New Oriental Education & Technology Group, Inc.

Good evening, and thank you for standing by for New Oriental's FY 2020 Fourth Quarter Results Earnings Conference Call. At this time, all participants are in the 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. Please go ahead.

Thank you. Hello, everyone, and welcome to New Oriental's fourth 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 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 full-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, Sissi. Hello, everyone, and thank you for joining us on the call. Despite the outbreak of COVID-19 pandemic starting from March posed continuing pressure on all businesses across the globe, including ours, we're pleased to report a set of financial results in the fourth fiscal quarter of this fiscal year, that is in line with our expectation. Total net revenue was $798.5 million, a slight decrease of 5.3% in dollar term or 1% in RMB term. A mix of results amongst various business line were reported, which I will elaborate each of them shortly. Total student enrollment in academic subjects tutoring and test-rack courses in the fourth quarter of fiscal year 2020 decreased by 6.2% year-over-year to approximately 2,585,600. The lower than normal increase in the number of student enrollments is primarily due to the outbreak of the COVID-19, which has made new customer acquisition in the quarter much more challenging. while the enrollment for the summer and autumn classes have also been delayed. In terms of the bottom line performance, for the entire fiscal year of 2020, we managed to deliver an extension of non-GAAP operating margin of 70 basis points year-over-year to 12.9% compared to 12.2% for the prior fiscal year. However, for the fourth quarter of 2020, Due to the negative impacts from the pandemic on our top-line performance and the increased spending from offering free classes to promote our cooler to a lot of large classes with the aim of taking more market share, our gross margin recorded for the quarter was 51% down 506 points year-over-year. Our non-gap of the margin for the quarter was 4.1% down 810 basis points year-over-year. and non-GAAP net margin for the quarter was 6.1%, down by 520 basis points year-over-year. In order to minimize the negative impact caused by the COVID-19 pandemic to our bottom line, we actively adjusted our operational strategy and made more efforts on cost control and reducing expenditures, especially for business lines facing bigger negative impacts in the near term. We believe that our continuous efforts will sustain us through the crisis, and hopefully that the adverse effect on our business from the pandemic will subside gradually. Per program-planned ASP, which is cash revenue divided by total student enrollment, decreased by 14.8% year-over-year in dollar terms. As for hourly-planned ASP, which is cash revenue divided by the total teaching hours, decreased by approximately 3.5% year-over-year in IRB terms. To provide the breakdown of the already-planned ASP, please note that UCAN class increased by 0.2%. UCAN VIP classes increased by 3.5%. Top kids increased by 6.4%. And Overseas Task Force Program increased by 16.1% year-over-year in IRB terms. Comparing with the normal price increase of 5% to 8%, this quarter's hourly blended ASP decrease was lower than normal level, mainly because of the bigger decline of the overseas test prep program and the UK and VIP personalized classes business, which hourly blended ASP are much higher than the other programs, as well as the use of the coupons as we provided to the customer to support the migration from offline classes to online OMO class during the winter. Now, I would like to spend some time to talk about fourth quarter performance across our individual business line in detail. In this unprecedented period, we see a mix of the results among each of the business line. Our key revenue for our K-12 after school business achieved the year-over-year growth revenue growth of approximately 4% in dollar terms or 8% in R&B terms. Breaking down, the U.K. Middle School, High School, Old Subjects, Afterschool, Children business recorded a revenue increase of approximately 1% in dollar terms or 5% in R&B terms for the quarter. Suing enrollment grew approximately 0.1% year-over-year for the quarter. Excluding VIP 101 business, UCAN small-class business grew by approximately 15% in dollar terms or 20% if measured in RMB. Our podcast program delivered outstanding results, with revenue up by about 10% in dollar terms or 14% in RMB terms for the quarter. Enrollment decreased by 9% for the quarter, though as the outbreak of the COVID-19 has caused the challenges on acquiring new customers in the quarter, while the enrollment for the summer and autumn classes have been delayed. Our overseas-related business, including test flags and consulting business, faced the most difficult challenges due to the cancellation of the overseas exams, suspension of the overseas schools, and restriction on travels. The overseas test flag business revenue declined by approximately 52% in dollar terms, or 50%. if measured in RMB. However, despite the challenges, the consulting business grew by approximately 6% in dollar terms or 11% in RMB terms. And finally, VMP personalized class assistance reported revenue decline of about 36% year-over-year in dollar terms or 34% in RMB terms year-over-year for the quarter. Our summer promotion strategy also delivered outstanding results. We offered low-price experiential courses for multiple subjects in total of about 69 cities, targeting entry grades of primary and secondary school students, customers, before they start this new school year. The promotion price is similar to last year at around 400 RMB. Even though we launched the summer promotion campaign almost one month later than we did last year due to the pandemic situation, the summer promotion remains very well received by the market. We're pleased to see that the promotion enrollment we brought in before the start of the summer holiday by mid-July this year achieved a 20% increase comparing the same period of last year. reaching 986,000 enrollments. The encouraging results have proven that such sound and highly profitable strategy enables us to capture and increase our market share in high-growth K-12 after-school children markets, also puts us in a more favorable position during this market consolidation period, and certain players may lack financial or digital capabilities to sustain their operation during these challenging times. As these students move to the higher grades, we expect the continuing improvement in retention rates and customer loyalty will drive revenue growth in the next three to six years. We continue to be guided by our optimized market strategy in this quarter and carry out capacity expansion in cities where we see potential for rapid growth and strong profitability. This quarter, we added a net of 44 learning centers in visiting cities, opened a new training school in the city of Weihai, as well as four dual-teacher model schools in the city of Hebi, Xintai, Zhongmabian, and Xuchang. Altogether, this increased the total square meter of classroom area by approximately 26% year-over-year, 5% quarter-over-quarter by the end of this quarter. Despite such challenging times, we didn't put our extension plan on hold as we wanted to ensure that we are fully prepared when the pandemic is over. Our service will resume with strong presence across different Chinese cities. As the outbreak of COVID-19 has highlighted the importance and demand of online education, we have placed more resources in this area and invested $36 million in the quarter to improve and maintain our OMO integrated education ecosystem. The investments also supported the migration of our offline class to small size online class during the pandemic. Apart from the OMO infrastructure, we have allocated part of the resources in advanced training programs for our teachers to enhance their online and offline integrated teaching skills in response to the growing demand in the market. At the same time, we continue to upgrade our technology platforms and will broaden the usage of the online tools and content in our OMO system for all business line through the whole network, as well as further develop the best teaching content and courseware to cater on online-offline integrated education methods. We're glad to see that our industry-leading OMO ecosystem has not only successfully managed to cushion most of the impact our service and operation caused by the pandemic, but we also see the refund rate from the cancellations have been stabilized at a normal level as we entered into the spring semester, while our customer retention rates from winter to spring semester and from spring to summer semester were trending higher than the same period last year, which further demonstrated that our customer satisfaction and effectiveness of our online course through our whole MO system. To further tap into the huge market opportunity in online education, we continue to place more resources in cooler in executing new initiatives in our K-12 online afterschool children's business in fiscal year 2020. This includes content development, teachers recruiting training, sales marketing, R&D, and other necessary cost expenses to drive the growth of the new online programs. With these programs, we're able to reach out to more students in low-tier cities in an interactive and scalable approach. We believe this will help CoolLearn.com to gain new market share in the online education space and drive up health and growth. In the past quarter, CoolLearn did a large-scale market promotion by offering three large-size online-level testing classes to the public. and attracts several times more traffic than normal time. Cooler also added a meaningful amount of customer service representatives and marketing staff to support the new initiatives in K-12 tutoring. These moves have raised our standing on the marketing front, but we believe those are necessary and understandable measures as we found ourselves in a Europe pandemic situation. The two-teacher class model has been offered for podcast program in 48 existing cities, UCAN program in 29 existing cities, and for both podcasts in UCAN head office business in 10 new cities. We're glad to see the model has proven to be successful as there is an increased market penetration in those markets we have tapped into. We also saw improved customer retention and scalability. With these probate results, we will continue this strategy going forward. Now, let me walk you through the other key financial details for the fourth quarter. Offering costs and expenses for the quarter was $788.2 million, representing a 2.9% increase year-over-year. Non-guide offering costs and expenses for the quarter, which includes share-based compensation expenses, were $765.9 million, representing a 3.5% increase year-over-year. Cost of revenue increased by 5.3% year-over-year to $391.1 million, primarily due to increased 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 11.4% year-over-year to $118.0 million, primarily due to the addition of a number of customer service representatives and marketing staff with the aim of capturing the new market opportunity during the pandemic, especially for the new initiative being changed to our pure online education platform, Cooler.com. General administrative expenses for the quarter decreased by 3.3% year-over-year to $279.2 million. Non-gas general administrative expenses, which include share-based compensation expenses, were $261.0 million, representing a 1.3% decrease year-over-year. Total share-based compensation expenses, which were allocated to relate to operating costs and expenses, decreased by 13.5% to $22.3 million in the first quarter of fiscal year 2020. Operating income was $10.3 million, and an 86.7% decrease from $77 million in the same period prior to fiscal year. Non-GAAP operating income for the quarter was $32.5 million, a 68.3% decrease from $102.7 million in the same period of prior fiscal year. Operating margin for the quarter was 1.3%, compared to 9.1% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 4.1%, compared to 12.2% in the same period of prior fiscal year. Net income attributable to new rental for the quarter was $13.2 million, representing a 69.5% decrease from the same period of prior fiscal year. Basics that load the earnings per ADF attributable to new rental were $0.08 and $0.08, respectively. Non-gas net income attributable to new rental for the quarter was $48.5 million, representing a 49% decrease from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributed to new rental were $0.31 and $0.30, respectively. Net margin for the quarter was 1.7%, compared to 5.1% in the same period of prior fiscal year, Non-gap net margin for the quarter was 6.1% compared to 11.3% in the same period of five fiscal year. Net operating cash flow for the fourth quarter of 2020 was approximately $108.5 million. Capital expenditures for the quarter were $89.7 million, which were primarily attributable to the opening of 73 facilities and renovations at the existing learning centers. Turning to the balance sheet, as of May 31st, 2020, New Rental had cash and cash equivalents of $915.1 million compared to $1,414.2 million as of May 31st, 2019. In addition, the company had $284.8 million in term deposits and $2,315.3 million in short-term investments. New Oriental's different revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instruction delivers, at the end of the fourth quarter of fiscal year 2020 was $1,324.4 million, an increase of 1.8% from $1,301.1 million at the end of the fourth quarter of prior fiscal year. We are now approaching to the new fiscal year. Despite the continued challenges from the COVID-19 pandemic, I expect to remain. We're still optimistic towards the company's business in the long run, and we'll continue to focus on the following key areas. First, we will continue to expand our offline business. We aim to add around 20% to 25% including new learning centers and expanding classroom area of some existing learning centers for K-12 business. We believe it will prepare us to further take more market share from other players post-COVID, as we believe some small players without strong financial position and online class capability may not be able to sustain its business during the hard period. And we expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with strong financial capacity and fresh offline facility enable us to further strengthen our market leading position and penetration. Second, we will continue to leverage our investment into digital technologies and to introduce our OMO system in more offline language training and test offerings especially for our K-12 business. The usage of the online tools and contents in our OMO system for all business lines throughout the whole network will be enhanced. To uplift the whole OMO teaching experience, we will place more efforts in developing the best teaching content and courseware, and also developing more advanced training programs to our teachers. For some who might not be very familiar with our OMO business model, allow me to spare a few minutes now to elaborate the four key OMO strategy we have in place. Number one, the online system is mainly used to supplement the offline classes we have in existing cities with hybrid format. Number two, for the cities we have presence but might not have enough learning centers to cater all our customers, our OMO system enables us to reach out to more students and customers. Number three, for some provinces where we don't have centers in all of the cities, our OMO system allows us to reach out to students of the surrounding satellite cities. Number four, we offer a series of complimentary low-cost experimental online classes for people and students to experience our classes, hoping to attract new customers. Here, I have to highlight that all of these OMO products are supported by our offline classes. They supplement each other. As a teaching content, courseware, materials, as well as our teachers and technology, developed and originated from our existing offline centers and resources. We believe that the above-mentioned OMO initiatives will be one of our growth engines to increase our customer acquisition post-COVID and enabling us to capture the market consolidation opportunity. This advanced new business model will also accelerate our margin recovery in the rest of the year and further extend our long-term margin target. Furthermore, we will continue to invest in and implement new initiatives including product concept development, teachers recruiting training, R&D, as well as sales marketing in K-12 after-school children's business on CoolLearn.com. Third, our top priority will remain as the focus on controlling cost and reducing expenditures across the company to minimize the negative impact from the pandemic, our bottom line. We believe we will resume the extension of overall non-GAAP operating margin year-over-year as COVID-19 subsides gradually. Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong. Although we are facing various short-term negative impacts from the pandemic, and we have been increasing our investment in different strategy, we remain optimistic of a brighter perspective of our business, and I believe our investments now will bring us fruitful returns in the long run. We're certain that with Neolinto's leading brand, superior education products and system, and the best of teachers' resources, we have the ability to take further market share in China's huge after-school children's market and deliver long-term value for our customers and shareholders. When looking at the near-term and our expectations for the next quarter, we have factors in various considerations, including the one-month delay of National Gaokao and Zhongkao, the delayed enrollments for summer and autumn classes this year in many major cities, and the shortening of the summer holiday in many major cities by one to two weeks. Summer courses in July and August will be trimmed down to three to four terms only. which we typically have four to five terms historically. The recent reemergence of the COVID-19 cases in cities such as Beijing has delayed the resumption of both public schools and our tutoring schools in these areas. Inevitably, all these unprecedented situations have caused a lower visibility of our business performance data for the summer quarter, hence, We take most conservative approach to make our forecast for Q1 2021. We expect total revenue to be in the range of $911.2 million to $953.5 million, representing a year-over-year decline in the range of 15% to 11% in dollar terms. If not taken into consideration, of the impact of potential change in training rates between RMB and US dollar, the projected revenue decline rate is expected to be in the range of 14% to 10% for the first quarter of fiscal year 2021. To provide a breakdown of the expected top line growth for key business line, K-12 all subjects after school children's business is expected to be growth 3% to 7%. Overseas test prep program is expected to decline 55% to 51%. And Overseas Study Consulting Business is expected to decline 7% to 11% all year-over-year in RMB terms. We also expect Overseas Related Business including Overseas Task Force and Consulting Service will continue to decline due to the pandemics around the globe caused by the cancellation of the Overseas exams and suspension of the overseas schools and restriction on travels. The negative impact on those overseas-related businesses will affect the entire education, the overseas health threat related to industry in China, not only new rental, and may last over the coming one or two quarters. That's right. In contrast, China's effective control of the pandemic situation has shed a more positive light on our business domestically. We're pleased to see that we have gradually resumed our offline operation in over 90% of cities that we are in, and vast majority of students in these cities have successfully migrated back to our learning centers from OMO online classes. We have also seen significant pick-up in the year-over-year trend of student enrollment and test proceeds from students in July this month for the summer quarter, which is a positive sign of recovery. To conclude, we're now taking all kinds of the additional actions to boost the enrollments and the classroom utilization for the summer and autumn semester and speed up recovery of business after the resumption of the schools and learning centers. We're confident that demand for afterschool tutoring business will pick up gradually in the summer and in the rest of the fiscal year. I must mention that these expectations reflect New Rental's current and preliminary view, which is subject to change. At this point, I will take your questions. Operator, please open the call for these. Thank you.

Thank you so much. 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 color. If you have more than one question, please request to join the question queue again after your first question has been addressed. To ask question, please press star and one on your telephone keypad. Again, it's star and one if you wish to ask a question. And our first question comes from the line of Penny Wong from HCC. Penny, your line is now open.

Hi, good evening, Stephen and Sissi. Thank you for taking my questions. So in terms of the revenue guidance, the outlook, it seems a little bit soft, right? Can you help us to understand the assumptions behind? And then also, I think that we are talking about like the recovery is already ongoing. And I think there's a very interesting point as Stephen mentioned since like last quarter call that about the consolidation of the market. So just want to see if there's any numbers that you can quantify as far on the industry side. Say, I don't know, like number of centers or number of institutions, something like along the line to help us better to understand whether like how much the consolidation has been progressing. Thank you so much.

Thank you, Fanny. Yeah. Yeah, due to the last visibility of the performance data for the summer quarter, yeah, we are using the most conservative way to make the forecast of the Q1. I think there were several key reasons. Number one, you know, we have the shortening like by one to two weeks in summer holiday. You know, typically we have five terms of the summer courses within the summer vacation, one summer vacation. But now we only have the 3.5 terms. And also, you know, the were delayed by one month. So that means, you know, the enrollment window for the summer for the summer had to be postponed by at least one month. And number two, you know, the recent re-emergency of the COVID-19 in Beijing and Hebei Province last week in Dalian and Urumqi. And, you know, I think they impact us again. But, you know, I must mention that, you know, the Beijing in the summer, I think it's really hard for us to make the new – to acquire the new student enrollment for the summer. So if you take out the Beijing, the impact, all the other schools, the K-12 business will grow by 11%. So, yeah. And the last one is over-detached religiousness. You know, all the exams are canceled, and, you know, these students cannot travel, and they develop ill. the volatile, the China-United States, the two countries' relationship. So we just wait. And yes, there's so many reasons. But I think we are confident about the future because, you know, so far, you know, 90% of cities, you know, most of the students of the 90 cities we are in went back to our learning centers. And we do believe we can take more market share from the consolidation potentially. Because, yeah, we have seen a lot of small players disappear from the market. I don't have the numbers, but, yeah, it is what it is. And that's why we opened 26% expansion last year in fiscal year 20. And we plan to open 20 to 25% new expansion. expansion if it's greater than 21. So I think this shows us the confidence to take more market share from the small players.

Yeah, and I also want to add that the successful results by far for the summer promotion also indicated the potential opportunity to keep taking market share from smaller players that are facing much bigger challenges during the pandemic period than us. You know, our summer promotion increase, total volume increase by far is already 20% increase year over year. And it's very likely that when we finish the whole summer, the total enrollments will be even increased higher than that. So these are all indicators for the potential opportunity for market consolidation for us.

Thank you. Thank you, Cecilia and Steven. Just a quick follow-up. In terms of the summer promotion course prices, how does it compare to last year as well?

Yeah. You know, we got 986,000 enrollment to be mid-July. And, you know, it's close to 1 million. So that means, you know, we got a 20% year-over-year growth. And, you know, we keep the same price at the 400 RMB. And we believe the retention rate will be higher than last year. So, you know, we do hope we can get the 5% higher of the retention rate after the summer promotion. So we did a very good job. And we do believe that those students we got from the summer promotion this year will stay with us for three or six more years.

Thank you. Thank you. That's very helpful. And I think this is quite understandable too. Thank you.

Thank you very much.

Thank you so much. And as a reminder, we will take one question at a time from each color. And your next question comes from the line of from News Research. Your line is now open.

Hey, good morning. Good evening, everyone. Steven and Cece, thanks for taking my question. I guess my question is related to your capacity expansion of 20 to 25%. You know, with that guidance that you gave, you know, some of these, you know, some of these, I guess, segments that you're seeing underperformance in, things like overseas test prep, have you moved capacity and work from these underperforming, I guess, segments to your better performing segments already? And is the capacity expansion already counting for the shift in capacity that you're potentially seeing in your classrooms already going from less performing to more performing type of classrooms? And so if I guess the reason I ask that is that the cost of capacity expansion, if it's net of a lot of this, I guess, shifting capacity already. Should we expect the actual capacity expense, the cost of it, to be materially less than what we've seen in the past? Thanks.

Yeah, we set up the expansion plan by 20 to 25% in fiscal year 21, as we did, you know, the same as we did in the last year. Yeah, and yeah, we do have the plan to make a shift of the summer non-performing learning center to close down or to move it from the over-the-top to K-12 business. But, you know, with all the numbers in, I think we will keep the same guidance of the expansion plan by 20% to 25% because we do believe post-COVID we do have a lot of the market's potential to take more market share from the small players and to field more students into the new learning centers. And even after the COVID-19 happens in January and February, after that, in the last three, four months, we opened nine. We're 10% new learning centers. I think we are quite ready, prepared for the new market consolidation opportunities.

Got it. Thanks, Stephen. Thank you, Dan.

Thank you so much. And the next question comes from the line of Xu Xun Gao from CICC. Your line is now open.

Hey, Stephen. Thanks for the opportunity. So I think I have a rather longer-term question. So imagine a situation given the sustained COVID-19 stress. where maybe structurally a higher and meaningful portion of your enrollment will be from online, either in a pure online form or an OMO form. How do you think this will impact your margin profile in the long term? Thank you.

Okay. Yeah, I think this is a great question. You know, I think going forward, you know, we care more, we care both the online and the OMO. I think, you know, in terms of revenue contribution, OMO class will continue to be our primary business model. But, you know, we learn a lot from the pandemic. And, you know, I think we started to bear fruit from the heavy investment in the last two to three years of the OMO model. And, you know, yeah, as I said, you know, where we're seeing the higher student retention rates and the customer satisfaction and the student retention rates, you know, are higher than the same period of last year. So going forward, I think we will do more and more on our OMO system. And the key is, you know, the OMO system, you know, that means we build the barrier entry higher for the whole industry. You know, we have the most advanced OMO system. And going forward, I think the OMO system will bring us more student enrollment, and it will drive the margin up by our new OMO model. And the pure online cooler, you know, cooler is just only 4% to 5% of our total revenue. But in the last quarter, you know, we did a very good summer promotion. And also we started to spend more money on the – especially on the R&D and on the teacher's training, something like that. And we spend a little bit more money on the marketing as well. But – you know, we do believe we can take more market share from even from the very heavy competition among the big players. But we do, we will have the good future for the cooler. So we have to end the growth engine, OMO, and the cooler, the pure online platform.

Understood. Understood. Very helpful. Thank you.

Thank you.

Thank you so much. And your next question comes from the line of Mark Lee from Citi. Mark, can we now ask you a question?

Hi, Steven and Susu. Thanks for your sharing. I want to ask for this quarter, we have seen like in the P&L, the gross margin is impacted by a few factors you mentioned like online and also the revenues. and then also coupled with a higher selling expense, et cetera. You're also paying the driver. May I know, in a short-term view, let's say in the next few quarters, how would we think these drivers to move? And how about, like, in the coming few years, more medium-term, like which part of the P&L do you think you have better upside improvement? Thanks.

Yeah, you know, it's a hard time, especially for Q4. And maybe in the Q1, you saw our guidance. But, you know, we're doing the two things at the same time. Number one, you know, we are focusing on the cost control. So, you know, and reduce the expenditures. across the company to minimize the negative impact of the COVID-19. So this is number one. And number two, we do believe the revamped OMO model will accelerate our margin recovery in the rest of the year and further extend our margin profile going forward. So as for the Q1, the fiscal year 21, the Q1 margin, we believe the margin decline in Q1 will be narrowed down compared to Q4 last year, compared to this quarter. And we're confident that we'll be able to deliver continued margin extension after the pandemic is over. For fiscal year 21, we expect the margin will be recovered in the second half of the year, especially. And in the long term, we want to change our guidance. of our mid-long-term margin guidance. You know, the non-GAAP operating margin in mid-long-term should be somewhere around 17%. But, you know, I must mention that with more and more OMO model we add into our learning centers, I do believe someday we will raise our mid-long-term margin guidance, okay, because of the new model. Thank you, Mark.

Okay. Thank you very much, Stephen.

Thank you so much. And your next question comes from the line of Felix Liu from EBS. Felix, your line is now open.

Hi. Thank you, management, for taking my question. My question is on the online side. Definitely, I'm very happy to see some positive progress there. So could you maybe share with us how well the traffic for Kula are pertaining to summer? And also for the online, I noticed the OMO model, as well as your duty trade, penetrating, you know, fairly successfully into lower-tier cities. So how would you balance that with the DFUB brand that Cooler runs, that runs, you know, similar, on paper, similar business models? Thank you.

Yeah. You know, during the last quarter, Cooler did a large scale of market promotion by offering the free large-size online And I think that we attract several times more traffic than that of last year. But, you know, I'm afraid I am not. I think that, you know, I don't think I can say something in detail or numbers in detail of the quorum because, you know, they haven't announced their results. But, you know, what I can say is we do believe, you know, we did a very good job in the last quarter of the promotion after the COVID-19. And we spent more money on the R&D and the teacher's training site as well as the marketing site. But, you know, I do believe we will – I think I do believe the R cooler will get the fast top-end growth and provide the better quality product to the students going forward.

Thank you, Stephen. And also, how would you balance the OMO with the DFUD goal going forward, say, from a longer-term perspective?

Yeah. You know, I think There is a two-way we're using at the same time. You know, Cooler is 100% online, okay? And the OMO is the language offline resources to our online platform that, you know, help us to reach out more through enrollment. So, but, you know, all the OMO classwork content and even the teachers are originated from our offline learning centers and schools. And so, and I know, you know, in some cities, maybe there might be like internal competition in the same city by the cooler and our OMO model. But I think, you know, the market is huge enough. So we care more about taking more market share from the others. So I do believe the... the cannibalization between the two parts will be very minimal.

Okay, Alex. Okay, thank you very much for the color. This is great. Thank you. Thank you.

Thanks. Thank you so much. And your next question comes from the line of Chen Xiao from PH Capital. Chen, your line is now open.

Hi, Steven. Thank you for picking up, picking my question. It's regarding the OMO. OMO is a very effective tool to, you know, deliver the courses in the area hard to reach or, you know, deliver the courses when we have this pandemic. So when we mix them together, And so what's the result? What is the, you know, impact to the growth margin? I expect to be positive. And, you know, what is the impact on that? Also, when students take in the class online and offline, will there be a, you know, price difference for the online and offline? And also, you know, we are entering into a new physical year. Is the price going to be higher than last year? So that's the question. Thank you.

I think the OMO model will bring us more revenue compared to the traditional way. So this is number one. Number two, you know, I think the OMO model, I think, you know, the students and parents love the new OMO model. you know, they think that the new model is, you know, products better than the traditional one. So it drives the retention rate up and the learning center utilization rate up. So to some extent, we can save some cost in rentals. So it will drive the margin up going forward by the OMO model. And the second part, you know, we try the same. We try the same for the OMO classes. with the traditional offline classes. And we will use the same price strategy going forward. You know, yeah, this quarter, you know, the prices are a little bit weird because of the coupons, because of the 101 business impact of the ASP. That's, you know, going forward, I think the hourly rate, our ASP, will be increased by 5% to 8%. as normal. So we don't want to change our price strategy going forward. It will be very stable.

Yeah. Okay. Thank you, Steven.

Yeah.

Thank you. Thank you so much. As a reminder, we will take one question at a time from each caller. And your next question comes from the line of Alexi from Credit Suisse. Alex?

Hi, Steven for taking my questions. So, firstly, a very quick question. You have shared the guidance for case trial in next quarter will be about 3 to 7% growth. Then what about the difference between POP keys and UCAN and UCAN VIP in your assumptions for the next quarter? And also, secondly, if we assume the pandemic in Beijing and other cities were well controlled before the start of the next academic year, what's your expectations for the recovery pace of the K-12 business in the rest of the fiscal year? When do we expect the business to get the normal growth rate in FY21?

Yeah, Alex, you know, the rapid guidance, in the coming Shibuya, you know, as I said, we are using the most conservative way approach to make the forecast because of the uncertainty. And, you know, even within this week, our enrollment window is still opening. So it's delayed by one to two months. And The different business lines, you know, the UCAN program, I think in the Q1, in most conservative way, the revenue growth will be 7% to 8%. And I think the VIP business in Q1 should be recovered, should be better than we did in Q4 because, you know, I think that the parents will push their kids to study more to make their art. for the last quarter. And the top case, I think the revenue growth will be somewhere around 5 to 6%. What I'm saying is in RMB term. And the recovery pace, you know, I think, yeah, as I said, 90% of our cities, our learning centers will reopen in the last one or two months. And I think the trend will be better And I do believe we'll do better and better in stat by stat in fiscal year 21. And so I think, yeah, I just want to persuade your guys to be a little bit more patient You know, in the Q1, there's some uncertainty about, like, the Beijing or Hebei province. But going forward, I believe our Q1 business will be recovered step by step, especially for the Q2, Q3, and Q4.

Yeah, actually, to share more details with you, for the Q1 guidance, you know, for Q12, because of the second round of newly identified COVID-19 cases in Beijing, you know, put more pressure on the recovery of Beijing city. So the new customer acquisition in Beijing are facing bigger challenges than other cities that have already resumed the offline operation. So if you take out Beijing, all the other cities, K-12, If you look at our forecast in Q1, the trend, year-over-year growth trend are similar to Q4. So I think the business are already started to recover for the K-12 business. Yeah.

And I do believe the Our Pages School will reopen our learning centers in September.

Okay? Sure. Thank you. Very helpful.

Thank you. Thank you very much.

Thank you so much. And your next question comes from the line of John Choi from Diver Capital Markets. John, your line is now open.

Hey, guys. Thanks for taking my question. I have a quick question on your overseas, you know, business, including test prep and consulting. I know it's a very difficult time due to the, you know, uncertainty and also the pandemic going globally. Do you think the recent COVID situation will have, like, an impact, like more of a long-term fundamental impact on your overseas test prep business? You know, obviously, next quarter, you guys got it a pretty, you know, conservative figure. But I'm just wondering for the, you know, remaining part of this year and also in the long term, how should we think about this business? Thank you.

The over-deposit business, you know, we saw the significant decline in Q4, and we gave the conservative guidance of the Q1, and because of the COVID-19 and cancellation of the exams, like the TOEFL GRE out, and substantial, the overseas schools and the restriction on silos. And, but, you know, we have seen And, you know, in some cities like Beijing and in eight or nine cities, the IELTS and TOEFL test will be reopened in this month. We know, we read this news, and we do hope our overseas test business can be recovered, you know, step by step. But, you know, it's a very hard time because of the volatile, the China-United States relationship between the two countries. So, some students and parents choose to hold their, to hold the time to make the final decision to study abroad or not. So, yeah, and, but I do believe the, our business can be recovered step by step. It depends on the students in China knows the exact time of the oversea college and universities will be reopened, and all the exams can be reopened, something like that. And yeah, but you know, it's a hard time. We just wait and see. Thank you. Oh, see, one more thing is, you know, the Overseas Task Force system, You know, I think in the Q4, the revenue contribution of the overseas test lab was only 5.6%. And so we do believe, because of the hard time, the revenue contribution in the Q1 from the overseas test lab should be below 10%. So the revenue contribution from the overseas test lab will be smaller and smaller. Thank you.

Thank you so much. And your next question comes from the line of from Morgan Stanley. Your line is now open.

Okay. Hi. Thank you for taking my question. Just one question about the K12 gloves. As you mentioned, the trend outside Beijing is similar in Q1 in similar way to Q4. But actually the summer holiday is shortened and the period is only about 70% of the normal summer holiday. We did take this into account. So can we say that in the summer holiday the K12 real growth during the summer season is actually heightened Thank you.

To some extent, in pro forma basis, because, yeah, you are correct, Zhongsheng, you know, we have the 30% time loss of the summer holiday. And the, yeah, as for the pro forma basis, I think the top line goals of the K-12 business are the actual, the real top-line growth of the K-12 business should be over 10%. And I do believe in the quarters after, like Q2 and Q3 and Q4, I do believe the K-12 business, the growth will go back to normal as we did in last year, unless the bad things come back again, like the COVID-19. in some major cities.

Thank you very much.

Thank you.

Thank you so much. And your next question comes from the line of BS Kim from JP Morgan. Your line is now open.

Hi. Thank you, Steven and Sissy, for taking my question. Quick one from me on VIP. I think I may have missed this earlier, but can you remind us how much Did the VIP revenue drop in fourth quarter in, you know, dollar term or renminbi? And what's implied in the guidance? And the follow-up from here would be that I'm just wondering why this segment is so bad into the summer still. Is this just a function of high price and, you know, like people are reluctant to convert to online or spending less? because less cash flows and whatnot, or, you know, is there anything else more structural, i.e., how much of this VIP drag is structured in your view versus temporary and cyclical setback? Thank you.

Yeah, the VIP business, you know, the UCAN VIP business in Q4 was down by 21% year-over-year. I think it's easy to understand the parents and the kids towards, you know, they pay you a lot of money, and we move the offline class to online, and, you know, some students choose to postpone their study plan by one-on-one business in Q4. But in the Q1, based on our forecast, I think, you know, the one-on-one business recovered very quickly, especially after, especially in June. You know, we have seen a lot of new student enrollments enroll our VIP classes to prepare for the Gaokao and Zhongkao. So I do believe the VIP business will be recovered step by step.

Okay. Thank you. May I just follow up? How much of the – so when you say recovery, are we talking about year-over-year growth or still down but much less than what we talked about?

Year-over-year growth. I do believe we will get the UCAM, the asset business, grow in the coming year-over-year.

Thank you very much. Thank you very much. So that answers my earlier question that the downturn is more temporary and cyclical than structural. Thank you.

Okay. Thank you.

Thank you so much. And your next question comes from the line of Alex Liu from China Renaissance. Alex, your line is now open.

Thanks, Sister and Stephen. So my first question is on the OML strategy. Specifically, I noticed some small class courses in fall semester are now 100% online. So we obviously know TEL has a pure online business. within its PAYO segment. So I was just wondering, so when we were talking about OMO, how should we think about the importance of pure online small-cost program within UCAN and PopKit in the longer term? And a quick follow-up, how should we think about a revenue growth across this segment in the fiscal year 2021? Thank you.

Yeah, you know, the pure online, you know, is, you know, cooler as a pure online platform. But OMO is the more supplemental tool to our offline business. But, yeah, you're right. In last quarter, in the Q4, we moved 100% of the offline class to online. But afterwards, you know, 90% of our students went back to our offline learning centers. But we will put more and more. We will keep some, like, online elements going forward. And... And so, yeah, as I said, you know, both the POI and the OMO site, all the market is huge enough for both part of the potential growth. And as I said, I think the competition, internal competition will be very small. And so, yeah. And what's the second one?

Yeah, so the revenue growth in 2021 across 25 months.

I think, you know, this time is very special. And, you know, even for the Q1 guidance, we spent a lot of time. And as I said, you know, we're still in the student enrollment window in this week and next week. So I will put the question to the next quarter of earnings call. But I do believe our business will be recovered step by step, especially for the things that are true. And I think all the business will be recovered as normal.

Yeah, I understand. Thank you very much.

Thank you, Alex.

Thank you so much. And your next question comes from the line of Tommy Wong from China Merchant Security. Tommy, the line is now open.

Okay, thank you. Hi, Stephen and Cece. I just have a general question. If you look at the overall market, we can see a lot of the online players like, you know, YouGao and GSFaction, the share price has done really, really well. And when I looked at your selling expenses, it seems has not really increased a lot. I was kind of expecting to increase a little bit for the fourth quarter, but it actually hasn't increased. I'm kind of concerned are we not being aggressive enough, and maybe if you can talk about your sales and marketing kind of breakdown between, you know, the OMO and versus Cooler, and what's your strategy going forward? I'm just kind of concerned that we're not being aggressive. Thank you.

Yeah, I think we spent a little bit more money on the Cooler.com in the last quarter. You know, I think we did the first time the free course for the large side class in the spring semester. But as I said in the last earnings call, you know, we don't want to spend crazy money on marketing sites. we would rather spend more money on the R&D and teachers training and some, like the core product development. And, but yeah, I know that some players, you know, spend a lot of money on the marketing side, but I think the market is huge enough. And we are special because we have the number one education brand name in China. And I think the Cool Learn can benefit from our new rental brand name to acquire the new student enrollment. This is very unique.

Okay. Thank you. Thank you.

And also, our cooler.com, you know, we have the DFUB, the small size online broadcasting classes. These are very special. And I think we are one of the few players can do the small size pure online classes. And I think the business model does work. You know, we testified in the last two to three years, and it's grown very fast. And, yeah, that's it. Is it clear?

Thank you.

Thank you. Thank you very much.

Thank you so much. We are now approaching the end of the conference call. I will now turn the call over to the new Oriental CFO, Mr. Stephen Yan, for his closing remarks.

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