Hello, everyone, and welcome to New Oriental's First Fiscal Quarter 2019 Earnings Conference Call. Our financial results for the period were released earlier today and are available on the company's website, as well as on newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr. Stephen Yang. Please go ahead.

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We are very pleased with the start of fiscal year of 2019. With the year-over-year accelerating our top-line growth net revenues in the first fiscal quarter of 2019 increased by 30.1% to $859.8 million. Student enrollments in academic subjects tutoring and test prep courses in the first fiscal quarter went up by 13.2% year-over-year to approximately 1.7 million student enrollments. The accurate number is 1,735,300. Guided by our successful "Optimize the Market" strategy, we continue to expand our offline business, while also investing our online offline integrated education system. In this quarter, we added a total of 19 new facilities, which includes 18 new learning centers in existing cities, and one new training school in the City of Yiwu. Altogether, the total square meters of classroom area by end of the quarter increased approximately 34% and 3% quarter-over-quarter. Our strategic capacity expansion is on the right track to capture market opportunities in cities with the robust growth momentum and remains the important focus in the fiscal year 2019. We will also continue to focus on improving utilization rate and investing in enhancing teaching quality in line with our long term strategy. Our business has started the year with an accelerated revenue growth even with the discount revenue due to the large scale summer promotion. Our key growth driver, K-12, all subject to after-school tutoring business, achieved remarkable year-over-year revenue growth of 49%. This is largely driven by our solid performance in student enrollment in the recent two quarters, which had a year-over-year increase of approximately 34% in the fourth fiscal quarter of 2018 and first fiscal quarter of 2019. The growth in the K-12 business can be broken down into outstanding performance from the U-Can middle…

Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jin Yoon from New Street Research. Please ask your question.

Hi, good evening, guys. Thanks for taking my question. Stephen, you guys mentioned -- you just mentioned about the costs associated with the regulatory environment impacting SG&A. What exactly are those costs? And how much of that cost is actually reoccurring costs going forward? And are you still comfortable with the 100 basis points upsizing your margins for this year? Thanks.

Okay. The question about the regulation -- the law through recent regulation that the State Council issued in the Circular 80 is in late August. So what I said is the incremental costs and expenses, I think, most of them is related to the like the classroom rental and some incremental fee for costs. But, I think, we're still within in process of the communication with the local government in cities. So it's early -- it's too early to say the accurate number. But I don't think it will be a big number. So we do have the impact on the margins from the new regulation. But it’s not a big deal. And -- the Q1 margin, as you know, because the non-GAAP operating margin is declined by 440 bps, and partially it's because of the large -- the scale of the summer promotion. And this promotion enrollment was the 38% higher than that of last year, and then retention has grown. So for the offline business, I think, the margin pressure will generally balance off at least the rest of the year. And for the online -- yes, we started to be invested a lot since the [indiscernible], like the HR costs or IT costs and marketing expenses. It’s a great opportunity for us. So it’s worthy to spend more money on that. But it's a margin like -- it’s a margin like. And so this year is margin pressure here. And for the full and medium long-term margin guidance, we give positive view of the margin expansion in the next year and the year after. So this is my view of the margin. Okay. Thanks.

Your next question comes from the line of Natalie Wu from CICC. Please ask your question.

I noticed that the net add-on f facility is only like 19 compelled with 65 new openings this quarter. So may I know the major consideration behind the closing down of the learning centers during the past quarter? And should we think about it in the upcoming quarters? Thank you.

Okay. Natalie, I don’t think this is slowing down the expansion. Typically the Q1 is not the peak season to open the new learning centers. Don’t forget we opened almost 40% of new square meters last year. So we don't change the whole. year expansion guidance, it's 20% to 25%. So typically we open most of the new learning centers in the second half of the year, because it’s prepare for the new coming year. So for the whole year, 20% to 25% expansion, we don't want to slowdown our expansion plan.

Thank you, Stephen. But what I mean is that you mentioned that the CapEx you spend is majorly for the 65 new openings in the past quarter, right? But if you look at the net add, it’s only 19 -- 1-9. So just wondering the major consideration behind the 40-46 closing down of the learning centers in the past …

Okay. You know Natalie, we have 1,100 learning centers. Some learning centers we rent for 5 or even 10 years. So some of them, let’s say, very decent 4% to 5% of these learning centers -- some learning centers expire the terms. So …

So it’s not regulation relatively.

It’s not -- it's not regulation related. Okay.

Your next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question.

Hi. Thanks management for taking my questions. I have two quick questions. The first one is about our revenue trend. Should we stick to our 30% year-on-year growth for our revenue growth for FY'19 in RMB terms? And should we expect that will be the acceleration in terms of the revenue? And my second question is a follow-up for the first question. Hey, Stephen, when you're talking about FY'19, is margin pressure give? And you said any direction in terms of the margin trends. And how should we think about the absolute amount of online investment in FY'19? Thank you.

Okay. Yes, the revenue guidance -- yes, we give the guidance of the term rent is 27% to 31% year-over-year growth in Q2. So for the whole year, fiscal year '19, we don't want to change our guidance as we guided before. So the whole year, revenue growth will be -- in R&D term will be around 30% year-over-year. And most of this growth will come from the K-12 business term. So this is my answer of your question about the top-line growth. And for the margin, yes, we meet with margin pressure in Q1 because of the larger promotion, and also the heavy online investments in the Q1. And I mentioned continuously, going forward, I think, we will spend the big month in the online platform. So this is the margin drag. But on the other hand, as I said, the total expenses were in this year will be 20% to 25%. Some top line growth will be 30%. So we do have a leveraged on the utilization rate. And the -- this is the margin expansion fee factor. But as I said, we do have some negative impact from the new regulations. So this is also a margin factor. So that's why I said this is a margin pressure here. Okay.

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

So the question is really related -- I don't really want to focus on margin issue. I want to focus on the growth issue. So I think the growth is really great. And when we review the company website, we also saw some new program, which we didn't see before, one of the program codes slim. So I really want to ask the company, once you added a new program, we saw some welcome enrollments by students and the students' parents. So how the -- what's the company's plan in the future in the, one is to continue to rollout such a healthy content. Second, what are some other healthy content are in the pipeline of the company's education inventory? That's my question.

Okay. We're keeping focusing on the development of new products. Yes, you have seen your life set, you know these lean courses as high-end courses for the -- not only for the English, but also for some non-academic courses like the programming and some -- like the science courses. So I think our purpose is to provide all kinds of the subjects, not only for the academic only courses to the Chinese kids. I think this is the big market demand, and parents need us to provide more and more courses besides the traditional ones. And we are here -- are focusing to develop more and more new courses. And it's still in the early phase. So the revenue contribution is small, but its growth is extremely fast. So I think going forward maybe in the next year or the year after, it will generate more and more revenue contribution from the new courses.

Your next question comes from the line of Mark Lee from CIGI. Please ask your question.

Hi management. Thanks for taking my question. I want to know, for this quarter, have we already incurred any margin pressure due to the regulation? Or do you expect the regulation margin pressure to emerge in the future quarter? And also, I noticed the POP Kids growth seems to be a bit slowing down compared to U-Can despite like a lower phase. So may I know like any reasoning or any strategy going forward? Thank you.

Okay. Let me answer second question first. POP Kids, I think, the growth rate is good. And in some quarters, because of the timing difference in some quarters, POP Kids is better, some quarter the U-Can is better. So in general, the K-12 business together is booming. So the run-rate was good. And, yes, in the Q1, I don't think that we have the material impact from the new regulation of the -- in terms of the margin. And going forward, as I said, there might be some incremental costs and expenses of the coming quarters in this -- in the rest of the fiscal year. But what I'm saying is that -- it's just a short term impact. Maybe it will impact like the two quarters while the two quarters. So I don't think it will impact us in the next fiscal year or the year after. Okay. It's just one time.

Your next question comes from the line of Mariana Kou from CLSA. Please ask your question.

Hi. Thanks management for taking my question. My question is actually more on the, I guess, the share repurchase program, and also the competitive landscape given the regulation changes. Would management data open to consider other right opportunities where -- now with the small players might be actually getting into -- cover situation to actually compliance or regulations. But would there be opportunities available for market leaders like yourself to absorb some smaller players? Or would you actually consider stepping to more organic growth and kind of expanding yourselves? Thank you.

Yes. I think that’s a great question. The governments continuously have regulatory oversight. And as a leading independent provider, as already we fully support the government reforms. And I think it’s a great opportunity for big players like us. I think we will keep doing to provide the best of service in the whole market. So I think this is an opportunity for us to take more market share from small players. Maybe you do read some news historically, some small players, they can do the business in a proper way. So and we have seen some students in the last 6 months, the students from the small players originally to join our classes. So this is what we have seen in the last 6 months, and I think with opportunity for us. And, yes, as we announced this afternoon, the Board of Directors approved the $200 million share buyback program. I think this is annualizing determination of the provider -- to deliver values to the shareholder. And so we are confident of the long-term prospect for the shareholders. So this shows our confidence of the future -- in future. This is what the whole audit of the share buyback. Thanks.

Your next question comes from the line of Lucy Yu from Bank of America. Please ask your question.

Hi Stephen. Would you mind giving us some breakdown of the non-GAAP operating margin construction this quarter? It has been down by 450 basis points. How much of that is coming from summer promotion? How much is from online investment? And how much is from the consulting business due to the timing of revenue recognition? And how should we expect the margin for the following quarters given these three drivers? Thank you.

Okay. Within the margin decline, 110 bps comes from the offline business. This is our core business. Within this, it's mainly due to the summer promotion and some rental costs. We set up that most of the learning centers in the second half of the last year. And so that all the others is come from the online business overseas consulting other business. So this is a breakdown of the margin. And going forward, I think, for the offline business itself, we do have the leverage on the core business, the offline business. So we do believe in the rest of the year. The margin of the poor business will be flattish or a little bit done, so I think there’s a good sign of the margins. Because we started to feel students into the learning centers we set up last year. So it’s a good news. For the other business, I think, with trade off because -- if we think the online businesses is a great opportunity, it’s a worthy to spend more on the online platform. But one other thing for this quarter, for the oversea consulting business, typically Q1 is not a peak season for the overseas consulting business. And then we adopt the new accounting standard seems to be the first quarter. So we lost like $141 million revenue of the Q1. We will report it into the returns, but this is just one time. I think for the whole year, the overseas consulting business, the margin will be flattish, and the top line growth will be 20%. This growth is actually normal.

Just to clarify, you mentioned that for the offline business for the full year, you're expecting flattish or slightly down margins.

Yes.

So the online will also negatively impact the model as well where as the consulting business slightly to be largely flattish. So is it fare to say that for the full year we are expecting non-GAAP operating margin to contract this year?

We need maybe one more quarter to guide the whole year. It's just one quarter past.

Your next question comes from the line of John Choi from Daiwa. Please ask your question.

Good evening, guys. Thanks for taking my question. Just quickly a follow-up on the margin part. And Stephen, you mentioned that it's giving more or less, perhaps, slightly down this year for the offline. Because if we look at the utilization rate at picking up and as we go into the second half of this year, with less, as you said you're adding about 20%-25%, and top line is growing 30%. So where is this drag coming from? Is it more from the regulatory front? Or is it because of other factors that we haven't really seen more of G&A or operating expense that has to be factored in towards more in the second half this year? If you could give us a little bit more color on that, that will be great. Thank you.

Yes. My answer to your question is that, if, I said, if -- you take all of the impacts from the new revelation, I think, the margin for business will be expanded in this year. But we have to take some incremental cost expenses from the new regulation versus as always it's a matter of impact of the margin, okay. So, if you combine the core business, the normal condition combined with the new revelation impact, but is the result of the margin. Is it clear?

Yes. That's great. Thank you.

Okay, thanks.

Your next question comes from the line of Johnny Wong from Jefferies. Please ask your question.

Hello. Thank you for taking my call, Sisi and Stephen. My question is regards to the revenue for the first quarter. We see that the overall revenue growth was about -- was 30%, whereas our enrollment was above 13%. Can you clarify is the difference between that is it then the increase in ASPs? And if so, I mean, it does seem to be quite a large increase in ASP. Thank you.

Okay. Jonny, I think, I suggest that you combine the enrollment of the Q4 and fiscal '19 Q1 together. You know the two quarters together the enrollment was 28.4%. So I think this is in line with the revenue growth. The revenue growth is 30%. So the prices are in line with our guidance, the pricing interest for the K-12 business 5% to 8%, a slight increase, and overseas price about 10% increase. It's just -- we don’t want to change our prior guidance.

Just to remind everyone that we have the registration window in May -- in April and May allowing existing customers who registered both the summer course and autumn semester's course. That's why, so the Q4 borrowed a lot of enrollments from Q1. And that's why we suggest everyone to combine these two quarters together to calculate the actual trend -- the normal trend for enrollments to match the revenue growth. Okay.

Yes. But I want to add one point. Due to the new regulation, no advanced tuition fees of more than 3 months maybe collected. So we have already changed the tuition fees collection payment terms to meet new regulation requirements. So in the new quarter and the year after, I think that you will not see the up and down of the timing difference of the student enrollment in different quarters.

Your next question comes from the line of Tianli Wen from Blue Lotus. Please ask your question.

Hi management. Thanks for taking my question. I have one question regarding company expansions relative on new cities. How many cities that company trying to enter this year and how many of them are like second-tier cities and how many are third or lower-tier cities? Thank you.

Okay. I think the most of the new cities we set out in this year, we will use the duty tomorrow. We covered almost 70 cities already. So in the most of low-tiered cities, I think, the best way for us to take market share is to use the dual-teacher model. So we planned to open 10 new cities by dual-teacher model in this year. This is our plan to start with the new cities.

Your next question comes from the line of Julia Pan from UOB. Please ask your question.

Thank you, management for taking my questions. First, can you just give us some update on the latest new learning center approval situations in the major regions? Do you see any withholding on approvals? And also, do you maintain your guidance of 20% to 25% capacity expansion for FY'19? And then, I just want to follow-up on the regulation that schools can only collect money before -- 3 months before the course starts. How do we look at the differed revenue growth going forward? And how is the impact on your retention rate and also maybe on the interest income themselves going forward? Thank you.

Okay. We opened 18 new learning centers in this quarter. So in the past quarter, what I'm saying is that since the new regulation till now, we didn't meet any difficulties to apply for the new license in the current cities. So -- and we don’t want to change as of that, we don't want to change our expansion plan, and it's still 20% to 25% expansion plan within this fiscal year. And, yes, as I said, we changed our -- the students payments terms. Actually, we don’t need to make change for the summer and winter courses, typically, the courses within 3 months. But for the spring and autumn courses, we have to change. Typically, we would divide the one port to two payment terms. But I think, the retention rate will be enough impacted because for our total business, the retention is very high. For example, POP Kids program, and the retention rate close to 90%. And typically, for example, in the autumn or the spring, the students take up one semester course is typically lasts 3.5 months or 4 months. So I don’t think it will impact our -- like a retention rate during the spring and autumn semesters.

Your next question comes from the line of Andrew Orchard from Nomura. Please ask your question.

Can you give us more color on the specific regulation that is most impacting the costs? I know you talked about rental, for example. So is it things like having to allocate more space? Is that part of the pinpoint? Or is that anything else that is really meaningful that we should be noticing? And the other question is on the long-term margin guidance. I think you mentioned before that 70% to 80% in 2 to 3 years time. I used to go standing by the long-term guidance? Thanks.

I don’t want to change my long-term margin guidance. It's just we hoped for one year. So we don’t' want to -- because this year that we have to meet the requirement of the new regulations and some online management. So I don't want to change my guidance of the long-term margin. And from the new regulations, yes, that’s mainly from the incremental rental where the future costs, for example, for within the new regulation, all the future for Chinese, Math, English, Physics, Chemistry and Biology courses, the teachers need to have the teaching qualification. And the based on our statistics, 50% of our teachers have the qualifications. I think the reason that the other half -- they don’t have the qualifications is because, historically we push all the teachers to take the exam. And thus, in some province, the government needs the teachers to take exams in their birthplace. It’s really hard for us, for our teachers to take the exam. But now, almost all the cities have changed, make the reform of exams. So if the New Oriental gave the working certificate to the Government, they allow our teachers to attend the test. So in the coming new tests, almost all the -- our teachers with our license will attend test. And we believe the pass rate would be very high, okay. But I can't say 100% of our teachers will get a license. So if -- I said if, some teachers cannot get the license, we will move them from the teacher position to the teaching assistant position or we will change some teachers. There might be some incremental cost there. But we do believe, we have to be the high level of the whole industry to meet the government requirement. Thanks Andrew. Is it clear?

Yes. Thanks a lot.

Okay. Thanks.

Your next question comes from the line of Edwin Chen from UBS. Please ask your question.

Hey, Stephen and Sisi, thank you for taking the call, taking the questions. So just one quick question. What's the growth for online the first quarter and our guidance for online growth in the rest of the year? And also you mentioned that in the first quarter we spent some, I forgot the number, investment or online. But I think it is mostly on G&A. Do we have a budget for the rest of the year or each of the quarter? How much we plan to spend online on G&A, and maybe as general and marketing expenses to drive that online growth case? Thank you.

Okay. So as per the koolearn, we have already filed the Avon in the Hong Kong market, so we can't disclose the numbers. Sorry. I'm sorry, Edwin. And for the margin impact, I think, we will continuously invest in the online and other business is going forward. So it's still our margins drag. But I don't think, in the rest of the year, I don't think, we will suffer from the same level of the negative impacts of the Q1. So the -- you will see them -- the margin will balance out in the rest of the year. But as I said, this year is the margin pressure year that we do believe the margin expansion in the coming New Year and fiscal year '19 or the year after.

Okay. Thanks. Considering the online expansion right? Is that the overall money?

Yes. It's still our margin, right, because we will spend money. But it's online business. It's not our core business. It is worthy to spend more money to acquire new customers. There's a huge market.

And also could you remind me the utilization and the retention rates for K-12 in the first quarter please?

Okay. The utilization rate was down by 50 bps in the Q1, year-over-year, because the learning center opening in the last 2 to 3 quarters. And we do believe the utilization rates would get improvement, got some improvement in the future. And the retention rate, it will be the POP Kids close to 90% the retention rate is still getting higher, U-Can at 75% the retention rate.

There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.

Okay. Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any other Investor Relations representatives. Thanks again.

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