New Oriental Education & Technology Group Inc. (NYSE:EDU) Q3 2021 Earnings Conference Call April 20, 2021 8:00 AM ET

Company Participants

Sisi Zhao - Director, Investor Relations

Stephen Yang - Executive President and Chief Financial Officer

Conference Call Participants

Felix Liu - UBS

Mark Li - Citi

Candis Chan - Daiwa

Tian Hou - T.H. Capital

Sheng Zhong - Morgan Stanley

Alex Xie - Credit Suisse

DS Kim - J.P. Morgan

Lucy Yu - Bank of America Merrill Lynch

Jessie Xu - Nomura

Christine Cho - Goldman Sachs

Operator

Good evening and thank you for standing by for New Oriental’s FY 2021 Third Quarter Results Earnings Conference Call. At this time, all participants are in a 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. Thank you, please go ahead.

Sisi Zhao

Okay, thank you. Hello everyone, and welcome to New Oriental’s third fiscal quarter 2021 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, Executive President and Chief Financial Officer. After his prepared remarks, Stephen and I 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

Thank you, Sisi. Hello everyone, and thank you for joining us on the call. With the pandemic largely controlled in China, albeit it’s a small wave of outbreak in the northern part of the country, our business navigated the challenges and saw strong momentum in recovery. We are pleased to announce a set of financial results in the third quarter of this year that exceeds our expectations.

Total net revenue was $1,190 million, representing a 29% increase year-over-year, which is a very encouraging reflection affirming the business strategy that we have taken during the difficult period. Our key growth driver, K-12 all-subjects after-school tutoring business, achieved year-over-year revenue growth of approximately 37%.

Our U-Can middle school high school all-subjects after-school tutoring business continued its momentum with a growth of approximately 35%, while our POP Kids program recorded a growth of approximately 40%. Our overseas related businesses, despite being under continued pressure due to the uncertainty of the pandemic situation and travel restrictions around the globe showed strong resilience.

Although the overseas test prep recorded revenue decrease of about 12% for the quarter, this result that is better than we expected while the overseas consulting and study tour business recorded a revenue increase of about 11% year-over-year which is a very positive result.

Our industry-leading OMO system has been our core strategy since the start of the pandemic early last year and it has once again proved to be instrumental in this quarter.

The possibility of the - and effects of COVID-19 outbreaks in certain part of the China need strong flexibility in migrating students between online and offline classes is truly crucial during the challenging period and our OMO systems has been the answer to that. The small wave of COVID-19 outbreaks in around 20 cities in Northern China once again highlighted the importance of OMO as they enable us to respond swiftly and to migrate the offline class to online avoiding distractions of the student classes and learning progress.

At the same time, in other cities where the pandemic is largely controlled, vast majority of the students migrated from the online classes back to offline learning centers encouraged by its effect of this we have been committed to expand the reach of our OMO system and are delighted to say that we have piloted the OMO online courses in vast majority of existing cities and around 25 new surrounding satellite cities in the winter semester attracting a promising number of new customers.

The OMO system effectively boosted the enrollments and revenue with a low customer acquisition cost and is becoming the new driver for our business growth and it has solicited an increased contribution to the company’s overall revenue this quarter.

Total student enrollments in academic subjects tutoring and test prep courses in the third fiscal quarter of 2021 increased by 43% year-over-year to approximately 2,296,800, which is in line with our expectations.

In terms of pricing, per program blended ASP, which is cash revenue divided by total student enrollments, increased by about 7% year-over-year in dollar terms. As for hourly blended ASP, which is cash revenue divided by total teaching hours increased by 7% flat year-over-year and is in line with our normal price increase of about 5% to 8%.

To provide a breakdown of hourly blended ASP, please note that U-Can classes increased by 5%. U-Can VIP increased by 1%. POP Kids increased by 4% and overseas test prep programs increased by 12%, all year-over-year in RMB terms.

Now I would like to spend some time to talk about this quarter’s performance across our individual business lines in detail. As the pandemic became largely under control in China, recovery momentum continued to pick up in this quarter across our business lines.

Our key revenue driver, K-12 all-subjects after-school tutoring business, achieved year-over-year revenue growth of approximately 37% in dollar terms. Breaking it down, the U-Can middle school and high school business recorded a revenue increase of approximately 35% in dollar terms for the quarter. Student enrollments grew approximately 56% year-over-year for the quarter.

Our POP Kids program delivered outstanding results with the revenue up by about 40% in dollar terms for the quarter. Enrollment increased about 61% for the quarter. Our overseas related business, including test prep and consulting business showed encouraging signs of the recovery despite facing the most difficult challenges due to the cancellation of overseas exams and restrictions on travel, as well as the unpredictability of the pandemic situation in different parts of the world letting students hesitant to study abroad.

The overseas test prep business recorded a revenue decrease of about 12% in dollar terms for the quarter in comparison to a decrease of 29% in the last quarter, while the overseas consulting and overseas study tour business recorded revenue increase of about 11% in dollar terms year-over-year for the quarter, continuing its recovery momentum from last quarter’s 6% increase.

And finally, VIP personalized class business recorded cash revenue increase of about 36% year-over-year for the quarter. We continued to carry out our capacity expansion this quarter as we opened one new offline training schools in the city of Hengshui.

This increased the total square meter for classroom area by approximately 17% year-over-year, 7% quarter-over-quarter by the end of this quarter. The increase is in line with our expectation, as we gradually ramp up our expansion efforts throughout this academic year to prepare us for recruiting more new student at the start of the following academic year.

The expansion in our offline education network has also made sure that we are fully prepared for when the pandemic is over and our service can resume with a strong presence across different Chinese cities. We rolled out two tutor class model for POP Kids program in 58 existing cities, for U-Can program in 27 existing cities with a satisfactory customer retention and scalability, we will continue to use the model to increase our market penetration in those markets we have tapped into.

As outbreak of COVI-9 has highlighted the importance and demand of online education, we have allocated more resources to this space and invested $59 million in the quarter to improve and maintain our OMO integrated education ecosystem.

Our success in piloting the OMO system in around 25 new satellite cities through the nearby major cities this quarter is yet another testament of how these low-cost but high return OMO business model can rapidly become one of the most far reaching education service in China. We are very optimistic about the growth potential for our OMO system in the next few quarters.

Apart from the OMO infrastructure, we have allocated part of the resources to advance the training program for our teachers to enhance their online-offline integrated teaching skills in response to growing demand. At the same time, we continue to upgrade our technology platforms and will broaden the usage of the online tools and content in our OMO system for all business lines throughout the whole network, as well as further develop the best teaching content and courseware to cater to online-offline integrated education methods.

We are glad to see that our industry-leading OMO ecosystem has the only successfully managed to cushion most of the impacts by the pandemic but we also see our customer retention rates remain stable. Furthermore, the effects of the bolstering enrollments and we believe it will continue to play a huge part of the recovery of business in coming quarters.

To capture the huge market opportunity in online education area, Koolearn invests the more resources that’s been executing new initiatives in online K-12 after-school tutoring business since the second half of last fiscal year and added a meaningful amount of customer service representatives and marketing staff.

These things has consequently reached our spending on marketing staff in this fiscal year and our Dongfang Youbiao small size class currently enjoy a significant first mover advantage and stand to benefit from the increase in demand in major cities.

Koolearn large size K-12 courses are able to offer the best-in-class learning experience through the investments in upgrading the apps and the online platforms, introducing new education technologies, and adding more new interactive features to online classes.

Koolearn also continued to establish teaching training centers in other locations to attract more qualified teachers and tutors and provide a systematic training programs. A significant amount of the investment has been allocated to marketing and service enhancement in the past quarter to attract customers during the peak of the pandemic.

But the spending started to normalize from this quarter as we are very cautious in identifying high ROI marketing channels. We are focused on improving operational efficiency and emphasizing the word of mouth promotion for English programs with existing brand name advantages, which will in return keep the average user acquisition cost at a relatively low level. We believe Koolearn will continue to quickly acquire new users, while enhancing the strand retention.

Now I would to like to turn the call over to Ms. Sisi Zhao. Go ahead, Sisi.

Sisi Zhao

Yes. Now, let me walk you through the key financial details for the third quarter. Operating cost and expenses for the quarter were US$1089 million, representing a 35.1% increase year-over-year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation expenses were $1074.6 million, representing a 36.3% increase year-over-year.

Cost of revenue increased by 35.3% year-over-year to US$539.5 million, primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increasing number of schools and learning centers in operation. The increase in teacher’s compensation would also put us in a greater position in keeping teaching talent who are the mostly prudent assets in the education industry.

Selling and marketing expenses increased by 32% year-over-year to US$156.1 million, represent primarily due to the addition of marketing staff with the aim of executing our OMO strategy to capture the new market opportunity post COVID.

G&A expenses for the quarter increased by 36.1% year-over-year to US$383.4 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses were US$383.3 million, representing a 40.3% increase year-over-year.

Total share-based compensation expenses which were allocated to related operating cost and expenses decreased by 17.8% year-over-year to US$14.4 million.

Operating income for was US$101.5 million representing a 13.5% decrease year-over-year. Non-GAAP operating income for the quarter was US$115.9 million representing a 14% decrease year-over-year. Operating margin for the quarter was 8.5%, compared to 12.7% in the same period of the prior fiscal year.

Non-GAAP operating margin which excludes share-based compensation expenses for the quarter was 9.7% compared to 14.6% in the same period of the prior fiscal year.

Net income attributable to New Oriental for the quarter was US$151.3 million representing a 9.9% increase from the same period of the prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.09 and $0.09 respectively.

Non-GAAP net income attributable to New Oriental for the quarter was US$163.2 million representing a 9.9% increase from the same period of the prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental was $0.10 and $0.10 respectively.

Net operating cash flow for the third fiscal quarter of 2021 was approximately US$23.3 million. Capital expenditure for the quarter were US$105.8 million, which were primarily attributable to opening of 142 facilities and renovations at existing learning centers.

Turning to the balance sheet, as of February 28, 2021, New Oriental had cash and cash equivalents of US$1569.8 million as compared to US$915.1 million as of May 31, 2020. In addition, the company had US$1147.8 million in term deposits and US$3360.7 million in short-term investment.

New Oriental’s deferred revenue balance, which is cash collected from registered students for the courses and recognized proportionally as revenue as the instructions were delivered at the end of the third fiscal quarter of fiscal year 2021 was US$1865.7 million, an increase of 35.7% as compared to US$1675 – US$1375 million at the end of the third quarter of fiscal year 2020.

Now I'll hand over to Stephen to walk you through our outlook and guidance.

Stephen Yang

Looking ahead into the next quarter of fiscal year 2021, we are more clear about the recovery trend of the company’s near-term financial performance and the market opportunity over the long run. Our strategic focus and investment approach this year aim at improving the product quality, increasing the teachers’ compensation and enhancing our industry-leading system, which fully reflects our ethos of focusing on the essence of education.

In view of the market competition and opportunity to take advantage of the post-COVID market consolidation, we firmly maintain a stable and balanced investment strategy that will improve the quality of our education service with aim to achieve a sustainable and long-term growth, as opposed to unhealthy short-term growth that often requires excessive investments and higher cost to acquire customers.

As such, we will continue to focus on the following key areas: First, we will continue to expand our offline business. We aim to add around 20% capacity, including the new learning centers, and expanding classroom area of some existing learning centers to K-12 business in this fiscal year.

We believe our capacity expansion will prepare us to further take market share from other players post-COVID, as we believe some smaller players without strong financial position and online class capability may not be able to sustain their business during the 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 a strong financial capacity and fresh offline facilities enable us to further strengthen our market-leading position and penetration.

Second, we will continue to leverage our investments into digital technologies and introduce our OMO system in more offline language training and test offerings, especially for our K-12 tutoring business and overseas test prep key business.

The usage of our online tools and contents in our OMO system for all business lines throughout the whole network will be enhanced. It is our belief that the whole OMO teaching experience, we will place more efforts in developing the best teaching content and courseware and also developing more advanced training programs to our teachers.

With all the above mentioned infrastructure in place, we will continue to pilot our OMO online initiatives in major cities with a high demand and higher operational efficiency and in the surrounding satellite cities.

We believe that our OMO initiatives will be one of the – our growth engines to increase our customer acquisition post-COVID as we can quickly replicate in different parts of China, enabling us to capture the market consolidation opportunity. This revamped new business model will also contribute to our margin recovery when the pandemic is over and to further expand our long-term margin target.

Here I have to highlight all of these OMO products are supported by our offline classes. These supplement each other in a hybrid format.

Third, during the peak of the pandemic, we saw the necessary needs to ramp up the spending on different areas of the business aimed at migrating the challenges from the pandemic. Now, the business – now that the business readily recovers to a normal level. Going forward, we will closely the rise of the comp expenditure across the company to improve overall operational operating efficiency.

Here I would like to stress that we have great confidence in the fundamentals of our business which we believe we will continue to remain strong. We have been increasing our investments in different strategies and we remain optimistic of the brighter prospects of our business and believe our investments now will bring us recovery trends in the long run.

We're looking at the near-term and our expectations for the next quarter, we expect total revenue to be in the range of $1101.9 million to $1141.8 million, representing year-over-year increase in the range of 38% to 43%.

To provide a breakdown of the expected top-line growth for the key business lines, K-12 business is expected to be – to grow in the range of 45% to 50%. Overseas test prep program is expected to grow at around 30%. Overseas study, consulting and study tour business is expected to be flattish and the growth of the Koolearn.com pure online education platform is expected to accelerate all year-over-year in dollar terms.

To conclude, we are now taking all kinds of operational actions to boost the enrollments and classroom utilization for the spring semester and speed up the recovery of the business after the resumption of the schools and learning centers. We are confident that the demand for after school tutoring business are gradually picking up and in the process of trending toward the normalized level.

I must mention that these expectations reflect our considerations of the latest pandemic situation and regulatory situation, as well as our current and preliminary view, which is subject to change. At this point, Sisi and I will take your questions. Operator, please open the call for this. Thank you.

Question-And-Answer Session

Operator

[Operator Instructions] Your first question comes from Felix Liu from UBS. Please go ahead.

Felix Liu

Good evening, management. Thank you very much for taking my questions and congratulations on the sound quarter. My question is on regulation. I know during the past few months the regulator has made some relatively strict comments after instituting regulation. So, could you share some color about your take on potential regulation direction? Will there be any tightening in terms of the new learning center license ASP as well as after considering scheduling? Thank you very much.

Stephen Yang

Felix, it’s a good question. Actually, the government’s intention to tighten after the after-school tutoring business policy is not a surprise to us. It has been discussed for a long time since 2018. And we believe the regulations efforts will foster a positive environment for the whole market to improve the market standard and enhance the average teaching quality of the whole market.

And I think we are aligned with the government policy and also and fully committed to work together with the government to build a better – the education market in China. I think the reform details are yet to be announced. So now we are able to provide a full analysis on our business impacts. But at this stage, we do not foresee any material impacts on top-line. And we believe that some of the main cost may impact in the short-term to meet the new requirements.

As the largest provider New Oriental, I think we have the strong – to be compliant with the potential reform – the policy reform and at the same time, we expect China’s after-school tutoring market to further be consolidated. And we have the preparation for this and we are ready to further take more market share from the other players, Felix.

Operator

Thank you. Our next question comes from Mark Li from Citi. Please ask your question.

Mark Li

Hi management, congratulations on the very strong results. May I ask for the upcoming summer promotion what’s our plan or any target? Especially, I see maybe with the rising synergy with our OMO model? Thank you

Stephen Yang

Yes. We started to do the summer promotions four, five years ago. And last year, we got over 1 million student enrollments from the summer promotion campaign and the retention rate after the summer was somewhere around 60% as was the good number.

And this year, I think we will do the same thing. And we do expect to be summer promotion enrollments will be booming in the coming summer and we believe the retention rate after summer will be higher than that of last year.

Simply, we are regarded to be doing enrollments from the summer promotion temporarily which is RMB400, RMB500 per course, actually it’s not a free course just like some of the department courses. And I think the summer promotions will bring up the whole year the enrollment growth and it will not hit the margins for the full year, Mark.

Operator

Thank you. Our next question comes from Candis Chan from Daiwa. Please go ahead.

Candis Chan

Hi, Sisi and Stephen. Thank you for taking my question and congratulations on this very strong set of results. So, my question is regarding the OMO. So can you share with us the revenue contribution of OMO currently? And also, what would be the percentage of OMO contribution in long run as you expect? And how would be the long-term margin profile for OMO? Thank you.

Stephen Yang

You know, while the OMO model only contributed single-digits for the other revenue this quarter, that you know with the ability to work or reinforce later on some of that fees in China is unpromising. I think it will grow rapidly in the coming quarter and becomes a major driver to the – to our business growth. We expect the revenue contribution from the OMO next year will be similar around the 10%.

And the margin profile of the OMO, if you ask me of the OMO model, the margin of the OMO model should be a little bit higher than the traditional offline classes. But we took the start of the OMO model since the last year so we still need more time to intensify the business model and the margin profile. We are so far so good.

I think the progress of the OMO business as they expect – is better than we expected and the OMO model will contribute more and more revenue going forward in the next fiscal year and in the next two to three years.

Operator

Thank you. Our next question comes from Tian Hou from T.H. Capital. Please ask your question.

Tian Hou

Hi, Sisi, Stephen. Congratulations on the strong quarter. So, I see the overseas recover pretty nicely and also some data shows even though this year was a pandemic. However, the students applied to overseas schools, the number for that was really high. So, I wonder what’s the outlook for the overseas testing and consulting this part of the business, what’s the outlook for that? What do you see from today’s data? Thank you.

Stephen Yang

Thanks, Tian. I think the overseas test prep, overseas related business recovery is coming. And revenue decline of the overseas test prep this quarter was 12%. Last quarter, the revenue decline was 29% and two months ago the revenue decline was 50% in dollar terms. So it’s showing the encouraging sign of the recovery of the overseas test prep business.

And we gave that item. We gave that item in the Q4. The overseas test prep business will be increased by somewhere around the 30% - 3 0 percent. So, I think you will see the higher recovery of the overseas test prep business. And yes, I know we have the low base last year, but anyway, I think we are in the process of the recovery of the overseas test prep business.

In the consulting business, this quarter we got it increased by 11% and last year we guided the revenue growth for consulting business will be flattish. Typically, Q4 will be the high seasonal of the overseas consulting business. But during the hard time, I think the performance of the overseas test prep and the consulting business, I think it’s much better than we expected several quarters ago.

And last year, I believe the overseas business will grow to some extent for the fiscal year 2022. Thank you, Tian.

Operator

Thank you. Our next question comes from Sheng Zhong from Morgan Stanley. Please ask your question.

Sheng Zhong

Hi. Thank you for taking my question. So, my question is, looking at Beijing, I think the learning centers were opening slightly slow. So, any color on this government approval process? What the key items during the inspection now? And do you think also based on this what’s your – do you have capacity expansion plan for next year can be shared with us now. Thank you.

Stephen Yang

So far, we opened almost all the learning centers except for Beijing City. And in Beijing I’ll tell, we had over 100 learning centers in Beijing, but we opened our super bigger learning centers now. And – but, we started more – we will open more learning centers or we will open up more learning centers in Beijing.

And this year, we plan to open 20% of the capacity – plus for each quarter we open 17% and last year so far, we haven’t finished our budget of last year of the exact plan. So, I think the next earnings call in the next quarter I will share with our expansion plan. And so far, we want to change our expansion plan for the next year. But we still need more time to finalize our budget for next year.

Sisi Zhao

Yes. Sheng Zhong, in addition to the Beijing situation, I want to remind you all that, because we have the OMO system, so that we have all the students doing the spring course online very smoothly actually even with the closure of the offline learning centers, but still all the students can take their classes online and the retention is very stable.

And also you know overall the – since the pandemic, we are seeing Beijing’s situation is harder than other cities and revenue declined. But the reported Q3 quarter and forecasted Q4 quarter Beijing’s revenue trend is better – getting better and better.

Operator

Thank you. Our next question comes from Alex Xie from Credit Suisse. Please ask your question.

Alex Xie

Hi, management. Thank you for taking my questions and congratulations on very strong set of results. So, please comment on the margin trend in the next quarter and also for the next fiscal year. I think here we have a low base in the fourth quarter of last fiscal year. Thank you.

Stephen Yang

Yes. I think the revenue growth recovery is in the process, this is the first. And on the market front, I think we do have the – I think we have the business opportunity in the market front. And we are doing the – several – the investments now, actually since the two quarters ago. We make the learning center expansion by 20% this year and we firmly raised the teacher salary twice this year.

And also we spend more money on the R&D for the OMO. And also, we hired more people on the marketing team to do the marketing activities. So – but, I think the all the above mentioned expense will make us be fully prepared for the future. So, I think it will – I think it will impact the margin for the short-term. But I still believe the margin decline for the Q4 will be narrowed down compared to this quarter. And we are confident that we are able to deliver the margin expansion after the pandemic is over. And we don’t want to change the long-term margin guidance. Thank you.

Operator

Great. Thank you. Our next question comes from DS Kim. J.P. Morgan. Please ask your question.

DS Kim

Hi, good evening and congrats on the strong beat across the wood. Maybe differently term my question, can I just follow on your point that when you say margin decline was been narrowed versus this quarter, are you referring to last year or pre-COVID level? And I have my own question to this.

Stephen Yang

I mean, it’s a year-over-year comparison.

DS Kim

Year-over-year, okay. Thank you. Thank you. My question is regarding Koolearn and there seems to be some reports locally that there are some business adjustments et cetera and to see according to some media and could you help us understand what the key change in priority here plus potential margin impacts, say, for instance, Koolearn has been making about US$40 plus million operating losses every quarter in the past five, six quarters.

But shall we expect the absolute size of the losses from US$40 million plus to narrow into fiscal year 2022 or shall we only think about the margin improvement, not the absolute size of the losses? Thank you again.

Stephen Yang

DS Kim, I can’t say too much about the detailed numbers of the Koolearn. But I can share with you our strategy. Koolearn has spent more money on the R&D and marketing in the past quarter. But we started to control the marketing activities and money in this quarter. And going forward, I think we will be very cautious on the marketing spending. Okay?

And as I said, our strategic focus is to invest more money on – to improve the teaching quality, we are training the teachers, we are hiring talented people rather than we having spending on the marketing. So, we call it this is the essence of the education. And so, I do believe the revenue of the Koolearn of next quarter will be accelerated.

And the margin drive from the Koolearn to the EDU will be smaller and smaller going forward, Kim. Thank you.

Operator

Thank you. Our next question comes from Lucy Yu from Bank of America Securities. Please ask your question.

Lucy Yu

Thank you, Stephen. I have a follow-up question on the margins. So, in the fourth quarter, we have a relatively lower base and especially with the K-12 start to grow like 45% to 50%, should we expect some outbreak in that bridge of the K-12 side? And the K-12 margin should be improving right? So, what is actually driving the margin to be lower than the same period of last year? Thank you.

Stephen Yang

Yes. We believe we have the leverage on the K-12 business, because of the – that business recovered very, very fast. And – but, as I said, we are doing some of the investment for the future like – we’d be lifting the future salary and open more learning centers and also to invest more on the OMO model. We hired a meaningful number of the marketing staff to do the ground promotion.

And so, I think, you still need maybe more time to see the margin expansion, maybe one more quarter. But I will believe the margin profile in the Q4 will be better than this quarter, than Q3, Lucy.

Operator

Thank you. Our next question comes from Jessie Xu from Nomura. Please ask your question.

Jessie Xu

Good evening, management. Thank you for taking my question and congratulations for a very strong quarter and also very strong revenue target for 4Q. My question is also regarding offline normalization in Beijing. I want to understand what is our best scenario here and what about the worst scenario? And if Beijing learning centers cannot be opened before summer, what will be the impact to our summer promotional campaign? Thanks.

Stephen Yang

So far, we finished the 17% expansion in the first three quarters of this fiscal year. So, we still need 2% to 3% new capacity in Q4 to get the point – to get the number of the 20% capacity expansion. I think we are prepared for the capacity – the capacity is prepared for the coming summer promotion.

And don’t forget, we have the OMO model compared to last year. Our OMO model is much better than that of last year. And I think we will do some of the summer promotion by the OMO model. I think the online elements will help us to do the summer promotion around the traditional typical 100% offline to the format.

Operator

Thank you. Our next question comes from Christine Cho from Goldman Sachs. Please ask your question.

Christine Cho

Thank you so much. Congrats on the solid results this quarter, Stephen and Sisi. It seems that the capacity growth this quarter of 70% looks a bit faster and also it seems like you are targeting around 20% growth which seems to be kind of the low end of the 20% to 25% mid-term target. Just wondering if this is temporary or are there any lasting consideration such as for example like, OMO expansion plans or any regulatory concerns that you have there? Thank you.

Stephen Yang

Yes, we aim at around 20%, in fact the expansion for the full year – fiscal year 2021 this year. And in the last year, we expanded 26% new learning centers. Typically, we ramp up the learning centers from zero to 100% by three to four years.

So that means we have enough – the capacity to ramp up and also since the last year, we moved some classroom area of the overseas test prep to K-12 business, because we suffered the net of the impact from the overseas test prep business. And actually it will help us to prepare for the potential – the growth of the K-12 business.

Operator

Great. Thank you. So we are now approaching the end of the conference call. I will turn the call back to New Oriental's Executive President and CFO, Mr. Stephen Yang for his closing remarks.

Stephen Yang

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.

Operator

Great. Thank you. So this conclude our conference for today. Thank you for participating. You may now all disconnect.