Earnings Call Transcript - EDU Q2 2026

Operator, Operator

Good evening, and thank you for standing by for New Oriental Education & Technology Group Inc.'s FY2026 Second 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. I would now like to turn the meeting over to your host for today's conference, Ms. Alice Chow. Thank you. Please go ahead.

Alice Chow, Host

Hello, everyone, and welcome to New Oriental Education & Technology Group Inc.'s Second Fiscal Quarter 2026 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 Education & Technology Group Inc.'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 Education & Technology Group Inc. 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 Education & Technology Group Inc.'s Investor Relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead.

Stephen Yang, Executive President and CFO

Thank you, Alice. Hello, everyone. And thank you for joining us on the call. I'm pleased to report a strong set of results for 2026. Our continued focus on operational efficiency and disciplined resource management has been a key driver of our solid performance and continues to support our path to sustainable profitability. We are delighted to see strong profit growth accompanied by a significant improvement in non-GAAP operating margin, which is up more than four percentage points, exceeding our expectations. This quarter, total net revenue grew 14.7% year over year, to $1.19 billion. Non-GAAP operating income more than tripled, rising 206.9% to $89.1 million. Non-GAAP net income attributable to New Oriental Education & Technology Group Inc. increased 6068.6% to $72.9 million. Our core business remains steady, and I'm pleased to share that our new initiatives are gaining traction and making meaningful contributions to the group's overall performance. For the second fiscal quarter, our K-9 educational business and high school tutoring business reported accelerated year-over-year revenue growth, outpacing the previous quarter. Our overseas-related business has shown resilience, delivering modest revenue growth despite the ongoing macroeconomic headwind, exceeding our earlier conservative expectations. Our overseas test prep business recorded a revenue increase of 4% year over year. Our overseas study consulting business recorded a slight decrease of about 3% year over year. Our adults and university students business recorded a revenue increase percent year over year. As for our continued investments in new education initiatives, including non-academic tutoring and our intelligent learning system and devices, they deliver solid, sustainable results. Revenue from this business grew 22% year over year this quarter. Our non-dynamic two-front business has been rolled out to around 60 existing fees. Market penetration has grown steadily, particularly across high-tier cities, with the top 10 cities contributing over 60% of the revenue. As for our intelligent learning system and device business, that has been launched in around 60 cities. We are encouraged by improved customer retention and scalability of the new initiative, with the top 10 cities contributing over 50% of this business. Turning to our integrated tourism-related business, our domestic and international study tours and research camps for K-12 and university students were held in 55 cities across China, with the top 10 cities contributing over 50% of the revenue. In parallel, our newly launched tourism offering for middle-aged and senior citizens has expanded and is well received, now available in 30 key provinces in international markets. We have expanded our product portfolio to include cultural travel, China study tours, global study tours, and camp education, all designed to deliver enriching experiences through culture and knowledge sharing and personal growth. We are now also exploring opportunities in the health and wellness sector for seniors. We will partner with over 30 health and wellness spaces in locations such as Hainan, Yunnan, and Guangxi, piloting the segments with a light asset model. With regards to our OMO system, our efforts in developing and revamping our online merging offline teaching platform continue. These efforts aim to deliver more advanced and diversified education services to our customers of all ages. A total of $28.4 million has been invested during this quarter to upgrade and maintain our OMO teaching platforms. Beyond OMO, we continue to focus on our venture in AI. Encouraged by the positive market feedback, we have been and will continue to refine and embed AI across our offerings to strengthen New Oriental Education & Technology Group Inc.'s core capabilities. Simultaneously, we are also leveraging AI to streamline internal operations, thereby boosting efficiency and providing enhanced support for our teaching staff. As an industry leader, we are dedicated to driving long-term revenue growth through a dual focus on product innovation and operational efficiency. In upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investment in AI. Now turning to the East device performance, I’m pleased to share that during the reporting period, EasterBuy remained customer-centric and made strong progress in both product development and supply chain enhancements. EsterBio has expanded beyond its original focus on fresh foods and snacks to offer a broader, more diversified product range. As of the end of the period, private label SPUs reached 801. New categories include seafood, healthcare products, kitchen condiments, meat, eggs, dairy, personal care, household and cleaning items, paper goods, home textiles, apparel, and underwear. These offerings are thoughtfully created to meet customers' growing demand for health, quality of life, and convenience. They have contributed to both sales and profit growth for the group while further optimizing its product mix. Beyond expanding SDUs, EasterBuy also focused on product iteration, cost efficiency, and targeted marketing to build blockbuster products that resonate strongly with customers. At the same time, EasterBuy began exploring offline channels leveraging strong brand recognition and New Oriental Education & Technology Group Inc.'s learning center network. With the vending machine model now profitable in select cities, we plan to scale this initiative nationwide. All in all, we are pleased to see EasterBuy refocused and back on track, making a positive contribution to the group, both top line and bottom line. We expect EasterBuy to contribute more revenue and profits to the group in the future while continuously enhancing our brand's influence. Now I will turn the call over to Alice to share with you about the key financials. Please go ahead, Alice.

Alice Chow, Host

Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating costs and expenses for the quarter were $1.1251 billion, representing a 10.4% increase year over year. Cost of revenues increased by 11.8% year over year to $556.9 million. Selling and marketing expenses decreased by 1.1% year over year to $194.1 million. G&A expenses for the quarter increased by 15.2% year over year to $374.3 million. Total share-based compensation expenses allocated to related operating costs and expenses increased by 156.8% to $21.4 million in 2026. Operating income was $66.3 million, representing a 244.4% increase year over year. Non-GAAP income from operations for the quarter was $89.1 million, representing a 206.9% increase year over year. Net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $45.5 million, representing a 42.3% increase year over year. Basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were 29¢ and 28¢, respectively. Non-GAAP net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $72.9 million, representing a surge of 68.6% year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were 46¢ and 45¢, respectively. Net cash flow generated from operations for the second fiscal quarter was approximately $323.5 million, and capital expenditure for the quarter was $23.7 million. Turning to the balance sheet, as of November 30, 2025, New Oriental Education & Technology Group Inc. had cash and cash equivalents of $1.8429 billion. In addition, the company had $161.6 million in term deposits and $1.8752 billion in short-term investments. New Oriental Education & Technology Group Inc.'s deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as services or goods are delivered, at the end of 2026 was $2.1615 billion, an increase of 10.2% compared to $1.9606 billion year over year. Now I'll hand over to Stephen to go through our outlook and guidance.

Stephen Yang, Executive President and CFO

Thank you, Alice. We are very encouraged by the strong results we have achieved this quarter and in the first half of the fiscal year 2026. These outcomes give us greater confidence in our operational resilience and growth trajectory. Looking ahead, we will continue to pursue a balanced approach to revenue and profitability growth. We remain committed to cost discipline and sustainable profitability across all business lines. At the same time, we will take a thoughtful strategic approach to capacity expansion and hiring, ensuring that growth does not come at the expense of quality. We plan to deepen our presence in cities that demonstrate strong top and bottom line performance while continuing to manage resources carefully. We will closely monitor the pace and scale of new openings, aligning them with operational needs and financial performance throughout the year. Given our positive momentum, including the healthy growth of our K-12 business and the recovery of EasterBuy, we are now in a more optimistic position regarding our business outlook. We expect total net revenue for the group, including EasterBuy, in the 2026 fiscal year to be in the range of $1.3132 billion to $1.3487 billion, representing a year-over-year increase in the range of 11% to 14%. For the full fiscal year 2026, we are raising our total net revenue guidance for the group to be in the range of $5.2923 billion to $5.4883 billion, representing a year-over-year increase in the range of 8% to 12%. These expectations reflect our current outlook, taking into account recent regulatory developments as well as our preliminary view of market conditions, and they remain subject to change. I would like to give you an update on our shareholder return plan for fiscal year 2026. In October 2025, we announced that pursuant to the previously adopted three-year shareholder return plan, the board of directors had approved an ordinary dividend of $0.12 per common share, or $1.20 per ADS, to be distributed in two installments as part of the shareholder return for fiscal year 2026. As of today, the first installment has been fully paid to shareholders and ADS holders. Details of the second installment will be determined and announced in due course. Additionally, we also announced a share repurchase program in which New Oriental Education & Technology Group Inc. is authorized to repurchase up to $300 million of its ADS or common shares over the subsequent twelve months. As of January 27, we had repurchased a total of approximately 1.6 million ADS for a consideration of approximately $86.3 million from the open market under this share repurchase plan. To conclude, New Oriental Education & Technology Group Inc. remains firmly committed to sustainable growth, high-quality offerings to our customers, and creating long-term value for our shareholders. We also continue to work closely with government authorities across provinces and municipalities in China to ensure full compliance with the relevant policies, regulations, and measures, and to adjust our operations as needed in response. This is the end of our fiscal year 2026 summary. At this point, I would like to open the floor for questions.

Operator, Operator

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. If you have more than one question, please re-enter the queue. To cancel your request, you can press star 11 again. For the first question.

Felix Liu, Analyst

Hi. Good evening, Steven. This is Felix Liu from UBS. First of all, congratulations on the very solid second quarter results as well as on the lift to your full-year guidance. My question is on your guidance. Can management provide some breakdown on the segment growth as much as you can? I'm keen to understand the key drivers for the lift to your full-year guidance. Thank you.

Stephen Yang, Executive President and CFO

Yes. Thank you, Felix. So let us start with this quarter's revenue growth analysis. We are very pleased to see the acceleration. What I mean is the growth of the K-12 business. Our strategy this year is to improve the product quality and service quality. We have seen good results in Q2 with higher student retention rates and better feedback from the customers. In Q3, I estimate the K-12 business will grow somewhere around 20% year over year. As for overseas businesses, we faced some revenue growth pressure. However, in Q2, we still achieved top line growth in the overseas test prep by 4% year over year. We believe we are gaining market share. For the second half of the year, I expect revenue growth for overseas-related business to be flattish, but we will do our best. The college business is expected to have around 14-15% top line growth. Overall, we are positive about revenue growth in the second half of the year, along with improved margins due to our cost control efforts starting in March 2025.

Alice Cai, Analyst

Good evening, management. Thank you for taking my questions, and congratulations on the strong results. I heard about the business unit integration between your tech and consulting units. I have two quick questions. First, what is the expected margin expansion from this merger? And can it effectively offset the headwinds in the U.S. market? Second, regarding efficiency, how much reduction do you expect in the customer acquisition cost? And what is your target for the cross-selling rate? Thank you so much.

Stephen Yang, Executive President and CFO

I saw the news about the merger of the overseas test prep business and the consulting business. Before the merger, both units operated separately with their management teams. Now that we have merged them, this restructuring aims to provide customers with a one-stop service. We anticipate improved service quality and reduced costs because we have streamlined operations. We will share more about cost savings and revenue improvement in the next quarter's earnings call.

Lucy Yu, Analyst

Thank you. Hi, Steven. This is Lucy Yu. Congratulations. My question is on the margin expansion in the second quarter, which has been more than one percentage point. Could you please elaborate on the margin expansion? What is driving that? How should we think about the margin expansion magnitude in the second half?

Stephen Yang, Executive President and CFO

Regarding your question about margin, even though we faced some margin drag from the overseas-related business, we still achieved group margin expansion in Q2. The non-GAAP operating margin increased by 470 basis points, primarily driven by better utilization, higher operating leverage, and cost control measures, alongside the profit contribution from EasterBuy. We will continue to focus on operational efficiency and disciplined resource management. While I won't provide detailed guidance, we are optimistic about margin expansion in the second half of the year.

Yikun Zheng, Analyst

Good evening. This is Yikun Zheng. Thank you for taking my question, and also congrats on the strong results. My question is about the overseas business. As you mentioned, that's the OSC business has seen about 4% growth rates. The market conditions are quite challenging, so just wondering about the future trends and the main reasons for this growth.

Stephen Yang, Executive President and CFO

As I mentioned, the overseas business is impacted by the external economic environment. However, our team has performed very resiliently in the first half of the year, and we believe they will continue to gain market share from competitors. In the second half of the year, I expect flattish growth or low single-digit growth due to the unchanged external conditions, but I'm confident in our team’s performance.

D. S. Kim, Analyst

Hi, Stephen. Hi, Alice. Congrats on the great quarter. I want to clarify Lucy's earlier question. On margin, can we discuss how much of the margin expansion in Q2 came from Core Education versus EasterBuy? I have a follow-up question afterwards.

Alice Chow, Host

EasterBuy reported their first year first half results, so you can roughly calculate. If we take out EasterBuy, the rest combined saw a margin expansion of roughly about 300 basis points year over year.

D. S. Kim, Analyst

Thank you. My actual question for our new education business is great that we printed more than 20% growth. What do you think is, like, the sustainable growth rate for the segment from here, assuming stable 10% capacity expansion for the next three to five years?

Stephen Yang, Executive President and CFO

I think it's a great question. We changed our strategy at the start of this fiscal year, slowing down the learning center expansion to focus on quality improvement. Our student retention rate is guiding higher, and we are seeing better word-of-mouth, allowing us to reduce marketing expenses. Therefore, for the second half of the year, I anticipate around 20% top-line growth for the K-12 business to be sustainable in the coming years.

Timothy Zhao, Analyst

Great. Hi, Steven. Hi, Alice. Congrats on the study results. I recall in the last quarter results, you mentioned that you think about some of the new AI initiative that you are launching. Just wondering if you can share any tangible results or updates on the AI investments that you are making.

Stephen Yang, Executive President and CFO

In the last three months, our team has made significant progress on our new AI product offerings. We need maybe one quarter to test the new offerings. I believe they will contribute more revenue going forward, as AI technology also aids in existing products. The focus on quality and service has led to higher student retention rates, and AI contributes to this improvement. We plan to spend a little bit more on AI technology but will control our overall expenditure. We are optimistic about the returns from our AI investments.

Elsie Sheng, Analyst

Stephen and Alice, congratulations on the results. I have a follow-up question on the margin expansion. In the second quarter, the gross margin increased, and the marketing expense ratio decreased. I noticed you mentioned a cross-department customer service system so I wonder if this decrease is related to the initiative and if we can expect this trend to continue in the next few quarters.

Stephen Yang, Executive President and CFO

I believe this situation will continue. We are focusing more on product quality rather than spending excessively on marketing. Growth remains healthy. The new customer service department will enhance synergy between various business units and save on marketing expenses. Moving forward, I expect the selling marketing expenses as a percentage of revenue to decline in the second half of the year and next year. 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 very much.

Operator, Operator

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.