Ladies and gentlemen, good evening and thank you for standing by for New Oriental’s Third Quarter of Fiscal Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host for today’s conference, Ms. Sisi Zhao, New Oriental’s Investor Relations Director. Ms. Zhao, please go ahead.

Hello everyone, and welcome to New Oriental’s third fiscal quarter 2013 earnings conference call. Our financial results for the period were released earlier today and are available on the Company’s website as well as on Newswire services. Today, you will hear from Louis Hsieh, New Oriental’s President and Chief Financial Officer. After his prepared remarks, Louis will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now turn the call over to New Oriental’s President and CFO, Louis Hsieh. Louis, please.

Thank you, Sisi. Hello everyone and thank you for joining us today. First, the entire New Oriental family would like extend our warmest wishes to all the victims and those affected by the devastating Sichuan earthquake. We have donated RMB 2 million for the earthquake relief fund to help victims and assist reconstruction efforts. New Oriental stands ready to do more as needed. And before we discuss results, I would like to make a correction, there is this error in the earnings release that was released several hours ago. Under Michael Yu’s quote in the second page of the earnings release it says New Oriental’s Chairman and Chief Executive Officer, commented, we are pleased to report solid results for the third fiscal quarter with sustained top-line growth of 28.6%, which was well above the guidance range of 22% to 27% growth; that’s incorrect. The guidance range is actually 25% to 30%. The 22% to 27% excludes the elite business. So, it should be at the high end of the guidance at 28.6% which is within the 25% to 30% guided that we have given. So we apologize for that error in the earnings release. Now going to the third quarter, our results for the third quarter are encouraging and I am particularly pleased that after a tough few quarters, we are now seeing some very solid operating leverage and improvement in key areas. As you know, since last October we have been committed to reducing costs and improving operating efficiency through our network. We are now seeing those efforts starting to pay off, with a healthy improvement in GAAP operating margin to 10.8% this quarter, compared to 10.2% in Q3 of last year. But I'm also encouraged that this new improved bottom line performance has not come at the expense…

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. (Operator instructions). Your first question comes from the line of Tian Hou from T.H. Capital. Please ask your question now.

I have a question regarding the learning centers in a closure and opens. So, I would like to know among of the 30 centers that you have already closed, what was the criteria for shutting them down and where are they located and so for what reason you shut them down. So that’s number one. Also, related to learning center, now you are also opening more and just so, what is ongoing basis, what is the plan for how many you want to continue to shutdown, how many you want to open? That’s the question.

That’s a very good question Tian, thank you. What happens now is that the finance department and the HR department jointly do an analysis of every learning center in New Oriental. So all 700 plus learning centers. We look at learning centers, the ones we look to close are the ones that are been underperforming for one or two years or we don’t believe will ever become profitable. So that’s the criteria we look at based on the performance of the learning center to date, and whether it’s ramping according to what our typical learning center will do. In that case, we will go to the school head and ask for those centers to be closed and they'll have an opportunity to answer and make a case whether they should or should not be closed. So those are how we have closed 30 in two quarters and probably another 10 to go. So we'll probably end up closing about 40 to 45 learning centers for the year. And the learning centers are in all cities, including Beijing and Shanghai, any area where the learning centers are underperforming as far as utilization or as far as the ramp up in enrollments. They have been open for several years and still not profitable there. On the how we open up new learning centers is that we look at utilization of the whole city and of each learning centers around there. So, the fast growing cities that are of high profit margin and have high growth rates, we will allow them open learning centers to capture the market. So most of the learning centers are being open now in tier 2 and tier 3 cities, they’re not into tier 1 cities. So, as far as going forward, we'll probably end up this fiscal year with, we have 733 now, we’ll probably end up somewhere around 720 to 730 for the fiscal year. So it means we’ve added zero almost of the whole year, and next year we will probably open no more than 50, of which we probably won't open them in Q1. The ideal for us to open them in the slow season of the fall and then some in the winter and spring but not in Q1 this summer. So that’s why we are expecting the next three quarters to be very highly profitable as we are confident the operating margin is going to go up quite fast.

Next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question now.

My question is about your VIP business. Could you comment on how much contribution in terms of revenue enrollment for this quarter? And then also looking forward, as you mentioned previously that New Oriental would probably like to control the growth of 101 and focus more on the small to your large class format, but how effective could you be so if the demand in China is indeed shifting towards the 101?

Well I do not know, we want to conform the 101 growth Philip. What we want do is that we don’t want to open up anymore learning centers in 101. So, we want to make them as part of the other learning centers together. Therefore students can take 101 but what happens is if they want to stay on the 101 course, it's going to fill up quicker because we are not opening up a lot of new centers. So to in the locations, we have they will fill up there. Second thing is that we are increasing the price on 101, so it's more cost effective for students to select a small class and large class offering and we are giving incentives to the learning center because operating margin is the key metric for the school head to encourage more large class and small class that is going up. So you can call it control the growth of 101. I think it would be more as we opened up almost 500 101 centers in the last three years. Once we stop doing that, the utilization will go up. When the utilization goes up obviously the enrolment growth there will go down. So the utilization will go up, that means the margin will go up.

What about the contribution of…

It is about 30% of revenue for the quarter. The enrolments is much less because the ASPs are so high I do not know exact percentage of enrolment were VIP but it is normally about 7% or 8% Philip.

Thank you for your questions your question comes from the line of Mark Marostica from Piper Jaffray. Please ask your question.

My question is related to the expenses that your carrying forward that are tied to the learning center closures and the headcount reduction. Could you give us a sense of those expenses Louis and when you expect them to kind of peder out?

I think they should peder out Mark by the end of this year so in Q4. I think the total amount, I do not have a student breakdown by quarter because it's a fluid process. We will be somewhere between $4 million and $5 million for the whole process and that it should not occur again next year. We are looking in some closure and some reduction expenses each year. I would like to make new policy of New Oriental that we left over the bottom 3% to 5% of performers each year. So we are discussing right now and if so that’s the case, then we will have other seventh class on an ongoing basis. But for this one restructuring, I thing their cost should be finished by the end of Q4.

And then, one follow-up regarding utilization; could you talk about what your utilization was, you experienced in the quarter and then your goals going forward.

Utilization, we change the way we measure it. So I think the current way is actually much more accurate which is that we look at every season, every time that can be open. In past years we would measure utilization, that if the class opened, we’d count it as a utilized class, the whole class even if it is only half full or one quarter full. Now we count it by every seat that’s in that classroom. So utilization rate always goes way down. So our total physical real utilization rate is somewhere around 20% to 25% and so it’s very low. That’s why we believe we can afford not to open learning centers for the rest of this year, on a net basis, and also through Q1 of this year, and still maintain the high 20% to 25% revenue growth.

Your next question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

With regard to your performance that Beijing and Shanghai school, it’s good to see revenue growth rebounded, but it seems that net income is too growing slower than revenue. I wonder if you can talk about the margins outlook at these two schools and when do you think the margins will also achieve year-over-year improvement?

I think the margins were improve in Q4 and Q1. So they will improve immediately now. The reason the profit margin is lower is because Beijing and Shanghai had a lot of learning centers that were closed. So we had 17 learning centers last year, and it was too high, so some of them were closed. Also Beijing and Shanghai have had more of the impact from adult English and the CT4 and 6 decline, and those are typically larger classes in higher margin. So those, I think, is beginning to subside and so I think Beijing is set up for substantial margin improvement in the quarters ahead and that will drive the whole company. Because Beijing is so critical to our business. Shanghai is still work in progress, but as we said in the script it is actually encouraging. So, we believe that Shanghai is getting better and the margin will also improve in starting in this quarter and for sure in Q1. So, you are borrowing some kind of disaster from a pandemic, Q1 is set up to be a very strong quarter either for Beijing and Shanghai.

And if I can sneak in one more; I know you have close to 900 million of cash on balance sheet and you just announced the 50 million share buyback but any thoughts with regards to another dividend?

Yes, we discussed that yesterday. And I saw your note and you jumped the gun on us. I think as you know, if the share price is low, we will probably do a buyback. As one of the six Board members I am committed to pay a dividend this year. But we would like to look at the Q4 results. So what the Board decided to do is look at after Q4, if the results are descent then we will most likely declare a dividend as well one equal to or larger than last year's. But it's not done until it's done. The issue again is the sticking point is the tax that you have to pay to take the money out of China. So, we will do what Apple does but we will do it in two steps. We will do a buyback first and then a dividend, just putting it together. Yes, of being $100 billion, we will probably be $100 million to $110 million total, between the two. But like I said, you can’t hold me to that until we get Board approval. Because this is just me talking, I of course want to pay a dividend. I don't think we can use the money more efficiently and I'd like to reward our shareholders for sticking with us. And after the Q4 earnings we will have a Board meeting and that will be one of the top items in the agenda.

Thank you for your questions. The next question comes from the line of Steve Zhang from Macquarie. Please ask your question now.

I just have a follow-up in terms of your school expansion plans in FY14. So, it seems like your competitor is also planning to start re expanding, one of your larger competitors to re-start spending in the second half of their fiscal year. Is there a reason for this or do you see that this is a necessary move concerning how the landscape it is shaping out to be?

Well I think for us is we've already gone through that expansion, right? I mean we have gone through 500 leaning centers in three years. So, I think because you have had a prolonged expansion phase, we can have a longer harvest phase. I think, I know which competitor you’re talking about. I think as they had one year expansion phase followed by a one year contraction. I think in their situation I think it’s because their key market of Beijing, because of a governance policy change has made that business stop growing or shrink and so therefore they have to see growth in other markets. We don’t have that program. So there are other markets we’ve already established in 50 cities, we have all but 120 learning centers outside of Beijing and Shanghai. So we have 80% of our network outside of Beijing and Shanghai already. We don’t need to grow those kinds of numbers. In the ideal word, we would add 80 to 100 leanings centers a year, which means we have 80 to 100 learning centers, that’s about 80,000 to 100,000 enrollments a year. So, that’s why the enrollments look low because this is pure organic growth in existing learning centers and we’re cutting learning centers. So, if you look at the normal year, we probably organically grow about 8% enrollments, another 4% from new learning center growth. So, that’s why the number looks low for this year because we’ve added no learning center in spite of cutting learning centers and basically enrollments are falling because the students went away because we close the learning center. That will not happen in future years. So the knock on our numbers this time is your student enrollment decrease. Of course they’re decreased, we closed 30 learning centers and we added none essentially for the whole year. So, enrollment year, like last year we added 200 learning centers that’s the enrollment numbers were so high. So we want to get operating margin. So, we sacrifice some growth for that operating margin expansion. I think it’s the right balance.

Okay, sure. Does that mean the linearity of your operating margin going forward would be more loaded in the first half of fiscal ’14 and the expansion won’t be as appearing this second half next year?

I you are going to see a huge expansion in Q4, Q1, and Q2 of next year. So this time next quarter, Q1 and Q2, because they were quite poor last year, right, to be honest because we added large numbers of learning centers in those three quarters. Sorry, in Q3, Q4 and Q1 of last year. Therefore, I think this year because we’re not adding any learning centers we’re actually making that zero because of the closures. Then that means that you’ll see what this business model really looks like, which is a much higher operating margin than 12%. Our target operating margin should be 18% GAAP and 21% non-GAAP over the next couple of years.

Thank you for your question. Next question comes from the line of Fei Fang from Goldman Sachs. Please ask you question.

First question is regarding your deferred revenue. So on the balance sheet the revenue growth has declined sequentially from about 38% or 39% in the past few quarters to right now it is about 23% year-on-year in 3Q. So, how much of the decline was related to the Chinese New Year timing versus say the controlled expansion of the 101 format? Thanks.

Yes most of it is related to the CNY change Fei. So if you look at the first six weeks of this quarter, revenue reaches about 34%. And so really probably most of it is due to the CNY affect and then there is a significant affect due to the controlling 101 as well as you call it controlling because 101 students pay for two or three quarter in advance. So they pay a much larger amount that builds up the balance, two quarters they built up balance of the deferred revenue. So I think is that it is probably slightly more because of the Chinese New Year effect the 101 slowdown is an intentional slowdown on our part is also having affect. I think the revenue for Q4 is shaping up quite healthy. I think overall we will still grow 20%-25% total and higher than 23% or 28% if you exclude the ELITE business.

Yes most of it is related to the CNY change Fei. So if you look at the first six weeks of this quarter, revenue reaches about 34%. And so really probably most of it is due to the CNY affect and then there is a significant affect due to the controlling 101 as well as you call it controlling because 101 students pay for two or three quarter in advance. So they pay a much larger amount that builds up the balance, two quarters they built up balance of the deferred revenue. So I think is that it is probably slightly more because of the Chinese New Year effect the 101 slowdown is an intentional slowdown on our part is also having affect. I think the revenue for Q4 is shaping up quite healthy. I think overall we will still grow 20%-25% total and higher than 23% or 28% if you exclude the ELITE business.

Second question, regarding the margin expansion for the quarter, what is some of the rationale for management to control amortizing budgets and in a constant spend and what impact should we expect on revenue growth in the medium term say after 1Q next year?

Well you would remember if you are not opening your learning center you do not need to spend money on marketing. So contrary to what some people believe, most of the marketing spending is when you open new learning centers. So, if you are not opening new learning centers, the marketing spend already goes down. New Oriental's word of mouth is so strong, the brand name is strong, the existing leaning centers fill up on their own. We do not really need to spend a lot of money in marketing. It is for the new one. So that’s the reason. It is not we intentionally cut it, it is because we are not opening up learning centers, so there is no need to spend a lot on marketing.

Thank you for your questions. Next question comes from the line of Chao Wang from Merrill Lynch. Please ask your question.

Firstly as a follow up on previous one, I felt given that Beijing and Shanghai margin was actually down, so I am wondering if the margin improvement is from other schools or from the headquarter? And secondly I remember you mentioned in last earning call that you are facing competition from international program of public school. So wondering any updates on that front? Thank you.

Yes, I think the market is declining in Beijing and Shanghai. I think you will see margin pickup in Q4 and Q1, especially in Beijing. Shanghai may be not as much and the reason is because Beijing has some restructuring cost and now I think most of those are gone and I think the business in the Beijing is improving. So we closed some learning centers there. In Shanghai, we closed learning centers as well. Actually the margin should improve but Shanghai has more management related problems than Beijing. I think it was just an overbilled. So I think it the second part of your question, sorry Chao Wang, was related to?

As with the first one, I am asking whether the margin improvement is from other schools performance or headquarter levels costs.

Well, this is from other school’s improvement and also the restructuring, the fact that we have almost 2800 fewer employees now than two quarters ago. So, this operating efficiency, in past years we were adding a lot of cost out of the revenue by opening learning centers not doing that any more. So you are getting a better sense of the real margin of the business of each learning center as it fills up.

Got that and second question is regarding the competition from international program of public school.

Yes, that is still ongoing, especially the northeast of China. I think these things have a way of working themselves. I mean that they do have a short term negative impact on us but I think the parents will realize may be too late in this year’s case that the quality of those public school programs is just not as good as New Oriental’s English or overseas test prep. They are just not as good. And so I think there will be a typical what’s happening in past incidents where schools have tried this, they will be a rebellion by the parents and they’ll send their kids to our school any way. The quality is just not the same.

Do you expect any cooperation opportunity with those public schools?

We do, in most cities we do have cooperation with public schools, but some of them I guess, to make extra money, they will go through these kind of exercises, of setting up at sister schools whether it’s in line with the policy or against the policy, they do it any way. And then they kind of coerce the parents to send their kids to that program but ones that they are hurting actually the kids because their programs typically not as good and the teachers are not good as the campus is not as good as New Orientals. And so I think a lot of the parents will see through this and I think they have and many of them will come back, even against the wishes of the school. This happens to us all the time. It's just this time it’s a bigger group in a bigger region, in the whole northeast.

Thank you for your question. Next question comes from the line of Vivian Hao from Deutsche Bank. Please ask your question.

Based on your current experience, what's the breakage cost on the per center basis, I guess including the measure of the lease and also severance. This is my first question and then second question is in terms of the centers that you closed, I understand a lot of them are probably mixed centers with all divisions, say VIV or test prep together with K-12. So how to deal with the partially dis-functioning divisions? Are you going to close them down? It just sounds difficult to just cut it off, two questions first.

There isn't an average for center to center closing because each center had a separate lease, so the breakage costs of each lease are different, some are six months' rent, some are one year rent, some are, no breakage or one or two months' rent. So it varies by the size of the center and also by the terms of the lease. As far as the employees that are released from that center it's the same thing, some of them have an employment contracts, some do not. The ones that do not, typically we pay one to two month severance for every year they've been in New Oriental. So it varies a lot by the school, the learning center size, the city, the employee contract. So there's no average that's why I just gave you a ballpark number of about $4 million to $5 million for the whole thing, for the whole year.

$4 million to $5 million?

Yes, $4 million to $5 million. As far as the, how do you break off part of a learning center, typically if we close a learning center we'll get some of the students to go to nearby learning centers but we will lose some permanent students because they won't take the trouble of traveling to another learning center and go to a competitor, and that's why the enrollment numbers are not trending in the low teens, it's because of that breakage cost. It's not because our business isn't doing well. It's because some of the students are actually leaving us because we're closing the learning center that they're used to going to. This effect will also end by the end of this year. So we expect enrollments, as we open learning centers again to back up into the 10% to 12% growth range in the years ahead. This is a funny year because as you close the learning centers you actually lose students and that's why the enrollment number looks lower than normal, but we're not opening centers. So this is an abnormal year.

Understood, final question, the recording from last quarter, is there any update on the Shanghai school issue, fully resolved or?

I mean the Shanghai school head has been changed nine months ago. He is now replacing many of the department heads. So you've got almost a whole new management team in Shanghai. And I think he is making a lot of progress. I think Michael was talking to him and I think yesterday Michael was saying that he is pleased with the things that are happening in Shanghai. So we would expect Shanghai to do better in the quarters ahead.

In terms of margins?

Yes. Because the closures have happened, right? The learnings centers have already been closed. So this year has all the breakage cost in it.

Thank you for your questions. Next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.

I will ask a few questions. Firstly, on this 101, is the revenue contribution from Shanghai and Beijing this quarter, and their respective revenue growth? And secondly, I do want to know whether there are any guidance on your ASP growth rate for next year? And lastly I'm just wondering what is the difference in the operating margin between first tier cities and second to third tier cities?

Yes, I think Beijing growth rate in the quarter was 17%, Shanghai was 9% for this third quarter. The percentage of revenue, Beijing was 23% and Shanghai was 9%. And then for the profit margin for the quarter, Beijing was 34% operating margin and Shanghai was 20%. That answer your questions?

Yes. And the second question on ASP growth for next year?

I would expect it to be similar to this year, probably real ASP growth about 12% to 13%; and then because there is still a shift towards smaller classes, the overall effect will be 15% to 16% and we expect enrolments to grow probably 10%. So we will again 20% to 25% growth next year. Let’s say that's the current expectation. The budget is not finished yet. The budget, we would probably expect somewhere between 20% and 25% growth. We want to sacrifice some growth in the name of getting margin improvement.

And the last question on the operating margin between first tier cities and second and third tier cities?

Some of the second tiers cities have much better margin than Shanghai. So, the profit margin, just to give you a few examples, the profit margin in (inaudible) was 32% this quarter. The profit margin of Chongqing school was 28%, profit margin of (inaudible) 20%. So many other schools in Shin Jung (ph) was 27%; many of the schools have much higher operating margin which are high.

Thank you for your question. Next question comes from the line of Trace Urdan from Wells Fargo Securities. Please ask your question.

Louis I wanted to go back to the share buyback and first of all ask, are there extraordinary costs associated with repatriating those dollars in order to execute the buyback?

This one there is not because, well there is a little bit but it is the final amount of our retained profit before the new tax came into effect in 2008. So these are all the historical retained profits in New Oriental coming up, RMB 300 million with $46 million, that's paid for, no tax. We just got the money yesterday. We just got approved to review. But that’s why I said the fight in the Board will be in a dividend. The dividend we will have to pay the 5% or 10% tax. We have no more way of getting tax free money of, so does that mean that we will have to pay the tax and that's why that's the fight we have to have at the Board level at the end of Q4.

Got it and then the Board is obviously not happy with the stock price, I wonder if you guys have debate or if you can discuss the issues that would be associated with leaving the U.S. market and re-listing in an Asian market and whether that's something that comes up at the Board level.

It have not come up at the Board level, I came up a lot during the Muddy Waters issues in the fall and we went as far as talking to several investment banks several investment banks about it and our accounts and lawyers. It seems like it would not be difficult for us to relist in a venue like Hong Kong. So it certainly has come up. I am getting questions on all this, as has the privatization issue and everything else. So those are things that we have explored and we kind of hold those in our back pocket.

Thank you for your question. Next question comes from the line of Charles Cartledge from Sloane Robinson. Please ask your question.

Congratulations on a good quarter. Just a follow-on from your earlier comment, you likened New Oriental to Apple and so far as you have trying to catch and which the previous question also mentioned. So, Apple as I understand has a lot of cash oversees that we would have to pay, just like you would to repatriate that, but their solution, as I read in paper this morning is to borrow money in the U.S. against that cash overseas and I was wondering if you had explored that option also. So I think another Chinese company has also done, I borrowing money in U.S. against cash there into China. Okay.

Congratulations on a good quarter. Just a follow-on from your earlier comment, you likened New Oriental to Apple and so far as you have trying to catch and which the previous question also mentioned. So, Apple as I understand has a lot of cash oversees that we would have to pay, just like you would to repatriate that, but their solution, as I read in paper this morning is to borrow money in the U.S. against that cash overseas and I was wondering if you had explored that option also. So I think another Chinese company has also done, I borrowing money in U.S. against cash there into China. Okay.

Congratulations on a good quarter. Just a follow-on from your earlier comment, you likened New Oriental to Apple and so far as you have trying to catch and which the previous question also mentioned. So, Apple as I understand has a lot of cash oversees that we would have to pay, just like you would to repatriate that, but their solution, as I read in paper this morning is to borrow money in the U.S. against that cash overseas and I was wondering if you had explored that option also. So I think another Chinese company has also done, I borrowing money in U.S. against cash there into China. Okay.

Congratulations on a good quarter. Just a follow-on from your earlier comment, you likened New Oriental to Apple and so far as you have trying to catch and which the previous question also mentioned. So, Apple as I understand has a lot of cash oversees that we would have to pay, just like you would to repatriate that, but their solution, as I read in paper this morning is to borrow money in the U.S. against that cash overseas and I was wondering if you had explored that option also. So I think another Chinese company has also done, I borrowing money in U.S. against cash there into China. Okay.

Yes, we are looking at that.

Is there any apparent obstacle?

Is there any apparent obstacle?

Is there any apparent obstacle?

Is there any apparent obstacle?

Well, the only obstacle honestly so far has been you guys because all of sudden when we talk of, they are talking about convertible bond or doing the same thing, taking a loan offshore and then collateralizing it with RMB in China. Then everyone says well, does that mean that New Oriental's $800 million dollars is fake and so it's not. So we tabled that for this year because of the all of Muddy Waters into anything, and the cloud over our VI structure and our cash. The cash is real, it’s not fake, it’s not there. But because common shareholders are like you don’t need to borrow money; if you can take it, out take out, even though it saves this money to actually borrow it because we can earn 4% or 5% interest in China in RMB and we get the RMB appreciation. It’s actually not a bad thing to do. So, we have looked at it and we can’t do it as far as I know, there’s no restrictions, but we held off this year because of cloud of Muddy Waters from last year and we want to demonstrate our cash is not fake, it’s real so we don’t need to borrow against this.

I’m kind of confused by that. No one lend to you unless they had proof that money was real on the other side.

I’m kind of confused by that. No one lend to you unless they had proof that money was real on the other side.

I’m kind of confused by that. No one lend to you unless they had proof that money was real on the other side.

I’m kind of confused by that. No one lend to you unless they had proof that money was real on the other side.

I agree but…

I mean we should probably debate this offline but I'd prefer a strict backed bank loan as opposed to convertible bond with Chinese equity holders.

I mean we should probably debate this offline but I'd prefer a strict backed bank loan as opposed to convertible bond with Chinese equity holders.

I mean we should probably debate this offline but I'd prefer a strict backed bank loan as opposed to convertible bond with Chinese equity holders.

I mean we should probably debate this offline but I'd prefer a strict backed bank loan as opposed to convertible bond with Chinese equity holders.

But this is a sensitive year because of the Muddy Waters thing. So we thought we would be prudent to hold off on that.

Right, and so that I take it might be something that's up for debate at the Q4 result Board meeting.

Right, and so that I take it might be something that's up for debate at the Q4 result Board meeting.

Right, and so that I take it might be something that's up for debate at the Q4 result Board meeting.

Right, and so that I take it might be something that's up for debate at the Q4 result Board meeting.

Correct. They did a lower cost of a way out charge or right. It’s a lower cost way out of getting money, I agree with you. So we have explored it.

Thank you for your questions. You have a follow-up question from Steve Zhang from Macquarie. Please ask your question now.

Just quick question on the enrollment growth. I’m wondering if you have any same school or same learning center year-over-year enrollment growth, excluding the closure of the learning centers.

We don’t have with the closures because the closures, some of the students actually stay in the network. We will have it probably more near the end of this year. We have growth rate by enrollment by city. So you can ask Sisi for that if you want, I do not want to go, I do not want to read that off in this venue. You can follow up with Sisi and she can get you some of those numbers.

Thank you. We also have a follow up question from Ella Ji from Oppenheimer. Please ask your question.

Yes Louis, what is the revenue of the vision oversees consulting in this quarter?

You have that number?

For this quarter right?

Yes, what is the growth rate?

Our growth rate?

And the amount also.

60% revenue growth year-over- year.

Percent, 6%?

60%

60% because I am seeing these books in other line and the revenue growth is a lot lower than previous quarters. Is there any particular reason?

Actually books revenue is lower than average, yes.

So, is there any particular reason or is this related also to the enrolments being pushed to the next quarter?

I think part of it is the timing difference, I think it is part of the same timing difference Ella, because what Sisi is reading to you is the enrolments for the quarter where some of them are their actual revenue was recognized in the quarter versus the enrolment which will come in, some of them will come in next quarter, yes some of the actual process. It is a timing difference. You should always take Q3 and Q4 together right. See whenever there is a Chinese New Year that's not right in the middle between January and February, you should always take the average of the two quarters combined.

Thank you for your questions. The last question comes from the line of Peter Cannon from Black Crane Capital (ph). Please ask your question.

Just a quick question on declining, the trend in number of students per class or class size. I presume on smaller class sizes the gross margin or incremental margin is lower. To what extent has that sort of being part a cause behind operating margin decline and where do you see that trend going forward versus the trend of increasing utilization, that obviously works against the positive fashion.

I think you are going to see both go up Peter as the utilization goes up. So when utilization of the learning center goes up, the gross margin also goes up. Now the gross margin looks like it is a little bit lower this quarter because our accounts have us reclassifying some of the expenses from the G&A line into the cost revenue line in the cards (ph) of that line and it’s just adjustment for this year. So the actual gross margin relatively stays flat around 60%, 61% for years. As the smaller classes get, as utilization goes up, the gross margin will go up. The operating margin decline was mostly due to, you’re right, the fact that we have even smaller classes but also because of the heavy expansion. The 500 learning centers we added in three years as really what did it. It's headcount that was associated with that and the low utilization rate. Once we stop opening learning centers, utilization rate will start going up and then the classes will start flowing up, all those margins will go up.

What do you I mean maybe kind of disclose this but what sort of margin difference is they’re cross products by size of class, obviously…?

Well, it's not by size of class. It's more by, we do it by group. So overseas test cart has the highest margins, its well over 30% on the operating margin side. The UCan in business the voting list will be in the mid-20s. The two that are low right now is Kids English and one-on-one, outside overseas test prep and those are in the high single-digit, low double-digits but that’s because of utilization and so if the utilization goes up, and the kids, right now we have like 30 kids per class. The class was at 25 seats because 18 seats, all of sudden yes, you get it right, all of sudden the margin goes from 11% to 16% to 18%. And one-on-one the same thing. If you have 50 seats and we have 10 seats full, once you get the 25 seats full, the margin goes way up.

Yes what with one-on-one class utilization was 100% of the class.

No but it's just a classroom rental fee and so the more seats that are full, the less the classroom rental fee, the burden. So it makes a big difference. Also it goes to the fact of the consultants, right, the marketing consultants that customer service rep for the one-on-ones, if they had only 25 students as they capable of, the margin goes way up. If they have only 6, as there are 6 to 7 students there now the margins will be very low. So it takes time for those to fill up. Once the utilization goes up, the margin is actually still quite high at least 15% to 20%.

All right okay. So, the two issues are really in the trend.

Correct. That’s why I think you’re going to see a rapid increase in operating margin because as utilization goes up, we’re not adding a lot of learning centers employees ahead of the revenue and utilization goes up, the margins will all go up across the board. What we’re concerned about was if there is more rapid than expected decline in revenues that we’ve not seen yet. That’s why we’re keeping our fingers crossed.

Thank you for your questions. We’re now approaching the end of the conference call. I’ll now turn the call over to New Oriental’s President and CFO, Mr. Louis Hsieh for his closing remarks. Thank you.

Okay, we just want to say thank you for everyone for taking the time to be in this call and if you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Have a good day.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation. You may now disconnect the line.