Good evening and thank you for standing by for New Oriental’s Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. [Operator Instructions] After management’s prepared remarks there will be a question-and-answer session. Today’s conference is being recorded, if you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your for today’s conference Ms. Sisi Zhao. Please go ahead.

Thank you. Hello, everyone and welcome to New Oriental’s fourth fiscal quarter and fiscal 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. Yang. Stephen, please go ahead.

Thank you, Sisi. Hello everyone and thank you for joining us on the call. We are pleased to close fiscal year 2017 with a set of solid financial results. This year we have achieved both strong topline growth and bottom line performance. Net revenues in fiscal year 2017 increased to approximately $1.8 billion, which is increase of 21.7% in US dollar terms or 29.1% in RMB. Net income reached $274.5 million and student enrollments went up by 33.5% year-over-year. During fiscal year 2017, we opened a total of four new schools, three new learning centers and six dual-teacher model schools in ten new cities and added a net of 93 learning centers and one kindergarten in the existing cities. In total, we added 107 facilities representing approximately 14% increase year-over-year, this was important and profitable expansion. Throughout this fiscal year, we remained focused on strong execution of the optimized market strategy, which means we are continuing to expand our offline business while also investing in the O2O Two-way Interactive Education System. Our business has been performing along a strong and solid trajectory, which is supported by our better execution and enhanced management. In short, this year we experienced strong growth momentum across our business lines. To give a quick overview, annual revenue for K-12 all-subjects after-school tutoring business, our key revenue driver, grew approximately 44.2%; it’s contributing RMB, contributing 55% of total revenue. This was mainly supported by the U-Can business and the revamped POP Kids program, which achieved annual revenue growth of 40% and 55% in RMB respectively. It’s worth noticing that in order to capture the growth opportunity in low-tier cities, we continue to roll out our dual-teacher model schools and expand our business into remote areas in China. We started to follow the new dual-teacher class model…

[Operator Instructions] Our first question is coming from the line of Alvin Jiang from Deutsche Bank. Please ask your question.

My first question is about revenue, could you share with us you outlook for full-year revenue growth and should we still expect revenue growth acceleration for the full-year FY18. And my second question is about margin. Do you see margin pressure from this summer promotion class and what’s the margin outlook for Q1 and the full-year FY18? Thank you.

Your first question is about revenue, the guidance of fiscal year ’18. Yes, we do believe that the topline growth in the coming fiscal year ’18 will be accelerated continuously if you compare it with the topline growth with the fiscal year ’17. First, I think - we still have the great growth momentum in the K-12. And also, we’re doing the same thing, the O2O process with one in the overseas test prep, actually did for the K-12. So we’re quite confident that the topline growth of the overseas test prep will be accelerated in the fiscal year ’18. And also don’t forget we are doing the big, the large scale of the summer promotion till the early drive, I think we have already got the 417,000 summer promotion student enrollment. It’s more than doubled compared to last year. We do expect the retention rates of those students will be higher than that of last year. So I think, yeah, the topline growth in fiscal year ’18 will be accelerated. And the margin question, yeah, I don’t think we have the margin pressure of the summer promotion because as we did in last year, I think retention rates of the summer promotion students will be higher than last year. So there is no negative impact of the margin for the whole year. And so I think we will continue our strategy of the optimized market strategy. And as I said earlier, we will open 10% to 15% new learning centers and topline growth will be over 25% or 30%. So I think you will see these high retention rate will go up in the fiscal year ’18 and drive the margin expansion as we did in fiscal year ’17 and ’16.

Alvin, I want to add a little bit on the revenge growth. So for those in [indiscernible], I want to remind you that actually Q1 is our seasonally, in terms of growth rate, the lowest if you look at that several years revenue growth trend. So the peak season for our key growth driver K-12 business pick in the second half, so the rest of the year the revenue growth will be higher than Q1. Okay.

Yeah. If you look how the growth Q-by-Q, quarter-by-quarter in fiscal year ’17 Q1, the top line growth was 16.5%; Q2, 22%; Q3, 26% and Q4, 23%. So the second half of the year will be the peak season of the K-12 business. And also the overseas test preps and domestic test preps in the Q1 will be the peak season, even though the growth rates will be better than this year, but if you compare the top line growth of the overseas test preps and domestic test preps with the K-12 growth rate, this will be lower.

Our next question is coming from the line of Ivy Luo from Macquarie. Please ask your question. I’ll move on to the next question. Our next question is coming from the line of Jin Yoon from Mizuho Securities. Please ask your question.

Hi. Good morning, guys. A couple of questions. First of all, the learning centers and schools have -- opening in this quarter have accelerated from the quarters past. I apologize if you’ve answered this question on the prepared remarks already, but how should we see the trend going forward on that front or is this just kind of a one-time seasonality impact. And number two, I know that you guys are overall diminishing I guess or putting less emphasis on the VIP classes, but these new incremental learning centers and schools are opening, is there any VIP learning classes in them at all or is it just winding down on their existing ones?

Okay. I think, Jin, I think in terms of the learning, yeah, we opened 52 learning centers in this quarter. It’s accelerated, because I think we’re seeing the growing momentum in our K-12 business due to the rolling out of the new O2O product and also the solid market demand and the effect of operations as well. So this is a, but the expansion is, I think it’s controlled. So going forward, in fiscal year ’18, I think we will open 10% to 15% new learning centers. This is net increase. And I don’t think it will drag margins. On CapEx, I think the enrollment in top line growth will be higher than the learning center opening. So the margin will keep improved in the fiscal year ’18. And most of the new learning centers we opened for fiscal year ’18 will be K-12 rated. And I think we control the VIP business and we hope the big sized class and small sized class, K-12, in K-12 business will be, the growth will be faster than the VIP business. So last year, fiscal year ’16, the VIP revenue contribution was 29% and this year, fiscal year ‘17 was 28%. So next year, I think it should be lower a little bit. Okay.

Our next question is coming from the line of Fan Liu from Goldman Sachs. Please ask your question.

Would you mind to guide us what the utilization rate looks like this quarter and also the retention rates next quarter and also would you mind to add some color on Beijing, the revenue growth for Beijing and Shanghai in terms of the K-12 revenue. Thank you.

Okay. In terms of the retention rate, this year, the retention rate is about 22% and last year, it was 19% to 20%. And -- the utilization rate. I’m sorry, the utilization rate of this year is 22%. Last year, it was 19% to 20%. So it improved by 20 bps and going forward, in fiscal year ’18, I think you will see the utilization rate will go up going forward. Student retention rate, for the POP kids, retention rate, the retention rate is over 85% compared to the 75% last year and for the U-Can, the student retention rates is 70%. Last year, it was 60%. And yeah, it will go up. And your second question is about the Beijing and Shanghai revenue growth, for K-12 business or overall? Hi, Fan.

K-12 business.

Okay. So K-12. Okay. The Beijing K-12 business in Beijing, in this quarter, was 43%, Shanghai 40% growth in Q4 fiscal year 17.

Our next question is coming from the line of Tian Hou from T.H. Capital. Please ask your question.

I have a couple of questions. One is a much bigger question about the market. It seems like just recently the demand for the education shoots up and the utilization from your result, we can see the utilization rate, retention rate and the school opens, every single metrics are all up. So I want to ask from your point of view, what do you see in the market and how do you see the demand, what are the main drivers. That’s number one. Number two is that dual model, dual teacher model. So in what kind of circumstances you will open the dual teacher model, so that’s the two questions.

Okay. The market, yeah, we’re seeing the market demand is very strong. That’s why we accelerated learning center opening. We opened 52 learning centers in one quarter, because I think the market size of the K-12 is huge. I think it’s $50 billion or $60 billion, the market. And I think the growth potentially will be less than 15% to 20% CAGR going forward. But even we’re the largest player in the market, our market share is still below 2%. And also, don’t forget, we’ve spent $100 million in last two, three years to build out our O2O system, so we’re quite confident that we have the best products and features in the whole market. And this is the key driver of the potential growth. And yeah, and I want to add one point of the summer promotion. I think several years ago, let’s say about 5 years ago, in Beijing firstly, we’ve started to acquire the students with a low price in the summer for the great [indiscernible] and last year, we conducted a large scale in 27 cities to get us doing enrolment in summer promotion. And this year, I think we did more. So I think the, and the retention rate will be higher than last year. So by this way, we can take more market share going forward. This is my opinion to the whole market. And second dual teacher model, I think, in some low tier cities, I think the best way for us to penetrate the market is to do the dual teacher model. We opened 6 new cities in fiscal year ’17 and we will open 5 to 10 new cities to do the dual teacher model in the fiscal year ’18. And it is a good way for us to share the top or start teachers teaching experience with students in the low tier cities and also, as I said in the last earnings call, in last November, we successfully tapped that, the one teacher constraint to 20 classes, 39 classes at the same time. So it’s a best way for us to penetrate the low tier city markets. Yeah. Okay. Thank you.

Our next question is coming from the line of Alex Liu from Daiwa Capital. Please ask your question.

I understand, I think the management seems to be quite positive on overall momentum on both enrolment and also utilizations next year. I’m just wondering in terms of the magnitude of the margin expansion in 2018, how should we think about it going forward? And also a quick question on overseas test prep, is there any learnings update or metrics that you can share with us on the turnaround of this business? Thanks.

Okay. I think we will keep the same tone of the margin guidance. Our target is to get 17%, 18% operating margin, GAAP operating margin in two, three years. In last two years, every year, we got the margin expansion by 120, 130 bps and I think the trend will be continuously in fiscal year ’18 and yeah, that’s been the margin guidance. And the overseas test prep, yeah, if you see, the top line growth of the overseas test prep in Q4 in this quarter, in RMB terms, the top line growth was 17%. In the whole year of the fiscal year ’17, it was only 9%. So we, I think we do see the top line growth acceleration for overseas test prep since this quarter. And for the fiscal year ’18, I think the top line growth of the overseas test prep will be 10% to 15% year-over-year in RMB terms of maybe better. I think we’re doing with the same online, offline integrated products as we did in K-12 for overseas test preps and because, more and more younger, the young students enroll into the overseas test prep class and I think they like the O2O products. And also, we added the KPI, we added the overseas test prep enrolment growth into the local school KPI. So this is the change of this year. So of course, the local school has to do more for the overseas test prep business.

Our next question is coming from Zoe Zhao from Credit Suisse. Please ask your question.

I have three questions. First of all, a follow-up on your previous comment when you said like revenue growth to accelerate in FY18, do you mean like in RMB term or US dollar term?

Both.

Second question is, both, okay. And then second question, right. Okay, great. Yeah. Regarding the deferred revenue, it seems to be very strong this quarter, could you share with us a percentage of the summer to autumn joint enrollment, are you [indiscernible] and also what’s the cash revenue growth quarter-to-date. And then third question is, we’ve been seeing a very strong K-12 revenue growth of 40% to 50% for over a year now. How much further do you think this momentum could continue into the years?

The deferred revenue, yes, Q4 is the peak season of the K-12 enrolment for the summer and some of the -- in the autumn enrolment. So the trends were strong and the cash revenue, we don’t disclose the first seven or eight weeks cash revenue this time, but I can say that it’s, I think it’s strong as well, because don’t forget, the VIP registration peak season happened in June. We changed since last year, December and June are the two peak seasons for the VIP enrolment growth. And what’s the last question, okay, the K-12 business trends.

Yes. So, yeah, how long further do you think this 40% to 50% revenue growth could continue into the year?

Yeah. As I said, we’re the largest player in the market, but our market share is below 2%. So there’s a long way to go. And if we do the right thing or if we’re on the right way, I think we can get the same, well, the same growth in at least next three years, because the market is so strong and I don’t think the, nobody else can afford $100 million on the product as we did in last two, three years and also we, New Oriental, has been famous by well paid to the teachers. So we have the best teachers in the market. So the best products combine with the good teachers. We’re quite confident about the top line growth in that three or five years.

Our next question is coming from the line of Ivy Luo from Macquarie. Please ask your question.

I have two questions. One is just to follow-up on the summer promotion. So how many courses on average are we seeing each student get involved in for the summer courses. And specifically for the summer courses, what’s the retention rate that we’re expecting for them to get into the autumn. And the second question is to follow-up our best teacher that we have and the teacher salary, so what’s the number of the teachers that we have right now and what do we expect the teacher salary to increase going forward in FY18? That’s my two questions. Thank you.

Okay. The summer promotion, yeah, typically, in the big cities like Beijing and Shanghai, in big cities, the students enrolled these summer courses for 2 to 3 courses at the same time. But in low tier cities, some students choose one subject. So this is what we’re seeing. And for the, yes, student retention rates of the summer promotion, last year, in big cities, the student retention rate in Autumn after the summer promotion was 40% and this year, we hope the retention rate in those cities will be over 50%. And so the teacher salary, yeah, the, we have 22,000 teachers in hand now and the teacher, I think the headcount increase in fiscal year ’18 will be 5% to 10%. This is the teacher headcount increase. And the teacher salary inflation will be 8% to 9% year-over-year. And but we give the good teachers more teaching hours. So that means the good teachers, the salary package will be increased a lot.

[Operator Instructions] Our next question is coming from the line of Andrew Orchard from Nomura. Please ask your question.

My question is on sales and marketing costs, because we saw a drop in sales and marketing cost as a percent of revenue in the quarter. So I was just wondering if that’s because of what we did last quarter in terms of the bundle enrolment and that’s led to this relative drop in sales and marketing costs in the quarter. The other question I wanted to ask was on the divergence between your enrolment and revenue between the U-Can and POP kids businesses, because with U-Can, we saw enrolment growing faster than revenue, while POP kids was, it was the other way around. So I wanted to know if there was anything particular that we should pay attention to with regard to this. Thanks.

Okay. Yeah. The sales and marketing expense, the marketing activity is not our priority to acquire students. I think, we rely on the new O2O products. So we don’t need to spend large on the sales and marketing expenses, and not only for this quarter, but also for the whole year going forward. So in the fiscal year ’18, I think we expect the, as a percentage of revenue, the sales and marketing expenses will be down as a percentage of the revenue. And the enrolment growth, I think both the U-Can and POP kids enrolment growth are pretty wide. I think the trend is okay.

Yeah. Actually, the revenue, the gap between the revenue growth and the enrolment growth for U-Can business this quarter is mainly because of the contribution from VIP revenue, it’s lower, lower than normal because of the pre-registration in December.

I see. So that means that affects your U-Can more, is that correct?

Yes. Because there is no mature VIP business in POP kids.

Our next question is coming from the line of Lucy Yu from Bank of America. Please ask your question.

One quick question on the dual-teacher model. You mentioned that one teacher can take around 39 classes at a same time. Is this an optimal or normalized number of classes that one teacher can take. If that’s the case, then what does the margin look like on a particular class of dual teacher?

Okay. We just tested the one teacher can fit to how many classes at the same time. In November, in last November, the one teacher can fit to 39 classes at the same time, maximum. But in last month, I heard from the, my staff that the one teacher can fit 80 classes for the POP classes. So I don’t know what is maximum numbers, but on average, I think that one teacher can fit to 20 classes at the same time. But it will help the margin expansion, because the one teacher can fit to, let’s say, 400 or 500 students, because 20 or 25 students sit in one class room. Because one teacher can fit to 20, it will drive the margin expansion. This is the business model for the dual teacher model.

Sorry. We’ll follow up. So if say one teacher can take 20 classes at the same time, how much does the margin look like?

I think it’s too early to say the margin because we just piloted the program since fourth quarter. And, but I think going forward, if to some extent, the margin of the dual teacher model should be 5% higher than the traditional offline classes. Is it clear?

Yeah.

Our next question is coming from the line of [indiscernible] from CLSA. Please ask your question.

I’m asking on behalf of Mariana [indiscernible]. I was wondering how is the Q1 trending in terms of enrolment for K-12, the overseas prep and also like what’s the ASP. And my second question is I just wanted to confirm what the non-GAAP margin for [indiscernible]. Thank you.

Sorry. Voice is not very clear. I can’t follow your second question. I think your question is about non-GAAP operating margin. Okay. The K-12 business I think going forward, in RMB terms, the top line growth will be 40% to 45% or maybe more and the last, the price, the hourly price increase will be 5% to 9% year-over-year. So the others will be the volume growth or the enrolment growth. And the non-GAAP operating margin for, yeah, as I said, the non-GAAP operating margin, our target is to get 18% to 19% in next two to three years. What I said is non-GAAP operating margin. So the margin growth will be expanded step by step as we did in last two, three years. Okay.

Our next question is coming from the line of Zhao Yang from CICC. Please ask your question.

Could you please share more color on your current growth, the revenue growth of overseas test prep that is coming from US tests?

So we don’t disclose the revenue contribution of the United States business line of overseas test prep. But what I can say is the US test, the overseas test prep business in United States is the biggest business throughout the overseas test prep, because most students choose to study in the United States. This is the biggest market.

Our next question is coming from the line of Wayne Wang from HSBC. Please ask your question.

So my question is regarding to the coming revenue guidance, so as we have mentioned, that’s -- the coming revenue guidance will be like YoY growth of 20%. So you had mentioned that this kind of revenue growth is related with the relative seasonality reason. So may I ask whether like the summer promotion has some impact on the revenue growth as we actually don’t generate much revenue from the or integrate students as a way of offering like free classes to those students. So what will be our normalized growth in the future, like any color will be like very appreciated? And another question about tax rate, effective tax rate, it seems that in this quarter, the effective tax rate is a little bit relatively high. So what kind of tax rate we should expect in the coming quarters. Thank you.

Yeah. I think you’re right. The summer promotions with the price were low. So it generates very little bit revenue gap, revenue in Q1. But in rest of the year, because of the higher retention rate, I think we will make up the revenue growth in the rest of the year. And yeah, tax rate, yeah, the tax rate was 15.3% in this year and the tax rate will steadily move up. I think next year, I guess the tax rate will be in the range of 16% to 16.5%. This is the ETR. Okay.

We’re now approaching the end of the conference call. I’ll now turn the call over to New Oriental’s CFO, Stephen Yang, for his closing remarks.

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