Ladies and gentlemen, thank you for standing by and welcome to the New Oriental Third Fiscal Quarter 2017 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, April 24, 2017. I would now like to hand the conference over to your first speaker today, Ms. Sisi Zhao. Please go ahead.

Thank you. Hello, everyone and welcome to New Oriental’s third fiscal quarter 2017 earnings conference call. Our financial results for the period were released earlier today and are available on the company’s website as well as on Newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private 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 obligations to update any forward-looking statements, except as required under applicable laws. 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 Yang. Please go ahead, Stephen.

Thank you, Sisi. Hello, everyone and thank you for joining us on the call. We are pleased to report another strong quarter during which we achieved both stellar top line growth and continued solid bottom line performance this quarter. Net revenues increased to $437.8 million, which is an increase of 26.2% in U.S. dollar terms and 33.4% in our functional currency RMB beating the high end of our expected range. Net income was $67.6 million, representing a 39.6% increase year-over-year. As you know, accelerating revenue growth through capturing opportunities across our diversified business model has been a key priority for us. Subsequently, the strong top line growth was attributable to a significant increase in student enrollments in the recent two quarters. It’s worth noting that in this year, we started to bundle winter and spring courses registrations in Q2 and summer and autumn courses registration in Q4. As a result, we saw extremely strong year-on-year growth of student enrollment in Q2 and Q4 versus moderate growth in Q1 and Q3. We recorded a 56% year-over-year enrollment growth in the second quarter followed by 5.9% year-over-year growth in the third quarter. The combined enrollment growth for the second and third quarter reached 32%. It’s also encouraging to see a continued and strong momentum in enrollments and RMB cash proceeds from student registrations in the first 7 weeks of the fourth fiscal quarter, which grew by approximately 37% and 39% year-over-year. Our key revenue drivers K-12 all-subjects after-school tutoring business reported revenue growth of approximately 41% in U.S. dollar terms and 49% in RMB terms. The combined enrollment growth of K-12 after-school tutoring business for the second and third quarters was 45%. This was mainly supported by U-Can business and the revamped POP Kids program, which achieved revenue growth of 36% and…

[Operator Instructions] Our first question comes from the line of Tian Hou from T.H. Capital. Please ask your questions.

Thanks. Good evening, Sisi and Steve. Congratulations on the good quarter. My question is related to two questions, one is related to your expansion and previously, you were planning to open like 30, 40 new learning centers and what you just said, you are going to pretty much double it. And I wonder, if that’s – what’s the impact going to be on your margin and are we going to maintain our margin or if the margin is going to be impacting a bit? That’s the first question. Second question, not long ago in Shanghai, I think the government has some kind of a policy nice students to stay in the school a bit longer, so that will give their time to go to after-school tutoring program. And do you see any impact from that? So that’s the two questions.

Okay, thanks, Tian. Your first question is about our expansion plan. Yes, we raised the new learning center opening we made this year. Originally, we put up 30, 40 new learning centers, but we are seeing – our K-12 business will be growing momentum is very good and also we are seeing growing market demand and we are quite confident about our new K-12 products, not only U-Can, also in POP Kids, so we decide to open more learning centers. Even though we opened 70, 80 new learning centers within this year, that means the 10% expansion, so capacity expansion. As you know that all the margins and in offices we are seeing the margin expansion by 110 bps or 100 bps in this year. And also next year, I think we will still open 10% more learning centers and we expect the margin should be improved by 50 to 100 bps up in next fiscal year. So, this is the question for your – the answer for your question about the expansion plan. The second question is about – slowly, the policy change in Shanghai several months ago, but you know, we don’t have – we haven’t seen any negative impacts of our business. Typically, the students spend 30 or 40 hours a week in public schools, but the student only spends 4 or 6 hours a week with New Oriental. So, I don’t think we give lot of burden to students. We help the students to study in more efficiency and to teach them the pattern studying methods. So till now, I don’t see any effective impact of our business and you see our business, the trends are good. That’s it.

Yes. Okay, that’s all my questions. Thank you.

Okay. Thanks, Tian.

Thank you. Our next question comes from the line of Fan Liu from Goldman Sachs. Please ask your question.

Hi, management. Thanks for taking my questions. So you have mentioned in the first 7 weeks of first quarter, the enrollment grew by 37% year-on-year. May I know if this is related to registration for summer quarters only or summer and autumn quarters combined? And also could you please share with us the utilization and then the retention rate this quarter? Thank you.

Okay. Yes, in the first 7 weeks of the fourth quarter, we are seeing 37% growth in enrollments. I think most of these student enrollments are in the first 7 weeks of the fourth quarter as we reported the GAAP revenue in Q4 and Q1. So you know, we changed – we make a change of the time window for the student enrollments registration in K-12 business this year. So, that is – you will see the two windows of the whole year. The first one is in autumn. That is in November. And the second is in May. So, you will see more and more student enrollment growth in the rest of the time of the Q4. And the utilization rate, yes, this year, it’s 21%, so that means we are seeing the 20 bps up compared to 19% utilization rate in last year. And going forward, we expect the utilization rates will go up continuously and the retention rates, yes, in terms of the K-12 business in the retention rates is 75% to 80% this year. Last year, it was 65% to 70%. So that means the 10% improvement this year. Okay.

Thank you. Very helpful.

Okay, thanks.

Thank you. Our next question comes from the line of Wendy Huang from Macquarie. Please ask your question.

Hi, Stephen. Hi, Sisi. This is Ivy asking on behalf of Wendy. So, I just first want to clarify on that this year, we combine our enrollment, so basically spring and summer – sorry, basically 4Q and 1Q and 2Q and 3Q. So, when did it exactly started – started basically in the second quarter fiscal year 2017, so that this quarter is the first quarter that we are seeing the moderate 6% enrollment growth because of the combination? And my second question is our – there is a net loss that’s attributable to the minority shareholding. Is that from koolearn? And for koolearn after now is listing on new served board with how our strategy going forward to continue to push forward the pure online learning? That’s my two questions. Thank you.

Okay. Yes, we started to bundle winter and spring courses registration in Q2. So, this was the first time and we will do the same thing in Q4. That means this summer and autumn courses registrations will happen in Q4. Because you know, we are seeing our classes are popular from students, so they want to enroll into the class as early as they can. So, that means you will see very strong year-over-year growth on enrollments in Q2 and Q4 versus moderate growth in Q1 to Q3. But I suggest your guys to combine the student enrollment growth in – to two quarters, well, maybe three quarters. So I suggest you combine the Q2 and Q3 and first 7 weeks of the enrollment in a row together, so you can gather more reasonable student enrollment trends. And yes, this is the answer for your first question. What’s your second question? Okay. We are – we have several subsidiaries [indiscernible] and the others are extra, some companies still in last and so but the MI is not a big deal, it’s not a big number. And as for the koolearn.com, our pure online platform, it’s at least in certain of our markets. And I think it will help the koolearn.com to develop more rapidly. And going forward, I think we expect top line growth of koolearn.com will be 30% or 40% year-over-year and you will see the margin improvement of koolearn.com. Okay.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Alvin Jiang from Deutsche Bank. Please ask your question.

Hi, management. This is [indiscernible] asking on behalf of Alvin Jiang. First, congratulations on another strong quarter and we have two questions here. The first one is we know that some cities have launched this year’s summer promotion campaigns, so can management share some feedback of the promotion and what will be the impact on our financial results? Second question is we noticed the margin improvement is quite strong this quarter, so can management give us some color on the margin growth next quarter or even the quarter going forward? Thank you.

Okay. Yes. You know, we did large-scale promotion in last December in order to rapidly acquire Grade 7 students in 27 cities and I think it’s very successful, because in this fiscal year, 2017, the summer promotion generates 3% or 4% incremental revenues and there is no margin impact on that. And this year, I think we will do more summer promotion. We plan to conduct a summer promotion this year in about 30 cities or more. And I think the top priority of summer promotion this year, what I mean our job is to get higher retention rates. So we are quite confident that the retention rate in the coming autumn will be higher than that of last year. And so we hope the summer promotion will bring more and more new student enrollments and 3% or 4% or maybe 5% new student incremental revenues in fiscal year 2018. And I think as they did in last year, there is no margin impact, what I mean is no negative impact on margins, yes.

Okay. So, the second question is under margin.

Okay, margin. Yes, we are happy to see the margin improvements. And in the coming quarter, we expect the margin improve continuously. And as I shared with you guys several quarters ago, our margin target is to get 17% to 18% operating margin, GAAP operating margin in the next 3, 4 years. And this year, I think the operating margin for the whole year should be somewhere between 14%, 14.5%, or 14.6%. And so I think the margin will be improved gradually in the next whole year or in the next 3 years, okay.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Ms. Zhao Yang of CCIC. Please ask your question.

Good evening, Stephen and Sisi. Thanks for taking my question and congratulations for the strong quarter. I have two questions. Could you please share more detailed top line to rollout your dual-teacher model in the next quarter and in fiscal year of 2018? And the second question is could you please help us to breakdown the operating margin by segment and what’s the target for the next quarter and the fiscal year 2018? Thanks.

Okay. As for the dual-teacher model, we pilot the dual-teacher model in 5 cities, there are 3 new cities combined with the 2 cities we opened last quarter. And also on the other hand, we are in 20 learning centers in existing cities to pilot the dual-teacher model. And our plan is to open I think 5 to 8 – or 5 to 10 new cities in the next full year to open the learning centers to run the dual-teacher model. And anyway, you will see more and more existing cities to run the dual-teacher model. And the operating margin by segment, yes, the operating margin, what I said all when I said this before the cutoff expenses, the overseas test prep margin is about 30% and the U-Can business, the op margin is 25%. And the POP Kids, the operating margins for POP Kids improved lot in the last 2 years and now it’s between 16% to 20% and the next year, I think you will see the margin improvement in all business lines. So this is our target. Okay.

Very helpful. Thank you.

Thank you.

Thank you. Our next question comes from the line of Terry Chen from HSBC. Please ask your question.

Hi, thank you Steve and Sisi for taking the questions. You are talking about capacity expansion acceleration, so I am just wondering what kind of cities are we targeting to enter and also what’s our strategy in the maybe next 3 to 5 years? Are we entering expansion mode for the next 3 years? Thank you.

Okay. We plan to enter 3 or 4 new cities by opening the offline schools in this year. And next year, I think almost the same number, 3 to 4 new cities. So, we will enter into the low tier cities, but even though – I think if you see the chart where the data, I think there is a lot of cities we can enter into, because there are more than 100 cities with a population more than 2 million we are now in. So I think we will do it more carefully, just to open like the 3 or 4 new cities every year. But don’t forget next year we will open more and more cities by the pure dual-teacher model. So that means we are seeing the very good momentum in our K-12 business. And also we have the best teachers and best accountants. So we will open more cities and learning centers for the tiers we cut our margin. So, we won’t let the new learning centers and the cities drag the margin. This is our top priority in terms of the strategy, okay.

Yes, thank you very much. Just a quick follow-up on your summer promotion strategy, so you talked about doing the promotion in 30 more cities and the goal is to have higher retention rate this year. So, I am just wondering what kind of enrollment you are targeting for this year. Last year, we have 200,000, right. So what kind of enrollment number do you think we will be achievable for this year?

We don’t have the specific budgets on the summer promotion enrollment. That’s – I think we should get more students compared to the 200,000 enrollments in last summer promotion. So as I said, in the – as I said earlier, I think we care about the retention rates. Well, we learned a lot from the last year. We have more, that means we have more experience. So, we pushed the local school have to get more student retention rates for summer classes. This is our first top priority job this year. Okay.

Okay, great. Thank you, Stephen.

Okay. Thank you, Terry.

Thank you. Our next question comes from the line of Zoe Zhao from Credit Suisse. Please ask your question.

Hi, management. Thank you for taking my questions. I have got several questions here. First of all, on the margin expansion, can management give us some outlook on the gross profit margin, specifically? Because we noticed the absolute COGS picked up a little bit this quarter on a Q-on-Q basis versus the previous year. So when we talk about margin expansion, does it mainly come from operating cost savings or GPN has more upside? The second question is regarding the change of your enrollment window. Would that affect your marketing strategy? Because the sales and marketing expenses seemed to have some operating leverage this quarter, so just wondering how would the change of enrollment window affect the expenses spread out? And the third question is on the enrollment growth, top 5 cities versus the others, can management give us some colors? Thank you.

Okay. The gross margin, I think going forward, you will see the gross margin will be flattening or improved a little bit. So, we have some leverage on New Oriental where the teaching cost. So, the GP margin will be flattening or improved a little bit going forward. And the selling and marketing expenses, I think it’s not related to the enrollments registration window change, because now we rely on the word of mouth, now the selling and marketing activities. So, you will see the more and more leverage on the selling and marketing expenses as a percentage of the revenue going forward. And the top 5 cities, I think your question is about revenue contribution or the enrollment contribution?

Yes. If you could mention both, that will be great.

Okay. Yes, the revenue contribution, the top 5 cities, the biggest one is Beijing, so 24% to 25% revenue contribution. And the other – the second is Shanghai, 7% and the third one is Guangzhou and Xi'an and Wuhan. These are the top 5 cities. So, it contributes except – besides Beijing, each city contributes 3% to 7% revenue contribution each. That’s it. Zhao, is it clear?

Okay, thank you.

Okay, thank you.

Yes, great. Thank you.

Thank you. Our next question comes from the line of Mr. Alex Liu from Daiwa. Please ask your question.

Thanks, Stephen. And just a quick question on the oversea test prep business, I think the business itself has been more or less stable for the past few quarters. I am just thinking about considering the fact that we are undergoing some revamp on the continent structures for that business, just how should we think about it, the segment’s enrollments and revenue growth in the next 2 years?

Okay. Actually, the student enrollment is up by 1% of overseas test prep, it ends two quarters to try. So, this is the good news for us. And actually, the cash revenue in Q3 is up by 21%, what I mean is the cash revenue in RMB terms. So, it’s a good start. And yes, we are revising the new O2O products on overseas test prep as we did in last 2 years in POP Kids and U-Can. So, the new product will be more impressive, more diagnostic. I think it’s more suitable for the younger age students, the young age students. So, in the coming quarter, I think the student enrollment for overseas test prep will be flattening were in low single-digit growth. And with the price increase, the revenue will grow by 10%. For the next whole year, I think we are confident that the overseas test prep business will grow by 10% to 15% or more, because first the first launch of the new O2O product with this was ours. So we have been done well on IELTS. So, we are entering for total SAT and GRE and GMAT. So, this is the reason why we feel confident about the future of the overseas test business. But don’t forget, we also have the overseas consulting business. This quarter, the GAAP revenue of the overseas consulting business was 30% year-over-year growth. So, it’s – I suggest you guys combine the overseas consulting business with the overseas test prep business. And yes, our CEO, [indiscernible] runs overseas consulting business in the last 7, 8 years. He and the whole management team have done a great job. So going forward, I think the top line growth of the overseas consulting business will grow very well.

Thank you.

Thank you. [Operator Instructions] We will open the next line for Ms. Lucy Yu from Merrill Lynch. Please ask your questions.

Hi, management. Congratulations on a solid quarter. Quick question on dual-teacher, can we please learn some color on the revenue contrition from dual-teacher classes as far as the margins? Is it suitable time to share more color with us? Thank you.

Thanks, Lucy. It’s a great question. But we are so far so good, what I mean is for the dual-teacher model, but it’s too early to make prediction of the revenue contribution, because we just opened 5 new cities and some 20 learning centers – 20 learning centers in existing cities. So, it’s too early to say. So maybe in next 6 or 9 months, I will tell you the revenue contribution of the dual-teacher model.

Just one quick follow-up, so how many classes can one teacher take on average at the moment?

Till now, as I said in the last earnings call, in last November, we successfully pilot a class in POP Kids. That’s one teacher can face 39 classes at the same time. But this is the best. But on average, the one teacher can face 15 to 20 classes at the same time. So that means, in the low tier cities, the students likes to take the class of the top teacher from Beijing or Shanghai, the top cities, so this is very good for them. And so if the one teacher can take so many classes at the same time, I think the margin of the dual-teacher model should be higher than the offline classes.

Okay, thank you very much.

Okay, thanks.

Thank you. Our next question comes from the line of Leon Chik from JPMorgan, Hong Kong. Please ask your question.

Hi, congrats. Just a simple question, I think your stock-based comp is up 80%. Just wondering, like the main reason why? Thanks.

Okay. We issued the restricted shares to the management this fiscal year in last November, in last November. So we report most of the share conversation in Q3 and Q4. So, this is the reason that you see the stock-based compensation increased by 80%.

Okay, okay. Thanks.

Thanks.

Thank you. Our next question comes from the line of Eric Qiu from CCBI. Please ask your question.

Hi, good evening Steven and Sisi. Thank you taking my questions. My question is regarding to the revenue growth breakdown. Your top line growth by like 33% in terms of renminbi and for K-12, it grew by like 46%. I was wondering if we divide it by like ASP growth and also the enrollment of utilization growth and new learning center. What’s the contribution of this rate? And I know there is fourth quarter ahead, but could you give some color of these three factors for next year and maybe next year’s top line growth? I was thinking, if excluding the renminbi depreciation effect would still maintain like over 30% year-over-year for next year? Thank you.

Okay. Yes, I think – I suggest that your guys used the hourly rates, as I said earlier, as the ASP. So, the hourly rate in Q3 was increased by 3.1%.

Okay. But would you give…

Yes, the volume growth is 29.5%. So if you combine the two parts together, you get the 34% growth in RMB terms. And going forward, I think we will increase the price. What I mean is in terms of the hourly rates, the price increase will be 5% to 8%. This is our strategy. And the others will be the volume growth, but most of the revenue growth comes from the organic growth. That’s why you see the margin expansion. And so going forward, in the next fiscal year, what I mean is in fiscal year 2018 I think we will execute the same strategy as we did in this year. So, most of the revenue in the next year will come from the organic growth. And yes, I think it’s too early to give the guidance of the next year, but you see the very good student enrollment trends in this quarter and the Q4. So maybe I think in next quarter, we will give you the guidance of the next full year you see the full trends. Anyway, okay.

Okay, okay. I just want to follow-up on – for the existing schools and the learning centers, which are opened like for 2 – 1 or 2 years before, what’s the utilization rates of them? Is there some still much upside from the existing centers?

Yes, that’s why – yes, the utilization rates overall is only 21% to 22% currently. So, the maximum of the utilization rates will be somewhere between 30% to 35%. So, there will be a lot of room to improve. This is the key margin improvement driver.

Okay, thank you.

Okay, thanks.

Thank you. Our next question comes from the line of Mariana Kou from CLSA. Please ask your question.

Thank you, management. I think most of the questions have been asked, but just about another small question on the dividends. I know we previously discussed that we don’t want to have a regular dividend that would cause some of the tax impact. But should we expect that business would still be something management would consider on an annual basis if we feel that, because of the huge cash build out you already have on the balance sheet?

Okay, thank you Mariana for great questions. I think the question is for me. And our policy is that average why our board would discuss the – what the next year dividend policy and also we knew one more quarter to see how much cash we generate in the whole last fiscal year. And – but don’t forget in last 3, 4 years, we paid 3x special dividends and did several times share buybacks. So, we have shown the investor finally. And so we almost paid $250 million to $400 million in total in the last 4, 5 years. And so please wait for 3 more months and we will discuss in board meeting in July. Okay, thank you.

Thank you.

Thank you. We don’t have any further questions at this time, sir. So you may continue.

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.