New Oriental Education & Technology Group, Inc.

Good evening, and thank you for standing by for New Orientals FY 2020 Third Quarter Results 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 like to turn the meeting over to your host for today's conference, Ms. Cici 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 period were released earlier today and are available on the company's website as well as on NewsWare services. Today, you will hear from Stephen Yao, 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 assiduities. As such, our results may be materially different from the views expressed today. A number of potential risks and assiduities are outlined in our public filings 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 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, Cece. 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 these difficult times. Thank you. Let us all play our part 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 responsibility by donating 20 million RMB in cash to Hubei province and providing fully small-sized offline courses to the children of nearly 20,000 medical staff, 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 encouraging financial results in the third fiscal quarter of this year, delivering a top-line growth and continuing the operating margin extension. Despite COVID-19 pandemic causing massive impact to all those industries across the 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 first fiscal quarter were $845.7 million, representing a 16.3% increase year-over-year. The growth was mainly driven by K-12 after school courses, which achieved a year-over-year revenue growth of approximately 24% in dollar terms, or 27% if compared to the RMB. We continue to be guided by our optimized 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 two 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 enrollment in the Examinate Subjects Tutoring and Testcraft courses in the first fiscal quarter of 2020 increased by 2.3% year-over-year, 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 continue to 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 translated 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, our peer online education platform, CoolLearn.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 a non-gap operating income of $106. and $34.8 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 extension is mainly driven by the federal leverage in closing rental and related operating expenses, just as we consistently improve the utilization of the facilities before the outbreak of COVID-19. The next margin extension is also due to the VAT exemption approved by the government during the pandemic, and the net loss is cooler and subsidiary undertaken by the non-controlling interest of shareholders. We're confident that we will be able to deliver continued margin expansion after the pandemic is over and generate sustainable long-term value for our customers and shareholders. Per program blended ASP, which is cash revenue divided by total student enrollment, increased by about 2.7% year-over-year in dollar terms. As for hourly blended ASP, which is cash revenue divided by total teaching hours, increased by approximately 3% year-over-year in R&D terms. To provide the breakdown of the already planned ASP, please note that UCAN Middle School High School program increased by 4%, Top Kids increased by 6%, and Overseas High School High School program increased by 7% year-over-year in R&D terms. Comparing with our normal price increase of 5% to 8%, This quarter's hourly planning AFP increase was 2% to 3% lower than normal level, 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 assistance. At the same time, to show gratitude to the medical staff who traveled to Wuhan to offer help. They offered special complimentary 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 drivers, K-12, all subjects after school children's business, achieved year-over-year revenue growth of 24% in dollar terms or 27% in R&D terms. breaking it down. When you came into school, high school, all subjects, after school, children's business, recorded a revenue increase of approximately 23% in dollar terms, or 26% in R&D terms for the quarter. Student enrollment grew approximately 23% a year for the quarter. Our pop case program delivered outstanding results, with the revenue up by about 26% in dollar terms, or 29% in R&D terms for the quarter. 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 physical quarter because of the earlier timing of the Chinese New Year this year compared with last year. The overseas test lab business recorded the revenue decrease of 14% in dollar terms for 12% in RMB terms for the quarter. Consulting business recorded revenue growth of about 27% in dollar terms, worth 13% in R&D terms year-over-year for the quarter. Finally, VIP personalized process business recorded revenue growth of about 10% year-over-year in dollar terms, worth 13% in R&D terms year-over-year for the quarter. Next, I will provide some updates on progress we're making with our optimized market strategies. Beginning with our offline business this quarter, as mentioned earlier, we added a net of 110 learning centers in business cities, opened two new training schools. Altogether, this increased the total square meters of classroom error by approximately 30 percent year-over-year, 11 percent quarter-over-quarter, and 21 percent 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 two-teacher class model has been introduced into the practice program in 48, in season B. For UCAN program, in 28 existing cities, and for both top KFC and UCAN to develop business in seven 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 these proven results, 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 the demand of online education, the investment also supported the migration of our online classes to small-sized online offices of the offline class to small-sized online lab broadcasting classes during the pandemic. Apart from the OMO infrastructure, we have allocated a part of the resources for teacher training to ensure they are all well-equipped to be managing the online classes. As a result, the OMO ecosystem manages to cushion the most of the impact on our service and operation caused by the pandemic. Most of the investments were recorded in the GMA census. Furthermore, we also made stable progress in the Pure Online Cooler.com business line and other supplementary online education products, which is experiencing growth through market demand. More resources are invested into executing the new initiatives in online K-12 after-school children's business in the Cooler 2020. The investment includes content development, teachers recruiting training, self-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 both your cities in an interactive and scalable manner. We believe this will help Kulin.com to gain new market share in the online education space and grab top-line roles. In addition, during the COVID-19 pandemic, Cool Learn did a large-scale market promotion by offering three large-sized online live broadcasting classes to the public and attracted several times more traffic than normal times. To capture the new market opportunity, Cool Learn also added a meaningful amount of the customer representatives and marketing staff to support the new initiatives in K-12 children. have consequently raised our spending on the market front, but we believe these are necessary and understandable measures as we found ourselves in a usual pandemic situation. Now let me work through the other key financial details for the third quarter. Operating cost expenses for the quarter were $806.0 million, representing a 15.0% increase year-over-year. Non-GAAP operating cost 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 teacher's compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation. Center marketing census increased by 35.2% year-over-year to $118.2 million, primarily due to a significant increase of the promotion census and the number of the customer service representatives and marketing staff for the new initiative in K-12 tutoring on coolant.com. General administrative expenses for the quarter increased by 4.8 percent year-over-year to $289.1 million. Non-GAAP GMA expenses, which exclude share-based compensation expenses, were $273.3 million, representing a 5.9 percent increase year-over-year. Total share-based compensation expenses, which were allocated to relate operating costs and expenses decreased by 2.4 percent to $17.5 million in the third fiscal quarter of 2020. Operating income was $117.3 million, representing a 22.4 percent increase year-over-year. Non-GAAP income from operations for the quarter was $134.8 million, representing an 18.5 percent 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 rental for the quarter was $137.7 million, representing a 41.4 percent increase from the same period of prior fiscal year. Basic and value-added earnings per ADS attributed to the new rental were $0.87 and $0.86, respectively. Non-GAS net income attributed to the new rental for the quarter was $148.5 million, representing a 36.4% increase from the same period of prior fiscal year. Non-GAAP basic values of earnings per ADS, typically new rental, 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 attributed to the opening of 27 facilities and renovations at the existing learning centers. Turning to the balance sheet, as of February 29, 2020, New Rental had cash and cash equivalent of $1,057.1 million, as compared to $1,414.2 million as of May 31, 2019. In addition, the company had $269.2 million in term deposit and $2,241.0 million in short-term investments. The ORIMTO's preferred 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 quarter of 2020, was $1,375.0 million, an increase of 15.4% as compared to $1,191.8 million at the end of the fourth quarter of fiscal year 2019. Looking ahead to the fourth quarter of this fiscal year, despite the continued challenges from the COVID-19 pandemic, we're still optimistic towards the company's business and will continue to focus on the following key areas. We will continue to expand our offline business. We still aim to add around 20% to 25% capacity, including new learning centers and extending cross-minorities of some existing learning centers for case law business in existing cities. We believe our capacity extension will support us to hold more student-owned facilities in the coming summer. which will very likely be shortened by one or two weeks due to the delayed start of the second semester of all public schools in China to combat the academics. More importantly, it will prepare us to further take market share from our 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. The expatriate industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we're a major player with strong financial capacity and fresh offline facilities allow us to further strengthen our market-leading position and penetration. In addition, we'll continue to roll out our new teacher model schools to a number of new local cities in certain provinces for the whole year. Second, we'll continue to leverage our investment into digital technologies and reintroduce our OMO systems to more offline language training and test offerings, especially for our K-12 business and over-the-top web business. We will broaden the usage of the online tools and content in our OMO system for all business lines throughout the whole network. We will continue to invest in developing the best teaching content and courseware to cater to online-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 lessons 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 new initiatives, including product with constant development, teachers recruiting training, R&D, as well as marketing in pure online K-12 after-school business on our cool1.com platform. As mentioned earlier, during the COVID-19 pandemic, CoolLearn encountered several times more traffic than normal times by offering free online live broadcasting classes to the public during the winter and spring seasons. CoolLearn 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 activity. Third, our top priority will remain as the focus on controlling costs and reducing the expenditures across the company to minimize the negative impact from COVID-19 pandemic on our bottom line. Although we expect the margin to climb year-over-year in the fourth quarter of fiscal year 2020, we believe we can still maintain non-gap 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-to-year decline in the last two fiscal years. Finally, the recent R&D depreciation against the U.S. dollars might cause impact on earnings in dollar terms for the fourth quarter fiscal year 2020. Finally, I would like to emphasize we have great confidence in the fundamentals of our business. Although we are facing the next impact from the pandemic 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 rental leading brand, superior education products and systems, and best future 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 the total revenue to be in the range of $774 million to $806.2 million. We present a year-over-year decline in the range of 8% to 4%. If not taken into consideration, the impact, the potential change in exchange rates between RMB and U.S. dollars The projected decline of revenue is expected to be in the range of 4% to 0% for the first 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 children business, is expected to grow around 10% to 11%. 18% to 19% excluding the IT 101 business. Overseas test lab program is expected to decline around 45%, and overseas study consulting business is expected to grow 12% to 13% all year-on-year in R&D terms. The expected significant decline of the overseas test lab business and slowdown of the overseas 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 restrictions on travel. We expect the negative impact of overseas 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're optimistic over the trend of the K-12 after-school children's business. I've tracked from the public news that 30 provincial-level governments, that's 88% of the total, have announced a public school resumption plan. We're confident that demand for the after-school children's business will pick up after the reception of the schools, and the short-term impact from the school hour changes and short-term summer holidays will be manageable. The estimated exchange rate used to calculate expected revenue for the fourth quarter of fiscal year 2020 is 7.07%. The historical exchange rate used to calculate revenue for the fourth quarter of the fiscal year 2019 was 6.76. I must mention that this expectation reflects New Rental's current 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 these. Thank you.

The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. If you wish to ask a question, please press star 1 on your cell phone and wait for a name to be announced. If you wish to cancel your request, please press the pattern or hash key. Your first question comes from the line of Mark Lee from Citigroup. Please ask your question.

Hi. 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's pressure is pretty big. Can you share with us what's your estimate for the short-term or the one-off class impact for the Q4? And I see for TOEFL, et cetera, they are still not offering China to have the stay-at-home test. So what do you think that impact will last for the overseas test prep and consulting segment? Thank you.

Thanks, Mark. Yeah, the overseas test prep business recorded revenue decline of about 14% in dollar terms this quarter. Actually, it's 12% in R&D terms. Year-to-year decline in Q3. And the Q4... You know, I think, you know, the pandemic, you know, spread to a lot of countries, the Western countries now. So it will impact our overseas Tesla business in Q4. So we guided the top-line growth of the overseas Tesla business increased by about 45% year-on-year in Q4. But we believe the Q4 will be the worst of times. And upon the pandemic phase, I think the situation will be better in the fiscal year 2021. And so this is my explanation for the overseas tax cuts. And overseas consumption, yeah, we did very good. We did very good in Q3. And also, even we have effective impact from the Q4, but it would still guide the top-line growth of the overarching consulting business growth by 12% in R&D terms in Q4. And, yeah, that's it. I think the reason is very easy to understand because, you know, we have seen the cancellation of the overseas exams like TOEFL, ELTS, and GRE, and suspension of the overseas schools and the restriction on the travel. So, yeah, we hope the pandemic can pass very quickly so we can make recovery of our overseas-related business. And Mark?

Thank you, Steven. May I quickly follow up? Do you have any rough estimate that what percent of your overseas test prep students are like a short-term or what percent is a longer-term student?

I think for the short-term, I think in the Q4, I think we'll lose 35% to 40% enrollment for our overseas test prep. Long term, it's really hard for me to make a prediction. But I think that 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 from HSBC. Please ask your question.

Hi, sorry. This is here. Thank you for taking my questions. And I see here.

Yes, very clear.

Okay, thank you. Thank you. Thank you. Thank you. I just want to follow up here. I think you mentioned a very good point about the consolidation angle. How should we see in terms of during the crisis that we are seeing? Are there any closures 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 we talked about that in terms of our online growth is of course doing very well given the current situation. And is it also – that if 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 modified a bit so that we can accommodate because this situation might still prolong for some time? And having said that, do you think we are seeing the 12 already? with second quarter growing a single-digit growth, do you think this is the 12th we should expect? Thank you.

Okay. Yeah, let me answer your first question about the market consolidation opportunity. Yeah, as the disease subsides gradually, I think there will be a potential opportunity of the market consolidation, especially for the big players. You know, we have seen a lot of small players you know, they face severe impacts that may cause some of them to shut down their business. So, you know, New England, as one of the leading players in the market, so we're well prepared to take more market share after the pandemic is over. Yeah, that's why we still open the new learning centers in new cities and existing cities. And also, you know, in Q3, you know, we successfully moved all the offline students to online, you know, in things later February. So I think the small players cannot copy us. So that's why I said it's a great opportunity for the bigger players like the new rental. And the best Yeah, the pure online, you know, cooler, yeah. We spend a little bit more money in Q3 and, yeah, a little bit more in Q4 in the coming quarter to acquire new student enrollment because, you know, the pandemic, when the pandemic comes, I think it's a great opportunity for the big online players. So, yeah, I think, you know, anyway, you know, we got a lot of student enrollment during the pandemic. And I think, you know, the money we spend is worthy and it's understandable. I think even though we spend a lot in Q3, but we still get the margin extension for the overall of the company. So that's it. Okay. So I think going forward, I think, yeah, the situation will benefit us, the big players like us. Okay. Thank you.

Okay. Just a quick follow-up here, Stephen, if I may. In terms of the summer promotion campaign upcoming in terms of the students, new students 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 12th we're seeing? The worst should be over?

Yeah, I think, yeah, this is a great question. You know, last year we didn't The very successful summer promotion, I remember we got 820,000 summer promotions in a moment, and the retention rate was 59% last year in the autumn. And this year, I think we will use the three following strategies. Number one, we care more about the retention rate. And number two, we will use the more and more OIMO model in the summer promotion campaign because of the short term of the summer vacation period. So we will use one or two weeks. So we will provide more and more OIMO 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 us more valuable customers for the more large. So I think it's 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, you know, we started, we have already started the summer promotion enrollment window for the grade four And so far, the numbers are good.

Okay. Okay.

Okay.

Thank you. Thank you. Okay. Thank you, Steve.

Your next question comes from the line of Joe Sun from TH Capital. Please ask your question.

Yeah, this is Tian. So the question is regarding the expansion plan. So, you know, ICANN innovation is pretty tough, given the whole nation is still very cautious on any offline gatherings, and a lot of places have not yet 100% open yet. So how do you carry out the expansion plan? So that is the first question. So the second question is related to... I do see a lot of, you know, online education guides. It puts a lot of money, you know, in the advertising system. So what is our defensive plan in that front? Thank you, Stephen. Okay.

Yeah, I see the defensive plan. Yeah, we added a lot of 112 learning centers in this quarter. You know, most of the learning centers we set up in this quarter happened in the first two months, in December last year and January. And the total classroom error 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 class extension will support us to take more students from the market, especially from the snow players and in the coming summer. You know, in the summer, I think, which will very likely to be shortened by one or two weeks. So that means the more learning centers we have, so we can provide more seats to the kids in the coming summer and the time afterwards. And one more thing is, you know, I think, you know, we feel confident about our business going forward. So, you know, we want to change our extension plan going forward. I think the pandemic will pass away maybe next quarter. So next year we will feel the extent, the capacity by 20% to 25%. So we don't want to change our guidance of the expansion plan next year. And the second question is about the online spending. Yeah, we did the large-scale promotion for the winter and the spring courses for the large-size class of the K-12 business in our cooler.com. Because I think once the... pandemic happens in China, we still have great opportunities. And we're confident that we can provide the best service in the competition. So I don't think that spending more money is a defensive way from us. On the contrary, I think it's a good opportunity for us to take more market share from our players. So that's it. Thank you, Tim.

Thank you.

Once again, 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. Your next question comes from the line of Yu Zhong Gao from CICC. Please ask your question.

Hey, thanks for the opportunity. I think my question is focused on reactivity in longer term. So obviously given the outbreak, you moved from all your students to the online small class model. I don't know if you are thinking about keeping this model And in other words, in the future, when we talk about capacity expansion, you actually may not need that much center versus before the outbreak. And whatever capacity expansion target we have for next year, should we think that your enrollment goals may probably outgrow your capacity expansion pace? Thanks. Yeah.

Because of the lockdown and carbon restrictions, In the last two to three months, we successfully moved all the offline classes to online to all the students. The overall feedback from the customers has been very positive. However, I think going forward, offline classes will continue to be our primary business model. In the last two to three months, the situation was very special. because the kids and their parents, they can't go outside from home, and the parents can't sit while their kids are studying face-to-face with the computer. So as the pandemic is over, I think that most of the students will choose the offline class. You know, we made a survey in a big city, and the survey results told us that 95% of students' parents prefer going back to the learning center for after-school children's studies. when the virus situation stabilizes. But I think for the pure online players like the cooler and all 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 that going forward, the big players will take more and more of the market share from the small players. This is a key point. And so we, going forward, we will use the two ways, the development strategy, online and the OMO. Okay. This is our strategy going forward.

Okay. Are we clear? Very helpful. Yeah, very, very clear. Very helpful. Just very, very quick follow-up. One minute. Do you have a quote, anything from Garmin on when we could resume offline teaching activities?

I'm sorry. I can't hear you very clear.

So if we have heard anything from Garvin, when could we resume off on teaching activities?

Sissy, can you hear Yuzhong very clearly?

No, Yuzhong, your line is not very clear. Can you say that again?

Yuzhong? I suggest you drop off the line first, okay? And back to the queue and ask again.

Let's take next one. Okay.

Okay. I'm sorry, Bill.

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 backend assumption regarding this moderation, whether it's due to pricing or lower enrollment? If it's 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? Thank you.

Okay. Yeah, the Q4 will be a little bit hard. And the K-12 business, the growth will be around 10% to 11%. And this is the overall K-12 business growth. And if you take off the 101 business, the small-sized class K-12 business growth will be 18% to 19% year-over-year. So that means the 101 business the one-on-one business will be down by 5% in Q4. You know, I think some students don't like to take the relatively expensive one-on-one class online. So this is a reason. And secondly, you know, 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 in March and April is lower than the February. But the problem we are facing is the acquiring of new student enrollment. You know, China has been locked down for typically months, so it's really hard for us to acquire new student enrollment for the second half of the Q4 and even for the summer. So it's a hard time. But the good news for us is we're happy to see the schools in China, what I mean, the public schools in China, are going to reopen gradually in this month or early May. I think we are optimistic towards our K-12 business for the summer classes. And, yeah, that's my explanation for the Q4 K-12 graduate school. Thanks, Stephen.

When public schools resume their offline activity, some regions said they will utilize the Saturday to make up the missing classes. 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 study schedule. So we can move some classes from Saturday to Sunday where we can use some of the working day evening time to provide classes. For us, we can use the OMO model to provide the classes.

So it has been baked into your 10 to 11 percent 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.

Okay, thank you, Lucy.

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

Hi, thank you, Steven, and Cece. Just a quick question. Is there any impact from the one-month delay in the Gaokao for your business and the magnitude or any color would be great? Thank you.

Yeah, 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 cold call. So there's no big negative impact to our old 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, Steven. I actually have two quick questions both online. I think we first, we noticed the non-control odds increased a lot this quarter. So obviously that was mainly related to Cool Learn. So I was wondering, you know, how should we think about the margin implication 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, how should we think about the management? How does the management manage and benefit and balance the conflict of interest between online and offline growth? Thank you.

Okay. Yes, I think the coolant did large-scale market propulsion in Q3 and March. Yeah, that's in Q4. So we spent a little bit more money, and yeah, you 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, yeah, 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 worthy. And our lessons were. And, yeah, that's it. I think the second question is about the chemicalization or the balance between the offline and online. I think the chemicalization between the EDU and cooler or the online and offline will be minimal. It will be minimal because, you know, the market is huge. See the other hand, you know, a lot of small player sites in the market, they disappear from the market. So there's a lot of room for big players. And I think the students will, you can divide the students into two groups. For the small part of the students, they can study through online. Most of the students, they choose to, they still need to take the offline classes. So the market's huge for both sides, cooler and EVU. So the competition internally will be very minimal. And our first job for both sides, EVU and cooler, are taking more market share as much as they 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 compared to February.

The next quarter, yeah, the next quarter, Q4, the net loss of the cooler will be bigger. But next fiscal year will be smaller. Yeah. Fiscal year 21 will be smaller.

Okay, very clear. Thank you.

Thank you, Alex.

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

Hello, Steven. Thank you very much for taking my question. My question is mostly on the summer. So first, we were 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 rolled back in summer, or could it be further delays? Thank you.

It's really hard to... to make a forecast of the overseas test labs because, you know, almost all the schools in the United States and UK are still closed. So, and we do hope the pandemic is over as early as it can. And so, yeah, we know the Q1 will be a big season for the overseas test labs. And, you know, I think we will prepare the well internally but it's really hard for us to make a prediction for the negative impact from the pandemic of the overseas test therapy in the coming summer, okay? And yeah, this is the summer. Yeah, I think the summer vacation will be shortened by one or two weeks in the coming summer. And so there are several things we can do Actually, we have done. We have done. And number one, I think we will use more and more OMO model, OMO model. You know, we can take, we can, let's say if we open the learning centers in the summer, that we can provide one more online course combined with the offline course. We can save some classroom areas. And so this is our first one. And secondly, you know, we can make some of the cloud scheduling or make the cloud 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. I'm optimistic for the business of the coming summer.

I see. I see. Thank you. Thank you very much for sharing the color and cloud. We're making good progress in the summer for AST. Thank you very much.

Okay, thank you.

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 the margins given the full year is flat. So I'm wondering if you can provide some color on the breakdown of your color pressure according to the including I think maybe you open more learning centers and the overseas test prep is also some pressure. So can you please give more color on the breakdown and what we should expect for the coming year?

Yeah, you know, we got it with the top line growth in R&D terms in Q4 will be flattish in R&D terms. So, but anyway, you know, we have to face the high rental because, you know, you look at the expansion. in the last three quarters. And also, you know, typically, the selling market expenses and GMA will be increased in the Q4, so it will drive the margins in the Q4, but I think it's just one time, okay? And we know, you know, even though for nowadays, our top priority for our job is to focus on controlling costs and reducing the expenses, across the company to minimize the negative impact from the pandemic. And we are confident that we will be able to deliver the continued margin expansion after the pandemic is over. So in fiscal year 2021, we still expect the margin expansion. And as well, we don't want to change our new long-term margin guidance of the 17%, this is a non-GAAP OP market in the near long term. Thank you, Zhongshan.

Thank you, Steven. Okay, thank you. Your next question comes from the line of John Choi from Daiwa. Please ask your question.

Hi, Stephen. Thanks for taking my question. My question is more about after the pandemic, what have you guys really learned? As I 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, you know, yeah, this is no end. And, you know, three or four years ago, we spent a lot of money and time on the concept development on the product itself. So it makes us, you know, move the old students from offline to online one day, just after the, during the Chinese holiday, when the pandemic came. So going forward, I think we'll build the value 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 a great opportunity for New Orleans because, you know, we can take more market share from the small players going forward. And in the next two, I think in fiscal year 21 and maybe the year after, we will use more and more OMO model. So let's assume going forward next year, if your child takes a course of new rental, so maybe 80% of his class will be happened Offline, 20% will be happened online. 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 to our margins? Would that be more in the long run?

Thank you. I think that the OMO model, the margin should be higher than the pure offline business because we can save some cost in rental and we can We can, yeah, because, you know, as I said, we will open 25% extension plan. But after the pandemic, I think the 2025% will bring us more and more student involvement. And we can provide the online, offline, the online OMO courses to them. So, yeah, we can send some classroom rentals. And I think it will help us to drive the student retention rate up, okay? Because, you know, I think the all-in-one model is better than the traditional offline course, so the people love it, okay? Is that clear?

Okay. Okay, once again, We will take one question at a time from each caller. If you have more than one question, please request to join the queue again after your first question has been addressed. Your next question comes from the line of Alexi from Credit Suisse. Please ask your question.

This is the last one. 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 UCAN and PubKids? And secondly, would you please share a bit more about our four-year margin guidance? So you mentioned the FY20 margin should be flat through FY19, if I'm correct. So what's the implication for fourth quarter margin? Thank you.

Yeah, I think the VIP business, you know, there's a few one-on-one businesses within the podcast. So within the UCAN business, the one-on-one business is 25% to 30% of total revenue of UCAN. And margin, yeah, I think our margin in Q4 will be dropped because of the pandemic. But as I said, it's one time. And, yeah, I think the worst case, of the whole year margin, of the non-GAAP operating margin, will be slashed year to year. But, you know, we've got the VAT exemption. You know, this is a benefit from the government policies. So we recorded the VAT exemption in the other income, and also we recorded the MI, the ACI, non-controlling interest, below the operating level. So I think the net margin of the whole year will be expanded in fiscal year 20. But anyway, it's one time the impact from the 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. 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 relationships. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.