Good evening. Thank you for standing by for New Oriental's FY 2020 third quarter results earnings conference call. At this time, all participants are in 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 like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead.
Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter 2020 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 news wire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law.
As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I will now turn the call over to Mr. Yang. Stephen, please go ahead.
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Before we kick off the call, I would like to firstly convey our deepest condolences to the people who have sadly passed away and to their loved ones during this global health crisis. We would like to express our sincere gratitude to medical staff around the world for their dedication and commitment in these difficult times. Thank you. Let us all play our part and stay healthy. Together, we can overcome the challenge. In response to the outbreak of the COVID-19, New Oriental has immediately transferred more than 1 million students to online programs through New Oriental cloud-based classrooms. We have also actively assumed social responsibilities by donating CNY 20 million in cash to Hubei province and providing free small-sized offline courses to the children of nearly 20,000 medical staffs.
As well as providing the public with tens of millions of free high-quality educational resources that can benefit over 10 million people, including students of all levels, parents, teachers, and entrepreneurs. Back to our business. We are very pleased to report a set of encouraging financial results in the third fiscal quarter of this year, delivering a top-line growth and continued operating margin expansion despite COVID-19 pandemic posing massive impacts to all those industries across globe. Total revenue growth was $923.2 million, representing a growth of 15.9% in dollar terms or 18.7% if computed in RMB. Net revenues from education programs and services for the first fiscal quarter were $845.7 million, representing a 16.3% increase year-over-year. The growth was mainly driven by K12 after-school tutoring courses, which achieved a year-over-year revenue growth of approximately 24% in dollar terms or 27% if computed in RMB.
We continued to be guided by our optimized market strategy in this quarter and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability. This quarter, we added a net of 112 learning centers in existing cities, opened two new training schools in the city of Zhangjiagang and Nanjing. Altogether, this increased the total sq m of classroom area by approximately 30% year-over-year, 11% quarter-over-quarter, and 21% comparing with the end of the fiscal year 2019. Total student enrollment with dynamic subjects tutoring and test-prep courses in the first fiscal quarter of 2020 increased by 2.3% year-over-year to approximately 1,606,000.
Slower than normal increase in the number of student enrollments is primarily due to a bigger portion of the enrollment for the winter semester falling into the second fiscal quarter because of the earlier timing of Chinese New Year this year compared with the last year, as well as the higher than normal cancellation for winter classes. The outbreak of COVID-19 have also caused challenges on acquiring new customers in the second half of the quarter, while the enrollments for classes in Q4 and summer classes have also been delayed. At the same time, we continue to our efforts in improving and maintaining our online/offline OMO standardized classroom teaching system, especially during the outbreak of COVID-19. All the offline classes have been transited smoothly to online classes since the beginning of February. We're very encouraged to have received the positive feedback from our customers.
We also continue to make strategic investments in our initiatives in K-12 tutoring, our pure online education platform, koolearn.com, to leverage our advanced teaching resources in lower-tier cities and those in remote areas. Following last quarter's strong bottom line performance, we once again achieved year-over-year operating margin expansion in this quarter. During the quarter, we recorded non-GAAP operating income of $134.8 million, compared to $113.8 million in the same period of last year. Non-GAAP operating margin rose by 30 basis points year-over-year to 14.6%, and non-GAAP net margin rose by 240 basis points year-over-year to 16.1%. The continued operating margin expansion is mainly driven by the better leverage in classroom rental and related operating expenses, just as we consistently improved the utilization of the facilities before the outbreak of the COVID-19.
The net margin expansion is also due to the VAT exemption approval by the government during the pandemic, and the net loss of Koolearn subsidiary undertaken by the non-controlling interest to shareholders. We're confident that we will be able to deliver continued margin expansion after the pandemic is over and generate sustainable long-term value for our customers and shareholders. Per program blended ASP, which is cash revenue divided by total student enrollment, increased by about 2.7% year-over-year in dollar terms. Hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 3% year-over-year in RMB terms. To provide the breakdown of the hourly blended ASP, please note that U-Can middle school/high school program increased by 4%, Pop Kids increased by 6%, and the overseas test-prep program increased by 7% year-over-year in RMB terms.
Comparing with our normal price increase of 5%-8%, this quarter's hourly blended ASP increase was 2%-3% lower than normal level, mainly because of the discount we provided to the customers to support the migration from offline class to online, as well as the bigger slowdown of the VIP personalized class business. At the same time, to show gratitude to the medical staff who traveled to Wuhan to offer help, we offered special complimentary classes to their children. This has inevitably contributed a slight decrease of the ASP. Now, let's move on to the third quarter performance across our individual business lines. As mentioned earlier, our key revenue driver, K12 all subjects after-school tutoring business, achieved year-over-year revenue growth of 24% in dollar terms or 27% in RMB terms.
Breaking it down, the U-Can middle school, high school all subjects after-school tutoring business recorded a revenue increase of approximately 23% in dollar terms or 26% in RMB terms for the quarter. The enrollment grew approximately 23% year-over-year for the quarter. Our Pop Kids program delivered outstanding results, with the revenue up by about 26% in dollar terms or 29% in RMB terms for the quarter. The enrollment decreased by 23% for the quarter. The decline is due to the bigger portion of the enrollment for the winter semester falling into the second fiscal quarter because of the earlier timing of the Chinese New Year this year compared with last year. The overseas test-prep business recorded a revenue decrease of 14% in dollar terms or 12% in RMB terms for the quarter.
The consulting business recorded revenue growth of about 27% in dollar terms or 30% in RMB terms year-over-year for the quarter. Finally, VIP personalized class business recorded revenue growth of about 10% year-over-year in dollar terms or 13% in RMB terms year-over-year for the quarter. I will provide some updates on progress we are making with our optimized market strategy. Beginning with our offline business this quarter, as mentioned earlier, we added a net of 110 learning centers in busy cities, opened two new training schools. Altogether, this increased the total square meters of classroom area by approximately 30% year-over-year, 11% quarter-over-quarter, and 21% compared with the end of the fiscal year 2019.
The expansion in our offline education network has also made sure that we are fully prepared for when the pandemic is over, and our service can resume with the strong presence across the different Chinese cities. The two-teacher class model has been introduced into the top tier program in 48 existing cities, for U-Can program in 28 existing cities, and for both top tiers in U-Can K-12 business in seven new cities. The initiative supported increased market penetration in those markets we have tapped into. We also saw improved customer retention and scalability of the new model. With these program results, we will continue this strategy in the rest of the year. On the digital technology front, we invested $40 million in this quarter to improve and maintain our OMO education ecosystem.
As the outbreak of the COVID-19 has highlighted the importance of the demand of online education, the investment also supported the migration of our offline classes to small-sized online live broadcasting classes during the pandemic. Apart from the OMO infrastructure, we have allocated a part of the resources for teacher training to ensure they are all well-equipped to be managing the online classes. As a result, the OMO ecosystem managed to cushion the multiple impacts on our service and operation caused by the pandemic. Most of the investments were recorded in the G&A expenses. We also made stable progress in the pure online Koolearn.com business line and other supplementary online education products, which is currently in growing market demand. More resources are invested into the execution of the new initiatives in online K-12 after-school children business into the year 2020.
Investment includes content development, teachers recruiting, training, sales, marketing, R&D, and other necessary cost expenses to drive growth of the new pure online programs. With these programs, we are able to reach out more students in those new cities in an interactive and scalable manner. We believe this will help Koolearn.com to gain new market share in the online education space and drive top-line growth. In addition, during COVID-19 pandemic, Koolearn did a large-scale market promotion by offering free large-sized online live broadcasting classes to the public and attracted several times more traffic than normal times. To capture the new market opportunity, Koolearn also added a meaningful amount of the customer representatives and marketing staff to support the new initiatives in K-12 children.
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. Let me walk you through the other key financial details for the third quarter. Operating costs and expenses for the quarter were $806.0 million, representing a 15.0% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $788.4 million, representing a 15.4% increase year-over-year. Cost of revenue increased by 18.1% year-over-year to $398.6 million, primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation.
Sales and marketing expenses increased by 35.2% year-over-year to $118.2 million, primarily due to a significant increase of the promotion expenses and number of the customer service representatives and marketing staff for the new initiatives in K-12 children on Koolearn.com. General and administrative expenses for the quarter increased by 4.8% year-over-year to $289.1 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $273.3 million, representing a 5.9% increase year-over-year. Total share-based compensation expenses, which were allocated to relate to operating costs and expenses, decreased by 2.4% to $17.5 million in the third fiscal quarter of 2020. Operating income was $117.3 million, representing a 22.4% increase year-over-year. Non-GAAP income from operations for the quarter was $134.8 million, representing an 18.5% increase year-over-year. Operating margin for the quarter was 12.7% compared to 12.0% in the same period of prior fiscal year.
Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 14.6% compared to 14.3% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $137.7 million, representing a 41.4% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.87 and $0.86 respectively. Non-GAAP net income attributable to New Oriental for the quarter was $148.5 million, representing a 36.4% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.94 and $0.93 respectively. Net margin for the quarter was 14.9% compared to 12.2% in the same period of the prior fiscal year. Non-GAAP net margin for the quarter was 16.1% compared to 13.7% in the same period of the prior fiscal year.
Net operating cash flow for the third quarter of 2020 was approximately $39.7 million. Capital expenditures for the quarter were $103.2 million, which were primarily attributable to the opening of 27 facilities and renovations at existing learning centers. Turning to the balance sheet. As of February 29, 2020, New Oriental had cash and cash equivalents of $1,057.1 million as compared to $1,114.2 million as of May 31, 2019. In addition, the company had $269.2 million in term deposits and $2,241.2 million in short-term investments. New Oriental's deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as the revenue as the instructions are delivered at the end of the third quarter of fiscal year 2020, was $1,375.0 million, an increase of 15.4% as compared to $1,191.8 million at the end of the third quarter of fiscal year 2019.
Looking ahead to the fourth quarter of this fiscal year, besides the continuing challenges from the COVID-19 pandemic, we're still optimistic towards the company's business and will continue to focus on the following key areas. First, we will continue to expand our offline business. We still aim to add around 20% to 25% capacity, including new learning centers and extending class members of the some existing learning centers for K-12 business in existing cities. We believe our capacity expansion will support us to hold more students in our facilities in the coming summer, which will very likely to be shortened by one or two weeks due to the delayed start of the second semester of all public schools in China to combating the pandemic.
More importantly, it will prepare us to further take market share from other players after COVID-19 subsides gradually, as some small players without strong financial position and online class capability may not be able to sustain their business during the period and will be forced to cease operations. We expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we're a major player with strong financial capacity and fresh offline facilities allow us to further strengthen our market leading position and penetration. In addition, we'll continue to roll out our two- teacher model schools to a number of new local cities in certain provinces for the whole year. Second, we'll continue to leverage our investment into digital technologies and reintroduce our OMO systems to more offline language training and test offerings, especially for our K12 business and overseas test prep business.
We will broaden the usage of the online tools and content in our OMO system for all business lines throughout the whole network. We will continuously invest in developing the best teaching content and courseware to cater to online, offline integrated education methods. At the same time, we will provide more advanced training programs to our teachers and enhance their online, offline integrated teaching skills. We will continue to make investments, and we believe the total spending in absolute dollar terms in fiscal year 2020 will increase compared with the previous fiscal year. Furthermore, we will continue to invest in and execute new initiatives, including product and content development, teachers recruiting training, R&D, as well as assist marketing in pure online K12 after-school tutoring business on our koolearn.com platform.
As mentioned earlier, during the COVID-19 pandemic, Koolearn encountered several times more traffic than normal times by offering free online live broadcasting classes to the public during the winter and spring seasons. Koolearn also added a meaningful amount of customer service representatives and tutors. Third, our top priority will remain as the focus on controlling costs and reducing the expenditures across the company to minimize the negative impact from COVID-19 pandemic on our bottom line.
Although we expect the margin decline year-over-year in the fourth quarter of fiscal year 2020, we believe we can still maintain non-GAAP operating margin for the full year of fiscal year 2020 at a similar level as last year, and achieve expansion of non-GAAP net margin for the full year of 2020, compared with a year-over-year decline last two fiscal years. Finally, the recent RMB depreciation against the US dollars might cause impact on earnings in dollar terms for the fourth quarter of fiscal year 2020. Finally, I would like to emphasize we have great confidence in the fundamentals of our business. Although we are facing the negative impact from the pandemic for the near term, we remain optimistic of the brighter prospect of our business over the long run.
We're certain that with the New Oriental's leading brand, superior education products and systems, and best teacher resources, we'll keep taking market share with the leading position in China's huge after-school tutoring market and deliver long-term value for our shareholders and customers. Looking at the near term and our expectations for the next quarter, we expect the total revenue to be in the range of $774 million-$806.2 million, representing a year-over-year decline in the range of 8%-4%, if not taking into the consideration the impact, the potential change in exchange rate between RMB and the U.S. dollar. The projected decline of revenue is expected to be in the range of 4%-0% for the fourth quarter of fiscal year 2020.
To provide a breakdown of the expected top-line growth for key business lines, K-12 whole subjects after-school tutoring business is expected to grow around 10%-11%, or 18%-19%, excluding the AP one on one business. Overseas test-prep program is expected to decline around 45%, and overseas study consultant business is expected to grow 12%-13% whole year-over-year in RMB terms. The expected significant decline of the overseas test-prep business and slowdown of the overseas study consultant business is due to the outbreak of the COVID-19 pandemic around the globe, starting from March, with the cancellation of the overseas exams, suspension of the overseas schools, and restriction on travels. We expect the negative impact to overseas related business will affect the entire education industry in China, not only in New Oriental, and will last over the coming one to 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 optimistic over the trend of the K-12 after-school tutoring business, abstract from the public news that 30 provincial-level governments, that is 88% of the total, have announced the public school resumption plan. We're confident that demand for the after-school tutoring business will pick up after the resumption of the schools, and the short-term impacts from the school hour changes and shorter summer holidays will be manageable. The estimated exchange rate used to calculate expected revenue for the fourth quarter of fiscal year 2020 is CNY 7.07. The historical exchange rate used to calculate revenue for the fourth quarter of the fiscal year 2019 was CNY 6.76. I must mention that this expectation reflects New Oriental's current preliminary view, which is subject to change, especially in the pandemic period.
At this point, I will take some 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. If you wish to ask a question, please press star one on your cellphone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Mark Li from Citigroup. Please ask your question.
Hi, Stephen and Sisi. Can you hear me?
Yes, Mark, please go ahead.
Hi. Thanks for the explanation. I want to ask, I noticed for our overseas test prep, the next quarter's pressure is pretty big. Can you share with us what's your estimate for the short term or the one-off cost impact for the Q4? I see for TOEFL, et cetera, they are still not offering China to have their home test. What do you think the impact will last for the overseas test prep and consulting segment? Thank you.
Thanks, Mark. The overseas test prep business reported revenue decline of about 13% in dollar terms this quarter. Actually, it's 12% in RMB terms, year-over-year decline in Q3. The Q4, I think the pandemic spread a lot of countries, the Western countries now, so it will impact our overseas test prep business in Q4. We guided the top line growth of the overseas test prep business increased by about 45% year-over-year in Q4. We believe the Q4 will be the worst time. Upon the pandemic phase, I think the situation will be better in the fiscal year 2021. This is my explanation for the overseas test prep. The overseas consulting business, we did very good.
We did very good in Q3, and also even we have negative impact from the Q4, but we still guide the top line growth of the overseas consulting business grow by 12% in RMB terms in Q4. Yeah, that's it. I think the reason is very easy to understand, because we have seen the cancellation of the overseas exams like TOEFL, IELTS, and GRE, and suspension of the overseas schools, and the restriction on the travels. Yeah, we hope the pandemic can pass very quickly so we can make recovery of our overseas-related business. Yeah, Mark?
Thank you, Stephen. May I quickly follow up? Do you have any rough estimate at what percent of your overseas test prep student are short-term, or what percent is a longer-term student?
I think for the short-term, in the Q4, I think we lose 35%-40% enrollment. That figure for our overseas test prep. Long-term, it's really hard for me to make a prediction. I think once the pandemic disappears, I think most of the time students will still choose to study abroad after the pandemic's over. Thanks.
Thank you, Stephen.
Okay, thanks, Mark.
Your next question comes from the line of Charlotte Wei from HSBC. Please ask your question.
Hi. Sorry, this is Binnie Wong here. Thank you for taking my questions. Sisi and Stephen, can you hear me well here?
Yes. Very clear.
Okay, thank you.
Yeah, go ahead.
Thank you. Okay, good. Actually, just want to follow up here. I think you mentioned a very good point about the consolidation angle. How should we see about, in terms of during the crisis that we're seeing, right? Are there any actually closure of some of the smaller ones? Are they mostly the online ones or the offline ones? For us to think about longer term, how we should see our market share gains from here. Then a second question here is also that I think we talked about that in terms of our online growth is, of course, doing very well given the current situations. Is it also that if we are thinking about our user acquisition, right? Because in the past, our recruitment for the online students has also been relying on some of our local resources.
Would that make our strategy also modified a bit so that we can accommodate, because this situation might still prolong for some time. Having said that, do you think we are seeing the trough already, with second quarter growing a single digit growth? Do you think this is the trough we should expect? Thank you.
Okay. Yeah. Let me answer your first question about the market consolidation opportunity. Yeah. As the disease subsides gradually, I think there will be a potential opportunity of the market consolidation, especially for the big players. We have seen a lot of small players, they face a severe impact that may cause some of them to shut down their business. New Oriental, as one of the leading players in the market, so we're well prepared to take more market share after the pandemic's over. Yeah, that's why we still open the new learning centers in new cities and existing cities. Also, in the Q3, we successfully moved all the offline students to online since late February. I think the small players cannot copy us.
That's why I said it's a great opportunity for the bigger players like the New Oriental. The pure online, Koolearn, we spend a little bit more money in Q3, and a little bit more in Q4, in the coming quarter, to acquire new student enrollment, because when the pandemic comes, I think it's a great opportunity for the big online player.
I think, anyway, we got a lot of the student enrollment during the pandemic. I think the money we spent is worth it and it's understandable. I think even though we spend a lot in Q3, but we still get the margin expansion for the overall of the company.
Yeah. That's it.
Okay. Thank you.
I think going forward, I think the situation will benefit us, the big player, like us. Yeah. Thank you.
Okay. Just a quick follow-up here, Stephen, if I may. In terms of the summer promotion campaign upcoming in terms of the new students acquisition, how do you see your summer promotion campaign plan for this year will be? Do you think into May quarter, the single-digit growth should be the trough we are seeing, the worst should be over?
Yeah. This is a great question. Last year we did the very successful summer promotion where I remember we got 820,000 summer promotion student enrollment. The retention rate was 59% last year in the autumn.
This year, I think we will use the three following strategies. Number one, we care more about the retention rate. Okay.
Number two, we will use the more and more online model in the summer p romotion campaign because of the shorten of the summer vacation period. We will use one or two weeks, so we will provide more and more online classes for the summer promotion campaign. Number three, the last one is we will raise the price again as we did in last year. I think it will bring us the more valuable customers for the more loyalty. I think it's still a good way to take more market share from the market, especially from the small players, by the summer promotion. We will use it there. The good news for us is we have already started the summer promotion enrollment window for grade 4 and grade 6 students. So far, the numbers are good. Okay.
Okay. Thank you.
Okay.
Thank you.
Okay .
Thank you, Steve.
Thank you, Binnie.
Your next question comes from the line of [Tian Hou] f rom T.H. Capital. Please ask your question.
Yeah, this is Tian. The question is regarding the expansion plan. I can envision it's pretty tough given the whole nation is still very cautious on any offline gatherings, and a lot of places have not yet 100% open yet. How do you carry out the expansion plan? That is the first question. Second question is related to, I do see a lot of online education guys put a lot of money in advertising system. What is our defensive plan in that front? Thank you, Stephen.
Okay. Yeah. As to the expansion plan, we added a net of 112 learning centers in this quarter. Most of the learning centers were set up in this quarter happened in the first two months, in December last year and January. The total classroom area increased by 21% for the first three quarters comparing with the end of last fiscal year time. I think it's in line with our expansion plan. We believe the class expansion will support us to take more students from the market, especially from the small players and in the coming summer. In the summer, I think this will very likely to be shortened by one or two weeks. That means the more learning centers we have, we can provide more seats to the kids in the coming summer and the time after work.
One more thing is, I think we feel confident about our business going forward. We want to change our expansion plan going forward. I think the pandemic will pop away maybe next quarter. Next year we will still expand the capacity by 20%-25%. We want to change our guidance of the expansion plan next year. The second question is about the online spending. Yeah, we did the large scale promotion for the winter and the spring courses for the large size class of the K-12 business in our koolearn.com. I think once the pandemic happens in China, we saw the great opportunity. We were confident that we can provide the best service in the competition. I don't think that spending more money is a defensive way from us.
On the contrary, I think it's a good opportunity for us to take more market share from the players. That's it. Thank you, Tian.
Thank you.
Okay.
Once again, 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. Your next question comes from the line of Yuzhong Gao from CICC. Please ask your question.
Oh, hey. Thanks for the opportunity, Stephen. I think my question is focused on relatively longer term. Obviously, given the outbreak, you moved all your students to the online small-sized class model. I wonder if you are thinking about keeping this model and, in other words, in the future, when we talk about capacity expansion, you actually may not need that much learning center, versus before the outbreak. Whatever capacity expansion target we have for next year, should we think that your enrollment growth may probably outgrow your capacity expansion pace? Thanks.
Yeah. Because of the lockdown and travel restrictions in the last two to three months, we successfully moved all the offline classes to online, to all the students. The overall feedback from the customers has been very positive. However, I think going forward, offline classes will continue to be our primary business model. In the last two, three months, the situation was very special because the kids and their parents, they can't go outside from home, and the parents can see their kids studying face the computer. If the pandemic's over, I think that most of the students will choose the offline class. We made a survey in a big city, and the survey results told us that 95% of students prefer to going back to the learning center for after-school tutoring.
When the virus situation stabilizes. I think for the pure online players like the Koolearn or the other three players, it's a great opportunity as well, because the market is so huge for both the online and the offline players. I think that going forward, the big players will take more and more market share from the small players. This is the key point. Going forward, we will use the two ways, the development strategy, online and the offline mode. Okay. This is our strategy going forward. Okay. Are you clear?
Very helpful. Yeah, very clear. Very helpful. Just very quick follow-up. I was wondering if you have heard anything from government on when we could resume offline teaching activities?
I'm sorry. I can't hear you very clear, Yuzhong. Can you.
If we have heard anything from government on when could we resume offline teaching activities?
Sisi, can you hear Yuzhong very clearly?
No. Yuzhong, your line is not very clear. Can you say that again?
Yeah.
Yuzhong? I suggest you drop off the line first, okay? Back to the queue, and ask again.
Let's take next one.
Okay. I'm sorry, Yuzhong.
Your next question comes from the line of Lucy Yu from Bank of America Corporation. Please ask your question.
Hi, Stephen. This is Lucy. Thanks for taking my question. My question is on the fourth quarter revenue guidance for K-12. You mentioned it will grow at 10%-11%, so that's a moderation from the previous quarter. Could we know your backend assumption regarding this moderation? Whether it's due to pricing or lower enrollment. If it's enrollment related, why is that? Is it just because the new enrollment has not been done very well after Chinese New Year, or there are some other reasons? Thank you.
Okay. Yeah. The Q4 will be a little bit hard. In the K-12 business, the growth will be around 10%-11%. This is overall K-12 business growth. If you take out the one on one business, the small-sized class business growth will be 18%-19% year-over-year. That means the one on one business will be down by 5% in Q4. I think some students don't like to take the relatively expensive 101 class online. This is the reason. Secondly, I think the retention rate is not a problem. Here in the spring, in this quarter, the retention rate is still getting higher compared to last quarter. The drop-off rate is lower than in March and April, it's lower than the February. The problem we are facing is the acquiring of the new student enrollment.
China has been locked down for two to three months, it's really hard for us to acquire new student enrollment for the second half of the Q4 and even for the summer. It's a hard time. The good news for us is we're happy to see the schools in China, I mean, the public schools in China, are going to reopen gradually in this month or in early May. I think we are optimistic towards our K12 business for the summer classes. Yeah, that's my explanation for the Q4 K12 drop we got.
Thanks, Stephen. When public school resume their offline activity, some regions said they will utilize the Saturday to make up the missing classes. Will that impact our class scheduling? Is this in your 10%-11% growth assumption already or not?
We have been well-prepared for the rescheduling of the public school, the study schedule. We can move some classes from Saturday to Sunday, where we can use some of the working day evening time to provide classes. Good news for us, we can use the OMO model to provide the classes. Yeah.
It has been baked into your 11% assumption already, right?
Yes. We still need.
Okay
we still need some time, but I think it's not a big problem for us. Yeah.
Okay. Thank you so much.
Yeah. Okay. Thank you, Lucy.
Your next question comes from the line of Christine Cho from Goldman Sachs Group, Inc. Please ask your question.
Hi. Thank you, Stephen and Sisi. Just a quick question. Is there any impact from the one-month delay in the Gaokao, for your business and the magnitude or any color would be great? Thank you.
Yeah. We know that Gaokao will be delayed by one month, but I don't think it will impact our business. On the contrary, I think the delay of the Gaokao will help our one-on-one business a little bit because we have one more month before the Gaokao. There is no big negative impact to our whole business. Okay. Christine.
Okay. Thank you.
Thank you.
Your next question comes from the line of Alex Liu from China Renaissance. Please ask your question.
Thanks, Stephen. I actually have two quick questions both on online. First, we noticed the non-controlling interest increased a lot this quarter. Obviously that was mainly related to Koolearn. I was wondering, how should we think about the margin implication in the next fiscal year from the online investment side? That's the first question. Second question, given we have both quite aggressive growth targets for online and offline, How does the management manage and benefit, balance the conflict of interest between online and offline growth? Thank you.
Okay. Yes. I think Koolearn did a large-scale marketing promotion in Q3 and in March. Yeah, that's in Q4. We spent a little bit more money, and yeah, you saw the NCI, the big number NCI in the Q3 numbers. Q4, it will be a little bit bigger. I think in the fiscal year 2020, the numbers will be lower than this year. It will be less. I think it's mainly due to the pandemic. The opportunity for the online industry comes and so yeah, we bid a lot on the free course of the super large classes. That's what we're doing. We think it's worthy and necessary. Yeah, that's it. I think your second question is about the cannibalization or the balance between the offline, online.
I think the cannibalization between the EDU and Koolearn or the online, offline will be minimal. The market is huge. The other hand, a lot of small players died in the market. They disappeared from the market. There's a lot of room for big players. I think the students, you can divide the students into two groups. For the small part of the students, they can study through online. Most of the students, they still need to take the offline classes. The market's huge for both sides, Koolearn and EDU. The competition internally will be very minimal. Our first job for both sides, EDU and Koolearn, are taking more market share as much as we can going forward in the market. Yeah. Alex.
Okay. Just to clarify, you were saying the next quarter online loss will be basically smaller comparing to February?
No, next quarter, it will Yeah. The next quarter, Q4, the net loss of the quarter will be bigger, but next fiscal year will be smaller. Yeah. Fiscal year 2021 will be smaller.
Okay. Very clear. Thank you.
Thank you, Alex.
Your next question comes from the line of Felix Liu from UBS. Please ask your question.
Hello, Steve and Sisi. Thank you very much for taking my question. My question is mostly on the summer. First, we're probably seeing one to two weeks of shorter summer break. Could you let us know how that will impact our scheduling in terms of the K-12 segment? Also for the overseas test prep, I know summer is typically the peak season in that segment. What is our expectation in overseas test prep in summer? Are exams loading back in the summer, or could it be further delays? Thank you.
It's really hard to make a forecast of the overseas test prep because almost all the schools in United States and U.K. are still closed. We do hope the pandemic's over as early as it can. Yeah. We know the Q1 will be a big season for the overseas test prep. I think we will prepared well internally, but it's really hard for us to make a prediction for the negative impact from the pandemic of the overseas test prep in the coming summer. Okay. Yeah, the K-12 business this summer. Yeah, I think the summer vacation will be shortened by one or two weeks in the coming summer. There are several things we can do. Actually, we have done. We have done. Number one, I think we will use more and more online model.
We can Let's say if we open the learning centers in the summer, that we can provide more and more online courses combined with the offline courses. We can save the some classroom areas. This is the first one. Secondly, we can make some, the class rescheduling or make the class size a little bit bigger compared to last year to acquire the more and more new student enrollment in the coming summer. Okay. I think it's okay for the coming summer. I'm optimistic for the business of the coming summer.
I see. Thank you. Thank you very much for sharing the color. I'm glad we're making good progress in the summer for AST. Thank you very much.
Okay. Thank you, Alex.
Your next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.
Thank you for taking my question. It's about the margin outlook in the fourth quarter. It looks like we have a lot of pressure in the fourth quarter on the margin, given the full year is flat. I wonder if you can provide some color on the breakdown of your color on cost and margin pressure, including, I think maybe you open more learning centers and overseas test prep is also face some pressure. Can you please give more color on the breakdown and what we should expect for the coming year? Thank you.
We guided the top line growth in RMB terms in Q4 will be flattish in RMB terms. We have to face the higher rental, because you look at the expansion in the last three quarters. Typically, the selling, marketing expenses, and G&A will be increased in the Q4, so it will drive the margins in the Q4. I think it's just a one time. We know, even both for nowadays, our top priority, for our job is to focus on controlling costs and reducing the expenses across the company, so to minimize the negative impact from the pandemic. We are confident that we will be able to deliver the continuing margin expansion after the pandemic is over. In fiscal year 2021, we still expect the margin expansion.
As well, we don't want to change our mid long-term margin guidance of the 17%. This is a non-GAAP operating margin in the mid long term. Okay. Thank you, Sheng Zhong.
Thank you, Stephen.
Okay, thank you.
Your next question comes from the line of John Choi from Daiwa. Please ask your question.
Hi, Sisi. Hi, Stephen. Thanks for taking my question. My question is more about after the pandemic, what have you guys really learned? As you said, 95% of the students want to go back to offline. After the pandemic, do you think you'll be able to expand for spending per student? In terms of based on the experience or the user feedback, what are the areas that EDU has to further spend? That's my question. Thank you.
The number one education brand name in China, this is New Oriental. Three to four years ago, we spent a lot, money and time, on the content development on the product itself. It makes us move the old students from offline to online one day, just during the Chinese New Year holiday, when the pandemic came. Going forward, I think we'll build the barrier entry higher, okay? To provide better quality product, and also to help our teachers to improve their teaching quality. I think the pandemic, anyway, it's a starting, that it's a great opportunity for New Oriental, because we can take more market share from the small players going forward. In the next two, I think even in fiscal year 2021, and maybe the year after, we will use more and more OMO model, okay?
Let's assume, going forward, next year, if your child takes a course of New Oriental, maybe 80% of his class will be happened offline, 20% will be happened online. Okay? I think that the kids love it and parents love it. Is it clear?
Just a quick follow-up on that. If you do more OMO, how would that impact to our margins? Would that be more in the long run? Thank you.
I think that gradually the OMO model, the margin should be higher than the pure offline business, because we can save some cost in rental, and we can. Yeah. As I said, we will open 20%-25% expansion plan. After the pandemic, I think the 20%-25% will bring us more and more student enrollment, and we can provide the online OMO courses to them. Yeah, we can save some cost on rentals. I think it will help us to drive the student retention rate up. Okay? Because, I think the OMO model is better than the traditional offline course, so the people love it. Okay. Is that clear? Okay.
Okay. Once again, we will take one question at a time from each caller. If you have more than one question, please request to join the queue again after your first question has been addressed. Your next question comes from the line of Alex Xie from Credit Suisse. Please ask your question.
Okay. This is the last one.
Thank you, Sisi and Stephen, for taking my questions. My first question is, can you elaborate more about our VIP business? How much is the VIP contribution in U-Can and Pop Kids? Secondly, would you please share a bit more about our full-year margin guidance? You mentioned the FY 2020 margin should be flat to FY 2019, if I'm correct. What's the implication for fourth quarter margin? Thank you.
I think the VIP business, there is a few of the one-on-one business within the Pop Kids. Within the U-Can business, the one-on-one business is 25%-30% of total revenue of U-Can. Margin, I think our margin in Q4 will be dropped because of the pandemic. As I said, it's one-time. I think the worst case of the whole year margin, of the non-GAAP operating margin, will be flattish year-over-year. We've got the VAT exemption. This is a benefit from the government new policies. We recorded the VAT exemption in the other income, and also we recorded the NCI, non-controlling interest below the optimum level. I think the non-GAAP net margin of the whole year will be still expanded in fiscal year 2020. Anyway, it's one-time impact from the pandemic.
This is a margin impact. Going forward, fiscal year 2021, I believe the margin will be expanded again, so it will go back to normal trend. Okay. Thank you, Alex.
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, 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 relationship representatives. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.