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Executives

Sisi Zhao - Senior Investor Relations Manager

Louis Hsieh - President &CFO

Analysts

Chenyi Lu - Cowen &Company

Philip Wan - Morgan Stanley

Eugene Yeoh - Deutsche Bank

Mark Marostica - Piper Jaffray

Catherine Leung - Goldman Sachs

Amy Junker - Robert W. Baird

Ella Ji - Oppenheimer

Tom Dillon - William Blair

Chao Wang – Merrill Lynch

Jennifer Kao - Credit Suisse

New Oriental Education & Technology Group Inc. (EDU) F1Q2012 (Qtr End 31/10/2011) Earnings Call October 18, 2011 8:00 AM ET

Operator

Good evening and thank you for standing by for New Oriental’s first quarter of fiscal year 2012 earnings conference call. At this time all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao.

Sisi Zhao

Hello everyone, and welcome to New Oriental’s first quarter of fiscal year 2012 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 Louis Hsieh, New Oriental’s President and Chief Financial Officer. After his prepared remarks, Louis 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 statement, except as required under applicable laws. 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 New Oriental’s President and CFO, Louis Hsieh.

Louis Hsieh

Thank you Sisi. Hello everyone and thanks for joining us. I will start today with an overview of the business highlights from the last quarter and then quickly review some of the key financial indicators. We are starting the fiscal year on a really strong footing with an exceptional set of results for the first quarter. As you know over the last few quarters we have set ourselves the challenge of striking the ideal balance of increasing profits while continuing to invest for growth and I think our results for the quarter really speak to the success of achieving the right mix. New Oriental continues to grow at a stellar rate with revenues increasing by 41.4% year over year to $272 million. Combined with this our efforts to control spending continue to bear fruit enabling us to increase net income by 45.8% to $90.7 million. At the same time we recorded improved gross margin of 65.9% up 40 basis points and a very healthy operating margin of 34.8% up 50 basis points. For the last 12 months our results are very impressive with revenue growth of over 48% to over $637 million, enrollment growth of approximately 17.6% to almost 2.2 million students, GAAP net income growth of over 56% to $138 million, GAAP net profit margin of about 20.4% and non-GAAP net income growth of approximately 48% to over $148 million and for the non-GAAP profit margin of 23.3% over the trailing 12 months.

Underpinning these excellent overall performances were really strong results across each of our key business segments. Overseas test preparation programs recorded year-over-year enrollment growth of more than 19% to about 107,800 students and year over year gross revenue growth of over 48% to over $92 million. We continue to see particularly strong demand for our TOEFL, IO, GRE, GMAT and SAT test prep classes. The K-12 all subjects after school tutoring business recorded year-over-year enrollment growth of more than 24% to over 436,600 students and year-over-year gross revenue growth of over 50% to over $94 million. This is particularly hardening given that the summer quarter is not the peak season for K-12 all-subjects tutoring. Rather the six months before the Gaokao and [Xunkao] test which are administered in June of each year, namely the winter and spring quarters, typically are stronger K-12 and test prep tutoring demand.

And once again, we see very rapid growth in our VIP personalized profits. Year-over-year enrollment growth increased more than 46% to about 21,200 and year-over-year cash revenue growth was over 65% to over $42 million. Finally, our Vision Consulting, overseas study consulting business, had another great quarter with year-over-year gross revenue growth of approximately 110% to $13.4 million.

We are extremely pleased with the rapid growth of our smaller class sizes offerings, particularly in the VIP sector. These are premium offerings at a premium price. So our ability to get traction here is quickly, really speaks to the strength of the New Oriental brand in the high quality of our courses.

I want to highlight though that these smaller classes obviously have lower margins. So as our product mix shift, our overall operating margins will be negatively impacted. In addition as Beijing and Shanghai are now less than 50% of our revenues, many of the other schools, as a whole, are growing faster than Beijing and Shanghai, our margins will also be negatively impacted as Beijing and Shanghai, traditionally, have enjoyed higher gross and operating margins. These negative impacts can be offset in large part over time by higher ASPs, higher learning centre utilization rates and economies of the skill advantages that New Oriental enjoys.

While we continue to emphasize the importance of expense control, I want to make it clear that we’re very committed to investing in our existing business and taking advantage of growth opportunities, particular in several young and fast growing markets in K-12 college area.

In the last quarter we continued to invest in four major areas that we believe will position New Oriental for continued success. First, let’s look at the network expansion effort. It’s important to remember that with our after school programs, overseas consulting services and online education offerings we are operating in relatively new but hugely promising markets. New Oriental is in 49 cities right now, but we have to remember that China has over 200 cities with more than a population of 1 million inhabitants where incomes are growing quickly and more and more people are looking forward to expand their supplemental education options. So it’s really, we’ve just barely begun to scratch the surface of this addressable market.

As we look to capitalize on this, we are cognizant of the fact that being an early mover and achieving scale quickly creates high barriers to entry advantages. This is highly competitive market environment. So we continue to open new centers in attractive market to ensure that we stay head of our competitors.

Over the last quarter, we opened two new schools in the cities of Tangshan and Urumqi along with a net of 20 learning centers in about 15 existing cities. That gave us a total of 55 schools in 433 learning centers in 49 cities as of August 31, 2011.

Let me just note that this number excludes the one school and 20 learning centers that we acquired from Newave education in September 2010. Just in case you missed the discussion in the earnings release, we’ve taken legal action against Newave claiming breach of contract and we’ll update you on the proceedings as and when appropriate.

Looking forward we plan to open around 100 to 110 new learning centers this year. Most of the learning centers will be dedicated to kids, U-Can and VIP courses. So it will typically be much smaller than traditionally multi-use learning centers. The second area of investments I want to highlight is a very exciting new initiative and entirely new product offering called Maxen. Maxen provides intensive after school training courses targeting students four to 17 years old and with eight to 15 student class format sizes, modeled closely after the US and UK education systems. In essence with Maxen we are offering the best of both worlds. Students can get an intensified US standard English education in a US standard learning environment, but one doesn’t have to leave China. Currently we are offering English language courses for one, for over time we expect to add modules and other subjects such as Math, World History and Government and others to round out the learning experience and help Chinese students become truly bilingual, bicultural, global citizens.

Maxen is aimed at two audiences in particular. The first group of kids who are planning to study abroad, either for high school or university. By taking Maxen programs before they go abroad, they can ensure that they have both the language skills and the cultural confidence and awareness to compete with their international peers.

The second target group is kids who want to really master the English language and who are looking for the best possible learning environment to achieve that. I am not talking about simple Mickey Mouse English training. Maxen is an intensive, rigorous, very high quality program that produces students who are completely comfortable, both linguistically and culturally in Chinese and English speaking environments.

Today, we have five Maxen centers in four cities across China. They are very high end facilities with top quality teachers, audio, video and IT equipment and systems and the best-in-world class course materials.

We are very excited by Maxen because we believe that parents are looking for programs like Maxen to help train these kids to be productive, savvy, employable graduates who can function seamlessly in a bi-lingual and bi-cultural manner. As a result, an international standard education is increasingly seen as a vital asset in China’s highly competitive jobs market.

So as more families reach for income levels where they can afford to give their students a better education, we expect demand for Maxen programs to grow quickly. Also Maxen dovetails perfectly with our existing overseas test prep and overseas study consulting businesses. These are obviously synergies in crossselling opportunities here and we expect to see the benefits from that.

The third area of investment that I want to flag is dajie.com. Last quarter, we made a investment of $2 million for a 5% equity stake in Dajie. Dajie is a recruitment website targeting Chinese college graduates. It was started in 2008 and has about 8 million registered users with about over 10,000 company corporate customers. Much like Maxen, there are substantial potential synergies for New Oriental and dajie.com, especially when you consider how engaged we are with college students nationwide through our language and test prep courses and materials.

And finally in terms of investment, I want to stress how important we believe it is to continue devoting resources to teacher training and course development. We’ve built an unrivaled reputation as the premium education brand in China for K-12 college, and this enabled us to charge a premium price for our products. But this is a competitive market and we need to keep working hard to ensure that we stay out in front.

So, last quarter we continued to increase investment in teacher training programs, curriculum and materials development and K-12 classes to ensure that our content is to provide the very best product offerings in the market.

Before I move on, I’d like to spend a couple of minutes to talk about overall enrollments, which grew by 14.6% year-over-year. The picture here is very healthy, but I do want to stress three underlying issues that hampered overall enrollment growth and prevented this picture from even be brighter.

First, as you know, the summer quarter is traditionally not the peak season for our K-12 process. Most students sign up for courses in fiscal Q3 and Q4, the winter and spring quarters as they get closer to exam time. So we usually see the strongest growth in new K-12 enrollment in the second half of the fiscal year.

Second, we have continued to see a decline in enrollments for our adult English classes in the first quarter with enrollments declining 12% year-over-year to approximately 97,200. As I mentioned in the last quarter call, the overall market for adult English education in China is gradually slowing, and so we expect this gradual decline enrollment to be a long-term trend.

Young people are getting better English education in their school, and of course, they’re getting top quality after-school training at New Oriental learning centers as well. So, looking down the road, there will be fewer adults needing English instructions because they will have already learned reached a proficient English level by adulthood. This is not necessarily bad news though, because we are actually benefitting from the fact that these people are joining our classes at a younger age and are staying in our system much longer.

And the third factor affecting enrollments this quarter is an unexpected drop in registrations in the Northeast regions for New Oriental. We’ve observed in the cities of Harbin, Jinan, Shenyang and Chongqing, overall enrollments has dropped by 18% year-over-year to approximately 59,400 in Q1.

We have pinpointed some management issues as the root of the poor performance. So we recently replaced the school heads in each of the four cities and we are working very closely with the new management to get things back on track. It will take a little time to rebuild momentum, of course, but well we have got good people in place and the senior management team is paying a lot of attention to fixing this problem. So we are hopeful that we will be able to turn things around quickly.

Before I turn to the financials, let me quickly say a few words about the macro environment in China. Because this is one area, we have been getting a lot of questions from investors, there seems to be a lot of discussion about a potential economic slowdown in China and certainly there are plenty of economic challenges facing both China and international markets, but what I can tell you is that as of this time, New Oriental’s business continues to be very healthy and we do not see signs of a retrenchment.

As evidence of this, I can point to our deferred revenue balance, which stood at $175 million as of the end of August; that’s an increase of 74% from the year-ago period.

I also want to highlight here the education spending is traditionally much more resilient than other discretionary spending items, categories in China.

During the last downturn in China caused by the financial crisis in 2008 and early 2009 New Oriental actually continued to experience very robust growth with revenue growth of approximately 46% to $292 million for our fiscal year ending May 2009. So we are very confident in the medium to long-term outlook for our business.

Turning now to the financials. The detailed financial results for this quarter and fiscal year are available in our press release, which was issued earlier today. So I just want to highlight the most important indicators.

Net revenue from education programs and services for the fiscal first quarter were $251.9 million representing a 39.3% increase year-over-year. The growth was mainly driven by an increase in the number of student enrollments in academic subjects, tutoring and test preparation courses and higher average selling prices resulting from price increases and students selecting more expensive smaller class options.

Total student enrollments in academic subjects tutoring and test preparation courses in the first quarter fiscal year 2012 increased by 14.6% year-over-year to approximately 807,700 for approximately 704,500 in the same period of the prior fiscal year.

Sales and marketing spending remained under control, rising just 22% to $28.5 million or just 10.5% of revenues, down from 12.1% in Q1 of last year. In fact, direct promotional expenses increased to just 17% to $15.1 million or just 5.5% of revenues compared to a revenue growth of 41.4% for the quarter.

General and administrative expenses for the quarter increased by 52.8% year-over-year to $56 million. This is in part due to headcount increases as a result of expansion in our network and as mentioned earlier as well as the fact that this summer we had more temporary staff on board working in our summer camps and on summer programs than ever. I will also add one point here is that for the G&A expense, we actually accrued almost all of the management bonuses for the whole year during the fiscal quarter for the summer. So that means that for the rest of the year there won't be much accrual left. So basically we paid for the rest of year bonuses in Q1.

Net income attributable to New Oriental for the quarter was 90.7 million, representing a 45.5% increase for the same period of the prior fiscal year. Non-GAAP net income attributed to New Oriental for the quarter was $97.5 million representing a 44.9% increase for the same period of the prior fiscal year.

On that note, I’ll turn to our outlook for the second fiscal quarter of 2012. We expect net revenue to be the second quarter of fiscal year 2012 September 1, 2011 to November 30, 2011 to be in the range of $124.4 million to $129.1 million, representing year-over-year growth in the range of 30% to 35%. This forecast reflects our current and preliminary view which is subject to change.

At this point, I will take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chenyi Lu from Cowen & Company. Please ask your question.

Chenyi Lu - Cowen &Company

I’ve a question regarding the G&A expense, this quarter it’s been really high. So can you give us a view in terms of G&A expense for this year and also overall operating margin? Thank you.

Louis Hsieh

Sure Chenyi. I think our operating margin for the quarter was up 50 basis points year-over-year. The spending was high for the reasons I mentioned is that we’ve invested heavily in some new programs like Maxen. By Maxen, each learning center costs over $400,000; it will take two years to be profitable. So that’s already $2 million dollar that we were to put in the last couple of quarters. Other investment is that we’ve invested heavily in teacher training resources. So in order to maintain our advantage over our competitors in teacher quality and content quality, we’ve expanded our teacher trainers from 50 to 150 teacher trainers. So we are really taking teacher training very, very seriously.

In addition, our content management staff, we want to make sure we have the best K-12 content in China and a lot of that itself developed so that number we had it carved back to about 180 over the last couple of quarters. We have now raised that back to 280 people. So this is an investment in the long-term success of New Oriental because we must have the best content and the best teachers.

And finally, investment, because the quarter was so strong profit-wise, I thought it prudent to go ahead and take a lot of the management bonus accruement now instead of spreading it out over the full year and so most of the management bonuses which are paid out until next June have already been accrued in this quarter. So without those type of charges the G&A margin would have been much higher and then the operating margin would have been what you guys probably have modeled which is 36% or 37%. So there’s nothing wrong with our business. It’s just that we thought it prudent given the profits and the revenue were so strong that we take some of the expenses now.

Chenyi Lu - Cowen &Company

And then, so what’s your view for the G&A margin going forward?

Louis Hsieh

Well, I think the margin for the year we had predicted, the net GAAP operating margin of 18% to 19%. I think we’ll still get to the lower end of that about 18% or 18.5%. So I don’t think we’re off track on that.

Operator

Your next question comes from Philip Wan from Morgan Stanley. Please ask your question.

Philip Wan - Morgan Stanley

Hi Louis thanks for taking my question. I have a follow-up question on your G&A expenses. You mentioned that part of the increase was due to the investment in Maxen. Can you share with us, do you have any budget or the investment for this year for Maxen for example how many cities do you want to venture into and your updated CapEx budget for this year? Thank you.

Louis Hsieh

Yeah, for Maxen for the rest of this year we expect to open a couple more centers. So we will be at seven or eight centers by December of this year. And then the investment of each one is about $400,000. So we’ll spend another 800,000 to 1 million. Also the current operations will continue to lose a little bit of money, so in the second – most of the new centers by this time next year will be profitable. So we need about a couple more quarters of heavy spend in this area.

Philip Wan - Morgan Stanley

So I remember last quarter you mentioned that this year for CapEx maybe about $30 million. Are we expecting more of that?

Louis Hsieh

Yeah, I would expect the CapEx that was before we decided to go in the Maxen. So I would expect that number to be $35 million to $38 million for existing centers and new centers. Now that doesn’t include if we decide to buy buildings or we go to new initiatives. That also doesn’t include the equity investment in Dajie.com and things like that.

Philip Wan - Morgan Stanley

Sorry, last question from me, what is the expected gross margin or operating margin for the Maxen centers?

Louis Hsieh

For the….?

Philip Wan - Morgan Stanley

For the Maxen learning centers?

Louis Hsieh

Well, Maxen, we’re working on it now. I don’t like to give that number because it’s a work in progress. I can tell you we have to use typically eight to 15 students per class. Right now we have about 250 enrollments already. They paid about $1,500 to $2,500 per year and so the – but the breakeven or profitability for each learning center is about 18 months to two years. It is a bit longer because there is heavy investment upfront in super high end audio-video equipment and things like that. So that sort of the business model.

But you have to remember that the market opportunity here is huge. The number of Chinese students who want to study abroad, our SAT business is growing at 50% to 80% a year, so we are – soon it will be over 100,000 Chinese kids who want to study abroad for high school or college. And they need to speak English very early. So you’re talking about multi-year and New Oriental is the, we believe the best offering in this space by far. We have teachers eventually will teach not just English but mathematics as well as sort of world politics and history to getting the global view.

And the second group is just parents who really don’t want just like a Mickey Mouse English program right, just a simple you know kids playing around. They want a serious English program for multi-years for their children and Maxen meets that need perfectly. So I think it’s going to be quite a fast grower and grow very rapidly, but it needs time just like U-Can there to take a couple of years.

Operator

Your next question comes from Eugene Yeoh from Deutsche Bank. Please ask your question.

Eugene Yeoh - Deutsche Bank

Just wondering if you can elaborate on the problem in the Northeastern part of China a little bit more, is it a – is it something specific to New Oriental or is it something that’s and pervasive within [Streets]? Thanks.

Louis Hsieh

I think it’s specific to New Oriental. We’ve had some management issues here for a few years now. So what we have – we did make a mistake, we had one of these four schools that are doing very well. So we thought the school head was so good, we moved him into a different school; he didn’t do as well in that second area. But we have had problems in this region for a couple of years now, and so over the last couple of quarters we've actually replaced all four of these school heads. And as you know, it takes us time to fix these problems. A new school head usually takes one or two years.

And so, the decline last quarter was actually much more pronounced than we thought. We don’t have a very strong competitor in this region. So this is really just an execution issue within New Oriental and we are working hard to fix it, but Eugene, you’ve always known and I think most of our investors know that the biggest challenge we face is finding good school heads, and so that has always been our biggest challenge.

Operator

Your next question comes from Mark Marostica from Piper Jaffray. Please ask your question.

Mark Marostica - Piper Jaffray

Louis, I wanted to ask you about the trend that you saw with respect to learning center utilization in the quarter and if you could give us a sense of how that utilization look at your U-Can centers as well as the other centers as well so, that will be helpful.

Louis Hsieh

Well, I think utilization continues to improve Mark, but as I said in the call and in the earnings release the summer is not the peak season for middle and high school because your students will take a break after studying for the Gaokao and [Xunkao] in June, and so I think as the summer is more a test prep season and an English language season than sort of all subjects middle-high school season.

So I think as – but the utilization ramps up fine, I mean, obviously we have some issues in the Northeast. Shanghai is not growing as fast as I would like. Beijing is doing exceptionally well. So it’s a mix bag across the different regions. Most of our cities are doing exceptionally well with demand well above expectation, but then there’s other cities that are lagging. But if you put it all together demand remains untracked, I would say except so for the Northeast region.

Mark Marostica - Piper Jaffray

And then a follow-up question on ASPs. Can you give us a sense of what ASP increases you’ve seen and would you expect ASP increases to look like for the rest of the year?

Louis Hsieh

ASPs for the quarter blended were up about 22% year-over-year, so it’s about $285 per course now. ASPs in the VIP sector were up 15% year-over-year. So we still have a lot of pricing power, but like we raised prices in the kids area and it probably impacted demand a little bit. We didn’t get the exceptional growth that we typically expect. And so, we raised prices about 18% in kids this last quarter. So we do – we are cognizant of not raising prices too fast, too soon, but in the test prep area we have significant pricing power, in the kids area probably less, in the VIP area we believe we have significant pricing power as well. So we will begin to use it probably judiciously. You know we don’t want to raise prices too fast.

Operator

Your next question comes from Catherine Leung from Goldman Sachs. Please ask your question.

Catherine Leung - Goldman Sachs

I was wondering if you could elaborate on where you think you are in terms of investments for the VIP personalized business?

Louis Hsieh

I think we are early Catherine which is – the demand for this VIP business is exploding in China, so I think we are early. That’s why I said is, of the learning centers the 100 to 110 probably 20 or more of those will be just be VIP centers. So we are seeing explosive demand for one-on-one to one-to-five tutoring. So we are very early.

When you play these learning centers out, they actually become quite profitable. So after two or three years they usually have over 20% operating margin. So it’s just that because we have such a large number that are new, the overall margin is still under 15% right now. But when you have a big base of three year old or older VIP learning centers they are going to be very profitable. I think the picture here is gross margin is over 60% and operating margin is over 20% in this sector.

Catherine Leung - Goldman Sachs

Has there been anything and whether it’s just sort of competitive dynamics or the strength of the VIP demand, has anything changed over the past three months that would have led you to change your sort of expansion or investment plans for the remainder of the year?

Louis Hsieh

No, actually in the VIP sector we are actually opening up a lot more centers than we wanted to and that’s why you saw me increase the number from 80 to 100 this time to 100 and 110. So I think as the VIP remains quite strong across the country. I think we were a little bit different positioned than our competitor in this space. You know out there our competitor build a lot of centers before the IPO, you know just everywhere and now they are having trouble filling them. Ours is different. We didn’t build enough centers. So now we are scrumming to catch up with centers to make sure we have good coverage in the major cities. So we are strategically a little bit different.

Operator

Your next question comes from Amy Junker from Robert W. Baird. Please ask the question.

Amy Junker - Robert W. Baird

Just wanted to follow up on the teacher training, I am wondering if you could provide a little more color on what drove the decision to invest more there, did you – are you seeing you know a dip in student-teacher satisfaction scores or anything?

Louis Hsieh

No, not at all. I think is that – we may – you know New Oriental succeeds by not taking a short-term view. So we know that every year we need a net of 3,000 to 3,500 new teachers. In order to do a good job in doing that, we need a lot of teacher trainer, lot of teacher’s teachers. And our, you know, 50 or 60 just wasn’t enough. So we realized that in order to maintain the quality across the whole country, in addition to our video teaching system, we really needed to improve the course material of the teaching training system, and it also help retain teachers as well.

And so we’ve tripled the size of our teaching training staff in the last year to make sure that they continue to provide the best teacher training for teachers, provide the best course materials for our students and also to maintain ongoing teacher re-training to make sure that they are current in their studies and also to make sure that teachers are happy.

So we’ve basically almost doubled our content management staff again from 180 to –about 150 to 170 all the way to 280 and by approaching 300 and we’ve increased our teacher’s teachers from 50 to 150 in the last couple of quarters. I think this is….

Amy Junker - Robert W. Baird

Thank you.

Louis Hsieh

These are long-term what we need to do to make sure our content and teachers are the best in China.

Amy Junker - Robert W. Baird

And can you just remind us how many courses per quarter or per year, the average teacher teaches and where you think that can ultimately go over time? Is it at the right number where it should be now?

Louis Hsieh

Well, for the one-on-one teachers, which is sort of the metric that is being out in the market, our teachers teach about five students a quarter and they can potentially teach seven or eight. So I think there's still slack there. But the issue is, you know, as we ask students to pay a premium for New Oriental, we must give a higher level of service. We must have better content and courses. We must have better teachers. And so we are doing that by investing in training and in content.

Yeah so I don't really care if they teach five or they teach seven or teach eight. Yes we will make more money if they teach eight, but they also may become too tired. So our key is to make sure is to have constant monitoring of the teachers to make sure that the students are happy in the courses and learning the materials and are reporting that their teachers are doing an excellent job.

Operator

Your next question now comes from Ella Ji from Oppenheimer.

Ella Ji - Oppenheimer

How much do the four northeastern cities represent as a percentage of your revenue?

Louis Hsieh

The four cities in northeast if I look at them now, they were, hold on a second, they are about 5% of our total revenue, but their enrollments went down from 72,400 last year to 59,000 this year. Yeah, I expected them to rise. So they should have done over 80,000 enrollments. Instead we got 59,000. That 20,000, 25,000 delta is most of the problem.

The revenues for the quarter were about US$30 million out of 272. So they’re about 5% of revenue.

Ella Ji - Oppenheimer

And I missed a bit of your early part of comments. I have a question on about your VIP revenue. It represents about 15% of your total revenue for this quarter. It’s a little below your last year’s 20%.

Louis Hsieh

No, VIP revenue was 42 million, yeah, out of 272 million, that’s correct.

Ella Ji - Oppenheimer

Right. It’s a little, you know, it’s 15%, it’s a little below the 20% for the last year. Is it just the seasonality or is there anything?

Louis Hsieh

Seasonality, if you don’t forget the summer is the peak season for overseas test prep, right? So VIP revenue was up 65% year-over-year. It actually outgrew everything else.

Ella Ji - Oppenheimer

So it’s just seasonality.

Louis Hsieh

Right, so that’s a seasonal effect.

Ella Ji - Oppenheimer

Right. We recently, we’ve heard that you know, the competition in the VIP market is more intense than ever and with competition coming from not only public, but also some private companies. And so could you elaborate on that, is it going to change any of your operational strategy for the year?

Louis Hsieh

Well no, I think as we just stay ahead of everybody else by having better teachers and better content. That’s why we’re investing in it. We haven’t seen a slowdown, right? Our enrollments were up over 46% year-over-year, our revenues up to over 65% year-over-year. So we face intense competition in all our business segments. I don’t think VIP is anything different. And I think, you know, for us to continue have very high growth in this area, we took a business that was $3 million, 4 years ago and this year it will be very close to US$200 million, just five years later. So we don’t see a slowdown in this area.

Operator

Your next question comes from Tom Dillon from William Blair. Please ask your question.

Tom Dillon - William Blair

How is your market share in IELTS going?

Louis Hsieh

IELTS is, I don’t have the exact number, but our IELTS enrollments were up to 19% and revenue was up, for the quarter enrollments were up 19% and revenue was up 50% to 55% in this area. So I think we do what we always do. We take share. So I don’t know what it is, but it’s well over 20, probably almost 25% of the total market for IELTS now. And we are, by far, the highest in revenue in IELTS. I know that Global Education says they are but that’s because they have 90% of the revenues from franchises, but I think as we are all self-owned and our revenue from IELTS in the quarter was almost US$20 million just from one quarter. So it is growing rapidly, the enrollment growth of 90% and the revenue growth of 58%. So we haven’t seen a slowdown at all. We’ve seen the acceleration.

Tom Dillon - William Blair

Okay. And then is there any opportunity to consolidate the overseas consulting space?

Louis Hsieh

I don’t need to buy something where, we’ve already beaten them. The time to consolidate was three years ago.

Operator

Your next question comes from Chao Wang from Merrill Lynch.

Chao Wang – Merrill Lynch

Thanks for taking my question. Just Louis, how do you see the competition from international school in your overseas test preparation and with New Oriental expanding to that area? Thanks.

Louis Hsieh

From the international schools, what do you mean, you mean Kaplan?

Chao Wang – Merrill Lynch

Yeah. No, no. I mean international boarding school.

Louis Hsieh

We have one in Beijing. We have an international boarding school in Beijing. I think they are kind of two different businesses, right? Our Maxen program is not a boarding school, it’s not a degree granting school or anything like that. So I think what we’re trying to do is that we believe there is a new market in China for parents who want truly bilingual, bicultural so to, they don’t want their children moving to the US when they are 10 or 11 for junior high.

They will wait till high school or college, but they want to make their children prepared to go overseas and they don’t want to go to international school in China either because in the schools, their children don’t learn Chinese well enough. So I think is that, create some market and a big market for families who want their children to grow up in China, be Chinese-educated but be very competitive in English, in world history and things like that with their international peers. That’s what we offer.

Our overseas test prep business is not really affected by international schools. I mean they don’t have, they can’t hold the candle to us. I mean as far as SAT, we have probably 70%, 80% of the market in China. And then for obviously TOEFL, we are 70% or more in GRE, GMAT, is very similar. So I don’t think we face the threat from international schools for 15, 20 years also from Kaplan and Princeton Review, but none of them are, you know, can really hold the candle to our market share.

Chao Wang – Merrill Lynch

Just, if more students go to international board school the demand for your overseas test preparation program, will it be weakened?

Louis Hsieh

It will be – because for them to go to international boarding school they have to take SAT. They have to take TOEFL Junior, they will take the SAT; those are everything we provide. And they would want to take Maxen before they go. I mean, you just don't go to a overseas school without English experience or without English training, and so what we do is we don't care what age they go, they are going to spend several years in New Oriental before they go.

Chao Wang - Merrill Lynch

Okay. Got it. Thanks.

Louis Hsieh

So we are helping them to go overseas. But we are not competing with the overseas schools; they are our partners. The more demand the international schools create in China, the better for us, because those Chinese students don’t just walk, don’t go to those new schools without any English experience or without any experience about world history and you know what we want to do is we want to be that bridge. We want to make sure that when they get to the, we want to help them take the test prep, apply to those schools and when they get in, they are well prepared to take on the challenges of international curriculum.

Operator

Your next question now comes from Jennifer Kao from Credit Suisse. Please ask your question.

Jennifer Kao - Credit Suisse

Hi, Louis. I have a question about the enrollment momentum with regards to English and non-English subjects in terms of U-Can and POP? And my second question is, I saw that your online paid users’ numbers have been declining from 2010 to 2011; can you share with us your strategy in terms of the online segment? Thanks.

Louis Hsieh

Yeah, I think the paid users have been coming down a little bit, but the revenues are way up. So the revenues went from RMB13 million to RMB25 million, so revenues are up 90%...

Jennifer Kao - Credit Suisse

Yeah, the registered users are going up, the pay users actually are going down?

Louis Hsieh

Correct. But the paid users pay more money. So what I am saying is the revenue from our online programs went up 90% year-over-year to RMB25 million, so $5 million last quarter. So what we’re trying to do is offer higher priced higher quality content to the paid users. So that’s our strategy because you can’t make a lot of money even online at $30 per class, you have to be closer to $80 to $100. So that’s – so we’re saying you know, we’ll lose the low end, we’ll pick up the high end. And that’s what we’re doing across our programs, right. You look at our English program, we’re losing at low end but we are picking up the high middle end and the high end. So that’s just a part of our overall strategy.

As far as our English enrollment, for the quarter, kids and middle school are doing just fine. Our growth is flowing as we mentioned already and that’s normal. Our other subjects are doing very well. So our math, physics, chemistry, biology are doing very well.

Jennifer Kao - Credit Suisse

And can you give some numbers?

Louis Hsieh

Well we gave – the enrollments are up at 24%, the revenue was up over 50% for the year, year-over-year. Now, don’t forget the summer is not a peak season for that. So the numbers were actually quite good. Sisi can give you the specific breakdowns by and I don’t want to take a lot of time doing that here.

Jennifer Kao - Credit Suisse

Can I ask one more question about Maxen, can you tell us about the rationale behind the Maxen; is that like the VIP shop for POP?

Louis Hsieh

It’s the high end POP. So you know -- don’t forget, we have POP which is sort of for middle class and upper middle class families with very serious English. But we didn’t – you know we have the VIP which is one-on-one that’s the gold standard, right. But we didn’t have something in the middle. This was the program that we were considering going to partnership with Disney four years ago, four or five years ago before the IPO, actually five years ago now, where it was seven to 12 people, young kids and then they learn English in with classrooms that have like audio-video blackboards, right. So it is very high end content, it’s spectacular.

And so this is a business we were looking into for a while because we had a hole in our product offerings, but we decided that – English is just not enough, parents want not just serious English but you know English, speaking about the English grammar, but also they want like math and like world geography and history and things like that. So we are beginning to put together a course offering after school that helps meet the needs of these parents who want their children to be completely bilingual and bicultural. So that was the genesis of Maxen, there was a part in the market for kid’s English that weren’t addressing well. We addressed the middle class and the high end one-on-one VIP English but we didn’t get these 7% to 15% classrooms.

Operator

Your next question comes from [Tsao Yen Chang from Nomura Securities]. Please ask your question.

Unidentified Analyst

I am just wondering if you can elaborate a little bit on your headcount for the quarter, the divide between support staff and teachers as well as your full term and part term?

Louis Hsieh

Okay. I can find the sheet. For the quarter, we finished the quarter at 24,500 change people and that was up from last quarter we had was a total of 26. Last quarter, we had 22,000. So we added 2,000 people in the quarter 2300, but a 1,000 of them will come off. So the temporary workers we talked about, so more than 1,000 will come off and then we will hire some more people in Q2, so the number will probably stay relatively flat.

As far as teachers go we have 13,500 now, up from 11,100 last quarter. So we’ve got 1,800 teachers in the last quarter. That’s why we need to keep training more teachers. Off the teacher, let me see, of the teachers, part-time teachers were 7,100 right, and full time teachers were 6,300.

Unidentified Analyst

Great. Thank you.

Louis Hsieh

Okay. So, like I said, that was what I talked about G&A expenses blew out because we had – our summer programs are very popular and we had to hire a lot of – more than usual temporary workers. And so a lot of them – so it took the headcount to 24,500; a 1,000 or more of them will drop off this quarter, but because of continued hiring teachers for the winter in the spring, the numbers will probably stay about the same.

Unidentified Analyst

I see. So in the – can you explain, sorry…

Louis Hsieh

Last year we had like 3,800.

Unidentified Analyst

I was just wondering, do you also expect to hire term teachers or is that just for?

Louis Hsieh

No, which we just probably won’t – the summer is a lot of them are for summer camps and things like that and so it’s – so we actually need to have them. And so the good thing is we hire them on temporary basis, which is good. The winter and the spring, we need more teachers because that’s the peak season for K-12.

Unidentified Analyst

Okay and that’s going to be permanent?

Louis Hsieh

Yeah.

Operator

Your next question comes from [Jessica Zhang from Flowering Tree Investments]. Please ask your question.

Unidentified Analyst

I've got a couple of questions, yeah, Louis can you talk about the follow-up of the last question, can you talk about, what is our full-year guidance for the total number of teachers who were hired this year and also the total number of staff you plan to hire this year?

Louis Hsieh

I don't have guidance. I've never provided that kind of guidance. But if I am at 24,500 now, I should probably be close to 28,000 by the end of fiscal year, is my sort of top of my head estimate, and we’ve 13,500 teachers. We added 1,800, we need to add about 3,500. So it would probably be about 15,000 to 15,500 teachers by the end of the fiscal year. A lot of those are for one-on-one teachers because you know the one-on-one business is growing so fast.

Unidentified Analyst

And what about staff?

Louis Hsieh

Staff would be, well staff would go from 11000 or so, by 1,000 to 2,000. For every teacher, two teachers, three teachers we hire about two staff. So it will be about 15,500 teachers and about 12,500 other staff. So it would be 28,000 or so by the year-end is my guess.

Unidentified Analyst

So how much did you have last year, so addition of the teachers you just guided, I didn’t have the last year number.

Louis Hsieh

What?

Unidentified Analyst

So the addition of this year, I didn’t have, how many of your or how many teachers you have last year. So what is, can you just give me the addition, in terms of total number of teachers, you know translates to what you just guided.

Louis Hsieh

Do you have the last year's numbers, Sisi? I don't have the last year's numbers in front of me.

Unidentified Analyst

Okay. So you said by the end of this year how many teachers, I will look it up, I guess. How many teachers are we going to have?

Louis Hsieh

By Q1 of last year we had 10,100 teachers. So we added 3,500 year-over-year. So that's why I said if we are at 11,700 at the end of Q4, we should add 4,000 teachers, we’ll be right around 15,500. So that number, that’s the best estimate I can give you right now.

Unidentified Analyst

And second question is regarding the Maxen, sorry I couldn’t get in the call earlier. Can you just quickly talk about how many centers you were looking to open and how many staff you were looking to hire associated with that particular effort?

Louis Hsieh

Can you repeat that please? Learning centers we opened, we opened probably two in the quarter, actually 20 learning centers in the quarter plus two new schools. We’ll open about a 100 for the year. So we’ll open another 80 or so over the next three quarters, probably another one or two new cities as well for new schools.

Unidentified Analyst

Okay. So that’s in terms of learning centers. Sorry, I was talking about the whole new effort that you were trying to do, where this high end POP?

Louis Hsieh

For Maxen we have five now. We expect to have seven or eight by year-end December. And then we’re going to evaluate the business from there. We’re not going to open a lot more because I want to – these are expensive and number two is they have long paybacks. So they take almost two years. So I want to get, we are in four cities, we will probably get five or six cities by the end of this year and then what I want to see is I want to see them how fast they grow before we expand these.

Unidentified Analyst

Got it and how many teachers and staff that we are going to hire associated with that Maxen?

Louis Hsieh

Each learning center has typically about 15 to 20 staff and that doesn’t include teachers. So you just put 15 as each one. So we’ve about 100 staff and probably another 100 teachers. Sorry 200 are at Maxen right now.

Unidentified Analyst

Okay, great, thank you.

Louis Hsieh

Thank you. Okay, no more question. Great. Thank you everybody for joining us today on the call. We look forward to talking you soon. Bye, bye.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all now disconnect.

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