EDU 新东方

Operator

Thank you for standing by for the New Oriental's fourth quarter and fiscal year 2008 Earnings Call. At this time all participants are in listen-only mode. After managements prepared remarks there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao, New Oriental's Senior Investor Relations Manager. Please proceed.

Sisi Zhao

Hello everyone and welcome to New Oriental's fourth fiscal quarter and fiscal year 2008 earnings conference call. Our earnings results were released earlier today and are available on the company's website, as well as on Newswire services. Today you will hear from Michael Yu, our Chief Executive Officer, and Louis Hsieh, our Chief Financial Officer. After their prepared remarks, both Michael and Louis will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risk and uncertainties, as such our results maybe materially different from the view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligations 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 http://investor.neworiental.org. I will now turn the call over to New Oriental's CEO, Michael Yu. Michael, please.

Micheal Yu

Thank you, Sisi. Hello, and good morning or good evening to everyone on the call. Thank you for joining us today. It's my pleasure since last time to review with you our fourth quarter and the full fiscal year 2008 results. Overall 2008 was a great year for us, with your help and with the fourth quarter contributing to our impressive overall growth. I would like to spend some time taking you through the highlights and some key developments from the last quarter while adding a bit on our plans for the future. As we have mentioned during previous calls the fourth quarter is typically a seasonally slow quarter in terms of revenue as students are focused on their year end examinations in schools. It is also upon when we increase our marketing efforts to encourage enrollment during the summer holiday season, which is typically our busiest time of the year. I am pleased to report that we delivered strong results despite a slowdown in enrollments in May following the Sichuan earthquake as well as the potential net of the impact on Beijing schools business from the upcoming Olympic games. With healthy revenue growth in all of our key business segments, we exceeded the high end of our revenue guidance by around $6.8 million. With over 300,000 in total enrollments during the quarter, New Oriental student enrollments for fiscal year 2008 exceeded a record 1.270 million students, up about 19% a year-over-year and the fiscal year net revenue exceeded a record $200 million for the first time in our history. During the quarter we continued to grow our New Oriental U-Can all subject middle and high school training program after its initial launch for the fiscal quarter. Our U-Can program targets students aged 13 to 18 who are preparing to take college entrance examination in China or in Chinese Gaokao for the first time and also for those looking to improve their grade in subject areas such as Chinese, mathematics, physics, chemistry and others. The test preparation market for the Gaokao remains very fragmented and it continues to grow and re-accomplish the strong enrollment particularly despite enrollment slowdown in May following the Sichuan earthquake. In the fourth quarter rolled out U-Can programs in 21 cities throughout China with the enrollment of more than 7,000 in non-English subject classes. We are confident that U-Can, along with English language training and overseas test preparations, will drive New Oriental's growth in the years ahead. In addition to the launch of our U-Can program in the fourth fiscal quarter we announced the acquisition of 60% stake in Mingshitang, a Beijing-based private school that specializes in tutoring students who need to retake the gaokao. This strategic move extends the New Oriental brand now to a large non-English test preparation market, moderates some of the seasonality of our business and offers mainly content and a resource of synergies with our U-Can program. In June and in the first two weeks of July 2008 ended July 13 we wrote off our gaokao re-takers training business with a total enrollment of over 900 students for only two weeks actually. For the first fiscal quarters of 2009, we plan to open another camp in Beijing and we expect to significantly increase our gaokao retaking enrollment. The demand for quality private education in China continues to grow and one of our key strategies for the years to come is to rapidly expand our leading nationwide network for product capture, strong demand for our programs and services, especially in the education market. In fiscal year 2008, we exceeded our target and opened a total of 77 facilities consisting of six schools and 71 new learning centers. In the fourth fiscal quarter, we opened a total of three new schools in the cities of Lanzhou, Huangshi and Ningbo and a net 23 new learning centers. We remain confident that our goal, these investments have impacted G&A and the marketing expenses in the short-term. Our accelerated growth strategy will generate handsome returns in the future quarters and the future years. Another of our continuing key strategy is to enhance our program and service offerings through strategic partnerships with leading international content developers. In the second fiscal quarter we announced our partnership with Heinle ELT to launch a line of custom learning materials, tailored from the Oriental high English brand conversational of English language courses and by of our Koolearn.com online learning platform. Recently we've formed a strategic partnership with Intuto Limited, a New Zealand-based the e-learning solutions provider to co-develop and update custom learning materials tailored for existing International English Language Testing System or IELTS. This partnership as well as initiated like those with Nokia, Dynamic Education International and Coco Cola in China are important to New Oriental for future growth and the market positioning, as the leading education provider in China. While we have achieved record results in several areas in fiscal year 2008, we are looking forward to many more new opportunities in 2009 of course not without difficulties. We'll continue to look for strategic partnerships and acquisitions that will add to our diversified offerings and deliver continued financial performance for our shareholders. We are at the same time responsible for New Orientals and for our shareholders. And now we'll turn the call over to Louis Hsieh, who most of you are familiar with to discuss the quarters' financial performance. Louis Hsieh.

Louis Hsieh

Thank you, Michael. Hello to everyone on the call. Thank you for joining us today. Before I get into the numbers, I'd like to speak briefly on the challenges facing New Oriental because of the recent earthquake and the Olympics that are up coming in Beijing. As we noted in our press release and Michael touched on earlier, results in the fourth fiscal quarters decreased slightly from the previous year primarily due to three reasons. One, earthquake relief rightfully just priority over personal endeavors such as test preparation and studying; two Beijing faces uncertainties surrounding housing, transportation and travel logistics for the summer of 2008 as the city prepares to host the Olympic Games; and three Q4'08 is a difficult comparison to the Q4 '07 in terms of student enrollment, due to the Chinese New Year holiday in 2007, which pushed those enrollment normally recorded in the third fiscal quarter of 2007 into the fourth fiscal quarter of that year. In early June, we issued a release announcing that we remain confident in the long-term success of the business despite the impact of the May 12th earthquake in Sichuan and the 2008 Olympic Games in Beijing. And despite these challenges, we are pleased to announce that we meet our top line guidance by delivering 62.5% top line growth. As we stated in our press release, in early June we were hopeful of a rebound in student enrollments and revenue. Recently, we have witnessed a strong recovery in student enrollments and revenues in June and in the first two weeks of July ending July 13th. Cash proceeds, which are the tuition fees paid by students in cash when they register for classes and recognized proportionately as revenue as the instructions are delivered for the past six weeks ending July 13, 2008 were approximately US$60 million, an increase of approximately 50% from $40 million in the corresponding period of 2007. The Beijing school has also rebounded in the same six week period with cash proceeds of approximately up 47% to $14.6 million. New Oriental's school in Chengdu, the city closest to the Sichuan earthquake is totally operational with six learning centers and has also recovered in the past six weeks with cash proceeds up approximately 32% to $1.4 million as compared to the year ago period. In fact, we saw strong demand for our programs and services throughout our nationwide network at schools and learning centers. Now I'll walk you through the contributions to our fourth fiscal quarter results and financial highlights. Please note that certain figures I'm about to read are non-GAAP including all measures that are given, excluding share-based compensation. You can find a reconciliation of these figures in the financial tables at the end of the press release. The fourth fiscal quarter 2008, net revenues were $40.2 million, an increase of 62.5% over the fourth fiscal quarter of 2007. Revenues from our education program and services, I'm talking about language training and test preparation courses and primary and secondary education programs rose 60.9% year-over-year favored by the increase in a number of language training and test preparation courses. Student enrollments and language training and test preparation for the fourth fiscal quarter of 2008 dropped 2.8% year-over-year to 305,200 from 314,000 in the fourth quarter of fiscal year 2007. The main reason as discussed earlier can be accounted for due to the slowdown in May following the Sichuan earthquake; the slowdown in the Beijing School due to uncertainties surrounding housing, transportation and travel logistics for the summer of 2008 as Beijing prepares to host the summer games; and the difficult year-over-year comparison with the fourth fiscal quarter of 2007, when student enrollments were up 31.5% to over 314,000 last year. These enrollments would normally have occurred in the third fiscal quarter of 2007 but it was pushed into the fourth fiscal quarter due to the late timing of the Chinese New Year. Chinese New Year last year was on February 18th. This year, the Chinese New Year is more normal like February 7th and next year it will be January 26th. So, students typically will come two weeks after Chinese New Year to begin enrolling classes. So, last year we had a surge in March, which is kind of high number in last years number 314,000. So, those were the three main reasons for the enrollment figure decrease by 2.8% year-over-year. Overall operating costs and expenses for the quarter were 43.2% year-over-year. All these cost of revenue increased by 50.9% year-over-year mainly due to the increased number of courses offered to the largest school base and a greater number of schools and learning centers in operation. Selling and marketing expenses increased 49.9% year-over-year mainly due to the headcount for the selling and marketing department, which includes registration verification personnel increased by over 330 from the year ago period, as the company added 77 new schools and learning centers in fiscal year 2008. General and administrative expenses increased 32.5% year-over-year due to the increased headcount of the company’s further expanding its business. Excluding share-based compensation expense, non-GAAP operating income for the fourth quarter was $2.5 million, compared to a loss of $1.2 million in the year ago period. GAAP operating loss for the quarter was $0.2 million, a 94% decrease, a loss of $3.5 million in the year ago period. Excluding share-based compensation expenses, operating margin for the quarter was 6.3%, compared to negative 4.9% in the corresponding period of last year. GAAP operating margin for the quarter was negative 0.5%, compared to negative 14.1% in the corresponding period of last year. This increase is primarily due to the improved operating efficiency and revenue compared to the growth in operating expenses. Capital expenditures for the quarter were $2.5 million, which was primarily used for the 3 new schools and a net 23 new learning centers that we added in the quarter. Total share-based compensation expenses for the quarter were $2.7 million. Excluding share-based compensation expense, non- GAAP net income increased $4.5 million, an increase of 513% in the fourth quarter fiscal quarter 2007. GAAP net income for the quarter was $1.8 million, compared to net loss of $1.5 million in the year ago period. Excluding share-based compensation expenses, non-GAAP basic and diluted earnings per share ADS were $0.12 and $0.12 respectively. GAAP basic and diluted earning per ADS, were $0.05 respectively. Each ADS represents four common shares. Moving to our balance sheet, our total cash and cash equivalents as of May 31, 2008 were $208.4 million, as compared to $230.1 million as of the February 29, 2008 quarter. Net operating cash flow for the quarter was $23.9 million. The decrease in cash was due to the company’s share buyback program of 1 million ADS, which was announced on February 14, 2008. We are pleased to announce that the company has completed the 1 million ADS share buyback program. The deferred revenue balance at the end of the quarter was $59.2 million, an increase of 37%, compared to $43.2 million at the end of the fourth quarter of 2007. Before I give guidance, I would like to take a brief look at the comparison between the fiscal year 2008 and 2007. Student enrollments in language and test preps grew 19.1% year-over-year to 1.271 million from approximately 1.068 million in the year ago period. Net revenues were up 51.6% year-over-year to $201 million. Excluding share-based compensation expenses, non-GAAP net income was up 75.9% year-over-year to $54.1 million. GAAP operating income was up 73.8% year-over-year to $45.3 million. Its non-GAAP operating income was up 75.9, non-GAAP net income. Non-GAAP operating margins went from 23.2% for the fiscal year ended May 31, 2007 to 26.9% for the fiscal year ended May 31, 2008. GAAP operating margins went from 19.7% for the fiscal year ended May 31, 2007 to 22.6% for the fiscal year ended May 31, 2008. Non-GAAP net income was up 73.7% year-over-year to $57.8 million. GAAP net income was up 71.4% year-over-year to $49 million. Excluding share-based compensation expense or non-GAAP basic and diluted earnings per share was $1.54 and $1.48 respectively. GAAP basic and diluted earnings per ADS, was $1.31 and $1.25 respectively. I will now read you New Oriental's financial guidance for the first fiscal quarter 2009. Please note that the following outlook statements are based on our current expectations. These statements are forward looking and actual results may differ materially. Total net revenues in the first fiscal quarter of 2009 that went from June 1, 2008 to August 31, 2008 are expected to be in the range of $103.8 million to $109.5 million, representing year-over-year growth in the range of 28% to 35%, respectively. This preliminary forecast could be negatively impacted by the Beijing Olympic Games, which will take place August 8th to 24th, during the middle of New Oriental's August term, due to the potential travel and transportation logistics disruptions in Beijing and potential distractions as the nation and the world enjoy the Beijing Olympic Games. Now let me hand the call back to Michael for his final thoughts. Michael?

Michael Yu

Well, once again thank you for participating in our earnings call for the fourth quarter and the fiscal year 2008. And at this point, we are happy to take your questions.

Operator

(Operator Instructions) And your first question comes from the line of Mark Marostica of Piper Jaffray. Please proceed.

Mark Marostica

Good evening. My question is related to the number of new schools and learning centers that you are targeting to open in fiscal ‘09. And then as a follow-up to that, would you expect a commensurate number of new ads to your selling and marketing department as was the case in fiscal '08 at about - always at 330?

Michael Yu

I think mostly it should be the same access. We are going to open new schools and new learning centers also in fiscal year 2009, approximately around 50, new learning centers and schools, maybe among them four to five new schools, and then 45 to 50 new learning centers. By doing that, we should add some more G&A expenses and also new marketing fees. But at this stage within the control, I think.

Mark Marostica

So, would we expect less than that 330 then, Michael.

Michael Yu

Now, how much of that?

Mark Marostica

We were at 330 last year, would we expect lesser amount than that. Can you give us a sense of around how many you will add?

Louis Hsieh

Hey Mark its Louis, we would expect less than that if we only open 50 learning centers.

Michael Yu

Yeah.

Mark Marostica

Okay.

Louis Hsieh

I don't have the exact number, my best guess it would be between 250 and 280.

Mark Marostica

Okay, great. Then, one other question I want to just follow up with. Regarding the rebound that you talked about in those last six weeks, would you characterize that rebound as also applying to U Can as well, as English Language and Test Prep, or was there any one area that benefited more so than the other? Thank you and I'll turn it over.

Louis Hsieh

I think U Can is hard to predict because this is our first year of doing it.

Mark Marostica

Right.

Louis Hsieh

So it's not clear. But it's been an accelerating rebound from the second week in June, so the strongest week we have is the first week in July, where the company had record cash revenues of over 100 million RMB which is the first time in our history.

Michael Yu

That's right.

Louis Hsieh

The previous record was 62 million.

Michael Yu

I don't have any guess or estimation about U Can, but it's not a rebound. U Can is our new program, so we don't have any numbers from last year. But since students studying English language and the test ratings is rebounding back so quickly, I can expect that the U Can still is the number we are increased to.

Mark Marostica

Great, thank you.

Michael Yu

Okay. Hello

Operator

Your next question comes from the line of Catherine Leung, please proceed.

Catherine Leung

Hi, congratulations on a very strong quarter and a very strong full year.

Louis Hsieh

Thanks Catherine.

Catherine Leung

I just have one question. Can you just discuss, given that the company is preparing some additional measures in relation to the Olympics for the first quarter, such as diverting some classes to other cities outside of Beijing, and the larger scale launch of U Can for the summer. Can you help us understand how we should think about margins for the first quarter?

Louis Hsieh

Right now we are probably not going to be diverting classes out of (inaudible) our Beijing school’s remained open.

Catherine Leung

Right.

Louis Hsieh

And you see that in our announcement where we increased our revenues in the last few weeks by 47% year-over-year. So we are not diverting in any way. We did increase sales and marketing expense during the summer to advertise that our schools are open. So I would expect margins in line with last year if not with a slight improvement due to price increases as due to more students and better utilization.

Catherine Leung

Okay.

Louis Hsieh

I don’t know exact number Catherine, but it would probably be about 100 basis points.

Catherine Leung

At or by about 100 basis points.

Louis Hsieh

Yeah.

Catherine Leung

Okay, on an operating margin basis or on a…

Louis Hsieh

They are probably built for gross margins and operating margins.

Catherine Leung

Okay. And related to that, do you have a little more clarity on your tax rate for the next year for me to know…

Louis Hsieh

We know it’s going up, so I think last year we were probably in the 7%-8% and next year we’re probably guiding the street around 11%.

Catherine Leung

Okay.

Louis Hsieh

So our taxes are going up. Our interest income is going down. That’s what's going to hurt the net income line the most.

Catherine Leung

All right. Thank you.

Operator

Your next question comes from the line of Adele Mao, Susquehanna Financial. Please proceed.

Adele Mao

Thank you. My first question is often related to gross margin trends going forward. I was wondering with the increasing mix of revenue from kids English and all-subjects training, could you comment on how the significant growth in these areas will impact your overall gross margins going forward let's say next year or so given that ASP profile on the cost side of the businesses are a little bit different from your traditional classes?

Louis Hsieh

Yeah. There are a lot of moving parts in the ASP and the margin side. What's happening in our company is that yes, kids and U-Can are coming out, and they have typically lower ASP than overseas test prep or others. But the issue that's happening is that our classes are moving to smaller sizes. So, our average sized classes decreasing by about 30% a year. It's been the case for two years now, which means that students are signing after smaller classes and paying much higher ASPs. That's why if you look at our numbers you'll see that in RMB terms, ASPs went up 18% in the quarter. So, our margins will increase as ASPs rise, but this product mix change I think will have negative impact on our margins. But it will more than offset by the benefits of more students, better utilization of facilities, and in general just attracting more students per classes. Better utilization will more than offset the product mix towards kids and U-Can enrollments.

Adele Mao

Okay. What percentage of total revenue that comes from Kids English right now? About what half of the number you can share with us?

Louis Hsieh

Yeah. If you give me one second, I'll look at that for you. Kids English represents approximately about little over 25% of revenue.

Adele Mao

I see, okay. Thank you.

Louis Hsieh

Okay. But the fact is that it's growing over 50% a year in revenue.

Adele Mao

Right. And most of your learning centers that you are opening right now are toward Kids English is that right?

Louis Hsieh

Yeah. Half or little bit more than half. But many of the learning centers are actually a mix. So, they are coming at kids, high school and adult.

Michael Yu

But in the half year it is English and learning center, and then in six weeks it is mixed adult and kids and learning center all together.

Adele Mao

I see okay. Great, thank you.

Michael Yu

Thank you.

Operator

Your next question comes from the line of Trace Urdan of Signal Hill. Please proceed.

Trace Urdan

Hi. Just a follow-up on that question. So, can you help us Louis to understand the variance here that revenues were up 50% on decreased unit volume. You suggested ASPs were up 18%. What accounts for the rest of it? Is it accelerate or?

Michael Yu

The ASPs are up over 80% in RMB terms. So, you can't say that US dollars over 28% okay. The other thing is there is a backlog if you recall from Q3 there was a 105% increase in differed revenue year-over-year. I think it was $35 million, $23 million was used up in Q4, but $12 million will flow into Q1. So, we had a very strong backlog that flowed into Q4 from Q3, which is why how we got to 62% revenue increase.

Trace Urdan

Right, but that's still attached to since I presume?

Michael Yu

Yeah.

Trace Urdan

How do explain the difference between what you are counting as enrollment? Enrollments are just the new students coming in?

Louis Hsieh

Yes. So, we've two systems right. The revenue that we recorded as GAAP revenue many of the enrollments actually came in the quarters before. So, that's why you guys look at deferred revenue as the key measure of our backlog. So, last quarter we had a record of 105% increase to $35 million in backlog more than two-thirds of that revenue was recognized in Q4, but they don't show up as student count in Q4.

Trace Urdan

So, is there some measure of student days that would represent sort of a unit volume measure in the current quarter?

Louis Hsieh

We don't have that calculation because we've so many different kinds of programs and all have different price points.

Trace Urdan

I'm trying to understand the notion of an impact from the Olympics, if you have the enrollments up through July. I presume that what would happen would be that students simply would stop coming to classes, right. So, that wouldn't show up presumably in enrollments or at least, I mean the enrollments would be affected during that period. But to the extent that students don't show up for classes and you are not recognizing revenues, is there some metric, where we would see this?

Louis Hsieh

No. We recognize the revenues. What happened during the earthquake was that the earthquake happened on May 12 by then the students had already enrolled. So, they will get counted whether they come to class or not through the end of month. So, when the class finishes that revenue will be counted. Now many of those students for hardship reasons will ask for deferrals into the summer. And of course in affected areas, we'll grab that so that and that revenue would be pulled from Q4 and moved into Q1, right. So if a student show up or don't show up the revenue will be counted because they paid for the class as long as their money is not refunded then when the class is finished that revenue will be recorded.

Trace Urdan

Okay. So, final follow-up then…

Louis Hsieh

Yeah.

Trace Urdan

To get the low-end of your guidance range of 38% revenue growth in the first fiscal quarter. What would that imply or what's going on during the Olympics in the worst case scenario?

Louis Hsieh

Well, during the summer we run two terms, the one going to start in late June and one start in early August. It would mean that the early August that the late June term has started in the middle of it. So, we note the enrollment very strong, but we expected it, remember we told you guys that we will start this summer. So, then the key is whether the August term was started in August 1 and Olympic is coming in middle of that, where the enrollments will drop off for the August term. That we’ve all know for the next two weeks because a lot of students are signing up now for the second half of the summer. It would have to be that the second half for the summer drops, or that because of a some logistical change in Beijing, where students can’t get the class, we have a rebate system, where we will give them the money back, if they can't get the class for no fault their own, but because of travel restrictions. So, those are the two risks to the second half of the summer.

Trace Urdan

Okay. I'll get back in the queue. Thank you, guys.

Michael Yu

You have anything.

Trace Urdan

Yeah, it really going forward to understand that there is someway to understand, what the worst case scenario assumes in terms of enormous drop off, but?

Louis Hsieh

Well, the worst case scenario already, I can tell that you that we've booked. We have probably; we have more revenue today than we did last summer already. But the key is what the second term looks like and we will know that in the next two weeks. By the first week in August almost all the revenue for the summer is done and then the enrollment will come in to the last three weeks in August actually flow into Q2, which is the quarter that starts September 1 and ends November 30th. For the next two weeks, it tell us that if we are going to hit the low-end of the number, where we got the 28% or the higher end of 35%.

Trace Urdan

Right, but the statement in the press release says, here is the range, but it could be a risk because of the Olympics.

Louis Hsieh

Right, so the method is worst case scenario. The police say, no students can came in to Beijing and our learning centers are closed for this August term. That means that, we have to refund all the money in the August term. But I know that through the last week, we have more revenue than we did last year, was RMB611 million.

Trace Urdan

Okay. So, in that kind of circumstance the 38% would still be a risk? Is that correct?

Louis Hsieh

No, but the definitely not. Only in Beijing too, the other cities remain wide open.

Trace Urdan

You know, I understand that’s again…

Louis Hsieh

Yeah, but Beijing still in last year it was 34% of revenue, this year it will still be about 28% of our revenue. And the summer of Beijing is the busiest time period.

Trace Urdan

I understand. I’m just trying to understand, whether the bottom end of your range encompass the worst case scenario, there is conceivably something worse?

Louis Hsieh

There is conceivably something worse.

Trace Urdan

All right.

Louis Hsieh

But it wouldn’t be much worse than that.

Trace Urdan

I understood.

Operator

Your next question comes from the line of Scott Schneeberger of Oppenheimer. Please proceed.

Scott Schneeberger

I’d like to ask, I believe you work this summer getting the message out, and with the little more marketing spend with regard to the Olympics in Beijing, and just letting the country know what you’re doing logistically, could you please talk about, one your spending related to that and what type of return you hope or think you’ll get on that? And two, what you’re seeing in general with advertising costs, you would have been seeing some year-over-year inflation mentioned a few months ago, just wanted an update on that? Thanks.

Michael Yu

On our cost, I mean, our marketing dollars, we spend I think about RBM10 million?

Louis Hsieh

To market throughout the country, not everybody knows the Beijing School is opened ,and that also promoting UK and other programs, this summer additional RMB10 million, which is about $4 million. I don’t know what the return we'll get on it, but we can see, there you can see in the numbers for Beijing schools, that the demand over the last six weeks have been quite strong, and that demand actually going to accelerate in the last two weeks. So, the message is getting out and I think Beijing will be okay for this summer assuming that look the August term is not materially impacted.

Michael Yu

One of the reasons to spend all the money for marketing is that, originally people thought they were not allowed to come to Beijing to study like for the first two months. And then the Beijing Government and government said that, if you can manage, August schools can be open in Beijing, especially in June to July, and we are not very sure about August, but I think the policy will be the same. So, we have to do some marketing to tell the people or we're trying to tell them that our Beijing School will open as normally as ever. That’s one of the reasons we spend more marketing fees than last year.

Scott Schneeberger

Thank you. And what are you seeing out there as far as the pricing being put you for advertising?

Louis Hsieh

I think advertising prices are still going up, especially before the Beijing Olympic Games. But they haven’t gone up as much this year they did last year, as I get from the schools themselves.

Scott Schneeberger

Okay, thanks. And then kind of shifting gears. I believe the gaokao test results should already be back from the test taken about a month ago. Do you have pass rates; do you have national pass rates for the provinces that took the test on time?

Louis Hsieh

You mean for our students or in general?

Scott Schneeberger

In general, so you can get an idea of how that may you know I think you had …

Louis Hsieh

Yeah, I think its kind of set by the governments. So, I think probably the deposits will be the same 4-year colleges will probably be 2.5-2.7 million students out of 10.4 million who took it and another 2 million to 2.5 million who will go to associate degree programs.

Scott Schneeberger

Yeah.

Louis Hsieh

2 or 3-year programs. So, a little bit over half the students will pass the gaokao. But don’t forget Scott that there is two factors in the gaokao, right. Many of the students, of the 2.5 or 2.7 million who get into 4-year colleges will decide not to go. So they want to go into a Tier 1, they didn’t get into Tier 1 school and many of the students who got into the associate degree programs will sit out one more year and try again to get into a 4-year college. So that is the three million students who are re-takers.

Scott Schneeberger

Okay, thanks very much.

Louis Hsieh

Okay, yeah. So, its pretty much set by the number of degrees that are allowed to be granted by the government and that number is probably gone up 3% to 5% a year.

Operator

(Operator Instructions) And your next question comes from the line of Brandon Dobell of William Blair. Please proceed.

Brandon Dobell

Hi guys. Want to get a sense for what your assumptions or what your thinking is around your main cause. So employees ran things like that as you look out for the current quarter but also thinking about the fiscal year coming up, are you still kind of in that same inflationary position to the semis that you have been or are things getting easier for you from that perspective?

Louis Hsieh

Well, I think we are probably in the same state we were in last year. So, but we have been increasing prices overall but many much of that is due to the fact that is where the students are opting for the smaller classes. So, I think that in the inflationary environment -- inflation in China has actually gone down the last quarter. If you look at the numbers its down to 7.1% from 8.7% two quarters ago. And so our two biggest cost items are typically teacher salaries and rents. I think we raised teacher's salaries about 10% this year and we did it once we haven’t done it since then. And rent we had the same issue we signed 5-year leases. As you move in the less expensive cities the inflation is not as big an issue and because we signed longer-term leases we were able to pass the cost through and price increases about the same rate if not higher than our rent which is going up.

Brandon Dobell

Okay, and then on a related topics as you think about teacher compensation or just or employee compensation how do you think about the near term trends on stock based compensation?

Michael Yu

The near term trend of the company you will stock compensation as we said two quarters ago that it would approach $3.5 million to $4 million a quarter. You will see that in the next quarter we had another round of stock based. It was only 65,000 shares around two weeks ago. So its open in the August quarter and then it will begin to tail off as I told you guys in the winter quarter as the '06 options wrap for '08 its fully vested. So you would see, you'll see stock based comp go to about $3.5 million. Stay there for two quarters and then begin to drop over the next couple of years.

Brandon Dobell

Alright, great thanks.

Michael Yu

Thank you.

Operator

Your next question comes from the line of Chenyi Lu of Brean Murray. Please proceed.

Chenyi Lu

Hey, this is Chenyi. I have a question regarding the gaokao opportunity. Can you discuss the gaokao opportunity in the 2009-2010 as to potential revenue in terms of total revenue of the company. Separately also a question regarding the marketing expense. Do you plan to spend heavily also this year to promote gaokao and the Kids English. Just want to see the marketing expense trending you see…

Louis Hsieh

Yeah, that's a good question. I think on the gaokao we have budgeted for 2009 about 50,000 enrollments. If each one pays about $100 per enrollment that will give us $5 million and we will probably be very close to $270-$280 million in revenue. So that will account a little bit less than 2% of our revenue, but much less, so $5 million out of $270 million. We would hope and we haven’t forecasted for '10. We would hope that number would go up between 1500% the year after. As far as marketing spend it was about a little bit over 12% of net revenue in 2008. We expect that number to stay about same if not decrease a little bit in 2009.

Chenyi Lu

Great, thank you.

Louis Hsieh

Thank you.

Operator

Next we have a follow up question from the line of Adele Mao. Please proceed.

Adele Mao

Thank you, my follow up question is related to Mingshitang. Looks like the upcoming school year, you guys are offering gaokao re-takers not only the boarding program but also there is a non-boarding program. What is your target enrollment for both programs and whether non-boarding program is actually being posted in your existing facility?

Louis Hsieh

Yeah, I think we have over 900 enrollments already Adele, in the first couple of weeks and we would target about 1,200 boarding students. So that means Mingshitang don't forget last year had a little bit less than 800. And for non-boarding students or short-term we would expect very close to 1,000 enrollments. But their ASP is much lower. It's about $130 - $140 versus the 2000 plus for boarding students.

Adele Mao

Non-boarding revenue and non-boarding ASP is actually in $100?

Louis Hsieh

Yeah, it's about RMB900. So, it's about $150 to $125.

Adele Mao

Okay. If there are any target enrollments for non-boarding programs?

Louis Hsieh

Yeah. Enrollment for short-term classes the target is about 900 students.

Adele Mao

Okay. So, these are not year along courses that goes from September to May.

Louis Hsieh

No, these are short-term. These are cram courses.

Adele Mao

I'll see, okay. Great, thank you.

Louis Hsieh

Because I showed you some of the synergies, we'll use some of the Beijing School facility for the short-term students.

Adele Mao

Okay. Thanks.

Louis Hsieh

So, I think the larger follow-up is that we would expect leisure time revenue to probably double a little bit more from last years number, which is about RMB13 million in revenues.

Operator

Your next question comes from the line of Mark Chang of Merrill Lynch. Please proceed.

Mark Chang

Hi, Louis and Mike. Can you take me through two things; one is your guidance for share-based compensation into '09 and '10? And second part is, I was wondering actually, during the Olympic period, if the student actually go back to their hometown they probably can only find New Oriental greater than any other competitors in terms of the overseas test preparation. So are you seeing any market share gains during this period or would you expecting market share gains during this period?

Louis Hsieh

I think we expect market share gains every year.

Mark Chang

Yes.

Louis Hsieh

Yeah. I think we'll see market share gains regardless of studying in Beijing or in other city. But you don't forget the ASPs in other cities except for Shanghai will certainly be a little bit lower than Beijing. So, we actually prefer them, who are studying in Beijing.

Mark Chang

Okay. And how about share-based comps?

Louis Hsieh

Share-based comps it is $2.7 million this quarter will probably be $3.5 million next quarter. US$3.5 million the quarter after and then will drop to probably $3 million or so the quarter after and then begin to fully decrease.

Mark Chang

Okay. And when you look at…

Louis Hsieh

Around the 4010 numbers you've got to know the '09 grams yet. But you can expect it to be about $12 million to $14 million a year.

Mark Chang

Okay.

Louis Hsieh

For 2009.

Mark Chang

Okay. Thank you.

Operator

Your next question comes from the line of James Mitchell of Goldman Sachs. Please proceed.

James Mitchell

Hi. Thank you very much, Louis.

Louis Hsieh

Yes, I do.

James Mitchell

Thank you for taking my question. On the 18% ASP growth could you shed a little bit of color around that in terms of what is the same class ASP growth versus the impact of shift to smaller class sizes? And then also, are you able to raise prices by a teens' percentage right across the board or is it more skewed toward overseas test preps suppose to the domestic?

Louis Hsieh

I think the overseas test preps has always have a little bit more pricing power. So, it's a little bit higher. The apples-to-apples comparison still hasn't changed but most profit is about 10% year-over-year. So, there is a significant shift to so what we call VIP English or small fact test prep and English courses. So, a lot of these students will pay RMB600, RMB700 or $100 for one class is couple of hours for small session classes. So, that's what's skewing the ASP calculation. So, the overseas test preps a little bit higher than 10% price increases. But the same year-over-year classes are the same size, same school tends to be 11%- 12%. Then the difference, because of the higher percentage of overseas test preps and bigger numbers coming from the product mix change to smaller classes. They do not diminish our margin numbers that you've seen in the '08 numbers. This has been a shift for two years now and our margins fee is improving.

James Mitchell

Great. Thank you.

Michael Yu

Thank you.

Operator

Next we've a follow-up question from the line of Catherine Leung of Citi. Please proceed.

Catherine Leung

Hi. I just wondered if you can share a little bit more color on your expansion of the U-Can. And first of all, how many enrollments you are seeing for the summer and anecdotally trying to understand that events recruiting sooner. Is there a significant overlap between the U-Can students and your existing students, or is there any new students coming in specifically to New Oriental or U-Can just trying to understand because U-Can is the newer business find for you and I mean the brand has historically not been associated with non-English or non-test prep courses?

Louis Hsieh

I mean I think we are still getting many more, if not most of our enrollments from students who take English from New Oriental and they will take an additional one or two other classes. U-Can is rolled on now in 21 cities but most of these are not at scale. So, Beijing I think of the 7,000 students, last time Beijing probably was one-third of that because U-Can is highlighted in Beijing for a longer period of time. So, we'll expect the other schools to catch up soon. Of the 7,000 enrollment last quarter in U-Can, 2,700 came from Beijing, so more than one-third. And then in the other cities, it's just being rolled out now, it's been in Beijing for a couple of quarters now. So, we would expect the other cities like Shanghai to begin to pickup over the course of the year. Our second biggest enrollment because they are near Beijing and they started early with Qingjing. Qingjing had enrollments of almost 1600 students over last quarter. So, as we roll out into the cities with one more resources you'll see the numbers from Shanghai and other big cities pick up.

Catherine Leung

Okay. And can I understand, is the expansion a little bit restricted by how fast and how comprehensive you can develop the content because, there is some variance among the gaokao some other various provinces. As you mentioned before, I think the science content is a little bit more complicated. So, is there some restriction in terms of how fast you are able to develop the content that is limiting somewhat the growth in the other cities as well.

Louis Hsieh

It's going to take us time, because in every city we needed to by market the U-Can brand and to be honest our schools are quite busy with their other programs. So, we need to motivate them to spend more resources and time to market U-Can and to train teachers for that probably that’s what. It will take some time; it will probably take a couple of years before we're at scale at most of the cities. Yes, we're still going to face challenges in specific provinces because each test is a little bit different. So it will take us some time to get the local knowledge of the variations.

Catherine Leung

Okay, thank you.

Louis Hsieh

Yes. That’s why I think we are targeting only 50,000 enrollments in the first twelve months.

Operator

Your next question comes from the line of Marisa Ho of Credit Suisse. Please proceed.

Marisa Ho

Hello, Michael. Hello, Louis. How are you?

Michael Yu

Hi, Marisa.

Louis Hsieh

Hi, Marisa.

Marisa Ho

I just have a predominating question, on your revenue guidance for first quarter of FY 2009, in what type of forward assumption have you made?

Louis Hsieh

Can you repeat that please Marisa, sorry.

Marisa Ho

The forward assumption you have made, when you made your first quarter.

Louis Hsieh

I left it at the current exchange rate 7.0157, which is what we translate the P&L into this earnings release. The current rate is about 6.84. So, the assumption I use is 7.0157 as you know I try to be conservative. So, I used them more and more considerably.

Marisa Ho

Right, okay, but realistically if the thought rate just stay, where it is now then it is basically too conservative on that.

Louis Hsieh

Exactly, well in better term we take weighted average throughout the quarter. So, that 7.0157 rate was a weighted average from April 1 through May 31. So, as of June 1 it was very lower at 6.9 and you are right, we have taken weighted average throughout the summer quarter to do the final calculation on our revenues. So, it did conservative by 0.1 per RMB per dollar.

Marisa Ho

Right. Good days and thanks.

Operator

Your next question is a follow-up from the line of Trace Urdan of Signal Hill. Please proceed.

Trace Urdan

Hi, thank you. I’m looking at the school and learning center openings and the first question I have is, are there any, do you have or are there any in those numbers any sort of smaller tuck under acquisitions of other schools as you move are they all organically open?

Louis Hsieh

These are organically opened.

Trace Urdan

Okay. So…

Louis Hsieh

But one thing Trace is, though you know is that, we closed two learning centers in Beijing. So, there lease is expired. So, we actually added 25. We closed two in the net 23 for the quarter.

Trace Urdan

Okay. So, then my follow-up question to that is, what kind of lead time do you guys have in terms of opening up these centers and there is always a big disparity between what you are able to open in the quarter and what you have conservatively estimated that you’re going to be able to open in advance in the quarter. I wonder what kind of visibility you have?

Louis Hsieh

Well, we have a budget right? And so we have a budget of 50 to 60 schools and learning centers for the year. Now the 30 came up last year because do we call it right two years ago in fiscal year ’07 we opened 19 schools and learning centers. So, total of 19 facilities. We’ve never opened more than 35. So, when I forecasted you we’d opened 40, I didn’t think we’d ever do it, but we opened. So, the school had the demand that was strong, where it kept opening on, but we’ve never opened more than 35 in a year before that, as you know to open up, really the facilities take time, get the final location, you have to do tenant improvement in the final lease with higher personnel. So, it’s accustomed to our school heads and to our real estate teams that we were able to open 77. Now, I think we’ve learned from that and I think since we have more schools and learning centers opened there’s actually more schools operational, where you’ll see the learning centers number go up, but last year it was probably a record number for at least in next couple of years.

Trace Urdan

Okay. So, what kind of lead…

Louis Hsieh

There is a disconnect rates between what a lot of times what the school had budgeted and what they can physically open.

Trace Urdan

Understood, how far in advance do you typically need to contract the real estate and the start up cost in advance of opening the new center or…

Louis Hsieh

About three to six months to open up the learning center. Three months is a good number. Six months is probably…

Michael Yu

A Larger number.

Louis Hsieh

A conservative number.

Trace Urdan

Okay, fair enough. And then I guess just as a follow-up question, I think I heard you state pretty clearly in the next two weeks you would have some additional information about what kind of level of travel restrictions are likely to take place around the Beijing Olympics. Can we expect that you’ll share that information with us when you…

Michael Yu

Anything is material, we’ll probably put it in the press release. But a lot of the times the information is already out there. People pick it up, the newswires will pick it up.

Michael Yu

We don’t expect the policy of the government will change George, dramatically from now. The policy says that everybody can come to Beijing, of course you have to show your identification card. They will ensure you have an identity card, they will check you are a good persons; you are allowed to come in Beijing. And all our students are good person. Actually, they are allowed to come to Beijing, that's the policy today. We don't know, what something that people cannot think about can happen mostly it should be like that all through Olympics games I think.

Trace Urdan

Okay

Louis Hsieh

The fact is that if you come to Beijing you'll see that there is checkpoint in every road going into the city.

Trace Urdan

I just know if I am a good person or not?

Louis Hsieh

With your ID card they can tell you if you have a criminal record.

Michael Yu

I got detected yesterday.

Louis Hsieh

Michael actually got into Beijing though.

Michael Yu

Even though I am the bad person.

Operator

We are now approaching the end of the conference call. I'll now turn the call over to New Oriental's Chief Executive Officer, Michael Yu for closing remarks.

Michael Yu

Okay, hello everybody. Thank you for attending this conference call and I thank you for all your questions and thank you for your concern and understanding about New Oriental. We also, anyway we are trying our best to the management and to run New Oriental smoothly over the Olympics Games and part of the Olympics games in China. And I am sure both will be successful the games and New Oriental. Thank you, very much for attending.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.