Earnings Call Transcript - EDU Q4 2023

Operator, Operator

Good evening and thank you for joining New Oriental’s FY 2023 Fourth Quarter Results Earnings Conference Call. After the management's remarks, we will have a question-and-answer session. Today's conference is being recorded. I will now hand it over to your host for today’s conference, Ms. Sisi Zhao.

Sisi Zhao, Host

Okay. Thank you. Hello, everyone and welcome to New Oriental’s fourth 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 Yang, Executive President and Chief Financial Officer, and I will share New Oriental’s latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead.

Stephen Yang, Executive President and CFO

Thank you, Sisi. 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 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 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 in enhancing operational efficiency and cost control. In particular, I would like to highlight that the solid recovery has been validated in the growth of our overseas business. 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 well-grounded resilience across our business lines, thanks to our ongoing efforts enhancing operational efficiency and cost control. In particular, I would like to highlight that the solid recovery has been validated 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 utilizes the facility better and streamlined cost structure have not only helped us yield better-than-expected margins in this fiscal quarter, but also enlivened our continued exploration of new potential ventures as we unfold a new chapter of innovative endeavors. The company’s sustainable profitability, resilient business lines, and emerging new initiatives have reaffirmed our belief in maintaining a healthy growth of our market share amid the encouraging environmental recovery. 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 prep business reported a revenue increase of 52% in dollar terms or 62% in RMB terms year-over-year for the first quarter. The overseas study consulting business recorded a revenue increase of about 6% in dollar terms or 13% in RMB terms year-over-year for this quarter. The adults and university students business reported 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' overall development. I am pleased to share with you that these initiatives have continued to exceed our expectations by sustaining our promising growth and generating meaningful profit for the company. Firstly, the non-academic tutoring courses, which we have offered in around 60 existing cities focused on cultivating students’ innovative abilities and comprehensive quality. We are happy to see further rise in 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 from this business. Secondly, the intelligent learning system and device business or 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%. Thirdly, our study tour and research camp business, an initiative that aims to offer students of K-12 and university ages the opportunity to fully leverage their free time to broaden their knowledge and cultivate subject interest, has also achieved encouraging results. We have conducted study tours and research camps in over 50 cities across the country, with the top 10 cities in China providing 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 digitalized smart study solutions, as well as exam preparation courses, have also contributed meaningful results to the overall growth of the company and have attained instrumental profit since the previous quarters. With regard to our OMO system, our positions in revamping our platforms and advancing technology capability has enabled us to continue to provide high-quality service to our customers and successfully capture new business opportunities during the transition period. During the reporting period, a total of $31.7 million has been invested into the system. Now, I would like to spend a bit of time to give you updates on East Buy's latest performance. Fiscal year 2023 marks an adventurous beginning for East Buy. Since inception, it has achieved significant breakthroughs in both business operations and financial performance through proactively redesigning strategic plans and implementing a series of initiatives to strengthen long-term sustainability. During the reporting period, the company introduced a change of its name from Koolearn Technology Holding Limited to East Buy Holding Limited for closer alignment with its long-term core business direction, which is to offer top-quality agricultural products under our private label, DongFang JingYuan. The platform creates a live streaming environment that safeguards product quality and user experience for customers as well as nurtures nationwide cultural appreciation. Throughout fiscal year 2023, East Buy continued to expand the product variety to provide customers with high-quality and cost-effective offerings. The extremely stringent standards applied in selecting suppliers and manufacturers have ensured that outputs are always created with better craftsmanship and similar quality. In terms of private label products, we are committed to introducing only high-quality products that are worth their price. East Buy elevated user experience by applying advanced technology to safeguard the entire process from product development to sales and after-sales service. Furthermore, with the vision to foster content innovation and knowledge sharing with customers, East Buy began leading onsite live streaming events in various provinces in China, joined by cultural celebrities from all walks of life to document a rich variety of intangible cultural heritage. We are also grateful for the support of East Buy’s exploration in cultural tourism and it’s inspiring to see that the platform has since risen in public attention, awareness, and most importantly, affection for Chinese cultural assets. We will continue to explore this area of business and provide updates when suited. With regard to the company’s latest financial position, I am confident to share that the company is seeing a healthy financial status with cash and cash equivalents, term deposits, and short-term investments totaling approximately $4.5 billion. On July 26, 2022, the company’s Board of Directors authorized a share repurchase of up to $400 million 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 extension of its share repurchase program launched in July 2022 by 12 months through May 31, 2024. As of July 25, 2023, the company repurchased an aggregate of approximately 5.9 million ADS for approximately $191.7 million from the open market under the share repurchase program. Now I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead.

Sisi Zhao, Host

Now I’d like to walk you through other key financial details for this quarter. Operating costs and expenses for the quarter were $812.5 million, representing a 29% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $782 million, representing a 30.1% increase year-over-year. The increase was primarily due to the cost expenses related to the substantial growth in East Buy’s private label products and live streaming e-commerce business. Cost of revenue increased by 58% year-over-year to $391.6 million. Selling and marketing expenses increased by 54.3% year-over-year to $147.8 million. G&A expenses for the quarter decreased by 4.5% year-over-year to $273.1 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $249.5 million, representing a 3% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating cost expenses, increased by 6.1% to $30.5 million in the fourth fiscal quarter of 2023. Operating income was $48.1 million compared to a loss of $105.6 million in the same period of the prior fiscal year. Non-GAAP income from operations for the quarter was $78.6 million compared to a loss of $76.9 million in the same period of the prior fiscal year. Net income attributable to New Oriental for the quarter was $29 million compared to the loss of $189.3 million in the same period of last year. Basic and diluted net income per ADS attributable to New Oriental were $0.18 and $0.17, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $62.1 million compared to the loss of $160.3 million 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 and $0.37, respectively. Net cash flow generated from operations for the fourth fiscal quarter of 2023 was approximately $421.6 million and capital expenditure for the quarter was $68.4 million. Turning to the balance sheet, as of May 31, 2023, New Oriental had cash and cash equivalents of $1,663 million. In addition, the company had $1,318.5 million in term deposits and $1,477.8 million in short-term investments. New Oriental’s deferred revenue balance, which is cash collected upfront from customers and related revenue will be recognized as service or goods as the services and goods are delivered at the end of the fourth fiscal quarter of 2023 was $1,337.6 million, an increase of 43.4% as compared to $933.1 million at the end of the fourth quarter of fiscal year 2022. Now I’ll hand over to Stephen to go through our outlook and guidance.

Stephen Yang, Executive President and CFO

Thank you, Sisi. Heading into the first quarter of fiscal year 2024, we firmly believe that our business will progress on 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 recovery and economic recovery has heightened our conviction in leveraging our brand advantage rooted in influential teaching content and resources and our long-established solid foundation. We will continue to work diligently and have the latest guidance from the Chinese authorities on enhancing the nation’s education level to strengthen its leading position and further unveil our potential in all business lines and these new opportunities as they arise. Regarding learning centers and classroom space, we plan to increase our capacity by about 15% to 20% in the new year, of 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 options will be launched in cities with better top line and bottom line performance in fiscal year ‘23. We will keep monitoring the pace and scale of new offerings according to local operations and financial results during the new year. In summary, we expect total net revenue in the first quarter of fiscal year 2024 to be in the range of $983.2 million to $1,005.5 million, representing a year-over-year increase in the range of 32% to 35%. To conclude, the financial results we recorded in fiscal year ‘23 and the performance of our new business have reaffirmed our confidence in achieving satisfactory levels of operating profit and the improvement of profitability in the first quarter and the whole year of fiscal year ‘24. New Oriental has great determination to invigorate new endeavors with our existing capabilities. Simultaneously, we will also devote reasonable resources to research and application of new technologies such as AI and ChatGPT into our educational and product offerings with the vision to uplift our strength and pursue growth in opening and operating efficiency. At the same time, we will continue to stay committed to seeking guidance from and collaborating with government authorities in various provinces, in alignment with its efforts to comply with the relevant policies as well as further adjusting our business operations as required. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measures as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2023 Q4 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you.

Operator, Operator

Thank you. Our first question comes from Felix Liu from UBS. Please go ahead, Felix.

Felix Liu, Analyst

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 had picked up this quarter and that you guided a 15% to 20% capacity increase for FY ‘24, which I think is an acceleration from previous plans. So may I ask you to share more color on this capacity reacceleration? Are they in existing cities or in new cities? And are they for just for our new K-12 businesses? Or are they multipurpose in covering overseas test prep? 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.

Stephen Yang, Executive President and CFO

Yes. Thank you, Felix. 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 you all that the capacity growth was about 10%. I think the reason is that we have seen the strong demand in the education sector, especially in the overseas test prep business and non-academic courses. So, that’s why we raised the guidance for capacity expansion. And I think most of the new openings will happen in existing cities. We don’t have plans to open new cities, but I must mention that we will open a small quantity of new learning centers in certain cities, and we will expand some classroom areas for some existing cities because many of the existing learning centers are nearly at full capacity. Most of the new learning centers or the new areas will be utilized by the K-12 non-academic courses, as well as overseas-related business and some domestic test prep courses. As for this being our fiscal year ‘24 plan, I think over the next 2 to 3 years, we will keep the same pace in the expansion plan, depending on the overall market environment and the development of the business, Felix.

Felix Liu, Analyst

Thank you very much.

Operator, Operator

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

Yiwen Zhang, Analyst

Yes. Good evening. Thanks for taking my questions. Congrats on a very strong set of results. So, just a general question on your guidance. Your August quarter guidance is quite impressive, and even in the medium term. So actually, what is driving such strong growth? Can you describe more maybe by segment? Thank you.

Stephen Yang, Executive President and CFO

Okay. Yes. I think we remain confident and optimistic about the business performance in the coming Q1 and even for the new fiscal year ‘24. As the post-COVID recovery and overall economic recovery, we have seen a strong demand for our products like the overseas related courses and new business. By leveraging our brand advantage and solid teaching content and resources, we believe we will continue to seize market opportunities. This means we will capture a significant market share. For example, regarding the overseas related business, on the demand side, we have observed a strong demand for our overseas test prep business. On the supply side, we have seen some competitors disappear from the market. This means we are facing less competition. For our new business, like the non-academic courses, the encouraging performance in this quarter and last year proved that we are heading in the right direction. For the upcoming Q1, we are guiding the top line growth to be in the range of 32% to 35% in dollar terms. In RMB terms, that might be somewhere around 40% to 45%. Regarding the bottom line, we are confident in achieving greater profit in the upcoming Q1. That means we are quite optimistic about the operating margin expansion in Q1 and the whole New Year. Yiwen?

Yiwen Zhang, Analyst

Thank you. Thank you very much.

Stephen Yang, Executive President and CFO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Lucy Yu from Bank of America Securities. Please go ahead, Lucy.

Lucy Yu, Analyst

Thank you. Hi Stephen, this is Lucy from BAM. One question on your selling expense. I noticed that the selling expense has been up quite a lot Q-on-Q and Y-o-Y. Could you please elaborate on what is driving that? And how should we think about the selling expense trend in the new fiscal year? Thank you.

Stephen Yang, Executive President and CFO

Yes. Thank you, Lucy. We have indeed spent more on selling and marketing expenses, because we are seeing a strong demand in the market. Yes, I think you noted that our top line growth in this quarter is at 64% in dollar terms. Even though we will spend a little more on selling and marketing expenses, I believe we have operating leverage in hand. Going forward, even in Q1 of the new year, I think we will be spending a bit more on selling and marketing expense, but we do have operating leverage on the costs and SG&A side. This means you will notice margin improvement in the coming new year.

Lucy Yu, Analyst

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

Stephen Yang, Executive President and CFO

Both businesses, despite the education business and East Buy.

Lucy Yu, Analyst

Okay. Thank you.

Operator, Operator

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

Candis Chan, Analyst

Hi Stephen and Sisi. Good evening. This is Candis from Daiwa. First, congratulations on the very strong revenue guidance for the coming quarter. I would like to follow up on your comments about the operating margin. Would you mind sharing a little more on the margins by different businesses such as the non-academic tutoring and also the overseas test prep, etcetera? My second question is about the revenue this quarter; would you mind breaking it down into different segments as well? Thank you.

Stephen Yang, Executive President and CFO

Yes, let’s start with the margin analysis of this quarter. Because of the downsizing of the learning centers and laying off some employees last year, we have achieved a lower fixed cost per learning center, which drives the margin up. As for the different business lines, the growth in overseas test prep is very strong in this quarter. Higher utilization of classrooms and operating leverage have pushed the margin up. Moving forward, I believe that both the overseas business and the new business will see margins rise in the upcoming quarter and the new year. Regarding the revenue breakdown by business lines, Sisi can provide that.

Sisi Zhao, Host

Yes. You mean for Q4, right?

Candis Chan, Analyst

Right. Mainly for Q4, but if you can also provide some colors on Q1, that would be great. Thank you.

Sisi Zhao, Host

Okay. Yes. So, for Q4, the revenue mix is roughly like – in Q4, the overseas-related business contributes, like test prep is about 11%. The consulting business is around 17%—seasonally high quarter. The university students business revenue contribution in Q4 is about 2% to 3%. The new business collectively accounts for about 18%, roughly the same for the whole fiscal year as well. The rest includes high school and some other businesses, including DongFang JingYuan.

Candis Chan, Analyst

Thank you, Sisi. May I ask one more question about the coming quarter? So, I think that we see that on the ground, the demand for the research camps and also study tours have been very strong. Would you mind sharing some insights on what we are seeing for this? And what is our plan for this New Year and going forward for this new business? Thank you.

Sisi Zhao, Host

Yes. So actually, we give strong guidance for Q1’s revenue. The key driver, if you look at the different categories of businesses, like overseas related business, both including the overseas test prep and consulting are growing faster. We are seeing accelerating trends of growth for overseas-related business due to post-COVID recovery, which is clear. Additionally, some other new businesses certainly drive growth even higher than our original expectations, given strong demand during summer registration. According to our current forecast, this portion can also grow significantly. These are the key drivers. Other remaining businesses and DongFang JingYuan have also contributed good revenue growth for Q1.

Candis Chan, Analyst

Great. Thank you very much.

Operator, Operator

Alright. Thank you. Our next question comes from the line of Tony Wang from CICC. Please go ahead, Tony.

Tony Wang, Analyst

Hi Stephen and Sisi. Good evening. Thank you for taking my questions. Since you have announced to offer cultural and tourism services targeting middle-aged and older people, could you mind sharing more color on this, like how do you expect to enter this market? And to what extent do you expect this business to contribute to revenue? Thank you.

Stephen Yang, Executive President and CFO

Yes. As for the new cultural tourism business, yes, I think first of all, we see great potential in this market opportunity in the country. We have many skilled teachers, some of whom are star teachers. By leveraging their knowledge and combining cultural studies, I think we believe we will be able to present one-of-a-kind cultural tourism offerings that combine both entertainment and cultural education for middle-aged and older people. In addition, we may also be able to leverage our extensive online platforms and school networks for distribution. We have developed several high-quality cultural tourism offerings to feature in future tourism cities and provinces like Hangzhou, Chengdu, Tianjin, and Gansu. These offerings are gaining traction in the market. We are still in the very early stage, testing the products and service processes. I will keep you updated on any developments regarding this new business. However, we are excited about this initiative as we were with the East Buy business, which generated significant top-line growth and profit for the group in fiscal year ‘23. We are very enthusiastic about tourism business.

Tony Wang, Analyst

Alright. Thank you.

Operator, Operator

There are no further questions. I will now turn the call over to New Oriental’s Executive President and CFO, Stephen Yang, for his closing remarks.

Stephen Yang, Executive President and CFO

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, Operator

Thank you. This does conclude today’s conference call. Thank you for participating. You may now disconnect.