Ladies and gentlemen, good evening and thank you for standing by for New Oriental's First Fiscal Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 host for today's conference, Ms. Sisi Zhao.

Thank you. Hello, everyone, and welcome to New Oriental's first fiscal quarter 2020 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 and I 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. Welcome, everyone, and thank you for joining us on the call. We're very pleased to begin fiscal year 2020 with the robust top line growth, which exceeded the high end of our expected range in RMB terms.For the first quarter of 2020, New Oriental reported net revenue of $1,071.8 million, representing a growth of 24.6% or 29.7% if measured in RMB.Net revenues from educational programs and services for the quarter were $996.5 million, representing a 25% increase year-over-year or 30% if measured in RMB.Our key growth driver, K-12, after-school tutoring business reported significant increase in student enrollment. Together, with the overwhelming responses received from the summer promotion combined, both segments made great contributions to this quarter's outstanding performance.In the first quarter of fiscal year 2020, we continued to implement our well-proven, Optimize the Market strategy and carried out about capacity expansion in cities where we see potential for rapid growth and strong profitability.During the quarter, we added another seven learning centers in existing cities. The total square meters of classroom area by the end of the quarter increased approximately 24% year-over-year and 3% quarter-over-quarter, in line with our expansion plan.Our total student enrollment in academic subjects tutoring and test prep courses in the first fiscal quarter of 2020 increased by 50.4% year-over-year to approximately 2,609,200 for the first fiscal quarter of 2020.On this point, please note the higher-than-normal increases in the number of student enrollments is primarily due to the split of the autumn semester into two sections, a change we adopted to meet the latest regulatory requirements since November 2018, which means student enrollments for each half of the autumn semester were calculated separately.To explain, the number of student recruitment and received classes for the first half of the autumn semester were booked in previous quarter,…

[Operator Instructions]. Your first question comes from the line of Mark Li from Citi. Please ask your question.

Hi, management. Congratulations for the very strong results. My question is, I think the non-GAAP operating margin, up 350 bps, is a very good surprise. Do you have any analysis for the breakdown of this a bit? Because it's quite a bit higher than the previous guidance. Thanks.

Okay. Yeah. Our non-GAAP operating margin rose by 360 basis points year-over-year in this quarter. I think this is much better than we expected three months ago. And I think our efforts to keep a healthy balance between the capacity expansion and the operating efficiency have paid off in this quarter.And I think there were three reasons. The first one, as you know, you have seen the strong utilization rate in this quarter because our expansion capacity this quarter is only 3% quarter-over-quarter. But in RMB terms, we got the 29.7% revenue growth.And number two, as you know, we have the cost control within the company.And number three, the last one is we have the one-off summer promotion drive, of course, because we raised the price from RMB 200 per course on average last year to RMB 400 this year. So, it's a healthy margin expansion.And I think from the one-off, the summer promotion positive impact will be similar, around 100 basis points. And so, all the others only comes from the operating leverage and high utilization rates.And, yeah, keep going forward. I think within the rest of this fiscal year, we're confident that we will have the margin expansion in the rest of the year because, as I guided in the last earnings call, our expansion plan this year is somewhere around 20%, but our top line growth for the whole year will be 30% year-over-year growth. So, we believe we will have the more leverage on the rental side and the SG&A side as well.Thanks, Mark.

Thanks. So, may I understand if the first reason is bigger than the second and bigger than the third? Is that in this sequence, for the help?

Yes, yes. So, yeah, as I said, the major margin driver comes from the better utilization rates and the operational efficiency.

Okay, thank you.

Thanks, Mark.

[Operator Instructions]. Your next question comes from the line of Yuzhong Gao from CICC. Please ask your question.

Hey, Stephen and Sisi. Thanks for the opportunity. A quick question on your K-12 segment. So, for the whole year, could you add some color on your margin guidance? And specifically on your offline-online, how has your offline contributed margins [indiscernible], how the online dragged margins, maybe if you can quantify this a little bit, that will be really helpful. Thanks.

Okay. As I guided, this quarter, we got very good results of the margin expansion, 360 basis points margin expansion in this quarter. For the whole year, we believe we have the margin expansion in the rest of the year. And, yeah, most of the margin expansion comes from the offline business, especially for the K-12 business. And, yeah, I think the online part – the online side is still a drag, but I think the drag will be offset by the offline business margin expansion. I don't have the detailed numbers because we just have the one quarter past. But for the whole year, as a whole – as the company as a whole, the whole margin will be expanded in the fiscal year 2020.

[indiscernible].

Okay, thanks.

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

Hey. Good evening, everyone. Thanks for taking my question. Stephen, I think you mentioned on the prepared remarks that, on a teaching hour basis, that pricing was up 5% if I heard that correctly. I guess, for the rest of the year, how should we expect that? With the utilization continuing to ramp and demand environment being strong, should we see that number accelerate throughout the year? Thanks.

Yeah. The price question first. I think the hourly rates – the hourly rate basis, overall, the price for this quarter was increased by 5% in RMB terms. And so, we've been at 7% of the U-Can business, the price increase; 9% of the POP Kids percent price increase.And going forward, I think we don't want to change our price strategy. So, in the rest of this fiscal year, the price increase for the whole business overall will be 5% to 10% in RMB terms year-over-year.And we have seen more leverage, operational leverage for the first quarter. And we do believe you will see more leverage in the rest of the year. And, yeah, as my answer to the first question, we do believe you will see more leverage in the rest of the year. Yeah, I won't to give the detailed guidance for the margins for the Q2 and the rest of the year, but we believe we'll have the margin expansion, the upside.

Great, thank you.

Thanks

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

Thank you for taking my question. I want to have more color of your margin guidance or about the operating expense. I think, Stephen, you mentioned that, in first quarter, there were more spending on the team and the products, so the G&A cost is a bit similar, while the sales and marketing is lower. So, if we look ahead, say, in the coming winter and the next summer season, do you expect more spending on the sales and marketing when the Koolearn's product is more ready? And so, in this case – so, what's your guidance or outlook of the sales and marketing spending in the second half of this year? Thank you.

Yeah. This quarter, our selling and marketing expenses increased only by 1% in dollar term year-over-year. And this is our strategy as our original plan. Within the Koolearn, I think we continue to invest more resources or money on the product and the teachers recruitment and training and the content development as well as good marketing. But we will spend reasonable marketing expenses within the Koolearn platform in a reasonable way. And we don't want to use the burning money way to acquire students as we did in the offline business.And also, on the other hand, for our offline business, I'm not sure you remember it clearly. Last quarter, our selling and marketing expenses didn't increase a lot. So, I do believe we will have more leverage on the selling and marketing side going forward. And, yeah, that's my answer.And also, I think for the G&A and cost effect like rentals, we do have the more leverage going forward as we did in the selling and marketing side.

Thank you.

Thanks, Sheng Zhong.

Your next question comes from the line of Binnie Wong from HSBC. Please ask your question.

Hi. Good evening, management. Thank you for taking my questions. So, my question is actually on the growth in the top-tier cities. So, we see that there is also intensive competition, right? So, how do you see that the trend in terms of your market share gains in those top-tier cities?And also, if you look at the next quarter growth outlook, right, excluding the FX impact, it's actually still quite strong. So, can you help us to understand how much of that is driven by your enrollment growth? And then, how do you see the trend going forward? And also, give us kind of like your update in terms of your vision on your online education strategy as well? Thank you.

Okay. I can share with you one number. The top 10 cities, [indiscernible] trailing 12 months, the revenue growth for the top 10 cities was 36% in RMB terms year-over-year. And I think we're seeing the good trend. Actually, we're seeing the revenue acceleration in almost all the cities.So, go back to your question about the guidance. And for the Q2, we give the guidance of the top line growth by 30% to 33% in the RMB terms year-over-year growth. And within it, most of the growth will come from the K-12 business. For U-Can, middle school/high school, I think the growth in the second quarter will be 45% plus year-over-year in the second quarter. And for POP Kids, the growth will be somewhere around 50% year-over-year. And overseas test prep business will be somewhere around 10%. So, you could calculate the total. The overall growth will be somewhere around 33%.

The enrollment is the key drive for the revenue growth.

Yes. The price increase will be somewhere between 5% to 10%. Most of the growth will come from the enrollment growth. And don't believe – the retention rates after the summer promotion was 59% from the summer promotion and it's 5% higher than the number of last year. So, we do believe most of these students will stay with us for at least one year or hopefully three to six years. So, it will help the enrollment growth in rest of the year. Thank you.

Okay, thank you so much. Very clear.

Thank you.

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

Hi. Thanks Stephen and thanks Sisi for taking my questions. Very strong quarter. Two quick questions. First, I think you guided around 20% full-year fiscal year capacity growth. Well, I think this quarter you're doing 24% year-on-year growth. Does that imply some kind of a deceleration into the second half this fiscal year?And second, I think we just passed through a very fierce sort of a competition summer for online. I'm just wondering whether this aggressive promotions has impacted New Oriental's offline business in any way. Thank you.

Okay, the capacity question, yes, we have the seasonality of the extension quarter by quarters. If we go back to the last year, the extension, we set up most of the learning centers in the second half of the fiscal year. So, this year, we will use the same strategy. So, it's back-loaded within the same fiscal year. And the reason that we open more learning centers in the second half of the year is because we prepare for the coming new summer. And so, we don't want to change the guidance of the expansion plan as the 20% expansion plan for the whole year, back-loaded.And, yeah, the online competition is a great question. I think, firstly, the market is so huge. Even though we're one of the market leader, but our offline business, the market share is only 2%, somewhere around 2%. So, the market is huge in that. And so far, we haven't seen any negative impact from the recent aggressive online education competition. And, in fact, we have very good revenue acceleration runway in the offline business side. Even though we have seen some players to spend a lot on the online education on the marketing, selling and marketing expenses, but the key is – after we raise the price, we doubled the price of the summer promotion, we still covered the 820,000 enrollments which is 8%, the increase compared to last year. And the retention rate is higher than we expected. 59% is a good result.Our strategy is we care more. We care both offline business and online business growth. And so, that means we will have two growth engines, offline and online. So, the online, as I've said, we are still in process of the investment period, to spend more money and time on the R&D and products development and the teachers training or staff training. And so, the online, so part of the New Oriental's future. But we don't want to – but on the other hand, the offline business, I think we're doing good for the offline business. So, we have two growth engines in future. Thank you.

Okay, thank you.

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

Sisi, Stephen, congratulations on a good quarter. So, the question is related to your offline dual-teacher model. So, if you expand school by school, it will be somehow slower. But if you do the dual-teacher and actually accelerated the growth, so I wonder in your future plans, how many expansion will come from the dual-teacher, the expansion? And also, dual-teacher, how much it contributed to the margin expansion? So, that's the question. Thank you.

Hi, Tian. It's a great question for the dual-teacher model. We have tested the dual-teacher model in 46 existing cities for the POP Kids and 30 cities for the U-Can business. And in several low-tier cities for both POP Kids and U-Can business. And we're happy to see the increased market penetration in the low-tier – in both markets in the low-tier cities. So, we plan to open 10 to 15 more new cities business with the dual-teacher model in next 12 months.And so, yeah, so one teacher can say to so many children at the same time compared to the offline business. So, directly [ph], [indiscernible] dual-teacher model should be higher than the offline business. So, going forward, purely, I think the dual-teacher model business will help the margin expansion for the whole company.

Thank you. That's the question.

Thanks, Tian.

Your next question comes from the line of Lucy Yu from Bank of America Merrill Lynch, please ask your question.

Hi, Stephen, Sisi. Thanks for taking my question. Stephen, you just mentioned that, in the second quarter, U-Can is about to deliver 45% plus growth, with POP Kids delivering 50%. So, actually, the growth rate is accelerating from the first quarter. So, my understanding is that the better-than-expected retention rate from summer promotion might have something to do with the acceleration. Is my understanding correct?

Yes. Number one, we had a very strong retention rates after the summer promotion. This is number one reason. Number two is, we have seen the student retention rates for the normal classes, both U-Can and POP Kids are trending up. So, it testify the – that New Oriental is providing better service and products to the customers, student customers. So, the better the student retention rates and the higher the retention rates from the summer promotion.And lastly, we opened more learning centers in Q1, Q2, and also we're ramping up the learning centers we set out in last two years. So, that means we will fill more students into the current learning centers and help us to calculate the revenue acceleration in Q2, in the coming quarter.

Thank you. May I please follow-up? What's the retention rate for normal class this quarter and how is that comparing to the previous quarter?

Okay. The U-Can middle school/high school business, the retention rates in this quarter is close to 80% and POP Kids is close to 90%, the retention rates. So, compared to last year, we got 3% to 5% higher rates year-over-year. Thank you.

Okay, thank you very much.

Thanks.

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

Thank you. Congratulations, Stephen and Sisi. I just have one question. So, seems like even in pretty mature cities like Beijing, it's off to a very good start this year. What are some key drivers behind this acceleration? Thank you.

It's not only for Beijing school did very good results, but also for the – also for the other big cities. And I think it seems – this is a long story. We're starting to invest on the new products since three years – three, four years ago. And so, we start to bear fruit of the historical investments and also we used to renew the new revamped POP Kids program, the product. Compared to before, it's more interactive, more adaptive for the kids. So, the kids and their parents love the new products than we expected. So, it helps us to get a better student retention rates. And so, anyway, we do believe the big cities, even with the high base number, we do believe they can get healthy growth in the future, going forward. Thank you, Christine. Thanks.

Thank you.

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

Hello, Steven and Sisi. Congratulations on the strong quarter and thank you for taking my question. I think you mentioned that the biggest reason for the margin expansion this quarter is the utilization improvement. So, may I know what is the current utilization level and how much upside do we expect going forward? Thank you very much.

Yeah, this quarter, the overall utilization is 21% and a 2% improvement compared with last year. So, the key driver is U-Can and POP Kids K-12 business. So, the learning centers are ramping up faster than before and the utilization got improved.

Thank you.

Yeah, going forward, I think we – I think we will see higher utilization rates in the rest of the year because U-Can – I think it's a simple math. I suggest that your guys compare the topline growth with the expansion plan. So, that means we fill more students into the existing learning centers. This is the math.

Great. Thank you very much.

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

Hi, management. Thank you for taking my questions. So, I'll also ask about – if we exclude impact from the regulation changes in tuition fee collection, what will be the student enrollment growth for U-Can and POP Kids? Thank you.

For this quarter?

Yeah.

I think for the K-12 business, if you take out the impact of the regulation, I think the enrollment growth for the U-Can and POP Kids together will be somewhere around 30% to 35%. This is the real enrollment growth on pro forma basis.

Got it. Thank you.

Okay, thanks.

Your next question comes from the line of Tommy Wong from China Merchants. Please ask your question.

Hi, thank you. Thanks for taking my questions. You mentioned a lot about the success in the retention rate improvement this year. Can you share with us some of anecdotal maybe strategies at the learning center level, what kind of efforts did the teacher made or any kind of special programs that led to such a good result? Maybe just a little bit of anecdotal evidence. Thank you.

Yeah. Actually for product side, we keep growing our online-offline-merge standardized teaching system to the whole network. And also, we invested money and also our teaching resources to refine the standardized product. For example, like POP Kids, this year, from the summer, we rolled out our new courseware to make the class more interactive and also very, very important new feature of the new courseware is that our teachers can save a lot of time and the teaching quality can be improved because it's more and more standardized teaching process. And also, by interactive features, new features, students are more interested in the class. And also, the effectiveness and stickiness of the customer are also improved. And it's shown by the numbers in those cities are using the new product. So, that's one new feature of the whole standardized system.And going forward, we will keep investing in having more and more new features, new services, better services to our customers. So that's one key driver. And also, like teachers, because their service quality also got improved, our training process for teachers are getting more and more standardized because the product is standardized.So, for example, like starting from last year, last summer, we train our U-Can teachers using the new modularized, new system to train our teachers, especially new teachers, to help those teachers to improve the teaching quality in short period of time. And also, overall teaching quality got improved a lot. So, that's the benefit that we can get from the standardization of the teaching products.

Think about that. We raised the price. We doubled the price of the summer promotion this year, but we still got 8% enrollment growth, from RMB 200 per course to this year RMB 400 per course. RMB 400 is something. It is some money. So, I think the strategy for us is it's better for us to identify who are the real customers and also we do believe we are providing better quality, services and products to the customer students.

Okay, thank you. And congrats on a strong result. Thank you. Thank you.

Thank you very much.

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.

Thank you all, again, 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, this concludes today's conference call. Thank you for participating. You may now disconnect.