Ladies and gentlemen, thank you. Standby and welcome to the New Oriental third fiscal quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by question and answer session. At which time, if you wish to ask a question, you need to press star one on your telephone. I must advise that this conference is being recorded today, Tuesday, the 24th of April, 2018. I'd like to hand the conference over to you, first speaker for today, Ms. Sisi Zhao. Thank you. Please go ahead.
Thank you. Hello, everyone, welcome to New Oriental's third fiscal quarter 2018 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with 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'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 pleased to continue our strong momentum in driving top-line growth for the third quarter of fiscal year 2018. Net revenues in the third quarter increased to $618.1 million, which is 41.2% growth, once again meeting our expectations. Specifically, strong top-line growth was driven by significant increase in student enrollment in dynamic subjects, tutoring, and test prep courses in the last two quarters. Starting from the last fiscal year, we bundled winter and spring courses registration in Q2 and summer and autumn courses registration in Q4. This year, we delivered a very strong 43% year-over-year enrollment growth in the second quarter. Following the powerful drive in the second quarter, student enrollments continued to grow at 7.7% year-over-year in the third fiscal quarter.
It's also worth noting that this year's much later Chinese New Year has caused student enrollment in the last weeks of the third quarter to fall into the beginning of the fourth quarter. Nonetheless, the combined enrollment growth for the second and third quarters together reached 30%, even with the impact of Chinese New Year. In this regard, we're very encouraged to see outstanding results in terms of the enrollment and cash proceeds from students registration in the first eight weeks of the fourth fiscal quarter, which grew year-over-year by approximately 40% and 65% respectively. In the third quarter, we remain committed to sustaining a healthy balance between top-line and bottom-line growth. We execute our well-proven optimized market strategy.
Following a strong track record in the previous three quarters, we continue to make great strides in our planned acceleration in capacity expansion across cities with superior growth potential and higher operating efficiency. In this quarter, we added a net of 47 learning centers in 23 existing cities, opened two new schools in the city of Lianyungang and Yancheng. We launched three dual-teacher model schools and eight learning centers in the city of Jiaozuo, Dongguan, and Haikou. Put together, our total square meters of classroom area by the end of this quarter expanded by approximately 41% year-over-year. We also continue to strengthen our online/offline integrated standardized teaching system in the K-12 business. We deploy the standardized teaching system in our overseas test prep business in some of the largest cities in China.
Moreover, we continue to invest in our pure online education platform, Koolearn.com, which delivered year-over-year revenue growth of approximately 63% in this quarter, with registered users and paying users up by approximately 88% and 70% respectively. With solid support in resources, a series of new initiatives being rolled out, our online K-12 app school tutoring business reported a robust year-over-year revenue growth of approximately 176%. The results boost our confidence in making strategic investments to capitalize on the booming online education market and drive up our top-line growth. Our encouraging results for the third quarter was mainly driven by the significant increase in student enrollment in the second and third quarters, as mentioned a moment ago. Our K-12 all subjects after-school children business accelerated growth momentum in the third quarter, leading to a significant year-over-year revenue increase of 51%.
Furthermore, our U-Can middle high school, all subjects after-school tutoring business also recorded revenue growth of approximately 51%, while the POP Kids program grew by approximately 50% year-over-year. I will now turn to pricing. Per program blended ASP, which is cash revenue divided by total enrollment, increased by about 12% year-over-year in dollar terms. Hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 13% year-over-year in dollar terms. To provide a breakdown of hourly blended ASP, please note that U-Can increased by 13%, POP Kids increased by 11%. Overseas test-prep program increased by 18% all year-over-year in dollar terms. Meanwhile, our sustained efforts to push ahead with our capacity expansion strategy contributed to a short-term headwind in the margin for this quarter, which we contain at a reasonable level.
Non-GAAP operating margin for our language training and test-prep business declined 140 basis points year-over-year, a trend in line with that of the previous quarter. We anticipate that the margin pressure will gradually lessen and be lifted off over the fourth fiscal quarter and the coming fiscal year. As we remain focused on enhancing our operational efficiency, utilization of facilities, and cost control as the business expands. Looking ahead, we're confident that the downward pressure in margin will continue to ease throughout the remainder of the fiscal year. More importantly, as the business expands, it will also benefit from greater economies of scale as we continue to make strategic investments. We believe that with our well-proven expansion strategy, our strategic vision and investments will continue to create sustainable long-term value for our customers and shareholders. Now, let us move on to third quarter performance across our individual business lines.
Our key revenue driver, K-12, all subjects after-school tutoring business, achieved revenue growth of about 51% year-over-year, and enrollment growth of about 13% year-over-year. The combined enrollment growth of K-12 after-school tutoring business for the second and third quarter was 38%. Breaking it down, the U-Can middle school and high school business reported a revenue increase of about 51% for the third quarter. Student enrollment grew approximately 17% year-over-year for the quarter. The combined enrollment growth for the second and third quarter was 37%. Our POP Kids program revenue was up by 50% in dollar terms. Enrollment grew by 7% year-over-year. The combined enrollment growth for the second and third quarter was 39%. Our overseas test-prep and tutoring business together recorded a revenue growth of about 24% year-over-year in the third quarter. Finally, VIP personalized classes business recorded revenue of about 34% year-over-year for the quarter.
Next, I'll provide some updates on progress we are making with our optimized market strategy. Consistent with our long-term plan, we have been focusing on expanding capacity by investing in the build-out of O2O integrated education system. This continues to produce very promising results. We will start with our offline business. In the third quarter of fiscal year 2018, we added a net of 47 learning centers in 23 existing cities, opened two new schools in the city of Lianyungang and Yancheng, and rolled out three dual-teacher model schools and eight learning centers in the city of Jiaozuo, Dongguan and Haikou. Altogether, our total sq m of classroom area by the end of the quarter expanded approximately 41% year-over-year.
In order to capture the growth opportunities in low-tier cities in China, we continue to roll out our dual-teacher model schools and expand our business into remote areas of China. We began to pilot a new dual-teacher model class in select cities in July 2016. By the end of the third fiscal quarter, October 2018, we have deployed new offering in over 35 existing cities for the POP Kids program, in 25 cities for the U-Can program, and 13 new cities for both POP Kids and U-Can K-12 business together. We're delighted to see higher market penetration in those markets as a result of our strategy. We also saw improved customer retention and scalability brought by this new model. With this promising result, we will continue to deploy this strategy in the remainder of the year. Turning to our online business.
We invested $19.3 million in the third quarter to improve and maintain our O2O integrated education ecosystem. Most of the investments were recorded under G&A expenses. I will now provide some updates on our O2O two-way interactive education system. Since the launching of the U-Can Visible Progress teaching system in September 2014, the interactive education system has been deployed in all existing cities. We launched the newly revamped POP Kids program Shuangyu in most cities by the end of the third quarter of fiscal year 2018. The interactive education system has also been gradually implemented in an increasing number of cities across China. The interactive education system for overseas test prep, including IELTS, TOEFL, and SAT courses, was rolled out and tested in most major cities by the end of the third quarter.
At the same time, we also standardized product offerings across seven cities, including Shenzhen, Xiamen, Changsha, Hefei, Nanjing, Suzhou, and Hangzhou. Now, I will walk you through our progress in Koolearn.com business line and other supplementary online education products. Koolearn.com generated net revenue of $24.8 million, representing a 63% increase year-over-year in the third quarter. The number of paid users increased about 70% year-over-year in this quarter. Accumulated number of registered users reached 20.9 million. Our online K-12 after-school children business achieved an impressive year-over-year revenue growth of approximately 176%. Our Doughnut Learning app recorded over 78.3 million downloads by end of the third quarter of fiscal year 2018. Our LeCi app recorded about 7.4 million users by the end of the third quarter of fiscal year 2018.
To capitalize on the huge market opportunity in online education space, we invested more resources in executing new initiatives in our online K-12 after-school children business. This includes content development, teachers recruiting and training, sales and marketing, and other essential costs and expenses contributing to driving the growth of our new online programs. With these programs, we're able to reach more students in low tier cities in an interactive and scalable manner. We believe this will help Koolearn.com gain new market share in the online education space and drive up top-line growth. Now, let me walk you through the other key financial details for the third quarter. As mentioned earlier, the business once again delivered outstanding year-over-year increase in net revenues and growth in the third quarter. Due to the expansion of capacity, operating cost expenses for the quarter were $559.7 million, representing 47.2% increase year-over-year.
Non-GAAP operating cost expenses for the quarter, which excludes share-based compensation expenses, were $536.9 million, representing a 44.3% increase year-over-year. Cost of revenues increased by 46.5% year-over-year to $268.8 million, primarily due to increase in teachers' compensation for more teaching hours and rental cost for the increased number of schools and learning centers in operation. Selling and marketing expenses increased by 38.2% year-over-year to $77.2 million, primarily due to increase in broad promotion expenses and compensation for selling and marketing staff. General and administrative expenses for the quarter increased by 51.7% year-over-year to $213.7 million. Non-GAAP general administrative expenses, which excludes share-based compensation expenses, were $190.9 million, representing a 43.9% increase year-over-year, primarily due to increased headcount as the company expands 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 system.
Operating income for the quarter was $58.4 million, a 1.5% increase from $57.5 million in the same period of prior fiscal year. Non-GAAP income from operations for the quarter was $81.2 million, a 23.4% increase from $65.8 million in the same period of prior fiscal year. Operating margin for the quarter was 9.4% compared to 13.1% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 13.1% compared to 15% in the same period of prior fiscal year. Net income attributed to New Oriental for the quarter was $68.4 million, representing a 1.1% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.43 and $0.43, respectively. Net operating cash flow for the third quarter of 2018 was approximately $108.2 million.
Capital expenditures for the quarter were $60 million, which were primarily attributable to the opening of 5 new schools and 66 new learning centers, and renovations at existing learning centers. Turning to the balance sheet. At the end of the third quarter, the deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions were delivered at the end of the third quarter of fiscal year 2018, was $1,083.8 million, an increase of 42.5% from $760.5 million at the end of the third quarter of fiscal year 2017. Before moving on to expectations for the fourth and final quarter of fiscal year 2018, I would like to take a moment to reiterate our overarching goals and priorities and our optimized market strategy.
In terms of our priorities, first, we will continue to expand our offline business in consistent with our long-term plan. We aim to add around 20% new learning centers and expand classroom area of some existing learning centers and K-12 business in existing cities. We also plan to enter 2 to 4 new cities, which we identify as the markets with greatest business opportunities. In addition, we will continue to roll out our dual-teacher model schools in over 10 new low-tier cities in China. Second, we will continue to leverage our investments in our O2O integration and initiatives in online education offerings. More specifically, we will continue our focus on product refinement and maintenance for the O2O system for K-12 business. Meanwhile, we will continue to revamp and roll out our O2O standardized teaching system for our overseas test prep business.
Furthermore, we will continue to invest in executing the new initiatives, which include content development, teacher recruiting and training, as well as sales marketing in online K-12 after-school tutoring business on our koolearn.com platform. Third, we will continue to make strategic investments, and we currently believe that total spending in absolute dollar terms in fiscal year 2018 will increase moderately compared with the prior fiscal year. Looking at the near term and our expectations for the fourth quarter, we expect the total net revenues to be in the range of $661.4 million to $680.9 million, representing year-over-year growth in the range of 36%-40%. Lastly, I must mention that these expectations reflect New Oriental's current and preliminary review, which is subject to change. At this point, I will take your questions. Operator, please open the call for this. Thank you.
Thank you. Ladies and gentlemen, we'll now begin a 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. To cancel your request, it is the pound or hash key. Our first question comes from the line of Thomas Chong of Credit Suisse. Please ask your question.
Hi. Thanks, Stephen and Sisi, and congratulations for a very solid quarter. I have a couple of questions. The first question is about the margin trend. Can management comment about how we should think about the margin trend in Q4 and FY 2019 as we continue to improve the operating efficiencies? Can we expect the margin pressure basically to behind us starting from Q4? My second question is about the online education initiative. Given the fact that our online education is growing at triple digit growth, very solid momentum, is there any target or separate disclosure on this line in coming years? Also, target for FY 2019? My final question is about the regulatory front. In particular, do we see any regulations that we need to pay attention in the near future? Thank you.
Okay. Thanks, Thomas. Your first question is about the margin trends. I think the Non-GAAP operating margin this quarter declined by 190 basis points. I must mention that within it, the Non-GAAP operating margin for the language training and test prep program business declined by 140 basis points. This part is contributing to 85% of total revenue. Don't forget, we started to execute the capacity expansion since the Q4 last year. By the end of this quarter, the total square meters of classroom area was increased by 41%. The classroom rental in this quarter increased by 60% in dollar term. I think this is the key factor driving the margin. Going forward, we believe the margin pressure will lessen in Q4 due to the exact acceleration of the revenue growth and higher the learning center utilization.
Especially, we do believe the Non-GAAP operating margin for the language training and test prep business in Q4 will be up year-over-year. This is Q4. In the medium long term, I think we keep the same view as I guided before. We care about the top line growth and margin expansion, we will focus on the same strategy going forward. Our margin target is to get to 17%-18% in the next three years. Your second question is about online. The pure online platform, Koolearn.com, the top line growth in this quarter was increased by 63%. Within it, the online K-12 business in Koolearn.com reported very strong year-over-year growth of 176%. We have a very good start. I think this quarter, we will start to report the year-over-year growth of the pure online K-12 business numbers.
I think we will invest more of the pure online, like the content development and teacher training, and also the marketing and sales. Okay. In terms of the regulation, we have noticed the government has carried out some special programs to straighten out the after-school tutor market, like the canceling some unlicensed paper-based exams in nine-year compulsory education period. Also the government is strict checking the business license or education license in some learning centers. As a public company, New Oriental, we do comply with the government regulations, and we believe these actions taken by the government are a neutral to positive sign to New Oriental, because I think it's a great opportunity for us to consolidate the market, to take more market share from the competitors. Okay. It's clear, Thomas?
Thank you. Yeah. Thank you, Stephen.
Thanks.
Thank you. Next question comes from the line of Sheng Zhong of Morgan Stanley. Please ask your question.
Hi. Congratulations for the good result. I actually have three questions. The first one is, we have a very fast capacity expansion, that is 41% year-on-year in terms of sq m. With our guidance of full year, 30% year-on-year growth, how do we expect the fourth quarter capacity expansion? Can you give some outlook on the FY 2019 capacity expansion? Second one is the U-Can business grow very strong in this quarter. This is actually even stronger than POP Kids. Can you add some more color of the U-Can's growth? The last one is our guidance and deferred revenue in RMB terms, the growth have slightly year-on-year decline. Can you give some color about this revenue and deferred revenue guidance? Thank you.
Okay. Thank you, Zhong. As for the expansion plan, I think we have already opened 145 learning centers in the first three quarters of this fiscal year. In the Q4, we plan to open 40 to 60 new learning centers. For the year-over-year growth, for the whole year 2018, I think the net class expansion will be a little bit over 30%. Maybe somewhere between 32%-33%. That's the net class expansion year-over-year. This is the expansion for the Q4. We set up a lot new learning centers this year. Next year, we budget 20%-25% expansion plan. In the next year, the first target for us is to fill the students into the learning centers we set up this year. This is our expansion plan for the fiscal year 2019, the next year. Okay, the next question is for the U-Can.
Yeah, we did very good in the Q3 of the U-Can business. I think there are three reasons. The first one is, the U-Can online offline integrated system, we call the Visible Progress Teaching System, VPTS. This system has been deployed in all the existing cities. I think the feedback from parents and students are much better than expected. It drives the higher student retention rate. Finally, I think, don't forget, almost all the new learning centers we set up in the last 12 months were K-12 business related. It's another key driver of the U-Can business growth. Your last question is about the deferred revenue. Yeah, the deferred revenue in dollar term at the end of the Q3 sounds a little bit lower than we expected. Don't forget, this year, the Chinese New Year is late.
The much later Chinese New Year has caused student enrollment in the last week of third quarter to fall into the beginning of the fourth quarter. That is the first week of the fourth quarter. As mentioned earlier, in the first eight weeks of the fourth quarter, the enrollment grew by 40%, and the cash revenue, in dollar term, was increased by 65% year-over-year. It's something like the delay. I think that if you look at the numbers, like the enrollment or the cash revenue combined Q2, Q3, and the first eight weeks of the Q4, I think the trend is good. We still have very solid, strong momentum in the K-12 business. Okay?
Yeah.
Is it clear?
Thank you very much. Very helpful.
Yeah. Okay. Thank you.
Yeah, just a follow-up of the Sorry.
Okay, go ahead.
A small follow-up about you mentioned the retention rate is improving. Do we have some number of the retention rate?
Okay. I think the K-12, let's say it separately. The top tier program, the retention rate is 84%, it's getting higher. As well, the U-Can business, the retention rate is 75%. I think this is 5%-10% higher if you compare the number to the last year. Okay. Thank you.
Great. Thank you very much.
Thank you, Sheng Zhong .
Thank you. Our next question comes from the line of Jin Yoon of Mizuho. Please ask your question.
Hi. Hi, guys. Can we talk about margins for 2018? You talk about capacity expansion being 20%-25% next year, and a very significant revenue upside as well. Should we expect, of the 3-year margin guidance that you gave, the 17%-18%, the big jump would be next year given the fact that we see trough margins? Should we overall expect a huge step-up function on margins heading into next year? Is the capacity expansion going to be more front-end loaded or back-end loaded, first half or second half? One final thing is your summer seasonality is coming up pretty soon. How should we look at the summer enrollment programs for this summer in terms of promotional activity versus last summer? Thanks, guys.
Okay. Yeah. I think the margin for the next fiscal year, what it means, the fiscal year 2019, will be up by 100 basis points. I think because, as I said, the 3-year target is to get 17%-18%, I think the margin will be expanded step by step in next 3 years. Okay. Yeah. As for the summer promotion, yeah, last year, the summer promotion enrollment was over half million. This year, I think the summer promotion student enrollment will be more than that of last year. I don't know the numbers because it's too early, but I think the numbers should be more than last year. This year, we care more about the student retention rate. Last year, the retention rate after the summer promotion in autumn was about 50%. This year, I think we're targeting to be 55%-60% student retention rate.
This is our target. Okay, Jin?
Great. Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Natalie Wu of CICC. Please ask your question.
Hey, thanks for taking my question. Couple of questions here. First one, how much of your current classroom space sq m is attributable to the K-12 related business? Secondly, what's the forex exchange rate assumption underlying your guidance? Or on constant currency basis, what's the actual growth expectation your guidance implies? Lastly, how much of your online revenue is contributed by the K-12 business excluding U-Can business currently? Among that, what % is live broadcasting versus pre-record? Also, it would be great if management can update us about the retention rate for the live broadcasting classes. Thank you.
Okay. A lot of questions from Natalie. The first one is the how many learning centers we have to do the K-12 business. Sisi takes the question?
Yeah. We have roughly about 600 learning centers including having the K-12 business. This year, almost all the new openings, new adds are for K-12 business, so you can get the %.
Okay.
Yeah.
Yeah. Your last question is about the pure online K-12 after school tutoring business in koolearn.com. This quarter, we got a very strong top-line growth. It was 176%. I think most of the revenue of the koolearn.com comes from the college students. We did business for more than 10 years. We just started the business, the K-12 pure online business, I think two to three years ago. I think the revenue contribution is small, but don't forget it's grown very fast. I think this quarter we will report numbers going forward. It's very good numbers. What's your second question? About what?
About the foreign exchange rate assumption underlying your guidance.
Oh. I think the exchange rate benefit in the Q4 will be 8%-10%. For the Q4, we used the exchange rate of 6.3049. Last year, Q4, we used the exchange rate of 6.8884. That's our exchange rate we are using to do the forecast.
Great. Very helpful. Thank you, Stephen and Sisi.
Okay.
Thank you. Our next question is from Wendy Wang of Macquarie. Please ask your question.
Thank you, Stephen and Sisi. Congratulations on the solid results. My first question is about your price increase. Can you share with us about your plan for the next fiscal year? Also, in terms of the capacity expansion, you just mentioned it's going to be about 20%-25%, assuming that there will be a ramp-up period for the new learning centers. Should we expect this 20%-25% capacity expansion rate to translate into a revenue growth rate in one to two years out? Also, lastly, can you give us more color behind the margin expansion you just mentioned that you expected for the next coming year? Thank you.
As for the price increase, this quarter, the price increase, I think it's the 12% in dollar terms because we benefit a lot from the exchange rate. In RMB, the price increase was 6% this quarter. For the next fiscal year, I think we plan to increase the price by 5%-8% of the K-12 business. I think the POP Kids is a little bit higher than the U-Can. Maybe POP Kids, 7%-8% price increase. U-Can, 5%-6%. This is what I said is all in RMB. For the overseas test prep, I think the price increase will be 10% in RMB year-over-year for the next fiscal year. In terms of the expansion plan, we're budgeting 20%-25% class expansion.
The first priority for us next year will be ramp up the learning centers we set up this year. The top line will be over 25%. I think for next fiscal year, top line growth will be somewhere around 30%. We do have the leverage on the operating efficiency, and I think we will see the higher utilization rate in fiscal year 2019. The margin, we do believe the margin expansion will be happening in fiscal year 2019 because we do have the leverage on the cost expense side in fiscal year 2019. With this, we think the Q4 last year, we opened a lot of learning centers in last 12 months, even including the Q4, in the coming Q4.
I think it's a good trade-off because at this time, we are more confident about our product and services, and we're seeing higher student retention rates. This is our thinking logic to make the decision to expand the expansion. I think this is a long-term business. I think we would rather to see New Oriental take more market share going forward. I think it's a very good trade-off, and numbers tell the result. Even though we may have a margin headwind in short term, education is long-term business. I think it's good for us in long term. We would rather to create more value to the customers and even for the shareholders. Thank you.
Thank you.
Thank you. Our next question is from Mariana Kou of CLSA. Please ask your question.
Hi, actually thank you for taking my question. Again, congratulations on strong set of results. My question is more, I guess, more on the longer term. Just wondering for the learning centers that were opening recently, because now we are at about 1,000 now. Just wondering if you could give us a little bit more color in terms of the ramp-up that we are seeing, say, for the learning centers we opened in the past six months versus those that we opened a year ago. Are we seeing any difference in terms of utilization, retention, or even margins? Across the different cities and just in terms of the regular kind of ramp-up pattern. I guess the second question is on the longer-term margin. I think we are maintaining the 17%-18% outlook.
Would it be possible to give us a little bit more color on how much of that we are expecting to be driven from K-12, continue to catch up in margins to overseas test prep, or are we also expecting overseas test prep also to continue to see margin expansion? Thank you.
In terms of the new learning center ramp-up pace, I think we spend a short term, short time to get a break-even point of the new learning centers. In the last six months, typically, in the last 12 months, I think it typically spans five to eight months to get a break-even point of the learning centers. In the second year, the margin of the new learning center will be 10%-15%. In the third year, the year 3, the margin will be over 20%, and it gets much better. If you compare the time to get a break-even point now with several, like two, three years ago, I think we saved five to six months to get a break-even point. Typically, three years ago, it spanned one year to get a break-even point. Your second question is about the long-term margin.
I think we do believe all the business lines, the margin will be expanded. Don't forget, I think the margin expansion is related to how many learning centers we set up for that year. If the top-line growth exceeds the expansion, the learning center, I think we will have the leverage. Most of the margin expansion will come from the K-12 business, because the K-12 business has the potential top-line growth and also it contributes more and more revenue going forward. Now it's about, let's say, 55%-60%. Going forward, it's going to be more. Okay. Thank you.
Thank you.
Thank you. Next question comes from the line of Mark Li of Citi to ask a question.
Hi, management. Congratulations. I want to ask actually, what is the breakdown of our guidance in the revenue for the next quarter between different operations? I want to know, actually, I think the Non-GAAP margin decline of about 190 basis points is better than the previous guidance. I want to know what is the difference during the quarter that actually result in the margin beat. Thanks.
The breakdown of the guidance. I can tell you the K-12 business. In the Q4, the U-Can business, the top-line growth of U-Can business will be around 50%. POP Kids, the growth rate will be over 60%. The overseas test prep and consulting business together, the top-line growth will be over 20%. This is a breakdown of the guidance of Q4. The margin in the Q4 was a little better than we expected. It's mainly because we ramped up the new learning centers more quickly than we expected. This is the key reason. Do not forget, even in this quarter, the classroom rental in dollar term increased by 60%, because we started to set up the learning centers in last year Q4. We will still have a hard comparison in this quarter.
In the Q4, in next year, it's much easier for us. Thank you.
Thanks, Stephen. Just a quick follow-up. The test prep actually delivered pretty good recent performance. Can you share about the strategy for the recent better performance? Thanks.
Actually, there were several reasons for the overseas test prep. The first one, we changed local school head's KPI . We put the overseas test prep enrollment into the local school head's KPI . What I mean is, this year, they can't hide the numbers. They can make up the enrollment growth of the overseas test prep by the K-12 business. The K-12 business is much easier. Second, we started to roll out the online, offline integrated program, as we did for the overseas test prep, as we did in U-Can, POP Kids. As more and more cities, we start to use the new online, offline integrated product. More students of the overseas test prep are high school students, so they get used to the new style product. It's better than we expected.
Third, New Oriental, the overseas test prep, was a regional business of New Oriental. Several years ago, we had a super large classes. Now we change to the small class format. We need the teachers make some change of the class, and we're doing. I think going forward, the overseas test prep, we expect the top line growth will be 10%-15%, and it's not good enough. We do hope the actual numbers will be over our expectations for the overseas test prep. Thank you.
Thanks, Mark.
Thanks. Thank you.
Okay.
Thank you. Our next question is from Tian Hou of T.H. Capital. Please ask your question.
Hi, Sisi Zhao, Stephen Yang.
Hi, Tian Hou.
The questions related to the internet education or Koolearn.com. What is the differentiation between the courses on the internet and offline? How can we avoid the cannibalization situation, if there is any? That's my question.
Yeah, Tian Hou. I think the target of our Koolearn.com.
We are focused on the lower tier cities. This is the difference. I think we're targeting the customers in the lower tier cities, even there's no New Oriental offline schools. This is the first part. Second, I think the online course a little bit cheap than the offline classes. We give the choice made by the customers, by the students and parent. They can choose either the online courses or the offline courses, or combined. We are open to the customers. As the price difference, till now, the price of the online courses are just like one-third of the offline courses. Going forward, I think we will try more new subjects, especially in the K-12 business. What I mean is even more subjects, or more programs. Okay?
Great. Thank you.
Thank you, Tian.
Go ahead.
Thanks. Thank you. Our next question is from Alex Xie of Bank of America Merrill Lynch. Please ask your question.
Hi, Stephen. I got two questions here. One is, could you please share with us the utilization rate for this quarter, as well as for the third quarter of last year? Secondly, regarding your online strategy, you mentioned that we're focusing on the lower tier cities where you do not have any learning centers. It will be out of our existing student base. How much student acquisition cost do you expect will incur, to get new student into your system? Thank you.
Okay, the utilization rate this quarter, the Q3, if you compare the utilization rate this quarter to Q3 last year, it was down by 100 basis points. Last year, it was 22%, this year it's 21%. I think it's due to the expansion plan. But going forward, I think we will see the higher utilization rates. The online strategy. Yeah, I think the online education, there is no boundary. We're targeting the lower tier cities, but we're open to the students in the existing cities. We give the customer opportunity to choose the class as they want. But we don't believe there's a cannibalization between the offline and online. Yeah, because for some students, if they don't have the full ability to control themselves to study pure online, they can choose our offline classes. It depends on the customer choice. Okay.
Okay. Thank you.
Okay. Thanks.
Thank you. Once again, to those who wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. There are no questions at this time. Please continue. We have a question from Andrew Lan of RHB Asset Management. Please ask your question.
Hello, management. Hello, Stephen. I just want to ask about the student acquisition cost for third quarter 2018. How does it compare on year-over-year basis?
I think the student acquisition cost is very low. Even though the overall selling marketing expense is 12%-13% of total revenue. Within that, only 4% is the out-of-pocket. It's the pure marketing expenses. It's very low. Yeah, you see the marketing expenses increased by 38%. I think I'm right. We do have a leverage on the selling marketing expenses as a percentage of the revenue, okay? We just rely on the word of mouth and brand recognition of New Oriental. We don't need to spend a lot on the student customer acquisition cost. Okay. Thanks.
Understand. Just want to ask about the trend in the per unit cost of student. Is it trending up or is it trending down?
You mean the price increase will be 5%-8%. You asked the question about the online or the offline?
Both. Maybe if you can break down online and offline, it would be great. I just want to know the trend, where did the student acquisition cost, the per unit student acquisition cost is going up or going down?
I don't know. The per student acquisition cost will go down.
Will go down? Okay.
Yeah.
Understand.
Okay, thanks.
Thank you. Our next question is from Mark Li of Citi to ask a question.
Hi, Stephen. I have a follow-up question. Regarding the latest regulation, actually, what do you think we need to prepare, like any area we need to focus on in the upcoming times, like a curriculum or anything? Thanks.
Actually, as I said, as a public company, we do comply with government regulation. I do not think we will make material changes because, firstly, we do not perform any licensed paper-based exams for any subject to recruit students before. I think we do not need to do something special to comply with the regulations. Okay.
Got it, thanks.
Okay, thanks.
Thank you. That is the end of our Q&A session. I will hand over the call back to our presenters.
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.
Thank you. Ladies and gentlemen, that does end the conference for today. Thank you for participating. You now all disconnect.