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New Oriental Education & Technology Group Inc.  (NYSE:EDU)
Q3 2019 Earnings Call
April 23, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening and thank you for standing by for New Oriental's Third Fiscal Quarter 2019 Earnings Conference Call. At this time, all participants are in 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. I'd like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead.

Sisi Zhao -- Investor Relations

Thank you. Hello everyone and welcome to the New Oriental's third fiscal quarter 2019 earnings conference call. We have released our financial results for the period earlier today, which are now available on the Company's website as well as on newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After prepared remarks, he 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 view 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.

I will now turn the call over to Mr. Yang Stephen. Please go ahead.

Stephen Yang -- Chief Financial Officer

Thank you, Sisi. Hello everyone and thank you for joining us on the call. We're very pleased to see continued acceleration of growth momentum in this quarter and to achieve top line growth of 28.9% in dollar terms or 36.1% in RMB terms, which exceeded our expectations. The positive growth was largely driven by the exceptional performance of our key business unit, the K-12 all-subjects after-school tutoring, once again demonstrating our quality product and service offerings and strong business fundamentals, which enable us to capture growing demand from the market.

Total student enrollments in academic subjects tutoring and test prep courses in this quarter increased by 82.3% year-over-year to approximately 1,570,600. The significant increase in the number of student enrollments is primarily due to the division of the spring semester into two parts, a practice we adopted in November 2018 to comply with the latest regulatory requirement. Under this calculation method, student enrollment and the amount of the collected fee in the spring semester are both in parts and thus fall into separate quarters. More specifically, the first part of the spring semester was booked in the second quarter, while the second part is booked end of this quarter Q3 and the following Q4. Historically, we collect the full amount of the tuition fees and record student enrollment from the spring semester in the second quarter only. Furthermore, our U-Can middle school and high school all-subjects after-school children business grew by approximately 37% in dollar terms or 44% in RMB terms. Our POP Kids program achieved a growth approximately 41% in dollar terms or 49% in RMB terms. We're confident that's well-placed to continue expanding our market share over the long-term, through our ceaseless efforts, improving in teaching quality and enhancing learning experience for our customers.

In the third quarter, we continue to make great strides in our planned acceleration capacity expansion as we execute our well-proven Optimize the Market strategy. We added a net of 36 learning centers in existing cities and opened new training schools in the city of Xining as well as two dual-teacher model schools in the city of Mianyang and Xinxiang. Altogether, this increased the total square meters of classroom area by approximately 27% year-over-year and 6% quarter-over-quarter at the end of this quarter. Cumulatively, we added about 14% new capacity in the first three quarters in the fiscal year. This growth is in line with our full year expansion plan of 20% to 25%.

While regulatory changes brought new market dynamics, we're currently firmly on track with our expansion strategy. As we progress steadily with our expansion strategy, we also make thoughtful efforts to optimize our existing operations with the student-first approach in mind, in order to deliver a high quality education service to our customers. Driving on the powerful drive from the preceding quarters, we continued our efforts and strategic investments in area, including enhancement of courses and programs design, improvement of teaching capabilities and the innovative application of new technologies in our teaching process. We're delighted to see hugely positive market feedback and results ever since we ramped up the use of technology such as AI and data analytics to improve teaching quality and facilitate student our ways of interactive learning. Our efforts in sustaining a healthy balance between capacity expansion and operating efficiency have also paid off in this quarter. Our non-GAAP operating income increased by 40.2% year-over-year to approximately $113.8 million and non-GAAP operating margin rose by 120 basis points to 14.3% from 13.1% a year ago. The encouraging results were driven by better utilization of facilities and enhanced cost expenses efficiency. This gave us confidence in capturing new growth opportunities and scaling our business at higher efficiency. We will continue to focus on revamping all business lines through a standardized, modular and systematic approach, which will be also our goal to maintaining a healthy pace of expansion and efficiency improvement.

Let me now go through the details about pricing. Per program blended ASP, which is cash revenue divided by total student enrollment decreased by about 24% year-over-year. I would like to bring to your attention that the lower the normal blended ASP is primarily due to the change in tuition fee collection schedule for our K-12 business. To reiterate, we divided the spring semester into two parts starting from last November. As such, the quarter only covered part of the spring enrollment and tuition fees for the second part of the spring semester. Therefore, the blended ASP for this quarter appears to be lower than historical numbers.

On the other hand, hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 5% year-over-year in RMB terms. Here is the breakdown. The hourly blended ASP for the U-Can business increased by 5%, POP Kids increased by 10% and overseas test prep increased by 9% year-over-year in RMB terms.

I will now go through the performance updates across the individual business lines. Our key revenue driver K-12 after-school tutoring business achieved a notable year-on-year revenue growth of 38% in dollar terms or 46% in RMB terms. This was driven by the robust spring enrollment. Breaking down, the U-Can middle school and high school business reported a revenue increase of 37% in dollar terms or 44% in RMB terms for the quarter.

Student enrollments grew approximately 72% year-over-year for the quarter, which is primarily because of the aforementioned enrollment practice change for spring semester to comply with the latest regulatory requirements. Our POP Kids program once again delivered outstanding results with revenue up significantly by about 41% in dollar terms or 49% in RMB terms for the quarter. Enrollment reported remarkable growth at about 143%, which is primarily because of the aforementioned enrollment practice change for spring semester. In addition, a certain portion of the POP Kids enrollments were also deferred from Q2 to Q3 for the same reason. Our overseas test prep consulting business together recorded a revenue growth of about 11.4% in dollar terms or 17.6% in RMB terms year-over-year for the quarter. Finally, VIP personalized class business recorded a revenue growth of about 24% in dollar terms or 31% in RMB terms year-over-year for the quarter.

Now let us move on to the updates on the progress we're making with our Optimize Market strategy. In consistent with our long-term plan, we have been focusing on expanding our capacity through ongoing refinement and leveraging our online/offline integrated education system.

Let me start with our offline business. This quarter we added a net of 36 learning centers in existing cities and opened a new offline training school in the city of Xining and two dual-teacher model schools in the city of Mianyang and Xinxiang. Altogether, this increased the total square meters of classroom area by approximately 27% year-over-year, 6% quarter-over-quarter and 14% year-to-date at end of this quarter. We started the pilot new dual-teacher class model in select cities in July 2016 and by end of Q3 2019, we have deployed this offering in 38 existing cities for the POP Kids program and 29 existing cities for the U-Can program and in nine new cities for both POP Kids and the U-Can business together. We confidently focused on maintaining our service quality, while further deepening our penetration into those markets we have tapped into. We're very encouraged to see our customer retention and scalability of our new model continuing to improve this quarter. Looking ahead, we will remain committed to this well-proven strategy in the coming quarter and the fiscal year.

Turning to the online business. On the whole, we aim to extend New Oriental's traditional offline classroom teaching offerings to online education services. We invested $25.2 million in this quarter to improve and maintain our online/offline integrated education system. Most of the investments were reported under G&A expenses.

I will first provide an update on our online/offline two-way interactive education system. Since the launch of the U-Can Visible Progress teaching system in September 2014, the interactive education system has been used in all existing cities. We have launched a newly revamped POP Kids program, Shuang You in most cities by the end of this quarter. Also the interactive education system has been quite well used in more and more cities. The interactive education system for overseas test prep including IELTS, TOEFL, and SAT courses was rolled out and tested in most major cities by end of Q3. At the end of time -- at the same time, we also standardized our product offerings across 14 cities.

I will now turn to koolearn.com and other supplementary online education products. New Oriental subsidiary Koolearn, a leading online education service provider in China, has completed its global offering of ordinary shares, which comprised of a international offering and a Hong Kong public offering. Koolearn commenced the trading of shares on the Main Board of the Stock Exchange of Hong Kong Limited on March 28, 2019 under the stock code 1797. Moving forward, Koolearn will disclose its periodical financial results under International Financial Reporting Standards. And after the listing, its financial results will continue to be consolidated into New Oriental's financial records. With the goal of tapping into the market opportunity in the pure online education space, Koolearn continue to invest more resources into executing initiatives in online K-12 after-school tutoring business in fiscal year 2019. This includes constant development, teachers recruiting and training, sales and marketing, R&D, and other necessary cost expenses to drive the growth of the new online programs.

With these strategic investment, we're able to reach more students in low-tier cities in an interactive and scalable approach. We believe this will keep koolearn.com to gain more market share in online education area and drive up top line growth.

Now, let me walk you through the other key financial details for the third quarter. Operating cost and expenses for the quarter were $700.9 million, representing a 25.2% increase year-over-year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation expenses, were $683.0 million, representing a 27.2% increase year-over-year. Cost of revenues increased by 25.6% year-over-year to $337.5 million, primarily due to increase in teachers' compensation for more teaching hours and rental cost for increased number of schools and learning centers in operation. Selling and marketing expenses increased by 13.3% year-over-year to $87.5 million, primarily due to the increase in brand promotion expenses and selling and marketing staff's compensation.

General and administrative expenses for the quarter increased by 29.1% year-over-year to $276 million. Non-GAAP general and administrative expenses, which exclude share-based compensation expenses were $258 million, representing a 35.1% increase year-over-year. The increase was primarily due to increased headcount as the Company grew its network of schools and learning centers as well as increase in R&D expenses and human resources expenses related to the development of the Company online/offline integrated education system. Total share-based compensation expenses, which were allocated to related operating cost and expenses decreased by 21.1% to $18 million in third quarter. Operating income for the quarter was $95.8 million, representing 64.1% increase year-over-year. Non-GAAP operating income was $113.8 million, representing a 40.2% increase year-over-year.

Operating margin for the quarter was 12% compared to 9.4% in the same period of prior fiscal year. Non-GAAP operating margin, which exclude share-based compensation expenses for the quarter, was 14.3% compared to 13.1% in the same period of prior fiscal year. Gain from fair value change of long-term investments for the quarter was $6.5 million.

Net income attributable to New Oriental for the quarter was $97.4 million, representing 42.5% increase from the same period prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.62 and $0.61 respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $108.9 million, representing a 19.4% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.69 and $0.69 respectively. Net operating cash flow for the third quarter was approximately $114.1 million. Capital expenditures for the quarter were $83.6 million, which were primarily attributable to the opening of 59 facilities and renovations at the learning centers.

Turning to the balance sheet, as of February 28, 2019, New Oriental had cash and cash equivalents of $844.9 million. In addition, the Company had $96.7 million in term deposits, and $1,792.7 million in short-term investments. Deferred revenue balance, which is cash collected from registered students for the courses and recognized proportionally as revenue as these instructions are delivered, at the end of the third quarter was $1,191.8 million, an increase of 10% from $1,083.8 million at the end of the third quarter of fiscal year 2018.

The lower than normal growth is due to adoption of the new accounting standard starting from June 2018, meaning part of that deferred revenue in Q3 was reclassified to accrued expenses and other current liabilities to reflect estimated sales returns and loans. The change of the tuition fee collection for K-12 after-school tutoring course also contributes to the growth slow down.

In terms of the outlook for the next quarter, we remain committed to our Optimize the Market strategy. Before going into the details of our guidance, I would also like to reiterate our overarching goals and our strategy as well as the challenges and opportunities we anticipate.

First, we will continue to expand our offline business. Our plan to increase capacity by around 20% to 25% remain unchanged, which includes operating of new learning centers and the expansion of classroom area of some existing learning centers for K-12 business. Moreover, we will also continue to roll out our dual-teacher model schools in new low-tier cities in certain provinces.

Second, we will continue to leverage our investments in online/offline integrated standardized teaching system for our offline language training and test prep offerings, especially for our K-12 business and overseas test prep business. We will keep pace in the investments, and we believe that total spending in absolute dollar terms in fiscal year 2019 will increase moderately year-over-year. Investment execution of new initiatives remain key to our strategy with improved product content development, teachers recruiting and training, R&D as well as sales and marketing activities for our pure online K-12 business. Third, our top priority continues to be optimizing the utilization of facilities and controlling cost and expenses across the Company, so as to drive continued margin improvements and operational efficiency. In the previous fiscal year, we expanded our overall capacity by approximately 40% year-over-year, with the expansion being more concentrated in the second half of the year. The new facilities built last year are being ramped up more efficiently than we expected.

For the fourth quarter, we anticipate continued improvement in non-GAAP operating margin of the offline business, especially compared to the prior fiscal year. This improvement is expected to lift off the margin pressure resulting from our investments in koolearn.com, and other supplementary pure online education products. On the whole, we expect our overall non-GAAP operating margin to maintain flattish year-over-year in the fourth quarter.

With newly introduced policy related to the after-school tutoring institutions being implemented on a city-by-city basis, we continue to foresee certain degree of the uncertainty while the current impact so far is in line with our expectations. As the leading education service provider in China, we're firmly supportive of these reforms, which will improve the market standards and foster healthy growth in the industry. As always, we're committed to provide high quality education service and contributing to a creation of a sustainable market. We do not expect to see material negative impact on our growth opportunity nationwide, although, we expect to see incremental administrative costs and expenses as a result of the implementation of the policies in certain cities.

Finally, the recent RMB depreciation against the US dollar will also impact our earnings in dollar terms for the fourth quarter of 2019. Finally, I would like to emphasize that we have great confidence in the fundamentals of our business. It's our firm belief that New Oriental will maintain a strong business foundation and continue to sustainably capture growth opportunities in the market, and deliver long-term value for our shareholders.

Regarding the near-term guidance for the fourth quarter of fiscal year 2019, we expect total revenue to be in the range of $820.6 million to $840.6 million, representing year-over-year growth in the range of 17% to 20%. If not taking into consideration the impact of potential changes in exchange rates between Renminbi and US dollars, the projected revenue growth rate is expected to be in the range of 23% to 26% for the fourth quarter. The estimated exchange rates used to calculate expected revenue for the fourth quarter of fiscal year 2019 is 6.65. Historically, exchange rates used to calculate revenue for the fourth quarter of fiscal 2018 was 6.33. This forecast would take into account several factors including, firstly, the industry seasonality of our core business, which historically tends to result in a slower growth in Q4 especially compared to Q3. Secondly, we have moved to one week of K-12 tutoring classes from March to June to ensure our teachers have enough time to complete license procedures. Therefore, the revenue related to adjustments will be recognized in the first quarter of fiscal year 2020.

Lastly, the adoption of new accounting standards has cut (ph) a larger portion of the revenue from our overseas consulting business being recognized in Q3 in past year of Q4, which is a big season for business line. I must mention that these expectations reflect New Oriental's current and preliminary view, which is subject to change.

At this point, I will take your questions. Operator, please open the call for this.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Tallan Zhou from Deutsche Bank. Please ask your question.

Tallan Zhou -- Deutsche Bank -- Analyst

Hi, Stephen. Hi, Sisi. Thanks for taking my question. Stephen, you just mentioned about the 4Q guidance and then there will be so one week of the class will be postponed to the next quarter. So can you quantify how much the impact will be for the first quarter revenue growth? Thanks.

Stephen Yang -- Chief Financial Officer

Okay. Yeah, to comply with the policy requirements, we have moved about one week of the K-12 classes in March to June. So the postpone will negatively impact the revenue by 3%, roughly 3% of the total revenue in Q4 but will take it back in the Q1 from the Q1 2020, OK. So this is the first reason.

Second is the overseas consulting business. Typically, Q4 is the peak season for the overseas consulting business. However, starting from this fiscal year, we adopt a new accounting standard, which results -- in the Q3, we reported in RMB term, we reported 32% revenue growth in Q3. And don't forget in last year Q4, we had a 44% year-over-year growth in RMB term, so that means the last year Q4 compared to the Q4 the year before last year. So we have a hard comparison in the coming Q4. But if you add that number from the above two factors back, the revenue growth in Q4 should be over 30%.

And the last point, I just want to reiterate that the fundamentals of our business, especially for the K-12 business and the overseas test prep, the other business, has not changed. So we will maintain the strong business foundations and continue to create the value for the shareholders.

Tallan Zhou -- Deutsche Bank -- Analyst

Thanks, Stephen. That's very clear. Thanks.

Stephen Yang -- Chief Financial Officer

Okay. Thanks, Tallan.

Operator

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

Alex Liu -- China Renaissance -- Analyst

Thanks, Stephen. Just one question. Could the management talk about -- share more color on the pro forma deferred revenue growth for this quarter especially after adjusting the currency issues, after adjusting the payment schedule as well as the accounting standard change? Thank you.

Stephen Yang -- Chief Financial Officer

Okay. The deferred revenue balance was increased by 10% in dollar terms year-over-year, but the lower than the normal growth is due to the adoption of the new accounting standards. It means that part of our deferred revenue in Q3 was reclassified to the accrued expenses and other liabilities. So this impact is about 7% to 8%.

And second reason, the change of the tuition fee collection for K-12 business also is a similar net fee impact of the deferred revenue balance. So this impact is roughly 6% to 7%. And also I suggest you add back of the 7% of the RMB depreciation. So the pro forma deferred revenue growth at the end of the Q3 will be over 30%.

Alex Liu -- China Renaissance -- Analyst

Okay. Thank you.

Stephen Yang -- Chief Financial Officer

Thanks, Alex. Okay. Thanks, Alex.

Operator

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

Mariana Kou -- CLSA -- Analyst

Thank you, management. I just had a quick question on -- looking a little bit further, I guess for FY '20, how should we think about online investments? I think Q4 you just mentioned that we should expect flattish margins, but like looking at the year kind of forward, how should we think about that? Thank you.

Stephen Yang -- Chief Financial Officer

Okay. In the fiscal year '20, firstly, I want to keep the same guidance of the top line growth of the fiscal year '20. So the top line growth guidance will be similar around 30% in RMB term year-over-year. So we don't want to change.

And also in the New Year, we do believe we'll have the margin expansion because we will see more operating leverage because this year we opened 20% to 25% the new expansion, the top line growth for the next year will be roughly 30%. So, we do have the leverage.

And online investments, this year I think for the whole year, the online/offline integration investment will be $95 million to $100 million. And next year, we guided $110 million to $120 million. This is the online/offline integration investment.

Mariana Kou -- CLSA -- Analyst

Thank you.

Stephen Yang -- Chief Financial Officer

Thanks.

Operator

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

Tianli Wen -- Blue Lotus -- Analyst

Hi, management, thanks for taking my call. I have one question about the utilization rates. Could management give us more color on the utilization rate? How much room for the utilization rate to improve going forward?

Stephen Yang -- Chief Financial Officer

Okay. In this quarter Q3, the utilization rate is up by 200 bps. So, I think this is the key driver of the market expansion of this quarter. And going forward, even for the coming quarter and coming new year, we believe you will see the high utilization rates in the coming quarters, because I think it's easy to make math -- to do a math, just to compare the top line growth with the expansion plan, OK? So 30% top line growth compared to the 20% to 25% expansion plan. And so we do have the leverage on the higher utilization rate, OK?

Tianli Wen -- Blue Lotus -- Analyst

Thank you.

Stephen Yang -- Chief Financial Officer

Okay. Thanks.

Operator

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

Tian Hou -- T.H. Capital -- Analyst

Hi, Steve and Sisi. The question is how much capacity do you plan to add in the new fiscal years?

Stephen Yang -- Chief Financial Officer

Okay. Thanks Tian. It's a great question. The expansion plan for this fiscal year, fiscal year 2019, will be 20% to 25%. We have already opened 14% in the first three quarters of this fiscal year. So for the whole year, 20% to 25%, and next year, fiscal year 2020, I think we keep the same guidance as we guide in the fiscal year '19. It will be 20% to 25% the current expansion plan.

Tian Hou -- T.H. Capital -- Analyst

Thank you.

Stephen Yang -- Chief Financial Officer

The market still has lots of the opportunity for us, for the big players like us. We will open 20% to 25% new capacity in the coming years, OK? Thanks, Tian.

Tian Hou -- T.H. Capital -- Analyst

Thank you. Thank you, Stephen.

Operator

Your next question comes from the line of John Wang from Macquarie. Please ask your question.

John Wang -- Macquarie -- Analyst

Thank you. So my question is, so Stephen mentioned that the retention rates for all lines of the business is kind of be improving. So can you share more colors on the retention rates of different business lines? And also what is the retention is going to improve in the coming quarters or next fiscal years? Thanks.

Stephen Yang -- Chief Financial Officer

Yeah. Actually we have seen the student retention rates is guiding higher for both POP Kids and the U-Can business. And for the POP Kids, the retention rate for this quarter is close to 90% and U-Can business middle school/high school is over 75%.

So it's 75% to -- between 75% to 80% and it'll keep going forward. Since we started to invest on the online/offline, the new product and we have seen the retention rates getting up. And going forward, I think we will see higher student retention rates going forward. And I think, this is the -- it shows that our investments in the last three years it start to bear fruit from the investments we made in the last three years.

John Wang -- Macquarie -- Analyst

Okay. Thanks.

Stephen Yang -- Chief Financial Officer

Thanks.

Operator

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

Lucy Yu -- Bank of America -- Analyst

Hi, Stephen. I've got a question on the online business, Koolearn. So how much online loss did Koolearn make this quarter? And what's the guidance for next quarter?

Stephen Yang -- Chief Financial Officer

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

Lucy Yu -- Bank of America -- Analyst

It's regarding the online loss. So how much online loss was booked this quarter and how about next quarter and 2020?

Stephen Yang -- Chief Financial Officer

Sorry. We can't disclose the numbers of the Koolearn for this quarter. And I think till the coming July, so in the next earnings call, we'll disclose the Koolearn numbers. Okay.

Lucy Yu -- Bank of America -- Analyst

Okay. Do you have any guidance for 2020? How much would that be comparing to 2019?

Stephen Yang -- Chief Financial Officer

Yes. But I do believe the margin derived from the online part, from Koolearn, in the second half of the year will be lower than the first half of this year. Okay.

Lucy Yu -- Bank of America -- Analyst

Okay. Thank you.

Stephen Yang -- Chief Financial Officer

Thank you.

Operator

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

Alex Xie -- Credit Suisse -- Analyst

Hi, management. Thank you for taking my questions. So I would like to ask about what will the enrollments growth for POP Kids and U-Can look like if we exclude the impacts from the change of tuition fee collection schedule? And my second question is what are our plans for the summer promotion in the coming summer of this current year? Thank you.

Stephen Yang -- Chief Financial Officer

Okay. Yes. The significant increase in the number of enrollments is very good because of the change of the class. And so, I think, the normal where the enrollments for the POP Kids program in the Q3 was 40% to 45%, this is the real student enrollment, OK? And for the U-Can, the enrollment growth was somewhere around 40%. But it's still great, the progress. And so, if you combine the enrollment growth with the 5% to 10% price increase, you'll get the top line growth. Okay? And your second question is about summer promotion, yes. As I mentioned in the last earnings call, in the last year we got over 700,000 summer promotion enrollments in last year Q1. And this year I think we will make a change of the summer promotion strategy. We will care more about the student retention rate than last year.

And as I mentioned in the last earnings call, we raised the summer promotion class price from RMB 200 last year to RMB 400 this year. And so I think it's better for us to identify who are the real customers after the summer promotion. So we do believe the retention rates after the summer promotion will be higher than last year.

Alex Xie -- Credit Suisse -- Analyst

Thank you.

Stephen Yang -- Chief Financial Officer

Thanks.

Operator

Your next question comes from the line of Leon Chik from JPMorgan. Please ask your question.

Leon Chik -- JPMorgan -- Analyst

Hi. Congrats on the results. Just wondering on your other income of $24.1 million, which was down more than 30% from the previous quarter, just wondering what's the main reason? Thanks.

Stephen Yang -- Chief Financial Officer

I think the main part of the other income is the interest income. So I suggest that you see the year-over-year growth and because of the different cash balance. And typically the average interest rate of the interest income is a little bit lower than last year. Okay?

Leon Chik -- JPMorgan -- Analyst

Okay. Thanks.

Stephen Yang -- Chief Financial Officer

Thanks, Leon.

Operator

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

John Choi -- Daiwa -- Analyst

Good evening, guys. Just a quick question on operating margin. I think you mentioned on your prepared remarks, non-GAAP operating margin went up by 120 basis points this quarter. So looking ahead, I think management did say 17% to 18% in couple of years time. So if we look at fiscal year '20 and '21, is that something that we could achieve?

And can you kind of elaborate what are going to be the key metrics, is it going to be utilization rate improvement or better improvement from the online business? So which will be the main factor behind the margin improvement? Thank you.

Stephen Yang -- Chief Financial Officer

I think the margins relates to two factors. Number one is the expansion plan. Number two is the online investments, OK, the other investments. And so in the fiscal year '20, we expect the margin expansion year-over-year and we don't want to change our main long-term margin guidance to the 17%. This is non-GAAP operating margin in main (ph) long-term.

John Choi -- Daiwa -- Analyst

Okay.

Operator

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

Edwin Chen -- UBS -- Analyst

Thank you. Congrats, Stephen and Sisi on the great results. Just a couple of questions. Number one, on your guidance, operating margin guidance for next quarter, flattish year-on-year, had this considered the impact you mentioned of one week push back of the revenue bookings from March to June?

And the second question is on your income tax rates. I noticed that the tax rates in the third quarter has been much higher than a year ago. And just wondering what's your guidance of the tax rate for the first quarter and maybe a sustainable tax rate for FY '20? Thank you.

Stephen Yang -- Chief Financial Officer

Yes. The guidance of the margin in the coming quarter, we guided the margin flattish. And, partially it relates to the revenue impact. But it's just for the K-12 business, we just sacrificed the one week's revenue in Q4, but we'll make it up in the Q1.

And yes, as of the margin guidance for the next year, we do feel positive of the margin expansion for the next whole year. And the tax rates, yes, in Q3 in this quarter, the tax rate was 22%. But we have a fair value gain impact. So if you take it off, the tax rate was 18.5%. I think the reason that the tax rate steadily move up is because we lose some benefit of our tax efficient structures, because you want some high-tech companies and what we set up, we have the certain period of the tax prep. And when they expire, the tax rates tend to go up. So our guidance for the whole year of the ETR will be somewhere between 18% to 19%. Thanks.

Edwin Chen -- UBS -- Analyst

Okay. Thank you.

Stephen Yang -- Chief Financial Officer

Thanks, Edwin.

Operator

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

Xu Zhong -- ICCC -- Analyst

Hey, Stephen. Thanks for the opportunity. This is Xu Zhong (ph) on behalf of Natalie. We have two questions. So first one is on your offline/online business. Can you maybe provide some color on what kind of synergy should we expect between those two business going forward?

And second question is on your class duration shift. I noticed some cities, for example Shanghai, where you use the 2.5 hour course duration to replace the previous three hour courses. Wonder what would be the scale of this change and how should we think about the impact on margin? Thanks.

Stephen Yang -- Chief Financial Officer

Yes. The offline and online businesses essentially -- actually when we started to make a reform, I think, three years ago for the domestic test prep first and we pushed almost all of the large-scale classes into pure online because it's focused to the domestic test prep students, mostly for the college students or university students. But in the offline, we are still providing small-size class, because we divided the students by two parts. For some students, they have the full ability to control themselves to study pure online, OK, we do it online. But for some students, they still need the offline classes, because they don't have the enough ability to study through online.

So we have seen some affinity between the offline and the online business. But don't forget, the market is huge enough for both the online part and offline part. Even though we're the leading player in the market, one of the leader player in the market, our market share for both offline and online are very small. So I think the cannibalization between the offline and online will be very small and we will see more and more synergy between the offline business and online business, OK?

And the class duration, actually we started to pilot this program two years ago in Beijing school to change the one-fourth of three hours to one session of the course, from the three hours, three hours 100% offline to two hours offline class combined with the 30 minutes online classes. And the 30 minutes online class is related to the homework where some contents for the students can do it by themselves online.

So I think that's great for us to make the higher evaluation rate of the classrooms. So it does work. And I think it's successful for the Beijing school. And in other cities, we'll do it more and more to provide more and more online/offline integrated classes going forward.

Xu Zhong -- ICCC -- Analyst

Great. Thanks. Very helpful.

Stephen Yang -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Eric Qiu from CCBI. Please ask your question.

Eric Qiu -- CCBI -- Analyst

Hi, good evening, Stephen and Sisi. Thanks for taking my question. I have two questions. One is regarding to the operating margin. This quarter you reverted the previous two quarters' margin contraction and achieved a margin expansion of 100 bps. Just wondering what's the major reasons behind that? And for next quarter is that because you are still quite conservative, so at this moment you maintain a flat margin outlook? The second is for the top line. For the fourth quarter revenue guidance, you guided even in Renminbi terms it seems the growth rate is a bit slower than previous three quarters, which is all above 30 percentage year-over-year. So I'm wondering is that because of seasonality or because of accounting issues? Thank you.

Stephen Yang -- Chief Financial Officer

Okay. Your first question is about margin. This quarter, we got the 120 bps up on the operating margin. I think there were two reasons. The first one is we do have a leverage on the utilization rates, because the expansion plan in the first three quarters was only 14%. And actually, we saw it, things the first half this year. So don't forget, we setup multiple new learning centers in the second half of last year. So in the Q3 and Q4, we will have more leverage than the first half of this year.

And secondly, you saw our selling and marketing expenses increased only by 13% and we do believe we will have the leverage on the selling and marketing expenses as a percentage of the revenue going forward. And the margin guidance, yes, since last earnings call, we guided this with your (ph) guide, the margin will be flattish in the close range and we got 120 bps up finally, but we don't want to change our actual guidance over the Q4, it would still be more than flattish. Thank you.

Eric Qiu -- CCBI -- Analyst

Okay. Thank you.

Stephen Yang -- Chief Financial Officer

Okay, top line growth, OK, your last question. Actually, typically, the Q4 typically the seasonality -- in terms of the seasonality, the Q4 learning is lower by 2% compared to Q3. So this is the normal, OK? And so this is the first thing. Combine the two reasons, I explained to answer my first question in the earnings call, 2% of the class change from Q3 to Q4 and 3% from the oversees consulting, the accounting new treatment. So if you add it all back, the revenue growth will be over 30%. So I think it's normal.

Eric Qiu -- CCBI -- Analyst

Okay. Thank you. Got you.

Stephen Yang -- Chief Financial Officer

Thank you.

Operator

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

Christine Cho -- -- Analyst

Hi Stephen and Sisi. I have two quick questions. So one just on the OP margin increase, so if you just decompose that between offline and online, could you give us some color there in terms of this quarter? And then secondly, we noticed that a lot of the learning centers that you've added this year was mostly in the existing cities. If you think about the future expansion plans, will it be actually shifting toward more new cities? Or will it still be kind of the existing cities that you will be initially targeting? And just kind of the mix between the offline versus online in terms of thinking about expansion into these newer lower-tier cities as well? Thank you.

Stephen Yang -- Chief Financial Officer

Okay. Second question first. Going forward, for the fiscal year '20, I think we will expand more learning centers in existing cities. And yes, we do have a plan to open like, first of all, new cities, but most of the new learning centers we setup will happen in the existing cities. Even in Beijing, we're (ph) the top tier city, we do have a lot of room to open more learning centers.

And the OP margin -- I'm sorry, I can't disclose the detail for the online net profit, but what I can say is the operating margin expansion for the offline part is higher than the overall margin expansion.

Christine Cho -- -- Analyst

Okay. Thank you.

Stephen Yang -- Chief Financial Officer

Is it clear Christine? Thank you.

Christine Cho -- -- Analyst

Yeah.

Operator

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

Sheng Zhong -- Morgan Stanley -- Analyst

Hi, Stephen and Sisi. I have a question on the overseas consulting fee -- consulting income. So can you give more color on the consulting income number of last quarter -- fourth quarter last year and more color on how did the accounting policy change, so that will impact your guidance? And whether the accounting policy will also change the cost recognition in the P&L in next quarter as well? And also secondly, what's the growth outlook for overseas test prep business in this year and the next year? Thank you.

Stephen Yang -- Chief Financial Officer

Okay. Thanks, Zhong Sheng. We don't disclose the detailed numbers of the overseas consulting business. The way I can say is, overall, the revenue contribution from the overseas consulting business for the whole year is about 8% to 9%. So this is revenue contribution. But typically, in the Q4, the revenue contribution from the overseas consulting business is a bit more than the other quarters. And the accounting standard changes before the Q4 2018, the overseas consulting revenue recognized will -- mostly the revenue is recognized but with the context (ph) really.

And of the new revenue accounting standard, we reported revenue according to the several benchmarks by (inaudible), so that means we reported the revenue earlier than before based on the new accounting standard. And yeah, this is the answer for your question about the overseas consulting and to the other question.

What's your next question? The second question?

Sheng Zhong -- Morgan Stanley -- Analyst

Second question is about overseas test prep growth outlook in this year and the next year.

Stephen Yang -- Chief Financial Officer

Okay. Yeah. Typically, well, we expect the overseas test prep business in the coming Q4 in RMB terms will be growth by 10% to 15% in RMB terms. And for the next year, the guidance will be similar, 10% to 15% in RMB terms.

Sheng Zhong -- Morgan Stanley -- Analyst

Thank you. And may I ask the accounting policy change on consulting revenue. Will it impact your cost recognition as well?

Stephen Yang -- Chief Financial Officer

No. There is no impact for the cost side.

Sheng Zhong -- Morgan Stanley -- Analyst

Okay. Thank you. Thank you very much.

Stephen Yang -- Chief Financial Officer

Thank you, Zhong Sheng.

Operator

Our next question comes from the line of Manyi Lu from DBS. Please ask your question.

Manyi Lu -- DBS -- Analyst

Hi, management. Actually my question was asked by someone before, so I can skip mine.

Stephen Yang -- Chief Financial Officer

I'm sorry. I can't hear you very clearly. Please repeat it again.

Manyi Lu -- DBS -- Analyst

Okay. Can you hear me now?

Stephen Yang -- Chief Financial Officer

Yes. Please speak a little louder, yeah. Go ahead please.

Manyi Lu -- DBS -- Analyst

Hi. Yeah. Can you hear me now?

Stephen Yang -- Chief Financial Officer

Yeah, sounds better. Go ahead.

Manyi Lu -- DBS -- Analyst

Actually, my question was asked by someone else before. So, I can skip my question. Yeah.

Stephen Yang -- Chief Financial Officer

Okay. Okay. Thank you.

Manyi Lu -- DBS -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Alan Deng from IRA (ph) Please ask your question

Alan Deng -- IRA -- Analyst

Hi, management. Thank you very much. And can I ask you what is the current biggest risk in the management view? Is it policy? Is it going to be competition? Or will you kind of view that as probably preventing from achieving 30% top line growth and margin expansion for next year?

Stephen Yang -- Chief Financial Officer

I'm sorry. Can you repeat it again? I can't hear you very clearly. Your question is about what the policy or -- can you repeat it again?

Alan Deng -- IRA -- Analyst

What is the biggest risk that management is thinking about at this moment that makes the potential of missing the 30% top line good and margin expansion target? Is it going to be policy or is it going to be competition?

Stephen Yang -- Chief Financial Officer

I think for the management concern, we always have two kinds of risks. The first one is regulation for both the overseas test prep and the K-12 business. And so this is the first part of the risk.

Secondly, we do have the human resource risk, even though we spent a lot in the last three years to build up the new education system, but we still rely on the talented people to run the business, especially for the local school. So there is a risk for the human resources. Okay? Two risks, regulation and human resources. Okay?

Alan Deng -- IRA -- Analyst

Okay. Thank you.

Operator

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

Stephen Yang -- Chief Financial Officer

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

Operator

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

Duration: 62 minutes

Call participants:

Sisi Zhao -- Investor Relations

Stephen Yang -- Chief Financial Officer

Tallan Zhou -- Deutsche Bank -- Analyst

Alex Liu -- China Renaissance -- Analyst

Mariana Kou -- CLSA -- Analyst

Tianli Wen -- Blue Lotus -- Analyst

Tian Hou -- T.H. Capital -- Analyst

John Wang -- Macquarie -- Analyst

Lucy Yu -- Bank of America -- Analyst

Alex Xie -- Credit Suisse -- Analyst

Leon Chik -- JPMorgan -- Analyst

John Choi -- Daiwa -- Analyst

Edwin Chen -- UBS -- Analyst

Xu Zhong -- ICCC -- Analyst

Eric Qiu -- CCBI -- Analyst

Christine Cho -- -- Analyst

Sheng Zhong -- Morgan Stanley -- Analyst

Manyi Lu -- DBS -- Analyst

Alan Deng -- IRA -- Analyst

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