Good evening and thank you for standing by for New Oriental’s FY 2020 Third Quarter Results Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao. Thank you. Please go ahead.

Thank you. Hello, everyone, and welcome to New Oriental’s third fiscal quarter 2020 earnings conference call. Our financial results for the periods were released earlier today and are available on the company’s website as well as on Newswire Services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr. Yang. Stephen, please go ahead.

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Before we kick off the call, I would like to firstly convey our deepest condolences to the people who have sadly passed away and to their loved ones during this global health crisis. We would like to express our sincere gratitude to medical staff around the world for their dedication and commitment in this difficult time. Thank you. Let us all play out hard and stay healthy. Together, we can overcome the challenge. In response to the outbreak of the COVID-19, New Oriental has immediately transferred more than 1 million students to online programs through New Oriental cloud-based classrooms. We have also actively assumed social responsibilities by donating RMB20 million in cash to Hubei province and providing free small size offline courses to the children of nearly 20,000 medical staffs as well as providing the public with tens of millions of free high-quality educational resources that can benefit over 10 million people, including students of all levels, parents, teachers and entrepreneurs. Back to our business, we are very pleased to report a set of very encouraging financial results in the third fiscal quarter of this year, delivering a top line growth and continued preparing margin expansion – and continued operating margin expansion despite COVID-19 pandemic putting negative impact to all those industries across globe. Total revenue growth was $923.2 million, representing a growth of 15.9% in dollar terms or 18.7% if computed in RMB. Net revenues from education programs and services for the third fiscal quarter were $845.7 million, representing a 16.3% increase year-over-year. The growth was mainly driven by K-12 after-school tutoring courses, which achieved a year-over-year revenue growth of approximately 24% in dollar terms or 27% if computed in RMB. We continue to be…

[Operator Instructions] Your first question comes from the line of Mark Li from Citigroup. Please ask your question.

Hi, Stephen. Can you hear me?

Yes. Mark, please go ahead.

Hi, thanks for the explanation. I want to ask – I noticed for our overseas test prep, the next quarter the pressure is pretty big. Can you share with us what’s your estimate for the short-term or the one-off cash impact for the Q4? And I see for TOEFL, etcetera, they are still not offering China to have the say home test. So what do you think that impact will last for the overseas test prep and consulting segment? Thank you.

Hey, thanks, Mark. Yes. The overseas test prep business reported revenue decline of about 13% in dollar terms this quarter. Actually, it’s 12% in RMB terms year-over-year decline in Q3. And the Q4, I think the pandemic spread a lot of countries, western countries now. So it will impact our overseas test prep business in Q4. So we guided to top line growth of the overseas test prep business decrease by about 45% year-over-year in Q4. But if we believe, the Q4 will be the worth of time. And upon the pandemic phase, I think the situation will be better in the fiscal year ‘21. And so this is my explanation for the overseas test prep. And overseas consulting business, yes, we did very good. We did very good in Q3. And also, given we had the negative impact from the Q4, but we still guide the top line growth of the overseas consulting business grow by 12% in RMB terms in Q4. And yes, that’s it. I think the reason is that it’s very easy to understand because we have seen the cancellation of the overseas exams like TOEFL, IELTS and GRE and suspension of the overseas schools and restriction on the travel. So yes, we hope the pandemic can pass very quickly, so we can make recovery of our overseas related business.

Thank you, Stephen. May I quickly follow-up, do you have any rough estimate that what percent of your overseas test prep student like a short-term or what percent is the longer-term student?

I think for the short-term, I think – yes, in the Q4, I think we will do 35% to 40% at the moment. That – this is for our overseas test prep. Long-term, it’s really hard for me to make a prediction. But I think once the pandemic disappears – I think most of the Chinese students will still choose to study abroad after the pandemic is over.

Thank you, Stephen.

Okay. Thanks Mark.

Your next question comes from the line of Charlotte Wei from HSBC. Please ask your question.

Hi, sorry. This is Binnie Wong here. Thank you for taking my question. And Stephen, can you hear me well here?

Yes, very clear. Go ahead.

Okay. Thank you. Good. So, actually just wanted to follow-up here, I think you mentioned a very good point about the consolidation angle. So how should we see about in terms of during this like the crisis that we are seeing, right? Are there any actually like closure of some of the smaller ones? And are they mostly the online ones or the offline ones? And so for us to think about like longer-term, how we should see our market share gains from here? And then a second question here is also that – I think you talked about that in terms of our online growth is, of course, doing very well given the current situation. And is it also that we are thinking about our user acquisition, right, because in the past, our recruitment for the online students has also been relying on some of our local resources. Would that make our strategy also modify a bit so that we can accommodate because this situation might still pull along for some time? And having said that, do you think we are seeing the trough already? With second quarter growing at single-digit growth, do you think this is the trough we should expect? Thank you.

Okay. Yes. Let me answer your first question about the market consolidation opportunity. Yes. As the disease subsides gradually, I think there will be a potential opportunity for the – of the market consolidation especially for the big players. We have seen a lot of small players. They face severe impact that may cause some of them to shut down their business. So New Oriental as one of the leading players in the market, so we are well prepared to take more market share after the pandemic is over. Yes. That’s why we still opened new learning centers in new cities and existing cities. And also in Q3, we successfully moved all the offline students to online in – since later February, so I think [indiscernible]. So that’s why I said it’s a great opportunity for the bigger players like the New Oriental. And yes, the pure online, Koolearn, yes, we spend a little bit more money in Q3 and yes a little bit more in Q4, in the coming quarter, to acquire new student enrollment because the pandemic – when the pandemic comes, I think it’s a great opportunity for the big online players. So yes, I think, anyway, we got a lot of the enrollment during the pandemic. And I think the money we spend is working and is spendable. I think even though we spent a lot in Q3, but we still get the margin expansion for the – for overall the company.

Okay. Thank you.

So I think going forward, I think yes, the situation will be – benefit the big players like us. Okay. Thank you.

Okay. And just a quick follow-up here, Stephen, if I may. In terms of the summer promotion campaign upcoming in terms of the students – new student acquisition, how do you see your summer promotion campaign plan for this year will be? And then do you think into May quarter, the single-digit growth should be the trough we are seeing, the worst would be – should be over?

Yes. I think – yes, this is a great question. Last year, we did the very successful summer promotion where I remember, we got 820,000 summer promotion student enrollment, and the retention rate was 59% last year in the autumn. And this year, I think we will use the 3 following strategies. Number one, we care more about the retention rate, okay. And number two, we will use them more and more – allow more model through the summer promotion campaign because of the importance of the summer vacation period. So we will use 1 or 2 weeks. So we’ll provide more and more classes for the summer promotion campaign. And number three, the last one, we will raise the price again as we did in last year. I think it will bring likely more valuable customers for the more large. So I think – still a good way to take more market share from the market, especially from the small players by the summer promotion. So we will do it. And the good news for us is we started – we have already started the summer promotion enrollment window for the Grade 4 and Grade 6 students. And so far, the numbers are good.

Okay. Thank you.

Thank you. Okay.

Thank you, Stephen.

Thank you, Binnie.

Your next question comes from the line of Zhou Sun from T.H. Capital. Please ask your question.

Yes. This is Tian. So the question is regarding the expansion plan. So I think innovation is pretty tough given the whole nation is still very cautious on any offline gatherings, and a lot of players have not yet 100% opening yet. So how do you carry out the expansion plan? So that is the first question. So second question is related to – I do see a lot of online education guys put a lot of money in advertising system. So what is our defensive plan in that front? Thank you, Stephen.

Okay. Yes, as for the expansion plan, yes, we added a net of 112 learning centers in this quarter. Most of the learning centers we set up in this quarter happened in the first 2 months in December last year and January and the total classroom area increased by 21% for the first three quarters comparing with the end of last fiscal year time. So I think it’s in line with our expansion plan. And we believe the capacity expansion will support us to take more students from the market, especially from the small players and in the coming summer, in summer, I think which will very likely to be shortened by 1 or 2 weeks. So gradually with the more learning centers we have so we can provide more seats to the kids in the coming summer and the time afterwards. And more – one more thing is, I think, we feel confident about our business going forward. So we don’t want to change our expansion plan going forward. I think the pandemic will pass away maybe next quarter. So next 2 years, we will still expand the capacity by 20% to 25%. So we don’t want to change our guidance of the expansion plan next 2 year. And your second question is about the online spending. Yes, we did the large scale – the promotion for the winter and the same process for the large size class of the K-12 business in our koolearn.com. Because we – I think once the pandemic happens in China we still have great opportunities. And we were confident that we can provide the best of service in the competition. So I don’t think of the spending your money is a defensive way from us. I think on the contrary, I think, it’s a good opportunity for us to take more market share from the players. So that’s it. Thank you, Tian.

Thank you. Thank you.

Okay.

[Operator Instructions] Your next question comes from the line of Yuzhong Gao from CICC. Please ask your question.

Thanks for the opportunity. I think my question is focused on relatively longer term. So obviously, given the outbreak, you moved all your student to the online small class model. I am wondering if you are thinking about keeping this model. And in other words, in the future, when we talk about capacity expansion, we actually may not need that much to any center versus before the outbreak? And whatever capacity expansion target we have for next year, should we think that your enrollment growth may probably outgrow your capacity expansion, please? Thanks.

Yes. Because of the lockdown and travel restrictions in the last 2 to 3 months, we successfully moved all the offline class to online in all the students – to all the students. And the overall feedback from the customers are very – has been very positive. And however, I think going forward offline classes will continue to be our primary business model. In the last 2, 3 months, the situation looks very special because the kids and the parents, they can’t go outside from home, and the parents can see whether kids is studying in his computer. So if the pandemic is over, we are – I think most of the students will choose the offline class. We made a survey in a big city. And the survey results told us that 95% students have preferred to going back to learning centers for after-school tutoring space when the virus situation stabilizes. And – but I think for the pure online players like the Koolearn or the other key players, it’s a great opportunity as well because the market is so huge for both the online and the offline players. So, I think going forward, the big players will take more and more small – the market share from the small players. This is a key point. And so we – going forward, we will use the 2-way development strategy, online and the OMO. This is our strategy going forward.

Alright, great. Very helpful. Yes, very, very clear. Very helpful. Just a very quick follow-up, really do you have heard anything from government on when we could resume offline teaching activities?

I’m sorry. I can’t hear you very clear, Yuzhong.

If we have heard anything from government on when could we resume offline teaching activities?

Sisi, can you hear Yuzhong very clearly?

No. Yuzhong, your line is not very clear. Can you say that, again?

Yes. Yuzhong, I suggest you drop off the line first okay and back to the queue and may ask again.

We will take next one.

Okay, I am sorry.

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

Hi Stephen. Thanks for taking my question. My question is on the fourth quarter revenue guidance for K-12. You mentioned it will grow at like 10% to 11%. So that’s a moderation from the previous quarter. Could we know your back-end assumption regarding this moderation? Whether it’s due to pricing or lower enrollment? Is it enrollment related? Why is that? Is it just because the new enrollment has not been done very well after Chinese New Year or there are some other reasons?

Okay. Yes. The Q4 will be a little bit hard. On K-12 business, the growth will be around 10% to 11%, and this is the overall K-12 business growth. And if you take out the one-on-one business, the small size class – K-12 business, small size class business growth will be 18% to 19% in RMB terms year-over-year. So that means the one-on-one business will be down by 5% in Q4. I think some students still like to take relatively extensive class – one-on-one class online. So this is the reason. And secondly, I think, the retention rate is not a problem. In the spring, in this quarter, the retention rate is still getting higher compared to last quarter. And the drop-off rate is lower than in March and April. It’s lower than the February. But the problem we are facing is the acquiring of new student enrollments. China has been locked down for 2 to 3 months. So it’s really hard for us to acquire new student enrollment for the second half, the Q4 and even for the summer. So it’s a hard time. But the good news for us is we are happy to see the schools in China. What I meant is the public schools in China are going to reopen gradually in this month or in early May. I think we are optimistic towards our K-12 business for the summer classes. And yes, that’s the – my explanation for the Q4 K-12 revenue growth.

When public school resume their offline activity, some regions said they will utilize the Saturday to make up the missing cases. So will that impact our class scheduling? So is this in your 10% to 11% growth assumption already or not?

We have been well prepared for the rescheduling of the public school – the study schedule. So we can move some classes from Saturday to Sunday where we can use the working day evening time to provide classes. Good news for us is we can use the OMO model to provide the classes.

So it has been baked into your 10% to 11% assumption already, right?

Yes. We still need some time. But I think it’s not a big problem for us.

Okay thank you so much.

Yes okay. Thank you, Lucy.

Your next question comes from the line of Christine Cho from Goldman Sachs. Please ask your question.

Hi thank you, Stephen and Sisi. Just a quick question, so is there any impact from the 1-month delay in the gaokao for your business and the magnitude or any color would be great?

Yes. We know that gaokao will be delayed by one month, but I don’t think it will impact our business. On the contrary, I think the delay of the gaokao will help our one-on-one business a little bit because we have one more month before the gaokao. So there is no big negative impact to our business, okay.

Okay thank you.

Thank you.

Your next question comes from the line of Alex Liu from China Renaissance. Please ask your question.

Thanks Stephen I actually have two quick questions, both on online. I think first, we noticed the non-control increased a lot this quarter. So obviously, that was mainly related to Koolearn. So I was wondering how should we think about the margin implications in the next fiscal year from the online investment side? That’s the first question. And second question, given we have both quite aggressive growth targets for online and offline and how should we think about the management – how does the management manage and balance the conflict of interest between online and offline growth? Thank you.

Okay. Yes. I think the Koolearn did large scale market promotion in Q3 and in the March. Yes, that’s in Q4. So we spent a little bit more money. And yes, you just saw the MI, the big number MI in the Q3 numbers. So Q4 it will be a little bit bigger. But I think in the fiscal year ‘20, the numbers will be lower than this year. So it will be less. And I think it’s mainly due to the pandemic. The opportunity for the online industry comes, and so yes we did a lot on the free course of the super large classes. So that’s where we’re going. And we think it’s virtually and are in lesser sorts. And yes, that’s it. I think your second question is about the cannibalization or the balance between the offline and online. I think the cannibalization between the EDU and Koolearn or the online/offline will be minimal, will be minimal because the market is huge. So see the other hands, a lot of small players spiked in the market. It is fear from the market. So there’s a lot of room for big players. And I think the students will – we can divide students into two groups. For the small part of business, for the Koolearn, they can study through online, most of the students they choose to choose facility to take the offline classes. So the market is huge for both sides, Koolearn and EDU. So the competition internally will be very minimal. And our first job for both sides, EDU and Koolearn, are taking more market share as much as we can going forward in the market. Okay, Alex?

Okay. Just to clarify, so you were saying the next quarter online loss will be basically smaller comparing to February.

No, next quarter it will – yes, the next quarter, Q4 the net loss of the Koolearn will be bigger. But like the fiscal year will be smaller. Yes. fiscal year ‘21 will be smaller.

Okay very clear. Thank you.

Thank you Alex

Your next question comes from the line of Felix Liu from UBS. Please ask your question.

Hello, Stephen. First of all, thank you very much for taking my question. My question is mostly on the summer. So first, we’re probably seeing one to two weeks of shorter summer break. So could you let us know how that will impact our scheduling in terms of the K-12 segment? And also for the overseas test prep, I know summer is typically the peak season in that segment. So what is our expectation in overseas test prep in summer? Are exams being rolling back in summer or could there be further delays? Thank you.

Yes. It’s really hard to make a forecast of the overseas test prep because almost all these schools in United States and U.K. are still closed. So – and we do hope the pandemic is over as early as it can. And so yes, we know the Q1 will be a big season for the overseas test prep. But I think we are prepared well internally, but it’s really hard for us to make a prediction for the negative impact from the pandemic of the overseas test prep in the coming summer, okay? And yes, the K-12 business this summer, yes, I think that the summer vacation will be shortened by one or two weeks in the coming summer. And so there were several things we can do – actually we have done. And number one, I think, we will use one more model, OMO model. We can keep – last year we opened a learning center through the summer that we can provide more and more online courses combined with the offline courses. We can save some classroom areas. And so this is the first one. And secondly, we can make some class rescheduling or make the class size a little bit bigger compared to last year to acquire more and more new student enrollment in the coming summer. So I think it’s okay for the coming summer and optimistic for the business of the coming summer.

I see it. Thank you very much for sharing the color. I am glad we are making good progress in summer for ASP. Thank you very much.

Okay. Thank you, Felix.

Your next question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.

Thank you for taking my question. It’s about the margin outlook in the fourth quarter. So it looks like we have a lot of pressure in the fourth quarter on margin given the full year is flat. So wondering if you can provide some color on the breakdown of your current contract pressure according to the – including, I think maybe you opened more learning centers and overseas test prep is also – put some pressure. So can you please give more color on the breakdown and what we should expect for the coming year? Thank you.

Yes. We guided the top line growth in RMB terms in Q4, will be flattish in RMB terms. So – but anyway, we have to face the high rental because you look at the expansion in the last 2, 3 quarters. And also, typically, we – the selling and marketing expenses and G&A will be increased in the Q4, so it will drop the margins in the Q4. But I think it’s just a one time, okay? And we know – even though for nowadays, our top priority for our job is to focus on controlling costs and reducing the expenses across the company, so to minimize the negative impact from the pandemic. And yes – and we are confident that we will be able to deliver the continued margin expansion after the pandemic is over. So in fiscal year ‘21, we still expect the margin expansion. And as well, we don’t want to change our near long-term margin guidance of 17%. This is non-GAAP OP margin in the near long-term. Okay, thank you Sheng Zhong.

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

Hi Sisi. Hi, Stephen. Thanks for taking my question. My question is more about the – after the pandemic, what have you guys really learned? As you said, 95% of the students want to go back to offline. After the pandemic, do you think you’ll be able to expand for spending for students? And in terms of – based on the experience or the user feedback, what are the areas that EDU has to further spend? That’s my question. Thank you.

Besides the number one brand name – education brand name in China, this is New Oriental. And we think three to four years ago, we spent a lot money and time on the content development, on the product itself. So it makes us move the – all the students from offline to online one day just after the – during the Chinese New Year holiday, when the pandemic came. So going forward, I think we’ll build the barrier entry higher, okay and to make us to provide better and better quality products and also to help our teachers to improve their teaching quality. And so I think the pandemic – anyway it’s stopping. So it is a great opportunity for New Oriental because we can take more market share from the small players going forward and yes. And in the next two, I think during fiscal year ‘21 and maybe the year after, we will use more and more OMO model, okay? So let’s assume going forward next year if your child take the course of New Oriental, so maybe 80% of his class will be happen offline, 20% will be happen online, okay. I think the kids love it and parents love it. Is it clear?

Just a quick follow-up on that, if you do more OMO, how would that impact our margins? Would that be more in the long run? Thank you.

OMO – I think drastically, the OMO model, the margins should be higher than the pure offline business because we can save some cost in the rental and we can – yes, this is because, as I said, we will open 25% expansion plan. But after the pandemic, I think the 20%, 25% will bring us more and more student enrollment. And we can provide the online/offline – the online OMO courses to them. So yes, we can see some classroom rentals. And I think it will help us to drive the student retention rates up, because I think the OMO model is better than the traditional offline course. So the people love it. Okay. Is it clear?

[Operator Instructions] Your next question comes from the line of Alex Xie from Credit Suisse. Please ask your question.

This is the last one.

Hi, management. Thank you for taking. Yes, yes thank you for taking my questions. So my first question is can you elaborate more about our VIP business? How much is the VIP contribution in U-Can and POP Kids? And secondly, would you please show a bit more about our full year margin guidance? So you mentioned that FY ‘20 margin should be flat to FY ‘19, if I’m correct. So what’s the implication for fourth quarter margin? Thank you.

Yes. I think the VIP business, there is a few of the one-on-one business within the POP Kids. So within the U-Can business, with the – one-on-one business is 25% to 30% of total revenue of U-Can. And margin, yes, I think our margin in Q4 will be dropped because of the pandemic, as I said, is onetime. And yes, I think the worst-case of the whole year margin or the non-GAAP operating margin will be flattish year-over-year. But we’ve got the VAT exemption. This is a benefit from the government new policies. So we reported the VAT exemption in the other income and also we recorded the MI, the NCI, non-controlling interest in the – below the operating level. So I think the net – non-GAAP net margin of the whole year will be still extended in fiscal year ‘20. But anyway, it’s onetime impact from pandemic. This is the margin impact. So going forward, fiscal year ‘21, I believe the margin will be expanded again. So it will go back to normal. Thank you, Alex.

Thank you.

We are now approaching the end of the conference call. I will now turn the call over to New Oriental CFO, Stephen Yang, for his closing remarks.

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relationship representatives. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may all disconnect.