Jul 23, 2013
Executives
Sisi Zhao - Director, IR Louis Hsieh - President and CFO
Analysts
Philip Wan - Morgan Stanley Mark Marostica - Piper Jaffray Ella Ji - Oppenheimer Zhuang Chao - Macquarie Fei Fang - Goldman Sachs Clara Fan - Jefferies Vivian Hao - Deutsche Bank Tian Hou - T.H. Capital Trace Urdan - Wells Fargo Securities Charles Cartledge - Sloane Robinson Jianning Lu - Flowering Tree
Operator
Ladies and gentleman, good evening and thank you for standing by for New Oriental's Fourth Quarter and Fiscal Year 2013 Earnings Conference 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 call over to your host for today’s conference, Ms.
Sisi Zhao, New Oriental’s Investor Relations Director. Ms.
Zhao, please proceed.
Sisi Zhao
Hello everyone, and welcome to New Oriental’s fourth fiscal quarter and fiscal year 2013 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 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 New Oriental’s President and CFO, Louis Hsieh. Louis, please.
Louis Hsieh
Thank you, Sisi. Hello everyone and thank you for joining us today.
I am pleased to say that we are closing out this year with historic set of results. For most of fiscal 2013, we have been very focused on shifting towards a strategy of harvesting the market, which we’ve said will drive growth and improved profitability.
The excellent top and bottom line results that we have reported today are testifying the success we delivered on these goals. Looking in the fourth quarter, our performance was very strong across the board.
The real standout as the major improvement of our bottom line. Thanks to our associates on and strict (inaudible) plan in improvement and utilization, we achieved a dramatic improvement in operating margin, which expanded our 440 basis point to 10.2%, an operating income which grew by 122.5% to $24.4 million a net income which rose by a very impressive 73.4% (ph) to $28.2 million.
If you recall, we also recorded strong margins in the third fiscal quarter and these consistent improvement are direct result of a success with the Harvest the Market' strategy. Since we commenced the strategic transition on November 2012, we have been living in the slowdown outpace of expansion and focus on ramping up utilization and efficiency across our existing network.
We have shut over 50 underperforming schools and learning centers over the past eight months, slowly allowing management to focus on improving utilization and profitability of our more productive locations. Looking ahead, we will continue to strictly control new learning center openings in the first half of fiscal 2013.
We currently don’t expect to open any new learning centers in this fiscal quarter. However, we’ll probably look to open 20 to 50 centers beginning in the second half or the second fiscal quarter starting in late October or November to take advantage of an expected peak in demand for K-12 and VIP process in the second half of fiscal year.
I will elaborate on this a little bit more when I discuss on other section. We have also reduced headcount by over 10% from a high of 34,300 at the end of our third fiscal quarter of 2013 to 30,700 as of the end of fourth fiscal quarter.
Importantly we have accomplished this reduction in headcount without compromising on the quality of our best offerings. On the top-line, we recorded very healthy net income growth relative to our revenue growth of 26.6% in the fourth fiscal quarter, driven by continued strong demand across all our key business lines and importantly improved utilization across our networks.
Overall, we're very encouraged by our financial performance for this quarter for the full fiscal year. We began a strategic shift in November 2012 and we struck a very healthy balance between driving growth and managing cost.
Our 'Harvest the Market' model is generating tangible results, and it sets us up well for sustained strong bottom line performance in the quarters to come. Turning to some of the other indications of our business.
Student enrollment grew by healthy 6.9% in the fourth fiscal quarter and by 5.7% for the full fiscal year. After the strong start to Q4 when enrollment rose by 40% in the first half of the quarter, the second half of the quarter, i.e.
the back half of April plus May was relatively flat compared to last year. This is in line with our expectation as we continue to transition to our Harvest the Market strategy.
As I said previously, we have been strictly controlling the pace of network expansion since the second fiscal quarter. I am pleased to note that this growth in enrollment is primarily coming from continued core improved utilization as we see the close rising and today with the addition of new schools or learning centers.
As I mentioned in previous quarters, it takes about two to three years for these facilities to reach maturity. So what we’re seeing now is that the locations we opened in fiscal 2010 and 2011 are getting out and beginning to contribute to operating margin improvement.
The deceleration in student enrollment work is compared to the previous fiscal year is also due to three factors. First, we have strictly formed the pace of expansion during fiscal year 2013 and closed and disposed of 73 underperforming learning centers.
Second, we continue to see a shift in market demand for smaller classes and VIP formats, which have one teacher to a maximum of five students. As a result the enrollment in our large class formats have declined by about 200,000 in a peak and about 1.25 million in fiscal year 2011 and the large classes contributed approximately 60% of educational services enrollment to about 925,000 in fiscal year 2013.
So we’re getting approximately 40% of educational services enrollment. Finally, our adult classes and previous enrollment continues to decline by about 19% in fiscal year 2013 to about 134,000 from 214,000 in the year ago period.
As we have stated previously, we keep the legacy business because of the tight profitability. So as you can see, our business mix continues to evolve and we’re gradually transitioning to operating more small size classes at a higher price point and in the VIP and K-12 business lines to lead market demand.
As you know, many of our newer learning centers are specifically designed for K-12 bringing on a more tailored learning experience than the smaller class. We are also encouraged by the rapid growth of some of our newer businesses such as our (inaudible).
The Chinese last year school entrance exam is similar to US GRE test. So enrollment increased 19% to 212,000 in fiscal year 2013 to approximately 178,000 in the year ago period.
The cash revenues increased by 25% to 27.4 million. New Oriental is the runway market leader in (inaudible) test classes that we have studied by as long term test process.
Going forward, growth in enrollment is our two key segments that K-12 after school tutoring and overseas test preps and study consulting we continue to be a sporting indicator of our market health and our business. But, given the business mix is shifting, it will also be important to support these classes at a peak level and revenue growth in assessing our overall performance.
Furthermore, we expect to see some changes in seasonality in line with this trend. The K-12 after school tutoring continues to account for greater proportion of our business over 40% in fiscal year 2013.
We expect it to become over 45% in fiscal year 2014. We should continue to experience greater revenue growth in Q3 winter quarter and in Q4 spring quarter of each fiscal year.
Since winter and spring are the key test prep quarters for the Chinese zhongkao, the college entrance exam and gaokao high school entrance exam which I have mentioned in (inaudible) each year. As I said earlier, beginning in late October we plan to have 20 to 50 new learning centers the class one activity to take advantage of the seasonal demand.
Breaking down our performance across different business lines, we continue to see strong and healthy growth across all core offerings in fiscal year 2013. In particular, as was mentioned earlier was our K-12 offering just after school tutoring overseas test prep and VIP business and very, very strong growth.
Our K-12 all subjects after school tutor business is doing exceptionally well. We reported very healthy gross revenue growth in this segment of 37% year-over-year for the fourth fiscal quarter and approximately 40% for the full fiscal year 2013.
Breaking that down further, our positive outlines grew by over 30% year-over-year in fourth fiscal quarter and around 36% in full fiscal year 2013, while our ETM middle and high school business was up at a 40% year-over-year in the fourth fiscal quarter, and 42% for the full fiscal year. Our overseas test prep and overseas study consulting business continued to perform well.
We recorded combined revenue growth of approximately 24% across the two lines, the fourth fiscal quarter and over 23% for the full fiscal year 2013. Finally, our VIP personalized classes business recorded about 36% year-over-year cap revenue growth in fiscal year 2013.
Let’s look quickly at some of the key financial metrics for the fourth fiscal quarter. Selling and marketing expenses for the quarter increased by 9.1% year-over-year to 36.7 million.
This growth in selling and marketing expense is below the rate of revenue growth of 26.6%, which demonstrates how our measures improved operating efficiency of driving increased performance. Furthermore, actual planned and market promotion expenses in the quarter declined by approximately 4.5% year-over-year to approximately $16 million.
As I mentioned already on a GAAP basis, operating income for this quarter was 24.4 million compared to an increase of 122.5% and $11 million in the same period of fiscal year 2012. Operating margin for the quarter was 10.2% compared to 5.8% in the same period of last year.
This is a significant improvement and really demonstrates the growth of our commitment to driving efficiency and profitability. Capital expenditures for the quarter is $7.7 million compared to $16.5 million in the same period a year ago.
The significant reduction in 15% is in line with our focus on controlling the expansion, lowering cost and driving improved utilization across our existing efforts. CapEx remained low in the first quarter fiscal year 2014 as we controlled the school opening.
Moving on, I would like to spend a couple of minutes talking about the expectations for the first quarter of fiscal year 2014. We expect total net revenues for the first fiscal quarter 2014 to be in the range of $389.6 million to $406.4 million, compared to our reported net income for the first quarter of fiscal year 2013.
Our projected year-over-year revenue growth in the first fiscal quarter would be in the range of 15% to 21%. This is somewhat lower than our usual guidance range but I do want to highlight some important factors increasing our outlets.
First and foremost, we are now going to shift from occupy the market or harvest the market. We have strictly controlled our pace of expansion over the past fiscal year, and we have maintained our flow of pace in the first half of the current fiscal year.
In fiscal 2013, we had a net of 53 schools and learning centers, compared to the net out of 177 in the previous fiscal year. Further we have currently planned zero new openings though the first quarter fiscal year 2014 compared to 69 (ph) centers we opened in first quarter fiscal year 2013.
This will obviously affect enrollment and top line growth, but it is important to remember that it also means that growth in the first quarter will be primarily organic, driven largely by improved utilization of our existing schools. This is a healthy trend and will contribute to continued margin improvement and better top and bottom line results.
The (inaudible) experiencing are expectation is the shift to the seasonality of our business that I mentioned earlier. Student demand for K-12 and VIP offering is growing very rapidly and much more quickly the demand for our more mature rookie test and adult English business line.
This means that some of the peak demand is shifting from summer to late winter and spring quarters. The overdue test process (inaudible) top level college students intend to sign up during summer holidays when they have more time to commit to studying for exams like TOEFL and GRE, which they can take at any time.
The K-12 and VIP classes are geared more towards school kids preparing for end of the year exams as the high school and college entrance exam. So the peak demands for these classes tend to be from December till May.
We have noticed this trend over the last few years but has become more pronounced this year as our K-12 and VIP offerings grow rapidly we expect the trend to continue. Over time we expect some of the peak demands will shift from the first quarter to the third and fourth quarters.
This is healthy for a long term business as it skews out the seasonality for the three high profit quarters depending on the summer quarter for the majority of our annual net income. Third, result for the Shanghai School are still below optimum.
As you know we made management changes in Shanghai last year in the senior management team and we have been focused on getting things right in the core market. We are not yet where we want to be but we are confident that we are on the right track.
On the positive side Beijing is performing well with gross revenue increasing 17% in fiscal year 2013 and that growth was carried on into December quarter. Finally we are seeing some limited impact from the economic slowdown in China.
Spending on education continues to be one of the most resilient areas of discretionary spending in China behind own housing and food. So the education sector is less affected by the slowdown than many other consumer discretionary categories, and as a premium brand in the education sector we are the best insulated from effects of the slowdown, due to the (inaudible).
Having said all this, let me emphasize once again, we are focused on executing the Harvest the Market strategy to generate tangible, sustainable results, staying true to our core value and delivering the highest quality teaching and course materials in China and I believe that the approach will continue to drive margin expansion and strong bottom line performance in the quarters ahead. For the four fiscal year 2014, we are forecasting very healthy revenue growth, 18% to 23%, for fiscal year 2014 and strong improvement in GAAP operating margin, that became 200 to 300 basis point, a 15% to 16%, compared to 12.8% in the fiscal year 2013.
So on complement we continue to capture market opportunities to deliver sustainable long term growth. Before I conclude, I want to take a minute to address our efforts over the last year.
We enhanced shareholder value. As we announced last month, we successfully completed the $50 million share repurchase program between late April and June of 2013 and as you all have seen in today’s press release, our board of directors have approved a special cash dividend of $0.35 per year, so we will be getting a 17% increase from last year’s $0.30 per year, to be paid on October 7, 2013.
It is another $54 million capital recurrence to shareholders. These initiatives underline our determination to deliver value to our shareholders.
Also we want to remind you that in the aftermath of the (inaudible) Muddy Water have passed last July 18, the senior management initiated a management buyback totaling about $33 million to demonstrate confidence in our company. The side point of reference for your information is that if you have ignored the Muddy Water and Carson Block and buy the short sell New Oriental on July 18, 2012, that infamous day the Muddy Water took a tax (ph) in the Oriental then our share is closed at a multi-year low of $9.50 and instead if new shares of $9.50 a year ago, you have been rich rewarded $13.75 per share based on the July 18, 2013 closing price of $23 or $25 or roughly 125% return in one year on the investment.
If not that have returned at all on a cost contrary costing investment. New Oriental we have overcome a number of challenges over the last 12 months.
We have emerged with our business in a stronger position than ever before. We, the board, management and employees want to thank all of our shareholders for bearing with us and we look forward to your continued support.
At this point I will take your questions. Operator, please begin.
Operator
Thank you, Mr. Hsieh.
By the way, Mr. Hsieh at the feedback of some of our participants, I will like to actually ask if possible for you to position yourself nearer to the phone, so that they can hear you more clearly Mr.
Hsieh?
Louis Hsieh
Is it better?
Operator
Yes this is much better now, Mr. Hsieh.
Thank you. So, ladies and gentlemen, we will now begin the question and answer session and in order to be fair to all callers who wish to ask questions, we will take one question at 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. (Operator instructions).
Our first question comes from the line of Mr. Philip Wan of Morgan Stanley.
Please ask your question.
Philip Wan - Morgan Stanley
My question is about your enrollment growth trend. Could you please comment on the enrollment goal for June and July so far for our both overseas and K-12 business?
And also given the increase in competition you have mentioned, I wonder what would be your pricing strategy going forward.
Louis Hsieh
We won’t disclose the exact enrolments, but I can tell you that we don’t break it down separately, but in May, the enrolments were flat year over year at the end of fourth fiscal quarter and for the first few weeks of June enrolments were flat with revenues up in the low teens in revenue growth. The last three weeks however both enrolments and revenues have turned around and so definitely would be picking up quite well.
And I think we attribute that partly to the late timing of Chinese New Year vis-a-vis last year. I think because Chinese New Year was two weeks later this year and the students in Q4 got other primary scores late June or early July that somehow was pushed back a little bit.
So now, I think the last several weeks, we have seen a much better trend and so that’s the part of the reason also for our lower than normal guidance. Second part your question Philip, on pricing.
On pricing trend, I think we continue to increase prices a little bit 10%, 12% and 13% year over year but a bigger part of the revenue is coming from mix shift changes because they address both in the earning release and in the script which is that our big class format which are popularly mostly in the summers and winter for overseas test for (inaudible) English are shrinking as a percentage of our total enrollment contributing overall, as the market is moving towards smaller classes and one on one VIP formats. So that also will slow down our enrollment growth.
As I said, it just means that we will get higher revenue per student for the students of China.
Philip Wan - Morgan Stanley
Just a quick follow up. Would you also try to manage the revenue contribution and enrolment growth from the VIP or smaller class?
Louis Hsieh
Yes, we have done that. VIP account for our 29% revenue in Q4.
Many of the learning centers we closed this year were VIP. So you have to understand that the slower than normal revenue growth is self-inflicted but if we want to grow revenue, it's easy, we just open learning centers and take a lot of VIP students.
But it’s a low margin revenue until the learning centers fill up and that takes a lot of time. So we purposely try to balance margin improvement with revenue growth and so we close many VIPs.
Like I said we could easily pick up the revenue quickly, just open up more VIP centers or open up more learning centers. But that’s not our goal.
Our goal is to improve the operating efficiency and the quality of our instruction and going forward we will balance revenue growth with profit growth so that in the future hopefully we won’t go to the massive cycles and we'll get to it a more balances sustained top and bottom line growth rate.
Operator
Thank you. And the next question comes from the line of Mark Marostica of Piper Jaffray.
Please ask your question.
Mark Marostica - Piper Jaffray
I was wondering if you could give us an update on the utilization performance in Q4 and your thoughts going forward on utilization in the coming quarter here.
Louis Hsieh
That's a great question. I think we started the new utilization system was started actually last year around this time.
So we don't have year over real comparisons in Q4, but I can tell you Q4 the utilization was better than Q3 and so Q3 was probably between 15% and 18% total and Q4 is probably around 18% to 19% and Q1 should be even better than that, obviously, since it's the biggest quarter. The new system is quite accurate.
I think it counts every seat in every learning center. So it's every NPC, if we're lucky we'll get the 25% utilization rate.
If we do that our operating margin will be much-much higher than it is today, it'll be (inaudible).
Mark Marostica - Piper Jaffray
And as a follow up to that your operating margin guidance today assumes what level of utilization on average?
Louis Hsieh
I mean it assumes about 6% to 8% enrollment increase for the fiscal year 2014. So if we only add 20 to 50 learning centers that should push the utilization rate right to around 20% for the whole fiscal year.
So it’s not aggressive. I think our cost cuts, as of the end of June; we're actually down to 30,200 employees.
So we're cutting another 500, so our cost rate is quite low and revenues are still trending up. So it's a good formula for margin improvement.
That's why we're quite confident that if these trends continue that our GAAP operating margin will improve by 200 and 300 basis points and non-GAAP as well. So non-GAAP will jump from 15.6% to 18% or 19% and our GAAP will go from 12.8% to 15% or 16%.
So you can do the math, you can see that, that means that net income growth will be much, much higher than revenue growth.
Operator
The next question comes from the line of Ella Ji of Oppenheimer. Please ask your question.
Ella Ji - Oppenheimer
Just want to clarify, did I just hear you that you said 6% to 8% enrollment growth expectation for FY14.
Louis Hsieh
Yes, that's for the whole fiscal year. It will be higher in Q3 and Q4, I think than in Q1 and Q2 because like I said Q1 you're looking against last year, last year we closed 73 learning centers and last year we opened 89 in Q1.
So that huge delta will dampen Q1 enrollment. But we'll start opening learning centers in the second half of October and into November, to prepare for the big winter and spring seasons.
Or if you think about our enrollment in K-12 is growing 15% a year even though we haven't added learning centers, so imagine what can happen when we start adding learning centers in the second quarter of this year. Enrollment should be much higher.
So even though we expect 6% to 8% enrollment growth it will be more second half loaded than first half. So don't expect too much in the first half, as far as enrolments.
Ella Ji - Oppenheimer
I want to ask you about this VIP/small class demand which seems to be very strong in the market but you just mentioned that VIP obviously is of low margin. So once you get your thoughts with regards to your long term expectation for VIP and the small cost as a percentage of revenue?
Louis Hsieh
Well I think VIP in small class already are close to more than two thirds of our revenue. So it is where the market is going so we can either fight it or we can join it and we decided to join it.
So small class enrollment is a chunk of 1.5 million almost 1.4 million enrollments. It's a huge number.
And VIP enrollments even though it's only about 96,000 for last year they account for 28% to 29% of revenue. So that is where the market is going, we have to adapt to it.
So as we told you before is that we have premium price in both small class and in VIP. Now our definition of small class differs from other companies like (inaudible).
Our small class is actually 40 people and under, not 20. So it’s a larger format, and the way we deal with it is, we charge a much higher price for better quality teaching and better quality content.
So as I said is vis-a-vis our biggest competitor in one on one, we're premium priced by about 50% to 60% from what I can gather from the latest results. So we will get a higher margin that way.
Also half of our VIP enrollments are closer to one to five. This also have higher margin than the other one.
And on the small class side the goal for us is to get more students in the seats, so to get it closer to 40 than to 20. If we do that than the margin will still be quite high, given our premium pricing.
Ella Ji - Oppenheimer
So going forward the two, format of classes do you think their percentage of revenue will continue trending up or…?
Louis Hsieh
I think they will continue trending up because the large class is attributable to adult English and oversea test prep is of both kind of slowish percentage revenue because K-12 will be the fastest grower. And on the K-12 actually it’s the middle and high school.
It’s that UCAN program that’s the fastest grower and that’s where the students studying for the high school entrance exam zhongkao and the gaokao for college entrance exam. So those formats, the preferred formats from parent in the market is small class 40 students and under or VIP 121 or up to one to five.
So those will continue to grow and I think as large class will continue to shrink as to up to 60% enrollment is down to 40 and declining and it’s a much smaller percentage of revenue.
Operator
The next question comes from the line of Zhuang Chao of Macquarie. Please ask your question.
Zhuang Chao - Macquarie
Hi thank you very much for taking my question. I have a question on operating margin as well.
I was wondering other than the 6 to 8% enrollment growth assumption what are the other assumptions that we should be thinking about behind the 18% to 19% operating margin guidance for this year. And additionally, as Louis mentioned earlier that weak margin expansion drivers in multi-year for the new suite that ramp up the utilization rate.
In two three years' time what do you think the operating margin can be and what are some of the drivers behind that? Thanks.
Louis Hsieh
Those are excellent questions, Zhuang. I think for us the assumption is to go into the 200 to 300 basis point improvement are not aggressive, assuming revenue growth of about 20%.
They are assuming that we don’t open more than 20 to 40 learning centers in fiscal year 2014 and we are assuming that we continue to have usual price increases and 6% to 8% enrollment increases. So they are not aggressive by any means.
As far as long-term trend in margins, if we can get 80% and 90% this year I am fairly confident that we’ll reach 20% non-GAAP the following year. At which we’ve got 17%, 18% GAAP operating margins two years from now.
So I think that long-term we should assuming utilization rate can keep going up you’ll see that 25% utilization rates our operating margins will both be in the 20s it would be a very good result if we could do it.
Operator
And the next question comes from the line of Fei Fang of Goldman Sachs. Please ask your question.
Fei Fang - Goldman Sachs
My question is again on margin the younger improvement of the operating margin was apparently very impressive but if we dig into the numbers it seems that he bulk of the margin improvement actually came from the sales and marketing savings meaning the margin improved largely because there was significant leverage with advertising spending. And so my question is how do you plan to assess then margin improvement into the next year?
Are we going to see more cut on advertising spend or would you expect other cost lines any cause of run rates from G&A (inaudible) leverage in the next few quarters? Thanks.
Louis Hsieh
Well I think the bulk of the savings actually came from the G&A line so I think it’s both in terms of marketing and G&A. The bulk is a direct result of the headcount reduction, right.
I think the prep promotion expenses were down in the fourth quarter but they are only 7% total expenses of total revenue each year anyway, they are 6% to 7% they are not a large number. So I don’t think we need to do much as far as we won’t be cutting some of the marketing much anymore, we won’t be cutting G&A much.
But I think if we can still keep current levels like I said we’ve already cut 500 more people in June alone. So the cost base of G&A and some of the marketing going down.
At the same kind revenues are still projected to go up 16%-20% this quarter. So it’s just similar to say to your Goldman model, right as long as you go up much if you cut cost.
So I think as we will continue to keep doing prudently the reductions where we can save money but we won’t compromise on our core value which is having the best quality teaching the best content in the industry. So we’ll continue doing that, I think if we can get revenue growth of 20% our cost base will as it currently stands will result in operating margin expansion well in excess of 200 and 300 basis points actually.
Fei Fang - Goldman Sachs
I see, thanks Louis if I may have a follow up question on that. So noticed that the number of learning centers of over 2013 actually grew by 10% versus the total enrollment grew by approximate 6%.
So how should we think about the discrepancy between the 10% and 6%?
Louis Hsieh
Well I thought I explained that, right well the number of learning centers were opened in Q1 so that’s before we shifted to this strategy. And I think we lost 120,000 enrollments just in the shift from big class to small class and that’s pretty much the bulk of it.
So I think if you do that it’s pretty consistent. The square footage that was added was much less than 10% of learning center capacity.
And you can look at it now we are still trending up 16% to 21% in revenues. We’ve actually closed six learning centers this quarter so we’re actually doing it with fewer learning centers than the last year.
In the last year still we are up 89 learning centers. So if we can still get higher utilization rates, the margin should be applicable.
Operator
Thank you. And the next question comes from the line of Clara Fan of Jefferies.
Please ask your question.
Clara Fan - Jefferies
I got a question, you mentioned about intensifying local competition particularly in large cities such as Beijing and Shanghai, just wondering if you can give a small color on it, mainly (inaudible) business or you're other businesses? Thank you.
Louis Hsieh
Yes, I think typical, in our business our strongest competitors are local competitors. Primarily in kids English and middle school test prep but also in overseas test prep and this is something we mentioned a couple of quarters ago, and we have told the investors who have asked about this as well, is that a lot of the public schools in China, in the high school level have been teaching kids SAT and basically carousing their public school students to take their classes and move New Oriental, SAT and TOEFL classes, that's hurdle oversea test prep business over the last few years.
But like as I said earlier they are beginning to back lash against those public schools, because the students are not scoring as high as they should because of the poor preparation study and so a lot of the parents are complaining, and so we have heard many stories about how the rate of acceptance in to some U.S. colleges is exceptionally low this year for the schools who have forcing their students to take their SAT class.
So one of our solutions to this is many of those public schools have now come to New Oriental and asked to cooperate with us. So they will basically provide the students in the classroom and we will provide the teacher in a 50/50 arrangement.
So we're considering that now to (inaudible) the local competition from the public schools. So, I think other than that our competition in K-12 sector is usually one strong local player.
And so like I said, we've said in previous years, we expect to be number one and number two in all our key markets in every city we play in within five to six years of entering that city, and that's still our target and largely successful in that endeavor.
Clara Fan - Jefferies
So we see that in terms of overseas test part, we don't see that competition actually persist in the long term.
Louis Hsieh
Well I don't think it's sustainable what the public schools are doing, because their quality is inferior. And the Chinese consumers won't put up with this for long.
So I believe it's not sustainable and many of those parents are actually secretly sending their kids in New Oriental any way. So I think it's not, the public competition is not sustainable in the long term.
The second source of competition in overseas also and some of it is responsible for our weakness in Shanghai. Our own overseas test prep head in Shanghai defected and started his own school picking many of our star teachers.
That's part of the reason why Shanghai has had difficulty over the last couple of years; we're talking about a year and a half, two years ago. So that's also hurt us.
So competition from defecting teachers is also competition from local public schools, thus hurting the overseas sector. And despite all that it still grows 28% revenue.
You can see that even in the face of intense competition our brand name and our results speaks for itself.
Clara Fan - Jefferies
And I just want to clarify on your center openings plan. So we are not going to open any centers in the first half of this fiscal year or are we going to start opening in second half this year?
And I am wondering whether they will be closing by anymore unprofitable centers and profitable centers will reopen. Thank you.
Louis Hsieh
Yes the second one is easier. We will continue to close down underperforming learning centers.
The other thing we will do is we will open up a couple of learning centers in fast growing cities, maybe before October, if it justifies it based on the profit level of the city and the utilization rates. So I think we will open a few, but the bulk of the 20 to 40 will come in late October, early November.
And the reason for that is last year we opened 89 learning centers in August, be in the August quarter. And those learning centers got mostly empty in Q2 which was the slowest seasonal quarter than the fall.
And so it doesn't make any sense to, bear that cost across a slower quarter. So we want to begin to ramp up in Q2 in the fall in order to prep for the busy winter and spring quarters.
So our plan will be to backend load the learning centers towards the end of this calendar year. But we may open a couple in fast growing cities before then.
Clara Fan - Jefferies
And what type of centers will be easy majority?
Louis Hsieh
Most of them will be K-12 centers multiple use, so they will be small class one-on-one and maybe a couple of large classrooms. So there will be typically 1,000 to 1,500 square meters covering three floors of the building.
So that's the typical center.
Operator
Thank you. The next question comes from the line of Vivian Hao of Deutsche Bank.
Please ask your question.
Vivian Hao - Deutsche Bank
I have two questions. So out of the total 6 to 7% of enrollments (inaudible) submitted for FY14, can you give us a directional guidance of how much will be for the overseas test prep, second and first year as relative to Q12?
And also the second question is, given (inaudible) non-performing learning centers are closing or have already been closed or the VIP centers, do you see that 40% of the large classes, I mean including enrollment in large classes to start to stabilize or it will continue to make a percentage of our large class enrollment will continue to be lower?
Louis Hsieh
Yes, I think the second question, yes the large classes will continue to be lower because the K-12 is outgrowing the declining adult English business and the overseas test prep business as far as enrollment goes. So, I think to answer your first question, we expect K-12 enrollments to increase probably around 15% or so, in the next fiscal year, which means the adult’s enrollment will continue to decline probably in the mid-teens and overseas test prep should grow somewhere between probably low single-digits on the growth side.
So the growth will come almost all from K-12 as far as enrollments goes. But overseas study consulting and overseas test prep will still grow probably 20% to 25% in revenues whereas K-12 should grow over 30%.
And that’s why we are assuming we continue to execute and the market holds up our revenue for the full year should be around 20% or higher.
Operator
And the next question comes from the line of Tian Hou of T.H. Capital.
Please ask your question.
Tian Hou - T.H. Capital
The question regarding the guidance, so the guidance is 16% to 21% year-on-year growth. So the delta is kind of, like a five percentage points.
And I just, I wonder under what kind of circumstances the company expects growth could be 16% and under what kind of circumstances it could be 21%?
Louis Hsieh
Okay. Thank you, Tian.
Our normal guidance range is 5%. So, I think we’re probably currently at about 18%.
So, if we have a good next few weeks because remember the summer has two halves, the July month and the August month. So the July month, the enrollments were lackluster but the August month the starting the enrollments are much better.
So, it depends on the next two or three weeks whether we track 20% or we stay at 17% to 18%.
Tian Hou - T.H. Capital
Okay.
Louis Hsieh
So, we give a 5% range. So it’s pretty normal.
Tian Hou - T.H. Capital
I see. Okay.
So, one follow-up question is really on the trends of English education so as Chinese kids they started to learn English when there were really young. And so I could imagine more and more students will meet overseas testing or English training less as they become adult.
So, do you see trends that education go to a younger age kid like shifting from the much older age to much younger age?
Louis Hsieh
You’re actually correct, and that part of our business has been declining, it’s been declining for years for exactly the reason you just mentioned it. So that’s why we went into the kids business 10 years ago because the choice for us either we eat our own young or let somebody else do it.
So we didn’t want our market to be cannibalized by someone else, so we are the market leader in kids English. So we’re going to just either we shift to the revenue from the adult level down to the kids level.
And actually we’re getting more revenue from kids levels because they study English for many, many years.
Tian Hou - T.H. Capital
Okay. So, compared with the margin of education like full adult and the kids, so are they at a similar level of margin or do you expect higher margin from adults?
Louis Hsieh
Yes, we do get higher margin from adults and that’s why we keep the business, right. And it’s also because of the mature business, so we’re not expanding at all.
So the adult business will have, typically will have operating margins between 20% - 25% whereas the kids are in the past were around 10% to 15% and are improving now as we slowdown our learning center growth. So, the adult margin will be higher because the kids, the maximum class five is usually typically 25 and most classes have between 30 and 50 students.
And also the price point is much lower; it’s about priced at US$150 per class. So it is lower margin.
But if we get the utilization rates up it’s still at a very healthy margin of over 15% and that’s one of our goals. Because the UCAN margins are actually very high and that’s the fastest growing business.
The middle and high school business where kids typically have to take six subjects for the gaokao or the zhongkao, the margins are actually quite high; they are 20% - 25% and growing. So eventually I think our cash cow will become the middle and high school business the UCAN business and the kids will continue to be a feeder into that business.
It’s still profitable, we’ll do it. But the real profit driver will be UCAN and even surpass (inaudible) are profitable overseas test prep in the next two to three years.
Operator
Thank you. And the next question comes from the line of Trace Urdan of Wells Fargo Securities.
Please ask your question.
Trace Urdan - Wells Fargo Securities
Thanks. My question was regarding, that you referenced slowing economic growth in your guidance and I was wondering if that was just sort of a prudent statement or whether you’re actually seeing evidence of that in terms of consumer behavior?
And if you are, what form that’s taking in terms of weaker economy. Is this in terms of volumes or people inclined to spend less in certain areas, can you elaborate?
Louis Hsieh
I think in the audience it’s something you kind of throw in because it’s one that’s contained. I don’t know.
I mean we definitely have seen a slowdown enrollments in May, and also for the first few weeks of June. So that, that’s just a fact.
We don’t know all the underlying reasons, so we kind of cover our basis, right. I think let`s say the last two or three weeks things have picked up again.
So, it's hard to tell. I think in general from all the anecdotal evidence is that parents are being more discriminating in their purchases.
And so you get the number that we’re a very high end purchaser, we’re the more expensive typically or one of the most expensive in every market we’re in. And so some parents will maybe trade down to a small class instead of a one on one or they make sure that it’s a big class out of a smaller class.
But I think the student will soon get the education, they will get the test prep. It just may not be in as expensive a format.
And some people may turn away from your rental viewer to expensive and take a lower priced alternative, right. And so I think it’s just to be prudent we put that in.
But for those who think that our business is slowing I mean if we really wanted to pick up that revenue we just lower our price but there are many ways for us to accelerate revenue and one is to open learning center, one is to lower our price and capture the middle of the market which we are not willing to do yet. Because as I said we want to balance high profit margin model, we want to have the highest profit margin in the industry and have the premium bread.
So we resisted our temptation.
Operator
Thank you. And the next question comes from the line of Charles Cartledge of Sloane Robinson.
Please ask your question.
Charles Cartledge - Sloane Robinson
I’m curious to ask, so thank you first of all for turning capital to shareholders best by way of the dividend and share buyback. By my estimate you put about $640 million of net cash but there is massive customer deposits if you like.
What’s your intention going forward and cognizant to the fact it's hard to move money out of China now. So I guess if you tell us how much money is offshore?
Is that how you’re paying this $54 million and will…?
Louis Hsieh
Well we don’t have any money offshore, very little just enough for expenses. So, the money we're giving to dividend is surplus funds that was moved from the VIE in to the (inaudible) and is moving that offshore.
So, we will take that fund.
Charles Cartledge - Sloane Robinson
Okay. And how easy is that process as what implications might that have for a current dividend of some kind as opposed to two special as Steve announced.
Louis Hsieh
Well, I think as we would unlikely announce a recurring dividend but we most likely we’ll assess every year after our Q4 earnings how much cash flow we have for the year and how much we will need for the following year to and how much we’ll need if it’s a security blanket, and then we will distribute percentage of what’s left. So, I think as I told you and other investors in past, we would like to pick every fiscal year see how much we make and see how much we can prudently distribute to shareholders whether in the form of a dividend or share buyback.
The share buyback would be opportunistically whenever the share price falls we’ll be able to consider that. We talk about this with every Board member and every quarter.
Charles Cartledge - Sloane Robinson
Okay. So, just thinking through, if you have a security blanket and I would love to hear, how much you feel you need, I think previously is in the order of 300 or 400.
And given your growth rates and the cash generous just to make sure the business, would it not be possible therefore for the dividends with the base of say I mean dividend and share buyback together $104 million this financial year. That should grow faster than revenues because if you can think about it as an element of operating leverage there with the security blanket.
Louis Hsieh
This year we generate 134 million in net income, we paid out 104 million, that’s roughly (inaudible), that's a high tier ratio. So, in terms of the board's thinking about the business and the competitive threats and other items.
And so, I think we will obviously evaluate this as a year.
Charles Cartledge - Sloane Robinson
So, it doesn’t address. That’s how I take your point, totally doesn’t address the stock of excess cash on your balance sheet.
Louis Hsieh
So I don't know what's going to happen in the future, I know I need $350 million that's for fixed cost base if I want to get into it and we need to pay keep our doors open full year. The rest is probably about 200 million, 300 million in excess cash is correct.
But having a little bit of excess cash is not a bad thing.
Charles Cartledge - Sloane Robinson
Sure. And does it restrict in any way that local requirement because I remember.
Louis Hsieh
It is, small part of it is restrictive as sort of the reinvestment requirement for educating companies and some of it is locked up because there is done in tax free manner. So over the 600 million probably, 250 million is somewhat restricted by that.
Charles Cartledge - Sloane Robinson
Okay.
Louis Hsieh
But that money can be used as part of the study - as well, don't forget.
Operator
And the last question comes from the line of Mr. Jianning Lu Flowering Tree.
Please ask your question.
Jianning Lu - Flowering Tree
In the call you mentioned that 125% of utilization rates. So I just want to know like what long-term utilization rate is after new--profitable learning centers?
And then even at 25% how--or can management further includes the utilization rate? That's question number two is I guess the enrollment of 2.5 million is regarding the cost of enrollment right.
You're talking about the number of students and cost enrollment per student in China you are saying that's each student now one more what's the trend? Thank you.
Louis Hsieh
I think the trend is that student in China for multiple classes especially between age of six to 18. So the kids in the middle and high school students stay for many years in center for more and more classes as they get older, so that was the whole basis of this one stop shop, so that's definitely the trend.
The 2.5 million enrollment, 1.5 million is K-12 . And so that is still enrollments are two multiple years, multiple recurring, enrollment .
As far as utilization rate your first question, we didn't track it this way before, the reason is calendar classes are one if the class gets opened in the year. So that's why much higher--we see very detailed, much more accurate way.
So I don't know the utilization in past years because we didn't count it this way. But the new way is absolutely accurate, to count every hour seat in that learning center.
And if we can get the 25% utilization our operating margin will be north of 25%. So there is a huge room to improve.
But like I said, it's hard for us to execute that perfectly. I think Beijing has the highest utilization rate.
If I had to guess, I don't know. Because we don't have a full year yet, but it is probably close to 25% and not counting corporate overhead 41% operating margin .
So there's huge improvement, potential but it's hard to execute on that potential.
Jianning Lu - Flowering Tree
But now I mean can I do not understand from business perspective, why is it good to improve the utilization rates more than 25%?
Louis Hsieh
Because you can take a look at some of our one-on-one centers, right? It's not cost effective to open a center unless you have 30 to 50 seats like in the first floor for VIP center.
But right now you probably have 10 students in one time and we want more seats because it in peak season, like in Q4 you may have 15 students or 20 students in those seats and you have plan for growth because you are starting at least for five years, right five years to 10 years. So you got a plan that it's going to fill up over three or four years.
And so that kind of analysis that it's hard to fill up because this is --. I think the number is that we open 500 learning centers not this year but in the previous three years.
It takes two or three years for them to mature, and you can get to 20% enrollment . So you got most of our networks still not mature yet.
So those two factors of most of learning centers were open after 2009 and they are not fully utilized yet. Second thing is that you have to build bigger than you want because if five years, seven years leases, we don't you can get the option to expand.
It's not, most members don't want to do that. So we kind of take the space upfront expecting to grow in the next three to five years.
And so it takes that time to fill up. And also, like I said for kids class we have many 325 seats but the average is only 13 to 14.
And so if we for the peak classes there is certain times it's been flat, if you don't let them in the class right you are cutting up on your revenue so it's still cost effective for us to have to have 25 seats almost half or empty most of the time.
Operator
Thank you. We’re now approaching the end of the conference call.
I’ll now turn the call over to New Oriental’s President and CFO, Louis Hsieh for his closing remarks. Mr.
Hsieh?
Louis Hsieh
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.