Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer
session. (Operator Instructions) Your first question now comes from the line
of Philip Wan from Morgan Stanley. Please ask your question.
Philip Wan - Morgan Stanley
Hi, Louis and Sisi, thanks for taking my question. My question is about your
overseas business, as you mentioned you are seeing intensifying competition
, could you elaborate a little bit more on where do you see tougher
competition in large class format or smaller class or one-on-one format? And
if it’s more difficult to compete in one-on-one or due to other reasons
and if that’s the reason, can New Oriental sustain the pricing power given
a more competitive environment? Thank you.
Louis Hsieh - President and Chief Financial Officer
Thank you, Philip. Good questions. The competition overseas test prep is not
in the large classes, it’s really in the small and one-on-one classes. And
as you have known us for years and many of you know, some of our own
teachers have left New Oriental to start competing schools. If the barriers
entry are lower when you do small classes and one-on-one, some of our
teachers as they takeaway just five students, it pays their whole salary. So
, you can imagine that there is a lot of good teachers who are starting
their own business in the one-on-one and small class, where brand is not as
big a factor. In the large class, we still obviously dominate. So, that’s
where the competition is coming from.
The second leg of competition, where middle and high schools throughout
China have setup affiliate programs with international schools. So, they are
actually getting paid to send their public school students to those other
schools. They are getting paid by those schools of their profit share. And
so that is also hurting New Oriental’s business, because as the public
schools realized that more and more the students want to go to college
internationally or graduate school, they are offering international classes
on weekends and evenings in competition with New Oriental to affiliated
programs. And they are obviously encouraging their students to go to their
schools. So, those two areas of competition have put a damper on our
overseas customer business. Having said that we have seen a very strong
bounce back in this third quarter, so enrollments as I said, up to the end
of last week were up 15% and cash revenue up 37% for the first, almost two
months of this quarter. So, I think the margin remains healthy. Also Philip
remember that the overseas test prep business as the number of students
leaving China has slowed. I think last year 390,000 or so according to
Ministry left China, that’s only 15% growth whereas in prior years, number
of students leaving China, it was over 20%. So, I think the market overall
has slowed a little bit the growth rate. And so I think those are the
primary challenges we face in the overseas test prep business.
Philip Wan - Morgan Stanley
Also do you expect New Oriental to sustain the pricing power as we have seen
has a couple of years? And do you have any specific strategy if you
overcome the other two increasing competition that you just mentioned?
Louis Hsieh - President and Chief Financial Officer
Yeah, I think we will sustain the pricing power that we have enjoyed for the
last year 10, 15 years. And I think what we will do is that we will
continue to do what we have been doing, which is to distance ourselves and
become a more premium product. So, in the one-on-one and one-to-five space,
we’ll continue to raise prices and we actually hope that some of those
students have actually picked the large class offering. Many students, their
parents will not sacrifice in this area. So, they will always pick New
Oriental as the best brand provider. So, if we continue to raise prices we
expect some students to actually switch to the large classes. In addition
for some of our best teachers, we are raising salaries Philip to keep them
from trying to spin off on their own and compete against us. So, I think is
that we are working on that, also we are working to increase utilization in
the overseas test prep centers either one-on-one in the small class to
improve profitability. So, doing all that at the same time, I am not so
worried about the overseas test prep business like I said it’s our bread
and butter and it will continue to grow. The market remains quite healthy.
And the overseas study consulting business is booming with revenue growth
between 60% to 80% year-over-year. So, I think we are well positioned here.
Philip Wan - Morgan Stanley
Thanks Louis.
Louis Hsieh - President and Chief Financial Officer
Yeah.
Operator
Thank you. Your next question comes from the line of Jeff Meuler from Baird.
Please ask your question.
Jeff Meuler - Baird
Yeah, thank you. I guess Louis, could you just talk a little bit more about
what you are doing specifically in Beijing and Shanghai in terms of a
turnaround plan. And I know that you have a new management in place and some
of the recent trends have been more encouraging. But as you talk about the
increased competition and the students staying in their local markets
instead of traveling to Beijing and Shanghai to take courses, it sounds like
those might be longer term headwinds. So, I guess any additional specifics
that you could talk about in terms of a turnaround plan, especially beyond
just expense adjustments if you are doing anything to, I guess, stimulate
stronger enrollment growth?
Louis Hsieh - President and Chief Financial Officer
Yeah, thank you Jeff. That’s a very good question. In Beijing and Shanghai,
Beijing is not really that problematic. Beijing still had 26% revenue
growth in the quarter. Shanghai is the more problematic one and that’s been
the case for three years now. And so with Shanghai as you know and Beijing
both we have put in new school heads and management teams. So, they need
sometime to integrate and to mature. I think what we have also done is we
have moved Zhou Chenggang who used to run Shanghai School is serious hero
and runs Visions Consulting he is spending a lot more time in Shanghai with
the new Shanghai school head. Also Chen Xiangdong, our President of Domestic
Business and Sha Yunlong are two of our most senior five people are
spending, focusing their time on Beijing along with Michael, our CEO. So,
there you’ve got three of our five most senior people spending almost all
their time focusing on Beijing, and then another couple focusing on Shanghai
. So, I think is that we are confident the Beijing will get turnaround
relatively soon, but Shanghai may take a bit longer, but I think we have the
right pieces.
We are looking at doing more marketing in Beijing and Shanghai. We are
looking at increasing, like I said, some of the teacher paid to prevent some
defections in the overseas test prep area. We are increasing the
utilization. So, Beijing’s issue is really not revenue, Beijing’s issue is
more utilization and profitability. So, if we increase the utilization that
will help Beijing significantly. We are also spending some money in Beijing
and Shanghai on marketing. Even though many of the students are staying in
the localities, I mean we think we can still pull some back into Beijing and
Shanghai during the winter and the summer holidays. So, they are spending
some money on summer camp marketing and winter camp marketing for overseas
test prep, so hopefully that will improve their top and bottom line
performance. So, we are doing all these. At the same time, we are also
reducing headcount, especially in Beijing headquarters side to increase cost
, so Beijing is an issue of profitability. Shanghai is an issue of growth
and profitability. So, Shanghai is the more wounded of the two. So, Beijing
we are quite confident will be fixed relatively soon Shanghai is the one
that will take some more time. Did that answer your question, Jeff?
Jeff Meuler - Baird
Okay. And then, it did, thank you very much for that. And then in terms of I
guess expense base inflation versus ASP increases if you strip out mix, so
what are underlying ASP increases if you normalize for mix? And then how
does it compare to what the expense base inflation is if you strip out lot
of the one-time things that are going on the severance expense and the legal
expense, regulatory expense, etcetera.
Louis Hsieh - President and Chief Financial Officer
Yeah, I think our enrollments have accelerated in this current quarter. So,
I think is that if you look at it for year-to-date, our enrollments are
probably up 11%, over 11%. And price increases up about on an apples-to-
apples basis about 14%. So, that’s why you get 25% revenue growth just
organically, not counting the mix difference, so the mix takes it up to 30%.
So, that’s what we are seeing. As far as expense cost like I said, we are
seeing salary inflation typically inline with what has been the past years
of probably 10% to 12%, but the issue relates to other cost right, social
welfare cost and others which take us up to about 13%, 14%. So, rent is
stable at around 10% to 12%. So, it’s really – our ability still remains
to increase cost. What’s striking us down is that we just over expanded. I
mean, it paid off right. We got our intended target of Occupy the Market. We
are number one or number two in almost every market that we have been there
for more than five years, which is what our target was. We are growing very
nicely in all those cities outside of Beijing and Shanghai, the Tier 2,
Tier 3 cities. So, we achieved our objective with the Occupy the Market
strategy. We probably added 238 learning centers in a four-quarter period is
just too much. As I told you in the past, we add 80 to 100 learning centers
a year. We typically it will be margin accretive. When you had 238, it’s
going to destroy your margins in a big way. And so that’s why what I tell
people is it’s like our where we’ve been our learning center binge now in
the overhang period. So, we will probably be here for another two quarters.
So, I think by Q4 or Q1 with that excess capacity would have been absorbed
and so it will be like if we almost had no learning centers for the next two
quarters, it will take us back to a rationale path.
Jeff Meuler - Baird
Okay, thank you, Louis.
Louis Hsieh - President and Chief Financial Officer
Thanks, Jeff.
Operator
Thank you. Your next question comes from the line of Mark Marostica from
Piper Jaffray. Please ask your question.
Mark Marostica - Piper Jaffray
Yes, thank you. Louis, could you give us some more color as to where exactly
you are going to take cost out of the business? Will you be looking to
close learning centers selectively, if so how many? And then just more
details around exactly where the costs are coming down? And then if you have
a goal in mind in terms of how much cost you try to take out of the
business that would be helpful as well?
Louis Hsieh - President and Chief Financial Officer
That’s a work-in-progress Mark, but I can tell you what we are doing. We
are taking cost out and so as we are closing unprofitable learning centers.
So, we are going center-by-center, school-by-school and looking at the
number of employees in each school. And we have a revenue target per
employee. And so schools that don’t meet those, profitability side, we have
to cut employees. And so that’s why I expect another 1000 or 1500 to be
cut by the end of this fiscal year in May. Yes, remember that many of these
employees have actually signed contracts through the end of the fiscal year.
So, we really can’t let them go. That’s why it hasn’t been more
accelerating. The other thing is that severance cost, we have to pay one to
two months for every year they have been employed. So, those costs are
significant US$6,000 to US$10,000 per employee. So, it’s a very expensive
cost, if you do it too quickly. So, those are the things that we are faced
with. We are closing unprofitable learning centers. I would expect to close
15 to 25 learning centers that are unprofitable. And so that’s an ongoing
review process around the specific number in mind as far as our cost out,
because I think if you take out too much, you end up reduced, but we are
looking more utilization. So, the other side is that, because we are not
opening up any more learning centers other than like in very fast growing
cities that are almost fully utilized. We would expect that as revenues
continue to grow at 30%, 35% year-over-year, there is no capacity increase.
If no capacity increase, then obviously the utilization will go way up and
that will take the profitability up. So, that sort of our strategy is to
reduce headcount, improve utilization, and close down unprofitable learning
centers.
Mark Marostica - Piper Jaffray
Okay, thanks for that. And then one follow-up, deferred revenue growth saw a
big jump this quarter, can you talk about the composition of deferred
revenue this last quarter compared to a year ago just to help us understand
how that deferred revenue gets recognized into revenue?
Louis Hsieh - President and Chief Financial Officer
Yeah, about $278 million of deferred revenue, it’s up 37% or 38% year-over-
year, half of it about 51% will likely get recognized this fiscal quarter,
Mark, and then the rest will be deferred into Q4 and into Q1. So, demand as
you know revenue is not our problem.
Mark Marostica - Piper Jaffray
A year ago?
Louis Hsieh - President and Chief Financial Officer
Yeah, versus year ago, year ago it’s probably a little bit slightly higher
by 53% or 54% was recognized and that’s because there is more and more
students signing up for multiple quarters. And as you know as the one-on-one
business grows, it would also add to the deferred revenue number. Now, we
are trying to rationalize the growth of one-on-one meaning that we prefer
students that take one-to-five classes than we take one-on-one because they
are more profitable. We are also are going to, because we are going to stop
or very severely curtail learning center growth, the one-on-one centers will
actually increase utilization, which will increase your profitability. So,
the fact we are not opening up more learning centers will reduce the one-on-
one growth and hopefully but will improve utilization and will push students
for one-to-five. So, that’s sort of our goal.
Mark Marostica - Piper Jaffray
Great, thank you.
Louis Hsieh - President and Chief Financial Officer
Thanks.
Operator
Thank you. Your next question comes from the line of Ella Ji from
Oppenheimer. Please ask your question.
Ella Ji - Oppenheimer
Thanks. So, Louis, how much of revenue in Beijing and Shanghai school comes
from the overseas test prep?
Louis Hsieh - President and Chief Financial Officer
In Beijing it’s higher, Beijing I think it’s probably around 50% or more.
I think that would change over time as you can that’s better. That’s why I
said I am not worried about Beijing, because when Q2, the revenue was still
even 26% growth despite the fact that overseas test prep was down,
enrollment 7% even the enrollments were up, I mean, revenues up 23%. And as
you know, the enrollments are quite strong so far this quarter in overseas
test prep, which benefits Beijing the most. Shanghai, I think it’s probably
less than 50%, but like the Shanghai it has to work through other issues.
Ella Ji - Oppenheimer
Alright. And then so I say that your Beijing and Shanghai schools’ revenue
grow 20% in a quarter, but bottom line declined 50%. Can you give us some
colors why the margins at Beijing and Shanghai schools suffered so much in
this quarter? Is there anything in particular and do you expect this
declining bottom line to continue?
Louis Hsieh - President and Chief Financial Officer
I don’t expect it to continue. Actually, Shanghai actually lost money
during the quarter. So, I obviously don’t expect that to continue. So, I
think the cost pressures in Beijing and Shanghai relate partly to headcount,
where the headcount increased, but the revenue did not over the last year,
revenue up 20%, but the headcount was up way much more than that. I also
think the, like I said that the fact that the overseas test prep was weak
during the quarter, had a big impact on the profitability in Beijing and
Shanghai for the quarter, because of as you know the utilization rate during
Q2 was the lowest of the year and because of prior expansion if it’s the
hardest in Q2. So, now that we have controlled the cost in the speed of
learning center openings, I don’t expect this to repeat itself. I think we
both will see much better profitability pictures going forward.
Ella Ji - Oppenheimer
How many learning centers did you open in Beijing and Shanghai in the past
year?
Louis Hsieh - President and Chief Financial Officer
I don’t have that. Sisi, do you know that exact number?
Sisi Zhao - Senior Investor Relations Manager
I don’t know the exact number, but it should be somewhere around 10.
Louis Hsieh - President and Chief Financial Officer
10 to 12, yeah, but see we have that and then you have the overseas test
prep business which where the enrollments were actually down in the quarter
year-over-year. And so those with more centers, more people and Shanghai
actually revenue is only up 4% or is it Shanghai in the quarter was only up
in revenue approximately we didn’t get the right exact number. Revenue in
the quarter was up. Revenue was only up 4% in Shanghai. So, when you have
number of headcount go up and you have centers go up, but the revenue goes
up 4%, it crushes your profitability. So, like I said, China is going
through a transition, it has a new school head and new department heads. And
they need time, they can’t walk in and fix things in one quarter or two
even take longer.
Ella Ji - Oppenheimer
Right, okay got it. And then regarding your margins I think last quarter I
kind of get a sense that we expect – we are expecting margins improvement
since the 3Q of this year, but you just mentioned improved margins in a
couple of quarters probably toward the end of this fiscal year. So, could
you elaborate on that is the cost and expenses that the impact from the past
expansion is that being bigger and longer than you originally expected?
Louis Hsieh - President and Chief Financial Officer
Yeah, it’s bigger and it’s longer than originally expected. It’s also the
severance costs are actually higher, right, and because a lot of these
employees have signed contracts through the fiscal year end, I mean in May.
If you let them go now, you have to pay them through May anyway plus their
severance cost. So, actually the severance costs are quite high. So, we are
staggering the reductions between Q2, Q3, and Q4. So, it is taking longer
Ella. And also like I said is the learning center binge of adding 238
learning centers in four quarters, the impact is much greater on our bottom
line than it should have been. The truth is I think a lot of that problems
happened in Q4 and Q1, especially in Q1 where we added 89 new learning
centers. And I think that was the time that honestly Michael and I were
distracted by the Muddy Waters and SEC stuff. And I think we took our eye
off the ball a little bit, so now we are paying the price. So, we are
working as hard as we can to fix the situation, but you still need one or
two more quarters. So, you are right, we originally were hoping to see the
worst of it in Q2 and turnaround in Q3. I think that’s been delayed one or
two quarters. It’s harder to kind of take the cost out than I was hoping
for originally.
Ella Ji - Oppenheimer
Got it. Thank you. That’s all my questions.
Louis Hsieh - President and Chief Financial Officer
Thank you, Ella.
Operator
Thank you. Your next question comes from the line of Jin Yoon from Nomura.
Please ask your question.
Jin Yoon - Nomura
Yeah. Couple of questions. Just on the Shanghai side of the business, so can
you expect that business I mean obviously the business has been in trouble
over the last few years? Can you expect that business to actually bounce
back without incurring, I guess, pricing I mean with the same level of
pricing levers that you have in other areas, because you may have to do more
discounting or whatsoever, because of the fact that competition in that
market is a lot more severe or increase your headcount in sales and
marketing our expenditures to kind of entice the students back into that
market. Can you bounce that business back with the same margin profile as
some of these other cities? And the second question is regarding your
expansion I know that you guys expanded 200 some odd schools over the last
year or so. Can you shutdown the same schools as quickly as you open them or
their cost implication that don’t allow you to do that, because I assume
that most of these new schools that you opened are the main reason for the
cost structure. So given the fact that they are not going to be profitable
in the near 12 to 18 months anyways, is it easier for them to shutdown as
quickly as you open them? Thanks.
Louis Hsieh - President and Chief Financial Officer
Those are good questions. On Shanghai, the answer is I don’t know Jin,
because Zhou Chenggang used to run Shanghai school. So, he has been
dispatched back there to help (Tian Hou) fix Shanghai school, the whole
brand new team there. I don’t expect us to go down in as far as pricing
ever. So, I don’t know how fast will take it up. I think Shanghai is quite
competitive, especially at the mid end. So, I think if we don’t - we have
to be at the premium end. So, just a matter of the pricing I will leave up
to them, the people on the ground there to figure out what’s the best
strategy to increase market share again. As far as your question on the
learning centers, it’s a good point. I think we expanded too fast over the
last year and now we are going center by center looking at utilization. In
some of the newer centers, we do have breakage clauses in the leases, which
as we still have to incur a big cost of six months rent. So, it’s these
kind of breakage costs and severance costs that are killing our bottom line
this quarter and into the next two quarters. That’s why I did anticipate
what the cost is to rationalize this business.
And so it is a big problem. We are trying to combine some of the centers,
the ones that we have added and we are letting some leases expire, which are
up for an expiration from four, five years ago. And then we are just using
new learning centers to take that capacity. So, we are imagining the best we
can which are right, the breakage costs are quite significant. And it’s
not easy to close a learning center that was just opened a year or year and
a half ago. So, the ones that are just no chance will eat the six-month
breakage cost. The ones that are expiring will try to combine centers nearby
to save cost. So, we are doing everything we can like I said to get over
this learning center binge that we were on for a couple of years, right. It
doesn’t solve itself in one or two quarters, it takes sometime. So, we are
in the overhang in the hangover period.
Jin Yoon - Nomura
Great. Thanks Louis.
Operator
Thank you. (Operator Instructions) Your next question comes from the line of
Steve Zhang from Macquarie. Please ask your question.
Steve Zhang - Macquarie
Hi, Louis. Just going on utilization, can you talk a little more about what
your utilization is right now compared to a year ag, and perhaps where you
hope to be by the end of the year?
Louis Hsieh - President and Chief Financial Officer
Yeah. I think our utilization for Q2 this last quarter was an all-time low.
It’s embarrassing it was below 25%. And so I expect Q3 obviously to be much
better than that and I would expect even our slow quarter Q2 to be
somewhere north of 35%. And that’s why I think if you figure it out right,
if we keep our revenues growing at 30% plus a year and we don’t add any
more capacity that will take care of the utilization question next year. It
’s the 238 learning centers we opened. That is the big problem in the 10,
000 headcount we added. And so it takes a year or two to absorb that. In the
Q3, we expect utilization to be probably in the north of 40%, 45%. And
obviously, our summer is our best utilization period, which is usually north
of 60%. So, this utilization is the focus. We want more students in the
seats. We want the more classes being opened with full students. So, that’s
why utilization is our number one focus.
Steve Zhang - Macquarie
Okay. And just follow-up, are you still planning to keep your net adds
within 20 sschools or are you thinking about reducing that?
Louis Hsieh - President and Chief Financial Officer
We actually have fewer learning centers today than we did as of November
30th, that’s how strict to control on keeping on the learning center
increase. We are not allowing any learning centers unless the school is
really booming. It’s really doing well, like if Chenggang wants to open a
learning center, I will let them. The profit margin is super high. Any of
this center, we are not letting them open learning centers unless their
utilization is really high. And so, that’s why we are tracking utilization
very closely now. You understand that it took a crisis for finance to take
control of that process. It used to be that any VP could approve a learning
center opening. And so school heads would just go to the VP that had a good
relationship with and get approval as they were just keep opening learning
centers. That was the easiest way for them to meet the revenue numbers and
to expand the footprint, which is what our target was for them is to be
number one, number two. So, they thought that it’s the bigger profitability
would take care of itself, it didn’t work out that way. So, now finance
has control of new center openings and we are being very – we have taken
that away from operations. And so we are being very strict, like I said, the
18 that were opened last quarter, I think all were opened before we took
that approval process. So, we basically approved like maybe one or two new
openings since then for the last couple of months and we closed we have let
8 or 10 in close. So, we actually have fewer learning centers today two
months into Q3 than we did at the end of Q2 in November. So, you can see
that finance is much tougher to deal with for the school heads than their
neighborhood Vice President was.
Steve Zhang - Macquarie
Okay, thank you.
Operator
Thank you. Your next question comes from the line of Fei Fang from Goldman
Sachs. Please ask your question.
Fei Fang - Goldman Sachs
Hi, Louis and Sisi. Thanks for taking my question. Regarding the ASP
increase, of course other segments, the trend has been very strong. So, how
long do you think the momentum will last, especially as you execute the
Harvest the Market strategy meaning probably the upside for enrollment
growth could be limited. Can you give medium-term ASP increase guidance?
Louis Hsieh - President and Chief Financial Officer
I think it will continue about the same. I think part of the way we get the
profit margin up is I want to increase prices, especially at the kids’
level. I think we’ve got each of our product lines high-profit model. So, I
think we will continue to take prices up on a blended basis in the 16%, 17%
range, so 14% for apples-to-apples and higher than that because of mix. So,
I don’t see any slowdown in that. I think the key is to just slowdown is
to increase utilization. If we do that, we don’t have a demand problem
right, our enrollments even with these price increases are still growing
back up again. We had a slow quarter in Q2, but they are rebounding in Q3.
So, I think it’s not a demand problem it’s a cost problem for us. And I
think the way we get the cost issue under control as utilization and control
the learning centers, so there is no expansion. We still have pricing power
is my point.
Fei Fang - Goldman Sachs
I understood. So, can we just briefly talk about the cost side as well,
noticed that the increase of your sales and marketing expense has been
outgrowing the revenue in the past few quarters. So, do you think it was
partially driven by a business mix shift towards the more sales driven one-
and-one business?
Louis Hsieh - President and Chief Financial Officer
That’s exactly what it is.
Fei Fang - Goldman Sachs
So, if that’s the case, can we assume that sales and marketing will sort of
structurally outgrow revenue going forward?
Louis Hsieh - President and Chief Financial Officer
No, because we were trying to push more people to one-on-five. We are trying
to curtail the one-on-one growth too, so we don’t want to open any more
learning centers. So, the problem more take care of itself in the fact that
one-on-one students will have to go at the existing centers and because we
are not opening up new centers that will mean that the growth will slowdown
on its own and we will push increased utilization in the existing centers,
which is we won’t be adding a lot of more sales people, sales and marketing
people there, because we are not adding centers, right, so that will take
care of itself.
Fei Fang - Goldman Sachs
Thank you, Louis.
Louis Hsieh - President and Chief Financial Officer
Yeah.
Operator
Thank you. Your next question comes from the line of Vivian Hao from
Deutsche Bank. Please ask your question.
Vivian Hao - Deutsche Bank
Hi, Louis. Thank you for taking my question. First of all, it’s a question
on your guidance, so like-for-like you are guiding about 22% to 27% growth,
but if I remember correctly last year was a abnormal seasonality of a
shorter winter break between Chinese New Year and also New Year, but you are
indicating the enrollment growth has recovered to 15%?
Louis Hsieh - President and Chief Financial Officer
The oversea test preps.
Vivian Hao - Deutsche Bank
Yes, just try to understand if it’s on easier compensation, why the
guidance is still within this moderate range? This is my first question.
Louis Hsieh - President and Chief Financial Officer
Well, I don’t think 30% growth is moderate. I mean, if you look at our
competitors, they are growing about 15%, 20%, whatever the other ones have
announced. So, I don’t think it’s moderate. Number two is that don’t
forget, it’s a double-edged sword, Chinese New Year was early last year,
because of that actually the enrollments for Q2 were impacted. So, if you
think about it, last year the enrollments from overseas test prep were front
loaded into Q2, that’s why we have 7% enrollment decrease this year, right
. So, it’s a double-edged sword because January 23rd was Chinese New Year
last year, this year it’s February 10. The later Chinese New Year actually
hurt Q2 enrollments. Right, so it goes, it cuts both ways. That’s why I
always asked you guys don’t look at it on a quarter-by-quarter, look at it
year-over-year. Right, so don’t compare quarters, because of the timing of
certain holidays affects the timing of certain enrollments. So, Q3 should
benefit means there is nothing wrong with overseas test prep by enrollment
popping back up, because Q2 was down. Q2 was down, because last year Chinese
New Year was so early, so pushed enrollments into Q2 of last year. Does
that make sense?
Vivian Hao - Deutsche Bank
Okay.
Louis Hsieh - President and Chief Financial Officer
Yeah. So, you understand it, that’s why if you take year-over-year it’s
fine. If you take the whole year, don’t just look at one quarter, that’s
why I tried to explain to you during the script part of this call that we
saw bounce back already. So, it’s not the oversea, you can write the
overseas business off as dead. It fell this Q2 because last year Chinese New
Year was early. So, the enrollments came in early, which means and so Q3
was weak, because Q2 was stronger. This year is the exact opposite. So,
overall if you look at it, it’s the same. We are still seeing strong growth
in overseas.
Vivian Hao - Deutsche Bank
Okay.
Louis Hsieh - President and Chief Financial Officer
Okay.
Vivian Hao - Deutsche Bank
Right. My second question is in terms of your center rationalization, you
are saying that the key focus is on utilization improvement, so do you think
I mean do you think that the students will naturally go from one center to
the other EDU because you combine it or there will be certain permanent loss
of traffic because of closing down of some of the unprofitable centers?
Louis Hsieh - President and Chief Financial Officer
I think there will be a permanent loss. I expect – fully expect a permanent
loss of some students because of inconvenience. But that’s better than
running a whole bunch of unprofitable centers, because they are
cannibalizing each other. So, like I said, I don’t think our Occupy the
Market strategy was wrong, it was correct. Basically we occupy the whole
national market in the big cities. We have the position we want. We have the
long-term brand name, the long-term market position we want being number
one or number two in each city. I think we overdid it. I think when we went
into 238 centers in one year is too much, it was my decision last year we
would open 120 as I told you guys it’s just unfortunately I didn’t have
control of that process last year, I do now. So, you will see us – so we
will go from one way where we opened too many centers 238, to go the other
way where we opened probably less than 50. And over two years that will take
care of itself, yes. So the long answer is yes, Vivian I expect some
permanent loss, but honestly I don’t care I have got to get this the profit
margin up.
Vivian Hao - Deutsche Bank
Okay great. Thank you.
Operator
Thank you. Ladies and gentlemen, we are now approaching the end of the
conference call. And I would now turn the call back to New Oriental’s
President and CFO, Louis Hsieh for his closing remarks. Thank you.
Louis Hsieh - President and Chief Financial Officer
Thank you again everyone for joining in today’s call. If you have any
further questions please feel free to contact me or any of our investor
relations representatives.