Good evening and thank you for standing by for New Oriental's Fourth Fiscal Quarter and Fiscal Year 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After management 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 fourth fiscal quarter and fiscal year 2019 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC.New Oriental does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org.I will now turn the call over to Mr. Yang. Stephen, please go ahead.

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are very pleased to conclude fiscal year 2019 on a strong note with robust growth in topline as well as improvements in operating margin.In fiscal year 2019, we reported net revenue of $3,096.5 million, representing a 26.5% increase year-over-year or 31.4% if computed in RMB.Total student enrollments in academic subjects tutoring and test prep courses in fiscal year 2019 increased by 32.4% to approximately 8,382,700.During fiscal year 2019, we added a total of 152 new facilities, which includes 141 new learning centers in existing cities, 9 offline training facilities in 6 new cities and 2 dual-teacher model facilities in two low-tier cities. Altogether, our total square meters of classroom area by the end of the fiscal year has extended by approximately 24% year-over-year.We also continued to strategically deepen our investments into the dual-teacher model classes and new initiatives for K-12 tutoring in our pure education platform, Koolearn.com.With innovative application of technology in our education services, we are well-placed to continue to capture new business opportunities in low-tier cities and remote areas.In the fourth quarter, we continued to execute our well-proven Optimize the Market strategy and focus our efforts in improving utilization in facilities and controlling costs and expenses. This has enabled us to tap into tremendous market opportunities with our standardized online, offline integrated educational system.As we continue to expand our capacity, we remain focused on improving utilization rates and investing in enhancing teaching quality in line with our long-term strategy.In the fourth quarter of 2019, we reported revenue of $842.9 million, representing a 20.2% increase year-over-year or 28.4% if computed in RMB. Net revenue from education programs and services for the fourth quarter were $717.0 million, representing a 25.1% increase year-over-year or 33.6% if…

[Operator Instructions]. Your first question comes from the line of Alex Xie from Credit Suisse. Please ask your question.

Hi, Stephen. Thank you for taking my questions. And congratulations on very strong results. So, I would like to ask for management's expectation about FY 2020 in terms of both revenue growth and margins after delivering a strong Q4. Have we become more optimistic about FY 2020 than before?And, secondly, I think for this quarter, the revenue growth of overseas and test prep and consulting business, I think, exceeded expectations. And what was the reason behind such outperformance? These are my two questions first. Thank you.

Okay. Thanks, Alex. This quarter, the revenue growth was 28.4% in RMB terms year-over-year. So, it was a very strong quarter. And even though we have the lower-than- usual K-12 revenue because we moved the one week revenue from March to June, so that means we will record the one week more revenue in the coming Q1 rather than this quarter and some overseas consulting revenue. That means, we report based on the accounting change or the accounting policy change, we record some revenue of the overseas consulting revenue in Q3 rather than this quarter. But we still get the very strong quarter.So, in the fiscal year 2020, I think we – as we guided before, we guided our top line growth in RMB terms year-over-year in fiscal year 2020 will be over 30%. So, this is our official guidance for fiscal year 2020 topline growth.I think this is because of the three reasons. Number one is we're seeing the higher student retention rate. And number two is, you saw, we expanded 24% new square meter classroom area in fiscal year 2020 and we plan to open another 20% new classroom area in the fiscal year 2020. And number three, we will get very strong performance from the summer promotion enrollment.And as for the margin, yeah, you all guys should see another strong quarter of the margin expansion. And in the Q1 fiscal year 2020 and the whole year, as I said before, we guided the – if you look at the margin expansion in the Q1 fiscal year 2020 and for the whole year because we have more leverage, operating leverage from the operation. So, this is my answer to your first question.Second question, overseas test prep. Yeah, this quarter, our overseas test prep business recorded revenue growth of about 13% in dollar terms or 21% in RMB terms. I think it's much better than we did in the last three quarters of fiscal year 2019. I think this is a result of our product reform for overseas test prep classes because we are seeing more and more the young students to take our TOEFL, SAT courses. And so, we are rolling out a new online and offline integrated product as we did in K-12 for the overseas test prep. So, I think, going forward, our overseas test prep business will achieve a positive result in fiscal year 2020.Okay, thank you.

Actually, please note that the revenue guidance for the next fiscal year is in RMB terms. Okay?

Yeah, RMB terms. Over 30% year-over-year. Thank you, Alex.

Thank you. May I just have a follow-up about summer promotion because I think our expectations for FY 2020 is actually quite strong. But I think in terms of number of summer promotion enrollment, it seems that the absolute amount of increase in the number of enrollments is not that high as before. So, what are the expectations for the retention rate? Have we changed the strategy to grow our business in this year?

Yeah, consistent with the last few years. We launched the summer promotion this year. Even we raised the price from RMB 200 last year to RMB 400 this year, we're still seeing the strong involvement from the summer promotion. So, so far, we brought the enrollment from the summer promotion of about 765,000, which is a 4% increase compared to last year. And so, this year, I think the strategy change we made of the summer promotion is to – and we're able to better identify who are the real customers and retain the customers, more customers after the summer promotion. So, we believe the retention rate after summer promotion this year will be better, higher than last year. Definitely.

Okay, thank you. Thank you very much.

Your next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.Tian Hou, your line is open. You may ask your question.

Sorry, I was silent myself. Hi, Sisi and Stephen. Congratulations on a good quarter. I also have two questions. One is related to online education. We see the contribution of the online education in China sort of keep it up and we saw a lot of advertising, offline advertising, online advertising. And so, EDU is also one of the online education vendors. I wonder what is the strategy for EDU to further develop your online education's brand awareness and as well as revenue, market share. That's number one.I'm going to give you the second question also, which is, it seems like your tone for next fiscal year is much more optimistic than last year. So, what are the drivers behind those optimistic tone for this fiscal year? Thank you.

Okay. Thanks, Tian. Your first question is related to the online education. With the goal of tapping into the market opportunities in the pure online sector, I think we continue to invest. But we would rather spend more money on the content development, R&D and teachers recruiting and training and also we will spend some money on the marketing – selling and marketing expenses. But I think the spend on the marketing will be reasonable because we won't use the – burning money away to acquire students as we did in our offline business historically. So, this is our online strategy. And your number two question is about the guidance, okay?

Yeah.

Actually, in this quarter, we've got very strong numbers. And I think in the fiscal year 2019, we opened 24% new learning centers in square meter size. And it brought us more student enrollments and we beat the topline guidance again this quarter. And we are seeing the highest student retention rate. So, I think this is the result of the investment on these products [indiscernible]. And so, I think we are more confident about our products. That means we are providing better quality service to students compared to before.And secondly, even though we raised the price of the summer promotion courses, we've still got the full numbers and we believe the retention rate after the summer promotion will be higher. And if you look at the competition environment, I don't think they change. So, our job is to provide the best service as we did before going forward and to take market share as much as we can going forward.

Thank you. Thank you. Congratulations again.

Thank you.

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

Hi, Stephen and Sisi. Congratulations on the good results. So, I want to follow-up your revenue outlook of 30 % year-over-year – more than 30% year-over-year growth. Can you give us a breakdown of the growth expectation for the different business lines? And also, you are also very confident about the margin expansion. Can you give us more color on the margin expansion magnitude, if possible? Thank you.

Okay. The breakdown of the different – all business lines, I think K-12 business will be the key revenue driver in fiscal year 2020. So, we guided the top line growth of the K-12 business growth will be 40%, somewhere around 40% year-over-year. All what I'm saying is in RMB terms, okay?The overseas test prep, I think the top line growth will be 10% plus year-over-year, okay? And domestic test prep, I think the growth rate will be somewhere between 15% to 20% in RMB terms. I'm sorry I can't give the detailed guidance of the pure online, the Koolearn.com. But I think the revenue will be strong. And overseas consulting, I think the top line growth will be somewhere around 20% – 15% to 20%. So, this is my guidance by different business lines. Okay?And margin, yeah, I think we do believe we'll have the more optimal leverage going forward because I gave the guidance – top line guidance of over 30% in fiscal year 2020. Last year, in fiscal year 2019, the expansion was 24%. And last year – in fiscal year 2018, we opened a lot of learning centers [indiscernible]. It was over 40%. So, I think the first job in fiscal year 2020 for us is to fill more students into the learning centers we set up in the last two years. And in fiscal year, as I said, we plan to expand 20% new learning centers. So, the top line growth will be over 30%. So, you will see more leverage going forward. So, that's why I gave the margin expansion guidance for this new fiscal year 2020.

Sure. Thank you very much.

As well, we do have the more optimal leverage on the selling and marketing expenses and in G&A. Because if you saw the numbers of this quarter, our selling and marketing expenses just increased by low-single digits.

Okay, thank you.

Okay, thank you.

Your next question comes from the line of Terry Weng from Blue Lotus. Please ask your question.

Hi, management. Thanks for taking my call and congratulations for a solid quarter. I have one question here. We see the gross margin fall 1.3% year-over-year. Could management provide more color on that? Thank you.

Okay. Yeah. Thanks, Terry. I think the margin was down by 130 bps. I think this is mainly due to the lower-than-usual revenue this quarter. As I said, we moved the one week's revenue from Q4 to Q1.

Because of regulation.

Yeah, because of the regulation. And this quarter, it's one-time impacts of the overseas consulting revenue. But we do have some of the fixed cost of the teachers and staff cost in Q4. But I do believe we will have the gross margin expansion in the coming new quarter.

Thank you.

Thank you.

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

Hi. Thanks, Stephen and Sisi. Two questions. First, I think given the recent regulations which basically limits the competition in admission selection for middle school, do we see any positive spillover effect for our middle and high school tutoring business going forward?And second question is a financial question. We see the non-controlling loss was actually expanding a bit this quarter sequentially and year-on-year. Is that something related to the loss of Koolearn or is that something from other business? Thanks.

Okay. My second question – for question two, yes, it was some impact from the Koolearn.com [indiscernible]. And to the regulation – and the regulations, yeah, there is some regulation since last year. But our attitude is that we're fully supportive of the government reforms and the implementation. Actually, for the offline side, the regulations is carried out on a city-by-city basis. But we do not foresee any material impacts from the regulations. On the contrary, we fully support the regulations from the government because I think it's good for the whole industry. And so, we are doing our jobs and to provide better service to the students and to provide them with better products and to get better feedback from the parents and kids. So, this is our target. So, I think this is a good timing for us to pick more market share by providing the better product. So, this is our attitude to the policy.

Okay, thank you. Thank you, Steven.

Okay. Thank you, Alex.

Your next question comes from the line of Jin Yoon from Newstreet Research. Please ask your question.

Hi. Good evening. Hey, thanks for taking my questions, guys. Just a couple from me. On the summer program, with the pricing increase, has there been a change in content in relation to that pricing increase? That's my first question.And then, what percentage of, I guess, summer programs or the programs today that you see is coming from the dual teacher program and how should we expect that for the fiscal 2020 going forward?And then, my second question is related to your FX. Not sure if I calculated this right, but I think my FX estimate in the prior quarter was a little bit different than what you guys provided. Hence, there was probably somewhere like a 300 basis point impact to FX according to my numbers, which impacted revenues upwards of $20 million. I'm just wondering if there was something different about FX in the quarter or is it something that I was just kind of mistaken myself. Anyhow, any color on that would be great. Thanks, guys.

Yeah, I think we kept it almost the same, the price strategy. This quarter, the hourly rate for all business lines was 10%. We raised the price by a reasonable price. And going forward, I think our price increase will be 5% to 10% year-over-year in the fiscal year 2020. We made some change of the product for both the U-Can and POP Kids. We spent a lot since two years ago. And even in the last trailing 12 months, we updated our product for the POP Kids product. That means we add more and more the online and offline elements to our offline classes. So, the kids in our classes are taking better classes than before. But as I said, we'll keep the same price strategy. This is our price strategy.And the exchange rate, the Q4, this quarter, we used the RMB 6.7601. And last year Q4, we used RMB 6.3287. So, this is the exchange rate we used to calculate the revenues. And in the coming new quarter, the Q1 2020, we use the RMB 6.8851 compared to the last year Q1, RMB 6.6757. So, these are the only numbers we are using.

Great, thank you.

Is it clear? Okay, thank you.

[Operator Instructions]. Your next question comes from the line of Christine Cho from Goldman Sachs. Please ask your question.

Hello, Stephen, Sisi. Congratulations. I think quickly on the tax rate this quarter, I noticed it was a bit higher than usual. Was there any specific that you would highlight regarding that? And then, in terms of looking at FY 2020, what would be the expected tax rate?

Okay. Thanks, Christine. That's a good question. In this quarter, the GAAP effective tax rate was 27%. It seems to be high. There are two reasons. Number one is, if you take out the loss from the fair value change, the ETR was 20%. So, this is number one reason. Number two reason, most software high tech entities have a certain period of tax holiday. When they expire, the tax rate tends to go up. But this quarter I think is very special. So, going forward, we expect the GAAP ETR in fiscal year 2020 will be somewhere between 20% to 23% because we believe we will not have such a big fair value loss in fiscal year 2020 as we had in fiscal year 2019. On the contrary, if we've got the fair value gain in fiscal year 2020, the ETR will be lower.

Thank you. That's very clear.

Thank you. Okay.

Your next question comes from the line of Felix Liu from UBS. Ask your question.

Hello, Stephen, Sisi. Congratulations on the strong results. One more question on the margin. So, I'm just wondering if there is any drag from the online business regarding the year-on-year GPM decline. Thank you.

We invest on the online platform, Koolearn.com. But as I said, we expected the non-GAAP operating margin of the offline core business continue to be expanded in the coming fiscal year 2020. So, I think this margin improvement is expected to cover the margin pressure from the online side. So, as I said, in short, overall margin, we expect our overall non-GAAP operating margin to expand in the next quarter, the Q1 and the whole fiscal year 2020.

Thank you. Thank you for the positive.

Thank you. Okay, thank you.

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

Hey, Stephen, Sisi. Thanks for the opportunity. This is [indiscernible] on for Natalie. Maybe we have two larger questions. On your K-12 revenue by several major cities, we noticed Beijing still achieved solid growth despite the fierce competition and the high penetration rate. And also, several other cities seems to register a tremendous growth. So can management share with us – so by ranking of importance – what are the key success factors behind those growth rate and specifically the factors for Beijing?And the second question, we noticed that pure online [indiscernible] using acquisition this summer. Do you think the rise in penetration of online education will be short or medium term? Why are Koolearn still a bit smaller compared with others? Did that somehow impact the overall offline growth? Thanks a lot.

Yeah. What I can disclose for the revenue by cities, what I can say is, in the last trailing 12 months, our top ten cities, the K-12 revenue growth was 37% in RMB terms year-over-year. So, you can see the strong momentum. And going forward, in fiscal year 2020, I think for the top 10 cities, we can get the – at least the same growth number in fiscal year 2020. So, actually, we don't care more about the competition. I think the competition environment has no change. And competition is always there.And your second question is about the online acquisition cost. Yeah, we – as I said, to answer the – as I said before, our investment for the online platform, Koolearn.com, I think most of our spending we will spend on the R&D and content development and teachers recruiting and training. Yeah, we will spend the marketing – selling and marketing expenses in a reasonable scale. And, yeah, this is our strategy.If you look at the historical, what happens in the past, New Oriental, we didn't like to spend too much more on the marketing because I think we rely the more – we relied more on the word of mouth because we have the nationwide brand name in China. Thank you.

Thanks.

Okay, thank you.

Your next question comes from the line of Mark Li from Citi. Please ask your question.

Hi, management. Thanks for the time. May I ask – actually, given the positive margin development we have, could you remind us our medium-term margin target? Is there any change? Thanks.

Thanks, Mark. Great question. As I said, regarding the margin expansion in fiscal year 2020, we want to make any change of the medium, long-term margin guidance. Our medium, long-term margin guidance will be 17% the margin guidance. So, there is no change.

Okay, thanks.

Thank you, Mark.

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

Thanks, Stephen and Sisi, for taking my questions. So, my question is that, it seems that the quarter-over-quarter capacity expansion speeded up a little bit. But does that mean we are facing less regulatory pressures on the opening new learning centers? And also, can management show some color on the utilization rate currently and going forward? So, if considering not moving one week's lesson to the next quarter, is the utilization rate going to be higher? Thanks.

Yeah. The expansion quarter-on-quarter in Q4 was 9%. I think it's not related to the regulations. It's just on track compared to our budget because we need to open more learning centers to prepare for the new summer and new year. So, if you combine the new square meters we opened in first three quarters, we would be 9% this quarter. So, we've got 24% for the whole year fiscal year 2019. And this is just on track.And what's your second question?

The second question was on the utilization rate.

Utilization, I'm sorry. The utilization rate this quarter was 21% to 22%. I think it's 100 to 200 bps up compared to the same period of the last fiscal year. And I think the math is very simple. The expansion was 24% for fiscal year 2019, but we've got the 31% top line growth in RMB terms year-over-year in fiscal year 2019. And next year, as I said, our expansion plan will be somewhere around 20% and the top line growth in RMB terms will be over 30%. So, I think we believe the utilization rates will go up going forward.Okay, thank you.

Thanks.

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

Hi, Stephen and Sisi. I've got one question for FY 2019. How much has rental and tutor cost increased Y-o-Y for the fiscal year? And secondly, the selling and distribution expense for the fourth quarter is only up by, like, 5% in US dollar term. How should we expect this cost item to grow in FY 2020? Thank you.

Sisi, can you check the numbers of the rental and tutor?

Yes. For full year, the staff costs increased about 27%, 28%. And rental is roughly about 25% to 26%.

This is dollar?

In US dollar terms.

Yeah, dollars terms. This is a whole-year number?

Whole year.

Okay. We performed better in the second half of the year than the first half. And selling, marketing expense, I think, yeah, you're right. The selling and marketing expenses just increased by 5% in the Q4. And as I said, we don't want to spend too much money on the selling and marketing or on the student acquisition cost. We care more about the word of mouth. And also, we have the very strong performance from the summer promotion. So, we don't need to spend so much on the marketing expenses. And going forward, I believe we have the more operating leverage from the selling and marketing side in fiscal year 2020.

Okay. Thank you.

Thank you. Thank you, Lucy.

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

Thanks, Stephen and Sisi, for taking my questions. Quickly, I'll follow-up on the margin side. Seems like you mentioned selling and marketing, you guys will see pretty decent operating leverage. But on the G&A, should we be expecting also decent leverage? And then, if you combine gross profit margin, as you mentioned, for offline, will continue to expand, it seems to me that the operating margin expansion is likely to accelerate versus – this coming fiscal year versus what the recent quarter we're seeing? And just quickly, there's been a lot of education start-ups and also investments around. What are our plans in terms of investing into this ecosystem? Thank you.

Yeah. I think you will see more leverage from the selling and marketing and G&A expenses going forward. But the gross margin in the fiscal year 2020, I believe, it will be flattish or up a little bit. Our money – I think we're looking at some new start-ups, especially for the online education side. And if we can find the potential synergy between New Oriental and the target companies, we'll buy it. We'll make investments. Thank you. Hello?

Yes. Your next question comes from the line of Johnny Wong from Jefferies. Please ask your question.

Hi, Stephen and Sisi. Thank you for taking my question and congratulations. My question relates to the summer promotion. You said that we are seeing very good enrollment, 765,000. Can you give us a breakdown between – approximate breakdown between online and offline? Is that mainly offline? Or is that mainly online students?And also, I know we've had very good conversion rates in the past, over 50%, if I remember correctly. What type of target conversion rate are we seeing? Thank you very much.

Yeah. Hey, Johnny. It's a great question. I think the 765,000 summer promotion enrollments, as I said, it's pure offline summer promotion enrollment. We don't count any online summer promotion enrollment. Okay. Is it clear?And last year – yeah, you're right. Last year, we got 54% retention rate after the summer promotion in autumn that year. And we do believe we can get higher student retention rates after this year's summer. Think about that. We raised the price of the summer promotion from RMB 200 to RMB 400. And I think it's much better for us to identify the real customers and to enhance the customer – the loyalty. So, that's why we believe the retention rates will be higher this year.

Thank you.

Johnny, is it clear? Thank you.

Yes, it is. Thank you.

Your next question comes from the line of from Lillian Wong [ph] from HSBC. Please ask your question.

My question has been answered. 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.