New Oriental Education & Technology Group Inc. (EDU) Q4 2017 Earnings Report, Transcript and Summary

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 in select cities in July 2016 and in fiscal year 2017, we tested these new offerings in over 20 existing cities and six new cities, and we are happy to see increased market penetration in those markets we have tapped into. With this proven result, we will continue this strategy in the next fiscal year. In addition, we are in the process of launching the O2O standardized teaching system for our overseas test prep business such as IELTS, TOEFL and SAT programs in some of the large cities in China. In terms of performance for the fourth fiscal quarter, this time of the year is part of our peak season and we performed quite well. Fourth quarter net revenues increased 23.2% to $486.4 million, with operating income up 39.7% and student enrollment at 36.9%. Breaking out, U-can business recorded a fourth quarter revenue increase of 37% in RMB and enrollment was up by approximately 50%. Our revamped POP Kids recorded fourth quarter revenue increase of 55% in RMB and enrollment was up 51%. To give you a better understanding of enrollment growth, I’d like to specifically mention our summer promotion efforts which have been proven to be a very successful strategy in past years to further progress our ability to consolidate the market and gain as much market share as possible. Similar with last year, we have conducted large scale promotion this summer to rapidly acquire Grade 7 student customers before they started the first year of secondary school. We offered low price experiential courses for multiple subjects in total of about 40 cities. The promotion was again well received by the market. The Grade 7 enrollments were brought in before the start of the summer holiday in early July this year, reached 417,000, more than doubled compared to the same period of last year. I’d like to reiterate that we do not include this promotional enrollment in our reported enrollment. We are pleased with this outcome and expect to retain a high portion of students after this promotion, which will boost revenue and drive profit growth throughout the whole fiscal year 2018. It’s equally important to know that due to a higher utilization of facilities in the rest of year, we don’t expect a material impact on operating margin throughout the whole fiscal year. We believe the summer promotion will continue to be a successful and effective strategy to quickly increase market share in the high growing K-12 after-school tutoring market. As these students move from Grade 7 through Grade 12, the continued improvement in retention rate and customer loyalty will drive the revenue growth in the next three to six years. Turning to pricing, per program blended ASP, which is cash revenue divided by total student enrollments decreased by about 6% year-over-year in US dollar term and is flat is RMB terms. The 6% decrease of per program blended ASP is nearly due to the shift of revenue mix from the overseas test prep business and slowdown of VIP business, which has a higher ASP. Starting from the third fiscal quarter of this year, we begun to consider the registration for U-Can VIP classes in June and December, the first month of the first fiscal quarter and third fiscal quarter respectively. Rather than squaring regularly throughout the year in order to streamline the registration process. As a result, we saw a very large year-on-year increase for enrollment for U-Can VIP classes in the first quarter but lower than normal growth in the fourth quarter. For the whole fiscal year 2017, VIP business recorded cash revenue growth of about 16%. Over the long run, we expect that the growth of our VIP business will be slower than our overall revenue growth which will continue to drive down blended ASP. Hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 7% year-over-year in RMB terms. To provide a breakdown of hourly blended ASP in RMB terms, please note that U-Can increased by 6%, POP Kids increased by 8% and overseas test prep program increased by 12% year-over-year. On the margin front, we continue to make great progress by improving our operational efficiency and utilization of facilities and controlling costs within the company. Operating margin for the fiscal year 2017 increased 120 bps year-over-year. The continued strong bottom line performance demonstrates the results of our commitments in creating sustainable long-term value for customers and shareholders. Now let me move onto the fourth quarter performance across our individual business lines. Our key revenue driver K-12 all-subjects after-school tutoring business achieved year-over-year revenue growth of 34% in US dollar terms or 42% in RMB terms. This was driven by a significant enrollment growth of about 51% year-over-year. For the whole fiscal year, K-12 has a revenue increase of about 36% in US dollar terms or 44% in RMB terms. Breaking it down, the U-Can middle school high school all-subjects after-school tutoring business recorded a revenue increase of 30% in US dollar terms or 37% in RMB terms in the fourth quarter and 32% in US dollar terms of 40% in RMB for the fiscal year. Student enrollment was approximately 50% year-on-year for the quarter and 45% for the fiscal year. Our POP Kids program delivered outstanding results with revenue up significantly up about 47% in US dollar terms or 55% in RMB terms for the first quarter and 47% in US dollar terms or 55% in RMB terms for the fiscal year. Enrollment went up about 51% for the quarter and 49% for the fiscal year. Our overseas test preps and consulting business together reported revenue growth of about 13% in US dollar terms or 19% in RMB terms year-on-year for the fourth quarter and 6% in dollar terms or 13% in RMB terms for the fiscal year. Finally, VIP personalized class business reported revenue growth of about 12% in US dollar terms or 18% in RMB terms year-over-year for the fourth quarter and 16% in dollar term or 23% in RMB term for the fiscal year. I will provide some updates on the progress we have continued to make with our optimized market strategy. We have been focusing on maintaining a healthy balance between topline and bottom line growth, while investing in the build out of O2O integrated education system and this continues to work very well. Starting with our core offline business. As mentioned earlier, we added net of 47 learning centers in around 30 existing cities, opened two new schools and new learning centers [indiscernible] and rolled out dual-teacher model schools in the city [indiscernible]. In fiscal year 2017, we opened the four new schools, three new learning centers, six dual-teacher model schools in ten new cities and added a net of 93 learning centers and one kindergarten in the existing cities. Regarding our online business, we invested approximately $17 million in the fourth quarter and $57 million in total for the fiscal year to improve and maintain our O2O integrated educational ecosystem. Most of the investments were recorded into G&A expenses. We have been devoted to this online business spillout since 2014 with a increase in customer retention rate and additional new customers. we fully believe this is transforming our business and the investments will bring continuing and long-term benefits. Before I go into details just a quick recap of three levels of online level. The first level, also the core of our online system is O2O two-way interactive education system across all of our business lines. The second level is our pure online learning platform and supplementary online educational products into New Oriental brand. The third level of our ecosystem is for New Oriental to take a minority shareholding in online education companies that complement our online educational offerings. Starting with the O2O Two-Way Interactive Education System, we aim to extend New Orientals’ traditional offline platform teaching offerings to online education services. This was also important factor that set us apart from other key players in the market. With advanced O2O product services, we’re poised to get more market share and improve brand recognition going forward. Since its launch in September 2014, U-Can Visible Progress Teaching system, our Interactive Education System, has been successfully rolled out across all existing cities in our nationwide school network and this expansion drove positive performance. Our newly revamped POP Kids English program, Shuang You, has also expanded its coverage reaching 54 cities by the end of fourth quarter. The Interactive Education System has been gradually used in more and more cities. And since its launch in the second quarter of fiscal year 2016, the Interactive Education System for overseas test prep program, including IELTS, TOEFL and SAT courses, was rolled out in ten cities by the end of fourth quarter. For the second level of our online education ecosystem, we have experienced consistent growth in our pure online learning platform and other supplementary online educational products. In the fourth quarter koolearn.com generated net revenue of $17 million representing an increase of 30% in US dollar terms or 38% increase in RMB terms. The number of paid user increased significantly this quarter, approximately 69% year-over-year. Number of cumulative registered users in this quarter has reached 17 million. koo.cn, our online broadcast open platform for both New Oriental and third-party teachers achieved around 634,500 registrations in the fourth quarter. DONUT, a series of game-based mobile learning apps for children reported over 60.6 million downloads by quarter end. Le Ci, an English language vocabulary training app for mobile phones and tablets app reported over 6.2 million users by quarter end. For the third level of our online education ecosystem, we invest in select online education companies with the minority stake and we continue to look for new opportunities that will not only complete our own offerings, but also facilitate our own O2O integration. Now, let me walk you through the other key financial details for the third quarter. Operating cost and expenses were $434.5 million, representing a 20.2% increase year-over-year. Non-GAAP operating cost and expenses, which exclude share-based compensation expenses, were $425.5 million, representing a 18.9% increase year-over-year. Cost of revenues increased by 21.9% to $199.3 million primarily due to increase in teachers’ compensation for more teaching hours. Selling and marketing expenses increased by 11.7% to $66.3 million primarily due to increase in brand promotion expenses and selling marketing expense compensation. General and administrative expenses for the quarter increased by 21.8% to $169 million. Non-GAAP general and administrative expenses, which excludes share-based compensation expenses were $160 million, representing a 18.4% increase year-over-year. This was primarily due to increased headcount at the company expanded its network of schools and learning centers by about 14% year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses increased by 147% to $9 million. Operating income for the quarter was $51.8 million, a 39.7% increase from $37.1 million in the same period over prior fiscal year. Non-GAAP income from operations was $60.8 million compared to a $40.7 million in the same period of prior fiscal year. Operating margin for the quarter was 10.7% compared to 9.4% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter was 12.5% compared to 10.3% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $55.4 million, representing a 31.9% increase from the same period of the prior fiscal year. Capital expenditures for the quarter was $26.5 million and this was primarily attributable to the opening of four new schools and 70 [ph] new learning centers and renovations of existing learning centers. Turning to the balance sheet, at the end of the fourth quarter, the deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue after the instructions are delivered, was $866.6 million, an increase of 34% as compared to $646.9 million at the end of the fourth quarter of fiscal year 2016. Before talking about our priority for the fiscal year 2018, I wanted to take a moment to reiterate our overarching goals for the future. Similar to those we have been outlining on our past conference calls. During fiscal year 2018, we have continued to focus on our optimized market strategy. With the current success achieved, we are confident that we have the right strategy in place and that it will continue to drive additional progress and help us create long-term value for all shareholders. To give you more specifics on our areas of focus, first, we will continue to expand our offline business. In fiscal year 2018, we aim to add about 10% to 15% new learning centers for K-12 business in existing cities. And we also plan to enter two to four new cities where we identify markets with the most business opportunities and receptivity to our offerings. In addition, we will continue to roll out our dual-teacher model schools to about five to ten new low-tier cities in China. Second, we will continue to leverage our investment in our O2O integration and the initiatives in online education offerings. In particular, we will continue our focus on products refinement and maintenance for the O2O for K-12 business. Meanwhile we will continue to revamp and rollout our O2O standardized teaching system for our overseas test prep business. We will continue to make investments but with delays that total spending in absolute dollar terms in fiscal year 2018 will be similar with the previous fiscal year which totals approximately $57 million. Third, we will continue to have a top priority on improving the utilization of facilities and controlling the cost across the company to drive the continued margin expansion and operational efficiencies. Looking at the near-term, in terms of the first quarter of fiscal year 2018, we expect total revenues to be in the range of $626.5 million to $647.3 million, representing year-over-year growth in the range of 17% to 21%. If not taking into consideration the impact of potential change in exchange rates between RMB and US dollars, the project revenue growth rate is expected to be in the range of 20% to 24% for the first quarter of fiscal year 2018. Lastly, I must mention that these expectations reflect New Oriental’s current and preliminary view, which is subject to change. At this point, I will take your questions. Operator, please open the call for this. Thank you.

[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.