New Oriental Education & Technology Group, Inc.

Good evening and thank you for standing by for the New Orientals FY 2020 second quarter and interim results earnings conference call. At this time, all participants are in a 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 meeting over to your host for today's conference, Ms. Cici Zhao.

Thank you. Hello, everyone, and welcome to New Oriental's second fiscal quarter 2020 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, 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 Security 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 findings with the SEC. New Rental 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 Rental's Investor Relations website at investor.newrental.org. I'll now turn the call over to Mr. Yang. Stephen, please go ahead.

Thank you, Cici. Hello, everyone, and thank you for joining us on the call. We are very pleased to report a set of solid financial results in the second fiscal quarter of this year, delivering both accelerated top-line growth and continued operating margin expansion. Total net revenue growth was $785.2 million, representing a growth of 31.5% or 34.8% if measured in RMB. exceeding the high end of our expected range. Net revenues from educational programs and services for the second quarter were $723.3 million, representing a 33.0% increase year-over-year. The growth was mainly driven by increases in student enrollment in K-12 after-school tutoring courses, which continued its strong momentum and achieved year-over-year revenue growth of approximately 46% in dollar terms or 49% if computed in RMB. We continue to be guided by our optimized market strategy in this quarter and carry out our capacity expansion in cities where we see potential for rapid growth and strong profitability. During this quarter, we added another 41 learning centers in existing cities opened a new training school in the city of Huizhou and a new teacher model school in the city of Chengde. By the end of this quarter, the total square meters of classroom area increased by approximately 25% year-over-year and 6% quarter-over-quarter. For the student enrollment, economics, subjects, tutoring, and test prep courses in the second fiscal quarter of 2020 increased by 63.3% year-over-year to approximately 3,789,200. Please note that the higher than normal increase in student enrollments is primarily due to the division of the autumn semester into two parts, meaning that the student enrollments are recorded separately and fall into separate quarters. At the same time, We continued our efforts in upgrading our online merger offline standardized classroom teaching system while the interactive courseware and podcast program was rolled out to more cities. We are very encouraged to have received positive feedback from our customers and see sustained improvement in customer retention rate. We also continue to make strategic investments into our due teacher model classes, as well as new initiatives in K-12 tutoring, our peer online education platform, CoolLearn.com, to leverage our advanced teaching resources in local cities and those in remote areas. Following last quarter's strong bottom line performance, we once again achieved year-over-year operating margin extension in this quarter. During this quarter, we reported non-GAAP operating income of $36.5 million compared to a loss of $14.9 million in the same period of last year. Non-GAAP operating margin rose by 720 basis points to 4.7% from negative 2.5% a year ago. The continued margin expansion is mainly driven by better leverage in classroom rental and related operating expenses, just as we consistently improve the utilization of facilities. In addition, supported by a standardized, modularized, and systemized operating process, we achieved an outstanding improvement in operational efficiency within each key business unit. We're confident that we will be able to deliver continued margin expansion and generate sustainable long-term value to our customers and shareholders. Per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 10% year-over-year. We'd like to note that the lower the normal blended ASP is primarily due to the change in the tuition fee collection schedule. for K-12 after-school tuition courses. As explained above, the number of students we recruited and the amount of fee collected during the quarter reflected the second half of the autumn semester, winter semester, and the first half of the spring semester. Therefore, our blended ASP for the second quarter of 2020 appears to be lower. Already blended ASP, which is gap revenue divided by total teaching hours, increased by approximately 6% year-over-year in RMB terms. To provide a breakdown of the hourly blended ASP, please note that UCAN program increased by 7%, POPCASE increased by 11%, and OVT Test Track program increased by 7% all year-over-year in RMB terms. Now, let's move on to the second quarter performance across our individual business lines. As mentioned earlier, Our key revenue driver, K-12 old-subjects after-school children's business, achieved year-over-year revenue growth of 46% in dollar terms or 49% in R&B terms. Breaking it down, the UCM Middle School high school old-subjects after-school children's business recorded a revenue increase of 43% in dollar terms or 46% in R&B terms for the quarter. Our student enrollment grew approximately 55% year-over-year for the quarter. Our podcast program delivered outstanding results with revenue up by about 51% in dollar terms or 55% in RMB terms for the quarter. Enrollment in the program went up about 87% for the quarter. The oversea test graph recorded the revenue increase of 3% in dollar terms or 5% in RMB terms for the quarter. The consulting business recorded revenue growth of about 1% in dollar terms or 4% in RMB terms year-over-year for the quarter. Finally, we actually personalized the cloud assistance, recorded revenue growth of about 37% year-over-year in dollar terms or 40% in RMB terms year-over-year for the quarter. Next, I will provide some updates on the progress we are making with our optimized market strategy. Beginning with our offline business this quarter, as mentioned earlier, we added a net of 41 learning centers in 16 cities, opened a new training school in the city of Huizhou, and a new teacher model school in the city of Chengde. Altogether, this increased the total square meters of classroom area by approximately 25% year-over-year. and 6% quarter-over-quarter by the end of this quarter. By the end of Q2 2020, the two-teacher class model has been introduced into the PubKids program in 48 existing cities, for UCAN program in 30 existing cities, and for both PubKids and UCAN K-12 business in seven new cities. The initiative supported increased market penetration in those markets we have tapped into. We also saw improved customer retention rate and scalability of this new model. With these proven results, we will continue this strategy in the rest of the year. On the digital technologies front, we invested $44 million in the quarter to improve and maintain our online merged offline called OMO, standardized classroom teaching system. Most of the investments were recorded under GNA expenses. Furthermore, we also made stable progress in the Pure Online Cooler.com business line and other supplementary online education products, which is experiencing growing market demands. More resources are investing to executing new initiatives in Pure Online K-12 after-school children's business in fiscal year 2020. The investments include constant development, teaching, reporting, and training, sales marketing, R&D, and other necessary costs and expenses to drive the growth for new pure online programs. With these programs, we're able to reach more students in low-tier cities in an interactive and scalable manner. We believe this will help the CoolLearn.com to gain new market share in the online education space and drive top-line growth. Now, let me walk you through the other key financial details for the second quarter. Offering cost expenses for the quarter were $759.9 million, representing a 21.1% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which excludes share-based compensation expenses, were $748.7 million, representing a 22.0% increase year-over-year. Cost of revenue increased by 8%. 19.6% year-over-year to $359 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 marketing expenses increased by 17.7% year-over-year to $107.8 million, GNA expenses for the quarter increased by 24.4% year-over-year to $293.1 million. Non-GAAP GNA expenses, which exclude share-based compensation expenses, were $282.1 million, representing a 27.1% increase year-over-year. Total share-based compensation expenses which were allocated to relate operating cost and expenses decreased by 18.1% to $11.2 million in the second fiscal quarter of 2020. Operating income was $25.3 million, representing a 188.6% increase year-over-year. Non-gap income from operations for the quarter was $36.5 million, representing a 345.6% increase every year. Operating margin for the quarter was 3.2%, compared to a negative 4.8% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 4.7%, compared to a negative 2.5% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $53.4 million, representing a 306.9% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental was $0.34 and $0.34 respectively. Non-gas net income attributable to New Oriental for the quarter was $57 million, representing a 147.8% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental was $0.36 and $0.36, respectively. Next, operating cash flow for the second quarter of 2020 was approximately $291.8 million, Capital expenditures for the quarter were $52.4 million, which were primarily attributable to the opening of 78 facilities, annual learning centers, and renovations at the existing learning centers. Turning to the balance sheet, as of the November 30th, 2019, New York rental had cash and cash equivalent of $1,047.6 million. as compared to $1,414.2 million as of May 31, 2019. In addition, the company had $348.3 million in term deposits and $221.5 million in short-term investments. New Orient's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered at the end of the second quarter of fiscal year 2020 was $1,570.4 million, an increase of 25.6% as compared to $1,150.3 million at the end of the second quarter of fiscal year 2019. Before moving on to our outlook and guidance, For the third quarter, I would like to provide some updates on the Cooler. Cooler Technology Holdings Limited, a subsidiary of New Oriental, which provides online extracurricular education service in China, also announced its interim results for fiscal year 2020 earlier today. I'd like to emphasize that Cooler is a very important platform for New Oriental. and were optimistic about the opportunities in the online education market and confident in our investment into the platform. During the period, CoolLearn has undergone a process of restructuring its college education business line, which had some negative impact on CoolLearn's near-term revenue growth. CoolLearn also continued to invest more resources in executing new initiatives in the areas of content development, teachers recruitment and training, sales marketing, research and development, and other necessary cost and expenses to drive the growth of new online programs. For the first six months in November 30, 2019, Cooler recorded an 18.8% year-over-year increase in revenue to RMB 567.6 million, or $81 million U.S. dollars. Gross profits was RMB $317.1 million or $45.2 million. Losses of the period was RMB $87.5 million. I'm sorry. Loss of the period was RMB $87.5 million or $12.5 million compared to a profit of RMB $36.2 million in the same period of prior fiscal year. It's encouraging that one of its K-12 business new initiatives, location-based live interactive after-school children courses, were Dongfang Youbo, DFUD, have been rolled out to 128 cities in China and recorded the enrollment growth of 186.2% year-over-year. For more details, please refer to Cooler's financial results and outstanding info. Looking ahead into the next quarter and the rest of the fiscal year 2020, we'll continue to be guided by our optimized market strategy and further ride upon the success and momentum we have viewed. We're confident about capturing a wider range of the market opportunity moving forward to provide more detail on our areas of focus for the rest of the year. First, we will continue to expand our offline business We aim to add around 20% to 25% capacity, including new learning centers and exciting, expanding classroom area of some existing learning centers for kids in our business in existing cities. In addition, we'll continue to roll out our due teacher model schools to a number of new low-tier cities in certain provinces for the whole year. Second, we'll continue to leverage our investments into digital technologies and introduce our online-merge-offline system to more offline language training and test offerings, especially for our K-12 children and overseas test drive key businesses. We will continue to make investments and we believe that total spending in absolute dollar terms in fiscal year 2020 will increase compared to with the prior fiscal year. Furthermore, We will continue to invest in and execute new initiatives, including product development, teachers recruiting training, R&D, as well as sales marketing expenses in pure online K-pop after-school children's business, ourcooler.com. Third, our top priority will remain as the focus on optimizing utilization of facilities and controlling cost and expenses across the company to drive the continued margin expansion and increased operational efficiency. The new facilities built in the last two years are being ramped up more efficiently than before. We expect our non-GAAP operating margin of the offline language training and test prep doses to continue to expand in the second half of fiscal year 2020. This improvement is expected to cover the margin pressure resulting from our online investments in the coolrun.com. On the whole, we expect our overall non-GAAP operating margin to continue to improve year-over-year in fiscal year 2020 compared to the year-over-year decline last two fiscal years. Fourth, as of today, we have decided to move two days of classes in our Wuhan new rental school from before the Chinese New Year to after the Chinese New Year in view of the disease cases. Classes will be taught via our online lab forecasting technology if the learning center's operations remain suspended after the Chinese New Year. Please note that classes in the cities except Wuhan have not been adjusted or suspended. The health and safety of our students is our top priority, and we will continue to closely monitor the situation and cooperate with the relevant authorities. Also note, we have taken the impact from the conditions in Wuhan into consideration in our third quarter's guidance. The impact is immaterial based on our current estimation. Finally, the recent RMB depreciation against the U.S. dollar might cause impacts on our earnings in dollar terms for the third quarter of 2020. Finally, I would like to emphasize that we have great confidence in fundamentals of our business, which we believe will continue to remain strong. As we continue to execute our optimized market strategy, We are certain that New Oriental will continue to capture the sustainable growth opportunities in the market and deliver long-term value for our shareholders. Looking at the near term and our expectations for the next quarter, we expect total net revenues in the third quarter of fiscal year 2020 to be in the range of $983 million. to $1,006.4 million, representing yield-year growth in the range of 23% to 26%. If not taking into consideration the impact of the potential exchange rate between RMB and the U.S. dollars, it protects the revenue growth rate in our functional RMB. In our functional currency, RMB is expected to be in the range of 26% to 29% for the third quarter of fiscal year 2020. The exchange rate used to calculate expected revenue for the third quarter for fiscal year 2020 is 6.95. The historical exchange rate used to calculate revenues for the third quarter of fiscal year 2019 was 6.81. I must mention that These expectations reflect New Orleans' current and preliminary view, which is subject to change. At this point, I will take your questions. Officer, please open the call for this. Thank you.

The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, Please request join the question queue again after your first question has been addressed. If you wish to ask a question, press star one on your telephone now and wait for your name to be announced. If you wish to cancel your request, please press the bounce or hash key. Your first question comes from the line of Mark Lee from Citi. Please ask your question.

Hi, management. Congratulations on the very strong margin performance for this quarter. We think it beat the guidance by pretty nicely. May I know what are the reasoning, major reasons for the non-GAAP OP margin beat for this quarter? And also, I would like to know maybe our revenue guidance breakdown across different segments. Thank you. Okay.

Okay, Mark. You know, yeah, we beat the margin guidance a lot. You know, our non-GAAP operating margin rose by 720 basis points in this quarter. I think it's because of the following reasons. Number one is, you know, I think the continuing margin expansion is mainly driven by the better utilization of the facilities. You know, Typically, you know, in the – typically our top-line growth, you know, is over 30% year-over-year in RMB terms. But, you know, the expansion in the last 12 months is just 25%. And also number two is, you know, we build a standardized and modularized and systemized operating process. So you see the results. We achieved outstanding improvements in the operational efficiencies, and we got a lot of leverage on the selling marketing and the G&A expenses. And finally, you know, we're seeing the revenue acceleration. Typically, you know, we're taking market share from the small player in the market. So the revenue is very good. And I think those three reasons guide us to the better result of the margin expansion. But, yeah, as I mentioned in the prepared remarks, you know, in the rest of the year, even in the Q3 and Q2 in fiscal year 20, I think we still get more leverage going forward. So we believe we will – have the margin expansion in the rest of this fiscal year. And even for fiscal year 21, I think our margin will get the expansion as of this year. Okay. So, and the revenue breakdown, yeah, in the Q3 revenue guidance, I think the K-12 revenue the business will grow by 40% in R&B terms. Okay, what I'm saying is all in R&B terms. Year-over-year growth, 40%. And overseas tax draft, I think it's a low single-digit growth. And the domestic tax draft, it will be down by, let's say, the 3% to 4%. And the overseas consulting business, the growth will be over 20%. So this is a breakdown of the Q3 guidance. Okay.

Thank you very much, Steven.

Thank you. Okay. Thanks, Mark.

Your next question comes from the line of Yuzhong Gao. Please ask your question.

Hey, Steven. This is Congress on the very strong result. So we noticed that you seem to have revised up your capacity expansion target from 20% to 20% to 25%. So how should we think about the margin expense scale? in the second half of fiscal year 20. Thanks.

Okay. Yeah, we, this quarter, you know, the quarter-over-quarter expansion was 6%, combined with a 3% in Q1, so we got 9% in the first half of this fiscal year. And typically, you know, in terms of the seasonality, we opened more learning centers in Q1 in the second half of the year. So it's more back loaded. And so I think we believe the whole year expansion plan will be somewhere around 20% to 25%. Actually, it's close to 25%. But, you know, the top line growth will be somewhere around 30% or I think it's a top to get the over 30% top-line growth in R&D terms. So in the rest of the year, as I said, I think we do have more leverage on the GP level and the SG&A level. But typically, we don't give the detailed guidance of the margin extension in the next quarter. But I believe we can get the margin extension in the rest of the year and the year after.

Thank you, very helpful. Thank you.

Your next question comes from the line of , please ask your question.

Hi, Steven . Thanks for taking my question. The question is related to your, you know, regional expansion. So now we have 1,300, more than 1,300 learning centers. for the new learning centers you are planning to open, where are those centers going to be? In what kind of a region? And to support the additional expansion, 20 to 25 percent, and how do you prepare your teachers for, you know, the team of teachers? So that's the question related to expansion. Thank you.

Yeah, we have 1,300 learning centers in total, and we plan to open, let's say, the 20 to 25% new capacity one year. And so, you know, most of the new learning centers we set up going forward will be happened in the existing cities. You know, internally, we only allow the good-performing schools to open more learning centers in their cities. But, you know, we have another business model called Dongfang Youbo. So, you know, it belongs to the cooler. And we will open more of the new business in low-tier cities. Okay. There's two ways. Okay. So traditional offline business of more cities, schools or learning centers in cities. Okay. And as a teacher's resource, you know, we believe we paid it back in the market to our teachers. And also, since last year, we built up the online teacher's training system. So that means we have the more ability to generate or produce more qualified teachers than before. So we believe we have the more qualified teachers to support the new opening of the new learning centers going forward. Thanks, Kim.

Thank you. Very helpful.

Thank you, Kim.

Your next question comes from the line of Alex Liu of China Renaissance. Please ask your question.

Hi. Thanks, Stephen, for this opportunity. I just want to follow up first on the 10 questions. Could you share more color on, for example, how fast is the capacity growth in top cities, for example, Beijing right now? And to follow up questions, I think the overseas tax distance is growing, if I remember correctly, is low single-digit growth this quarter. And may I know, you know, what's the reason behind this seemingly a little bit unexciting growth in the past few quarters. Thank you.

Yeah, actually, thanks, Alex. Actually, you know, we opened the learning center almost everywhere. If that city got a better result in the last 12 months. So, you know, we opened the learning center in the top tier, tier one or tier two cities, and we also opened the learning centers in like the tier three, tier four cities. So I think the only one indicator for us to decide whether or not to open the learning centers is the performance of that school throughout the year. But, you know, I think even for the big cities like Beijing and Shanghai and Wuhan and Guangzhou, I think there's a lot of room to open more offline learning centers. So, yeah. And the overseas test lab, yeah, this quarter, you know, the numbers is no good. Only the 5%. In R&B terms, you'll be a growth for overseas Tesla business. I think the main reason is because the United States, China, the two countries' relationship changed. So I think the, you know, our non-United States related business like the house or the other subjects, you know, the growth is very good. that the United States related businesses keep flattish this quarter. And we, even in the Q3, I think the growth will be flattish again. So I think this is the main reason. Okay.

Okay. Just, sorry, one more follow-up. Just on the growth margin, there seems to be notable challenge this quarter. May I know what was the driver behind this notable improvement on the gross margin? Thank you.

Firstly, you know, the revenue growth beat our guidance, okay? As I said, we're taking market share from the small players, and also there are a lot of schools providing very good numbers of this quarter on top-line growth. And secondly, you know, if you compare the top-line growth with the expansion, expansion, you know we have the better leverage on the rental side. And yeah, I think those are the two key reasons to expand the GP margin expansion.

Okay, thank you.

Okay, thank you, Alex.

Your next question comes from the line of Lucy Yu of Bank of America. Please ask your question.

Hi, Steven. I got one question on class scheduling. So actually this year, Chinese New Year, is earlier than last year. So is it fair to say that we started our spring semester a little bit earlier than last year? So theoretically, in February, we are seeing more positive benefit from this kind of calendar shift. Is that true? If so, can you give us a quantified impact on the class scheduling? Thank you.

I think, yeah, this year, the Chinese New Year is a little earlier, but I think the impact from the class schedule is the impact is very small, very minimal. Okay. So, but, you know, I must mention that You know, typically, you know, last year, the Q2, we started to do some, like, facility movement and class scheduling changes in last year Q2. So, which lead to a postponement of some K12 classes from Q2 to Q3 last year. So, that means, you know, last year, you know, this year, we have an easier comparison in Q2, but a little bit harder comparison in Q3. But anyway, it's a seasonal, whereas timing difference issue is not a big issue.

Okay, thank you. And the second question is that in the first half, you have already expanded your non-GAAP property margin by close to 5 percentage points. This is much higher than your previous expectation of 1.5% to like 2% for the full year. So is it fair to say the risk is on the upside to your full year guidance in terms of margin?

Thank you. Yes, I think, you know, I don't guide the second half of year margin, the guidance, but, you know, we do believe we will have the margin extension in Q3 and Q4. Yeah, we'll see a bit. I think for the whole year, the margin will be better than we expected several months ago.

Okay. Great. Thank you.

Okay. Thank you, Lucy.

Once again, in order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, Please request to join the question queue again after your first question has been addressed. Again, to ask a question, it's star 1 on your telephone. Your next question comes from the line of John Choi from Daiwa. Please ask your question.

Hey, Steve and Cece. Thanks for taking my question. I have a question on your online. I know Kula... basically on the cost that they'll step up more, you know, open you up in the lower tier cities. Can you kind of give a sense, will, you know, the EDU and Cooler in general will kind of step up the investment in online and as a result, we'll see more on the back end loaded for their physical year in terms of marketing expenses and user acquisition costs? And just quickly, after the, you know, the regulation which has been in place for more than about a year, on the offline schools, are you seeing more visibility or better visibility compared, given that the smaller players are being phased out, and as a result, you're seeing higher retention rate and better capacity growth in selective regions? Thank you.

Yeah, that's a little bit cooler investment. I'm cooler. You know, yeah, this year we started to invest On the CoolLearn.com, it includes the content development for teachers, training, or R&D, and some marketing expenses, things this fiscal year. In the first half of the year, the margin drag from the CoolLearn to EDU is roughly 100 bps. This is the margin impact from the cooler for EDU. And in the second half of the year, we still have some negative impact of the margins from the cooler. But we believe the margin expansion of the core business, or our school business, offline business, will cover the margin pressure from cooler. So we believe On the whole, our margin will be expanded in the rest of the year, even though we spend a lot on the cooler. And, yeah, number two questions about regulation. Last year, there were several new regulations. But as I said in the last two earnings calls, you know, we almost meet all the requirements by the new regulations in almost all the cities. and we have seen some small players disappear from the market, and we have seen some students during our classes, you know, who are the students from the small player. So I think our target, even going forward, is to provide the best service to the Chinese students, and we believe we can take more market share from the old players in the market. Thank you.

Your next question comes from the line of Binnie Wong of HSBC. Please ask your question.

Hi. Good evening, Stephen and Cece. Thank you for taking my question. So the question here is that if you look at training like last year, right, we see a wave of a lot of online education companies, smaller, middle-sized ones, compete, right, especially if you see the youth acquisition cost, right, has been rising up a lot. So if you look into 2020, how do you see, I mean calendar 2020, how do you see that will change? Do you see that how our marketing strategy will be different from our players? And also if you look at the, I guess, the deceleration of growth in Kulin, do you think that will continue or do there will be some drivers to re-accelerate the online business growth?

Thank you. Okay, you know, I think, firstly, you know, cooler has been in transition mode. It lasts two to three quarters. As you know, we changed the team members last year. And we prefer to give the new management team member more time, okay? But, you know, education is a very special business. You know, we don't want them to do the business too fast by, like, spending the crazy dollars. on the marketing activities. So even in the last year, you know, we didn't attempt, like, the burning of money to acquire the students. And going forward, I think we will allow the cooler to spend a little bit more on the marketing expenses. But anyway, it's not a huge number, okay? We prefer to make the more or huge investments on the R&D and like the teacher's training or the product itself. This is our strategy.

Thank you. Thank you. Very helpful. Thank you. Thank you.

Okay, Benny. Thank you.

Your next question comes from the line of Alex Sheehan of Credit Suisse. Please ask your question.

Hi, management. Congratulations on very strong results. So I would like to ask about Our magnitude of utilization rate improvement, I think in the last quarter's earnings call we mentioned it was 21% and 2% year-over-year increase.

Thank you. This year, I think the utilization rates for this year is somewhere around 21%, which means we got the 20 bits of the utilization rates. So that's why you see the margin expansion. Okay. And so going forward, you know, as I said, we plan to open 20, 25% new learning centers, And it bring us like 30% top line growth in R&D terms year-over-year. So I think you will see the higher utilization rate going forward in the rest of this fiscal year and the year after.

Got it. Thank you. Thank you.

Your next question comes from the line of Shang Dong of Morgan Stanley. Please ask your question.

Hi, Stephen. I want to ask a question about our due teacher model, because you are still adding more due teachers in the cities. So can you share some operating data about the margin of due teacher model and what the current class, what the average class a teacher can teach in the due teacher model? And at the same time, I noticed that you still invest a lot in your digital technology. I'm wondering whether this is partly because of this due teacher model. And if possible, can you share more color on this spending going forward? Thank you.

Okay, yeah, due teacher model. Yeah, you know, we changed our due teacher model strategy last year. So, you know, we focused more due teacher model in the Hebei and Henan province. So now, you know, we have the seven low-tier cities for both top case and UCAN programs by the due teacher model. And, you know, now, you know, the revenue contribution from the two-piece model is very small. So, I think, you know, the growth is very high, but, you know, revenue contribution is very small. And now, you know, I think it's too early. to say the margin of the Jiu-Jitsu model because it's in the early stage. But it's relatively, as I said, I think the Jiu-Jitsu model margin should be higher than the offline business, okay? And the, yeah, this quarter, the OMO investments, yeah, this quarter we invested $44 million on the, like the OMO ecosystem. I think, you know, this is on track, okay? Because, you know, we started to invest on the OMO things three, four years ago. And we started to bear fruit things last year. And I think this is, you know, this year's very good result. I think this is the – that means we bear fruit from the investments we made several years ago. So the whole year, I think we plan to spend somewhere around $150 to $160 million for the whole year. It's a little bit higher than we expected several months ago. But I think even though we spend a little bit more, but it should be covered by the offline school margin expansion. So that would be okay. We'll see the overall margin expansion, even though we spend a little bit more. Okay?

Thank you very much. Yeah, we are happy to see you spending more on the technology improvement. So can you give some color on... Go ahead. Yeah, can you give some color on the spending areas of our technology?

To our union, we hire more IT people and the content development people in our office. to provide more better products for offline schools and the duty-to-model schools. And also, we hire some new people who work for AI departments. And, yeah, so I think most of the investments we spend only happens in the head office. So, but you know, we do believe it will bring us the better student retention rates going forward. And we do believe this money, we spend the money today, will bring us the better quality product in the future.

Thank you very much.

Thank you.

Your next question comes from the line of Hugo Chen of Maclary. Please ask your question.

Hi, thank you for taking that question. I wonder if you could give us a breakdown of enrollment growth by business in this quarter. Thank you.

Enrollment breakdown. Do we disclose it, the enrollment breakdown?

You can send email to me, and I'll send you the details, okay, after the call.

Yeah, because it's a long question. Okay. Thank you. Thank you.

Your next question comes from the line of Felix Yu of UBS. Please ask your question.

Hello. Good evening. Congratulations, Steven, for the very strong quarter. So two quick questions from me. One is that you mentioned the Rump Hub is getting faster than previously. So could you share us the latest timeline to Rump Hub AMU center? And the second one is a follow-up to the previous question on O&O investment. So I understand a lot of the costs are in staff salary. So going forward, if we look at the second half and next year, do we plan to further increase the headcount, or is it likely to stay at this level? Thank you.

Yeah, you know, historically, let's say two to three years ago, Typically, we need 12 months to get a break-even point for the new learning center. But now, you know, it's only spent five to seven months to get a break-even point. So that means we ramp up the new learning centers faster than before. And I think this is one of the reasons that we decide to open more learning centers, okay, in every year, okay? And your second question is about the O&O investments. Yeah, I think we will hire more people, more qualified, more talented people to work for the IT departments and the concept development team, also for the AI departments. Because, you know, firstly, you know, I think it's a good investment. We spend more money today that, you know, we get a better future. And But anyway, I think total spending will be controlled by the management team. We don't want to waste the money. So as I said, even though we spend a little bit more on the OMO investments, but we do believe we'll have the margin expansion going forward, even for the second half of the year and the year after.

Okay, great. Thank you. I'm glad to see we have the budget in the longer-term growth. Congratulations again on the strong quarter. Thank you.

Okay. Thank you. Thank you, Felix.

Your next question comes from the line of Christine Cho of Goldman Sachs. Please ask your question.

Thanks, Stephen and Sisu. Just a quick question on the revenue guidance. You mentioned that you consider the Wuhan situation in terms of coming up with the third quarter guidance. Can you give us a little bit more detail here? And also, if this situation prolongs, what are some of the alternatives you can consider to kind of mitigate the impact from the situation? Thank you.

Yeah, you know, our Wuhan school actually decided today to move the two-day courses before Chinese New Year to sometime after the Chinese New Year because of the new disease. But also we have the plan B. Let's say if after the Chinese New Year we cannot run the business by offline, we'll make it up by the online courses, okay? Actually, we are ready. Yeah, we're ready. But so far, we have not made the decision of the class of just were suspended in the other cities except for Wuhan. So Wuhan is the only one. And yeah, we have taken some impact from the decision in Wuhan, but you know the amount is not material. Wuhan's revenue contribution For New Rancho, it's 4%. Don't forget, 45 days has passed, and also we have the makeup plan, Plan B, to make it up. So I think the impact will be immaterial so far by the current estimation.

Thank you.

Thank you.

Thank you. Your next question comes from the line of Youngrin Kim of CLSA. Please ask your question.

Hi, management. Congrats on the good quarter. I have two questions. The first is, how much of revenue growth is actually coming from organic growth versus stealing market share from other small players? That's my first question. My second question is, I know in the past you have provided mid- to long-term margin guidance of 17% to 19%. Do you still stick by this margin guidance, or do you see room for increase or things like that? Thank you.

Okay, yeah, the organic growth. You know, I think typically in the first 12 months after the new learning centers opening, it will bring us, let's say, the – For example, you know, we opened 20% new learning centers. But in the first year one, typically it will bring us 5% to 10% new revenues. So... And so I think all the others are the organic growth. And the market share, we don't have the numbers of how much market share we get from the small players. We're... Okay, so we just do our business to get a 30% top line growth, that's it. Okay, Susie, you have the numbers?

No, it's hard to quantify, but we keep taking market share from small players every day, almost every day. And the market growth is like 10%, 15%, but our K-12 business are growing over 40%. So definitely, the majority of the growth is from taking market share from other small players. in each city.

Yeah. And the mid-long-term margin guidance, we don't want to change the mid-long-term actually it's mid-term margin guidance. You know, we keep it at 17%. But this year, you know, the market expansion is better than we expected. And we are more optimistic on the overall margin expansion in the rest of the year and the year after. All right. Thank you very much.

Thank you.

Your next question comes from the line of Joy Wei of 86 and Research. Please ask your question.

Thank you for taking my question. So my question is during the quarter we saw that you can propagate growth accelerated. What's driving that? Do you see more opportunities in terms of perspectives like class offering and also product format? Thank you.

I think there are several reasons. The number one is, you know, if you remember clearly in the last quarter's earnings call, you know, the summer promotion retention rate is 5% higher of this year than last year. So this is the number one reason. Number two is we are seeing the higher student retention rate for both UCAN and PopCase programs. Actually, the UCAN business the retention rate is close to 80%, and the podcast retention rate is close to 90%. So it's higher than those numbers of last year. And third, we don't spend a lot on marketing expenses. The selling market expenses in this quarter is just increased by – I'm right, that's 17%. I think typically we rely on word of mouth to acquire the new student enrollment. And that means we're providing better the products to the students than before. So it bring us the good results, better results than we expected.

Is this clear?

Yes, thank you.

Okay, thank you.

We are now approaching the end of the conference call. I will now turn the call over to new Oriental CFO, Mr. Steven Yang, for those closing remarks.

Again, thank you for joining us today. If you have any other further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you. Thank you, guys.

ladies and gentlemen this concludes today's conference call thank you for participating you may now disconnect