New Oriental Education & Technology Group, Inc.

Good evening and thank you for standing by for New Orientals FY 2021 First 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 call is being recorded. If you have any objections, you may disconnect at this time. I'd like to turn the meeting over to your host for today's conference, Ms. Cici Zhao.

Hey, hello everyone and welcome to New Rental's first fiscal quarter 2021 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as our news bar services. Today you will hear from Stephen Young, 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 filings with SEC. New Oriental does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I will now turn the call over to Mr. Stephen Yeung. Please go ahead, Stephen.

Thank you, Cici. Hello, everyone, and thank you for joining us on the call. Although the impact of the pandemic continues to raise hurdles for business across the globe, We're pleased to kick off the fiscal year with a set of encouraging financial results in the first quarter of this year that is in line with our expectation. While it's showing signs of the recovery in some of our business lines as domestic markets begin its path to normalization, total net revenue was $986.4 million dollars. representing an 8% decrease year-over-year, which is better than we got it in the previous quarter. Net revenues from education programs and services for the first quarter were $935.6 million, representing a 6.1% decrease year-over-year. Our UCAN middle school, high school, old subjects, after school, children's business showed a positive light with a growth of approximately 9%. while our PubKids program reported the growth of approximately 4%. Our industry-leading OMO system has been vital in the previous quarters to ensure our service runs smoothly, and it has once again proved to be instrumental in this quarter. As it provides our operation with strong flexibility to help the vast majority of our students migrate from OMO online classes back to offline learning centers, which have gradually resumed service amid the easing of the pandemic restriction measures. Encouraged by its effectiveness, we have put more focus on executing our OMO strategy, including piloting the OMO online courses in around 26 cities and attract a promising number of new customers in the summer quarter. Total student enrollments in dynamic subjects tutoring and test drive courses in the fourth quarter of 2021 increased by about 13.5% year-over-year to approximately 2,961,100. The lower the normal increase in the number of student enrollments is primarily due to the delay of the enrollment for summer and autumn classes and shortening in the summer holiday in many major cities by one or two weeks this year, as well as the delayed resumption of the offline operation in cities such as Beijing due to the reemergence of the COVID-19 cases before the summer holiday. A key highlight in this quarter is the highly successful summer promotion campaign. Despite the challenge of the shortened summer holiday, we're delighted to see the total promotion enrollment reached $1,079,000, a 31% increase year-over-year, accompanied by improved student retention year-over-year. In terms of the pricing, per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 10% year-over-year in dollar terms. As for hourly blended ASP, which is cash revenue divided by the total teaching hours, decreased by approximately 2% year-over-year. To provide a breakdown of the already-blended ASPs, please note that UCAN classes increased by 2%, UCAN VIP courses increased by 3%, POP Kids decreased by 1%, and Overseas Test Drive Programs increased by 7% all year-over-year in dollar terms. Comparing with our normal price increase of 5% to 8%, This quarter's hourly blended ASP decrease was mainly because of, firstly, a bigger decline of Overseas Task Force Program, which hourly blended ASP was much higher than other programs. Secondly, the piloting of promotional OMO online courses in some major cities with discounted price in summer. And thirdly, a bigger portion of the enrollments on promotional courses to encourage students to register for more subjects. Now, I would like to spend some time to talk about the quarter performance across our individual business line in detail. As the pandemic gradually fades in China, encouraging signs of recovery have started to emerge across our business lines with significant jump in student enrollment. Our key revenue driver, K-12 after-school children's business, achieved the year-over-year revenue growth of approximately 8% in dollar terms. Breaking it down, the UCAN middle school, high school, all subjects, after school, children's business recorded the revenue increase of approximately 9% in dollar terms for the quarter. Student enrollment grew 23% year-over-year for the quarter. Our top kids program recorded the revenue increase of about 3.5% in dollar terms for the quarter. Enrollment increased by 17% for the quarter. Our overseas related business, including test track and consulting and study tour business, continue to face the difficult challenges due to the cancellation of the overseas exams and restrictions on travel, while the unpredictability of the pandemic situation in different parts of the world has raised the students' hesitance to study abroad. The overseas test track business recorded a revenue decrease of about 51% in dollar terms for the quarter, while the oversea consulting and oversea study tour business recorded revenue decrease of about 31% in dollar terms year-over-year for the quarter. And finally, VIP personalized class business recorded cash revenue decline of about 10% in dollar terms year-over-year for the quarter. We're pleased to see that our summer promotion strategy delivered outstanding results. We offered low-price experiential courses for multiple subjects in a total of about 70 cities, targeting grade seven secondary school and grade three primary school student customers before they start their new school year. The promotion price is similar with that of last year at around RMB 400. It's very encouraging that even we launched the summer promotion almost one month later than last year because of the huge challenge from the pandemic on our daily operation. The summer promotion remains very well received by the market. The complete promotion enrollment we brought in this year recorded a 31% increase year-over-year, reaching 1,079,000 enrollments. The encouraging results indicated the opportunity of the market consolidation as the COVID-19 pandemic fades and certain players may lack financial and digital capabilities to sustain their operations. It was well proven that under this strategy, we're able to better identify and retain customer with higher loyalty. Please note that these promotion enrollments are not recorded in our current reported enrollment. Going into the ultimate semester, we have returned about 60% of the students following the promotion, which will boost the revenue and margin recovery throughout the whole fiscal year 2021. And we do not foresee any negative impact of the promotions operating margin throughout the whole fiscal year. As these students move to the higher grades, the continual 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 the cities while we see potential for rapid growth and strong profitability. This quarter, we opened seven new offline training schools in the city of Changzhou, Huayan, Kaizhou, Yixing, Wuhu, and Jiaxing. Altogether, this increased the total square meters of classroom area by approximately 23% year-over-year, 1% quarter-over-quarter by the end of this quarter. This live increase is in line with our expectation. as we tend to achieve a more modest growth in capacity in the first quarter of the year and ramp up our expansion efforts in the latter part of the year to prepare us for recruiting more new student enrollment at the start of the following academic year. 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 a strong presence across different Chinese cities. We rolled out our due teacher class model for PubKey's program in 46 existing cities, for UCAN's program in 28 existing cities, and for both PubKey's and UCAN's in 10 new cities by end of this quarter. We're happy to see increased market penetration in those markets we have tapped into. We also saw the improved customer retention and scalability of this new model. With this proven result, we will continue this strategy in the rest of the year. As the outbreak of COVID has highlighted the importance and demand of online education, we have placed more resources in this area and invested $39 million in the quarter. to improve and maintain our OMO integrated education ecosystem. And as the COVID, outbreak of the COVID-19 has highlighted the importance and demand of the online education. Apart from the OMO infrastructure, we have allocated part of the resources in advance to training programs for our teachers to enhance their online, offline integrated teaching skills in response to the growing demand. At the same time, we continue to upgrade our technology platforms and will broaden the usage of online tools and content in our OMO system for all business lines throughout the whole network, as well as further develop the best teaching content and courseware to cater to online, offline education methods. We're glad to see that industry-leading OMO ecosystem has not only successfully managed to cushion most of the impacts on our service operation caused by the pandemic, but we also see the customer retention rates from spring to summer semester and from the summer to autumn semester were trending higher than the same period last year, which further demonstrated our customer satisfaction and effectiveness of our online courses throughout the OMO system. We believe those OMO initiatives will effectively boost the enrollment and speed up the recovery of business in the rest of the year. To capture the huge market opportunity in the online education space, we continued investing more resources in executing the new initiatives, the online K12 AdWords School Children's Business Physical Year 2021. During the COVID-19 pandemic, CoolLearn the large-scale market promotion by offering three large-size online lab broadcasting classes to the public and attracted several times more traffic than normal times. To capture this new market opportunity, Kulin also added a meaningful number of customer service representatives and marketing staff to support the new initiatives in K-12 tutoring. These moves have consequently raised our spending on the marketing front, but we believe these are necessary and understandable measures as we find ourselves in a euro-pandemic situation. Our Dongfang Youbo small-size class currently enjoys a significant first-mover advantage and stands to benefit from the increase in demand in larger cities. Cooler and larger-sized K-12 courses are able to offer the best in-class learning experience through the investment in upgrading the app and online platforms, introducing new education technologies, and adding more interactive features on online courses. Cooler also continues to establish teaching training centers in other locations to attract more qualified teachers and tutors to provide systematic training programs. At the same time, Cooler has dedicated a significant amount of investment to marketing and service enhancement in the past two quarters to attract customers during the peak of the pandemic. But we expect spending to be normalized in the coming quarter as we will be cautious in identifying high ROI marketing channels and evaluate their units' economics in real time, which will, in return, keep the average user acquisition cost at a relatively low level. We believe, as a result of the improvement of operational teams, as well as positive word-of-mouth promotion and brand loyalty, CoolLearn will continue to quickly acquire new users while enhancing the student retention rate. Now let me walk you through the other key financial details of the quarter. Offering cost expenses for the quarter were $836.1 million, representing a 1.3% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which exclude the share-based compensation expenses, were $820.2 million, representing a 0.7% increase year-over-year. Cost of revenue increased by 5.6% year-over-year to $464.9 million, primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation. Studying marketing expenses increased by 15.5% year-over-year to and $16.9 million, primarily due to the addition of number of customer service representatives and marketing staff with the aim of capturing the new market opportunity, especially for new in K-12 tutoring our pure online education platform, CoolLearn.com. General administrative expenses for the quarter decreased by 10.5% year-over-year to $254.3 million, Non-GAS GNA expenses, which exclude share-based compensation expenses, were $242.6 million, representing an 11.3% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 43.7% to $15.8 million in the fiscal quarter of 2021. Operating income was $150.3 million, representing a 38.9% decrease year-over-year. Non-GAAP income from operations for the quarter was $166.1 million, representing a 35.4% decrease year-over-year. Operating margin for the quarter was 15.2%, compared to 23.0% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 16.8% compared to 24% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $174.7 million, representing a 16.4% decrease from the same period of prior fiscal year. Basic and dilutive earnings per ADS attributable to New Oriental were $1.10 and $1.09, respectively. Non-GAAP non-income attributed to new rental for the quarter was $184.5 million, representing a 19.8% decrease from the same period prior fiscal year. Non-GAAP basic and dilutive earnings per ADF attributed to new rental were $1.16 and $1.15. Net operating cash flow for the first quarter of 2021 was approximately $391.6 million. Capital expenditures for the quarter were $95.2 million, which were primarily attributed to the opening of 42 facilities and renovations at existing learning centers. Turning to the balance sheet, as of August 31, 2020, New Rental had cash and cash equivalents of $1,047.6 million, as compared to $915.1 million as of May 31, 2020. In addition, the company had $291.8 million in term deposits, $2,778.4 million in short-term investments, New Orientals deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instruction delivered at the end of the first quarter of fiscal year 2021 was $1,563.1 million, an increase of 17.5% as compared to $1,330.7 million. at the end of the first quarter of fiscal year 2020. Looking ahead into the next quarter and the rest of the fiscal year 2021, despite the continued challenge from the COVID-19 pandemic are expected to remain. We're more clear about the recovery trends of the company near-term financial performance and the market opportunity over the long run. Our strategic focus an investment approach this year aimed at improving product quality, increasing teacher salaries, and enhancing our industry-leading system, which fully reflects our ethos of focusing on the essence of education. In view of market competition and opportunities to take advantage of post-COVID market consolidation, we firmly maintain a stable and balanced investment strategy that would improve the quality of our education service with aim to achieve sustainable and long-term growth as opposed to unhealthy short-term growth that often requires excessive investment and a higher cost to acquire customers. As such, we will 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% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-12 business in this fiscal year. We believe our class expansion will prepare us to further take market share from the other players post-COVID, as we believe some small players without strong financial position and online class capability may not be able to sustain their business during the period. We expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with a strong financial capability and a fresh offline facility enable us to further strengthen the market leading position and penetration. We will continue to leverage our investment into digital technologies and introduce our OMO system in more offline language training and test offerings, especially for the K-12 business and overseas test labs key business. The usage of the online tools and content in our OMO system for all business lines throughout the whole network will be enhanced. the whole OMO teaching experience will place more efforts developing the best teaching content and coursework, and also developing more advanced training programs to our teachers. With all the above mentioned infrastructure in place, we'll continue to pilot our OMO online initiatives in some major cities with high demand and higher operational efficiency. We believe that our 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 revamped new business model will also accelerate our margin recovery in the rest of the year and further extend our long-term margin target. Here, I have to highlight that all of these OMO products are supported by our offline classes that supplement each other in a hybrid format. All the teaching content, coursework, materials, as well as our teachers and technologies are developed and are regionally from our existing offline centers and resources. This integrative system continues to be broad in our customer base. as it enables us to reach students in satellite cities as well as the cities where we have fewer learning centers to cater all our customers. Furthermore, we will continue to invest in and implement new initiatives, including product content development, teachers recruiting training, R&D, as well as the sales marketing in pure K-12 after-school children's business our coolant.com platform. Third, our top priority will remain as the focus on controlling cost and reducing expenditures across the company to minimize the negative impact from pandemic on bottom line. We believe we will resume the expansion of the overall non-GAAP operating margin this 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 strategies, we remain optimistic of the brighter prospects of our business and believe our investments now bring us fruitful returns in the long run. As the pandemic situation and residual measures begin to ease in China, the timely reopening of all schools and our offline learning centers in September, the start of the new fiscal year, is seemingly to be a massive boost for our business. We believe this will enable us enable our recovery to pick up the momentum, which will likely to be reflected in the results in the coming quarters. We're certain that with New Rental's leading brand, superior education products and system, and the best teacher resources, we have the ability to further into market share in China's huge after-school children market. and deliver long-term value for our shareholders. We're looking at the near-term and our expectations for the next quarter. The expected total revenue to be in the range of $863.7 million to $887.3 million, representing year-over-year increase in the range of 10% to 13%. to provide the breakdown of the expected top-line growth for key business lines. K-12 business is expected to grow around 25%. Overseas test fire program is expected to decline 30% to 35%. And overseas study consulting and study tour business is expected to decline 0% to 5%. year-over-year in dollar terms. We also expect the overseas related businesses including overseas test labs and consulting service will continue to decline due to the pandemic around the globe caused by the cancellation of the overseas exams, suspension of the overseas schools, and restriction on travel. The negative impact on these overseas related businesses will affect the entire education industry in China, not only for New Oriental. and may last over the coming one or two quarters. That's that. 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 gradually resume our offline operation in all cities that we are in by mid-September, and vast majority of the students in these cities have successfully migrated back to our learning centers from our OMO online classes. To conclude, we are now talking on all kinds of the operational actions to boost the enrollment and classroom utilization for the autumn semester and speed up the recovery of the business after the resumption of the schools and learning centers. We're confident that the demands for after-school tutoring will gradually pick up and trend toward normalized level in the rest of this fiscal year. I must mention that this expectation reflects New Entra's current and preliminary view, which is subject to change. At this point, I will take two questions. Operator, please open the call for this.

Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. To ask a question now, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, that's star 1 for questions. Your first question comes from the line of Tian Ho from TH Capital. Please go ahead.

Good evening, Stephen, Cici. Congratulations on a good quarter and guidance in those kind of challenging times. So the question is related to the margin. On the growth margin, on a year-on-year basis, it was down pretty significantly. So I wonder how much is cost by the overseas business and going forward, what's the growth margin is going to trend? Thank you.

Yeah, the growth margin was down by roughly 6% year-over-year this quarter. I think the first reason is that the revenue was down by 8% in this quarter, year over year. And in this quarter, we still raise the salary of the teachers. And because we think of the teachers' quality as the core competence of the education business, So as we did in the last several years, we raised the teacher's salary. And also, we acquired the top teachers from the other small players during the pandemic. And the rentals, you know, I think that, you know, during the COVID-19 period, we still expanded our capacity in the areas where in the cities that we feel the comfort for driving potential growth in the future. And, you know, this quarter, the year-over-year expansion was 23% at the quarter end. So it drives the gross margin down. But I think it's just one time, okay? Because, you know, as I said, our business, you know, is in the process of the recovery, and we have already given the guidance of the Q2, And within it, in the Q2 guidance, you know, the K-12 business will be increased by 25%. So I do believe the GP margin recovery will be happened in the second quarter. Okay.

Thank you. Our next question comes from Felix Liu from UBS. Please ask your question.

Good evening, management, and congratulations on a good result. given the challenging environment. My question is on utilization. I understand that a lot of the offline classes have resumed in most of the cities. So could you give us some color on what the utilization is like currently and how is the trajectory going forward? Thank you.

It's a little bit hard for us to disclose the utilization rate because we're still in the time of the pandemic. For example, our Beijing school reopened all the learning centers in mid-September. That means we locked almost 10 to 15 days in September. And during the whole summer, I think some of our learning centers were not open. So it's really hard for us to disclose the utilization rates now. And I think we will disclose the utilization rates in, I think, the Q2 or Q3. And, but, you know, we do believe the utilization rates will get higher and higher after the pandemic is over. Because, you know, typically our revenue growth is higher than the expansion plan. So I think that means, you know, we do have to leverage on the learning center utilization. So this is the mid-long-term trend. Felix?

Thank you. Next question comes from Gene Yun from New Street Research. Please go ahead.

Hi, good evening. I just wanted to talk about overseas test prep. Your guidance kind of suggests, obviously, the bottom is in in terms of this slight improvement from last quarter's numbers. Can you just kind of talk about if that's really the case or if we're seeing kind of a seasonal head fake? And then the second question I have is I think we're seeing a massive testing in Qingdao of approximately like 9 million people or something like that. I think it just hit the press. I just wanted to see how big that revenue from that city is in case there is a second wave in that particular city. Thanks.

Yeah, the revenue decline of this quarter, Q1, was 51%. But we have already given the guidance of the Q2. The Overseas Test Lab will be down by somewhere around 35%. So the thing turns to be better in Q2. And because we have seen some, like the TOEFL or GRE test, were reopened in China in different cities. But anyway, I think the overseas Tesla business will be negatively, to some extent, to be negatively impacted by the COVID. And, you know, the Q1 this quarter will be the worst. And I do believe the overseas Tesla business will be recovered step by step. So this is my answer to the president about the Overseas Test Lab. And Qingdao, yeah, we know what happened in Qingdao since last week. And so far, we don't get any notice from the government of the shutdown of the schools. So that means our learning centers in Qingdao are still open now. But anyway, we will meet the requirements of the government. But you know, During the peak time of the COVID-19 times, I think we have the ability to move all the offline courses to online. We tested for two rounds of the pandemic. And so I don't think it will negatively impact our revenue of Qingdao. Anyway, Qingdao is now, the revenue contribution from Qingdao is very small.

Thank you. Our next question comes from Mark Lee from Citi. Please go ahead.

Hi. Thank you for taking my question. I want to ask... I'm sorry, I can't hear you very clearly. Hi, is it better now?

Sorry. Hi, Mark, I can't hear you.

Hi, hi, is it better now? Hello?

I think the line has some problem.

Try it again. Hi, is it better now?

Can you come closer to the mouthpiece, please? Hi.

Okay.

I just want to ask how is our FY21 guidance? Could you share the latest guidance for the full year with us? and also our OP margin target if we have any change in the timing to reach that. Thank you.

Okay. Yeah, actually, you know, we have already given the guidance, given the guidance of the Q2, and by 10% to 13%, And, you know, actually the business is not fully recovered in Q2, the autumn quarter. You know, Beijing School was reopened in mid-September. And we expect the revenue growth in the coming Q3 and Q4 will be better than Q2 because of the more recovery of our business and easy comparison. of this year, you know, the COVID-19 started since the last year Q3. So we do believe our top line growth performance in Q3 and Q4 will be better than Q2, okay? And margin guidance, yeah, I think, you know, I think Q2, you know, the next quarter, the margin, we believe the margin decline in Q2 will be continued to narrow down compared to this quarter, the Q1. And we're confident that we will be able to deliver the continued margin extension after the pandemic is over, especially in Q3 and Q4. And we don't want to change our mean long-term margin guidance. Mark, is it clear?

Thank you. Our next question comes from Alex Hsu from Credit Suisse. Please ask your question.

Hi, Stephen. Thank you for taking my questions. So my first question is about the breakdown of your next quarter K-12 revenue guidance. So I think in the August quarter, it's very unusual that pop keys was a little bit slower than the UCAN business. And what about the next quarter? And the second question is about the rollout of your I think I read from the news report that you launched the pure online small-class model in your Hangzhou school and received very positive feedback from the province-wide students. Would you please share more on that and what's the plan for the further rollout? Thank you.

Your first question about the Alex, can you repeat your first question again?

Sure, sure. So I noticed that in the August quarter, the pop keys business was a bit slower than the UCAN business. And what about the next quarter? We think the 25% growth. What about the difference between pop keys and UCAN?

Yeah. I think, you know, next quarter, the Q2, I think the growth rates of the UCAN business will be a little bit higher than the podcast business growth. Because, you know, the UCAN business is more mission critical. So for the middle school, high school students, they tend to study more, especially after the COVID-19. So that's why the growth of the UCAM business grows higher than the top kids business. And, yeah, the OMO, oh, it's a great question, the OMO. Yeah, you know, actually, we started the OMO business three years ago for our Beijing school UCAM business. But after the COVID-19, we are threatening the development of our OMO. Because during the COVID-19, almost all of our students took the courses pure online. But after the COVID-19, vast majority of our students goes back to the offline learning centers. But it would choose some percentage of the online course for those part of the students. And also for some new satellite cities, you know, we started to roll out the new OMO model. Yeah, I think that Hangzhou is a very good case. And this is the first year that the Hangzhou school did the OMO model. So Hangzhou school acquired a lot of the new customers of the grade 10 students from the satellite cities around Hangzhou. So I think it's a very good start. And we will roll out in more and more cities and provinces. OK. And one more thing is, you know, the retention rate of the OMO model in how the school, I think, you know, after the summer is over 50%. So I think it was a very good sign for the study results of the OMO model. So we will do it more and more in more cities. Cici, you want to add something?

Yeah, we're, as Stephen emphasized earlier in the prepared remarks, actually we have piloted this OMO model in around 20 cities already, just in the summer, only recovered, resumed the offline operation from the summer, and now we have already testified this model in several cities, key cities, and the feedback is good. So that's continued to be the key strategy going forward, yeah.

Thank you. Our next question comes from Sheng Zhong from Morgan Stanley. Please go ahead.

Hey, good evening. Thank you for taking my question. My question is on the OMO as well. So I want to understand more about how to operate this OMO model. So for the local school head, what's his key KPI for OMO? And so how will he balance to open new learning centers or push more OMO into these cities? Or if this, because you have two online as well, or if two online were mainly focused on the surrounding cities? Thank you.

Yeah. Hi, Zhongsheng. I think this is a great question. You know, we set up the KPI, you know, of the school head You know, I think the KPI of the school has divided by two parts. Number one is the traditional offline business, and second is the new OMO model. So two different KPI. And I think it's easy to understand the local school has made the decision. You know, for those areas that we are aware we do have the learning centers, I think we only do the OMO. and we would still use the learning centers to acquire the new student enrollment. But for the areas where we don't have the learning centers or for the new cities we don't have the learning centers there, the OMO will be first deployed. But as I said in the prepared remarks, All the content and courseware and teacher resources, even the teacher training system of the OMO model, are originated from the local city. But the head office will give the full support to the different areas and different cities. So we will roll out the OMO model to more cities going forward. I do believe the OMO model will contribute more and more revenue going forward. One more thing to add. We don't want to spend crazy money on marketing expenses for the OMO model. I think the students acquisition cost for the OMO model will be very low. it will be the same as our traditional offline business.

Thank you. Our next question comes from the line of Lucy Yu from Bank of America Securities. Please ask your question.

Thank you, Steven. So I would like to ask a question on dual-tutor. Steven, you just mentioned that when we penetrate into new cities, actually OMO will be the first choice. So how about dual teacher model? Are we still going to roll that out? And as far as I can understand that, previously, before OMO rollout, we were using the dual teacher to penetrate into lower tier cities. So now it's our first choice in terms of business model in a new city. And secondly, you mentioned that in dual teacher model, we have seen improving probability and the retention. So could we share more number on the probability and the retention of dual teacher business model? Thank you.

I think that going forward, the OMO model will be the first choice. We run a business in the new cities, especially for the low-tier cities. But, you know, we are doing well for the due teacher model. You know, we opened more and more the new cities of the podcast and UCAN program. But, you know, going forward, we will focus more on the model that the teachers in the head office will cast the due teacher model class to the low-tier cities. Typically, it's focused more on the top students in the high tier and low tier cities. So we have the two ways to run the business in the low tier cities, OMO and the due teacher model. Lucy.

Thank you. Our next question comes from Alex Liu from China Renaissance. Please go ahead.

Thanks, Stephen, for taking that question. First, on teacher compensations, how fast should we think about the teacher compensation growth going forward, especially some online players are rather aggressive in terms of teacher paying out? And second question is that, you know, regarding the strong summer enrollment growth, I was just wondering, you know, is there any specific reasons behind or any specific sort of observations in summer? why we did so well this year and how much of the growth is coming from, you know, small player exiting the market.

Thank you. Alex, I think the teacher's salary, yeah, we think the teacher's quality is the core competence of the education business. So we raise the teacher's salary by 8% to 9% every year. Even with faith to the challenge during the period of the COVID, we still did the same thing. I don't think the teacher salary increase will drive the margin. On the contrary, paying the teacher more will bring us the high quality or high quality feedback from the customers, students, and parents, and drive the utilization rate up and the revenue up. So I think we pay more of the teachers will help the GP margin performance better near-term and long-term. I think this is our strategy for the teachers. The second question is about summer enrollment. I think in the spring semester we met some problems. on acquiring the new customers because of the COVID. We couldn't see the students and parents face-to-face. But during the summer quarter, most of our learning centers were reopened. So we can give the study advisors to the parents and kids face-to-face. And actually, the competition environment, yeah, we know some small players disappear from the market. So I think it's a great opportunity for the big players like us to take more market share from the markets post-COVID. And the numbers, especially, you know, since the second half of 2020, of July, you know, the cash revenue and the enrollment numbers were booming. And so that's why we give the guidance of the K-12 business growth in second quarter will be somewhere around 25%. And I do believe the enrollment growth and the revenue growth in Q3 and Q4 will be even better. Thank you.

Thank you. Our next question comes from DS Kim from JPMorgan. Please ask your question.

Hello, sir. Hi, sis. Congrats on a good set of results and very good guidance. Actually, most of my questions have already been answered, so maybe I can just follow up on OMO. Can I double check, when you say this new piloting OMO, are we referring to pure online localized curriculum classes like PAYO online? And if so, Can I check what's the size of the each class ASP gap with the similar offline courses, and if there's any difference in offering, i.e., you know, this OMO is more for the weekdays versus weekend, or more for short-term courses, or it's really just same as our offline offerings?

You know, we're really of the new OMO model by three ways. Number one, the large classes. That means the large classes. And, you know, this is typically, you know, majority of the classes, you know, are happening online. And I think the price of that part of the course, you know, I think it's 20% to 30% lower than our normalized classes. And secondly, the OMO small size class. It's a hybrid class. And it's offline and online, the integrated classes. And the last one, number three, is some very short-term courses. I think the typical purpose of those part of the business is to acquire the new student enrollment in very short-term courses. And we ask the famous teachers to acquire the courses. And I think it's kind of the way to ask the marketing way. So we have the three ways. Anyways, OMO is still in the early stage. I think so far so good, and we'll do more going forward. So in next quarter or even the rest of the year, the earnest call, I will share more information with you. Thank you.

Thank you. Our next question comes from Tommy Wong from China Merchant Securities. Please go ahead.

Oh, hi. Thank you, management and Stephen. Congratulations on the strong results. Just a quick question. I guess we don't have a lot of time left. Can you comment about a secondary listing in Hong Kong? And, you know, potentially, you know, we need more funds to compete on the online space. You know, all these other guys tell, you know, they're all burning a lot of money. And if we want to play in this game, we have to kind of participate. So just wondering, you know, the secondary issue, bring some more money and play the game. Just wondering what's your thought on that. Thank you.

we are not in a right position to make comments on secondary listing. And the money. Yeah, as I said, you know, our strategic focus and investment approach this year, and not only this year, but also the mid-long term, okay, is aimed at improving the product quality increasing the teacher salary, and enhancing our system. I think these are the essence of the education. So we know there's a huge opportunity in the market, especially after COVID. We firmly maintain the stable and balanced investment strategy, and we want to spend crazy money on marketing and get unhealthy short-term growth. So this is our strategy, not only for now, but also for the near long term. Thank you.

Thank you. Our next question comes from Liping Zhao from CICC. Please go ahead.

Hi, Susan. Thank you for taking my question. My question is about the capacity expansion. How should we expect the impact of this pandemic? on your capacity expansion plan, especially for your K-12 business? And any chance we can see an accelerated expansion during the market consolidation? Thank you.

We aim to add around 20% to 25% new capacity in the fiscal year 21. And so, you know, last year we planned to open 20%. Finally, we opened 26%. And this year we made the same plan. And anyway, I think this is a great opportunity for us to take more market share. So we will open 20% to 25% new capacity to acquire new student enrollments. And also, you know, we do have the OMO model. And so the tool is the new capacity extension and OMO will bring us the new customers in the whole fiscal year 21. And, yeah, our strategy of the extension is very stabilized. Thank you.

Thank you. Our next question comes from Felix Liu from UBS. Please go ahead.

Oh, thank you. I just want to have a follow-up question on our different revenue balance. I noticed that the growth in different revenue is a lot stronger than our Q2 revenue guidance. I know there's a reason behind. Thank you.

Because of the pandemic phase in China, especially in the summer, And so as I said, since the second half of July, the revenue and enrollment growth was booming. And so that's why we got the higher deferred revenue balance at this quarter end. And I think In the Q2, we're still in the process of the recovery. I think even in the Q3 and Q4, you will see even higher enrollment and top line growth of the, especially for the K-12 business. Because I do believe we are taking the market share from the small players and also, and we do believe we will have the even higher student retention rate going forward because we met a lot of things last year. since four or five years ago. And we do believe we are providing one of the best products in the market. So I think the recovery will happen step by step and more back-loaded, Q3 and Q4. Thank you.

Thank you. We are now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Mr. Steven Yang, for his closing remarks.

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

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.