Earnings Call Transcript
New Oriental Education & Technology Group Inc. (EDU)
Earnings Call Transcript - EDU Q2 2020
Operator, Operator
Good evening and thank you for standing by for the New Oriental’s FY 2020 Second Quarter and Interim Results 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 meeting over to your host for today's conference, Ms. Sisi Zhao.
Sisi Zhao, Host
Thank you. Hello, everyone, and welcome to New Oriental's second fiscal quarter 2020 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 view we express 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, the 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.
Stephen Yang, CFO
Thank you, Sisi. Hello, everyone and thank you for joining us on the call. We are very pleased to report a set of solid financial results in the second fiscal quarter of this year, delivering both accelerated top-line growth and continued operating margin expansion. Total net revenue growth was $785.2 million, representing a growth of 31.5% or 34.8% if measured in RMB, exceeding the high end of our expected range. Net revenues from educational programs and services for the second quarter were $723.3 million, representing a 33.0% increase year-over-year. The growth was mainly driven by an increase in student enrollments in K-12 after-school tutoring courses, which continued its strong momentum and achieved a year-over-year revenue growth of approximately 46% in dollar terms or 49% if computed in RMB. We continued to be guided by our Optimize the Market strategy in this quarter and carried out our capacity expansion in cities where we see potential for rapid growth and strong profitability. During this quarter, we added a net of 41 learning centers in existing cities, opened a new training school in the city of Huizhou, and a dual-teacher model school in the city of Chengde. By the end of this quarter, the total square meters of classroom area increased by approximately 25% year-over-year, and 6% quarter-over-quarter. Total student enrollments in academic subjects tutoring and test preparation courses in the second fiscal quarter of 2020 increased by 63.3% year-over-year to approximately 3,789,200. Please note that the higher-than-normal increase in student enrollments is primarily due to the division of the autumn semester into two parts, meaning that the student enrollments are reported separately and fall into separate quarters. At the same time, we continued our efforts in upgrading our online-merger-offline standardized classroom teaching system, while the interactive courseware in the POP Kids program was rolled out to more cities. We are very encouraged to have received positive feedback from our customers and see sustained improvement in customer retention rate. We also continued to make strategic investments into our dual-teacher model classes as well as new initiatives in K-12 tutoring, our pure online education platform, Koolearn.com, to leverage our advanced teaching resources in lower-tier cities and those in remote areas. Following last quarter's strong bottom line performance, we once again achieved year-over-year operating margin expansion in this quarter. During this quarter, we recorded non-GAAP operating income of $36.5 million compared to a loss of $14.9 million in the same period of last year. Non-GAAP operating margin rose by 720 basis points to 4.7% from negative 2.5% a year ago. The continued margin expansion is mainly driven by better leverage in classroom rental and related operating expenses just as we consistently improve the utilization of facilities. In addition, supported by a standardized, modularized, and systemized operating process, we achieved an outstanding improvement in operational efficiency within each key business unit. We are confident that we will be able to deliver continued margin expansion and generate sustainable long-term value for our customers and shareholders. Per program blended ASP, which is cash revenue divided by total student enrollments, decreased by about 10% year-over-year. We’d like to note that the lower-than-normal blended ASP is primarily due to the change in the tuition fee collection schedule for our K-12 after-school tutoring courses, as explained above. The number of students we recruited and the amount of fees collected during the quarter reflects the second half of the autumn semester, winter semester, and the first half of the spring semester. Therefore, our blended ASP for the second quarter of 2020 appears to be lower. Hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 6% year-over-year in RMB terms. To provide a breakdown of hourly blended ASP, please note that U-Can program increased by 7%, POP Kids increased by 11%, and overseas test prep program increased by 7%, all year-over-year in RMB terms. Now, let's move on to the second quarter performance across our individual business lines. As mentioned earlier, our key revenue driver, K-12 all subjects afterschool tutoring business, achieved year-over-year revenue growth of 46% in dollar terms or 49% in RMB terms. Breaking down, the U-Can middle school/high school all-subjects after-school tutoring business recorded a revenue increase of 43% in dollar terms or 46% in RMB terms for the quarter. Our student enrollment grew approximately 55% year-over-year for the quarter. Our POP Kids program delivered outstanding results with revenue up by about 51% in dollar terms or 55% in RMB terms for the quarter. Enrollment in the program went up about 87% for the quarter. The overseas test prep recorded a revenue increase of 3% in dollar terms or 5% in RMB terms for the quarter. The consulting business recorded revenue growth of about 1% in dollar terms or 4% in RMB terms year-over-year for the quarter. Finally, VIP personalized classes business recorded revenue growth of about 37% year-over-year in dollar terms or 40% in RMB terms year-over-year for the quarter. Next, I'll provide some updates on the progress we're making with our optimized market strategy. Beginning with our offline business this quarter, as mentioned earlier, we added a net of 41 learning centers in existing cities, opened a new training school in the city of Huizhou, and a dual-teacher model school in the city of Chengde. Altogether, this increased the total square meters of classroom area by approximately 25% year-over-year and 6% quarter-over-quarter by the end of this quarter. By the end of Q2 2020, the dual-teacher class model has been introduced into the POP Kids program in 48 existing cities, for U-Can program in 30 existing cities, and for both POP Kids and U-Can K-12 businesses in 7 new cities. The initiative supported increased market penetration in those markets we have tapped into. We also saw improved customer retention rate and scalability of this new model. With this proven result, we will continue this strategy in the rest of the year. On the digital technologies front, we’ve added $44 million in the quarter to improve and maintain our online-merger-offline, called OMO standardized classroom teaching system. Most of the investments were reported under G&A expenses. Furthermore, we also made stable progress in the pure online Koolearn.com business line and other supplementary online educational products, which is experiencing growing market demand. More resources are invested into executing new initiatives in the pure online K-12 after-school tutoring business in fiscal year 2020. The investment includes constant development, teaching, recruiting, and training, sales and marketing, R&D, and other necessary costs and expenses to drive the growth for new pure online programs. With these programs, we're able to reach more students in low-tier cities in an interactive and scalable manner. We believe this will help Koolearn.com to gain new market share in the online education space and drive top-line growth. Now, let me walk you through the other key financial details for the second quarter. Operating costs and expenses for the quarter were $759.9 million, representing a 21.1% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $748.7 million, representing a 22.0% increase year-over-year. Cost of revenues increased by 19.6% year-over-year to $359 million, primarily due to increases in teachers' compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation. Selling and marketing expenses increased by 17.7% year-over-year to $107.8 million. G&A expenses for the quarter increased by 24.4% year-over-year to $293.1 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $282.1 million, representing a 27.1% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 18.1% to $11.2 million in the second fiscal quarter of 2020. Operating income was $25.3 million, representing a 188.6% increase year-over-year. Non-GAAP income from operations for the quarter was $36.5 million, representing a 345.6% increase in the year-over-year. Operating margin for the quarter was 3.2%, compared to a negative 4.8% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 4.7%, compared to a negative 2.5% in the same period of the prior fiscal year. Net income attributable to New Oriental for the quarter was $53.4 million, representing a 306.9% increase from the same period of the prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental was $0.34 and $0.34, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $57 million, representing a 147.8% increase from the same period of the prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental was $0.36 and $0.36, respectively. Net operating cash flow for the second quarter of 2020 was approximately $291.8 million. Capital expenditures for the quarter were $52.4 million, which were primarily attributable to the opening of 78 facilities and new learning centers and renovations at the existing learning centers. Turning to balance sheet, as of November 30, 2019, New Oriental had cash and cash equivalents of $1,047.6 million, as compared to $1,414.2 million as of May 31, 2019. In addition, the Company had $348.3 million in term deposits and $2,221.5 million in short-term investments. 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 second quarter of fiscal year 2020 was $1,570.4 million, an increase of 25.6%, as compared to $1,250.3 million at the end of the second quarter of fiscal year 2019. Before moving on to our outlook and guidance for the third quarter, I would like to provide some updates on Koolearn. Koolearn Technology Holdings Limited, a subsidiary of New Oriental, which provides online extracurricular education service in China, also announced its interim results for the fiscal year 2020 earlier today. I'd like to emphasize that Koolearn is a very important platform for New Oriental, and we’re optimistic about the opportunities in the online education market and confident in our investments into the platform. During the period, Koolearn has undergone a process of restructuring its college education business line, which had some negative impact on Koolearn near-term revenue growth. Koolearn also continued to invest more resources in executing new initiatives in the areas of content development, teachers recruitment and training, sales and marketing, research and development, and other necessary costs and expenses to drive the growth of new online programs. For the first six months ended November 30, 2019 Koolearn recorded an 18.8% year-over-year increase in revenue to RMB 567.6 million or $81 million. Gross profit was RMB 317.1 million or $45.2 million. Loss of the period was RMB 87.5 million or $12.5 million compared to a profit of RMB 36.2 million in the same period of the prior fiscal year. It's encouraging that one of our K-12 business new initiatives, location-based live interactive after-school tutoring courses or Dongfang Youbiao, DFUB, have been rolled out to 128 cities in China and recorded enrollment growth of 186.2% year-over-year. For more details, please refer to Koolearn's financial results announcement in full. Looking ahead into the next quarter and the rest of the fiscal year 2020, we’ll continue to be guided by our Optimize the Market strategy and further ride upon the success and momentum we have built. We're confident about capturing a wider range of market opportunities moving forward. To provide more detail on our areas of focus for the rest of the year. First, we will continue to expand our offline business. We aim to add around 10% to 25% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-2 business in existing cities. In addition, we’ll continue to roll out our dual-teacher model schools to a number of new low-tier cities in certain provinces for the whole year. Second, we’ll continue to leverage our investments into digital technologies and introduce our online-merge-offline system to more offline language training and test offerings, especially for our K-12 tutoring and overseas key businesses. We’ll continue to make investments, and we believe that total spending in absolute dollar terms in fiscal year 2020 will increase compared to the prior fiscal year. Furthermore, we’ll continue to invest and execute new initiatives, including product development, teacher recruiting, training, R&D, as well as sales and marketing expenses in the pure online K-12 after-school tutoring business on our Koolearn.com. Third, our top priority will remain as the focus on optimizing the utilization of facilities and controlling costs and expenses across the Company to drive continued margin expansion and increased operational efficiency. The new facilities built in the last two fiscal years are being ramped up more efficiently than before. We expect our non-GAAP operating margin of the offline language training and test prep business to continue to expand in the second half of fiscal year 2020. This improvement is expected to cover the margin pressure resulting from our online investment in Koolearn.com. On the whole, we expect our overall non-GAAP operating margin to continue to improve year-over-year in fiscal year 2020 compared to the year-over-year decline in the last two fiscal years. Fourth, as of today, we have decided to move two days of classes in our Wuhan New Oriental School from before the Chinese New Year to after the Chinese New Year in view of the disease cases. Classes will be taught via our online live broadcasting technology if the learning centers operations remain suspended after the Chinese New Year. Please note that classes in cities except Wuhan have not been adjusted or suspended. The health and safety of our students is our top priority, and we will continue to closely monitor the situation and cooperate with the relevant authorities. Also note, we have taken the impact from the conditions in Wuhan into consideration in our third-quarter guidance. The impact is immaterial, based on our current estimation. Finally, the recent RMB depreciation against the U.S. dollar might impact our earnings in dollar terms for the third quarter of 2020. Finally, I would like to emphasize we have great confidence in the fundamentals of our business, which we believe will continue to remain strong. As we continue to execute our Optimize the Market strategy, we are certain that New Oriental will continue to capture the sustainable growth opportunities in the market and deliver long-term value for our shareholders. Looking at the near term and our expectations for the next quarter. We expect total net revenues in the third quarter of fiscal year 2020 to be in the range of $983 million to $1,006.4 million, representing year-over-year growth in the range of 23% to 26%. If not taking into consideration the impact of the potential change in exchange rate between RMB and U.S. dollars, the projected revenue growth rate in our functional RMB - in our functional currency RMB, it is expected to be in the range of 26% to 29% for the quarter of fiscal year 2020. The exchange rate used to calculate expected revenue for the third quarter for fiscal year 2020 is 6.95. The historical exchange rate used to calculate revenues for the third quarter of fiscal year 2019 was 6.81. I must mention that this expectation reflects New Oriental’s current and preliminary view, which is subject to change. At this point, I'll take your questions. Operator, please open the call for this. Thank you.
Operator, Operator
The question-and-answer session of this conference call will start shortly. To ensure fairness to all callers wishing to ask questions, we will take one question at a time from each caller. If you have more than one question, we kindly ask that you join the question queue again after your first question has been answered. Your first question comes from the line of Mark Li from Citi. Please go ahead with your question.
Mark Li, Analyst
Hi, management. Congratulations on the very strong margin performance for this quarter. We think it’s beaten guidance pretty nicely. May I know what are the major reasons for the non-GAAP operating margin beat for this quarter? Also, I would like to know maybe our revenue guidance breakdown across different segments? Thank you.
Stephen Yang, CFO
Okay, Mark. Yes. We’ve beaten the margin guidance a lot. Our non-GAAP operating margin rose by 720 basis points in this quarter. I think it's because of the following reasons. Number one is the continued margin expansion is mainly driven by the better utilization of the facilities. Typically, our top-line growth is over 30% year-over-year in RMB terms, but the expansion in the last trailing 12 months is just 25%. Also, number two is we’ve built a standardized and modularized and systemized operating process. So, you see the results. We achieved outstanding improvements in operational efficiencies, and we get a lot of leverage on the selling, marketing, and G&A expenses. Finally, we're seeing revenue acceleration. Typically, we're taking market share from the small players in the market. So, the revenues are very good. And I think those three reasons got us the better results of the margin expansion. As I mentioned in the prepared remarks, in the rest of the year, even in the Q3 and Q2 in the fiscal year running, I think we’ve still got more leverage going forward. So, we believe we will have margin expansion in the rest of this fiscal year, and even for fiscal year 2021 I think our margin will see expansion as this year, okay? And the revenue breakdown, yes, in the Q3 revenue guidance, I think the K-12 business will grow by 40% in RMB terms. What I’m saying is in RMB terms year-over-year growth 40%, and for overseas test prep, I think it will be low-single-digit growth. And for the domestic test prep, it will be down by let’s say 3% to 4%. And the overseas consulting business will see growth of over 20%. So, this is the breakdown of the Q3 guidance.
Operator, Operator
Your next question comes from the line of Yuzhong Gao. Please ask your question.
Yuzhong Gao, Analyst
Hey, Stephen, Sisi. Congrats on the very strong results. So, we noticed that you seem to have revised up your capacity expansion target from 20% to 25%. So, how should we think about the margin expansion scale in the second half of fiscal year '20?
Stephen Yang, CFO
Okay. Yes. This quarter, the quarter-over-quarter expansion was 6% combined with 3% in Q1. So, we got 9% in the first half of this fiscal year. Typically, in terms of the seasonality, we open more learning centers in the second half of the year, so it's more backloaded. And so, I believe the whole year expansion plan will be somewhere around 20% to 25%. Actually, it's close to 25%. But, the top-line growth will be around 30%. I think it’s impossible to get over 30% top-line growth in RMB terms. So, in the rest of the year, as I said, I think we do have more leverage on the GP level and the SG&A level. But typically we don’t give detailed guidance of the margin expansion in the next quarter. But I believe we can get margin expansion in the rest of the year and the year after.
Operator, Operator
Your next question comes from the line of Tian Hou of T.H. Capital. Please ask your question.
Tian Hou, Analyst
The question is related to your regional expansion. So now we have more than 1,300 learning centers. For the newly planned learning centers, where are those centers going to be located, in what kind of region? To support the additional expansion, 20% to 25%, how do you prepare your teacher force, the team of teachers? So, that's the question related to expansion.
Stephen Yang, CFO
Yes. Tian Hou, we have 1,300 learning centers in total, and we plan to open about 20% to 25% new capacity in one year. Most of the new learning centers we plan to open going forward will be happening in existing cities. Internally, we only allow the well-performing schools to open more learning centers in those cities. However, we have another business model called Dongfang Youbiao, which belongs to Koolearn. We will open more of the new business in low-tier cities. There are two ways. For traditional offline business, we’ll open more schools or learning centers in existing cities. Regarding the teacher resources, we believe we pay the best in the market to our teachers. Additionally, since last year, we built up the online teachers’ training system. This means we have more ability to generate or produce more qualified teachers than before. We believe we have the qualified teachers to support the new openings of the new learning centers going forward.
Operator, Operator
Your next question comes from the line of Alex Liu of China Renaissance. Please ask your question.
Alex Liu, Analyst
I just wanted to follow up first on Tian's question. Could you share more color on how fast the capacity growth in top cities, for example, Beijing is right now? And a follow-up question, I think the overseas test business is growing, if I remember correctly, it’s low-single-digit growth this quarter. May I know what's the reason behind this seemingly a little bit unexciting growth in the past few quarters? Thank you.
Stephen Yang, CFO
Thanks, Alex. We have opened learning centers in many locations, specifically in cities that showed improvement in the past year. This includes top-tier cities as well as some tier-3 and tier-4 cities. Our only criterion for opening new centers is the previous year's performance of the relevant schools. There is still significant potential to establish more offline learning centers in major cities like Beijing, Shanghai, Wuhan, and Guangzhou. Regarding our overseas test preparation, this quarter showed only a 5% year-over-year growth in RMB, which is disappointing. The main factor affecting this is the shifting dynamics between the United States and China. Our non-U.S. business is facing challenges, while other subjects have remained stable; the U.S.-related business has not grown this quarter. I anticipate that growth will remain flat in the third quarter as well, and I believe this is the primary reason for our performance.
Alex Liu, Analyst
Okay. Sorry, one more follow-up. On the gross margin, there seems to be a notable jump this quarter. May I know what the driver is behind this notable improvement on the gross margin? Thank you.
Stephen Yang, CFO
Firstly, the revenue growth beat our guidance. As I said, we’re taking market share from small players and several schools provided very good numbers on this quarter for top-line growth. Certainly, if you compare the top-line growth with the expansion, capacity expansion, we achieved better leverage on the rental side. And yes, I think those are the two key reasons that explain the gross profit margin expansion. Okay.
Alex Liu, Analyst
Okay. Thank you.
Stephen Yang, CFO
Okay. Thank you, Alex.
Operator, Operator
Your next question comes from the line of Lucy Yu of Bank of America. Please ask your question.
Lucy Yu, Analyst
Hi, Stephen. I’ve got one question on the cross-scheduling. So, actually this year, Chinese New Year is earlier than last year. So, is it fair to say that we started our spring semester a little bit earlier than last year? So, theoretically, in February, we are seeing a more positive benefit from this kind of calendar shift, is that true? If so, can you give us a quantified impact on the cross-scheduling? Thank you.
Stephen Yang, CFO
I think yes. This year, the Chinese New Year is a little bit earlier. However, I believe the impact from the cross schedules is very small and minimal. I should mention that last year in Q2, we began to implement some facility movements and cross-scheduling changes, which caused some K-12 classes to be postponed from Q2 to Q3 last year. This means that while we have easier comparisons in Q2 this year, Q3 will present slightly tougher comparisons. Nonetheless, it's a seasonal change, just a minor difference; the issue is not a major concern.
Lucy Yu, Analyst
Okay. Thank you. And the second question is that in the first half, you have already expanded your non-GAAP operating margin by close to 5 percentage points. This is higher than your previous expectation of 1.5% to like 2% for the full year. So, is it fair to say, the risk is on the upside to your full-year guidance in terms of margin? Thank you.
Stephen Yang, CFO
Yes. I don't want to provide specific guidance for margin expectations in the second half of the year. However, we do expect to see margin expansion in Q3 and Q4. Overall, I believe that for the entire year, our margins will be better than we anticipated several months ago.
Operator, Operator
Your next question comes from the line of John Choi from Daiwa. Please go ahead with your question.
John Choi, Analyst
Thanks, Steve and Sisi, for taking my question. I would like to ask about your online operations. I understand Koolearn has announced plans to increase openings in lower-tier cities. Can you clarify if EDU and Koolearn will be increasing their investments in online? As a result, should we anticipate an increase in marketing expenses and user acquisition costs loaded towards the end of the fiscal year? Additionally, after more than a year of regulations impacting offline schools, are you observing improved visibility, particularly since the smaller competitors are being phased out? Consequently, are you seeing higher retention rates and better capacity growth in certain regions? Thank you.
Stephen Yang, CFO
Yes. The Koolearn investment, yes, this year, we started to invest in Koolearn.com, including content development for teachers’ training or R&D and some marketing expenses for this fiscal year. In the first half of the year, the margin drag from Koolearn to EDU was roughly 100 basis points. This is the margin impact from Koolearn for EDU. In the second half of the year we expect to still have some negative impacts on the margins from Koolearn. But we believe the margin expansion of the core business, our offline business, will cover the margin pressure from Koolearn. We believe that overall, our margins will expand in the rest of the year, even though we spend a lot on Koolearn. Your second question is about regulations. Last year, there were several new regulations, but as I said in the last two earnings calls, we have almost met all the requirements established by new regulations in almost all cities. We have seen some small players disappear from the market, and we have seen students during our classes who were the students from small players. So, I think our goal going forward is to provide better services to Chinese students. We believe we can take more market share from the old players in the market. Thank you.
Operator, Operator
Your next question comes from the line of Binnie Wong of HSBC. Please ask your question.
Binnie Wong, Analyst
The question here is about the changes in the online education landscape in 2020, particularly with the increase in competition among small and medium-sized companies due to rising user acquisition costs. How do you see our marketing strategy differing from our competitors? Additionally, concerning the slowdown in growth at Koolearn, do you think we will maintain this trend, or are there factors that could lead to a resurgence in online business growth? Thank you.
Stephen Yang, CFO
Okay. I think, firstly, Koolearn has been in a transition mode in the last two to three quarters. As you know, we changed the key members last year, and we prefer to keep the new management team members for more time. Education is a very special business. We don’t intend to rush into business by spending a lot on marketing activities. Even last year, we didn't attempt to burn money to acquire students. Moving forward, I think we will allow Koolearn to spend a little bit more on marketing. However, it's not a huge number. We prefer to make the more substantial investments in R&D and teacher training, or the product itself. This is our strategy.
Operator, Operator
Your next question comes from the line of Alex Xie of Credit Suisse. Please ask your question.
Alex Xie, Analyst
So, I'd like to ask about the magnitude of utilization rate improvement. I think, in the last quarter's earnings call, we mentioned it was 21% with a 2% year-over-year increase. Thank you.
Stephen Yang, CFO
Yes. This year the utilization rate is somewhere around 21%, which means we got a 200 basis point improvement in the utilization rates. That's why you see the margin expansion. Going forward, as I said, we plan to open 20% to 25% new learning centers, which we expect will bring us 30% top-line growth in RMB terms year-over-year. I think you will see the high utilization rate going forward in the remainder of this fiscal year and beyond.
Operator, Operator
Your next question comes from the line of Sheng Zhong of Morgan Stanley.
Sheng Zhong, Analyst
I wanted to ask a question about our dual-teacher model because you are still adding more dual-teacher models in cities. Can you share some operating data about the margin of the dual-teacher model and how many classes, on average, a teacher can teach in the dual-teacher model? At the same time, I noticed that you are still investing a lot in your digital technology. I wonder if this is partly because of this dual-teacher model. If possible, can you share more color on the spending going forward?
Stephen Yang, CFO
Okay. Yes, with the dual-teacher model. We changed our strategy last year, focusing more on the dual-teacher model in Hubei and Hunan. So now, we have seven low-tier cities for POP Kids and U-Can programs adopting the dual-teacher model. Currently, the revenue contribution from the dual-teacher model is very small. The growth is high, but revenue contribution is still modest. At this point, I think it's too early to comment on the margin of the dual-teacher model, since it's still in the early stage. But I believe dual-teacher model margins should be higher than the offline business. This quarter, we invested $44 million in the OMO ecosystem. I think this is on track because we started investing in OMO about three to four years ago, and we began to bear fruits since last year. I think this year's results are very good. For the whole year, I believe we planned to spend around $150 million to $160 million, which is a bit higher than we expected several months ago. However, I think even though we spend a little more, we should still see offline school margin expansion, so that would be okay. We'll see overall margin expansion, even though we spent a little more.
Sheng Zhong, Analyst
Yes. We're happy to see you spending more on technology improvements. Can you give me some color on the spending areas of our technology?
Stephen Yang, CFO
Typically, we are hiring more IT personnel and content development professionals in the head office to provide better products for offline schools and dual-teacher model schools. Moreover, we have hired new people to work for our AI department. Most of the investments we make are happening in the head office. However, we believe these investments will lead to better student retention rates going forward. We are confident that the money we spend today will result in higher quality products in the future.
Operator, Operator
Your next question comes from the line of Hugo Shen of Macquarie.
Hugo Shen, Analyst
I wonder if management could give us the breakdown of enrollment growth by business in the quarter.
Stephen Yang, CFO
Enrollment. Do we disclose the enrollment breakdown?
Sisi Zhao, Host
You can send an email to me, and I'll send the details after the call.
Hugo Shen, Analyst
Okay. Thank you.
Operator, Operator
Your next question comes from the line of Felix Liu of UBS.
Felix Liu, Analyst
So, two quick questions for me. One is that you mentioned the ramp-up is getting faster than expected. Could you share the latest timeline to ramp up a new center? The second one is a follow-up to the previous question on the OMO investment. I understand a lot of the costs are in staff salaries. Going forward, if we look at the second half of next year, do we plan to further increase headcount, or is it likely to stay at this level?
Stephen Yang, CFO
Yes. Historically, two to three years ago, we needed 12 months to reach the breakeven point for new learning centers. But now, it's only taking five to seven months to reach that breakeven point. So that means we are ramping up new learning centers faster than before. I believe this is one of the reasons why we decided to open more learning centers every year. As for your second question about OMO investments, yes, I think we will employ more qualified and talented people to work in the IT departments and content development teams, as well as in the AI department. Primarily, I think this is a good investment. We are spending more money today to secure a better future. However, I want to emphasize that overall spending will be controlled by the management team. We don’t want to waste money. Even though we are increasing our investment in OMO, we believe we will still see margin expansion in the second half of the year and the year afterward.
Felix Liu, Analyst
Okay, great. Thank you, and I'm glad to see we have the budget in the longer-term growth. Congratulations again on the strong quarter. Thank you.
Stephen Yang, CFO
Okay. Thank you, Felix.
Operator, Operator
Your next question comes from the line of Christine Cho of Goldman Sachs. Please ask your question.
Christine Cho, Analyst
Thanks, Stephen and Sisi. Just a quick question on the revenue guidance. You mentioned that you considered the Wuhan situation in terms of coming up with third quarter guidance. Can you give us a bit more detail here? Also, if this situation prolongs, what are some alternatives you can consider to mitigate the impact from this situation? Thank you.
Stephen Yang, CFO
Yes. Our Wuhan school actually decided today to move the two days of courses before the Chinese New Year to sometime after the Chinese New Year because of the new business. However, we have a plan B. Let's say, if after the Chinese New Year, we cannot run the business offline, we will make it up with online courses. Actually, we are already ready. However, so far, we have not made a decision on class adjustments or suspensions in other cities, except for Wuhan. So, Wuhan is the only one. Yes, we have taken some impact from this in Wuhan, but the amount is not material. Wuhan’s revenue contribution for New Oriental is 4%. Don't forget, 45 days have passed, and we have also made plan B to make up for this. So, I think the impact will be immaterial so far, based on our current estimation.
Christine Cho, Analyst
Thank you.
Stephen Yang, CFO
Thank you.
Operator, Operator
Your next question comes from the line of Youngrin Kim of CLSA. Please ask your question.
Youngrin Kim, Analyst
Hi, management. Congrats on the good quarter. I have two questions. The first is, how much of revenue growth is actually coming from organic growth versus taking market share from other small players? That's my first question. My second question is, I know in the past, you provided mid to long-term margin guidance of 17% to 19%. But, do you still stick by this margin guidance, or do you see room for increase?
Stephen Yang, CFO
The organic growth typically results in 5% to 10% new revenues in the first year after we open new learning centers, for example, if we open 20% new centers. The remainder comes from organic growth. We are not tracking the market share we gain from smaller competitors; our focus is on achieving a 30% top-line growth. Sisi, do you have the numbers?
Sisi Zhao, Host
No. It's hard to quantify. But we keep gaining market share from small players every day, almost every day. The market growth is around 10% to 15%. But our K-12 business is growing over 40%. So, definitely, the majority of the growth is from taking market share from other small players in each city.
Stephen Yang, CFO
As for the long-term margin guidance, we haven't changed the mid to long-term margin guidance. We keep it at 17%. This year, market expansion is better than we expected, and we are more optimistic about overall margin expansion in the rest of the year and the year after.
Youngrin Kim, Analyst
Thank you very much.
Stephen Yang, CFO
Thank you.
Operator, Operator
Your next question comes from the line of Joy Wei of 86 Research. Please ask your question.
Joy Wei, Analyst
Thank you for taking my question. So, my question is, again in the quarter, we saw that U-Can and POP Kids growth accelerated. What's driving that? Do you see more opportunities in terms of prospective cross offering and also product format? Thank you.
Stephen Yang, CFO
I think that there are several reasons. Number one is, as you recall from last quarter’s earnings call, the summer promotion and retention rate is 5% higher this year than last year. This is the number one reason. Number two, we are seeing higher student retention rates for both U-Can and POP Kids programs. Actually, the U-Can business retention rate is close to 80%, and the POP Kids retention rate is close to 90%. So, it's higher than those numbers from last year. Third, we haven't spent a lot on marketing expenses. Selling and marketing expenses increased just 17% this quarter. Typically, we rely on word of mouth to acquire new student enrollments, which means we're providing better products to the students than before. This brought us good results that exceeded our expectations.
Operator, Operator
We are now approaching the end of the conference call. I will now turn the call over to New Oriental's CFO, Mr. Stephen Yang, for his closing remarks.
Stephen Yang, CFO
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. Thank you, everyone.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.