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New Oriental Education & Technology Group Inc. (NYSE:EDU)
Q2 2020 Earnings Call
Jan 20, 2020, 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 the New Oriental's FY 2020 Second Quarter and Interim Results 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 like to turn the meeting over to your host for today's conference, Mr. Sisi Zhao.

Sisi Zhao -- Investor Relations

Thank you. Hello, everyone, and welcome to New Orientals second fiscal quarter 2020 earnings conference call. Our financial results for the periods were released earlier today and are available on our 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 US private securities litigation Reform Act of 1995. Forward- looking statements involved 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 Orientals Investor Relations website at investor.neworiental.org.

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

Zhihui Yang -- Chief Financial Officer

Thank you, Sisi. Hello, everyone and thank you for joining us on the call. We are very pleased to report a set of solid financial results in the second fiscal quarter of this year, delivering both accelerate top line growth and continued operating margin expansion.

Total net revenue was $785.2 million, representing a growth of 31.5% or 34.8%, if measured in RMB, exceedingly the high ends of our expected range. Net revenues from educational programs and services for the second quarter were $723.3 million, representing a 33% increase year-over-year. The growth was mainly driven by increase in student enrollments in K-12 after-school tutoring courses, which continued its strong momentum and achieved a year-over-year revenue growth of approximately 46% in dollar terms or 49% if computed in RMB.

We continue to be guided by our optimized market strategy in this quarter and carried our capacity expansion in cities where we see potential for rapid growth and strong profitability. During this quarter, we added another 41 learning centers in existing cities, opened a new training school in the city of Huizhou and the dual-teacher model school in the city of Chengde. By the end of this quarter, the total square meters of classroom area increased by approximately 25% year-over-year, and 6% quarter-over-quarter.

Total student enrollments in academic subjects tutoring and test prep courses in the second fiscal quarter of 2020 increased by 63.3% a year-over-year to approximately 3,789,200. Please know that this higher than normal increasing student enrollments is primarily due to the division of the autumn semester into two parts, meaning that the student enrollments are recorded separately and fall in two separate quarters. At the same time, we're continuing our efforts in upgrading our online-merge-offline standardized classroom teaching system, while the interactive courseware in the POP Kids program was rolled out to more cities. We are very encouraged to have received positive feedback from our customers and see such sustained improvement in customer retention rates. We also continue to make strategic investments into our dual-teacher model classes, as well as new initiatives in K-12 tutoring, pure online education platform Koolearn.com to leverage our advanced teaching resources in low tier cities and mostly remote areas.

Following last quarter's strong bottom line performance, we once again achieved year-over-year operating margin expansion in this quarter. During this quarter, we recorded non-GAAP operating income of $36.5 million, compared to a loss of $14.9 million in the same period of last year. Non-GAAP operating margin rose by 720 basis points to 4.7%, from negative 2.5% a year ago. The continued margin expansion is mainly driven by better leverage in classroom rental and related operating expenses, just as we consistently improve the utilization of facilities. In addition, supported by a standardized, modularized and systemized operating process, we achieved an outstanding improvement in operational efficiency within each key business unit. We are confident that we will be able to deliver continued margin expansion, and generate sustainable long-term value to our customers and shareholders.

For program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 10% year-over-year. We like to note that the lower than normal blended ASP is primarily due to the change in the tuition fee collection schedule for our K-12 after-school tutoring courses, as explained above. The number of students we recruited and the amount of fee collected during the quarter reflect the second half of the autumn semester, winter semester and the first half of the spring semester. Therefore, our blended ASP for the second quarter of 2020 appears to be lower. Hourly blended ASP, which is cash revenue divided by total teaching hours increased by approximately 6% year-over-year in RMB terms. To provide a breakdown of hourly blended ASP, please note that U-Can program increased by 7%, POP Kids increased by 11%, and overseas test prep program increased by 7%, all year-over-year in RMB terms.

Now let's move on to the second quarter performance across our individual business lines. As mentioned earlier, our key revenue driver K-12 all-subjects after-school tutoring business achieved year-over-year revenue growth of 46% in dollar terms or 49% in RMB terms. Breaking down U-Can middle school/high school all-subjects after school tutoring business recorded revenue increase of 43% in dollar terms or 46% in RMB terms for the quarter. Our student enrollments grew approximately 55% year-over-year for the quarter. Our POP Kids program delivered outstanding results with revenue up by about 51% in dollar terms or 55% in RMB terms for the quarter. Enrollments in the program went up about 87% for the quarter. The overseas test prep recorded revenue increase of 3% in dollar terms or 5% in RMB terms for the quarter. The consulting business recorded revenue growth of about 1% in dollar terms or 4% in the RMB terms year-over-year for the quarter. Finally, we actually personalized classes business reported revenue growth of about 37% year-over-year in dollar terms or 40% in RMB terms year-over-year for the quarter.

Next, I will provide some updates on the progress we're making with our Optimize the Market strategy, beginning with our offline business this quarter. As mentioned earlier, we added a net of 41 learning centers in existing cities, opened a new training school in the city of Huizhou and dual-teacher model school in the city of Chengde. Altogether, this increased the total square meters of classroom area by approximately 25% year-over-year and 6% quarter-over-quarter by the end of this quarter. By the end of Q2 2020 the dual-teacher class model has been introduced into the POP Kids program in 48 existing cities, for U-Can program in 30 existing cities, and for both POP Kids and U-Can K-12 business in seven new cities. The initiative supported the increased market penetration in both markets we have tapped into. We also saw improved customer retention rates and scalability of this new model. With this program results, we will continue this strategy in the rest of the year.

On the digital technology front, we invested $44 million in the quarter to improve and maintain our online-merge-offline called OMO standardized classroom teaching system. Most of the investments were reported under G&A expenses. 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 demands. More resources are invested into executing new initiatives in pure online K-12 after-school tutoring business in fiscal year 2020. The investments includes constant developments, teaching, recruiting and training, sales, marketing, R&D and other necessary cost and expenses to drive the growth for 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 the Koolearn.com to gain new market share in the online education space and drive top line growth.

Now, let me walk you through the other key financial details for the second quarter. Operating costs and expenses for the quarter were $759.9 million, representing a 21.1% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses were $748.7 million, representing a 22% increase year-over-year. Cost of revenue increased by 19.6% year-over-year to $359 million, primarily due to increases in teachers' compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation.

Selling, marketing expenses increased by 17.7% year-over-year to $107.8 million. G&A expenses for the quarter increased by 24.4% year-over-year to $293.1 million, non-GAAP G&A expenses, which exclude share-based compensation expenses were $282.1 million, representing a 21, I'm sorry, representing a 27.1% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 18.1% to $11.2 million in the second fiscal quarter of 2020.

Operating income was $25.3 million, representing a 188.6% increase year-over-year, non-GAAP income from operations for the quarter was $36.5 million, presenting 345.6% increase year-over-year. Operating margin for the quarter was 3.2%, compared to a negative 4.8% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was 4.7% compared to negative 2.5% in the same period of prior fiscal year.

Net income attributable to New Oriental for the quarter was $53.4 million, representing a 306.9% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental was $0.34 and $0.34 respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $57 million, representing a 147.8% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.36 and $0.36 respectively. Net operating cash flow for the second quarter of 2020 was approximately $291.8 million. Capital expenditures for the quarter were $52.4 million, which were primarily attributable -- of the opening of 78 facilities and new learning centers and renovations of the existing learning centers.

Turning to the balance sheet. As of the November 30, 2019, New Oriental had cash and cash equivalents of $1,047.6 million as compared to $1,414.2 million as May 31, 2019. In addition, the company had $348.3 million in term deposits and $2,221.5 million in the short-term investments. New Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered, at the end of the second quarter of fiscal year 2020 was $1,570.4 million, an increase of 25.6% as compared to $1,250.3 [Phonetic] million at the end of the second quarter of fiscal year 2019.

Before moving onto our outlook and guidance for the third quarter, I would like to provide some updates on the Koolearn. Koolearn Technology Holdings Limited, a subsidiary of New Oriental which provides online extracurricular education service in China also announced its interim results for the fiscal year 2020 earlier today. I'd like to emphasize that Koolearn is very important platform for New Oriental and we're optimistic about the opportunities in online education market and the confidence in our investments into the platform. During the period, Koolearn has undergone a process restructuring its college education business line, which had some of the negative impact on koolearn near term revenue growth. Koolearn also continue to invest more resources in executing new initiatives in the areas of content development, teachers' recruitment and training, sales marketing, research and development and other necessary cost and expenses to drive the growth of new online programs.

For the first six months ended November 30, 2019, Koolearn recorded an 18.8% year-over-year increase in revenue to RMB567.6 million or $81 million. Gross profits was RMB317.1 million or $45.2 million, losses of the period was RMB87.5 million, I'm sorry -- loss of the period was RMB87.5 million or $12.5 million, compared to a profit of RMB36.2 million, in the same period of prior fiscal year. It's encouraging that while it is K-12 business new initiatives location-based live interactive after-school tutoring courses or DFUB have been rolled out 128 cities in China and recorded the enrollment growth of 186.2% year-over-year. For more details, please refer to Koolearn's financial results announcement in full.

Looking ahead into the next quarter and the rest of the fiscal year 2020. We will continue to be guided by our optimized market strategy and further ride upon the success and momentum we have viewed. We're confident about capturing a wider range of the market opportunity moving forward to provide more detail on our areas of focus for the rest of the year. First, we will continue to expand our offline business. We aim to add around 20% to 25% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-12 business in existing cities. 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 into digital technologies and introduce our online-merge-offline system to more offline language training and test offerings. Especially for our K-12 tutoring and overseas test prep key businesses. We will continue to make investments and we believe that total spending in absolute dollar terms in fiscal year 2020 will increase compared with the prior fiscal year. Furthermore we will continue to invest in and execute new initiatives including product developments, teacher's recruiting, training, R&D, as well as sales marketing expenses in pure online K-12 after school tutoring business, our Koolearn.com.

Third, our top priority will remain as to focus on optimizing utilization of facilities and controlling cost and expenses across the company to drive the continued margin expansion and increased operational efficiency. The new facilities build in the last two fiscal years are being ramped up more efficiently than before. We expect our non-GAAP operating margin of the offline language training and test prep business to continue to expand in the second half of fiscal year 2020. This improvement is expected to cover the margin pressure resulting from our online investments in the koolearn.com. On the whole, we expect our overall non-GAAP operating margin to continue to improve year-over-year in fiscal year 2020 compared to the year-over-year decline last two fiscal years.

Fourth, as of today, we have decided to move two days of classes in our Wuhan New Oriental school from -- before the Chinese New Year to after the Chinese New Year in view of the disease cases. Class will be taught via our online lab forecasting technology, if the learning centers operations remain suspended after the Chinese New Year. Please note that classes in the cities except Wuhan have not been adjusted or suspended. The health and safety of our students is our top priority and we will continue to closely monitor the situation and co-operate with the relevant authorities. Also note, we have taken the impact from the conditions in Wuhan into consideration in our third quarter's guidance. The impact is immaterial based on our current estimation.

Finally, the recent RMB depreciation against the US dollar might cause impacts on our earnings in dollar terms for the third quarter of 2020.

Finally, I would like to emphasize that we have great confidence in fundamentals of our business, which we believe will continue to remain strong. As we continue to execute our Optimize Market strategy, we are certain that New Oriental will continue to capture the sustainable growth opportunities in the market and deliver long-term value for our shareholders. Looking at the near-term and our expectations for the next quarter. We expect total net revenues in the third quarter of fiscal year 2020 to be in the range of $983 million to $1,006.4 million, representing year-over-year growth in the range of 23% to 26%.

If not taking into consideration the impact of the potential change in exchange rate between RMB and US dollars, the projected revenue growth rate in our functional RMB -- in our functional currency RMB is expected to be in the range of 26% to 29% for the third quarter of fiscal year for 2020. The exchange rate, we used to calculate expected the revenue for the third quarter for fiscal year 2020 is 6.95. The historical exchange rates used to calculate revenues for the third quarter of fiscal years 2019 was 6.81. I must mention that this 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. Thank you.

Questions and Answers:

Operator

The question-and-answer session of this conference call will start in a moment. [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 on the very strong margin performance for this quarter. We think is a bit guidance by pretty nicely. May I know what are the reason -- major reasons for the non-GAAP OP margin be for this quarter? And also, I would like to know maybe our revenue guidance breakdown across different segments? Thank you.

Zhihui Yang -- Chief Financial Officer

Okay. Okay, Mark, you know, yeah we beat the margin guidance a lot. Our non-GAAP operating margin rose by 720 basis points in this quarter. I think it is because of the following reasons. Number one, I think the continued margin expansion is mainly driven by the better utilization of the facility. Typically -- typically our top line growth is over 30% year-over-year in RMB terms, but the expansion in latter trailing 12 months is just 25%. And also number two is, we build a standardized, modularized, and systemized operating process. So you see the result, we achieve outstanding improvement in the operational efficiencies and we got a lot of leverage on the selling, marketing, and G&A expenses. And finally, you know we are seeing the revenue acceleration, typically we're taking market share from the small player in the market. So the revenue is very good and I think those three reasons got us the better results of the margin expansion.

But yeah, as I mentioned in the prepared remarks, in the rest of the year, even in Q3 and in Q2 in fiscal year '20, I think we still got more leverage going forward. So we believe we will have the margin expansion in the rest of this fiscal year and even for fiscal year '21. I think our margin will get the expansion as this year, OK.

And the revenue breakdown, yeah, in the -- Q3 revenue guidance, I think the K-12 business will grow by 40% in RMB terms, OK. What I'm saying is only in RMB terms year-over-year growth 40% and overseas test prep, I think sort of low single-digit growth and see the domestic test prep, it will be done by, let's say, the 3% to 4% and the overseas consulting business, the growth will be over 20%. So this is the breakdown of the Q3 guidance.

Mark Li -- Citi Research -- Analyst

Thank you very much Stephen. Okay. Thanks, Mark.

Operator

Your next question comes from the line of Yuzhong Gao [Phonetic], please ask your question.

Yuzhong Gao -- Analyst

Hey, Stephen. Congrats on the very strong results. So we noticed that you seem to have revised up your capacity expansion target from 20% to 25%, so how should we think about the marketing spend scale in the second half of 20 -- fiscal year '20? Thanks.

Zhihui Yang -- Chief Financial Officer

Okay. Yeah, we -- this quarter, the quarter-over-quarter expansion was 6% combined with the 3% in Q1. So we get 9% in the first half of this fiscal year. And typically, in terms of the seasonality, we opened more learning centers in the second half of the year. So it's -- it's more back loaded and so I think we believe the whole year expansion plan will be somewhere around 20% to 25%, actually is close to 25%, and -- but you know the top line growth will be somewhere around 30%. I think it's impossible to over -- to get over 30% top line growth in RMB terms. So in the rest of the year, as I said I think we do have more leverage on the GP level and the SG&A level. And -- but you know typically we don't give the detailed guidance of the margin expansion in the quarter, but I believe we can get the margin expansion in the rest of the year and the year after.

Yuzhong Gao -- Analyst

Thank you. Very helpful.

Zhihui Yang -- Chief Financial Officer

Thank you.

Operator

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

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

Hi Stephen, Sisi, thanks for taking my question. The question is related to your regional expansion. So now we have 1300 -- more than 1,300 learning centers. So for the newly -- for the new learning center, you are planning to open, where are those centers going to be, in what kind of a region and to support the additional expansion, 25% and how do you prepare your teachers force, that the team of teachers, so that's the question related to expansion. Thank you.

Zhihui Yang -- Chief Financial Officer

Yeah Tian Hou we have the 1300 learning centers in total and we plan to open, let's say 20% to 25% new capacity one year. And so most of the new learning centers we set up going forward, will happen in the existing cities. You know internally we only allow the good performing schools to open more learning centers in the cities. And, but you know we have another business model called [Indecipherable]. So, many of you know it belongs to the Koolearn and we will open more the -- the new business in low-tier cities OK. There is two ways, OK, for traditional offline business we will open more cities -- schools or learning centers in existing cities, OK.

And as for teachers resource, you know we believe we pay the best in the market to our teachers and also things are -- last year we build up the online teachers' training system. So that means we have more ability to generate or produce more qualified teachers than before. So we do believe we have the more qualified teachers to support the new opening of the new learning centers going forward. Thanks again.

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

Thank you. Very helpful.

Zhihui Yang -- Chief Financial Officer

Thank you again.

Operator

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

Alex Liu -- China Renaissance Securities -- Analyst

Hi, thanks Stephen and this is right opportunity. I just want to follow-up first on Tian's questions. Could you share more color on, for example, how fast is the capacity growth in top cities, for example, Beijing right now? And a follow-up question, I think the overseas test business is growing, if I remember correctly, is low single-digit growth this quarter and may I know what's -- what was -- what's the reason behind this seemingly a little bit unexciting growth in the past few quarters? Thank you.

Zhihui Yang -- Chief Financial Officer

Yeah, actually -- Thanks Alex. Actually, we opened the learning center almost everywhere. Basically, that city got the better results in the last trailing 12 months. So we opened the learning center in the top tier Tier 1 or Tier 2 cities and we open -- we opened -- we also opened the learning centers in like the Tier 3, Tier 4 cities. So I think the only one indicator for us to decide whether or not open the learning centers is the performance of that school last year, OK. And, but you know, think even for the big cities like Beijing and Shanghai, Wuhan, and Guangzhou, I think there is a lot of room to open more offline learning centers. So, yeah.

And the overseas test prep, yeah this quarter you know the numbers is not good. The only 5% in RMB terms year-over-year growth for overseas test prep business. I think the main reason is because of the United States, China, the two countries relationship change. So I think -- our non-United States related business like the [Indecipherable] or the other subjects, [Indecipherable] United States related businesses keep flattish this quarter and I would and we -- even in the Q3, I think the growth will be flattish again. So I think this is the main reason.

Alex Liu -- China Renaissance Securities -- Analyst

Okay. Sorry, one more follow-up. On the gross margin, there seems to be a notable jump this quarter. May I know what was the driver behind this notable improvement on the gross margin? Thank you.

Zhihui Yang -- Chief Financial Officer

Firstly you know the revenue growth beat our guidance, OK. As I said we're taking market share from the small players and also there is -- there are a lot of schools provide a very good numbers of this quarter on top line growth and suddenly the -- if you compare the top line growth with the expansion -- capacity expansion, you know -- we have the better leverage on the rental side. And yeah, I think this is a -- those are the two key reasons to explain the GP margin expansion.

Alex Liu -- China Renaissance Securities -- Analyst

Okay, thank you.

Zhihui Yang -- Chief Financial Officer

Okay. Thank you, Alex.

Operator

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

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

Hi, Stephen, I got one question on the class scheduling. So actually this year, Chinese New Year is earlier than last year, so is it fair to say that we started our spring semester, a little bit earlier than last year. So theoretically in February, we are seeing more positive benefit from this kind of trend of the shift, is that true? If so, can you give us a quantified impact on the class scheduling? Thank you.

Zhihui Yang -- Chief Financial Officer

I think yes, this year the Chinese New Year is a little but earlier, but I think the impact from the class schedules -- the impact is very small, very minimal. So, but, I must mention that typically -- you know last year the Q2 we started to do something like the facility movements of the -- and class schedule and change in last year Q2, so which lead to a postponement of some K-12 classes from Q2 to Q3 last year. So that means, last year -- you know this year, we have an easier comparison in Q2, but a little bit harder comparison in Q3. But anyway -- it is seasonal or just tiny difference issue is not a big issue, OK.

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

Okay, thank you. And the second -- my second question is that in the first half you have already expanded your non-GAAP operating margin by close to 5 percentage point. This is higher than your previous expectation of 1.5% to like 2% for the full year. So is it fair to say the risk is on the upside to your full-year guidance in terms of margin? Thank you.

Zhihui Yang -- Chief Financial Officer

Yes, I think -- I don't guide the second half of the year margin, the guidance but we do believe we will have the margin expansion in the Q3 and Q4. Okay, we will see the -- I think for the whole year the margin will be better than we expected several months ago, OK.

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

Great, thank you.

Zhihui Yang -- Chief Financial Officer

Okay. Thank you, Lucy.

Operator

[Operator Instructions] Your next question comes from the line of John Choi from Daiwa. Please ask your question.

John Choi -- Daiwa Capital Markets -- Analyst

Hey, Stephen and Sisi. Thanks for taking my question. I have a question on your online, I know Koolearn basically on the cost side, they'll step up more -- open you up into tier cities. Can you kind of give a sense will EDU and Koolearn in general will step up the investment in online and as a result, we will see more on the back-end loaded for their fiscal year in terms of marketing expenses and use their acquisition costs? And just quickly after the regulation, which has been in place for more than about a year on the offline schools, are you seeing more visibility or better visibility compared -- given that the smaller players are being phased out and as a result, you're seeing higher retention rate and better capacity growth in selected regions? Thank you.

Zhihui Yang -- Chief Financial Officer

Yeah, so the Koolearn investment, on Koolearn, yeah, this year, we started to invest on the koolearn.com, it includes the content developments or teacher's training or R&D and some marketing expenses things this fiscal year and in the first half of the year the margin drag from the Koolearn to EDU is roughly is 100 bps. This is the margin impact from Koolearn for EDU and in the second -- second half of the year we expect that -- we still have some of the negative impacts of the margins from the Koolearn, but we believe the margin expansion of the core business where our school business and offline business will cover the margin pressure from Koolearn. So we believe on the whole, our margin will be expanded in the rest of the year, even though we spent a lot on the Koolearn.

And yes -- number two question was about regulation. Last year there was several of the new regulations and, but as I said in the last two earnings call, we -- we almost meet all the requirements by the new regulations in almost all the cities and we have seen some small players disappear from the market and we have seen some students join our classes, who are the students from the small player. So I think our target going forward is to provide the best of service to the Chinese students and we believe we can take more market share from the old players in the market. Okay, thank you.

Operator

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

Binnie Wong -- HSBC -- Analyst

Hi, good evening, Stephen and Sisi. Thank you for taking my question. So question here is that if you look at '20 like last year, right, we see a wave of a lot of online education company, small and middle-sized ones, compete right, especially if you see user acquisition cost has been rising up a lot. So if you look into 2020, how do you see, I mean calendar 2020, how do you see that will change? Do you see that how our marketing strategy will be different from players? And also if you look at the, I guess the deceleration of growth in Koolearn, do you think that will continue or there will be some drivers to reaccelerate the online business growth? Thank you.

Zhihui Yang -- Chief Financial Officer

Okay, I think firstly Koolearn has been in transition mode in last two to three quarters as you know, we changed the key management members last year and we prefer to give the new management team member more time, OK. And, but you know education is very special business, we don't want them to do the business too fast by like spending the crazy dollars on the marketing activities. So even in last year, we didn't attempt like the burning the money to acquire the students. And going forward, I think we will allow the Koolearn to spend a little bit more on the marketing, the expenses. But I think it's not a huge number. We refer to make the more or huge investments on the R&D and, like the teachers' training or the product itself is our strategy. Thank you.

Binnie Wong -- HSBC -- Analyst

Thank you. Very helpful, thank you. Thank you.

Zhihui Yang -- Chief Financial Officer

Okay Binnie. Thank you.

Operator

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

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

Hi, management and congratulations on very strong results. So I would like to ask about our magnitude of utilization rate improvement. I think in the last quarter's earnings call, we mentioned it was 21% and 2% [Phonetic] year-over-year increase? Thank you.

Zhihui Yang -- Chief Financial Officer

Yeah, this year the -- I think the utilization rate for this year is somewhere around 21%, which means the -- we got the 200 bps up of the utilization rate. So that's why you see the margin expansion, OK. And so going forward, as I said, we plan to open 20% to 25% new learning centers, and it bring us like 30% topline growth in RMB terms year-over-year. So I think you will see the higher utilization rate going forward in the rest of this fiscal year and the year after.

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

Got it. Thank you.

Zhihui Yang -- Chief Financial Officer

Thank you.

Operator

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

Sheng Zhong -- Morgan Stanley -- Analyst

Hi, Stephen. I wanted to ask a question about our dual-teacher model, because you are still adding more new teachers in the cities, so can you share some operating data about the margin of dual-teacher model and how with the current half -- what the average cost a teacher can teach in that dual-teacher model? And at the same time, I noticed that you have -- you still invests a lot in your digital technology, want to know whether this is partly because of this dual-teacher model, and if possible, can you share more color on the spending going forward? Thank you.

Zhihui Yang -- Chief Financial Officer

Okay, dual-teacher model. Yeah, we changed our dual-teacher model a strategy last year. So, we focused more -- we focused more dual-teacher model in the Hubei and Hunan province. So now we have been in seven low-tier cities for both POP Kids and U-Can programs through -- by the dual-teacher model. And now, the revenue contribution from the dual-teacher model is very small. So the -- I think the growth is very high, but revenue contribution is very small and now I think it's too early to say the margin of the dual-teacher model because it is in the early stage, but historically as I said, I think the dual-teacher model margins should be higher than the offline business.

And this quarter the OMO investments, yeah, this quarter we invest $44 million on the -- like the OMO ecosystem. I think this is on track OK, because you know we started to invest on the OMO things three years ago, four years ago, and we started to bear fruit things last year and I think this is the -- this year, very good result. I think that means we bore fruit from the investments we made several years ago. So -- and so the whole year, I think we plan to spend somewhere around $150 million to $160 million for the whole year. Yes, it's a little bit higher than we expected several months ago, but I think even though we spend a little bit more, but it should be covered by the offline school margin expansion. So that would be OK. We will see the overall margin expansion, even though we spent a little bit more.

Sheng Zhong -- Morgan Stanley -- Analyst

Thank you very much. Yeah, we are happy to see you spending more on the technology improvements. So can you --.

Zhihui Yang -- Chief Financial Officer

Thank you. Thank you Sheng Zhong.

Sheng Zhong -- Morgan Stanley -- Analyst

Yeah, can you give some color on the spending areas of our technology?

Zhihui Yang -- Chief Financial Officer

Typically, we hire more IT people and the content development people in our head office for -- to provide more better products for offline schools and the dual-teacher model schools. And also we hire some -- the new people worked for AI departments and yeah, so I think the most of the investments we spent, it only -- it happens in the head office. So, but we do believe it will bring us the better student retention rates going forward and we do believe this money -- we spend the money today will bring us the better quality products in the future.

Sheng Zhong -- Morgan Stanley -- Analyst

Thank you very much.

Zhihui Yang -- Chief Financial Officer

Thank you Sheng Zhong.

Operator

Your next question comes from the line of Hugo Shen of Macquarie. Please ask your question.

Hugo Shen -- Macquarie -- Analyst

Hi, thank you for taking my question. I wondered if management could give us the breakdown of enrollment growth by business in this quarter? Thank you.

Zhihui Yang -- Chief Financial Officer

Enrollment -- do I disclose it the enrollment breakdown?

Sisi Zhao -- Investor Relations

You can send email to me and I'll send you the details. Okay, after the call.

Zhihui Yang -- Chief Financial Officer

Yeah. Because of the long part, OK. Thank you.

Operator

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

Felix Liu -- UBS -- Analyst

Hello, good evening. Congratulations Stephen and Sisi for the very strong quarter. So two quick questions from me. One is that you mentioned the ramp-up is getting faster than expected -- than previously, so could you share as the latest timeline to ramp up a new center? And second one is a follow-up to the previous question on OMO investment, so I understand a lot of the costs are in staff, salary. So going forward, if we look at the second half of next year, do we plan to further increase the headcount or is it likely to stay at this level? Thank you.

Zhihui Yang -- Chief Financial Officer

Yeah you know historically let's say, two or three years ago, typically we need 12 months to get breakeven point for the new learning center. But now it's only spend five to seven a month to get a breakeven point. So that means that we ramp up learning centers faster than before. And I think this is one of the reason that we decided to open more learning centers, OK in the -- in every year OK.

And -- your second questions is about the ongoing investments. Yeah, I think we will have more people, more qualified, a more talent people work for the IT department and the content development team, also for the AI department, because you know, firstly, I think it's a good investment. We spend more money today, but we get better future. And but anyway I think the total spending, it will be controlled by the management team. We don't want to waste money, OK. So as I said, even though we spend a little bit more on the OMO investments, but we do believe we have the margin expansion going forward for the second half of the year and the year after, OK.

Felix Liu -- UBS -- Analyst

Okay, great. Great, thank you. Glad to see that we have the budgeted that in the longer-term growth. Congratulations again on strong quarter. Thank you.

Zhihui Yang -- Chief Financial Officer

Okay, thank you. Thank you, Felix.

Operator

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

Christine Cho -- Goldman Sachs -- Analyst

Thanks Stephen and Sisi. Just a quick question on the revenue guidance. You mentioned that you considered the Wuhan situation in terms of coming up with the third quarter guidance, can you give us a little bit more detail here? And also if the situation prolongs, what are some of the alternatives you can consider to kind of mitigate the impact from the situation? Thank you.

Zhihui Yang -- Chief Financial Officer

Yeah, we -- our Wuhan school actually decided today to move the two days courses before Chinese New Year to sometime after the Chinese New Year because of the new disease, but also we have plan B, let's say if after the Chinese New Year, we cannot run the business by offline, we'll make that -- make it up by the online courses, OK. Actually, we are ready. Yeah, we're ready. And so -- but so far we have not the made the decision of the class adjust or suspend in the other cities except for Wuhan, So Wuhan is only -- the only one. And yeah, we have taken some impact from the disease in Wuhan, but the amount is not material. Okay, Wuhan's revenue contribution for New Oriental is 4%. But don't forget 45 days have passed, and also we have the makeup plan, plan B to make it up, OK. So I think the impact will be immaterial so far by our -- the current estimation.

Christine Cho -- Goldman Sachs -- Analyst

Okay, thank you.

Zhihui Yang -- Chief Financial Officer

Thank you.

Christine Cho -- Goldman Sachs -- Analyst

Thank you.

Operator

Your next question comes from the line of Youngrin Kim of CLSA. Please ask your question.

Youngrin Kim -- CLSA Limited -- Analyst

Hi. Management, congrats on the good quarter. I have two questions. The first is, how much of revenue growth is actually coming from organic growth versus stealing market share from other small players? That's my first question. My second question is, I know in the past you have provided mid to long-term margin guidance of 17% to 19%. So do you still stick by this margin guidance or do you see room for increase or things like that? Thank you.

Zhihui Yang -- Chief Financial Officer

Okay, yeah, organic growth. I think typically in the first 12 months after the new learning centers opening it will bring us -- let's say the -- for example, we open 20% new learning centers, but in the first year one, it will bring us 5% to 10% new revenues. So -- and so, I think all the others are the organic growth and the market of the -- and we don't -- we don't have the numbers of the, how much market share we got from the small players. We're -- OK we just do our business to get a 30% top line growth assets. Sisi, do you have the numbers?

Sisi Zhao -- Investor Relations

No, it's hard to quantify, but we keep taking market share from small players every day, almost every day and the market growth is like 10%, 15%, but our K-12 business are growing over 40%. So definitely majority of the growth is from taking market share from other small players in each city.

Zhihui Yang -- Chief Financial Officer

And the mid and long-term margin guidance, we don't want to change the long-term -- actually it was mid -- mid-term margin guidance, I would keep it as 17% and but this year, the market expansion is better than we expected. And we are more optimistic on the overall margin expansion in the rest of the year and the year after.

Youngrin Kim -- CLSA Limited -- Analyst

All right, thank you very much.

Zhihui Yang -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Joy Wei of 86 Research. Please ask your question.

Joy Wei -- 86 Research Ltd. -- Analyst

Thank you for taking my question. So my question is, during the quarter, we saw that U-Can and POP Kids growth accelerated. So what's driving that? Do you see more opportunities in terms of prospectives like cross offering and also product format? Thank you.

Zhihui Yang -- Chief Financial Officer

I think there are several reasons. The number wise you know if you remember, clearly in the last quarter's earnings call, the summer promotion retention rate is 5% higher of this year than last year. So this number one reason. Number two is we -- number two is -- we are seeing the higher student retention rate for both U-Can and POP Kids program. Actually the U-Can business, you know the retention rate is close to 80% and the POP Kids retention rates is close to 90%. So it's a couple -- it is higher than the those numbers of last year. And third, we don't spend a lot on the marketing expenses, the selling market expenses in this quarter is just increased by 17%, OK. That I think that we typically would rely on word of mouth to acquire the new student enrollments and that means we're providing the better the product to the students than before. So it bring us the good result -- better results than we expected, OK. It's clear?

Joy Wei -- 86 Research Ltd. -- Analyst

Yes, thank you.

Zhihui Yang -- Chief Financial Officer

Okay, thank you.

Operator

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

Zhihui Yang -- Chief Financial Officer

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

Operator

[Operator Instructions]

Duration: 0 minutes

Call participants:

Sisi Zhao -- Investor Relations

Zhihui Yang -- Chief Financial Officer

Mark Li -- Citi Research -- Analyst

Yuzhong Gao -- Analyst

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

Alex Liu -- China Renaissance Securities -- Analyst

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

John Choi -- Daiwa Capital Markets -- Analyst

Binnie Wong -- HSBC -- Analyst

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

Sheng Zhong -- Morgan Stanley -- Analyst

Hugo Shen -- Macquarie -- Analyst

Felix Liu -- UBS -- Analyst

Christine Cho -- Goldman Sachs -- Analyst

Youngrin Kim -- CLSA Limited -- Analyst

Joy Wei -- 86 Research Ltd. -- Analyst

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