Good evening and thank you for standing by for New Oriental’s FY 2021 First 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 call is being recorded. If you have any objections, you may disconnect at this time. I’d now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao.

Hey. Hello, everyone, and welcome to New Oriental’s first fiscal quarter 2021 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 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, Stephen.

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Although the impact of the pandemic continues to raise hurdles for business across the globe, we're pleased to kick off the fiscal year with a set of encouraging financial results in the first quarter of this year, that is in line with our expectation. While it's showing signs of the recovery in some of our business lines, as domestic markets began its path to normalization. Total net revenue was $986.4 million, representing a 8% decrease year-over-year, which is better than we've guided in the previous quarter. Net revenues from education programs and services for the first quarter were $935.6 million, representing a 6.1% decrease year-over-year. Our U-Can middle and high school all-subjects after-school tutoring business shows a positive with a growth of approximately 9%, while our POP Kids program recorded a growth of approximately 4%. Our industry leading OMO system has been vital in the previous quarters to ensure our service runs smoothly, and it has once again proved to be instrumental in this quarter, as it provides our operation with strong flexibility to help the vast majority of our students migrate from OMO online class back to offline learning centers, which have gradually resumed service made the easing of the pandemic restriction measures. Encouraged by its effectiveness, we have put more focus on executing our OMO strategy, including piloting the OMO online courses in around 20 existing cities and attracts a promising number of new customers in the summer quarter. Total student enrollments in academic subjects tutoring and test preparation courses in the first fiscal quarter of 2021 increased by about 13.5% year-over-year to approximately 2,961,100 million. The lower-than-normal increase in the number of student enrollments is primarily due to the delay of the enrollment…

Thank you. [Operator Instructions] Your first question comes from the line of Tian Hou from T.H. Capital. Please go ahead.

Good evening, Stephen, Sisi. Congratulations on a good quarter and guidance in those kind of challenging time. So the question is related to the margin, on the gross margin on a year-on-year basis was down pretty significant. So I wonder how much is cost by the overseas business? And going forward, what's the gross margin is going to trend? Thank you.

Hi, Tian. Yeah, the gross margin was down by roughly 6% year- over-year this quarter. I think the first reason is that, you know, the revenue was down by 8% in this quarter year-over-year. And in this quarter we still raise the salary of the teachers. And because we think the teachers quality is the core competence of the education business. So as we did in last several years, you know, we raised the teacher salary. And also, you know, we acquired the top teacher from the other small players during the pandemic. And the rentals, I think that, you know, during the COVID-19 period, we still expanded our capacity in the areas where in the cities that we are - we feel the comfort to drive the potential of growth in the future. And this quarter the year-over-year expansion was 23% at the quarter end. So its drive the gross margin down, but I think it's just out one time, okay, because, you know, as I said, our business is in the process of the recovery, and we have already give the guidance of the Q2 and within it in the Q2 guidance, you know, the K-12 business will be increased by 25%. So I do believe the GP margin recovery will be happened in the second quarter.

Thank you. Our next question comes from Felix Liu from UBS. Please ask your question.

Good evening, management and congratulations on a good result, given the challenging environment. My question is on utilization. I understand that a lot of offline classes have resumed in most of the cities. So could you give us some color on what the utilization is like currently? And how is the trajectory going forward? Thank you.

Yeah. Hi, Felix. You know, it's a little bit hard for us to disclose the utilization rate because, you know, we’re still during the - we're still in the time of the pandemic. For example in Beijing school, our Beijing school – we opened all the learning centers in mid September, that means we lost almost 10 to 15 days in September. And during the whole summer, you know, I think some of our learning centers were not open. So it's really hard for us to disclose the utilization right now. And I think we will disclose the utilization rate in I think the Q2 or Q3. And - but you know, we believe the utilization rates will get higher and higher after the pandemic is over because typically our revenue growth is higher than the expansion plan. So I think that means, you know, we do have to leverage on the learning center utilization. So this is the near long term trend, Felix.

Thank you. Our next question comes from Jin Yoon from Newstreet Research. Please go ahead.

Hi, good evening. Just wanted to just talk about overseas test prep, your guidance kind of suggests obviously, the bottom is - the bottom is in, in terms of its site improvement from last year's quarter - last year - last quarters numbers, can you just kind of talk about if that's really the case or if we’re seeing a kind of a seasonal head fake? And then - and on the other - the second question I have is, I think we're seeing a massive testing in Qingdao [ph] approximately like 9 million people or something like I can just hit the press. Just wanted to see how big that revenue from that city is and in case there is a second wave in that particular city? Thanks.

Hi, Jin. The overseas test prep, the relative decline of this quarter for [ph] Q1 was 51%. But we give - we have already given the guidance of the Q2, the overseas test prep will be down by 30 - somewhere around 35%. So the things turn to be - turned to be better in Q2. And because you know, we have seen some like the TOEFL or GRE test were reopened in China in different cities. And - but anyway, I think our overseas test prep business will be negatively [ph] to some extent, negatively impacted by the by the COVID. And you know, the Q1 this quarter will be the - was the worst. And I do believe the overseas test prep business will be recovered step by step. So, this is my answer focused about overseas test prep. And Qingdao, we know what happens in Qingdao since last week. And so far, we don't get any notice from the governments of the surrounding [ph] schools. So that means our learning centers in Qingdao are still open now. But anyway, we'll leave [ph] the requirements of the government. But you know, during the – I think during the peak time of the COVID-19 times, I think we have the ability to move all the offline courses to online. You know, we tested the effects for yeah for too long [ph] of the pandemic. And so I don't think it will negatively impact our revenue of Qingdao. Anyway, Qingdao is now [ph] the relative contribution from Qingdao is very small, Jin.

Thank you. Our next question comes from Mark Li from Citi. Please go ahead.

Hi. Thank you for taking my question. I want to ask…

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

Hi. Is it better now?

Hi, Mark. I can’t hear you.

Hi. Is it better now? Hello.

I think the line has some problem. Try it again.

Mark, can you come closer to the mouthpiece please?

Hi.

Raise your voice, okay?

Okay. I just want to ask how is our FY ‘21 guidance? Could you share the latest guidance for the full year with us? And also our OP margin target if we haven't changed and the timing to reach that? Thank you.

Okay. Yeah, actually, you know, we have already given the guidance - give the guidance of the Q2 and by 10% to 15%. And, you know, actually the business is not fully recovered in Q2 the autumn quarter. Beijing school was reopened in mid September. And we expect the revenue growth in the coming Q3 and Q4 will be better than Q2 because of the more recovery of our business and easy comparison of this year, you know, the COVID-19 started seems a lot easier [ph] to please. So we do believe our top line growth performance in Q3 and Q4 will be better than Q2. Okay. And margin guidance. Yeah. I think I see Q2, the next quarter, the margin, we believe the margin decline in Q2 will be continues to narrow down compared to this quarter to Q1. And we're confident that we'll be able to deliver the continued margin expansion after the pandemic is over, especially in Q3 and Q4. And we don’t want to change our near long term margin guidance. Mark, is it clear?

Thank you. Our next question comes from Alex Xie from Credit Suisse. Please ask your question.

Hi, Steven. So thank you for taking my questions. So my first question is about the good time [ph] of your net quarter K-12 revenue guidance. So I think in all the August quarter, its very unusual that POP Kids was a little bit slower than U-Can business and what about the next quarter? And the second question is about the rollout of your OMO business model? I think I read from the news report that you launched the pure online and small class model in our Hangzhou school and received very positive feedback from the province wide students. Would you please share more color on that? And what’s the time for the further rollout? Thank you.

Yeah. Your first question about – Alex, can you repeat your first question again?

Sure, sure. So I noticed that in August quarter, the POP Kids business was a bit slower than U-Can business and what about the next quarter within the 25% growth, what about the difference between POP Kids and U-Can?

Okay. I think, you know, next quarter, Q2, I think the growth rates of the U-Can business will be a little bit higher than the Pop Kids business growth. Because, you know, the U-Can business is more mission critical. So for the middle school, high school students, they tend to study more, especially after COVID-19. So that's why the growth of the U-Can business growth higher than the Pop Kids business. And yeah, it's a great question. Actually, we started the OMO business 3 years ago, for our Beijing school U-Can business, but after the COVID-19, you know, we strengthened the development of our OMO, because, you know, during the COVID-19 almost all of our students took the courses, pure online. But you know, after the COVID-19 vast majority or students goes back to the offline learning centers, but it will choose some percentage of the online course for those part of the students and also for some new solid cities, we started to roll out the new OMO model. Yeah, I think the Hangzhou is very good case. And, you know, this is the first year that the Hangzhou school did the OMO model. So you know, Hangzhou school acquired a lot of the new customers of the grade 10 students from the satellite around Hangzhou. So I think it's a very good start, and we will roll out in more and more cities and provinces. Okay. And, and one more thing is that you have a retention rate of OMO model in how the school, I think, you know, after the summer is over 50%. So I think it was a very good sign for the study results of the OMO model. So we'll do it more and more in more cities. Sisi, do you want to add something?

Yeah, we're - as Stephen emphasized earlier in the prepared remarks, actually we have piloted this OMO model in around 20 cities already, just in the summer only recovered - resumes the offline operation from the summer. And then we have already testified this model in several cities, key cities, and the feedback is good. So that continued to be the key strategy going forward. Yeah.

Okay.

Thank you. Our next question comes from Sheng Zhong from Morgan Stanley. Please go ahead.

Hey, good evening. Thank you for taking my question. My question is on the OMO as well. So want to understand more about how to offer this OMO model. So for the local who had what’s the key KPIs for OMO? And so if - so how will he balance to open new learning centers or push more OMO into these new cities? Or is this because you have pure online as well? Or is pure online will mainly focused on the surroundings? Thank you.

Yeah. Hi, Sheng Zhong. I think it’s a great question. We set up the KPI, you know, off the school has [ph] I think KPI of the school has divided by two parts, the tradition - number one, the traditional offline business. And second is the new OMO model. So two different KPI. And I think its easy to understand the local school have made the decision, you know, for those areas that we are aware, we do have the learning centers, I think we need to be OMO, okay. And, you know, we will still use our learning center, our learning centers to acquire the new student enrollment. And - but for the areas where we don't have the learning centers or for the new cities, we don't have the learning center where the OMO will be first deployed. And - but, you know, as I said in the pre prepared remarks, all the content and courseware and teacher resources, even the teacher training system of the OMO model are reasonably from the local city, okay. But you know, the head office will give the fully support to the different areas and different cities. So we will go out [ph] feed OMO model to more cities going forward. And as you believe the OMO model will contribute more and more revenue going forward. And yeah, one more thing to add, and, you know, we don't want to spend crazy money on marketing expenses for the OMO model. So I think the students acquisition cost for the OMO model will be very low. I think it will be the same as the - our traditional offline business.

Thank you. Our next question comes from the line of Lucy Yufrom from Bank of America Securities. Please ask your question.

Thank you, Stephen, Sisi. So I would like to ask the question on dual teacher. Stephen, you just mentioned that when we penetrate into new cities, actually OMO will be the first choice. So how about dual teacher model, are we still going to roll that out? And as far as I can understand that previously, before OMO rollout, we were using the dual teacher to penetrate into lower tier city. So nowadays, what's and offer choice in terms of business model in new cities? And secondly, you mentioned that in dual teacher model we have seen improving probability and the retention. So we – so could you share more number on the probability and retention of dual teacher business model? Thank you.

Yeah. I think going forward the OMO model will be the first choice we run a business in the new cities, especially for the larger cities. But you know, we are doing well for the dual teacher model. We opened more and more the new cities by the – of the Pop Kids and U-Can program. But you know, going forward, we will focus more on the model, but the teachers in the head office will test [ph] the dual teacher model class to the low tier cities. Typically it will - it's focused - more focused on the past students in the high tier and low tier cities. So we have the two way to run the business in the low tier cities OMO and dual teacher model, Lucy.

Thank you. Our next question comes from Alex Liu from China Renaissance. Please go ahead.

Thanks, Stephen for taking my question. First on teacher compensations, how fast should we think about a teacher compensation world [ph] Going forward, especially some online players are rather aggressive in terms of teacher paying out? And second question is that, you know, regarding the strong summer enrollment growth, I was just wondering, you know, is there any specific reasons behind or any specific sort of observations in the summer? Why we did so well this year, and how much of the growth is coming from small player exiting the market? Thank you.

Alex, I think the teacher salary, yeah, we think the teachers quality is the core competence of the education business. So we raised the teacher salary by 8% to 9%, every year, even with phase to the challenge during the period of the COVID, we still - we still did the same thing. I don't think the teacher salary increase will drive the margin. On the contrary, paying the teacher more will bring us the high quality or high quality feedback from the customers, students and parents and drive the utilization rate up and revenue up. So I think we pay - I think we pay more the teachers will help the GP margin performance better near term and long term. So, you know, I think this is our strategy for the teachers. And, yeah. And the second question is about a summer [ph] enrollment. Yeah, I think, you know, spring semester we met some problems par of the new customers, because of the COVID. Well, we couldn't - or couldn't see the students and parents face to face. But, you know, during the summer [ph] quarter, you know, most of our learning centers were reopened. So we can give the - like the study advices to the parents and kids face to face. And as for the competition environment, yeah, we know some small players disappear from the market. So I think its great opportunity for the big players like us to take more market share from the markets post COVID. And, and the numbers especially, you know, since the second half of July, because revenue and the enrolment numbers was booming. And so that's why we give the guidance of K-12 business growth in the second quarter will be somewhere around 25%. And I do believe the enrolment growth and revenue growth in Q3 and Q4 will be even better.

Thank you.

Thank you. Our next question comes from DS Kim from JPMorgan. Please ask your question.

Hello, sir. Hi, Sisi, congrats on good set of results and very good guidance. Actually, most of my questions have already been answered. So maybe I can just follow up on OMO. Can I double check when you say this new piloting [ph] OMO are we referring to pure online, localized curriculum classes, like PO [ph] online? And if so, can I check what's the size of the each class ASB gap [ph] with the similar offline courses and if there's any difference in offering i.e., you know, this OMO is more for the weekdays versus weekends or more for short term courses or is really just same as our offline offerings?

You know, we were really the new OMO model by three ways. Number one, the large classes, that means the large classes. And, you know, this is totally, you know, majority of the classes haven't [ph] been online, and I think the price of the – or that part of the course, I think it's 20% to 30% lower than our normalized classes. And secondly, [indiscernible] OMO class, you know, its a hybrid class or – and its offline and online the integrated classes. And the last one, and number three, is there's some very short term courses. I think the typical purpose of those part of the business is to acquire the new student enrollment [indiscernible] courses. And we ask for the famous teachers to record the courses. And I think this is kind of the way to ask the banking way. So we have the three ways. Anyways, OMO is still in the early stage, having so far, so good, and we'll do more going forward. So in last quarter or even the rest of the year, the earnings [ph] call, I will show more information with you.

Thank you.

Thank you. Our next question comes from Tommy Wong from China Merchant Securities. Please go ahead.

Hi. Thank you, management and Stephen, congrats on the strong results. Just a quick question, I guess we don't have a lot of time left, can you comment about secondary listing in Hong Kong. And, you know, potentially, you know, we need more funds to compete on the online space, you know, all these other guys tell whoo [ph] they're all burning a lot of money. And if we want to play in this game, we have to kind of participate. So just wondering, you know, if the secondary issue bring some more money and play the game. Just wondering, what's your thought on that? Thank you.

We're not in a right position to make comments on secondary listing. And as I said, you know, our strategic focus and investment approach this year, not only this year, but also the mid and long term, okay, well, is aimed at improving the product quality, increasing the teacher salary, and enhancing our system. I think these are the essence of the education. So we know there's a huge opportunity in the market, especially after COVID. We firmly maintain the stable and balanced investment strategy. And we want to spend pretty money on marketing and get helping short term growth. So this is our strategy, not only for now, but also for the mid and long term. Thank you.

Thank you. Our next question comes from Liping Zhao from CICC. Please go ahead.

Hi, Stephen, for taking my questions. My question is about the capacity expansion. How should we expect the impact of this pandemic on your capacity expansion plan, especially for your K-12 business? And any chance we can see an accelerated expansion during the market consolidation? Thank you.

We aim to add around about 20% to 25% new capacity in the fiscal year ‘21. And so you know, last year we plan to open 20%. Finally, we opened 26%. And this year, we made the same plan. And anyway, I think it's a great opportunity for us to take more market share. So we will open 20% to 25% new capacity to acquire new student enrollments. And also you know, we do have the OMO model. And so the two is new capacity expansion and OMO will bring us to new customers in the whole fiscal year ‘21. And yeah, our strategy of the expansion is very stabilized. Thank you.

Thank you. Our next question comes from Felix Liu from UBS. Please go ahead.

Thank you. Just want to have a follow up question on our deferred revenue balance. I noticed that the growth in deferred revenue is a lot stronger than our Q2 revenue guidance, can I know there is the reason behind? Thank you.

Because of the pandemic phase in China, especially in the summer, and so as I said, in the second - since the second half, July and the revenue and enrollment gross was booming. And so that's why we got the higher deferred revenue balance this quarter end. And I think, in the Q2, the - you know, we're still in the process of the recovery. I think even in the Q3 and Q4 you will see higher enrollment and top line growth of the - especially for the K-12 business, because I do believe we are taking the market share from the small players and also - and we do believe we will have - even higher student retention rate going forward, because we invest a lot since 4, 5 years ago. And we do believe we are providing the one of the best products in the market. So I think the recovery will have step by that and more back loaded Q3 and Q4. Thank you.

Thank you. 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.

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