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New Oriental Education & Technology Group Inc. (NYSE:EDU)
Q1 2021 Earnings Call
Oct 13, 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 New Oriental's FY 2021 First Quarter Results Earnings Conference Call. [Operator Instructions] Today's conference call 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

Hey. Hello, everyone, and welcome to New Oriental's first fiscal quarter 2021 earnings conference call. Our financial results for the periods were released earlier today and are available on the Company's website, as well as on Newswire Services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the 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 will now turn the call over to Mr. Stephen Yang. Please go ahead, Stephen.

Yang Zhihui -- Chief Financial Officer

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Although the impact of the pandemic continues to raise hurdles for businesses across the globe, we're pleased to kick off the fiscal year with a set of encouraging financial results in the first quarter of this year, that is in line with our expectation, while showing signs of the recovery in some of our business lines as domestic markets began its path to normalization. Total net revenue was $986.4 million, representing a 8% decrease year-over-year, which is better than we've guided in the previous quarter. Net revenues from educational programs and services for the first quarter were $935.6 million, representing a 6.1% decrease year-over-year.

Our U-Can middle school/high school all-subjects after-school tutoring business showed a positive light with a growth of approximately 9%, while our POP Kids program recorded a growth of approximately 4%.

Our industry-leading OMO system has been vital in the previous quarters to ensure our service run smoothly and it has once again proved to be instrumental in this quarter. As it provides our operation with strong flexibility to help vast majority of our students migrated from OMO online classes back to offline learning centers, which has gradually resumed service amid [Phonetic] easing of the pandemic restriction measures. Encouraged by its effectiveness, we have put more focus on executing our OMO strategy, including piloting the OMO online courses in around 20 existing cities and attract a promising number of new customers in the summer quarter.

Total student enrollments in academic subjects tutoring and test prep courses in the fourth quarter of 2021 increased by about 13.5% year-over-year to approximately 2,961,100. The lower-than-normal increase in the number of student enrollments is primarily due to the delayed enrollment for summer and autumn classes and shortening of summer holiday in many major cities by one or two weeks this year, as well as the delayed resumption of the offline operation in cities, such as Beijing due to the reemergence of the COVID-19 cases before the summer holidays. A key highlight in this quarter is the highly successful summer promotion campaign. Despite the challenges of the shortened summer holidays, we are delighted to see the total promotion enrollments reached 1,079,000, a 31% increase year-over-year, accompanied by improved student retention year-over-year.

In terms of the pricing, per program blended ASP, which is cash revenue divided by total student enrollment decreased by about 10% year-over-year in dollar terms. As for hourly blended ASP, which is GAAP revenue divided by the total teaching hours, decreased by approximately 2% year-over-year. To provide the breakdown of the hourly blended ASP, please note that U-Can classes increased by 2%. U-Can VIP courses increased by 3%. POP Kids decreased by 1% and overseas test prep programs increased by 7%, all year-over-year in dollar terms. Comparing with our normal price increase of 5% to 8%, this quarter's hourly blended ASP decrease was mainly because of: firstly, a bigger decline of overseas test prep program, which hourly blended ASP, was much higher than other programs. Secondly, the piloting of promotional OMO online courses in some major cities with discounted price in summer. And thirdly, a bigger portion of the enrollments on promotional courses to encourage students to register for more subjects.

Now, I would like to spend some time to talk about the quarter performance across our individual business line in detail. As the pandemic gradually fades in China, encouraging signs of recovery have started to emerge across our business lines with significant jump in student enrollments. Our key growth driver, K-12 after-school tutoring business, achieved year-over-year revenue growth of approximately 8% in dollar terms. Breaking it down, the U-Can middle school/high school all-subjects after-school tutoring business recorded revenue increase of approximately 9% in dollar terms for the quarter. Student enrollments grew 23% year-over-year for the quarter. Our POP Kids program recorded a revenue increase of about 3.5% in dollar terms for the quarter. Enrollment increased by 17% for the quarter.

Our overseas-related businesses, including test prep and consulting and study tour business continue to face the difficult challenges due to the cancellation of the overseas exams and restrictions on travels, while the unpredictability of the pandemic situation in different parts of the world has raised students hesitant [Phonetic] to study abroad. The overseas test prep business recorded revenue decrease of about 51% in dollar terms for the quarter, while the overseas consulting and overseas study tour business recorded revenue decrease of about 31% in dollar terms year-over-year for the quarter.

And finally, VIP personalized classes business recorded cash revenue decline of about 10% in dollar terms year-over-year for the quarter.

We're pleased to see that our summer promotion strategy delivered outstanding results. We offered low-price experiential courses for multiple subjects in a total of about 70 cities, targeting grade seven secondary school and grade three primary school student customers before they start their new school year.

The promotion price is similar with that of last year at around RMB400. It's very encouraging that, even we launched the summer promotion almost one month later than last year because of the few challenges from the pandemic on our daily operation. This summer promotion remains very well received by the market. The complete promotion enrollments we brought in this year recorded a 31% increase year-over-year, reaching 1,079,000 enrollments. The encouraging results indicated the opportunity to market consolidation as the COVID-19 pandemic fades and certain players may lack financial and digital capabilities to sustain their operations. It was well proven that under this strategy, we are able to better identify and retain customer with higher loyalty. Please note that these promotion enrollments are not recorded in our current reported enrollments.

Going into the autumn semester, we have retained about 60% of students following the promotion, which will boost revenue and margin recovery throughout the whole fiscal year 2021. And we do not foresee any negative impacts of the promotions on operating margin throughout the whole fiscal year. As these students move to the higher grades, the continued improvement in retention rates and customer loyalty will drive revenue growth in the next three to six years.

We continue to be guided by our optimized market strategy in this quarter and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability. This quarter, we opened seven new offline training schools in the city of Changzhou, Weihai, Kaizhou, Xining [Phonetic], Wuhu and Xinxiang [Phonetic]. Altogether, this increased the total square meters of classroom area by approximately 23% year-over-year, 1% quarter-over-quarter by the end of this quarter. This slight increase is in line with our expectations, as we tend to achieve a more modest growth in capacity in the first quarter of the year and ramp up our expansion efforts in the latter part of the year to prepare us for recruiting more new student enrollments at the start of the following academic year.

The expansion in our offline education network has also made sure that we are fully prepared for when pandemic is over. And our service can resume with a strong presence across different China cities. We roll out our dual-teacher class model for POP Kids program in 46 existing cities, for U-Can program in 28 existing cities and for both POP Kids and U-Can K-12 business in 10 new cities by end of this quarter. We're happy to see increased market penetration in those markets we have tapped into. We also saw the improved customer retention and scalability of this new model. With this proven result, we will continue this strategy in the rest of the year.

As the outbreak of COVID has highlighted the importance and demand of the online education, we have placed more resources in this area and invested $39 million in the quarter to improve and maintain our OMO integrated education ecosystems. And as for COVID -- outbreak of the COVID-19 has highlighted the importance and demand of the online education. Apart from the OMO infrastructure, we have allocated part of the resources in advanced training programs for our teachers to enhance their online/offline integrated teaching skills in response to the growing demand. At the same time, we continue to upgrade our technology platforms and will broaden the usage of online tools and contents in our OMO system for all business lines throughout the whole network, as well as further develop the best teaching content and courseware to cater to online/offline integrated education methods.

We are glad to see that industry-leading OMO ecosystem has, not only successfully managed to cushion most of the impact on our service and operation caused by the pandemic, but we also see the customer retention rates from spring to summer semester and from the summer to autumn semester were trending higher than the same period of last year, which further demonstrated our customer satisfaction and effectiveness of our online courses throughout the OMO system. We believe these OMO initiatives will effectively boost enrollments and speed up the recovery of businesses in the rest of the year.

To capture the huge market opportunity in the online education space, we continue investing more resources in executing new initiatives online K-12 after-school tutoring business fiscal year 2021. During the COVID-19 pandemic, Koolearn did large-scale market promotion by offering free large size online live broadcasting classes to the public, and attracted several times more traffic than normal time. To capture this new market opportunity, Koolearn also added a meaningful number of customer service representatives and marketing staff to support the new initiatives in K-12 tutoring. These moves has consequently raised our spending on marketing front, but we believe these are necessary and understandable measures as we found ourselves in an unusual pandemic situation.

Our [Indecipherable] smaller-size class currently enjoy a significant first-mover advantage and stand to benefit from the increasing demand in low-tier cities. Koolearn large five K-12 courses are able to offer the best-in-class learning experience through the investment in upgrading the app and online platforms, introducing new education technologies and adding more interactive features on online courses.

Koolearn also continued to establish teaching training centers in other locations to attract more qualified teachers and tutors to provide a systematic training programs. At the same time, Koolearn has dedicated a significant amount of investment to marketing and service enhancements in the past two quarters to attract customers during the peak of the pandemic. But we expect spending to be normalized in the coming quarters -- in the coming quarter as we will be cautious in identifying high ROI marketing channels and evaluate their unit economics in real-time, which will in return keep the average user acquisition cost at relatively low level. We believe, as a result of the improvement of operational teams, as well as positive word of mouth promotion, and brand loyalty, Koolearn will continue to quickly acquire new users, while enhancing the student retention rates.

Now, let me walk you through the other key financial details of the quarter. Operating costs and expenses for the quarter were $836.1 million, representing a 1.3% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $820.2 million, representing a 0.7% increase year-over-year.

Cost of revenues increased by 5.6% year-over-year to $464.9 million, primarily due to increases in teachers' compensation to more teaching hours and higher rental costs for the increased number of schools and learning centers in operation.

Selling and marketing expenses increased by 15.5% year-over-year to $116.9 million, primarily due to the addition of a number of customer service representatives and marketing staff with the aim of capturing the new market opportunity, especially for the new initiatives in K-12 tutoring on our pure online education platform, Koolearn.com.

General and administrative expenses for the quarter decreased by 10.5% year-over-year to $254.3 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $242.6 million, representing an 11.3% decrease year-over-year.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 43.7% to $15.8 million in the fiscal first quarter of 2021.

Operating income was $150.3 million, representing a 38.9% decrease year-over-year. Non-GAAP income from operations for the quarter was $166.1 million, representing a 35.4% decrease year-over-year.

Operating margin for the quarter was 15.2%, compared to 23% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter was 16.8%, compared to 24% in the same period of the prior fiscal year.

Net income attributable to New Oriental for the quarter was $174.7 million, representing a 16.4% decrease from the same period of the prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $1.10 and $1.09, respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $184.5 million, representing a 19.8% decrease from the same period of the prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $1.16 and $1.15.

Net operating cash flow for the first fiscal quarter of 2021 was approximately $391.6 million. Capital expenditures for the quarter were $95.2 million, which were primarily attributable to opening of 42 facilities and renovations at existing learning centers.

Turning to the balance sheet. As of the -- at the August 31, 2020, New Oriental had cash and cash equivalents of $1,047.6 million, as compared to $915.1 million as of May 31, 2020. In addition, the Company had $291.8 million in term deposits, $2,778.4 million in 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 first quarter of fiscal year 2021 was $1,563.1 million, an increase of 17.5% as compared to $1,330.7 million at the end of the first quarter of fiscal year 2020.

Looking ahead into the next quarter and the rest of the fiscal year 2021, despite the continued challenge from the COVID-19 pandemics are expected to remain, we're more clear about the recovery trends of the Company near-term financial performance and the market opportunity over the long run.

Our strategic focus and the investment approach this year aim at improving product quality, increasing future salaries and enhancing our industry-leading system, which fully reflects our ethos of focusing on the essence of education. In view of market competition and opportunities to take advantage of post-COVID market consolidation, we firmly maintain a stable and balanced investment strategy, that would improve the quality of our education service with aim to achieve sustainable and long-term growth as opposed to unhealthy short-term growth that often requires excessive investments and higher cost to acquire customers. As such, we will continue to focus on the following key areas: 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 this fiscal year. We believe our class expansion will prepare us to further take market share from the other players post-COVID, as we believe some small players without strong financial position and online class capability may now be able to sustain their business during the period. We expect that the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with the strong financial capability and fresh offline facility enable us to further strengthen the market-leading position and penetration.

Second, we will continue to leverage our investments into digital technologies and then introduce our OMO system in more offline language training and test offerings, especially for the K-12 business and overseas test prep key business. The usage of the online tools and content in our OMO system for all business lines throughout the whole network will be enhanced. To uplift the whole OMO teaching experience, we will place more efforts in developing the best teaching content and courseware, and also developing more advanced training programs to our teachers. With all the above-mentioned infrastructure in place, we will continue to pilot our OMO online initiatives in some major cities with higher demand and higher operational efficiency.

We believe that our OMO initiatives will be one of our growth engines to increase our customer acquisition post-COVID and enabling us to capture the market consolidation opportunities. This revamped new business model will also accelerate our margin recovery in the rest of the year and further expand our long-term margin target. Here, I have to highlight that all of these OMO products are supported by our offline classes. They supplement each other in a hybrid format. All the teachers -- all the teaching content, courseware, materials, as well as our teachers and technologies are developed and originated from our existing offline centers and resources. This integrated system continue to be broaden our customer base, and [Phonetic] enable us to reach students in satellite cities, as well as the cities where we have fewer learning centers to catering our -- to cater all our customers.

Furthermore, we will continue to invest again and implement new initiatives, including product content development, teachers' recruiting, training, R&D, as well as the sales and marketing in pure K-12 after-school children business on our Koolearn.com platform.

Third, our top priority will remain as the focus on controlling costs and reducing expenditures across the Company to minimize the negative impact from the pandemic on our bottom line. We believe we will resume the expansion of the overall non-GAAP operating margin this -- year-over-year as COVID-19 subsides gradually. Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong. Although we are facing various short-term negative impacts from the pandemic and we have been increasing our investment in different strategy, we remain optimistic of the brighter prospects of our business and believe our investments now bring us fruitful returns in the long run.

As the pandemic situation and restricting measures begin to ease in China, the timely reopening of all schools and our offline learning centers in September, the start of the new fiscal year, is seemingly [Phonetic] to be a massive boost for our business. We believe this will enable us -- enable our recovery to pick up the momentum, which will likely to be reflected in the results in the coming quarters. We're certain that with New Oriental's leading brands, superior education products and systems and the best teacher resources, we have the ability to and further into market share in China's huge after-school tutoring market and deliver long-term value for our shareholders.

We're looking at the near-term and our expectations for the next quarter, we expect total revenue to be in the range of $863.7 million to $887.3 million, representing year-over-year increase in the range of 10% to 13%. To provide the breakdown of the expected top line growth for key business lines: K-12 business expects to grow around 25%, overseas test prep program is expected to decline 30% to 35% and overseas study consulting and study tour business is expected to be -- to decline 0% to 5%, all year-over-year in dollar terms.

We also expect the overseas-related business, including overseas test prep and consulting services will continue to decline due to the pandemic around the globe, caused by the cancellation of overseas exam, suspension of the overseas schools and restriction on travels. The negative impact on this overseas-related business will affect the entire education industry in China, not only for New Oriental and may lap over the coming one or two quarters. Thus, in contrast, China's effective control of the pandemic situation has shed a more positive light on our business domestically. We're pleased to see that we gradually resumed our offline operation in all cities that we are in by mid-September and the vast majority of the students in these cities have successfully migrated back to our learning centers from our OMO online classes.

To conclude, we are now talking on old cancel fees on operational items to boost the enrollments and classroom utilization for the autumn semester and speed up the recovery of the business after the resumption of the schools and learning centers. We're confident that the demand for after-school children will gradually pick up and to trend toward normalized level in the rest of this fiscal year. 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

Thank you. [Operator Instructions] Your first question comes from the line of Tian Hou from T.H Capital. Please go ahead.

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

Good evening, Stephen and Sisi. Congratulations on a good quarter and the guidance even though it's kind of a challenging time. So the question is related to the margin. On the gross margin, on a year-on-year basis, was down pretty significantly. So I wonder how much is caused by the overseas business and going forward, what the gross margin is going to trend? Thank you.

Yang Zhihui -- Chief Financial Officer

Hi, Tian. Yeah, the gross margin was down by roughly 6% year-over-year this quarter. I think we -- the first reason is that the revenue was down by 8% in this quarter year-over-year. And in this quarter, we still raised the salary of the teachers and because we think the teachers' quality is a core competence of the education business. So as we did in last several years we raised the teachers' salary. And also we acquired the top teachers from the other small players during the pandemic. And the rentals, I think, during the COVID-19 period, we still expanded our capacity in the areas or in the cities that we are -- we feel, be comfort for drive the potential growth in the future. And this quarter the year-over-year expansion was 23% [Phonetic] at the quarter end. So it's drive the gross margin down. But I think it's just a one-time. Okay? Because, as I said, our business are in the process of the recovery and we have already given the guidance of the Q2 and so within it, in the Q2 guidance, the K-12 business will be increased by 25%. So, I do believe the GP margin recovery will be happened in the second quarter, Tian.

Operator

Thank you. Our next question comes from Felix Liu from UBS. Please ask your question.

Felix Liu -- UBS Securities -- Analyst

Good evening, management and congratulations on a good result given the challenging environment. My question is on utilization. I understand that a lot of the offline classes have resumed in most of the cities. So could you give us some color on what the utilization is like currently? And how is the trajectory going forward? Thank you.

Yang Zhihui -- Chief Financial Officer

Yeah. Hi, Felix. It's a little bit hard for us to disclose the utilization rates because, we're still -- during the -- we're still in the time of the pandemic. For example, in Beijing school -- our Beijing school reopened the -- all the learning centers in mid-September. That means we lost almost 10 to 15 days in September. And during the whole summer, I think some of our learning centers were now open. So it's really hard for us to disclose the utilization rates now. And I think we will disclose the utilization rates in, I think, Q2 or Q3. And -- but we do believe the utilization rates will get higher and higher after the pandemic's over, because typically, our revenue growth is higher than the expansion plan. So I think that means, we do have a leverage on the learning center utilization. So this is the near long-term trends, Felix.

Operator

Thank you. Our next question comes from Jin Yoon from Newstreet Research. Please go ahead.

Jin Yoon -- Newstreet Research -- Analyst

Hi, good evening. Just wanted to start talking about overseas test prep. Your guidance kind of suggests, obviously, the bottom is in, in terms of this slight improvement from last year's quarter -- last year's -- last quarter's numbers. Can you just kind of talk about if that's really the case or you're foreseeing a kind of a seasonal head fake [Phonetic]? And then, and on the other -- the second question I have is, I think we're seeing a massive testing in Qingdao of approximately like 9 million people or something like that. I think it just hit the press. I just wanted to see how big that revenue from that city is in case there is a second wave in that particular city. Thanks.

Yang Zhihui -- Chief Financial Officer

Hi, Jin, the overseas test prep, yeah, the revenue decline of this quarter, Q1 was 51%, but we gave -- we have already given the guidance of the Q2, the overseas test prep will be done by 30 -- somewhere around 35%. So the things turns to be better in Q2 and because we have seen some, like the TOEFL, where our GRE class were already open in China in different cities. And -- but anyway, I think, the -- our overseas test prep business will be negatively -- to some extent, to be negatively impacted by the COVID. By the Q1, this quarter, will be the -- would be the work. And I do believe the overseas test prep business will be recovered step by step. So this is my answer for your question about the overseas test prep.

And Qingdao, yeah, we know what happened in Qingdao, since last week, and so far, we don't get any notice from the government of the shutdown of the schools. So that means our learning centers in Qingdao are still open now. But, anyway, we will meet the requirements of the government. But during the -- I think, during the peak time of the COVID-19 time, I think we had the ability to move all the offline courses to online. We tested the -- in -- for, yeah, for [Indecipherable] of the pandemic. And so I don't think it will negatively impact our revenue of Qingdao. Anyway Qingdao is now -- the revenue contribution from Qingdao is very small, Jin.

Operator

Thank you. Our next question comes from Mark Li from Citi. Please go ahead.

Mark Li -- Citi Research -- Analyst

Hi, Stephen and Sisi. Thank you for taking my question. I want to ask...

Yang Zhihui -- Chief Financial Officer

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

Mark Li -- Citi Research -- Analyst

Hi, Stephen and Sisi, is it better now?

Yang Zhihui -- Chief Financial Officer

Hi, Mark. I can't hear you.

Mark Li -- Citi Research -- Analyst

Hi. Hi. Is it better now? Hello?

Yang Zhihui -- Chief Financial Officer

I think the line has some problem. Try it again. Hi, Mark.

Mark Li -- Citi Research -- Analyst

Hi, is it better now?

Yang Zhihui -- Chief Financial Officer

[Foreign Speech]

Sisi Zhao -- Investor Relations Director

Mark, can you come closer to the head -- to the mouthpiece, please? [Speech Overlap] Okay?

Mark Li -- Citi Research -- Analyst

Okay. I just want to ask, how is our FY '21 guidance? Could you share the latest guidance for the full year with us? And also our OP margin target, if we have any change and the timing to reach that. Thank you.

Yang Zhihui -- Chief Financial Officer

Okay. Yeah, actually, we have already given the guidance of the Q2 and by 10% to 15% and actually, the business is now fully recovered in Q2, the autumn quarter. Beijing school was reopened in mid-September and we expect the revenue growth in the coming Q3 and Q4 will be better than Q2 because of the more recovery of our business and easy comparison of this year. You know the COVID-19 started since the last year Q3. So we do believe our top-line growth performance in Q3 and Q4 will be better than Q2. Okay?

And margin guidance, yeah, I think, Q2, the next quarter, the margin, we believe the margin decline in Q2 will be continue to narrow down compared to this quarter, the Q1. And we're confident that we'll be able to deliver the continued margin expansion after the pandemic's over especially in Q3 and Q4. And we don't want to change our new long-term margin guidance, Mark. Is it clear?

Operator

Thank you. Our next question comes from Alex Xie from Credit Suisse. Please ask your question.

Alex Xie -- Credit Suisse -- Analyst

Hi, Stephen and Sisi, thank you for taking my questions. So my first question is about the breakdown of your next quarter K-12 revenue guidance. So I think in the August quarter, it's very unusual that POP Kids was a little bit slower than U-Can business. And what about the next quarter? And the second question is about the rollout of your OMO business model. I think I read from the news report that you launched the pure online small cost model in your Hangzhou school and received very positive feedback from the provincewide students. Would you please share more color on that? And about the plan for the further rollout? Thank you.

Yang Zhihui -- Chief Financial Officer

Yeah. Your first question about the -- hey, Alex, can you repeat your first question again?

Alex Xie -- Credit Suisse -- Analyst

Sure, sure. So, I noticed that in the August quarter, the POP Kids business was slower than U-Can business. And what about the next quarter? You think the 25% growth, what about the difference between POP Kids and U-Can?

Yang Zhihui -- Chief Financial Officer

Yeah. I think, next quarter, in Q2, I think the growth rates of the U-Can business will be a little bit higher than the POP Kids business growth because the U-Can business is more mission-critical. So for the middle school, high school students, they tend to study more especially after the COVID-19. So that's why the growth of the U-Can business goes higher than the POP Kids business. And yeah, the OMO -- it's a great question, the OMO. Yeah, actually when we started the OMO business three years ago for our Beijing school U-Can business -- but after the COVID-19, we are strengthening the development of our OMO because here during the COVID-19, almost all of our students, of course, is pure online. That's -- after the COVID-19, a vast majority of our students goes back to the offline learning centers, but they would choose some percentage of the online course for those part of the students and also for some new cities, we started to roll out the new OMO model.

Yeah, I think that Hangzhou is a very good case. And this is for the first year that the Hangzhou school did the OMO model. So Hangzhou school acquired a lot of the new customers of the returned students from the several cities around Hangzhou. So I think it's a very good start and we will roll out in more and more cities and provinces. Okay. And one more thing is the retention rate of the OMO model in Hangzhou school, I think, after the summer, is over 50%. So I think it was a very good sign for the study result of the OMO model. So we will do it more and more in more cities. Sisi, you want to add something?

Sisi Zhao -- Investor Relations Director

Yeah, we are, as Stephen emphasized earlier in the prepared remarks, actually, we have piloted this OMO model in around 20 cities already just in the summer -- only recovers -- resumes the offline operation from the summer and then we have already testified this model in several cities -- key cities and the feedback is good. So that continues to be the key strategy going forward. Yeah.

Alex Xie -- Credit Suisse -- Analyst

Okay.

Operator

Thank you. Our next question comes from Sheng Zhong from Morgan Stanley. Please go ahead.

Sheng Zhong -- Morgan Stanley -- Analyst

Hey. Good evening. Thank you for taking my question. My question is on the OMO as well. So I want to understand more about how to offer this OMO model. So for the low co -- school head, what's the key KPI for OMO? And so, is -- so, how will you balance to open new learning centers or push more OMO in different cities? Or if this [Indecipherable] as well or this pure online were mainly focused on the surrounding cities? Thank you.

Yang Zhihui -- Chief Financial Officer

Yeah, hi, Zhong Sheng. I think it's a great question. We set up the KPI of the school head. We -- I think the KPI of the school head was divided by two-part-the tradition -- number one is the traditional offline business and second is the new OMO model. So two different KPI. And I think it's easy to understand the local school head made the decision. For those areas that we are -- where we do have the learning centers, I think will do the OMO. And we will still use our -- the learning center or learning centers to acquire the new student enrollments. And for the further areas where we don't have the learning centers or for the new cities, we don't have the learning center there, the OMO will be first deployed.

And -- but, as I said in the prepared remarks, all the content and courseware and teacher resources, even the teacher training system of the OMO model are originally from the local fee. But the head office, will give the fully support to the different areas and different cities. So we will roll out these OMO model by -- to more cities going forward. And I do believe the OMO model will contribute more and more revenue going forward.

And, yeah, one more thing to add. And we don't want to spend printed money on marketing expenses for the OMO model. So I think the students acquisition cost for the OMO model will be very low. I think it will be as same as the -- our traditional offline business.

Operator

Thank you. Our next question comes from the line of Lucy Yu from Bank of America Securities. Please ask your question.

Lucy Yu -- Bank of America Securities -- Analyst

Thank you, Stephen and Sisi. So I would like to ask the question of dual-teacher. Stephen, you just mentioned that when we penetrate into new cities, actually OMO will be the first choice. So how about dual-teacher model? Are we still going to roll that out? And as far as I can understand that previously, before OMO rollout, we were using the dual-teacher to penetrate into lower-tier cities. So now there's more or first choice in terms of business model in the new cities. And secondly, you mentioned that in dual-teacher model, we have seen improving profitability and retention. So we -- so could you share more number on the profitability and the retention of dual-teacher business model? Thank you.

Yang Zhihui -- Chief Financial Officer

Yeah, I think, going forward, the OMO model will be the first choice where we run the business in the new cities, in especially for the low-tier cities. But we are doing well for the dual-teacher model. We opened more and more -- the new cities by the -- of the POP Kids and U-Can program. But, going forward, we will focus more of the model that the teachers in the head office will [Indecipherable] the dual-teacher model class to the low-tier cities. Typically, it will -- it's focused more -- focused on the top students in the high-tier and low-tier cities. So we have the two way to run the business in the -- in this -- in the low-tier cities-OMO and the dual-teacher model, Lucy.

Operator

Thank you. Our next question comes from Alex Liu from China Renaissance. Please go ahead.

Alex Liu -- China Renaissance Securities -- Analyst

Thanks, Stephen, for taking my questions. First on teacher compensations, how fast should we think about the teacher compensation growth going forward? Especially some online players are rather aggressive in terms of teacher payout. And second question is that regarding the strong summer enrollment growth. I was just wondering, is there any specific reasons behind or any specific sort of observations in summer, why we did so well this year and how much of the growth is coming from small player exiting the market. Thank you.

Yang Zhihui -- Chief Financial Officer

Alex, I think the teacher salaries, yeah, we think the teachers' quality is the core competence of the education business. So we raise the teacher salary by 8% to 9% every year, even we faced through the challenge during the period of the COVID, we feel still the same thing. I don't think the teacher salary increase will drive [Indecipherable]. On the contrary, paying the teacher more will bring us the high-quality or high-quality feedback from the customers, students and parents and drives the utilization rate up and the revenue up. So I think we pay more the teacher will help the GP margin performance better near term and long term. So I think this is our strategy for the teachers. And, yeah, these -- yes.

And the second question is about the summer enrollments. Yeah, I think, in the spring semester, we met some problems, on part of the new customers because of the COVID. We couldn't see the students and parents face to face, but during the summer quarter, most of our learning centers were reopened. So we can give the -- like the the study advices to the parents and kids face to face. And as for the competition environment, yeah, we know some small players disappeared from the market. So I think it's a great opportunity for the big players like us to take more market share from the markets post-COVID. And the numbers -- especially, since the second half of July, the cash revenue and the enrollment numbers was booming. And so that's why we gave the guidance of the K-12 business growth in second quarter will be somewhere around 25%. And I do believe the enrollment growth and the revenue growth in Q3 and Q4 will be even better. Thank you.

Operator

Thank you. Our next question comes from DS Kim from J.P. Morgan. Please ask your question.

DS Kim -- J.P. Morgan -- Analyst

Hello, sir. Hi, Sisi. Congrats on good set of results and very good guidance. Actually most of my questions have already been answered. So maybe I can just follow-up on OMO. Can I doubletake, when you say this new payload in OMO, are we referring to pure online localized curriculum classes like pure online? And if so, can I check what's the size of each class ASP gap with the similar offline courses and if there is any difference in offering, i.e, this OMO is more for the week days versus weekend or more for short-term courses or it's really just same as our offline offerings?

Yang Zhihui -- Chief Financial Officer

We're doing the new OMO model by three ways. Number one, the large classes. That means the large classes and this is typically majority of the classes are happening online. And I think the price of the -- of that part of the course, I think it was 20% to 30% lower than our normalized classes. And secondly is the OMO small-sized class. As -- it's a hybrid class or -- and it's offline and online, the integrated classes. And the last one, number three is something like very short-term courses. I think the typical purpose of our -- of those part of the business is to acquire the new student enrollment as very short term courses and we have to [Indecipherable] teachers to acquire the courses, and I think it's kind of the way to ask the [Indecipherable] way. So we obviously wait. Anyway the OMO is still in the early stage. I think so far so good. And we will do more going forward. So in next quarter, or even the rest of the year, during the call, I will share more information with you. Thank you.

Operator

Thank you. Our next question comes from Tommy Wong from China Merchants Securities. Please go ahead.

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

Hi, thank you, management and Stephen. Congratulations on the strong results. Just a quick question, I guess, we don't have a lot of time left. Can you comment about the secondary listing in Hong Kong and potentially we need more funds to compete on the online space. All these other guys, [Foreign Speech] they're all burning a lot of money. And if you want to play in this game we have to kind of participate. So I was just wondering, the secondary issue bring some more money and play the game, just wondering what's your thought on that. Thank you.

Yang Zhihui -- Chief Financial Officer

We are not in a right position to make comments on secondary listing. And the money, yeah, as I said, our strategic focus and investment approach this year and not only this year, but also the near long term, OK, is aim at improving the product quality, increasing the teacher salary and enhancing our system. I think these are the essence of the education. So we know there is a huge opportunity in the markets, especially after COVID. We firmly maintain the stable and balanced investment strategy and we don't want to spend printed money on marketing and get -- and healthy short term growth. So this is our strategy not only for now, but also for the near long term. Thank you.

Operator

Thank you. Our next question comes from Liping Zhao from CICC. Please go ahead.

Liping Zhao -- CICC -- Analyst

Hi, Stephen. Thank you for taking my question. My question is about the capacity expansion. How should we expect the impact of the pandemic on your capacity expansion plans, especially for your K-12 business? And any chance we can see an accelerated expansion during the market consolidation? Thank you.

Yang Zhihui -- Chief Financial Officer

We aim to add around 20% to 25% new capacity in the fiscal year '21. And so, last year, we planned to open 20%, finally, we opened 26% and this year, we made the same plan and anyway, I think, it's a great opportunity for us to take more market share. So we will open 20% to 25% new capacity to acquire new student enrollments and also we do have the OMO model. And so we do have the capacity expansion and OMO will bring us new customers in the whole fiscal year '21. And, yeah, the -- our strategy of the expansion is very stabilized. Thank you.

Operator

Thank you. Our next question comes from Felix Liu from UBS. Please go ahead.

Felix Liu -- UBS Securities -- Analyst

Thank you. I just want to have a follow-up question on deferred revenue balance. I noticed that the growth in deferred revenue is a lot stronger than the -- than our Q2 revenue guidance. May I know the reason behind? Thank you.

Yang Zhihui -- Chief Financial Officer

Because of the pandemic faced in China, especially in the summer. And so, yeah, as I said, I think the second -- I think that the second half of July and the revenue and enrollments growth was booming. And so that's why we got the higher deferred revenue balance at this quarter end. And I think in the Q2, the -- we're still in the process of the recovery. I think even in the Q3 and Q4, you will see higher enrollments and top-line growth of the -- especially for the K-12 business, because I do believe we are taking the market share from the small players and also -- and we do believe we will have even higher student retention rate going forward because we made a lot of things, I think, last four, five years ago. And we do believe we're providing the -- one of the best product in the market. So I think the recovery will happen step by step and more back loaded, Q3 and Q4. Thank you.

Operator

Thank you. 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 his closing remarks.

Yang Zhihui -- 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

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Sisi Zhao -- Investor Relations Director

Yang Zhihui -- Chief Financial Officer

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

Felix Liu -- UBS Securities -- Analyst

Jin Yoon -- Newstreet Research -- Analyst

Mark Li -- Citi Research -- Analyst

Alex Xie -- Credit Suisse -- Analyst

Sheng Zhong -- Morgan Stanley -- Analyst

Lucy Yu -- Bank of America Securities -- Analyst

Alex Liu -- China Renaissance Securities -- Analyst

DS Kim -- J.P. Morgan -- Analyst

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

Liping Zhao -- CICC -- Analyst

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