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New Oriental Education & Technology Group Inc. (EDU) Q3 2021 Earnings Call Transcript

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New Oriental Education & Technology Group Inc. (NYSE: EDU)
Q3 2021 Earnings Call
Apr 20, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening and thank you for standing by for New Oriental's FY 2021 Third Quarter Results Earnings Conference Call. [Operator instructions].

I'd now like to turn the meeting over to your host for today's conference Ms. Sisi Zhao. Thank you, please go ahead.

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Sisi Zhao -- Investor Relations Director

Okay, thank you. Hello everyone and welcome to New Oriental's third fiscal quarter 2021 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website, as well as on Newswire services. Today you will hear from Steven 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. Steven, please go ahead.

Yang Zhihui -- Executive President, Chief Financial Officer

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

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 business 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 has recorded revenue decrease of about 12% for the quarter, it is a 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 effect of COVID-19 outbreaks in certain part of China means strong flexibility in migrating students between online and offline classes. It's truly crucial during the challenging period and our OMO system 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 migrate the offline class to online; avoiding disruptions of the student class 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 effects of this, we have been committed to expand the reach of our OMO system and are delighted to say that we are proud of 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 costs and is becoming the new driver to our business growth and it has solicited an increased contribution to the company's overall revenue in this quarter. Total student enrolment in academic subjects tutoring and test prep courses in third fiscal quarter of 2021 increased by 43% year-over-year for approximately $2,296,800, which is in-line with our expectation. 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 already blended ASP, which is cash revenue divided by total teaching hours, increased by 7% year-over-year and is in line with our normal price increase of about 5% to 8%. To provide a breakdown of already 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 program increased by 12% all year-over-year in RMB terms.

Now I would like to spend some time to talk about this quarter performance across our individual business lines in detail. When 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 down, the U-Can middle school high school business reported a revenue increase of approximately 35% in dollar terms for the quarter. So 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. Enrollments increased about 61% for the quarter. Our overseas-related business, including test prep and consulting business, showed encouraging sign 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 part of the world, [Indecipherable] who study abroad.

The overseas test prep business reported a revenue decrease above 12% in dollar terms for the quarter in comparison to a decrease of 29% in the last quarter, while the overseas consulting and the overseas study tour business reported revenue increase 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 continue to carry out our capacity expansion this quarter as we opened one new offline training school in the city of Hengshui. This increased the total square meters of classroom area by approximately 17% year-over-year and 7% quarter-over-quarter [Indecipherable]. 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 students 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 pandemics over. And our service can resume with strong presence across different Chinese cities.

We rolled out a 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 this model to increase our market penetration in those markets we have tapped into. An outbreak of COVID-19 have highlighted the importance and demands of online education. We have allocated some more resources to this space and the investments of $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 nearby major cities this quarter is yet another testament of how this low-cost but high-reach OMO business model can rapidly become one of the most far-reaching educational service in China. We're 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 programs for our teachers to enhance their online and offline integrated teaching skills in response to the growing demand. At the same time, we continue to upgrade our technology platforms and then we'll 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 and offline integrated education methods.

We're glad to see that our industry-leading OMO ecosystem has not only successfully managed to cushion most of the impacts by the pandemic, but we also see our customer retention rates remain stable. Furthermore, effectively bolstering enrollments and we believe it will continue to play a huge part of the recovery of businesses in coming quarters. To capture the huge market opportunity in online education area, Koolearn invested more resources in 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 moves has continually raised our spending on marketing front in this fiscal year.

And our [Indecipherable] small size class currently enjoy a significant first-mover advantage and stand to benefit from the increasing demand in low tier cities. Koolearn large size K-12 courses are able to offer the best-in-class learning experience through the investment in upgrading the app and online platforms, introduced new education technologies and adding more interactive features to online classes. Koolearn also continue 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 enhancements in the past quarters to attract customer 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 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 students' retention.

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

Sisi Zhao -- Investor Relations Director

Yeah. Now, let me walk you through the key financial details for the third quarter. Operating cost and expenses for the quarter were $1,089 million representing a 35.1% increase year-over-year. Non-GAAP operating cost and expenses for the quarter, which excludes share-based compensation expenses, were $1,074.6 million representing a 36.3% increase year-over-year. Cost of revenue increased by 35.3% year-over-year to $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 teachers' compensation will also put us in a greater position in keeping teaching talents, who are the most important assets in the education industry. Selling and marketing expenses increased by 32% year-over-year to $156.1 million, primarily due to the addition of marketing staffs 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 $383.4 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, was $383.3 million representing a 40.3% increase year-over-year.

Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 17.8% year-over-year to $14.4 million. Operating income was $101.5 million representing a 13.5% decrease year-over-year. Non-GAAP operating income for the quarter was $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 $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 $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 were $0.10 and $0.10, respectively. Net operating cash flow for the third fiscal quarter of 2021 was approximately $23.3 million. Capital expenditure for the quarter were $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 $1,569.8 million as compared to $915.1 million as of May 31, 2020. In addition, the company had $1,147.8 million in term deposits, $3,360.7 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 start -- fiscal quarter of fiscal year 2021, was $1,865.7 million, an increase of 35.7% as compared to $1,675 million -- $1,375 million at the end of the third quarter of fiscal year 2020.

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

Yang Zhihui -- Executive President, Chief Financial Officer

Looking ahead into the next quarter of fiscal year 2021, we're 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 reflect 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 costs 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 for kids to our 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 small players without strong financial position and online class capability may not be able to sustain the business during the period. We expect that industry will undergo market consolidation when the pandemic fade. 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 online tools and content in our OMO system for all business lines throughout the whole network will be enhanced. To uplift the whole OMO teaching experience, we'll place more efforts in developing the best teaching content and courseware and also developing more advanced training program for our teachers.

With all the above mentioned infrastructure in place, we will continue to pilot our OMO online initiatives in major cities with high demand and higher operational efficiency and the surrounding satellite cities. We believe that our OMO initiatives will be one of our growth engines to increase our customer acquisition post-COVID as it 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 further extend our long-term margin target.

Here, I have to highlight that all these OMO products are supported by our offline classes. They supplement each other in a hybrid format. Third, during the peak of the pandemic, we saw the necessary need to ramp-up spending on different areas of the business and at migrating the challenges from the pandemic. Now that the business has gradually recovered to a normal level, going forward, we will closely monitor the rise of the cost expenditure across the company to improve overall operating efficiency.

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

We're looking at the near term. In our expectations for the next quarter, we expect total revenue to be in the range of $1,101.9 million to $1,141.8 million, representing year-over-year increase in the range of 38% to 43%.

To provide the breakdown of the expected top-line growth for key business lines, K-12 business is expected to grow in the range of 45% to 50%. Overseas test prep program is expected to grow at around 30%. Overseas 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 year-over-year in dollar terms.

To conclude, we are now taking all kinds of operational actions to boost 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're confident that the demand for after-school tutoring business are gradually picking up and in the process of trending toward a normalized level. I must mention that these expectations reflect our considerations of the latest pandemic and regulatory situation, as well as our current and preliminary view which is subject to change.

At this point, I will take your questions. Operator, please open the call for this. Thank you.

Questions and Answers:

Operator

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

Felix Liu -- UBS Securities -- Analyst

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

Yang Zhihui -- Executive President, Chief Financial Officer

So, Felix, It's a good question. Actually the government's intention to tighten after-school tutoring business policy is not a surprise to us. As you know, 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 home markets. And I think we are aligned with the government policy and also fully committed to work together with the government to build a better education market in China.

I think the reform details are yet to be announced. So now we are unable to provide a full analysis on our business impact. But at this stage, we do not foresee any material impact on top-line. And we do expect some of the admin cost may increase in a short-term to meet the new requirements. As the largest provider, New Oriental, I think we are -- we have the strong capital 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 consolidate. And we have been in preparation for this and we're 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 -- Citi Research -- Analyst

Hi, management. Congratulations on the very strong results. May I ask for the upcoming summer promotions, what's our plan or any target that we can share, especially I see maybe with the rising synergy with our OMO model? Thank you.

Yang Zhihui -- Executive President, Chief Financial Officer

Yeah, we started to do this summer promotion four or five years ago. And last year we got over 1 million student enrollments from the summer promotion campaign and the retention rates after the summer was somewhere around 60%. It was a good number and this year I think we will do the same thing. And we do expect the summer promotion enrollment will be booming in the coming summer and we believe the retention rate after summer will be higher than that of last year. Typically we are -- we get these student enrollments from the summer promotion. Typically, we charge RMB400, RMB500 hundred RMB per course. Actually, it's not a free course just like some of the discounted courses. And I think the similar promotion will bring us the whole year -- the enrollment growth and it will not hit the margins for the whole year, Mark.

Operator

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

Candis Chan -- Daiwa Capital Markets -- Analyst

Hi, Sisi and Steven. 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 expand, and how would be the long-term margin profile for OMO? Thank you.

Yang Zhihui -- Executive President, Chief Financial Officer

Well, the OMO model only contributed single digits to the overall revenue this quarter, but with the ability to virtually reach both major and select cities across China, in some provinces, I think it will grow rapidly in the coming quarter and become the major driver to the -- to our business growth. We expect the revenue contribution from the OMO next year will be somewhere around the 10%. And the margin profile of the OMO, I believe the OMO model -- the margin of the OMO model should be a little bit higher than the traditional offline classes. But we just started the OMO model since the last year, so we still need more time to test the business model and the margin profile and so far so good. I think the progress of the OMO business is better than we expected. And OMO model will contribute more and more revenue going forward in the next fiscal year. And even 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 X. Hou -- T.H. Capital, LLC -- Analyst

Hi, Sisi, Steven. Congratulations on a strong quarter. So I see the overseas recover pretty nicely and also some data shows that even though this year was a pandemic, however, the students applied to overseas school, the number for that was really high, so I wondered 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.

Yang Zhihui -- Executive President, Chief Financial Officer

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 to two quarters ago the revenue decline was 50% in dollar terms. So it show the encouraging signs of the recovery of the overseas test prep business and we gave the guidance -- we gave the guidance for Q4. The overseas test prep business will be increased by somewhere around 30%. So I think, you will see the higher recovery of the overseas test prep business. And yeah, I know we had a low base last year, but anyway, I think we're in the process of the recovery of the overseas test prep business.

And consulting business, this quarter we got interest by 11% and next year we guided the revenue growth of our consulting business will be flattish. Typically Q4 will be the high season of the overseas consulting business, but during the hard time I think the performance of the overseas test prep and consulting business, I think, is much better than we expected several quarters ago. And next year, I believe the overseas related business will grow to 70% for the fiscal year '22. Thank you, Tian.

Operator

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

Sheng Zhong -- Morgan Stanley -- Analyst

Hi, thank you for taking my question. So my question is looking at '18, I think the learning centers reopened slightly slow. So, any color on this government approval process, what the key items there are during the inspection now and do you think -- so based on this, what's your -- do you have a capacity expansion plan for next year that can be shared with us now? Thank you.

Yang Zhihui -- Executive President, Chief Financial Officer

So far, we opened almost all the learning centers except for Beijing city. And in Beijing, we have [Indecipherable] learning centers in Beijing. But we opened single digital learning centers now and -- but we expect we will open more learning centers in Beijing. And this year we plan to open 20% of the capacity. Prior to three quarter we opened a 17% and next year -- so far we haven't finished our budget of next year of the expected plan. So I think the next earnings call, in the next quarter, I will share with you 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 of next year.

Sheng Zhong -- Morgan Stanley -- Analyst

Yeah. Zhong Sheng, 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 offline learning centers, but still all the students can take their classes online and the retention is very stable. And also, overall, since the pandemic, we're seeing Beijing's situation is harder than other cities and revenue declined, but the reported Q3 quarter and forecast 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 -- Credit Suisse -- Analyst

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

Yang Zhihui -- Executive President, Chief Financial Officer

Yeah, I think with the run of growth recovery is in the process. This is the first, and on the market front, I think we do have -- I think we have the business opportunity in the market front. And but we are doing several investment now actually, I think the two quarters both. 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, the marketing team to do the marketing activities. So -- but I think all the above mentioned investments will make be fully prepared for the future. So I think it will impact the margin for short term, but I still believe the margin decline for the Q4 will be narrowed down compared to this quarter and we're confident that we are able to deliver the margin expansion after the pandemics is over and we don't want to change the mid long-term margin guidance. Thank you.

Operator

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

DS Kim -- J. P. Morgan -- Analyst

Hi, good evening, sir. And congrats on the strong beat across the board. Maybe before I start my question, can I just follow-up on your point that, when you say margin decline would be narrowed versus this quarter, are you referring to last year or pre-COVID level? And I have my own questions after this.

Yang Zhihui -- Executive President, Chief Financial Officer

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

DS Kim -- J. P. Morgan -- Analyst

Year-over-year. Okay. Thank you, sir. Thank you. My question is regarding Koolearn and there seems to be some reports locally that there are some business adjustment at an entity according to some media and could you help us understand what's the key change in priority here, plus potential margin impact, say, for instance, Koolearn has been making about $40-PLUS million operating losses every quarter in the past five, six quarters, but shall we expect the absolute size of the losses from $40 million-plus to narrow into our fiscal year 2022 or shall we only think about the margin improvement, not the absolute size of the losses? Thank you, again.

Yang Zhihui -- Executive President, Chief Financial Officer

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 quarters. 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 to improve the teaching quality. We're training the teachers, we're hiring the talent people, rather than the heavy spending on the marketing. So we call this as the essence of the education. And so I do believe the revenue of the Koolearn of next quarter will be accelerated and the margin drag 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 -- Bank of America Securities -- Analyst

Thank you, Steven. 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 operating leverage on the K-12 side, at least, the key top margin should be improving, right? So what is actually dragging the margin to be lower than the same period of last year? Thank you.

Yang Zhihui -- Executive President, Chief Financial Officer

Yeah. We believe we have the leverage on the K-12 business because our business recovered very, very fast and -- but as I said, we're doing some of the investment for the future like raising the teacher 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 brand promotion. And so I think you still need maybe more time to see the margin expansion, maybe one more quarter. But I do believe the margin profile in 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 -- Nomura International Limited -- Analyst

Good evening, management. Thank you for taking my question and congratulations for a very strong quarter and also very strong revenue guidance for 4Q. My question is also regarding offline mobilization in '18. I want to understand what is our best scenario here and what about the worst scenario and if '18 learning centers cannot be opened before summer, what will be the impact to our summer promotional campaign? Thanks.

Yang Zhihui -- Executive President, Chief Financial Officer

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 to 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 rather than run the traditional typical 100% offline format.

Operator

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

Christine Cho -- Goldman Sachs & Co -- Analyst

Thank you so much and congrats on a solid results quarter, Steven and Sisi. It seems like the capacity growth this quarter of 70% looks a bit softer and also it seems like you're 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 here? Thank you.

Yang Zhihui -- Executive President, Chief Financial Officer

Yeah, we aim to add around 20% capacity 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 center from 0% to 100% by three to four years. So that means we have enough 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 you know we suffered the effect of the impact from the overseas test prep business. And I think it will help us to prepare for the potential growth of the K-12 business.

Operator

All right, 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. Steven Yang for his closing remarks.

Yang Zhihui -- Executive President, Chief Financial Officer

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 representative. Thank you.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Sisi Zhao -- Investor Relations Director

Yang Zhihui -- Executive President, Chief Financial Officer

Felix Liu -- UBS Securities -- Analyst

Mark Li -- Citi Research -- Analyst

Candis Chan -- Daiwa Capital Markets -- Analyst

Tian X. Hou -- T.H. Capital, LLC -- Analyst

Sheng Zhong -- Morgan Stanley -- Analyst

Alex Xie -- Credit Suisse -- Analyst

DS Kim -- J. P. Morgan -- Analyst

Lucy Yu -- Bank of America Securities -- Analyst

Jessie Xu -- Nomura International Limited -- Analyst

Christine Cho -- Goldman Sachs & Co -- Analyst

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