Ladies and gentlemen, good evening, and thank you for standing by for New Oriental's first fiscal quarter 2016 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 & 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 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 first fiscal quarter 2016 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as Newswire services. Today, you will hear from Michael Yu, New Oriental's Chairman and Chief Executive Officer, and Stephen Yang, Chief Financial Officer. After their prepared remarks, Michael and 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 involving higher 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 obligations 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 Michael. Michael, please.
Thank you. Hello, everybody, and thank you for joining us. I'm happy that I'm on this call today. I have decided that I will join the earnings conference call occasionally, providing me the opportunity to update our investors and the supporters on important strategic initiatives and answer any questions you all may have. As announced earlier today, the company has decided to promote Chenggang Zhou to the position of President, effective on January 5th, 2016. At the same time, Louis Xie will step down as President, but he will remain on our board of directors and will serve as a non-executive senior advisor to our company. We would like to congratulate Chenggang on his new position as our President. He will focus on corporate strategy and oversee overall business development in China.
He has been with New Oriental for more than 15 years and has brought to us with his deep understanding of education service industry. Actually, Chenggang Zhou was one of my high school classmates, and I understand him a lot. He has been in New Oriental for more than 15 years. First served as the head of Shanghai School. Actually, he's the founder of Shanghai School. He served as the head of Beijing School. After that, he served as the understanding VP for all New Oriental groups. He served as the CEO of Tianji overseas consulting. He's really a smart guy and has been helping me for all these 15 years for New Oriental's operations. We are confident that he will make great contributions to our continuous success in the market.
In the meantime, I would like to thank Louis for all he has accomplished and the leadership he has provided during this important period of our business development in China. I am pretty sure Louis is listening this conference, and I really thank him for that, for 10 years accompanying us for all these business decisions and the nice development of New Oriental in Chinese education areas. As our Chief Financial Officer, he led us through a very successful IPO on the New York Stock Exchange in 2006. He took on the role as President since 2009 to help us grow our business. Going forward, Louis will remain on the board and serve as a senior advisor to New Oriental and also to me. We thank Louis for his decade-long contribution to the company and wish him all the best.
I'm also very happy to be here today specifically because we had a very strong first quarter, which is a strong reflection of our ability to continuously meet our promises to students and the customers by delivering products and services of the highest quality. Also, it has been a year since we embarked on the new strategy of optimize the market, switching our focus to balancing between top line and bottom line growth, as well as furthering our integrated ecosystem and pushing forward into the online space. Building out our O2O programs, we have had great success with this strategy. Our results today are testament to this. You can see, our hard work in executing this strategy is paying off. To give you just a couple of high-level examples, we opened two new schools in the cities of Wenzhou and Quanzhou, where we see the most potential.
Our U- Can Visible program teaching system is now being used in 52 cities across China. Our newly revamped Pop Kids program continued to receive positive market feedback. This is a very encouraging signal, and it proves that we made the right decision to put so much effort into establishing the O2O ecosystem, which was still a very new concept in China not too long ago. Now our new products are helping hundreds and thousands of Chinese students to progress much more quickly and effectively and efficiently. Above all, we hope to create an enjoyable learning experience for the younger generation. Before I go into the details for the first quarter, I would also like to say a few words about the surrounding economic environment in China, which has, of course, had a great deal of attention domestically and abroad.
I would like to point out that a softening Chinese economy is actually contributing a bit to our ongoing business recovery, which is quite the opposite of what people would normally expect. Here is what you have to understand about Chinese parents. When the economy is slowing down, they tend to enter into protection and preparation mode, meaning children will be facing a lot of competition in a few years, be it for a college entrance examination or for a job interview. He or she needs to be more equipped to tackle those challenges. Better education is what parents immediately think of, and this is where New Oriental comes in. With this reality as a benefiting factor, we are contributing to work harder to create the best-in-class solutions for our students and teachers.
I would like to add another word, that Chinese parents have the habit of saving money for their kids for almost 18 years. No matter the economy's going up or going down, it doesn't matter. Parents would like to pay the full tuition or full money for their kids' future. That's why that in New Oriental, it doesn't matter whether the economy is going down or up. Parents are still paying money for their kids' education no matter what happens in China. The habits of Chinese parents is to save money for their kids. It's not like United States parents. They raise money from the bank. It's totally different.
In addition, with the economic slowdown and the turbulence in China's stock market, we do not expect as much wage inflation in the near future as private equity reduces the pace for the investment in online education startups, which is also a good news for us. If the investment in online education slows down, that means we have more time and more chances to find new opportunities in education areas. By saying this, we expect also better retention of our school heads, teachers, and other staff, because they don't have much opportunities outside already. New Oriental is still the best brand name in China. Now let's look in some details at our quarterly performance, the first quarter of 2016. During the first quarter, we saw an ongoing recovery in both top line and the bottom line, with a healthy operating margin of 28.3%.
Revenue was up 16.4% year-over-year to $458.5 million. Were mainly driven by the enrollment recovery, which increased 13.8% year-over-year to more than a million. As Stephen mentioned last quarter, we are narrowing the scope of our royalty program, the impact on our revenue in the first quarter was minimal. We would expect the same for the upcoming quarters as well. Our key revenue driver, the K12 all subjects after-school tutoring business, continued to excel. Very excitingly, our newly revamped Pop Kids program recorded a gross revenue increase of more than 30%. This is a remarkable improvement from the single-digit growth over the past two quarters, and we consider this a big achievement since the revamp a year ago. With the positive market feedback, we expect this growth trend to continue for the rest of fiscal 2016.
In terms of pricing, per program blended ASP increased by only 3% year-over-year, which is the lowest over the past years. On an apple-to-apple basis, which is GAAP revenue divided by total teaching hours, hourly blended ASP increased by 5%-6%. Breaking it down on an hourly base, blended ASP for U-Can increased 5%, and ASP for overseas test preparation program increased about 5%. For our Pop Kids, ASP increased about 7%, which is in line with our expectations, as our priority at this stage is to get into the market and take domination before raising our prices. Moving on to performance across our individual business lines. Our K-12 all subjects after-school tutoring business saw gross revenue grow over 29% year-over-year for the first quarter, and enroll growth of more than 23%. U-Can middle and high school all subjects after-school tutoring business achieved a gross revenue.
Increase of 28% year-over-year. Student enrollments growth 24% year-over-year. For the Pop Kids program business, as I said, saw increased momentum in the first quarter, with gross revenue up more than 30% and enrollment up 23% year-over-year. Our overseas test prep and consulting business achieved revenue growth of 10% year-over-year. Finally, revenue for VIP personalized classes business increased 25% year-over-year. Now let me turn to a discussion of our optimized market strategy. As we move into the second year of executing this strategy, we continue to enforce a healthy balance between top line and bottom line growth, as well as building out our integrated ecosystem. Here are some updates on the progress we are making. For the offline part, to start with our core offline business first, we added two new schools in the cities of Wenzhou and Quanzhou, which lie in the southeast part of China.
In order to optimize our resources and facilitate growth in the cities that can better drive up our operation margin, we closed a net of five learning centers while expanding some existing learning centers, adding a total of about 11,000 sq m of additional classrooms area. To be sure, we are right on the track to reach the annual plan to open about 30 new learning centers for our K-12 business in fiscal year 2016 in existing cities, and also enter four to five new cities where we see most growth potential. For our online part, as for our online business, fiscal 2016 will be another investment year as we look to fully build out our O2O integrated education ecosystem. Encouraged by the strong performance of U-Can and Pop Kids, we are confident that this investment will enable us to further penetrate into the market and deliver sustainable growth.
As said before, we target to spend about $50 million in fiscal 2016. For the first quarter, we invested about $10 million, most of which was recorded on the G&A expenses. Before I go into the details about our online business, just a quick recap of the all 3 levels of our online platform. The 1st level, also the core of our online system, is an O2O two-way interactive education system across all of our business lines. The 2nd level is our pure online learning platform and supplementary online education products under the New Oriental brand. The 3rd level of our ecosystem is for New Oriental to take minority shareholdings in online education companies that complement our own online education offerings.
Let us start with O2O two-way interactive education system, which we rolled out and upgraded a year ago across all major product lines in order to extend New Oriental's traditional offline classroom teaching offerings to online education services. This system continues to mature. In the first quarter, U-Can Visible Progress teaching system extended its coverage to all 52 cities in our network. This rapid growth is a solid proof of how much our new products are being welcomed by our students and the market. As said earlier, Shuangyu, our Pop Kids English program, picked up significantly this quarter with revenue up to more than 30% and enrollment up 23%. By the end of the first quarter, 42 cities in China are using this new interactive program, and we will gradually roll out in more cities in the rest of the year.
The O2O for the domestic test preparation program are being used in more than five cities now by the quarter end. We have been testing the O2O for overseas test preparation programs in seven cities since May. For the second level of our online education ecosystem, we have seen steady growth in our pure online learning platform and other supplementary online education products. In the first quarter of this year, Koolearn.com generated a net revenue of $9.8 million, up 32% year-over-year. The number of paid users increased over 150% year-over-year. The number of cumulative registered users has reached more than 11.1 million.
Koo.cn, our new live broadcast open platform for both New Oriental and third-party teachers, achieved almost 723,000 registrations in the first quarter. Donut, a series of game-based mobile learning apps for children, recorded over 28.2 million downloads in the fourth quarter, up from 22.5 million in the first quarter for fiscal year 2015. Le Ci is an English-Chinese vocabulary training app for mobile phones and tablets. The app recorded over 3 million users by the end of the first quarter of this year. Turning to the third level of our online education ecosystem, we have invested in seeing select online education companies with a minority stake, and we are constantly looking for new opportunities that will not only complete our own offerings but also facilitate our O2O integrations.
I would like to turn the call over to Stephen Yang to provide more details on our financial performance, as well as some information about our overall outlook. Stephen, it's your turn.
Thank you, Michael Yu. Let me walk you through the key financial details for the first quarter. Operating costs and expenses for the quarter were $328.6 million, a 15.9% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which excludes share-based compensation expenses, were $324.9 million, a 15.7% increase year-over-year. Cost of revenues increased by 15.6% year-over-year to $171.7 million, primarily due to an increase in teachers' compensation for more teaching hours. Selling and marketing expenses slightly decreased 0.3% year-over-year to $49.4 million. General administrative expenses for the quarter increased by 25.9% year-over-year to $107.6 million. Non-GAAP general administrative expenses, which excludes share-based compensation expenses, were $103.9 million, a 25.6% increase year-over-year, primarily due to an increase in R&D expenses and human resource expenses related to the development of our O2O integration.
Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 35.6% to $3.7 million in the first quarter. Income from operations for the quarter increased by 17.5% to $129.8 million. Non-GAAP operating income increased to 17.9% to $133.6 million for the quarter. Operating margin for the quarter was 28.3%, compared to 28.1% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 29.1%, compared to 28.8% in the same period of the prior fiscal year. Net income attributable to New Oriental for the quarter was $128.5 million, representing a 14.4% increase from the same period of the prior fiscal year. Capital expenditures for the quarter were $17.8 million, which were primarily attributed to the opening of 34 new learning centers and renovations of existing learning centers. Turning to the balance sheet.
Deferred revenue balance, which is cash collected from the registered students for the courses and recognized proportionally as revenue as the instructions are delivered, at the end of the first quarter was $511.7 million, an increase of 28.3% as compared to $398.9 million at the end of the first quarter of fiscal year 2015. Let me talk about our go-forward plans and expectations. I wanted to first take a moment to reiterate our overarching goals for the year, which we outlined on the fourth quarter's call. During fiscal year 2016, we will continue to implement and optimize market strategy. As part of this, we will have the below key areas of focus. We will continue to expand our offline business.
We continue to aim to enter four to five new cities where we identify the most growth potential, and open about 30 new learning centers for our K-12 after-school children business in existing cities that are driving both revenue growth and margin expansion. We will continue to invest heavily as we did in fiscal year 2015. Fiscal year 2016 will also be an investment year as we work to fully build out our O2O ecosystem. We'll continue to invest, spending about $50 million in the fiscal year. We consider this investment essential to helping strengthen our market dominance, and we're fully confident that all of these efforts will bring higher growth and sustainable profitability in the longer term. Last but not least, we will drive further operating efficiencies. We remain keen on improving operational efficiency and cost control across the organization, we'll continue to focus on this.
As Michael mentioned earlier, we're seeing less pressure on wage inflation as the economy slows down and private equity reduces the pace of investments in online education startups. With this strategy as our guide for the year, we expect to achieve double-digit annual revenue growth. At the same time, we're becoming more confident in our bottom line performance as operating margin for our offline business has been experiencing steady recovery over the past four quarters, and operating margin for the overall business also improved year-over-year in this reported quarter. With respect to the second quarter specifically, we expect total net revenue to be in the range of $267 million-$276.4 million, representing a year-over-year growth in the range of 13%-17%.
If not including the impact from the recent depreciation of the RMB against the US dollar, the product revenue growth rate is expected to be in the range of 17%-21% for the second quarter. This forecast reflects New Oriental's current and preliminary view, which is subject to change. At this point, Michael and I will take your questions. Operator, please begin.
Thank you, sir. The question and answer session 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 you to rejoin the question queue again after your first question has been addressed. Ladies and gentlemen, on the telephone lines, 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 your request, please press the pound or the hash key. We have the first question from the line of Dick Wei from Credit Suisse. Please ask your question.
Thank you for taking my question. Good evening, Michael, Stephen and Sisi. This is Dan Zhao calling on behalf of Dick Wei. Could you share some color on the margin of each segment courses, like Overseas Test Prep, U-Can, and Pop Kids? I just wonder, with revenue contribution from K12 keep rising, is there any impact on the margin trend? Thank you.
Okay, I'll take the question. I'm Stephen. For the different margin for different business lines, for the Overseas Test Prep, the operating margin for Overseas Test Prep is about 30%. For the U-Can business, the OP margin for this business line is about 25%. For the Pop Kids, now the margin is only 10%, but it's grown up very fast because we're seeing the more students filling in the classroom. Yeah, along with the K12 business account for more and more percentage of the revenue, now it's 45%, and it's like the 50% or more in the year after. We don't see the margin dilution by these things, because we're seeing more and more students filling in the classroom. That means it will help us to improve the utilization rates up. I think the margin will go up, especially since the fiscal year 2017.
Last year and this year, we are in the heavy investments, we will spend $50 million in this year. Since next year, the margin will go up. I think in the next three or four years, the 17% or 18% is our target for the operating margin. That's my answer. Thank you.
Thank you very much.
Okay.
Pardon me, sir. Can we move to the next question?
Sure. Okay.
We have the next question from the line of Fan Liu from Goldman Sachs. Please ask your question.
Thanks. Hi, Michael, Stephen. Thank you for taking my questions. It's very great to have Michael on these calls going forward.
Oh, yeah.
Congratulations on the solid results. I have two quick questions. The first one is regarding the overall industry landscape? Do you think in the pre-K and K-12 market, we can see the market leader with considerable market share, i.e., above 20%, emerge in the medium or longer term, just like what New Oriental has been able to achieve in the overseas test preparation area? The second one is about the online education. Would you like to share with us more colors about your U-Can visible progress teaching system? From what kind of perspective you would see online will add value to your offline facilities? Thank you.
Yes. Sure. Looking forward for the next five years, I'm pretty sure that the K-12 business for Chinese students will be one of our main businesses. Of course, our overseas test preparation and the consulting business will also be our main businesses. I can see that the K-12 business will be growing faster because this is a much bigger market than overseas consulting, overseas test and preparation, and the consulting business. Also New Oriental is new in this market, actually. We have just gone into this market for, mainly for three years. I can see that for the next three to five years, we can keep a growth in K-12, about 25% or even maybe if we are doing much better, maybe up to 30%. I'm pretty much confident on this, actually. This is a very good business.
Also, why I value this business is that because these kids are growing up from four years old up to 18 years old. I'm pretty sure that New Oriental have this stress on educating students and the families about how to build up healthy personalities and the characters for all these kids. If you are from China, you pretty much know that this is my stress also. The second is the online business. After long time consideration and of course, independent thought, I'm pretty sure that even though there will be pure online business in China, and New Oriental also is venturing into all kinds of possibilities in this area. I'm pretty sure by studying online businesses and offline businesses all over China and of course, all over the world, actually, including studying the MOOC system and other systems.
I'm pretty sure for New Oriental, the online business, the main part will be online and offline altogether. That is, it's a kind of synchronized or merged business from offline to online, and then from online to offline. That's what you mentioned, that the U-Can visible progress system is kind of online and offline combined together, which you can see that students are so much interested in this because they are studying in the classroom, but they can use all those online gadgets and the apps to see how their progress are made, and then how parents are viewed about their progress, and then how teachers value their progress, and then intellectually assign the new studying contents for them to finish, offline and online altogether. After that, we can collect the big data.
After all these students' studying habits, then we can research the new products for students and the new content for students. I value this online and offline together business. I'm pretty sure if we can use online and offline business much better, then this kind of strategy can push New Oriental forward for the next five years. Of course, I also value for online-only business, online study, because which I divided for students from 18 years old above. I'm pretty sure these 18 years above students who are very conscious in these students, that is, they want to study by themselves. If they can save time and save money, they want to get online to study.
One of my focuses nowadays is to put some of my focus, actually, very important focus on online business for those subjects above 18 years age for students, which I'm pretty sure we will have a great result. Let me give you an example. We have a domestic business for students to study English, and then graduate school entrance examination. For this year, for the first quarter, actually, we are combining online and offline together. For students, if they want to get online, they can get online freely, and then if they want to get offline, they can get offline freely. Before that, online group and offline group are two independent groups, and they fight with each other. Now they cooperate with each other because I put these two groups into one group.
We can see a growth, a very good growth in domestic businesses nowadays in New Oriental. I'm not very sure how much the growth will be, but for the second quarter and the third quarter, if you are still by the phone for our quarterly report, I'm pretty sure I can give you a very good result for this. I myself are pretty open for online, for all the technologies, for all the advanced ideas used into education. I'm pretty sure New Oriental is in the position to combine online and offline, and then to develop those purely online businesses into the future. This online business and online, offline combined together will be a main part of New Oriental business strategy in the next three to five years, but will be with a very good result, I'm pretty sure. Thank you. Thank you, Fan Liu.
Thank you, Michael. It's very helpful.
We have the next question from the line of Annie Xie from Brean Capital. Please ask your question.
Hi, good morning. Thanks for taking my question. Just, I guess following up on what Michael just mentioned, it sounds like the online business, of course, is a key part of the company's growth strategy. Besides Koolearn, I understand this is still early, could you share the total revenue from these three online kind of businesses? As this reaches a more meaningful contribution level, I was just wondering where perhaps the margins are falling out and would normalize longer term. Thank you.
Thank you.
Okay.
Okay, this is Stephen. I will take your questions. Koolearn, the GAAP revenue grows very faster than any other offline business. The GAAP revenue of Q1 growth by more than 30% year-over-year. The margin is now only like, it's just the break-even because as I told you, we call this the investment year. So the strategy we're using for pure online platform is to go after the market share first. That's why you are seeing our paid users get 150% year-over-year growth. I think the margin of the pure online business in next three to five years, it should be higher than the offline business because they don't have some rental expenses. They can save a lot of money on that. Anyway, the GAAP revenue of the Koolearn only contribute to 3% of the total revenues.
It's only a small part of the total business, but it's growing very fast. Yeah. Does it answer your question?
Yeah. Let me add up some of my ideas about pure online education. koolearn.com is only contributing 3% of our New Oriental total businesses. I'm pretty sure that it will take some time, I don't know how many years it will take, for the online business like Koolearn and the koo.cn to have a significant contribution to New Oriental's total business. The reason is that I think that people in China and all over the world, it takes peak time also for people to recognize that online teaching methods or online learning contents sometimes will be much more efficient and effective than offline business. For the next several years, I'm pretty sure that the koolearn.com and the koo.cn will be the fast or fastest-growing business part in New Oriental. I'm pretty sure that they will grow about more than 30% every quarter or every year.
Still, even though it grows more than 30% every quarter, it will take a long time to become a significant part contribution of New Oriental because as a whole, New Oriental business is also growing around 15%-20% every year. We still have to pay great attention to this because maybe it will represent the future of education, not only in China, but maybe all over the world. Of course, I'm paying great attention to the offline and online combination. We are still also using koolearn.com to use as a pure online business. Also we are telling students that sometimes if you really want to study offline, we are also ready for you here. I'm pretty sure we are building up a chain of education business or ecosystem here in New Oriental.
Give us enough time, I'm pretty sure you will see that we will have very good experience and result in pure online business and offline and online business combined together. Thank you.
Thank you.
We have the next question from the line of Tian Hou from T.H. Capital. Please ask your question.
Hi, Michael, Steven, Sisi Zhao. Congratulations on a good quarter, and good to have Michael on the call.
Thank you.
I have a couple questions. One is related to your royalty program. Since the time you started, it has been for a while, and I wonder how do you actually measure the result of the royalty program in terms of. If you compare last quarter with a year ago, which is actually, it is really one has this royalty program impact, one didn't have the impact of this royalty program. How do you see the difference in the? That is number 1 question. Number 2 is, you have a lot of cash. I do know you have this cash, the share purchase program, to better use the cash, there are lots of things for New Oriental you can actually buy. From past experience, in your acquisition experience, you have some company you acquired, and then you also divested some company.
In education area, in your area, what are the key for a successful acquisition? What are the key for not a successful acquisition? For you, what is your goal, or what do you want to do with your cash in terms of acquisition going forward? That is the question.
Okay. Thanks, Tian. I will take the first question about the loyalty program, and Michael will answer the second one. For the loyalty program, we launched the customer loyalty program since last October, and narrowed it down to K-12 only since this April. The negative impact of this quarter is very minimal, and since the next quarter, I think the impact will be positive. In the last Q2, we had $4 million, that means the 2% of the total revenue, negative impact for both bottom line and top line. This Q2, I think the net impact will be only 1% of the total revenue. We have a very easy comparison. I think that it is good for both the top line and the margins. I think this situation will be continued in the rest of the year.
That is my answer for your question about the loyalty program. I think Michael will answer the second question.
Please.
Thank you, Tian. First let me express my love about cash. I really love cash in the company, no matter in a good time or in bad time, cash is always the best thing for the company to go forward. As for the cash we have, especially those cashes that has already been the net income for New Oriental, we would like to actually, in due time to have buyback shares program. Also to have the dividend program to give more money back to our shareholders. Of course, on the basis that we don't have any more money to invest into new areas, also don't have any new acquisitions, that's what you mentioned.
I would like to use the money, except, besides to give money back to our shareholders as in dividends, to use the money to do the investments and to do the acquisitions for a better future of the company and for long-term development of the company. As for your questions, what is the key factors for a good acquisition and for a bad acquisition? Let me tell you that I've been in education for more than 20 years, since New Oriental have been get IPO for almost 13 years. In education, it is really difficult, let me tell you, to get a very good acquisition. The reason for that is that education is a very low-threshold business, everybody can rush into this business, also it's a very fragmented business. That means that not everybody can do a good business in education areas.
You can see, like about a little more than 5 to 6 years ago, there are many people carry cash to invest into education areas in opening learning centers. There are about more than, I'm pretty sure, thousands of those schools who opened the learning centers in China, half of them are gone. They disappeared because they lose money, or they cheated parents out of their pockets, they cannot refund the money back to parents or students. About two years ago, there are also many investors, like venture capital or angel capital, who invested lots of money into online business. They value the very high for online business in education because they think that online education business will be the future of education in China and all over the world.
We can see that up to today, there are many, many online education businesses have been closed because there is just no business model in this area. They said they want to build a bridge between the parents and the teachers, they said that there's no training education companies needed or school needed between them. Up to today, I have seen none of these companies has made any money out of this, most of them are losing big money. I'm pretty sure that there are many, many companies who will close their businesses within this year or the next year. For acquisitions in New Oriental, I'm pretty sure, I'm planning to acquire those companies or schools will build up the ecosystem, the ecosystem of New Oriental education environment.
Also that the business, which especially the vertical businesses, even small business, will add up values for New Oriental businesses. We have also invested in minority shareholding stocks for some companies. About 10 of them up to today. Every one of them are very successful to helping New Oriental in doing further business, and we are helping them to do further business. For acquisition-
A successful acquisition will be the acquisition that will be supplementary to your business and will add values to your business, and will have the same cultural environment or same culture with your business. For a bad acquisition, it's only for money, for revenue. After your acquisition, as those management teams go away, you do not have management, how to manage this company, the company goes little by little, it goes down. For me, my focus for the next several years will be on acquisitions, because this is-
The necessary path for New Oriental to become a great company. I will be very careful-
Which kind of companies I'm going to acquire. Tian Hou , be pretty sure that-
Yeah.
I will be a person who can be called that, kind of an expert with expertise in China education. Believe me, I will be trying my best to do everything right.
Thank you, Michael. That's very helpful.
We have the next question from the line of Cynthia Meng from Jefferies. Please ask your question.
Thank you. I have two questions. Is the higher gross margin as a result of higher pricing for the K12 business? If management can give us some more color on that would be great. We're wondering whether you could share with us, how we can see the margin trajectory for this year and maybe talk about, because of the add-on businesses, the new growth areas, how are you seeing margin trajectory going forward, beyond this year? Thank you.
Okay. I will take this. I will answer the question first, for your margin question. We are happy to see the margin improvement by 20 basis points in this quarter. I think it is mainly due to, we got much more revenue than we expected at the first of the quarter. I do not want to give the detail expect, like the guidance for this year margin. I can say that we are seeing the business resilience during the economic downturns and the revenue growth, the trend is very good. I think the bottom line trend will be also very good, and we are quite confident about the long-term margin expansion. Last year and this year are the peak for the investments. We will keep spending like $50 million for the online investments.
I think the next fiscal year, what I mean is fiscal year 2017, I think our margin will definitely go up. To get 17%-18% in next three to four years. What is your first question?
Let me ask the question.
Okay.
Yeah. For the margin projection, I am pretty sure that the margin will go up, like Stephen Yang said, but not really in new growth areas. New growth is in a kind of a cultivation area. I am pretty sure that we have to spend more money on these new areas that in the next few years will grow up and will give us more margin. I am pretty sure that the margin growth will be from Actually, let me see, from like Pop Kids U-Can and overseas test prep for other areas. What we are doing is a strategy to add more students in each classroom to raise the teaching quality so that the teachers can attract more students to their classrooms. This will raise our margin, I am pretty sure for the next year or next several years. We will pay gradually to the new growth area. No problem.
For the high pricing, let me express my personal view. I, myself, am very strongly against the high pricing policy in any education areas, not only in the Oriental, but in other areas. For this year, you can see the number of students that is rising in the Oriental is much faster than it was before. The reason is that I am emphasizing the teaching quality, and every teacher brings more students into the classroom rather than raising each student's price for each class. I am very against about those rising price strategies, the high price products or programs. I am pretty sure that this first quarter have a good result. It is not because our high pricing. It is because we have the right strategy to emphasize on the teachers' qualities and the teaching qualities, and give teachers more salaries and a bonus for their good teaching.
This is what we will be insist on for the next, even maybe forever, I don't know. I am pretty sure this will be Of course, we are reasonably raising our prices for each student. This is not our main strategy. The main strategy is to ask the teachers to give more, the much better quality of teaching so that we will attract more students and the parents. Thank you, Meng.
Thank you.
Ladies and gentlemen, 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 rejoin the question queue again after your first question has been addressed. We have the next question from the line of Leon Chik from J.P. Morgan, Hong Kong. Please ask your question.
Hi, Michael, Sisi.
Hi, Leon. How are you?
I remember covering with you guys before, there was a lot of drama last year in the first quarter in terms of English, whether it's required or not in universities, and then these English camps in the summer kind of went down a lot. My question is that basically old news, been resolved, and things are now at least stable and growing? There's nobody worried about the uncertainties of English required in the Chinese universities? Thanks. That's it.
Let me tell you. Actually, English is always required, always needed by Chinese people and Chinese parents. For New Oriental, about a year ago, we once had a department, a project called English Learning Programs. We see that actually, those students who are in Pop Kids and the U-Can, and also overseas or domestic, these students have divided themselves into different departments of New Oriental. That is for those students from four years old to 12, they were studying Pop Kids for English. 12 to 18, they were studying U-Can. Above 18, they were studying domestic in universities. That's why we break up our English programs, ask those students to go to different age groups to study English. That doesn't mean that English is not needed for Chinese people.
We can see actually a raise of students numbers in study English in New Oriental, but nowadays, we don't have a pure English studying department or pure English studying project in New Oriental because those kids have been divided into all different groups. This is actually good for New Oriental because while they study English in the same age group, they also can choose to study maybe Chinese or mathematics or physics or chemistry. That's why we can see a good raise in numbers of students in New Oriental in K-12 system. I think this is a good strategy. As for Chinese people, those adults who want to learn English, we are now build up some pure online English studying gadgets and apps for these people. Like Le Ci, which will help students to study vocabulary.
Vocabulary actually is my strength when I was in university and when I was teaching in New Oriental. Nowadays, we do not ask students to pay money to study in New Oriental for remembering vocabularies because this app, Le Ci, can help students to remember all these words also. After they remember all those words, we invite students come to New Oriental to listen to other subjects, maybe grammar, or maybe to pass an examination, or like test preparations. This is more effective students. On the one hand, the students feel that they have been saving money. On the other hand, they feel it's more effective because they can study vocabulary, for example, later, maybe oral English or writing anytime they want. English has never been an uncertainty in China.
Chinese people have never been more eager to study English than ever before because they know that their kids need English language proficiency in order to survive better in this world. Thank you, Leon.
Okay. Thank you.
We have the next question from the line of Julia Pan from Macquarie. Please ask your question.
Hello, management. Congratulations on the strong result. I think Michael could just answer my question for the dividend.
Thank you, Julia.
Thank you. I noticed that there's $62.6 dividend payables in our balance sheet. If that means we're going to pay the special dividend on fourth quarter of FY 2016. Another question, could you please give us some color on the overseas prep segment, the enrollment growth and the revenue growth, please? Thank you.
Yeah. We pay the dividends in October. I think you will see the numbers in the financial statement next quarter. For the overseas test prep in Q1, the GAAP revenue is up, increased by 9%. Don't forget, in the last quarter, in the Q4, the GAAP revenue for overseas test prep was only 3%. I think the business is recovering. We're doing the same thing as the U-Can and what we have done for the U-Can and the Pop Kids. We're rolling out the new O2O initiative, a new product for the overseas test prep. For the student enrollment, overseas test prep was down by 6%. I think the whole market doesn't grow very fast. In the long term, I think the number, the student enrollment growth for the overseas test prep will be flat or a little bit decreased. Mostly the increase will come from the ASP increase for the overseas test prep.
Julia, let me add some points. I myself am very interested in overseas test preparation, as you know that I'm from that area. New Oriental started from that area. We can see that there is a slowing down of the number of students who wants to go abroad to study because, the number almost has reached the top. Because not every family can afford for their kids to study overseas. I still feel regretting that New Oriental is not growing as fast as possible. Of course, one of the reasons is number of students is not growing all over China for overseas. Another reason is that, for those past 2 or 3 years, we have paid greater attention to K-12 education. We have put some of our resources in K-12.
From this year, my personal attention and New Oriental's also, some of the resources will come back to overseas test preparations. Because in my mind, this is a great area to help Chinese people to have a bright future. For the rest of the year and for the next several years, you can see that we will also build up some great systems for students who study overseas. I personally will provide more of my attention in this area, and then maybe we'll do more lectures and also some encouragement for students to study this area.
I'm pretty sure that the growth will not only come from the price increase, even though we also have space in this area to raise price, I'm also pretty sure that by our efforts, more students will choose New Oriental to study for their test preparations, and also choose New Oriental for their consulting overseas studies in universities. I'm expecting not only 10% increase in this area, I'm expecting for the next several years, maybe more than 10%. I don't know how much, 10%, 15% is my expectation, or even better than that. That's not my promise, that's what I want to say, that's my efforts in this area, because this is where we start out. It's kind of like, if you are familiar with Chinese history, it's kind of like in Chinese history for Communist Party. We cannot lose that.
Thank you, Michael. Thank you, Steve.
Thank you, Julia.
We have the next question from the line of Jinlong Wang from Mizuho. Please ask your question.
Hey, good evening, guys. Just to follow up on your previous remarks. I apologize in advance if I misunderstood. You said that operating margins may be going up to 17%-18% in the next few years, but you also followed that up and said that you don't believe that ASP increases meaningfully over that time. Can you just kind of help me reconcile how you get up to 17%-18%, if ASPs are not necessarily increasing meaningfully and without a very significant re-acceleration in revenue growth? Do you expect a majority of that growth to come from online scalability as well as new student growth? Trying to kind of ballpark how we kind of reconcile to 17%-18% margins without meaningful ASP growth. Thanks, guys.
Okay. I think the key driver for the future margin expansion is the more utilization rates we'll get, because we are seeing more and more students filling in the learning centers. Yeah, look at this quarter. I think the most of the 13% student enrollment growth come from the organic growth. We didn't open any new learning center this quarter. Also, as Michael said, during the whole China economy downturns, I think the wage inflation will benefit us. I don't think we will give as same as the latest inflation for the staff as before. Also, we still have some rental leverage for the margin expansion. We sign the five or 10-year leasing contracts, typically for the learning centers. The rental will be only up by 5%-6% year-over-year. We also have this kind of leverage.
Yeah. Let me add. For the revenue growth in New Oriental, I'm pretty sure that our strategy is to attract more new students into New Oriental. The revenue growth mostly will be the number of students, more students who are entering New Oriental to study, and also the utilization of our existing facilities. Also, for the margin growth, I'm pretty sure we are optimized, all kinds of management procedures, especially with the help of the information system. I'm pretty sure that more money will go to our teachers, so that to push our teachers, to encourage teachers to teach more quality lessons. At the same time, actually, we are going to reduce the supporting staff members because the system is going up so that we can help more people, for one person to do more job.
I'm pretty sure that's why I'm sure that for the next several quarters, also for the next several years, the revenue will grow very healthily, because we are expecting a number of students to come in New Oriental. The margin growth will also be fine because I'm expecting at least 1% of increase every annual year for the net income. The reason is that we are more effective efficiently doing our job every day. That's also my intention. Thank you, Jinlong.
Great. Thanks, guys.
We have the next question from the line of Dick Wei from Credit Suisse. Please ask your question.
Hi, good evening. Michael, Steve, and CC, thanks for taking my questions, and congrats on a good quarter. I have a question regarding Khan Academy. I guess, kind of free education is gaining more popularity in the U.S., particularly for the past year or so. I wonder how should we think about the threat or the opportunities that poses to New Oriental if the free education system is getting popular in China? I wonder if Michael has any thoughts.
Let me ask this question for you, because my son, who is just studying Khan Academy every day. My son is from the United States, from Canada, so his English is very good, so he has no difficulty listening to Khan Academy. Khan Academy, by translating to Chinese, it needs to take some time, but if it's translated into Chinese, it's a Huh? Khan Academy. Is it China Academy or Khan Academy?
I mean, Khan Academy. Yeah, the free education, the Khan Academy.
My answer is right.
Yes, that's correct.
Let me tell you. Actually, I did some research here about North American students and about Chinese students. Chinese students are very much, they don't like to study. Most Chinese students, about 90% of Chinese students, are forced by their parents to study. If you let them study conscientiously online, they don't have this patience, and they cannot pay great attention to this. We have tried a lot. The best New Oriental teachers try to put their classes, courses online for students to study, even for free. By doing this, we can see that there are much lesser students registered for studying than we expected. Actually, then, we can find that for Chinese parents and for Chinese students, the best way for them to study for a better result is to send these kids with face-to-face teachers, no matter at home or in the learning center.
We can see also by our research that Chinese parents would very much like to send their kids to a learning center nearby. Of course, if New Oriental is nearby, it's their best choice, I'm pretty sure. They will also choose some other learning centers by some schools because it's nearby for their convenience. The reason is that the teachers can supervise the students to study much more effectively, and also the teachers can teach these students to study face-to-face. That's why I tried my best to persuade New Oriental people to insist on face-to-face teaching tutoring, which proved up to today is a good strategy for us. I'm pretty sure Khan Academy, the form of Khan Academy, it's not Khan Academy maybe itself, will have very much less impact on Chinese students' learning habits than the impact on maybe U.S. students.
We are also building our Khan Academy system. It's very different. It's called a SPOC system, which is a small private online lessons for students. The SPOC system is like this. The students have already learned some lessons in the classrooms with their teachers, and they become like their teachers a lot. The teachers will tell students that there are some other content that I don't have any time to teach in the classroom. Would you like to pay some extra money to listen to my online courses when you are at home? Most of the students will say yes. We have already built this program for maybe most of this year, and we can see a success. That means that about 80% of the students who have already studied in the classroom have already paid the money for their teachers' online courses.
We call that New Oriental's specialized Khan Academy system, actually. I want to tell you that this is a good system, you have to combine with Chinese people's studying methods and their kids' studying habits. We are venturing into this area almost every day. I'm pretty sure that we will give you maybe a detailed report if you want.
Yeah. Great. Thanks a lot, Michael, for the detailed explanation.
Yeah. Thank you, Dick. I'm pretty sure this is your second question, right?
Yeah. Apologize for calling in late. I just want to catch up.
Yeah. Thank you. Thank you. Thank you a lot.
Thank you.
Ladies and gentlemen, 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.
Okay. Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you.
Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.