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New Oriental Education & Technology Group (NYSE:EDU)

F2Q08 (Qtr End 11/30/08) Earnings Call

January 20, 2009 8:00 am ET

Executives

Sisi Zhao - IR

Michael Yu - Chief Executive Officer

Louis Hsieh - Chief Financial Officer

Analysts

Chenyi Lu - Brean Murray

James Mitchell - Goldman Sachs

Catherine Leung - Citigroup

Mark Marostica - Piper Jaffray

Scott Schneeberger - Oppenheimer & Co.

Gordon Lasik - Robert W. Baird

Mark Chang - Merrill Lynch

Brandon Dobell - William

BlairMarisa Ho - Credit Suisse

Adele Mao - Susquehanna International

Operator

Good day. Welcome to the second quarter 2009, New Oriental Education & Technology Group Earnings Call.

I would now like to turn the call over to your host for today's call, Ms. Sisi Zhao, New Oriental's Senior IR Manager. Please proceed.

Sisi Zhao

Hello, everyone. Welcome to New Oriental's second fiscal quarter 2009 earnings conference call. Our second fiscal quarter earnings results were released yesterday and are available on the company's website, as well as on Newswire Services.

Today, you will hear from Michael Yu, our Chief Executive Officer; and Louis Hsieh, our Chief Financial Officer. After their prepared remarks, they will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the view expressed today. A number of potential risks and uncertainties are outlined in our public filings with 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 http://investor.neworiental.org.

Now, I will turn the call over to New Oriental's CEO, Michael Yu. Michael, please?

Michael Yu

Thanks everybody for attending this conference call today, because this is a really historic and auspicious day, as Barack Obama is inaugurated as America's 44th President. Actually I am more than excited, and want to go back home to listen to his speech, so this is difficult time for me to be here with all this happening. I think people have the same kind of mood maybe, so no matter we are doing good or bad, it doesn't matter today, right?

In China its less than a week away from the Chinese New Year, so I am also eager to go back home with my mother for the New Year's Eve. Also, I would like to take this opportunity to wish everybody happy holidays, even though, it is Chinese holidays.

As you know our second quarter is seasonally our lowest period, as school aged aspirants are occupied with the beginning of the formal school year in September, taking their final examinations.. Nevertheless, we are glad to end the year after last year is a (rich) year, this year is a poor year. Poor is a nice symbol actually, right? To grow up for what the economic situation is, I hope everybody can make money this year.

At Oriental, we are glad to end this year with satisfying results, hopefully for everybody concerned. As you have seen from our press release, which was released the day before yesterday, we achieved year-over-year revenue growth of 53.7%, exceeding the high-end of our guidance by $1.4 million. This was driven by a strong growth in student enrollments, particularly in our POP Kids English and U-Can, and all subjects training businesses, through areas that I would like to further discuss with you.

If you have been following us since our IPO, you know that we have had a strategic focus on reaching kids early and offering educational programs for lifetime. Our mission is to be the trusted lifeline education partner for Chinese students. We believe the earlier we are able to begin contributing to our child education, the more lifetime value, in terms of revenue contribution, and further loyalty, we are likely to receive from a student and his family or her family.

For example, a POP Kids English student has a much higher probability of becoming a student of our U-Can program, which is focused on middle and high school training, and later of our language training and test preparation process offerings. The immediate benefit of this strategy is that as the economic slowdown weakens demand and the margins are flat out, we are able to generate the strong student enrollments from the younger age groups.

As Chinese parents place a value on education for their children that is only behind food and sheltering, this positions us well to withstand any significant economic downturn in China. Today, we are beginning to see strong results from both POP Kids English, from age 5 to 12, and the U-Can alphabetic training, which attracts students in the 13 and 18 years range. This past quarter POP Kid English enrollments were up more than 43% year-over-year to over 56,000 during our second fiscal quarter.

For the first half of fiscal year 2009, POP Kids enrollments were up over 51% to over 154,000, and in November 2008 we entered into a partnership with the Sino-British Academic Exchange Center for Education Management or SBC, Cambridge ESOL's sole representative in China for the Cambridge Young Learners English exam, to administer the YLE exam to our students across mainland China. Currently, we are administering the exam for our POP Kids English students in 13 cities. The Oriental is the first and only language training school in China, authorized by SBC to administer exams on a national scale, which before usually were exams administered by government officials.

We are also pleased to report continual progress in our U-Can program, which provide after-school tutoring all stoppages in the preparation for the gaokao, which is Chinese college entrance examination. Our U-Can programs having enrollment in non-English courses for over 5,800 in the seasonally lowest second fiscal quarter and enrollments of over 22,000 for the first half of fiscal year 2009.

We recorded over 143,000 enrollments for middle and high school English courses in the same period. Furthermore, we expect a pick-up in U-Can enrollments during the second half of fiscal year 2009 ending in May as the gaokao examination is given once a year in June and the students typically begin intensive preparation as important exams nears.

We remain on our track to achieve our 40,000 or 50,000 enrollment target for U-Can non-English enrollments for fiscal year 2009. Overall total student enrollments increased by 13.4% year-over-year to approximately 292,200 from approximately 257,700 in the same period of the prior fiscal year.

Finally in the second fiscal quarter, we continued to execute on our expansion plan completing acquisition of the two Tongwen schools in Changchun, which is a capital city in Jilin province. That is gaokao school opening, and we also opened a new school in the city of Nanning, which is the capital city of Guangxi, a net of more than 20 new learning centers in existing markets nationwide.

This brings our total number of schools and the learning centers as of November 30, 2008 to 46 and 201, respectively, a increase of 25% from 222 in the previous quarter. We have now opened net 40 learning facilities in the first half of the fiscal year 2009, five new schools, including the acquisitions of Mingshitang and Tongwen schools, which are both gaokao schools and a net 35 learning centers.

We are well on our way to meeting our target for fiscal year, 2009 of four to six new schools and the 40 to 50 learning centers, because we are well ahead of target, we can expect us to slow all our learning center schools for the remainder of the fiscal year and in May, which will benefit our margin.

Well, I will finish and now I will hand the call over to Louis Hsieh, our Chief Financial Officer, who will talk you through our financial part of the quarter. Thank you. Hi Louis?

Louis Hsieh

Hi, Michael. Thank you everyone on the call. We at New Oriental wish all of you a happy, healthy and prosperous New Year, in the year of the bull, as Michael says, and we hope it is a prosperous bullish new year.

As Michael stated, we had a great quarter despite the usual seasonality in our second quarter business. These results are a testament to New Oriental's sale strategy and ability to grow our top and bottom line in both good and bad economic times. While I take you through the financials and highlights from the second fiscal quarter, please note that certain figures that we refer to that exclude share-based compensation expense or non-GAAP. You can find a reconciliation of these figures to GAAP in the financial tables at the end of the earnings press release.

As we have said in previous quarters, our business is best evaluated by monitoring four key measures. First, student enrollment growth; second, net revenue growth; third, non-GAAP operating income growth and fourth our free cash flow generation. So, let's go through these key measures and the factors affecting them.

For the second fiscal quarter 2009, we reported net revenues of $49.4 million, a 53.7% increase year-over-year. Net revenues from educational programs and services for the second fiscal quarter were $43.8 million, a 56.5% increase year-over-year.

The growth was primarily driven by the increase in the number of student enrolment in language training and test preparation courses. Total student enrolment in language training and test preparation courses in the second quarter increased by 13.4% year-over-year to approximately 292,200, up from approximately 257,700 in the same period of the prior fiscal year.

Given the strong enrolment in our seasonally strongest first fiscal quarter during the summer, we expected some abatement enrolment growth during the second fiscal quarter in the autumn. We are pleased that actual enrolment growth abatement was moderate, bringing enrolments to over 837,700 for the first half of fiscal year 2009, up 20% year-over-year.

In fact, we have experienced a strong enrolment pickup for the first six weeks of the fiscal third quarter from December 1, 2008 to January 11 of 2009, as compared with the same period in the prior year, with enrolments up 34% to approximately 160,000 enrollments from approximately 118,000 a year ago period. We believe this pickup in enrolment is attributable in part to the early timing of Chinese New Year, which falls on January 26, 2009 this year, compared to February 7, 2008 last year.

Although we expect the student enrolment growth rate to abate from the 34% for the remainder of the third fiscal quarter. We are on track to achieve our target of between 1,435,000 to 1,500,000 student enrolments for fiscal year 2009, ending in May, up 16% to 18% from approximately 1.271 million enrolments in the fiscal year 2008.

Excluding share-based compensation expense, non-GAAP operating costs and expenses for the quarter were $44.2 million, a 46.3% increase year-over-year. Total operating costs and expenses for the quarter were $48.6 million, a 50.4% increase year-over-year. Cost of revenues increased by 39.9% year-over-year to $21.7 million, primarily due to the increased number of courses and the greater number of schools and learning centers in operation.

Selling and marketing expenses increased by 62.9% year-over-year to $8.3 million, primarily due to brand promotion expenses, particularly directed at U-Can, POP Kids English, VIP English and overseas test prep marketing campaigns.

Non-GAAP general and administrative expenses were $14.4 million, a 43.4 increased year-over-year. GAAP general and administration expenses for the quarter increased by 58.9% year-over-year to $18.6 million, primarily due to increased headcount as the company expands its network of schools and learning centers.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased to US$4.3 million in the second quarter of fiscal year 2009 from US$2 million in the same period of fiscal year 2008. Stock-based compensation should remain at approximately $4.3 million during Q3 '09 and then drop below $4 million in Q4 '09.

Non-GAAP income from operations for the quarter was $5.2 million, a 170% increase from $1.9 million in the previous period of the prior fiscal year. Non-GAAP operating margin for the quarter was 10.5%, compared to 6%, in the same period of the prior fiscal year. GAAP operating margin for the quarter was 1.8%, compared to a negative 0.4% in the same period of the prior fiscal year.

This improvement was primarily due to better operating efficiency as revenue growth outpaced the growth in operating costs and expenses, also affecting margins in the slightly softening demand for our Adult Comprehensive English, as a result of the weak macro-economy with enrollments down 3.6% year-over-year to approximately 50,700.

However, revenue continued to grow in the category up over 25%, as a greater percentage of adult students selected more expensive smaller process in VIP format. Furthermore, our strong growth of Pops Kids enrollments of 42% and junior and high school English and U-Can enrollment of 22% year-over-year growth help offset this decline.

Again, we believe that New Oriental is well-positioned to withstand the economic downturn better than other players in the education industry, because as a world known education provider, our courses are a top priority for high school spending. Parents might sacrifice their own needs, but they are unlikely to sacrifice the education of their children.

Non-GAAP net income was $7.4 million, representing an 84.9% increase from the same period of the prior fiscal year. Basic and diluted earnings per ADS excluding share-based compensation, non-GAAP, was $0.20 and $0.19, respectively.

GAAP net income for the quarter was $3.1 million, representing a 57.5% increase year-over-year. Basic and diluted earnings per ADS were $0.08 and $0.08, respectively.

Capital expenditures for the quarter were $3.2 million, which was primarily used to add the one school in Nanning and a net of 22 learning centers in the quarter.

As of November 30, 2008, New Oriental had cash and cash equivalent of $182.8 million, as compared to $196.9 million as of August 31, 2008. In addition, we had $86.5 million in term deposits by the end of quarter. Net operating cash flow for the second quarter of fiscal 2009 was $5.3 million.

The deferred revenue balance at the end of the second quarter of fiscal year 2009 was $52.7 million, an increase of 39.5% as compared to 37.7% at the end of second quarter of fiscal quarter 2008.

Moving to the revenue guidance. We expect our total net revenues in the third quarter of fiscal year 2009 from December 1, 2008 to February 28, 2009 to be in the range of $65.5 million to $67.5 million, representing year-over-year growth in the range of 36.2% to 40.3%, respectively. This forecast reflects New Oriental's current and preliminary view, which is subject to change.

Since our reporting currency is US dollars and our operating currency is RMB, we have benefited from currency translation gains during periods when the RMB appreciates against the US dollar. In the past several quarters when the RMB consistently appreciate against US dollar by 8% to 10% year-over-year, our revenue growth for financial reporting purposes benefited from such appreciation. But given the current trend in the third and fourth fiscal quarters 2009 as the RMB/US dollar exchange rate has stabilized, our currency transition gains will shrink accordingly.

Once again, thank you for participating in our quarterly earnings conference call. At this point, we are glad to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Chenyi Lu from Brean Murray. Please proceed.

Chenyi Lu - Brean Murray

Good morning. I have a question regarding the gross margin. This quarter the gross margin hedges up by 450 basis points year-over-year, which is pretty good. So, can you give us a sense as to your gross margin trend going forward in the fiscal 2009? Do you still expect to be flat year-over-year?

Louis Hsieh

Hi, Chenyi, good morning. We would expect the gross margin to be roughly flattish if not slightly up, but less than 100 basis points. The reason is because we have a product mix change toward more POP Kids English classes, which will have a slightly lower gross margin than like overseas test prep or other test prep courses. At the same time, we have been successful in increasing prices, which will also help the gross margin line.

So, I think those two offsetting effects a shift towards smaller classes, particularly POP's English classes offset by increased ASP, where costs are going up as much as our price increases are. We counterbalance that we should end up like last year, when we finished the year with 61.6% gross margins. This year we expect a similar number.

Chenyi Lu - Brean Murray

Okay. One more question regarding ASP. Can you tell me what's the ASP present change year-over-year and what's the guidance for 2009, if you can, also for 2010? Thank you.

Louis Hsieh

I think the fiscal quarter just ended with our ASP increased up on a blended average of 13% in RMB terms and 24% in U.S dollar terms. I believe that the ASP increased because we will begin to lose the benefit of the US dollar translation number into RMB. But our ASP increases for next year will be in the range of 10% to 13% in RMB terms and if the US dollar stabilizes at the same 6.83 level, also 10% to 12% in US dollar terms.

Chenyi Lu - Brean Murray

Great and thank you. Great quarter. Very good quarter. Appreciate it.

Louis Hsieh

Thank you.

Operator

Your next question comes from the line of James Mitchell from Goldman Sachs. Please proceed.

James Mitchell - Goldman Sachs

Great, thank you for taking my questions and a good quarter given the environment. Could you update us on headcount trends after you had the big hiring splurge to previous quarter? Could you also breakdown the interest in other income line on the P&L, which looks unusually large this quarter?

Louis Hsieh

On the headcount side, we grew to 9,346 people at the end of November 30, up from 9,089 in the previous quarter. Our headcount grew by about 250 in the quarter, which is actually light, given that we added 22 net learning centers, and added three schools, including absorbing the 100 or so employees from Tongwen schools. So most of the hires were actually teachers. So our teacher count was actually, in fact the total increase can be attributed to teachers. We have 4,106 teachers at the end of Q1, we had 4,467 teachers or 350 more at the end of Q2. So we were very good at managing costs in Q2, and so, most of the hires are teachers. Those teachers are going to be used in Q3 when we're very busy again, for the winter holidays, when students get a month off for Chinese New Year, so that's the primary focus.

As far as the other line items your question is that, I believe was flat year-over-year, at about $4 million, if I read correctly. We have a $800,000 gain on the others, because we had deal with World Association Press, a long-term contract, and at the end of the contract, there was $800,000 left in that contract, that we don't have to pay them because the contract expired, so we took it back in the other's line for this quarter.

James Mitchell - Goldman Sachs

Thank you.

Louis Hsieh

You're welcome. So it's a one-time benefit.

Operator

Your next question comes from the line of Catherine Leung from Citigroup. Please proceed.

Catherine Leung - Citigroup

Good evening. Congratulations also on a very solid quarter, I have three questions. My first question is on, at the first time in fiscal year '09 you have added 40 facilities, which seems to be higher than your full year guidance was for, the [35] facilities previously given for full year '09. So, how we should we think about the impact to the margins for the third quarter considering that. It is now carrying a highest fixed comp base?

Louis Hsieh

I think that fixed cost base will hurt margins in Q3 a little bit. Obviously the 22 learning centers won't be full immediately. So, that's why Michael mentioned in his opening that we will probably slow down the number of learning center openings for the rest of the year and we are very well within our target of 40 to 50 for the year. So, with 35 we should make that easily. We will continue to open Kids learning centers and some VIP maybe couple of Adults, but we will slow that growth down. But it will have a negative impact on Q3 margins because we are carrying a higher fixed cost ahead of the revenue coming in.

Catherine Leung - Citigroup

Okay. And the second question is I think taking a longer term look at the company's expansion strategy, given that expansion, a, its revenue growth, but may initially be margin at last, dilutive for the school reaches breakeven and considering that pricing growth has been an important driver for margin expansion, to what extent or is there any relationship between expansion plans and how this will depend on ASP growth trend?

Louis Hsieh

I don't think so. I think the ASP growth trends have been from two sources. We typically raise prices 10% to 12% year-over-year for like-to-like classes. The other benefit comes from the US dollar transition, which we will lose, but don't forget our costs are all also in RMB as our revenues are. So, it actually had a neutral effect on our margin structure, right. Actually the price increases of 10%, 12% is higher than the Chinese inflation rate and currently is higher than our costs are going up. So, we will get the margin benefit going forward.

Even as we open up more and more schools and learning centers in the years to come, there we are opening them up in cities that are demographically attractive. The margin structure is very comparable to most of the other cities in which we've been opening in the past, with exception of the Beijing and Shanghai which have much higher margins.

Catherine Leung - Citigroup

Okay.

Louis Hsieh

So the strategy just moves on there is no change in that strategy.

Catherine Leung - Citigroup

Okay. Last question is, following up on James' question on gross margin. Considering that the number of part time teachers actually increased sequentially, which I understand, correct me if I'm wrong, I understand that the part time teacher costs were included in the cost of goods at the gross level. Can you help us understand a little bit, where the cost reduction was from in the second quarter on a sequential basis? Is this mainly from dismissing some of the administrative staff, and if so, seems like the proportion of administrative staff cost seems to be quite high relative to the overall cost base?

Louis Hsieh

I think last year Catherine, if you recall, in Q2 we also opened up a lot of learning centers.

Catherine Leung - Citigroup

Correct.

Louis Hsieh

So those learning centers have another year now to mature. So the utilization across the network every year is getting better and better, which improves the gross margin line. So the utilization and price increases together are going to drive up the gross margin side. What's going drive down the gross margin side, is going to be if we expand too many learning centers or if the students don't fill the seats. The smaller staff sizes will drive down the gross margin line and the shift toward POP Kids English enrollments, but the price increases and the utilization more than offset that in Q2 of this year versus Q2 of last year.

Catherine Leung - Citigroup

Right, sorry. I think I may not have been very clear with the questions. I was actually more looking towards on an absolute basis, so we're looking at about $16 million or about $17 million sequential decline in cost of revenue. So this considering that part time teacher count actually went up, most of this cost reduction is from lower administrative salary costs? If so, is it correct to assume that the administrative salary cost is actually about 40% of the cost of revenues?

Louis Hsieh

No, I think the lower cost in [consecrate], because the POP Kids English teachers are actually paid at a lower level than the overseas test prep teachers. So if POP becomes a bigger part of the mix, those teachers are actually in the G&A line, the majority of their compensation is in the G&A and not in the gross margin line.

Catherine Leung - Citigroup

Right, okay.

Louis Hsieh

Right. So 20% of the revenue comes from Kids English, the gross margin, it will improve our gross margins.

Catherine Leung - Citigroup

I see. Okay. That makes sense then. Thank you.

Operator

Your next question comes from the line of Mark Marostica from Piper Jaffray. Please proceed.

Mark Marostica - Piper Jaffray

Thank you. I just wanted to get a clarification on the softness you mentioned Louis, in regards to Adult. Was that specific to Q2 or did you actually see that softness continuing in the first half of Q3?

Louis Hsieh

That's a great question. I went to check this last week. We are seeing an increase in Q3. So we think the softness was due to Q2 specifically. Adult English has always been growing in a single-digit in enrollment. So it is slowing a little bit from historical trend, but it is up in the first six weeks of this quarter versus last year, whereas in the second quarter it was down 3.6% for the whole quarter.

Mark Marostica – Piper Jaffray

Got it.

Louis Hsieh

So we tend it as quarter specific.

Mark Marostica – Piper Jaffray

Okay and then in regards to the acceleration and enrollment growth in the first half of the quarter, the February quarter. Was that fairly broad based across all the sectors, segments of your business or were there any one or two segments that seemed to be driving that acceleration?

Louis Hsieh

I think from what the early data we have, the acceleration in student count is mostly driven by our three growth drivers which is our Kids English is the fastest growing, Middle High school and U-Can is second, and overseas test prep is growing also in the teens. So we've seen a bounce back in all three of the growth drivers. Domestic test prep continues to grow in the high single-digits and Adult is growing in the single-digits.

Mark Marostica – Piper Jaffray

Okay, great.

Louis Hsieh

Across all our product lines.

Mark Marostica – Piper Jaffray

One last question, I do recall that you received high tech's tax status across a number of your business units that you were requesting that status. Can you give us a sense what that means for the tax rate this year and then as you look into next year how we should be modeling tax rate?

Louis Hsieh

Yes, I think we would model this year at about 11.8% for calendar '09 and probably 11% for calendar year '010.

Mark Marostica – Piper Jaffray

Okay, great. Thank you.

Operator

Your next question comes from the line of Scott Schneeberger from Oppenheimer, please proceed.

Scott Schneeberger – Oppenheimer & Co.

Thanks, good evening. Just following up on the strong start to fiscal third quarter, you allude to an abatement later in the quarter. Could you talk a little bit about the timing within the quarter maybe a little bit about deferred revenue as well and of the number that you've seen in deferred revenue. How much of that will hit in the fiscal third quarter? Thanks.

Louis Hsieh

Yes, we have about $50 million to $53 million in deferred revenue coming in to Q3. Actually this is one of the quarters where deferred revenue much of it hits this quarter. So even though it was lighter than previous quarters at only 40% growth, 70% to 75% of that revenue will hit this quarter. So we estimate $39 million of the $53 million will come in to this quarter.

It's natural that if we have a light deferred revenue number coming in the quarter, we'll see strong enrolments in the quarter, its just delayed enrolments. But we did benefit from the third quarter, the 34% rate is too high and we think its driven because Chinese New Year is earlier this year, about 12 days earlier and so students will obviously come and enroll back. But this year the Chinese New Year is actually longer than normal. So it is similar to last where it was a little bit over four weeks. So we do expect very strong revenue growth to the whole quarter and that's why we guided, we've got 36% to 40% growth for the quarter.

Scott Schneeberger - Oppenheimer & Co.

Just following up a bit on the previous question, it sounds like fairly broad based, because you talk geographically as well. So a lot of this bounce back in Beijing, perhaps from people [devoid] from the Olympics?

Louis Hsieh

Yes. I think Beijing is actually doing really well. Beijing was up 35% last quarter and the early numbers from Beijing this quarter are well up over 30%, 35% in revenue again. So Beijing has bounced back nicely from the Olympics. If there is a slowdown, I mean Shanghai is slowing down a little bit but last year it grew 60%, so it's unsustainable.

We have a slowdown in some other cities like Guangzhou, but that's more management specific, because we had a school head change. So overall the new schools and the network is growing in line with expectations or higher, so our business is still clicking on all fronts.

Scott Schneeberger - Oppenheimer & Co.

Great thanks. Shifting gears, but last year at the beginning of a calendar year, you had an increase to staffing salary, do you anticipate something similar this year and what type of headwind might that pose. I assume not as much as what you're seeing in pricing growth, but if you can elaborate there? Thanks.

Louis Hsieh

The Board just approved on Monday, yesterday a 3% to 5% staff salary increase.

Scott Schneeberger - Oppenheimer & Co.

Great.

Louis Hsieh

Management doesn't get reset until Q1. So, until the summer, so it's a zero pay to the staff.

Scott Schneeberger - Oppenheimer & Co.

Okay, thanks and nice work.

Louis Hsieh

Thank you.

Operator

Your next question comes from the line of [Gordon Lasik] from Robert W. Baird. Please proceed.

Gordon Lasik - Robert W. Baird

Thanks for taking my question. First just quick housekeeping, can you run through the enrollments for each segment. I know that Adults was down 3.6% and kids was up. What was middle and high school and then what was the overseas test prep for the quarter?

Louis Hsieh

I would need your approximation, we don't disclose all that data, but for overseas test prep now was over 53,000 enrollments for the quarter.

Gordon Lasik - Robert W. Baird

Okay.

Louis Hsieh

You can also email Sisi and she will give you these numbers a score that's easier. Domestic test prep was over 85,000, Adult comprehensive was 50,700 more than that. High school was almost 31,000 -- 30,900 and change, Kids was 56,600 and those are the major ones.

Gordon Lasik - Robert W. Baird

Okay. And then I guess, can you talk a little bit about what matriculation you are seeing from Kids to U-Can to Adults. You talked Kids performing the best right now. Can you give us any sort of metrics as how much more likely are Kids, like which enrolled in the U-Can once they enrolled in the Kids program, anything you're seeing there?

Louis Hsieh

Yes, we don't have hard actual numbers, but we know from anecdotal events that of many students, who are 12 or 13 in our POP Kids English class, their parents will ask us about the next level, and we'll direct them to the U-Can programs. So, don't forget U-Can is brand new this year, but they have been consistently for the last several years, enrolling in middle and high school English. So, there is a high correlation. I would guess and this is an estimate, but it's well over 50%, that will move on if there are 11 year or 12 year old children, they will move on to our English for middle and high schools kids.

Gordon Lasik - Robert W. Baird

Okay.

Louis Hsieh

Then we'll begin to cross sell those middle and high schools kids into other subjects like math and Chinese and physics and chemistry. So, that's the whole strategy, remember, being the trust education partner for Chinese kids starting as early as possible, somewhere between 5 and 12, and then they stay with us all the way through college and graduate school.

Gordon Lasik - Robert W. Baird

And then for U-Can, how many non-English courses have you rolled out currently, and then how is that trending versus expectations? How many do you expect to have by the end of the year?

Louis Hsieh

We are rolled out in over 20 cities now. We have the full curriculum in all six or seven classes for each grade level in the big cities. So, we would expect a basically critical mass of rollout by Q1 of this year for the next two quarters. We would expect the total profit in Q1 during the summer of 2009. So, two quarters from now.

We are on track with enrollments. We had forecasted 40,000 to 50,000 enrollments in the beginning of the year. We are at 22,000 for non-English classes for the first half of the year. We are going in to the busy period, right. Q3 and Q4 the gaokao is given in the first week of June, so Q3 and Q4 is when students study in earnest for that exam.

Gordon Lasik - Robert W. Baird

Okay and then just one final question. Could you give us a rough percentage of how many of your schools and learning centers are currently profitable, I mean, by your estimates, you talked about learning centers being profitable after the first year. So, would that 60% to 65% learning centers will that be a good number to approximate?

Louis Hsieh

We don't measure profitability by learning centers. We measure it by school, which means by city. Every one of our cities that is open longer than one year or longer than 18 months is profitable. In fact, I don't even know if any of that is not operating profitable.

Gordon Lasik - Robert W. Baird

Okay. Thanks a lot.

Louis Hsieh

So, we don't measure it by specific learning centers, because it's all under one P&L by city.

Gordon Lasik - Robert W. Baird

Okay. And so, every city longer than 18 months…

Louis Hsieh

In fact, I almost want to say every city is profitable on an operating basis.

Gordon Lasik - Robert W. Baird

Okay. Thank you.

Operator

Your next question comes from the line of Mark Chang from Merrill Lynch. Please proceed.

Mark Chang - Merrill Lynch

I would like to check with you, how many students are included in this quarter coming from Tongwen and what's your plan in terms of growing the business here?

Louis Hsieh

Tongwen is almost none, it's like a 100 students this quarter for Q2. Their business really starts in Q3 and Q4. So, they expect probably 1,200 or 1,300 enrollments for Q3 and Q4 together. But these are higher ASP, right, Mark. I mean they are -- but they are going to be higher than the $100 of cost because they easily sell the whole five classes in one. So there if is really – if it's 1,200, you take five classes, there is really 6,000 enrollments.

Mark Chang - Merrill Lynch

Okay. And in terms of growing the business of Tongwen, are you thinking about just Tongwen or are you taking this brand to other cities or are you looking at other acquisition in other cities at this moment?

Louis Hsieh

Our initial thought is to look at different new acquisitions in each city, because we don't want to try to build a brand in the re-taker school in each city. Now, Tongwen isn't really a re-taker school as much, but Mingshitang is. So, we will prefer to acquire a re-taker school in profitable cities and thus try to build it from scraps. Now U-Can is different, we will roll our U-Can nationwide with our own New Oriental brand.

Mark Chang - Merrill Lynch

Okay. And in terms of teacher's number, since you mentioned that you see a lot of gross in the Kids English and those teachers in Kids English actually are kind of full time teachers. So, are you in terms of teachers breakdown, are you still guiding that half-half in terms of full-time and part-time or what's the breakdown at this moment?

Louis Hsieh

Part-time teachers are still a little bit higher than full-time. It's like 2,000 are full-time and 2,400 are part-time. And I think is, we always prefer part-time teachers, if we can, because then we have to absorb the cost when they are not teaching. So, we will probably keep it more part-time than full-time, but they are both growing as our student enrollments grow.

Mark Chang - Merrill Lynch

Since you have very strong growth in teachings, can I check with you how much revenue does Kids English contribute to your business and in terms of profit, is this higher than the revenue contribution or lower?

Louis Hsieh

We don't break it out separately, but it's probably inline. So it's about [20%].

Mark Chang - Merrill Lynch

Okay. Last question, can I check with you what's the profitability of U-Can program in this quarter?

Louis Hsieh

U-Can program will be profitable in Q1. But we are still building the program. We are spending a lot of money in marketing. But U-Can -- don't forget U-Can has the potential to be much more profitable than Kids English and almost as profitable as overseas test prep because it's much larger, right. If you think about Kids English, the average Kids English class has 17 or 18 students. The average U-Can class because it's not just language training, it has 50 or 100 students eventually. So it has the much higher ability to scale that class and be more profitable than Kids English, when it's mature.

Mark Chang - Merrill Lynch

Okay. Thank you.

Operator

Your next question comes from the line of Brandon Dobell, from William Blair. Please proceed.

Brandon Dobell - William Blair

Thanks. Quick question on the acquisition landscape, well just this expansion in general, would you guys consider going outside of China, perhaps to Hong Kong, Singapore, even Malaysia, to look for similar opportunities that you've grown in China right now, or just you're solely focused on staying in China?

Louis Hsieh

Well, our primary focus will be on China, given that the largest English school in Japan went bankrupt, and the largest English school in Hong Kong just went bankrupt. I think we have a hard time teaching English to Singaporeans, who think their English is better than American?

Brandon Dobell - William Blair

Right.

Louis Hsieh

I think we'll probably stick with China, but we are always on the outlook for other countries.

Michael Yu

We know a lot of other countries, but nowadays we are focusing on China, because the market in China is big, even though the economy is growing like about 30% to 40% every year, but we are only occupying, like about around 5% of the total market actually. So all of our expertise is in China, know how is in China, so for at least for 2009, the present year, we are going to focus mostly in China, even though I personally myself had traveled through Taiwan, and Hong Kong, and South Korea looking to their training patterns.

Louis Hsieh

Therefore, Brandon every province we go into, new province has a population probably bigger than South Korea. So its almost like a new country for every province we go into?

Brandon Dobell - William Blair

Right. Okay. And then to a certain extent you talked about the acceleration in enrollment in December and early January, if you look at the next couple of quarters, especially around the holiday you are heading into next summer? Given the macroeconomic backdrop what gives you guys the confidence that Q2 trends will be repeated, or that you are seeing acceleration, or that you are not just seeing more you know timing driven acceleration in enrollments versus just an overall slowdown, particularly in your overseas test prep or Adult English. Do you expect that to really reverse? Given what's going on with your macro-environment or do you have confidence that you guys can continue to grow at a decent pace?

Louis Hsieh

I think we will continue to take market share in all our main product groups, program groups. So I believe in overseas test prep we will grow equal to or faster than market. Now, overseas test prep grew at a torrid pace last year with enrollments up 26% to 27% nationwide. So that's unsustainable in the long-term, but overseas test prep we had the benefit of being able to raise prices, so that business will continue.

In Kids English, as Michael said, we are only several percent of the market. We have a long runway ahead of us. We are right at the hockey stick pace for Kids English so that will continue to grow. In middle school it is the same thing, we are at the level where we are beginning to really hit our stride in that area. And parents won't sacrifice in that spending.

So the one vulnerable area is the Adult comprehensive English. We have mentioned that we have so far in the six weeks of this quarter we have seen a pick up versus last year, whereas we saw a drop in Q2. So we are confident that that trend is reversing, but we are not going to see tremendous growth anyway.

Brandon Dobell - William Blair

Okay. In the overseas test prep business, is it still safe to assume that you are taking share within IELTS as compared to TOEFL and if that's the case, how do you breakout what the relative driver for that growth is in that segment. Is IELTS a lot more important for the overall growth rate in overseas test prep are they equal, just trying to get how important market share is in IELTS for you.

Michael Yu

TOEFL and IELTS contribute actually equally to earning's revenue and maybe profit, I believe because we didn't divide that. Looking forward, TOEFL and IELTS was skilled continue growing mostly because more high school students are taking TOEFL and IELTS, to get prepared to go abroad to like United Kingdom to be under graduate students. We will see a decrease for, students, who are in the university prepare for graduate schools to United States, because we predict a decrease of scholarships in United States, but this will be compensated by the high school students.

So, we still see, I don't know whether we can call it a storm, but a good growth or increase in number of students who are taking TOEFL and IELTS or in the revenue growth in Oriental, because high schools students are taking on more and more; more students are taking these two kinds of examinations. Most will be equally, I think because some of the Chinese go to the United States and some of them go to Commonwealth Countries. We are still optimistic with these two products.

Louis Hsieh

Yes, just one more point on that Brandon,, if you look at the affordability index right, the South Korean won has gotten hammered against the US dollar and the euro. The RMB has actually strengthened noticeably against the euro and the English pound in the last six months, which makes it much cheaper for Chinese student to go to the UK and to Australia. I think is the fact is because other countries are struggling financially to send students there, it actually opens more spots for Chinese students.

Brandon Dobell - William Blair & Company

Okay and then final question for you Louis. As you look at your cost base and the number of schools you have now being so large, how do you look at rent as a percentage of the overall, let's call it operating expenses and due to the opportunity to go back and renegotiate a lot of those leases, just given, how tough the real estate environment has been in China in the last year or so?

Louis Hsieh

I think our cost structure is favorable, and it will get more favorable. Because I believe that rents are stable and we know we signed five years or more leases, that we are not seeing rent increases like we did in past years. So, even if we don't renegotiate leases we got new learning centers. The market rent has not gone up and is probably going down, on the down side. So, we have leveraged on the rent. Rent is about 20% of revenue, 18% to 20% of revenue. It's pretty confident. So, I think, and I think its the same thing on the labor front side, is that last year we raised salaries 10%, this year its less than 5%.

Brandon Dobell - William Blair & Company

Right. Okay, Thanks a lot.

Louis Hsieh

The price increase is still the same, yes.

Brandon Dobell - William Blair & Company

Okay.

Operator

Your next question comes from the line of Marisa Ho from Credit Suisse. Please proceed.

Marisa Ho – Credit Suisse

Yes, hello. I just have a bit of quite technical question for third quarter of your financial year. What type of translation rate are you using for the RMB to the US dollar in your revenue guidance?

Louis Hsieh

Yes, I'm using 6.83. You have the easiest question in the night. Thanks Marisa.

Marisa Ho - Credit Suisse

Yes, it was close to the end of the conference call.

Operator

Your next question comes from the line of Adele Mao from Susquehanna International. Please proceed.

Adele Mao - Susquehanna International

Hi, I have got a couple of questions first just want to follow-up on earlier question regarding Kids English. If I take this quarters enrollment of 56K, that is about 19% to 20% of total enrollments for the quarter. I think you mentioned earlier that the revenue contribution for Kids English is about 20%. Shouldn't the revenue contribution for Kids English be much higher, because your ASP for Kids English is higher than your corporate average?

Louis Hsieh

Actually no, the ASP for Kids English is lower, slightly lower. It's about $110, with their average about $125 $130.

Adel Mao – Susquehanna International

Okay.

Louis Hsieh

US dollars per class.

Adel Mao – Susquehanna International

I see, okay. And my second question given your cash balance of $270 million or about $7 in cash per share. Would you consider buying back shares at current level?

Louis Hsieh

We discussed this all the time at the Board. We don't have another buyback program in place yet. As you know, Adel, we are challenged because of the fact that most of our cash is in RMB, and we have to pay a tax if we translate it in US, move it to US dollars, it's a 10% tax imposed by the Chinese government. So that is one factor. We just purchased one million ADS's last year which finished in July at an average of $63. So we have that one purchase. So we consider it all the time but we have not, we don't have immediate intention to start a new program yet.

Adel Mao – Susquehanna International

Okay. What's your percentage of cash that is currently in RMB?

Louis Hsieh

About $200 million of it is in RMB.

Adel Mao – Susquehanna International

Okay.

Louis Hsieh

And 70 million is in US dollars.

Adel Mao – Susquehanna International

Okay. That's all I have. Thank you.

Louis Hsieh

Thank you.

Operator

(Operator Instructions). You have a follow up question from the line of Catherine Leung from Citigroup. Please proceed.

Catherine Leung - Citigroup

Hi, I was just wondering whether you'd be able to tell us the revenue contribution from Mingshitang for this quarter and I assume that has turned breakeven for reversing the loss from the previous quarter?

Louis Hsieh

Yes. Actually I apologize that I don't have that handy. I think the cash revenue of Mingshitang in the quarter was about $3 million, almost $3 million is that right? No, no Q2 sorry. Its very small Q2 is a slow quarter for Mingshitang.

Catherine Leung - Citigroup

Right.

Louis Hsieh

It's about a couple hundred thousand, it's very small. They expect bigger more revenue in Q3 and Q4.

Catherine Leung - Citigroup

Okay.

Louis Hsieh

But it was about $0.25 million almost.

Catherine Leung - Citigroup

Okay.

Michael Yu

Mingshitang is a kind of strategic this year. The good result is that number one and the number two students who are taking the final examination [in other] areas this time, both of them are in Mingshitang actually.

Louis Hsieh

But Catherine, you know then Mingshitang last quarter had cash revenue of $3 million and that revenue is actually recognized through the whole year. So they have an additional 250, so it is $3.2 million so far this year total.

Catherine Leung - Citigroup

Okay.

Louis Hsieh

Okay. So that will be recognized over the course of nine months, but most of the enrolments come in summer. They will pick up some more enrolments in Q3, as people begin to realize they need to help for the gaokao and they also may do some short-term training. So that 1,500 students who came in short-term ranges like U-Can during the summer and they will have another program in the winter and also in the Q4. So we will use some of the Beijing school facilities for those purposes. So there is a lot of strategic benefit to it and I was really thinking that the total revenue so far is over $3.2 million for the year.

Catherine Leung - Citigroup

Okay. Thanks. Sorry its last question. In terms of the tax rate will there be any type of write back on the tax provision. I know that this has not (inaudible).

Louis Hsieh

We already took it back. So it came into Q2 already.

Catherine Leung - Citigroup

Okay.

Louis Hsieh

So we will be at 11, we will be at 12% for calendar year '09. And we will be at 11% for calendar year '010 as we forecast right now.

Catherine Leung - Citigroup

Okay. Thank you.

Louis Hsieh

Thank you.

Operator

At this time we have no further questions in queue. I would now like to turn the call back over to Mr. Michael Yu, CEO, for closing remarks.

Michael Yu

Thank you for joining us, today a special day, I hope everybody will enjoy today because most of the public are waiting for the historic speech by Obama and not by me. So if you have any further questions, please do not hesitate to contact myself or any of our Investor Relations representatives like Sisi Zhao, just call Louis. She is ready to take your questions.

Louis Hsieh

Michael has left for the door. He is going home to watch the speech.

Michael Yu

Yeah I am eager to. Actually, I have to catch this historic moment.

Louis Hsieh

Thank you, everybody.

Michael Yu

Thank you, everyone.

Operator

Thank you for your participation in today's conference. This concludes the presentation.

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