Categories Consumer, Earnings Call Transcripts

New Oriental Education & Technology Group Inc. (NYSE: EDU) Q3 2020 Earnings Call Transcript

EDU Earnings Call - Final Transcript

New Oriental Education & Technology Group Inc. (EDU) Q3 2020 earnings call dated Apr. 21, 2020

Corporate Participants:

Sisi Zhao — Investor Relations

Zhihui Yang — Chief Financial Officer

Analysts:

Mark Li — Citi Research — Analyst

Binnie Wong — HSBC — Analyst

Tian. X. Hou — T.H. Capital, LLC — Analyst

Yuzhong Gao — CICC — Analyst

Lucy Yu — Bank of America Merrill Lynch — Analyst

Christine Cho — Goldman Sachs — Analyst

Alex Liu — China Renaissance Securities — Analyst

Felix Liu — UBS — Analyst

Sheng Zhong — Morgan Stanley — Analyst

John Choi — Daiwa Capital Markets — Analyst

Alex Xie — Credit Suisse (Hong Kong) Limited — Analyst

Presentation:

Operator

Good evening, and thank you for standing by for New Oriental’s FY 2020 Third Quarter Results Earnings Conference Call. [Operator Instructions] After management’s 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.

Sisi Zhao — Investor Relations

Thank you. Hello, everyone, and welcome to New Orientals third 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involved 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.

Zhihui Yang — Chief Financial Officer

Thank you, Sisi. Hello everyone, and thank you for joining us on the call. Before we kick off the call, I would like to firstly convey our deepest condolences to the people who have sadly passed away, and to their loved ones during this global health crisis. We would like to express our sincere gratitude to medical staff around the world for their dedication and commitment in this difficult time. Thank you. Let us all play our part and stay healthy, together we can overcome the challenge. In advance to the outbreak of the COVID-19, New Oriental has immediately transferred more than 1 million students to online program through New Oriental cloud-based classrooms. We have also actively assumed social responsibilities by donating RMB20 million in cash to Hubei province and providing fully small sized offline courses to the children of nearly 20,000 medical staffs, as well as providing the public with tens of millions of free high quality educational resources that can benefit over 10 million people including students of all levels, parents, teachers and entrepreneurs.

Back to our business. We are very pleased to report a set of encouraging financial results in third fiscal quarter of this year, delivering a top line growth and continued operating margin expansion — and continued operating margin expansion. Besides COVID-19 pandemic posting negative impact to all those industries across globe. Total revenue growth was $923.2 million, representing a growth of 15.9%. In dollar terms, we were 18.7% if computed in RMB.

Net revenues from educational programs and services for the third fiscal quarter were $845.7 million, representing a 16.3% increase year-over-year. The growth was mainly driven by K-12 after-school tutoring courses, which achieved year-over-year revenue growth of approximately 24% in dollar terms or 27% if compared to the RMB. We continue to be guided by our optimized market strategy in this quarter and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability.

This quarter, we added another 110 learning centers in existing cities, opened two new training schools in the city of Zhangjiagang and Nanjing. Altogether, this increased the total square meters of classroom area by approximately 30% year-over-year, 11% quarter-over-quarter, and 21% compared with the end of the fiscal year 2019. Total student enrollments in academic subjects tutoring and test prep courses in the third fiscal quarter of 2020 increased by 2.3% year-over-year to approximately 1,606,100. The lower than normal increase in the number of student enrollments is primarily due to a bigger portion of the enrollment for the winter semester falling into the second fiscal quarter because of the earlier timing of Chinese New Year this year compared with last year, as well as the higher than normal cancellation for winter classes.

The outbreak of COVID-19 has also caused challenges on acquiring the new customers in the second half of the quarter, while the enrollments for classes in Q4 and summer classes have also been delayed. At the same time, we continue to our efforts by increasing and maintaining our online-offline OMO standardized classroom teaching system, especially during the outbreak of COVID-19. All the offline classes have been transited smoothly to online classes since the beginning of February, and we’re very encouraged to have received the positive feedback from our customers. We also continue to make strategic investments into our new initiatives in K-12 tutoring, our pure online education platform, Koolearn.com to leverage our advanced teaching resources in lower-tier cities and mostly remote areas.

Following last two quarters’ strong bottom-line performance, we once again achieved year-over-year operating margin expansion in this quarter. During the quarter, we recorded a non-GAAP operating income of $134.8 million, compared to $113.8 million in the same period of last year. Non-GAAP operating margin rose by 13 basis points year-over-year to 14.6%, and non-GAAP net margin rose by 240 basis point year-over-year to 16.1%. The continued operating margin expansion is mainly driven by better leverage in classroom rental and related operating expenses, just as we consistently improved utilization of the facilities before the outbreak of the COVID-19.

The nice margin expansion is also due to [indecipherable] exemption approval by the government during the pandemic, and the net loss of Koolearn subsidiary undertaken by non-controlling interest to shareholders. We’re confident that we will able to deliver continued margin expansion after the pandemic is over, and generate sustainable long-term value for our customers and shareholders. For program blended ASP, which is cash revenue divided by total student enrollment increased by about 2.7% year-over-year in dollar terms. As for hourly- blended ASP, which is cash revenue divided by total teaching hours increased by approximately 3% year-over-year in RMB terms.

To provide the breakdown of the hourly-blended ASP, please note that U-Can middle school, high school program increased by 4%, POP Kids increased by 6%, and Overseas test prep program increased by 7%, all year-over-year in RMB terms. Comparing with our normal price increase of 5% to 8%, this quarter’s hourly-blended ASPs increased towards 2% to 3% lower than normal level, mainly because of the discount we provided to the customers to support the migration from offline class to online, as well as a bigger slowdown of the VIP personalized classroom business. At the same time to show gratitude for the medical staff, we traveled to Wuhan to offer help. We offered special complementary classes to their children. This has inevitably contributed a slight decrease of the ASP.

Now let’s move on to the third quarter performance across our individual business lines. As mentioned earlier, our key revenue drivers K-12 all-subjects after-school tutoring business achieved year-over-year revenue growth of 24% in dollar term, or 27% in RMB terms. Breaking down, the U-Can middle school, high school all-subjects after-school tutoring business reported a revenue increase of approximately 23% in dollar term or 26% in RMB terms for the quarter. Student enrollments grew approximately 23% year-over-year for the quarter.

Our POP Kids program delivered outstanding results, with the revenue up by about 26% in dollar terms or 29% in RMB terms for the quarter. The enrollment decreased by 23% for the quarter, the decline due to the bigger portion of the enrollment for the winter semester falling into the second typical quarter because of the earlier timing of the Chinese New Year this year compared with last year. Overseas test prep business recorded revenue decrease of 14% in dollar terms or 12% in RMB terms for the quarter. The consulting business recorded revenue growth of about 27% in dollar terms or 30% in RMB terms year-over-year for the quarter.

Finally VIP Personalized classes business recorded revenue growth of about 10% year-over-year in dollar terms or 13% in RMB terms year-over-year for the quarter. Next, I will provide some updates on progress we’re making with our optimized market strategy. Beginning with our offline business this quarter, as mentioned earlier, we added 110 learning centers in existing cities, opened two new training schools, altogether this increased to total square meters of classroom area by approximately 30% year-over-year, 11% quarter-on-quarter and 21% compared with the end of the fiscal year 2019.

The expansion in our offline education network have also made sure that we are fully prepared for when the pandemic is over and our service resume would be the strong presence across the different Chinese cities. The dual-teacher class model has been introduced to the POP Kids Koolearn program in 48 existing cities, for U-Can program in 28 existing cities and for both POP Kids and U-Can K-12 business in seven new cities.

The initiative supported the increased market penetration in both markets we have tapped into. We also saw improved customer retention and scalability of this new model. With this program results, we will continue this strategy in the rest of the year.

On the digital technology front, we invested $40 million in this quarter to improve and maintain our OMO education ecosystem and as the outbreak of the COVID-19 has highlighted the importance of the demand of online education, the investments also supported the migration of our online classes to small sized online — offline classes to small sized online live broadcasting classes during this pandemic. Apart from the OMO infrastructure, we have allocated the part of the resources for teacher training to ensure that they are all well equipped to be managing the online classes.

As a result, the OMO ecosystem management to tuition including the multiple impacts for our students and operation cost by the pandemic, most of the investments were reported under G&A expenses. Furthermore, we also made stable progress in the pure online Koolearn.com business line and other supplementary online education products, which is experiencing growth — growing market demand. More resources are invested into executing new initiatives in online K-12 after-school tutoring business in fiscal year 2020.

The investments includes constant development, teaching, recruiting, training, sales, marketing, R&D and other necessary cost and expenses to drive the growth for the new pure online programs. With these programs, we are able to reach out more students in low-tier cities in an interactive and scalable manner. We believe this will help Koolearn.com to gain new market share in the online education space and drive top line growth.

In addition, during COVID-19 pandemic Koolearn saw large-scale market promotion by offering three large sites online live broadcasting classes to the public and attracted several times more traffic than normal times. We captured the new market opportunity, Koolearn also added a meaningful amount of the customer representative and marketing staff to support the new initiative in K-12 children. This move have comfortably rated outstanding on the market brand, but we believe these are necessary and a tangible measure as they found ourselves here in this unusual pandemic situation.

Now let me walk you through the other key financial details for the third quarter. Operating costs and expenses for the quarter were $806.0 million, representing a 15.0% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which excludes share-based compensation expenses were $788.4 million, representing a 15.4% increase year-over-year. Cost of revenue increased by 18.1% year-over-year to $398.6 million primarily due to increases in teachers’ compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation.

Selling and marketing expenses increased by 35.2% year-over-year, to $118.2 million primarily due to a significant increase of the promotion expenses and number of the customer service representatives and marketing staff for the new initiatives in K-12 tutoring on Koolearn.com. General and administrative expenses for the quarter increased by 4.8% year-over-year to $289.1 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses were $273.3 million representing a 5.9% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses decreased by 2.4% to $17.5 million in the third fiscal quarter of 2020.

Operating income was $117.3 million representing a 22.4% increase year-over-year. Non-GAAP income from operations for the quarter was $134.8 million, representing an 18.5% increase year-over-year. Operating margin for the quarter was 12.7% compared to 12.0% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter was 14.6% compared to 14.3% in the same period of prior fiscal year.

Net income attributable to New Oriental for the quarter was $137.7 million representing a 41.4% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.87 and $0.86 respectively. Non-GAAP net income attributable to New Oriental for the quarter was $148.5 million representing a 36.4% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.94 and $0.93 respectively. Net margin for the quarter were 14.9% compared to 12.2% in the same period of prior fiscal year. Non-GAAP net margin for the quarter was 16.1% compared to 13.7% in the same period of prior fiscal year.

Net operating cash flow for the third quarter of 2020 was approximately $39.7 million. Capital expenditures for the quarter were $103.2 million, which were primarily attributable to opening of 127 facilities and renovations at existing learning centers. Turning to the balance sheet, as of February 29, 2020, New Oriental had cash and cash equivalents of $1,057.1 million, as compared to $1,414.2 million as of May 31, 2019. In addition, the Company had $269.2 million in term deposits, and $2,241.0 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 instructions are delivered, at the end of the third quarter of fiscal year 2020 was $1,375.0 million, an increase of 15.4% as compared to $1,191.8 million at the end of the third quarter of fiscal year 2019. Looking ahead to the fourth quarter of this fiscal year, despite the continuing challenges from the COVID-19 pandemic, we’re still optimistic towards the Company’s business and will continue to focus on the following PLS.

First, we will continue to expand our offline business. We still aim to add around 20% to 25% capacity including new learning centers and expanding classroom area of some existing learning centers for K-12 business in existing cities. We believe our capacity expansion will support us to hold more students in our facilities in the coming summer which will more likely to be shortened by one or two weeks due to the delayed start up in the second semester of all public schools in China, combating the pandemic.

More importantly, it will prepare us to further make — to further take market share from our other players after COVID-19 subside as some small players without strong financial position and online possibility may not be able to sustain their business during the period, and will be forced to cease operations. We expect the industry will undergo a wave of market consolidation upon the pandemic fade. The fact that we are a major player with strong financial capacity and fresh offline facilities allow us to build and strengthen our market leading position and penetration. In addition, we will continue throughout our model to number of the existing cities and certain provinces for the whole year.

Second, we will continue to leverage our investments into [indecipherable] and reintroduce of our OMO system to more offline language training and test offerings especially to our K-12 business and overseas test prep business. We will grow then the usage of the online tools and content on OMO system for our business lines throughout the whole network. We will continue as we developing the past the teaching content and courseware to get into online offline education methods. At the same time, we will provide more advanced training programs to our teachers and enhance their online offline integrated teaching skills. We will continue to make lesson, and we would believe the total spending in absolute dollar terms typically in 2020 will be compared to the — compared with the previous fiscal year.

Furthermore, we will continue to invest in and execute new initiatives including product and content development, teachers’ recruiting, training, R&D as well as sales and marketing in pure online K-12 after-school tutoring business on our Koolearn.com platform. As mentioned earlier, during the COVID-19 pandemic, Koolearn encountered several times more topics than normal times, offering free online level casting process for public during winter and spring season. Koolearn also added a meaningful amount of the customer service representatives and tutors. This near-term investments enhance our competitive advantage to capture the new online education market activity.

Third, our top priority will remain as the focus on controlling costs and we do see the expenditures across the company to minimize the negative impact from COVID-19 on our bottom line. Although we expect the margin decline year-over-year in the fourth quarter of fiscal year 2020, we can still maintain non-GAAP operating margin for the full year of fiscal year 2020 at a similar level as last year and achieve expansion of non-GAAP net margin for the full year of 2020 compared to the year-over-year decline in the last two fiscal years.

Finally, the recent RMB depreciation against the US dollars cost impact on learning in dollar terms in the third quarter of fiscal year 2020. Finally, I would like to provide, we have great confidence in the fundamentals of our business. Although we are seeing the impact from the pandemic of the near-term, we remain optimistic of the brighter from that of our business over the long run. We’re certain that with the New Oriental leading brand to pure education products and system and best future resources, we’ll keep market share with the leading China after-school tutoring market and deliver long-term value for our shareholders and customers.

Looking at the near term and our expectation for the next quarter, we expect the total revenue to be in the range of $774 million to $806.2 million, representing year-over-year decline in the range of 8% to 4%, it’s now taking into the consideration of the impact, the potential change in the exchange rates with the RMB and the US dollars, and projected decline of revenue is expected to be in the range of 4% to 0% for the fourth quarter of fiscal year 2020.

To provide a breakdown of the expected top line growth for 4Q business lines, K-12 all-subjects after-school tutoring business is expected to grow around 10% to 11% or 18% to 10% excluding the VIP one-to-one business. Overseas test prep program is expected to decline around 45% and overseas study consulting business is expected to grow 12% to 13% all year-over-year in RMB terms. We expect the significant decline of the overseas test prep business and the slowdown of the Overseas study consulting business is due to the outbreak of the COVID-19 pandemic around the globe starting from March, with the cancellation of the Overseas exams, suspension of overseas schools and the restriction on travel.

With that the negative impact over this Overseas business will affect the entire education industry in China not only New Oriental and we will love to all becoming one to two quarters. That said, in contrast China’s effective control of the pandemic situation have set a more positive light on our business domestically. We’re optimistic over the trend of the K-12 after-school tutoring business abstracted from the public new study 30 provincial level government that is 88% of the total after the public school redemption plan. We are confident that demand for the after-school tutoring business will pick up after the exemption of the school and the short term impact from the school changes and of course in the summer holiday will be manageable.

The estimated exchange rates used to calculate expected revenue for the fourth quarter of 2020 is 7.07. This historical exchange rate is used to calculate the revenue for fourth quarter of the fiscal year 2019 was 6.76. I must mention that this capacity expansion reflect New Oriental’s preliminary deals, which is subject to, especially in the pandemic period. At this point, I will take some questions. Operator, please open the call for this. Thank you.

Questions and Answers:

Operator

The question-and-answer session of this conference call will start in a moment. [Operator Instructions] Your first question comes from the line of Mark Li from Citigroup. Please ask your question.

Mark Li — Citi Research — Analyst

Hi. Can you hear me?

Zhihui Yang — Chief Financial Officer

Yes Mark, please go ahead.

Mark Li — Citi Research — Analyst

Hi, thanks for the explanation. I want to ask, I noticed for our overseas and test prep the next quarters the pressure is a pretty big issue with us, what was your estimate for the short term or the one-off costs impact for the Q4? And I see for total is that, you are still are not offering China to have I’d say home. So what do you think that impact would last for the overseas and test prep and consulting business? Thank you.

Zhihui Yang — Chief Financial Officer

Hey, thanks Mark. Yeah, yeah, the overseas and test prep business recorded revenue decline of about 15% in dollar terms this quarter, actually it’s 12% in RMB terms year-over-year decline in Q3. And the Q4, I think the pandemic threat is in a lot of countries, in the Western countries now. So it will impact our overseas and test prep business in Q4. So the guidance in the topline growth of the overseas and test prep business increased by about 45% year-over-year in Q4, but we believe the Q4 will be work the time and upon the pandemic phase, I think the situation will be better in the fiscal year 2021. And so, this is my flat expectation for the overseas and test prep.

And overseas consulting business will be very good, will be very good in Q3. And also we have impact from the Q4, but it is still a guide to the top line growth in the overseas consulting business grew by 12% in RMB terms in Q4. And yeah, that’s it. I think the reason is that — that we need to understand because you know we have seen the cancellation of the overseas example like TOEFL, IELTS, and GRE of the overseas schools and there is fixing on the travel. So yeah, we hope the pandemic can pass — and pass very quickly, so we can make recovery of our overseas related business. Mark.

Mark Li — Citi Research — Analyst

Thank you, Stephen. May I quickly follow-up, do you have any rough estimate that what percent of your overseas test prep student like a short-term or what percent is a longer-term student?

Zhihui Yang — Chief Financial Officer

Well, I think for the short term, I think in the Q4 I think we will have 35% to 40% at the moment. That gives us floor to our outlook netbacks. Long term, it’s really hard for us to make a prediction, but I think that once the epidemic disappears, I think most of the students will still choose to study abroad after the epidemic is over.

Mark Li — Citi Research — Analyst

Thank you, Stephen.

Zhihui Yang — Chief Financial Officer

Okay. Thanks, Mark.

Operator

Your next question comes from the line of [indecipherable] from HSBC. Please ask your question.

Binnie Wong — HSBC — Analyst

Hi, sorry. This is Binnie Wong here. Thank you for taking my questions. And Sisi, Stephen do you hear me well here?

Zhihui Yang — Chief Financial Officer

Yes, we’re clear. Thank you. Yeah, go ahead, Binnie.

Binnie Wong — HSBC — Analyst

Thank you. Thank you, okay, good. Okay. So as you heard, I just wanted to follow-up here. I think you mentioned a very good point about the consolidation angle. So how should we see about in terms of during this like the crisis that we are seeing, right. Are there any actually like closure of some of the smaller ones and are they mostly the online ones or the offline ones? And so for us to think about like longer term, how we should see our market share gains from here?

And then a second question here is also that I think you talk about that in terms of our online growth is of course doing very well, given the current situation. And is it also that if we are thinking about our user acquisition, right because in the past, our equipment for the online students has also been the line on some of our local resources, would that make our strategy also modified a bit, so that that we can accommodate because this situation might still prolong for some time. And having said that, do you think we are seeing the trough already with second quarter growing a single-digit growth. Do you think this is the trough, we should expect. Thank you.

Zhihui Yang — Chief Financial Officer

Okay. Yeah, let me answer your first question about the market consolidation. Yeah. As the disease subside gradually, I think there will be a potential opportunity for the of the market consolidation especially for the big players. We have seen a lot of small players, they face severe impacts that may cause some of them to shutdown their business. So New Oriental as one of the leading players in the market. So we are well prepared to take them market share after the epidemic is over. Yeah, that’s why we still opened the new learning centers in new cities and existing cities.

Also, in Q3 we successfully moved all the offline students to online late of February. So I think [indecipherable]. So that’s why I said, it’s a great opportunity for the big, bigger players like the New Oriental. And the business, yeah the pure online Koolearn, yes we depend a little bit more money in Q3 and a little bit more in Q4 in the current quarter to acquire new enrollment because you know the epidemic, when the epidemic calms, I think it’s a good opportunity for the big online player. So yeah, I think guys will anyway, we’ve got a lot of enrollment during the pandemic. And I think you know the money we have is worthy and sensible. I mean, even though we spend a lot the Q3, but we still got the margin expansion for the overall of the company.

So, yeah, that’s it. So I think going forward, I think, yeah, the situation will be benefit us the big player like us. Yeah. Thank you.

Binnie Wong — HSBC — Analyst

Okay. And just a quick follow-of-year Stephen, if I may, in terms of the summer promotion campaign upcoming in terms of the students, new students acquisition. How do you see your summer promotion campaign plan for this year will be. And then do you think into May quarter the single-digit growth should be the trough, we have seen the worst will be should be over.

Zhihui Yang — Chief Financial Officer

Yeah, I think yeah, this is a great question. Last year, we had a very successful summer promotion, I remember we got 820,000 summer promotion student enrollment, and the retention rates was 59% last year in the autumn. And this year, I think probably we will use the three following strategies. Number one, we care more about the retention rate, okay. And number two, we will use the more and more of our new model with the summer promotion campaign because you know because of the forehand of the summer vacation period. So we will use one or two weeks. So we will provide a more and more offline more for the summer promotion campaign.

And number 3, the last one we will revise the price again as we did in last year. I think that will bring us the more valuable customer for the more larger. So, I think is still a good way to take more market share from the market, especially from the small player by the summer promotion. So and the good news for us, as you know we started, we have already started to see some of the promotion enrollment window for the great report and students and then so far the numbers are good, okay.

Binnie Wong — HSBC — Analyst

Okay. Okay, thank you. Thank you.

Zhihui Yang — Chief Financial Officer

Okay.

Binnie Wong — HSBC — Analyst

Thank you, Steve.

Zhihui Yang — Chief Financial Officer

Thank you, Binnie.

Operator

Your next question comes from the line of [indecipherable] T.H Capital. Please ask your question.

Tian. X. Hou — T.H. Capital, LLC — Analyst

Yeah, this is Tian. So the question is regarding the expansion plan. So I can envision is pretty tough given the whole nation still very cautious on any offline gathering and a lot of place have not yet 100% opening yet. So how do you carry out the expansion plan. So that is the first question. Second question is related to, I do see a lot of you know online education guys it puts a lot of money in advertising system. So what is our defense plan in that. Thank you, Stephen.

Zhihui Yang — Chief Financial Officer

Okay. Yeah after the expansion plan yeah. We added a net of 112 learning centers in this quarter. Most of the learning centers we put out in this quarter happened in the first two months in December last year and January. And the total cost we have there increased by 21% for the split between quarters comparing with the end of the last fiscal year time. So I think it’s in line with our expansion plan. And we believe the expansion will support us to take more students from the market essentially from the same players and in the coming summer.

In the summer I think which will then likely to be shortened by one or two weeks. So that the more learning from that we have, so we can provide more heat to the kick in the coming summer and the time after work. And one more thing as you, I think we feel confident about our business going forward. So we want to change our expansion plan going forward. I think the epidemic will probably maybe next quarter. So, next year we will still extend the capacity by 20% to 25%. So we want to change our guidance of the expense plan like-to-year.

And your second question is about the online spending. Yeah, we did the large-scale the promotion for the winter and the spring courses for the large size class K-12 business in our Koolearn.com. We feel that — I think once the pandemic happens in China, we saw the growth opportunities. So we were confident that we can provide the best that is in the competition. So I don’t think of the spending your money in discounted way from us. I mean on the contrary, I think it’s a good opportunity for us to take more market share from the players. So and that’s — thank you, Tian.

Tian. X. Hou — T.H. Capital, LLC — Analyst

Thank you. Thank you.

Zhihui Yang — Chief Financial Officer

Okay.

Operator

[Operator Instructions] Your next question comes from the line of Yuzhong Gao from CICC. Please ask your question.

Yuzhong Gao — CICC — Analyst

Okay, thanks for the opportunity. I think my question is focused on actively longer term. So obviously given the units coming offline student to the online small class model, I’m wondering if you are thinking about keeping this model and in other words, in the future and talk about capacity expansion, we actually may not need that much center versus before the outbreak, and the capacity expansion in terms it happens next year should we think that normal growth may probably outgrow your capacity expansion piece. Thanks.

Zhihui Yang — Chief Financial Officer

Yeah. Because of the lockdown and travel restrictions in the two to three months, we successfully moved the whole the offline class to online to all the students. And the oral briefly back from the customers are very positive, has been very positive. And however I think going forward offline classes will continue to be our primary business model. You know in the last two, three months the situation was very special, we give the kids and their parents they can’t go outside their home and the parents can sit with their kids, and so as the pandemic over I think the most of the students will choose the offline classes. We made a survey in the big cities and the surveys have told us that 95% students parents preferred to going back to learning centers and [indecipherable] stabilize and but I think for the pure online players like the Koolearn, the other key players is that, it’s a great opportunity as well because the market is so huge for both the online and the offline.

So I think going forward the briefly as we’ll take more and more small market share from the small players this is a key point and so we — going forward, we will use the full rate the development from the online and the OMO. This is our strategy going forward. Okay.

Yuzhong Gao — CICC — Analyst

Okay, very helpful. Yeah, very, very clear, very quick follow up. We hadn’t heard anything from the government, when we could resume offline teaching activities.

Zhihui Yang — Chief Financial Officer

I’m sorry, I can’t hear you very clear.

Yuzhong Gao — CICC — Analyst

We haven’t heard anything from the government on when could we resume offline teaching activities?

Zhihui Yang — Chief Financial Officer

Sisi, can you hear? Is Zhong very clear?

Sisi Zhao — Investor Relations

No, Zhong your line is not very clear. Can you say that again?

Zhihui Yang — Chief Financial Officer

I suggest you drop out the line for us. Okay. And back to the queue and ask again.

Operator

We will take next one.

Zhihui Yang — Chief Financial Officer

Okay. Okay. I’m sorry.

Operator

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

Lucy Yu — Bank of America Merrill Lynch — Analyst

Hi. Stephen. Thanks for taking my question. My question is on the fourth quarter revenue guidance for K-12. You measure it will grow at like 10% to 11%. So that’s a moderation from the previous quarter. Could we know your back end assumption regarding this moderation? Was this due to pricing or lower enrollments? If it’s enrollment related why is that, is it just because the new enrollment has not been done very well after the Chinese New Year? Or are there some other reasons — reasons?

Zhihui Yang — Chief Financial Officer

Thank you. Okay. Yeah, Q4 will be little bit hard and Q4 businesses, the growth will be around the 10% to 11% and this is overall K-12 business grows. And if you take off the one to one business, the small size class, the Koolearn business, small size class business growth will be — growth will be 18% to 19% year-over-year, so that in, see one on one business. The one on one business will be down by 5% in Q4, you know, I think some students go like to pay the relatively expensive one on one class online.

And secondly, I think the retention is not a problem here in the — this quarter the retention rate is still getting higher compared to last quarter and the drop-off rate, it’s lower than it was in March and April. It’s lower than the February. So the problem that we are facing is the acquiring of enrollment. You know the China has been locked down for two to three months. So it’s really hard for us to acquire new enrollments for the second half of the Q4 and even for the summer. So, it’s a hard time. But the new for us is, we’re happy to see the schools in China. What I mean it’s a public schools in China are going to be open quite only in this month. We’re early May. I think we are optimistic towards our kids well before the summer classes. And yeah, that’s the, if I mentioned for the Q4, given our brand.

Lucy Yu — Bank of America Merrill Lynch — Analyst

Thanks, Stephen. When public school resume their offline activity some regions that they will utilize the Saturdays to makeup the missing classes. So, would that impact our class scheduling. So is this, in your 10% to 11% growth assumption already or not?

Zhihui Yang — Chief Financial Officer

We have been well prepared for the rescheduling of the public school the summer schedule, so we can move some classes from Saturday to panic we can use something we are working day even in time to provide classes, it will, you probably we can use the OMO model to provide classes.

Lucy Yu — Bank of America Merrill Lynch — Analyst

Yeah. So it has been baked into your 10% to 11% consumption already.

Zhihui Yang — Chief Financial Officer

Yeah, we would still make redundancy. We still need some time, but I think it’s not a big problem for us.

Lucy Yu — Bank of America Merrill Lynch — Analyst

Okay, thank you so much.

Zhihui Yang — Chief Financial Officer

Yeah, okay. Thank you, Lucy.

Operator

Your next question comes from the line of Christine Cho from Goldman Sachs. Please ask your question.

Christine Cho — Goldman Sachs — Analyst

Hi. Thank you, Stephen and Sisi. Just a quick question. So the, is there any impact from the one month delay in the Gaokao for your business and the magnitude or any color would be great. Thank you.

Zhihui Yang — Chief Financial Officer

Yeah. We know that the Gaokao will be delayed by one month, but I don’t think it will impact our business. On the contrary, I think the delay of the Gaokao will help our one on one business a little bit, because that we have one more month before the Gaokao, but there is a note back in no big negative impact to our old business. Okay.

Christine Cho — Goldman Sachs — Analyst

Okay, thank you.

Zhihui Yang — Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Alex Liu from China Renaissance. Please ask your question.

Alex Liu — China Renaissance Securities — Analyst

Thanks, Stephen, actually I have two quick questions both are online. I think we, first, we noticed the non-control increased a lot at this quarter. So obviously down was mainly related to Koolearn. So I was wondering how should we think about the margin implications in the next fiscal year from the online investment side. That’s the first question. And second question, given we have both quite aggressive growth targets for online online and offline and how should we done it, how should we think about the management’s — how does the management manage and benefit — balance the conflict of interest between online and offline growth? Thank you.

Zhihui Yang — Chief Financial Officer

Yes, I think the, Koolearn in large scale market promotion in Q3 and the March. Yeah, that’s in Q4. So we spend a little bit more money. And yes, you still the MI big number MI into Q2, Q3 numbers, so Q4, it will be a little bit bigger, but I think it’s in the fiscal year ’20, the numbers will be lower than this year, so it will be. And I think it’s mainly due to the pandemic, the opportunity for the online industry comes and so yeah, we’d be in a lot on the, on the full course of the super large classes. So that’s why we’re doing and we think it’s worthy and are less as well. And yeah, that’s it. The. yeah, I think the second question is about the cannibalization with the balance between the offline online. I think the cannibalization between the review and core for the online, offline will be minimal, will be minimal, because the market is huge.

So if you see the other hand we know lot of small size in the market with the from the market. So there is a lot of room for big player and I think the students will you can divided by into group. For the full can set it to online. Most of the student who take the of-line classes. So the market is huge for both sides Koolearn, and U-Can so the competition internally will be very minimal. And our first up for both sites in the course, take you more market share as much as we can going forward in the market. Okay, Alex.

Alex Liu — China Renaissance Securities — Analyst

Okay, just to clarify, so you were saying the next quarter online loss will be basically smaller compared to compared to February —

Zhihui Yang — Chief Financial Officer

So next quarter it will, yeah. That then the next quarter Q4 will loss of the quarter will be bigger. But that will be smaller. Yeah, typically Q1 will be smaller.

Alex Liu — China Renaissance Securities — Analyst

Okay, very clear. Thank you.

Zhihui Yang — Chief Financial Officer

Thank you, Alex.

Operator

Your next question comes from the line of Felix Liu from UBS. Please ask your question.

Felix Liu — UBS — Analyst

Hello, Stephen. Thank you very much for taking my question. My question is mostly on the summer. So firstly, we are probably seeing one to two weeks of shorter summer break. So could you let us know how that will impact our scheduling in terms of the K-12 segment? And also for the overseas test prep, I know, summer is typically the peak season in that segment. So what is our expectation in overseas test prep in summer, are exams being will come back in the summer, or could it be further delayed. Thank you.

Zhihui Yang — Chief Financial Officer

It’s really hard to, to make a forecast on the, it has, perhaps because almost look all these schools in our sales and K are still closed. So, and we do hope the pandemic is over as early as it can and so yeah, we know the Q1 will be a peak season for the overseas test prep that’s I think we will be prepared well internally, but it’s really hard for us to make a prediction for the back impacts from the pandemic of the overseas test prep in the coming summer. Okay. And yes, the business to summer. Yeah, I think, the summer vacation will be shortened by one or two weeks in the coming summer and this is — there were some of things we can do. Actually we have done, we have, we have done and number one. I think we will do one more and more model for an model, which we can, we could, you know, let’s say if we kind of the open the learning centers in the summer that we can provide more and more online course combined with the offline course, can say through some classroom couple areas and so this is, this is the first one.

And then secondly, you know we can make some the class scheduling or make the class size a little bit bigger compared to last year to acquire being more and more to enrollment in the coming summer. Okay. So I think it’s okay for the coming summer and optimistic for the business of the coming summer.

Felix Liu — UBS — Analyst

I see. Thank you. Thank you very much for your sharing the color and glad we are making good update the progress in summer for ASP. Thank you very much.

Zhihui Yang — Chief Financial Officer

Okay, thank you, Felix.

Operator

Your next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.

Sheng Zhong — Morgan Stanley — Analyst

Thank you for taking my questions. It’s about the margin outlook in the fourth quarter. So it looks like we have a lot of pressure in the fourth quarter on margins, given the full-year is flat. So I wonder if you can provide some color on the breakdown of your color pressure, according to the — including I think maybe you open more learning centers and overseas test prep is also through some pressure. So can you please give more color on the breakdown. And what we should expect for the, for the upcoming career year?

Zhihui Yang — Chief Financial Officer

Yeah, I think, will give, we guided the top line growth in RMB terms in Q4 will be flattish in RMB terms, so, but anyway, you know, we are, we do, we have some stage high rental because you know you look at the expansion in the last two, three quarters and also you have typically — we are selling marketing expenses and G&A will be increased in the Q4. So it will drive the margins in the Q4. But I think it is settled one time, okay. And we know — even though nowadays our top priority for our job is to focus on controlling cost and reducing the expenses across the company to minimize the maximum impact from the pandemic. And, yeah and we are confident that we’ll be able to deliver the continued margin expansion after the pandemic is over.

So in fiscal year ’21, we still expect the margin expansion and as well, we don’t want to change our long-term margin guidance of 17%. This is our non-GAAP operating margin in the long-term. Thank you, Sheng Zhong.

Sheng Zhong — Morgan Stanley — Analyst

Thank you, Stephen.

Zhihui Yang — Chief Financial Officer

Okay, thanks.

Operator

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

John Choi — Daiwa Capital Markets — Analyst

Hi Sisi, hi, Stephen. Thanks for taking my question. My question is more about the — after the pandemic. What have you guys really learned? You said 95% of students want to go back to offline. After the pandemic, do you think you’ll be able to expand for spending per students. And in terms of based on the experience or the user feedback, what are the areas that you do have to further spend? That’s my question. Thank you.

Zhihui Yang — Chief Financial Officer

Well besides, we are the number one brand name, education brand name in China, yeah, New Oriental, and we don’t seem to have — three to four years ago, we spend a lot money and time on the — on the content development, on the product itself. So it’s a mix of mostly all the students from offline to online in one day, just after the Chinese New Year holiday, when the pandemic came. So going forward, I think we would build the barrier to entry higher. Okay. And to make — to make up, to provide better and better quality products and also to help our teachers to improve their teaching quality and so I think the pandemic anyway, it’s staffing that is a great opportunity for New Oriental because you know we can take more market share from the small players going forward.

And yeah, and in the next two, I think in the fiscal year ’21 and maybe the year after, we will use new and more OMO model. Okay. So let’s assume going forward, next year, take the year course of the rental to nearly 80% of each class will happen offline, 20% will happen online. Okay. I think the kids love it and parents love it.

John Choi — Daiwa Capital Markets — Analyst

Just a quick follow-up on that, if you do more OMO, how would that impact to our margins. Would that be more in the long run. Thank you.

Zhihui Yang — Chief Financial Officer

OMO, I think logically the OMO model in margins should be higher than the pure offline business, because you know we can save some costs in rental and we can — we can — yeah, this is because you know as per the data, we will open 25% and expand the plans. After the pandemic, I think the 20%, 25% would bring us more and more student enrollment. And we can provide the online-offline — the online OMO programs to them. So we can see some classroom rentals. And I think it will help us to try to keep the student retention rate high, okay, because you know I think the online model is better than the traditional offline course. So the people love it. Okay. Is it clear? Okay.

Operator

[Operator Instructions] Your next question comes from the line of Alex Xie from Credit Suisse. Please ask your question.

Zhihui Yang — Chief Financial Officer

This is the last one.

Alex Xie — Credit Suisse (Hong Kong) Limited — Analyst

Yeah, yeah. Thank you. Thank you for letting me posting the questions. So my first question, my first question is, can you elaborate more about our VIP business? How much is the VIP contribution in U-Can and POP Kids? And secondly, would you please share a bit more about our full year margin guidance? So, you mentioned the FY ’20 margins should be flat through FY ’19, if I’m correct. So what’s the implication for fourth quarter margin? Thank you.

Zhihui Yang — Chief Financial Officer

Yeah, I think the VIP business is very centered to the one-on-one business within the POP Kids. So within the U-Can business, the overall business is 25% to 30% of the revenue of U-Can. And margin, yeah, I think our margin in Q4 will be dropped because of the pandemic, and it’s one-time. And, yeah, I think the worst case of the whole year margin or the non-GAAP equity margin will be flattish year-over-year, but you know we are — we’ve got, we’ve got the VIP exemption that benefit from the government policies. So we reported the VIP exemption in other income. And also, we recorded the MI CACI9 controlling interest in the below the operating model.

So I think the net — non-GAAP net margin of the whole year will be extended in fiscal year ’20, but anyway it’s one time the impact from the pandemic versus the margin impact. So going forward fiscal year ’21 I believe the margin will be expanded again. So it will go back to normal. Yeah. Thank you, Alex.

Alex Xie — Credit Suisse (Hong Kong) Limited — Analyst

Thank you.

Zhihui Yang — Chief Financial Officer

Thank you.

Operator

We now are 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.

Zhihui Yang — Chief Financial Officer

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 Relationship representatives. Thank you.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

Important takeaways from Domino’s Pizza’s (DPZ) Q3 2024 report

Domino’s Pizza, Inc. (NYSE: DPZ) reported mixed results for the third quarter of 2024, with earnings beating and revenues slightly missing estimates. The company has been able to improve its

Main takeaways from Delta Air Lines’ (DAL) Q3 2024 earnings report

Shares of Delta Air Lines (NYSE: DAL) stayed red on Thursday after the company delivered mixed results for the third quarter of 2024. Earnings missed expectations while revenue came in

Infographic: Domino’s Pizza Q3 2024 earnings beat estimates

Fast-food chain Domino’s Pizza (NYSE: DPZ) reported higher third-quarter revenues and a net profit that is broadly unchanged year-over-year. Meanwhile, earnings came in above Wall Street's forecasts. The company reported

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top