne Song from Industrial Securities. Please ask..

Hi, good evening, Stephen and Sisi. Thank you for taking my question.

I have one question about - can you break down the number of the net new learning centers opening this quarter, which is 25? Or how many are new opened and how many are closed? And there are some blacklisted learning centers in the second half of 2008 [ph] How long with these learning centers reopen after renovation? Thank you..

Okay. We've opened 48 new learning centers in Q2 and closed down 23 learning centers, so the net increase was 25. And, I think most of the learning centers which were closed down is the regular closedown, okay, for some like the leasing ….

Will they reopen….

Yeah. And we opened 48 and closed down 23, so we got 25..

Will these reopen, or just close down forever?.

Just close down..

Yeah, it's typically replacement of some old learning centers that lease term expired and we typically move around, so we close down the old one and open a new one..

Okay. Thank you. Thank you very much..

Thanks..

The next question is from Johnny Wong from Jefferies. Johnny, please ask..

Hi, Stephen. Thank you for taking my call. A lot of my questions have been answered, but just one for me, - can you please elaborate on the type of promotions that we are doing in terms of online business, what is working and what's not, and whether or not we have some sort of target for an acquisition cost per student? Thank you very much..

Thanks, Johnny. I think your question is about the student acquisition. For our offline business, the students acquisition cost is very low as a percentage of the revenue. Typically, the out-of-pocket selling and marketing expenses is just 4% of total revenue.

And we just rely on word of mouth because you know, New Oriental is the best household brand name in China, and we rely on word of mouth, okay, almost - a lot of people in China, parents and kids know New Oriental's name. And, for the online business, it is quite new, and the market is huge.

And I think some students and parents they don't know New Oriental is doing online business, so we prefer to spend more on the selling and marketing expenses to acquire new students. But, this - we will use this way by a reasonable way. We don’t like to burn the money to acquire new students.

We care more about teaching quality and content development rather than the marketing activities..

Okay. Thank you..

Thank you, Johnny..

Your next question is from Sheng Zhong from Morgan Stanley. Please ask..

Thank you. So, I have two questions. One is about the enrollment. We know that there is some collection fee period change, so if you look at enrollment, what's the guidance for next quarter and second half? And secondly is, you are executing the share repurchase plan, so can you give some updates on this? Thank you..

Okay. Enrollments, as I said, the lower-than-normal enrollments in this quarter is due to the delayed registration in some cities from Q2 to Q3. That's from November to December and because of the new regulations, and so tuition fees cannot be collected for more than three months ahead of the class start.

But, we have seen a very, very strong enrollment growth and cash revenue growth in the first seven weeks of the third fiscal quarter. So I don't want to give the guidance for enrollment growth. It's really hard for me. But, we do believe in the second half of the fiscal year, the enrollment growth will be very strong.

And, your second question is about the share repurchase plan. Yeah, we announced the $20 million share repurchase plan, and we're still in the process. We're buying the shares in the open market, and it's still in process, okay. Its planned to end at the end of this fiscal year, May 31st..

Thank you..

Thank you, Zhong Sheng..

Your next question is from Tallan Zhou from Deutsche Bank. Please ask..

Hi, Stephen. Hi, Sisi. Thanks for taking my questions. I've got two. The first is since you mentioned about not going aggressively online investment, so do you have a target of online enrollment or online revenue as a percentage of total? ‘ And second question on margin, it seems like you're quite bullish on second half margin.

So on the offline business, is this because of the retention rate and the new learning standards are gradually going up? Thanks..

Thanks, Tallan. Your first question about the enrollment growth of the online platform, sorry, I can't say too much about the enrollment growth because we filed the A-1 for our koolearn.com in the Hong Kong markets, so I can't say too much detail in the numbers.

But, I can say that the enrollment growth is very strong, okay, and, the margin guidance of the second half of the year. The overall margin guidance for the second half of the year for the whole company is flattish. Actually, it's not bullish, just flattish. Compared to the first half margin dilution, it's just flattish.

So, I think this is reasonable because last year we opened 40% new learning centers, and this year, we bear fruit. And going forward, for next year, you will see more leverage on the margins for the New Year. Thanks, Tallan..

Thanks, Stephen..

Your next question is from Charlotte Wei from Citi. Please ask..

Thank you, Stephen for taking my question. I'm asking questions on behalf of Mark Li. And, first, I want to congratulate you on the solid results. I have two small questions.

First is can you give us the revenue growth in the top five cities and in lower-tier cities in the last quarter? Also, may I know our share for you [ph] in top cities, and do you have a target to achieve more shares in, say, mid-term or long-term? Thank you..

Yeah. I think the top five cities, the revenue growth of the Kids [ph] 12 business in the trailing 12 months is 31% to 32% in RMB terms. This is our disclosure. And, actually I think you saw the very great momentum of the Kid [ph] 12 business. Actually, we are taking more market share in most cities, whether it's high-tier or low-tier..

Thank you..

Thanks..

The next question is from James Weir from USS. Please ask..

Hi, good evening. I wonder if you comment again on regulation, particularly as it relates to the internet and the online learning. It seems - we've been picking up signals that the government was looking at increasing regulation on that side now that they've dealt with offline. And, the second question was just on wage costs.

We've seen this kind of licensing program come in place.

I wonder is that putting additional upward pressure on wage costs, now that the teachers have the license, are they asking for higher wages?.

Thanks, James. We have not seen the new regulations for online education, so it's what it is, okay. There is no new regulation on the online education sector.

And, the wage inflation -- yeah, as you mentioned, I think New Oriental, we provide the highest level of wages to teachers in the market, and typically, the teachers see inflation every year its 8% to 9%, so we don't need to pay too much or too more the wage inflation in terms of the new regulations. Our wage inflation strategy will be stabilized..

All right. Thank you..

Thank you..

We are now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Stephen Yang, for his closing remarks..

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