New Oriental Education & Technology Group Inc. (EDU) Q2 2021 Earnings Call Transcript

New Oriental Education & Technology Group Inc. (NYSE:EDU)
Q2 2021 Earnings Call
Jan 22, 2021, 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 Second Quarter Results Earnings Conference Call. [Operator Instructions]. After the management’s prepared remarks, there will be a question-and-answer session. [Operator Instructions]. 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. Thank you. Please go ahead.

Sisi Zhao — Investor Relations Director

Thank you. Hello everyone, and welcome to New Oriental’s second fiscal quarter 2021 earnings conference call. Our financial results for the period were released earlier today and are available on the Company’s website as well as on Newswire services. Today, you will hear from Stephen Yang, Executive President and Chief Financial Officer. After his prepared remarks, Stephen and I will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr. Stephen. Stephen, please go ahead.

Zhihui Yang — Executive President, Chief Financial Officer

Thank you, Sisi. Hello, everyone and thank you for joining us on the call. Although, the impacts of the pandemic continues to raise hurdles for business across the globe, we are pleased to announce a set of financial results in the second quarter of this year that are in line with our expectation. While reflecting strong signs of recovery in some of our business lines as certain cities began its path to normalization.

Total net revenue was $887.7 million representing a 13.1% increase year-over-year, which is an encouraging result despite the challenges. Our key revenue growth driver, K-12 after-school tutoring business achieved year-over-year revenue growth of approximately 26%. Our U-Can middle-school and high school all-subjects after-school tutoring business continued its momentum with a growth — growth of approximately 27% while our POP Kids program recorded a growth of approximately 24%.

Our industry-leading OMO system has been vital in the previous quarters to ensure our classes run smoothly and it has once again proved to be instrumental in this quarter. As is [Technical Speech] our operation with strong flexibility to help vast majority of our students migrate from OMO online class back to offline learning centers, which have gradually resumed the service amid easing of the pandemic restriction measures.

Encouraged by effectiveness, we have been committed to expand the reach of our OMO system and are delighted to say that we have talents to OMO online courses in vast maturity of existing cities and almost 20 new surrounding satellite cities in the autumn semester, attracting a promising number of new customers and students, while the OMO system contributed single digit to the overall revenue in this quarter. With its ability to virtually reach both major and satellite cities across China, we have no doubt that it will grow rapidly in the coming quarters and become a major driver to our business growth in the future.

Cost control has become a key feature in our operation as we aim to cushion the impact from pandemic. We focused on the cost-effective strategies that would deliver strong return and outcome and avoid spending on strategies or promotions that would have little business impact. While online education is a growing trend in China, pure online platforms tend to require substantial spending on marketing and promotion. Hence, with the OMO system, we have been able to achieve constantly high number of enrollments with cost-effective promotions. Because of our strong on-ground presence and online channels supplements each other, which enable us to more effectively recruit new customers and deliver better service to our students.

Total student enrollments in academic subjects tutoring and test prep courses in the second fiscal quarter of 2021 increased by 10.4% year-over-year to approximately 4,183,100, which is in line with our expectation.

In terms of pricing, per program blended ASP, which is cash revenue divided by total student enrollment increased by about 13% year-over-year in dollar terms. As for already blended ASP, which is GAAP revenue divided by total teaching hours was flat year-over-year.

To provide a breakdown of the already blended ASP, please note that U-Can classes increased by 8%. U-Can VIP increased by 5%, POP Kids increased by 0.3% and overseas test prep program increased by 13%, all year-over-year in RMB terms. Comparing with our normal price increase of 5% to 8%, this quarter’s already blended ASP flat was mainly because of the bigger decline of overseas test prep program with already blended ASP was much higher than the other programs.

Now, I’d like to spend some time to talk about the quarter performance across our individual business lines in detail. Academic became largely under control in China, recovery momentum continued to pick up in this quarter across our business lines. Our key revenue driver K-12 all-subjects after-school tutoring business, achieved year-over-year revenue growth of approximately 26% in dollar terms.

Breaking down, the U-Can middle and high school all-subjects after-school tutoring business recorded a revenue increase of approximately 27% for the quarter. Student enrollments grew approximately 15% year-over-year for the quarter. POP Kids program delivered outstanding results with the revenue up by about 24% in dollar terms for the quarter. Enrollment increased by 14% for the quarter.

Our overseas related business including test preps and consulting business showed encouraging signs of recovery despite facing the most difficult challenges due to the cancellation of the overseas test exams and restrictions on travel as well as the unpredictability of the pandemic situation in different parts of the world [Indecipherable] the students hesitant to study abroad.

The overseas test prep business reported a revenue decrease of about 29% in dollar terms for the quarter in comparison to a difference of 51% in the last quarter. While the overseas consulting and overseas study tour business reported revenue increase of about 6% in dollar terms year-over-year for the quarter recovering from last quarter’s 31% decrease.

And finally, VIP personalized class business recorded the cash revenue increase by about 20% year-over-year in dollar terms for the quarter. We carried out capacity expansion in cities where we see potential for rapid growth and strong profitability in this quarter. We opened five new offline training schools in the city of Langfang, Kunshan, Dongyang, Danyang and Zhejiang. Altogether, this increased the total [Technical Issues] of classroom area by approximately 21% year-over-year, 4% up quarter-over-quarter by the end of this quarter.

This increase is in line with our expectation as we gradually ramped up our expansion effort throughout the academic 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 strong presence across different Chinese cities.

We rolled out a tutor class model for POP Kids program in 58 existing cities, for U-Can program in 27 existing cities. With satisfactory customer retention and scalability, we will continue to use the model to increase our market penetration in those markets we have tapped into. Outbreak of COVID has highlighted the importance and demand of online education, we have placed more resources in this area and invested $54 million in this quarter to improve and maintain our OMO integrated educational ecosystem.

Our success in targeting the OMO system around 20 new satellite cities through the nearby major cities this quarter is yet another testament of how this low cost but high return OMO business model can rapidly become one of the most far-reaching education service in China. Leveraging the presence of the offline school and learning centers and brand visibility in major cities, we’re able to reach nearby satellite cities and continue to bring in high number of enrollments without the need to spend a huge sum of money on promotion marketing. More importantly, this is a model that we can easily and cost effectively replicate in different parts of China.

Hence, we are very optimistic about the growth potential of our OMO system in the next few quarters. Apart from the OMO infrastructure, we have allocated part of the resources in advance of the teacher — teacher’s training program for our teachers to enhance their online/offline integrated teaching skills in response to growing demands.

At the same time, we continue to upgrade our technology platforms and will broaden the usage of the online tools and contents in our OMO system for all business lines throughout the whole network as well as further develop the best of teaching contents and courseware to cater to online, offline integrated education methods.

It’s important to highlight that while it is the key aspects that’s made our OMO system stand out from the industry it’s the localization of our teaching content. OMO teaching material for each city are developed by the local schools rather than mass produced centrally. Which means our content is tailored with local nuance and reference for to help students understand the materials better and we encourage them to be more engaged in classes.

On the promotional front, the nature of OMO system enable us — enable us to implement cross selling strategy whereby we promote the courses through both online and offline channels, reaching the broader range of the customer from different locations. We’re glad to see that our industry leading OMO ecosystem has not only successfully managed to cushion most of the impact on our service penetration caused by the pandemic, but we also see our customer retention rates remain stable, which further demonstrates our customer’s satisfaction and the effectiveness of our online course through our OMO system.

We believe these OMO initiatives will effectively boost the enrollments and speed up the recovery of our business in the coming quarters. To capture the huge opportunity in the online education space, we continue to invest in more resources, in executing new initiatives in online K-12 after school children business in fiscal year 2021.

During the COVID, Koolearn did a large-scale market promotion by offering three large online live broadcasting classes to the public and attracted several more — several times more traffics then 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 children. These moves have consequently raised our spending on the marketing front, but we believe these are necessary and understandable measures as we found ourselves in an unusual situation.

Our [Indecipherable] DFUB small size classes currently enjoy a significant first-mover advantage and a stand to benefit from the increasing demand in low-tier cities. Koolearn large-sized K-12 course are able to offer the best-in-class learning experience through the investments, upgrading the app and online platforms introducing the new education technologies and adding more new attractive features in online classes. Koolearn also continued to establish teaching training centers in other geographic locations to attract more qualified teachers and tutors and provide a systematic training programs.

At the same time, we will be very 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 a relatively low level. We believe, as a result of the improvements through 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, I will turn the call over to Sisi to walk you through the other key financial details for the second quarter.

Sisi Zhao — Investor Relations Director

Okay. Operating cost expenses for the quarter were $919.8 million representing a 21% increase year-over-year, non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses were $901.4 million representing a 20.4% increase year-over-year.

Cost of revenue increased by 26.4% year-over-year to $453.7 million, primarily due to the increases in teachers’ compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation. Selling and marketing expenses increased by 23.9% year-over-year to $133.6 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 during COVID-19 period, especially for the new initiatives in K-12 tutoring on our pure online education platform, Koolearn.com.

G&A expenses for the quarter increased by 13.5% year-over-year to $332.6 million. Non-GAAP, general and administrative expenses, which exclude share-based compensation expenses were $319.8 million representing a 13.4% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 64.8% to $18.5 million in the second fiscal quarter of 2021.

Operating loss for the quarter was $32.1 million, compared to an increase [Phonetic] of $25.3 million. Non-GAAP loss from operations for the quarter were $13.7 million, compared to an income of $36.5 million. Operating margin for the quarter was negative 3.6%, comparing to 3.2% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensations for the quarter was negative 1.5%, compared to 4.7% in the same period of the prior fiscal year.

Net income attributable to New Oriental for the quarter was $53.9 million, representing a 0.9% increase from the same period of the prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.33 and $0.33, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $69.1 million, representing a 21.3% increase from the same period of the prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.43 and $0.43, respectively.

Net operating cash flow for the second fiscal quarter of 2021 was approximately $410.7 million. Capital expenditures for the quarter were $62.0 million, which was primarily attributable to the opening of 78 facilities and renovations at existing learning centers. Turning to the balance sheet, as of November 30, 2020, New Oriental had cash and cash equivalents of $2,643.2 million, as compared to $915.1 million as of May 31, 2020. In addition, the Company had $416.1 million in term deposits and $3,035.3 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 quarter — second quarter of fiscal year 2021 was $1,987.1 million, an increase of 26.5% as compared to $1,570.4 million at the end of the second quarter of fiscal year 2020.

Now, I’ll hand over — hand back to Stephen to talk about the outlook and guidance.

Zhihui Yang — Executive President, Chief Financial Officer

Looking ahead into next quarter and the rest of fiscal year 2021, despite the continuous challenges from pandemic and the concerns covering the new wave of outbreak emerging in China, we’re more clear about recovery trends of the Company’s 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 teacher salaries and enhancing our industry leading system, which fully reflects our ethos on focusing on the essence of education. In view of market competition and opportunity 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 the aim to achieve a 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 capacity expansion will prepare us to further take market share from other players post-COVID, as we believe some smaller players without strong financial position and online class capability may not be able to sustain in this business during this period.

With that, the industry would undergo away from market consolidation upon the pandemic phase. The fact that we are a major player with a strong financial capacity and fresh offline facilities enable us to further strengthen our market-leading position and penetration. Second, we will continue to leverage our investments into digital technologies and introduce our OMO system in more offline, language training and test offering, especially our K-12 tutoring and overseas test prep key business. The usage of 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’ll continue to pilot our OMO online initiatives in major cities with a high demand and higher operational efficiency in these surrounding satellite cities. We believe that our OMO initiatives will be one of the — our growth engines to increase our customer acquisition post-COVID, as we can quickly replicate — parts of China, enabling us to capture the market consolidation opportunities.

This revamped new business model will also accelerate our margin recovery when the pandemic is over and further expand our long-term margin targets. Here, I have to highlight all of this OMO products are supported by our offline classes. They supplement each other in a hybrid format. All the teaching content, coursework materials, as well the teachers are developed and originated from our existing offline center of resources.

Furthermore, we will continue to invest in and implement new initiatives including product and content development, teacher recruiting training, R&D, as well as sales and marketing expenses in pure online K-12 after school tutoring business on our Koolearn.com platform. Third, our top priority will remain as the focus on controlling cost and reducing expenditures across the organization to minimize the negative impact from pandemic on our bottom line.

We believe we will resume the expansion of overall non-GAAP operating margin 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 full time negative impacts from the pandemic, we have been increasing our investments in different strategies and we remain optimistic of a brighter prospect of our business and believe our investments now will bring us footfall returns in the long run.

Due to the concerns that a new wave of COVID-19 outbreak is emerging in North China, as of today, we have moved our offline classes to small-sized online broadcasting classes through the OMO system in over ten cities, including the major cities, such as Beijing, Xian and Taiyuan. Despite these challenges, our OMO system enables us to migrate classes between offline and online platforms swiftly and seamlessly and therefore the impact on our business will be cushioned should there be a significant outbreak.

In the meantime, the unpredictability of the pandemic has also reminded us to plan ahead of the future as we continue to build new learning centers to ensure we will be ready to accommodate a large number of students when situation normalized. When looking ahead at near-term, our expectations for the next quarter, we expect total revenue to be in the range of $1,098.6 million to $1,144.8 million representing a year-over-year increase in the range of 19% to 24%. To provide a breakdown of the expected topline growth for the key business units, K-12 after school children business is expected to grow in the range of 27% to 32%. Overseas test prep program is expected to decline 25% to 20%.

Overseas study consulting and study tour business is expected to be — decline 5% to 0% and the growth of the Koolearn.com pure online education platform is expected to accelerate, all year-over-year in dollar terms. Despite the fact that our overseas test prep and consulting services for the second quarter fared better than the first fiscal quarter, we still expect overseas-related business to continue to be hit harder due to the pandemic around the globe, caused by the cancellation of the overseas exams, suspension of the overseas schools and restriction on travels.

The negative impact on these overseas related business will affect the entire education industry in China, not only in New Oriental, and may last over the coming one or two quarters. That said, we’re pleased to see that China has been controlling the pandemic situation relatively well, which shed a more positive light on our business domestically.

To conclude, we are now taking all kinds of operational actions to boost the enrollments and classroom utilization for autumn semester and speed up the recovery of business after the resumption of the schools and learning centers. We’re confident that the demand for after-school tutoring will gradually pickup and trend toward a normalized level gradually.

I must mention that these expectations reflect our considerations of the latest pandemic situation as well as our current and preliminary view, which is subject to change. At this point, Sisi and I will take your questions.

Operator, please open the call for these. Thank you.

Questions and Answers:

Operator

Thank you. The question-and-answer session of this conference call will start in a moment. [Operator Instructions]. Your first question comes from the line of Tian Hou of T.H. Capital. Please ask your question.

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

Sisi, Stephen, congratulations on the good quarter. So in your opening remarks, you talk about OMO and it also shows some positive — shows the positive results in your last quarter’s earnings and your offline enrollment growth, revenue growth is much more higher than peers. So I wonder, can you elaborate how important OMO strategy is for you in fiscal 2021, as well as next couple of years? And by the end of this year, this fiscal year or next fiscal year, what’s the portion of OMO is going to be in your total enrollment or revenue? So basically is that, elaborate on your OMO strategy for the future?

Zhihui Yang — Executive President, Chief Financial Officer

Thank you, Tian. This is a great question. On the market front, actually we are seeing the great business opportunity originally, because more and more players disappeared from the market. And, you know, we put more efforts on our offline business combined with the OMO model. And we have piloted the market leading OMO model in a vast majority of the cities, and to set up the OMO business, in 20 new satellite cities nearby the core city.

And the key is, I think the student retention rate and the satisfaction from the customers are better than we expected in the summer. And so, this quarter the OMO contributed single digits to the overall revenue contribution. That’s, you know, we believe the OMO model will grow rapidly going forward and will become a major driver to our business growth. So, that means the OMO will help the topline growth of our traditional, the offline business.

And let me repeat some advantage of the OMO model, OK? You know, the OMO model typically has the lower customer acquisition cost. That means we do the very strong, the marketing teams and so that means we do need to spend crazy money on the Internet or something like the channels, the online channels.

And second, you know, I think it’s very easy for us to replicate the OMO model in the other provinces in China. And third, I think our content of the OMO model are more localized than the — like the typical super large, the online broadcasting classes. I think this is our advantage. And all the coursework, all the like materials are reasonable from the local, our local staff. So I think this makes the students, they love our OMO courses more and pull them through more engaged in the classes.

And the last one is, I do believe the OMO model will bring us the — even the opportunity of the cross selling. We can cross sell the OMO or the online course and the offline course, each other. So I spent too much time on the OMO model, but I think this is very important. Tian, is it clear?

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

Yes. Thank you so much, Stephen. I’ll give the floor to others.

Zhihui Yang — Executive President, Chief Financial Officer

Yes, I think [Speech Overlap] the revenue contributions in fiscal year in next fiscal year will be more than that of this year. And I think that we will see one or two more quarters to estimate the revenue contribution, but I do believe the revenue contribution from the OMO model will be a meaningful number next year. Thank you.

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

Okay, great. Thank you so much.

Zhihui Yang — Executive President, Chief Financial Officer

Thank you, Tian.

Operator

Your next question comes from the line of Mark Li of Citi. Please ask your question.

Mark Li — Citi Research — Analyst

Hi, Stephen and Sisi and thanks for the presentation. I want to ask at this point, could you give us some color for the FY’22 guidance like in terms of the revenue growth or the capacity expansion or the lower tier city penetration and any color would be helpful. Thank you.

Zhihui Yang — Executive President, Chief Financial Officer

Yeah, I think, the — I think we have done very well to run the business during the COVID, the hard time. And, we expanded our capacity by 20% to 25% and also we raised the salary of the teachers during the hard time and I think that we are ready for the New Year. And so in the fiscal year 2022, I think the revenue growth will be booming, OK? And in the fiscal year 2022, I believe the margin will be expanded.

Because, first of all, we have a low base this year and second, I do believe the China will control the pandemic relatively well and I do believe that most of the students can go back to our learning centers, and some new cities, lower tier city students can enjoy the service of our OMO model and yeah. Mark?

Mark Li — Citi Research — Analyst

Sure. Thank you, Stephen.

Zhihui Yang — Executive President, Chief Financial Officer

Thank you, Mark.

Operator

[Operator Instructions]. Your next question is from Felix Liu of UBS. Please ask.

Felix Liu — UBS Securities — Analyst

Good evening, management and congratulations on the results. My question is on COVID-19 impact. I know your guidance of 15% to 24% revenue growth for the next quarter, has that reflected in the current level of COVID-19 lockdown or are we expecting potentially more cities to roll out similar measures? And for this round of COVID-19 you mentioned that you’re better prepared than last time. May I know, well the new enrollment growth, or is the May quarter be impacted or are we OK with new enrollment growth at this time? Thank you.

Zhihui Yang — Executive President, Chief Financial Officer

Felix, due to the concerns of the new wave of the COVID-19 outbreak in North China, I think we are — today, we have moved all the offline classes to online in over ten cities, such as the major city like Beijing, Xian and Taiyuan. And all these cities in northeast [Indecipherable] region. And so, I think the, yes well, I think there’s [Indecipherable] the negative impacts, but the key is despite the challenge, I think our OMO system enabled us to migrate class between offline/online. And I think this time we prepared better, face the challenge, compared to that of last year.

And the one more point, the Q3 because of the late Chinese New Year holiday, the Q3 or the class scheduling will be negatively impact to some extent. But anyway, even we faced to the challenge of the new wave of the COVID, I think the Q3 radicals will be accelerated than the Q2 and we’re kind of optimistic about the business performance in Q4, and next year. And the last one, I want to add is, we are using the conservative way to make the guidance or forecast, because the environment changes almost every day. Thank you.

Felix Liu — UBS Securities — Analyst

Okay, thank you very much.

Operator

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

Alex Xie — Credit Suisse — Analyst

Hi management, thank you for taking my questions. So my first question will be about OMO. Stephen, you’ve mentioned you covered 20 satellite cities, may I ask how many core cities and does that involve to cover 20 satellite cities? And what will be your plan to extend in the next fiscal year for this kind of OMO model to cover more satellite cities and core cities?

And secondly, congratulations Stephen on your new role as Executive President. Would you please share with us what’s the responsibility with this new role and your thoughts about the implication for the corporate governance about this new role? Thank you.

Zhihui Yang — Executive President, Chief Financial Officer

Okay, thank you first of all. I think, yeah, I think I’m happy to take the role of the Executive President and the CFO. And yeah, I believe I will spend more time on my job. And, but the good news for me, as you know, I have very strong teams. We worked together for so many years. And I think all the managers and my staff like Sisi will support me stronger than before. And also, actually things are two years ago I spent some time on the operations side. I think that some investors knew that.

So, I love to spend more time with the business, with the operational team because it makes me to more familiar with the business and to give them the better instructions and guidance. And yeah, I think I was in the back to this new job and to create more value to the shareholders and our customers.

And the — yeah, the OMO portal. Yeah, I think we are running the seven provinces of the OMO model, we call this [Foreign Speech]. We started from the Hangzhou in the Zhejiang province and like the Shandong and Shaanxi and the Fujian and some of the key provinces followed and so far so good. Actually most of the provinces performed better than we expected. So I believe they will do better going forward and we will pilot the new OMO model in more provinces going forward. Thank you.

Alex Xie — Credit Suisse — Analyst

Got it, very helpful. 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, good evening. Thank you for taking my question. Just one question about your offline price. You mentioned that it increased very strong. So wondering, the reasons of the price increase, especially, there were a lot of competition from the online. And also we see the supply, the small institutions, they also provide price discount. Is it because you see the offline supply decreased post COVID-19 or for some other reasons, that your pricing strategy? Thank you.

Zhihui Yang — Executive President, Chief Financial Officer

Hi, Zhong. I think our price strategy has been very consistent and this quarter’s hourly blended ASP was flat. And yeah, we raised the price of the U-Can program by 5% — by 8% and VIP, U-Can VIP price increase was 5% top case, we keep the same price. I don’t think the online platforms competition will impact our, the price strategy. I’m not sure you remember, clearly or not. We did the very good successful summer promotion half year ago and during the summer, we got more than 1 million, the summer promotion enrollment.

And, we charged RMB400, I think it’s much expensive than the other — the online players, most of them are providing, were providing the free course, like [Indecipherable] and so, but you know our retention rates was over 60%. So, I think the Chinese parents and students, they care more about the teaching quality, and the study results of their kids, and rather than the price. So going forward, I think our price strategy will be consistent.

Sheng Zhong — Morgan Stanley — Analyst

Thank you.

Zhihui Yang — Executive President, Chief Financial Officer

Thank you.

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 Steven. I just got a very quick question. You mentioned that in the third quarter, there will be some negative impact from cost scheduling. Could you please quantify that for us, please?

Zhihui Yang — Executive President, Chief Financial Officer

Yeah. You know, technically the delayed Chinese New Year will impact the revenue by 5% to 6%, because — yes of the K-12 business, because last year, the first [Indecipherable] the first of the two courses in the spring semester, what happens in the Q3. But this year, we started all the courses in March. So that means we sacrificed 5% to 6% of revenue of the POP Kids and U-Can, but it’s just the one time impact just the timing difference.

Lucy Yu — Bank of America Merrill Lynch — Analyst

So — understood, just to make sure that your guidance on the third quarter K-12 is 26% — sorry, 27% to 32%. So if we’re adding a 5% to 6% back, it should be like low 30s to high 30s kind of growth right?

Zhihui Yang — Executive President, Chief Financial Officer

Yes.

Lucy Yu — Bank of America Merrill Lynch — Analyst

Yes, thank you.

Operator

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

Christine Cho — Goldman Sachs — Analyst

Hi, thank you. Thank you, Stephen and Sisi. So I know that you are dual listing, you’ve built up quite a substantial net cash position. So could you give us some color as to your capital allocation strategy going forward? And then secondly, just very quickly Stephen, do you have any thoughts on your midterm guidance of 17% to 18% operating profit margin, any plans to revisit that? Thank you.

Zhihui Yang — Executive President, Chief Financial Officer

Yeah, Christine, the capital allocation — yeah, we raised money last year in November in Hong Kong market, from the second listing. And we love to pay the capital allocation to investors. Historically, we did it several times, special dividends and several times share buybacks. And the use of the money, I think we prefer to use the money to make some the potential valuable investments, if we can find some potential synergy between the targeted company and us, we’ll do it, but we will do it very carefully.

And the second we will have to pay the investors. And this is the — your number one question. Number two question is about the long-term margin. Yeah, we don’t want to change our mid or long term margin guidance. Let me start with the revenue first, I think the revenue growth recovery is in the process. And I think we still need one to two quarters to go back to the normal.

And on the market front — we’re seeing a great opportunity everywhere because the small players disappear from the market and I do believe it’s a great opportunity for New Oriental going forward. So that’s why we tend to firmly make more investment now. We make the learning center expansion by 20% to 25% during a hard time and we raise the teacher’s salary and we hire more ground marketing staff to do the ground promotion, which is more effective than the online channels and also we spend some R&D on the OMO model. And so all the above, the investment plus the negative impact from the overseas test prep and the Koolearn attracts the margin for the time, but we’re confident that we’ll be able to deliver to continue the margin expansion upon the pandemic phase. And that’s why I said, I don’t want to change our mid to long-term guidance.

Christine Cho — Goldman Sachs — Analyst

Thank you so much.

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 Yang Zhihui, thanks Sisi, I think you kind of just answered my question, but actually my question was that in terms of margin, if I look at the non-GAAP operating margin, I think this quarter was still slightly declining year-over-year, but just how fast or specifically around what time should we expect the margin to bottom out in the next few quarters? Thank you.

Zhihui Yang — Executive President, Chief Financial Officer

I think you know, yeah, as I said, to answer the question from that Christine, last one and because — I think the — our revenue recoveries still need to go back to normal, it will still need maybe one or two quarters, you know the topline, where it will be to draw, like it should be very bottom line. And also, we’re in the investing phase to hire more, to spend more on the teachers and on the expansion. And, especially for the — especially for the impacts of the new wave of the COVID in North China like Beijing, Zian and Taiyuan and all provinces in [Indecipherable], I think will impede us a little bit in the Q3, having some adjustment time — I do believe that China will manage the COVID relatively well in the going forward. And I do believe our performance in the coming quarters and even in the next year will be better than the Q2. Thank you.

Alex Liu — China Renaissance Securities — Analyst

Okay, thank you. I actually have a quick follow-up. Just on the teacher compensation, I think we changed the teacher compensation structure a bit in the past — in this fiscal year. I’m just wondering how should we think about the teacher compensation growth in the next few quarters? Is it fair to say that given we might be already past the time when — when the competition pressure on teacher compensation is already is the most severe, given you know, from those online players.

Zhihui Yang — Executive President, Chief Financial Officer

I think it’s a great question. You know the reason that we raised the teacher salary is not because of the competition from the online players. You know the online players they just need like the few teachers and we — we have a lot of teachers and I think this — this decision was totally made by Michael, OK. He think — he discussed a lot internally with all the managers and school just to raise the teacher’s salary.

Because this is our most advantage, not only for the short time but also for the long time. So, we fully — internally, we fully supported Michael’s decision. And even during the hard time and our topline growth was negatively impact to some extent — but we firmly raised the teacher’s salary — I don’t think it will attract the margin because I think the — we pay the teachers higher, we bring out the higher utilization rates and the student retention rates in the mid to long-term.

Alex Liu — China Renaissance Securities — Analyst

Great, thank you.

Operator

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

Zhihui Yang — Executive President, 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 representative. Thank you very much.

Operator

[Operator Closing Remarks].

Duration: 54 minutes

Call participants:

Sisi Zhao — Investor Relations Director

Zhihui Yang — Executive President, Chief Financial Officer

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

Mark Li — Citi Research — Analyst

Felix Liu — UBS Securities — Analyst

Alex Xie — Credit Suisse — Analyst

Sheng Zhong — Morgan Stanley — Analyst

Lucy Yu — Bank of America Merrill Lynch — Analyst

Christine Cho — Goldman Sachs — Analyst

Alex Liu — China Renaissance Securities — Analyst

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