Ladies and gentlemen, good evening and thank you for standing by for New Oriental's third fiscal quarter 2015 earnings conference call. At this time, all participants are in 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 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 third fiscal quarter 2015 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 Louis Hsieh, New Oriental's President, and Stephen Yang, New Oriental's new Chief Financial Officer. After their prepared remarks, Louis 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 involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC.
New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I'll now turn the call over to Louis Hsieh.
Thank you, Sisi. Hello, everyone, and thanks for joining us today. As announced earlier today, after almost 10 years serving as New Oriental's CFO, I and our board of directors have decided it was time to transition this role to Mr. Stephen Yang. I am delighted to congratulate Stephen on his new position as our CFO. Since I hired him in 2006, Stephen and I have worked closely together for more than nine years, and I am confident that he will make significant contributions to the company in his new position. I will remain President of the company and will continue to be a member of the board of directors, focusing on overall corporate strategy and online education initiatives. I want to express my sincere gratitude to Michael Yu and our board of directors for the opportunity.
It has been a great privilege and honor to serve as New Oriental's CFO the past decade. I would also like to thank New Oriental's more than 33,000 teachers and staff for their dedication through good times and challenging ones. We have accomplished a great deal, growing revenues from approximately $90 million in fiscal year 2006 to almost $1.2 billion. A nine-year CAGR of about 37%, and net income CAGR of over 55% to over $215 million. This tremendous financial performance has been reflected in New Oriental's share price. Since our successful IPO on the New York Stock Exchange in September 2006, pricing at $15 per ADS, our share price has risen to almost $100, closing last night at $24.68 and accounting for a four-for-one stock split. I believe New Oriental's best days lie ahead as China's preeminent private education services leader.
I want to thank New Oriental's shareholders and equity research analysts for your tremendous support these past many years, and I look forward to continuing our professional relationship. Now, I would like to pass the CFO baton over to New Oriental's new CFO and my good friend, Stephen Yang. Stephen, please.
Thanks very much, Louis. I would like to thank Michael Yu, Louis Hsieh, and our board members giving me this great opportunity. All of you have been giving me full support and trust during the past nine years, and I look forward to working with you continuously as we move forward. Turning to a summary of our third quarter results, we are pleased that we completed another solid quarter with revenue up by 13.1% year-over-year to $287.7 million U.S. dollars. This increase was mainly driven by strong performance of our K-12 all subjects after school tutoring business, which grew 22% year-over-year to approximately $143 million, contributing almost half of our revenues. One of our key segments, the U-Can business, saw an increase of approximately 29% in gross revenue and 12.4% in enrollment growth.
As we discussed in the second quarter, the company has started to implement new customer loyalty programs to encourage repeat business. For the third quarter, this resulted in deferred revenue of about $3.7 million, which is expected to be recognized within two years without any additional expenses associated with such revenues. If including this, our top-line growth would have been 14.6%. As mentioned, this will be just temporarily dampening our revenue. After six months of implementation, the company has decided to narrow down the scope of the loyalty program to K-12 only starting in the month of April. By doing so, we will be better able to capture the benefit of this program because K-12 enjoys much higher rollover rates than any other business lines.
That said, we expect the impacts of loyalty programs on quarterly revenue will be reduced, which will be reflected in the performance in the first quarter of fiscal year 2016. Turning back to the business performance, one of most exciting news for the quarter is that our revamped POP Kids program has continued to turn around with gross revenue growth about 7% and enrollment growth of 16%. This is the first time we experienced revenue growth since its nationwide roll out in the second quarter. Our new offerings have reached 36 cities so far across our national school network, and market feedback has been very encouraging. In the first six weeks of the fourth fiscal quarter, the POP Kids program recorded over 30% growth in enrollments and almost 40% growth in cash receipts versus the same period last year.
We will continue to roll out our new POP Kids offerings in fourth quarter, we expect to see further pick up on both gross revenue and enrollment. Total enrollments for the third quarter were flat year-over-year, this was mainly due to the timing of the Chinese New Year in 2015, which we addressed in the earnings call for the second quarter. The holiday occurred later this year, delaying enrollments for spring classes and resulting in a shift to the fourth quarter. In the first six weeks of the fourth quarter, there has been a significant 35.8% uplift year-over-year enrollment, a 43% increase year-over-year in cash receipts or cash collected in advance for enrollment. Looking at aggregate third fiscal quarter and the first six weeks of the fourth quarter will be most accurate to understand the business trends.
The total enrollments for the period of the third fiscal quarter and the first six weeks of our fourth quarter increased by 9.5% year-over-year. For the same reason, we reduced class hours in some cities to fit in two terms of courses within the winter break. Shortened class lengths has dampened our ASPs with overall growth of 2.2% year-over-year. If you look at it on an apple-to-apple basis, ASPs increased by 5%-10%. Breaking it down on an hourly basis, blended ASP for POP Kids increased by 5%, the U-Can program grew between 5%-10%. Let me walk you through our performance across individual business lines. Our K-12 all subjects after-school tutoring business continued to be our key revenue driver, we recorded gross revenue growth of 22% year-over-year for third quarter.
During the quarter, this contributed to almost half of our revenue, even higher than 41% in the second quarter, as this business was getting into its peak season. Breaking it down a bit further, U-Can middle school and high school all subjects after-school tutoring business achieved a gross revenue increase of approximately 29% year-over-year. Student enrollment grew approximately 12.4% year-over-year, slowdown of growth was due to the timing of the Chinese New Year of 2015, as explained earlier. For the third quarter, the growth of our revamped POP Kids program business has turned positive for the first time since its rollout in the second quarter, with gross revenue growth of approximately 7% and enrollment growth of 16%. With the new and better offerings, we are well-positioned to realize further growth in the K-12 business.
I would also like to add our new POP Kids program has already been well-received by the students and market. We expect such positive performance to accelerate in the coming quarters. As we enter into fiscal 2016, this will sure help New Oriental to further differentiate ourselves in the competitive market in China. Our overseas test prep and consulting business together achieved revenue growth more than 10% year-over-year for the third quarter. Finally, the VIP personalized class business recorded a continued revenue growth of 10% year-over-year in the third quarter.
Turning to the balance sheet, New Oriental's deferred revenue balance with cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered at the end of the third quarter was $424.9 million, an increase of 11.4% as compared to the $381.4 million at the end of the third quarter of fiscal year 2014. Let me provide some updates on the ongoing execution for the optimized market strategy. Starting in fiscal 2015, we shifted our operating focus to maintaining a healthy balance between top line and bottom line growth while capitalizing on the substantial growth of China to make solid progress on all fronts, which is laying down a good foundation for fiscal 2016. As previously emphasized, as part of this strategy in 2015, we are in investment mode, upgrading the infrastructure, optimizing resources in the existing cities.
The fourth quarter is halfway done as we speak. We are preparing for the new fiscal year. By then, we should be in a very good position to meet the increasing market demands and also capture the growth potential that we've identified. Let me first talk a little bit about the core of our business and our focus on further driving our offline initiatives. In the third quarter, we further expand in existing markets as we open 20 new schools and learning centers and close 11, adding a net of nine. In the first three quarters of fiscal 2015, we add a net of 19 learning centers, bringing our total learning centers to 722, and expand some existing learning centers by adding a total of over 5,900 sq m of additional classroom area.
Going into the fourth quarter, we aim to open five to 10 new learning centers in cities that are driving both revenue growth and margin expansion. For fiscal 2016, we will continue to open new learning centers in the existing cities. We will also explore the opportunities in three to four new cities or schools where we see strong growth potential. Looking at the online side of our strategy, we have been a pioneer in the mobile internet online education in China, never cease to improve and progress in all possible ways, in R&D advancements and O2O integration. Another vision of ours is to build the largest digitized content library for K-12 college education courses and tools in China. For the third quarter, we spent about $8 million-$9 million, most of which were recognized as cost and G&A expenses.
For full fiscal 2015 year, the investments in online education is expected to amount to $30 million to $35 million U.S. dollars. Before I go into the details of the progress we made during the quarter, just a brief recap of all three 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 our business lines. The second level is our pure online learning platform, Koolearn.com, and supplementary online education products under the New Oriental brand. The third level of our ecosystem is for New Oriental to take minority shareholdings in online education companies to complement our own online education offerings.
Let's start with O2O two-way interactive education system, which we roll out and upgrade in the first quarter across all major product lines, aiming to extend New Oriental's traditional offline classroom teaching offerings to online education services. We launched the U-Can Visible Progress teaching system into over 33 cities in September 2014. This is an online platform that supports after-class self-learning. We expect this to help us better return customers. The system is now being used in more than 40 cities. We expect a total of 50 cities by the end of fiscal 2015. I said earlier, we achieved a turnaround to revenue growth in the newly revamped POP Kids English program, Shuangyu, which offers interactive learning resources and multicultural experience based on students' own interests.
The new program has now reached over 35 cities. We expect this to continue to expand and contribute to our revenue growth. We have also seen good results from the launch of the O2O two-way interactive education system for the domestic test-prep program. The program has extended its coverage to 6 cities for the third quarter. In March, we launched the pilot for the O2O for overseas test-prep. We target official launch by the end of the fourth quarter. For the second level of our online education ecosystem, we have seen substantial growth in Koolearn.com and other supplementary online education products. In the third quarter, Koolearn.com generated a net revenue of $10.2 million, representing a 39% increase year-over-year. The number of registered users has increased more than 200% year-over-year. Now the number of cumulative registered users has reached more than 10.3 million.
Cool.cn, our own live broadcast open platform for both New Oriental and third-party teachers, achieved about 256,800 registrations in the third quarter. Donut, a series of game-based mobile learning applications for children, renewed its records of over 12 million downloads set in the second quarter to more than 17 million by the end of the third quarter. Lecí, an English language vocabulary training application we launched in late 2014 for mobile phones and tablet apps, records over 1,146,300 users by end of the third fiscal quarter. This is an increase of more than 40% compared to the second quarter. Turning to the third level of our online education ecosystem. We have invested in select online education companies with a minority stake. We continuously search for new business opportunities that will not complement our own offerings, but also support our goal to develop a comprehensive online/offline integrated ecosystem.
Our investments include [Koyuu], [Maonu.com], [AI07.com], Tarena, and Juesheng.com, all of which are excellent in their own niche markets. Last but not least, it is clear that our business is right on track, as we laid out for the fiscal year 2015. As we mentioned in the past, 2015 is an important investment year, and during the third quarter, our operating margin and net margin faced with a short-term pressure, which is within our expectation, as discussed previously. We do believe that these efforts are necessary as we are eyeing the massive potential in the market and enable us to solidify our market-leading position. Now, let us take a quick glance at some of the key financial metrics for third quarter in addition to the financials we mentioned in the beginning of the call. Operating costs and expenses for the quarter were $256.3 million, a 14.6% increase year-over-year.
Non-GAAP operating costs expenses for the quarter, which excludes share-based compensation expenses, were $251.9 million, a 15.3% increase year-over-year. Cost of revenue increased by 17% year-over-year to $126.1 million, which is in line with our revenue growth. Selling marketing expense increased by 10% year-over-year to $41.7 million, primarily due to the increase in selling marketing staff's compensation. General and administrative expenses for the quarter increased by 13.4% year-over-year to $88.5 million. Non-GAAP general administrative expenses, which excludes share-based compensation expenses, were $84.2 million, a 15.8% increase year-over-year, primarily due to increase in R&D expenses and human resource expenses related to the development of our online/offline integrated education system. Total share-based compensation expenses, which were allocated to relate operating costs and expenses, decreased by 16.7% to $4.5 million in the third quarter of 2015. Income from operations for the quarter increased by 2.4% to $31.4 million.
Income from operations would have been approximately $35.1 million if not for the accounting effects of the company new customer loyalty programs. Non-GAAP operating income decreased slightly to $35.9 million for the quarter. Operating margin for the quarter was 10.9% compared to 12% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 12.5% compared to the 14.2% in the same period, a 2.6% decrease from the same period of prior fiscal year. Capital expenditures for the quarter were $16.9 million, which were primarily attributed to the opening of the 20 new learning centers and renovations at existing learning centers. We expect total net revenue in the fourth quarter of 2015 to be in the range of $322 million-$333.5 million, representing year-over-year growth in the range of 12%-16%.
Approximately $5 million revenue, representing about 2% of year-over-year growth, will be deferred results from the company's customer loyalty programs. If not considering this impact, the product's revenue growth rate is expected to be in the range of 14%-18%. This forecast reflects New Oriental's current and preliminary view, which is subject to change. At this point, Louis and I will take your questions. Operator, please begin.
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 question, we will take one question at a time for 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 Fan Liu from Goldman Sachs. Please ask.
Hi, Louis, Stephen, and Sisi. Thank you for taking my question. Would you mind share with us more color around your investment plan on the online education initiatives and the potential impact on your margins in the fourth quarter and fiscal year 2016? How should we expect the margin trend in the coming quarters? Can I quickly confirm with you that if we combine the third quarter and the first six weeks, the revenue growth should be 9.5% year-on-year growth? Thank you.
Yes. Thanks. I'll answer the second question from you. If you combine the student enrollments in third quarter and with the first six weeks in the fourth quarter, the student enrollments will be increased by 9.5%. For our online initiatives, I think the most important part is our O2O initiatives. In the almost past year, we roll out our new revamped POP Kids program successfully, and you can see the number in Q3, our GAAP revenue for the POP Kids was up by 7%. Going forward, we're doing the same thing as U-Can and Overseas Test Prep. We spent $8 million-$9 million on the online and online O2O things in the third quarter. We will spend the same amount in the fourth quarter. In the next whole fiscal year, what I mean is in 2016, we hope we spend not as much as this year.
That means it will help to improve the margins of next fiscal year. Yeah. Does it answer your question?
Thank you. Thank you, Stephen.
Okay.
The next question comes from Alice Yang from Macquarie. Please ask your question.
Hi, Sisi, Louis, and Stephen. This is Alice from Macquarie. Thank you very much for taking my question, and congratulations for a solid quarter and Stephen for a new position. My question is also related to the pure online part. Can you share with us what is the online revenue as percentage of total revenue in this quarter, and how do you see the trend going forward, saying fiscal years 2016 or 2017? How do you differentiate your online versus offline courses? Will you have any kind of concern or any kind of potential cannibalization between the two going forward? Thanks.
Okay. Thanks, Alice. Our pure online revenue, with this, the Koolearn.com, the GAAP revenue of the Q3 was up by 39%. It's much faster than our offline business. I think going forward, it will contribute more than before, and because the big class are non-mission critical test prep takers, for example, for the domestic and overseas test prep, on purpose, we move the students from offline to online. The online revenue is booming. The online revenue accounts for the 4%-5% of the total revenue. In the next fiscal year, it will be more than this year. I think the difference between the online and offline classes is, the first difference is the age. I think that for the adult students or the college students are suitable for the pure online study.
For the K-12, most of them are suitable for study offline. We moved most of the short-term, non-mission critical offline class from offline to online. You will see the pure online revenue grows faster than our offline classes in the future. Okay.
Thank you very much. A very, very quick follow-up. Say, for example, in fiscal year 2016 or 2017, do you think that the online revenue will contribute high single-digit % of total revenue? Do you have that-
Yes. We haven't finished the budget yet, I think the trends will go up. In the next two to three years, I think the percentage of the online revenue will meet high single digits, maybe the 7%, 8%, or 9% of the total revenue. Okay.
Thank you. Thank you very much. Great.
Okay.
The next question comes from Ella Xu from Oppenheimer. Please ask your question.
Good evening, management. Louis, thank you for everything you've done for New Oriental. We will miss you. Stephen, congratulations on your new role. I have two questions. The first question is relating to your POP Kids program. Since you have seen such a strong enrollment performance with the program, could you talk about your thoughts on price increases in future quarters? Secondly, also relating to your total OPEX spending. I noticed the dollar amount for both sales and marketing and G&A declined sequentially from fiscal 2Q. Could you give us some color why you spent less money than last quarter, and how should we think about the dollar amount spending for the fourth quarter? Thank you.
Okay. Thank you, Ella. The first question about the POP Kids, the ASP. Yes, you are right, a little bit more difficult to increase the ASP for the POP Kids because the class is non-mission-critical. It makes us differentiate with any other competitors. Our strategy is to seek the market share first. We just keep the ASP increase rates by only 5%. We still have the price power. That means, I think we need the more students to take the new product classes as early as they can. After they get hooked, we can continue as before to increase the price. This year, you will see the price of the POP Kids increased by only 5%.
Next year, I think the percentage will be a little bit higher than this year. Your second question is about our OPEX of online. We spent $8 million-$9 million in Q3. It's divided by two parts. We spent half of them, we recorded the half of them in the cost, you can see our cost increased a lot than before. Most of them, the R&D expenses, HRs, like the IT people, would report in the G&A. That's the fact. Does it answer your question?
Sure, yeah. How about the dollar spending level for the fourth quarter?
I think the amount is almost same as this quarter. We'll keep spend $8 million-$9 million on OPEX for online.
Okay, got it. Let me just have a quick follow-up relating to your sales and marketing spending. Since you've rolled out some product by end of last year, such as Youdao, we have not observed strong promotions relating to such online product. As you will roll out more products throughout calendar year 2015, how should we think about your sales and marketing spending for the online products?
Yeah. Youdao is quite new. In kind of the test launch within English and a little bit math. It has not been blown across the QQ and Weixin, so we didn't do a lot of the promotions for the Youdao. The aim for us is to put all the subjects in it. It will be a long-term program. I think it's just like the Koolearn.com. Once the product got mature, we doubled paid users in Q3. Once we feel the product of Youdao is mature and accurate, we will use the QQ and Weixin channel besides our own ones and to blog, and we will spend more on marketing expenses. I think our strategy for the marketing is the product first, and then the marketing promotions. Yeah.
Got it. Thank you, Stephen. Very helpful.
Thank you, Ella.
Thank you, Ella, for your compliment. I'll miss you, too.
The next question comes from Tian Hou from TH Capital.
Hi, Louis. Thank you for working with us and let us know your new venture. Steve, congratulations on your new role. The question is related to actually not this quarter we're in, but rather related to your summer quarter. Last year, I do remember the summer quarter was kind of hit by multiple negative factors, such as the misunderstanding of the English examination policies as well as your summer boarding school. Now we're approaching the summer, and those issue may be raised again. I wonder, what could be the situation this year?
Okay. Thanks, Tian. For the summer, now it's April, it's a long way to go, I think that in the coming summer, we will not meet the same policy problem with the last year. I think we're lucky this year. For the dorm classes, I don't think we will hope the numbers will go up, I think the dorm class revenue will be kept flat with last year. Yes, you're right. For the Q1, our K-12, the Q1 is not the peak season, I think we will do as much as we can to get more student enrollment. I think about the student enrollment of the first six weeks in the Q4, we are in a good trend.
I hope the trends will keep going forward we can I don't know the detailed number in the coming Q1, I hope it's much better than Q1 last year. Yeah.
Okay. Thank you, Stephen.
Okay, thanks, Tian.
The next question comes from Jialong Xu from Credit Suisse.
Hi. Good evening, management. Thanks for taking my call. Congratulations on the solid results. I have a quick follow-up. I think Stephen just mentioned the normalized enrollment growth would be 9.5% if we combine Q3 and the first six weeks in Q4. I just wonder if management can provide more colors on the normalized enrollment growth rate for your different tutoring programs. Given the strong momentum in your K-12 program, I just wonder what will be the revenue growth rate you guys are looking at for next fiscal year. Thank you.
Okay. Thanks, Jialong. Right now, our growth is going to be driven by three parts, the U-Can, the POP Kids, and overseas test prep with the overseas consulting. Let me start with U-Can. The U-Can has increased by about 30% in Q3, and student enrollment is up by 12%. If we add back the first six weeks in Q4, it would have been a significant growth with more than 30%. In the long term, our U-Can will be the future of New Oriental. The student enrollment growth rates will be above 20% at least. For the POP Kids, we roll out the new products successfully, and the kids, for the three months and six weeks, the enrollment was up by 20%. In the long term, it will have the almost same student enrollment growth rate as U-Can, maybe a little bit lower than U-Can.
For the overseas test prep, the student enrollment growth will be flat because the whole market doesn't grow as fast as before. I think the good news for us is more and more Chinese parents would rather send their kids to study abroad at their younger age. It's not like before. That means more and more young kids will take our overseas test prep program, and it will help us to improve the ASP because the ASP for the SAT and TOEFL Junior is much higher than the GRE and GMAT. Overall, the revenue of the overseas test prep will be 10% or 10%-15% in the future, with zero student enrollment increase, with the ASP increase by 10%.
If we combine the overseas test prep with the overseas consulting business, the overseas consulting business was booming in the last 4 or 5 years. Going forward, the business of overseas consulting will be increased at least 25%. The business line overseas will be increased by at least 15%. The only drag of our businesses are DaDa English and domestic test prep, but it declined by 10% in the last 3 years in a row. Anyway, we moved most of the students, the B class of the domestic classes, from offline to online. Overall, if you see the company as a whole, the overall student enrollment growth will be probably around 8%-10%. Price increase, I think it will be between 5%-10%.
If you break that out, the ASP for U-Can will be increased by 5%-10%, for the POP Kids, 5%.
Thank you for the-
That way, we guide the revenue increase by 15%-20% in the future.
Thank you for the color.
Okay.
The next question comes from Leon Tse from JPMorgan.
Hi. Congrats on the results. Just a couple quick questions. First, on the U-Can enrollment, its growth is 12%. Can I just confirm the enrollment does not include pure online students?
Yes, not much include the pure. It is just the pure offline student enrollments.
Okay
of 12%.
I guess it works up to around 15% or so ASP growth because your sales is up 29%. What's the breakdown between tuition increase and just students taking more courses? Is it about half?
Yes, we increased the price for U-Can, it's about 8%-9%.
Okay.
Yeah. It's a tiny difference of the Chinese New Year. The trend is, the apple-to-apple comparison, the basis, the student enrollments was up by 20%, and the price increase is by 8%-10%. You can combine-
Oh, okay.
Yeah. Right.
Okay. Thank you.
Okay, thanks.
The next question comes from Tracey Steuart from Wells Fargo. Please ask your question.
Yes, thank you. I wondered if you could talk about the POP Kids ASP in a little bit more detail, and specifically, I am interested in understanding what the trend is in class hours on a year-over-year basis.
Yeah. Thanks, Trace. Good question. We almost finished the roll-outs of the new product of the POP Kids. The new POP Kids has used the I think this is successful strategy. I think the strategy is to go after the market share first and increase the price later. We will control the ASP increase of this physical year, what I mean is in the coming Q4, maybe within the coming Q1, within 5%. After that, we will increase the price of POP Kids above 5%. It will be about 10% year-over-year.
Right. My question isn't about the pricing, because you described that before. It has to do with what the average number of class hours per student is. That trend was down in the prior quarter, and I'm wondering if that's still the case, and when you would expect that trend to level out.
Okay. Yeah. In the two quarters before, we changed some of the class hours for some cities. From the half-year class per course to three months. I think the trend.
Right
It will be continued, but it will not the big changes as before. I think the class length will be kept stable in the future.
Just so I understand. The shorter length program, which requires more repeated renewals on the part of the families, that's part of the new rollout. Am I correct about that?
Yes. You're correct.
Okay. Will we see that trend stabilize then in the first quarter of next year?
Yes.
The second quarter of next year first?
Yes. The class lengths will be stable because we almost finished all the actual reforms, the initiatives of the product of POP Kids. The trend will be stable, the class length.
All right. Thank you.
Okay, thanks, Tracey.
The next question comes from Alvin Jiang from Morgan Stanley.
Hi, Louis, Stephen, Sisi, thank you for taking my question. My question is on investment. As you mentioned, this year will be investment year, especially for those online initiatives. What's your plan for next few years, and do you have some kind of targets? After achieving those targets, you will consider to slow down such investments.
Yes. Thanks. That's a good question, I think. Yeah, this year is the investing year for online. We almost finished the actual reform for the POP Kids, and we're doing for U-Can and overseas test prep, all the business lines. We spent $30 million to $35 million in OPEX for online. Next year, I think the number of investments will be as same as this year or a little bit less. Because this year, we hire a lot of IT people and content writers, and we cannot fire them after the job. They will do a lot of follow-up jobs. This year, we spent some money on the third party's IT service from outside the company. Next year, we don't need that part. I think in the next year, the total spending will be a little bit less than this year. Okay.
Okay, thank you.
The next question comes from Alan Lee from Deutsche Bank. Please ask your question.
Hi, management. This is Alan asking on behalf of Vivian Hao. My question is regarding the partnership with Tencent. Could management give us more color on what kind of support we should expect from Tencent this year? In addition to the Youdao, will we roll out more products with Tencent this year? Thank you.
We did a joint venture last year and launched Youdao. I think it's the first step of the cooperation between New Oriental and Tencent. As you know, we have the best content and teachers. They have the most abundant distribution channels. We're exciting to seek further cooperation between us. I think you will see some announcements in the future, but it's too early to say because it's in confidential. For the Youdao, as I said earlier, because it only have the subject of the English and a little bit more in math. We just want to put all the subjects, all grades, the question answers into the Youdao. Then we will use the activation or the QQ to blow out the product. I think that Tencent will help us to distribute our new product online. Okay.
Thanks, Alan. Thank you.
Thanks.
The next question comes from Clara Frank from Jefferies. Please ask your question.
Hi. Well, thank you for taking my question. I got two questions. First is, I guess the ASP growth this quarter was better than last two quarters. Is it due to the late Chinese New Year, that's why there were less enrollment this year that ended up with a 13% increase in ASP? I'm just wondering, what would be the ASP growth like if we do it on a normalized basis? What is the ASP growth expected in the next quarter? My next question is on your operating profit margin. It's better than expected. In particular, we see that the selling and marketing expenses, in absolute value, was less than last quarter. If we look at it as a percentage of revenue, on a year-on-year basis, it's also down 0.4 percentage points.
I'm just wondering what is the reason behind the lower selling and marketing expenses this quarter, and what should we expect going forward? Thank you.
Okay. I answer the second question first. For the selling expenses, I think the first reason for the selling expenses not to increase so much is because we just opened six learning centers net in Q3. That means we don't need so much the marketing expenses for the new learning centers. The second one is we almost finished the O2O reforms for the POP Kids. We don't need so much marketing expenses. Once we roll out the overseas test prep in the U-Can, we will spend a little bit more, but not as much as the two or three quarters before as the POP Kids, because more and more students and parents will know the product, the quality of them than the older versions. Your first question is about the POP Kids, the ASP.
I think you make a misunderstanding about the ASP, because I think the GAAP revenue is 13% in Q3, the enrollment is flat, the cash revenue of the Q3 will be also flat. The ASP of the Q3 will be flat. As I said earlier, if we add it back to over the first six weeks, the ASP will be 4%-5%. It's on purpose. In the coming Q4, I think the ASP will be lying between 5%-10%. Next year will be much higher than this year.
Thank you.
Okay, thanks.
We are now approaching the end of the conference call. I will now turn the call over to New Oriental's President and CFO, Steve 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. Thanks.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.