Earnings Call Transcript
New Oriental Education & Technology Group Inc. (EDU)
Earnings Call Transcript - EDU Q4 2020
Operator, Operator
Good evening and thank you for standing by for New Oriental’s FY 2020 Fourth Quarter 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 like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao. Thank you. Please go ahead.
Sisi Zhao, Host
Thank you. Hello, everyone, and welcome to New Oriental’s fourth fiscal quarter 2020 earnings conference call. Our financial results for the periods were released earlier today and are available on the Company’s website as well as on Newswire Services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen will be available to answer your questions. Before we continue, please note that the discussion today will contain Forward-Looking Statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now turn the call over to Mr. Yang. Stephen, please go ahead.
Stephen Yang, CFO
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Despite the outbreak of the COVID-19 pandemic starting from March, we posted continuing pressure on all business across the globe, including ours. We are pleased to report a set of financial results in the fourth fiscal quarter of this fiscal year that is in line with our expectations. Total net revenue was $798.5 million, a slight difference of 5.3% in dollar terms or 1% in RMB terms. A mix of results amounted to various business lines were reported, which I will elaborate on shortly. Total student enrollments in academic subjects tutoring and test preparation courses as seen in the fourth quarter of fiscal year 2020 decreased by 6.2% year-over-year to approximately 2,585,600. The lower than normal increase in the number of student enrollments is primarily due to the outbreak of COVID-19, which has made new customer acquisition in the quarter much more challenging. While the enrollment for the summer and autumn classes have also been delayed. In terms of bottom line performance, for the entire fiscal year of 2020, we managed to deliver an expansion of the non-GAAP operating margin of 70 basis points year-over-year to 12.9% compared to 12.2% for the prior fiscal year. However, for the fourth quarter of 2020, due to the negative impacts from the pandemic, our top line performance and the increased spending from operating free classes to promote our Koolearn kids of larger classes with the aim of taking more market share, our gross margin for the quarter was recorded at 51%, down 500 basis points year-over-year. Our non-GAAP operating margin for the quarter was 4.1%, down 810 basis points year-over-year and non-GAAP net margin for the quarter was 6.1%, down by 520 basis points year-over-year. In order to minimize the negative impacts caused by COVID-19 on our bottom line, we actively adjusted our operational strategy and made more efforts on cost control and reducing expenditures, especially for business lines facing bigger negative impacts in the near term. We believe that our continuous efforts will sustain us through this crisis and hopefully that the adverse effects on our business from the pandemic will subside gradually. Per program blend ASP, which is cash revenue divided by total student enrollment, decreased by 14.8% year-over-year in dollar terms. As for hourly blend ASP, which is GAAP revenue divided by the total teaching hours, decreased by approximately 3.5% year-over-year in our business. To provide the breakdown of the hourly blend ASP, please note that the class increased by 0.2%. U-Can VIP personalized classes increased by 3.5%, Pop Kids increased by 6.4%, and other programs increased by 16.1% year-over-year in RMB terms, comparing with the normal pricing increase of 5% to 8%. This quarter's blended ASP was lower than normal level mainly because of the bigger decline of the overseas test preparation program and U-Can VIP personalized classes business, which already had a blended ASP much higher than the other programs as well as the use of the two part support we provided for customers to migrate from offline class to online or OMO class during the winter. Now I would like to spend some time to talk about fourth quarter performance across our individual business lines in detail. In this unprecedented period, we see a mix of results among each of the business lines. Our K-12 total business achieved a year-over-year revenue growth of approximately 4% in dollar terms or 8% in RMB terms. Breaking down, the U-Can middle school/high school all subject business recorded revenue increase of approximately 1% in dollar terms or 5% in RMB terms for the quarter. Student enrollments grew approximately at 0.1% year-over-year for the quarter, excluding VIP one-on-one business. U-Can small class business grew by approximately 15% in dollar terms or 20% if measured in RMB. Our POP Kids program delivered outstanding results with revenue up by about 10% in dollar terms or 14% in RMB terms for the quarter. However, our overseas test prep and consulting business faced the most challenges due to the cancellation of overseas exams, suspension of overseas schools, and restrictions on travels. The overseas test prep business revenue declined by approximately 62% in dollar terms or 50% if measured in RMB. Despite the challenges, the consulting business grew by approximately 6% in dollar terms or 11% in RMB terms. And finally, the VIP personalized classes business reported a revenue decline of about 36% year-over-year in dollar terms or 44% in RMB terms year-over-year for the quarter. Our summer promotion strategy also delivered outstanding results. We offered low-priced experiential courses for multiple subjects in a total of about 69 cities targeting entryway for primary and secondary school students customers before this school year started. The promotion price is similar to last year at around RMB400. Even though we launched the summer promotion campaign almost one month later than we did last year due to the pandemic situation, this summer promotion remains very well received by the market. We are pleased to see that the promotion enrollment we brought in before the start of the summer holiday this year achieved a 20% increase compared to the same period last year, reaching 986,000 enrollments. The encouraging results have proven that such a sound and highly profitable strategy enables us to capture and increase our market share in the high-growth K-12 after-school children market, also putting us in a more favorable position during this market consolidation period. As certain players may lack financial or digital capabilities to sustain their operations during these challenging times. As students move to higher grades, we expect the continual improvements in retention rates and customer loyalty will drive revenue growth in the next three to six years. We will continue to be guided by our optimized market strategy this quarter and carry out capacity expansion where we see potential for rapid growth and strong profitability. This quarter, we added a net of 44 learning centers, opened a new training school in the city of Weihai, as well as four K-12 model schools in the city of Quanzhou. All together, this increases the total square meters of classroom area by approximately 26% year-over-year, 5% quarter-over-quarter by the end of this quarter. Despite such challenging times, we didn’t put our expansion plan on hold, as we want to ensure that we are fully prepared when the pandemic is over. Our service will resume with a strong presence across different Chinese cities. As the outbreak of COVID-19 has highlighted the importance of online education, we have placed more resources in this area and invested $36 million in the quarter to improve and maintain our OMO integrated education ecosystem. The investments also supported the migration of our offline class to small size online classes during the pandemic. Apart from the OMO infrastructure, we have allocated part of the resources in advance for training programs for our teachers to enhance their online and offline teaching skills, as we assume continued demand in the market. At the same time, we continue to upgrade our technology platforms and we will broaden the usage of the online tools and content in our OMO system across the whole network, as well as further develop the best teaching contents and courses to cater to online/offline integrated education methods. We are glad to see that our industry-leading OMO ecosystem has not only successfully managed to cushion most of the impact on our service and operating costs during the pandemic, but we also see the refund rate from cancellations has stabilized at a normal level as we entered into the spring semester. While our customer retention rates from winter to spring semester and from spring to summer semester are trending higher than the same period last year, which further demonstrates our customer satisfaction and the effectiveness of our online courses through our OMO system. To further tap into the huge market opportunities in online education, we continue to place more resources in Koolearn, executing our K-12 online after-school children business in fiscal year 2020. This includes content development, teacher recruiting and training, sales and marketing, R&D, and other necessary expenses to drive the goals of the new online programs. With these programs, we are able to reach out to more students in lower-tier cities in an interactive and scalable approach. We believe this will help koolearn.com gain new market share in the online education space. In the past quarter, Koolearn undertook a large-scale market promotion by offering three large-size online classes, attracting several times more traffic than usual. Koolearn also added a significant amount of customer service representatives and marketing staff to support the new initiatives in K-12 tutoring. These moves have raised our standing on the marketing front, but we believe these are necessary and understandable measures as we navigate through the ongoing pandemic situation. The future class model has been offered Pop Kids program in 48 existing cities, U-Can program in 29 existing cities, and for both Pop Kids and U-Can K-12 business in 10 new cities. We are pleased to note that the model has proven to be successful and has significantly increased market penetration in both markets we have tapped into. We also saw improved customer retention and scalability. With these proven results, we will continue this strategy going forward. Now, let me walk you through the other key financial details for the fourth quarter. Operating costs and expenses for the quarter were $788.2 million, representing a 2.9% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $765.9 million, representing a 3.5% increase year-over-year. Cost of revenue increased by 5.3% year-over-year to $391.1 million, primarily due to increased teacher 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 11.4% year-over-year to $118.0 million, primarily due to the addition of customer service representatives and marketing staff aimed at capturing new market opportunities during the pandemic, especially for the new initiatives in K-12 tutoring and the pure online advertising platform koolearn.com. General and administrative expenses for the quarter decreased by 3.3% year-over-year to $279.2 million. Non-GAAP general administrative expenses, which include share-based compensation expenses, were $261.0 million, presenting a 1.3% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 13.5% to $22.3 million in the first quarter of fiscal year 2020. Operating income was $10.3 million, down 86.7% from $77 million in the same period of the prior fiscal year. Non-GAAP operating income for the quarter was $32.5 million or a 68.3% decrease from $102.7 million in the same period of the prior fiscal year. Operating margin for the quarter was 1.3% compared to 9.1% in the same period of the prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses, for the quarter was 4.1% compared to 12.2% in the same period of the prior fiscal year. Net income attributable to New Oriental for the fourth quarter was $13.2 million, representing a 69.5% decrease from the same period of the prior fiscal year. Basic diluted earnings per ADS attributable to New Oriental were $0.08 respectively. Non-GAAP net income attributable to New Oriental for the quarter was $48.5 million, representing a 49% decrease from the same period in the prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.31 and $0.30 respectively. Net margin for the quarter was 1.7% compared to 5.1% in the same period of the prior fiscal year. Non-GAAP net margin for the quarter was 6.1% compared to 11.3% in the same period of the prior fiscal year. Net operating cash flow for the fourth quarter of 2020 was approximately $108.5 million. Capital expenditure for the quarter was $89.7 million, which was primarily attributable to the opening of 73 facilities and renovations at existing learning centers. Turning to the balance sheet, as of May 31, 2020, New Oriental had cash and cash equivalents of $915.1 million, compared to $1,414.2 million as of May 31, 2019. In addition, the company had $284.8 million in term deposits, and $2,315.3 million in short-term investments. New Oriental’s deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as revenue as the instruction is delivered, at the end of the fourth quarter of fiscal year 2020 was $1,324.4 million, an increase of 1.8% from $1,301.1 million at the end of the fourth quarter of the prior fiscal year. We are now approaching the new fiscal year. Despite the continued challenges from the COVID-19 pandemic, I expect to remain optimistic about the Company's business in the long run, and we will continue to focus on the following key areas. First, we will continue to expand our offline business, aiming at around 20% to 25% capacity, including new learning centers and expanding the classroom area of some existing learning centers for K-12 business. We believe this will prepare us to take more market share from other players post-COVID, as we believe some smaller players without strong financial positions and online class capability may not be able to sustain their business during this hard period. We expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with strong financial capacity and offline facilities enables us to further strengthen our leading position in the market. Second, we will continue to leverage our investments into digital technologies as we introduce our OMO system in more offline training and test offerings, especially for our K-12 business. The usage of online tools and content in our OMO systems for all business clients while the whole network will be enhanced to uplift the overall teaching experience. We will provide more efforts in developing the best teaching content and course materials and also in developing more advanced training programs for our teachers. For those who might not be very familiar with our OMO business model, allow me to spare a few minutes now to elaborate on the four key OMO strategies we have in place. Number one, the online system is mainly used to supplement the offline classes we have in the cities with a hybrid format. Number two, for the cities where we may not have enough learning centers to cater to all our customers, our OMO system enables us to reach out to more students and clients. Number three, in some provinces where we don’t have centers in all of the cities, our OMO system allows us to reach students in these cities. Number four, we offer a series of complimentary low-cost experimental online classes for students to experience our classes, hoping to attract new customers. I want to stress that all of these OMO products are supported by our offline classes. They supplement each other. The teaching contents, courseware materials as well as our teachers and technology development originate from our existing offline centers and resources. We believe that these OMO initiatives will be one of our growth engines to increase our customer acquisition post-COVID and enable us to capture the market consolidation opportunity. This advanced new business model will also accelerate our margin recovery for the rest of the year and further expand our long-term margin targets. Furthermore, we will continuously invest in and implement new initiatives including content development, teacher training, R&D, as well as sales and marketing in K-12 after-school tutoring and on koolearn.com. Our top priority will remain to focus on controlling costs and reducing expenditures across the company to minimize the negative impact of the pandemic on our bottom line. We believe we will resume the expansion of overall non-GAAP operating margin year-over-year as COVID-19 subsides. Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong. Although we are facing various short-term negative impacts from the pandemic and we have been increasingly changing our strategies, we remain optimistic about the brighter prospects for our business and we believe our investments now will bring full returns in the long run. We are confident that with New Oriental's leading brand, superior education products and services, and the best teaching resources, we have the ability to take further market share in China’s huge after-school children market and deliver long-term value for our customers and shareholders. Looking at the near-term and our expectations for the next quarter, we have factored in various considerations, including the one-month delay of national examinations, the delayed enrollments for summer and autumn classes this year in many major cities, and the shortening of the summer holiday in many major cities resulting in one to two weeks less time. Summer courses into July and August will be reduced to three to four terms only, which we typically have four to five terms. Additionally, the recent emergence of COVID-19 cases in cities such as Beijing has resulted in the resumption of restrictions on some public and children's schools in these areas. Inevitably, all these personal situations have caused a lower trajectory for our business and performance data for the summer quarter, hence we take a more conservative approach to our forecast for Q1 2021. We expect total revenue to be in the range of $911.2 million to $953.5 million, representing a year-over-year decline in the range of 15% to 11% in dollar terms. Considering the potential impact of changes in the exchange rate between RMB and U.S. dollar, the projected revenue decline rate is expected to be in the range of 14% to 15% for the first quarter of fiscal year 2021. To provide a breakdown of the expected trends for key business lines, K-12 all subjects after-school children business is expected to grow 3% to 7%. The overseas test prep program is expected to decline 55% to 51%, and the overseas study consulting business is expected to decline 7% to 11% year-over-year in RMB terms. With respect to overseas-related business, including overseas test prep and consulting services, we expect continued declines due to the pandemic worldwide, resulting from the cancellation of exams and suspension of overseas schools as well as travel restrictions. The net impact on those overseas-related businesses will affect the entire overseas test prep industry in China, not just New Oriental and may last over the coming one or two quarters. With that said, in contrast, effective control of the pandemic situation has shed a more positive light on our business domestically. We are pleased to see that we have gradually resumed our offline operations in over 90% of the cities we are in, and the vast majority of students in those cities have successfully transitioned back to our learning centers from OMO online classes. We have also seen a significant pickup in year-over-year enrollments and test proceeds from students in July this month for the summer quarter, which is a positive sign of recovery. To conclude, we are now executing all kinds of operational actions to boost enrollments and classroom utilization throughout the summer and autumn semesters and speed up the recovery of business after the resumption of schools and learning centers. We are confident that demand for after-school children business will gradually increase in the summer and the rest of the fiscal year. I must mention that these expectations reflect New Oriental’s current and preliminary view which is subject to change. At this point, I will take your questions. Operator, please open the call. Thank you.
Operator, Operator
Thank you so much. The question-and-answer session of this conference call will start in a moment. Our first question comes from the line of Binnie Wong from HSBC. Binnie, your line is now open.
Binnie Wong, Analyst
Hi, good evening Stephen and Sisi, thank you for taking my questions. So in terms of the revenue guidance, the outlook, can you help us understand the assumptions behind it? And then also, I think there'll be a talk about the recovery is really ongoing. And I think there’s a very interesting point as Stephen mentioned since last quarter call about the consolidation of the market. So just want to see if there are any numbers that you can quantify as far on the industry side, say, I don't know, the number of centers or number of institutions or something along those lines to help us better understand how much the consolidation has been progressing? Thank you so much.
Stephen Yang, CFO
Thank you, Binnie. Yes, due to the lack of visibility on performance data for the summer quarter, we are using the most conservative approach to make our forecast for Q1. I think there are several key reasons. Number one, we have the shortening of the summer holiday by one to two weeks. Typically, we would have five terms of summer courses within one summer vacation, but now we only have 3.5 terms. And the enrollment window for summer has to be postponed by at least one month. Number two, there was an emergence of COVID-19 in Beijing and Hubei provinces recently, which has impacted our ability to acquire new student enrollments for the summer. If you take away the effects in Beijing, the K-12 business outside of that is expected to grow by 11%. Yes, and the last factor is overseas operations that are affected by cancellations of exams and travel. We will just wait and see. There are many reasons, but I think we are confident about the future. So far, 90% of cities - most students in the 90 cities we operate in have returned to our learning centers. I do believe we can take more market share from the consolidation as we have witnessed many small players disappearing from the market. I don't have the exact numbers, but we expanded by 26% last year in fiscal year 2020, and we plan to open 20% to 25% in fiscal year 2021. This shows our confidence in taking more market share from smaller players.
Sisi Zhao, Host
Yes. And I also wanted to add that the successful results from our summer promotion indicate our potential opportunity to keep taking market share from smaller players that are facing much bigger challenges during the pandemic period than we are. You know, our summer promotion saw total volume increase by 20% year-over-year, and it is very likely that when we finish the whole summer, total enrollments will be even higher than that. So these are all indicators for our opportunities for market consolidation.
Binnie Wong, Analyst
Thank you Sisi and Stephen. Just a quick follow-up. In terms of summer promotion course policies, can you help us compare this year to last year?
Stephen Yang, CFO
Yes. You know we have got 986,000 enrollments by mid-July, and it is close to one million, which means we achieved a 20% year-over-year growth while maintaining the same price of RMB400. We believe the retention rate will be higher than last year. We expect to gather 5% higher retention rates after the summer promotion, as we did a very good job. We believe that those students we acquired from the summer promotion this year will stay with us for three to six more years.
Binnie Wong, Analyst
Thank you. That is very helpful. And I think the situation is quite understandable too. Thank you.
Stephen Yang, CFO
Thank you Binnie.
Operator, Operator
Thank you so much. Your next question comes from Jin Yoon from Newstreet Research. Your line is now open.
Jin Yoon, Analyst
Hey good morning and good evening everyone. Stephen and Sisi, thanks for taking my question. I guess my question is related to your capacity expansion of 20% to 25%. With that guidance that you gave some of these, I guess, segments that you are seeing underperformance in things like overseas test prep, have you moved capacity from these underperforming segments to your better-performing segments already? And is the capacity expansion already counting for the shift in capacity that you are potentially seeing in your classrooms already going from less performing to more performing type of classrooms? And so if, I guess the reason I ask that is that the cost of capacity expansion, if it is net of a lot of this, I guess, shift in capacity already, should we expect the actual capacity expand, the cost of it to be materially less than what we have seen in the past? Thanks.
Stephen Yang, CFO
Yes. Some of the expansion plan of 20% to 25% in fiscal year 2021, I actually did and as we did in last year, we do have the plan to shift some non-performing learning centers to close down or to move over to K-12 business. With all the numbers in, I think we will keep the same guidance of the expansion plan of 20% to 25% because we believe post-COVID there is a lot of market potential to take more market share from the small players and accommodate more students in new learning centers. Even after COVID-19 began in January and February, we opened up about 10% new learning centers. I think we are ready and prepared for the new market consolidation opportunity. Okay?
Jin Yoon, Analyst
Got it. Thanks Stephen.
Stephen Yang, CFO
Thank you Jin.
Operator, Operator
Thank you so much. And your next question comes from the line of Yuzhong Gao from CICC. Your line is now open.
Yuzhong Gao, Analyst
Hey Stephen thanks for the opportunity. So, I think I have a longer term question. So, imagine a situation given the sustained COVID-19 stress where maybe structurally a higher - a meaningful portion of your enrollment will be funded online or either your pure online form or a normal form. How do you think this will impact your margin profile in the long term? Thank you.
Stephen Yang, CFO
Okay. Yes, I think it is a great question. I think going forward, we still care about both the online and OMO. In terms of revenue contribution, OMO class will continue to be our primary business model. We have learned a lot from the pandemic and I think we started to see the benefits from the heavy investments over the last two to three years in the OMO model. As I said, we are seeing higher retention rates and customer satisfaction, with student retention rates higher than last year as well. So, going forward, I believe we will implement more in our OMO systems. The key here is that the OMO system aims to elevate the entire industry. We have the most advanced OMO system, and I think going forward it will bring in more student enrollments and improve margins with our new OMO model. The pure online Koolearn accounts for only 4% to 5% of our total revenue, but in the last quarter we did very well in our summer promotion, and we have started to invest more significantly in R&D and teacher training, as well as marketing, which we expect will yield a healthy growth trajectory. We believe both OMO and Koolearn will serve as our growth engines.
Yuzhong Gao, Analyst
Understood. Very helpful thank you.
Stephen Yang, CFO
Thank you.
Operator, Operator
Thank you so much. And your next question comes from the line of Mark Li from Citi. Mark, you may now ask your question.
Mark Li, Analyst
Hi Stephen, thanks for your insights. I want to ask about this quarter. We have seen like in the P&L. The gross margin is impacted by a few factors you mentioned like online revenue and higher selling expenses, etc. As you are paying the driver, may I know in a short-term view, let's say in the next few quarters, how would we think these drivers to move? And how far like in the coming few years, medium term, which part of the P&L do you think will have better upside potential? Thanks.
Stephen Yang, CFO
Yes, it is a hard time especially for last quarter and maybe in Q1 you saw our guidance. But we are doing two things at the same time. Number one, we are focusing on cost control and reducing expenditures across the company to minimize the impact of COVID-19. This is number one. Number two, we believe the revamped OMO model will accelerate our margin recovery in the rest of the year and further expand our margin profile going forward. As for fiscal year 2021, the Q1 margin, we believe the margin decline in Q1 will narrow down compared to Q4 last year. We are confident that we will be able to deliver continued margin expansion after the pandemic is over. For fiscal year 2021, we expect the margin will be recovered in the second half of the year, especially in the long term. Our main long-term margin guidance, the non-GAAP operating margin in the long term should be around 17%. However, I must mention that as more OMO model is integrated into our learning centers, we believe that someday we will raise our main long-term margin guidance because of the new model.
Mark Li, Analyst
Thank you very much, Stephen.
Operator, Operator
Thank you so much. And your next question comes from the line of Felix Liu from UBS. Felix, your line is now open.
Felix Liu, Analyst
Hi, thank you, management for taking my question. My question is about the online side. Definitely, I'm very happy to see some positive progress there. So could you please share with us how well the traffic from Koolearn performed during summer? And also, for the online, I noticed that the OMO model, as well as your strategy, is penetrating fairly successfully into larger cities. So how would you balance that with the other online brands, Koolearn and similar business models? Thank you.
Stephen Yang, CFO
Yes, during last quarter Koolearn did large scale market promotions by offering free, large size online classes. I think we attracted several times more traffic than that of last year. But I'm afraid, I don’t think I can disclose detailed numbers for Koolearn. All I can say is we have done a very good job this quarter in promotion after COVID-19, and we spent more money on R&D and teacher training, as well as marketing. I believe Koolearn will experience significant growth with healthy metrics in the future.
Felix Liu, Analyst
Thank you, Stephen. And also how would you balance the OMO with your other online offerings from a longer-term perspective?
Stephen Yang, CFO
You know I think there are two ways we are using the same model. Koolearn is 100% online, and the OMO system utilizes offline resources to support our online platform and helps us reach more students at once. But, all the OMO class content and even the teachers come from our offline learning centers and schools. In some cities, there might be internal competition between Koolearn and our OMO model. However, I believe the market is huge enough that we are focused on gaining more market share from others. Therefore, I don't expect significant cannibalization between the two parts.
Felix Liu, Analyst
Alright, thanks for providing me with further clarification. This is great, thank you.
Stephen Yang, CFO
Thank you.
Operator, Operator
Thank you so much. And your next question comes from the line of Tian Hou from T.H. Capital. Tian, your line is now open.
Tian Hou, Analyst
Hi Stephen and Sisi, thank you for addressing my questions. It's regarding the OMO model, which is a very effective tool to deliver courses in areas that are hard to reach, or deal with disruptions from the pandemic. When you integrate the two systems, what are the results? What is the impact on the gross margin? I expect it to be positive and what is that impact? Also, when students choose classes, what is the price difference between online and offline, and as we are entering into a new fiscal year, is the price going to be higher than last year? That's my question. Thank you.
Stephen Yang, CFO
I think the OMO model will bring us more revenue compared to the traditional ways, so that is number one. Number two, I think students and parents appreciate the new OMO model. They feel that this new model is better than traditional models. It will drive customer retention rates up and learning center utilization rates will also increase. So to some extent, we can see some customer rentals, which will enhance margins moving forward through the OMO model. Price-wise, we maintain the same pricing strategy for the OMO classes as for traditional offline classes. We expect prices to be in line with last year's, though we expect regular increases in hourly rates and ASP by 5% to 8% normally. So we will not alter our pricing strategy going forward, it will remain stable.
Tian Hou, Analyst
Okay, thank you Stephen, yes.
Stephen Yang, CFO
Thank you.
Operator, Operator
Thank you so much. And your next question comes from the line of Alex Xie from Credit Suisse. Alex, your line is now open.
Alex Xie, Analyst
Hi Stephen, Sisi for taking my questions. So, firstly, a very quick question. You showed that guidance for K-12 next quarter will be about 3% to 7% growth. Then what about the difference between POP Kids and U-Can and U-Can VIP in your assumptions for the next quarter? And then also, secondly, if we assume the pandemic in Beijing and other cities are well controlled before the start of the next academic year, what are your expectations for the recovery pace of the K-12 business for the rest of the fiscal year? When do we expect things to return to normal growth rates in FY 2021?
Stephen Yang, CFO
Alex, the revenue guidance in the current quarter reflects our most conservative approach due to uncertainties. Even last week, our enrollment window is still open, affecting projections as well. In the most conservative outlook for Q1, I expect revenue growth in U-Can to be around 7% to 8%, and I believe that the VIP business should see improvement better than last quarter due to parental pressure for children to catch up. For the POP Kids business, I expect revenue growth to be around 5% to 6%, which is in RMB terms. Regarding recovery pace, I'd estimate that 90% of our learning centers will reopen within a short time and the trend will continue improving as we move forward. I expect our K-12 business to recover rather steadily throughout fiscal year 2021, particularly in Q2, Q3, and Q4.
Sisi Zhao, Host
Yes, actually I would like to provide more details for the Q1 guidance. For K-12, the recent COVID-19 cases in Beijing place more pressure on recovery in that area. Therefore, acquiring new customers in Beijing remains challenging compared to other cities that have reopened offline operations. If you exclude the effects from Beijing, K-12 performance in other cities appears healthy and growing at a pace similar to Q4. Overall, the business is already showing signs of recovery.
Stephen Yang, CFO
Yes, and I do believe our Beijing schools will reopen their learning centers in September.
Alex Xie, Analyst
Sure. Thank you, very helpful.
Stephen Yang, CFO
Thank you very much.
Operator, Operator
Thank you so much. And your next question comes from the line of John Choi from Daiwa Capital Markets. John, your line is now open.
John Choi, Analyst
Hey, guys, thanks for taking my question. I have a quick question on your overseas business test prep consulting. I know it is a very difficult time with the uncertainty and pandemic globally, but do you think this recent COVID situation will have a long-term fundamental impact on your overseas test prep courses? Obviously, you gave a rather conservative figure for next quarter, but I'm just wondering for the rest of this year and long-term how should we think about this business? Thank you.
Stephen Yang, CFO
Yes. The overseas test prep business has seen significant declines in Q4, and we are projecting conservatively for Q1. This is due to COVID-19 and the cancellation of exams such as TOEFL, GRE, and IELTS, alongside the overall suspension of overseas schooling and travel. Recently, we have seen cities like Beijing and others beginning to reopen IELTS and TOEFL tests this month. We remain optimistic that our overseas test prep business will recover gradually, but it is indeed a challenging time. The volatility in China and United States relations has led some students and parents to delay decisions about studying abroad. I believe our business can recover step-by-step, though it heavily relies on when students can take international exams and schools abroad can reopen. In Q4, revenue from overseas test prep was only 5.6% of our overall revenue, and for Q1, we expect it to fall below 10%. Therefore, the contribution from overseas test prep is likely to diminish in the near future.
Operator, Operator
Thank you so much. And your next question comes from the line of Sheng Zhong from Morgan Stanley. Your line is now open.
Sheng Zhong, Analyst
Hi, thank you for taking my question. Just one question about the K-12 growth. As you mentioned, the trends outside Beijing in Q1 are similar to Q4, but actually, the summer holiday is shorter, and the period is only about 70% of the normal summer holidays if we consider that. So can we say that in the summer holiday, K-12 growth during the summer season is actually in the mid to high teens? Thank you.
Stephen Yang, CFO
Well, yes, to some extent on a pro forma basis, because you are correct Sheng, we have lost 30% of summer holiday time. After adjusting for that, I think the top line growth of the K-12 business on a real top line basis should be over 10%. I do believe the growth for K-12 business will return to normal as we did last year, unless new COVID-19 cases arise in major cities.
Sheng Zhong, Analyst
Thank you very much.
Stephen Yang, CFO
Thank you, Sheng.
Operator, Operator
Thank you so much. And your next question comes from the line of DS Kim from J.P. Morgan. Your line is now open.
DS Kim, Analyst
Hi, thank you Stephen and Sisi for taking my question. First one on VIP only, I may have missed this all year, but can you remind us how much did the VIP revenue drop in the fourth quarter in dollar terms or RMB unless implied in the guidance? And the follow-up from here would be that I’m just wondering why the segment is doing so poorly in the summer still. Is this just a function of high prices and people's reluctance to convert to online classes, or are there structural factors at play? How much of this VIP drag do you consider structural versus a temporary and cyclical setback? Thank you.
Stephen Yang, CFO
Yes. The U-Can VIP business in Q4 was down by 21% year-over-year. This situation is understandable; parents and students have expressed hesitation about the high costs associated with online conversions, and as a result, some opted to postpone their study plans for VIP classes in Q4. However, in Q1, based on our forecast, I expect one-on-one business to recover quickly, especially in June, where we've seen a surge in new student enrollments for VIP classes in preparation for upcoming examinations. So I believe the VIP business will recover.
DS Kim, Analyst
Thank you. May I just follow-up? Are we thinking about year-over-year growth for this recovery or is it still down but not as bad as we expected?
Stephen Yang, CFO
Year-over-year growth. I don’t believe we will see year-over-year growth in U-Can VIP business in the upcoming Q1.
DS Kim, Analyst
Thank you very much. That answers all my questions. The downturn is more temporary and cyclical.
Stephen Yang, CFO
Thank you.
Operator, Operator
Thank you so much. And your next question comes from the line of Alex Liu from China Renaissance. Alex, your line is now open.
Alex Liu, Analyst
Thanks Sisi and Stephen. So, my first question is on the OMO strategy. Specifically, I noticed that some small courses you offer in the fall semester are now 100% online. We obviously know Koolearn has a pure online business within its segments. So I was just wondering how important do you think pure online small class programs within U-Can and POP Kids will be in the longer term? And a quick follow-up; how should we expect revenue growth across business segments in fiscal year 2021? Thank you.
Stephen Yang, CFO
Yes, pure online is a viable platform, but remember that OMO is a supplemental tool to our offline business. In Q4, we moved 100% of offline classes to online. However, 90% of our students returned to our offline learning centers subsequently. We will maintain some online elements ongoing. As I said, both the pure online and OMO segments present vast potential for growth, but the internal competition will be minimal.
Alex Liu, Analyst
Yes, so regarding revenue growth across business segments in fiscal year 2021.
Stephen Yang, CFO
You know this situation is very unique. We've taken a considerable amount of time in establishing Q1 guidance, especially since enrollment is still open currently. I prefer to reserve the detailed outline for revenue growth across segments for the next quarter earnings call. However, I do believe our business's general recovery will progress, especially in Q2.
Alex Liu, Analyst
Yes, I understand. Thank you very much.
Stephen Yang, CFO
Thank you, Alex.
Operator, Operator
Thank you so much. And your last question comes from the line of Tommy Wong from China Merchant Security. Tommy, your line is now open.
Tommy Wong, Analyst
Okay, thank you. Hi Stephen and Sisi. I just have a general question. If you look at the overall market, we can see many online players have seen share prices perform well, and when I review your selling expenses, it seems they haven’t increased appreciably. I expected them to rise a little in Q4, but they actually haven’t increased. I’m concerned that we might not be aggressive enough. Could you discuss your sales and marketing breakdown between OMO versus school learning and explain your strategy going forward? I'm worried that we might not be aggressive.
Stephen Yang, CFO
Yes, we did spend a little more on Koolearn.com in the last quarter, particularly with large class free offerings this spring semester. However, as I’ve mentioned in previous earnings calls, we aren't excessively focused on margin optimization, but instead are investing heavily in R&D and teacher training to enhance core product development. Although I know some players are spending a lot on marketing, I believe the market is vast enough, and that our strong brand name in education gives us the advantage to attract students. Koolearn can benefit from the strong New Oriental brand name for student acquisition. This distinction is crucial for us.
Tommy Wong, Analyst
Okay. Thank you.
Stephen Yang, CFO
And, in addition, at Koolearn.com, we have implemented small size online classes significantly, which can be seen as a unique offering. I believe we are one of the only players capable of executing these small-sized, purely online classes. We validated this business model over the last two to three years, and it is growing rapidly. Yes, that's clear.
Tommy Wong, Analyst
Thank you for the clarity.
Stephen Yang, CFO
Thank you.
Operator, Operator
Thank you so much. 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.