New Oriental Education & Technology Group Q2 2024 Earnings Call Transcript

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Provided by Quartr
January 24, 2024

There are 8 speakers on the call.

Operator

Good evening, and thank you for standing by for New Oriental's FY 20 24 Second Quarter Results Earnings 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. Suzhou.

Speaker 1

Thank you. Hello, everyone, and welcome to NeuRentals' 2nd fiscal quarter 2024 earnings conference call. Our financial results for the quarter were released earlier today and are available on the company's website as well as on Consumer Services. Today, Stephen Yelling, 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 views 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 call will be available on New Oriental's Investor Relations website at investor. Neworiental.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 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 healthy recovery and anchored stable top line performance, while the enduring momentum of our new business has made meaningful contribution to the company's revenue and continue to pave the way for further acceleration.

Speaker 2

New Rental'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, while utilizing resources and streamline cost structure. Encouraged by the company's sustainable profitability, resilient business lines and prospering new business, We've enforced our commitment to maintaining a healthy market share growth and creating sustainable value for customers and shareholders in the long term. Now, I would like to spend some time to talk about the performance across our remaining business lines and new initiatives to you in detail. Our key remaining businesses have depicted a propitious trend, while the new initiatives secured a positive momentum.

Speaker 2

Breaking it down, the overseas test drive business reported 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 adult 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 multi pronged new initiatives, which mostly revolve around facilitating students all around development. They have continued to prosper with consistent growth, delivering meaningful profits to the company.

Speaker 2

Firstly, the non academic tutoring courses, which we have offered in around 60 existing cities, focused on cultivating students' innovative ability and comprehensive quality. The markets we have tapped into have recorded elevated penetration, Especially in higher Tier Cs, with a total of approximately 786,000 students enrollment recorded in this quarter. The top 10 cities in China contribute over 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 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 recorded in the quarter.

Speaker 2

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 growth. 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 overseas, as well as camp education, New Rental's cultural tourism business shared a spirit to provide premium quality travel experience 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-twelve 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 research camp in over 50 cities across the country, with the top 10 cities in China offering over 55% revenue share of this new initiative.

Speaker 2

We also pilot a number of top notch tourism offerings to expand our reach to old age groups, including the middle aged and elderly individuals across 17 featured provinces, As we are still at the preliminary stage of planning, testifying and evaluating the viability of the business in select regions, We will keep you posted should there be timely updates. With regards to our OMO system, We have persist 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 $28,700,000 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, Easter Buy has attained strong growth momentum through a series of new initiatives aim 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 Easter Buy has made remarkable breakthroughs in supply chain integration, boosting its private label products to a total of 2,000 no, a total of 264 SKUs.

Speaker 2

Furthermore, nationwide broadcast events across provinces were launched with the consistent support from local cultural and tourism authority. Eastbay 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 Easter 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 healthy is in a healthy financial status with cash and cash equivalents, term deposit and short term investments totaling approximately $4,800,000,000 On July 26, 2022, the company's Board of Directors authorize a share repurchase of up to $500,000,000 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, 12 months through May 31, 2024. As of January 23, 2024, the company repurchased an aggregate of approximately $6,000,000 ADS for approximately $194,200,000 from the open market under the share repurchase program.

Speaker 2

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

Speaker 1

Now I'd like to go through the other key financial details for this quarter. Operating costs and expenses for the quarter were $848,300,000 representing a 32.4% increase year over year. Non GAAP operating costs and expenses for the quarter, which excludes share based compensation expenses, were $818,700,000 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 Dubai's private label Products and live streaming e commerce business. Cost of revenue increased by 25.7% year over year to $422,600,000 Selling and marketing expenses increased by 62.2% year over year to 155 $1,000,000 G and A expenses for the quarter increased by 29.6 percent year over year to $270,700,000 Non GAAP G and A expenses, which exclude share based compensation expenses, were $256,100,000 representing a 34.2% increase year over year.

Speaker 1

Total share based compensation expenses, which were allocated to Related operating costs and expenses increased by 57.3 percent to 29,600,000 dollars in the 2nd fiscal quarter of 2024. Operating income was $21,300,000 compared to a loss of $2,500,000 in the same period of the prior fiscal year. Non GAAP income from operations for the quarter was $50,900,000 representing a 200 and 12.2% increase year over year. Net income attributable to New Oriental for the quarter was 30,100,000 dollars representing a 4,007.4 percent increase year over year. Basic and diluted net income per ADS attributable to Neur Oriental were $0.18 and $0.18 respectively.

Speaker 1

Non GAAP net income attributable to New Oriental for the quarter was $50,200,000 representing a 182.6% increase year over year. Non GAAP basic and diluted net income per ADS attributable to to Oriental were $0.30 and $0.29 respectively. Net cash flow generated from operation for the 2nd quarter of 2024 was approximately $300,600,000 and capital expenditure for the quarter were $43,400,000 Turning to the balance sheet. As of November 30, 2023, New Oriental had cash and cash equivalents of $1942,600,000 In addition, the company had $1324,100,000 in term deposits and 1571 $200,000 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 Q2 of fiscal year 2020 4 was $1645,000,000 an increase of 44.4 percent as compared to $1139,100,000 at the end of the 2nd fiscal quarter of 2023.

Speaker 1

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

Speaker 2

As we enter the new quarter, We look forward to delivering assuring growth and ongoing margin expansion. Building on the blend of our brand advantage, roots to history, influential teaching content resources and solid foundation. We're also committed to working diligently, Adhering to the latest guidance from the Chinese authorities on increasing 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.

Speaker 2

The groundwork we have laid and the progress we have made thus far has fulfilled our optimism of our performance 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 $1,070,900,000 to $1093,500,000 representing year over year increase in the range of 42% to 45%. To conclude, we are delighted to share our latest set of results to all of We are confident in our ability to drive our business towards 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 reasonable research and application of new technologies as AI and child care teams into our educational and product offerings to uplift our strength and pursuit the further growth and operating efficiency. At the same time, we will continue to seek guidance from and cooperate with government authorities in various provinces in China in alignment with its efforts to comply with the relevant policies, guidelines and regulations, 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 measure 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 these. Thank you.

Operator

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

Speaker 3

Hi, good evening, Stephen. Congratulations again on the strong set of results. My question is on your very good Q3 guidance of over 40% revenue growth. Could you give us a rough break What's driving the strong growth? Thank you.

Speaker 2

Okay. Thank you, Philip. I think we've been 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.

Speaker 2

So we're quite confident about the whole year's revenue growth 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 demand side, we have seen this very strong demand for overseas test prep and the consulting business. And on 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're heading towards the right direction.

Speaker 2

And so we believe this business will be able to maintain the very good top line growth in the Q3. And yes, so overall, so that's why we give the guidance of the top line growth by 42% to 45%. And so, Cixi, you want to add the breakdown?

Speaker 1

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%, 20% to 21% of total revenue, like domestic test prep 2% to 3%. And also the K-twelve newly developed educational initiatives for K-nine 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.

Speaker 2

Thank you, Felix.

Speaker 3

Okay. Thank you very clear. Congratulations on the

Speaker 4

Thank you again.

Operator

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

Speaker 5

Hey, good evening management. Thanks for Congrats on a strong quarter result. So my question is about our learning center expansion. You mentioned about whole year 20 Capacity growth, if I calculate correctly that actually implies second half net add would slow down a bit. So could you discuss what our consideration is there given the very strong demand?

Speaker 5

Thank you.

Speaker 2

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%. And I think we will alter a reasonable amount of the new learning centers, while some of the new classroom areas Some existing vendors will be expanded in the second half of the year.

Speaker 2

And I think most of the new openings will be in the cities with a better top line and bottom line performance. And I think we will keep monitoring the pace scale to new offerings 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.

Speaker 5

Yes. Okay. Thank you.

Operator

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

Speaker 6

Hi, Stephen. This is Lucy from BLSA. So a follow-up on the 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 lending center, but was told it's already full, even the lending center is still under The revision 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?

Speaker 6

So what is the bottleneck from preventing us expanding even faster? Thank you.

Speaker 2

Yes. Thank you, Lucy. I think the reason that we give the guidance of the learning center expansion above 20% Because I think we do have the OMO system and the OMO model. So that means the online sites will help us to take over more students into the existing classrooms and the learning centers. So, OMO model helps a lot.

Speaker 2

And secondly, education is typically 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 top line growth, Actually, we have already given the guidance of 45 percent top line growth in Q3. And also, we also care about the margin expansion.

Speaker 2

It's the growth balance between the top line and bottom line. Lucy?

Speaker 6

Thank you, Stephen. Just to follow-up, you mean the OMO model, I know it's adopted for the high school, but for the non curricular training, We are also using OMO at the moment. So what's the percentage of like online versus offline at the moment?

Speaker 2

Yes, Lucy. For some of the non diamond courses And the overseas test prep, even for some college students business, all of the business, we do have the OMO model.

Speaker 1

And also the intelligent learning devices, which is also the one that we don't require too many new locations.

Speaker 6

Thank you so much.

Speaker 2

Thank you, Lucy.

Operator

Thank you, Lucy. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.

Speaker 4

Thank you. Hi, Stephen. Hi. This is Timothy from Goldman. My question is on the margins.

Speaker 4

I saw this quarter, the non GAAP operating margin by around 3.3 percentage points. Just wondering if you can provide any color in terms of breakdown because on the other hand, I think for eSpy, there was some pressure on the margin. Just wondering if we exclude the margin impact from eSpy, kind of margin expansion that we are seeing for the core BNS? And then after this quarter, how do we think about the full year OP margin guidance? Thank you.

Speaker 2

Okay. Yes, let's start with the quarter this quarter margin analysis. Even though, yes, as you said, Even though it's the bias margin drag in this quarter, we still got the non GAAP OP margin expansion by 3 30 basis points. And I think the margin increase was mainly driven by the following reasons. Number 1 is the utilization rates improving of our facilities and the teaching resources increased the learning center margins on average.

Speaker 2

So that means we have to lower fixed cost and expenses compared to that of last year. And number 2 is, the new business Margin is over is around like the 19%, 20%. So we just started the new business 2 years ago. So that means the ramping up pace is much faster than we expected. And also the remaining business such as the overseas related business and the college business generally higher margin than that of last year.

Speaker 2

So in the Q2, if we take out the Ezbuy's impact education in non GAAP Open Markets, what was that?

Speaker 1

Increased actually is much higher than the overall margin, yes, Because they don't actually, Instabuy don't release quarterly earnings. So you can look at the results of their first half. So you can roughly get the calculation of the educational business margin expansion.

Speaker 2

And as we head into the Q3 With the operating leverage and the higher utilization control, I think the you will get the margin expansion continuously in the Q3 and in Q4. So that means the second half of the year, I think you will see the margin expansion in education business.

Speaker 4

Thank you, Stephen. This is very helpful.

Operator

Thank you. Thank you, Tim. Our next question comes from the line of Tian Hou from TH Capital. Please ask your question Tian.

Speaker 7

Hi, Sisi, Steven. Congratulations for a good quarter. I have actually two questions. One is, how does culture and tourism business is conducted? How do you record revenue from that?

Speaker 7

That's number 1. Number 2, can you break down the results and guidance into different segments for both revenues and the margin profiles? That's 2. Thank you.

Speaker 2

Thank you, Tian. I will take the question about tourism business. Tian, as mentioned in the last quarter, We have started the tourism business as the one of our innovative ventures. And this the tourism business includes our well grounded study tour and research Cat business for the students as well as our new tourism business that serves the middle aged and senior people. We don't have a lot of good teachers.

Speaker 2

And I think that our new tourism business will utilize our strength in knowledge sharing of those features. And as well, we have abundant sales channel, including Dongdongjianxuan and onlineoffline channels in New Rental. So during this quarter, we piloted a number of tourism offerings to expand the to reach all ages people. And the top line growth It's very good in this quarter because of the last year, we do have the next we did have the negative impacts from the COVID. And we set up the new company named New Oriental Cultural Tourism Group.

Speaker 2

And also this group company set up the 100% the subsidiaries in OECD. So we divided the revenue and the financial statement from the education to the tourism business. So that means going forward, we will record the 2 business lines in 2 parts. And so going forward, I think our goal is to be the leading the cultural tourism company in China and to provide the best service to the customers as much as we can. And I do hope the going forward, the tourism business will contribute more revenues and the profits To the whole group, Ken?

Speaker 7

Yes. That's good. Yes.

Speaker 1

Yes. Ken, your second question on the guidance breakdown, so as I mentioned earlier, For overseas related business for Q3, roughly the distribution are similar with previous quarter, about 21%, 22%. And the domestic test prep is about 2% to 3%. And the K-twelve, including the new educational initiatives for and also remaining high school business together contribute over 40% of total revenue. Yes, so that's the key business lines

Operator

Thank you, Tian. Our next question comes from Candace Chen from Daiwa. Please ask your question, Candace.

Speaker 6

Hi, Sisi and Stephen. Congratulations on a very strong quarter and also the revenue guidance. My question It's on the margins for longer term. So I think you just mentioned that for the new education businesses that actually we are looking at around 19% to 20% operating margin, which is pretty impressive as compared to what you mentioned in the previous quarters. And I just wonder for the in the longer term that we are talking about like 2 to 3 years down the road, what should we expect for this New Education Business in terms of their operating margins and also for the overseas test purposes, What kind of margin should we be expecting given the very strong demand out of the revenue here?

Speaker 6

Thank you.

Speaker 2

Yes. As you know, we started the new education business 3 years ago. And in this quarter, The margin of this business is roughly 19%. And going forward, I think the margin will be over 20%. So that means we expand the margin of this business.

Speaker 2

We will expand the margin of this in the second half of this year. And even in the new year, fiscal year 2025, we expect The margin of the education business overall will be expanded. Because of the Yes, Sasan, because of the lower fixed cost and the higher utilization of the learning centers and the cost control, I think both the existing business such as the overseas led business and the college business and the new business, new initiatives will expand the margin. So Going forward, even in the second half of this fiscal year and fiscal year 'twenty five, I think the margin will be expanded. So, yes, and you know we care more about the top line growth and the margin expansion.

Speaker 2

So we believe we will create more value to the shareholders, yes, as the bottom line wise.

Speaker 6

Another question is about our cash. I think we are having almost $5,000,000,000 cash right now. So In terms of shareholder returns, what are we going to do with the cash in the following years?

Speaker 2

Yes. We announced the $400,000,000 share buyback program. And so far, we finished $194,000,000 And I think we will buy the share back from the open markets going forward. And this round, we choose to buy the share back. And but, historically, we paid the several times special dividend and did several times share buyback.

Speaker 2

So going forward, next round, maybe we will choose the dividend again And where do we share buyback?

Speaker 6

Okay. Good to hear. Thank you, Susan.

Operator

Thank you, Candace. Our next follow-up question comes from the line of Felix Liu from UBS. Please go ahead, Felix.

Speaker 3

Hi, good evening. Stephen, Citi. May I have a follow-up question on competition? You mentioned that the supply demand dynamics of the sector is very strong. So do you see any risk in competition intensify?

Speaker 3

Do you see smaller players also ramping up capacity expansions or it's not what is happening on ground? Thank you.

Speaker 2

Yes, Philip, we have seen a lot of the competitors disappear from the market since 2, 3 years ago. And especially in 2020 is we are facing last And so I think this is true both for the K-twelve business and the overseas related business even with the college business. And going forward, I think we expect the competition environment will be stabilized.

Operator

Thank you, Felix. Next follow-up question comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead, Tim.

Speaker 4

Stephen, just a follow-up question, I think, on the intelligent learning system and devices. I saw the number of active users, I think, for the past quarter is actually quite similar to the summer semester. Just wondering if you can share some color In terms of the seasonality of these business lines and what is the, I think, probability that we are seeing and how do you think about the, I think the Q on Q growth, I think, into the Q3, Q4, that will be very helpful.

Speaker 1

Yes. Actually, the intelligent learning device Business are developing also very well. The growth is pretty strong, and we're seeing actually not very seasonal pattern for this business quite similar with previous tutoring business, especially for middle school students. And This year, the year over year increase of user is very And also we have prepared a lot of new devices to cater the needs of customers. The key drivers, growth drivers are new customers and also we're making efforts on expanding to more subjects for existing customers as well, because this is the very good products that helping kids to enhance their self study ability, even without our teachers instruction, but using the device and also benefiting from our Very, very good content, differentiating content embedded in the device that kids can also prepare for the academic study and do the process by themselves.

Speaker 1

So this is a good solution after the policy change and all the restructuring of the whole company. So we're confident in the development of this new products and also the profitability is also currently we're seeing the margin are similar with our tutoring business, like, the non academic tutoring business, for mostly for elementary school students. And also we're seeing the potential for this kind of learning device business, the margin potential is also quite strong. We can leverage more of our teacher resources and also we don't need to spend a lot of cost on the learning center opening. Yes.

Speaker 4

That's clear. Thank you, Assistant.

Operator

Thank you, Ting. Our next follow-up question comes from the line of Tian Hou from TH Capital. Please go ahead Tian.

Speaker 7

Yes. Sisi, Stephen, just a follow-up question. It's also related to the seasonality. So Just not quite sure what's the seasonality under the current business structure. So can you share some color?

Speaker 2

Yes, Q2, the seasonality becomes more smooth than many years ago. And but the Q2 is still the lowest season. And so the strongest season is Q1 then followed by the Q3 and Q4 and then the Q2 is the lowest

Speaker 7

season. Is the margin also follow the same trends?

Speaker 2

I think so. Yes. If you look at the margin, in Q2, The non GAAP OV margin is roughly 5.9%. I think the margin in Q3 definitely will be higher than

Operator

We are now approaching the end of the conference call. I'll turn the call over to New Oriental's Executive President and CFO, Mr. Steven Yang, 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

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.

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New Oriental Education & Technology Group Q2 2024
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