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New Oriental Education & Technology Group Inc. (NYSE:EDU)
Q1 2020 Earnings Call
Oct 22, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good evening and thank you for standing by for New Oriental's First Fiscal Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session.

Today's conference is being recorded, if you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao.

Sisi Zhao -- Investor Relations Director

Thank you. Hello, everyone, and welcome to New Oriental's first fiscal quarter 2020 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 and I will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking 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'll now turn the call over to Mr. Yang. Stephen, please go ahead.

Zhihui Yang -- Chief Financial Officer

Thank you, Sisi. Welcome, everyone, and thank you for joining us on the call. We're very pleased to begin fiscal year 2020 with a robust topline growth which exceeded the high end of our expected range, in RMB terms. For the first quarter of 2020, New Oriental reported net revenue of $1,071.8 million, representing a growth of 24.6% or 29.7%, if measured in RMB.

Net revenues from educational programs and services for the quarter were $996.5 million, representing a 25% increase year-over-year or 30% if measured in RMB. Our key growth driver K-12 after-school tutoring business recorded significant increase in student enrollment. Together with the overwhelming responses received from the summer promotion campaign, both segments made great contributions to this quarter's outstanding performance.

In the first quarter of fiscal year 2020, we continued to implement our well-proven Optimize the Market strategy and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability.

During this quarter, we added a net of seven learning centers in existing cities. The total square meters of classroom area by the end of the quarter increased approximately 24% year-over-year and 3% quarter-over-quarter, in line with our expansion plan.

Our total student enrollments in academic subjects tutoring and test prep courses in the first fiscal quarter of 2020 increased by 50.4% year-over-year to approximately 2,609,200. On this point, please note the higher than normal increases in the number of student enrollments is primarily due to the split of autumn semester into two sections. A change we adopt to meet the latest regulatory requirements since November 2018, which means student enrollments for each half of the autumn semester were calculated separately.

To explain the number of student recruitment and fees collected for the first half of the autumn semester were booked in previous quarter while those for the second half were booked in both period [Phonetic] reported for the first quarter as well as the following second quarter, prior to the change which historically collects the full sum of the tuition fees and recorded the same enrollments for autumn semester in the first quarter of the prior fiscal year.

Meanwhile, we also continue to deepen our online-merge-offline standardized classroom teaching system, and in particular rolled out an innovative interactive courseware for the POP Kids program in some main cities, creating a more interactive and high quality learning experience for our students. We also made further strategic investments into dual-teacher model classes and new initiatives for pure online K-12 tutoring through Koolearn.com. With our core competency in both offline and online education service, we're confident to capture the substantial business opportunities in low-tier cities and remote areas in China moving forward.

Furthermore, we would like to take this opportunity to highlight the success of our summer promotion campaign as briefly mentioned earlier. Similar with the previous years, we offered low-cost offline trial courses for multiple subjects across most of our existing cities during the summer period, targeting students before they begin secondary school. The largest field promotion this year was launched in 43 cities and we're very encouraged to see that even with the doubled average promotion price compared to last year.

Our total promotion enrollments reached 820,000, an 8% increase year-over-year, accompanied by improved student retention rates year-over-year. Please note that these promotion enrollments were not included in our reported enrollments. Overall, 59% [Phonetic] of students recruited from the summer promotion campaign were successfully retained as customers for our full-price courses for the autumn semester, which is 5% higher than the rate last year.

We're confident that this will boost our revenue and drive profit growth throughout the whole fiscal year 2020. We have firm belief in our summer promotion strategy in generating long-term benefits and foresee this to continue to be a successful and effective strategy to readily capture market share and acquire long-term loyal student customers in the K-12 after-school tutoring market.

As these students moved from Grade 7 to Grade 12, we expect the continued improvement in retention rates and customer loyalty will further drive revenue growth in the next three to six years. These investments lay down a solid foundation for stronger growth in the long-term and further cement our leadership in the market.

Another highlight of the first quarter of fiscal year 2020 is our year-over-year operating margin expansion which is compounded by a strong bottom line performance. Our non-GAAP operating income increased by 46.8% year-over-year in dollar terms to approximately $257.2 million, while non-GAAP operating margin rose by 360 basis points to 24% from 20.4% a year ago which signal to a strong utilization rate and operational efficiency in addition to our one-off summer promotion drive.

We will continue to focus on following this improvement and we are confident in our ability to deliver stable and positive margin expansion this year and create sustainable long-term value for our customers and shareholders.

I will now turn to pricing. Per program-blended ASP, which is cash revenue divided by total student enrollments, decreased by about 13% year-over-year. We'd like to note that the lower-than-normal blended ASP is primarily due to the change in tuition fees collection schedule for our K-12 after-school tutoring courses, as explained above. The number of the students we recruited and amount of the fee collected during the quarter only reflects the second half of the autumn semester.

Therefore, our blended ASP for the quarter of 2020 appears to be lower. Hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 5% year-over-year in RMB terms. Breaking down hourly blended ASP, the U-Can middle school high school rates increased by 7%, POP Kids increased by 9% and overseas test prep work program increased by 7%, all year-over-year in RMB terms.

Now, we will move on to the first quarter performance across our individual business lines. Our key revenue K-12 all-subjects after-school tutoring business achieved year-over-year revenue growth of 35% in US dollar terms or 40% in RMB terms. To provide a breakdown of the growth, the U-Can middle school high school all-subjects after-school tutoring business reported a revenue increase of 33% in dollar terms or 38% in RMB terms for the quarter.

Student enrollment grew approximately 65% year-over-year for the quarter. Our POP Kids program delivered outstanding results with revenue up about 38% in dollar terms or 44% in RMB terms for the quarter. Enrollment was up about 70% for the quarter. Overseas test prep business recorded a revenue increase of 5% in dollar terms or 10% in RMB terms for the quarter.

Our consulting business recorded the revenue growth of about 23% in dollar terms or 28% in RMB terms year-over-year for the quarter. Finally, VIP personalized class business recorded revenue growth of about 19% year-over-year in dollar terms or 24% in RMB terms year-over-year for the quarter.

Next, I'll provide some updates on the progress we're making with our Optimize the Market strategy. In terms of the offline expansion, as mentioned earlier, this quarter we added a net of seven learning centers in existing cities. Altogether, we increased total square meters of the classroom area by approximately 24% year-over-year and 3% quarter-over-quarter by the end of this quarter.

Our dual-teacher model has been proven successful, it has been introduced into the POP Kids program in 46 existing cities, and U-Can program in 30 existing cities, and for both program in seven new cities, further deepening our market penetration in both markets we have tapped into.

The model also supported the further improvement in our customer retention and scalability of the new model. With this proven result in mind, we will continue with this strategy in the coming quarters.

On the digital technology front, we've added $30 million in the first quarter to improve and maintain our online-merge-offline standardized classroom teaching system. Most of our investments were recorded under G&A expenses. In particular, we would like to highlight the implementation of our digital interactive courseware for the POP Kids program in some major cities.

The digitally enables courseware strengthens and standardize our teaching and learning quality, boosted our platform efficiency and delivers improved student experience and satisfaction, would also means higher stickiness of our enrollment student customers.

Furthermore, we also made stable progress in the pure online koolearn.com business line and other supplementary online educational products, which is experiencing growing market demand. More resources are invested into the executing new initiatives in online K-12 after-school tutoring business in fiscal year 2020.

The investment includes constant development, teacher's recruiting and training, sales and marketing, R&D and other necessary cost -- expenses to drive the growth of new pure online programs. With these programs we're able to reach more students in low-tier cities in an interactive and scalable manner. We believe this will help koolearn.com to gain new market share in online education area and drive our top line growth.

Now let me walk you through the other key financial details for the first quarter. Operating cost and expenses for the quarter were $825.6 million, representing a 17.9% increase year-over-year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation expenses, were $814.6 million, representing an 18.7% increase year-over-year.

Cost of revenues increased by 19.8% year-over-year to $440.2 million, primarily due to increases in teachers' compensation for more teaching hours and rental costs for the increased number of schools and learning centers in operation.

Selling and marketing expenses increased by only 1.9% year-over-year to $101.2 million. General and administrative expenses for the quarter increased by 21.6% year-over-year to $284.2 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $273.5 million, representing a 24.5% increase year-over-year.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 20.8% to $11 million in the first fiscal quarter of 2020. Operating income was $246.2 million, representing a 52.6% increase year-over-year. Non-GAAP income from operations for the quarter was $257.2 million, representing a 46.8% increase year-over-year. Operating margin for the quarter was 23%, compared to 18.8% in the same period of the prior fiscal year.

Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was 24%, compared to 20.4% in the same period of the prior fiscal year. Net income attributable to New Oriental for the quarter was $209.0 million, representing a 69.6% increase from the same period of the prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $1.32 and $1.31, respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $230.2 million, representing a 25% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $1.45 and $1.44, respectively.

Net operating cash flow for the first fiscal quarter of 2020 was approximately $364.6 million. Capital expenditures for the quarter were $64.3 million, which were primarily attributable to opening of 43 facilities and renovations at existing learning centers.

Turning to the balance sheet; as of August 31st, 2019, New Oriental had cash and cash equivalents of $973.2 million. In addition, the Company had $351.6 million in term deposits and $2,010.7 million in short-term investment as of August 31st, 2019.

New Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as per the instructions [Phonetic] delivered, at the end of the first quarter of fiscal year 2020 was $1,330.7 million, an increase of 16% as compared to $1,146.7 million at the end of the first quarter of fiscal year 2019. The lower-than-usual increase was due to the change of tuition fees collection schedule for K-12 business, in compliance with the latest regulatory requirements. This change was implemented during the second quarter of fiscal year 2019.

Before moving on to our priority for the second quarter, I would like to take a moment to reiterate our broader goals and our Optimize the Market strategy. First, we will continue to focus on expansion of our offline business. We aim to add around 20% of capacity in fiscal year '20, which includes new learning centers and growing classroom area for -- of some existing learning centers for K-12 business mainly. In addition, we will continue to roll out, our dual-teacher model schools to a number of new low-tier cities in certain provinces for the whole year.

Second, we will continue to leverage our investments in the digital technologies front, extending new features of our OMO system to more offline language training and test prep offerings, especially for our K-12 tutoring and overseas test prep key business. We will continue to make such investments and we believe that the total spending in absolute dollar terms in fiscal year 2020 will increase moderately compared with the prior fiscal year.

Furthermore, we will also continuously invest in and execute new initiatives including product, content development, teacher's recruiting and training, R&D, as well as sales and marketing in our pure online K-12 tutoring business, our Koolearn.com platform. At this point, I would like to reiterate that we believe the strong growth in our offline business will offset the online investment expenses on our bottom line.

Third, our top priority will remain as to focus on optimizing the utilization of facilities and controlling costs and expenses across organization to drive continued margin expansion and the increased operational efficiencies. The new facilities built in fiscal year 2018 and 2019 are being ramped up at a more efficient level.

We expect our non-GAAP operating margin of the offline language training and test prep business to continue to expand in the rest of the fiscal year 2020. With the strong operating leverage and consistently improved utilization rate and robust offline business growth, we'll be able to cover the margin pressure from our online investments.

On the whole, we expect our overall non-GAAP operating margin to improve year-over-year in fiscal year 2020 compared to the year-over-year decline in last two fiscal years, reflecting a healthy strong growth trend. Finally, the recent RMB depreciation against US dollars will also impact our earnings in dollar terms for the first quarter of 2020, and second quarter of the year 2020.

Again, I would like to emphasize that the fundamentals of our business remains strong, as we believe with our Optimize the Market Strategy being the focus as always, we are confident that New Oriental will continue to capture sustainable growth opportunities in the market and deliver long-term value for our shareholders.

Looking on the near term and our expectations for the next quarter, we expect total net revenues in the second quarter of fiscal year 2020 to be in the range of $753.6 million to $771.0 million, representing a year-over-year growth in the range of 26% to 29% in dollar terms. The projected growth rate of revenue in our functional currency Renminbi is expected to be in the range of 30% to 33% for the second quarter of the fiscal year 2020.

The exchange rate used to calculate expected revenues for the second quarter of fiscal 2020 is 7.11, while historical exchange rate used to calculate revenues for the second quarter of fiscal 2019 was 6.90. I must mention that these expectations reflects New Oriental's current and preliminary view, which is subject to change.

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

Questions and Answers:

Operator

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

Mark Li -- Citi Research -- Analyst

Hi, management. Congratulations for the very strong results. My question is, I think the non-GAAP operating margin, up 350 bps is a very good surprise. Do you have any analysis for the breakdown of this a bit, because these are quite a bit higher than the previous guidance? Thanks.

Zhihui Yang -- Chief Financial Officer

Okay. Yeah, the -- our non-GAAP operating margin rose by 360 basis points year-over-year in this quarter. I think this is much better than we expected three months ago. And I think the -- our efforts to keep a healthy balance between the capacity expansion and the operating efficiency have paid off in this quarter.

And I think there were three reasons. The first one, as you know, you have seen the strong utilization rates in this quarter because you know our expansion plan -- our expansion capacity this year -- this quarter is only 3% quarter-over-quarter. But we got -- in RMB terms we got the 29.7% revenue growth.

And number two, as you know, we have the cost control within the company. And number three, the last one is we have the one-off summer promotion drive, of course we have -- we raised the price from RMB200 per course on average last year to RMB400 this year. So it's a healthy margin expansion.

And I think from the one-off, the summer promotion, positive impact will be similar, around 100 basis points. And so the -- all the others only comes from the operating leverage and higher utilization rates. And, yeah, keep going forward, I think we think that the rest of this fiscal year, we're confident that we will have the margin expansion in the rest of the year, because as a guidance, in the last earnings call, our expansion plan this year is somewhere around 20%, but our top line growth for the whole year will be 30% year-over-year growth. So we believe we will have the more leverage on the rental side and the SG&A side as well. Okay, thanks Mark.

Mark Li -- Citi Research -- Analyst

Thanks. So, may I understand if the first reason is bigger than the second, and bigger than the third? Is that in this sequence, for the help?

Zhihui Yang -- Chief Financial Officer

Yes, yes. So, yeah, as I said, the major demand, the margin driver comes from the better utilization rates and the operational efficiency. Okay.

Mark Li -- Citi Research -- Analyst

Okay, thank you.

Zhihui Yang -- Chief Financial Officer

Thanks Mark.

Operator

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

Yuzhong Gao -- China International Capital Corporation -- Analyst

Hey, Stephen and Sisi, thanks for the opportunity. A quick question on your K-12 segment, so for the whole year, could you add a bit color on your margin guidance, and specifically on your offline-online, how's your offline contributed margins is pacing well while how the -- the online dragged margins, maybe if you can quantify this a little bit, that will be really helpful. Thanks.

Zhihui Yang -- Chief Financial Officer

Okay. As the guidance you know this quarter, we got very good results of the margin expansion, 360 basis points margin expansion in this quarter. And for the whole year, we do believe we have the margin expansion in the rest of the year. And yeah, most of the margin expansion comes from the offline business, especially for the K-12 business. And yeah, I think the online part -- the online side is still a drag, but you know I think the drag will be offset by the offline business margin expansion.

I don't have the detailed numbers, because you know we just have the one quarter past, but for whole year, as a whole -- as the company as a whole, the whole margin will be expanded in the fiscal year '20. Okay.

Yuzhong Gao -- China International Capital Corporation -- Analyst

Well, there have a sense.

Zhihui Yang -- Chief Financial Officer

Okay, thanks.

Operator

Your next question comes from the line of Jin Yoon of Newstreet Research. Please ask your question.

Jin K. Yoon -- Newstreet Research -- Analyst

Hey good evening everyone. Thanks for taking my question. Stephen, I think you mentioned on the prepared remarks that on a teaching hour basis that pricing was up 5% if I heard that correctly. I guess for the rest of the year, how should we expect that? Should we -- with the utilization continuing to ramp and demand environment being strong, should we see that number accelerate throughout the year? Thanks.

Zhihui Yang -- Chief Financial Officer

Yeah, the price question first. I think the hourly rates, the hourly rate basis, overall, the price for this quarter was increased by 5% in RMB terms and so we've been at 7% of the U-Can business the price increase, 9% of the POP Kids percent price increase. And going forward, I think we don't want to change our price strategy. So in the rest of this fiscal year, the price increase for the whole business overall will be 5% to 10% in RMB terms year-over-year.

And we have seen more leverage, operational leverage for the first quarter and we do believe you will see more leverage in the rest of the year. And yeah, as again -- as my answer to the first question, we do believe, we'll see more leverage in the rest of the year and, but and -- yeah, I think, I won't to give the detailed guidance for the operating margins for Q2 and the rest of the year, but we believe we'll have the margin expansion upside.

Jin K. Yoon -- Newstreet Research -- Analyst

Great, thank you.

Zhihui Yang -- Chief Financial Officer

Thank you, Jin. Thanks

Operator

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

Sheng Zhong -- Morgan Stanley -- Analyst

Thank you for taking my questions. I want to have more color of your margin guidance or about the operating expense. I think, Stephen, you mentioned that in first quarter, there were more spending on the team and the products, so that G&A cost is similar while the sales and marketing is lower. So if we look ahead, say in the coming winter and the next summer season, do you expect more spending on the sales and marketing when the Koolearn's product is more ready? And so in this case -- so what's your guidance or outlook of the -- well, sales and marketing spending in the second half of this year? Thank you.

Zhihui Yang -- Chief Financial Officer

Yeah, this quarter, our selling and marketing expenses increased only by 1% in dollar term year-over-year. And this is our strategy as our original plan. Within the Koolearn, I think we continue to invest more resources, more money on the products and the teacher's recruitment and training and the content development as well as good marketing. But we will spend reasonable marketing expenses within the Koolearn platform in a reasonable way.

And we don't want to use the burning money way to acquire students as we did in the offline business. And also for -- on the other hand, for our offline business, yeah, I think if -- I'm not sure you remember it clearly. Last quarter, our selling and marketing expenses didn't increase a lot. So I do believe we will have more leverage on the selling and marketing side going forward.

And yes, that's my answer and also we, if -- I think for the G&A and our cost effect like rentals, we do have the more leverage going forward, yeah, as we did in the selling and marketing side.

Sheng Zhong -- Morgan Stanley -- Analyst

Thank you.

Zhihui Yang -- Chief Financial Officer

Thank, Sheng Zhong.

Operator

Your next question comes from the line of Binnie Wong from HSBC. Please ask your question.

Binnie Wong -- HSBC -- Analyst

Hi, good evening, management. Thank you for taking my questions. So my question is actually on the growth in the top-tier cities. So, we see that there is also intensive competition, right. So, how do you see that the trend in terms of your market share gains in those top-tier cities? And also, if you look at the next quarter growth outlook, right, excluding the FX impact, it actually still quite strong. So can you help us to understand how much of that is driven by your enrollment growth, and then how do you see that the trend going forward and also give us kind of like your update in terms of your vision on your online education strategy as well? Thank you.

Zhihui Yang -- Chief Financial Officer

Okay. I can share with you one number, the top 10 cities, in light of trailing-12 months, the revenue growth for the top 10 cities was 36% in RMB terms year-over-year and I think we are seeing the good trend. Actually, we're seeing the revenue acceleration in all those -- almost all the cities.

So, go back to your question about the guidance, and for the Q2. We give -- we give the guidance of the top line growth by 30% to 33% in the RMB term year-over-year growth and within it, most of the growth will come from the K-12 business.

For U-Can middle school high school. I think the growth in the second quarter will be 45% plus year-over-year in the second quarter. And for the POP Kids, there the growth will be somewhere around 50%, 5-0 percent, year-over-year and overseas test perp business will be somewhere around 10%. So you can calculate the total -- the overall growth will be somewhere around 33%. Okay.

Sisi Zhao -- Investor Relations Director

The enrollment is the key drive for the revenue growth.

Zhihui Yang -- Chief Financial Officer

Yes, the price increase will be somewhere between 5% to 10%, most of the growth comes from the -- will come from the enrollment growth. And don't [Phonetic] believe the retention rates of the -- after the summer promotion was 59% from the summer promotion and is 5% higher than the number of last year. So, we do believe most of these students will stay with us for at least one year or hopefully three to six years. So it will help the enrollment as well in the rest of the year. Okay. Thank you.

Binnie Wong -- HSBC -- Analyst

Okay, thank you so much, very clear.

Zhihui Yang -- Chief Financial Officer

Thank you.

Operator

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

Alex Liu -- China Renaissance Securities -- Analyst

Hi. Thanks Stephen and thanks Sisi for taking our questions; very strong quarters. Two quick questions; first, I think you guided around 20% full-year fiscal year capacity growth. Well, I think this quarter you are doing 24% year-on-year growth. Does that imply some kind of a deceleration into the second half this fiscal year? And second, I think we just passed through a very fierce sort of a competition summer for online. I'm just wondering whether this aggressive promotions has impacted New Oriental's offline business in anyway? Thank you.

Zhihui Yang -- Chief Financial Officer

Okay the capacity question. Yeah, you know we have the seasonality of the extension quarter-by-quarters. If we go back to the last year of the extension, we set up most of the learning centers in the second half of the fiscal year. So this year, we will use the same strategy, so we -- it's back-loaded within the same fiscal year. And the reason that we opened more learning centers in second half of the year is because we prepare for the coming new summer, OK, and so we don't change the guidance of the expansion plan as the 20% expansion plan for the whole year, back-loaded.

And yeah, the online competition is a great question. I think you know, firstly, the market is so huge, even though we're the -- one of the market leader, but our offline business market share is only 2%, somewhere around 2%, so that the market is huge in that. And so far we haven't seen any negative impact from the recent aggressive online education competition. And in fact, we are in revenue acceleration runway in the offline business side.

Even though we have seen some players to spend a lot on the online education on the marketing, selling and marketing expenses, but the key is -- after we raise the price, we doubled the price of the summer promotion, we still covered the 820,000 enrollments which is 8% the increase compared to last year and the retention rate is higher than we expected, 29% is a good results.

And, but -- our strategy is we care more, we care both offline business and online business grows, and so that means we will have two growth engines, offline and online. So the online, yeah, as I've said, we are still in process of the investment period to spend more money and time on the R&D and products development and the teachers training or staff training, and so the online, so part of the New Oriental's future. But we don't want to -- but you know on the other hand, the offline business, I think we're doing good for the offline business, OK. So we have two growth engines in future. Yeah, thank you.

Alex Liu -- China Renaissance Securities -- Analyst

Okay, thank you.

Operator

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

Tian. X. Hou -- T.H. Capital, LLC -- Analyst

Sisi, Stephen; congratulations on a good quarter. So the question is related to your offline dual-teacher model. So if you'd expand school-by-school, will be somehow slower and but if you do the dual-teacher and actually accelerated the growth, so I wonder in your future plans, how many expansion will come from the dual-teacher, the expansion. And also dual-teacher how much you know it's contributed to the margin expansion. So that's the question. Thank you.

Zhihui Yang -- Chief Financial Officer

Hi, Tian, it's a great question for the dual-teacher model. You know we have tested the dual-teacher model in 46 existing cities for the POP Kids and 30 cities for the U-Can business. And in several low-tier cities for both POP Kids and U-Can business and we're happy to see the increased market penetration in the low-tier -- in both markets in the low-tier cities. So we plan to open 10 to 15 more new cities business with the dual-teacher model, OK, in next 12 month.

And so, yeah, so one teacher and say to [Phonetic] so many children's at the same time compared to the offline business. So if you ask me, our job with a dual-teacher model should be higher than the offline business. So going forward, obviously, I think the dual-teacher model business will grow -- help the margin expansion for the whole Company. Okay.

Tian. X. Hou -- T.H. Capital, LLC -- Analyst

Thank you, that's the question.

Zhihui Yang -- Chief Financial Officer

Thanks, Tian.

Operator

Your next question comes from the line of Lucy Yu from Bank of America Merrill Lynch, please ask your question.

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

Hi, Stephen, Sisi, thanks for taking my question. Stephen, you just mentioned that in the second quarter, U-Can is about to deliver 45% plus growth with POP Kids delivering 50%. So actually the growth rate is accelerating from the first quarter. So, my understanding is that the better than expected retention rate from summer promotion might have something to do with the acceleration, is my understanding correct?

Zhihui Yang -- Chief Financial Officer

Yes. Okay, so number one, we had a very strong retention rates from the -- after the summer promotion. This is number one reason. Number two is, we have seen the student retention rates for the normal classes, both U-Can and POP Kids are trading up. So it testify the -- that New Oriental is providing better service and products to the customers, student customers. So the better the student retention rates and the higher retention rates from the summer promotion. And lastly, we opened more learning centers in Q1, Q2, and also we're ramping up the learning centers we had set out in last two years. So that means we will fill more students into the current learning centers, and help us to calculate the revenue acceleration in Q2, in the coming quarter. Okay.

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

Thank you. May I please follow up for what's the retention rate for normal class this quarter and how is that comparing to the previous quarter?

Zhihui Yang -- Chief Financial Officer

Okay. The U-Can middle school high school business, the retention rates in this quarter is close to 80% and POP Kids is close to 90%, the retention rates. So compared to last year, we got 3% to 5% higher rates year-over-year. Thank you.

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

Okay, thank you very much.

Zhihui Yang -- Chief Financial Officer

Thanks.

Operator

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

Christine Cho -- Goldman Sachs & Co. -- Analyst

Thank you. Congratulations, Stephen and Sisi. I just have one question. So seems like even in pretty mature cities like Beijing is off to a very good start this year, what are some key drivers behind this acceleration? Thank you.

Zhihui Yang -- Chief Financial Officer

I think, yeah, we -- as for the -- it's not only for Beijing school did very good results, but also for the -- also for the other big cities and I think it seems, this is a long story. We're starting to invest on the new products, things three year, three, four years ago. And so this we will start -- will start to bear fruit of the historical investments and also we used to renew the new revamped POP Kids program the product. Compared to before, it's more interactive, more adaptive for the kids. So the kids and their parents love the new products than we expected.

So it helps us to get the better student retention rates, and -- so anyway, we believe the big cities, even with the high base number, we do believe we kind of got a healthy growth in the future, going forward. Okay, thank you Christine. Thanks.

Christine Cho -- Goldman Sachs & Co. -- Analyst

Thank you.

Operator

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

Felix Liu -- UBS Investment Bank -- Analyst

Hello, Steven and Sisi, congratulations on the strong quarter and thank you for taking my question. I think you mentioned that the biggest reason for the margin expansion this quarter is the utilization improvement. So may I know what is the current utilization level and how much upside do we expect going forward? Thank you very much.

Sisi Zhao -- Investor Relations Director

Yeah, this quarter the overall utilization is 21%, and a 2% improvement compared with last year. So the key driver is U-Can and POP Kids K-12 business. So the learning centers are ramping up faster than before and the utilization got improved.

Felix Liu -- UBS Investment Bank -- Analyst

Thank you.

Zhihui Yang -- Chief Financial Officer

And going forward -- yeah, going forward, I think we -- I think we will see higher utilization rates in the rest of the year because U-Can -- I think it's a simple math, you can suggest your guys compare the topline growth with the expansion plan, OK. So, that means we feel more students into the existing learning centers. This is the math. Okay.

Felix Liu -- UBS Investment Bank -- Analyst

Great, thank you very much.

Operator

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

Alex Xie -- Credit Suisse (Hong Kong) Limited -- Analyst

Hi, management. Thank you for taking my questions. So I'll also ask about if we exclude the impacts from the regulation changes in tuition fee collection, what will be the student enrollment growth for U-Can and POP Kids? Thank you.

Zhihui Yang -- Chief Financial Officer

For this quarter?

Sisi Zhao -- Investor Relations Director

Yeah.

Zhihui Yang -- Chief Financial Officer

I think the -- for the K-12 business, if you take out the impact of the regulation, I think the enrollment growth for the U-Can and POP Kids together will be somewhere around 30% to 35%. This is the real enrollment growth, OK, and on pro forma basis.

Alex Xie -- Credit Suisse (Hong Kong) Limited -- Analyst

Got it. Thank you.

Zhihui Yang -- Chief Financial Officer

Okay, thanks.

Operator

Your next question comes from the line of Tommy Wong from China Merchants. Please ask your question.

Tommy Wong -- China Merchants Securities (HK) Co., Ltd -- Analyst

Hi, thank you. Thanks for taking my questions. You mentioned a lot about the success in the retention rate improvement in this year. Can you share what some of anecdotal, maybe strategies or at the learning center level, what kind of efforts did the teacher made or any kind of special programs that led to such a good result? Maybe just a little bit of anecdotal evidence. Thank you.

Sisi Zhao -- Investor Relations Director

Yeah, actually for product side, we keep growing out our online-offline-merge standardized teaching system to the whole network and also we invested money and also our teaching resources to refine the standardized product, for example like POP Kids, right, this year from the summer, we rolled out our new courseware to make the class more interactive and also very, very important new feature of the new courseware is that our teachers can save a lot of time and the teaching quality can be improved because it's more and more standardized teaching process and also by interactive features, new features students are more interested in the class, and also the effectiveness and stickiness of the customer are also improved and as shown by the numbers in those cities are using the new product. So that's one new feature of the whole standardized system.

And going forward, we will keep investing in having more and more new features, new services, better services to our customers. So that's one key driver. And also like teachers, because their service quality also got improved, our training process for teachers are getting more and more standardized, because the product is standardized. So for example, like starting from last year, last summer we train our U-Can teachers using the new modularized, new system to train our teachers, especially new teachers to help those teachers to improve the teaching quality in short period of time and also the teaching -- overall teaching quality got improved a lot. So that's the benefit that we can get from the standardization of the teaching products, OK.

Zhihui Yang -- Chief Financial Officer

You know saying about that, we raised the price, we doubled the price of the summer promotion this year, but we still got the 8% enrollment growth from the RMB200 per course through this year to RMB400 per course. You know that RMB400 is something, it is some money. So I think the strategy for us is better for us to identify who are the real customers and also we do believe we are providing better quality and services and products to the customer, students.

Tommy Wong -- China Merchants Securities (HK) Co., Ltd -- Analyst

Okay, thank you and congrats on the strong results. Thank you. Thank you.

Zhihui Yang -- Chief Financial Officer

Thank you very much.

Sisi Zhao -- Investor Relations Director

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.

Zhihui Yang -- Chief Financial Officer

Thank you all, again, 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

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Sisi Zhao -- Investor Relations Director

Zhihui Yang -- Chief Financial Officer

Mark Li -- Citi Research -- Analyst

Yuzhong Gao -- China International Capital Corporation -- Analyst

Jin K. Yoon -- Newstreet Research -- Analyst

Sheng Zhong -- Morgan Stanley -- Analyst

Binnie Wong -- HSBC -- Analyst

Alex Liu -- China Renaissance Securities -- Analyst

Tian. X. Hou -- T.H. Capital, LLC -- Analyst

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

Christine Cho -- Goldman Sachs & Co. -- Analyst

Felix Liu -- UBS Investment Bank -- Analyst

Alex Xie -- Credit Suisse (Hong Kong) Limited -- Analyst

Tommy Wong -- China Merchants Securities (HK) Co., Ltd -- Analyst

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