Q3 2021 New Oriental Education & Technology Group Inc Earnings Call
[music].
Good evening and thank you for standing by for New Orientals, FY 2021 third quarter results 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 and.
And I'd like to turn the meeting over to your host for today's conference. Mr. C. Jo. Thank you. Please go ahead.
Hello, everyone and where it comes from new Orientals third fiscal quarter 2021 earnings Conference call. Our financial results for the parent 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 Executive President and Chief Financial Officer after he.
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 U S. Private Securities Litigation Reform Act of 90, 95 forward looking statements involve inherent risks and uncertainties and <unk>.
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 the Oriental semester real.
<unk> web site at Investor Day, New Oriental Dot Org I will now turn the call over to Mr. Stevens. Please go ahead. Thank you Susie Hello, everyone and thank you for joining us on the call with a pandemic largely controlled and China would be it's a small wafer outbreak and the northern part of the country.
Our business navigates the challenges and the so strong momentum in recovery, we're pleased to announce a set of financial results and our Florida quarter.
Of this year.
Seeds our expectation.
Total net revenue was 1100 $90 million, representing a 29% Inc.
Christy year over year, which is a very encouraging reflection and affirming the business strategy that we have taken during the difficult period.
Our key growth driver K 12, all subjects after school tutoring business achieved year over year revenue growth of approximately 37%.
Our U can middle School High school all subjects after school tutoring business continued its momentum with a growth of approximately 35%.
While our pop Kids program reported a growth of approximately 40%.
And our overseas related business, despite being under continued pressure due to the uncertainty of the pandemic situation and travel restrictions around the globe showed strong resilience.
Although the oversea test prep reported revenue decrease of about 12% for the quarter.
And just the result that is better than we expected while the oversea consulting and study tour business recorded a revenue interest of about 11% year over year, which is a very positive result.
Our industry, leading oil system.
Core strategy since the start of the pandemic.
Early last year and half.
As once again proved to be instrumental in this quarter.
The ability of the effects of COVID-19 outbreak and sort of part of the China, new strong flexibility and migrating students between online and offline classes.
Absolutely crucial during the challenging period.
And there are all of them will system has been the answer to that.
So small wave of COVID-19, and I'll break around 20 cities and northern China. Once again highlighted the importance of or more of the enable us to respond swiftly and migrate the offline class to online.
Lloyd and disruptions of the student's class and learning progress.
At the same time the cities.
And that makes largely controlled vast majority of the students microwave and it's from the online.
And I suspect to offline learning centers and.
Encouraged by effective sales, we have been committed to expand the reach of our <unk> system and are delighted to say that we are part of the or more online courses.
Vast majority of existing cities and around 25, new strong and sell our cities and the winter semester, attracting a promising number of new customers.
And well system effectively boost to the enrollments and revenue with a low customer acquisition cost and is becoming the new driver of our business growth and the.
As has solicited interest.
<unk> contribution to the company's overall revenue this quarter.
Total student enrollment and timing subjects tutoring and test prep courses and third a physical quarter over 221 increased by 43% and year over year for approximately $2 million 290, 612 and 800.
And in line with our expectations.
In terms of pricing.
Per program blended ASP, which is cash revenue divided by total student enrollment increased by about 7% year over year and arms.
And we'll already blended ASP.
GAAP revenue divided by total teaching hours.
Interest and by 7% year over year and.
And in line with our normal price interest of about 5% to 8%.
To provide a breakdown of already blended ASP.
Please note that U can classes increased by 5% you can VIP increased by 1% pop kids increased by 4% and Oversea test Prep program increased by 12% all year over year in RMB terms.
No I would like to spend some time to talk about this quarter performance across our individual business lines in detail.
And pandemic became largely under control in China recovery and momentum continued to pick off and this quarter across our business lines.
Our key revenue driver K 12, all subjects after school tutoring business achieved year over year revenue growth of approximately 37% million terms.
<unk> Dong for U can Middle School High School business reported a revenue increase of approximately 35% in dollar terms for the quarter, So and enrollments grew approximately 56% year over year for the quarter, Our pop Kids program delivered outstanding results with revenue up.
About 40% in dollar terms for the quarter enrollments increased about.
Ah, 61% for the quarter, our overseas related business income.
Moving test prep and consolidate business showed encouraging signs of the recovery despite facing the most difficult challenges due to the cancellation of the overseas exams and the restrictions on travel as well as the and predictability of the pandemic situation and different.
And part of the World Wrestling, and Sudan, Hesitance from sorry, both the overseas test prep business reported a revenue decrease above 12% in dollar terms for the quarter and comparison to a decrease of 29% and in the last quarter, while the overseas consulting and the overseas study tour business reported revenue increase of about 11.
Percentage in dollar terms year over year for the quarter.
And the recovery momentum from last quarter, 6% and English.
And finally, VIP personalized class business recorded a cash revenue increased about 36% and year over year for the quarter.
We continue to carry out our capacity expansion this quarter as we opened one new offline training schools and the city of Hangzhou.
This interest.
The total square meters with plasma revenue by approximately 17% year over year, 7% quarter over quarter by the end of this quarter.
The interest is in line with our expectation.
As we gradually ramp up our expansion efforts throughout this academic year to prepare us for recruiting recruiting more new too and.
And you started the falling a dynamic year.
The expansion and our offline education and that work has also means for that and we're fully prepared a floor wouldnt pandemics.
And our services can resume.
And presence across different Chinese cities.
We enrolled all the do teacher class model for pop Kids program and 58 existing cities for U can program in 2000, and suddenly existing cities with a satisfactory customer retention and scalability. We will continue to use this model to increase our market penetration and both markets we have tapped into.
And I'll break or COVID-19 has highlighted the importance and demands of online education, we have allocated more resources to this space and the message was $59 million in the quarter to improve and maintain our <unk> integrated education ecosystem.
Our success and policy and the <unk> system and around 25, new cities through near by a major cities. This quarter is yet another testament of how this low cost by the high return and <unk> business model can rapidly become one of the most far reaching applications service and China, We're very odd.
Optimistic about the growth potential for our oil and more system in the next few quarters.
Apart from the infrastructure, we have allocated part of the resources to advance the training programs for our teachers to enhance their online and offline group teaching skills and risk.
Bonds to the growing demand.
At the same time, we continue to upgrade our technology platforms, and then will broaden the usage of the online tools and content and <unk> system for all business lines throughout the whole network as well as and further develop the path to teach and content and courseware to cater to online offline growth idle crews from methods.
We're glad to see that.
Our industry, leading one ecosystem has not only successfully manage two crews and most of the impact.
By the pandemic, but we also see our customer retention rates remain stable for the more.
And actually boost to the new enrollments and we believe it will continue to play a huge part of the recover a business and coming quarters.
To capture the huge market opportunity online education area cooler and Mazda more resources and executing new initiatives and online coupons and after school tutoring business since the second half and lots of fiscal year and added a meaningful months of customer service Representatives, and Martin and stuff and <unk>.
Consequently raised our spending on marketing from the in this fiscal year and our tone from you. Both small size class currently enjoy a significant and the first the more advantage and stand to benefit from the interest and demand in electricity cooler and large sized K 12 courses.
Ofer offer the best in class and learning experience through the investment and upgrade them up and online platforms introduced the new education technologies, and adding more interactive features to online classes.
Cooler and also continued to establish teaching and training centers and other locations to attract more qualified teachers and tutors and provide and provider system systematic training programs a significant amount of the investment has been and allocates to marketing and services has been in the past quarters to attract customers.
During the peak of the pandemic, but the spending started true normalized from this quarter as we are very cautious.
75, new high ROI marketing channels, we are focused on improving operational efficiency and emphasizing the word of mouth promotion for English programs with existing brand name advantages.
We.
And return keep the average new user acquisition costs, and so relatively low level, we believe cooler and will continue to quickly acquire new users, we're enhancing student retention.
And now I would like to turn the call over to Mr. <unk>. Please go ahead.
Yes.
Now, let me walk you through the key financial details for the third quarter operating cost and expenses for the quarter.
<unk> thousand $89 million, representing a 35, 1% increase year over year, non-GAAP operating cost and expenses for the quarter, which excludes share based compensation expenses were $1074 $6 million.
Representing a 36, 3% increase year over year cost of revenue increased by 35, 3% year over year to 539 5 million U S dollars.
Primarily due to increased and teachers compensation for more teaching hours and higher rental costs for the increasing.
Of course, and learning centers and operation the.
The increase in futures compensation will also put us in a greater position and keeping teaching talent.
Who are the most important assets and the education industry, selling and marketing expenses increased by 32 percentage year over year.
And $156 $1 million represents primarily due to the addition of marketing staff with the aim of executing our <unk> strategy.
<unk> strategy to capture that new market opportunity post COVID-19 G&A expenses for the quarter and increased by 36, 1% year over year to $383 $4 million non-GAAP, G&A expenses, which exclude share based compensation expenses.
And $383 $3 million, representing a 43% increase year over year.
Total share based compensation and expenses, which were allocated to related operating costs and expenses decreased by 17, 8% and year over year to $14 4 million net operating income was $101 $5 million, representing a 13, 5%.
That decrease year over year.
Non-GAAP operating income for the up for the quarter was 115 $9 million, representing a 14% decrease year over year.
Operating margin for the quarter was eight 5% compared to 12, 7% and the same period of the prior fiscal year non-GAAP operating margin.
It excludes share based compensation expenses for the quarter was nine 7% compared to 14, 6% and same period prior fiscal year.
Net income attributable to new Oriental for the quarter was one <unk>.
Third 51, 3% $3 million, representing a nine 9% increase from the same period of the prior fiscal year basic and diluted earnings per ads attributable to new Oriental or <unk>, and <unk> and <unk> respectively.
Non-GAAP net income attributable to new Oriental for the quarter was $163 $2 million, representing a nine 9% increase from the same period of the prior fiscal year non-GAAP basic and diluted earnings per ads attributable to new.
And we're 10 cents and <unk> respectively.
Net operating cash flow for the third fiscal quarter after that and 21 or approximately $23 3 million U S.
Capital expenditure for the quarter wagon and $5 8 million U S dollars, which were primarily attributable to the opening of 142 facilities and renovations at existing learning centers.
Turning to the balance sheet.
As of February 28, two that 'twenty, one new Oriental had cash and cash equivalents of $1569 $8 million as compared to $915 $1 million as of as of May 31, 2020. In addition, the company had.
747, 8 million U S dollars and term deposits.
And 3300 $67 million and short term investments.
New Oriental deferred revenue balance, which is cash collected from registered students.
For the courses and recognized proportionally as revenue as the instructions were delivered at the end of the start fiscal quarter of fiscal year 2021.
<unk> hundred $65 7 million U S dollars and increase of 35, 7% as compared to.
60, and $175 million at 30% 30 $175 million.
At the end of the third quarter of fiscal year 2020 now.
Now I will hand over to Stephen to walk you through.
Outlook and guidance.
Luke and half into the next quarter of fiscal year 2021, we're more clear about the recovery trend of the Companys near term financial performance of our market opportunity over the long run.
Our strategic focus and investment approach this year and improving the product quality, increasing the teachers' compensation and enhancing our industrial leading system.
Which fully reflects our ethos of focusing on the essence of education and.
New of the market competition.
And opportunity to take advantage of the post COVID-19 market consolidation, we firmly maintain a stable and balanced investment strategy that will.
And improve the quality of our education service with aim to achieve a sustainable and long term growth.
Opposed to healthy short term growth, but also request excessive investments and higher cost.
<unk> customers.
We will continue to focus on the following key areas.
<unk>.
We will continue to expand our offline business, we aim to add around 20% capacity, including new learning centers and expanding classroom area of some existing learning centers for K 12 business in this fiscal year.
We believe our capacity expansion will prepare us to further take market share from other players post COVID-19 as we believe some small players without strong financial provision and online class capability may not be able to assist the town that our business during the period.
We expect the industry and the goal way from market consolidation and pound pandemic phase.
The fact that we are a major player with a strong financial capacity and fresh offline facilities enable us to further strengthen our market leading position and penetration.
Second we will continue to leverage our investments in digital technologies and introduce hours or more system and more offline language training and test offerings, especially for our K 12, tutoring and overseas test prep key business.
And the usage of online tools and constantly our mill system for all business lines throughout the whole network will be enhanced.
And to off leaves with a whole lot more teaching experience will play its more efforts and developing the past the teaching content and courseware and also developing more advanced training programs for our teachers.
And with all with all of the above mentioned and infrastructure in place.
We will continue to pilot our online initiatives and major cities with high demand and higher operational efficiency and its surrounding philosophies.
We believe that our initiatives will be one of our growth engines to increase total customer acquisition postponement assets.
And quickly replicate and different parts of China, and limiting us to capture the market consolidation opportunity.
This re ramped new business model will also contribute to our margin and recovery when the pandemics or and further expand our long term margin targets.
Here I have to highlight that <unk> products are supported power offline and cloud based supplements each other hybrid format.
Third during the peak of the pandemic, we sold it necessarily needs to ramp up and spending.
Areas of the business and.
And at migrating and the challenges from the pandemic now the business now that the business gradually recover to a normal level going forward, we will closely monitor the loss of the coffee and expenditure across the company to improve overall operational operating efficiency.
Here I would like to stress that we have great confidence and the fundamentals of our business, which will believe will continue to remain strong we have been increasing our investments and different strategies and we remain optimistic of the brighter prospects of our distance and I believe our investments now will bring us fruitful rich.
Turns and long run.
When looking at the near term and our.
Our expectations from next quarter, we expect total revenue to be and a range of 1100 and.
One $9 million to 1140 $1 million.
Representing year over year interest in the range of 38% to 43%.
The breakdown of the effects of topline growth for our key business lines should flow business.
We expect to be to grow and the range of 45% to 50%.
Obviously tough for our programs.
Expect to flow at around 30%.
Overseas study consulting and studied tour business.
To be flattish and the growth and the pooler and dot com pure online education platform.
And it's good.
Except.
Except it accelerates all year over year in dollar terms.
To conclude we're now taking all kinds of the operational actions to both enrollments and cloud from utilization for the spring semester and speed up the recovery of the business. After the resumption of the schools and learning centers.
We're confident that the demand for after school tutoring.
Our growth will lead, peaking off and in the process with trillium tours from normalized level and.
<unk> mentioned that this expectations reflect our considerations of the latest pandemic and.
The regulatory situation as well as our current and preliminary view, which subsequently subject to change.
This points.
I will take your questions operator, please open the call for this thank you.
The question and answer session of this conference call will start.
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Keith.
Yeah.
Okay.
Yeah.
Your first question comes from.
So like slew from UBS. Please go ahead.
Good evening management. Thank you very much for taking my question and congratulations on the quarter.
And I can move from regulation I know during the past few months.
Peter has made some relatively strict comment and.
After school tutoring and regulation.
Could you share some color about Europe and protect.
Congratulations our action.
Would there be any tightening and term does that.
New aligning sales or license.
And he applies.
Considering tagging.
Thank you very much.
And for <unk>.
Good question.
And actually the government's intention to tightened and after the after school tutoring business our policy if not.
Surprise to us.
And it has been.
Relative.
Discuss it.
For a long time since 2018.
And we believe the the regulations efforts will force are a positive environment for the whole market to improve the market standard and enhanced the of the average pizza and quality of the home markets and.
And.
And I think and I think we are aligned with the government policy and also full and fully commuting to work together with the government to build a better.
The education market in China, I think the reform details are yet to be announced so now we are able to provide a full analysis on our business impact.
But at this stage.
Stage, we do not foresee any material impact our topline.
And we believe that some.
The admin cost may increase even for a short term to meet the new requirement.
As the largest <unk>.
Provider and a new Oriental I think we are we are.
We have a strong capital to be compliant with the potential reform policy reform and all of the same time, we expect with Chinas After school tutoring market to further.
And the consolidated.
And we have the and prepare a reason for this and we are ready to take more market share from other players.
Thank you. Our next question comes from Mark Li from Citi. Please ask your question.
Hi management, congratulations on the very strong results.
For the upcoming summer promotions.
Our plan pocket and ship, especially.
Maybe with the ryzen and seen that you with our <unk> model. Thank you.
Yes.
Yes.
We we started true to do this summer promotions of four or five years ago, and and last year, we got over $1 million, our student enrollments from the summer promotion campaign and the retention rates after the summer.
Yes.
And somewhere around 60%.
<unk>.
The the good number and and this year I think we will be we will do the same thing and.
And we do expect the summer promotion enrollments.
And we will be booming in the coming summer and we believe.
And the retention with outflows summer will be higher than that of last year.
Typically we are regardless, we got with these new enrollment from the summer promotion.
Typically we chartered for 500 or RMB per course accurate.
And if not a three course, just like some of the.
And the defendants courses and.
And I think.
The summer promotion will bring us the whole year.
The enrollment growth and it will not payable margin for the whole year.
Mark.
Thank you. Our next question comes from Kansas Cheng from Daiwa. Please go ahead.
Hi, Cc and <unk>.
And and Stephen Thank you for taking my question and Congrats Hey, congratulations on a very strong set of results and so my question is regarding the OLED. So can you share with us the revenue contribution of <unk> and Margaret currently and also what would be the percentage of oil and more contribution in long run.
And how would be the long term margin profile from OEM or thank you.
While the <unk> model only contribute single digit flow over revenue of this quarter.
And then.
What would be the ability to work with our reach both major and smaller cities across China, and some province, I think it will.
To grow rapidly and the coming quarter and becomes a major driver to the to our business growth.
We expect the U b.
The revenue contribution from the <unk> next year will be somewhere around the 10%.
And the margin profile of the <unk> volume.
Theoretically if the AMA model the margin of the <unk> model should be a little bit higher than the traditional offline classes.
But.
And we've just started the amo model since the last year. So we still need more time to healthy by the business model and.
And the margin profile and so far for growth I think the programs of the Amo business.
And as they expect.
It's better than we expected.
And.
And the AMA model will contribute more and more revenue going forward and the.
And the next fiscal year and to be in.
And the next two to three years.
Thank you. Our next question comes from Tien Ho from Th capital. Please ask your question.
Hi, This is Steven.
Ladies and gentlemen, John quarter.
And so I see the overseas recovered pretty nicely and.
And also some data shows.
Even though this year.
Hey, Dan.
However, the students apply to.
School, and remember that with really high.
And I wonder, what's the growth what's the outlook for the overseas.
Okay and the consulting.
This is part of it with.
What's the outlook for that.
What do you see from that from today's data. Thank you.
Thanks Pierre.
I think the the overseas perfect overview related business Recut.
Our recovery.
It's coming and.
And the revenue decline of the overseas test at this quarter was 12%.
Last quarter, the revenue decline was 29% and true.
So the revenue decline was 50% in dollar terms.
So and so the encouraging sign of the recovery of the overseas test prep business and.
And.
And we gave the guidance we gave the guidance for Q4, the overseas test prep business will be interest to buy.
Somewhere around the 30%.
<unk> zero percent so.
So I think the.
You will see the even the higher of the recovery of the overseas test prep business and.
And.
Yes, I know, we had a low base last year, but anyway I think we're in the process of the of the recovery of the overseas <unk> business and and consulting fees and so.
Therefore, we we.
And we got the EBIT by 11% and next year, we guided the revenue growth and solid business that will be flattish and political in Q4 will be the.
The high season and of the oversea consulting business, but doing the hard time I think the performance of the overseas test prep and consulting business.
And this is much better than we expected several colorful and last year I believe the overview relative business will grow two 7% for the for the fiscal year 'twenty true.
Thank you Ken.
Thank you. Our next question comes from Sheng Zhong from Morgan Stanley. Please ask your question.
Hi, and thank you for taking my question.
So my question is.
Looking at <unk>, Inc.
And then we.
And we opened new me slightly slow so any color on this.
And that proven process.
Key items.
Yes.
And now and.
And David Inc.
Based on day one.
What's your day.
Our capacity.
Pension plan for next year can be shared with US now thank you.
So far and you know we opened almost all the learning centers, except for Beijing City and in Beijing.
We have over one and learning centers in Beijing, and but we.
And we open we opened and single digit and learning centers now and and.
But we expect that the more we will open more learning centers reopen.
And more learning center in Beijing.
And B.
This year, you know we plan to open 20% of the capacity.
Our total three quarter, we opened 17%.
And the next year, so far we haven't off of finished our budget next year of the expected plan. So I think the net earnings call and the next quarter, our will be our expansion plan and so far we don't want to change our expense and plan for next year, but we feel even more time to finalize our budget.
And as of next year Yeah.
Georgetown and in addition to the Beijing and situation I want to remind you that because we have the OMB system. So that we have all the students during the spring Kors online very smoothly actually eight even with a.
Closure of offline learning centers, both day, all the students Kevin can take their classes online and the retention and it's very stable.
And also and our overall debt.
Since the pandemic, we're seeing and Beijing situation is hotter than that and other cities and revenue declined but.
The reported Q3 quarter and forecast Q4 quarter ratings revenue trend is better and getting better and better.
Okay.
Okay Alright. Thank you and next question comes from Alex Zhou from Credit Suisse. Please ask your question.
Hi, I mentioned and thank you for taking my questions and congratulations on very strong set of results.
And so would you please comment on the margin and trained in the next quarter and also for them.
Next fiscal year.
And we have a low base in the fourth quarter of last fiscal year. Thank you.
Yes, I think with the revenue growth recovery of fee and the process.
This is their first and only market from I think we do have.
I think we have the breadth of the business opportunity.
And the market trough.
And we.
We are doing.
Several of the investment and now actually think two quarters ago.
And we make the learning center expansion by 20% this year and we firmly rip the teachers salary.
Price this year and also we spend more money on the R&D for the <unk> and also we hired more people on the marketing team to do the the.
The the marketing activities.
But I think all the above mentioned the vast bands will make us.
<unk> be fully prepared for the future.
I think it will.
I think it will impact the margin and for sure.
Short term debt.
I still believe the margin decline for the Q4 will be narrowed down compared to this quarter and we're confident confident that we are able to deliver the margin expansion.
After the pandemic is over and we don't want to change the mid and long term margin guidance.
Thank you.
Thank you. Our next question comes from DFS Kim from Jpmorgan. Please ask your question.
Hi, good evening and congrats on the strong beat across the board maybe before I start my question can I just follow up on your point that when you say margin decline would be narrowed versus this quarter are you referring to last year were pre COVID-19 level and.
And I have my own questions. After this.
Year over year comparison year over year, Okay. Thank you Sir.
Thank you my question is regarding cooler and and there it seems to be some reports locally debt. There are some business adjusted net debt and according to some media and could you help us understand what the key change and priority here plus potential margin impact say for instance.
And has been making about 40 plus million U S. Dollar operating losses every quarter in the past six quarters, but shall we expect the absolute size of the losses from $40 million plus to narrow into our fiscal year 2022, where shall we only think about the margin improvement.
Absolute size of the losses. Thank you again.
And <unk>.
And too much about the detailed numbers.
Of the cooler that's I can share with you our strategy.
Cooler heads and more money on the R&D and marketing in the past quarters, but.
We started to control the marketing.
And good marketing and.
Active this and money.
In this quarter and going forward I think we will be very cautious.
And the market is spending okay and.
And as I said, our strategic focus is to invest more money on to improve the teaching quality. We're training. The futures were hired the talent people rather than the heavy spending and other marketing. So we call. This is the.
And the essence of the education, and so I do believe fee.
The revenue of the cooler of next quarter will be accelerated.
And the margin drag from the cooler to the EU.
We will be smaller and smaller going forward.
Okay.
Thank you.
Thank you. Our next question comes from Lucy Yu from Bank of America Securities. Please ask your question.
Thank you Stephen and I have a follow up question on the margin. So in the fourth quarter and we have a relative to and know what base and especially with the K 12 start to grow like 45% to 50%.
Should we expect some operating leverage on the <unk> side and these the K 12 margin should be improving right. So what is actually dragging the margin to be lower than the same period of last year. Thank you.
Yes.
And we believe we have the leverage on the coupon business because of the European business and recovered very very fast and.
Our society you know with this wind from the.
<unk> for the future like de risked and the future salary and open more learning centers and also true.
Invest more on the AMA model we have.
Art.
And the minimum number of the marketing staff true.
And do the brand promotion.
And so I think you still need maybe more time to see the margin expansion, maybe one more quarter, but I do believe the margin profile in the Q4 and will be better than this quarter and Q3.
Moving.
Thank you. Our next question comes from Jesse <unk> from Nomura. Please ask your question.
Hum.
And good evening management and thank you for taking my question and congratulations for a very strong quarter and also very strong revenue guidance first of all Q. My question is also regarding offline and mobilization.
And if so what is our base scenario and what about the and what's the scenario and if Peyton Manning and Torrance.
Cannot be open before summer.
And what.
The impact to our from a promotional campaign.
So far.
We are finished.
17% expansion in the first three quarters of this and physical year. So we still need to do 3% and new capacity in Q4 to gather point to get the number of the 20% to plastics expansion.
I think we are.
Prepared for the capacity.
Capacity is prepared for the coming summer promotion and don't forget we have the amo model compared to last year.
And my model is much better than that of last year and.
I think we will do.
Some of the summer promotion by the oil and Memorial I think the online elements will help us to do the summer promotion.
So rather than the traditional typical 100% offline.
And the format.
Thank you.
Question comes from Christine Cho from Goldman Sachs. Please ask your question.
Thank you so much and congrats.
Our results quarter, and Stephen and <unk>.
And.
It seems like the capacity growth this quarter and 70%.
I'll start and I'll also it seems like you are targeting around 20% growth, which seems to be kind of below and the 20% to 25% midterm target.
And.
Just wondering if this is temporary or are there any moskin considerations such as for example, like Oh and mill expansion plan or any regulatory concerns that you have here.
Thank you.
Yes.
We aim to add around 20% capacity expansion.
The whole year fiscal year 2021 this year and.
And last year.
We extended a 26% and new learning centers. It will typically we ramp up the learning center from zero to 1%.
By three to four years, so that means we have enough.
The capacity to raw to ramp up.
And also I think the last year, we moved from classroom area of the overseas test prep to K 12 business, because we want we suffered with suffered.
The negative impact from the overseas business.
And I think it will help us to prepare for the four b and the potential.
<unk>.
The growth of the <unk> business.
Great. Thank you. So we are now approaching the end of the conference call I would turn the call back to new Oriental Executive President and CFO, Mr. Stephen Yang for his closing remarks.
Again, thank you for joining us today.
If you have any further questions. Please do not have debt to contact me or any of our Investor Relations representative. Thank you.
Great. Thank you so that does conclude our conference for today. Thank you for participating you may all disconnect.
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Good evening and thank you for standing by for New Orientals, FY 2021 third quarter results earnings Conference call.
At this time.
And in a listen only mode and.
Management's prepared remarks, there will be a question and answer session. Today's conference is being recorded.
Have any objections you may disconnect at this time and I'd like to turn the meeting over to your host for today's conference. Mr. Zhang. Thank you. Please go ahead.
Okay. Thank you Hello, everyone and where it comes from new Oriental third fiscal quarter 2021 earnings Conference call. Our financial results for the period were released earlier today and are available on the company's website as well as newswire services. Today, you will hear from Stephen Yang Executive President and 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 U S. Private Securities Litigation Reform Act of 90, 95 forward looking statements involve inherent risks and uncertainties and such.
Our results may be materially different from the views expressed today.
And 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 statement, 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 Orientals investor.
And as website at Investor adopt new Oriental Dot Org I will now turn the call over to Mr. Stevens. Please go ahead. Thank you Susie Hello, everyone and thank you for joining us on the call with a pandemic largely controlled and China.
It's a small wafer outbreak and the northern part of the country our business navigates the challenges and are so strong momentum in recovery. We are pleased to announce a set of financial results and our Florida quarter of this year that exceeds our expectation.
Total net revenue was 1100 $90 million, representing a 29% increase year over year, which is a very encouraging reflection affirming the business strategy that we have taken during the difficult period.
Our key growth driver K 12, all subjects after school tutoring business achieved year over year revenue growth of approximately 37%.
Our U can middle School High school all subjects after school tutoring business continued its momentum with a growth of approximately 35%.
While our pop Kids program recorded a growth of approximately 40%.
And we're oversee related business, despite it being continuing to pressure due to the uncertainty of the pandemic situation and travel restrictions around the globe So strong resilience.
Although the oversea test prep reported revenue decrease of about 12% for the quarter.
And just the resolve that is better than we expected while the oversea consulting and study tour business recorded a revenue interest of about 11% year over year, which is a very positive results.
Our industry, leading <unk> system.
<unk> core strategy since the start of the pandemic.
Early last year and half.
As once again proved to be instrumental in this quarter.
The ability of the effects of COVID-19, outbreaks and sort of part of the China, new strong flexibility and migrating students between online and offline classes is absolutely crucial during this challenging period.
And our <unk> system has been the answer to that.
So small wave of COVID-19 outbreak and around 20 cities and more from China. Once again highlighted the importance of or more as they enable us to respond swiftly and migrate the offline class to online.
Lloyd and disruptions of the student's class and learning progress.
At the same time the cities.
And that makes largely controlled vast majority of the students migrating from the online class of spec to offline learning centers, Inc.
Bias effective sales, we have been committed to expand the reach of our <unk> system and are delighted to say that we are part of the or more online courses.
Vast majority of existing cities and around 25, new strong and sell our cities and the winter semester and.
<unk> promised new number of new customers.
And more system effectively boost to the enrollments and revenue with a low customer acquisition costs and is becoming the new driver to our business growth and the.
It has solicited and interest.
<unk> contribution to the company's overall revenue this quarter.
Total student enrollment and the timex subjects tutoring and test prep courses and third a physical quarter over towards 2021 increased by 43% and year over year for approximately $2 million 296800 <unk>.
And in line with our expectations.
In terms of pricing.
Per program blended ASP, which is cash revenue divided by total student enrollment increased by about 7% year over year in dollar terms and.
And we're already blended ASP, which is GAAP revenue divided by total teaching hours.
Interest and by 7% and year over year and.
In line with our normal price interest of about 5% to 8%.
To provide a breakdown of already blended ASP.
Please note that U can classes increased by 5% you can VIP increased by 1% pop kids increased by 4% and Oversea test Prep program increased by 12% all year over year in RMB terms.
No I would like to spend some time to talk about this quarter performance across our individual business lines in detail.
And pandemic became largely under control in China recovery and momentum continued to pick up in this quarter across our business lines.
Our key revenue driver K 12, all subjects after school tutoring business achieved year over year revenue growth of approximately 37% million terms.
Breaking down the U can middle School High School business reported a revenue increase of approximately 35% in dollar terms for the quarter, So and enrollments grew approximately 56% year over year for the quarter, Our pop Kids program delivered outstanding results with revenue up.
About 40% in dollar terms for the quarter enrollments increased about.
Ah, 61% for the quarter, our overseas related business income.
Moving turf forever and consolidate business showed encouraging signs of the recovery despite facing the most of the difficult challenges due to the cancellation of the overseas exams and the risks.
Travel as well as the and political ability of the pandemic situation and different different part of the world wrestling through them Hesitance from sort of both the overseas test prep business reported a revenue decrease above 12% in dollar terms for the quarter and comparison to a decrease of 29% and in the last quarter.
While the overseas consulting and the overseas study tour business reported revenue increase of about 11% in dollar terms year over year for the quarter.
And the recovery momentum from last quarter, 6% interest.
And finally, VIP personalized class business reported cash revenue increased about 36% and year over year for the quarter.
We continue to carry out our capacity expansion this quarter as we opened one new offline training schools and the city of Hangzhou.
This interest.
The total square meters of classroom area by approximately 17% year over year, 7% quarter over quarter by quarter.
The interest is in line with our expectation.
As we gradually ramp up our expansion efforts throughout this academic year to prepare us for recruited recruiting more new student starts.
Start of the falling a dynamic year.
The expansion and our offline education and that work has also means for that and we're fully prepared for when the pandemic is over.
And our services can resume with a strong presence across different Chinese cities.
We rolled all the do teacher class model for pop Kids program and 58 existing cities for U can program in 2000, and suddenly existing fees with a satisfactory customer retention and scalability. We will continue to use this model to increase our market penetration and both markets we have tapped into.
And I'll break or COVID-19 has highlighted the importance and demands of online education.
<unk> allocated more resources to this space and the message was $59 million in the quarter to improve and maintain our <unk> integrated education ecosystem.
Our success and policy and the <unk> system and around 25 still sell our cities through nearby and major cities. This quarter is yet another testament of how this low cost high return and <unk> business model can rapidly become one of the most far reaching education service and China.
And we're very optimistic about the growth potential for our oil and more system in the next few quarters.
Apart from the Amo infrastructure, we have allocated as part of the resources advanced training programs for our teachers to enhance their online and offline group teaching skills and response to the growing demand.
And the same time, we continue to upgrade our technology platforms and will broaden the usage of the online tools and content and <unk> system for all business lines throughout the whole network as well and further develop the path to teach and content and courseware to catered to online and offline with education methods.
We're glad to see that.
Our industry, leading one ecosystem has not only successfully managed to push and most of the impacts.
By the pandemic, but we also see our customer retention rates remained stable for the more effectively those two new enrollments and we believe it will continue to play a huge part of the recover a business and coming quarters.
To capture the huge market opportunity in online education area.
You must have more resources and executing new initiatives and online K 12 After school tutoring business since the second half and lots of fiscal year and added a meaningful months of customer service Representatives and Marvin and stuff this moves.
Consequently raised our spending on marketing from in this fiscal year and our total <unk>. Both small size class currently enjoy a significant and the first and more advantage and stand to benefit from the interest and demand in lower tier cities.
And large size K 12 courses.
Ofer offer the best in class and learning experience through the investment and upgrade them up and online platforms introduced the new education technologies, and adding more interactive features to online classes.
Cooler and also continue to establish teaching and training centers and other.
And the locations to attract more qualified teachers and tutors and provide and provider system systematic training programs and a significant amount of the investment has been and allocates to marketing and services has been in the past quarters to attract customer during the peak of the pandemic.
Spending started to normalized from this quarter as we are very cautious.
75, new high ROI and marketing channels, we are focused on improving operational efficiency and emphasizing the word of mouth promotion for English programs with existing brand name advantages.
We are.
When we return to the average new user acquisition cost and so.
Relatively low level, we believe cooler and will continue to quickly acquire new users, we're enhancing student retention.
Now I would like to turn the call over to Mr. <unk>. Please go ahead and Susie.
Yes.
Now, let me walk you through the key financial details for the third quarter operating cost and expenses for the quarter were 1080 $9 million, representing a 35, 1% increase year over year non-GAAP operating costs and expenses for the quarter, which excludes share based compensation and expenses were 1000.
$74 $6 million, representing a 36, 3% increase year over year.
Cost of revenue increased by 35, 3% year over year to 539 5 million U S dollars.
Primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increasing.
Number of schools and learning centers and operation the.
The increase in futures compensation will also put us in a greater position and keeping teaching talent.
Who are the most important assets and the education industry, selling and marketing expenses increased by 32 percentage year over year.
And $156 $1 million represents primarily due to the addition of marketing staff with the aim of executing our <unk> strategy.
<unk> strategy to capture that new market opportunity post COVID-19 G&A expenses for the quarter and increased by 36, 1% year over year to $383 $4 million non-GAAP, G&A expenses, which exclude share based compensation expenses was $383 3 million.
Net dollars, representing a 41, 3% increase year over year.
And.
Total share based compensation and expenses, which were allocated to related operating costs and expenses decreased by 17, 8% and year over year to $14 4 million net operating income was $101 $5 million, representing a 13, 5% decrease year over.
A year.
Non-GAAP operating income for the up for the quarter was 115 $9 million, representing a 14% decrease year over year.
Operating margin for the quarter was eight 5% compared to 12, 7% and the same period of the prior fiscal year non-GAAP operating margin.
It excludes share based compensation expenses for the quarter was nine 7% compared to 14, 6% and the same period the prior fiscal year.
Net income attributable to new Oriental for the quarter was one.
Third 51, 3%.
And 1 million dollar.
Representing a nine 9% increase from the same period of the prior fiscal year basic and diluted earnings per ads attributable to new Oriental or <unk>, and <unk> and <unk> respectively.
Non-GAAP net income attributable to new Oriental for the quarter was $163 2 million U S dollars.
And a nine 9% increase from the same period of the prior fiscal year non-GAAP basic and diluted earnings per ads attributable to new.
Or tencent and <unk>, respectively.
Net operating cash flow for the third fiscal quarter after that and 21, whereas the approximately $23 3 million U S dollars capital expenditure for the quarter and were longer than $5 8 million U S dollars, which were primarily attributable to the opening of 142 facilities and renovations.
And at existing learning centers.
Turning to the balance sheet.
As of February 28, two that 'twenty, one new Oriental had cash and cash equivalents of $1569 $8 million as compared to $915 $1 million as of as of May 31, 2020. In addition, the company had.
747, 8 million U S dollars and term deposits.
And 3300 $67 million and short term investments.
New Oriental as deferred revenue balance, which is cash collected from registered students.
For the courses and recognized proportionally as revenue as the instructions were delivered at the end of the start fiscal quarter of fiscal year 2021.
<unk> hundred $65 $7 million and increase of 35, 7% as compared to.
60, and 175 million us others at 30% 3100 $75 million.
At the end of third quarter and fiscal year 2020 now.
Now I will hand over to Stephen to walk you through.
Outlook and guidance.
Luke and half into the next quarter of fiscal year 2021, we're more clear about the recovery trend of the Companys near term financial performance of our market opportunity over the long run.
Our strategic focus and investment approach this year and improving the product quality, increasing with teachers compensation and enhancing our industry leading system.
Which fully reflects our ethos of focusing on the essence of education and.
New of the market competition.
And opportunity to take advantage of the post COVID-19 market consolidation, we firmly maintain a stable and balanced investment strategy debt.
And improve the quality of our education service with aim to achieve a sustainable and long term growth.
Opposed to healthy short term growth, but also request excessive investments and higher cost to acquire customers.
We will continue to focus on the following key areas first.
<unk>.
We will continue to expand our offline business and.
And at around 20% capacity, including new learning centers and expanding classroom area of some existing learning centers from kids to our business and this fiscal year.
We believe our capacity expansion will prepare us to further take market share from other players post COVID-19 as we believe some small players without a strong financial position and online class capability and may not be able to assess the town that our business during the period.
We expect the industry and the goal way from market consolidation and pound pandemic phase.
The fact that we are a major player with a strong financial capacity and fresh offline facilities enable us to further strengthen our market leading position and and penetration.
Second we will continue to leverage our investments in digital technologies and introduce our <unk> system and more offline language training and test offerings, especially for our K 12, tutoring and overseas test prep key business.
And the usage of online tools and constantly our mill system for all business lines throughout the whole network will be enhanced.
So at least with a whole lot more teaching experience will play its more efforts and developing the past the teaching content and courseware and also developing more advanced training programs for our futures.
And with all with all of the above mentioned and infrastructure in place.
We will continue to pilot, our ome online initiatives and major cities with high demand and higher operational efficiency and its surrounding <unk>.
We believe that our <unk> initiatives will be one of our growth engines to increase total customer acquisition post COVID-19 assets.
Quickly replicate and different parts of China and live.
And and us to capture the market consolidation opportunity.
This revamped new business model will also contribute to our margin and recovery when the pandemics or and further extend our long term margin target.
Here I have to highlight that oldest <unk> products are supported the power offline class.
And this supplements each other hybrid format.
Third during the peak of the pandemic, we sold the necessary released ramp ups and spending on different areas of the business and.
And migrating and the challenges from the pandemic now the business now that the business gradually recover to a normal level moving forward, we will closely monitor it.
Price of the coffee expenditure across the company to improve overall operational operating efficiency.
And here I would like to stress that we have great confidence and the fundamentals of our business, which will believe will continue to remain strong we have been increasing our investments and different strategies and we remain optimistic of the brighter prospects of wild distance and believe our investments now will bring us a fruitful written.
Turns and long run.
When looking at the near term and our.
Our expectations from next quarter, we expect total revenue to be and a range of 1100 and.
One $9 million to 1140 $1 million.
Representing year over year and interest in the range of 38% to 43% from.
The breakdown of the sites to top line growth for our key business lines and <unk> business.
Expect to be to grow and the range of 45% to 50%.
Overseas Test prep program.
Expect to grow at around 30%.
Overseas study consulting and studied tour business.
Back to be flattish and the growth and the pooler and dot com pure online education platform.
It's good.
Yep.
Except it accelerates all year over year in dollar terms.
To conclude we're now taking all kinds of the operational actions to both enrollment and cloud from utilization for the spring semester and speed up the recovery of the business. After the resumption of the schools and learning centers.
We're confident that the demand for after school tutoring.
Business, our growth will be peaking off and in the process with trillium tours from normalized level and.
Just to mention that this expectations reflect our considerations of the latest pandemic and.
The regulatory situation as well as our current and preliminary view, which subsidy and subject to change.
This point.
I will take some questions operator, please open the call for this thank you.
The question and answer session of this conference call will start.
In a moment and.
All day to be fair to all callers, who wish to ask questions. We will take one question at a time from each caller. If you have more than one question. Please request to join the question queue again. After your first question has been addressed.
To ask a question today. Please press star one on your telephone and wait for your name to be announced if you wish to cancel your request. Please press the pound key.
Yeah.
Your first question comes from Felix Liu from UBS. Please go ahead.
Good evening management. Thank you very much for taking my question and congratulations on this quarter and.
My question is on regulation and I know during the past few months.
And regulator has made some relatively strict comments and after school tutoring and regulation.
Good day.
Could you just share some color about Europe.
Potential regulation direction will there be any tightening in terms of that new aligning sales or license.
And after school tutoring scheduling and thank you very much.
And <unk>.
Good question.
And actually the government's intention to tightened and after the after school tutoring business our policy, it's not a surprise to us.
And.
And it has been.
Discuss it.
For a long time since 2018.
And we believe the the regulations effort will force are a positive environment for the home market to improve the market standard and then you have the of the average TCE and quality of the whole market.
And and.
And I think and I.
I think we are aligned with the government policy and also full and fully committed to work together with the government to build a better.
The education market in China, I think the reform details are yet to Vietnam and so now we are able to provide a full analysis on our business impact.
But at this stage.
Stage, we do not foresee any material impact our topline.
And we believe that some.
And the admin cost may increase for a short term to meet the new.
New requirement.
As the largest.
Provider and new Oriental I think we are we have these strong capital to be compliant with the potential reform policy with one and.
And the same time, we expect with Chinas after school tutoring market to further.
The consolidated and we have and prepare a reason for this and we're ready to take more market share from the other players Phillips.
Thank you. Our next question comes from Mark Li from Citi. Please ask your question.
Hi management, congratulations on the very strong results.
For the upcoming summer promotions.
Our plan and its pocket and ship.
It's really I see maybe with the ryzen and seen that with our <unk> model. Thank you.
Yes.
Yes.
And we started to do this summer promotions of four or five years ago, and and last year, We got over 1 million student enrollments from the summer promotion campaign and the retention rate after the summer.
Russ.
Somewhere around 60%.
Yes.
And the good number and and this year I think we will we will do the same thing and.
And we do expect to be similar promotional and enrollment.
And we'll be booming in the coming summer and we believe.
The retention rates after the summer will be higher than that of last year.
Typically we are we done and we thought we'd be student enrollment and from the summer promotion.
Typically we chartered for 500 or RMB per course accurate.
And if not a three course, just like some of the.
And the strong its courses and I think the odds.
And the similar promotion will bring us the whole year.
The enrollment growth and it will not hit the margin for the whole year.
Mark.
Thank you. Our next question comes from Kansas Cheng from Daiwa. Please go ahead.
Hi, Susan.
And and Stephen Thank you for taking my question and congratulate congratulations on this average.
And Seth on the results and so my question is regarding the OLED. So can you share with us the revenue contribution of <unk> and currently and also what would be the percentage of all ammo contribution in long run.
And how would be the long term margin profile for <unk> for all and more thank you.
While there are more model only contribute to the single digits with overall revenue this quarter.
But as you know.
And where the ability to work with our risk both major and smaller cities across China in some provinces.
Will grow rapidly and the coming quarter and it becomes a major driver to the to our business growth.
We expect the.
The revenue contribution from the <unk> next year will be somewhere around the 10%.
And the margin profile of the Oi model volume.
We also believe the Amo model the margin of the <unk> model should be alluding to higher than the traditional offline classes.
And then.
And we've just started the amo model think the lots a year. So we're still need more time to testify the business model and.
And the margin profile and so far for growth and the <unk>.
<unk> of the Amo business.
And as they expect.
Net.
It's better than we expected.
And.
And the Amo model will contribute more and more revenue going forward and the.
And the next fiscal year and the B.
And the next two to three years.
Thank you. Our next question comes from Tien Ho from Th capital. Please ask your question.
ICC Stephen Congratulations on Ms Cheng quarter.
And so I see the overseas recovered pretty nicely and.
And also some data shows.
Even though this year.
And then make however, the students apply to.
Schools, and remember that with really high.
I wonder what's the what's the outlook for the overseas.
Testing and the consulting part of it.
What's the outlook for that and what do you see from that from today's data. Thank you.
Yeah I.
I think the.
Overseas test that oversee relative business recover.
Recovery.
And it's coming and.
And the revenue decline of the overseas test that this quarter was 12%.
Last quarter, the revenue decline was 29% and true.
So the revenue decline was 50% in dollar terms.
So and show the encouraging signs of the recovery of the overseas test prep business and.
And.
And we gave the guidance we gave the guidance for Q4, the overseas test prep business will be and interest of bi.
Somewhere around that 30% three zero percent so.
So I think.
And you will see the higher the recovery of the overseas test prep business and.
And.
Yes, I know, we had a low base last year, but anyway I think we're in the process of.
The recovery all day.
The overseas test lab business and consulting services.
This quarter, we we got the EPS by 11% and next year, we guided the revenue growth and some of the business that will be flattish and then political in Q4 will be the.
And the high season of the oversea consulting business, but doing the hard time I think the performance of the overseas test prep and consulting business.
And much better than we expected several colorful and last year I believe the overview relative business will grow to 70% for the for the fiscal year 'twenty two.
Thank you Kevin.
Thank you next question comes from Sheng Zhong from Morgan Stanley. Please ask your question.
Hi, Thank you for taking my question.
And my question is so new.
Thank you and I think the.
And then we opened and a slightly slow so any color on the government approval process.
Key items.
And to India.
And section now and.
David Inc.
Based on day.
What's your do you have that.
Capacity.
Pension plan for next year cash can be shared with US now thank you.
So far you know we opened almost all the learning centers, except for Beijing City and impact.
We have over one and the learning centers in Beijing, but we.
And we open we opened saw single digit alert and centers now and.
And but we expect that the more we will open more learning centers, we opened more learning centers in Beijing.
And.
B. This year, you know we plan to open 20% of the capacity and all of <unk>.
Total three quarter, we opened up 17% and next year, so far we haven't.
And finished our budget next year.
Of the expected plan. So I think the next earnings call and the next quarter or so where we are.
Expansion plan and so far we don't want to change our expense and plan for the next year, but we still need more time to finalize our budget next year.
Georgetown and in addition to the Beijing and situation I want to remind you that because we have the OMB system. So that we have all the students during the spring course online.
Smoothly actually eight even with a.
Closure of offline learning centers, both day, all the students Kevin can take their classes online and the retention and it's very stable.
And I'll tell you and our overall debt.
And since the pandemic, we're seeing Beijing situation is hotter than that and other cities and revenue declined but.
The reported Q3 quarter and forecast Q4 quarter ratings revenue trend is better and getting better and better.
Okay alright, thank you.
Next question comes from Alex Zhou from Credit Suisse. Please ask your question.
Hi, and mentioned and thank you for taking my questions and congratulations on very strong set of results.
And so would you please comment on the margin and trained.
And the next quarter and also from.
For the next fiscal year.
Okay.
I think we have a low base.
And fourth quarter of last fiscal year. Thank you.
Yes, I think that the revenue growth recovery as seamless process.
This is the FERC and.
And on the market from I think we do have.
We have the breadth of the business opportunity.
And the market trough and.
And but we are doing.
The investment and now actually think two quarters ago.
And we make the learning center expansion by 20% this year and we firmly rip the teachers salary.
Price this year and also we spend more money on the R&D for the <unk> and also we hired more people and.
And marketing team to do the.
B the marketing activities.
But I think all the above mentioned <unk> will make us.
And the be fully prepared for the future. So I think it will.
I think it will impact the margin for.
And the short term debt.
I still believe the margin decline for the Q4 will be narrowed down compared to this quarter and.
And we are confident confident that we are able to deliver the margin expansion.
After the pandemic is over and we don't want to change the mid and long term margin guidance.
Thank you.
Great. Thank you. Our next question comes from DFS Kim from Jpmorgan. Please ask your question.
Hi, good evening, Sir and congrats on the strong beat across the board.
Maybe before I start my question can I just follow up on your point that when you say margin decline would be narrowed versus this quarter are you referring to last year were pre COVID-19 level and and I am.
One question after this.
Year over year comparison year over year, Okay. Thank you Sir.
Thank you my question is regarding cooler and there seems to be some reports locally debt. There are some business or just my net debt.
And according to some media and could you help us understand what the key change and priority here plus potential margin impact say for instance, cooler and has been making about 40 plus million U S. Dollar operating losses every quarter in the past six quarters, but shall weeks by the.
Absent the size of the losses from $40 million plus to narrow into our fiscal year 2022, where shall we only think about the margin improvement not the absolute size of the losses.
Julien.
Yes.
Kim.
I can't say too much about the detailed numbers.
The cooler.
Can share with you our strategy.
And it has the scale and.
More money on the R&D and marketing in the past quarters, but.
We started to control the marketing.
And the marketing.
Active this and money.
And this quarter and going forward I think we will be very cautious.
All of the market and spending okay and.
As I said, our strategic focus is to invest more money on to improve the teaching quality, where train and the teachers were hired the talent people rather than the heavy spending and other marketing. So we call. This is.
The essence of the education, and so I do believe fee.
The revenue of the cooler off next quarter will be accelerated and the margin drag from the cooler to the EU.
And will be smaller and smaller going forward.
Kevin.
Thank you.
Thank you. Our next question comes from Lucy Yu from Bank of America Securities. Please ask your question.
Thank you Steven.
A follow up question on the margin so in the fourth quarter, we have a relative to know what base and especially with the tariff start to grow like 45% to 50%.
Should we expect from operating leverage on the top side and leave.
Can you talk margin should be improving right. So what is actually dragging the margin to be lower than the same period of last year. Thank you.
Yes.
We believe we have the leverage on the coupon business because of the you have to be a business and recovered already.
And assets.
Our society with is we're winning some.
The investments for the future like the risk and the future salary and to open more learning centers and also true.
And that's more on the AMA model.
Sure.
And the minimum number of the marketing staff to do B Braun promotion and.
And so I think you'll still need maybe more time to see the margin expansion, maybe one more quarter, but I do believe the margin profile in the Q4 will be better than this quarter and Q2.
Great.
Moving.
Thank you. Our next question comes from Jesse <unk> from Nomura. Please ask your question.
And good evening management and thank you for taking my question and congratulations for a very strong quarter and also very strong revenue guidance first of all Q. My question is also regarding offline and normalization in 18.
And if so what is our base and yeah.
And here and.
What about the and what's the scenario and if Peyton Manning and Torrance.
It cannot be opened before from <unk>.
And what.
And.
Impact to our from a promotional campaign.
You know so far.
We are finished.
17% expansion in the first three quarters of this fiscal year, So we still need 2% to 3% and new capacity in Q4, two together to get the number of the 20% to plastics expansion.
I think we are well.
Prepared for the capacity.
And lastly is prepared for the coming summer promotion and don't forget we have the amo model compared to last year.
And.
And our model is much better than that of last year and.
I think we will do.
Some of the summer promotion by the AMA model I think the online elements will help us to do the summer promotion.
Relative to the traditional typical 100% offline.
The format.
Thank you.
Question comes from Christine Cho from Goldman Sachs. Please ask your question.
Thank you so much and congrats.
Our results quarter, and Stephen and PC.
It seems like the capacity growth this quarter and a 17% looks a bit softer and also it seems like you are targeting around 20% growth, which seems to be kind of the low and the 20% to 25% midterm target.
Just wondering if this is temporary or are there any moskin considerations such as for example, like.
Oh and mill expansion plan or any regulatory concerns that you have here.
Thank you.
Yes.
We aim to add around 20% capacity expansion for the full year fiscal year 2021 this year and.
And the last the year.
<unk> expanded to 26% and new learning centers. It will typically we ramp up the learning center from zero to 1%.
And by three to four years, so that means we have enough.
The capacity to ramp up.
And also I think the last year, we moved some classroom area of the overseas test prep to K 12 business, because we know we suffered with suffered.
The negative impact from the obviously picked up.
And I think it will help us to prepare for the four b the potential.
The growth of the <unk> business.
Great. Thank you. So we are now approaching the end of the conference call I will turn the call back to new Oriental Executive President and CFO and Mr. Stephen Yang for his closing remarks.
Again, and thank you for joining us today.
If you have any further questions. Please do not have debt to contact me or any of our Investor Relations representative.
Okay.
Great. Thank you so that does conclude our conference for today. Thank you for participating you may all disconnect.