Good evening, and thank you for standing by for New Oriental's first fiscal quarter 2017 earnings conference call. At this time, all participants are on listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objection, you may disconnect at this time. I would now like to turn the meeting over to host for today's conference, Ms. Sisi Zhao. Please go ahead, ma'am.
Thank you. Hello, everyone, and welcome to New Oriental's first fiscal quarter 2017 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, Steven 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 US 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 view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law.
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. Stephen Yang. Please go ahead, Stephen.
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are off to a great start for fiscal year 2017. More specifically, we had very strong top-line growth and exceeded our original guidance for the first quarter. Net revenues increased by 16.5% year-over-year to $534.1 million. The growth was bolstered by the improvements in customer acquisition and retention rates and largely driven by a healthy 31.2% increase in student enrollment. It's worth noting that net revenues increased by 23.7% year-over-year in our functional currency, RMB. You have likely heard us mention previously that the first quarter is traditionally our biggest quarter, although with a lower year-over-year growth rate. Even given that historical trend, our performance was really quite strong in many areas compared to the prior year.
For instance, we're pleased to see the continued good momentum in our key revenue driver, the K-12 all subjects after-school tutoring business. It delivered a strong revenue growth of about 28% in US dollar terms or 36% in RMB terms year-over-year in the first quarter, driven by exceptionally high enrollment growth of about 46% year-over-year. This is mainly led by the significant student enrollment growth of both U-Can business and the revamped POP Kids program with 44% and 49%. As we remain focused on our well-proven optimized market strategy, we continue to focus on expansion of our offline business while also investing in O2O two-way interactive education system, which we believe is and will continue to be a key differentiator to set us apart from competitors and help us further penetrate the market.
During the first quarter, we opened a new school and added a net of 22 learning centers in the existing cities. In total, we added approximately 49,000 sq m of classroom area, expanding capacity by 4%. In addition, we started to pilot new teaching model, namely the dual teacher classes, in selected existing and new cities in July 2016. By utilizing online live broadcasting technology, our high-quality teachers based in high-tier cities can reach students in low-tier markets with on-site support from teaching assistants sitting in the remote classrooms with the students. We plan to implement the dual teacher class model in around 10 out of 15 existing cities in our nationwide school network. We expect to enter five to eight new cities, specifically in low-tier market, by opening new teacher model learning centers in fiscal year 2017.
To complement this offline expansion, we continue to roll out sophisticated O2O integrated education system, including new POP Kids program and U-Can Visible Progress Teaching System in all existing cities. We firmly believe that the strategic investments we made will propel our future growth. Turning to pricing. Per program blended ASP decreased by about 14% year-over-year, which represents a decrease of 8% in RMB terms. On an apple-to-apples basis, which is GAAP revenue divided by total teaching hours, hourly blended ASP in RMB terms increased by about 1% year-over-year. To provide a breakdown of the hourly blended ASP in RMB terms, please note that U-Can increased about 1%, POP Kids increased about 5%, and the Overseas Test-Prep program increased about 6% year-over-year.
The decrease of per program blended ASP is mainly due to the shifting of revenue mix from the overseas test prep business with higher ASP to the K-12 business, together with a huge increase of enrollments for discounted U-Can classes during the summer promotion we offered. Meanwhile, it's encouraging to see the continuous improvement of operating margin. Despite the promotion costs, the operating margin for the first quarter increased by 30 basis points to 28.6% from 28.3% a year ago, even while we invested quite heavily in customer acquisition and loyalty development via our summer promotion, which I will talk about in some detail later in my remarks. The margin expansion was largely driven by improved utilization of facilities and effective cost control within the company. We were committed to achieve higher efficiency in our operations in fiscal year 2017.
It's allowing us to reinvest in the business even while protecting margins, and this is very important. This also highlights our management team's ability to manage the business, knowing that what levers to pull, when to drive overall performances. Now let's move on to the performance across our individual business lines. Our key revenue driver, K-12 all subjects after-school tutoring business, achieved a revenue growth of about 28% in US dollar terms or 36% in RMB terms year-over-year for the first quarter, driven by exceptionally high enrollment growth of about 46% year-over-year. Breaking it down, the U-Can middle school, high school, all subjects after-school tutoring business experienced a revenue increase of about 23% in US dollar terms or 31% in RMB terms year-over-year. Student enrollment grew about 44% year-over-year for the quarter.
Our POP Kids program kept delivering a strong performance with revenue up by about 39% in US dollar terms or by 48% in RMB terms during this quarter, and enrollment growing significantly by about 49%. Our overseas test-prep and consulting business together reported revenue growth of about 2% in US dollar terms or 8% in RMB terms year-over-year. Finally, VIP personalized class business achieved cash revenue growth of about 11% in US dollar terms or 18% in RMB terms year-over-year. Now I will provide some updates on the progress we have continued to make with our well-proven optimized market strategy. We have been focusing on maintaining a healthy balance between top-line and bottom-line growth while investing in the build-out of our O2O integrated education system.
With the encouraging results that have been achieved, we are confident that this strategy has laid a solid foundation on which we will build sustainable long-term growth. With respect to our core offline business, in the first quarter, we opened a new school in the city of Baoding. We added a net of 22 learning centers and expanded some existing ones, adding a total of approximately 49,000 sq m of classroom area. As for our online business, we invested about $10.8 million in the first quarter to improve and maintain our O2O integrated education ecosystem. Most of the investments were recorded under G&A expenses. We have been devoted to this online business build-out since 2014, and our hard work has been rewarded with increase in customer retention and the addition of new customers.
We fully believe this is transforming our business, and investments now bearing tangible fruit has been well worth it. Before I go into the details, just a quick recap of the 3 levels of our online platform. The first level, also the core of our online system, is an O2O two-way interactive education system across all of our business lines. The second level is our pure online learning platform and supplementary online education products under New Oriental brand. The third level of our ecosystem is for New Oriental to take minority shareholdings in online education companies that complement our online education offerings. Starting with O2O two-way interactive education system, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. This is also an important factor that sets us apart from other key players in the market.
With advanced O2O product service, we're poised to gain more market share and improve brand recognition going forward. Since its launch in September 2014, U-Can Visible Progress Teaching System, our interactive education system, has been successfully rolled out across all 55 existing cities in our nationwide school network, and this expansion drove positive performance. Our newly revamped POP Kids English program, Shuangyu, has also gradually expanded its coverage to 54 cities by the end of the first quarter. The interactive education system has been gradually used in more and more cities. The O2O for domestic test prep program was being used in 5 cities for some classes by the end of the first fiscal quarter.
Since its launch in the second quarter of fiscal year 2016, the interactive education system for overseas test prep program, including IELTS, TOEFL, and SAT courses, was rolled out in 7 cities by the end of this quarter, an increase of 4 cities from last quarter. For the second level of our online education ecosystem, we have seen consistent growth in our pure online learning platform and other supplementary online education products. In the first quarter, Koolearn.com generates net revenue of $14.2 million, representing an increase of 45% year-over-year. The number of paid users increased significantly, about 37% year-over-year. The number of cumulative registered users has reached 14.2 million. Koo.cn, our own live broadcast open platform for both New Oriental and third-party teachers, achieved over 624,700 registrations in the first quarter.
Donut, a series of game-based mobile learning apps for children, recorded over 47.5 million downloads by quarter end. Leci, an English language vocabulary training app for mobile phones and tablets app, recorded over 4.8 million users by quarter end. For the third level of our online education ecosystem, we invest in select online education companies with a minority stake, and we continue to look for new opportunities that will not only complete our own offerings, but also facilitate our O2O integration. I wanted to spend a couple minutes now talking about a key initiative we executed in the first quarter. To further progress our effort to consolidate the market and gain as much share as possible, we conduct a large-scale promotion this summer in order to rapidly acquire grade 7 student customers before they start the first year of secondary school.
To do so, we offered a low price experiential courses for multiple subjects in Beijing and Shanghai, and math course in approximately 25 other cities. The promotion was very welcomed by the market and brought in about 204,000 enrollments for the first quarter of 2017, which was not included in our report enrollments for the quarter. We're very pleased with the outcome, and we also expect the students will return after the promotion for further full-price classes will boost revenue and profit growth throughout the whole fiscal year. Because of the promotion, our operating margin was negatively impacted by about 1% in the first quarter, though the operating margin for the first quarter still increased by 30 basis points to 28.6% from 28.3% a year ago.
However, due to a higher utilization of facilities in the rest of the year, we don't expect that there will be a material impact on operating margin throughout the whole fiscal year. It's important to note that this is proving a successful strategy to quickly increase market share in the high-growing K-12 after-school children market. As these students move from grade 7 through grade 12, we believe that the continuing improvement in retention rates and hopeful resulting customer loyalty will drive revenue growth in the next three to six years. Now, let me walk you through the other key financial details for the first quarter specifically. Operating costs and expenses for the first quarter were $381.5 million, representing a 16.1% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which excludes share-based compensation expenses, were $380.6 million, representing a 17.1% increase year-over-year.
Cost of revenues increased by 18.5% year-over-year to $203.4 million, primarily due to increase in teachers' compensation for more teaching hours. Selling marketing expenses increased by 18.4% year-over-year to $58.5 million, primarily due to increase in brand promotion expenses and selling marketing staff compensation. General administrative expenses for the quarter increased by 11.2% year-over-year to $119.7 million. Non-GAAP general administrative expenses, which excludes share-based compensation expenses, were $118.8 million, representing a 14.3% increase year-over-year. Total share-based compensation expenses, which we'll allocate to relate operating costs and expenses, decreased by 76.5% to $0.9 million in the first quarter of 2017. Operating income for the quarter was $152.6 million, an increase of 17.5% compared to $129.8 million in the same period of prior fiscal year.
Non-GAAP income from operations for the quarter was $153.5 million, a 14.9% increase compared non-GAAP income from operations of $133.6 million in same period of prior fiscal year. Operating margin for the quarter was 28.6% compared to 28.3% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 28.7% compared to 29.1% in the same period in the prior fiscal year. Net income attributable to New Oriental for the quarter was 141.1%. I'm sorry, was $141.1 million, representing a 9.7% increase from the same period in the prior fiscal year. Capital expenditures for the quarter was $25.4 million, and this was primarily attributable to the opening of 45 new learning centers and renovations of existing learning centers. Turning to the balance sheet.
Deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructors delivered. At the end of the first quarter of 2017 was $657.1 million, an increase of 28.4% as compared to $511.7 million at the end of the first quarter of fiscal year 2016. Before talking about our expectations for the second quarter, I wanted to take a moment to reiterate our overarching goals for the year, which were outlined on the last conference call. During fiscal year 2017, we will continue to focus on our optimized market strategy. With the current success achieved, we're confident that we're moving in the right direction and we should drive additional progress and success. To give you more specifics, first, we will continue to expand our offline business.
In fiscal year 2017, we plan to add 40-50 new learning centers for K-12 business in existing cities. We also plan to enter two or three new cities where we identify as markets with the most business opportunities. We also plan to implement the new initiatives to a teacher class model in around 10 existing cities and enter 5-8 new cities, specifically targeting low-tier markets. Second, we will continue to invest our O2O integration and initiatives in our online educational offerings. In particular, we will focus on product refinement and maintenance. We will continue to make investments, but we believe that the total spending will begin to stabilize this year compared with huge annual incremental increase over the last two fiscal years.
Third, we will continue to have a top priority on improving utilization of facilities and controlling costs across the company to drive continued margin expansion. By executing all of these things, we believe that we will deliver strong results and create long-term value. In terms of the second quarter of fiscal year 2017, we expect total net revenue to be in the range of $324.6 million-$335.1 million, representing year-over-year growth in the range of 17%-21%. The projected growth rate of revenue in our functional currency, RMB, is expected to be in the range of 23%-27% for the second quarter of fiscal year 2017. 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 for this. Thank you.
Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. The first question comes from the line of Terry Chen from HSBC. Please ask your question.
Hi. Good evening and good morning, everyone. Thank you, Stephen and Sisi, for taking my questions, and congratulations on the solid results. I have some questions, it's on your 2Q revenue guidance. I think the numbers are better than expectation. Can management give more color on your expectation into the different business lines? Of yours. Given the strong 2Q numbers, will management consider to raise the full year revenue guidance? Thank you very much.
Thank you, Terry. As for the guidance for the second quarter, we're happy to see the very strong student enrollment in Q1. What I mean is the cash revenue and student enrollment in Q1, and the first half of the second quarter. We did very successful summer promotion in the Q1, and I think the retention rate will be higher. I think the key growth driver in Q2, and also for the rest of the year, the K-12 business will be the key top-line growth driver. Most of the revenue growth will come from the K-12 business. You can also look at the deferred revenue balance at the end of the Q1. We have the 28%-29% deferred revenue balance increase, at the end of the Q1.
Going forward, what I mean for the whole fiscal year 2017, I think the top-line growth for the whole year, for overall business will be somewhere at 24% or 25% year-over-year growth. Is it clear?
Yes. 24%, 25% is in RMB terms, is that correct?
Yes. In RMB term. It's really difficult to predict the exchange rate changes going forward. I just want to give the guidance in RMB term. Okay.
Sure. Just one very quick follow-up. What's the actual retention rate of your summer course students?
We have 200,000 student enrollments for lower priced summer promotion courses. This is the number.
What's the actual retention rate? Can you share with us?
Based on the student enrollment accounts in big cities like Beijing and Wuhan, we had the retention rate of about 40%-50%.
Okay, great. Thank you, Stephen.
The next question comes from the line of Wendy Huang from Macquarie Securities. Please ask your question.
Thank you. My question is about the margin trend where you mentioned earlier that this quarter's operating margin was negatively affected by like one percentage point by the promotions. Should we actually view this as more like a one-quarter seasonality? How should we look at the margin trend for the rest of the FY 2017 team in the longer term? Thank you.
Okay. We're happy to see the operating margin improvement by 30 basis points in the first quarter of this year. Despite we spent $11 million on the online investment, and also we had a very huge summer promotion, and the cost is not very small. Despite we spent a lot in the first quarter, finally we got the margin improvements in Q1. I don't want to guide the operating margin in fiscal year 2017. Going forward, our target is to get 17%-18% operating margin in next three, four years. Going forward in the rest of the fiscal year, I think the management will manage the business very strictly, and also, I think we have a lot of business leverages. Also we will control the cost very strictly.
Hopefully we expect the operating margin will be a little bit higher compared to last year. Okay?
Thanks, Stephen.
Okay, thanks.
The next question comes from the line of Tian Hou from TH Capital. Please ask your question.
Stephen, Sisi. I have a question related to your summer promotion program. You have been doing that for two years, the first time you did in Beijing, this time you did in many more cities. Even though it's two years in a row, however, those two years are different. I wonder, what have you learned from those kind of promotion programs in this quarter, what are some areas you do believe this promotion program is very good, what are some areas you believe you can do better or improve? That's the question.
Okay. Tian, actually, we started the summer promotion in Beijing five or six years ago.
Oh, yes.
It's not two years. This year, since two years ago, we learned a lot on the O2O product. Now we are very confident about our product. That's why we make the decision to spread the summer promotions from Beijing only to over 27 cities in this summer. Because of the promotion, I think it's very important to know that it's a very successful strategy because it's a quick way to take market share from competitors. For those students who enroll in the summer promotion classes, I think we believe that the continuous improvement in the retention rate and hopefully the resulting customer loyalty will drive the very strong top line growth in the whole year or next three or six years. I think this is the main purpose of the summer promotion program.
Now, I think the promotion was very welcomed by the market, and it's brought in 200,000 student enrollment. I think it will give us the 2%-3% or maybe 2%-4% incremental revenue growth in the rest of the year. It will help the top line growth.
Is clear?
Yes. Thank you.
Okay. Thanks again.
Yeah.
The next question comes from the line of Credit Suisse. Please ask your question.
Hi, management. Congratulations on a very strong quarter. I have two questions. One, could management share with us your current utilization rate and the operating margin of different segments? The second question is regarding your dual teacher model. What's the difference in our strategy from our competitor and what's our margin expectation on this initiative? Thank you.
In terms of the utilization rate, now the utilization rate is about 20%, but we have the 200 basis points up compared to last year. Going forward, we expect the utilization rates will go up because the expansion, we will plan to expand 5% to 10% capacity in class room area. Our student enrollment will get maybe 25%, 30% year-over-year growth. We expect the utilization rates go up going forward. The dual teacher model, I think we're still in process of piloting period. It's very easy to understand just the star or good teachers who stay in the high-tier cities. It sounds like the hybrid model. We have one or two teacher assistants in the classroom in lower-tier cities to support the teaching cycle.
I think it's too early to say the operating margin of this model because it's too early. When we pilot the program by two to three quarters, I think I will tell you. If it's the time, I will tell you the operating margin prediction. Okay.
Sure. Thanks a lot. Sorry. May I have a quick follow-up on our SBC expenses?
Okay.
Why is our share-based compensation cost a lot lower than previous quarters? Thank you.
Okay. We have not issued the incentive shares of this fiscal year to high management and key staff till now. Last year, we issued the shares to them in July. That's why you see this SBC amount difference. We plan to issue the shares to management and key staff in one or two months. You will find more SBC, share-based compensation expenses reported during the rest of the fiscal year. Okay.
Thank you.
Thanks.
The next question comes from the line of Alex Liu from Daiwa. Please ask a question.
Thanks, management, for this opportunity. My first question is on capacity. I think if my calculation is correct, on a year-on-year basis, it seems that the company has sped up the learning center area growth in this quarter. I was wondering what is the management thought on accelerating capacity growth for this year and next year, and if the management can add some color on where are we adding those capacities. Thank you.
Okay. We added 22 learning centers in first quarter. If you calculate the classroom area, we expand 4% in capacity in this quarter. I think it is in line with our budget. We plan to open 40 to 50 learning centers in the whole fiscal year. We opened 22 in the Q1. I think in the whole year, we will open still the 40 to 50 new learning centers, and that means the 5%-8% classroom area capacity expansion.
Okay. Thank you.
Okay. Thanks.
The next question comes from the line of Natalie Wu from CICC. Please ask your question.
Hi, good evening, Stephen. This is Wu. Thanks for taking my question. A couple of questions. The first one is regarding the POP Kids. What's the driving force behind the continuing strength in the growth rate of POP Kids? Will the trend last into the future quarters? The second one is, actually, in the past month, we have witnessed the teacher salary raise from your competitor in the K-12 area out of a competition issue. Just wondering, will you guys follow in the salary raise? If yes, will this impact your margin profile in longer terms? Thank you.
Okay. Yeah, we had a very strong quarter, both the enrollment growth and revenue growth in POP Kids program. We launched the new online, offline integrated program named [Sanhao] last year. Now, I think we're seeing it start to bear fruit from the new revamped product. Most of the revenue growth come from the enrollment growth. Going forward, what I mean, the rest of this fiscal year, and also for the next two to three years, I think the top line growth of POP Kids will be very strong. Combined with the U-Can business, the K-12 business will be the key driver of the top line growth in the company. Your second question is about salary inflation of teachers. Typically, on apple-to-apple basis, what I mean is the hourly rate for the teacher's salary, we increased it 8%-9% year-over-year. It's quite stable.
Also since last year, we start to give more teaching hours to the good teachers to help them to earn a lot than before in New Oriental. We hope they stay longer with New Oriental. Going forward, I think the increase of teacher salary will be in line with the top-line growth. Is it clear?
Great. Great.
Okay.
Thank you, Stephen. Actually, may I have a very quick question regarding the summer promotion program this year?
Okay.
Can you share with us some color on how many courses per student take on average in the summer promotion program this year? How many courses will a student take in the autumn session normally, maybe in large cities like Beijing and Wuhan?
Okay. In the summer promotion, the students on average take two to three courses at the same time, like in big cities in Beijing and Shanghai. Also, going forward in the autumn classes, typically the students take two courses at the same time on average.
Great.
Is it clear?
Very helpful. Thank you.
Okay, thanks.
Yeah, very clear.
Okay.
The next question comes from the line of Fan Liu from Goldman Sachs. Please ask your question.
Hi, management. Congratulations on your solid result. I have a quick question about your headcount number. Could you please update the latest headcount number, and also among which, how many are teachers and how many are training assistants? Do you have the plan for the headcount increase, especially in light of your expansion in your dual teacher model?
The total headcount, including the staff and teachers at the end of the Q1, was 38,600. We had 19,800 full-time teachers, and more than 70% are full-time teachers. The headcount, based on the budget, we plan to increase the total headcount by 5%-10% in the fiscal year '17. In terms of the dual teacher model, we just pilot the program, and we plan to open maybe the 10 learning centers in existing cities, and also we will open five to eight new cities. It won't need so many teachers.
Okay. Thank you. Just a quick follow-up. Do you have a target for the student-to-teacher ratio you want to achieve for this dual teacher class model?
We don't have a target till now because I told you that we are still in the process of pilot. Within the company, we don't calculate like this. We calculate the student retention rates and utilization rate. Okay.
Okay, understood. Thank you.
Thank you.
The next question comes from the line of Mariana Cao from CLSA. Please ask your question.
Thanks, management for taking my questions. Again, congratulations on a strong set of results. I actually have two questions. My first one is on pricing. I think, you mentioned, Stephen, just now that, ASP per hour is up about 1% for U-Can, 5% for POP Kids, and about 6% for overseas. I'm wondering if you could comment that whether this is a little bit below historical levels, and what are you planning to do for the rest of the year in terms of pricing?
Okay. Thanks. The first, I think the K-12 business is growing faster than the overseas test prep and adult English business. Typically, the K-12 business have the lower ASP than the overseas test prep. Also within the K-12 business, the K-12 business in other cities are growing faster than Beijing and Shanghai. This kind of revenue mix drags down the overall ASP per program. Second, we have huge increase in enrollments for discounted U-Can classes. Besides the summer promotion, we made some discounted classes in U-Can for the summer courses. Since the autumn and also in the rest of the year, the price will go back to normal level. The summer term is the first term of the whole fiscal year.
In the rest of the year, I think the price strategy of the company will be as same as last year or maybe a little bit higher than last year. Overall, we will increase the price on hourly basis by 5%-8% in the rest of the year. Okay.
Thanks. Just to follow up a little bit on that. Would it be fair to say that since POP Kids seems to be growing faster in terms of ASP and I think the margins, as we previously talked about in other calls, that margins are still a bit lower for POP Kids. Should we expect the operating margins for U-Can and POP Kids to narrow?
I think both the U-Can and POP Kids program, the margins will be higher than last year because we expect the higher utilization rates for both U-Can and POP Kids.
Right. Okay. Thank you.
Okay.
I guess another small question, to add on the dual teacher program that we've been talking about. Could you actually comment in terms of lead time, should we expect I know we don't have an exact schedule on when we are going to roll it out and all the targets, but in terms of just lead time, should we expect couple months of training before you roll out this program, so we should expect some sort of margin pressure, the quarter before you exactly roll it out?
No, I don't think so. I think we don't have the margin negatively margin impact for the dual teacher model because we just pilot the program by like eight or 10 learning centers. We have 750 learning centers, I think the amount is immaterial.
All right. Thank you. Good to know.
Okay.
Thanks.
The next question comes from the line of Andrew Orchard from Nomura. Please ask your question.
Hi, Stephen and Sisi. Thanks for taking my question and congrats on a good set of numbers. A couple of questions from me. First, can you give us some additional color on the utilization, especially for U-Can and POP Kids? I know earlier you mentioned overall utilization is about 20%, up about 200 basis points, how about specifically in these two business areas? Secondly, for the dual teacher model, are you expecting any meaningful increase in CapEx as a result of building out some of this infrastructure? Those are my two questions. Thanks.
Okay. Andrew, we don't disclose the utilization rates by different business lines. In my personal view, I think the utilization rates for U-Can and POP Kids, it's just as the same as the utilization rates for the whole company. Like I said before, going forward, the utilization rate will go higher because you will see the higher enrollment growth going forward. In terms of the dual teacher model, yeah, we will have a little bit more CapEx. As I said, we just set up, let's say the five to 10 new learning centers in the new cities. Compared to the $60 million-$70 million, the CapEx for the whole company is not a big number. It's not a big deal. Last year, the CapEx was $64 million, $65 million. $11 million.
This year, what I mean is in FY 2017, we plan to spend somewhere at $75 million in the CapEx. Okay.
Got it. Thank you.
Okay, thanks, Andrew.
The next question comes from the line of Johnny Wong from Jefferies. Please ask your question.
Hello, management. Thanks for taking my question, and congratulations on a very nice set of results. Most of my questions have been asked, I just have one question to clarify. We mentioned that we spent an extra $11 million on the promotion. Does that mean that this number will fall off for the rest of the year in terms of the hit to the P&L? Thanks very much.
Okay. I just want to clarify the numbers. What I said is that we spent $11 million. The accurate number is $10.8 million on the online investments for the first quarter. Based on the budget, we plan to spend the same amount in this fiscal year as same as we spent last year. We plan to spend $54 million in this year. For the summer promotion, we spend some teacher salary and maybe some rental for the summer promotion, and we have the negative impact for operating margin for Q1 by 1%. Maybe we spend $5 million-$6 million on the summer promotion on the cost and expense side. Okay.
Thank you.
Okay. It's one time for the summer promotion. It's a one-time cost and expenses. Okay. Thank you.
The next question comes from the line of Claire Zhao from Morgan Stanley. Please ask your question.
Hi, management. Thanks for taking my question. Can management remind us what level of retention rates do we need to achieve for the summer promotion course to be value accretive to New Oriental? My second question is regarding, I understand this might be a little bit too early, but given the dynamics in the market this year, what should we think about the summer promotion strategy as we enter into next year, given the market has become quite promotional and these low-price courses will probably become a new norm? Thanks.
Okay. The overall retention rate for K-12 business in the company, in New Oriental, is about 75%. Now, last year, it was somewhere at 65%. Yeah. For the summer promotion, the retention rate, like I said, in the big cities like Beijing and Wuhan, the retention rate is 40%-50%. That's it. What's your second question?
Next year.
Next year. I think we will summarize what we have done for the coming summer promotion. I think it's too early to say what will be the plan for next year. I think we will do the same thing next year. I don't know the amount.
Okay.
For the specific plan of next year. Okay. It's too early. I think it's a great way to take more market share. Yeah. I think it's a great way, method to take more market share from competitors, and also to make the market consolidation based on the summer promotion way. Okay. Is it clear?
Yeah, sure.
Okay. Thanks.
The next question comes from the line of Jin Hyong from Mizuho Securities. Please ask it.
Hi, good evening, guys. I think on your prepared remarks or the press release mentioned that you guys launched the O2O education system for the overseas test prep. Given the fact that those students have a typically a shorter shelf life than your typical K-12, can we expect meaningful price increases in the overseas test prep business going forward? It launched in seven cities in China, where do you expect that to be in the next quarter or two? Thanks.
Yeah. Okay. We're seeing the Chinese parents send their kids to study abroad in younger age. That means most of our overseas test prep students are high school or junior high school students. They still need the same O2O product. We launched the new O2O product of IELTS in March. Going forward, we will launch more and more new products like the TOEFL, SAT, or GRE. The whole market of the overseas test prep doesn't grow as much as before, because I think the world cannot take more Chinese students. I think the whole market grows with low single digits. Based on the new O2O products, and also if you remember the earnings call in the last Q1, Michael, the founder of the company, said he will spend more time on the product reform of the overseas test prep.
I think we are confident to see the top-line growth of the overseas test prep. In terms of the pricing, we still increase the price. We plan to increase the price of overseas test prep by 8%-10% going forward. Half of them, whether we have 4% or 5%, are apple-to-apple price increase. The other part, another 50%, has come from the product mix. Typically, the SAT or TOEFL Junior class, those kind of class, are much expensive than the GRE and GMAT classes. Okay.
Perfect. Thank you.
Okay, thanks.
The next question comes from the line of Terry Chen from HSBC. Please ask your question.
Hi. Thank you for taking my call again. I have a question on your investment philosophy. We have $1.9 billion cash. I think the cash will continue to pile up given our strong free cash flow. I'm just wondering how much will you deploy for acquisition investment, and any possibility for us to do overseas expansion in the future?
Yeah. I think the first thing, use of the cash, we'll be looking at the M&A and investments. This is our first priority. As you saw, we spent $90 million in last two years on investments of O2O and Pure Online. In terms of the M&A, I think we'll look at the companies, like some vertical Pure Online companies, which have the good content or good channels, or they're good at some specific subject. I think we will buy some minority shares from them. The thinking we have is we'll consider the potential cooperation between the target company and New Oriental. This is our logic of investment. What I want to say is we will do it very carefully. Okay.
Okay. In terms of preference, do we prefer to make a strategy investment by acquiring minority stake in third party companies, or do we prefer to do a full acquisition?
I think this is quite open for our view. Most of the M&A going forward will be the minority shareholding buying. If we find some companies have the potential synergy between the target company and New Oriental, maybe we'll buy 100% shares hold them. Okay.
Okay, great. Thanks, Stephen, again.
Thanks.
We are now approaching the end of the conference call. I will now turn the call over to New Oriental CFO, Stephen Yang, for his closing remarks.
Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you.
Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect.