© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good evening and thank you for standing by for New Oriental’s FY 2020 Third Quarter Results Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao. Thank you. Please go ahead.
Thank you. Hello, everyone, and welcome to New Oriental’s third fiscal quarter 2020 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 Newswire Services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions.
Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org.
I will now turn the call over to Mr. Yang. Stephen, please go ahead.
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Before we kick off the call, I would like to firstly convey our deepest condolences to the people who have sadly passed away and to their loved ones during this global health crisis. We would like to express our sincere gratitude to medical staff around the world for their dedication and commitment in this difficult time. Thank you. Let us all play out hard and stay healthy. Together, we can overcome the challenge.
In response to the outbreak of the COVID-19, New Oriental has immediately transferred more than 1 million students to online programs through New Oriental cloud-based classrooms. We have also actively assumed social responsibilities by donating RMB20 million in cash to Hubei province and providing free small size offline courses to the children of nearly 20,000 medical staffs as well as providing the public with tens of millions of free high-quality educational resources that can benefit over 10 million people, including students of all levels, parents, teachers and entrepreneurs.
Back to our business, we are very pleased to report a set of very encouraging financial results in the third fiscal quarter of this year, delivering a top line growth and continued preparing margin expansion – and continued operating margin expansion despite COVID-19 pandemic putting negative impact to all those industries across globe. Total revenue growth was $923.2 million, representing a growth of 15.9% in dollar terms or 18.7% if computed in RMB. Net revenues from education programs and services for the third fiscal quarter were $845.7 million, representing a 16.3% increase year-over-year. The growth was mainly driven by K-12 after-school tutoring courses, which achieved a year-over-year revenue growth of approximately 24% in dollar terms or 27% if computed in RMB. We continue to be guided by our Optimize the Market strategy in this quarter and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability.
This quarter, we added a net of 110 learning centers in existing cities, opened 2 new training schools in the city of Zhangjiagang and Nanjing. Altogether, this increased the total square meters of classroom area by approximately 30% year-over-year, 11% quarter-over-quarter and 21% comparing with the end of the fiscal year 2019. Total student enrollments in academic subjects tutoring and test prep courses in the third fiscal quarter of 2020 increased by 2.3% year-over-year to approximately 1,606,000. The lower-than-normal increase in the number of student enrollment is primarily due to a bigger portion of the enrollment for the winter semester falling into the second fiscal quarter because of the earlier timing of Chinese New Year this year compared with the last year as well as the higher-than-normal cancellation for winter classes.
The outbreak of COVID-19 has also caused challenges on acquiring the new customers in the second half of the quarter, while the enrollment for classes in Q4 and summer classes have also been delayed. At the same time, we continued our efforts in improving and maintaining our online/offline OMO standardized classroom teaching system, especially during the outbreak of COVID-19. All the offline classes have been transited smoothly to online classes since the beginning of February, and we are very encouraged to have received positive feedback from our customers. We also continue to make strategic investments into our new initiatives in K-12 tutoring on our pure online education platform, koolearn.com, to leverage our advanced teaching resources in lower tier cities and those in remote areas.
Following last quarter’s strong bottom line performance, we once again achieved year-over-year operating margin expansion in this quarter. During the quarter, we recorded non-GAAP operating income of $134.8 million compared to $113.8 million in the same period of last year. Non-GAAP operating margin rose by 30 basis points year-over-year to 14.6% and non-GAAP net margin rose by 240 basis points year-over-year to 16.1%. The continued operating margin expansion is mainly driven by the better leverage in classroom rental and related operating expenses, just as we consistently improved the utilization of the facilities before the outbreak of COVID-19. The net margin expansion is also due to the VAT exemption approval by the government during the pandemic and the net loss of Koolearn subsidiary undertaken by the non-controlling interest to shareholders.
We are confident that we will able to deliver continued margin expansion after the pandemic is over and generate sustainable long-term value to our customers and shareholders. Per program blended ASP, which is cash revenue divided by total student enrollments, increased by about 2.7% year-over-year in dollar terms. As for hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 3% year-over-year in RMB terms.
To provide the breakdown of the hourly blended ASP, please note that U-Can middle school/high school program increased by 4%, POP Kids increased by 6% and overseas test prep program increased by 7%, all year-over-year in RMB terms. Comparing with our normal price increase of 5% to 8%, this quarter’s hourly blended ASP increase was 2% to 3% lower than normal levels, mainly because of the discount we provided to the customers to support the migration from offline class to online as well as the bigger slowdown of the VIP personalized class business. At the same time, to show gratitude to the medical staff who traveled to Wuhan to offer help, we offered special complementary classes to their children. This has inevitably contributed a slight decrease of the ASP.
Now let’s move on to the third quarter performance across our individual business lines. As mentioned earlier, our key revenue driver, K-12 all-subjects after-school tutoring business, achieved year-over-year revenue growth of 24% in dollar terms or 27% in RMB terms. Breaking down, the U-Can middle school/high school all-subjects after-school tutoring business recorded a revenue increase of approximately 23% in dollar terms or 26% in RMB terms for the quarter. Student enrollments grew approximately 23% year-over-year for the quarter.
Our POP Kids program delivered outstanding results, with revenue up by about 26% in dollar terms or 29% in RMB terms for the quarter. The enrollment decreased by 23% for the quarter. The decline is due to the bigger portion of the enrollment for the winter semester falling to the second fiscal quarter because of the earlier timing of the Chinese New Year this year compared with last year. The overseas test prep business recorded a revenue decrease of 14% in dollar terms or 12% in RMB terms for the quarter. The consulting business recorded revenue growth of about 27% in dollar terms or 30% in RMB terms year-over-year for the quarter. Finally, VIP personalized class business recorded revenue growth of about 10% year-over-year in dollar terms or 13% in RMB terms year-over-year for the quarter.
Next, I will provide some updates on progress we’re making with our Optimize the Market strategy. Beginning with our offline business this quarter, as mentioned earlier, we added a net of 110 learning centers in existing cities, opened 2 new training schools. Altogether, this increased the total square meters of classroom area by approximately 30% year-over-year, 11% quarter-over-quarter and 21% compared with the end of the fiscal year 2019. The expansion of our offline education network has also made sure that we are fully prepared for when the pandemic is over and our service can resume with the strong presence across the different Chinese cities. The dual-teacher class model has been introduced into the POP Kids program in 48 existing cities, for U-Can program in 28 existing cities and for both POP Kids and U-Can K-12 businesses in 7 new cities. The initiative supported increased market penetration in those markets we have tapped into. We also saw improved customer retention and scalability of the new model. With this program result, we will continue this strategy in the rest of the year.
On the digital technology front, we invested $40 million in this quarter to improve and maintain our OMO education ecosystem. And as the outbreak of the COVID-19 has highlighted the importance of demand of online education, the investment also supported the migration of our online classes to small size online – of the offline classes to small size online live broadcasting classes during the pandemic. Apart from the OMO infrastructure, we have allocated part of the resources to teacher streaming to ensure they are all well equipped to be managing the online classes. As a result, the OMO ecosystem managed to cushion most of the impact on our service and operation caused by pandemic.
Most of the investments were recorded in the G&A expenses. Furthermore, we also made stable progress in the pure online koolearn.com business line and other supplementary online education products, which is experiencing growing market demand. More resources are invested into executing new initiatives in online K-12 after-school tutoring business in fiscal year 2020. The investment includes content development; teachers recruiting and training; sales, marketing, R&D and other necessary cost incentives to drive the growth of the new pure online programs. With these programs, we are able to reach out to more students in low-tier cities in an interactive and scalable manner. We believe this will help koolearn.com to gain new market share in the online education space and drive top line growth.
In addition, during COVID-19 pandemic, Koolearn did a large-scale market promotion by offering free large size online live broadcasting classes to the public and attracted several times more traffic than normal times. To capture the new market opportunity, Koolearn also added a meaningful amount of the customer representatives and marketing staff to support the new initiatives in K-12 tutoring. This move has consequently raised our spending on the marketing front, but we believe these are necessary and understandable measures as we found ourselves in an unusual pandemic situation.
Now, let me walk you through the other key financial details for the third quarter. Operating cost and expenses for the quarter were $806.0 million, representing a 15.0% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $788.4 million, representing a 15.4% increase year-over-year. Cost of revenue increased by 18.1% year-over-year to $398.6 million, primarily due to increase in teachers’ compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation.
Selling and marketing expenses increased by 35.2% year-over-year to $118.2 million, primarily due to a significant increase of the promotion expenses and a number of the customer service representatives and marketing staff for the new initiatives in K-12 tutoring on koolearn.com. General and administrative expenses for the quarter increased by 4.8% year-over-year to $289.1 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $273.3 million, representing a 5.9% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses decreased by 2.4% to $17.5 million in the third fiscal quarter of 2020.
Operating income was $117.3 million, representing a 22.4% increase year-over-year. Non-GAAP income from operations for the quarter was $134.8 million, representing an 18.5% increase year-over-year. Operating margin for the quarter was 12.7% compared to 12.0% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 14.6% compared to 14.3% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $137.7 million, representing a 41.4% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.87 and $0.86, respectively.
Non-GAAP net income attributable to New Oriental for the quarter was $148.5 million, representing a 36.4% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.94 and $0.93, respectively. Net margin for the quarter was 14.9% compared to 12.2% in the same period of prior fiscal year. Non-GAAP net margin for the quarter was 16.1% compared to 13.7% in the same period of prior fiscal year. Net operating cash flow for the third quarter of 2020 was approximately $39.7 million. Capital expenditures for the quarter were $103.2 million, which were primarily attributable to the opening of 127 facilities and renovations at existing learning centers.
Turning to the balance sheet, as of February 29, 2020, New Oriental had cash and cash equivalents of $1,057.1 million as compared to $1,414.2 million as of the May 31, 2019. In addition, the company had $269.2 million in term deposits and $2,241.0 million in short-term investments. New Oriental’s deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as the revenue as the instructions are delivered, at the end of the third quarter of fiscal year 2020, was $1,375.0 million, an increase of 15.4% as compared to $1,191.8 million at the end of the third quarter of fiscal year 2019.
Looking ahead to the fourth quarter of this fiscal year, despite the continuing challenges from the COVID-19 pandemic, we’re still optimistic towards the company’s business, and we’ll continue to focus on the following key areas. First, we will continue to expand our offline business. We still aim to add around 20% to 25% capacity, including new learning centers, and expanding classroom areas of the some existing learning centers for K-12 business in existing cities. We believe our capacity expansion will support us to hold more students in our facilities in the coming summer, which will very likely be shortened by 1 or 2 weeks into the delayed start of the second semester of all public schools in China to combating the epidemics.
More importantly, it will prepare us to further take market share from other players after COVID-19 subsides gradually as some small players without strong financial position and online cloud capability may not be able to sustain their business during the period and will be forced to cease operations. We expect the industry will undergo ways of market consolidation upon the pandemic phase. The fact that we are a major player with strong financial capacity and fresh offline facilities allows us to further strengthen our market-leading position and penetration. In addition, we will continue to roll out our dual-teacher model schools to a number of new low-tier cities in certain provinces for the whole year.
Second, we will continue to leverage our investments into digital technologies, and we introduced our OMO systems to more offline member training and test offerings, especially for our K-12 business and overseas test prep business. We will broaden the usage of the online tools and content in our OMO system for all business lines throughout our whole network. We’ll continue to invest in developing the best teaching content and courseware to cater to online and offline integrated education methods. At the same time, we will provide more advanced training programs to our teachers and enhance their online/offline integrated teaching skills. We will continue to make investments, and we believe the total spending in absolute dollar terms in fiscal year 2020 will increase compared with the previous fiscal year.
Furthermore, we will continue to invest in and execute the initiatives, including productive content development, teachers recruiting and training, R&D as well as sales and marketing in pure online K-12 after-school tutoring business on our koolearn.com platform. As mentioned earlier, during the COVID-19 pandemic, Koolearn encountered several times more traffic than normal times by offering free online live broadcasting classes to the public during the winter and spring season. Koolearn also added a meaningful amount of customer service representatives and tutors. This near-term investment enhanced our competitive advantage to capture the new online education market opportunity.
Third, our top priority will remain as to focus on controlling costs and reducing the expenditures across the company to minimize the negative impact from COVID-19 pandemic on the bottom line. Although we expect the margin decline year-over-year in the fourth quarter of fiscal year 2020, we believe we can still maintain non-GAAP operating margin for the full year of fiscal year 2020 at a similar level as last year and achieve expansion of non-GAAP net margin for the full year of 2020 compared to the year-over-year decline in last two fiscal years. Finally, the recent RMB depreciation against the U.S. dollars might cause impact on earnings in dollars terms for the fourth quarter of fiscal year 2020.
Finally, I would like to emphasize, we have great confidence in the fundamentals of our business. Although we are facing the negative impact from the pandemics for the near term, we remain optimistic of the brighter prospects of our business over the long run. We’re certain that with the New Oriental leading brand, superior education products and the best teacher resources, we’ll keep taking market share with the leading position in China’s huge after-school tutoring market and deliver long-term value for our shareholders and customers.
Looking at the near-term and our expectations for the next quarter, we expect total revenue to be in the range of $774 million to $806.2 million, representing year-over-year decline in the range of 8% to 4%. If not taking into the consideration the impact of the potential change in exchange rate between RMB and the U.S. dollars, the projected decline of revenue is expected to be in the range of 4% to 0% for the fourth quarter of fiscal year 2020.
To provide a breakdown of the expected top line growth for key business lines, K-12 all-subjects after-school tutoring business is expected to grow around 10% to 11% or 18% to 19%, excluding VIP one-on-one business. Overseas test prep program is expected to decline around 45%. And overseas study consulting business is expected to grow 12% to 13% all year-over-year in R&D terms. We expect the significant decline of the overseas test prep business and slowdown of the overseas study consulting business is due to the outbreak of the COVID-19 pandemic around the globe, starting from March, with the cancellation of the overseas exams, suspension of the overseas schools and restriction on travels.
We expect the negative impact of overseas related business will affect the entire education industry in China, not only New Oriental, and will last over the coming one to two quarters. That said, in contrast, China’s effective control of the pandemic situation has shed a more positive light on our business domestically. We are optimistic over the trend of the K-12 after-school tutoring business. I’ve tracked from the public news that 30 provincial level governments, that’s 88% of the total, have announced the public school resumption plan. We’re confident that demand for the after-school tutoring business will pick up after the resumption of the schools, and the short-term impacts from the school hour changes and short-term summer holiday will be manageable. The exchange rate used to calculate expected revenue for the fourth quarter of fiscal year ‘20 is CNY 7.07. The historical exchange rate used to calculate revenue for the fourth quarter of the fiscal year 2019 was CNY 6.76. I must mention that these expectations reflect New Oriental’s current and preliminary view, which is subject to change, especially in the pandemic period.
At this point, I will take some questions. Operator, please open the call for this. Thank you.
[Operator Instructions] Your first question comes from the line of Mark Li from Citigroup. Please ask your question.
Hi, Stephen. Can you hear me?
Yes. Mark, please go ahead.
Hi, thanks for the explanation. I want to ask – I noticed for our overseas test prep, the next quarter the pressure is pretty big. Can you share with us what’s your estimate for the short-term or the one-off cash impact for the Q4? And I see for TOEFL, etcetera, they are still not offering China to have the say home test. So what do you think that impact will last for the overseas test prep and consulting segment? Thank you.
Hey, thanks, Mark. Yes. The overseas test prep business reported revenue decline of about 13% in dollar terms this quarter. Actually, it’s 12% in RMB terms year-over-year decline in Q3. And the Q4, I think the pandemic spread a lot of countries, western countries now. So it will impact our overseas test prep business in Q4. So we guided to top line growth of the overseas test prep business decrease by about 45% year-over-year in Q4. But if we believe, the Q4 will be the worth of time. And upon the pandemic phase, I think the situation will be better in the fiscal year ‘21. And so this is my explanation for the overseas test prep. And overseas consulting business, yes, we did very good. We did very good in Q3. And also, given we had the negative impact from the Q4, but we still guide the top line growth of the overseas consulting business grow by 12% in RMB terms in Q4. And yes, that’s it. I think the reason is that it’s very easy to understand because we have seen the cancellation of the overseas exams like TOEFL, IELTS and GRE and suspension of the overseas schools and restriction on the travel. So yes, we hope the pandemic can pass very quickly, so we can make recovery of our overseas related business.
Thank you, Stephen. May I quickly follow-up, do you have any rough estimate that what percent of your overseas test prep student like a short-term or what percent is the longer-term student?
I think for the short-term, I think – yes, in the Q4, I think we will do 35% to 40% at the moment. That – this is for our overseas test prep. Long-term, it’s really hard for me to make a prediction. But I think once the pandemic disappears – I think most of the Chinese students will still choose to study abroad after the pandemic is over.
Thank you, Stephen.
Okay. Thanks Mark.
Your next question comes from the line of Charlotte Wei from HSBC. Please ask your question.
Hi, sorry. This is Binnie Wong here. Thank you for taking my question. And Stephen, can you hear me well here?
Yes, very clear. Go ahead.
Okay. Thank you. Good. So, actually just wanted to follow-up here, I think you mentioned a very good point about the consolidation angle. So how should we see about in terms of during this like the crisis that we are seeing, right? Are there any actually like closure of some of the smaller ones? And are they mostly the online ones or the offline ones? And so for us to think about like longer-term, how we should see our market share gains from here? And then a second question here is also that – I think you talked about that in terms of our online growth is, of course, doing very well given the current situation. And is it also that we are thinking about our user acquisition, right, because in the past, our recruitment for the online students has also been relying on some of our local resources. Would that make our strategy also modify a bit so that we can accommodate because this situation might still pull along for some time? And having said that, do you think we are seeing the trough already? With second quarter growing at single-digit growth, do you think this is the trough we should expect? Thank you.
Okay. Yes. Let me answer your first question about the market consolidation opportunity. Yes. As the disease subsides gradually, I think there will be a potential opportunity for the – of the market consolidation especially for the big players. We have seen a lot of small players. They face severe impact that may cause some of them to shut down their business. So New Oriental as one of the leading players in the market, so we are well prepared to take more market share after the pandemic is over. Yes. That’s why we still opened new learning centers in new cities and existing cities. And also in Q3, we successfully moved all the offline students to online in – since later February, so I think [indiscernible]. So that’s why I said it’s a great opportunity for the bigger players like the New Oriental. And yes, the pure online, Koolearn, yes, we spend a little bit more money in Q3 and yes a little bit more in Q4, in the coming quarter, to acquire new student enrollment because the pandemic – when the pandemic comes, I think it’s a great opportunity for the big online players. So yes, I think, anyway, we got a lot of the enrollment during the pandemic. And I think the money we spend is working and is spendable. I think even though we spent a lot in Q3, but we still get the margin expansion for the – for overall the company.
Okay. Thank you.
So I think going forward, I think yes, the situation will be – benefit the big players like us. Okay. Thank you.
Okay. And just a quick follow-up here, Stephen, if I may. In terms of the summer promotion campaign upcoming in terms of the students – new student acquisition, how do you see your summer promotion campaign plan for this year will be? And then do you think into May quarter, the single-digit growth should be the trough we are seeing, the worst would be – should be over?
Yes. I think – yes, this is a great question. Last year, we did the very successful summer promotion where I remember, we got 820,000 summer promotion student enrollment, and the retention rate was 59% last year in the autumn. And this year, I think we will use the 3 following strategies. Number one, we care more about the retention rate, okay. And number two, we will use them more and more – allow more model through the summer promotion campaign because of the importance of the summer vacation period. So we will use 1 or 2 weeks. So we’ll provide more and more classes for the summer promotion campaign. And number three, the last one, we will raise the price again as we did in last year. I think it will bring likely more valuable customers for the more large. So I think – still a good way to take more market share from the market, especially from the small players by the summer promotion. So we will do it. And the good news for us is we started – we have already started the summer promotion enrollment window for the Grade 4 and Grade 6 students. And so far, the numbers are good.
Okay. Thank you.
Thank you. Okay.
Thank you, Stephen.
Thank you, Binnie.
Your next question comes from the line of Zhou Sun from T.H. Capital. Please ask your question.
Yes. This is Tian. So the question is regarding the expansion plan. So I think innovation is pretty tough given the whole nation is still very cautious on any offline gatherings, and a lot of players have not yet 100% opening yet. So how do you carry out the expansion plan? So that is the first question. So second question is related to – I do see a lot of online education guys put a lot of money in advertising system. So what is our defensive plan in that front? Thank you, Stephen.
Okay. Yes, as for the expansion plan, yes, we added a net of 112 learning centers in this quarter. Most of the learning centers we set up in this quarter happened in the first 2 months in December last year and January and the total classroom area increased by 21% for the first three quarters comparing with the end of last fiscal year time. So I think it’s in line with our expansion plan. And we believe the capacity expansion will support us to take more students from the market, especially from the small players and in the coming summer, in summer, I think which will very likely to be shortened by 1 or 2 weeks. So gradually with the more learning centers we have so we can provide more seats to the kids in the coming summer and the time afterwards. And more – one more thing is, I think, we feel confident about our business going forward. So we don’t want to change our expansion plan going forward. I think the pandemic will pass away maybe next quarter. So next 2 years, we will still expand the capacity by 20% to 25%. So we don’t want to change our guidance of the expansion plan next 2 year. And your second question is about the online spending. Yes, we did the large scale – the promotion for the winter and the same process for the large size class of the K-12 business in our koolearn.com. Because we – I think once the pandemic happens in China we still have great opportunities. And we were confident that we can provide the best of service in the competition. So I don’t think of the spending your money is a defensive way from us. I think on the contrary, I think, it’s a good opportunity for us to take more market share from the players. So that’s it. Thank you, Tian.
Thank you. Thank you.
Okay.
[Operator Instructions] Your next question comes from the line of Yuzhong Gao from CICC. Please ask your question.
Thanks for the opportunity. I think my question is focused on relatively longer term. So obviously, given the outbreak, you moved all your student to the online small class model. I am wondering if you are thinking about keeping this model. And in other words, in the future, when we talk about capacity expansion, we actually may not need that much to any center versus before the outbreak? And whatever capacity expansion target we have for next year, should we think that your enrollment growth may probably outgrow your capacity expansion, please? Thanks.
Yes. Because of the lockdown and travel restrictions in the last 2 to 3 months, we successfully moved all the offline class to online in all the students – to all the students. And the overall feedback from the customers are very – has been very positive. And however, I think going forward offline classes will continue to be our primary business model. In the last 2, 3 months, the situation looks very special because the kids and the parents, they can’t go outside from home, and the parents can see whether kids is studying in his computer. So if the pandemic is over, we are – I think most of the students will choose the offline class. We made a survey in a big city. And the survey results told us that 95% students have preferred to going back to learning centers for after-school tutoring space when the virus situation stabilizes. And – but I think for the pure online players like the Koolearn or the other key players, it’s a great opportunity as well because the market is so huge for both the online and the offline players. So, I think going forward, the big players will take more and more small – the market share from the small players. This is a key point. And so we – going forward, we will use the 2-way development strategy, online and the OMO. This is our strategy going forward.
Alright, great. Very helpful. Yes, very, very clear. Very helpful. Just a very quick follow-up, really do you have heard anything from government on when we could resume offline teaching activities?
I’m sorry. I can’t hear you very clear, Yuzhong.
If we have heard anything from government on when could we resume offline teaching activities?
Sisi, can you hear Yuzhong very clearly?
No. Yuzhong, your line is not very clear. Can you say that, again?
Yes. Yuzhong, I suggest you drop off the line first okay and back to the queue and may ask again.
We will take next one.
Okay, I am sorry.
Your next question comes from the line of Lucy Yu from Bank of America. Please ask your question.
Hi Stephen. Thanks for taking my question. My question is on the fourth quarter revenue guidance for K-12. You mentioned it will grow at like 10% to 11%. So that’s a moderation from the previous quarter. Could we know your back-end assumption regarding this moderation? Whether it’s due to pricing or lower enrollment? Is it enrollment related? Why is that? Is it just because the new enrollment has not been done very well after Chinese New Year or there are some other reasons?
Okay. Yes. The Q4 will be a little bit hard. On K-12 business, the growth will be around 10% to 11%, and this is the overall K-12 business growth. And if you take out the one-on-one business, the small size class – K-12 business, small size class business growth will be 18% to 19% in RMB terms year-over-year. So that means the one-on-one business will be down by 5% in Q4. I think some students still like to take relatively extensive class – one-on-one class online. So this is the reason. And secondly, I think, the retention rate is not a problem. In the spring, in this quarter, the retention rate is still getting higher compared to last quarter. And the drop-off rate is lower than in March and April. It’s lower than the February. But the problem we are facing is the acquiring of new student enrollments. China has been locked down for 2 to 3 months. So it’s really hard for us to acquire new student enrollment for the second half, the Q4 and even for the summer. So it’s a hard time. But the good news for us is we are happy to see the schools in China. What I meant is the public schools in China are going to reopen gradually in this month or in early May. I think we are optimistic towards our K-12 business for the summer classes. And yes, that’s the – my explanation for the Q4 K-12 revenue growth.
When public school resume their offline activity, some regions said they will utilize the Saturday to make up the missing cases. So will that impact our class scheduling? So is this in your 10% to 11% growth assumption already or not?
We have been well prepared for the rescheduling of the public school – the study schedule. So we can move some classes from Saturday to Sunday where we can use the working day evening time to provide classes. Good news for us is we can use the OMO model to provide the classes.
So it has been baked into your 10% to 11% assumption already, right?
Yes. We still need some time. But I think it’s not a big problem for us.
Okay thank you so much.
Yes okay. Thank you, Lucy.
Your next question comes from the line of Christine Cho from Goldman Sachs. Please ask your question.
Hi thank you, Stephen and Sisi. Just a quick question, so is there any impact from the 1-month delay in the gaokao for your business and the magnitude or any color would be great?
Yes. We know that gaokao will be delayed by one month, but I don’t think it will impact our business. On the contrary, I think the delay of the gaokao will help our one-on-one business a little bit because we have one more month before the gaokao. So there is no big negative impact to our business, okay.
Okay thank you.
Thank you.
Your next question comes from the line of Alex Liu from China Renaissance. Please ask your question.
Thanks Stephen I actually have two quick questions, both on online. I think first, we noticed the non-control increased a lot this quarter. So obviously, that was mainly related to Koolearn. So I was wondering how should we think about the margin implications in the next fiscal year from the online investment side? That’s the first question. And second question, given we have both quite aggressive growth targets for online and offline and how should we think about the management – how does the management manage and balance the conflict of interest between online and offline growth? Thank you.
Okay. Yes. I think the Koolearn did large scale market promotion in Q3 and in the March. Yes, that’s in Q4. So we spent a little bit more money. And yes, you just saw the MI, the big number MI in the Q3 numbers. So Q4 it will be a little bit bigger. But I think in the fiscal year ‘20, the numbers will be lower than this year. So it will be less. And I think it’s mainly due to the pandemic. The opportunity for the online industry comes, and so yes we did a lot on the free course of the super large classes. So that’s where we’re going. And we think it’s virtually and are in lesser sorts. And yes, that’s it. I think your second question is about the cannibalization or the balance between the offline and online. I think the cannibalization between the EDU and Koolearn or the online/offline will be minimal, will be minimal because the market is huge. So see the other hands, a lot of small players spiked in the market. It is fear from the market. So there’s a lot of room for big players. And I think the students will – we can divide students into two groups. For the small part of business, for the Koolearn, they can study through online, most of the students they choose to choose facility to take the offline classes. So the market is huge for both sides, Koolearn and EDU. So the competition internally will be very minimal. And our first job for both sides, EDU and Koolearn, are taking more market share as much as we can going forward in the market. Okay, Alex?
Okay. Just to clarify, so you were saying the next quarter online loss will be basically smaller comparing to February.
No, next quarter it will – yes, the next quarter, Q4 the net loss of the Koolearn will be bigger. But like the fiscal year will be smaller. Yes. fiscal year ‘21 will be smaller.
Okay very clear. Thank you.
Thank you Alex
Your next question comes from the line of Felix Liu from UBS. Please ask your question.
Hello, Stephen. First of all, thank you very much for taking my question. My question is mostly on the summer. So first, we’re probably seeing one to two weeks of shorter summer break. So could you let us know how that will impact our scheduling in terms of the K-12 segment? And also for the overseas test prep, I know summer is typically the peak season in that segment. So what is our expectation in overseas test prep in summer? Are exams being rolling back in summer or could there be further delays? Thank you.
Yes. It’s really hard to make a forecast of the overseas test prep because almost all these schools in United States and U.K. are still closed. So – and we do hope the pandemic is over as early as it can. And so yes, we know the Q1 will be a big season for the overseas test prep. But I think we are prepared well internally, but it’s really hard for us to make a prediction for the negative impact from the pandemic of the overseas test prep in the coming summer, okay? And yes, the K-12 business this summer, yes, I think that the summer vacation will be shortened by one or two weeks in the coming summer. And so there were several things we can do – actually we have done. And number one, I think, we will use one more model, OMO model. We can keep – last year we opened a learning center through the summer that we can provide more and more online courses combined with the offline courses. We can save some classroom areas. And so this is the first one. And secondly, we can make some class rescheduling or make the class size a little bit bigger compared to last year to acquire more and more new student enrollment in the coming summer. So I think it’s okay for the coming summer and optimistic for the business of the coming summer.
I see it. Thank you very much for sharing the color. I am glad we are making good progress in summer for ASP. Thank you very much.
Okay. Thank you, Felix.
Your next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.
Thank you for taking my question. It’s about the margin outlook in the fourth quarter. So it looks like we have a lot of pressure in the fourth quarter on margin given the full year is flat. So wondering if you can provide some color on the breakdown of your current contract pressure according to the – including, I think maybe you opened more learning centers and overseas test prep is also – put some pressure. So can you please give more color on the breakdown and what we should expect for the coming year? Thank you.
Yes. We guided the top line growth in RMB terms in Q4, will be flattish in RMB terms. So – but anyway, we have to face the high rental because you look at the expansion in the last 2, 3 quarters. And also, typically, we – the selling and marketing expenses and G&A will be increased in the Q4, so it will drop the margins in the Q4. But I think it’s just a one time, okay? And we know – even though for nowadays, our top priority for our job is to focus on controlling costs and reducing the expenses across the company, so to minimize the negative impact from the pandemic. And yes – and we are confident that we will be able to deliver the continued margin expansion after the pandemic is over. So in fiscal year ‘21, we still expect the margin expansion. And as well, we don’t want to change our near long-term margin guidance of 17%. This is non-GAAP OP margin in the near long-term. Okay, thank you Sheng Zhong.
Your next question comes from the line of John Choi from Daiwa. Please ask your question.
Hi Sisi. Hi, Stephen. Thanks for taking my question. My question is more about the – after the pandemic, what have you guys really learned? As you said, 95% of the students want to go back to offline. After the pandemic, do you think you’ll be able to expand for spending for students? And in terms of – based on the experience or the user feedback, what are the areas that EDU has to further spend? That’s my question. Thank you.
Besides the number one brand name – education brand name in China, this is New Oriental. And we think three to four years ago, we spent a lot money and time on the content development, on the product itself. So it makes us move the – all the students from offline to online one day just after the – during the Chinese New Year holiday, when the pandemic came. So going forward, I think we’ll build the barrier entry higher, okay and to make us to provide better and better quality products and also to help our teachers to improve their teaching quality. And so I think the pandemic – anyway it’s stopping. So it is a great opportunity for New Oriental because we can take more market share from the small players going forward and yes. And in the next two, I think during fiscal year ‘21 and maybe the year after, we will use more and more OMO model, okay? So let’s assume going forward next year if your child take the course of New Oriental, so maybe 80% of his class will be happen offline, 20% will be happen online, okay. I think the kids love it and parents love it. Is it clear?
Just a quick follow-up on that, if you do more OMO, how would that impact our margins? Would that be more in the long run? Thank you.
OMO – I think drastically, the OMO model, the margins should be higher than the pure offline business because we can save some cost in the rental and we can – yes, this is because, as I said, we will open 25% expansion plan. But after the pandemic, I think the 20%, 25% will bring us more and more student enrollment. And we can provide the online/offline – the online OMO courses to them. So yes, we can see some classroom rentals. And I think it will help us to drive the student retention rates up, because I think the OMO model is better than the traditional offline course. So the people love it. Okay. Is it clear?
[Operator Instructions] Your next question comes from the line of Alex Xie from Credit Suisse. Please ask your question.
This is the last one.
Hi, management. Thank you for taking. Yes, yes thank you for taking my questions. So my first question is can you elaborate more about our VIP business? How much is the VIP contribution in U-Can and POP Kids? And secondly, would you please show a bit more about our full year margin guidance? So you mentioned that FY ‘20 margin should be flat to FY ‘19, if I’m correct. So what’s the implication for fourth quarter margin? Thank you.
Yes. I think the VIP business, there is a few of the one-on-one business within the POP Kids. So within the U-Can business, with the – one-on-one business is 25% to 30% of total revenue of U-Can. And margin, yes, I think our margin in Q4 will be dropped because of the pandemic, as I said, is onetime. And yes, I think the worst-case of the whole year margin or the non-GAAP operating margin will be flattish year-over-year. But we’ve got the VAT exemption. This is a benefit from the government new policies. So we reported the VAT exemption in the other income and also we recorded the MI, the NCI, non-controlling interest in the – below the operating level. So I think the net – non-GAAP net margin of the whole year will be still extended in fiscal year ‘20. But anyway, it’s onetime impact from pandemic. This is the margin impact. So going forward, fiscal year ‘21, I believe the margin will be expanded again. So it will go back to normal. Thank you, Alex.
Thank you.
We are now approaching the end of the conference call. I will now turn the call over to New Oriental CFO, Stephen Yang, for his closing remarks.
Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relationship representatives. Thank you.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may all disconnect.