New Oriental Education & Technology Group Inc. (NYSE:EDU) Q2 2024 Earnings Call Transcript

New Oriental Education & Technology Group Inc. (NYSE:EDU) Q2 2024 Earnings Call Transcript January 24, 2024

New Oriental Education & Technology Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good evening and thank you for standing by for New Oriental’s FY 2024 Second Quarter Results Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao.

Sisi Zhao: Thank you. Hello, everyone, and welcome to New Oriental’s second fiscal quarter 2024 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, Stephen Yang, Executive President and Chief Financial Officer, and I will share New Oriental’s latest earnings results and business updates in detail with you. After that, 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 view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any 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 neorental.org. I will now first 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. It’s our pleasure to announce that New Oriental has delivered a set of fruitful financial results that have surpassed our expectations this quarter. Our diverse business lines have embarked a healthy recovery and anchored stable top line performance, while the enduring momentum of our new business has made a meaningful contribution to the company’s revenue and continuing to pave the way for further acceleration. New Oriental’s bottom line performance has achieved promising growth with operating margin and non-GAAP operating margin reaching 2.5% and 5.9% for this quarter, respectively. Thanks to our unwavering efforts to brush up our operational efficiency and cost control, as well as the combined efforts of our restructured business model, were used less resources and streamlined cost structure.

Encouraged by the company’s sustainable profitability, resilient business lines and fostering new business, we’ve been forced our commitment to maintain a healthy market share growth and creating sustainable value for customers and shareholders in the long-term. Now, I’d like to spend some time to talk about the quarter’s performance across our remaining business lines and new initiatives to you in detail. Our key remaining business have depicted a propitious trend, while the new initiatives secured positive momentum. Breaking it down, the overseas test prep business recorded the revenue increase of 47% in dollar terms or 50% in RMB terms year-over-year for this quarter. The overseas study consulting business recorded revenue increase of about 32% in dollar terms or 35% in RMB terms year-over-year for this quarter.

The adults and university students business recorded a revenue increase of 43% in dollar terms or 46% increase in RMB terms year-over-year for this quarter. As mentioned in the past quarters, we have launched multipronged new initiatives, which mostly revolve around facilitating students around development. They have continued to prosper with consistent growth, delivering meaningful profits to the company. Firstly, the non-academic tutoring courses, which we have offered in around 60 existing cities, focus on cultivating students’ innovative ability and comprehensive quality. The markets we have tapped into have recorded elevated penetration, especially in higher-tier cities with a total of approximately 786,000 students enrollment recorded in this quarter.

The top 10 cities in China contribute over 60% of the revenue of this business. Secondly, the intelligent learning system and devices business, a service designed to provide a tailored digital learning experience for students to enhance learning efficiency has been adopted in around 60 existing cities. We have observed enhanced customer retention rate and scalability of this new initiative. Approximately 181,000 active paid users reported in this fiscal quarter. The revenue contribution of these initiatives from the top 10 cities in China is around 55%. Our smart education business, educational materials and digitalized smart study solutions have continued to contribute material results to the overall [Technical Difficulty] In summary, our new educational business initiatives reported a revenue increase of about 68% in dollar terms or 72% increase in RMB terms year-over-year for this fiscal quarter.

In addition, as mentioned in the last quarter, we have inaugurated a newly integrated tourism-related business line as one of our innovative ventures tailored with diverse offerings of cultural trips, study tours in China and overseas as well as camp education. New Oriental’s cultural tourism business shares the spirit to provide premium quality of travel experiences that are infused with joy from cultural exchange, knowledge sharing and personal fulfillment. Within this new business line, our study tour and research camp business for students of K-12 and university age anchors encouraging growth this quarter. Thanks to a strong post-COVID recovery of demand and resumed traveling. We have conducted study tours and research camps in over 50 cities across the country with the Top 10 cities in China offering over 55% revenue share of this new initiative.

And also pilots a number of top-notch tourism offerings to expand our reach to all age groups, including the middle-aged and elderly individuals across 17 featured provinces. As we are still at a preliminary stage of planning, testifying, and evaluating the viability of the business in selected regions, we will keep you posted should there be timely updates. With regard to our OMO system, we have persisted in revamping our platform and leveraged our educational infrastructure and technology edge on remaining key business and new business with a vision to provide advanced, diversified education service to customers of all ages. During this reporting period, a total of $28.7 million has been invested in our OMO teaching platform, which equips us with the flexibility to maintain unrivaled service to students continuously.

During the reporting period, East Buy has attained strong growth momentum through a series of new initiatives aimed to foster the development of its private label products and upgrades on customer service. A comprehensive detailed optimization of product quality has been conducted. And East Buy has made remarkable breakthroughs in supply chain integration, boosting its private label products to a total of a total of 264 SKUs. Furthermore, nationwide broadcast events across provinces were launched with the consistent support from local cultural and tourism authorities. East Buy also began introducing cultural tourism products and incorporates century-long history, culture, geographies and folklore into the hours of live streaming, e-commerce broadcast, presenting lively introductions of historical monuments, tourism attractions and local specialties to their audience.

We look forward to witnessing the continued growth of the East Buy and its positive reception within the community. With regard to the Company’s latest financial position, I’m confident to share with you that the company is a healthy — is in a healthy financial status with cash and cash equivalent term deposit and short-term investments totaling approximately $4.8 billion. On July 26, 2022, the Company’s Board of Directors authorized a share repurchase of up to $500 million of the Company’s ADS or common shares during the period from July 28, 2022 through May 31, 2023. The Company’s Board of Directors further authorized the company to extend its share repurchase program launched in July 2022 by 12 months through May 31, 2024. As of January 23, 2024, the company repurchased an aggregate of approximately six million ADS for approximately $194.2 million from the open market under the share repurchase program.

Now, I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead.

Sisi Zhao: Now I’d like to go through the [Technical Difficulty] for this quarter. Operating costs and expenses for the quarter were $848.3 million, representing a 32.4% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $818.7 million, representing a 31.6% increase year-over-year. The increase was primarily due to the cost and expenses related to the substantial growth in East Buy’s private-label products and live-streaming e-commerce business. Cost of revenue increased by 25.7% year-over-year to $422.6 million. Selling and marketing expenses increased by 62.2% year-over-year to $155 million. G&A expenses for the quarter increased by 29.6% year-over-year to $270.7 million.

Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $256.1 million, representing a 34.2% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating cost expenses, increased by 57.3% to $29.6 million in the second fiscal quarter of 2024. Operating income was $21.3 million, compared to a loss of $2.5 million in the same period of the prior fiscal year. Non-GAAP income from operations for the quarter was $50.9 million, representing a 212.2% increase year-over-year. Net income attributable to New Oriental for the quarter was $30.1 million, representing a 4007.4% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.18 and $0.18, respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $50.2 million, representing 182.6% increase year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.30 and $0.29, respectively. Net cash flow generated from operations for the second fiscal quarter of 2024 was approximately $300.6 million and capital expenditure for the quarter were $43.4 million. Turning to the balance sheet. As of November 30, 2023, New Oriental had cash and cash equivalents of $1,942.6 million. In addition, the company had $1,324.1 million in term deposits and $1,571.2 million in short-term investments. New Oriental’s deferred revenue, which represent cash collected upfront from customers and related revenue that will be recognized as the services or goods are delivered at the end of the second quarter of fiscal year 2024 was $1,645 million, an increase of 44.4%, as compared to $1,139.1 million at the end of the second fiscal quarter of 2023.

Now I’ll hand over to Stephen to go through our outlook and guidance.

Stephen Yang: As we enter the new quarter, we look forward to delivering student growth and ongoing margin expansion, building on the blend of our brand advantage roots to history, influential teaching and content resources, and solid foundation. We’re also committed to working diligently, adhering to the latest guidance from the Chinese authorities on enhancing the nation’s education level to strengthen its leading position to further unveil our possibility across all business lines and creative endeavors. With regard to the learning center and classroom space, we plan to increase our capacity moderately by about 20% year-over-year. We will keep monitoring the pace and scale of new openings according to the local operation and our financial results in this fiscal year.

The groundwork we have laid and the progress we have made thus far have fueled our optimism [Technical Difficulty] future. We remain dedicated to achieving margin expansion throughout the whole year. In the coming quarter, we expect total net revenue to be in the range of $1,070.9 million to $1,093.5 million, representing a year-over-year increase in the range of 42% to 45%. To conclude, we’re delighted to share our latest set of the results to all of you. We are confident in our ability to drive our business toward an even more positive trajectory and enhance profitability throughout the remainder of the fiscal year 2024. While we cultivate new endeavors to build upon our capabilities, we will also devote [Technical Difficulty] research and application of new technologies such as AI and ChatGPT into our educational and product offerings to uplift our strengths and pursued the further growth and operating efficiency.

At the same time, we will continue to seek guidance from and coverage with government authorities in various provinces in China in alignment with its efforts to comply with relevant policies, guidelines, and regulations, as well as to further adjust our business operations as required. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measures, as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2024 Q2 summary. At this point, I’d like to open the floor for questions. Operator, please open the call for this. Thank you.

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Q&A Session

Operator: Thank you. The question-and-answer session of this conference call will start in a moment. [Operator Instructions] Our first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Felix Liu: Hi. Good evening, Stephen and Sisi. Congratulations again on the strong set of results. My question is on your very good third quarter guidance of over 40% revenue growth. Could you give us a rough breakdown of what’s driving that strong growth? Thank you.

Stephen Yang: Okay. Thank you, Felix. I think we will give the top line guidance in this quarter a lot as we did in previous quarters. So as for the revenue guidance for the Q3, I think we are still taking a conservative approach in giving the Q3 growth guidance, which will be in the range of 42% to 45% in dollar terms year-over-year, given the strong demand in education sector and growth momentum we have seen so far in this fiscal year. So we’re quite confident about the whole year’s revenue growth, it will be better than we originally expected, especially in the coming Q3. And so, for the — all the business lines, the overseas related business on the demand side, we have seen very strong demand for overseas test prep and the consulting business.

And on the supply side, we have seen some players disappear from the market during the COVID. And so, that means we’re facing less competition in the market. And for our — the other revenue contributor, the new businesses. I think the encouraging performance in this quarter in Q2 proves that we are heading towards the right direction. And so, we believe this business will be able to maintain the very good top-line growth in the Q3. And yes, so in overall — so that’s why we give the guidance of the top-line growth by 42% to 45%. And so Sisi, do you want to add the breakdown?

Sisi Zhao: Yes. Actually, the revenue contribution from key business lines is pretty consistent in this year, very similar to last quarter, like, overseas-related business contributes like 20%, 21% of total revenue, like domestic has prep 2% to 3%. And also the K-12 newly developed educational initiatives for K-9 and also some remaining other training — tutoring business for high school together contribute over 41%, 42% of total revenue. So the key drivers are growing very, very well. And we are seeing continued trend for all the key business lines as well.

Stephen Yang: Thank you, Felix.

Felix Liu: Okay. Thank you. Very clear. Congratulations on the results.

Stephen Yang: Thank you again.

Operator: Thank you. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please ask your question, Yiwen.

Yiwen Zhang: Hey, good evening, management, and thanks for taking my question. Congrats on another strong quarterly result. So my question is about our learning center expansion. You mentioned about, whole year 20% capacity growth. If I calculate correctly, that actually imply second half net ad would slow down a bit. So could you discuss what our consideration is there given the very strong demand? Thank you.

Stephen Yang: Yes. Yes, this quarter, we added around 7% new capacity. And at this time last quarter, we guided the capacity expansion will be somewhere around 15% to 20%. So this time we’ll raise the expansion guidance to somewhere around 20%. So and — I think we will open a reasonable amount of the new learning centers, while some in the new classroom areas or some existing learning centers will be expanded in the second-half of the year. And I think most of the new openings will be in the cities with the better top-line and bottom-line performance. And I think we will keep monitoring the pace and scale of the new openings according to the operation and financial results in the second-half of the year. And I think maybe in the next quarter or just in Q4, I think we will share with you about the new — our new decision of the learning center expansion, maybe we’ll raise again. Thank you.

Yiwen Zhang: Yes. Okay. Okay. Thank you.

Operator: Thank you, Yiwen. Our next question comes from the line of Lucy Yu from Bank of America Securities. Please ask your question, Lucy.

Lucy Yu: Hi, Stephen. So this is Lucy from BofA. So a follow-up on earlier question on expansion. So actually we have seen very, very strong demand on the ground. Many of my friends trying to enroll to a learning center, but I was told it’s already full even the learning center is still under reservation at the moment. So I’m wondering what is the bottleneck for us to expand faster at the moment. Is it teacher recruitment or is it like finding the right location or get the license? So what is the bottleneck from preventing us expanding even faster? Thank you.

Stephen Yang: Yes. Thank you, Lucy. I think the reason that we give the guidance of the learning center expansion about 20% because, I think we do have the OMO system and the OMO model. So that means the online site will help us to, like, take over more students into the existing classrooms and learning centers. So OMO model help us a lot. And secondly, education is typically a long-term business. So we care more about the top-line growth and the bottom-line growth, that means the margin expansion. So we don’t want to grow the business too fast. So what we’re carrying is that the topline growth actually, we have already gave the guidance of 45% topline growth in Q3. And also — we also care about the margin expansion. So it’s the growth balance between the top-line and bottom-line, Lucy.