Good evening, thank you for standing by for New Oriental's fourth quarter and fiscal year 2018 earnings conference call. At this time, all participants are in listen-only mode. After the 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 your line now. I would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead, ma'am.
Thank you. Hello, everyone, welcome to New Oriental's fourth fiscal quarter 2018 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire Services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law.
As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I will now turn the call over to Mr. Stephen Yang. Please go ahead, Stephen.
Thank you, Sisi. Hello, everyone, thank you for joining us on the call. We're very pleased to conclude the fiscal year 2018 with sustained acceleration in our top-line growth as well as student enrollments. Net revenues in fiscal year 2018 increased by 36% to $2,447.4 million. Total student enrollment in academic subjects, tutoring, and test prep courses in fiscal year 2018 increased by 30.3% to approximately 6,329,500. For the year 2018, we added a total of 226 new facilities, which include 200 new learning centers in existing cities, 11 offline training facilities in three new cities, 14 two-teacher model facilities in six low-tier cities, and one kindergarten. All together, our total square meters of classroom area at the end of the fiscal year has expanded by approximately 40% year-over-year.
Strategic expansion was an important focus in fiscal year 2018, which yielded very positive results. In the fourth quarter, we continued to execute our optimized market strategy and stepped up our capacity expansion efforts in cities with robust growth momentum, supported by our highly efficient operational capabilities. This enables us to seize tremendous market opportunity with our standardized online and offline integrated education system. As we continue to expand our capacity, we remain focused on improving utilization rate and investing in enhancing teaching quality in line with our long-term strategy. Net revenues in the fourth quarter increased to $701.0 million, which is a 44.1% growth year-over-year. Once again, delivering outstanding results exceeding our target. In the first quarter, our student enrollments were up approximately 44.9% during the period.
The top-line growth was driven by the continued momentum in our K-12 after-school tutoring business, achieving a revenue growth of approximately 52% year-over-year. During the quarter, we added a net of 81 learning centers in around 37 existing cities. Total student enrollment in academic subject tutoring and test prep courses increased by 44.9% year-over-year to approximately 2,058,000 for the first quarter of 2018. To give you a better understanding of the growth in enrollment, I will now talk about our summer promotion efforts. Similar with the last few years, we once again conducted the promotion this summer to rapidly secure grade 7 students customers before they started their first year of secondary school. We offered low-priced experiential courses for multiple subjects in a total of about 48 cities. Once again, the summer promotion was very well-received by the market.
The promotion enrollments we brought in before the start of the summer holiday in early July this year reached 736,000, representing over a 32% increase comparing with the same period of last year. Please note that we do not include these promotion enrollments in our reported enrollments. On the whole, we are very pleased with this outcome. This year, we will become even more focused in retaining a larger portion of students following the promotion, which will boost revenue and drive profit growth throughout the whole fiscal year 2019. It's equally important to know that due to a higher utilization of facilities in the rest of the year, we don't expect a material impact on operating margin throughout the whole fiscal year.
We are confident that our summer promotion will continue to be a successful and highly profitable strategy to rapidly increase market share in the high-growth K-12 after-school tutoring market. As these students move from grade 7 through to grade 12, the continuing improvement in retention rate and customer loyalty will drive revenue growth in the next three to five years. I will now turn to pricing. Per-program blended ASP, which is cash revenue divided by total student enrollment, increased by about 0.5% year-over-year. Hourly blended ASP, which is cash revenue divided by total teaching hours, increased by approximately 3% year-over-year in RMB terms. To provide a breakdown of the hourly blended ASP, please note that U-Can program increased by 3%, POP Kids program increased by 3%, and overseas test-prep program increased by 16% all year-over-year in RMB terms.
We're very encouraged by the fact that operating margin in our language training and test-prep business in this quarter remains constant year-over-year, even with the increase in our overall capacity by approximately 40% year-over-year, showing that margin pressure in previous three quarters has eased off. Looking ahead into fiscal year 2019, we aim to add approximately 20%-25% new teaching facilities in existing cities, mainly our K12 after-school business. In addition, we will continue to expand our business into remote areas in China through the rolling out of new two-teacher model schools and new initiatives in our pure online K12 after-school tutoring. We will continue to uphold the healthy balance between our strong growth momentum with our efforts in improving the utilization rates of our facilities and approach cost control in the most efficient manner.
With these strategies in place, we're confident in our efforts in delivering sustainable long-term value to our customers and shareholders. Now, let us move on to the fourth quarter performance across our individual business lines. Our key revenue driver, K12 all subjects after-school tutoring business, achieved revenue growth of about 52% year-over-year in dollar terms, driven by the significant growth in our enrollments by about 52% year-over-year. For the entire fiscal year, the K12 business saw a revenue increase of about 46%. Breaking it down, the U-Can middle school, high school, all subjects after-school tutoring business recorded a revenue growth increase of about 47% for the fourth quarter and 44% for the fiscal year. Student enrollments grew approximately 53% year-over-year for the quarter and 37% for the fiscal year.
Our POP Kids program revenue delivered outstanding results, with revenue up by about 65% for the fourth quarter and 51% for the fiscal year. Enrollments went up by about 50% for the quarter and 39% for the fiscal year. Our overseas test-prep and consulting business together reported revenue growth of about 33% year-over-year in the first quarter and 23% for the fiscal year. Finally, VIP personalized class business recorded revenue growth of about 40% year-over-year for the quarter and 32% for the fiscal year. Next, I will provide some updates on progress we are making with our optimized market strategy. Consistent with our long-term plan, we have been focusing on expanding our capacity by investing in the build-out of our O2O integrated education system, and this continues to produce very promising results. We will start with our offline business.
In the fourth quarter of fiscal year 2018, we added a net of 81 learning centers in 37 existing cities. For fiscal year 2018, we added a total of 226 new facilities, including 200 new learning centers in existing cities, 11 offline training facilities in three new cities, 14 two-teacher model facilities in 6 low-tier cities, and a kindergarten. Significant growth opportunities we see in the low-tier cities. We continue to roll out our two-teacher model schools and expand our businesses into remote areas in China. We began to pilot a new two-teacher model class in select cities in July 2016. By the end of the fiscal year 2018, the new offerings have been tested in our POP Kids program in over 35 existing cities, in our U-can program in 26 existing cities. 12 new cities for both business lines.
We're delighted to see increased market penetration in the markets we're investing in. With this new model, we were also able to achieve enhanced customer retention rates and scalability. The results are deeply encouraging, and we will continue to implement this strategy in the coming new fiscal year. Regarding our online business, we invested $23.5 million in the first quarter, and $75.9 million in total for fiscal year 2018 to improve and maintain our O2O integrated education ecosystem. Most of the investments were recorded under G&A expenses. Now I will walk you through some updates on our O2O two-way interactive education systems. Since the launching of our U-Can Visible Progress Teaching System, VPS, in September 2014, the interactive education system has been deployed in all existing cities.
We launched the newly revamped Top Kids English program, Songyou, our interactive education system in most cities by the end of the fourth quarter in fiscal year 2018. It has also been gradually implemented in an increasing number of cities across China. The interactive education system for overseas test prep program, including IELTS, TOEFL, and SAT courses, was rolled out and tested in most major cities by end of the fourth quarter. Meanwhile, we also standardized product offerings across seven cities, including Shenzhen, Xiamen, Changsha, Hefei, Nanjing, Suzhou, and Hangzhou. We also made strides in the koolearn.com business line and other supplementary online education products. Now let me walk you through the other key financial details for the fourth quarter. Operating costs and expenses for the quarter were $644.4 million, representing a 48.3% increase year-over-year.
Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $622.2 million, representing a 46.2% increase year-over-year. Cost of revenue increased by 50.3% year-over-year to $299.5 million, primarily due to increase in teachers' compensation for more teaching hours and rental costs for increased number of schools and learning centers in operation, as we continue to facilitate our capacity expansion strategy. Selling and marketing expenses increased by 52.4% year-over-year to $101.0 million, primarily due to increase in brand promotion expenses and compensation for the selling and marketing staff. General and administrative expenses for the quarter increased by 44.4% year-over-year to $243.9 million. Non-GAAP general and administrative expenses, which excludes share-based compensation expenses, were $221.7 million, representing a 38.6% increase year-over-year.
Total share-based compensation expenses, which were allocated to relate to operating costs and expenses, increased by 147.6% to $22.2 million in the first quarter of fiscal year 2018. Operating income for the quarter was $56.6 million, a 9.2% increase from $51.8 million in the same period of prior fiscal year. Non-GAAP income from operations for the quarter was $78.8 million, a 29.6% increase from $60.8 million in the same period of prior fiscal year. Operating margin for the quarter was 8.1%, compared to 10.7% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 11.2%, compared to 12.5% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $65.1 million, representing a 17.4% increase from the same period of prior fiscal year.
Both basic and diluted earnings per ADS attributable to New Oriental were $0.41. Non-GAAP net income attributable to New Oriental for the quarter was $87.3 million, representing a 35.6% increase from the same period of prior fiscal year. Both Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.55. Net operating cash flow for the first quarter of 2018 was approximately $294.7 million. Capital expenditures for the quarter were $64.4 million, which were primarily attributable to the opening of 96 learning centers and renovations at existing learning centers. Turning to the balance sheet. At the end of the fourth quarter, the deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered, was $1,270.2 million, an increase of 46.6% from $866.6 million at the end of the fourth quarter of fiscal year 2017.
Before moving on to our priority for the fiscal year 2019, I would like to take a moment to reiterate our overarching goals for the future under our optimized market strategy. To give you more specifics, our areas of focus. First, we will continue to expand our offline business in consistent with our long-term plan. We aim to add around 20%-25% new learning centers and expand classroom area of some existing learning centers for K12 after-school tutoring business in existing cities. Meanwhile, we also plan to further roll out our two teacher model schools in low-tier cities in China. Second, we will continue to leverage our investment in our O2O integration and initiatives in our pure online education offerings.
As always, we will focus on product refinement and maintenance for the O2O system for K12 business, and continue to revamp and roll out our O2O standardized teaching system for overseas test-prep business. We believe the total spending in absolute dollar terms in fiscal year 2019 will increase moderately compared with the prior fiscal year, as we continue our investments in new initiatives, including content development, teacher recruiting and training, as well as sales marketing expenses in online K12 after-school tutoring business on our Koolearn.com platforms. Third, our top priority remains improving utilization of facilities and controlling costs across the entire company to enhance our margins and operational effectiveness. Look at the near term and our expectations for the next quarter.
We expect total net revenues in the first quarter of fiscal year 2019 to be in the range of $829.9 million-$850 million, representing year-over-year growth in the range of 26%-29%. Traditionally, our overseas test-prep business has a relatively large contribution to the overall business in the first quarter compared to the rest of the year. Thus, the overall year-over-year growth rates for the first quarter tends to be as lowest as compared to the other quarters. In view of this, we anticipate an upward trend to emerge throughout the whole fiscal year. I must mention that this expectation reflects New Oriental's current and preliminary view, which is subject to change. At this point, I will take your questions. Operator, please open the call for these. Thank you.
Sure, sir. The question and answer session for this conference call will start in a moment. In order to be fair to all the callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. Ladies and gentlemen, if you wish to ask an audio question now, please press star followed by one on your telephone keypad and wait for your name to be announced. Once again, it is star one to ask an audio question. We have our first question coming from Jin Yoon from New Street. Please go ahead, ask your question.
Hi, good morning, guys. On your Koolearn filings, it said that you guys plan to rapidly expand the K-12 enrollments. I'm just kind of wondering what this means in terms of marketing investments this year, if it's in line with your previous commentary regarding guidance, regarding the weight of where the investment cycle is gonna hit. At the same time, how should we see the 25% capacity expansion hit throughout the year in terms of the weighting of that as well versus first half versus second half? Thanks, guys.
Okay. Thanks, Jin. Let me answer your second question first. In terms of the expansion, don't forget, we added 226 learning centers this year, and we got the 40% growth of the classroom area year-over-year this year. We made a lot this year. Next year, based on our current budget, we believe the expansion plan in 2019 will be 20% to 25%. I think the first priority for the next fiscal year will be the job of that we fill the students into the learning centers we set up this year I think in the first half of the year and the second half of the year, I think the learning center number we set up in the next year will be average.
For your first question about, yeah, Koolearn has submit the application for the listing on the main board in Hong Kong stock market. At this stage, we can't say too much about Koolearn things. We can't comment on the numbers of the Koolearn. In terms of the investment of the online, I think we will keep invest on the online items such as the content development, teacher recruiting, and some marketing staff. Because we started to bear fruit from the investment we made in recent years. We know the online, both the O2O and pure online, are our first priority of all our jobs. I think the students like the online way to learn something. But on the other hand, the offline business is still growing very fast. We carry the two parts at the same time. Okay. Jim?
Great. Thank you, guys.
Thanks.
Thank you. We have our next question coming from the line of Tallan Chow from Deutsche Bank. Please go ahead.
Hi, management. I have a question on the guidance. The first quarter guidance growth appeared to slow down on a quarter-to-quarter basis, but actually, it is higher than first quarter last year. I just want management to elaborate a little bit on, for example, the currency change and, for example, product mix K12 versus non-K12. Thanks.
Okay. It is a great question, Tallan. Our Q1 2019 guidance year-over-year growth is in the range of 26%-29% in dollar terms. Actually, I think it is very good guidance because don't forget that our overseas test prep courses has a relatively large contribution in the first quarter compared to the rest of quarters of the year. If you look back the numbers, the top line growth in the Q1 2018 was only 23.8%, if I am right, in dollar terms, year-over-year. We have a 36% year-over-year growth for the whole fiscal year of 2018. Even if you take out exchange rate impact, the whole year growth rate is 500 basis points higher than the Q1 growth. We expect the upward trend to emerge for the Q1, even for the whole year.
We look at the growth, we would suggest you guys don't look at the Q on Q growth, you should make your analysis of the year-over-year growth. I think in the coming quarter, the K12 business will be the key revenue driver as same as this year. The K12 business growth in the dollar term will be 45%-50%. This is the key driver. We're seeing the exchange rates change recently. That's why we said in the earnings release that we use the 6.6672 as the exchange rate RMB terms versus U.S. dollar terms. That's it. Okay, Tallan?
Thanks. Thanks, Stephen.
Okay. Thanks, Tallan.
We have the next question coming from Thomas Chong from Credit Suisse. Please go ahead.
Hi. Thanks, Stephen and Sisi, for taking my questions. I have a quick question about our strategy in FY 2019, focusing on efficiencies improvement. Can management comment about how we should think about the margin trend in online and the potential drag in online, margin expansion in offline and margin drag from online for this year? My second question is about, do we see any potential cannibalization between online and offline? Thank you.
Okay. The margin question, I think this quarter we got the 130 basis points down of the Non-GAAP operating margin. The key I want to mention is that we're seeing the offline business, the school business and test prep and K12 business, the margin was flattish year-over-year. We're still seeing the 40% of the expansion plan in this quarter. That means we started to execute the capacity expansion since the Q4 last year. The margin pressure in the Q4 has eased off. Going forward, I think we do believe the Non-GAAP operating margin for the language training and test prep business, we call the school business, in the coming new year will be up year-over-year, due to the expected acceleration of the revenue growth and higher utilization.
In terms of the online business margin, as I said, we can't make more comments on the number of the quarter because we submit the application form to be listed in Hong Kong Main Board. What I can say is, last year, fiscal year 2018, we invested $75 million for both O2O and the pure online. This year, we're budgeting the $80 million to $90 million in total. This is our budget of the online investment. I can't say the detailed numbers of the margin drag of the online, but the offline business, you'll definitely see the margin expansion going forward. Okay.
Thank you.
Thanks.
Thank you, sir. We have the next question coming from the line of Lucy Yu from Bank of America. Please go ahead.
Hi, Stephen. This is Yu. I've got one question on the margin. Given that the summer promotion enrollment seems to be better than your previous expectation, is it fair to say that although on a full year basis, non-GAAP property margin is going to expand, on the first quarter, there still might be some pressure on the margin front given the summer promotion? Also, are you still comfortable with your full-year margin guidance of 100 basis points improvement?
Even we got the 740,000 summer promotion enrollments. Last year, that number was 500,000. This year, we increased a little bit of the price of the summer promotion. We know there will be a little bit margin drag from the summer promotion in the Q1. For the whole year, there's no material impact of the margins by the summer promotion. We keep the same guidance of the whole year, fiscal year 2019. We don't want to change the guidance. Thank you.
Thank you.
Thank you. We have the next question coming from John Choi from Daiwa. Please go ahead.
Thanks, guys, for taking my question. I just have a follow on your summer promotion. Could you give us a little bit more color? It's been pretty strong. You said the enrollment's been more than 740,000. What particular within subjects have been strong? At the same time, I recall that you guys are aiming for a higher retention rate. Obviously, that should lead to a better growth going forward. Any color on that will be highly appreciated. Secondly, following up on Stephen, your comment on the expense side. You said you're going to see a moderate increase here. Just to see on a like-for-like basis versus last year operating expense percentage growth versus this year, should we be seeing a lot less? Hence, that will be kind of also another key factors of margin expansion. Thank you.
Okay. Yeah, the summer promotion, as I said, we got 32% of the summer promotion enrollment growth. This is now the first year, and we tested several years ago. This year, we care more about the retention rate. We believe the student retention rate after the summer promotion, which will be happening in the autumn, the retention rate will be higher than last year by 5%-10% higher. That's why, as I said, we care more about the higher student retention rate. We do believe the summer promotion will continue to be a successful and effective way to take more market share because the whole market grow very fast. These students move from grade 7 to grade 12, so we can keep them as much as we can.
Last year, after the autumn for the summer promotion student enrollment, 90% are still with us in winter and after. That means this is a smart way to take more market share. This is my answer for a question about the summer promotion. Expenses. I think we spent $75 million in this year. Next year, we'll budget the $90 million. We would like to spend more from $75 million-$90 million because the investment we spent the last three years together is over $150 million the last three years. We're seeing the feedback of the parents or customers are very good. We're seeing the student retention rates getting higher to over 85%. That means that we bear the fruit of the investment, we prefer to invest more going forward. Okay?
Yes, if we spend $90 million, we still have the leverage on the margin side. Okay, thanks.
We have the next question coming from Terry Wong from Blue Lotus. Please go ahead.
Hi, management. I had one question regarding the online business. Right now, online education has 72% revenue from university education and 13% from the K-12 business. Is the business model between these two businesses have a big difference? What is our strategy to expand the K-12 online business in the future? Thank you.
Okay. Yeah, as I said, I can make more comments on the online Koolearn.com. You are right, historically, the domestic test prep and overseas test prep, the adult business contribute more of the revenue of the Koolearn.com. K-12 is the future. In the last several quarters, we made a lot of efforts for the pure online K-12 business because the market is huge. Even for the offline worthy online market. We will focus more on the K-12 pure online business. Okay.
Thank you.
The next question comes from Sheng Zhong from Morgan Stanley. Please go ahead.
Hi, Stephen. This is My question, first one is about our capacity expansion in FY 2019. You mentioned that you will add penetration to lower-tier cities. In terms of our capacity, how we should look at the split between tier 1 and 2 cities versus lower-tier cities. You have a dual-teacher model. We do use a more dual-teacher model to cover the lower-tier cities. For now, what our margin and retention, these operating metrics for our dual-teacher model. Thank you.
Yeah. In terms of the expansion plan, as I said, we plan to add 20%-25% in the coming new year. I think we will use the same strategy as we used in the fiscal year 2018. We will choose the good performance schools to open more learning centers, whether it's high tier or low tier. In the low tier, even for the new cities, I think most learning centers we set up will roll out the dual-teacher model. The dual-teacher model, it grows very fast. Because of the low base, the revenue contribution is rather low. I think it's still early to say the margin of the dual-teacher model because it's too early.
Theoretically, in the future, I think the margin of the dual-teacher model should be higher than the offline business, because one teacher can face so many students at the same time, and all the other costs are similar. Okay? This is the margin trend of the dual-teacher model. Okay.
Thank you. Can I add one more question very quickly?
Okay, go ahead.
Yeah. Thank you. You have a redeemable non-controlling interest of around $200 million this quarter.
Yeah.
What is this?
Okay. Your question is about NCI. I think. It's part of the reason of the Koolearn.com and some other companies, but it's not a material number. Okay?
Okay. Thank you.
Thanks. Hello, operator?
No.
Go ahead.
Hello. Hi, is this Edwin?
Yes.
Yeah, you can go ahead and ask your question. We're contacting operator now. It seems that the operator got cut off. You can ask your question.
Okay.
Hopefully-
Yeah.
Go ahead.
Yeah. Sure. Hi, Stephen. Congrats on the strong results and the good guidance for the first quarter. Just want to get some updates on the operating metrics. For example, the retention rates and the capacity utilization in the fourth quarter, especially for the K-12. Regarding your guidance for the first quarter, how much have you priced in for the overseas test prep business growth in the first quarter?
Okay.
I think you mentioned the K-12 is like 40%-50%, but I missed that point. Just can you reiterate?
Okay.
Thank you.
I think, yeah, in the coming Q1, the guidance, the K-12 business, the growth rates will be 45%-50%. The overseas test prep, I think the growth rate will be single digits. It's close to 10% year-over-year. Typically, we don't give the guidance of the student retention rates and the utilization rates in the new quarter. I think the trend is going up. We're seeing, in last so many quarters, the student retention rates for both the POP Kids and U-can program have got higher. Based on the trends, I think we do believe the student retention rates in the coming quarter will be higher year-over-year. Okay?
Yeah, sure.
Okay. In terms of the utilization- Can you hear me?
Sorry, go ahead.
Okay. In terms of the utilization rate, I think, yeah, in the Q1, we will slow down a little bit the expansion plan because we set up the 40% new expansion in the fiscal year 2018. The first job, in the coming quarter or the whole coming new year, is fill the students into the old learning centers. Anyway, we will set up the 20%-25% new learning centers in the coming new year. That's the top line growth in the coming new year will be, 30% year-over-year. This is my current estimation. We do have the leverage on the utilization rate going forward, even for the Q1 and the whole year. Okay?
Yeah. Thank you. Understood. Just to follow up, what's the utilization and retention for the fourth quarter, the quarter just passed? Can you give us some updates?
Okay. The student retention rate for the K-12 business together, the retention rate was 84% in the Q4.
Oh.
Yeah. You see the trend is getting up.
Right
In the Q4, the utilization rate is 21%, it's similar compared to the last of year Q4. Okay.
Excellent
Flattish of the school business.
Okay. Thank you.
Yep.
Thank you. Thank you so much.
Okay.
Next one. Your next question comes from the line of Johnny Wong. Please ask your question.
Okay.
Hi, this is Wendy Huang from Macquarie. First, I just want to clarify on your 20%-25% capacity expansion guidance. You mentioned this is just the capacity expansion for the existing cities, right? What would be the overall capacity expansion ratio if we include the dual-teacher model in new cities and the others? Also given that the revenue growth rate will be the slowest in Q1 versus full year, how should we expect the margin trend in the coming Q1? Thank you.
Okay. Yeah. I must clarify that the 20%-25% is the net expansion plan for overall business. It includes everything. This is our budget. It includes everything, okay? Offline business, dual-teacher model-
Okay
and everything. Okay. The Q1, as I said, I think we do believe the bang gap of the margin of the lever training and the test prep, and the K-12 business, the margin will be up, or at least flattish in the coming Q1. Yeah. We do have some drag for the other business. I think for the whole year, you will see the margin expansion for the whole year. Okay.
Sorry, the flat is for the overall or just for the offline for Q1 you mentioned?
The offline is flattish to up of the school business. Okay.
What would be the blended margin for the Q1 then?
I think the margin of the Q1, based on our current estimation, this will be slightly down. Okay?
Okay. Thank you, Stephen.
Yeah. Thanks.
Our next question comes from the line of Julia Pan from UOB. Please ask your question.
Yeah. Thanks, management, for taking my question. Just a quick one. I noticed that you have a really strong growth in your deferred revenue, which is almost 47%. I am just wondering what would be the major gap between your deferred revenue growth and your guidance of 26%-29% of next quarter's guidance? Another question is regarding your VIP business. I guess you mentioned that VIP business recorded over 40% year-on-year growth. I am wondering, do you see maybe a faster growth in the premium after-school tutoring market? Also, do you see maybe your standardized operation in the VIP business could improve the maybe traditional considered as the lower margin VIP business?
Okay.
That's my question. Thank you.
Okay. Yeah. Your first question is about deferred revenue. Yes, we saw very high growth of the deferred revenue balance. I think I mentioned last earnings call, since the Q2 last year, we start to bundle the winter and the spring courses registration in Q2, and the summer and some autumn courses registration in Q4. I think this is the reason to explain the gap of the higher deferred revenue growth, with the top-line growth of the coming Q1. This is my answer for first question. What's your second question?
Your VIP business.
Okay, VIP. Yeah, we saw very strong the VIP business growth in this quarter, 40%. Anyway, the growth rate is slower than the small-sized class. Going forward, I think the revenue contribution from the VIP business will be limited. What I mean is, going forward, the small size and large size class, the growth rates will be higher than the VIP business. I think if you not make analysis of our VIP business, the margin of the VIP business itself is getting higher. Okay?
Thanks.
Okay. Thank you.
Our next question comes from the line of Eric Qiu from PCPPI. Please ask your question.
Good evening, management. Thank you for taking my question. I just want to ask about the relationship between the enrollment and the revenue. Since this year, 2018, the student enrollment is 30% year-over-year, while the revenue growth was 36%. This was a bit different from the last two years, while the revenue growth fall behind of the enrollment. I just wondering to ask the relationship of it. Thanks.
This is your third quarter.
Yeah. Historically, our revenue growth is higher than enrollment growth. Basically, the hourly rate increase is similar with our per program ASP increase. The last one to two years, as we keep rolling out new programs, and we're seeing that the class months changed for both POP Kids and U-Can program. That's why if you do the calculation by dividing the cash revenue divided by enrollments, the per program ASP increase is lower because the shortened program length. That's one key reason for different programs. It happened for both POP Kids and U-Can program. It do varies by quarter. Also, please pay attention that our enrollment calculation is based on cash basis. But the revenue growth, GAAP revenue growth, is based on accrual basis, so it's different. Okay.
Oh, okay.
I suggest you guys to make the analysis of the enrollment and GAAP revenue in yearly basis.
Yeah.
If you look at the numbers in a long term, that would be okay. Yeah. Thanks.
Oh, okay. Thank you. One follow-up question. For the revenue growth, can you elaborate about how much was it from the 1st or 2nd tier cities, while the others are from the low tier cities, and also the prospects? Thank you.
For the kids' business, the top five cities, the revenue contribution for the top five cities was 43% in this quarter. Even for the top five cities, we got 40% top-line growth in this quarter. What I mean is, even in the first tier or second tier cities, the big cities, they're still getting the higher growth year-over-year. Okay.
Okay. Thank you.
Our next question comes from the line of Andrew Lam from Thomson Asia. May I remind everyone to ask one question per person. Thank you. You may ask your question now.
Hi, management. Just want to ask the impact in terms of the Gaokao, in terms of the English test change, where students are allowed to take three English tests, in terms of their Gaokao exams. What is that impact on your English courses for your K12 business segment?
Yeah, I think it's a neutral to positive impact to us, because the new policy allows students to take more the test of the Gaokao English. Typically, the Chinese students take at least twice to try to get higher scores. It produce more retakers for us. I think this will have the positive impact from the new policy. Okay?
Understand. Sorry, just a follow-up question. I just want to understand the utilization rate in the top five cities for your K12, and also the lower tier cities in terms of the revenue contribution. Are you able to provide this statistic?
We don't disclose the utilization rate by cities. What I can say is the higher tier cities, the utilization rate is higher than the lower tier cities. Okay?
By how much, or around?
Sorry, we don't need disclose to the market, because we have so many cities. Okay?
Understand. Okay. All right. Thank you very much, management.
Thanks.
Your next question comes from the line of Jeffrey Chen from CLSA. Please ask your question.
Yes. Hello, thank you for taking my question. I would like to ask, can you walk us through the share option expense guidance for the next fiscal year and the quarterly split of this number? Thank you.
Okay. I think this year, the stock-based compensation for the whole year was $57 million. Next year, I just want to guide the stock-based compensation similar numbers compared to this year. Okay?
Sorry, I missed it just now. Can you repeat it? Sorry.
Yeah. This year, $57.4 million. Next year, same number. Okay?
Okay, thank you, management.
Thanks.
There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.
Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thanks again.
Ladies and gentlemen, that is conclude the conference for today. Thank you for participating. You may all disconnect.