Jan 16, 2007
Operator
Good evening and thank you for standing by for the New Oriental Second Fiscal Quarter 2007 Earnings Call. At this time, all participants are in a 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, New Oriental’s Investor Relations Manager. Please proceed.
Sisi Zhao
Hello everyone and welcome to New Oriental's second fiscal quarter 2007 earnings conference call. Our second fiscal quarter earnings results were released earlier today and are available on the Company’s website as well as on Newswire services.
Today, you will hear from Michael Yu, our Founder, Chairman and Chief Executive Officer and Louis Hsieh, our Chief Financial Officer. After their prepared remarks Michael and 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such our results may be materially different from the views expressed today.
A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statement, except as required under applicable law.
As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at http.investor.neworiental.org.
I will now turn the call over to New Oriental's CEO, Michael Yu.
Michael Yu
Hi everybody. Good morning and good evening.
This is Michael Yu speaking from Beijing. Thank you for joining us today.
I am pleased to report that New Oriental posted strong results for the second fiscal quarter of 2007. As we exceeded the top of our revenue guidance by more than RMB10 million, or $1.3 million and has delivered net income of over $1 million.
As you may know, due to the beginning of the Chinese full year, the second fiscal quarter in New Oriental is typically characterized by a sharp drop in the enrollments from the summer quarter. And last year, we recorded a net loss over $1.1 million for the period.
So, we are very excited and pleased about achieving a positive net income result this quarter. During the quarter, our revenue increased 33% from the same period in 2005 calendar year.
Once again, the main driver behind our revenue growth was a strong rise in student's enrollments for our leading language training and the test preparation courses, which increased from 181,000 to over 217,000 year-over-year. While our boost in our student enrolments is a key goal, we are also focused on elaborating on our brand name and a dominant market position to extend our leading nationwide network into under developed markets across China.
During the second fiscal quarter, we opened two new schools. One is North Star in Beijing, marking New Oriental's entry into the fragmented professional certification test preparation market.
The other is our second primary/secondary school in Taixing, which is nearby our Yangzhou school. And so our network expands and our student base increases.
We are constantly evaluating and improving our cost content to ensure that it is of the highest of standards. Aside from developing contents in-house, we also look to link with the premier content providers, both domestically and internationally, such as Pearson, which is very famous in United States and the Cambridge University Press.
We continue to leverage our stress in our core businesses to develop complementary programs in language training and test preparation. As I've just mentioned, we have recently entered the market for professional certification test preparation.
And in language training, we are very excited about the potential for growth in our Elite English business, which targets a higher income demographic than our traditional language courses. In fact, you may have seen our announcement today that we have announced an agreement with DynEd, the full name is Dynamic Education in United States for licensed award winning English teaching software for our Elite English school.
We believe that these will both enhance sales experience and it give us a greater scalability in this business. We are also seeing a wealth of opportunities in our other business lines including consulting, content distribution, and online education, which grew over 36% from the same period last year.
We are constantly exploring strategic relationship with premium education thoroughness that help us fully leverage our online education user base. And the content distribution channels and we look forward to development in this space in the quarters to come.
With regards to the pace of development nationwide, it is extremely exciting to be involved in education in China today. We are very encouraged by the strong growth that we have been experiencing in our central business line and we believe that with our unparalleled network of schools and learning centers, broad product offering and a nationwide brand awareness, we are well positioned to play a crucial role in the development of private education in China for many years to come as we have done for many years in the past.
Now, I will turn the call over to Louis Hsieh, our CFO, to take you through the financials. Lou?
Louis Hsieh
Thank you, Michael. And welcome to everybody on the call.
As Michael mentioned earlier, we delivered another set of strong quarterly results demonstrated clearly by our positive net income position and improved operating margin. Now, I will walk you through the contributions to our second fiscal quarter results and some financial highlights.
Please note that certain figures I will talk about are non-GAAP based measurements that are given excluding share-based compensation expenses. You can find a reconciliation of these figures in the financial tables at the end of the press release.
Our second fiscal quarter 2007, total revenue were RMB169.0 million or $21.6 million, an increase of 42.9% over the second fiscal quarter of 2006. Revenues from our educational programs and services comprising of language training and test preparation courses, and primary and secondary education programs rose 32.5% year-over-year driven by an increase in new student enrollment in language training and test preparation courses.
And we saw increased revenue from books and other education materials and services which rose 36.4% to RMB17.1 million or $2.2 million from the year ago period. Overall operating expenses for the quarter were up 22.9% year-over-year, of these costs of revenues increased by 40.5% year-over-year, mainly due to the increased number of courses offered to a larger student base and the greater number of schools and learning centers in operation.
Selling and marketing expenses increased 90.8% year-over-year, mainly due to an accounting reclassification of some human resource related expenses from G&A to sales and marketing expense. General and administrative expenses decreased 8.7% year-over-year, primarily due to the accounting reclassification described above of some human resource related expenses from G&A to sales and marketing.
Without such accounting reclassification, general and administrative expenses would have increased year-over-year. Operating margin for our quarter was 0.2% compared to a negative 8.0% in the corresponding period of the previous year.
Excluding share-based compensation expenses, operating margin for the quarter was 4.9% compared to a negative 8% in the corresponding period of the prior year. This increase was primarily due to the improved operating efficiency as revenue growth outpaced the growth in operating costs and expenses.
Total share-based compensation expenses for the quarter were RMB8.0 million or equivalent to $1.0 million, of that amount approximately RMB0.2 million was recognized as cost of revenue, RMB0.1 million was recognized as selling and marketing expense and RMB7.7 million as general and administrative expense. Net operating cash flow for the quarter was RMB42.4 million or equivalent $5.4 million.
Net income for the quarter increased to RMB8.2 million or equivalent 1.0 million from a net loss of RMB8.7 million in the second quarter of fiscal year 2006. And income attributable to holders of common shares excluding share-based compensation expenses increased to RMB16.2 million or equivalent $2.1 million.
Basic and diluted earnings per ADS were RMB0.23 or equivalent of $0.03 and RMB0.22 equivalent to $0.03. Excluding share-based compensation expenses, non-GAAP, basic and diluted earnings per ADS were RMB0.46 or equivalent of $0.06 and RMB0.44 equivalent of $0.06, respectively.
Each ADS represents four common shares. Common shares used in calculating basic and diluted earnings per ADS increased in the second quarter of 2007 due to 34.5 million new shares issued and sold by the company at September 7, initial public offering on the New York Stock Exchange.
Moving to our balance sheet. Our total cash and cash equivalent as of November 30, 2006 were RMB1,166.5 million equivalent of $148.8 million, an increase of 295.5% from August 31.
This jump was primarily due to proceeds from our September 7, initial public offering. I am pleased to report that we have repaid all of our long-term debt giving us a sound financial footing for the future.
Before I give guidance, I would like to take a brief look at the comparison between the first six months of fiscal year 2007 and the first six months of fiscal year 2006. Student enrollment in language training and test preparation grew 23.6% year-over-year to 554,900 for the six month period.
Net revenues were up 31.8% year-over-year to RMB598.4 million equivalent of $76.4 million. Net income was up 135.7% year-over-year to RMB173.3 million equivalent $22.1 million.
And our operating margins went from 18.68% in the six months in November 2005 to 30.2% in the six months ended November 30, 2006. We are very pleased with these results.
I will now read you New Oriental’s financial guidance for the third fiscal quarter of 2007. Please note that the following outlook statements are based on our current view and expectations.
These statements are forward-looking and actual results may differ materially. Total net revenue in the third fiscal quarter of 2007, that runs from December 1, 2006 to February 28, 2007 is expected to be in the range of RMB202 million, equivalent $25.8 million to RMB212 million, equivalent $27.1 million, representing year-over-year growth in the range on 19.8% to 25.8%.
Now let me turn the call back to Michael for his closing remarks.
Michael Yu
Thank you, Lou. Once again thank you for participating in our earnings call for the second fiscal quarter 2007.
Now we will be happy to take your questions, any easy questions?
Operator
The question-and-answer session at this conference will start in a moment. In order to be fair to all callers who wish to pose a question we will take one question in a time from each caller.
If you have more than one question please request to join the question queue again after your first question has been addressed. And your first question comes from the line of Mark Marostica of Piper Jaffray.
Please proceed.
Mark Marostica
Good evening everyone.
Michael Yu
Good Evening.
Louis Hsieh
Hey Mark.
Mark Marostica
Hey, my question relates to the overseas test prep business for the February quarter actually. And I am wondering whether or not things are tracking to your expectations in that line of business?
Louis Hsieh
For the -- you mean for the fiscal third quarter?
Mark Marostica
Correct.
Louis Hsieh
Okay, it’s a little bit early for us to answer that because we are only month and a half in. And as you know Chinese New Year is quite like this year.
It’s about two or three weeks later than normal.. You can tell though from our deferred revenue line on our balance that we had a deferred revenue number, I am looking at it now, about RMB182 million versus RMB140.7 million a year ago.
So that shows that we have 30% increase in deferred revenue coming into Q3.
Mark Marostica
Okay, great. Also, just one quick follow-up on the topic of teacher retention, instructor retention, what was your experience in the November quarter on that front and again, was it better or worse than previous trends?
Louis Hsieh
Right now, I have the net teacher add for the quarter and for the quarter we added a total of 166 net adds to teachers, both part-time and full-time teachers. So that means for the year, we’ve added more than 300 teachers on a net basis.
So, our retention of teachers and addition of new teachers to our qualified teacher base continues to drive our business. So, we are very pleased with our teacher retention for now.
Mark Marostica
Okay. Great, I’ll turn it over to the next questioner.
Michael Yu
Thank you, Mark.
Operator
Your next question comes from the line of Kit Low of Goldman Sachs. Please proceed.
Michael Yu
Hello.
Kit Low
Good evening. Thanks for taking my question.
Just one question, in terms of the recent announcement about an hour ago on the ELITE program, if you could help to shed some light on the revenue generation potential of that business or in terms of how quickly that business could run and what the margin we would be expecting of that? That will be great.
Thank you.
Louis Hsieh
Kit, we haven’t -- we are not publicly disclosing our models for that. But our ELITE program is two, three years old in Beijing, we currently have five centers.
And what we plan to do with the Elite business is to add the DynEd software, so that it will increase our margins because it's a computer based teaching tool, and that it will reduce the amount of teacher time that the students will take, and is also more scalable. So we will then, in the next two years will roll out the DynEd software into several Tier-1, large cities in China.
So, we haven't given a revenue forecast for that. But the Elite business has been growing for us at a nice clip for last couple of years and we have five centers today, and we plan to open many more in 2007.
Kit Low
Okay. Great, thank you.
Operator
Your next question comes from the line of Paul Keung of CIBC World Markets, please proceed.
Paul Keung
Hi, good evening.
Michael Yu
Hi, Paul.
Louis Hsieh
Good evening.
Paul Keung
Hi. The first question, I guess, saw some good enrollment growth this quarter, and also, you opened some schools.
I was also wondering to another component, the pricing, were you able to put some good pricing increases through and is there any resistance at all in the market place right now?
Louis Hsieh
Our blended ASP increases were 10% year-over-year.
Paul Keung
Okay.
Louis Hsieh
And it was a slight increase year-over-year of 10% versus Q1 it was a slight increase of less than 1%, so, most of the price increases were taken in Q1. As the prices continue to hold and we are still able to increase prices particularly in the overseas Test prep market, and so we are very pleased with the results that even though prices are at higher level than last year, our students' enrollment still continued to climb at over 20%.
Paul Keung
Okay. So, very little of resistance.
And the other question I guess is, there is also some decent operating leverage this quarter. Is the operating leverage you saw this quarter indicative of what you would be able to do in the back half of your fiscal year?
Louis Hsieh
As you know, Q2 is traditionally our most challenging quarter. So, we would expect better results in Q2 and Q3.
Q3 is usually a slight pickup because of the winter holidays and Chinese New Year holidays, where most of the students have one month off. But we would expect traditionally, seasonally we will have higher revenues and profits in Q3 than we did in Q2.
Paul Keung
Okay. All right, great.
Thanks.
Operator
Your next question comes from the line of [Lin Shu] of Lehman Brothers. Please proceed.
Lin Shu
Hi, Michael and Louis, good evening. Thank you for taking my question.
Michael Yu
Good evening.
Lin Shu
Hi. I will just pick the easiest question first.
Well, I just want to get an idea about your original expansion strategy. We understand '05 and '06, you setup about 20 new schools in new cities.
Would you please elaborate a little bit as to whether the development in those new schools have been able to meet your expectations and what do you see the market competition over there and the market share New Oriental has accumulated so far?
Michael Yu
First, we are very satisfied with new school development, because we opened new schools like about two years ago, one year ago. Most of the new schools have performed very well and actually meet up to our expectations.
And they are still developing very fast. So, we expect somehow also a rapid growth for these new schools this year and next year.
And also we are planning to open some new schools actually in 2007, like some big cities that we haven't gone into yet, like we are opening schools now in Nanjing and some planning or are thinking of opening some other schools in Tier I cities; and also opening more learning centers. I would like to, Louis, just add that we are also -- we are -- kind of going to focus some of our stress on the high-end English training like Elite Center.
So, that's why we have our corporation with the Dynamic Education software. And, also we've focused our strategy on the student enrollment try to increase (inaudible) much, so that we will have a bigger influence and great influence of [university and high-end school] students and even on the parents of those kids.
That’s in generally speaking is our Elite School development and our new strategy for the -- our core business for this year and the next maybe.
Louis Hsieh
And then, for the quarter, we had a net add of six new learning centers. We added eight new learning centers, and we closed two in Beijing due to expiring leases.
So, we have a net 121 learning centers as of November 30, including the 34 schools versus the 115 we had at the August 31 timeframe.
Lin Shu
Okay, great. If we want to quantify the revenue [accretional] effect, how would you compare the regional expansion versus your high-end product like Elite education?
Louis Hsieh
Elite revenue continues to grow, so it will still grow at higher than 30% year-over-year. So, our new schools are growing very rapidly.
The 2005 calendar year class of 10 schools had revenue growth of 80% this quarter alone from the same quarter last year. And that’s consistent with what happened with [rev growth] and what happened over the summer as well.
So, we are seeing nice growth in the 10 schools opened in 2005. The new schools that opened in 2006 summer, the 7 that opened in Q1, contribute about 2 million in revenue to this quarter.
So, they're just getting started.
Lin Shu
Okay, it's very helpful. I will go back to the queue then.
Thank you.
Louis Hsieh
Okay
Operator
Your next question comes from the line of Brandon Dobell of Credit Suisse. Please proceed.
Brandon Dobell
Hi guys. Good evening.
Louis Hsieh
Hi, Brandon.
Michael Yu
Hi, Brandon.
Louis Hsieh
How was Europe?
Brandon Dobell
It was very exciting.
Louis Hsieh
You were in Europe?
Brandon Dobell
I was in Europe last week. Thankfully back in snowy Chicago.
Wondering if I could get a little bit of color on some of the major cost buckets that you think about, Louis and Michael, teacher training cost or teacher costs, advertising, rents expense, marketing expense, technology expense, trying to get a feel for how those are trending given the strength in the Chinese economy, if we should think about modeling in those lines any differently going forward in terms of other growth expectations or how you think about those costs on a per unit basis?
Louis Hsieh
Yeah. I think in general, our rental cost in the big cities like Beijing and Shanghai, as our leases expire, are going up.
At the same time, we are able to pass much of that move in price increases. The rents do go up but because when we sign leases, we typically sign for 5 to 10-year period, we are somewhat buffered from it, but we do have leases from 5 years ago that are expiring now.
So, we will be hit by that. On teacher salaries, there is some pressure on teacher salaries but not significant compared to what we are able to increase in ASPs.
Having said that, the trend is also for smaller classes overall, so that of course will increase our teacher costs because it's spread over a small revenue base among -- in a small path, even though the ASPs are higher. Other costs, sales and marketing, we have more or less control over and we try to keep it around, as we told you, 8% to 10% of revenue.
In G&A, we have been able to control relatively well, given that our rapid expansion, our G&A costs have not gone up on apples to apples comparison with how fast we are growing.
Brandon Dobell
Okay.
Louis Hsieh
So, overall that’s what -- that's why you are seeing operating leverage and profit increases in our business.
Brandon Dobell
Okay. In a connected way, then as you think about the new Elite schools rolling out, how should we think about the rental costs, the teacher costs of those perhaps, I know it's a much higher ASP, but I also think about the margin for those, if you are going into the Tier I and Tier II cities, are those costs going to be materially higher or are those locations going to be co-located with your existing centers in those cities?
Louis Hsieh
We have five centers in Beijing now. So the good thing for us, the two -- the positive development is, one is that the dynamic education software allows us to basically reduce the number of teachers and teacher hours taught because some of the teaching is done out with a computer-based software and so it reduces our teacher costs there.
Rent is high because it's typically in commercial areas, large office buildings where a lot of professionals work. So, rent is typically high.
At the same time, the ASPs, we have been able to generate very high ASPs from the lease where it's well over RMB13,000, RMB14,000 per student per six-month courses or so up to one-year course. So even though the costs are higher, the ASPs are quite high, and we have been able to get efficiencies from now using the DynEd software going forward.
And we will expand, as Michael mentioned earlier, we will expand Elite into other Tier I cities and because these Tier I cities like Shanghai or Yangzhou or others are big, they typically will have higher ASPs.
Brandon Dobell
Okay. Great.
Thanks a lot.
Operator
(Operator Instructions). And your next question comes from the line of [Lin Shu] of Lehman Brothers.
Please proceed.
Lin Shu
Hello.
Louis Hsieh
Hi.
Operator
Your next question comes from the line of [Alberto Assato of Jay Hopp]. Please proceed.
Alberto Assato
Hi Michael and Lou. How are you?
Michael Yu
Hi Alberto, how are you?
Alberto Assato
I am fine. Congratulations for the great quarter.
This is my question, I just wanted from you, Lou, maybe add some color, say if you compare the New Oriental evaluation both from a P/E and also from probably enterprise value over revenue standpoint to U.S. peers or to Chinese companies simulating size and growth, and also through a couple of Singapore leases for profit education, you see that the EDU is trading at, I will say, for a significant premium, can you give me some colors on what you see has been competitive advantage to explain this premium and how you see them going forward?
Thank you.
Louis Hsieh
Okay. Although we don’t comment on our stock price or our P/E ratios, and things like that; however, our view is that our differentiator and what makes New Oriental a special unique story really is our market position in China with a leading private education provider with the leading brand name.
And the brand can’t be duplicated by anyone in a short period of time. And so we are the largest -- we are in a market that is growing faster than the market that our peers are operating on in the United States.
We also face less large competitors, so because China is a highly fragmented market, we are the largest player by a long short in this space. We face less competition.
I think that is my personal belief is why the market has attributed a premium valuation to us.
Alberto Assato
Okay. Thank you very much.
Operator
Your next question comes from the line of Brandon Dobell of Credit Suisse. Please proceed.
Brandon Dobell
Hi. Just a quick follow up, from a competitive perspective, anything that we should think about differently especially in the kind of three or four big cities that are a big portion of your revenue, kind of, going through the different products you offer domestic, international test prep and English?
And then as you think about the Elite schools rolling out anything competitively and the differences as you are looking at that we should think about in terms of modeling and your pricing or margins for that business?
Michael Yu
Well, Brandon is your question that the Elite goes to these big cities that the New Oriental has also schools there?
Brandon Dobell
Right.
Michael Yu
Yeah, actually we are thinking of rolling our Elite English Learning Center team to these cities like within these two years. Because we have opened 5 centers in Beijing, Elite Center in Yangzhou; we are running them quite successfully actually.
And now adding dynamic education software entries so we can save some money from the teacher’s cost and also scalability combined with the software and the teaching together would be somehow more powerful than while just let a teacher teach in the center. But it's easier for us to go into others cities.
And also in these four cities, we are -- our brand name is very famous, so it's easier for us to go into these cities.
Louis Hsieh
I think, we are going to go in with lease, just like we did when we opened our schools Brandon, and as they basically go after the largest most lucrative markets first.
Brandon Dobell
Okay. And then from a different perspective, anything that may be changing kind of underneath the surface from a regulatory perspective, in terms of how the Chinese government might look at the post secondary opportunity, any movements there to address some of the big gap there?
Michael Yu
Actually, the government is discussing about some regulatory things about post secondary education in China, but generally speaking there is not -- they haven't yet decided what kind of a regulation they are going to give out. But in my opinion, it may be -- even though they give some newer regulations, their regulators will have no -- not very into effect on the New Oriental Education, plus is that we haven’t going to put [this way] even though we are thinking of doing that.
Secondly, that because we have such a strong brand name here in China and also have good in terms of relations, so, we -- I think, this will -- the new regulations -- according to the development of China should be kind of good, not bad side, bad effect, should be good effect on the private education in China.
Brandon Dobell
Okay. Thanks a lot.
Michael Yu
Thank you.
Operator
Your next question comes from the line of James Mitchell of Goldman Sachs, please proceed.
James Mitchell
Hi, good evening. Thank you for taking the call.
There seemed quite impressive reacceleration in your overseas test prep revenue, which looks a little bit mature a year ago, but now it's growing at over 50% a year. Are your still test prepping most of these post-graduate Chinese going to the US, or has the business broadened out to other kinds of tests in other fields?
Michael Yu
Yes, actually the increase in the test preparation area is mostly because, one of the reasons that still university students, when they finish their university studies they want to go aboard to study. And no matter they go to United States or go to UK, they have to take overseas prep tests.
The other reason is that actually many Chinese parents trying to send their kids, when their kids finish their high school to study in undergraduate schools, or universities in United States or other English language countries. So, this is a kind of good, for us to promote our alternative test and preparation programs for students.
So, actually more and more high school students have come in to New Oriental to study overseas tests, in order to get prepared to go abroad to study for their undergraduate studies.
James Mitchell
Right and the main sort of limiting factor or guiding factor on the growth; is it the number of visas that other countries are prepared to issue Chinese students or is it the affordability of studying overseas?
Michael Yu
Yes. I think mostly is because of Chinese parent's affordability to send their kids to study aboard, because for all over these years most English speaking counties have been friendly to Chinese kids, if these kids can pay their own money, and if they have the qualifications for studying in their country.
So visas nowadays are relatively easier for Chinese students to get, no matter to United States or to other countries, because these country's education institutions also believe that most of Chinese students, they have the ability to pay to study in their institutions.
James Mitchell
Okay. Thank you.
Michael Yu
Thank you.
Operator
Your next question comes from the line of Mark Marostica of Piper Jaffray. Please proceed.
Mark Marostica
Yes, just another follow-up. I appreciate the color on organic growth that you provided regarding the 10 centers that opened in '05.
Also tying to that if possible, could you give us a sense for the performance of your centers in Tier-1 cities versus performance of centers in Tier-2 cities or a revenue growth basis and on a profitability basis relative to your original expectations?
Louis Hsieh
I think it's a good question Mark. I think for the schools, our first schools in 2001 in Beijing, all the way up to 2004.
The revenue grew to 25% year-over-year, so even the big schools are still generating nice revenue gains on that side. But they are mix of Tier 1 and Tier 2, but mostly Tier 1 cities.
Mark Marostica
Right.
Louis Hsieh
All the schools in the Tier 2 side, we don’t really break them out specifically, are mostly the newer schools and they are right now, they are still in the rapid growth phase. So, most of the schools when they are managed properly will deliver what our expectations are, if not greater.
Mark Marostica
Okay. Thank you.
Operator
Your next question comes from the line of [Lin Shu] of Lehman Brothers. Please proceed.
Lin Shu
Hi, I have a follow-up question on the Taixing school. I just wonder, why did you choose to open a school in Taixing, it's very close to Yangzhou, it's in Southern China, why didn’t you pick a place in Northern China so that you can cover the whole country?
And why don’t you take a more traffic concentrated city, so, you can make it easier for students to go their for summer camps etcetera?
Michael Yu
Actually the reason that we opened Taixing school there is because it's near Yangzhou so that we can use the resources we already have in Yangzhou school. The teachers, because we experienced teachers in Yangzhou school and the Taixing school is kind of 40 minutes away by highway from Yangzhou.
But in China primary schools or secondary schools are very local. So, those students in Taixing will not come to Yangzhou to study but they know that our Yangzhou school is running very well.
So, we kind of have a cooperation with local entrepreneurs and we build off a campus and we use this campus and we occupy 50% of the total revenues in the shares. Although we don’t have to spend money on renting the campus so that saves us money.
And so we only have to bear teachers expenses and share some G&A costs. So, that means that like Yangzhou school, because we build up our own buildings and we spend a lot of money on this, so their return is slow.
But in Taixing school, if we can find enough students, the return will be very quick, because we don’t have any investment in it. So that's what the reason, because we can use the teachers and that we can use the teaching materials, and if anything happens, our teachers can go over to that place in 40 minutes and we don’t need another principal of the school, the head of school to manage that, the same head of school manage two schools.
And, actually manages kind of relatively easily.
Louis Hsieh
And then, with the addition of the Taixing school as Michael mentioned, we leveraged off the same resources and so, , it extends our capacity from 4,500 students to 6,000 with relatively not much increase in headcount or in resources. It’s really an opportunity that came our way that we thought was a good one to grab.
Lin Shu
Okay, understood. Thank you.
Michael Yu
Thank you.
Operator
Your next question comes from the line of Robin Roberts of Fiery Phoenix Consultant, please proceed.
Robin Roberts -- Fiery Phoenix Consultant
Hi, Michael and Louis, congratulations for a great quarter. While looking at your performance in the past, you guys have really delivered and you delivered whatever you promised the investors since the IPO.
Louis Hsieh
Thank you
Robin Roberts -- Fiery Phoenix Consultant
So, you have generated a lot of shareholder value, while looking forward, I am concerned about one factor that actually have nothing to do with your fundamentals, especially your lockup expiration, and just looking at your public documents, it looks like your float is about to double once the lockup expires, and historically, when I look at the Chinese IPOs, about 36 companies, 32 of them suffer significant stock decline right around the lockup expiration. And, Louis, you've very experienced in Capital markets, I am sure you have seen the same trading pattern, so I am just wondering what actions are you planning to take to make sure EDU does not follow the same fate of other Chinese IPOs that have suffered a significant stock decline right around lockup expiration.
Louis Hsieh
Yeah. That’s a very good question.
And we are taking steps and those steps -- because on advice of counsel, we can’t elaborate on those steps, but we 're very well aware of the issue and it's a traditional 180-day lock-up that ends on March 7. So, we are -- the management and the Board is well aware and we are taking steps to address that lock-up issue, but I am prohibited by counsel from being more specific right now.
Robin Roberts -- Fiery Phoenix Consultant
Okay.
Louis Hsieh
So, my advice is to stay tuned and you will realize what the steps are.
Robin Roberts -- Fiery Phoenix Consultant
Okay. Thank you.
Louis Hsieh
Thank you.
Operator
Your next question comes from the line of Trace Urdan of Signal Hill. Please proceed.
Trace Urdan
Hi. Good evening.
Michael Yu
Hey, Trace.
Louis Hsieh
Good evening, Trace.
Trace Urdan
I am wondering if you might be able to -- clearly this operating leverage, but given the accounting changes, it's difficult to make it out separately, the sales and marketing and the G&A line. I am wondering if you can help with that challenge at all.
Is there a way to sort of express those numbers as a percentage of revenue, exclusive of the accounting change?
Louis Hsieh
Yeah. I mean, we have guided you guys that we think we can do -- the sales and marketing expense should be between 8% and 10% of revenue on an annualized basis and the G&A, if you -- the total G&A will be about 30%.
If you take out the teacher salary component of G&A, the real G&A for the headquarters and other costs should be about 17% of total revenue.
Trace Urdan
Right, I am just trying to understand where the leverage in the quarter was specifically? Whether it was sort of equally weighted on both of those lines or where -- ?
Louis Hsieh
Sales and marketing -- if you take out the accounting change, the accounting change equivalent was about RMB15 million. So, actually sales and marketing went down from RMB11 million a year ago to RMB10 million this year.
So, the numbers is 25 million because of the accounting change. The accounting change related to employee reclassification of sales and marketing employees in the sales and marketing which historically has been classified in G&A.
Trace Urdan
All right. Understood.
Louis Hsieh
If the G&A goes the other way, the real number, we had 15 million back to 57 million, you get 72 million, we had 64 million a year ago, so we have only just seeing about over 13% increase in real G&A, however you are seeing a 32% increase in revenue.
Trace Urdan
Right. Understood.
Louis Hsieh
So, that's where you're seeing the operating leverage, both on sales and marketing and on G&A.
Trace Urdan
Perfect. Okay.
And then the second question I had was related to the plan changes in the Chinese corporate tax code and I am wondering whether those are likely to impact your own tax rate in anyway? And whether you believe the status of your sort of special technology related rates in some areas might come under review, as a result of that change?
Louis Hsieh
From our understanding of the new unified tax structure, it shouldn't -- it doesn't affect the technology or the high growth status of certain companies, that’s the second part of your question. The first part of your question, the corporate rate will go down from 33% to 25%, so in that instance, that may help us in some areas.
Trace Urdan
Okay, so only helping in your estimation, does not hurt your rate?
Louis Hsieh
We don’t know the full impact of it yet, but we don’t see -- unless there is change in the classification that it will materially negatively impact us.
Trace Urdan
Okay. And can you comment, there seem to be some rumors that it might be accelerated from the January 1st, 2008 timeframe, can you comment on that at all?
Louis Hsieh
I don’t know of any change in that. I know that it's being considered by the government in March and April this year, I don’t know if it would accelerate the implementation of it or not.
Trace Urdan
Okay great, thank you very much.
Operator
We are now approaching the end of the conference call. I would now like to turn the call over to New Oriental’s Chief Executive Officer, Michael Yu, for his closing remarks.
Michael Yu
Thanks everyone again. Thank you for joining us today if you have any further questions please do not hesitate, contact myself, or Louis or any of our Investor Relation’s representative, Sisi Zhao and others.
And I know that most probably you have our contact information. So thanks again for joining us.
Thanks for supporting us and thank you a lot. And good evening and good morning again.
Operator
Thank you, for your participation in today’s conference. This concludes the presentation you may now disconnect.
Good day.