New Oriental Education & Technology Group Inc. (NYSE:EDU) Q3 2024 Earnings Call Transcript

New Oriental Education & Technology Group Inc. (NYSE:EDU) Q3 2024 Earnings Call Transcript April 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 Third Quarter Results Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I’d 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 third 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 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’ll 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. We’re pleased to announce that New Oriental has achieved robust growth this quarter that have surpassed our expectations. The remarkable top line performance this quarter has spoken volumes about sustained recovery across our diverse business lines, while steady expansion of our new business made healthy contributions to the company’s revenue, invigorating our portfolio of innovative endeavors. New Oriental’s bottom line performance has achieved encouraging yields with operating margin and non-GAAP operating margin reaching 9.4% and 11.7% for this quarter, respectively. Thanks to the combined efforts of our restructured business model by the utilized resources and streamlined cost structure, bolstered by a vital growth across all business line, our commitment to maintaining a healthy market share growth stands firm as we strive to create sustainable value for our customers and shareholders in the long-term.

Now, I would like to spend some time to talk about the quarter’s performance across our remaining business line and new initiatives to you in detail. Our key remaining business have painted a promising upward trajectory, while the new initiatives secure positive momentum. Breaking down, the overseas test prep business recorded the revenue increase of about 53% in dollar terms or 59% in RMB terms year-over-year for the third fiscal quarter of 2024. The overseas study consulting business recorded a revenue increase of about 26% in dollar terms or 31% in RMB terms year-over-year for this quarter. The adults and university students business recorded the revenue increase of 53% in dollar terms or 60% increase in RMB terms year-over-year for this quarter.

Our multipronged new initiatives, which mostly revolve around facilitating students or around development have continued to deliver continued growth and meaningful profits to the company. Firstly, the non-academic tutoring courses, which we have offered in around 60 existing cities focuses 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 355,000 student enrollments recorded in this quarter. The top 10 cities in China contribute over 60% of this business. Secondly, the intelligence learning system and device 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 business. With approximately 188,000 active paid users recorded in this quarter, the revenue contribution of this initiative from the top 10 cities in China is over 55%. Our smart education business, educational material and digitalized smart study solutions have continued to contribute material results to the overall advancements of the company. In summary, our new educational business initiatives reported a revenue increase of 73% in dollar terms or 80% increase in RMB terms year-over-year for this quarter. In addition, as mentioned in the past quarters, we inaugurated a newly integrated tourism-related business line as one of our creative venture, tailored with diverse offerings of cultural trips, study tours in China and overseas as well camp education.

New Oriental’s cultural tourism business shared the spirit to provide premium quality travel experience that are infused with joy from cultural exchange, knowledge sharing and personal fulfillment. Within the new business line, our study tour and research camp business for students of K-12 and university age achieved inspiring growth in this quarter. We have conducted study tours and research camp in over 50 cities across the country with the top 10 cities in China offering over 55% of revenue share of this business. We also pilot a number of top notch tourism offerings to expand our reach to old age group, including the middle aged and elderly individuals across 25 featured provinces. As we’re still at the preliminary stage of the planning, testifying and evaluating the availability of this business in selected regions, we will keep you posted should there be timely updates.

With regards to our OMO system, Online Merge Offline system, we have persisted in revamping our platform and leveraged our educational infrastructure and technology edge on remaining key business and new initiative with the vision to provide advanced, diversified education service to customers of all ages. During this reporting period, a total of $25.5 million has been invested in our OMO teaching platform, which equips us with flexibility to maintain unrivaled service to students. With regards to the East Buy, East Buy attains sustainable growth momentum in this quarter thanks to a rapid development of its private label products. As part of the ongoing expansion strategy for an early venture like East Buy, we have devoted substantial investments to support the growth of the company, including the optimization of the East Buy’s multi-platform strategies, supply chains, product offerings as well as quality control to safeguard on product quality and regions.

We’re glad to see the East Buy has further enlarged its customer base following the latest establishment of time with Yuhui channel [indiscernible]. In addition, further enhancements in East Buy have been made through our comprehensive organizational structure, strategy hands for professional talents and upgrades, all of which strengthened East Buy’s private label products and live streaming in e-commerce. The resources we committed into East Buy have thankfully nourished improved user management and loyalty, and we will look forward to leverage this input to propel further growth of the platform that promise premium offerings and sustainable growth for our customers. With regards to the Company’s latest financial position, I’m confident to share with you that the Company is in a healthy financial state with cash and cash equivalent, term deposit and short-term investment totaling approximately $4.8 billion.

On July 26, 2022, the Company’s Board of Directors authorized a share repurchase of up to $400 million of the Company 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 yesterday, April 23, 2024, the company repurchased an aggregate of approximately 6 million ADS for approximately $195.3 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: Okay. Now I’d like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $1,093.9 million, representing a 59.1% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which excludes share based compensation expenses were $1,066.4 million, representing a 60.1% increase year-over-year. The increase was primarily due to the cost expenses related to substantial growth in East Buy private label products and live streaming e-commerce business. Cost of revenue increased by 74.5% year-over-year to $644.8 million. Selling and marketing expenses increased by 57.1% year-over-year to $161.3 million. G&A expenses for the quarter increased by 33.6% year-over-year to $287.8 million.

Non-GAAP G&A expenses, which exclude share based compensation expenses were $273.6 million, representing a 40.7% increase year-over-year. Total share based compensation expenses, which were allocated to related operating costs and expenses increased by 28.3% to $27.5 million in the third fiscal quarter of 2024. Operating income was $113.4 million, representing a 70.6% increase year-over-year. Non-GAAP income from operations for the quarter was $140.9 million, representing a 60.3% increase year-over-year. Net income attributable to New Oriental for the quarter was $87.2 million, representing a 6.8% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.53 and $0.52, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $104.7 million, representing a 9.8% increase year-over-year.

Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.63 and $0.63, respectively. Net cash flow generated from operation for the third fiscal quarter of 2024 was approximately $109.4 million and capital expenditure for the quarter were $80.1 million. Turning to the balance sheet. As of February 29, 2024, New Oriental had cash and cash equivalents of $2,013.6 million. In addition, the Company had $1,570.8 million in term deposit and $1,175.3 million in short-term investments. New Oriental’s deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the services or goods are delivered at the end of the third quarter of fiscal year 2024 was $1,521.7 million, an increase of 30.8% as compared to $1,163.2 million at the end of the third quarter of last fiscal year.

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

Stephen Yang: Thank you, Sisi. As we progress into the fourth quarter, which is typically expected as a slower quarter comparing with the third quarter in terms of the revenue growth and profitability due to various seasonality of our key educational businesses, we place confidence in sustaining a healthy growth, building on the collective bricks of our rooted foundation, brand advantage and influential teaching resources. Our strategic focus and investment approach aim at achieving satisfactory operating profits in the rest of the year, coupled with the year-over-year margin expansion for the full year. As always, we will work diligently to adhere to the latest guidance from the Chinese authorities on enhancing the nation’s education level to strengthen its leading position, to further strengthen our edge on all business lines and creative endeavors.

With regards to the learning center and classroom space, as part of the continued evolution of our offering across business line, we plan to increase our capacity by around about 30% for this fiscal year, by which a reasonable amount of new learning centers is expected to be opened, while classroom areas of some existing learning centers will be expanded in a few major cities. Most of the new openings will be launched in the city with better top line and bottom line performance in this year. At the same time, we will continue to hire new teachers and staff to match our capacity expansion and support our revenue growth, especially for new education business initiatives and newly integrated tourism related business. We expect total net revenue in the fourth quarter 2024 – March 1st, 2024 to May 31st, 2024, to be in the range of $1,101.5 million to $1,127.3 million, representing year-over-year increase in the range of 28% to 31% in dollar terms.

The projected increase of revenue in our functional currency RMB is expected to be in the range of 34% to 37% for the fourth quarter of this fiscal year 2024. To conclude, New Oriental is determined to persistently expand our existing offerings and fertilize new endeavors, dedicating strategic inputs to sharpen our capability. We will also continue to devote reasonable resources on research and application of new technologies such as AI and ChatGPT into our offerings and strong belief that we could uplift our strength to favor further growth, better margin and operating efficiency. At the same time, we will also continue to seek guidance from and cooperate with government authorities in various provinces and municipalities in China in alignment with these efforts to comply with relevant policies, regulations and measures, 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 matter as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2024 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for this. Thank you.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Felix Liu: Hi, good evening, management. Thank you very much for taking my question and congratulations on the strong growth and guidance. My question is on growth. So first, I understand that Q4, we will have a bit of seasonality in the education business, but maybe could you just share more color on the growth in different business segments in Q4? And also you mentioned that the capacity guidance – the expansion guidance for the year is now lifted to 30%. How do you see that as the capacity expansion pace going forward? Do you think 30% is a sustainable expansion that we can maybe keep for two to three years? Thank you.

Stephen Yang: Thank you, Felix. Yes, as you know, we did the top line guidance this quarter a lot, you know, just like the past couple of quarters. And as for the revenue guidance in Q4, which seems to be a little bit lower than the Q3 year-over-year revenue growth, there are three reasons. Number one, as always, were quite conservative to give the guidance. So this is number one. And number two, yes, as you know, Q4 is typically expect as a slower quarter compared to the Q1 and Q3 because of the seasonality, for example, like for the K-12 related business and the overseas related business, typically Q4 is the low season. And number three is in last year Q4 without the impact of the pandemic, I think our business in last year Q4 was basically back to normal.

So that’s why we give the Q4 top line guidance seems to be a little bit lower. But I think in my personal view, I think the guidance in dollar terms is 28% to 31%, in RMB term is 34% to 37%. I think it’s still very strong. And I think in the coming new fiscal year, that means the fiscal year 2025 we’re quite optimistic on revenue growth with the margin session for the whole fiscal year 2025. As for the expansion plan, yes, we raised the guidance of the capacity expansion by 30% year-over-year this time because actually we’re taking market share and I think the demands from the customers are very strong and that’s why we raised the guidance of the expansion plan again this quarter. And going forward next year I think we will keep almost at the same pace to open the new learning centers because, you know, the – because we may – when we made the analysis of the market demand and the supply.

So I think we’re still on the pace to take more market share. And as for the revenue growth of the different business if we disclose it in the next quarter.

Sisi Zhao: Just roughly for key business lines like overseas related including the test prep and consulting will grow roughly about 15% to 20% range and domestic test prep, university students business revenue growth will be around 20% to 25% range. And you know, high school tutoring will grow moderately and the new business – new initiative, which is the key growth driver will be over maybe 60% revenue growth. This based on – this is based on the exchange rate that estimated by us when we do the projection.

Felix Liu: Okay. That’s very clear. Thank you.

Stephen Yang: Thank you.

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

Yiwen Zhang: Good evening, management. Thanks for taking my question. So my question regarding our margin, if we look at the group level operation – adjusted operation margin, it was 11.7%, which was flattish on a YoY basis. Understood that a lot of incremental was due to the East Buy expansion. So if we just look at the education rate margin, how does it expand on a YoY basis and how would you expand to trend in the next few quarters? Thank you.

Stephen Yang: Yes, the Group’s non-GAAP op margin was flattish in this quarter. Within the education business, I think we’re seeing the meaningful GP margin and non-GAAP op margin expansion for education business in this quarter. I think that thanks to the combined the newly – the business structure model and the higher utilized resources and the better the utilization for the learning centers and the streamlined cost structure. So it made the education business margin expansion again this quarter. And so going forward, I think in the coming Q4 and even for the whole year, the new year fiscal year 2025, I think we do have the operating leverage in hand. Yes, as you know, we raised the guidance of the learning center expansion by 30% and we hired more teachers and staffs to match with the new expansion.

But I think the top line growth in the new fiscal year 2025 will be very strong. And we do have a leverage in fiscal year 2025. So we expect you will see the margin expansion with the healthy top line growth for education business in fiscal year – in the new fiscal year 2025. Yes, the East Buy, yes, I think the cost of expenses, especially for the selling and marketing expenses this quarter increase was primarily due to – partly due to the East Buy’s the investment. And yes, I think, you know, you saw a very strong growth in East Buy’s top line, especially for the private label products and the e-commerce business. And I think East Buy has devoted substantial investment to support the growth of the company, including the – like the optimization of the multi-platform strategies in [indiscernible] top line, the other platform, supply chain and product offerings and the quality control.

And also, East Buy recruit some more – the professional talent people from the market. And so we are optimistic on East Buy’s development going forward. And we look forward to leverage this investment – leverage this investment or input this time and going forward. So in summary, the margin profile for the whole group, so we are quite optimistic about the margin expansion for the whole group in – for the education business and in fiscal year 2025. And also as well, we do think, you know, the East Buy will generate more revenue, top line growth and more profit to the company going forward.

Yiwen Zhang: Okay, thank you. That’s very clear.

Stephen Yang: Thank you.

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