Hello, everyone, and welcome to New Oriental's first fiscal quarter 2019 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 of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. 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.
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 Yang, please go ahead.
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are very pleased to start fiscal year 2019 with a year-over-year acceleration in our top-line growth. Net revenue seen in the first fiscal quarter 2019 increased by 30.1% to $859.8 million. Student enrollments in academic subjects tutoring and test prep courses in the first fiscal quarter went up by 13.2% year-over-year to approximately 1.7 million student enrollment. The accurate number is 1,735,300. Guided by our successful optimized market strategy, we continue to expand our offline business while also investing in our online/offline integrated education system. In this quarter, we added a total of 19 new facilities, which includes 18 new learning centers in existing cities and one new training school in the city of Yiwu. The total sq m of classroom area by end of the quarter increased approximately 34% year-over-year and 3% quarter-over-quarter.
Our strategic capacity expansion is on the right track to capture market opportunities in cities with a robust growth momentum, and remains an important focus in fiscal year 2019. We will also continue to focus on improving utilization rates and investing in enhancing teaching quality in line with our long-term strategy. Our business has started the year with accelerated revenue growth, even with the discounted revenue due to the large-scale summer promotion. Our key revenue driver, K12 all subjects after-school tutoring business, achieved remarkable year-over-year revenue growth of 49%. This was largely driven by our solid performance in student enrollment in the recent two quarters, which had a year-over-year increase approximately 34% in the first fiscal quarter of 2018 and first fiscal quarter of 2019.
The growth in the K-12 business can be broken down into the outstanding performance from U-Can middle school, high school, after-school tutoring business, and POP Kids program, each of which achieved impressive growth respectively. One of the key areas of focus for the first quarter was our summer promotion efforts. Similar with the last few years, we conducted the summer promotion campaign to rapidly acquire grade 7 students customers before the start of the first year of secondary school. The large-scale promotion offering low-priced experiential courses was launched at a total of 39 cities. Once again, the promotion was very well received by the market. The low-cost trial course enrollments for this summer reached 762,000, which increased of 37.5% year-over-year. Note that these promotion enrollments were not included in our reported enrollment.
More importantly, 54% of students recruits from the summer promotion campaign were successfully retained to our full price courses for the autumn semester, which is 5% more than that of last year. This will certainly boost our revenue and drive profit growth throughout the whole fiscal year 2019. Overall, we believe the summer promotion is generating long-term benefits and will continue to be a successful and effective strategy to capture as much market share as possible, and acquire long-term loyal student customers in the K-12 after-school tutoring market. As these students move from grade 7 through grade 12, the continuing improvement in retention rate and customer loyalty will further drive revenue growth in the next 3-6 years. These investments will set a solid foundation for stronger growth in the long term and further strengthen our leadership in the market. I will now turn to pricing.
Per program blended ASP, which is cash revenue divided by total student enrollments, increased by about 14% year-over-year, partially due to the longer summer course hours. Hourly blended ASP, which is cash revenue divided by total teaching hours, increased by approximately 3% year-over-year in RMB terms. To provide a breakdown of the hourly blending ASP in RMB terms, please note that U-Can increased by 9%, POP Kids increased by 4%, and overseas test prep program increased by 10% year-over-year. We remain firmly optimistic about our overall top-line performance, which we expect will be supported by the continuous improvement of the retention rate of existing customers and the ability to acquire new customers. The goal of our expansion remains at adding approximately 20%-25% in overall capacity for the full year 2019 through opening new learning centers in existing cities and rolling out two-teacher model schools in new cities.
All the while, we will continue to uphold the balance between our strong growth momentum and cost control in the most efficient manner, with constant efforts in further improving utilization rate. As for our offline language training and test prep business, the cost of pressure in this quarter from our large-scale summer promotion and our online business investment had a short-term impact on our operating margin. As mentioned, this important investment will help set foundation forward and further generate long-term growth. In terms of the details, non-GAAP operating margin for offline language training and test prep business decreased by approximately 110 basis point year-over-year in this quarter. As we continue to see ramping up new facilities, we believe the short-term margin pressure for offline business will generally balance out as the year progresses.
For our Koolearn.com pure online education platform, we continue making investments in new initiatives in K-12 after-school tutoring business to capture the huge market opportunity in remote areas in China. Even with the short-term margin pressure from these investments, we are confident that our efforts in building out our ecosystem in integrating both offline and online education will deliver sustainable long-term value for our customers and shareholders. Now let's move on to the first quarter performance across our individual business lines. As mentioned, our key revenue driver, K-12, all subjects after school tutoring business, achieved revenue growth of about 49% year-over-year, driven by the solid enrollment growth in the recent two quarters of about 34% year-over-year. Breaking it down, the U-Can middle and high school all subjects after school tutoring business recorded a revenue increase of 49% for the quarter. Student enrollment grew approximately 18% year-over-year for the quarter.
Our POP Kids program delivered outstanding results, with revenue up significantly by about 48% for the first quarter. Enrollment went up about 12% for the quarter. Our overseas test prep and consulting business together recorded revenue growth about 5% year-over-year for the quarter. This comparatively slower growth for this quarter is mainly due to the change of the revenue recognition of our consulting business upon the adoption of the new revenue accounting standard starting from June 1st, 2018. VIP personalized class business recorded a revenue growth of about 34% year-over-year for the quarter. Next, I will provide some updates on the progress we are making with our optimized market strategy. We have been focusing on expanding our capacity by investing in the build-out of our online and offline integrated education system, and this continues to produce very promising results. Starting with our core offline business.
In the first quarter, we added a net of 18 learning centers in existing cities and opened a new training school in the city of Yiwu. Altogether, the total square meter of the classroom area by the end of the quarter increased approximately 34% year-over-year and 3% quarter-over-quarter. To further tap into the booming private education market and fully strengthen our leadership, we started to pilot our new two-teacher model in select cities in July 2016. By the end of the first quarter of 2019, we have tested the adoption of the new model in 40 existing cities for POP Kids program, in 28 existing cities for U-Can program, and in 10 lower tier cities for both POP Kids and U-Can K-12 programs. It's encouraging to see increased market penetration and student retention in those markets we have tapped into.
The scalability of the new model also continued to improve and started to bear fruit. With this proven result, we are confident that our two-teacher model will carry on the strategy in the fiscal year of 2019. With respect to our online business, we invested $22.7 million in the first quarter to improve and maintain our online, offline integrated education ecosystem, which has been an area of focus since 2014. Most of the investments were recorded under G&A expenses. With a high customer retention rates and the acquisition of new customers, we are positive that our investments will bring sustainable long-term benefits. I will first talk about online, offline two-way interactive education system. On the whole, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services.
With the booming market and our advanced online, offline integrated product service, we're poised to gain more market share and strengthen our hold going forward. Since the launch in U-Can Visible Progress teaching system in September 2014, the interactive education system has been deployed in all existing cities. We have launched the newly revamped POP Kids program, Shuangyu, in most cities by the end of the first quarter in fiscal year 2019. At the same time, the interactive education system has been gradually used in increasing number of 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 first fiscal quarter 2019. At the same time, we also standardized product offerings across 14 cities. We also made great progresses in the Koolearn.com business line and other supplementary online education products.
To capture the huge market opportunity in online education area, we continue to invest in more resources in executing new initiatives in online K-12 after-school tutoring business in fiscal year 2019. This includes content development, teacher recruitment and training, sales, marketing, R&D, and other cost expenses that are necessary to drive the growth of new online programs. With these programs, we're able to cover more students in lower-tier cities in our interactive and scalable approach and gain further market share in the online education space. Now, let me walk you through the other key financial details for the first quarter. Operating cost expenses for the first quarter was $700.4 million, representing a 40.0% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which excludes share-based compensation expenses, were $686.4 million, representing a 38.1% increase year-over-year.
Cost of revenue increased by 36% year-over-year to $367.4 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 34.4% year-over-year to $99.3 million, primarily due to increases in brand promotion expenses and selling marketing staff compensation. General administrative expenses for the quarter increased by 49.8% year-over-year to $233.7 million. Non-GAAP general administrative expenses, which exclude share-based compensation expenses, were $219.7 million, representing a 43.7% increase year-over-year, primarily due to increased headcount as the company expanded its network of schools and learning centers, as well as increase in R&D expenses and human resource expenses related to the development of our online/offline integrated education ecosystem. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 345.3% to $13.9 million in the first fiscal quarter of 2019.
The substantial increase was primarily due to the grants of total 1.5 million restricted shares units of the company to employees and directors in October 2017, with the grants vesting over three years. Operating income for the quarter was $161.3 million, an increase of 0.2% compared to $161.1 million in the same period of the prior fiscal year. Non-GAAP income from operations for the quarter was $175.3 million, a 6.7% increase compared to non-GAAP income from operations of $164.2 million in the same period of prior fiscal year. Operating margin for the quarter was 18.8% compared to 24.4% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 20.4% compared to 24.8% in the same period in the prior fiscal year.
Operating margin were affected by the increase in the cost and expenses, mainly due to the cost pressure from the larger scale summer promotion and continued heavy investment in our online education platform in this quarter. Last, from fair value change of long-term investments for the quarter was $47.7 million. Please note that this is resulted from the adoption of the new financial instrument accounting standard starting from June 4th, 2018, which means the company will measure its long-term investments at fair value with gains or losses recorded through the income statement. On the other hand, the approximately $97.9 million of cumulative other comprehensive income for the available for sale equity securities as of May 31st, 2018, was reclassified into retained earnings. Net income attributed to New Oriental for the quarter was $123.2 million, representing a 22.2% decrease from the same period of the prior fiscal year.
Basic and diluted earnings per ADS attributed to New Oriental were $0.78 and $0.77, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $184.1 million, representing a 14% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $1.16 and $1.16 respectively. Net operating cash flow for the first quarter of 2019 was approximately $231.5 million. Capital expenditures for the quarter were $62.4 million, and this was primarily attributable to the opening of one new school and 65 facilities, and renovations at existing learning centers. Turning to the balance sheet. The deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as revenue as the instructions are delivered.
At the end of the first quarter of 2019 was $146.7 million, an increase over 23.3% as compared to $930 million as of the first quarter of fiscal year 2018. On this note, I also want to mention that as a result of adopting of new revenue accounting standards from June 1st, 2018, a $66.0 million of deferred revenue was reclassified to accrued expenses and other current liabilities, which represents the estimated amount of the tuition that may be refunded in the future if students withdraw from the course. Before moving on to our priority for the second quarter, I would like to take a moment to reiterate our overarching goals and our optimized market strategy, as well as the challenges and opportunities we anticipate in the future. First, we remain determined to expand our offline business.
Our goal remains adding around 20%-25% capacity, including new learning centers and expanding classroom areas of some existing learning centers for K-12 business in existing cities. We also plan to further roll out two-teacher model schools to about 10 new low-tier cities in the year. Second, we will continue to leverage our investments in online and offline integration for our offline language training test prep offerings. As always, we will focus on product refinement and maintenance for the online/offline integrated education system for K-12 business, and continue to revamp and roll out our online/offline integrated standardized teaching system for overseas test prep business. We believe that expanding in absolute dollar terms in fiscal year 2019 will increase moderately compared to the previous fiscal year.
In addition, we'll continue our investment in new initiatives, including content development, teacher recruiting and training, as well as sales marketing in pure online K12 after-school tutor business on our Koolearn.com platform. Our top priority will continue to focus on improving utilization of facilities and controlling costs across the entire company so that we will be able to improve our margins and enhance operational effectiveness of our offline core business. As the Chinese government continues to enhance regulatory oversight, we expect China's after-school tutor market to further consolidate. We believe the regulatory efforts will bolster a positive environment with improved market standards and enhance the teaching quality, supporting the healthy growth of the market in the long term.
As a leading education service provider in China, our company is fully supportive of these reforms. We're committed to providing high-quality education service and doing our shares to build up a sustainable and robust market. At this stage, we do not foresee any material impacts of the regulatory reform our top-line growth, while our administrative costs and expenses may increase in the short term. The recent RMB depreciation against the US dollar will also impact our earnings in dollar terms for the second quarter of 2019. I would like to emphasize that the fundamentals of our business remain strong as we believe with our optimized market strategy being the focus as always, we're confident that New Oriental will continue to capture sustainable growth opportunities in the market and deliver long-term value for our shareholders.
Looking at the near term and our expectations for the next quarter, we expect total net revenues in the second quarter of fiscal year 2019 to be in the range of $568.5 million-$586.4 million, representing year-over-year growth in the range of 22%-26%. If not considering the impact of the potential changes in exchange rates between RMB and the US dollars, the projected revenue growth rate is expected to be in the range of 27%-31% for the second quarter of fiscal year 2019. I must mention that these expectations reflect New Oriental's current and preliminary view, which is subject to change. Before I conclude, I also want to take a moment to address our efforts to enhance our shareholder value.
As you may have seen in today's press release, our board of directors has authorized the repurchase of up to $20 million of the company's common shares during the period from October 29th, 2018, through May 31st, 2019. This share repurchase program is planned to be implemented in line with market conditions and funded from the company's available cash balance. Our board of directors will review the share repurchase program periodically and may authorize adjustments of its terms and size accordingly. The initiative once again underlines our determination to deliver value for our shareholders and reiterates our confidence in the long-term prospect for our business. At this point, I'll take your questions. Operator, please open the call for this. Thanks.
Ladies and gentlemen, we will now begin the question and answer session. 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 be advised to ask only one question per person. Your first question comes from the line of Jin Yoon from New Street Research. Please ask your question.
Hi, good evening, guys. Thanks for taking my question. Stephen, you just mentioned about costs associated with the regulatory environment impacting SG&A. What exactly are those costs, and how much of that cost is actually reoccurring costs going forward? Are you still comfortable with the 100 basis points upside in your margins for this year? Thanks.
Okay. The question about the regulation, the most recent regulation that the State Council issued the Circular 80 in late August. What I said, the incremental cost and expenses, I think most of them is related to the classroom rental and some incremental teacher cost. I think we're still in process of the communication with the local governments in each city. It's too early to say the accurate number, but I don't think it will be a big number. We do have the impact on the margins from the new regulation, but it's not a big deal. Yeah, the Q1 margin, the non-GAAP operating margin is declined by 440 basis. Partially it's because of the scale of the summer promotion. The promotion involvement was 38% higher than that of last year. The retention rate is good.
For the offline business, I think the margin pressure will generally balance out as the rest of the year. For the online, yeah, we started to invest a lot since two quarters ago, like the HR cost, IT cost, and marketing expenses. It's a great opportunity for us, so it's worthy to spend more money on that. It's a margin drag, yes. It's a margin drag. This year is margin pressure year. For the mid-long-term margin guidance, we keep a positive view of the margin expansion in the next year and the year after. This is my view of the margin, okay? Thanks.
Great. Thanks, guys.
Okay.
Your next question comes from the line of Natalie Wu from CICC. Please ask your question.
Hi. Good evening, Stephen and Sisi Zhao. Thanks for taking my question. I noticed that the net adult facility is only 19 compared with the 65 new openings this quarter. May I know the major consideration behind the closing down of the learning centers during the past quarter? Should we think about it in the upcoming quarters? Thank you.
Okay. Natalie, I don't think it's a slowing down of the expansion. Typically, the Q1 is not the peak season to open the new learning centers. Don't forget, we opened almost 40% new square meters last year. We don't want to change the whole year expansion guidance, it's 20%-25%. Typically, we open the most new learning centers in second half of the year because it's prepared for the new coming year. For the whole year, 20%-25% expansion. We don't want to slow down our expansion plan, okay? Thanks.
Thank you, Stephen. What I mean is that you mentioned that the CapEx you spent is majorly for the 65 new openings in the past quarter, right? If we look at the net add, it is only 19.
Okay.
Just wondering the major consideration behind the 46 closing down of the learning centers in the past quarter.
Okay. Natalie, we have 1,100 learning centers. Some learning centers we rent for five or even 10 years. Some of them, let's say the 4% or 5% of the learning centers, some learning centers expire, the terms.
It is not regulation related, right?
It's not regulation related. Okay?
Great. Got it. Thank you.
Okay.
Your next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question.
Hi. Thanks management for taking my questions. I have two quick questions. The first one is about our revenue trend. Should we stick to our 30% year-on-year growth for our revenue growth for FY 2019 in RMB terms, and should we expect there should be re-acceleration in terms of the revenue? My second question is a follow-up for the first question. Hey, Stephen, when you're talking about FY 2019 is a margin pressure year. Is there any direction in terms of the margin trend, and how should we think about the absolute amount of online investment in FY 2019? Thank you.
Okay. The revenue guidance, we give the guidance in RMB term, range is 27%-31% year-over-year growth in Q2. For the whole year, fiscal year 2019, we don't want to change our guidance as we guided before. The whole year, our revenue growth in RMB term, will be around 30% year-over-year. Most of the growth will come from the K-12 business currently. This is my answer of your question about the top line growth. For the margins, we meet the margin pressure in the Q1 because of the larger promotion and also the heavy online investment in the Q1. As I continuously, going forward, I think we will spend the big amount in the online platform. This is a margin drag.
On the other hand, as I said, the total expansion plan this year will be 20%-25%, but the top line growth will be 30%. We do have a leverage on the utilization rate. This is the margin expansion, the factor. As I said, we do have some negative impact from the new regulations. This is also a margin drag factor. That's why I said, it is a margin pressure year. Okay?
Got it. Thank you, Stephen.
Thanks, Thomas.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please be reminded to ask only one question. Your next question comes from the line of Tian Hou from TH Capital. Please ask your question.
Hi, Stephen, CC. Good evening. The question is really related. I don't really want to focus on margin issue. I want to focus on the growth issue. I think the growth is really great. When we review the company website, we also saw some new program, which we didn't see before. One of the programs called STEAM. I really want to ask the company, once you added a new program, we saw some welcome enrollment by students and the students' parents. What's the company's plan in the future? One is to continue to roll out such healthy content. Second, which are some other healthy content are in the pipelines of the company's education inventory? That's my question.
Okay. We're keeping focusing on the development of new products. As you have seen in our website, the STEAM courses, it's a high-end courses not only for the English, but also for some non-academic courses like the programming and some like the science courses. I think our purpose is to provide all kinds of the subjects, not only for the academic only courses to the Chinese kids. I think that this is the market demand, and the parents need us to provide more and more courses besides the traditional ones. We keep focusing to develop more and more new courses. It's still in the early phase. The revenue contribution is small, but it's grown extremely fast. I think going forward, maybe in the next year or the year after, it will generate more and more revenue contribution from the new courses. Okay?
Thank you.
Okay. Thanks, Tian.
Your next question comes from the line of Mark Li from Citi. Please ask your question.
Hi, management. Thanks for taking my question. I want to know, for this quarter, have we already incurred any margin pressure due to the regulation, or do you expect the regulation margin pressure to emerge in the future quarter? Also, I noticed the POP Kids growth seems to be a bit slowing down compared to U-Can, despite a lower base. May I know any reasoning or any strategy going forward? Thank you.
Okay. Let me answer the second question first. POP Kids, I think the growth rate is good. In some quarters, because of the timing difference, some quarters POP Kids is better, some quarters the U-Can is better. In general, the kids' business together is booming. The revenue growth is good. Yeah, in the Q1, I don't think we have the material impact from the new regulation in terms of the margin. Going forward, as I said, there might be some incremental cost and expenses of the coming quarters in the rest of the fiscal year. What I'm saying is that it's just a short-term impact. Maybe it will impact two quarters, one or two quarters, but I don't think that it will impact us in the next fiscal year or the year after. Okay? It's just one time.
Okay, thank you.
Thanks.
Your next question comes from the line of Mariana Kou from CLSA. Please ask your question.
Hi. Thanks, management, for taking my question. My question is actually more on the, I guess, the share repurchase program and also the competitive landscape, given the regulation changes. Would management be kind of open to consider other opportunities where now the smaller players might be actually getting into a tougher situation to actually be compliant to all the regulations? Would there be opportunities available for market leaders like yourself to absorb some of the smaller players, or would you actually consider sticking to more organic growth and kind of expanding yourself? Thank you.
Yes. I think it's a great question. The government continuously has the regulatory oversight. As a leading education provider, absolutely, we fully support the government reforms. I think it's a great opportunity for big players like us. I think we will keep doing to provide the best service in the whole market. I think this is an opportunity for us to take more market share from the small players. Maybe you read some news historically, some small players, they can't do the business in the proper way. We have seen some students in the last six months, the students from the small players originally to join our classes. This is what we have seen in the last six months, and I think this is a great opportunity for us.
Yes, as we announced this afternoon, the board of the directors approved the $20 million share buyback program. I think this is underlying our determination to deliver values to the shareholders and show our confidence of the long-term prospects for the shareholders. This show our confidence in the future. Okay. This is the whole logic of the share buyback. Thanks. Okay.
Thank you, Stephen.
Thanks.
Your next question comes from the line of Lucy Yu from Bank of America Merrill Lynch. Please ask your question.
Hi, Stephen. Would you mind giving us some breakdown of the non-GAAP operating margin contraction this quarter? It has been down by 450 basis points. How much of that is coming from summer promotion? How much is from online investment, and how much is from the consulting business due to the timing of revenue recognition? How should we expect the margin for the following quarters given these three drivers? Thank you.
Okay. Within the margin decline, 110 basis points comes from the offline business. This is the core business. Within it's mainly due to the summer promotion and summer rental cost. We set up most of the learning centers in the second half of the last year. All the others come from the online business, obviously consulting and other business. This is a breakdown of the margin. Okay? Going forward, I think for the offline business itself, we do have a leverage on the core business, the offline business. We do believe in the rest of the year, the margin of the core business will be flattish or a little bit down. Okay? I think this is a good sign of the margins because we started to fill the students into the learning centers we set up last year. It's good news.
For the other business, I think it's a great trade-off because, if we think the online business is a great opportunity, it's worthy to spend more on the online platform, okay? One other thing for this quarter, for the overseas consulting business, typically Q1 is not peak season for the overseas consulting business. Then we adopt the new accounting standard since the first quarter. We lost $1.1 million revenue of the Q1. We will report it into the retained earnings. It's just one time. I think for the whole year, the overseas consulting business, the margin will be flattish and the top line growth will be 20%. It's growth as normal, okay? Thanks.
Hi, Stephen, just to clarify, you mentioned that for the offline business for the full year, you're expecting flattish or slightly down margins.
Yeah.
The online will also negatively impact the margin as well.
Yeah
the consulting business is likely to be largely flattish. Is it fair-
Yeah
to say that for full year, we are expecting non-GAAP property margin to contract this year?
Yes. I think we need maybe one more quarter to guide the whole year margin. It's just one quarter passed. All right.
Yeah, sure. Thank you.
Thanks.
Your next question comes from the line of John Choi from Daiwa. Please ask your question.
Good evening, guys. Thanks for taking my question. Just quickly follow up on the margin part that Stephen, you mentioned that it's going to be more or less flat to slightly down this year for the offline. If we look at the utilization rate has been picking up, and as we go into the second half this year, with less, as you said, you're adding about 20%, 35% and top line is growing 30%. Where is this drag coming from? Is it more from the regulatory front, or is it because of other factors that we haven't really seen more or G&A or operating expense that has to be factored in towards the more in the second half this year? If you could give us a little bit more color on that would be great. Thank you.
Yeah. My answer of your question is that if I said if you take out the impact from the new regulation, I think the margin of the core business will be expanded in this year. We have to take some incremental cost expenses from the new regulation. It's absolutely, it's a negative impact of the margins. Okay? If you combine the core business, the normal condition combined with the new regulation impact, that is the result of the margin. Okay? Is it clear?
Yep, that's great. Thank you.
Okay, thanks.
Your next question comes from the line of Johnny Wong from Jefferies. Please ask your question.
Hello. Thank you for taking my call, Sisi and Stephen. My question is regards to the revenue for the first quarter. We see that the overall revenue growth was 30%, whereas our enrollment was about 13%. Can you clarify, is the difference between that, is it then the increase in ASPs? If so, it does seem to be quite a large increase in ASP. Thank you.
Okay. Yeah, Johnny, I suggest that you combine the enrollment of the Q4 and this quarter and Q1 together. The two quarters together, the enrollment growth was 28.4%. I think this is in line with the revenue growth. The revenue growth is 30%. The price is just in line with our guidance, the price increase. For the kids class, this is 5%-8% price increase, and the overseas test prep is 10% increase. It's just we don't want to change our price guidance.
Yeah. Just to remind everyone that we have the registration window in April and May, allowing existing customers to register both the summer course and autumn semesters course. That's why. The Q4 borrowed a lot of enrollments from Q1. That's why we suggest everyone to combine these two quarters together to calculate the actual trend, the normal trend for enrollment to match the revenue growth. Okay?
Yeah. Thanks, Sisi, what I want to add one point. It's due to the new regulation, no advanced tuition fees of more than three months may be collected. We have already changed the tuition fee collection payment terms to meet new regulation requirements. In the new quarter, and the year after, I think you will not see the up and down of the timing difference of the student enrollment in different quarters. Okay? Thanks.
All right. Thank you very much.
Your next question comes from the line of Tianli Wen from Blue Lotus. Please ask your question.
Hi, management. Thanks for taking my question. I have one question regarding company expansion strategy on new city. How many cities that company plan to enter this year, and how many of them are like 2-tier city, and how many are 3-tier or lower tier city? Thank you.
I think most of the new cities we set up in this year, we will use the two-teacher model. We covered almost 70 cities already. In the most low-tier cities, I think the best way for us to take market share is to use the two-teacher model. We plan to open 10 new cities by two-teacher model in this year. This is our plan to set up the new cities.
Thank you.
Thanks.
Your next question comes from the line of Julia Pan from UOB. Please ask your question.
Yes. Thank you, management, for taking my question. First, could you please give us some update on the latest new learning center approval situations in the major regions? Do you see any withholding on approvals? Do you maintain your guidance of 20%-25% capacity expansion for FY 2019? Second, to follow up on the regulations that schools can only collect money three months before the class starts. How do we look at the deferred revenue growth going forward? How is the impact on your retention rate and also maybe on the interest income as well going forward? Thank you.
Okay. We opened 18 new learning centers in this quarter. In the past quarter, what I'm saying is that, since the new regulation till now, we didn't meet any difficulties to apply for the new license in the certain cities. We don't want to change. As I said, we don't want to change our expansion plan. It's still 20%-25% expansion plan within this fiscal year. As I said, we changed the student's payment terms. Actually, we don't need to make change for the summer and winter courses. Typically, the course is within three months. For the spring and autumn courses, we have to change. Typically, we divide the one course to two payment terms. I think the retention rate will be not impacted because, for our K-12 business, the retention rate is very high.
For example, the PopKids program, the retention rate is close to 90%. Typically, for example, in the autumn or the spring, these students take one semester courses. Typically, it lasts three and a half months or four months. I don't think it will impact our retention rate during the spring and autumn semester.
Okay. Thank you.
Okay. Thanks, Julia.
Your next question comes from the line of Andrew Orchard from Nomura. Please ask your question.
Hi, evening. Thanks for taking my question. Can you give us more color on the specific regulation that is most impacting your cost? I know you talked about rental, for example. Is it things like having to allocate more space? Is that part of the pain point, or is there anything else that is really meaningful that we should be noticing? The other quick question is on the long-term margin guidance. I think you mentioned before that is 17%-18% in two to three years' time. Are you still standing by that long-term guidance? Thanks.
I don't want to change my long-term margin guidance. It's just we postpone one year. Okay? This year, we have to meet the requirement of the new regulations, and some online investments. I don't want to change my guidance of the long-term margin. Yeah, for the new regulations, yeah, there's maybe some incremental rental or the teacher cost. For example, within the new regulation, all the teachers for Chinese, Math, English, Physics, Chemistry, and Biology courses, the teachers need to have the teaching qualification. Based on our statistics, 50% of our teachers have the qualifications. I think the reason that the other half, they don't have the qualifications is because historically, we push all the teachers to take the exam. In some province, the government need the teachers take exams in their birthplace. It's really hard for us, for our teachers to take the exams.
Now, almost all the cities change, make the reform of the exams. If New Oriental gave the working certificate to the government, they will allow our teachers to attend the test. In the coming new test, almost all our teachers without a license will attend test, and we believe the pass rate will be very high. Okay? I can say 100% of our teachers will get a license. If, I said if, some teachers cannot get the license, we will move them from the teacher position to the teaching assistant position, or we will change some teachers. There might be some incremental cost. We do believe we have the high level of the whole industry to meet the government requirement. Okay? Thanks, Andrew. It's clear?
Yeah. Thanks a lot.
Okay, thanks.
Your next question comes from the line of Edwin Chen from UBS. Please ask your question.
Hey, Stephen, Sisi. Thank you for taking the call, taking the question. Just one quick question. What is the growth for online in the first quarter, and our guidance for online growth in the rest of the year? You also mentioned that in the first quarter, we spent some, I forgot the number, investment online, but I think it is mostly on G&A. Do we have a budget for the rest of the year or each quarter, how much we plan to spend online on G&A and maybe on selling and marketing incentives to drive that online growth, please? Thank you.
As for the Koolearn, we have already filed the A1 in the Hong Kong market, so we cannot disclose numbers. Sorry, I am sorry, Edwin. As for the margin impact, I think we will continuously invest in the online and other businesses going forward. It is still a margin drag. In the rest of the year, I do not think we will suffer from the same level of the negative impacts as the Q1. You will see even the margin will balance out in the rest of the year. As I said, this year is the margin pressure year. We do believe the margin expansion in the coming new year, in fiscal year 2020 or the year after. Thanks.
Considering the online expansion, right? That is the overall margin.
Yes. It is still a margin drag because we will spend money. It is online business. It is not a poor business. It is worthy to spend more money to acquire new customers. It is a huge market.
Yeah.
Yeah.
could you remind me the utilization and the retention rates for kids' business in the first quarter, please?
Okay. The utilization rate was down by 50 basis points in the Q1 year-over-year, because the learning center opening in the last two to three quarters. We do believe the utilization rates will get improvement in the future. The retention rate, the POP Kids is close to 90%. It's still getting higher. U-Can, 75%, the retention rate. Yeah.
Great. Thank you.
Thanks.
There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.
Okay. Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thanks again. Thanks.
Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.