For standing by for New Oriental's third fiscal quarter 2019 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. Welcome to New Oriental's third fiscal quarter 2019 earnings conference call. We have released our financial results for the period earlier today, which are now available on the company's website as well as on newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After prepared remarks, he 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. Such, our results may be materially different from the view 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.
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. I'll 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 very pleased to see continued acceleration of growth momentum in this quarter, to achieve top line growth of 28.9% in dollar terms or 36.1% in RMB terms, which exceeded our expectations. The positive growth was largely driven by the exceptional performance of our key business unit, the K-12 all subjects after-school tutoring. Once again, demonstrating our quality product and service offerings and strong business fundamentals, which enable us to capture growing demands from the market. Total student enrollment, academic subject tutoring, and test prep courses in this quarter increased by 82.3% year-over-year to approximately 1,570,600. The significant increase in the number of student enrollments is primarily due to the division of the spring semester into two parts. A practice we adopted in November 2018 to comply with the latest regulatory requirement.
Under this calculation method, student enrollment and amount of the collected fee in the spring semester are booked in parts and thus fall into separate quarters. More specifically, the first part of spring semester was booked in the second quarter, while the second part is booked end of this quarter, Q3, and the following Q4. Historically, we collect the full amount of the tuition fees and record the student enrollments from the spring semester in the second quarter only. Furthermore, our U-Can middle school, high school, all subjects after-school tutoring business grew by approximately 37% in dollar terms or 44% in RMB terms. Our top tier program achieved a growth approximately 41% in dollar terms or 49% in RMB terms. We're confident that we're well-placed to continue expanding our market share over the long term through our ceaseless efforts improving in teaching quality and enhancing learning experience for our customers.
In the third quarter, we continued to make great strides in our planned acceleration capacity expansion as we execute our well-proven optimized market strategy. We added a net of 36 learning centers in existing cities and opened a new training school in the city of Xining, as well as two dual-teacher model schools in the city of Mianyang and Xinxiang. Altogether, this increased the total sq m of classroom areas by approximately 27% year-over-year and 6% quarter-over-quarter by the end of this quarter. Cumulatively, we added about 14% new capacity in the first three quarters in the fiscal year. This growth is in line with our full year expansion plan of 20%-25%. While regulatory changes, whilst new market dynamics, we're currently firmly on track with our expansion strategy.
As we progress steadily with our expansion strategy, we also make thoughtful efforts to optimize our existing operations with a student-first approach in mind in order to deliver high-quality education service to our customers. Riding on the powerful drive from the preceding quarters, we continued our efforts and strategic investment in area including enhancements of courses and programs design, improvement of teaching capabilities, and innovative applications of new technologies in our teaching process. We're delighted to see hugely positive market feedback and results ever since we ramped up the use of the technology such as AI and data analytics to improve teaching quality and facilitate student-oriented interactive learning. Our efforts in sustaining a healthy balance between capacity expansion and operating efficiency have also paid off in this quarter.
Our non-GAAP operating income increased by 40.2% year-over-year to approximately $113.8 million, and non-GAAP operating margin rose by 120 basis points to 14.3% from 13.1% a year ago. The encouraging results were driven by better utilization of facilities and enhanced the cost expenses efficiency. This gave us confidence in capturing new growth opportunities and scaling our business at higher efficiency. We will continue to focus on revamping our business lines through a standardized, modular, and systematic approach, which will be integral to our goal of maintaining a healthy pace of expansion and efficiency improvement. Let me now go through the details about pricing. Per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 24% year-over-year.
I would like to bring to your attention that the lower than normal blended ASP is primarily due to the change in tuition fee collection schedule for our K-12 business. To reiterate, we divided the spring semester into two parts starting from last November. As such, the quarter only covered a part of the student enrollment and tuition fees for the second part of the spring semester. Therefore, the blended ASP for this quarter appears to be lower than historical numbers. On the other hand, hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 5% year-over-year in RMB terms. Here's the breakdown. The hourly blended ASP for the U.K. business increased by 5%. Pop Kids increased by 10%, and Overseas Test-Prep increased by 9% year-over-year in RMB terms.
I will now go through the performance updates across the individual business lines. Our key revenue driver, K-12 after-school tutoring business, achieved a notable year-over-year revenue growth of 38% in dollar terms or 36% in RMB terms. This was driven by the robust student enrollment. Breaking it down, the U-Can middle school, high school business recorded a revenue increase of 37% in dollar terms or 44% in RMB terms for the quarter. Student enrollment grew approximately 72% year-over-year for the quarter, which is primarily because of the aforementioned enrollment practice change for spring semester to comply with the latest regulatory requirements. Our Pop Kids program once again delivered outstanding results, with revenue up significantly by about 41% in dollar terms or 49% in RMB terms for the quarter. Enrollment recorded remarkable growth at about 143%, which is primarily because of the aforementioned enrollment practice change for spring semester.
In addition, a certain portion of the Pop Kids enrollments were also deferred from Q2 to Q3 for the same reason. Our Overseas Test-Prep and Consulting business together recorded a revenue growth of about 11.4% in dollar terms or 17.6% in RMB terms year-over-year for the quarter. Finally, VIP personalized class business recorded a revenue growth of about 24% in dollar terms or 31% in RMB terms year-over-year for the quarter. Now, let us move on to the updates on the progress we're making with our optimized market strategy. Consistent with our long-term plan, we have been focusing on expanding our capacity through ongoing refinement and leveraging our online, offline integrated education system. Let me start with our offline business.
This quarter, we added a net of 36 learning centers in existing cities and opened a new offline training school in the city of Xining and two dual-teacher model schools in the city of Mianyang and Xinxiang. Altogether, this increased the total square meters of classroom area by approximately 27% year-over-year, 6% quarter-over-quarter, and 14% year-to-date by the end of this quarter. We started to pilot a new dual-teacher class model in select cities in July 2016, and by end of the Q3 2019, we have deployed this offering in 38 existing cities for the Pop Kids program and 29 existing cities for the U.K. program, and in nine new cities for both Pop Kids and U.K. business together. We constantly focused on maintaining our service quality while further deepening our penetration into those markets we have tapped into.
We are very encouraged to see our customer retention and scalability of our new model continuing to improve this quarter. Looking ahead, we will remain committed to this well-proven strategy in the coming quarter and the fiscal year. Turning to the online business. On the whole, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. We invested $25.2 million in this quarter to improve and maintain our online, offline integrated education system. Most of the investments were reported under G&A expenses. I will first provide an update on our online, offline two-way interactive education system. Since the launch of the U-Can Visible Progress teaching system in September 2014, the interactive education system has been used in all existing cities. We have launched the newly revamped Pop Kids program, Shuangyu, in most cities by the end of this quarter.
The interactive education system has been gradually used in more and more cities. The interactive education system for Overseas Test-Prep, including IELTS, TOEFL, and SAT courses, was rolled out and tested in most major cities by end of Q3. At the same time, we also standardized our product offerings across 14 cities. I will now turn to Koolearn.com and other supplementary online education products. New Oriental subsidiary, Koolearn, a leading online education service provider in China, has completed its global offering of ordinary shares, which comprise of an international offering and a Hong Kong public offering. Koolearn commenced the trading of shares on the main board of The Stock Exchange of Hong Kong Limited on March 28, 2019, under the stock code 1797. Moving forward, Koolearn will disclose its periodical financial results under international financial reporting standards.
After the listing, its financial results will continue to be consolidated into New Oriental's financial records. With the goal of tapping into the market opportunity in the pure online education space, Koolearn continued to invest more resources into executing new initiatives in online K-12 after-school children business in fiscal year 2019. This includes content development, teachers recruiting and training, sales marketing, R&D, and other necessary cost expenses to drive the growth of the new online programs. With this strategic investment, we're able to reach more students in lower tier cities in an interactive and scalable approach. We believe this will keep Koolearn.com to gain more market share in the online education area and drive up top-line growth. Let me walk you through the other key financial details for the third quarter. Operating costs and expenses for the quarter were $700.9 million, representing a 25.2% increase year-over-year.
Non-GAAP operating cost expenses for the quarter, which excludes share-based compensation expenses, were $683.0 million, representing a 27.2% increase year-over-year. Cost of revenues increased by 25.6% year-over-year to $337.5 million, primarily due to increase in teachers' compensation for more teaching hours and rental cost for increased number of schools and learning centers in operation. Selling marketing expenses increased by 13.3% year-over-year to $87.5 million, primarily due to increase in brand promotion expenses and selling marketing staff compensation. General and administrative expenses for the quarter increased by 29.1% year-over-year to $276 million. Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $258 million, representing a 35.1% increase year-over-year.
The increase was primarily due to increased headcounts as the company grew its network of schools and learning centers, as well as increase in R&D expenses and human resource expense related to the development of the company online, offline integrated education systems. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 21.1% to $18 million in the third quarter. Operating income for the quarter was $95.8 million, representing 64.1% increase year-over-year. Non-GAAP operating income was $113.8 million, representing 40.2% increase year-over-year. Operating margin for the quarter was 12.0% compared to 9.4% in the same period of prior fiscal year. Non-GAAP operating margin, which exclude share-based compensation expenses for the quarter, was 14.3% compared to 13.1% in the same period of prior fiscal year. Gain from fair value change of long-term investments for the quarter was $6.5 million.
Net income attributable to New Oriental for the quarter was $97.4 million, representing 42.5% increase from the same period prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.62 and $0.61 respectively. Non-GAAP net income attributable to New Oriental for the quarter was $108.9 million, representing a 19.4% increase from the same period of prior fiscal year. Non-GAAP basics and diluted earnings per ADS attributable to New Oriental were $0.69 and $0.69 respectively. Net operating cash flow for the third quarter was approximately $114.1 million. Capital expenditures for the quarter were $83.6 million. Which will provide attributable to the opening of 59 facilities and renovations at the learning centers. Turning to the balance sheet. As of February 28th, 2019, New Oriental had cash and cash equivalent of $844.9 million. In addition, the company had $96.7 million in term deposits and $1,792.7 million in short-term investments.
The deferred revenue balance, which is cash collected from registered students for the courses and recognized proportionally as revenue as the instruction are delivered at the end of the third quarter, was $1,191.8 million, an increase of 10% from $1,083.8 million at the end of the third quarter of fiscal year 2018. The lower than normal growth is due to the adoption of the new accounting standard starting from June 2018, meaning part of our deferred revenue in Q3 was reclassified to accrued expenses and other current liabilities to reflect estimated sales returns and allowance. The change of tuition fee collection for K-12 after-school children courses also contributes to the growth slowdown. In terms of the outlook for the next quarter, we remain committed to our optimized market strategy.
Before I go into the details of our guidance, I would also like to reiterate our overarching goals and our strategy, as well as the challenges and opportunities we anticipate. First, we will continue to expand our offline business. Our plan to increase capacity by around 20%-25% remains unchanged, which includes the opening of new learning centers and the expansion classroom area of some existing learning centers for K-12 business. Moreover, we will also continue to roll out our dual-teacher model schools in new low-tier cities in certain provinces. Second, we will continue to leverage our investment in online/offline integrated centralized teaching system for our offline language training and test prep offerings, especially for our K-12 business and overseas test-prep business . We will keep pace in investment, and we believe that total spending in absolute dollar terms in fiscal year 2019 will increase moderately year-over-year.
Investment execution of the new initiatives remains key to our strategy, which includes product content development, teachers recruiting and training, R&D, as well as sales marketing activities for our pure online K-12 business. Our top priority continues to be optimizing the utilization of facilities and controlling costs and expenses across the company so as to drive continual margin improvement and operational efficiency. In the previous fiscal year, we expanded our overall capacity by approximately 40% year-over-year, with expansion being more concentrated in the second half of the year. The new facility built last year are being ramped up more efficiently than we expected. For the fourth quarter, we anticipate a continued improvement in non-GAAP operating margin of the offline business, especially compared to the prior fiscal year.
This improvement is expected to lift off the margin pressure resulting from our investment in Koolearn.com and other supplementary pure online education products. On the whole, we expect our overall non-GAAP operating margin to maintain flattish year-over-year in the fourth quarter. With newly introduced policy related to the after-school children institutions being implemented on a city-by-city basis, we continue to foresee a certain degree of the uncertainty, while the current impact so far is in line with our expectations. As a leading education service provider in China, we're firmly supportive of these reforms, which will improve the market standards and foster healthy growth in the industry. As always, we're committed to providing high-quality education service and contributing to a creation of the sustainable market. We do not expect to see material negative impact on our growth opportunity nationwide.
Although we do expect to see incremental administrative costs and expenses as a result of the implementation of the policy in certain cities. Finally, the recent RMB depreciation against the U.S. dollar will also impact our earnings in dollar terms for the first quarter of 2019. Finally, I would like to emphasize that we have great confidence in the fundamentals of our business. It's our firm belief that New Oriental will maintain its strong business foundations and continue to sustainably capture growth opportunities in the market and deliver long-term value for our shareholders. Regarding the near-term guidance for the fourth quarter of fiscal year 2019, we expect total revenue to be in the range of $820.6 million-$840.6 million, representing year-over-year growth in the range of 17%-20%. It's not taking into consideration the impact of potential changes in exchange rate between RMB and the U.S. dollars.
The projected revenue growth rate is expected to be in the range of 23%-26% for the first quarter. The estimated exchange rate used to calculate expected revenue for the fourth quarter of fiscal year 2019 is 6.65. The historical exchange rate used to calculate revenue for the fourth quarter of fiscal year 2018 was 6.33. This forecast takes into account several factors, including, firstly, the industry seasonality of our core business, which historically tends to result in a slower growth in Q4, especially compared to Q3. Secondly, we have moved one week of K-12 tutoring classes from March to June to ensure our teachers have enough time to complete license procedures. Therefore, the revenue related to adjustments will be recognized in the first quarter of fiscal year 2020.
The adoption of new accounting standards has caused a larger portion of the revenue from our Overseas Study Consulting business being recognized in Q3 instead of Q4, which is peak season for this line. 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.
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 telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Please note there will be a short pause as the questions are being collated. We thank you for your patience. Your first question comes from the line of Tallan Zhou from Deutsche Bank. Please ask your question.
Hi, Stephen. Hi, Sisi. Thanks for taking my question. Stephen just mentioned about the 4Q guidance, and that there will be one week of the class will be postponed to the next quarter. Can you quantify how much the impact will be for the first quarter revenue growth? Thanks.
To comply with the policy requirements, we have moved about one week of the K-12 classes from in March to June. The postponement will negatively impact the revenue by 3%, roughly 3% of the total revenue in Q4. We will take it back in the Q1 from the Q1 2020. This is the first reason. Second is the Overseas Study Consulting business. Typically, the Q4 is the peak season for the Overseas Study Consulting business. However, starting from this fiscal year, we adopt new accounting standards. Which results in the Q3, we reported in CNY term, we reported 32% revenue growth in Q3. Don't forget, in last year Q4, we had a 44% year-over-year growth in CNY terms. That means the last year Q4 compared to the Q4, the year before last year. We had a hard comparison in the coming Q4.
If you add back the numbers from the above two factors back, the revenue growth in Q4 should be over 30%. The last point, I just want to reiterate that the fundamentals of our business, especially for the K-12 business and the Overseas Test-Prep, the other business, has not changed. We will maintain the strong business foundations and continue to create the value for the shareholders. Okay. Talan?
Thanks, Stephen. That's very clear. Thanks.
Okay. Thanks, Talan.
Your next question comes from the line of Alex Liu from China Renaissance. Please ask your question.
Thanks, Stephen and Sisi. Just one question. Could the management share more color on the pro forma deferred revenue growth for this quarter, especially after adjusting the currency issues, after adjusting the payment schedule as well as the accounting standard change? Thank you.
Okay. The deferred revenue balance was increased by 10% in dollar terms year-over-year. The lower than normal growth is due to the adoption of the new accounting standard. It means that part of our deferred revenue in Q3 was reclassified to the accrued expenses and other liabilities. This impact is about 7%-8%. Second reason, the change of the tuition fee collection for K-12 business, also it's another negative impact of the deferred revenue balance. This impact is roughly 6%-7%. Also, I suggest you add back of the 7% of the RMB depreciation. The pro forma deferred revenue growth at the end of the Q3 will be over 30%.
Okay. Thank you.
Thanks, Alex. Okay, thanks, Alex.
Your next question comes from the line of Mariana Kou from CLSA. Please ask your question.
Thank you, management. I just have a quick question on looking a little bit further, I guess, for FY 2020. How should we think about online investments? I think Q4, you just mentioned that we should expect flattish margins, looking a year kind of forward, how should we think about that? Thank you.
Okay. In the fiscal year 2020, firstly, I want to keep the same guidance of the top line growth of the fiscal year 2020. The top line growth, our guidance will be somewhere around 30% in RMB term year-over-year. We don't want to change. Also in the new year, we do believe we have the margin expansion because we will see more optional leverage because this year we opened 20%-25% the new expansion. The top line growth for the next year will be roughly 30%. We do have the leverage. Online investments, this year, I think for the whole year, the online/offline integration investment will be $95 million-$100 million. Next year, we guide it $110 million-$120 million. This is the online/offline integrated investment.
Thank you.
Thanks.
Your next question comes from the line of Terry Weng from Blue Lotus. Please ask your question.
Hi, management. Thanks for taking my call. I have one question about the utilization rate. Management, give us more color on the utilization rate. How much room for the utilization rate to improve going forward?
Okay. In this quarter, Q3, the utilization rate is up by 200 basis points. I think this is the key driver of the margin expansion of this quarter. Going forward, even for the coming quarter and the coming new year, we believe you will see the higher utilization rates in the coming quarters. I think it's easy to do a math just to compare the top line growth with the expansion plan. Okay? 30% top line growth compared to the 20%-25% expansion plan. We do have the leverage on the higher utilization rate. Okay.
Thank you.
Okay, thanks.
Your next question comes from the line of Tian Hou from TH Capital. Please ask your question.
Hi, Stephen, Sisi. The question is, how much capacity do you plan to add in the new fiscal years?
Okay. Thanks, Tian. That's a great question. The expansion plan for this fiscal year, fiscal year 2019, will be 20%-25%. We have already opened 14% in the first three quarters of this fiscal year. For the whole year, 20%-25%. Next year, fiscal year 2020, I think we keep the same guidance as we guide in the fiscal year 2019. It will be 20%-25%, the capacity expansion plan. Okay.
Thank you.
The market still has a lot of the opportunity for us, for the big players like us.
Okay. We will still open 20%-25% new capacities in the coming new year.
Okay. Thanks, Tian.
Thank you. Thank you, Stephen.
Your next question comes from the line of John Wang from Macquarie. Please ask your question.
Thank you. My question is, Stephen mentioned that the retention rate for all lines of the business is kind of improving. Can you share more colors on the retention rate of different business lines? And also, what is the retention that's going to improve in the coming quarters or next fiscal years? Thanks.
Yeah. Actually, we have seen the student retention rate is getting higher for both Pop Kids and U-Can business. For the Pop Kids, the retention rate for this quarter is close to 90%, and U-Can business, middle school, high school, is over 75%. It's between 75%-80%. Keep going forward, since we started to invest on the online/offline, the new product, we have seen the retention rates going up. Going forward, I think we will see higher student retention rates going forward. I think this shows that our investments in the last three years are working. It start to bear fruit from the investments we made in last three years. Okay.
Okay. Thanks.
Thanks.
Our next question comes from the line of Lucy Yu from Bank of America. Please ask your question.
The online business, Koolearn. How much online loss did Koolearn make this quarter? What's the guidance for next quarter?
I'm sorry, I can't hear you very clearly.
Oh. It's regarding the online loss. How much online loss was booked this quarter, and how about next quarter and 2020?
Sorry, we can't disclose the numbers of the Koolearn for this quarter, and I think until the coming July. In the next earnings call, we'll disclose the Koolearn numbers. Okay?
Okay. Do you have any guidance for 2020? How much would that be comparing to 2019?
Yeah, I do believe the margin drag from the online part from Koolearn in the second half of the year will be lower than the first half of this year. Okay.
Okay. Thank you.
Thank you.
Your next question comes from the line of Alex Xie from Credit Suisse. Please ask your question.
Hi, management. Thank you for taking my questions. I would like to ask about what will the enrollment growth for Pop Kids and U-Can look like if we exclude the impact from the change of tuition fee collection schedule? My second question is, what are our plans for the summer promotion in the coming summer of this calendar year? Thank you.
The significant increase in the number of enrollment is very good because of the change of the class. I think the normal where the enrollment for the Pop Kids program in the Q3 was 40%-45%. This is the real student enrollment. For the U-Can, the enrollment growth was somewhere around 40%. It is still a great progress. If you combine with the enrollment growth with the 5%-10% price increase, you'll get the top-line growth. Your second question is about-
Summer promotion.
Summer promotion. As I mentioned in the last earnings call, in the last year, we got over 700,000 summer promotion enrollment in last year Q1. This year, I think we will make a change of the summer promotion strategy. We will care more about the student retention rate than last year. As I mentioned in the last earnings call, we raised the summer promotion class price from CNY 200 last year to CNY 400 this year. I think it's better for us to identify who are the real customers after the summer promotion. We do believe the retention rate after the summer promotion will be higher than last year.
Thank you.
Thanks.
Your next question comes from the line of Leon Chik from JP Morgan. Please ask your question.
Hi. Congrats on the results. Just wondering on your other income of $24.1 million, which was down more than 30% from the previous quarter. Just wondering what's the main reason. Thanks.
I think the main part of the other income is the interest income. I suggest you see the year-over-year growth and because of the different cash balance. Typically, the average interest rates of the interest income is a little bit lower than last year. Okay?
Okay. Thanks.
Thanks, Leon.
Your next question comes from the line of John Choi from Daiwa. Please ask your question.
Good evening, guys. Just a quick question on your operating margin. I think you mentioned on your prepared remarks, non-GAAP operating margin went up by 120 basis points this quarter. Looking ahead, I think management did say 17%-18% in a couple of years' time. If you look at a fiscal year 2020 and 2021, is that something that we could achieve? And can you kind of elaborate what are going to be the key metrics? Are they going to be utilization rate improvement or better improvement from the online business? Which will be the main factor behind the margin improvement? Thank you.
I think the margin is related to the two factors. Number one is the expansion plan. Number two is the online investments. Okay. The other investments. In the fiscal year 2020, we expect the margin expansion year-over-year. We don't want to change our mid, long-term margin guidance to the 17%. This is non-GAAP operating margin in mid, long-term. Okay.
Okay.
Your next question comes from the line of Edwin Chen from UBS. Please ask your question.
Thank you. Congrats, Stephen and [Sisi] , on the great results. Just a couple of questions. Number one, on your operating margin guidance for next quarter, slightish year-on-year. Has this considered the impact you mentioned of one week pushback of the revenue bookings from March to June? The second question is on your income tax rate. I noticed that the tax rate in the third quarter has been much higher than a year ago. Just wondering what's your guidance of the tax rate for the fourth quarter and maybe a sustainable tax rate for FY 2020. Thank you.
The guidance of the margin in the coming quarter, we guide the margin slightish. I think partially it's related to the revenue impact. Even though it's just for the K-12 business, we just sacrificed the one week revenue in Q4, we'll make it up in the Q1. Yeah, as I said, of the margin guidance for the next year, we do feel positive of the margin expansion for the next whole year. The tax rate, yeah, in the Q3, in this quarter, the tax rate was 22%. As you know, we have a fair value gain impact. If you take it out, the tax rate was 18.5%.
I think the reason that the tax rate steadily move up is because we lose some benefits of some our tax efficient structures, because some high tech companies, when we set up, we have a certain period of the tax preference. When they expire, the tax rates tend to go up. Our guidance for the whole year of the ETR will be somewhere between 18%-19%.
Okay. Thank you.
Thanks, Edwin.
Your next question comes from the line of Natalie Wu from CICC. Please ask your question.
Hey, Stephen. This is Zhu on behalf of Natalie. We have two questions. First one is on your offline, online business. Can you maybe provide some color on what kind of synergy should we expect between those two business going forward? Second question is on your class duration shift. Noted some cities for example, Shanghai, will use the two and a half hour course duration to replace the previous three-hour courses. Wonder what will be the scale of this change, and how should we think about the impact on margin? Thanks.
The offline and online business synergy, actually, we started to make a reform since three years ago for the domestic test-preps first. We pushed almost all the large-scale classes into pure online because it's focused to the domestic test-prep students, mostly who are the college students or university students. In offline, we are still providing small-size class because we divided the students by two parts. For some students, they have the full ability to control themselves to study pure online, okay, they do it online. For some students, they still need the offline classes because they don't have the enough ability to study pure online. We have seen some synergy between the offline and online business. Don't forget, the market is huge enough, okay? For both the online part and offline part.
Even though we are the leading player in the market, one of the leading player in the market, our market share for both offline, online, are very small. I think the cannibalization between the offline, online will be very small, and we will see more and more synergy between the offline business and online business. Okay. The class duration, actually, we started to pilot this program two years ago in Beijing school to change the one course of three hours to one session of the course from the three hours, 100% offline, to two hours offline class combined with the 30 minutes online classes. The 30 minutes online class is related to the homework or some contents that the students can do it by themselves online. I think this is great for us to make the higher realization rate of the classrooms.
It does work, and I think we are successful for the Beijing school. In the other cities, we will do it more and more to provide more and more online, offline integrated classes going forward. Okay.
Agreed. Thanks. Very helpful.
Thank you.
Your next question comes from the line of Eric Qiu from CCBI. Please ask your question.
Hey. Hi. Good evening, Stephen and Sisi. Thanks for taking my question. I have two questions. One is regarding to the operating margin. This quarter, you reverted the previous two quarters margin contraction and achieved the margin expansion of 100 basis points. For next quarter, is it because you are still quite conservative, so at this moment you maintain a flat margin outlook? The second is for the top line. For the fourth quarter revenue guidance, you guided, even in renminbi terms, it seems the growth rate a bit slower than previous three quarters, which is all above 30% year-over-year. I am wondering, is that because of seasonality or because of accounting issues? Thank you.
Okay. Your first question is about margin. This quarter, we got the 120 basis points up for the non-GAAP operating margin. I think there were two reasons. The first one is we do have a leverage on the utilization rates, because expansion plan in the first three quarters was only 14%. Actually, we saw it since the first half of this year. Don't forget, we set up most of the new learning centers in the second half of last year. In the Q3 and Q4, we do have more leverage than the first half of this year. Secondly, you saw our selling margin expenses increased only by 13%. We do believe we will have the leverage on the selling marketing expenses as a percentage of the revenue going forward. The margin guidance, yeah.
Since the last earnings call, we guided this week, your guys, the margin will be flattish in the Q3, and we got 120 basis points up finally. We won't change our actual guidance over the Q4. It'll still be margin flattish. Yeah. Thank you.
Okay. Thank you.
Oh, top line.
Top line.
Okay, top line growth. Okay, your last question. Actually, typically, the Q4, typically, in terms of the seasonality, the Q4 revenue growth is lower by 2% compared to Q3. This is the normal, okay? This is the first reason. Combine the two reasons I explained to answer my first question in this earnings call, 3% of the class change from Q3 to Q4, and 3% from the overseas consulting, the accounting new treatment. If you added all it back, the revenue growth will be over 30%. I think it's normal. Yeah.
Okay. Thank you. Got it.
Thank you.
Our next question comes from the line of Christine Cho from Goldman Sachs. Please ask your question.
Hi, Stephen and Sisi. I have two quick questions. One, just on OP margin increase. If you just decompose that between offline and online, could you give us some color there in terms of this quarter? Secondly, we noticed that a lot of the learning centers that you've added this year was mostly in the existing cities. If you think about the future expansion plans, will it be actually shifting towards more new cities, or will it still be kind of the existing cities that you will be initially targeting? Just kind of a mix between the offline versus online in terms of thinking about expansion into these newer lower tier cities as well. Thank you.
Okay. Second question first. Going forward, even for the fiscal year 2020, I think we will expand more learning centers in existing cities. We do have a plan to open several new cities, but most of the new learning centers we set up will be happened in the existing cities. Even in Beijing, where the top tier cities, we do have a lot of room to open more learning centers. Yeah. The OP margin. I'm sorry, I can't disclose the detail for the online net profit. What I can say is the operating margin expansion for the offline part is higher than the overall margin expansion. Yeah.
Okay. Thank you.
Is it clear, Christine? Yeah. Thank you.
Yeah.
Okay. I'm sorry. Okay.
Your next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.
Hi, Stephen and Sisi. I have a question on the overseas consulting fee, consulting income. Can you give more color on the consulting income number of fourth quarter last year? What are the more color on how did the accounting policy changed, so that will impact your guidance? Whether the accounting policy will also change the cost recognition in the P&L in next quarter as well. Also, secondly, what the growth outlook for overseas test-prep business in this year and the next year? Thank you.
Okay. Thanks, Sheng Zhong. We don't disclose the detailed numbers of the overseas consulting business. What I can say is, overall, the revenue contribution from the overseas consulting business for the whole year is about 8%-9%. Okay? This is revenue contribution. Typically, in the Q4, the revenue contribution from the overseas consulting business is a little bit more than the other quarters. The accounting standard changes, before the June 4th, 2018, the overseas consulting revenue is recognized when most of the revenue is recognized, when the contract is completed. Under the new revenue accounting standard, we report revenue according to the several benchmarks by milestones. That means we report the revenue earlier than before based on the new accounting standard. This is the answer for your question about the overseas consulting and the other question.
What's your next question, the second question?
Second question is about Overseas Test-Prep-
Overseas.
-growth outlook in this year and the next year.
Okay. Yeah. Typically, we expect the overseas test-prep business in the coming Q4, in RMB terms, will be growth by 10%-15%, in RMB terms. Okay? For the next year, the guidance will be similar, 10%-15% in RMB terms.
Thank you. May I ask the accounting policy change on overseas study consulting revenue , will it impact your cost recognition as well?
No. There's no impact for the cost side.
Okay. Thank you. Thank you very much, Stephen.
Thank you, Sheng Zhong.
Our next question comes from the line of Manyi Lu from DBS. Please ask your question.
Oh, hi. Hi, management. Actually, my question was asked by someone before, can skip mine.
I'm sorry, I can't hear you very clear. Please repeat again.
Okay. Can you hear me now?
Yes. Please speak a little bit louder. Okay? Go ahead, please.
Hi. Yeah. Can you hear me now?
That's good. Sounds better. Yeah. Sounds better.
Yeah.
Go ahead.
Yeah. Actually, my question was asked by someone else before, so can skip my question. Yeah.
Okay. Thank you.
Okay. Thank you.
Our next question comes from the line of Alan Deng from KIARA. Please ask your question.
Hi, management. Thank you very much. Can I ask you, what is the current biggest risk that in the management view? Is it policy? Is it going to be competition? What kind of risk that probably would prevent you from achieving 30% top line growth and margin expansion for next year?
I'm sorry, can you repeat again? I can't hear you very clearly. Your question is about what? Can you repeat again?
What is the biggest risk that management is thinking about at this moment for next year, potential of missing the 30% top line growth and margin expansion target?
Oh, right
policy or is it going to be competition?
I think for the management concern, we always have two kinds of the risks. The first one is regulation, for both the Overseas Test-Prep and the K-12 business. This is the first part of the risk. Secondly, we do have the human resource risk. Even though we spent a lot in the last three years to build up a new education system, but we still rely on the talent people to run the business, especially for the local school head. There's a risk for the human resources. Okay? Two risks, regulation and human resources. Okay.
Okay. Thank you.
Okay. 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 relations representatives. Thank you.
Ladies and gentlemen, that is conclude the conference for today. Thank you for participating. You may all disconnect.