New Oriental Education & Technology Group Q4 2023 Earnings Call Transcript

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Provided by Quartr
July 26, 2023

There are 8 speakers on the call.

Operator

Good evening, and thank you for standing by for New Oriental's FY 2023 4th Quarter Results Earnings Conference Call. At this time, all participants are in 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'd now like to turn the meeting over to your host for today's conference, Ms. Cixiao.

Speaker 1

Okay. Thank you. Hello, everyone, and welcome to New Oriental's 4th fiscal quarter 2023 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 Young, Executive President and Chief Financial Officer and I will share New Oriental's latest earnings results and business updates in detail with you.

Speaker 1

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.

Speaker 1

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. Neurendo 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.

Speaker 1

Neworiental.org. I'll now first turn the call over to Mr. Yang. Stephen, please go ahead.

Speaker 2

Thank you, C. C. Hello, everyone, and thank you for joining us on the call. It's our great pleasure to announce that New Oriental has managed to conclude this fiscal year With a set of remarkable financial results this quarter and with our top line performance beating the expectations, Our existing business lines and new initiatives have pivoted towards a stable recovery and anchored fruit bearing growth, mainly benefiting from the strong post COVID recovery of demand and the resumption of the consumption. Our bottom line performance has also achieved solid growth With operating margin and non GAAP operating margin reaching 5.6% and 9.1%, respectively, for this quarter, Depicting a well grounded resilience across our business lines, thanks to our ongoing efforts enhancing operational efficiency and cost control.

Speaker 2

In particular, I would like to highlight that solid recovery Our bottom line performance has also achieved solid growth with operating margin and non GAAP operating margin reaching 5.6% and 9.1%, respectively, for this quarter, depicting a well grounded resilience across our business lines. Thanks to our ongoing efforts in enhancing operational efficiency and cost control. In particular, I would like to highlight the solid recovery has been embodied in the growth of our overseas test prep and overseas study consulting businesses, which have recorded steady increments in revenues and enrollments. The dedicated blend of our restructured business model, Better utilized facility and streamlined cost structure has not only helped us yield better than expected margins in this fiscal quarter, but also enlivant our continued exploration of new potential ventures as we unfold a new chapter of Innovative Endeavors. The company's sustainable profitability, resilience, business lines and emerging new initiatives have reaffirmed our belief in maintaining a healthy growth of our market share amid the encouraging environmental recovery.

Speaker 2

Now, I would like to spend some time to talk about the quarter's performance across our remaining business lines and new business to you in detail. Our key remaining business secured a promising trend, coupled with the positive momentum in our new initiatives. Breaking it down, the Overseas Test Drive business recorded a revenue increase of 52% in dollar terms or 62% in RMB terms year over year for the Q1. The overseas study consulting business recorded revenue increase of about 6% in dollar terms or 13% The adults and university students business recorded a revenue increase of 34% in dollar terms or a 43% increase in RMB terms year over year for this quarter. As mentioned in the previous quarters, We have launched several new initiatives, which mostly revolve around facilitating students all around developments.

Speaker 2

I'm pleased to share with you that these initiatives have continued to exceed our expectations By sustaining a promising growth and generating meaningful profit to the company. Firstly, the non academic tutoring courses, which we have offered in around 60 existing cities, focused on cultivating students' innovative ability and comprehensive quality. We're happy to see further rise of market penetration in those markets we have tapped into, especially in higher tier cities, With a total of 629,000 student enrollments recorded in this quarter, the top 10 cities in China have contributed about 60% of revenue of this business. Secondly, the Intelligent Learning System and Device Business, A service designed to provide a tailored digital learning experience for students has been adopted in around 60 existing cities with 99,000 active paid users reported in this quarter. The revenue contribution of this new business from the top 10 cities in China is around 60%.

Speaker 2

Thirdly, our study tour and research camp business, An initiative that aims at offering students of K-twelve and university ages the opportunity to fully leverage their free time We have conducted study tours and research attempt in over 50 cities across the country, with the top 10 cities in China offering over 55% of revenue contribution to this new business. Benefiting from the post COVID recovery of demand, We have seen strong enrollment trends and expect the new business to contribute meaningful revenue in the coming new fiscal year. Last but not least, our Smart Education business, educational materials and utilized Smart Study solutions, as well as exam prep courses have also contributed meaningful results to the overall growth of the company and has attained instrumental profits since the previous quarters. With regard to our OMO system, Our persistence in revamping our platforms and advancing the technology capability has enabled us to continue to provide high quality service to our customers and successfully capture the new business opportunity during the transition period. During the reporting period, a total of $31,700,000 has been invested into the system.

Speaker 2

Now, I would like to spend a bit of time to give you updates on Easter by latest performance. Fiscal year 2023 marks Adventure's beginning for Easter Buy. Since inception, It has achieved significant breakthroughs in both business operations and financial performance through proactive redesigning of its strategic plan and the implementation of a series of the initiatives to strengthen the long term sustainability. During the reporting period, the company introduced a change of its name from Coolerne Technology Holding Limited to Easterbay Holding Limited For closer alignment with its long term core business direction, which is to offer top quality agriculture products under our private label, Dongfeng Zhenxuan, creates a live streaming platform, which safeguards product caliber and use experience for customers as well as nurture nationwide cultural appreciation. Throughout fiscal year 2023, YiXiBai continued to expand product variety to provide customers with high quality and cost effective offerings.

Speaker 2

The extremely stringent standard applies in selecting prime suppliers and manufacturers have ensured outputs are always created a better craftsmanship with simpler ingredients. In terms of private label products, we're existing to introduce only high quality products that are price worthy. Eased by elevated user experience by applying advanced technology to safeguard the entire process From product development, sales to after sales service, furthermore, with a vision to foster content innovation And now that you're sharing with customers, Yi Sibai began leading on-site live streaming events in various provinces in China, joined by the cultural celebrities from all walks of life to document a rich variety of intangible Cultural Heritage. We're also grateful for the support to Easterby's exploration in quarter tourism, And it's inspiring to see that the platform has since rose wild public attention, awareness and most importantly, Affection on Chinese Cultural Assets. We will continue to explore the area of business and provide updates when suited.

Speaker 2

With regard to the company's latest financial position, I'm confident to share with you that the company It's in a healthy financial status with cash and cash equivalents, term deposits and short term investments totaling approximately $4,500,000,000 On July 26, 2022, The company's Board of Directors authorized a share repurchase of up to $400,000,000 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 the July 25, 2023, the company repurchased aggregate of Approximately 5,900,000 ADS for approximately $191,700,000 from the open market under the share repurchase 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 key other key financial details for this quarter. Operating costs and expenses for the quarter were $812,500,000 representing a 29% increase year over year. Non GAAP operating costs and expenses for the quarter, which excludes share based compensation expenses, were $782,000,000 representing a 30.1% increase year over year. The increase was primarily due to the cost expenses related to the substantial growth in Aestabuy's private label products and the live streaming e commerce business. Cost of revenue increased by 58% year over year to $391,600,000 Selling and marketing expenses increased by 54.3 percent year over year to $147,800,000

Operator

G and A expenses for

Speaker 1

the quarter decreased by 4.5% year over year to $273,100,000 Non GAAP G and A expenses, which exclude share based compensation expenses were $249,500,000 representing a 3% decrease year over year. Total share based compensation expenses, which were allocated to related Operating cost expenses increased by 6.1 percent to $30,500,000 in the 4th fiscal quarter of 2023. Operating income was $48,100,000 compared to a loss of $105,600,000 in the same period of the prior fiscal year. Non GAAP income from operations for the quarter was $78,600,000 compared to the loss of $76,900,000 in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $29,000,000 compared to the loss of $189,300,000 in the same period of last year.

Speaker 1

Basic and diluted net income per ADS attributable to New Oriental were $0.18 $0.17 respectively. Non GAAP net income attributable to Neurantal for the quarter were $62,100,000 compared to the loss of $160,300,000 in the same period of the prior fiscal year. Non GAAP basic and diluted net income per ADS Attributable to New Oriental were $0.38 $0.37 respectively. Net cash flow generated from operation for the 4th fiscal quarter of 2023 was approximately $421,600,000 and CapEx capital expenditure for the quarter were $68,400,000 Turning to the balance sheet. As of May 31, 2023, New Oriental had cash and cash equivalents of $1663,000,000 In addition, the company had $1318,500,000 in term deposits

Operator

and $1477,800,000

Speaker 1

in short term investments. New Oriental's deferred revenue balance, which is cash collected upfront from customers and related revenue will be recognized as a service or goods As the service and goods are delivered, at the end of the 4th fiscal quarter of 2023 was $1337,600,000 an increase of 43.4% as compared to $963,100,000 and the same at the end of the Q4 of fiscal year 2022. Now I will hand over to Stephen to go through our outlook and guidance.

Speaker 2

Thank you, C. C. Heading into the Q1 of fiscal year 2024, we firmly believe that our business will progress A healthy trajectory of growth, which will be reflected in our performance in the new fiscal year. The surge in demand we observed as a result of post COVID reception and economic recovery has heightened our conviction in leveraging our brand advantage, rooted history, influential the teaching content and resources and our long established solid foundation. We will continue to work diligently Hearing the latest guidance from the Chinese authorities on enhancing the nation's education level to strengthen its leading position to further unveil our potential in all business lines and seize new opportunities as they arise.

Speaker 2

With regard to learning center and classroom space, we plan to increase our capacity by about 15% to 20% and New Year, by which a small quantity 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 fiscal year 2023. We will keep monitoring the pace and scale of new openings according to the local operation and the financial results during the New Year. In summary, we expect total net revenue in the Q1 of fiscal year 2024 to be in the range of $983,200,000 to $105,500,000 representing year over year increase in the range of 32% to 35%. To conclude, The financial results we recorded in fiscal year 'twenty three and performance of our new business have reaffirmed our confidence Achieving the satisfactory level of the operating profit and the improvement of the profitability in the Q1 and the whole year of fiscal year 2024. New Oriental placed great determination to invigorate new endeavors with our existing capabilities.

Speaker 2

Simultaneously, we will also devote reasonable resources on research and application of new technologies such as AI and Chart JPT into our educational and product offerings with a vision to uplift our strength in pursuit of growth and operating efficiency. At the same time, We will continue to stay committed to seek guidance from and cooperate with government authorities in various provinces. In alignment with its efforts to comply with the relevant policies, 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 measure, as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2023 Q4 summary.

Speaker 2

At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you.

Operator

Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. Our first question comes from the line of Felix Liu from UBS. Please go ahead, Felix.

Speaker 3

Hi, good evening. Thank you management for taking my question and congratulations on the strong quarter and guidance. My question is on capacity. I noticed that your capacity expansion have picked up this quarter and that you guided a 15% to 20% capacity increase for the next Are they in existing cities or in new cities? And are they for just for our new K-twelve businesses or are they multipurpose in covering overseas test prep?

Speaker 3

And for the plan of 15% to 20% this year, Do you see that as a sustainable level if we were to project this into a few years down the road? Thank you.

Speaker 2

Yes. Thank you, Felix. I think as for the expansion plan, yes, we raised a little bit About the capacity expansion plan compared to that of the last quarter earnings call, last quarter, I shared with your guys about the 10% Capacity expansion. I think the reason is because we have seen the strong demand in education sector, especially in overseas test prep business and non academic courses. So that's and also I think that's why we raised the guidance of the capacity expansion.

Speaker 2

And I think most of The new alternate will be happened in the existing cities. We don't have the plan to open the new cities. And but I must mention that we will open these small quality of the new learning centers in existing cities And we will expand some classroom area for some existing cities because it's almost full of the existing some learning centers. And most of the new learning centers or the new areas will be used by the The K-twelve non dynamic courses and overseas related business and the some domestic test prep courses. And as for the this is our fiscal year 'twenty four plan.

Speaker 2

And I think in the next 2 to 3 years, I think we'll keep the same pace of the expansion plan and it depends on the whole market environment and the development of the business.

Speaker 3

Thank you very much.

Operator

Thank you. Our next question comes from the line of Ewen Zhang from China Renaissance. Please ask your question, Yi Wen.

Speaker 4

Hi, thank you. Good evening. Thanks for taking my question. Congrats on a very strong set of results. So just a general question on our guidance.

Speaker 4

So your August quarter guidance is quite impressive and Mostly in the mid term. So actually, what is driving such a strong growth? Can you describe more maybe by segments? Thank you.

Speaker 2

Okay. Yes, I think we remain confident and optimistic about the business performance in the coming Q1 And even for the new fiscal year 2024. And as the post COVID reception and the whole economy recovery, think we have seen a strong demand of our product like the overseas related courses And the dynamic, of course, some new businesses. And so I think with leveraging our brand advantage And the good teaching content and resources and our long established solid foundation, I think we will continue to seize the market opportunity in the market. That means we will take the market share.

Speaker 2

And for example, as for the overseas related business, on demand side, we have seen a strong demand for the overseas test prep business. On supply side, we have seen some players disappear from the market. So that means we are facing less competition. And for our new business, like the non diamond courses, I think we are the encouraging performance In this quarter or even in the last year, proof that we are heading towards the right direction. So in the coming Q1, we guided the top line growth It will be in the range of 32% to 35% in dollar terms.

Speaker 2

And in RMB terms, there might be somewhere around 40%, 45%. And so and also as for the bottom line wise, we're confident achieving the greater fee, a profiting profit in the coming Q1. That means we're quite optimistic about the operating margin Expansion in the Q1 and the whole New Year. Yuan?

Speaker 4

Thank you. Thank you very much.

Speaker 2

Thank you.

Operator

All right. Thank you. Next question comes from the line of Lucy Yu from Bank of America Securities. Please go ahead, Lucy.

Speaker 5

Thank you. Hi, Stephen. This is Lucy from BAML. One question on your selling expense. So I noticed that the selling expense has been up quite a lot Q on Q and Y o Y.

Speaker 5

Could you please elaborate what is driving that? And how should we think about the selling expense trend in the new fiscal year? Thank you.

Speaker 2

Yes. Thank you, Lucy. I think we spend a little bit more money on Selling and marketing expenses, because we're seeing the strong demand in the market. And Yes. I think you saw our top line growth in this quarter is 60%, 64% in dollar terms.

Speaker 2

And even though we will spend a little bit more on selling market dividends, but I think we do have the operating leverage in hand. And going forward, even in the Q1, the New Year, I think we'll spend a little bit more on the selling and marketing business. But I think we do have the operating leverage on the cost and SG and A side. So that means you will see the margin improvement in the coming New Year.

Operator

Just to

Speaker 5

follow-up, Stephen. So your selling is mainly driven by which business? Is it non academic and overseas or any other business?

Speaker 2

Both is by the Education business and the Easter Bunny.

Speaker 6

Okay. Thank you.

Operator

Thank you, Lucy. Our next question comes from the line of Candice Chen from Daiwa. Please ask your question, Candice.

Speaker 7

Hi, Stephen and Sisi. Good evening. This is Candice from Daiwa. So firstly, congratulations on the very strong revenue guidance for the coming quarter. And I would like to follow-up on your comments about the operating margin.

Speaker 7

Would you mind sharing a little bit more on the margins by different businesses for it such as the Academic tutoring and also overseas test prep, etcetera. And my second question is about the revenue this Would you mind to break it down into different segments as well? Thank you.

Speaker 2

Yes. Let's start with the margin And that is of this quarter. Because of the downsizing of the learning centers and laying off some employees last year, That's the lower fixed cost per learning centers. It drives the margin up. And as for the different business lines, the overseas test The growth is very good in this quarter and with the higher utilization of the classrooms and the operating And the margin was up.

Speaker 2

And going forward, I think both the overseas related business And the new business, the margin will go up in the coming quarter and the coming new year. And the question The different business line revenue? Yes. This is kind of taking the question.

Speaker 1

You meant for Q4, right?

Speaker 7

Right. Mainly for Q4, but if you can also provide some colors on the 1Q, that would be very great.

Speaker 6

Thank you.

Speaker 1

Okay. Yes. So for Q4, the revenue mix is roughly Like Q4, the overseas related business contributes Like test prep is about 11% and the consulting business is like 17%, because it's the seasonality seasonally high quarter. And also for university students business, The revenue contribution in Q4 is about 2% to 3%. And the new business together is about New business together is about 18%, so roughly same for the whole fiscal year as well.

Speaker 1

And the rest are high school and some other business and also including Zhu Huandexuan. Yes.

Speaker 7

Thank you, Susie. May I ask one more question that is about the coming quarter? So I think that we do see that on the ground, the demand for the research camps and also the study tours have been very strong. Would you mind sharing a little bit more on the like what we are seeing for this and what is our plan for the full year and going forward for this new business? Thank you.

Speaker 1

Yes. So actually we give the strong guidance for Q1's revenue. The key driver if you look at by each Categories of businesses like overseas related business both including the overseas test prep and consulting are growing faster. And also we're seeing accelerating trends of the growth for overseas related business Because of the post COVID recovery, the trend is very clear. And also, the some other New business definitely is a key driver, even higher than our original expectation because we are seeing strong Demand during the summer's registration and according to our current forecast, this portion can also grow very, very fast.

Speaker 1

So these are the key driver. Definitely other business, we have the remaining businesses and Also, Duanzhen Shen are also contributing good revenue growth as well for Q1.

Speaker 7

Great. Thank you very much.

Operator

Great. Thank you. Our next question comes from the line of Tien tsin Huang from CICC. Please go ahead, Tien tsin Huang.

Speaker 6

Good evening. So thank you for taking my questions. My question is, since we have announced to offer Cockrell and tourism services that target middle aged and older people, So could you mind sharing more color on this, like how do we expect to enter this market? And to which extent do we expect this business to contribute to revenue? Thank you.

Speaker 2

Yes. As for the new the cultural tourism business, yes, I think, first of all, we think the it has a big potential, the market opportunity in the country. And we do have a lot of the good teachers. Some of them are star teachers. And by leveraging the knowledge of the teachers and in like the general studies, history or Chinese history or Some cultural studies, I think we believe we'll be able to present a one of a kind of cultural The tourism offerings, combined both the entertainment and cultural education for the like the middle or the older age group people.

Speaker 2

In addition, I think we may also be able to leverage our extensive self the online platforms and the school network as the distribution channel. We have newly developed a couple of the top quality cultural tourism offerings In some feature tourism cities and provinces such as Hangzhou, Chengdu, Xi'an and Gansu, I think these offerings are gaining the increase in the traction from the market. And yes, we're still in the very early stage and we're testing the product and the service process. And so and I will keep you posted for any updates on the new business. But we're excited for the new business as we did in The year before last year, we started the business of the Easter Buy.

Speaker 2

And the Easter Buy generated a lot of the top line growth and the profits to the group in fiscal year 2023. And this runs for the we're very excited about the new business of the tourism business. Thank you.

Operator

Right. Thank you. All right. There are no further questions. I'll now turn the call over to New Oriental's Executive President and CFO, Stephen Young, 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

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Earnings Conference Call
New Oriental Education & Technology Group Q4 2023
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