Good evening and thank you for standing by for New Oriental’s FY 2020 Fourth Quarter Results 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 would 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 2020 earnings conference call. Our financial results for the periods 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 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. Despite the outbreak of COVID-19 pandemics starting from March posted continuing pressure on all business across the globe, including ours. We are pleased to report a set of financial results in the fourth fiscal quarter of this fiscal year, that is in line with our expectation. Total net revenue was $798.5 million, a slight difference of 5.3% in dollar term, or 1% in RMB term. A mix of results amounted to various business line were reported, which I will elaborate each of them shortly. Total student enrollments in academic subjects tutoring and test preparation courses as seen in the fourth quarter of fiscal year 2020, decreased by 6.2% year-over-year to approximately 2,585,600. The lower than normal increase in the number of student enrollments is primarily due to the outbreak of the COVID-19, which has made new customer acquisition in quarter much more challenging. While the enrollment for the summer and autumn classes have also been delayed. In terms of the bottom line performance, for the entire fiscal year of 2020, we managed to deliver expansion of the non-GAAP operating margin of 70 basis points year-over-year to 12.9% compared to 12.2% for the prior fiscal year. However, for the fourth quarter of 2020, due to the negative impacts from pandemic, our top line performance, and the increased spending from operating free classes to promote our Koolearn kids of larger classes with the aim of taking more market share, our gross margin recorded for the quarter was 51%, down 500 basis points year-over-year. Our non-GAAP operating margin for quarter was 4.1% down 810 basis points year-over-year and non-GAAP net margin for the quarter was 6.1% down by 520 basis points year-over-year. In order to minimize the negative impacts…

Thank you so much. The question-and-answer session of this conference call will start in a moment. [Operator instructions] And our first question comes from the line of Binnie Wong from HSBC. Binnie, your line is now open.

Hi, good evening Stephen and Sisi, thank you for taking my questions. So in terms of the revenue guidance, the outlook, in terms of [indiscernible] right, can you help us understand the assumptions behind and then also, I think there'll be a talk about the recovery is really ongoing. And I think there is a very interesting point as Stephen mentioned since like last quarter call that about the consolidation of the market. So just want to see if there is any numbers that you can quantify as far on the industry side, say I don't know that number of centers, or number of institution or something right along the line to help us better understand with how much the consolidation has been progressing? Thank you so much.

Thank you, Binnie. Yes due to the lack of visibility of the performance data for the summer quarter, yes we are using the most conservative way to make the full capital for Q1. I think there are several key reasons. Number one, we have the fortune like the one to two weeks in summer holiday. Typically, we have we had a five terms of the summer courses within the summer vacation, one summer vacation, but now we only have the 3.5 terms. And also you know the [indiscernible] we are delayed by one month. So that means the moment of window for the summer had to be postponed by at least one month. And number two, the reasons - the emergency of the COVID-19 in Beijing and Hubei province, last week in [indiscernible] And I think the impact again, but you know I must mention that, the Beijing in the summer I think is really hard for us to make the new - to acquire the new student enrollment for the summer. So if you take off the Beijing, the impacts, all the other schools the K-12 business will grow by 11%.So yes. And the last one overseas has about religiousness. All the exams are canceled and the students cannot travel and the volatile China units - the two countries relationships. So we will just wait. And, yes, there is so many reasons, but I think we are confident about the future. Because you know so far 90% of cities - most of the students of the 90 cities were in, went back to our learning centers. And we do believe we can take more market share from the consolidation, potentially, because yes, we have seen a lot of small players disappear from the market. I don't have the numbers. But yes, it is what it is, and that’s why we opened 26% expansion last year in fiscal year 2020, and we plan to open 20% to 25% of new expansion in fiscal year 2021. So I think this shows us the confidence to take more market share from the small players.

Yes. And I also wanted to add that the successful results by far for the summer promotion also, you indicated the potential opportunity to keep taking market share from smaller players that are facing a much bigger challenges during the pandemic period than us. You know, our summer promotion increased - total volume increased by far is already 20% increase year-over-year. And it is very likely that, when we finished the whole summer, the total enrollments will be even increased higher than that. So these are all indicators for the potential opportunity for a market consolidation for us.

Thank you Sisi and Stephen. Just a quick follow-up. In terms of summer promotion course policies, help us compare to last year as well.

Yes. You know we have got 986,000 enrollment be mid July, and it is close to one million, so that means we got 20% year-over-year growth and we keep the same price, RMB400 and we believe the retention rate will be higher than last year. So, we do hope we can gather 5% higher of the retention rates after the summer promotion. So we did a very good job and we do believe that those students we got from the summer promotion this year will stay with us for three or six more years.

Thank you. That is very helpful. And I think the situation is quiet understandable too. Thank you.

Thank you Binnie.

Thank you so much. [Operator Instructions] your next question comes from the line of Jin Yoon from Newstreet Research. Your line is now open.

Hey good morning and good evening everyone. Stephen and Sisi thanks for taking my question. I guess my question is related to your capacity expansion of 20% to 25%. With that guidance that you gave some of these I guess segments that you are seeing under performance in things like overseas test perp, have you moved capacity from these underperforming, I guess, segments to your better performing segments already, and is the capacity expansion already counting for the shift in capacity that you are potentially seeing in your classrooms already going from less performing to more performing type of classrooms. And so if, I guess the reason I asked that is that the cost of capacity expansion, if it is net of a lot of this I guess shift in capacity already, should we expect the actual capacity expand, the cost of it to be materially less than what we have seen in the past? Thanks.

Yes. Some of the exception plan that 20% to 25% in fiscal year 2021, I actually did, as we did in last year, and we do have the plan to make a shift of some non-performing learning center to close down or to move it from over to K-12 business and with all the numbers in, I think we will keep the same guidance of the expansion plan by 20% to 25%, because we do believe post the COVID we do have a lot of the market potential to take more market share from the small player and to fill more students into the new learning centers. And even after the COVID-19 happens in January and February after that, in the last three, four months we opened - 10% new learning centers. I think we are quite ready prepared for the new market consolidation opportunity. Okay?

Got it. Thanks Stephen.

Thank you Jin.

Thank you so much. And your next question comes from the line of Yuzhong Gao from CICC. Your line is open.

Hey Stephen thanks for the opportunity. So, I think I have a longer term question. So, imagine a situation given the sustained COVID-19 stress where maybe structurally a higher - a meaningful portion also your enrollment will be fund online or either your pure online form or a normal form. How do you think this will impact your margin profile on long-term? Thank you.

Okay. Yes, I think it is great question. I think going forward, still we care both the online and he OMO. I think in terms of the revenue contribution OMO class will be continued to be our primary business model. But you know we will learn a lot from the from the pandemic and I think we started to bear fruit from the heavy - in the last two to three years of the OMO model. And so, yes, as I said we are seeing the highest retention rates and the customer satisfaction and the student retention rates are higher than that similar to last year. So, going forward, I think we will. We will do more and more on our OMO systems. And the key here, the OMO system, the OMO system that means we build the better and higher for the whole industry. We have the most advanced OMO system and going forward I think the OMO system will bring out more student enrollments and it is - margins up by the new our new OMO model. and the pure online Koolearn, Koolearn is just only 4% to 5% of our total revenue but in the last quarter we did very good summer promotion and also we started to spend more money especially on the R&D and on the teachers training something like that and we spend a little bit more money on marketing as well. But we do believe we can take more market share from even from the very heavy competition among the big players. We do, we will have a good future for the Koolearn. So, we have two as the growth engine OMO and the Koolearn, the pure online platform.

Understood. Very helpful thank you.

Thank you.

Thank you so much. And your next question comes from the line of Mark Li from Citi. Mark, you m a y now ask your question.

Hi Stephen, thanks for your sharing. I want a answer for this quarter we have seen like in the P&L. The gross margin is impacted by a few factors you mentioned like online revenue, and then also coupled with a higher selling expenses, etcetera. You are paying the driver may I know in a short-term view, let's say in the next few quarters. How would we think these drivers to move and how far like in the coming few years more medium term, like which part of the P&L you think you have better upside improvement? Thanks.

Yes, it is a hard time especially for last quarter for the Q4 and maybe in Q1 you saw our guidance. But we are doing two things at the same time. Number one, we are focusing on the cost control and reduce the expenditures across the company to minimize the impact of the COVID-19 so this is number one. And number two, we do believe the revamped OMO model will accelerate our margin recovery in the rest of the year and further expand our margin profile going forward. So, as for the fiscal year 2021 the Q1 margin, we believe the margins decline in Q1 will be narrowed down, compared to Q4 last year compared to this quarter. And we are confident that we will be able to deliver continued margin expansion after this pandemic is over. For fiscal year 2021, we expect the margin will be recovered in the second half of the year especially and long-term we would want to change our guidance, our main long-term margin guidance. You know the non-GAAP operating margin in the long-term should be somewhere around 17%. But I must mention that with more and more OMO model into our learning centers. I do believe someday we will raise our main long-term margin guidance because of the new model. Thank you, Mark.

Okay. Thank you very much, Stephen.

Thank you so much. And your next question comes from the line of Felix Liu from UBS. Felix your line is now open.

Hi thank you management for taking my question. My question is the online side. Definitely. I'm very happy to see some positive progress there. So could you maybe share with us how well the traffic from Koolearn pertain into summer? And also for the online, I noticed that OMO model, as well as your duty try is penetrating fairly successfully into larger cities. So how would you balance that with the [indiscernible] brands, the Koolearn, similar from a person or similar business models? Thank you.

Yes, during last quarter Koolearn did large scale market promotions by offering the free, large size online classes. And I think we attract several times more traffic than that of last year. But I'm afraid, I think that you know I don’t think I can see something in detail or numbers in detail of the Koolearn because they haven’t got their result. But what I can say, so we should believe you did a very good job in a quarter of the promotion, after the COVID-19. And we spent more money on the R&D and the teacher’s training side as well as some margins side. But I do believe - I think I believe that our Koolearn will get the healthy the fact top end growth and we provided the better quality product to the students going forward.

Thank you, Stephen. And also how would you balance the OMO with [indiscernible] going forward say from a longer term perspective?

You know I think there is a two way we are using same time Koolearn is 100% online okay and the OMO - is offline resources to our online platform that help us to reach off more at once. But you know all the OMO class work content and even the teachers are regional - from our offline learning center and the schools. And I know even in some cities, maybe there might be like internal competition in the same city by the Koolearn and our OMO model. But I think, the market is huge enough, so we care more about picking more market share from others. So I do believe the cannibalization between the two parts will be very minimal.

Okay alright. Thanks for giving me much further color. This is great thank you.

Thank you.

Thank you so much. And your next question comes from the line Tian Hou from T.H. Capital. Tian your line is now open.

Hi Stephen and Sisi, thank you for picking my questions. Its regarding the OMO, OMO is a very effective tool to deliver the courses in the area hard to reach or deliver the courses where we have this pandemic, so when we mix them together so what is the result, what is the impact to the gross margin, I expect to be positive and what is the impact on that. Also when students picking the class, online and offline they offer the price difference for the online and offline and also we are entering into a new fiscal year is the price going to be higher than last year. So that is the question. Thank you.

I think the OMO model will bring us more revenue compared to the traditional way, so this number one. Number two, I think the OMO model, I think they are going to see the students and parents love the new OMO model. They think that the new model is better than the traditional. So it is drive the retention rate up and the learning center utilization was up. So to some extent we can, we can see some costume rentals, so it will drive the margin up going forward by the OMO model. Price, we try the same for the OMO classes or what the traditional offline classes. And, we will use the same class strategy going forward. This quarter the price is little alert to cancel be at the coupons because of the one on one business [indiscernible] but you know going forward. I think the hourly rates, our ASP will be increased by 5% to 8% at normal. So we will not change our price strategy going forward it will be very stable.

Oaky. Thank you Stephen, yes.

Thank you.

Thank you so much. [Operator instructions] And your next question comes from the line of Alex Xie from Credit Suisse. Alex, your line is now open.

Hi Stephen Sisi for taking my questions. So, firstly, a very quick question. You showed the guidance for K-12 next quarter will be about 3% to 7% growth. Then what about the difference between POP Kids and U-Can and U-Can VIP in your assumptions for the next quarter. And then also, secondly, if we assume the pandemic in Beijing and other cities were well controlled up before the start of the next academic year. What is your expectations for the recovery pace of the K-12 business in the rest of the fiscal year, when do we expect things to get into normal growth rates in FY 2021?

Alex, you know the revenue guidance in the [indiscernible] is that we are using the most conservative way approach to make the forecast because of the certainty. And you know even within this week our enrollment window is still opening, so it is delayed by one to two months and the different business lines, the U-Can, I think in Q1 in most conservative way the revenue growth will be to 7% to 8%. And I think that VIP business in Q1 should be recovered, should be better than we did in Q4. Because, I think that the parents will push their kids to study more to make the [ark] (Ph) for the for the last quarter. And the POP Kids, I think the revenue growth will be somewhere around 5% to 6%. What I'm saying is in RMB term. And the recovery pace, I think 90% of our learning centers will be reopened in less than one or two months and I think the trend will be better and I believe will do better and better in [indiscernible] in fiscal year 2021. And so I think yes, I just want to persuade your guide to be a little bit more patient, in the Q1 there are some like the some uncertainty like the Beijing or the Beijing or other province, but going forward, I believe our K-12 business will be recovered step-by-step, especially for the Q2, Q3 and Q4.

Yes, actually to share more details with you for the Q1 guidance, for K-12 because of the second run off nearly identified COVID-19 cases in Beijing, put more pressure on the recovery of Beijing city. So, the new customer acquisition in Beijing are facing bigger challenges than other cities that have already resumed the offline operation. They just take out Beijing, all the other cities K-12. So look at our forecast in Q1, year-over-year growth trend are similar to Q4. So, I think the business already started to recover for the K-12 business. Yes.

Yes. And I do believe our Beijing school will reopen our learning centers in September. okay.

Sure. Thank you very helpful.

Thank you. Thank you very much.

Thank you so much. And your next question comes from the line of John Choi from Daiwa Capital Markets. John, your line is now open.

Hey, guys, thanks for taking my question. I have a quick question on your overseas business test prep consulting. I know it is a very difficult time through the uncertainty and also pandemic going globally, but do you think this on the recent COVID situation will have impact like a more of a long-term fundamental impact on your overseas test prep courses? Obviously, next quarter you guys started a pretty conservative figure, but I'm just wondering for the remaining part of this year, and also in long-term how should we think about this business? Thank you.

Yes. The overseas test prep business, we saw the significant decline in Q4, and we will give the conservative guidance of the Q1. And because of the COVID-19 and cancellation of the exams, like TOEFL, GRE and IELTS and substantially the overseas schools in the future on travel. And we have seen, in some cities like Beijing, and eight or nine cities, the IELTS and TOEFL test will be reopening this month. We know we read this news and we do hope our overseas test prep business can be recovered, stuff like that. But it is a very hard time because of the volatile, the China and United States relationship between the two countries. So some students and parents choose to hold the time to make the final decision to study abroad or not. So, and but I do believe our business can be recovered step-by-step. It depends on the students in China, mostly the exam exact time of the overseas college and universities will be open. And the all exams can be reopened you know something like that. And yes, but it is a hard time, we have to wait and see. Okay. One more thing, the overseas test prep business, I think in the Q4, the revenue contribution of the overseas test preps was only 5.6%. And so we do believe because of the hard time the revenue contribution in the Q1 from the overseas test prep should below 10%. So the revenue contribution from the overseas test prep will be smaller and smaller. Thank you.

Thank you so much. And your next question comes from the line of Sheng Zhong from Morgan Stanley. Your line is now open.

Hi, thank you for taking my question. Just one question about the K-12 growth. As you mentioned, the trends outside Beijing in Q1 is similar ways in Q4, but actually, the summer holiday is shortened and period is only about 70% of the normal summer holidays if they take this into account. So can we say that in the summer holiday the K-12 growth during the summer season is actually is mid to high teens. Thank you.

Well to some extent in pro forma basis, because yes you are correct Zhong Sheng, you know we have the 30% time loss of this summer holiday and after the pro forma basis. I think the top line growth of the K-12 business, the actual the real top line growth of the K-12 business should be over 10%. And, I do believe in the quarters after like Q2 and Q3, Q4. I do believe the K-12 business - the growth will go back to normal as we did in last year unless the bad things that come back again like the COVID-19 in some major cities.

Thank you very much.

Thank you Zhong Sheng.

Thank you so much. And your next question comes from the line of DS Kim from J.P. Morgan. Your line is now open.

Hi, thank you Stephen and Sisi for taking my question. First one from on VIP only, I may have missed this all year, but can you remind us how much did the VIP revenue dropped in fourth quarter in dollar term or RMB unless implied in the guidance? And the follow-up from here would be that I’m just wondering why the segment is so bad into the summer still, is this just a function of high price and like people are reluctant to convert to online or spending less because less cash pools and what not or is there anything else more structural i.e., how much of this VIP drag is structured in your view versus temporary and cyclical setback? Thank you.

Yes. The U-Can VIP business in Q4 was down by 21% year-over-year. I think it is easy to understand the parents and the kids towards they paid you a lot of money and we moved the offline class to online and some students choose to postpone their study plan by one-on-one business in Q4, but in the Q1 based on our forecast I think the one-on-one business recovered very quickly, especially in June, we have seen a lot of new student enrollment enroll our VIP classes to prepare for the [indiscernible]. So I do believe the VIP business will be recovered -.

Thank you. May I just follow-up how much of the - so when you say recovery are we thinking about year-over-year growth or still down but much less than what we thought.

Year-over-year growth. I don’t believe we will get the U-Can VIP business grow in the coming Q1, year-over-year.

Thank you very much. That answers my all question that downturn is more temporary and cyclical [indiscernible]. Thank you.

Thank you.

Thank you so much. And your next question comes from the line of Alex Liu from China Renaissance. Alex, your line is now open.

Thanks Sisi and Stephen. So, my first question is on the OMO strategy. Specifically, I noticed some small courses you fall semester are now 100% online. So, we obviously know [indiscernible] pure online business within its segments. So I was just wondering, so, when we are talking about OMO, how should we think about the importance of pure online small class program within U-Can and POP Kids in the longer term? And a quick follow-up how should we think about the revenue growth across business segments in the fiscal years 2021? Thank you.

Yes you know pure online is - pure online platform, but OMO is the supplemental tool to our offline business. But yes you are right, in the last quarter in the Q4, we moved 100% of the offline class to online. But afterwards, 90% of our students went back to our offline learning centers. And but we only - we will pull one more - we will keep some like the online elements going forward. And, and so yes, as I said both the pure online and the OMO site, all these debarks huge enough for both part of the potential growth. And as a fact, I think the internal competition will be very small, okay. And so yes, and so -.

Yes, so the revenue growth. I think in 2021 across business segments.

I think you know this time it is very special. And even for the Q1 guidance we have spent a lot of time and as I said we are still in the student enrollment window in this week and next week. So, I will put the question to the next quarter earnings call. But I do believe our business will be recovered step-by-step especially for the things in Q2. And I think the old business will be recovered as normal okay.

Yes I understand. Thank you very much.

Thank you Alex.

Thank you so much. And your next question comes from the line of Tommy Wong from China Merchant Security. Tommy, your line is now open.

Okay, thank you. Hi Stephen and Sisi. I just have a general question. If you look at the overall market, we can see a lot of the online players like you know [indiscernible] GSX you know the share prices went really, really well. And when I look from your selling expenses, it seems has not really increased a lot. I was kind of expecting to increase a little bit for the fourth quarter, but it actually hasn't increased. I'm kind of concerned are we not being aggressive enough and maybe if you can talk about your sales and marketing kind of breakdown between the OMO versus school learning, what is your strategy going forward. I'm just kind of concerned that we are not being aggressive? Thank you.

Yes, I mean, we spend a little bit more money on the koolearn.com in last quarter, we did the first - I think with this first time the free course for the large size class in the spring semester, but as a fact in the last several - last earnings call, we don't spend squeezing money on margin side. We would rather spend more money on the R&D and teachers training in some like the core product developments. But yes, I know there are some players you know spend a lot of money on the marketing side, but I think the market is huge enough. And we are special because we have the number one education brand name in China. And I think the Koolearn can benefits from our New Oriental brand name to acquire the new student enrollment. This is very unique.

Okay. Thank you.

And also our Koolearn.com, we have TFUB the small size online broadcasting classes. These are very special. And I think we are one of the few players who can do these small size pure online classes. And now I think the business model does works and we testified in the last two to three years and it grows very fast and yes, that is it. Is it clear?

Thank you.

Yes. Thank you very much.

Thank you so much. We are now approaching the end of the conference call. I will now turn the call over to New Oriental’s CFO, Mr. 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.