Good evening, and thank you for standing by for New Oriental's FY 2021 first quarter results earnings conference call. At this time, all participants are in listen-only mode.
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there will be a question and answer session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao.
Hey. Hello, everyone, welcome to New Oriental's first fiscal quarter 2021 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 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'll now turn the call over to Mr. Stephen Yang. Please go ahead, Stephen.
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Although the impact of the pandemic continues to raise hurdles for business across the globe, we're pleased to kick off the fiscal year with a set of encouraging financial results in the first quarter of this year that is in line with our expectation. While we're showing signs of the recovery in some of our business lines as domestic markets begin its path to normalization. Total net revenue was $986.4 million, representing an 8% decrease year-over-year, which is better than we guided in the previous quarter. Net revenues from education programs and services for the first quarter were $935.6 million, representing a 6.1% decrease year-over-year.
Our U-Can middle school, high school, all subjects after-school tutoring business showed a positive light with a growth of approximately 9%, while our POP Kids program reported a growth of approximately 4%. Our industry-leading OMO system has been vital in the previous quarters to ensure our service runs smoothly, and it has once again proved to be instrumental in this quarter, as it provides our operation with strong flexibility to help the vast majority of our students migrate from OMO online classes back to offline learning centers, which have gradually resumed service amid the easing of the pandemic's restriction measures. Encouraged by its effectiveness, we have put more focus on executing our OMO strategy, including piloting the OMO online courses in around 20 cities, it attracts a promising number of new customers in the summer quarter.
Total student enrollments in academic subjects tutoring and test-prep courses in the fourth quarter of 2021 increased by about 13.5% year-over-year to approximately 2,961,100. Lower than normal increase in the number of student enrollments is primarily due to the delayed enrollment for summer and autumn classes and shortening of the summer holiday in many major cities by one or two weeks this year, as well as the delayed resumption of the offline operation in cities such as Beijing due to the reemergence of the COVID-19 cases before the summer holiday. A key highlight in this quarter is the highly successful summer promotion campaign. Despite the challenge of the shortened summer holiday, we're delighted to see the total promotion enrollment reached 1,079,000, a 31% increase year-over-year, accompanied by improved student retention year-over-year.
In terms of the pricing, per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 10% year-over-year in dollar terms. As for hourly blended ASP, which is cash revenue divided by the total teaching hours, decreased by approximately 2% year-over-year. To provide a breakdown of the hourly blended ASPs, please know that U-Can classes increased by 2%, U-Can VIP courses increased by 3%, POP Kids decreased by 1%, and overseas test-prep programs increased by 7% all year-over-year in dollar terms. Comparing with our normal price increase of 5%-8%, this quarter's hourly blended ASP decrease was mainly because of, firstly, a bigger decline of overseas test-prep program, which hourly blended ASP was much higher than other programs. Secondly, the piloting of promotional OMO online courses in some major cities with discounted price in the summer.
Thirdly, a bigger portion of the enrollments on promotional courses to encourage students to register for more subjects. I would like to spend some time to talk about the quarter performance across our individual business line in detail. As the pandemic gradually fades in China, encouraging signs of recovery have started to emerge across our business lines with significant jump in student enrollments. Our key revenue driver, K12 after-school tutoring business, achieved year-over-year revenue growth of approximately 8% in dollar terms. Breaking it down, the U-Can middle school/high school all subjects after-school tutoring business recorded the revenue increase of approximately 9% in dollar terms for the quarter. Student enrollments grew 23% year-over-year for the quarter. Our POP Kids program recorded a revenue increase of about 3.5% in dollar terms for the quarter. Enrollment increased by 17% for the quarter.
Our overseas related business, including test prep and consulting and study tour business, continue to face the difficult challenges due to the cancellation of the overseas exams and restrictions on travel. While the unpredictability of the pandemic situation in different parts of the world has raised the students' hesitance to study abroad. The overseas test prep business recorded a revenue decrease of about 51% in dollar terms for the quarter. While the overseas consulting and overseas study tour business recorded revenue decrease of about 31% in dollar terms year-over-year for the quarter. Finally, VIP personalized class business recorded cash revenue decline of about 10% in dollar terms year-over-year for the quarter. We're pleased to see that our summer promotion strategy delivered outstanding results.
We offered low-priced experiential courses for multiple subjects in a total of about 70 cities, targeting grade seven secondary school and grade three primary school student customers before they start their new school year. The promotion price is similar with that of last year at around RMB 400. It's very encouraging that even we launched this summer promotion almost one month later than last year because of the huge challenge from the pandemic, our daily operation. The summer promotion remains very well-received by the market. The complete promotion enrollments we brought in this year reported a 31% increase year-over-year, reaching 1,079,000 enrollments. The encouraging results indicated the opportunity of the market consolidation as the COVID-19 pandemic fades, and certain players may lack financial and digital capabilities to sustain their operations. It was well-proven that under this strategy, we're able to better identify and retain customer with higher loyalty.
Please note that these promotion enrollments are not recorded in our current reported enrollment. Going into the autumn semester, we have retained about 60% of the students following the promotion, which will boost the revenue and margin recovery throughout the whole fiscal year 2021. We do not foresee any negative impact of the promotions on operating margin throughout the whole fiscal year. As these students move to the higher grades, the continuing improvement in retention rates and customer loyalty will drive the revenue growth in the next three to six years. We continue to be guided by our optimized market strategy in this quarter and carried out capacity expansion in the cities where we see potential for rapid growth and strong profitability. This quarter, we opened seven new offline training schools in the city of Changzhou, Huai'an, Taizhou, Yixing, Wuhu, and Jiaxing.
Altogether, this increased the total square meters of classroom area by approximately 23% year-over-year, 1% quarter-over-quarter by the end of this quarter. This slight increase is in line with our expectation, as we tend to achieve a more modest growth in capacity in the first quarter of the year and ramp up our expansion efforts in the latter part of the year to prepare us for recruiting more new student enrollments at the start of the following academic year. The expansion in our offline education network has also made sure that we are fully prepared for when pandemic is over, and our service can resume with a strong presence across different Chinese cities.
We rolled out our dual-teacher class model for POP Kids program in 46 existing cities, for U-Can program in 28 existing cities, and for both POP Kids and U-Can K12 business in 10 new cities by end of this quarter. We're happy to see increased market penetration in those markets we have tapped into. We also saw the improved customer retention and scalability of this new model. With this proven result, we will continue this strategy in the rest of the year. As the outbreak of COVID-19 has highlighted the importance and demand of online education, we have placed more resources in this area and invested $39 million in the quarter to improve and maintain our OMO integrated education ecosystem.
Apart from the OMO infrastructure, we have allocated part of the resources in advanced training programs for our teachers to enhance their online/offline integrated teaching skills in response to the growing demand. At the same time, we continue to upgrade our technology platforms and will broaden the usage of online tools and content in our OMO system for all business lines throughout the whole network, as well as further develop the best teaching content and courseware to cater to online/offline integrated education method. We're glad to see that industry-leading OMO ecosystem has not only successfully managed to cushion most of the impact on our service operation caused by the pandemic, we also see the customer retention rate from spring to summer semester and from the summer to autumn semester were trending higher than the same period last year.
Which further demonstrated our customer satisfaction and the effectiveness of our online courses throughout the OMO system. We believe those OMO initiatives will effectively boost the enrollment and speed up the recovery of business in the rest of the year. To capture the huge market opportunity in the online education space, we continued investing more resources in executing new initiatives, online K12 after-school tutoring business fiscal year 2021. During the COVID-19 pandemic, Koolearn did large-scale market promotion by offering free large-sized online live broadcasting classes to the public and attracted several times more traffic than normal time. To capture this new market opportunity, Koolearn also added a meaningful number of customer service representatives and marketing staff to support the new initiatives in K12 tutoring.
These moves have consequently raised our spending on marketing front, but we believe these are necessary and understandable measures as we found ourselves in an unusual pandemic situation. Our Dongfang Youbo both small-size class currently enjoy a significant first-mover advantage and stand to benefit from the increase in demand in lower-tier cities. Koolearn large-size K-12 courses are able to offer the best in-class learning experience through the method in upgrading the app and online platforms, introducing new education technologies and adding more interactive features on online courses. Koolearn also continue to establish teaching training centers in other locations to attract more qualified teachers and tutors to provide a systematic training programs. At the same time, Koolearn has dedicated a significant amount of the investment to marketing and service enhancements in the past two quarters to attract customers during the peak of the pandemic.
We expect spending to be normalized in the coming quarter, as we will be cautious in identifying high ROI marketing channels and evaluate their unit economics in real time, which will, in return, keep the average user acquisition cost at a relatively low level. We believe as a result of the improvement of operational teams, as well as positive word-of-mouth promotion and brand loyalty, Koolearn will continue to quickly acquire new users while enhancing the student retention rate. Now let me walk you through the other key financial details of the quarter. Operating expenses for the quarter were $836.1 million, representing a 1.3% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which exclude the share-based compensation expenses, were $820.2 million, representing a 0.7% increase year-over-year.
Cost of revenue increased by 5.6% year-over-year to $464.9 million, primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation. Selling, marketing expenses increased by 15.5% year-over-year to $116.9 million, primarily due to the additional number of customer service representatives and marketing staff, with the aim of capturing the new market opportunity, especially for new initiatives in K-12 tutoring, our pure online education platform, Koolearn.com. General and administrative expenses for the quarter decreased by 10.5% year-over-year to $254.3 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $242.6 million, representing a 11.3% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 43.7% to $15.8 million in the fiscal first quarter of 2021.
Operating income was $150.3 million, representing a 38.9% decrease year over year. Non-GAAP income from operations for the quarter was $166.1 million, representing a 35.4% decrease year over year. Operating margin for the quarter was 15.2% compared to 23.0% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 16.8% compared to 24% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $174.7 million, representing a 16.4% decrease from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $1.10 and $1.09, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $184.5 million, representing a 19.8% decrease from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $1.16 and $1.15.
Net operating cash flow for the first quarter of 2021 was approximately $391.6 million. Capital expenditures for the quarter were $95.2 million, which were primarily attributed to the opening of 42 facilities and renovations at existing learning centers. Turning to the balance sheet. As of August 31st of 2020, New Oriental had cash and cash equivalents of $1,047.6 million, as compared to $915.1 million as of May 31st of 2020. In addition, the company had $291.8 million in term deposits, $2,778.4 million in short-term investments. New Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instruction delivered at the end of the first quarter of fiscal year 2021, was $1,563.1 million.
An increase of 17.5% as compared to $1,330.7 million at the end of the first quarter of fiscal year 2020. Looking ahead into the next quarter and the rest of the fiscal year 2021, despite the continued challenge from the COVID-19 pandemic are expected to remain, we are more clear about the recovery trends of the company near-term financial performance and the market opportunity over the long run. Our strategic focus and investment approach this year aim at improving product quality, increasing teacher salaries, and enhancing our industry-leading system, which fully reflects our ethos of focusing on the essence of education.
In view of market competition and opportunities to take advantage of post-COVID market consolidation, we firmly maintain a stable and balanced investment strategy that would improve the quality of our education service with aim to achieve sustainable and long-term growth, as opposed to unhealthy short-term growth that often requires excessive investments and higher cost to acquire customers. As such, we will continue to focus on the following key areas. First, we will continue to expand our offline business. We aim to add around 20%-25% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-12 business in this fiscal year.
We believe our class expansion will prepare us to further take market share from the other players post-COVID, as we believe some small players without strong financial position and online class capability may not be able to sustain their business during the period. We expect this industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with a strong financial capability and a fresh offline facility enable us to further strengthen the market-leading position and penetration. Second, we will continue to leverage our investment into digital technologies and introduce our OMO system in more offline language training and test offerings, especially for the K-12 business and overseas test prep key business.
The usage of the online tools and content in our OMO system for all business lines throughout the whole network will be enhanced. To uplift the whole OMO teaching experience, we'll place more efforts developing the best teaching content and courseware, and also developing more advanced training programs to our teachers. With all the above mentioned infrastructure in place, we'll continue to pilot our OMO online initiatives in some major cities with high demands and higher operational efficiency. We believe that our OMO initiatives will be one of our growth engines to increase our customer acquisition post-COVID, and enabling us to capture the market consolidation opportunity. This revamped new business model will also accelerate our margin recovery in the rest of the year, and further extend our long-term margin target.
Here, I have to highlight that all of these OMO products are supported by our offline classes that supplement each other in a hybrid format. All the teaching content, coursework, materials, as well our teachers and technologies, are developed and originate from our existing offline centers and resources. This integrated system continue to broaden our customer base as it enable us to reach students in satellite cities, as well as the cities where we have fewer learning centers to cater all our customers. Furthermore, we will continue to invest in and implement new initiatives, including product content development, teachers recruiting and training, R&D, as well as the sales marketing in pure K-12 after-school tutoring business, our koolearn.com platform. Third, our top priority will remain as the focus on controlling cost and reducing expenditures across the company to minimize the negative impact from pandemic on bottom line.
We believe we will resume the expansion of the overall non-GAAP operating margin this year-over-year as COVID-19 subside gradually. Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong. Although we are facing various short-term negative impacts from the pandemic, and we have been increasing our investment in different strategy, we remain optimistic of the brighter prospects of our business, and believe our investments now bring us fruitful returns in the long run. As the pandemic situation and restriction measures begin to ease in China, the timely reopening of all schools and our offline learning centers in September, the start of the new fiscal year, is seemingly to be a massive boost for our business.
We believe this will enable our recovery to pick up the momentum, which will likely to be reflected in the results in the coming quarters. We're certain that with New Oriental's leading brands, superior education products and system, and the best teacher resources, we have the ability to earn further into market share in China's huge after-school tutoring market and deliver long-term value for our shareholders. We're looking at the near term and our expectations for the next quarter. We expect total revenue to be in the range of $863.7 million-$887.3 million, representing year-over-year increase in the range of 10%-13%. To provide the breakdown of the expected top line growth for key business lines, K-12 business is expected to grow around 25%.
Overseas test prep program is expected to decline 30%-35%, and overseas study consulting and study tour business is expected to decline 0%-5% all year-over-year in dollar terms. We also expect the overseas-related business, including overseas test prep and consulting service, will continue to decline due to the pandemic around the globe caused by the cancellation of overseas exams, suspension of the overseas schools, and restriction on travels. The negative impact on these overseas-related business will affect the entire education industry in China, not only for New Oriental, and may last over the coming one or two quarters. That said, in contrast, China's effective control of the pandemic situation has shed a more positive light on our business domestically.
We're pleased to see that we gradually resume our offline operation in all cities that we are in by mid-September, and vast majority of the students in these cities have successfully migrated back to our learning centers from our OMO online classes. To conclude, we're now taking on all kinds of the operational actions to boost the enrollments and classroom utilization for the autumn semester, and speed up the recovery of the business after the resumption of the schools and learning centers. We're confident that the demands for after-school tutoring will gradually pick up and to trend toward normalized level in the rest of this fiscal year. I must mention that these expectations reflect New Oriental's current preliminary view, which is subject to change. At this point, I will take your questions. Operator, please open the call for this.
Thank you. The question-and-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. To ask a question now, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, that's star one for questions. Your first question comes from the line of Tian Hou from TH Capital. Please go ahead.
Good evening, Stephen, CC. Congratulations on a good quarter and guidance, even though it's kind of a challenging time. The question is related to the margin. On the gross margin, on a year-on-year basis, was down pretty significant. I wonder how much is caused by the overseas business, and going forward, what the gross margin is going to trend. Thank you.
Hi, Tian. Yeah, the gross margin was down by roughly 6% year-over-year this quarter. I think the first reason is that the revenue was down by 8% in this quarter, year-over-year. In this quarter, we still raised the salary of the teachers, and because we think the teachers' quality is the core competence of the education business. As we did in last several years, we raised the teachers' salary. Also, we acquired the top teachers from the other small players during the pandemic. The rentals, I think that during the COVID-19 period, we still expanded our capacity in the areas or in the cities that we feel the comfort for drive the potential growth in the future. This quarter, the year-over-year expansion was 23% at the quarter end. It drives the gross margin down. I think it's just a one time, okay.
Because as I said, our business is in the process of the recovery, and we have already gave the guidance of the Q2. Within it, in the Q2 guidance, the K-12 business will be increased by 25%. I do believe the GM margin recovery will be happened in the second quarter. Tian.
Thank you. Our next question comes from Felix Liu from UBS. Please ask your question.
Good evening, management. Congratulations on a good result given the challenging environment. My question is on utilization. I understand that a lot of offline classes have resumed in most of the cities. Could you give us some color on what the utilization is like currently, and how is the trajectory going forward? Thank you.
Yeah. Hi, Felix. It's a little bit hard for us to disclose the utilization rate because we're still in the time of the pandemic. For example, in Beijing School, our Beijing School reopened all the learning centers in mid-September. That means we lost almost 10 to 15 days in September. During the whole summer, I mean, some of our learning centers were not open. It's really hard for us to disclose the utilization rates now. I think we will disclose the utilization rates in, I think, the Q2 or Q3. We do believe the utilization rates will get higher and higher after the pandemic's over, because typically, our revenue growth is higher than the expansion plan. I think that means we do have a leverage on the learning center utilization. This is the main long-term trend, Felix.
Thank you. Our next question comes from Jin Yoon from New Street Research. Please go ahead.
Hi, good evening. Just wanted to talk about overseas test prep. Your guidance kind of suggests, obviously, the bottom is in in terms of this slight improvement from last quarter's numbers. Can you just kind of talk about if that's really the case, or if we're seeing a kind of a seasonal head fake? The second question I have is, I think we're seeing a massive testing in Qingdao of approximately like nine million people or something like that, I think just hit the press. I just wanted to see how big that revenue from that city is in case there is a second wave in that particular city. Thanks.
Hi, Jin. The overseas test prep, the revenue decline of this quarter, the Q1, was 51%. We have already given the guidance of the Q2. The overseas test prep will be down by somewhere around 35%. Things turn to be better in Q2. Because we have seen some, like the TOEFL or GRE tests, were reopened in China in different cities. Anyway, I think our overseas test prep business will be, to some extent, negatively impacted by the COVID-19. The Q1, this quarter, was the worst. I do believe the overseas test prep business will be recovered step by step. This is my answer for the question about the overseas test prep. Qingdao, we know what happened in Qingdao since last week. So far, we don't get any notice from the government of the shutdown of the schools.
That means our learning centers in Qingdao are still open now. Anyway, we will meet the requirements of the government. I think during the peak time of the COVID-19 times, we have the ability to move all the offline courses to online. We tested it for two months of the pandemic. I don't think it will negatively impact our revenue of Qingdao. Anyway, Qingdao is now, the revenue contribution from Qingdao is very small, Jin.
Thank you. Our next question comes from Mark Li from Citi. Please go ahead.
Hi, Stephen and Sisi. Thank you for taking my question.
I'm sorry, I can't hear you very clearly.
Hi, Stephen and Sizhu. Is it better now? Sorry.
Hi, Mark. I can't hear you.
Hi. Is it better now? Hello?
I think the line has some problem. Try it again.
Hi.
Hi, Mark.
Is it better now?
Mark, can you come closer to the mouthpiece, please?
Hi.
It's fine. Raise your voice, okay?
Okay. I just want to ask, how is our FY 2021 guidance? Could you share the latest guidance for the full year with us? Also, our OP margin target, if we have any change and the timing to reach that. Thank you.
Okay. Yeah. Actually, we have already given the guidance of the Q2, by 10%-13%. Actually, the business is now fully recovered in Q2, the autumn quarter. Beijing school was reopened in mid-September. We expect the revenue growth in the coming Q3 and Q4 will be better than Q2 because of the more recovery of our business and easy comparison of this year. The COVID-19 started since last year, Q3. We do believe our top-line growth performance in Q3 and Q4 will be better than Q2. Okay? Margin guidance. Yeah. I think, actually Q2, the next quarter, we believe the margin decline in Q2 will be continued to narrow down compared to this quarter, the Q1. We are confident that we will be able to deliver the continued margin expansion after the pandemic is over, especially in Q3 and Q4.
We don't want to change our mid long-term margin guidance. Mark, is it clear?
Thank you. Our next question comes from Alex Chu from Credit Suisse. Please ask your question.
Hi, Stephen and Sisi. Thank you for taking my questions. My first question is about the breakdown of your next quarter K-12 revenue guidance. I think in the August quarter, it's very unusual that the POP Kids was a little slower than the U-Can business. What about the next quarter? The second question is about the rollout of your OMO business model. I think I read from the news report that you launched the pure online small class model in your Hangzhou school and received very positive feedback from the province-wide students. Could you please share more color on that and what's the plan for the further rollout? Thank you.
Yeah. Your first question about Alex, can you repeat your first question again?
Sure. I noticed that in the August quarter, the POP Kids business was a bit slower than the U-Can business. What about the next quarter? Within the 25% growth, what about the difference between POP Kids and U-Can?
Yeah. I think, next quarter, the Q2, I think the growth rate of the U-Can business will be a little bit higher than the POP Kids business growth because the U-Can business is more mission-critical. For the middle school, high school students, they tend to study more, especially after COVID-19. That's why the growth of the U-Can business grows higher than the POP Kids business. Yeah. The OMO. Oh, that's a great question. The OMO. Yeah. Actually, we started the OMO business three years ago, for our Beijing school U-Can business. After the COVID-19, we are strengthening the development of our OMO because during the COVID-19, almost all of our students took the courses pure online.
After the COVID-19, vast majority of our students goes back to the offline learning centers, but would choose some percentage of the online course for those part of the students. Also for some new satellite cities, we started to roll out the new OMO model. I think Hangzhou is a very good case, and this is the first year that the Hangzhou school did the OMO model. Hangzhou school acquired a lot of the new customers of the grade 10 students from the satellite cities around Hangzhou. I think it's a very good start, and we will roll out in more and more cities and provinces. Okay. One more thing is the retention rate of the OMO model in Hangzhou school, I think after the summer is over 50%.
I think it was a very good sign for the study result of the OMO model. We will do it more and more in more cities. Cindy, you want to add something?
Yeah. As Stephen emphasized earlier in the prepared remarks, actually, we have piloted this OMO model in around 20 cities already, just in the summer. Only resumed the offline operation from the summer, now we have already tested this model in several key cities. The feedback is good. That's continued to be the key strategy going forward, yeah.
Okay.
Thank you. Our next question comes from Sheng Zhong from Morgan Stanley. Please go ahead.
Hey, good evening. Thank you for taking my question. My question is on the OMO as well. I want to understand more about how to operate this OMO model. For the local school head, what's his key KPI for OMO? How will he balance to open new learning centers or push more OMO into these new cities? If it's because you have pure online as well, or if pure online will mainly focus on the surrounding cities. Thank you.
Yeah. Hi, Sheng Zhong. I think this is a great question. We set up the KPI of the school heads. I think the KPI of the school heads divided by two parts. Number one is the traditional offline business. Second is the new OMO model. Two different KPI. I think it's easy to understand the local school heads make the decision. For those areas that we are aware we do have the learning centers, I think we will do the OMO. Okay. We will still use the learning centers to acquire the new student enrollment. For the areas where we don't have the learning centers or for the new cities we don't have the learning centers there, the OMO will be first deployed.
As I said in the prepared remarks, all the content and courseware and teacher resources, even the teacher training system of the OMO model are originated from the local city. Okay? The head office will give the full support to the different areas and different cities. We will roll out the OMO model to more cities going forward. I do believe the OMO model will contribute more and more revenue going forward. Yeah, one more thing add, we don't want to spend crazy money on marketing expenses for the OMO model. I think the students acquisition cost for the OMO model will be very low. I think it will be the same as our traditional offline business.
Thank you. Our next question comes from the line of Lucy Yu from Bank of America Securities. Please ask your question.
Thank you, Stephen, Su. I would like to ask a question on dual-teacher. Stephen, you just mentioned that when we penetrating into new cities, actually OMO will be the first choice. How about dual-teacher model? Are we still going to roll that out? As far as I can understand that previously, before OMO roll out, we were using the dual-teacher to penetrating into lower tier cities. Nowadays, what's in offer choice, in terms of business model, in the new cities? Secondly, you mentioned that in dual-teacher model, we have seen improving profitability and the retention. Could we share more number on the profitability and retention of dual-teacher business model? Thank you.
Yeah, I think that going forward, the OMO model will be the first choice. We run a business in the new cities, especially for the low-tier cities. We're doing well for the dual-teacher model. We open more and more the new cities of the POP Kids and U-Can program. Going forward, we will focus more of the model that the teachers in the head office will cast the new teacher model class to the low-tier cities. Typically, it focused on the top students in the high-tier and low-tier cities. We have the two way to run the business in the low-tier cities, OMO and the dual-teacher model. Lucy.
Thank you. Our next question comes from Alex Liu from China Renaissance. Please go ahead.
Thanks, Stephen, for taking my question. First, on teacher compensations, how fast should we think about a teacher compensation growth, going forward, especially, some online players are rather aggressive in terms of teacher paying out. Second question is that regarding the strong summer enrollment growth, I was just wondering, is there any specific reasons behind or any specific sort of observations, in summer, why we did so well this year, and how much of the growth is coming from small player exiting the market? Thank you.
Alex, I think the teacher salary. We think the teacher's quality is the core competence of the education business. We raise the teacher salary by 8%-9% every year. Even we face through the challenge during the period of the COVID-19, we still did the same thing. I don't think the teacher salary increase will drive the margin. On the contrary, paying the teacher more will bring us the high quality or high quality feedback from the customers, students, and parents, and drive the utilization rate up and the revenue up. I think we pay more the teachers will help the GP margin performance better near term and long term. I think this is our strategy for the teachers. The second question is about the summer enrollment.
I think in the spring semester, we met some problems on acquiring the new customers, because of the COVID-19. We couldn't see the students and parents face-to-face. During the summer quarter, most of our learning centers were reopened. We can give the study advices to the parent and kids face-to-face. As for the competition environment, yeah, we know some small players disappear from the market. I think it's great opportunity for the big players like us to take more market share from the markets post-COVID-19. The numbers, especially, since the second half of July, the cash revenue and the enrollment numbers was booming. That's why we give the guidance of the K-12 business growth in second quarter will be somewhere around 25%. I do believe the enrollment growth, and the revenue growth in Q3 and Q4 will be even better. Thank you.
Thank you. Our next question comes from DS Kim from JP Morgan. Please ask your question.
Hello, sir. Hi, Sisi. Congrats on a good set of results and very good guidance. Actually, most of my questions have already been answered, so maybe I can just follow up on OMO. Can I double-check, when you say this new piloting OMO, are we referring to pure online localized curriculum classes, like DFUB? If so, can I check what's the size of each class ASP gap with the similar offline courses and if there's any difference in offering, i.e., this OMO is more for the weekdays versus weekend or more for short-term courses, or it's really just same as our offline offerings?
We are doing the new OMO model by three ways. Number one, the large classes. That means the large classes. This is typically majority of the classes are happening online. I think the price of that part of the course, I think it's 20%-30% lower than our normalized classes. Secondly, the OMO small size class. It's a hybrid class, and it's offline and online, the integrated classes. The last one, number three, is some very short-term courses. I think the typical purpose of those part of the business is to acquire the new student enrollment as very short-term courses. We ask the famous teachers to record the courses, and I think this is the way to ask the marketing way. We have the three ways. Anyway, the OMO is still in the early stage.
I think so far so good, and we'll do more going forward. In next quarter or even the rest of the year, the earnings call, I will share more information with you. Thank you.
Thank you. Our next question comes from Tommy Wong from China Merchants Securities. Please go ahead.
Oh, hi. Thank you, management and Stephen. Congratulations on the strong results. Just a quick question, I guess we don't have a lot of time left. Can you comment about the secondary listing in Hong Kong? Potentially, we need more funds to compete on the online space. All these other guys, TAL, they're all burning a lot of money. If we want to play in this game, we have to participate. Just wondering, the secondary issue, bring some more money and play the game. Just wondering, what's your thought on that? Thank you.
We are not in a right position to make comments on secondary listing. The money. Yeah, as I said, our strategic focus and investment approach this year, and not only this year, but also the mid-long term, okay, is aimed at improving the product quality, increasing the teacher salary, and enhancing our system. I think these are the essence of the education. We know there is a huge opportunity in the market, especially after COVID. We firmly maintain the stable and balanced investment strategy, and we want to spend prudent money on marketing and get a healthy short-term growth. This is our strategy, not only for now, but also for the mid-long term. Thank you.
Thank you. Our next question comes from Liping ZHAO from CICC. Please go ahead.
Hi, Stephen. Thanks for taking my question. My question is about the capacity expansion. How should we expect the impact of this pandemic on your capacity expansion plan, especially for your K-12 business? Any chance we can see an accelerated expansion during the market consolidation? Thank you.
We aim to add around 20%-25% new capacity in the fiscal year 2021. Last year, we planned to open 20%. Finally, we opened 26%. This year, we made the same plan. Anyway, I think it's a great opportunity for us to take more market share. We will open 20%-25% new capacity to acquire new student enrollments. Also, we do have the OMO model. The two ways, the new capacity expansion and OMO will bring us the new customers in the whole fiscal year 2021. Yeah, our strategy of the expansion is very stabilized. Thank you.
Thank you. Our next question comes from Felix Liu from UBS. Please go ahead.
Oh, thank you. I just want to have a follow-up question on our deferred revenue balance. I noticed that the growth in deferred revenue is a lot stronger than our Q2 revenue guidance. Might I know there's a reason behind. Thank you.
The pandemic in China, especially in the summer. As I said, since the second half of July, the revenue and enrollment growth was booming. That's why we got the higher deferred revenue balance at this quarter end. I think in the Q2, we're still in the process of the recovery. I think even in the Q3 and Q4, you will see even higher enrollment and top line growth, especially for the K-12 business. I do believe we are taking the market share from the small players, and we do believe we will have the even higher student retention rate going forward, because we invest a lot since four or five years ago. We do believe we are providing one of the best products in the market.
I think the recovery will happen step by step and more backloaded, Q3 and Q4. Thank you.
Thank you. We are now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Mr. Stephen Yang, for his closing remarks.
Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.