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New Oriental Education & Technology Group Inc. (EDU) Q4 2019 Earnings Call Transcript

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New Oriental Education & Technology Group Inc. (NYSE: EDU)
Q4 2019 Earnings Call
Jul 23, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening, and thank you for standing by for New Oriental's, Fourth Fiscal Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions]

I would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead.

Sisi Zhao -- Director, Investor Relations

Thank you. Hello, everyone, and welcome to New Oriental's fourth fiscal quarter and fiscal year 2019 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org.

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

Zhihui Yang -- Chief Financial Officer

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We're very pleased to conclude the fiscal year 2019 on a strong note, with the robust growth in the top line, as well as improvement in operating margin. In fiscal year 2019, we reported the net revenue of $3096.5 million, representing a 26.5% increase year-over-year or 31.4% if computed in RMB.

Total student enrollments in academic subjects tutoring and test preparation [Phonetic] courses in fiscal year 2019 increased by 32.4% to approximately 8,382,700. During fiscal year 2019, we added a total 152 new facilities, which includes 141 new learning centers in existing cities, nine offline training facilities in six new cities, and two dual-teacher facilities in two low-tier cities. Altogether, our total square meters of classroom area by the end of the fiscal year has extended by approximately 24% year-over-year. We also continue to strategically keep our investments into the dual-teacher model classes and new initiatives for K-12 tutoring in our pure education platform, Koolearn.com. With the innovative application of technology in our education services, we are well-placed to continue to capture new business opportunities in lower-tier cities and remote areas. In the fourth quarter, we continue to execute our wealth program optimized market strategy and focus our efforts, improving utilization in facilities and controlling cost and expenses. This has enabled us to tap into tremendous market opportunities with our centralized, online and offline integrated education system.

As we'll continue to expand our capacity, we remain focused on improving utilization rates and investing in enhancing teaching quality in line with our long-term strategy. In the fourth quarter of 2019, we reported revenue of $842.9 million, representing a 20.2% increase year-over-year or 28.4%, if computed in RMB. Net revenue from educational programs and services for the fourth fiscal quarter were $717.0 million, representing a 25.1% increase year-over-year or 33.6%, if computed in RMB.

The growth was mainly driven by increases in student enrollments in K-12 after-school tutoring courses. Total student enrollments in academic subjects tutoring and test preparation courses in the fourth quarter of 2019 increased by 33.9% year-over-year to approximately 2,756,000. I will now turn to pricing.

Per program blended ASP, which is cash revenue divided by total student enrollment decreased by about 18% year-over-year. Please note that, the lower than normal blended ASP is primarily due to the change in tuition fees collection schedule for K-12 after-school tutoring courses. We split the autumn semester into two parts, similar to what we did in spring semester. The total -- the number of the students recorded and the amount of the fee collected during the quarter only covered the first half of the autumn semester.

This is different from the past. When we historically collected the full sum of the tuition fee for the autumn semester in the fourth quarter. The change in tuition collection schedule. Therefore, means our blended ASP for the fourth quarter of 2019 appears to be lower. Hourly blended ASP, which is cash revenue divided by total teaching hours, increased by approximately 10% year-over-year in RMB terms. To provide a breakdown of hourly blended ASP, U-Can middle school and high school increased by 10%. Pop Kids increased by 12%, and overseas test prep program increased by 7%, all year-over-year in RMB terms. Our solid progress in fiscal year 2019 is in line with our expansion plan and our emphasis on improving our operational efficiency. We would like to highlight that once again delivers another year-over-year operating margin expansion in this quarter.

During the quarter, our non-GAAP operating income increased by 30.3% year-over-year to approximately $102.7 million, and non-GAAP operating margin rose by 100 basis points to 12.2% from 11.2% a year ago. As we enter the fiscal year 2020, we will continue to leverage our online and offline integrated education system across all business lines, and improve efficiency by using standardized, modularized and systemized operating process. We are confident that we will be able to deliver continued margin expansion, and generate sustainable long-term value to our customers and shareholders.

We also like to take the chance to talk about our recent summer promotion strategy, which has deliver outstanding results. In consistence within last a few years, we launched the summer promotion this year to rapidly secure Grade 7 students customers before they started their first year of secondary school. We offered low-priced experiential courses for multiple test subjects in total of about 43 cities. We're extremely pleased to see that even with an increasing our promotion price from around RMB200 to around RMB400 to summer promotion remains very well received by the market.

In fact, the promotion enrollments we brought in before the start of the summer holiday in early July this year saw a 4% increase comparing the same period of last year, reaching 765,400 enrollments . And then this strategy, we're also able to better identify and retain customers with the higher loyalty, and overall we are pleased to see the higher positive outcome. Please note that these promotion enrollments are not reported in our enrollments.

Looking ahead, this year will become even more focused on efforts in retaining a larger portion of students following the promotion, which will boost the revenue and drive profitable growth throughout the fiscal year 2020. We do not foresee any negative impacts of the promotions on operating margins throughout the whole fiscal year. We're confident that the summer promotion will continue to be a sum and a highly profitable strategy to rapidly increase and secure market share in the high growth K-12 after-school tutoring market. These students move from grade seven through to grade twelve, the continued improvement in retention rates and customer loyalty will drive revenue growth in the next three to six years.

Now let us move on to the fourth quarter performance across our individual business lines. Our key revenue driver, K-12 all subjects after-school tutoring business achieved year-over-year revenue growth of 29% in dollar terms or 37% in RMB terms, which will highlight that, as we have mentioned in last quarter's earnings call, we moved the one week of K-12 tutoring classes from March to June to ensure our teachers have enough time to complete the licensing procedures. Therefore, our K-12 tutoring revenue in this quarter saw a degree of impact from the arrangement. The revenue relates to the adjustment will be recognized in the first quarter of fiscal year 2020. Breaking it down, the U-can middle school, high school all-subjects after school tutoring business recorded that a revenue increase of about 27% in dollar terms or 36% in RMB terms for the quarter.

Student enrollment grew approximately 24% year-over-year for the quarter. The lower than normal enrollments growth is due to delayed, registration for classes in certain cities in compliance with the new industry regulation, stating that the tuition fees will not be collected more than three months before the class start. Our Pop kids program continues to provide outstanding results, with revenue up by about 31% in dollar terms or 40% in RMB terms for the quarter. Enrollment was up about 56% for the quarter.

The overseas test prep business recorded the revenue increase of 13% in dollar terms or 21% in RMB terms for the quarter. The consulting business recorded a revenue growth of about 2% in dollar terms or 9% in RMB terms year-over-year for the quarter. As we mentioned in the last quarter's earnings call, the adoption of the new accounting standard has led to greater portion of the revenue from overseas consulting business being recognized in Q3 instead Q4 -- instead of Q4, which is peak season for the business line.

Finally, VIP personalized class business recorded the cash revenue growth of about 14% year-over-year in dollar terms or 21% in RMB terms year-over-year for the quarter. Next, I will provide some updates on the progress we're making with our optimize marketing strategy. In consistent with our long-term plan, we have been focusing on expanding our capacity by investing in the buildout of our online and offline integrated education system, and this continues to produce very promising results.

We will start with our offline business, in the fourth quarter of fiscal year 2019, we added a net of 65 learning centers in existing cities and opened three offline training schools and one learning centers in the city of Baotou Changshu and Yuci. Altogether, this increase the total square meters of our classroom area by approximately 24% year-over-year and 9% quarter-over-quarter by the end of the quarter.

Since July 2016, we started to pilot the new dual-teacher model class in select cities by the end of fourth quarter of fiscal year 2019. The new offering has been tested in the Pop Kids program in 37 existing cities and the U-Can middle-school high-school program in 29 cities and in both Pop Kids and U-Can K-12 business in nine new low-tier cities.

We're encouraged to see increased market penetration in those markets. We have tapped into as a result of the offering. We also still maintain the customer retention rates improve the great scalability generated by the model. We will continue to execute the strategy in the coming new fiscal year given this poll end results.

Moving on to the online parts. We invested $31.5 million, in the quarter to improve and maintain our offline -- to offline integrates education, eco-system and a total of $103.1 million for the full fiscal year 2019. Most of the investments were recorded under G&A expenses.

Now, I will walk you through some updates on the online\offline two way interactive education system. Since the launching of the U-Can Visible Progress teaching system in September 2014, the interactive education system has been used in all existing cities. We have launched the newly revamped POP Kids English program, Shuang You, in most of the cities by end of the Q4, '19 -- fiscal year '19.

Also, the interactive education system has been gradually used in more and more cities. The interactive education system for overseas test prep program, including ESL, TOEFL, and SAT courses, was rolled out and tested in most major cities by the end Q4 fiscal year '19. At the same time, we also standardized our product offerings across 14 major cities. We also made strides in the Koolearn.com business line and other supplementary online education products. With the goal of capturing to the huge market opportunity in the online education space. We continue to deepen our investment of resources into executing new initiatives in our online K-12 after-school tutoring business during the fiscal year 2019. This includes investment into content development, teachers recruiting and training, sales/marketing, R&D and other cost expenses necessary to drive the growth of the new online programs. This provides to cover more students in Boston low-tier city -- low-tier new cities and higher tier cities covered by our offline business, interactive and scalable approach through these programs. We're confident that this will help koolearn.com gain new market share in the online education market and drive up top line growth.

Now, let me walk you through the other key financial details for the fourth quarter. Operating costs expenses for the quarter were $765.9 million, representing an 18.9% increase year-over-year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation expenses were $740.2 million, representing a 19% interest year-over-year.

Cost of revenues increased by 24% year-over-year to $371.2 million, primarily due to an increase in teachers' compensation for more teaching hours and rental costs for the increased number of schools and learning centers in operation. Selling and marketing expenses increased by 4.8% year-over-year to $105.9 million. General and administrative expenses for the quarter increased by 18.4% year-over-year to $288.8 million. Non-GAAP general and administrative expenses, which exclude share-based compensation expenses, were $264.4 million, representing a 19.2% increase year-over-year. This increase was primarily due to the increased headcount as the Company grew its network of schools and learning centers, as well as the increases in R&D expenses and human resources expenses related to the development of the Company's online and offline integrated education system.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 15.9% to $25.7 million in the fourth fiscal quarter of 2019. Operating income was $77.0 million, a 36% increase from $56.6 million in the same period of the prior fiscal year. Non-GAAP operating income for the quarter was $102.7 million, a 30.3% increase from $78.8 million in the same period of the prior fiscal year.

Operating margin for the quarter was 9.1%, compared to 8.1% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses, and the changes from fair value change of the long term investment for the quarter was 12.2%, compared to 11.2% in the same period of the prior fiscal year, that means our margin expansion was 100 bps in this quarter.

Net income attributable to the New Oriental for the quarter was $43.2 million, representing a 33.5% decrease from the same period of the prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.27 and $0.27, respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $95.1 million, representing a 8.9% increase from the same period of last year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.60 and $0.60, respectively.

Net operating cash flow for the fourth fiscal quarter of 2019 was approximately $326.9 million. Capital expenditures for the quarter were $65.3 million, which were primarily due to the opening of 104 learning centers and renovations at existing learning centers.

Turning to the balance sheet. As of May 31, 2019, New Oriental had cash and cash equivalents of $1,157.1 million, compared to $983.3 million as of May 31, 2018. In addition, the Company had $365.7 million in term deposits and $1,668.7 million in short-term investment.

New Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered, at the end of the fourth quarter of the fiscal year 2019 was $1,301.1 million an increase of the 2.4% from $1,270.2 million at the end of the fourth quarter of the fiscal year 2018. Due to the company's adoption of new accounting standards starting June 1, 2018 as of the end of the fourth quarter of fiscal year 2019, $76.1 million of deferred revenue was reclassified to the accrued expenses and other current liabilities, representing the estimated amounts of tuition collected that may be refunded in the future if students withdraw from a course before completing all classes. In addition, the lower than usual increase was due to the change of tuition fees collection schedule in compliance with the latest regulatory requirements.

Heading to the new fiscal year, we will continue to execute the optimized market strategy. The approach has consistently supported us to achieve success in the last several years and well-placed to capture a wider range of the market opportunities. To give you more specifics, our areas of focus for fiscal year 2020.

First, we will continue to expand our offline business. We aim to add around 20% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-12 business in existing cities. In addition, we will continue to roll out our two-teacher model schools to a number of new low-tier cities in certain provinces throughout the year.

Second, we will continue to leverage our investments in online/offline integrated standardized teaching systems for our offline business, especially for our K-12 tutoring and the overseas test prep business. We will continue to make investments, and we believe that the total spending in absolute dollar -- in absolute dollar terms in fiscal year 2020 will increase moderately compared with the last fiscal year.

Furthermore, we will continue to invest in and execute the initiatives, including the product content development, teacher recruitment and training, R&D, as well as sales marketing in pure online K-12 after-school tutoring business, our Koolearn.com platform.

Third, our top priority will remain at the focus on optimizing utilization of facilities and controlling costs expenses across the business to drive continued margin expansion and increased operational efficiency. We have solid confidence to deliver a continual non-cash operating margin expansion and enhanced operational efficiency for the coming fiscal year. As new facility disputes in fiscal year 2018 and 2019 continued to be ramped up and utilized that efficiently. To improve the utilization, we'll cover the margin pressure resulting from our investments in the Koolearn.com. As well as -- as well as the other pure online education products. In short, we expect our overall non-GAAP operating margin to expand year-over-year in the first quarter of fiscal year 2020 and for the whole fiscal year.

With newly introduced policy related to the after-school tutoring institutions being implemented on a city-by-city basis, we continue to comply with the regulatory requirements closely and comfortably. Administrative cost that incurred as a result of new policy, have been in line with our expectation and have been digested within the fiscal year 2019. As such, we do not truly see material impact on the business. As the leading education service provider in China, we're firmly supportive of these reforms, which will improve market standards and foster the healthy growth of the industry. We're committed to provide high-quality education service and contributing to a creation of the sustainable markets.

Finally, the recent RMB depreciation against the U.S. dollar will also impact our earnings in dollar terms for the first quarter of 2020. Finally, I would like to emphasize that we have great confidence in the fundamentals of our business, which is set to remain strong. As we continue our optimize market strategy, we're certain that New Oriental will continue to capture sustainable growth opportunities in the market and deliver long-term value for our customers and shareholders.

Looking at the near-term and our expectations for the next quarter, we expect total revenue to be in the range of $1,050.5 million to $1,075.5 million, representing a year-over-year growth in the range of 22% to 25%. If not taking into consideration the impact of the potential change in the exchange rates between RMB and U.S. dollar. The projected revenue growth rate is expects to be in the range of 26% to 29% for the first quarter of fiscal year 2020. The estimate of the exchange rates used to calculate expected revenues for the quarter of fiscal year 2020, for the first quarter of fiscal year 2020 is 6.8851 [Technical Issues] exchange rates used to calculate the revenue for the first quarter of fiscal year 2019 was 6.6757. This forecast has taken into account the factor that traditionally our overseas test prep business has relatively large contribution to the overall business in the first quarter compared to the rest of the year.

Thus the overall year-over-year growth rate in the first quarter tends to be slowest, when compared to the other quarters. With this we anticipate the upward trend to emerge throughout the year. I must mention that this expectations -- reflecting New Oriental's current and preliminary view, which is subject to change.

At this point, I will take your questions. Operator, please open the calls, please. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Alex Xie from Credit Suisse. Please ask your question.

Alex Xie -- Credit Suisse -- Analyst

Hi, Stephen, and thank you for taking my questions and congratulations on very strong results. So, I'd like to ask for management's expectations about FY '20 in terms of both revenue growth and margins after delivering a strong Q4. Have we become more optimistic about FY 20 than before? And secondly, I think for this quarter, the revenue growth of overseas and test prep and consulting business, I think exceeded expectations. And what was the reason behind such out performance? And these are the two questions first. Thank you.

Zhihui Yang -- Chief Financial Officer

Okay. Thanks, Alex. This quarter, the revenue growth was 28.4%, the RMB terms year-over-year. So, and it was a very strong quarter and even though we -- we have been lower than our year-old K-12 revenue because we moved the one-week revenue from March to June. So that means we will record the one week more revenue in the the coming Q1, rather than this quarter and some overseas consulting revenue the -- that means we record the -- based on the accounting change, the accounting policy change. We recorded some revenue of the overseas consulting revenue in Q3 rather than this quarter.

But you know, we would still get the very strong quarter. So in the fiscal year '20, I think we -- as we got it before, we got in the streets being our top line growth in RMB term year-over-year in fiscal year '20 will be over 30%. So this is our official guidance for the fiscal year '20 top line growth. I think this is because of three reasons, a number one is diversity [Phonetic] and the higher student retention rates; and number two, as you know, you saw we expanded 24% new square meter classroom area in fiscal year '20. And we plan to open another 20% new classroom area in the fiscal year '20.

And number three, we would get a very strong performance from the summer promotion enrollments. And yes, as for the margin, yes, your going to see another strong quarter of the margin expansion. And in the Q1 fiscal year '20 and the whole year as I said before, we guided the -- to get the margin expansion in the Q1 fiscal year '20 and for the whole year, because, you know, we have more leverage -- up in the leverage from the operation. And so this is my answer to your first question.

Second question, overseas test prep. Yeah, this quarter our overseas test prep business recorded revenue growth of about 13% in dollar terms or 21% in RMB terms. I think it's much better than we -- than we did in the last three quarters of this fiscal year '19. I think this is a result of our product reform for overseas test prep classes because, you know, we have -- we were seeing more and more the young students to take our TOEFL, SAT courses and so where we are -- we're rolling out in new online/offline integrated product as we did in the K-12 for business for the overseas test prep. So I think going forward our overseas test prep business will achieve a positive result in fiscal year '20. Okay. Thank you.

Sisi Zhao -- Director, Investor Relations

Actually, please know that the revenue guidance for next fiscal year is in the RMB term. Okay.

Zhihui Yang -- Chief Financial Officer

Yeah, RMB term over 30% year-over-year. Okay.

Alex Xie -- Credit Suisse -- Analyst

Okay. Thank you. May I just have a follow-up about summer promotion, because I think our expectations for FY 20 is actually quite strong. But I think for the -- in terms of number of summer promotion enrollments, it seemed that absolute amount of increase in the number of enrollments is not that high as before. So what are the expectations for the retention rate? Or how you changed the strategy to grow our business in this year?

Zhihui Yang -- Chief Financial Officer

Yeah, it consistent with a last few years. We launched the summer promotion this year and even we raise the price from RMB200 last year to RMB400 this year. We still -- we're still seeing the strong involvement from the summer promotion. So, far we've brought the enrollments from this summer promotion of about 765,000, which is a 4% increase compared to last year. And so, this year I think these strategy change were made of the summer promotion is to -- for us and we're able to better identify and identify who are the real customers. And then we change the customers -- more customers after the summer promotion. So, we believe the retention rates after summer promotion this year will be better higher than last year, definitely.

Alex Xie -- Credit Suisse -- Analyst

Okay. Thank you. Thank you very much. It's very clear.

Operator

Your next question comes from the line of Tian Hou from T.H. Capital. Please ask your question. Tian Hou, your line is open. You may ask your question.

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

Sorry, I was in silent mode. Hi, Sisi and Stephen. Congratulations on a good quarter. I also have a two questions. One is to related to online education. We see the computation of the online education in China sort of heated up and we saw a lot of advertising, offline advertising, online advertising. And so EDU, is also one of the online education vendors. I wonder what is the strategy for EDU to further develop your online educations, brand awareness and as well as revenue market share, that's number one. I'm going to give you second question also, which is it seems like your tone for next fiscal year is much more optimistic than last year. So what are the drivers behind those optimistic tone for this fiscal year. Thank you.

Zhihui Yang -- Chief Financial Officer

Okay. Thanks, Tian. Your first question is relate to the online education with a goal to tapping into the market opportunities in the pure online sector. I think we continued to invest, but, you know, we would rather spend more money on the content development RMB and teachers recruiting and training. And also we will spend some money on these marketing and selling marketing expenses. But, you know, I think we spend on the marketing will be reasonable. Because we won't use them for any money way to acquire students as we're dealing with our offline business historically. So this is our online strategy. And [Technical Issues] number two questions about the guidance. Okay. They are guidance?

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

Yes.

Zhihui Yang -- Chief Financial Officer

Actually in this quarter, we got very strong numbers. And I think, you know, in the fiscal year '19, we open 24% new learning centers in a square meters size. And it brought us more student enrollments and we would be at the top line guidance again this quarter. And we're seeing the higher student [Technical Issues]. So I think this is the result of the math on the product. I think for the several years [Indecipherable]. And so I think we are more confident about our products, that is, we're providing better quality service to student compare to before.

And second, you know, even though we are with the price of the summer promotions versus what was -- we'd we still got the full numbers. And we believe that retention rates after the summer promotion will be higher. And if you look at the competition environment, I don't think it change. So our job is to provide the best services as we did before going forward and to take market share as much as we can going forward.

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

Thank you. Thank you. Congratulation again.

Zhihui Yang -- Chief Financial Officer

Thank you.

Operator

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

Sheng Zhong -- Morgan Stanley -- Analyst

Hi, Stephen and Sisi. Congratulations on the good results. So, I want to follow-up your revenue outlook of 30% year-over-year more than 30% year-over-year growth. Can you give us a breakdown of the growth expectation for the different business lines? And also, you are also very confident about the margin expansion. Can you give me -- can you give us more color on the margin magnitude -- margin expansion magnitudes if possible? Thank you.

Zhihui Yang -- Chief Financial Officer

Okay. The EBITDA -- the different the old business lines. I think the K-12 business will be the key revenue driver in fiscal year '20. So we got it -- we got the top line growth of the K-12 business growth will be 40%, somewhere around 40% year-over-year. All what I'm saying is in RMB terms, Okay. And the overseas Tesla. I think the top line growth will be 10% plus year-over-year, OK. And the domestic test class. I think the growth rate will be somewhere between 15% to 20% in RMB terms. And I'm sorry, I kind of give the detail guidance of the pure online, the koolearn.com. But I think the revenue was strong. And overseas consulting I think the top line growth will be somewhere around 20% -- 15% to 20%. So, this is my guidance by different business lines.

And margin. Yeah. So, I think we do believe we'll have the more optional average going forward because when I give the guidance, a top line guidance of 30% over 30% in fiscal year '20, that you know last year and fiscal year '19, we opened 20, the expansion was 24% last year, now in fiscal year '18, we opened a lot of learning centers have installed. It was over 40%. So I think the first job in fiscal year '20 for us is to feel more students into the learning centers we set out in last two years. And in fiscal year as I said, we plan to expand the 20% new learning centers. The top line growth will be over 30%. So you will see more leverage going forward. So, that's why I give the margin expansion guidance for the new fiscal year '20.

Sheng Zhong -- Morgan Stanley -- Analyst

Sure. Thank you very much.

Zhihui Yang -- Chief Financial Officer

And, yeah, as well, we do have the more operating leverage on the selling and marketing expenses and G&A. If you saw the numbers on this quarter, our selling and marketing expenses just increased by low single digit.

Sheng Zhong -- Morgan Stanley -- Analyst

Okay. Thank you.

Zhihui Yang -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Tianli Wen from Blue Lotus. Please ask your question.

Tianli Wen -- Blue Lotus -- Analyst

Hi, management. Thanks for taking my call and congratulations for a solid quarter. I have one question here. We see the gross margin by 1.3% year-over-year. Could management provide more color on that? Thank you.

Zhihui Yang -- Chief Financial Officer

Okay. Yeah. Thanks, Tianli. I think the margin was down by one of the 30 bps. I think it's mainly due to be lower than euro revenue this quarter. As I said, we moved to one week's revenue from Q4 to the -- to Q1.

Sisi Zhao -- Director, Investor Relations

Because of the regulation.

Zhihui Yang -- Chief Financial Officer

Yeah, because of the regulation. And this quarter, you know, as one time impacts the overseas consulting revenue. So I think -- but you know, we do have some of the fixed cost of the teachers and staff cost in Q4. But I do believe we will have the gross margin expansion in the coming new quarter.

Tianli Wen -- Blue Lotus -- Analyst

Thank you.

Zhihui Yang -- Chief Financial Officer

Thank you.

Operator

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

Alex Liu -- China Renaissance -- Analyst

Hi. Thanks, Stephen, and just two questions. First, I think given the recent regulations, which basically limits the competition and admission [Phonetic], selection for middle school, do we see any positive spillover effect for our middle and high school tutoring business going forward? And second question is on the financial questions. We see the non-controlling loss was actually expanding a bit this quarter sequentially on year-on-year that -- is that something related to the loss of koolearn? Or is that something from other business? Thanks.

Zhihui Yang -- Chief Financial Officer

Okay. My second question -- for your question two, yes it was some of the impact from the koolearn.com, OK, the NCI [Phonetic]. And to the regulation, OK -- yes. And the regulations -- yes, there's some regulations, it seems, last year. But, you know, our -- actually, there's two -- we're fully supportive the government's reforms and their implementations, actually for the offline site, the regulations is carrying -- carried out on city-by-city basis. But, we do not foresee any material impacts from the regulations. And other country, we fully support the regulations from the government because, I think it's good for the whole industry. And so we're doing our jobs and to provide faster service to the students and to provide better products and to give the better feedback from the parents and kids. So, this is our target. So, I think -- this is a good timing for us to take more market share by providing the better product. So this is our attitude to the policy.

Alex Liu -- China Renaissance -- Analyst

Okay. Thank you. Thank you, Stephen.

Zhihui Yang -- Chief Financial Officer

Okay. Thank you, Alex.

Operator

Your next question comes from the line of Jin Yoon from New Street Research. Please ask your question.

Jin Yoon -- Newstreet Research -- Analyst

Hi, good evening, and thanks for taking my questions, guys. Just a couple for me. Excuse me, on the summer program, with the pricing increase has been -- has there been a change in content in relation to that pricing increase? That's my first question. And then what percentage of the -- I guess the summer program or the programs today that you see is coming from the dual-teacher program? And how should we expect that for the fiscal 20 going forward? And then my second question is related to your FX. I'm not sure if I calculate this right, but I think my FX has been in the prior quarter was a little bit different than what you guys provided. Hence, there was probably somewhere like a 300 basis point impact FX according to my numbers, and which impacted revenues upwards of 20 million. I'm just wondering if there was something different about FX in the quarter? Or is it something that I was just kind of mistaken myself anyway -- anyhow, any color on that would be great. Thanks, guys.

Zhihui Yang -- Chief Financial Officer

Yes. And yes, the -- I think we keep almost the same the price strategy. This quarter, the hourly rate for all business lines is almost 10%, and yeah, we were surprised by a reasonable price. And going forward, I think our price increase will be 5% to 10% year-over-year in the fiscal year 20. And by -- we made some -- we made some change of the product for both the U-Can and Pop kids, you know, we spend a lot since two or three years ago. And even in the last trailing 12 months, we update our product for the POP Kids product. And that means we add one more the online/offline elements, 12 offline classes. So the kids in our classes are taking better classes than before. And, but as I side, we'll keep the same price strategy. This is our instructor price strategy. And the exchange rate, you know, the Q4 this quarter, we use the 6.7601 and last year Q4 we used that the -- 6.3287. So this is the exchange rate we used to calculate the revenues. And in the coming new quarter, the Q1, '20, we used the 6.8851 compared to the last year Q1, 6.6757. So this is the only numbers we're using.

Jin Yoon -- Newstreet Research -- Analyst

Great. Thanks, Stephen.

Zhihui Yang -- Chief Financial Officer

Is it clear?

Jin Yoon -- Newstreet Research -- Analyst

Very clear.

Zhihui Yang -- Chief Financial Officer

Okay. Thank you.

Operator

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

Christine Cho -- Goldman Sachs -- Analyst

Hello, Stephen and Sisi, congratulations. I think quickly on the tax rate this quarter. I noticed it was a bit higher than usual or 30 specific that you would highlight regarding that. And then in terms of looking at FY 20, what would be your expected tax rate?

Zhihui Yang -- Chief Financial Officer

Okay. Thanks, Christine. It's a good question. You know, in this quarter, the GAAP effective tax rate was 27%. It seems to be high. There are two reasons. Number one, if you take out the loss from the fair value of change, the ETR was 20%. So this is number one reason. Number two reason, most our software are high-tech entities, have a certain period of tax holidays. When they expire, the tax rates tend to go up. And but, you know, I think that -- this quarter I think it's very special. So going forward we expect the GAAP ETR in fiscal year '20 will be somewhere between 20% to 23% and because, we don't believe we will have a such a big fair value loss in fiscal year '20, as we had in fiscal year '19. On the contrary, if we've got out the fair -- the fair value gain fiscal year 20, the ETR will be lower.

Christine Cho -- Goldman Sachs -- Analyst

Thank you. That's very clear.

Operator

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

Felix Liu -- UBS Securities -- Analyst

Hello, Stephen and Sisi. Congratulations on the strong results. One more question on me on the margins. So, I'm just wondering if there is any -- from the online business regarding to the year-on-year JPM decline. Thank you.

Zhihui Yang -- Chief Financial Officer

Okay. Yeah, we invest the -- on the online platform, koolearn.com. But as I said, we expect to be non-GAAP operating margin for -- of the offline core business continue to be expanded in the coming fiscal year '20. So, I think this margin improvement is expects to be cover the margin pressure from the online side. So, as I said, in short, overall margin, we expect our overall non-GAAP operating margins to expand in the next quarter the Q1 and the whole fiscal year 20?

Felix Liu -- UBS Securities -- Analyst

Thank you. Thank you for the positive.

Zhihui Yang -- Chief Financial Officer

Thank you. Okay. Thank you.

Operator

Your next question comes from the line of Natalie Wu from CICC. Please ask your questions.

Drew -- China International Capital Corporation -- Analsyt

Hi, Stephen, since its excellent opportunity. This is Drew here for Natalie. Maybe we have two larger questions. In your K-12 revenue by the several major cities, we noticed Beijing still achieved solid growth despite of the fierce competition and high penetration rate. And also, several other cities seems to register a tremendous growth. So can management share with us, so by ranking of importance, what are the key success factors behind those growth rate and specifically the factors for Beijing? And the second question, we noticed that pure online koolearn [Phonetic] business, that it had been [Indecipherable] for you the acquisition this summer. So -- do you think the rising penetration of online education will be short or medium term? Why are our koolearn is still a bit smaller compared with others? Did that somehow impact the overall off-line growth? Thanks a lot.

Zhihui Yang -- Chief Financial Officer

Yeah. What I can disclose for the revenue by city is -- what I can say is in the last trailing 12 months. Our top 10 cities, the K-12 revenue growth was 37% in RMB term year-over-year. So you can see the strong momentum. And going forward in fiscal year '20, I think for the top 10 cities, we can still get the -- at least the same growth number, OK, in fiscal year '20. So I actually we don't care more about the competition. I think the competition environment has not changed and competition is always there.

And your second question is about the online acquisition cost. Yeah, we as I said to answer the -- as I said before, you know, our investments for the online platform koolearn.com. I think most of our expenses were spending will spent on the R&D and content development and teachers recruiting and training. And, we will spent the marketing and selling marketing expenses in a reasonable scale. And yeah, this is our strategy. And if you look at the historical what happens in the past, you know, until this we wouldn't like to spend too much more on the marketing because, you know, I think we relied the -- more -- we will add more on the word of mouth, OK, because we have the nationwide brand name in China. Thank you.

Drew -- China International Capital Corporation -- Analsyt

Okay. Got it. Thanks.

Zhihui Yang -- Chief Financial Officer

Okay. Thank you.

Operator

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

Mark Li -- Citi Research -- Analyst

Hi, management. Thanks for the --. Hi, may I ask actually given the positive margin development we have, is that -- would you remind us our medium-term a margin target? Is there any change? Thanks.

Zhihui Yang -- Chief Financial Officer

Thanks, Mark. Great question. As I said, we got the market expansion this fiscal year 20. And we want to make any change of the -- on the long term margin guidance. Our long term margin guidance will be 70%, the margin guidance. So there's no change. Okay.

Mark Li -- Citi Research -- Analyst

Okay. Thanks.

Zhihui Yang -- Chief Financial Officer

Thank you, Mark.

Operator

Your next question comes from the line of Jon Huang from Macquarie. Please ask your question.

Jon Huang -- Macquarie -- Analyst

Thanks, Stephen and Sisi for taking my questions. So my question is that, it seems that the quarter-over-quarter capacity expansion speeding up a little bit, but does that mean we are facing less regulatory pressures on the opening new learning centers? And also, can management show some color on the utilization rate currently and going forward? So if considering not moving one week's lesson to the next quarter, is the utilization rate going to be higher? Thanks.

Zhihui Yang -- Chief Financial Officer

Yeah, the expansion quarter-on-quarter in Q4 was 9%. I think it's not related to the regulations. It's just on track compared to our budget because, you know, we need to open more learning centers to prepare for the new summer and the -- and new year. So if you combine the new square meters, we opened in first three quarters with 9% this quarter. So we've got a 24% for the whole year fiscal year '19 and this is just on track. And what's your second question?

Jon Huang -- Macquarie -- Analyst

The second question is on the utilization rate.

Zhihui Yang -- Chief Financial Officer

Utilization, I'm sorry. The utilization rate this quarter was 21% to 22%. I think, it's 100 to 200 bps compared to the same period of the last fiscal year. And I think the math is very simple. You know, the expansion was 24% for fiscal year '19, but we got the 31% top line growth in RMB terms year-over-year in fiscal year '19. And next year, as I said, we -- our expansion plan will be somewhere around 20% at the top line growth -- RMB terms will be over 30%. So, I think, I would believe the utilization rates will go up going forward.

Jon Huang -- Macquarie -- Analyst

Okay. Thank you.

Zhihui Yang -- Chief Financial Officer

Thanks.

Operator

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

Lucy Yu -- Bank of America -- Analyst

Hi, Stephen and Sisi. I've got one question for FY '19. How much has rental and tutor cost increased Y-o-Y for the fiscal year. And secondly on the sale and distribution expense for the fourth quarter is only up by like 5% in U.S. dollar term. How should we expect this cost item to grow in FY '20? Thank you.

Zhihui Yang -- Chief Financial Officer

Sisi can you check the numbers of the rental and tutor?

Sisi Zhao -- Director, Investor Relations

Yes, for full year the staff costs increased about 27%, 28% and rental is roughly about 25% to 26%.

Zhihui Yang -- Chief Financial Officer

This is dollar?

Sisi Zhao -- Director, Investor Relations

U.S. dollar terms.

Zhihui Yang -- Chief Financial Officer

Dollars terms. This is whole year number?

Sisi Zhao -- Director, Investor Relations

Whole year.

Zhihui Yang -- Chief Financial Officer

Okay. We performed better in the second half of the year than the first half. And selling, marketing expense. I think yeah, you're right. The selling, marketing expense is just increased by 5% in the Q4. And as I said, we don't want to spend too much money on the selling, marketing we're on the student acquisition cost and we care more about the word of mouth. And also we have the very strong performance from the summer promotion. So we'd only spend so much on marketing expenses. And going forward, I believe we have more operating leverage from the selling, marketing site in fiscal year 20.

Lucy Yu -- Bank of America -- Analyst

Okay. Thank you.

Zhihui Yang -- Chief Financial Officer

Thank you. Thank you, Lucy.

Operator

Your next question comes from the line of John Choi from Daiwa. Please ask your question.

John Choi -- Daiwa Capital Markets -- Analyst

Thanks so much, Stephen and Sisi for taking my questions. Quickly, I'll follow up on the margin side. Seems like you've mentioned, you know, selling and marketing, you guys will see pretty decent operating leverage. But on the G&A, should we -- we be expecting also decent leverage? And then if you combine gross profit margin, as you mentioned, for off-line, it will continue to expand. It seems to me that the operating margin expansion is likely to accelerate versus this coming fiscal year versus what the recent quarter we're seeing? And just quickly, you know, there's been a lot of education start-ups and also, you know, investments around. What are our plans in terms of investing into this ecosystem? Thank you.

Zhihui Yang -- Chief Financial Officer

Yeah, I think the -- you will see more leverage from the selling, marketing and G&A expenses going forward. That's, you know, the gross margin in the fiscal year '20. I believe it will be flattish or up a little bit. So and yeah -- and our -- our money, I think we're looking at some new start-ups for -- especially for the online education side. And if we can find the potential synergy between new rental and the target companies we'll buy it. We'll makes investments. Thank you. Hello?

Operator

Yes. Your next question comes from the line of Johnny Wong from Jefferies. Please ask your question.

Johnny Wong -- Jefferies -- Analyst

Hi, Stephen and Sisi. Thank you for taking my question and congratulations. My question relates to the summer promotion. We said -- you said that we are seeing very good enrollment 765,000. Is there a -- can you give us a breakdown between -- approximate breakdown between online and offline. Is that mainly offline? Or is that mainly online students? And also, I know we've had very good conversion rates in the past, over 50%. If I remember correctly. What type of target conversion rate are we seeing? Thank you very much.

Zhihui Yang -- Chief Financial Officer

Yeah, hi Johnny. It's a great question. I think the 765,000 summer promotion enrollments, as I said, it's pure offline summer promotion enrollment. We don't count any online summer promotion enrollment. Okay, is it clear? And last year -- yeah, you're right. Last year we got 54% retention rate after the summer promotion in ultimate year. And we do believe we can get the higher student retention rates after this year's summer. I think, well that, will raise the price of the summer promotion from RMB200 to RMB400. And I think it's much better for us to identify the real customers and to enhance the customer -- the loyalty. So that's why -- would believe the retention rates will be higher this year.

Johnny Wong -- Jefferies -- Analyst

Thank you.

Zhihui Yang -- Chief Financial Officer

Johnny. Is it clear? Thank you.

Johnny Wong -- Jefferies -- Analyst

Yes, it is. Thank you.

Operator

Your next question comes from the line of from Lilian Wong [Phonetic] from HSBC. Please ask your question.

Lilian Wong -- HSBC -- Analyst

My question has been answered. Thank you.

Operator

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

Zhihui Yang -- Chief Financial Officer

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

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Sisi Zhao -- Director, Investor Relations

Zhihui Yang -- Chief Financial Officer

Alex Xie -- Credit Suisse -- Analyst

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

Sheng Zhong -- Morgan Stanley -- Analyst

Tianli Wen -- Blue Lotus -- Analyst

Alex Liu -- China Renaissance -- Analyst

Jin Yoon -- Newstreet Research -- Analyst

Christine Cho -- Goldman Sachs -- Analyst

Felix Liu -- UBS Securities -- Analyst

Drew -- China International Capital Corporation -- Analsyt

Mark Li -- Citi Research -- Analyst

Jon Huang -- Macquarie -- Analyst

Lucy Yu -- Bank of America -- Analyst

John Choi -- Daiwa Capital Markets -- Analyst

Johnny Wong -- Jefferies -- Analyst

Lilian Wong -- HSBC -- Analyst

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