Thank you for standing by for New Oriental's fourth quarter and fiscal year 2017 earnings conference call. At this time, all participants are in a listen-only mode. 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 now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao.
Thank you. Hello, everyone, welcome to New Oriental's fourth fiscal quarter and fiscal 2017 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 the 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, thank you for joining us on the call. We're pleased to close fiscal year 2017 with a set of solid financial results. This year, we have achieved both strong top-line growth and bottom-line performance. Net revenues in fiscal year 2017 increased to approximately $1.8 billion, which is increase of 21.7% in U.S. dollar terms, or 29.1% in RMB. Net income reached $274.5 million, and student enrollments went up by 33.3% year-over-year. During fiscal year 2017, we opened a total of four new schools, three new learning centers, and six dual-teacher model schools in 10 new cities, and added a net of 93 learning centers and one kindergarten in the existing cities. In total, we added 107 facilities, representing approximately 14% increase year-over-year. Throughout this fiscal year, we remained focused on strong execution of the optimized market strategy.
Which means we're continuing to expand our offline business while also investing in the O2O two-way interactive education system. Our business has been performing along a strong and solid trajectory, which is supported by our better execution and enhanced management. In short, this year, we experienced a strong growth momentum across our business lines. To give a quick overview, annual revenue for K-12 all subjects after school tuition business, our key revenue driver, grew approximately 44.2% in contributed RMB, contributing 65% of total revenue. This was mainly supported by the U-Can business and the revamped POP Kids program, which achieved annual revenue growth of 40% and 55% in RMB respectively. It's worth noticing that in order to capture the growth opportunity in low-tier cities, we continue to roll out our dual-teacher model schools and expand our business into remote areas in China.
We started to pilot the new dual-teacher class model in select cities in July 2016, and in fiscal year 2017, we tested these new offerings in over 20 existing cities and six new cities, and we're happy to see increased market penetration in those markets we have tapped into. With these proven results, we will continue this strategy in the next fiscal year. In addition, we're in the process of launching the O2O standardized teaching system for our overseas test-prep business, such as IELTS, TOEFL, and SAT programs in some of the large cities in China. In terms of performance for the fourth fiscal quarter, this time of year is part of our peak season, and we performed quite well. Fourth quarter net revenues increased 23.2% to $486.4 million, with operating income up 39.7% and student enrollment up 36.9%.
Breaking it up, U-Can business recorded a fourth quarter revenue increase of 37% in RMB, and enrollment was up by approximately 50%. Our revamped POP Kids recorded fourth revenue increase of 55% in RMB, and enrollment growth of 51%. To give you a better understanding of enrollment growth, I would like to specifically mention our summer promotion efforts, which have been proven to be a very successful strategy in past years. To further progress our ability to consolidate the market and gain as much market share as possible. Similar with last year, we have conducted large-scale promotion this summer to rapidly acquire Grade 7 students customers before they started the first year of secondary school. We offered low-priced experiential courses for multiple subjects in total of about 40 cities. The promotion was again well-received by the market.
The Grade 7 enrollments we brought in before the start of the summer holiday in early July this year reached 417,000, more than double compared to the same period of last year. I would like to reiterate that we do not include this promotion enrollment in our reported enrollment. We're very pleased with this outcome and expect to retain a high portion of students after this promotion, which will boost revenue and drive profit growth throughout the whole fiscal year 2018. It's equally important to note 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 believe the summer promotion will continue to be a successful and effective strategy to quickly increase market share in the high-volume K-12 after-school tutor market.
As these students move from Grade 7 through Grade 12, the continued improvement in retention rates and customer loyalty will drive the revenue growth in the next three to six years. Turning to pricing. Per program blended ASP, which is cash revenue divided by the total student enrollment, decreased by about 6% year-over-year in US dollar terms, and is flat in RMB terms. The 6% decrease of per program blended ASP is mainly due to the shift of revenue mix from the overseas test prep business and slowdown of VIP business, which has a higher ASP. Starting from the third fiscal quarter of this year, we began to concentrate the registration for U-Can VIP classes in June, December, the first month of the first fiscal quarter and third fiscal quarter, respectively, rather than spreading them evenly throughout the year in order to streamline the registration process.
As a result, we saw a very large year-on-year increase in enrollment for U-Can VIP classes in the third quarter, but lower than normal growth in the fourth quarter. For the whole fiscal year 2017, VIP business recorded cash revenue growth of about 16%. Over the long run, we expect that the growth of our VIP business will be slower than our overall revenue growth, which will continue to drag down the blended ASP. Hourly blended ASP, which is cash revenue divided by total teaching hours, increased by approximately 7% year-over-year in RMB terms. To provide a breakdown of hourly blended ASP in RMB terms, please know that U-Can increased by 6%, POP Kids increased by 8%, and overseas test prep program increased by 12% all year-over-year. On the margin front, we continue to make great progress by improving operational efficiency and utilization of facilities and controlling costs within the company.
Operating margin for fiscal year 2017 increased 120 basis points year-over-year. The continued strong bottom-line performance demonstrates the result of our commitment in creating sustainable long-term value for customers and shareholders. Now, let me move on to the fourth quarter performance across our individual business lines. Our key revenue driver, K-12 all subjects after-school tutoring business, achieved year-over-year revenue growth of 34% in US dollar terms, or 42% in RMB terms. This was driven by a significant enrollment growth of about 51% year-over-year. For the whole fiscal year, K-12 had a revenue increase of about 36% in US dollar terms, or 44% in RMB terms.
Breaking it down, the U-Can middle school, high school, all subjects after-school tutoring business recorded revenue increase of 30% in US dollar terms, or 37% in RMB terms for the fourth quarter, and 32% in US dollar terms or 40% in RMB terms for the fiscal year. Student enrollment grew approximately 50% year-over-year for the quarter and 45% for the fiscal year. Our POP Kids program delivered outstanding results with revenue up significantly by about 47% in US dollar terms or 55% in RMB terms for the fourth quarter, and 47% in US dollar terms or 55% in RMB terms for the fiscal year. Enrollment went up about 51% for the quarter and 49% for the fiscal year.
Our overseas test prep and consulting business together reported revenue growth of about 13% in US dollar terms or 19% in RMB terms year-over-year for the fourth quarter, and 6% in dollar terms or 13% in RMB terms for the fiscal year. Finally, VIP personalized classes business reported revenue growth of about 12% in US dollar terms or 18% in RMB terms year-over-year for the fourth quarter, and 16% in dollar terms or 23% in RMB terms for the fiscal year. I will provide some updates on the progress we have continued to make with our optimized market strategy. We have been focusing on maintaining a healthy balance between top line and bottom line growth while investing in build-out of our O2O integrated education system. This continues to work very well. Starting with our core offline business.
As mentioned earlier, we added net of 47 learning centers in around 30 existing cities, opened two new schools and new learning centers in the city of Zhengzhou and Nanyang, and rolled out dual-teacher model schools in the city of Anyang and Handan. In fiscal year 2017, we opened four new schools, three new learning centers, six dual-teacher model schools in 10 new cities and added a net of 93 learning centers and one kindergarten in existing cities. Regarding our online business, we invested approximately $17 million in the fourth quarter and $67 million in total for the fiscal year to improve and maintain our O2O integrated education ecosystem. Most of the investments were recorded under G&A expenses. We have been devoted to this online business build-out since 2014, with an increase in customer retention rates and addition of new customers.
We fully believe this is transforming our business. The investments will bring continuing and long-term benefits. Before I go into the details, just a quick recap of three levels of our online platform. The first level, also the core of our online system, is an O2O two-way interactive education system across all of our business lines. The second level is our pure online learning platform and supplementary online education products under New Oriental brand. The third level of our ecosystem is for New Oriental to take minority shareholdings in online education companies that complement our online education offerings. Starting with the O2O two-way interactive education system, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. This is also an important factor that sets us apart from other key players in the market.
With advanced O2O product services, we're poised to gain more market share and improve brand recognition going forward. Since its launch in September 2014, U-Can Visible Progress Teaching System, our interactive education system, has been successfully rolled out across all existing cities in our nationwide school network. This expansion drove positive performance. Our newly revamped POP Kids English program, Shuangyu, also expanded its coverage, reaching 54 cities by the end of the fourth quarter. The interactive education system has been gradually used in more and more cities. Since its launch in the second quarter of fiscal year 2016, the interactive education system for overseas test prep programs, including IELTS, TOEFL, and SAT courses, was rolled out in 10 cities by the end of the fourth quarter.
For the second level of our online education ecosystem, we have experienced consistent growth in our pure online learning platform and other supplementary online education products. In the fourth quarter, koolearn.com generated net revenue of $17 million, representing an increase of 30% in US dollar terms or a 38% increase in RMB terms. The number of paid users increased significantly this quarter, approximately 69% year-over-year. The number of cumulative registered users in this quarter has reached 17 million. Koo Da Shan, our own live broadcast open platform for both New Oriental and third-party teachers, achieved around 634,500 registrations in the fourth quarter. Donut, a series of game-based mobile learning apps for children, reported over 60.6 million downloads by quarter end. Le Ci, an English language vocabulary training app for mobile phones and tablets, reported over 6.2 million users by quarter end.
For the third level of our online education ecosystem, we invest in select online education companies with a minority stake, and we continue to look for new opportunities that will not only complete our own offerings but also facilitate our O2O integration. Now let me walk you through the other key financial details for the fourth quarter. Operating cost and expenses were $434.5 million, representing a 20.2% increase year-over-year. Non-GAAP operating costs and expenses, which excludes share-based compensation expenses, were $425.5 million, representing an 18.9% increase year-over-year. Cost of revenues increased by 21.9% to $199.3 million, primarily due to increase in teachers' compensation for more teaching hours. Sales and marketing expenses increased by 11.7% to $66.3 million, primarily due to increase in product promotion expenses and sales marketing staff compensation. General and administrative expenses for the quarter increased by 21.8% to $169 million.
Non-GAAP general and administrative expenses, which excludes share-based compensation expenses, were $116 million, representing an 18.4% increase year-over-year. This was primarily due to increased headcount as the company expands its network of schools and learning centers by about 14% year-over-year. Total share-based compensation expenses, which were allocated to relate to operating costs and expenses, increased by 147% to $9 million. Operating income for the quarter was $51.8 million, a 39.7% increase from $37.1 million in the same period of prior fiscal years. Non-GAAP income from operations was $60.8 million compared to $40.7 million in the same period of prior fiscal year. Operating margin for the quarter was 10.7% compared to 9.4% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 12.5% compared to 10.3% in the same period of prior fiscal year.
Net income attributable to New Oriental for the quarter was $55.4 million, representing a 31.9% increase from the same period of prior fiscal year. Capital expenditures for the quarter were $26.5 million, and this was primarily attributable to the opening of four new schools and 70 new learning centers and renovations of existing learning centers. Turning to the balance sheet. At the end of fourth quarter, the deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as revenue as the instructions were delivered, was $866.6 million, an increase of 34% as compared to $646.9 million at the end of the fourth quarter of fiscal year 2016. Before talking about our priority for the fiscal year 2018, I wanted to take a moment to reiterate our overarching goals for the future, similar to those we have seen outlining on our past conference calls.
During fiscal year 2018, we have continued to focus on our optimized market strategy. With the current success achieved, we're confident that we have the right strategy in place, that it will continue to drive additional progress and help us create long-term value for all shareholders. To give you more specifics on our areas of focus, first, we will continue to expand our offline business. In fiscal year 2018, we aim to add about 10%-15% new learning centers for K-12 business in existing cities. We also plan to enter two to four new cities where we identify markets with the most business opportunities and receptivity to our offerings. In addition, we will continue to roll out our dual-teacher model schools to about 5 to 10 new low-tier cities in China.
Second, we will continue to leverage our investment in our O2O integration and initiatives in online education offerings. In particular, we will continue our focus on product refinement and maintenance for the O2O system for K-12 business. Meanwhile, we will continue to revamp and roll out our O2O standardized teaching system for our overseas test prep business. We will continue to make investments that we believe that total spending in absolute dollar terms in fiscal year 2018 will be similar with the previous fiscal year, which totals approximately $57 million. Third, we will continue to have a top priority on improving utilization of facilities and controlling costs across the company to drive the continued margin expansion and operational effectiveness.
Looking at the near term, in terms of the first quarter of fiscal year 2018, we expect total revenues to be in the range of $626.5 million-$647.3 million, representing year-over-year growth in the range of 17%-21%. If not taking into consideration the impact of potential change in exchange rates between RMB and U.S. dollars, the projected revenue growth rate is expected to be in the range of 20%-24% for the first quarter of fiscal year 2018. Lastly, 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 now open the call for this. Thank you.
The question answer session of this conference call will start in a moment. In order to be fair to all 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. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Our first question is coming from the line of Alvin Jiang from Deutsche Bank. Please ask your question.
Hi, Stephen and Sisi. Thank you for taking my questions. My first question is about revenue. Could you share with us your outlook for full-year revenue growth? Should we still expect a revenue growth acceleration for the full year of FY 2018? My second question is about margin. Do you see margin pressure from the summer promotion class? What's the margin outlook for Q1 and the full year FY 2018? Thank you.
Okay, thank you, Alvin. Your first question is about revenue, the guidance of fiscal year 2018. Yes, we do believe that the top line growth in the coming fiscal year 2018 will be accelerated continuously if you compare it with the top line growth with the fiscal year 2017. First, I think we still have the great growth momentum in the K-12 business. We're doing the same thing, the O2O product with one in the overseas test prep as we did for the K-12. We are quite confident that the top line growth of the overseas test prep business will be accelerated in the fiscal year 2018. Don't forget, we are doing the large scale of the summer promotion. Till the early July, I think we have already got the 417,000 summer promotion student enrollment.
It's more than doubled compared to those last year. We do expect the retention rates of those students will be higher than that of last year. I think the top line growth in the fiscal year 2018 will be accelerated. The margin question. I don't think we have the margin pressure of the summer promotion because as we did in last year, I think the retention rates of the summer promotion students will be higher than last year. There's no negative impact of the margin for the whole year. I think we will continue our strategy of the optimized market strategy. As I said earlier, we will open 10%-15% new learning centers, and top line growth will be over 25% or 30%.
I think you will see the utilization rates will go up in the fiscal year 2018 and drive the margin expansion as we did in fiscal year 2017 and 2016.
Okay. Alvin, I want to add a little bit on the revenue growth. For those investors or analysts, I want to remind you that actually Q1 is our seasonally, in terms of growth rates, the slowest, if you look at last several years' revenue growth trend. The peak season for our key growth driver K through 12 business peaked in the second half. The rest of the year, the revenue growth will be higher than Q1. Okay.
Yes. If you look at the growth Q by Q, quarter by quarter in fiscal year 2017, Q1, the top line growth was 16.5%, Q2 22%, Q3 26%, and Q4 23%. The second half of the year will be the peak season of the K12 business. Also the overseas test prep and domestic test prep in Q1 will be the peak season, even though the growth rates will be better than this year. If you compare the top line growth of the overseas test prep and domestic test prep with the K through 12 growth rate, this will be lower.
Thank you.
Okay?
Okay, thank you. This is helpful.
Okay. Thank you, Alvin.
Our next question is coming from the line of Ivy Luo from Macquarie. Please ask your question. I'll move on to the next question. Our next question is coming from the line of Jin Yoon from Mizuho Securities. Please ask your question.
Hi, good morning, guys. A couple of questions. First of all, the learning centers and schools opening this quarter have far re-accelerated from the quarters past. I apologize if you answered this question on the prepared remarks already, but how should we see the trend going forward on that front? Or is this just a one-time seasonality impact? Number two, I know that you guys are overall diminishing, I guess, or putting less emphasis on the VIP classes. These new incremental learning centers and schools are opening. Is there any VIP learning classes in them at all, or is it just winding down on your existing schools? Thanks, guys.
Okay. Thank you, Jin. I think that, in terms of the exact plan, yeah, we opened 52 learning centers in this quarter. Yeah, it's accelerated because I think we are seeing the growing momentum in our K12 business due to the rolling out of new O2O products and also the solid market demand, and the effective operation as well. The expansion is, I think, controlled. Going forward in fiscal year 2018, I think we will open 10%-15% new learning centers. This is net increase. I don't think it will drag margin. On campus, I think the enrollment growth and top line growth will be higher than the learning center opening. The margin will keep improved in the fiscal year 2018. Most of the new learning centers we opened for fiscal year 2018 will be K12-oriented.
I think we control the VIP business, and we hope the big size class and small size class in K-12 business, the growth will be faster than VIP business. In your last year, fiscal year 2016, the VIP revenue contribution was 29%, and this year, fiscal year 2017, was 28%. Next year, I think it should be lower a little bit. Okay.
Got it. That's great color. Thanks, guys.
Okay, thank you.
Our next question is coming from the line of Fan Liu from Goldman Sachs. Please ask your question.
Hi, Stephen. Thanks for taking my question. Would you mind guiding us what the utilization rate look like this quarter and also the retention rate this quarter? Also, would you mind adding some color on the revenue growth for Beijing and Shanghai, I mean, in terms of the K-12 value? Thank you.
Okay. In terms of the retention rate, this year the retention rate is about 22%, and last year it was 19%-20%. The utilization rate, I'm sorry, the utilization rate of this year is 22%. Last year it was 19%-20%. So it improved by 20 basis points. Going forward in FY 2018, I think you will see the utilization rate will go up going forward. Student retention rate, for the POP Kids retention rate, the retention rate is over 85% compared to the 70%-75% last year. For the U-Can, the student retention rate is more than 70%. Last year it was 60%. Yeah, it will go up. Your second question is about the Beijing and Shanghai revenue growth for K-12 business or overall? Hi, Fan.
K-12, standard.
Okay, for K-12. Okay. The K-12 business in Beijing in this quarter was 43%, Shanghai 40% growth in Q4 FY 2017.
Thanks.
Okay. Thanks, Fan.
Our next question is coming from the line of Tian Hou from TH Capital. Please ask your question.
Hi, Stephen. Congratulations on a strong quarter. I have a couple of questions. One is much bigger question about the market. It seems like just recently the demand for the education shoots up, and the utilization from your result, we can see the utilization rate, retention rate, and the school opens, every single matrix are all up. I want to ask from your point of view, what do you see the market, and how do you see the demand? What are the main drivers? That's number one. Number two is the new model, new teacher model. In what kind of circumstances you will open the new teacher model? That's the two questions.
Okay. We're seeing the market demands very strong. That's why we accelerate the learning center opening. We opened 50 or 52 learning centers in one quarter. I think the market size of the K-12 is huge. I think it's a $50 billion or $60 billion market, and I think the growth potentially will be less than the 15%-20% CAGR going forward. Even we are the largest player in the market, our market share is still below 2%. Also, don't forget, we spent $100 million in the last two, three years to build out our O2O system. We're quite confident that we have the best product and teachers in the whole market, and this is the key driver of the potential growth. I want to add one point of the summer promotion.
Several years ago, let's say five years ago in Beijing, firstly, we started to acquire the students with a low price in the summer for the grade 7 students. Last year, we conducted a large scale in 27 cities to get 20,000 student enrollment in the summer promotion. This year, I think we did more. The retention rates will be higher than last year. By this way, we can take more market share going forward. This is my opinion to whole market. Second is dual-teacher model. I think in some low-tier cities, the best way for us to penetrate the market is to do the dual-teacher model.
We opened six new cities in fiscal year 2017. We will open 5 to 10 new cities to do the dual-teacher model in the fiscal year 2018. It's a good way for us to share the top Blue Sky teachers teaching experience with the students in the low-tier cities. Also, as I said in the last earnings call, in last of November, we successfully tested that the one teacher can teach to 39 classes at the same time. It's the best way for us to penetrate the low-tier city market. Okay. Thank you.
Okay. Thank you.
Our next question is coming from the line of Alex Liu from Daiwa Capital. Please ask your question.
Yeah. Thanks, Sisi and Stephen, for this opportunity. I understand, I think the management seems to be quite positive on overall momentums on both the enrollment and also utilizations next year. I'm just wondering, in terms of the magnitude of the margin expansion in 2018, how should we think about it going forward? Also, a quick question on Overseas Test Prep. Is there any latest updates or metrics that you can share with us on the turnaround of this business? Thanks.
Okay. I think we will keep the same tone of the margin guidance. Our target is to get 17%-18% operating margins, GAAP operating margin, in less than two to three years. In the last two years, every year we got the margin expansion by 20, 130 bps. I think the trend will be continually in the fiscal year 2018. Yes, that's the margin guidance. The Overseas Test Prep, if you see the top line growth of the Overseas Test Prep in Q4, in this quarter, in RMB term, the top line growth was 17%. But in the whole year of the fiscal year 2017, it was only 9%. I think we do see the top line growth acceleration for Overseas Test Prep since this quarter.
For the fiscal year 2018, I think the top line growth of the Overseas Test Prep will be 10%-15% year-over-year in RMB term, or maybe better. I think we are doing the same online, offline integrated product as we did in K-12 for Overseas Test Prep. Because more and more the young students enroll into the Overseas Test Prep class, I think they like the new O2O product. Also, we added the KPI. We added the Overseas Test Prep enrollment growth into the local school KPI. This is the change of this year. It pushed the local school have to do more for the Overseas Test Prep business. Okay?
Yeah. Thanks.
Thank you, Alex.
Our next question is coming from the line of Zoe Zhao from Credit Suisse. Please ask your question.
Hi, management. Thank you for taking my question. I have three questions. First of all, a follow-up on your previous comment when you said revenue growth to accelerate in FY 2018. Do you mean in RMB term or U.S. dollar term?
Both.
Both. Okay. Second question. Right. Okay, great. Yeah. Regarding the deferred revenue, it seems to be very strong this quarter. Could you share with us a percentage of the summer to autumn joint enrollment, i.e., 夏秋联报? What's the cash revenue growth quarter to date? Third question is, we've been seeing a very strong K-12 revenue growth of 40%-50% for over a year now. How much further do you think this momentum could continue into the years? Thank you.
Okay. A lot of questions. The deferred revenue. Yes, Q4 is the peak season of the K-12 enrollments for the summer and some of the autumn enrollments. The trends were strong. The cash revenue, we don't disclose the first several eight weeks cash revenue this time, but I can say that I think it's strong as well, because don't forget, the VIP registration peak season happened in June. We changed since last year. December and June are the true peak season for the VIP enrollment growth. What's the last question? Okay, the K-12 business trends.
Yeah. How long further do you think this 40%-50% revenue growth could continue into the years?
Yeah. As I said, you know we are the largest player in the market, but our market share is below 2%. It's a long way to go. If we do the right thing, or if we are on the right way, I think we can get the same growth in at least next three years, because the market is so strong. I don't think nobody else can afford $100 million on the product as we did in last two, three years. Also, New Oriental has been famous by well-paid teachers. We have the best teachers in the market. The best product combined with the good teachers. I'm quite confident about the top line growth in the next three or five years. Okay.
Okay. Thank you.
Thank you.
Our next question is coming from the line of Ivy Luo from Macquarie. Please ask your question.
Thank you, Stephen. Thanks, Sisi, for taking my question again. I have two questions. One is just to follow up on the summer promotion. How many courses on average are we seeing each student get enrolled in for the summer courses? Specifically for the summer courses, what is the retention rate that we are expecting for them to get into the autumn? The second question is to follow up on our best teacher that we have and the teacher salary. What is the number of the teachers that we have right now, and would we expect the teacher salary to increase going forward in FY 2018? That is my two questions. Thank you.
The summer promotion. Typically, in the big cities like Beijing and Shanghai, in the big cities, the students are enrolled these summer courses for two to three courses at the same time. In the lower tier cities, some students choose from one subject. This is what we are seeing. For the student retention rates of the summer promotion, last year in big cities, the student retention rates in autumn after the summer promotion was 40%. This year, we hope the retention rate in those cities will be over 50%. The teacher salary, we have 22,000 teachers in hand now. I think the headcount increase in fiscal year 2018 will be 5%-10%. This is the teacher headcount increase. The teacher salary inflation will be 8%-9% year-over-year. We give the good teachers more teaching hours.
That means the good teachers, the salary package will be increased a lot. Okay.
Thank you. Very helpful. Thanks.
Thank you.
Ladies and gentlemen, please be reminded that we are taking one question at a time. If you wish to ask more than one question, please be requested to join the question queue again after your first question has been addressed. Our next question is coming from the line of Andrew Orchard from Nomura. Please ask your question.
Hi, management. Thanks for taking my question. My question is on sales and marketing costs, because we saw a drop in sales and marketing costs as a % of revenue in the quarter. I'm just wondering if that's because of what we did in last quarter in terms of the bundle enrollments, and that's led to this relative drop in sales and marketing costs in the quarter. The other question I wanted to ask was on the divergence between your enrollment and revenue between the U-Can and POP Kids businesses. With U-Can we saw enrollment growing faster than revenue, but POP Kids, it was the other way around. I wanted to know if there was anything particular that we should pay attention to with regards to this. Thanks.
Okay. Yeah, the selling marketing expense. The marketing activity is not our priority to acquire students. I think we rely on the new O2O product. We don't need to spend a lot on selling marketing expenses, and not only for this quarter, but also for the whole year going forward. In the fiscal year 2018, I think we expect as the % of revenue, the selling marketing expenses will be down as a % of the revenue. Enrollment growth. I think both the U-Can and POP Kids enrollment growths are pretty well. I think the trend is okay.
Yeah. Actually, the gap between the revenue growth and enrollment growth for U-Can business, this quarter is mainly because of the contribution from VIP revenue is lower than normal because of the preregistration in December.
Okay.
I see. That means that affects your U-Can more. Is that correct?
Yes.
Yes.
Because there's no material VIP business in POP Kids.
Yeah.
Yeah.
Okay. Okay, thank you.
Thanks, Andrew.
Our next question is coming from the line of Lucy Yu from Bank of America. Please ask your question.
Hi, management. Thanks for taking my question. One quick question on the dual-teacher model. You mentioned that one teacher can take around 39 classes at the same time. Is this an optimal or normalized number of classes that one teacher can take? If that's the case, what does the margin look like on a particular class of a dual-teacher? Thank you.
Okay, yeah. We just tested the one teacher can face to how many classes at the same time. In last November, the one teacher can face to 39 classes at the same time, maximum. In last month, I heard from my staff that the one teacher can face to 80 classes for the Pop Math classes. I don't know what is maximum numbers, on average, I think the one teacher can face to 20 classes at the same time. It will help the margin expansion because the one teacher can face to let's say 400 or 500 students because 20 or 25 students are sit in the one classroom. One teacher can face to 20, it will drive the margin expansion. That's it. This is the business model for the dual-teacher model.
Sorry. One follow-up. If, say, one teacher can take 20 classes at the same time, how much does the margin look like?
I think it's too early to say the margin because we just pilot the program since four quarters ago. I think going forward, if to some extent, the margin of the dual-teacher model should be 5% higher than the traditional offline classes. Is it clear?
Yeah. Thank you.
Okay, thanks.
Our next question is coming from the line of Alison Lee from CLSA. Please ask your question.
Hi, management. Thank you for taking my question. I'm asking on behalf of Mariana, she's not here today. I was wondering how is the Q1 trending in terms of enrollment for K-12 and overseas prep, and also, what's the ASP? My second question is, I just want to confirm what's the non-GAAP EBIT margin for FY 2018? I think you mentioned the margin before, but I just want to confirm the numbers. Thank you.
Sorry, voice is not very clear. I can't follow your second question. I think your question is about Non-GAAP operating margin. Okay. The K-12 business, I think going forward in RMB terms, the top-line growth will be 40%-45%, or maybe more. The less is volume. The hourly price increase will be 5%-9% year-over-year. The others will be the volume growth or the enrollment growth. As I said, the Non-GAAP operating margin, our target is to get 18%-19% in the next two to three years. What I said is Non-GAAP operating margin. The margin growth will be extended step by step as we did the last two years. Okay.
Thank you so much. Thank you very much.
Okay, thanks.
Our next question is coming from the line of Zhao Yang from CICC. Please ask your question.
Thanks, Stephen and Sisi for taking my question. Could you please share more color on your current growth, the revenue growth of overseas test prep that coming from U.S. tests?
We don't disclose the revenue contribution of the United States business line of overseas test prep. What I can say is the overseas test prep business in United States is the biggest business throughout the overseas test prep. Most of the students choose to study in the United States. Yeah. This is the biggest market. Okay.
Got it. Thank you very much.
Thanks.
Our next question is coming from the line of Wayne Wang from HSBC. Please ask your question.
Hi, management. Thank you for taking my question. My question is regarding to the coming revenue guidance. As we have mentioned that the coming revenue guidance would be like year-over-year growth of 20%. You have mentioned that this kind of revenue growth has related with the relatively seasonality reason. May I ask whether the summer promotion has some impact on the revenue growth as we actually don't generate much revenue from the entry grade student as we are offering free classes to those students? What will be a normalized growth in the future like? Any color would be very appreciated. Another question about effective tax rate. It seems that in this quarter, the effective tax rate is relatively high. What kind of tax rate we should expect in the coming quarters? Thank you.
I think you're right. The summer promotion, the price is very low. It generates a very limited revenue gap rather than the Q1. In the rest of the year, because of the high retention rate, I think we will make up the revenue growth in the rest of the year. Tax rate. The tax rate was 15.3% in this year. The tax rate will slowly move up. I think next year, I got the tax rate will be in a range of 16%-16.5%. This would be the ETR. Okay? Thanks.
Thank you very much.
Thanks.
We're now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Stephen Yang, for his closing remarks.
Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thanks.