Good evening, thank you for standing by for New Oriental's first fiscal quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. After the 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 now like to turn the meeting over to your host for today, Ms. Sisi Zhao. Thank you. Please go ahead.
Thank you. Hello, everyone, welcome to New Oriental's first fiscal quarter 2018 earnings conference call. Our financial results for the period were released earlier today and are available on our company's website as well as on Newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law.
As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I will now turn the call over to Mr. Yang. Stephen, please go ahead.
Thank you, Sisi. Hello, everyone, thank you for joining us on the call. We're off to a strong start for fiscal year 2018, and in the first quarter, we laid down a solid basis on which to build during the rest of the fiscal year. Net revenues in the first quarter increased to $661.2 million, which is 23.8% growth in dollar term or 25.9% if computed in RMB. Net income increased by 12.3%, and total student enrollments in academic subjects tutoring and test-prep courses went up by 15.6% year-over-year to approximately 1,532,900 in the first quarter. To further tap into the booming private education market and further strengthen our leadership in the market, we also added a net of 43 learning centers in 22 existing cities and rolled out the Dual Teacher Model school in the city of Zhongshan.
Altogether, this added a total of approximately 116,700 sq m of classroom area, representing approximately 8% capacity expansion over the previous quarter and 31% growth year-over-year. In the first quarter, we remained focused on our well-proven optimized market strategy. This means we are continuing to expand our offline business while also investing in the O2O two-way interactive education system. As just mentioned, our business has started the year with a better-than-expected revenue growth, and this is mainly driven by the substantial increase in student enrollments in the recent two quarters. Even with the discount of the revenue due to the large-scale summer promotion, our key revenue driver, K-12 all subjects after-school children business, has so far achieved revenue growth of about 35% in dollar terms or 38% in RMB terms year-over-year.
The enrollment growth rate of K-12 business in the recent two quarters is at a very encouraging 35% year-over-year. The growth in our K-12 business can be broken down into the outstanding performance from our U-Can Middle School, High School, after-school children business, and POP Kids program, each of which achieved impressive growth respectively. The key area of focus for the first quarter was our summer promotion campaign, which we accelerated and made larger than last year, with aim to capture as much market share as possible and acquire long-term loyal student customers. The large-scale promotion offering low-priced experiential courses was launched in a total of 38 cities this year.
On this note, I would also like to mention our deferred revenue balance, meaning cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered, was $930 million at the end of the first quarter, an increase of 41.5% as compared to $657.1 million at the end of the same period last year. This shows that the promotion was very well received and is generating long-term benefits. The low cost of child course enrollment for this summer reached 554,000, which is more than doubled compared to the same period last year. I would like to reiterate that we do not include this promotion enrollment in our reported enrollment. Compared with last year, this year we retained a higher portion of students who went on to enroll in full-price classes for the autumn.
This will boost revenue and drive profit growth throughout the whole fiscal year 2018. At the same time, the cost in teachers' labor and facility rental resulting from the summer promotion, negatively impacting our operating margin by about 2% in the first quarter. That said, we're not expecting material impact on operating margin from the summer promotion throughout the whole fiscal year. Overall, we're very pleased with this outcome. We believe the summer promotion will continue to be a successful and effective strategy to optimize our market share in the fast-growing K-12 after-school tutorial market. As these students move from grade 1 to grade 12, the continuing improvement in retention rate and customer loyalty will drive revenue growth in the next three to six years. This investment will set a solid foundation for stronger growth in long term and further strengthen our leadership in the market.
I will now turn to pricing. Program blended ASP, which is cash revenue divided by total student enrollment, increased by about 8% year-over-year in dollar terms or 10% in RMB terms. VIP business recorded the cash revenue growth of 32% during this quarter. Starting from the third quarter last year, we began to concentrate the registrations for U-Can VIP classes into December, which are the first months of the first and third fiscal quarter respectively, instead of spreading them evenly throughout the year. The decision is designed to streamline the registration process. As a result of the adjustment, we saw a large year-on-year increase of enrollment for U-Can VIP classes in this quarter. Over the long run, we expect a slower growth of our VIP business compared to our overall revenue growth, which will continue to drag down blended ASP.
Hourly blended ASP, which is cash revenue divided by total teaching hours, increased by approximately 4% year-over-year in RMB terms. To provide a breakdown of the hourly blended ASP in RMB terms, please note that U-Can increased by 1%, POP Kids increased by 3%, and overseas test-prep program increased by 10% all year-over-year. We remain firmly optimistic about our top-line performance, which we expect will be supported by the continuous improvement of retention rates of existing customers and ability to acquire new customers. As mentioned, the summer promotion capacity expansion have a short-term impact on operating margin, but this important investment will help build our long-term growth. In terms of the details, operating margin for the quarter decreased by 420 basis points, and net margin decreased by 240 basis points year-over-year. We believe that this is a short-term dilution that will generally balance out as the year progresses.
We will provide some additional important thoughts on this at the end of the call today. Now, let's move on to the first quarter performance across our individual business lines. Our revenue driver K-12 all subjects after-school tutoring business achieved the revenue growth of about 35% in dollar term or 38% in RMB terms year-over-year, driven by enrollment growth in the recent two quarters of about 35% year-over-year. Breaking down, U-Can Middle School, high school all subjects after-school tutoring business reported the revenue increase of about 35% in dollar term or 37% in RMB terms. Student enrollment grew approximately 22% year-over-year for the quarter. Our POP Kids program again delivered outstanding results, with revenue up substantially by about 36% in dollar term or 38% in RMB terms for the first quarter. Enrollment went up about 23% for the quarter.
Our overseas test-prep and consulting business, Scholar, reported revenue growth of about 16% in dollar terms or 18% in RMB terms year-over-year for the first quarter. Finally, VIP personalized class business reported a revenue growth of about 32% in dollar term or 34% in RMB term year-over-year for the first quarter. Next, I will provide some updates on the progress we're making with our optimized market strategy. We have been focusing on expanding our capacity by investing in the build-out of our O2O interactive 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 43 learning centers in 22 existing cities and rolled out one Dual Teacher Model schools in the city of Zhongshan.
Altogether, this added a total of approximately 116,700 square meters of classroom area, representing approximately 8% capacity expansion over the previous quarter and 31% year-over-year. In order to capture the growth opportunities in low-tier cities, we continue to roll out our Dual Teacher Model schools and expand our business into remote areas in China. We started to pilot the new Dual Teacher Model in select cities in July 2016, and by end of the first quarter, we have tested these new offerings in over 30 existing cities and 7 new cities. We are pleased to see increased market penetration in the markets we're testing too. With these encouraging results, we'll continue to deploy the strategy in the rest of the fiscal year. With respect to our online business, we invested $14.4 million in the first quarter to improve and maintain our O2O interactive education system.
This has been an area of focus since 2014. Most of the investments were reported under G&A expenses. With high customer retention rates and acquisition of new customers, we believe the investments will bring continuing and long-term benefits. I will first talk about O2O two-way interactive education system. On the whole, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. This is an important front on which we set ourselves apart from other key players in the market. For the booming market and our advanced O2O product service, we are poised to gain more market share and strengthen our hold going forward. Since the launch of U-Can visible progress teaching system in September 2014, the interactive education system has been used in all existing cities. We also advanced our POP Kids English program in all existing cities by end of the first quarter.
The interactive education system for overseas test prep program, including IELTS, TOEFL, and ACT courses, was rolled out and tested in about 20 cities by the end of the first quarter. Now I will talk about our online education ecosystem. We have seen consistent growth in our koolearn.com learning platform and other supplementary online education products. koolearn.com generates net revenue of $20 million, representing 42% increase in dollar terms or 44% in RMB terms year-over-year in the first quarter. The number of paid users increased about 45% year-over-year in the quarter, and cumulative registered users reached 17.7 million. Koo.cn broadcast platform achieved about 662,200 registrations in the first quarter. Donuts Learning apps recorded over 68.9 million downloads by quarter end. Leci app recorded about 6.6 million users by quarter end. Now, let me walk you through the other key financial details for the first quarter.
Operating costs and expenses for the first quarter were $500.1 million, representing a 31.1% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which excludes share-based compensation expenses, were $497.0 million, representing a 30.6% increase year-over-year. Cost of revenues increased by 32.9% year-over-year to $270.2 million, primarily due to increase in teachers' compensation for more teaching hours and number of schools and learning centers in operation. Selling and marketing expenses increased by 26.4% year-over-year to $73.9 million, primarily due to increase in brand promotion expenses and selling marketing staff compensation. General and administrative expenses for the quarter increased by 30.4% year-over-year to $156.0 million. Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $152.9 million, representing a 28.7% increase year-over-year, primarily due to increased headcount as the company expands its network of schools and learning centers by about 17% year-over-year.
Total share-based compensation expenses, which were allocated to relate to operating cost and expenses, increased by 254.8% to $3.1 million in the first quarter. Operating income for the quarter was $161.1 million, an increase of 5.6% compared to $152.6 million in the same period of prior fiscal year. Non-GAAP income from operations for the quarter was $164.2 million, a 7.0% increase compared to non-GAAP income from operations of $153.5 million in the same period in the prior fiscal year. Operating margin for the quarter was 24.4% compared to 28.6% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 24.8% compared to 28.7% in the same period in the prior fiscal year.
Operating margins were negatively affected by the increase in cost and expenses, mainly due to the capacity expansion in the recent two quarters and the bigger scale summer promotion. Net income attributable to New Oriental for the quarter was $158.4 million, representing a 12.3% increase from the same period in the prior fiscal year. Capital expenditures for the quarter were $54.1 million, and this was primarily attributable to the opening of one new school and 74 new learning centers, and renovations at existing learning centers. Turning to the balance sheet. 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 first quarter of 2018, was $930 million, an increase of 41.5% as compared to $657.1 million at the end of the first quarter of fiscal year 2017.
Before moving on to our expectations for the second quarter, I would like to take a moment to reiterate our overarching goals for the year. This is outside of our fiscal year 2017 year-end conference call. During the fiscal year 2018, we will continue to execute our optimized market strategy and build on the success we have achieved through this approach. We are optimistic and confident that we have the right strategy in place and that it will continue to drive the business in a way that creates long-term value for our shareholders. In terms of our priorities, first, we will continue to expand our offline business. We aim to add around 20% new learning centers and expand classroom area of some existing learning centers for K-12 business in existing cities.
We also plan to enter two to four new cities where we identify as markets with the most business opportunities. In addition, we will continue to roll out our Dual Teacher Model schools to about 5-10 new low-tier cities in China. Second, we will continue to leverage our investments in our O2O integration and initiatives in online education offerings. In particular, 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. We will continue to make investments, we believe that total spending in absolute dollar terms in fiscal year 2018 will be similar or increase moderately compared with the prior fiscal year.
Third, we will continue to focus on driving up utilization of our facilities and controlling costs to drive operational effectiveness and deliver long-term bottom-line growth. However, even while we are focused on this, it's important to point out that the utilization rate of facilities declined in the first quarter of 2018 versus the same period last year due to the capacity expansion we have been driving in the last few months. As mentioned earlier in the call, this excess capacity, as well the short-term impact on margins from our aggressive summer promotion this year, also had a slight dampening effect on the overall margins in the first quarter. We currently believe the pressure on margins will lessen and reverse throughout the remainder of the fiscal year.
Given the expected acceleration of revenue growth and the anticipated boost in facility utilization in the coming quarters, we will keep you updated on this as we move through the fiscal year. In any event, what is most important is that our expansion strategy and recent incentives should drive additional revenue growth and market shares in the long run. We expect a significant return on the investments we have made and believe this will also deliver long-term value for our customers and shareholders. Looking at the near term and our expectations for the second quarter, we expect total net revenues to be in the range of $447.0 million-$460.7 million, representing year-over-year growth in the range of 31%-35%. Lastly, I must mention that these expectations reflect New Oriental's current and preliminary view, which is subject to change. At this point, I will take your questions.
Operator, please open the call, please.
Ladies and gentlemen, 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. Your first question comes from the line of Alvin Zhang from Deutsche Bank. Your line is open.
Hi, management. Thank you for taking my questions. I have two quick questions. First one is still on margin. Could you give us more color on the margin or EPS outlook for the full year? Thank you. I have a follow-up.
Okay. Yeah, the margin question. I think this aggressive summer promotion and excess capacity expansion in last two quarters has a short-term negative impact our operating margins for this quarter. We think the important investments we make will help build our long-term growth of the top line and deliver long-term value for our customers. We currently believe the pressure on margins will lessen and reverse in the rest of this fiscal year. Actually, Alvin, if you see the margin in the next 12 months, what I mean is in the Q2, Q3, Q4, and the Q1 next year, what is in the next 12 months, you will see the more operating leverage because I take out the Q1 is because we did large scale summer promotion and the capacity expansion.
Going forward, in the mid- long-term margin guidance, I will keep the same view as I guided before. This is the margin question. My answer is clear?
Okay, got it. Yes, it's very helpful.
Okay.
My second question is on the guidance. The second quarter guidance is very strong. Could you also give us a breakdown of different business lines underlying this strong revenue guidance? Thank you.
Okay. Within the Q2 guidance, I think in different business lines, first one, the U-Can middle school, high school, the top line growth will be 45%-50% year-over-year. POP Kids, over 50%.
Yeah.
Overseas Test-Prep, 12%-15% growth year-over-year. The (Inaudible) will be increased by 10%. The only drag is our Adult English. I think it will be down by 10%-15%. In the overseas consulting business, we expect the growth rate will be 25%. Pure online learning center, the Koolearn.com, will grow by 40%-50% year-over-year. Okay.
40%-50%. Okay, got it. Thank you. This is very helpful.
Okay. Thank you, Alvin.
Your next question comes from the line of Ivy Luo from Macquarie. Your line is open.
Hi, management. Thank you for taking my question. My first question is on the capacity. We do see that we lifted our guidance from 10%-15%-20% capacity increase. Just wondering how much of it is actually coming from the new learning center opening, because we said that capacity increased 31% year-over-year, but based on the number of learning centers, it actually increased 16% or 17%. Just wondering exactly how many learning centers we plan to open in fiscal 2018. Yeah, that's my first question.
Okay. In terms of the capacity expansion, I think we have two parts. Firstly, we are raising our expansion plan of the new learning center opening to 20%. That means we plan to open 20% new learning centers for the whole year. Also, we will add 10% the classroom area of existing learning centers. If you plus the 20% with the 10%, you will get 30% the capacity expansion. I want to say something about our change of the expansion plan. We think, first one, the market is very good. We raised our expansion plan. It's to meet the requirement or demand of the market. Second, I think we're quite confident about our actual product. The expansion is controlled this time, and we won't repeat the overexpansion mistakes we made several years ago.
This time, we are doing this, I think it's because of just the way to meet the demand of the market. I think we will control the cost. Yeah, that's it.
Yeah. Very helpful. Thank you. My second question is still on the margin pressure and, I guess, utilization. Would you be able to break down how much of the margin pressure in this quarter is coming from summer promotion and how much is from the new center opening, i.e., the utilization rate? When would we expect the utilization rate of the newly opened learning center to ramp up to our average? Thank you.
Okay. I think, the non-GAAP operating margin decreased by 380 basis points in the Q1. Within this, 200 basis points comes from the summer promotion. Another 180 basis points down comes from the new learning centers opening. Actually, we opened 94 new learning centers net add in the last two quarters. I think in Q2, what I mean, in the next quarter, we will see the operating leverage or higher utilization rate of the new learning center opening. As I said, we control the expansion by the management, and we only allow the schools or the cities with high growth rate and high margins to open more learning centers. For example, in Wuhan, in Hangzhou, and Beijing, we open more learning centers than before. Yeah. In the rest of the year, we expect the utilization rate will go up going forward. Yeah. Okay.
Thank you. Just to clarify, for utilization rate, our full year EBITDA should be up year-over-year. That's what we are expecting here.
It's too early to say because we had a decrease of the utilization rate in Q1.
Got it.
As I said, in the rest of the year, the utilization rates will go up. We'll keep you updated on this as we move through the fiscal year. Okay.
Yeah, all right. Very helpful. Thank you.
Thank you.
Your next question comes from the line of Fan Liu from Goldman Sachs. Your line is open.
Hi, Stephen and Sisi. Hi, this is Seth asking questions on behalf of Fan. We have a couple of questions. The first one, would you mind sharing with us your latest utilization rate and also the breakdown between old learning centers and new learning centers that you opened within the past one year?
I think in the first quarter, our utilization rate in this quarter was down by 1%-2% because we opened 94 learning centers the last two quarters. Also we have a large-scale summer promotion, and we don't charge the common price to the customers. This is the utilization rates of this quarter.
Okay. In terms of the breakdown between the old and new learning centers that was opened over the past one year, is that possible to disclose?
We have 900 learning centers, we don't disclose the utilization rates by different learning centers. Okay. I'm sorry.
Okay. Sure, no problem. One more question is, could you also please share with us your enrollment and revenue growth figures for Beijing, Shanghai, and Guangzhou and Shenzhen as well? Thank you.
Okay. I just want to share with you the K-12 after-school tutoring business. In the last 12 months, the revenue growth of K-12 business in Beijing was 39%, in Shanghai was 36%, and the top five cities, including Beijing, Shanghai, Xi'an, was 40%. The top five cities contribute 45%-46% of total revenue. Okay.
Okay, got it. Thank you so much.
Okay.
Your next question comes from the line of Jin Yoon from Mizuho Securities. Your line is open.
Hi, good evening. I think in the past you said, Stephen, that the retention rate among summer users for this summer was better than the years past. Can you just talk about just the timing of this retention in terms of how it should flow going forward? Should we expect quite a bit of the retention to happen one or two quarters after the promotional period, or can you just kind of talk about the timing of that retention? Second of all, on the first question that was asked, are you saying that full-year margins should be higher this year than last? I just want to make sure that I clarify that. Thanks, guys.
Okay. Thanks, Jin. Your first question is about the retention rates of the summer promotion. Actually, I think we got a higher student retention rate after the summer promotion this year. It's close to 50%, and last year, this same number was 40%. We got improvement. Yeah, 40% last-
Right. Can you talk about the timing of that, though? Like, when should we expect that retention rate to come in? Is that right after the summer, or is that kind of a step function in that?
Actually, it happened already.
Okay. Got it.
After the summer promotion, the students have already enrolled for the autumn class.
Yeah.
I see.
That's the retention Q on Q, so from summer course to the autumn course.
Yes.
Got it. Okay, perfect.
Going forward. Yeah, Jin. Going forward, I think you should be interested in the student retention rate after the autumn or even next spring. I can share with you the last year numbers. 90% of the summer promotion students we got last year enrolled, who's enrolled in autumn courses are our current students. The retention rate is a lot higher than on average. So going forward, we believe the retention rate of the students coming from the summer promotion will be higher. Okay?
Got it.
The second question is about margin.
Yeah. I just wanted to clarify, I just wanted to make sure, are you saying that full year margins this year should be higher than margins last year on a full year basis?
We just passed the one quarter, and we got a 380 basis points down of the operating margin.
Right.
As I said, in the rest of the year, we will make up the margins. I think it's too early to say, but what I can say is we do believe the margin expansion in the rest of the year. I think that we will keep you updated on that as we move throughout the year. Okay?
Got it. Great. Thanks, Stephen. Thanks, Sisi.
Okay. Thank you Jin .
Your next question comes from the line of Tian Hou from T.H. Capital. Your line is open.
Stephen, Sisi, congratulations on a good quarter and the strong guidance. I think it is time for you guys to actually start to expansion because the market is needed. One thing I would be a little bit concerned is the management capacity. The expansion of the learning center is just not like the physical location, but has to be run by people. Students have to be taught by teachers. In those kind of much faster expansion, how do you resolve the quality of teaching? That's my question.
Okay. Tian, thanks. I think this is a great question. As I said, even we're raising the expansion, the new learning center opening, I think we do believe we have the ability to manage.
the teaching quality. First one, maybe I mentioned earlier, New Oriental is becoming more and more centralized. That means the head office is managing the teaching quality and the content and the teacher quality. It is quite better than before. I just want to say, we just opened 20% new learning centers combined with a 10% new classroom area. I think it's not overbuilt. The 30% is okay for us. The key is we are quite confident about the teacher compensation. We pay.
the best in the market to pay our teachers.
We are quite confident about the teachers' quality themselves. Okay.
Thanks.
Okay. Another question is, I think a lot of investors or analysts are concerned about margin. I'm not quite concerned about margin, because I really think you guys learned from post-2008, that kind of expansion. I wonder this kind of expansion compared with last time expansion, what's the difference for your KPIs when you're managing those teachers or Xiaozhang's performance?
Okay. Yeah, in 2008, six, seven years ago, we tripled our learning centers in three and a half years. We caused overbuild period. At the time, the KPI, 80% of the local school heads' KPI came from the top-line growth. That means only 20% was related to the margin. Now it's quite balanced. 50% of the school heads' KPI comes from the top-line growth and 50% come from the operating margin expansion. It's quite balanced. We're quite confident about the KPI system we set up for the local school heads'. Yeah.
When we push the local-
I have one last question.
Okay, we push the local school heads to care about not only the top-line growth, but also the margin, the teaching quality, and so on.
Okay. Go ahead, please.
Stephen, one last question. In the past, how long does it take you for the full ramping up of a learning center? How long does it take you today to ramp up a new learning center?
Yeah, actually, I remember several years ago, typically it took 12 months, that means one year, to get to break-even point.
since the learning center opening. Now, I think that the periods are becoming short. Typically, on average, it takes five to eight months of the specific learning center to get to break-even point.
That means we ramp up the learning center more quickly than before.
Thank you. That's all my question.
Okay. Thanks, Tian.
Your next question comes from the line of Alex Liu from Daiwa. Your line is open.
Hi. Thanks, Stephen. Just for the benefit of the audience, would you mind reminding us again the medium to long-term margin guidance, and how soon should we expect the company to achieve this medium to long-term margin guidance?
Okay, Alex. Yeah, I think that in the last earnings call, where the earnings call before the last one, I shared with you the long-term margin guidance is to get 17%-18% in the next three, four years. I think we'll keep the same margin target now, because even though we opened 94 learning centers in the last two quarters, we're quite confident to fill the students into the new learning centers as quick as we can. I think you will see the more operating leverage and high utilization rates going forward. This is our target to manage the local schools. Yeah, actually, I don't want to change my mid-long-term guidance of margin. Okay.
Okay. My second question is on the Overseas Test Preparation business. Just would you mind reminding us the Overseas Test enrollment this quarter, as well as the revenue growth? How should we think about the direction for the rest of the year?
Okay. The revenue growth was 14% in RMB terms for Overseas Test Prep business. The program enrollment decreased by 3% for this quarter. Maybe you remember that in order to improve the effectiveness of the results of the training offered to the younger age customers of the Overseas Test Prep, we doubled the class length of TOEFL and IELTS or SAT programs in the last year. This change negatively impacted the enrollment by 8% or 9% year-over-year. The actual volume growth in this quarter of Overseas Test Prep is 3.5%. Is it clear, Alex?
Yeah. Thank you.
Thank you.
Your next question comes from the line of Lucy Yu from Bank of America Merrill Lynch. Your line is open.
Hi, Stephen. I've got a quick question on the operating expenses, i.e., adding up selling and distribution and admin together. This expense was growing at teens to around low 20s in the past several quarters, but this quarter, it went up by 29%. I believe it's largely related to your acceleration of learning centers. Could you please give us some guidance on this expense, the growth outlook in the next few quarters? Thank you.
Yeah. I think it's mainly due to the new learning center opening in this quarter. Over the long run, going forward, I think as a percentage of the revenue, the selling margin expenses and G&A, as a percentage of the revenue will go down going forward. We still have the leverage on the OPEX. Okay.
Okay. Thank you.
Yeah.
In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. Your next question comes from the line of Thomas Chong from Credit Suisse. Your line is open.
Hi. Thanks for taking my questions. I have a quick question about the full-year revenue growth. Given the strong set of second quarter guidance, should we expect the revenue growth re-acceleration to be better than previously expected? Thanks.
Thanks, Thomas. Yes, we raised our revenue guidance for the whole year of fiscal year 2018. I think the revenue growth of this year will be around 30%. That means that 25% comes from the volume growth and 5%-6%, 7% comes from the price increase. Actually, the key driver is still the Kidz Club business, and that's why we decided to open more Kidz Club learning centers in the past two quarters. Also, we're seeing the higher student retention rate, and also we have the ability to acquire new customers because of the better quality of the product. That's the reason we raised the revenue guidance for the whole year. Okay.
Thank you.
Thanks, Tom.
Your next question comes from the line of Mark Li from Citi. Your line is open.
Good evening, management. Thanks for your presentation. I want to ask for the learning center density for your existing city. Actually, how many learning centers do you think you have over the medium term? I wonder maybe for the top cities like Beijing, Shanghai, Shenzhen, and also maybe the cities like in the tier 2 cities. Thank you.
Okay. Actually, in the existing cities, I think we are in the 66 cities already, and we have 900 learning centers now currently. I think the maximum learning center, maybe in the next couple of years, the maximum should be 1,500. For example, in Beijing, we have 90 learning centers here, but I think the maximum learning centers we can tap into in Beijing will be 150. Also, we have a lot of cities with a population of over 10 million and we're now tapped into. I think the most of the new cities will do the business by the tutor-teacher model going forward. The market is big. In the end, our market share in the K-12 business, even though we're one of the leading player, but our market share is below 2%. It's a long way to go.
Originally, actually, since last year, we have been seeing the market booming of the K-12 after-school children business. That's why we accelerate the learning center opening originally. Yeah.
Thank you. How about tier 2 city? Do you think, how many learning center is possible?
Actually, we don't have the statistics. What I can say is it's a long way to go. Yeah. For example, like the tier 2 or tier 3 cities, the maximum learning centers should be 50 to 70. Now we only have the 20 or 30 learning centers total. Yeah.
Sure. Thanks, Stephen.
Okay. Thank you.
Thanks.
Your next question comes from the line of Wayne Wang from HSBC. Your line is open.
Thank you, management, for taking my question. I have a question on Koolearn part. We are very glad to see the growth rate accelerating in revenue and the new number of users. Could management share with us the margin profile for this business currently, or future outlook and also what kind of progress we have made so that make the growth accelerating in the revenue and the users? Thank you very much.
Okay. In terms of the Koolearn, the margin is 10%-15%. Maybe Sisi, you can share the more accurate numbers. Going forward, I think the top line growth of the Koolearn.com should be 40%-50% or even better. I think Koolearn is one of a few players of the pure online platform in the China's market can make money. We do believe the Koolearn's outcome will do better job going forward. Okay.
Thank you very much.
Okay, thanks.
Your next question comes from the line of Johnny Wong from Jefferies. Your line is open.
Hi, Stephen, Sisi. Thank you very much for taking my question. My question is about the summer promotion. It seems that for the last few years, there has been an acceleration in the summer promotion. I'm wondering if this will be a continuing trend, and do you think that will negatively affect margins in the next few years in our fiscal year first quarter? Thank you.
Okay. Actually, we got more than doubled summer promotions enrollment of this year compared to last year, because I think that we believe that summer promotion is a successful and effective way to optimize the market share and to meet the fast-growing K-12 market demand. In terms of the margin impact, yeah, we have the 2% negative impact on the margins in the first quarter. Over the one year, what I mean for the whole year, we don't see the material impact on the margin because we're seeing the high retention rate in autumn, and we expect the high retention rates the rest of the year of the students come from the summer promotion. The rest of the year, the margin will make up the margin dilution in the first quarter. Okay.
Okay. Thank you very much.
Thanks.
Your next question comes from the line of Cheryl Yang from the CICC. Your line is open.
Thanks, Stephen and Sisi. Thanks for taking my question. I have three questions. The first one is regarding your new teacher classes. What's the current retention rate and utilization rate under this model, and what's your future expansion plan regarding this model in fiscal 2018 and beyond that? How long does it take to reach breakeven for this new teacher model, and how long to collect the investment under this model?
Okay. Actually, the retention rates of the Dual Teacher Model, we just piloted the Dual Teacher Model one year ago, so it is too early to say. What I want to say is the retention rate of the student is 50%-60%. I think this is better than we expected. In terms of the expansion plan, in this fiscal year 2018, we plan to open 5 to 10 more new cities for the Dual Teacher Model. I think we will open more learning centers in existing cities to roll out the Dual Teacher Model for POP Kids and U-Can. I think it is still too early to say we can get something worth from the investment of the Dual Teacher Model, because we do it very carefully. We cover the teachers and students and parents' response of the new product. We open the learning center very carefully.
That's why we only opened seven cities, and each city only has one learning center of the Dual Teacher Model in last year. Okay.
Thanks.
Thanks.
Thanks. My second question is that we noticed that EDU has set up a RMB 10 billion fund re-emphasizing this M&A, merger and acquisition strategy. Given you have been quite conservative this year, shall we expect to see more investment to be carried out by EDU? What types of company would you be interested in?
Okay. Actually, we're still in process of planning of this fund. I think going forward for our company, I think we will look at some of the pure online companies or offline schools or the kindergartens to buy. If we find the potential synergy between the target company and us, I think we will buy. Also, we care about valuation, and we care about the cooperation between us. That's it. Okay.
Got it. Thanks. My last question is about the competition landscape. Can management please share your views on current market competition in K-12 and in overseas test prep market?
As I said, I think even though we are a leading player in the market, our market share is quite small, it's below 2%. The competition is still there. I think my view is, if we have the qualified teachers and the good product, I think we should take more market share from small players. It's a long way to go. The overseas test prep competition, I think we dominate the market of overseas test prep because we ran the business for 24 years already. There's still a long way to go. In last quarter, if you remember, our top-line growth of the overseas test prep was 17%, this year 14%, in our mid-term year-over-year growth. We still have a lot of room to get improvement of the overseas test prep business.
Yes. What's your view on the IELTS?
IELTS. What was that? I'm sorry. Hello? Can you hear me?
Yes.
What was the question?
I was trying to ask your views on this IELTS, the [Foreign language].
Oh, okay. I don't want to make comments on our competitors. What I can say is the market is there, we care about the improvement of our teacher quality, we just want to provide better services to the students. That's it. I think if we do things right, we'll take more market share from the small players in the market. Okay.
Got it. That's very helpful. Thanks.
Okay. Thank you.
Your next question comes from the line of Allison Lee from CLSA. Your line is open.
Hi. Thank you for taking my question. I'm asking on behalf of Mariana. Just one quick question on this Dual Teacher Model again. I just want to confirm how many cities are you testing the Dual Teacher Model on, and if there are any metrics that you could share on the student performance by using this model compared to the traditional classroom? Thanks.
Okay. Actually, till now, we stepped into seven cities already, new cities, to roll out the Dual Teacher Model. Also, we have 30 learning centers in existing cities to perform the Dual Teacher Model. Even though it's too early to say, but so far so good. What I mean is the response of the parents and students are good. In the low-tier cities, I think the students have less opportunity to take the good teachers' classes. We're providing the good teachers from the hub city, like Beijing, Shanghai, or Wuhan, and to broadcast the better classes into the low-tier cities.
Okay.
I think it's a great opportunity for us, to the business in low-tier cities. Okay?
Thank you. Seven cities already, 30 learning centers.
Yes.
Okay. Thank you. Perfect. Thank you.
Okay. Thank you.
Your next question comes from the line of Nicole Wang from Fuhua Securities. Your line is open.
Hi, management, good morning . Thank you for taking my question. Just one quick question. Could you elaborate a little bit more about your quarterly student enrollment, because you are saying that the last quarter YOY is 15%, but compared to the revenue growth is about 23%, could you elaborate about that? Also, how do you expect your student enrollment in Q2? Thank you.
Okay. Actually, since last year, we started to bundle the winter and spring courses registration in Q2, and summer and autumn courses registration in Q4. That's why we recorded 37% year-over-year enrollment growth in Q4, last quarter.
The 15.6% year-over-year enrollment growth in this quarter. The combined enrollment growth is 25%. Going forward, I think the trend will continue, that's why I guide you the volume growth. I think in the coming Q2, we guided the top line growth will be 31%-35%, I think the 25%-27% comes from the volume growth or enrollment growth, others will be the price increase. Okay.
Okay. Thank you.
Thank you. Thank you very much.
We are now approaching the end of the conference call. I will now turn the call over to New Oriental CFO, Mr. Stephen Yang, for his closing remarks. Please go ahead.
Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.