Good evening and thank you for standing by for New Oriental's Third Fiscal Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After managements 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'd like to turn the meeting over to your host for today's conference Ms. Sisi Zhao. Thank you. Please go ahead.

Thank you. Hello, everyone and welcome to New Oriental's third fiscal quarter 2019 earnings conference call. We have released our financial results for the period earlier today, which are now available on the company's website as well as on newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After prepared remarks, he 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 view 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. I will now turn the call over to Mr. Yang. Stephen, please go ahead.

Thank you, Sisi. Hello, everyone. Thank you for joining us on the call. We're very pleased to see continued acceleration of growth momentum in this quarter, and to achieve top line growth of 28.9% in dollar terms, or 36.1% in RMB terms, which exceeded our expectations. The positive growth was largely driven by the exceptional performance of our key business units the K-12 all-subjects after-school tutoring, once again demonstrating our quality products and service offerings and strong business fundamentals, which enable us to capture growing demands from the market. Total student enrollment in academic subjects tutoring and test prep courses in this quarter increased by 82.3% year-over-year to approximately 1,570,600. The significant increase in the number of student enrollment is primarily due to the division of the spring semester into two parts, a practice we adopted in November 2018 to comply with the latest regulatory requirements. Under this calculation method, student enrollment and the amount of the collected fee in the spring semester are both in parts and thus fall into separate quarters. More specifically, the first part of spring semester was booked in the second quarter, while the second part is booked end of this quarter Q3 and the following Q4. Historically, we collect the full amount of the tuition fees and recorded as student enrollments from the spring semester in the second quarter only. Furthermore, our U-Can middle school high school all-subjects after-school tutoring business grew by approximately 37% in dollar terms or 44% in RMB terms. Our POP Kids program achieved a growth of approximately 41% in dollar terms, or 49% in RMB terms. We are confident that well placed to continue expanding our market share over the long-term through our ceaseless efforts in improving, in teaching quality and enhancing learning experience for our customers. In the…

The question-and-answer session of this conference call will start in a moment. [Operator Instructions] Your first question comes from the line of Tallan Zhou from Deutsche Bank. Please ask your question.

Hi, Stephen. Hi, Sisi. Thanks for taking my question. Stephen, you just mentioned about the 4Q guidance and then there will be so one week of the class will be postponed to the next quarter. So can you quantify how much the impact will be for the first quarter revenue growth? Thanks.

Okay. Yeah, to comply with the policy requirements, we have moved about one week of the K-12 classes from -- in March to June. So the postpone will negatively impact the revenue by 3% -- roughly 3% of the total revenue in Q4 but we'll take it back in the Q1 -- from the Q1 2020, okay. So this is the first reason. Second is the overseas consulting business. Typically the Q4 is the peak season for the overseas consulting business. However, starting from this fiscal year we adopt a new accounting standard, so which results -- in the Q3, we reported in RMB we reported 32% revenue growth in Q3. And don't forget in last year Q4, we had a 44% year-over-year growth in RMB terms, so that means the last year Q4 compared to the Q4 the year before last year. So we had a hard comparison in the coming Q4. But if you add that number from the above two factors back the revenue growth in Q4 should be over 30%. And the last point, I just want to reiterate that the fundamentals of our business, especially for the K-12 business and the overseas test prep the other business has not changed. So we will maintain the strong business foundations and continue to create the value for the shareholders.

Thanks, Stephen. That’s very clear. Thanks.

Okay. Thanks, Tallan.

Your next question comes from the line of Alex Liu from China Renaissance. Please ask your question.

Thanks, Stephen. Just one question. Could the management talk about -- share more color on the pro forma deferred revenue growth for this quarter especially after adjusting the currency issues after adjusting the payment schedule as well as the accounting standard change? Thank you.

Okay. The deferred revenue balance was increased by 10% in dollar terms year-over-year, but the lower than the normal growth is due to the adoption of the new accounting standard. It means that part of our deferred revenue in Q3 was reclassified to be accrued expenses and other liabilities. So this impact is about 7% to 8%. And second reason, the change of the tuition fee collection for K-12 business also is a similar next fee impact of the deferred revenue balance. So this impact is roughly 6% to 7%. And also you should -- I suggest you to add back of the 7% of the RMB depreciation. So the pro forma deferred revenue growth in the -- at the end of the Q3 will be over 30%.

Okay. Thank you.

Thanks, Alex. Okay, thanks Alex.

Your next question comes from the line of Mariana Kou from CLSA. Please ask your question.

Thank you, Management. I just had a quick question on -- looking a little bit further, I guess for FY, 2020? And how should we think about online investments? I think Q4 you just mentioned that we should expect flattish margins, but like looking at year kind of forward how should we think about that? Thank you.

Okay. In the fiscal year 2020, firstly, I want to keep the same guidance of the top line growth of the fiscal year2020. So the top line growth our guidance will be similar around 30% in RMB term year-over-year. So we don't want to change. And also in the New Year, we do believe, we'll have the margin expansion because, we will see more operating leverage because, this year we opened 20% to 25% the new expansion. The top line growth over the -- for the next year will be roughly 30%. So, we do have capital leverage. And online investments, this year I think for the, for whole year the online/off-line integration investments will be $95 million to $100 million. And last, year we guided $110 million to $120 million. This is the online/off-line integration investments.

Thank you.

Thanks.

Your next question comes from the line of Tianli Wen from Blue Lotus. Please ask your question.

Hi management thanks for taking my call. I had one question about the utilization rates. Could management give us more color on the utilization rate? How much room for the utilization rate to improve going forward?

Okay. In this quarter Q3, the utilization rate is up by 200bps. So, I think this is the key driver of the market expansion of this quarter. And going forward, even for the coming quarter and coming new year, we believe you will see the high utilization rates in the coming quarters. Because I think it's easy to make math -- to do a math, just to compare the top line growth with the expansion plan okay? So, 30% top line growth compared to the 20% to 25% expansion plan. And so we do have the leverage on the higher utilization rates okay?

Thank you.

Okay. Thanks.

Your next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.

Hi, Steve and Sisi. The question is how much capacity do you plan to add in the new fiscal years?

Okay. Thanks Tian. This is a great question. We -- the expansion plan for this fiscal year fiscal year 2019 will be 20% to 25%. We have already opened 14% in the first three quarters of this fiscal year. So for the whole year 20% to 25%, and next year fiscal year 2020 I think we keep the same guidance of the -- as we guide in the fiscal year 2019. It will be 20% to 25% the current expansion plan.

Thank you.

The market still has a lot of -- lots of the opportunity for us for the big players like us. We will open 20% to 25% new capacity in the coming years okay?

Thank you. Thank you, Stephen.

Your next question comes from the line of John Wang from Macquarie. Please ask your question.

Thank you. So my question is so Steven mentioned that the retention rate for all lines of the business is kind of improving. So can you share more colors on the retention rate of different business lines? And also what is the retention is going to improve in the coming quarters or next fiscal years? Thanks.

Yeah. Actually we have seen the student retention rates is guiding higher for both POP Kids and U-Can business. And for the POP Kids the retention rate for this quarter is close to 90% and U-Can business middle school, high school is over 75%. So it's 75% to between 75% to 80% and it'll keep going forward. Since we started to invest on the online/offline, the new product and we have seen the retention rates getting up. And going forward, I think, we will see higher student retention rates going forward. And this is -- I think, this is the -- it shows that our investments in the last three years it start to bear fruit from the investments we made in the last three years.

Okay. Thanks.

Thanks.

Your next question comes from the line of Lucy Yu from Bank of America. Please ask your question.

Hi, Stephen. I've got a question on the online business, Koolearn. So how much online loss did Koolearn make this quarter? And what's the guidance for next quarter?

I'm sorry, I can't hear you very clearly.

It's regarding the online loss. So how much online loss was booked this quarter and how about next quarter and 2020?

Sorry. We can't disclose the numbers of the Koolearn for this quarter. And I think till the coming July, so in the next earnings call we will disclose the Koolearn numbers. Okay.

Okay. Do you have any guidance for 2020? How much would that be comparing to 2019?

Yes. But I do believe the margin derived from the online part from Koolearn in the second half of the year will be lower than the first half of this year. Okay.

Okay. Thank you.

Thank you.

Your next question comes from the line of Alex Xie from Crédit Suisse. Please ask your question.

Hi, management. Thank you for taking my questions. So I would like to ask about what will the enrollments growth for POP Kids and U-Can look like if we exclude the impacts from the change of tuition fee collection schedule. And my second question is what are our plans for the summer promotion in the coming summer of this current year. Thank you.

Okay. Yes. The significant increase in the number of enrollments is very good, because of the change of the class. And so, the -- I think, the normal where the enrollments for the POP Kids program in the Q3 was 40% to 45%, this is the real student enrollment, okay? And for the U-Can, the enrollment growth was somewhere around 40%. And -- but it's still great, the progress. And so, if you combine with the enrollment growth with the 5% to 10% price increase, you'll get the top line growth. Okay? And your second question is about summer promotion, yes. As I mentioned in the last earnings call, in the last year we got over 700,000 summer promotion enrollments in last year Q1. And this year I think we will make a change of the summer promotion strategy. We will care more about the student retention rate than last year. And as I mentioned in the last earnings call, we raised the summer promotion class price from RMB 200 to -- last year to RMB 400 this year. And so, I think, it's better for us to identify who are the real customers after the summer promotion. So we do believe the retention rates after the summer promotion will be higher than last year.

Thank you.

Thanks.

Your next question comes from the line of Leon Chik from JPMorgan. Please ask your question.

Hi. Congrats on the results. Just wondering on your other income of $24.1 million, which was down more than 30% from the previous quarter, just wondering what's the main reason. Thanks.

I think, the main part of the other income is the interest income. So I suggest that you see the year-over-year growth and because of the different cash balance. And typically the average interest rate of the interest income is a little bit lower than last year. Okay?

Okay. Thanks.

Thanks Leon.

Your next question comes from the line of John Choi from Daiwa. Please ask your question.

Good evening guys. Just a quick question on operating margin. I think you mentioned on your prepared remarks, non-GAAP operating margin went up by 120 basis points this quarter. So looking ahead, I think management did say 17% to 18% in couple of years' time. So if we look at fiscal year 2020 and 2021, is that something that we could achieve? And can you kind of elaborate what are going to be the key metrics is it going to be utilization rate improvement or better improvement from the online business? So which will be the main factor behind the margin improvement? Thank you.

I think the margins relates to these two factors. Number one is the expansion plan. Number two is the online investments, okay, the other investments. And so in the fiscal year 2020, we expect that the margin expansion year-over-year and we don't want to change our main long-term margin guidance to the 17%. This is non-GAAP operating margin in main long-term. Okay.

Okay.

Your next question comes from the line of Edwin Chen from UBS. Please ask your question.

Thank you. Congrats Stephen and Sisi on the great results. Just a couple of questions. Number one, on your guidance operating margin guidance for next quarter flattish year-on-year, had this considered the impact you mentioned of one-week push back of the revenue bookings from March to June? And the second question is on your income tax rates. I noticed that the tax rates in the third quarter has been much higher than a year ago. And I'm just wondering what's your guidance of the tax rate for the first quarter and maybe a sustainable tax rate for FY 2020? Thank you.

Yes. The guidance of the margin in the coming quarter, we guided the margin flattish. I mean, partially it relates to the revenue impact. But it's just for the K-12 business, we just sacrificed the one week's revenue in Q4, but we'll make it up in the Q1. So -- and yes, as of the margin guidance for the next year, we do feel positive for the margin expansion for the next whole year. And the tax rates, yes, in Q3 in this quarter, the tax rate was 22%. But we have a fair value gain impact. So if you take it off the tax rates was 18.5%. I think the reason that the tax rate steadily move up is because we'll lose some benefit of the some our tax efficient structures, because some high-tech companies and what we said we have a certain period of the tax prep. And when they expire, the tax rates tend to go up. So our guidance for the whole year of the ETR will be somewhere between 18% to 19%. Thanks.

Okay. Thank you.

Thanks Edwin.

Your next question comes from the line of Natalie Wu from CICC. Please ask your question.

Hey, Stephen. Thanks for the opportunity. This is John [ph] on behalf of Natalie. We have two questions. So first one is on your off-line/online business. Can you maybe provide some color on what kind of synergy should we expect between those two business going forward? And second question is on your class duration shift. I noticed some cities, for example Shanghai, where you use the 2.5 hour course duration to replace the previous three hour courses. Wonder what would be the scale of this change and how should we think about the impact on margin? Thanks.

Yes. The off-line and online businesses certainly actually when we started to make a reform, I think three years ago for the domestic test prep first and we pushed almost all of the large-scale classes into pure online, because it's focused to the domestic test prep students mostly for the college students or university students. But in the off-line, we are still providing small-size class, because we divided the students by two parts. For those some students they have the full ability to control themselves to study pure online okay we do it online. But for some students they still need the off-line classes, because they don't have the enough ability to study through online. So we have seen some affinity between the off-line and the online business. But don't forget, the market is huge enough okay both -- for both the online part and off-line part. Even though we're the leading player in the market, one of the leader player in the market our market share for both off-line and online are very small. So I think the cannibalization between the off-line and online will be very small and we will see more and more synergy between off-line business and online business, okay? And the class duration actually we start -- we're starting to pilot this program two years ago in Beijing school to change the one-fourth of three hours -- one session of the course from the three hours -- three hours 100% off-line to two hours off-line class combined with the 30 minutes online classes. And the 30 minutes online class is related to the homework where some contents that for the students can do it by themselves online. So I think that's great for us to make the higher evaluation rates of the classrooms. So it does work. And I think it's successful for the Beijing school. And in other cities, we'll do it more and more to provide more and more online/off-line integrated classes going forward.

Okay. Thanks very helpful.

Thank you.

Your next question comes from the line of Eric Qiu from CCBI. Please ask your question.

Hi, good evening, Stephen and Sisi. Thanks for taking my question. I have two questions. One is regarding to the operating margin. This quarter you reverted the previous two quarters margin contraction and achieve the margin expansion of 100 bps. Just wondering what's the major reasons behind that? And for next quarter is that because you are still quite conservative, so at this moment you maintain a flat margin outlook? The second is for the top line. For the fourth quarter revenue guidance you guided even in Renminbi terms it seems the growth rate is a bit slower than previous three quarters, which is all above 30 percentage year-over-year. So I'm wondering is that because the seasonality or because of accounting issues? Thank you.

Okay. Your first question is about margin. This quarter we got the 120 bps up for the -- on the operating margin. I think this is -- there were two reasons. The first one is we do have a leverage on the utilization rates, because the expansion plan in the first three quarters was only 14%. And actually we have -- we thought -- we thought things the first half of this year. So don't forget, we setup multiple new learning centers in the second half of last year. So in the Q3 and Q4, we will have more leverage than the first half of this year. And secondly, you saw our selling marketing expenses increased only by 13% and we do believe we will have the leverage on the selling and marketing expenses as a percentage of revenue going forward. And the margin guidance, yes, since last earnings call, we guided this with earlier guide, the margin will be flattish in the close range and we got 120 bps up finally, but we don't want to change our actual guidance over the Q4, but still remain flattish. Thank you.

Okay. Thank you.

Okay, topline growth, okay, your last question. Actually, typically, the Q4 typically the seasonality -- in terms of the seasonality, the Q4 learning is lower by 2% compared to Q3. So this is the normal, okay? And so this is the first thing. Combine the two reasons, I explained at the end of my first question in the earnings call, 2% of the class change from Q3 to Q4 and 3% from the oversees consulting, the accounting new treatment. So if you add it all back, the revenue growth will be over 30%. So I think it's normal.

Okay. Thank you. Got it.

Thank you.

Our next question comes from the line of Christine Cho from Goldman Sachs. Please ask your question.

Hi Stephen and Sisi. I had two quick questions. So one just on the OP margins increase, so if you just decompose that between off-line and online, could you give us some color there in terms of this quarter? And then secondly, we noticed that a lot of the learning centers that you've added this year was mostly in the existing cities. If you think about the future expansion plans, will it be actually shifting towards more new cities? Or will it still be kind of the existing cities that you will be initially targeting? And just kind of the mix between the off-line versus online in terms of thinking about expansion into these newer -- lower-tier cities as well? Thank you.

Okay. Second question first. Going forward, for the fiscal year '20, I think we will expand more learning centers in existing cities. And yes, we do have a plan to open like new cities, but most of the new learning centers we setup will be happen in the existing cities. Even in Beijing where the top tier city, we do have a lot of room to open more learning centers. And the OP margin -- I'm sorry I can't disclose the detail for the online net profit, but what I can say is the operating margin expansion for the off-line part is higher than the overall margin expansion.

Okay. Thank you.

Is it clear Christine? Thank you.

Yeah.

Your next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.

Hi Stephen and Sisi. I have a question on the overseas consulting fee -- consulting income. So can you give more color on the consulting income number of last quarter -- fourth quarter last year and what would be the more color on how did the accounting policy changed so that will impact your guidance? And whether the accounting policy will also change the cost recognition in the P&L in next quarter as well? And also secondly, can you -- what the growth outlook for overseas test prep business in this year and the next year? Thank you.

Okay. Thanks, Zhong Sheng. We don't disclose the detailed numbers of the overseas consulting business. The way I can say is, overall, the revenue contribution from the overseas consulting business for the whole year is about 8% to 9%. Okay? So this is revenue contribution. But typically, in the Q4 the revenue contribution from the overseas consulting business is a bit more than the other quarters. And the accounting standard changes before the Q4 2018, the overseas consulting revenue is recognized when most of the revenue is recognized but when the context really. And of the new revenue accounting standard, we reported revenue according to the several benchmarks by outlook, so that means we reported the revenue earlier than before based on the new accounting standard. And yeah, this is the answer for your question about the overseas consulting and to the other question, what? What's your next question? The second question?

Second question is about overseas test prep growth outlook in this year and the next year.

Okay. Yeah. Typically, we -- well, we expect the overseas business -- the overseas test prep business in the coming Q4 in RMB terms will be growth by 10% to 15% in RMB terms. Okay? And for the next year, the guidance will be similar, 10% to 15% in RMB terms.

Thank you. And may I ask the accounting policy change on consulting revenue. Will it impact your cost recognition as well?

No. There is no impact for the cost side.

Okay. Thank you. Thank you very much.

Thank you, Sheng Zhong.

Our next question comes from the line of Manyi Lu from DBS. Please ask your question.

Hi, management. Actually my question was asked by someone before, so I can skip mine.

I'm sorry. I can't hear you very clearly. Please repeat it again.

Okay. Can you hear me now?

Yes. Please speak a little louder, yeah. Go ahead please.

Yeah. Can you hear me now?

Yeah, sounds better.

Yeah.

Go ahead.

Actually -- yeah, my question was asked by someone else before. So, I can skip my question. Yeah.

Okay. Okay. Thank you.

Okay. Thank you.

Our next question comes from the line of Alan Deng [ph] from IRA [ph]. Please ask your question.

Hi, management. Thank you very much. And can I ask you when the -- what is the current biggest relief that in your view -- in the management view? Is it policy? Is it going to be competition? Or will you kind of view that as probably preventing from achieving 30% top line growth and margin expansion for next year?

I'm sorry. Can you repeat it again? I can't hear you very clearly. Your question is about what the policy or -- can you repeat it again?

What is the biggest relief that management is thinking about at this moment that makes a potential uplifting the 30% top line growth and margin expansion target? Is it going to be policy or is it going to be competition?

I think for the management concern, we always have two kinds of risks. The first one is regulation for the -- both the overseas test prep and the K-12 business. And so this is the first part of the risk. Secondly, we do have the human resource risk even though we spent a lot in the last three years to build up the new education system, but we still rely on the talent people to run business, especially for the local school. So, there is a risk for the human resources. Okay? Two risks, regulation and human resources. Okay?

Okay. Thank you.

Okay. Thank you.

We are now approaching the end of the conference call. I will 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. Thank you.

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