Ladies and gentlemen, good evening and thank you for standing by for New Oriental's second fiscal quarter 2016 earnings conference call. At this time, all participants on listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host for today's conference, Ms. Sisi Zhao, New Oriental's Investor Relations Director. Ms. Zhao, please proceed.
Thank you. Hello, everyone, and welcome to New Oriental's second fiscal quarter 2016 earnings conference call. Our financial results for the periods were released earlier today and are available on the company's website as well as on news wire services. Today, you will hear from Chenggang Zhou, New Oriental's President, and Stephen Yang, Chief Financial Officer. After their prepared remarks, Chenggang and 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 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. Zhou. Zhou, please.
Okay. Thank you, Sisi. Hello, everyone. Thank you for joining us. This is my first time to be here speaking to investors and analysts as President of New Oriental, a new role I began earlier January. I'm so happy to be here and would like to thank Michael, Louis, and Steven for all their support. As Mike has said on the last conference call, my job will be to guide corporate strategy and oversee business development, which I'm quite excited about. New Oriental entered a new chapter with the optimized market strategy, and in particular, the O2O integrated education ecosystem. It is an exciting time to be here in this position. Now, let's now look at the details of our quarterly performance. Revenues was up by 17.7% year-over-year to $278.1 million.
If not including the impact of the recent depreciation of renminbi against the US dollar, the revenue growth rate would have been 22.1%. This strong top-line performance was mainly driven by a significant growth in the total enrollment, which went up by 35.3% to approximately 841,000 for the quarter. You may have noticed that our enrollment increased more than it normally has in the second quarter in previous years. This is because we moved the registration of the winter classes earlier to the month of November, starting this fiscal year. We will continue to do so going forward. This decision is in response to the increasing demand from our students, who wish to secure class booking as early as they can.
Another contributing factor to the enrollment growth is the continuous rollout of our new POP Kids program and the U-Can VPF, which has been generating quite positive feedback from both students and teachers. The new POP Kids program reached 44 cities, and U-Can Visible Progress System reached all the existing cities. Our revenue driver, the K12 all subjects after-school tutoring business, achieved revenue growth of more than 33%, and enrollment increased of 59%. It is important to note, it has been a year since we rolled out the newly revamped POP Kids program, which definitely helped to further differentiate New Oriental from the rest of the market. For the quarter, POP Kids continued to deliver strong results from revenue up 30%, and we expect this trend to continue for the second half of the year.
In terms of our pricing, per program branded ASP decreased by 7% year-over-year. On an apple-to-apple basis, which is GAAP revenue divided by the total teaching hours, hourly branded ASP increased about 2%. A breakdown of the hourly branded ASP, U-Can increased about 1%. Overseas test program is flat. POP Kids increased about 60% year-over-year. This needs probably a bit more explanation. First of all, the early registration winter classes causes a reduction per program branded ASP because the winter classes are shorter than the autumn classes in terms of the total classes hours. Secondly, during the second quarter, we made an adjustment to the semester arrangement for the POP Kids program, which used to have two or three semesters a year. Now we have four to make it more flexible for the students to plan for their learning process.
Therefore, we can see now we are seeing a reduction in the quarterly per program branded ASP. However, if you look at it on a yearly basis, the impact is minimal, as the total class hours would still be same or quite similar. Thirdly, we are seeing the slowdown of VIP classes, which have a higher ASP. Finally, we want to point out that RMB devaluation has negatively impacted our ASP growth rates, which would have been 4% higher. Now let me walk you through our performance across individual business lines. Our K12 all subjects after-school tutoring business experienced a gross revenue growth of more than 33% year-over-year for the second quarter, and enrollment growth of about 59%. Breaking that down, U-Can middle and high school, all subjects after-school tutoring business achieved a gross revenue increase of 35% year-over-year. Student enrollments grew 56% year-over-year.
POP Kids program continued its growth momentum with the gross revenue up to 30%, and enrollment is significant to 62% year-over-year. As the management said repeatedly, we are quite confident that POP Kids will play an increasingly important role in realizing further growth for K12, and this is proving to be true quarter-over-quarter. Finally, revenue for VIP personalized classes business increased 9% year-over-year. Now let me provide some updates on the ongoing execution for the optimize the market strategy.
As we emphasized before, we're focused on maintaining a healthy balance between the top line and the bottom line growth, while investing heavily in the build out of our O2O integrated education system. Starting with the core of our business, we opened a new school in Weifang, an emerging and populous city that lies in Eastern China. We also closed a net of two learning centers while we expanded some existing ones, adding a total approximately 14,000 square meters of classroom area. In the approaching winter and the spring quarters, we will continue to improve the utilization at our existing schools and the learning centers, and we will add some capacity in the cities that demonstrate the high growth potential.
For online, we spent about $13 million for in further improving our O2O system in the second quarter, and this is in line with our $50 million investment plan for the fiscal year. Clearly, our efforts are paying off as the new O2O system for K12 is enhancing customer retention rate and bringing in new customers as well, which therefore contributed to our revenue growth for the second quarter. This O2O system has become the defining factor for the New Oriental, and we truly believe it will continue to enhance our profitability for the next few years. Before I go into the details about our online business, just a quick recap of all 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 center, a learning platform, and supplementary online education products under the New Oriental brand. The third level of our ecosystem is for the New Oriental to take minority shareholdings in online education companies that complement our own online education offerings. That is investment. Let's start O2O two-way interactive education system, which we rolled out and upgraded in the first quarter of fiscal 2015 across all major product lines in order to extend New Oriental traditional offline classroom teaching offerings to online education services. Solid progress was made in all fronts. U-Can Visible Progress teaching system has been used in all the 52 existing cities, and a positive market feedback keeps coming in. POP Kids English program, or the Shangyao in Chinese, saw another quarter revenue increase of 30%, and enrollment up to 62% year-over-year.
By the end of the second quarter, 44 cities in China are using POP Kids Shangyao. The O2O for the domestic test prep program was being used in five cities by quarter end. Good news on the O2O for the overseas test prep program. It has been officially launched in the second quarter and now it's being used in two cities. We will continue with this rollout for the rest of the year. For the 2nd level of our online education ecosystem, we have seen healthy growth in our Pure online learning platform and other supplementary online education products. In the second quarter, koolearn.com generated a net revenue of $13.3 million, up to 19.4% year-over-year. The number of paid users increased over 215% year-over-year. The number of cumulative registered users has reached more than 11.9 million.
Koo.cn, our own live broadcast open platform for both New Oriental and third-party teachers, achieved roughly 1.2 million registrations. Donut, a series of game-based mobile learning apps for children, recorded over 33 million downloads. I guess it was successfully launched in New Oriental today as a pilot program.
Yeah.
Right?
Yeah.
An English program, a language vocabulary training app for mobile phones and a tablet app, recorded about 3.5 million users by quarter end. We are thinking of the best ways to make the best use of these resources in these pools in the days to come. Turning to the 3rd level of our online education ecosystem, we invest in select online education companies with a minority stake. In September 2015, we invested in leleketang.com, which is complementary to our K12 business. Leleketang is an online platform that provides personalized education for K12 students. It offers teaching learning products by level, by subject, through animation videos, interactive practice tools, and a question bank. Currently, it has 15 million cumulative unique visitors and 2 million daily active users.
Together with our previous investments in kouyu100.com, alo7.com, jason.com, Golden Finance, and Robotron, we are now on the right track building out our O2O ecosystem, and we have created more opportunities to partner with our new online education companies to enhance our product offerings and strengthen our leading position in China's private education market. Another note to add here is the kouyu100.com, which we invested in December 2014 and was listed in China's New Third Board in December 2015, which is an over-the-counter market for growth enterprises. That's basically what I've got to say. Now I will turn the call over to Stephen to discuss the key financials and outlook. Stephen?
Thank you, Joe. Now let me walk you through the key financial details for the second quarter. Operating costs and expenses for the quarter were $288.5 million, a 16.2% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which excludes share-based compensation expenses, were $283.5 million, a 16.2% increase year-over-year. Cost of revenues increased by 17.3% year-over-year to $134.2 million, primarily due to increase in teachers' compensation for more teaching hours. Selling marketing expenses slightly increased by 0.3% year-over-year to $44.1 million. General administrative expenses for the quarter increased by 22.7% year-over-year to $110.1 million. Non-GAAP general administrative expenses, which excludes share-based compensation expenses, were $105.1 million, a 23% increase year-over-year, primarily due to increase in R&D expenses and human resources expenses related to the development of our O2O integration.
Total share-based compensation expenses, which were allocated to relate operating costs and expenses, increased by 16.5% to $5.0 million in the second quarter. Loss from operations for the quarter was $10.4 million, compared to a loss of $11.9 million in the same period of prior fiscal year. Non-GAAP loss from operations for the quarter was $5.4 million, compared to non-GAAP loss from operations of $7.6 million in the same period of prior fiscal year. Operating margin for the quarter was negative 3.7%, compared to negative 5.0% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was negative 1.9%, compared to negative 3.2% in the same period of prior fiscal year. Net income attributed to New Oriental for the quarter was $5.9 million, representing a 17.3% increase from the same period of prior fiscal year.
Capital expenditures for the quarter were $11.6 million, which were primarily attributable to the opening of 20 new learning centers and renovations at 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 instructions delivered, at the end of the second quarter, was $586.5 million, an increase of 33.1%, as compared to $440.7 million at the end of the second quarter of fiscal year 2015. Before we move into the Q&A session, let me go through our expectations for the third fiscal quarter. We expect total net revenues to be in the range of $328 million to $339.5 million, representing year-over-year growth in the range of 14%-18%.
If not including the impact from the recent RMB depreciation, the projected revenue growth rate is expected to be in the range of 20%-24%. This forecast reflects New Oriental's current and preliminary view, which is subject to change. At this point, Joe and I will take your questions. Operator, please begin.
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. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel a request, please press the pound or hash key. The first question comes from the line of Julia Pan from Macquarie. Please ask your question.
Hi, Stephen. Hi, Sheng Gang. Congratulations on a strong result in this quarter. I have two questions. Could you please give some color on the margin outlook in fiscal year 2016? Is this going to still be flat or a little bit increased? Why is the tax rate low at 6% in this quarter? Could you please tell us what the market share of EDU have in after-school tutoring market now? What's your outlook for the consolidation of the education industry in the future? Thank you very much.
Okay. Thank you. I think your first question is about the margins of fiscal year 2016. I just want to guide the operating margin for the whole fiscal year of 2016. I think the margin will be flat in the whole year. For the offline schools, we're happy to see the margin improvement because of the leverage. You can see in the Q2 numbers, the revenue was up by 70% without adding any new learning centers. We are still in the investment phase. Based on the budget, we will spend $50 million within this year, that's why I guide the margin will be flat. Your second question is about the tax rate. Yeah, you know the Q2 is the lower season for the profits, and I think that the ETR for the first and second quarter cumulatively is about 11.8%.
For the whole year, it should be 12%-13%. Your third question is about market share. Yeah, we are the number one player in the whole market for K12 after-school tutoring business. I think the market share occupied by New Oriental is only 1%-2%. It's a huge market. It's very fragment. About the potential consolidation, yes, we are taking more market share, as you saw the very strong student enrollment growth. I think in the future, we'll take more and more market share.
Also in the existing cities New Oriental is holding, we are still having quite a lot room for improvement in some of the existing cities. As time passes, our performance probably will be better and the results could be better. Not including the cities probably we're expanding to in the days to come.
Okay. Thank you.
Okay.
Thank you, management. That's very helpful.
Okay. Thank you.
The next question comes from the line of Cynthia Meng from Jefferies. Please ask your question, ma'am.
Hi, management. This is Annie Tu, and I am asking on behalf of Cynthia Meng. I have two questions about EDU's results. The first one is, given the lower blended ASP into Q16, is the higher gross margin a result of higher utilization rates? What is the utilization rate in the second quarter of 2016? My second question is, could you give us some color about the ASP trend of U-Can, POP Kids, overseas test preparation, and domestic test preparation, as well as comprehensive English business, respectively, in fiscal year 2016 compared to last year? Thank you.
Okay. Yeah, the utilization rate of New Oriental is up in second quarter because our student enrollment grew by 35% year-over-year without adding new learning centers. The utilization rate is 20% in Q2. The Q2 last year was 18%, that means 200 basis points up. For the ASP, I think I would rather spend more time to explain the ASP. The enrollment for Q2 is 35%, and the cash revenue is 28%. If you do the math, it is 7% of the ASP down. That is per program. There were four reasons. The first reason is the early registration for the K12 business. We moved the enrollment window for K12 from December to November. As you know, the winter class is shorter than the autumn class. This is one reason, the impact of ASP.
The second reason is that we changed the class length for POP Kids program in some cities. That means that now we have the more shorter POP Kids classes. The third one is the VIP revenue contribution is decreasing. The VIP revenue contributes 30% of total revenue. In the Q2, it was only 9% growth, it dragged the ASP. The number four reason is the exchange rate. We have the negative 4% due to the RMB depreciation. I will give you the hourly rate. It is not the price per program, it is the hourly rate. In US dollar term, it is increased by 2% in second quarter. If you calculate in RMB term, it is 6% for ASP. In the longer term, I think we will increase the price by 5%-10% year-over-year for the price. That's my answer.
Thank you.
Okay.
The next question comes from the line of Anne Shi from Brent Capital. Please ask your question.
Hi. I just had some follow-up questions on the margins in the ASP. Could you just provide maybe some more details on the cost efficiencies and then the flat margin for the full fiscal year? Just wondering, given lower O2O spending for next year, should we also expect more rapid recovery to normalize margin levels? Second on the blended ASPs, could you also discuss the company's pricing strategy for promotions, particularly in K12? Thank you.
Okay. For the margins, yeah, we're seeing the margin improvements in this fiscal year. Yeah, we will spend $50 million on investment for O2O and pure online. That's why I guide the margin will be flat within this fiscal year. Next year, I think we will cut some investment money we have compared to this year. We don't have the budget till now, but I think the number of the investment, the money we spend in next year should be lower than this year. The margin will be higher next year.
That means as we promised before, we are going to invest more money, the CNY 50 million, making the investment and to improve our infrastructure, the online, offline system. When the structure's ready, we'll save the money and probably for the sustainable development, the performance, all the figures, the numbers will be much better.
In the longer term, what I mean is in next three to four years, our operating margin targets will be 17%-18%.
Yes.
What's your second question, Anne?
The second question was related to promotions and pricing for the K12 segments.
Yeah, we did some promotions for K12 business in some big cities, like in Beijing, Wuhan. I think it's very minimal because we give some very lower price classes in grade 1 and grade 7, it's the entrance class. It's the small part of the business. For all the other grades except for grade 1 and grade 7, the prices are as normal.
All these classes, I believe, are basically to attract more customers, for the promotion and marketing only.
Yeah.
Yeah, Anne, actually, we did more promotions by pricing in Q1, which is the entrance point for the whole year registration. In the rest of the year, we won't do a lot of pricing promotion. Also, for the whole year, our pricing strategy for K12 is to take up the hourly rates by probably controlled within 5%. This is our current pricing strategy. Going forward, we have more pricing power to take up the price.
Yeah.
Great. Thank you.
The next question comes from the line of Fan Yu from Goldman Sachs. Please ask your question.
Hi, Chenggang Zhou, Stephen, and Sisi. Thanks for taking my question, and congratulations on the strong result. I have two questions. Number one is about learning center expansion. Year-to-date, actually, we haven't really added much learning centers. What's your guidance for the rest of the year, and maybe also for the coming fiscal year 2017? Second question about your O2O investment. You have mentioned that you are still on track for the whole year, $15 million investment. May I know how much have you spent in the first half on the O2O? These are my questions. Thank you.
Okay. In terms of the expansion plan, our learning center decreased by one in Q2, but we added net 14,000 sq m in capacity for the current learning centers. We closed some small learning centers due to the leasing contract expired, opened big learning centers nearby. For the rest of the year, what I mean is, in the Q3 and Q4, we plan to open the learning centers below 10. What I mean is the net increase. For the next year, I think we will increase the 30 learning centers. Compared to the 720 we have, it's 4% or 5%. For the O2O and pure online investment, in the first quarter we spent $10 million, and in the second quarter we spent $13 million. $23 million we spent in total for the first half of the year.
Great. Thanks, Stephen.
Okay. Thanks, Fan.
The next question comes from the line of Yoon Jin-kyu from Mirae Asset Securities. Please ask your question.
Hey, good evening, guys. Real quickly on the enrollment. You said that enrollment grew this quarter largely due to the fact that there was a bit of a pull-forward demand due to earlier enrollments, and that's largely due to the fact that the students demanded that. I guess, why this quarter? I guess, is this a recent and a new phenomenon that we haven't seen in the past? When we see kind of a pull-forward demand on enrollment, what should the enrollment look like this quarter, and then the subsequent quarters going forward? Can you just kind of give an outlook on just kind of how we should be modeling for that? Great. Thanks, guys.
Okay. I think it's not the first time. If you recall the numbers six months ago, we had very strong student enrollment growth in Q4.
Q4 2015.
Yeah, in Q4 2015. I think, the new O2O product is very popular in the market. The students wish to enroll the class as early as they can to secure the class seat. That means we have the early enrollment. If you build up your model at normal level, I think the student enrollment should be the 30%-35% increase year-over-year.
Got it. That's 30%-35%.
Yeah, for the K to 12.
Got it. You mentioned O2O as kind of this driver for that. Is there a particular seasonality that we should look at in terms of fourth quarter and this quarter, or is it going to be just 30%-35% for the next few quarters going forward?
No. What I mean is, if you build up your model in the Q2 and Q4 going forward, you should build up the higher student enrollment growth. What I mean is, for the next year, the whole year, you should build up the model for the K-12 business. The student enrollment growth should be like 20%-25%. For all the business, it's 15%-20% student enrollment growth.
Yeah. The timing difference.
Got it. That's clear.
This is only for current fiscal year.
Yes.
It's not for next year.
Yeah.
Got it. That's clear. Okay, thanks, guys.
Okay, thank you.
The next question comes from the line of Tian Hou from TH Capital. Please ask your question.
Hi, Sisi, Stephen, and Joe. The question is related to your investment. You previously announced a joint venture with Tencent to develop mobile internet education. I wonder what's the progress on that front. Also, you also mentioned the kouyu100.com, and has already been traded on the OTCB, over-the-counter market in China. I wonder, such kind of arrangement, one of your assets is invested in the local market, how the shareholder of EDU benefit from such arrangement? That's my question.
Okay. Yeah, we made a lot of investment during the past two to three years. The target company we seek for is, if we can find the synergies between New Oriental and the target company, we will do the investment. For example, for the kouyu100.com, their customers are like the grade 6 to grade 8, the students for the K12 students. The students, they study our English online. So, we can make a lot of the cross-selling to their customers for our K12 class provided by New Oriental. The synergies should be the key factor of our investment logic.
Basically, that means that the companies should be compatible with each other, then we can make the best uses of the resources of each other's pool, so that we can support each other. Right?
What about the joint venture with Tencent? What's the progress on that one?
Yeah, we set up the joint venture last year, and we launched the product. To be frankly, I think both on the registered users and the revenue should need more improvement, just wait more time.
Should be moving on smoothly.
Yeah.
Just keep waiting for the final results.
Yeah.
Okay, thank you.
Okay.
Yeah.
The next question comes from the line of Alvin Jiang from Deutsche Bank. Please ask your question.
Hi, good evening, Joe, Stephen. Congratulations on the strong results. I have two questions. The first question is on the performance of U-Can and the POP Kids. I noticed that in the past quarter, U-Can actually outperformed POP Kids. Can you share any color on this? Maybe this is coming from some VPS deployment or any other new improvements of U-Can. My second question is on the price cannibalization, because I noticed that Koolearn actually has a very robust growth in terms of traffic, but actually revenue growth decelerated. I'm not sure if you introduced some new subjects, maybe dilute the price or any other insights from you will be very helpful. Thank you.
Yeah. I think we're seeing the enrollment growth, both U-Can and POP Kids. I think U-Can is better than the POP Kids because the courses of U-Can are more mission-critical, with a higher price for the students. Going forward, both the U-Can and POP Kids will be as strong as this quarter, maybe a little bit better. For the cannibalization for the online, you mean the Koolearn. Yeah, this quarter, the Koolearn, the revenue was up by only 19%, but I think that's due to the two reasons. The first one is the To B business decreased in Q2 for Koolearn. It's shrinked in last several quarters. Now it comes for the 15%-20% of the total revenue. On the other hand, the To C business increased by 45%.
The second reason is the peak season for the Chinese GRE should be the third quarter. In the coming quarter, what I mean is in Q3, you will see the very strong GAAP revenue growth for koolearn.com. Okay.
The next question comes from the line of Mariana Kou from CLSA. Please ask your question. Ms. Mariana from CLSA, your lines are open. You can ask your question now.
I know the market is definitely quite volatile at the moment. The interest income actually is quite a significant portion of your bottom line. If you could give some color, that would be very helpful. Thank you.
I know the market is definitely quite volatile at the moment, and the interest income actually is quite a significant portion of your bottom line. If you could give some color, that would be very helpful. Thank you.
Okay. In terms of the market share, yeah, we occupy only 1%-2% of the K-12 market. In some big cities, like in Beijing and Shanghai, I think the numbers will be higher than 1%-2%, but I'm not sure I have the idea about the detailed numbers. Yeah.
By the way, this is the market share for K-12. This is a very huge and fragmented market, in overseas, TestPrep we're dominating.
Yes. Yeah. Your second question is about the interest income. All the interest income we made come from the bank deposit or the treasury products we bought in banks. The bank will 100%. What I mean is, the principal and interest income is 100% protected by the banks. The average interest rate of this year should be lower than last year.
Because of the government policy?
Yeah. It's not only because of the policy, but because of the market needs. Yeah. Anyway, you will see the interest income increased a little bit.
Great. Thank you.
Okay. Thanks.
Yeah.
The next question comes from the line of Chou Chou from Credit Suisse. Please ask your question.
Hi, management. Congratulations on the strong quarter. Two questions from me. One follow-up from the previous question on the promotions. You mentioned that you've done promotions on Grade 1 and Grade 7 products in Beijing and Shanghai. I just wonder which courses are you promoting on? In addition, do you book this promotion spending on sales and marketing expenses, or on a net of revenue basis? The second question is: Can you share a little bit about your K12 enrollment growth regional exposure? Which provinces do you see the most rapid growth among all? Thank you.
Okay. For the promotion, we provided some promotions for the Grade 1, Grade 7 for the math and physics and the chemistry for the courses. As Sisi said, we made a once a year, typically in the summer, to get more new students.
We're doing this to demonstrate, to show the quality teaching and all those as our top, the first-class performance in the classrooms, so that we can have more students in the coming season.
Okay. Your second question about the K12 driver. One is that, the non-English courses grow faster than the English courses. For the U-Can, I think the English courses account for only one third of the total revenue. The non-English account for two-third. The non-English grow faster than the English courses. Before the POP Kids, English courses account for 80% of the total revenue, and math and Chinese account for 20%. Same, the non-English courses grow faster than the English courses.
Yeah, because the market potential is much bigger than the English one, right?
Yeah.
Right. Sorry, just on the regional exposure perspective, which provinces do you see strongest growth among the all? Also on the first question, I guess, second part I wonder is that, do you book the promotion spending in the marketing spending or on a more like a net of revenue basis, as in a counter revenue, that kind of measure? Thank you.
Okay. Yeah. We just account the net of the revenue, not record the expense in selling and marketing. In terms of the different cities, we're seeing the very strong growth in Beijing, Wuhan, Nanjing, and Xiamen, Hefei. I think it just depends on the different managements. I just want to focus on the Beijing numbers. The K12 business in Beijing grew very fast during the last three or four years, and the trend will be continued.
Yeah.
Thank you, management.
Okay.
Yeah. This is basically because of the resources of the different cities they have, and also because of the differences of the management, the quality.
Yeah.
Okay.
The next question comes from the line of Andrew Orchard from Nomura. Please ask your question.
Hi. Good evening, everyone. I have a question on the VIP. You noted that one of the reasons why your hourly ASP is down is because VIP is a lower contribution as a % of the total. I wanted to get some idea of why that was the case. Is it because VIP is slowing, or is it because you're seeing your other products doing very well? Thanks.
Yeah. As you know, the management made the new policy of the VIP. We don't like the VIP business. It has the lower margin. I think the management think the small and big class are the suitable class style for the students. We just want to cap the VIP business 30% of the total revenue.
Yeah. I've got to say that actually we like the VIP business, it's quite tricky. In order to keep the balance of the healthiness of the whole development, so we've got to keep the percentage.
Yeah.
That's why-
Sorry. Are you actively doing that? Because-
Yes
I think there's a trend that there's more demand for more personalized attention, right? You are saying we're just not going to offer it even though there's demand?
Yeah. The market demand is still there. We still provide the classes, but we encourage the local school heads to open more small and big classes.
Yeah.
Other than VIP.
Okay. Thanks.
Yeah.
Okay.
We are now approaching the end of the conference call.