New Oriental Education & Technology Group Q1 2024 Earnings Call Transcript

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Provided by Quartr
October 25, 2023

There are 8 speakers on the call.

Operator

Good evening, and thank you for standing by for New Oriental's Fiscal Year 20 24 First 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.

Operator

I would now like to turn the meeting over to your host today, Ms. Cissy Zhao. Please

Speaker 1

Thank you. Hello, everyone, and welcome to New Oriental's 1st fiscal quarter 2024 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, Stephen Young, 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.

Speaker 1

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 we expressed today.

Speaker 1

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 This call will be available on New Oriental's Investor Relations website at investor. Neworrento.org.

Speaker 1

I will now first turn the call over to Mr. Yang. Steven, please go ahead.

Speaker 2

Thank you, C. C. Hello, everyone, and thank you for joining us on the call. It's a great pleasure to announce that New Oriental has painted an encouraging start of fiscal year 2024 By delivering a set of robust financial results this quarter, with top line performance beating the high end of our expectations, Following a tireless year of trial and development, our multi pronged business lines have pivoted towards a stable recovery and Anchor's fruitful yields, mainly benefiting from the strong post COVID recovery of demand, consumption and traveling. While our new businesses have begun making meaningful contributions to the company's revenue, thereby invigorates growth and Margin Expansion.

Speaker 2

Our bottom line performance has also achieved a promising growth. Our operating margin and non GAAP operating margin reaching 18.6% and 22.3%, respectively, for this quarter, depicting a solid resilience across our business lines, thanks to our ongoing efforts in brushing up on operational efficiency and cost control. The dedicated blend of our restructured business model, Better utilized resources and streamlined cost structure have sharpened our capability to yield better than expected margins in this fiscal quarter, as well as enlivens our exploration in the Ingenious Ventures. Coupled with the company's sustainable profitability, Resilient business lines and emerging new initiatives will have firm conviction in maintaining a healthy growth of our market share and creating 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 lines and new initiatives to you in detail.

Speaker 2

Our key remaining business secured a promising trend, coupled with the positive momentum in our new initiatives. Breaking it down, the Overseas Test Prep business recorded a revenue increase of 52% in dollar terms or 62% in RMB terms year over year for the fiscal quarter of 2024. The overseas study consulting business Recorded revenue increase about 27% in dollar terms or 35% in RMB terms year over year for this quarter. The adults' university students business recorded a revenue increase of 26% in dollar terms or 34% increase in RMB terms year over year for this quarter. As mentioned in the past quarters, we have launched several new initiatives, which mostly revolves around facilitating students all around development.

Speaker 2

I'm pleased to share that these initiatives have continued to exceed Our expectations by yielding consistent growth and meaningful profit to the company. Firstly, The non academic tutoring business, which we have offered in around 60 existing cities, focus on cultivating students' innovative ability and comprehensive quality. We're happy to see increased penetration in those markets we have tapped into, especially in higher tier cities, with a total of approximately 438,000 student enrollment recorded in this fiscal quarter. The top 10 cities in China contribute over 60% of the revenue of this business. Secondly, the Intelligent Learning System and Device Business, a service designed to provide tailored Digital learning experience for students has been adopted around 60 cities.

Speaker 2

We're thrilled to see improved customer retention and scalability of this new business with approximately 181 1,000 active paid users reported in this quarter. The revenue contribution of this initiative from the top 10 cities in China is around 60 Our Smart Education business, educational materials and digitalized smart study solutions have continued to contribute material results to the overall advancements of the company. In summary, our new education business initiatives recorded the revenue increase of 103% in dollar terms or 117% increase in RMB terms year over year for the Q1 of 2024. In addition, beginning in this fiscal year, we're pleased to announce a newly integrated business line, which will be comprised of all of our tourism related business, targeting diverse age groups. This includes our well grounded study tour and research camp business for students of K-twelve and university ages, as well as our newly established tourism business that mainly serve middle aged and senior audience.

Speaker 2

Upon consolidation, this tourism related business line will utilize New Oriental's strength of knowledge sharing, STAR teachers and repsable branding to visualize our capability in serving customers for our old age group. It's our great pleasure to share the performance of new business line in detail. Our Study Tour and Research Chem business, an initiative that aims to offering students of K-twelve and university ages The opportunity to utilize their free time to broaden the scope of knowledge and cultivate subject interest has achieved encouraging growth in this summer. Thanks to the strong post COVID recovery of demand, our resumed consumption and traveling, we have conducted study tour and research camp in over 50 cities across the country, with the top 10 cities in China offering over 55% of the revenue share of this new initiative. We firmly expect new business to contribute meaningful revenue in this fiscal year.

Speaker 2

In addition to success of our study tour and the research camp offerings, we also began venturing into the tourism business to expand our reach to all age groups, including the middle aged and elderly individuals. During this fiscal quarter, we piloted a number of top quality tourism offerings in featured provinces, including Zhejiang, Sichuan, And we're sincerely grateful for the increasing traction that these novel adventures have gained. As we are still at a very preliminary stage of planning, testifying and evaluating the visibility of this business in selected districts, We will keep you posted should there be timely updates on this new voyage. With regard to our OMO system, we have persisted in revamping our platform and leveraged our educational Infrastructure and Technology Edge, our 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 $45,600,000 has been invested in our OMO teaching platform, which equips us with the flexibility to maintain top notch service to students during the pandemic.

Speaker 2

During this reporting period, East Dubai has embraced a multi platform strategy through our official debut EachBuy consistently adhered to developing its private label products that are healthy, Safety, high quality with good value for money and has attained instrumental breakthroughs with streams of new products roll out each month. From groceries to daily necessities, EasterBuy's live streaming e commerce has not only helped customers reap good bargains, but also helped farmers, producers and local enterprise sell their products through strategic marketing strategies. In addition, the brand continued to draw in hands with local governments to promote unique agriculture products from region to region, nurturing public appreciation towards diverse cultures through inventive content. It also pioneered a new mode of live streaming that's incorporated with the product's traceability, by which our lead teams would atherse the regions of our private label products, factories and ochres. Our live streams have thereby offered assurance to the customers through guaranteeing products, Authenticity and Visibility.

Speaker 2

With regard to the company's latest financial position, I'm confident to share with you that the company is in a healthy financial status with cash and cash equivalents, term deposits and short term investments totaling approximately $4,600,000,000 On July 26, 2022, the company's Board of Directors authorized a share repurchase of up to 200 $1,000,000 of the company ADS were common shares during the period from July 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 October 24, 2023, the company repurchased an aggregate of approximately 6,000,000 ADS for approximately $193,300,000 from the open market under this program. Now, I will turn the call over to C. C.

Speaker 2

To share with you about the key financials. C. C. Please go ahead.

Speaker 1

Now I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $894,900,000 representing a 34.2% increase year over year. Non GAAP operating costs and expenses for the quarter, which excludes share based compensation expenses, were $855,300,000 representing a 32% increase year over year. The increase was primarily due to the cost expenses related to the substantial growth in Easterby, of Private Label Products and Live Streaming E Commerce Business. Cost of revenue increased by 41.4% year over year to $441,200,000 Selling and marketing expenses increased by 37.9 percent year over year to $136,100,000 G and A expenses for the quarter increased by 24% year over year to $317,600,000 Non GAAP G and A expenses, which exclude share based compensation expenses, were $290,300,000 representing a 22.3% increase year over year.

Speaker 1

Total share based compensation expenses, which were allocated to related operating costs and expenses increased by 108 percent to $39,600,000 in the Q1 of 2024. Operating income was $205,100,000 representing 163% increase year over year. Non GAAP income from operations for the quarter was $244,800,000 representing a 100 and 52.2% increase year over year. Net income attributable to New Oriental for the quarter was $165,400,000 representing a 150.6 percent increase year over year. Basic and diluted net income per ADS attributable to Neur Oriental were $1.99 respectively.

Speaker 1

Non GAAP net income attributable to New Oriental for the quarter was $189,300,000 representing a 126.2% increase year over year. Non GAAP basic and diluted net income per ADS attributable to New Oriental were $1.15 $1.13 respectively. Net cash flow generated from operations for the 1st fiscal quarter of 2024 was approximately $335,800,000 and capital expenditure for the quarter or $132,500,000 Turning to the balance sheet. As of October 31, 2023, New Oriental had cash and cash equivalents of 1748 point $9,000,000 In addition, the company had $139,400,000 in term deposits and $1423,900,000 in short term investments. New Oriental's deferred revenue balance At the end of the fiscal 1st fiscal quarter of 2024 was $1401,400,000 an increase of 38.4 percent as compared to $1,012,500,000 at the end of the 1st fiscal quarter of last fiscal year.

Speaker 1

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

Speaker 2

We're confident embarking a healthy journey of sustainable growth for the rest of this fiscal year, Building on the combination of our brand advantage, rooted history, influential teaching content and resources and solid foundation, We're also committed to work diligently adhering to the latest guidance from the Chinese authorities on enhancing the nation's education level to strengthen this leading position to further unveil our potential in all business lines and creative endeavors. With regards to the learning center and classroom space, we plan to increase our capacity by about 15% to 20%, by which a reasonable amount of new learning centers is expected to be opened, Well, 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 cities with better top line and bottom line performance. We will keep monitoring the pace and scale of new openings according to the local operation and financial results in this fiscal year. Despite the historical seasonality of some new rentals major businesses, which will usually result In a slower period for every second quarter, we remain confident in sustaining a healthy growth across all business lines.

Speaker 2

In summary, we expect total net revenue in the Q2 of fiscal year 2024 to be in the range of $785,000,000 to $804,200,000 representing year over year increase in the range of 23% to 26%. To conclude, We're confident in achieving satisfactory operating profit level and improving our profitability and the rest of fiscal year 2024. As always, New Oriental plays great determination to cultivate new endeavors and are bolstered our existing capabilities. Simultaneously, we'll devote reasonable resources on research and application of new technologies such as AI and Chat GPT into our educational and product offerings with a vision to uplift our strengths and pursue the growth and operational efficiency in the future. We will also continue to seek guidance from and cooperate with government authorities in align with these efforts to comply with the relevant policies, regulations and measures as well as to further adjust our business operations as required.

Speaker 2

I must say that these expectations and forecasts reflect our considerations of the latest regulatory measures as well as Current and preliminary view, which is subject to change. This is the end of our fiscal year 2024 Q1 summary. At this point, I'd like to open the floor for questions. Operator, please open the call for this. Thank you.

Operator

Thank you. The question and answer of this conference will begin in a moment. In order to be fair, all callers who wish to ask a question, Please stand by while we compile the Q and A roster. One moment for our first question please. Our first question comes from Yiwen Zheng with China Renaissance.

Operator

Your line is now open.

Speaker 3

Hey, thank you. Good evening, management. Thanks for taking my question. So my question is about November quarter revenue guidance. If we look at the Y o Y growth, there was a bit deceleration versus the August quarter.

Speaker 3

Can you walk through us what are the I was behind and probably you can also talk about how do we see the growth outlook across different segments? Thank you.

Speaker 2

Yes. As for the revenue guidance for Q2, actually, it's not the deceleration. I want to emphasize the following points of the Q2 guidance. Firstly, as always, we take a conservative approach in giving the guidance of Q2. Secondly, the exchange rates negatively impact the revenue growth guidance by approximately 3 basis points.

Speaker 2

Thirdly, I think It also need to be noted that typically Q2 is our seasonally slow quarter for most of our education business with the lower than euro revenue and profit. Given the strong demand of the growth Momentum we have seen so far this year, we're quite confident that the whole year's revenue growth We'll be better than we originally expected, especially in last quarter. We gave the guidance for the top line growth. This quarter, I think we gave the better guidance or higher guidance than that of the last quarter, Okay. For the whole year.

Speaker 2

And lastly, Easter buy will start to have a higher base comparison since Q2 this year. And overall, I think benefiting from the post COVID, The economy recovery, we have seen strong demand in education sector, especially in the overseas related business and now Diamond Children Business. And by leveraging our brand, the advantage of new rental and The good content and resources and our long established solid foundation. I think we'll continue to see great opportunity and to take more market share in the future. Thank you.

Speaker 4

Thank you. Thanks.

Operator

One moment for our next question. Our next question comes from the line of Felix Liu with UBS. Your line is now open.

Speaker 4

Hi, good evening, management, and thank you for taking my question and congratulations on the very strong Q1 results. My question is on your capacity plan. I noticed that in this quarter, your capacity, your Q on Q new learning center expansion accelerated from Q4 last year. So may I check your plan capacity plan from here? Do we expect this Q on Q new addition pace to maintain throughout this year or are there any seasonalities with capacity expansions quarter by quarter?

Speaker 4

And how do you see the regulation landscape or regulation environment around capacity expansions? Thank you. Yes.

Speaker 2

This quarter, we added 6% new capacity in this quarter. And as you know, we increased our And as I said, we will open a reasonable amount of new learning centers or new classroom areas in the top tier cities with the good performance of the top line and the bottom line. And as I said, The market the demand in education sector is very strong. That's why we've raised the guidance of the whole year of the top line growth and the learning center expansion plan for the whole year. As for the regulation side, I think so far so good.

Speaker 2

We and I think going forward, we expect The regulations will be stabilized in the future. And That's it. And one more point I want to add. I think for the Q2 to Q2, Q3 and Q4, I think we will following the guidance of the learning center expansion for the whole year, 15% to 20%. And maybe in the Q4, when we look at The budgets of fiscal year 2025, maybe we will raise the guidance for the learning center expansion plan again in Q4.

Speaker 2

Yes. Thank you.

Speaker 4

Okay. Very clear. Thank you.

Operator

One moment for our next question, please. Our next question comes from the line of Lucy Yu with Bank of America Securities. Your line is now open.

Speaker 5

Hi, Stephen. This is Lucy. I have a question on the margin. So this quarter, we have seen the OP margin expanded a lot and reached 22%, which is a pretty high level even compared to our historical kind of OP margin, especially in Q1. So how could we be coding the margin expansion?

Speaker 5

And how should we think about the margin expansion for the rest of the year? Thank you.

Speaker 2

Okay. Thank you, Lucy. Let us start with the this quarter margin analysis. The GP margin and OP margin increased a lot In this quarter was mainly driven by the following reasons. Number 1, the utilization and improving of our learning centers and the teaching resources Increased the Learning Center margin.

Speaker 2

That means we have lower fixed Cost and expenses compared to that of last year. And number 2, new business margin is over 20% in this quarter. The profit growth is faster than we expected 2 years ago. We started the business 2 years ago. And the recovery of the remaining business, especially in the overseas related business, generally the higher margin in this quarter It's higher definitely higher than that of last year.

Speaker 2

And number 3 is that, Eastbay enjoys a higher margin. And as we head into the fiscal year 2024 Q2, I think with operating leverage And higher utilization and the remaining business lines and the new business lines will generate The more profit to the group. And I think we are optimistic on margin expansion and sustainable Profitability in Q2 and in the rest of the whole year. I think the whole team will continue to work together to seek profitable growth in fiscal year 2024. And I think we believe we'll create more values to the shareholders over the long run.

Speaker 2

Thank you, Lucie.

Operator

Thank you. One moment for our next question, please. Our next question comes from the line of DS Kim with JPMorgan. Your line is now open.

Speaker 6

Hi, Stephen. Hi, Sisi. Good evening and thanks for taking my question. And by the way, congrats on the quarter. I think 245,000,000 OP was the 2nd best level on record, which is pretty amazing.

Speaker 6

Anyway, I have a high level question on long term growth, if that's okay. I guess, we Talked a lot about new businesses, which are completely different animal and can continue to grow triple digit, I'm sure. But for Old businesses, existing businesses like overseas, study, high schools, how shall we think about the sustainable growth from here, I. E, I mean, segment revenues, I think both of them are probably at backward high level. So it's no longer recovery phase.

Speaker 6

And what's going to drive the growth further from here, say, if you were to break out different levers, Like Centra expansions, we discussed 15%, 20% versus utilization growth, how much further room can we drive here and the price hikes, if any. And how shall we think about, say, next 2 to 3 years annual growth for the old businesses

Speaker 2

Thank you. Yes. I think, yes, for the existing business, such as the overseas test prep, Over to consulting and the adult and the university students business. I think less analysis The market like this, on demand side, we have seen the strong demand for the overseas test prep consulting business and for the college business. And on supply side, after the COVID And the policy, we have seen a lot of players disappear from the market.

Speaker 2

So that means we're facing less competition. So I think the existing business, including the overseas related business And the adult and college students business, I think we will generate the top line growth very good in the next 2 to 3 years. So we're quite optimistic about the top line growth and the margin expansion for the existing business. And as for the utilization rates, right, and for overall, in this quarter, in Q1, Q1 is the high season of the educational products. So in Q1, the utilization rate in Q1 is Somewhere around 65%, so that means the 2 thirds.

Speaker 2

But I think we have a long way to go. And as you know, as I said, in this fiscal year, we'll plan to open 15% to 20 Percent new capacity, but our top line growth is we beat the guidance every quarter and then we raise guidance of the whole year top line growth. I think the healthy top line growth will cover The rentals of the new capacity. So that means we do have the operating leverage in hand. And going forward, I think we will see you will see more operating leverage for all business lines.

Speaker 2

It will drive the merger up. Thank you,

Operator

We are now approaching the end of the conference. I would now turn the call over to New Oriental's Executive President and Chief Financial Officer, Steven Yang for his closing remarks.

Speaker 2

Again, thank you for joining us today.

Speaker 1

Operator, we probably have one more question from one of our analysts. Okay.

Operator

All right.

Speaker 1

Hi, Steve.

Operator

A question from Tianyong Wang with CICC. Your line is now open.

Speaker 2

Go ahead, please.

Speaker 7

Hi, Stephen. This is Lily Ling. This is Tanya Huang from CICC. So congrats on very strong set of results. So I just have a quick question.

Speaker 7

Our intelligent learning devices, so we've seen that the active paid users this quarter had a quite impressive growth like double Q on Q. So actually, what is driving such a strong growth? And how would we expect this business in the medium term? Thank you.

Speaker 1

Okay. Yes. Actually, we are very satisfied with our the developments of the new initiatives, especially for this kind of targeting younger kids, like K-twelve students, new initiatives, like the new intelligent learning device business. Last year, we rolled out in almost all the cities and now we're seeing a huge demand for the service. It's quite Innovative in terms of the offering using our all the technologies that we accumulated in last several years that we have the cutting edge technology and content as well and offering students a unique experience that helps students to enhance their academic study ability, especially self study ability as well.

Speaker 1

So Actually, the demand in all kinds of cities, high tiers, low tiers are also are all very strong. And we are Confidence in this kind of user number increase improvement year over year. And definitely, we're also in the process of enhancing the quality of our products and the services as well. So we will make Efforts in increasing the user number, as well as enhancing the tuition, like this kind of Scribing fee renewal rates as well and also we want to expand to more subjects for all the existing users. So in summary, actually the high demand and also the best content and technology and all the Service are the fundamentals for the development for this new initiative, and we will try to continue to enhance the quality and try to maintain this kind of healthy growth for this new initiative.

Speaker 1

Okay?

Speaker 7

Thank you, Jessica.

Operator

Thank you. One moment for our next question. Our next question will come from the line of DS Kim with JPMorgan. Your line is now open.

Speaker 6

Hi, sorry. Can I follow-up one more question here regarding shareholder return policy? I think I do think that our stock is very, very cheap still, but I noticed that the buyback activity past 3 months has been pretty minimal. I'm just wondering given the stock rally so far, have you considered shifting the policy a little towards dividend or some other way? Or Are we going to keep reiterating this buyback policy for the rest of the year and next year?

Speaker 6

Thank you.

Speaker 2

Yes. As you know, we announced a $400,000,000 share buyback plan. And so far, We finished $193,400,000 and I think we will buy more shares going forward in the rest of this year. And as always, we aim to create more values to the shareholders on capital return slide. Thank you, Diaz.

Operator

Thank you. And at this time, I'm showing no further questions. We are approaching the end of the conference call. I would now turn the call over to New Oriental's Executive President and Chief Financial Officer, Stephen Wang, for his closing remarks.

Speaker 2

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

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

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New Oriental Education & Technology Group Q1 2024
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