Good evening and thank you for standing by for New Oriental’s FY 2020 Fourth Quarter Results 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 like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao. Thank you. Please go ahead..

Thank you. Hello, everyone, and welcome to New Oriental’s fourth fiscal quarter 2020 earnings conference call. Our financial results for the periods 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. Despite the outbreak of COVID-19 pandemics starting from March posted continuing pressure on all business across the globe, including ours.

We are pleased to report a set of financial results in the fourth fiscal quarter of this fiscal year, that is in line with our expectation. Total net revenue was $798.5 million, a slight difference of 5.3% in dollar term, or 1% in RMB term. A mix of results amounted to various business line were reported, which I will elaborate each of them shortly.

Total student enrollments in academic subjects tutoring and test preparation courses as seen in the fourth quarter of fiscal year 2020, decreased by 6.2% year-over-year to approximately 2,585,600.

The lower than normal increase in the number of student enrollments is primarily due to the outbreak of the COVID-19, which has made new customer acquisition in quarter much more challenging. While the enrollment for the summer and autumn classes have also been delayed.

In terms of the bottom line performance, for the entire fiscal year of 2020, we managed to deliver expansion of the non-GAAP operating margin of 70 basis points year-over-year to 12.9% compared to 12.2% for the prior fiscal year.

However, for the fourth quarter of 2020, due to the negative impacts from pandemic, our top line performance, and the increased spending from operating free classes to promote our Koolearn kids of larger classes with the aim of taking more market share, our gross margin recorded for the quarter was 51%, down 500 basis points year-over-year.

Our non-GAAP operating margin for quarter was 4.1% down 810 basis points year-over-year and non-GAAP net margin for the quarter was 6.1% down by 520 basis points year-over-year.

In order to minimize the negative impacts caused by COVID-19 dynamics to our bottom line, we actively adjusted to our operational strategy and the made more efforts on cost control and reducing expenditures. Especially for business lines facing bigger negative impacts in the near-term.

We believe that our continuous efforts will sustain us through the crises and hopefully that the adverse effects on our business from the pandemic will subside gradually.

Per program blend ASP, which is cash revenue divided by total student enrollment decreased by 14.8% year-over-year in dollar terms as for hourly blend for ASP which is GAAP revenue divided by the total teaching hours decreased by proximately 3.5% year-over-year in our business.

To provide the breakdown of the hourly blend ASP please note that - class increased by 0.2%. U-Can VIP personalized classes increased by 3.5%, Pop Kids increased by 6.4% and [indiscernible] programs increased by 16.1% year-over-year in RMB terms. Comparing with the normal pricing increase of 5% to 8%.

This quarter is already blended ASP first was lower than normal level mainly because of the bigger decline of the overseas test preparation program and U-Can VIP personalized classes business, which already blend ASP much higher than the other programs as well as the use of the two part as we provided for the customer to support a migration from offline class to online or OMO class during the winter.

Now I would like to spend some time to talk about fourth quarter performance across our individual business line in detail. In this unprecedented period, we see a mix of the results among the each of the business line.

Our Q1 of our K-12 - school total business achieved a year-over-year revenue growth of approximately 4% in dollar terms, or 8% in RMB terms. Breaking down, the U-Can middle school/high school all subject - school children business recorded revenue increase of approximately 1% in dollar terms or 5% in RMB terms for the quarter.

Student enrollments grew approximately at 0.1% year-over-year for the quarter, excluding VIP one-on-one business U-Can small class business grew by approximately 15% in dollars terms, or 20% if measured in RMB. Our POP Kids program delivered outstanding results with revenue up by about 10% in dollar terms, or 14% in RMB terms for the quarter.

- decreased by 9% for the quarter low as the outbreak of the COVID-19 has caused the challenges and acquired a new customer in the quarter while the enrollment for the summer autumn classes had been delayed.

Our overseas released business including test prep and consultant business faced with the most difficult challenges due to the cancellation for overseas exams, suspension of the overseas schools and restriction on travels. The overseas test prep business revenue declined by approximately 62% in dollar terms, or 50% if measured in RMB.

Higher despite the challenges, the consulting business grew by approximately 6% in dollars terms or 11% in RMB terms. And finally, VIP personalized classes business reported revenue decline of about 36% year-over-year in dollar terms, or 44% in RMB terms year-over-year for the quarter. Our summer promotion strategy also delivered outstanding results.

We offered low price experiential courses for multiple subjects in total of about 69 cities targeting entryway for primary and secondary school students customers before this start this new school year. The promotion price is similar to last year at around RMB400.

Even though we launched the summer promotion campaign almost one month later than we did last year due to the pandemic situation. This summer promotion remains very well received by the market.

We are pleased to see that the promotion enrollment we brought in before the start of the summer holiday - this year achieved a 20% increase comparing the same period of last year, reaching 986,000 enrollments.

The encouraging results have proven that such sound and highly profitable strategy enables us to capture and increase our market share in high growth K-12 after school children market, also puts us in a more favorable position during this market consolidation period.

As certain players may lack financial or digital capabilities to sustain their operation during this challenging times. As if students move to the higher grades, we expect the continually improvements in retention rates and customer loyalty will drive revenue growth in the next three to six years.

We will continue to be guided by our optimized market strategy in this quarter and carried out capacity expansion indices where we see potential for rapid growth and strong profitability.

This quarter we added a net of 44 learning centers [indiscernible], opened a new training school in the city of Weihai, as well as four K-12 model school in the city of [indiscernible]. All together this increase the total square meter of classroom area by approximately 26% year-over-year, 5% quarter-over-quarter by the end of this quarter.

Despite such challenging times we didn’t close our expansion plan on hold, as we wanted to insure and we are fully prepared when the pandemic is over. And our service will resume with strong presence across different Chinese cities. As outbreak of COVID-19 has highlighted the important sentimental of the online education.

We have placed the more resources in these area and invested $36 million in the quarter to improve and maintain our OMO integrated education ecosystem. The investments also supported to be migration of our offline class to small size online class during the pandemic.

Apart from the OMO infrastructure, we have allocate part of the resources in advance to the training programs for our teachers to enhance their online and offline teaching skills, as we assume to be growing demand in markets.

At the same time we continue to upgrade our technology platforms and we will broaden the usage of the online tools and contents in our OMO system flow business line through the whole network, as well as further development of the best teaching contents and course, where to cater on online/offline integrated education methods.

We are glad to see that our industry leading OMO ecosystem has now only successfully managed to cushion most of the impact our service and operation costs of pandemic, but we also see the refund rate from the cancellations have been stabilized at a normal level as we entered into the spring semester.

While our customer retention rates from winter to spring semester and from spring to summer semester we are trending higher than same period last year. Which further demonstrated that our customer satisfaction and then fact the status of our online course through our OMO system.

To further tap into the huge market opportunities in the online education, we continue to place in more resources in koolearn in executing universities in our K12 online afterschool children business in fiscal year 2020.

This includes content development, teachers, recruiting and training, sales and marketing, R&D and other necessary copy expenses to drive the goals of the new online programs. With these programs, we are able to reach out to more students in the low tier cities in interactive and scalable approach.

We believe this will help koolearn.com to gain new market share in the online education space and [indiscernible]. In the past quarter, koolearn is a large scale market promotion by offering three large sites online level enhancing classes through public and then tracks several times more traffic than normal time.

Koolearn also added a meaningful amount of customer service representatives and marketing staff to support the new initiatives in K-12 tutoring. These moves have raised our standing on the marketing front, but we believe those are necessary and understandable measures as we found ourselves year in and year out of the pandemic situation.

The future class model has been offered Pop Kids program in 48 existing cities, U-Can program in 29 existing cities and for both Pop Kids and U-Can K-12 business in 10 new cities. We are glad to see the model has proven to be successful and variously increased market penetration in both markets we have tapped into.

We also saw improved customer retention and scalability. With these proven results, we will continue this strategy going forward. Now, let me walk you through the other key financial details for the fourth quarter. Operating cost and expenses for the quarter was $788.2 million, representing a 2.9% increase year-over-year.

Non-GAAP operating cost expenses for the quarter, which exclude share based compensation expenses were 765.9 million, representing a 3.5% increase year-over-year.

Cost of revenue increased by 5.3% year-over-year to $391.1 million primarily due to increased teachers compensation for more teaching hours, and then higher rental costs for the increased number of the schools and learning centers in operation.

Selling and marketing expenses increased by 11.4% year-over-year to $118.0 million primarily due to the addition of a number of customer service representatives and marketing staff with the aim of capturing the new market opportunities during the pandemic, especially for the new initiatives in K-12 tutoring or pure online advertising platform koolearn.com.

General and administrative expenses for the quarter decreased by 3.3% year-over-year to $279.2 million. Non-GAAP general mix with the expenses, which include the share based composition expenses were $261.0 million, presenting a 1.3% decrease year-over-year.

Total share based compensation expenses, which were allocated to related operating cost and expenses decreased by 13.5% to $22.3 million in the first quarter of fiscal year 2020. Operating income was $10.3 million and 86.7% differs from $77 million in the same period prior fiscal year.

Non-GAAP operating income for the quarter was $32.5 million or 68.3% decrease from $102.7 million in same period of prior fiscal year. Operating margin for the quarter was 1.3% compared to 9.1% in the same period of prior fiscal year.

Non-GAAP operating margin which excludes the share based compensation expenses for the quarter was 4.1% compared to 12.2% in same period of prior fiscal year. Net income attributable to the New Oriental fourth quarter was $13.2 million representing a 69.5% decrease from the same period of prior fiscal year.

Basic diluted earnings per ADS attributable to New Oriental were $0.08 respectively. Non-GAAP net income attributable to New Oriental for the quarter was $48.5 million representing a 49% decrease from the same period prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.31 and $0.30 respectively.

Net margin for the quarter was 1.7% compared to 5.1% in same period prior fiscal year. Non-GAAP net margin for the quarter was 6.1% compared to 11.3% in the same period prior fiscal year. Net operating cash flow for the fourth quarter of 2020 was approximately $108.5 million.

Capital expenditure for the quarter were $89.7 million, which were primarily attributable to the opening of 73 facilities and renovations at existing learning centers. Turning to a balance sheet, as of May 31, 2020 New Oriental had cash and cash equivalents of $915.1 million, compared to $1,414.2 million as of May 31, 2019.

In addition, the company had $284.8 million in term deposits, and $2,315.3 million in short-term investments.

New Oriental’s deferred revenue balance which is cash collected from the registered students for courses and recognized proportionally as revenue as the instructional delivers, at the end of the fourth quarter of fiscal year 2020 was $1,324.4 million, an increase of 1.8% from $1301.1 million at the end of the fourth quarter prior fiscal year.

We are now approaching to new fiscal year. Despite the continued challenge from the COVID-19 pandemic, I expect to be remain - we are still optimistic towards the Company's business in the long run, and we will continue to focus on following key areas.

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

We believe it will prepare us to further take more market share from other players post COVID, as we believes some small players without strong financial position and online class capability may not be able to sustain its business during the hard period. And we expect the industry will undergo a wave of market consolidation upon the pandemic phase.

The fact that we are major player with the strong financial capacity/offline facility enable us to further strengthen our merchant leading position in the penetration.

Second, we will continue to leverage our investments into digital technologies as we introduce our OMO system in more offline - training and test offerings, especially for our K-12 business. The usage of online tools and contents in our OMO systems for all business clients while the whole network will be enhanced.

To uplift the whole learn more teaching experience, we will play more efforts in developing the best teaching content course and also developing more advanced training programs to our teachers.

For some who might not be very familiar with our OMO business model, allow me to spare a few minutes, now to elaborate the four key OMO strategy we have in place. Number one, the online system is mainly used to supplement the offline classes we have in a system city with a hybrid format.

Number two for the CDs, we have partners, but may have enough learning centers to cater all our customers, our OMO system enable us to reach out to more students and customers. Number three, for some providences problems where we don’t have centers in all of the cities, our OMO system allow to reach us to students [indiscernible] CDs. Number four.

We offer a series of complimentary low cost experimental online classes for people and students to experience our classes, hoping to attract new customers. Here I have to highlight that all of this OMO products are supported by our offline classes. They supplement each other.

As a teaching contents, courseware materials as well our teachers and technology development are originated from our existing offline centers and resources.

We believe that the above mentioned OMO initiatives will be one of our growth engines to increase our customer acquisition post COVID and enabling us to capture the markets consolidation opportunity.

This advanced new business model will also accelerate our margin recovery in the rest of the year and the further expand our long-term or allows for margin targets.

Furthermore we will continuously invest in and implement new initiatives including a content, development teachers we put in training, R&D as well as sales marketing in K-12 after school tutoring are on koolearn.com.

Our top priority will remain as the focus on controlling costs and reducing expenditures across the company to minimize the negative impact of some pandemic on our bottom line. We believe we will resume the expansion of overall non GAAP operating margin year-over-year as COVID-19 subsides.

Here I would like to stress that we have great confidence in the fundamentals of our business, which we will believe will continue to remain strong.

Although we are facing various short-term negative impact on the pandemic and we have been increasingly in different strategy, we remain optimistic of brighter prospective of our business and we believe our investments now will bring up full return in the long run.

We are certain that with New Oriental leading brands, superior education product and system and the best teachers resources we have the ability to take further market share in China’s huge after school children market and deliver long-term value for our customers and shareholders.

Looking on a near-term and our expectations for the next quarter, we have factored in various considerations, including the one month delay of national [indiscernible] the delayed enrollments for summer and all the classes this year in many major cities and the shortening of the summer holiday in many major cities have one to two weeks.

Summer courses into July and August will be turned down to three to four terms only, which we typically have four to five terms probably. As well as of the recent emergence of the COVID-19 cases in cities such as Beijing have resumed some of the public schools and children's schools in these areas.

Inevitably all these and personal situation have costs the lower ability of our business and performance data for the summer quarter, hence we take more conservative approach to make our forecast for Q1 2021.

We expect total revenue to be in the range of $911.2 million to $953.5 million representing a year-over-year decline in the range of 15% to 11% in dollar terms. Taking into consideration of the impact of potential change in exchange rate between RMB and U.S.

dollar, the projected a revenue decline rates is expected to be in the range of 14% to 15% for the first quarter of fiscal year 2021. To provide a breakdown of the effects the top rank was for key business line. K-12 all subjects after school children business is expect to grow 3% to 7%.

Overseas test prep program is expected to decline 55% to 51% and overseas study consulting business is expect to decline 7% to 11% year-over-year in RMB terms.

With respect to overseas related business, including overseas test prep and consulting service will continue to decline due to the pandemic around the globe caused by the cancellation of the oversea exams and suspension of the overseas schools and the restriction on travel.

The net impact on those overseas related business will affect the entire education the overseas test preps industry in China not only New Oriental and may last over the coming one or two quarters.

With that said, in contrast present effective control of the pandemic situation have shed a more positive light on our business domestically, we are pleased to see that we have gradually resumed our offline operations in over 90% of the cities that we are in, and vast majority students in this cities have successfully migrated back to our learning centers from OMO online classes.

We have also seen significant pick up in the year-over-year turnovers during enrollment and test proceeds from students in July this month for the summer quarter, which is positive signs of recovery.

To conclude, we are now teaching all kinds of operational actions to boost the enrollments and classroom utilization whole summer and autumn semester and speed up recovery of business after the resumption of the schools and learning centers.

We are confident that demand for after school children business will pick up gradually in the summer and in the rest of the fiscal year. I must mention that these expectations reflect New Oriental’s current and preliminary view which is subject to change. At this point, I will take your questions. Operator, please open the call. Thank you..

Thank you so much. The question-and-answer session of this conference call will start in a moment. [Operator instructions] And our first question comes from the line of Binnie Wong from HSBC. Binnie, your line is now open..

Hi, good evening Stephen and Sisi, thank you for taking my questions. So in terms of the revenue guidance, the outlook, in terms of [indiscernible] right, can you help us understand the assumptions behind and then also, I think there'll be a talk about the recovery is really ongoing.

And I think there is a very interesting point as Stephen mentioned since like last quarter call that about the consolidation of the market.

So just want to see if there is any numbers that you can quantify as far on the industry side, say I don't know that number of centers, or number of institution or something right along the line to help us better understand with how much the consolidation has been progressing? Thank you so much..

Thank you, Binnie. Yes due to the lack of visibility of the performance data for the summer quarter, yes we are using the most conservative way to make the full capital for Q1. I think there are several key reasons. Number one, we have the fortune like the one to two weeks in summer holiday.

Typically, we have we had a five terms of the summer courses within the summer vacation, one summer vacation, but now we only have the 3.5 terms. And also you know the [indiscernible] we are delayed by one month. So that means the moment of window for the summer had to be postponed by at least one month.

And number two, the reasons - the emergency of the COVID-19 in Beijing and Hubei province, last week in [indiscernible] And I think the impact again, but you know I must mention that, the Beijing in the summer I think is really hard for us to make the new - to acquire the new student enrollment for the summer.

So if you take off the Beijing, the impacts, all the other schools the K-12 business will grow by 11%.So yes. And the last one overseas has about religiousness. All the exams are canceled and the students cannot travel and the volatile China units - the two countries relationships. So we will just wait.

And, yes, there is so many reasons, but I think we are confident about the future. Because you know so far 90% of cities - most of the students of the 90 cities were in, went back to our learning centers.

And we do believe we can take more market share from the consolidation, potentially, because yes, we have seen a lot of small players disappear from the market. I don't have the numbers. But yes, it is what it is, and that’s why we opened 26% expansion last year in fiscal year 2020, and we plan to open 20% to 25% of new expansion in fiscal year 2021.

So I think this shows us the confidence to take more market share from the small players..

Yes. And I also wanted to add that the successful results by far for the summer promotion also, you indicated the potential opportunity to keep taking market share from smaller players that are facing a much bigger challenges during the pandemic period than us.

You know, our summer promotion increased - total volume increased by far is already 20% increase year-over-year. And it is very likely that, when we finished the whole summer, the total enrollments will be even increased higher than that. So these are all indicators for the potential opportunity for a market consolidation for us..

Thank you Sisi and Stephen. Just a quick follow-up. In terms of summer promotion course policies, help us compare to last year as well..

Yes. You know we have got 986,000 enrollment be mid July, and it is close to one million, so that means we got 20% year-over-year growth and we keep the same price, RMB400 and we believe the retention rate will be higher than last year. So, we do hope we can gather 5% higher of the retention rates after the summer promotion.

So we did a very good job and we do believe that those students we got from the summer promotion this year will stay with us for three or six more years..

Thank you. That is very helpful. And I think the situation is quiet understandable too. Thank you..

Thank you Binnie..

Thank you so much. [Operator Instructions] your next question comes from the line of Jin Yoon from Newstreet Research. Your line is now open..

Hey good morning and good evening everyone. Stephen and Sisi thanks for taking my question. I guess my question is related to your capacity expansion of 20% to 25%.

With that guidance that you gave some of these I guess segments that you are seeing under performance in things like overseas test perp, have you moved capacity from these underperforming, I guess, segments to your better performing segments already, and is the capacity expansion already counting for the shift in capacity that you are potentially seeing in your classrooms already going from less performing to more performing type of classrooms.

And so if, I guess the reason I asked that is that the cost of capacity expansion, if it is net of a lot of this I guess shift in capacity already, should we expect the actual capacity expand, the cost of it to be materially less than what we have seen in the past? Thanks..

Yes.

Some of the exception plan that 20% to 25% in fiscal year 2021, I actually did, as we did in last year, and we do have the plan to make a shift of some non-performing learning center to close down or to move it from over to K-12 business and with all the numbers in, I think we will keep the same guidance of the expansion plan by 20% to 25%, because we do believe post the COVID we do have a lot of the market potential to take more market share from the small player and to fill more students into the new learning centers.

And even after the COVID-19 happens in January and February after that, in the last three, four months we opened - 10% new learning centers. I think we are quite ready prepared for the new market consolidation opportunity.

Okay?.

Got it. Thanks Stephen..

Thank you Jin..

Thank you so much. And your next question comes from the line of Yuzhong Gao from CICC. Your line is open..

Hey Stephen thanks for the opportunity. So, I think I have a longer term question. So, imagine a situation given the sustained COVID-19 stress where maybe structurally a higher - a meaningful portion also your enrollment will be fund online or either your pure online form or a normal form.

How do you think this will impact your margin profile on long-term? Thank you..

Okay. Yes, I think it is great question. I think going forward, still we care both the online and he OMO. I think in terms of the revenue contribution OMO class will be continued to be our primary business model.

But you know we will learn a lot from the from the pandemic and I think we started to bear fruit from the heavy - in the last two to three years of the OMO model. And so, yes, as I said we are seeing the highest retention rates and the customer satisfaction and the student retention rates are higher than that similar to last year.

So, going forward, I think we will. We will do more and more on our OMO systems. And the key here, the OMO system, the OMO system that means we build the better and higher for the whole industry.

We have the most advanced OMO system and going forward I think the OMO system will bring out more student enrollments and it is - margins up by the new our new OMO model.

and the pure online Koolearn, Koolearn is just only 4% to 5% of our total revenue but in the last quarter we did very good summer promotion and also we started to spend more money especially on the R&D and on the teachers training something like that and we spend a little bit more money on marketing as well.

But we do believe we can take more market share from even from the very heavy competition among the big players. We do, we will have a good future for the Koolearn. So, we have two as the growth engine OMO and the Koolearn, the pure online platform..

Understood. Very helpful thank you..

Thank you..

Thank you so much. And your next question comes from the line of Mark Li from Citi. Mark, you m a y now ask your question..

Hi Stephen, thanks for your sharing. I want a answer for this quarter we have seen like in the P&L. The gross margin is impacted by a few factors you mentioned like online revenue, and then also coupled with a higher selling expenses, etcetera. You are paying the driver may I know in a short-term view, let's say in the next few quarters.

How would we think these drivers to move and how far like in the coming few years more medium term, like which part of the P&L you think you have better upside improvement? Thanks..

Yes, it is a hard time especially for last quarter for the Q4 and maybe in Q1 you saw our guidance. But we are doing two things at the same time. Number one, we are focusing on the cost control and reduce the expenditures across the company to minimize the impact of the COVID-19 so this is number one.

And number two, we do believe the revamped OMO model will accelerate our margin recovery in the rest of the year and further expand our margin profile going forward. So, as for the fiscal year 2021 the Q1 margin, we believe the margins decline in Q1 will be narrowed down, compared to Q4 last year compared to this quarter.

And we are confident that we will be able to deliver continued margin expansion after this pandemic is over. For fiscal year 2021, we expect the margin will be recovered in the second half of the year especially and long-term we would want to change our guidance, our main long-term margin guidance.

You know the non-GAAP operating margin in the long-term should be somewhere around 17%. But I must mention that with more and more OMO model into our learning centers. I do believe someday we will raise our main long-term margin guidance because of the new model. Thank you, Mark..

Okay. Thank you very much, Stephen..

Thank you so much. And your next question comes from the line of Felix Liu from UBS. Felix your line is now open..

Hi thank you management for taking my question. My question is the online side. Definitely. I'm very happy to see some positive progress there.

So could you maybe share with us how well the traffic from Koolearn pertain into summer? And also for the online, I noticed that OMO model, as well as your duty try is penetrating fairly successfully into larger cities.

So how would you balance that with the [indiscernible] brands, the Koolearn, similar from a person or similar business models? Thank you..

Yes, during last quarter Koolearn did large scale market promotions by offering the free, large size online classes. And I think we attract several times more traffic than that of last year. But I'm afraid, I think that you know I don’t think I can see something in detail or numbers in detail of the Koolearn because they haven’t got their result.

But what I can say, so we should believe you did a very good job in a quarter of the promotion, after the COVID-19. And we spent more money on the R&D and the teacher’s training side as well as some margins side.

But I do believe - I think I believe that our Koolearn will get the healthy the fact top end growth and we provided the better quality product to the students going forward..

Thank you, Stephen.

And also how would you balance the OMO with [indiscernible] going forward say from a longer term perspective?.

You know I think there is a two way we are using same time Koolearn is 100% online okay and the OMO - is offline resources to our online platform that help us to reach off more at once. But you know all the OMO class work content and even the teachers are regional - from our offline learning center and the schools.

And I know even in some cities, maybe there might be like internal competition in the same city by the Koolearn and our OMO model. But I think, the market is huge enough, so we care more about picking more market share from others. So I do believe the cannibalization between the two parts will be very minimal..

Okay alright. Thanks for giving me much further color. This is great thank you..

Thank you..

Thank you so much. And your next question comes from the line Tian Hou from T.H. Capital. Tian your line is now open..

Hi Stephen and Sisi, thank you for picking my questions.

Its regarding the OMO, OMO is a very effective tool to deliver the courses in the area hard to reach or deliver the courses where we have this pandemic, so when we mix them together so what is the result, what is the impact to the gross margin, I expect to be positive and what is the impact on that.

Also when students picking the class, online and offline they offer the price difference for the online and offline and also we are entering into a new fiscal year is the price going to be higher than last year. So that is the question. Thank you..

I think the OMO model will bring us more revenue compared to the traditional way, so this number one. Number two, I think the OMO model, I think they are going to see the students and parents love the new OMO model. They think that the new model is better than the traditional.

So it is drive the retention rate up and the learning center utilization was up. So to some extent we can, we can see some costume rentals, so it will drive the margin up going forward by the OMO model. Price, we try the same for the OMO classes or what the traditional offline classes. And, we will use the same class strategy going forward.

This quarter the price is little alert to cancel be at the coupons because of the one on one business [indiscernible] but you know going forward. I think the hourly rates, our ASP will be increased by 5% to 8% at normal. So we will not change our price strategy going forward it will be very stable..

Oaky. Thank you Stephen, yes..

Thank you..

Thank you so much. [Operator instructions] And your next question comes from the line of Alex Xie from Credit Suisse. Alex, your line is now open..

Hi Stephen Sisi for taking my questions. So, firstly, a very quick question. You showed the guidance for K-12 next quarter will be about 3% to 7% growth. Then what about the difference between POP Kids and U-Can and U-Can VIP in your assumptions for the next quarter.

And then also, secondly, if we assume the pandemic in Beijing and other cities were well controlled up before the start of the next academic year.

What is your expectations for the recovery pace of the K-12 business in the rest of the fiscal year, when do we expect things to get into normal growth rates in FY 2021?.

Alex, you know the revenue guidance in the [indiscernible] is that we are using the most conservative way approach to make the forecast because of the certainty.

And you know even within this week our enrollment window is still opening, so it is delayed by one to two months and the different business lines, the U-Can, I think in Q1 in most conservative way the revenue growth will be to 7% to 8%. And I think that VIP business in Q1 should be recovered, should be better than we did in Q4.

Because, I think that the parents will push their kids to study more to make the [ark] (Ph) for the for the last quarter. And the POP Kids, I think the revenue growth will be somewhere around 5% to 6%. What I'm saying is in RMB term.

And the recovery pace, I think 90% of our learning centers will be reopened in less than one or two months and I think the trend will be better and I believe will do better and better in [indiscernible] in fiscal year 2021.

And so I think yes, I just want to persuade your guide to be a little bit more patient, in the Q1 there are some like the some uncertainty like the Beijing or the Beijing or other province, but going forward, I believe our K-12 business will be recovered step-by-step, especially for the Q2, Q3 and Q4..

Yes, actually to share more details with you for the Q1 guidance, for K-12 because of the second run off nearly identified COVID-19 cases in Beijing, put more pressure on the recovery of Beijing city. So, the new customer acquisition in Beijing are facing bigger challenges than other cities that have already resumed the offline operation.

They just take out Beijing, all the other cities K-12. So look at our forecast in Q1, year-over-year growth trend are similar to Q4. So, I think the business already started to recover for the K-12 business. Yes..

Yes. And I do believe our Beijing school will reopen our learning centers in September. okay..

Sure. Thank you very helpful..

Thank you. Thank you very much..

Thank you so much. And your next question comes from the line of John Choi from Daiwa Capital Markets. John, your line is now open..

Hey, guys, thanks for taking my question. I have a quick question on your overseas business test prep consulting.

I know it is a very difficult time through the uncertainty and also pandemic going globally, but do you think this on the recent COVID situation will have impact like a more of a long-term fundamental impact on your overseas test prep courses? Obviously, next quarter you guys started a pretty conservative figure, but I'm just wondering for the remaining part of this year, and also in long-term how should we think about this business? Thank you..

Yes. The overseas test prep business, we saw the significant decline in Q4, and we will give the conservative guidance of the Q1. And because of the COVID-19 and cancellation of the exams, like TOEFL, GRE and IELTS and substantially the overseas schools in the future on travel.

And we have seen, in some cities like Beijing, and eight or nine cities, the IELTS and TOEFL test will be reopening this month. We know we read this news and we do hope our overseas test prep business can be recovered, stuff like that.

But it is a very hard time because of the volatile, the China and United States relationship between the two countries. So some students and parents choose to hold the time to make the final decision to study abroad or not. So, and but I do believe our business can be recovered step-by-step.

It depends on the students in China, mostly the exam exact time of the overseas college and universities will be open. And the all exams can be reopened you know something like that. And yes, but it is a hard time, we have to wait and see. Okay.

One more thing, the overseas test prep business, I think in the Q4, the revenue contribution of the overseas test preps was only 5.6%. And so we do believe because of the hard time the revenue contribution in the Q1 from the overseas test prep should below 10%. So the revenue contribution from the overseas test prep will be smaller and smaller.

Thank you..

Thank you so much. And your next question comes from the line of Sheng Zhong from Morgan Stanley. Your line is now open..

Hi, thank you for taking my question. Just one question about the K-12 growth. As you mentioned, the trends outside Beijing in Q1 is similar ways in Q4, but actually, the summer holiday is shortened and period is only about 70% of the normal summer holidays if they take this into account.

So can we say that in the summer holiday the K-12 growth during the summer season is actually is mid to high teens. Thank you..

Well to some extent in pro forma basis, because yes you are correct Zhong Sheng, you know we have the 30% time loss of this summer holiday and after the pro forma basis. I think the top line growth of the K-12 business, the actual the real top line growth of the K-12 business should be over 10%.

And, I do believe in the quarters after like Q2 and Q3, Q4. I do believe the K-12 business - the growth will go back to normal as we did in last year unless the bad things that come back again like the COVID-19 in some major cities..

Thank you very much..

Thank you Zhong Sheng..

Thank you so much. And your next question comes from the line of DS Kim from J.P. Morgan. Your line is now open..

Hi, thank you Stephen and Sisi for taking my question.

First one from on VIP only, I may have missed this all year, but can you remind us how much did the VIP revenue dropped in fourth quarter in dollar term or RMB unless implied in the guidance? And the follow-up from here would be that I’m just wondering why the segment is so bad into the summer still, is this just a function of high price and like people are reluctant to convert to online or spending less because less cash pools and what not or is there anything else more structural i.e., how much of this VIP drag is structured in your view versus temporary and cyclical setback? Thank you..

Yes. The U-Can VIP business in Q4 was down by 21% year-over-year.

I think it is easy to understand the parents and the kids towards they paid you a lot of money and we moved the offline class to online and some students choose to postpone their study plan by one-on-one business in Q4, but in the Q1 based on our forecast I think the one-on-one business recovered very quickly, especially in June, we have seen a lot of new student enrollment enroll our VIP classes to prepare for the [indiscernible].

So I do believe the VIP business will be recovered -..

Thank you. May I just follow-up how much of the - so when you say recovery are we thinking about year-over-year growth or still down but much less than what we thought..

Year-over-year growth. I don’t believe we will get the U-Can VIP business grow in the coming Q1, year-over-year..

Thank you very much. That answers my all question that downturn is more temporary and cyclical [indiscernible]. Thank you..

Thank you..

Thank you so much. And your next question comes from the line of Alex Liu from China Renaissance. Alex, your line is now open..

Thanks Sisi and Stephen. So, my first question is on the OMO strategy. Specifically, I noticed some small courses you fall semester are now 100% online. So, we obviously know [indiscernible] pure online business within its segments.

So I was just wondering, so, when we are talking about OMO, how should we think about the importance of pure online small class program within U-Can and POP Kids in the longer term? And a quick follow-up how should we think about the revenue growth across business segments in the fiscal years 2021? Thank you..

Yes you know pure online is - pure online platform, but OMO is the supplemental tool to our offline business. But yes you are right, in the last quarter in the Q4, we moved 100% of the offline class to online. But afterwards, 90% of our students went back to our offline learning centers.

And but we only - we will pull one more - we will keep some like the online elements going forward. And, and so yes, as I said both the pure online and the OMO site, all these debarks huge enough for both part of the potential growth. And as a fact, I think the internal competition will be very small, okay. And so yes, and so -..

Yes, so the revenue growth. I think in 2021 across business segments..

I think you know this time it is very special. And even for the Q1 guidance we have spent a lot of time and as I said we are still in the student enrollment window in this week and next week. So, I will put the question to the next quarter earnings call. But I do believe our business will be recovered step-by-step especially for the things in Q2.

And I think the old business will be recovered as normal okay..

Yes I understand. Thank you very much..

Thank you Alex..

Thank you so much. And your next question comes from the line of Tommy Wong from China Merchant Security. Tommy, your line is now open..

Okay, thank you. Hi Stephen and Sisi. I just have a general question. If you look at the overall market, we can see a lot of the online players like you know [indiscernible] GSX you know the share prices went really, really well. And when I look from your selling expenses, it seems has not really increased a lot.

I was kind of expecting to increase a little bit for the fourth quarter, but it actually hasn't increased. I'm kind of concerned are we not being aggressive enough and maybe if you can talk about your sales and marketing kind of breakdown between the OMO versus school learning, what is your strategy going forward.

I'm just kind of concerned that we are not being aggressive? Thank you..

Yes, I mean, we spend a little bit more money on the koolearn.com in last quarter, we did the first - I think with this first time the free course for the large size class in the spring semester, but as a fact in the last several - last earnings call, we don't spend squeezing money on margin side.

We would rather spend more money on the R&D and teachers training in some like the core product developments. But yes, I know there are some players you know spend a lot of money on the marketing side, but I think the market is huge enough. And we are special because we have the number one education brand name in China.

And I think the Koolearn can benefits from our New Oriental brand name to acquire the new student enrollment. This is very unique..

Okay. Thank you..

And also our Koolearn.com, we have TFUB the small size online broadcasting classes. These are very special. And I think we are one of the few players who can do these small size pure online classes. And now I think the business model does works and we testified in the last two to three years and it grows very fast and yes, that is it.

Is it clear?.

Thank you..

Yes. Thank you very much..

Thank you so much. We are now approaching the end of the conference call. I will now turn the call over to New Oriental’s CFO, Mr. 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..