Ladies and gentlemen, good evening. And thank you for standing by for New Oriental First Fiscal Quarter 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host for today's conference, Ms. Sisi Zhao, New Oriental's Investor Relations Director. Ms. Zhao, please proceed.

Thank you. Hello, everyone. And welcome to New Oriental’s first fiscal quarter 2015 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 Louis Hsieh, New Oriental’s President and Chief Financial Officer and Stephen Yang, New Oriental’s Vice President of Finance. After their prepared remarks, Louis and Stephen will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking 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 Oriental's Investor Relations website at investor.neworiental.org. I will now turn the call over to New Oriental's President and CFO Mr. Louis Hsieh. Louis, please?

Thank you, Sisi. Hello, everyone, and thanks for joining us today. For the first fiscal quarter of 2015 we recorded $394 million in net revenue, [steadily] up 1.4% year over year. The lower-than-expected revenue growth was mainly due to several challenges we detailed quite extensively last quarter. Among these was the uncertainty about the implementation of the new policies relating to the English test for Gaokao, or the Chinese College Entrance Exam. And this at the end was the main cause for the softer than planned performance. Due to the uncertainty around the implementation of the newly introduced policy, sign-ups for our English summer camp and dorm tutoring classes for middle and high school students for the first fiscal quarter were severely weakened, and there was a decline of approximately 30% in revenues of this business. Second, we are also revamping our POP Kids English program. As we expected this impacted enrollments and revenues in this business line for the first fiscal quarter as schools held off on marketing and promotion around this until we complete the rollout of the new program. The growth of our POP Kids program was therefore hindered, and revenue down by 9% year over year. Third, related to the uncertainty about the Gaokao English test [indiscernible] much larger than expected 31% decrease in adult comprehensive English enrolments in the quarter, as some middle and high school students also take that program. As you will recall, we took the conflux of factors that impact the revenue, as I just mentioned, into account when we gave our top line expectations for the first quarter. But unfortunately we underestimated the extent of the near-term impact. However, I would like to emphasis that many of these were non-recurring challenges and here are the reasons why we are fairly certain…

Thank you, Louis. Hello, everyone. Now I would like to take a quick glance at some of the key financial metrics for the first fiscal quarter, in addition to financials we mentioned in the beginning of the call. Selling and marketing expenses for the first fiscal quarter increased 16% year over year to $49.5m primarily due to the increase in selling and marketing staff compensation. General and administrative expenses for the quarter increased 9.7% year over year to $85.5m. Total headcount at the end of August 2014 stood at about 32,300, addition of about 2,300 from the same time last year. Quarterly operating income decreased 18.4% year over year to $110.5 million. Operating margin for the quarter amounted to 28.1% compared to 34.9% in the same period of the prior fiscal year. And non-GAAP based operating margin for the quarter was 28.8% compared to 36.2% in the same period last year. Net income attributable to New Oriental for the quarter was US$112.4 million, down 11.2% year-over-year. Basic and diluted earnings per ADS attributable to New Oriental were US$0.71 and US$0.71, respectively. Capital expenditures for the quarter were US$12.2 million compared to US$8.6 million in the same period of the prior fiscal year and were primarily attributable to opening of 26 new learning centers and renovations and other existing learning centers which generated approximately US$139.7 million operating cash flow for the quarter compared to US$167.4 million in the period quarter year ago. Now let me go through our expectations for the second fiscal quarter of 2015 before we move into the Q&A session. We expect total net revenue in the second fiscal quarter of 2015 to be in the range of $235.4 million to $243.7 million, representing a year-over-year growth in the range of 13% to 17%. The above forecast reflects New Oriental's current preliminary view which is subject to change. At this point, Louis and I will take your questions. Operator, please begin.

[Operator Instructions]. Your first question comes from the line of Ellis Lau, Macquarie. Please ask your question.

Hi, Louis, Stephen and Sisi. Thank you for taking my question. My first question is about the reset enrolment growth and ASP trend, we understand that roughly poor performance in the first quarter was affected largely by – uncertainty from English test policies in Gaokao as now the policy uncertainties is largely listed. Then what’s your current view for the future enrolment growth in price trend? And if it's possible is there any revenue guidance for the whole fiscal year ’15? Thanks a lot.

Thank you. Good question. I think the recent trend, August was quite good. September and October are okay. So that's why we guided about 15% top-line growth for this quarter. We expect similar or higher growth for the next two quarters, so Q3 and Q4 of next year, as our new programs, the POP Kids and the U-Can businesses basically get seasonally strong in Q3 and Q4, so we expect better performance going forward. For the full fiscal year, because of the Q1 quarter, it will be less than we've done in the past, but going forward, we expect somewhere around 15% or higher growth in each quarter going forward, and hopefully next year, we won't encounter these policy changes, and with this revamp of the POP Kids, this should last us for a couple of years. So we don't expect the confluence of factors to occur next year. As far as enrollment, we would expect that if our POP Kids enrollment revamp is successful, we'll find out later this quarter and into next quarter, we would expect revenue growth, especially in K-12, to pick up again into the over 10% range for K-12, and for the whole company as a whole, around 5%, because we're still seeing declines in adult English and domestic test prep. So we expect around 5% overall enrollment growth going forward, not counting this first fiscal quarter. And also, we'll probably see 8% to 10% price increases, and a shift toward smaller classes will add a couple percentage points. So that's why we're targeting growth of about 15% going forward.

Okay, thanks, Louis. Very helpful. And I just have a very quick follow-up. It's about the POP Kids, revamped POP Kids. We see that there is a little bit of delay in the launch of revamped POP Kids. Can you share with us something more about the current progress of those courses?

Yes. There was a slight delay. We were hoping to get it out this quarter. It's going to probably be at the end of this quarter, so that's why we would expect better growth in Q3 and Q4 as its fully rolled out. It's difficult to roll out across 50 cities, and so it's taking more time than anticipated. And because of the technical difficulties, given the IT needs of the new program, it is taking a little bit more time, so we want to hopefully get it out to almost all the cities by the end of this fiscal quarter, meaning end of November, and have it ready in Q3 and Q4. So it is slightly delayed.

Thank you very much. And your next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question.

Hi, Louis. Thanks for taking my questions. In this quarter, I figure that the other revenue dropped about 8%, but in the earlier remarks, you also mentioned consulting dropped 30%, so could you give us some color on what is causing this drop this quarter?

Which part of the drop, Philip?

The other revenue, booked as other revenue?

Stephen, do you want to take that? I think part of it is -- you want to take that?

Okay, I will take the question. I think Philip you are concerned about the Overseas Consulting business, it was only increased about 7% in Q1. But you know as – same as last the year. The Q3 and Q4 are the peak season for the Overseas Consulting businesses. So Q1 is really a low season for the Overseas Consulting business. So, I think for the trends in the whole year, we still hope the total revenue increase what I mean the growth rate of the Overseas Consulting will be above 25% to 30%.

Yes, Philip, the cash revenue number I gave you at 30% is the cash taken in, but it gets recognized mostly in Q3 and Q4, as the kids get into colleges. So there's a time delay.

All right, thank you.

Does that make sense?

Yes, sure.

So most of the revenue will actually get recognized in May, once the kids have their acceptances letters.

Right. Could you share with us, you mentioned $25 million to $30 million spending for the technology online. So how much did you spend in Q1?

Well, it's going to be proportional. It's hard for us to break it up separately, because everything we do now has an online component, so we kind of give up. It's all built into G&A and capital expenditures, but it's a recognition since last year that everything needs to have an IT component. So IT is basically pervading all our products. There's really -- online and offline are becoming blended, and so the IT cost that we're experiencing and the recent R&D development is what accounts for the $25 million to $30 million additional cost, compared to all our D&A now.

Yes, Philip. I'm Stephen. Maybe I can give you, the December months will be -- the R&D expense in Q1. We spent $7 million to $8 million in Q1.

It's on track for $25 million to $30 million.

Yes, yes.

Thank you. And the next question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

Good evening Louis, Stephen and Sisi, my first question is also relating to your full year growth outlook so there has [indiscernible] U.S. being rebound enrollment for fiscal 2Q. But as we enter fiscal 3Q which is winter break which usually you will have some just some little bit maybe dorm based study. How do you expect that growth would be?

It's too early to tell yet, Ella, but the summer quarter was heavily impacted by the uncertainty about the policy regarding English, and now that it's been clarified more or less, English will remain with equal weight with Chinese and not underweight, and that English will be given twice a year, starting in a couple years, we believe that the dorm-based classes will not be impacted by 30%, as it was in Q1. But in general, dorm-based classes have been slowing for a couple years, but not to this level. So we would expect dorm-based classes to be slightly down or equal with last year, and we're hopeful that it may be some increase, because the students who didn't come in during the summer quarter may want to do it during the winter quarter. So it's too early to tell. We haven't seen the enrollments come in on those.

Got it. Thank you. And then relating to your POP Kids, so along with your school rollout nationwide, can you talk about your sales and marketing budget for that? Are we expecting to see some sales and marketing increases in the coming quarters?

Stephen, you want to take that? You have the budget.

No. I think that we will spend a little bit more selling and marketing expenses in POP Kids, the new rolling-out program. A little bit, but not much, in the Q2 and Q3.

I think it's been well telegraphed to the market that these programs are coming. Our competitors have been bashing us, saying that we have old content, so I think a lot of the parents know that the new program is coming.

Thank you very much. And the next question comes from Trace Urdan from Wells Fargo Securities. Please ask your question.

Thank you. Louis you referenced in your prepared remarks strategies in first expanding the markets and then harvesting the markets and I think that I heard you describe now a more balanced strategy going forward. In each of these phases one of the challenges that you seem to had has been having the right incentives with local managers. And I am wondering how to think about that in the context of this new strategy going forward? Whether you’ve made any changes and whether you feel comfortable that all of the folks that are managing the centers locally are on board with what you’re planning?

That's a great question, Trace. Yes, in the old days, meaning like four or five years ago, we used to incentivize school heads, where their bonus component of their compensation was more or less about 75% related to revenue growth, and so that's why we experienced very rapid revenue growth of 35% to 40% for many years, as we expanded into new cities and added learning centers. And then when we started harvesting the market two years ago, we flipped it on its head and did 75% or so targeted at profit and operating statistics, instead of revenue. And so we saw the effect of 500, 600-basis-point improvement in operating margin last year to 17.3% on the cap basis. Now, for this year, starting June 1, we have done it more or less 50-50, so we're hoping that the same effect will take hold, and then the school heads will balance, as we've asked them to do, profit and revenue targets. So they'll be incentivized half revenue and half profitability measures.

Okay, thank you. And then I wondered if you might also just -- I know you spoke extensively about your online strategy, but I wondered if you could take a step back and talk more broadly about what your intention is here. Because I think that one of the perceptions is that you have so many different things going on, and I wonder if the brand power that you have in the marketplace is diluted across all of these different efforts that you're making online. I wonder if you could speak to that a little bit and why you've chosen that strategy of having so many different online things happening at once.

Yes. That's also a very good question. I think our key core strategy is to offline, online integrate the whole ecosystem, so basically to make it easier for kids and make children much more productive in the courses. And so that's the key -- and that's where most of the revenue will come from. You won't see it, because it'll be built into the course fees. So the O2O integration is the key. The rest of the investments are in online, pure online model with koolearn is because that’s where the market is going. The third part of taking minority investments is because we don’t know when and if the new next disruptive technology will come from. So we’re trying to sort of take almost the gun, a machinegun approach and try to take all the points that related to K-College and somewhat little bit of professional training, because we think that's a good area for online education. We're trying to cover our bases, Trace, and looking at partnerships as a way to grow in this area, because we don't know how it's going to shape out.

Do the local managers feel any level of anxiety with respect to the online activities, and do they have any kind of share in the revenue that comes from the supplemental online offerings?

They do get a share of the supplemental ones for the O2O offerings, because it's built into their courses. They don't get a share of the Koolearn revenues, in that that's a separate subsidiary of New Oriental. But I think as the local school heads I don't feel so much anxiety. I think there's been a lot of hype about online education, a lot of investment going in and a lot of talk, but there really hasn't been anything yet where there's a lot of revenue and profit being generated. So it's mostly talk right now, but we can't take any chances, so we have to have our hands in as many different pies as we can.

Thank you. And your next question comes from the line of Vivian Hao from Deutsche Bank. Please ask your question.

Hi. Thank you for taking my question, sorry about this. My first question is could you please give us a guidance or indication of where we should be looking at the margins in terms of operating margins for this year and next year? We understand that this year probably the persist was leveraging from the disappointment in the first quarter results? And also what is the margin trend or our target for the future years? I do have a follow up question regarding this. Thank you.

Thank you, Vivian. Yes, I think the operating margin for Q1 was 600 basis points below that of last year, or more. It was almost 35%, down to 28%, 29%. So, yes, it'll be difficult for us to catch up for this fiscal year. But Q2 margin should be better than last year, and Q3 and Q4, as well, should be better than last year, assuming we're successful in our POP Kids rollout and the other programs perform as expected. And we did 17.3% GAAP operating margins last year. In the long term, we would expect still to get to over 18% as time goes on, once some of the spending begins to turn into revenue in the online sector, as well. So we would expect future years to be for sure better than this year, and this year slightly down from last year. Last year was 17.3%. Probably this year, we'll be down, 15% to 16%, and then next year should go back up.

Okay, that's very helpful.

Yes. We're still targeting 18% higher for the --

Right, understood. Yes. So my second question, probably a tough one. I guess some of the market understands this might be a one-off thing because of the policy change, but probably from my perspective, it looks like it's more structural, that we may not have recurring -- reacceleration of dorm students in some of the higher-margin segments. Those see deceleration over quite some period of time. What gives us the confidence that we can reaccelerate our business and see margin improvement going forward?

Well, I don't think we're reaccelerating. We had one quarter where last year we grew 19%. This year, we're forecasting, even not counting this disappointing quarter -- we're only forecasting 15%. So we are decelerating, and it's because we're off a much larger base. It's because -- you just mentioned the dorm-based classes are a structural issue and adult English is a structural issue. So what gives us confidence that we will continue to grow at 15% or so is because our K-12 business, especially U-Can business, is growing over 20%. It's over 30% of our business. Kids is about 16%, 17% of our business. If we take out the last couple quarters, it's also growing over 20%. And then overseas test prep and overseas study consulting are growing 15% to 22% or so. So that's what gives us confidence. Together, those three groups, K-12, including U-Can and POP Kids and also overseas test prep and study consulting is about over 80% of our revenue. And so if we can get those right, the ones that are dragging us down are becoming a less and less large piece of the business. And also, as you mentioned earlier, Vivian, it's correct. Structurally, we're getting so big here, $1.51b in revenue, we're three times, four times larger than anybody else, any of our competitors. It is harder to grow off that base.

Thank you very much. And the next question comes from Tian Hou from T.H. Capital. Please ask your question.

Hi, Louis, Stephen, Sisi. My question is related to your business seasonality and the impact of the softer seasonality. For the summer season, the Q1, you have this camp, summer camp, or boarding school, so it looks like this part of the business has become a big, big negative to your business growth, drag down the quarter. And certainly, Q2, we see a much better year on year compared with Q1. However, as we're going forward, next year, we'll have another Q1, and we'll have another -- the boarding school, and so how do you see the future of this part of the business. Is there any way to prevent this part of the business from becoming a big negative again? If so, how? If you can't prevent it, what's some other alternatives do you have to actually drive the company as a whole to grow further and while you offset the decline of the boarding school?

Thank you, Tian that’s a good question. We’ve been facing this kind of challenges for years right with adult English. And so as you recall eight or nine years ago adult English was 30% of our business now it’s down to 10%. The dorm based classes for the summer used to be a third to 40% of our revenue and how that’s down to around 20%. so it's the same thing of every year it becomes less and less important in our business mix, as our faster-growing businesses, like All Subjects U-Can non-English and overseas test prep and others continue to grow in kids. So I think we'll outgrow it. The other thing is that this year is particularly bad, so it actually will have easier comparisons next year because of the policy changes. So once the policy changes have been clarified, we don't expect the same 30% drop next year. And plus, we'll adjust our costs accordingly, so we won't be expecting as much in the summer camps.

That's very helpful. Thank you.

So I think this year was particularly bad. Policy changes and pandemics, remember, are the two biggest risks to our business. So we've seen this kind of thing happen before with policy changes, where we have one year where it's quite negative, and then the next year it bounces back. But I agree with you wholeheartedly that over time, dorm-based classes will become less important as the students study throughout the year. And that's also a function of the increase in competitiveness of other schools across the country, as we highlighted last quarter, right? People used to pay the extra money to come to Beijing and Shanghai because New Oriental -- it was viewed that New Oriental classes were so much better than the local offerings. So now after five or six or 10 years, the local offerings are getting better and so it’s not as necessary to send the Children to Beijing and Shanghai for the summer. So we understand that. It’s similar to what happened to adult English seven-eight years ago and we’ve managed through that quite well. That why we’re always looking for new revenues but can’t really looking for online we’re looking for continued growth of non-English U-Can and POP kids.

Okay.

That's why we're always looking for new revenue streams, right, Tian? We're looking for online. We're looking for the continued growth of non-English U-Can and POP Kids.

Another question is related to the joint venture or joint effort with Tencent, regarding the online education. You guys have seen -- made an announcement last quarter, and three months have been passed, so do you want to share some update to us?

Yes, I can't tell you the specific programs, because I'll get in trouble if I do, but we have three different applications lined up. And we expect a beta or a version of the program to come out hopefully early next year is the target. It may be delayed a month or two, but right now, the teams are fervently working on the applications, and so we would hope to announce something or beta test something early next year.

Thank you. And the next question comes from Fei Fang from Goldman Sachs. Please ask your question.

Hi, Louis, Stephen, Sisi. Thanks for taking my question. Can you give us an update on the share buyback program?

Sure. I think for the first couple months, we bought back about $35 million to $40 million, so far, I believe. I think the average price is somewhere in the $21-something, so where the current price is. Our share buyback is ahead of schedule. We said up to $120 million over nine months. In two months, we've bought back about a third of it.

Thank you very much. And your next question comes from the line of Charles Cartledge from Sloane Robinson. Please ask your question.

Hi Louis, Sisi, Steven. Just there hasn’t been I don’t think any primary policy given us to the size of revenue and cost for the some account and to on tutoring classes. So, you’ve told us today that it is or was 20% of total revenue. Do you think you could just elaborate on the revenue and cost per month because I guess these results fallen short of strict forecast impart because it's very hard for anyone to know how much, I mean you did tell us the revenues are going to be down 30%, but we don’t know whether cost were flat and that diversion for example which -- see increase to margin -- next year?

I think the analysts and -- yes, for the analysts and for investors like you, Charles, I think Sisi can send something out on that. I don't have the exact breakdown in front of me. Sisi, can you prepare that for the analysts?

Okay. That would be great.

Yes. Okay. I'll follow up.

For the dorm, especially the U-Can summer camp. Thank you. That's a good point, Charles.

Thank you.

Thank you very much. We are now approaching the end of the conference call. I will now turn the call over to New Oriental's President and CFO, Louis Hsieh, for his closing remarks.

Thank you, operator. 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 representations.