Earnings Call Transcript
New Oriental Education & Technology Group Inc. (EDU)
Earnings Call Transcript - EDU Q3 2024
Operator, Operator
Good evening and thank you for standing-by for New Oriental's FY 2024 Third 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'd now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao.
Sisi Zhao, Host
Thank you. Hello everyone, and welcome to New Oriental's third fiscal quarter 2024 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'll 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. We're pleased to announce that New Oriental has achieved robust growth this quarter that has surpassed our expectations. The remarkable top line performance this quarter has spoken volumes about sustained recovery across our diverse business lines, while steady expansion of our new business made healthy contributions to the company's revenue, invigorating our portfolio of innovative endeavors. New Oriental's bottom line performance has achieved encouraging yields with operating margin and non-GAAP operating margin reaching 9.4% and 11.7% for this quarter, respectively. Thanks to the combined efforts of our restructured business model by utilizing resources and a streamlined cost structure, bolstered by vital growth across all business lines, our commitment to maintaining healthy market share growth stands firm as we strive to create sustainable value for our customers and shareholders in the long term. Now, I would like to spend some time to talk about the quarter's performance across our remaining business lines and new initiatives to you in detail. Our key remaining businesses have painted a promising upward trajectory, while the new initiatives secure positive momentum. Breaking down, the overseas test prep business recorded a revenue increase of about 53% in dollar terms or 59% in RMB terms year-over-year for the third fiscal quarter of 2024. The overseas study consulting business recorded a revenue increase of about 26% in dollar terms or 31% in RMB terms year-over-year for this quarter. The adults and university students business recorded a revenue increase of 53% in dollar terms or 60% increase in RMB terms year-over-year for this quarter. Our multipronged new initiatives, which mostly revolve around facilitating students' development, have continued to deliver continued growth and meaningful profits to the company. Firstly, the non-academic tutoring courses, which we have offered in around 60 existing cities, focus on cultivating students' innovative abilities and comprehensive quality. The markets we have tapped into have recorded elevated penetration, especially in higher-tier cities, with a total of approximately 355,000 student enrollments recorded this quarter. The top 10 cities in China contribute over 60% of this business. Secondly, the intelligence 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 rates and scalability of this new initiative business, with approximately 188,000 active paid users recorded this quarter, and the revenue contribution of this initiative from the top 10 cities in China is over 55%. Our smart education business, educational material, and digitalized smart study solutions have continued to contribute material results to the overall advancements of the company. In summary, our new educational business initiatives reported a revenue increase of 73% in dollar terms or 80% increase in RMB terms year-over-year for this quarter. In addition, as mentioned in the past quarters, we inaugurated a newly integrated tourism-related business line as one of our creative ventures, tailored with diverse offerings of cultural trips, study tours in China and overseas, as well as camp education. New Oriental's cultural tourism business shares the spirit of providing premium quality travel experiences infused with joy from cultural exchange, knowledge sharing, and personal fulfillment. Within the new business line, our study tour and research camp business for students of K-12 and university age achieved inspiring growth this quarter. We have conducted study tours and research camps in over 50 cities across the country, with the top 10 cities in China offering over 55% of revenue share from this business. We also piloted a number of top-notch tourism offerings to expand our reach to all age groups, including the middle-aged and elderly individuals across 25 featured provinces. As we're still at the preliminary stage of the planning, testing, and evaluating the availability of this business in selected regions, we will keep you posted should there be timely updates. With regards to our OMO system, Online Merge Offline system, we have persisted in revamping our platform and leveraged our educational infrastructure and technology edge on remaining key business and new initiatives with the vision to provide advanced, diversified educational services to customers of all ages. During this reporting period, a total of $25.5 million has been invested in our OMO teaching platform, which equips us with the flexibility to maintain unrivaled service to students. Regarding East Buy, East Buy has attained sustainable growth momentum in this quarter thanks to a rapid development of its private label products. As part of the ongoing expansion strategy for an early venture like East Buy, we have devoted substantial investments to support the growth of the company, including the optimization of East Buy's multi-platform strategies, supply chains, product offerings, as well as quality control to safeguard product quality and regions. We're glad to see that East Buy has further enlarged its customer base following the latest establishment of time with Yuhui channel. In addition, further enhancements in East Buy have been made through our comprehensive organizational structure, strategy hires for professional talents, and upgrades, all of which strengthened East Buy's private label products and live streaming in e-commerce. The resources we committed to East Buy have thankfully nourished improved user management and loyalty, and we look forward to leveraging this input to propel further growth of the platform that promises premium offerings and sustainable growth for our customers. With regards to the company's latest financial position, I'm confident to share with you that the company is in a healthy financial state with cash and cash equivalents, term deposits, and short-term investments totaling approximately $4.8 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 company to extend its share repurchase program launched in July 2022 by 12 months through May 31, 2024. As of yesterday, April 23, 2024, the company repurchased an aggregate of approximately 6 million ADS for approximately $195.3 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 Zhao, Host
Okay. Now I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $1,093.9 million, representing a 59.1% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which excludes share-based compensation expenses, were $1,066.4 million, representing a 60.1% increase year-over-year. The increase was primarily due to the cost expenses related to substantial growth in East Buy private label products and live streaming e-commerce business. Cost of revenue increased by 74.5% year-over-year to $644.8 million. Selling and marketing expenses increased by 57.1% year-over-year to $161.3 million. G&A expenses for the quarter increased by 33.6% year-over-year to $287.8 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $273.6 million, representing a 40.7% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 28.3% to $27.5 million in the third fiscal quarter of 2024. Operating income was $113.4 million, representing a 70.6% increase year-over-year. Non-GAAP income from operations for the quarter was $140.9 million, representing a 60.3% increase year-over-year. Net income attributable to New Oriental for the quarter was $87.2 million, representing a 6.8% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.53 and $0.52, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $104.7 million, representing a 9.8% increase year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.63 and $0.63, respectively. Net cash flow generated from operations for the third fiscal quarter of 2024 was approximately $109.4 million, and capital expenditures for the quarter were $80.1 million. Turning to the balance sheet. As of February 29, 2024, New Oriental had cash and cash equivalents of $2,013.6 million. In addition, the company had $1,570.8 million in term deposits and $1,175.3 million 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 third quarter of fiscal year 2024, was $1,521.7 million, an increase of 30.8% as compared to $1,163.2 million at the end of the third quarter of last fiscal year. Now, I'll hand over to Stephen to go through our outlook and guidance.
Stephen Yang, Executive President and CFO
Thank you, Sisi. As we progress into the fourth quarter, which is typically expected as a slower quarter compared with the third quarter in terms of the revenue growth and profitability due to the various seasonality of our key educational businesses, we place confidence in sustaining healthy growth, building on the collective bricks of our rooted foundation, brand advantage, and influential teaching resources. Our strategic focus and investment approach aim at achieving satisfactory operating profits in the rest of the year, coupled with year-over-year margin expansion for the full year. As always, we will work diligently to adhere to the latest guidance from the Chinese authorities on enhancing the nation's education level to strengthen its leading position, to further solidify our edge on all business lines and creative endeavors. With regards to the learning center and classroom space, as part of the continued evolution of our offerings across business lines, we plan to increase our capacity by around 30% for this fiscal year, by which a reasonable number 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 cities with better top line and bottom line performance this year. At the same time, we will continue to hire new teachers and staff to match our capacity expansion and support our revenue growth, especially for new education business initiatives and newly integrated tourism-related business. We expect total net revenue in the fourth quarter 2024 - March 1st, 2024 to May 31st, 2024, to be in the range of $1,101.5 million to $1,127.3 million, representing a year-over-year increase in the range of 28% to 31% in dollar terms. The projected revenue increase in our functional currency RMB is expected to be in the range of 34% to 37% for the fourth quarter of this fiscal year 2024. To conclude, New Oriental is determined to persistently expand our existing offerings and fertilize new endeavors, dedicating strategic inputs to sharpen our capability. We will also continue to devote reasonable resources on research and application of new technologies such as AI and ChatGPT into our offerings and are strong in our belief that we could uplift our strength to favor further growth, better margin, and operating efficiency. At the same time, we will also continue to seek guidance from and cooperate with government authorities in various provinces and municipalities in China in alignment with these efforts to comply with relevant policies, regulations, and measures, 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 matters as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2024 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for this. Thank you.
Operator, Operator
Your first question comes from Felix Liu from UBS. Please go ahead, Felix.
Felix Liu, Analyst
Hi, good evening, management. Thank you very much for taking my question and congratulations on the strong growth and guidance. My question is on growth. So first, I understand that Q4, we will have a bit of seasonality in the education business, but maybe could you just share more color on the growth in different business segments in Q4? And also you mentioned that the capacity guidance - the expansion guidance for the year is now lifted to 30%. How do you see that as the capacity expansion pace going forward? Do you think 30% is a sustainable expansion that we can maybe keep for two to three years? Thank you.
Stephen Yang, Executive President and CFO
Thank you, Felix. Yes, as you know, we did the top line guidance this quarter a lot, you know, just like the past couple of quarters. And as for the revenue guidance in Q4, which seems to be a little bit lower than the Q3 year-over-year revenue growth, there are three reasons. Number one, as always, we're quite conservative to give the guidance, so this is number one. And number two, yes, as you know, Q4 is typically expected as a slower quarter compared to Q1 and Q3 because of the seasonality, for example, like for the K-12 related business and the overseas related business, typically Q4 is the low season. And number three is in last year Q4 without the impact of the pandemic, I think our business in last year Q4 was basically back to normal. So that's why we give the Q4 top line guidance seems to be a little bit lower. But I think in my personal view, I think the guidance in dollar terms is 28% to 31%, in RMB term is 34% to 37%. I think it's still very strong. And I think in the coming new fiscal year, that means the fiscal year 2025, we're quite optimistic on revenue growth with the margin session for the whole fiscal year 2025. As for the expansion plan, yes, we raised the guidance of the capacity expansion by 30% year-over-year this time because actually we're taking market share, and I think the demands from the customers are very strong, and that's why we raised the guidance of the expansion plan again this quarter. And going forward next year, I think we will keep almost at the same pace to open the new learning centers because, you know, when we made the analysis of the market demand and the supply. So I think we're still on the pace to take more market share. And as for the revenue growth of the different business, if we disclose it in the next quarter.
Sisi Zhao, Host
Just roughly for key business lines like overseas related, including the test prep and consulting, will grow roughly about 15% to 20% range, and domestic test prep, university students business revenue growth will be around 20% to 25% range. And you know, high school tutoring will grow moderately, and the new business - new initiatives, which is the key growth driver will be over maybe 60% revenue growth. This based on the exchange rate that is estimated by us when we do the projection.
Felix Liu, Analyst
Okay. That's very clear. Thank you.
Stephen Yang, Executive President and CFO
Thank you.
Operator, Operator
Thank you, Felix. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please ask your question, Yiwen.
Yiwen Zhang, Analyst
Good evening, management. Thanks for taking my question. So my question regarding our margin, if we look at the group-level operation - adjusted operation margin, it was 11.7%, which was flattish on a YoY basis. Understood that a lot of incremental was due to the East Buy expansion. So if we just look at the education rate margin, how does it expand on a YoY basis, and how would you expand the trend in the next few quarters? Thank you.
Stephen Yang, Executive President and CFO
Yes, the Group's non-GAAP op margin was flattish in this quarter. Within the education business, I think we're seeing meaningful GP margin and non-GAAP op margin expansion for the education business in this quarter. I think that thanks to the combined the newly - the business structure model and the higher utilization of resources and better utilization for the learning centers and the streamlined cost structure. So it made the education business margin expand again this quarter. And so going forward, I think in the coming Q4 and even for the whole fiscal year 2025, I think we do have operating leverage in hand. Yes, as you know, we raised the guidance of the learning center expansion by 30% and we hired more teachers and staff to match with the new expansion. But I think the top line growth in the new fiscal year 2025 will be very strong. And we do have leverage in fiscal year 2025. So we expect you will see the margin expansion with the healthy top line growth for the education business in fiscal year - in the new fiscal year 2025. Yes, the East Buy, yes, I think the cost of expenses, especially for the selling and marketing expenses this quarter increase was primarily due to - partly due to the East Buy's investment. And yes, I think, you know, you saw very strong growth in East Buy's top line, especially for the private label products and the e-commerce business. And I think East Buy has devoted substantial investment to support the growth of the company, including the optimization of the multi-platform strategies in other platforms, supply chain and product offerings, and the quality control. And also, East Buy recruited professional talent from the market. And so we are optimistic about East Buy's development going forward. We look forward to leverage this investment - leverage this investment or input this time and going forward. So in summary, the margin profile for the whole group, we are quite optimistic about the margin expansion for the whole group for the education business and in fiscal year 2025. And also as well, we do think, you know, East Buy will generate more revenue, top line growth, and more profit for the company going forward.
Yiwen Zhang, Analyst
Okay, thank you. That's very clear.
Stephen Yang, Executive President and CFO
Thank you.
Operator, Operator
Thank you, Yiwen. Our next question comes from the line of Lucy Yu from Bank of America. Please ask your question, Lucy.
Lucy Yu, Analyst
Thank you, Stephen and Sisi. So my question is still on the margins. So it looks like judging from the minority interest that East Buy might be loss-making for the quarter. So how should we think about the East Buy margin volatility impact on a group level in the upcoming quarter and upcoming fiscal year? So Stephen, how do you plan those margins for the next fiscal year? Thank you.
Stephen Yang, Executive President and CFO
Lucy, I'm glad to hear from you that your questions about East Buy. But I'm afraid I'm unable to share with you about the latest financial results at this moment and our guidance for East Buy. And you know in the next quarter, in July, I think East Buy will announce their full year report - half year report and the full year report. And so at that time, I think the management of East Buy will share more color with you about the margins and top line growth. Yes, but I must mention that we are still quite optimistic about East Buy's investment in this quarter. And over the long run, I think East Buy will bear fruit from this front investment and will generate more revenue and profit for the whole group, Lucy.
Lucy Yu, Analyst
Thank you, Stephen.
Stephen Yang, Executive President and CFO
Thank you.
Operator, Operator
Thank you, Lucy. Our next question comes from the line of Tian Hou from T.H. Capital. Please ask your question, Tian.
Tian Hou, Analyst
Hello. Yes. Hi, Steve and Sisi. The question is related to the high school learning center expansion and also the non-academic course learning center. What's the retention rate and utilization rate for both of them? Thank you.
Stephen Yang, Executive President and CFO
I think for the utilization rate and the student retention rate for both the high school business and the non-academic courses for K-9 are still improving year-over-year, actually quarter-by-quarter. And so the good news for us is we're seeing the trend is still there. And going forward, I think we will see the higher utilization rates for the existing learning centers and the higher student retention rates. A couple of years ago, typically, it would spend us 12 months to get to the breakeven point after we opened the new learning center. But now, I think, roughly, it will take about six months to reach breakeven. And so I think going forward, we expect better utilization rates for learning centers and higher student retention rates for all these lines. Thank you.
Tian Hou, Analyst
Yes. So one follow-up question. So before the double reduction, when you guys did the learning center expansion, there's a tricky line. So how much you do the expansion, if you do a little bit bigger, more than will impact the gross profit margin? So I saw this quarter, the gross profit margin relative to last year's same time was down by about 5 percentage points. Is that because of the learning center expansion or is it because of East Buy?
Stephen Yang, Executive President and CFO
Yes. I think the learning center expansion, we raised again the learning center expansion by 30%, and I think it's the result of the analysis of this business for the last two to three quarters. And as I said, on the demand side, it's very strong, especially for the non-academic courses for the kids. And on the competition side, the competitive environment is different compared to a couple of years ago. And so I think - and the key is, we only choose the top-performing cities in terms of both the bottom line and top line to allow them to open more learning centers or extend the new classroom areas for the existing learning centers. So I think it will not drag the whole margin, in fact, it will help the margin expansion going forward.
Tian Hou, Analyst
Got it. Thank you so much, Stephen. Good quarter.
Stephen Yang, Executive President and CFO
Thank you.
Operator, Operator
Thank you, Tian. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.
Timothy Zhao, Analyst
Great. Hi, Stephen. Hi, Sisi. Thank you for taking my question. My question is regarding the cash flow statement. So basically, one is on the operating cash flow. I noticed that for this quarter, I think the operating cash flow dropped a little bit on a year-on-year basis. Just wondering if you can share some color on the rationale or the reason behind that? And second, also on the financing cash flow, I do notice that the existing share repurchase program is about to expire. Just wondering regarding your capital allocation and shareholder return? Any thoughts on the shareholder policy going forward in terms of potential dividend or further share repurchase programs? Thank you.
Stephen Yang, Executive President and CFO
As for the operating cash flow, I think you know I suggest the investors to analyze the cash flow year-on-year, not quarter-on-quarter because of the business seasonality where the students' enrollment window changes quarter-by-quarter. So that's why I suggest you guys to analyze year-on-year. So if you saw the deferred revenue balance year-on-year, the increase is still very strong. So yes, that's it. And that's why we give the very strong top-line guidance for Q4, even though Q4 is typically a slow quarter. Yes. And as for the share buyback plan, yes, I think we keep to create more value for the shareholders. And I think we will keep buying back shares. This round, we announced the share repurchase plan about two years ago, and we finished almost half of it, around $195 million. And I think we'll keep buying in this quarter. At the fiscal year end, I think we will discuss with the Board whether or not to extend the share repurchase plan. But historically, we have done several rounds of share buybacks and a few times special dividends. So our aim is to create more value for the investors as the capital return, either through share buyback or dividend.
Timothy Zhao, Analyst
Thank you, Stephen. That's helpful.
Operator, Operator
Thank you, Timothy. Our next question comes from the line of Chongguang from CITIC. Please ask your question, Chongguang.
Chongguang Feng, Analyst
Hi, Stephen and Sisi. So actually, I had a question about the financials. So we saw a larger loss from equity method investments this quarter as well as less investment interest this quarter compared to the same period of last year. So I'm just wondering which factors led to these changes? Thank you.
Stephen Yang, Executive President and CFO
I think, yes, we had loss in this quarter due to our investment in certain companies. So I think we do have a one-time impact on the very bottom line this quarter. I think all those two companies were negatively impacted by the deduction policy 2.5 years ago. And but this is a one-time occurrence. It's not ongoing. Yes.
Chongguang Feng, Analyst
Thank you. Just a follow-up question about the - also, we saw less investment interest this quarter Q-on-Q. So I'm just wondering the reason.
Stephen Yang, Executive President and CFO
I'm sorry, can you repeat again? Do you have less than what?
Chongguang Feng, Analyst
Yes, as you saw less other income, which I suppose is mainly our investment interest this quarter only decreased.
Stephen Yang, Executive President and CFO
Yes. I think the interest rate in China, you know, has been down in this quarter. And so I think it impacted some interest income.
Sisi Zhao, Host
Actually, the interest income is - the absolute dollar number is similar to previous one to two quarters. So it's pretty stable.
Stephen Yang, Executive President and CFO
Yes.
Chongguang Feng, Analyst
Understood. Thank you, Stephen and Sisi. Congrats on the results again.
Stephen Yang, Executive President and CFO
Thank you.
Operator, Operator
All right, we are now approaching the end of the conference call. And we do have one more question from DS Kim from JPMorgan. Please ask your question, DS Kim.
DS Kim, Analyst
Hello, sir. Good evening and congrats on amazing top line growth again. Actually, I wanted to ask about margins and expansion. I think you're right to discuss all of that. So just wanted to follow up on one small thing if that's okay. You mentioned earlier that new center expansions could now be margin accretive because it's primarily expansion of the existing center. But if we only look at, say, newly opened locations, newly opened centers for non-academic courses, how long do you think it takes for those new centers to hit breakeven and then to ramp up to the full level at the center level? I think back in the days, it took about a year to turn breakeven for the new learning center K-12 AST and another couple of more quarters to fully ramp up, and I'm wondering how this has changed now versus now that the courses have changed primarily for non-academic?
Stephen Yang, Executive President and CFO
I think now, typically, on average, it will take about six months to get to breakeven for new learning centers. So in the second year, typically, the margin of the new learning centers depends on the different areas. I think the margins of that new learning centers should be somewhere around 15% to 20%. So it's much better. That's why we made the decision to raise the learning center expansion guidance by 30%. I think it's a good trade-off. This round - in this quarter and next - in Q3, Q4, even for the whole year in fiscal year 2024, we opened more learning centers, 30%, but it will drive the top line growth in the new fiscal year 2025. And I believe that for the whole education business, the whole margin of the education business will improve in fiscal year 2024 because of the better utilization and higher student retention.
DS Kim, Analyst
Thank you, sir. I think it's not just good, it's amazing trade-off to have. But if I may follow-up here, do you think that faster ramp-up or faster breakeven is just a timing thing, earlier recovery or earlier ramp-up in utilization, and/or do you think that even after the ramp-up, the ultimate level of center level margin can be actually higher than the back end now that the academic, i.e., like on a central level, do you think that five years down the road some of the non-academic centers can make more than 20% margins better than the K-9 academic of the past or just the timing is all there?
Stephen Yang, Executive President and CFO
Both, yes, as I said, it will take a shorter time to reach the breakeven point. This is number one. And number two is theoretically, I think the ultimate margin of the new learning centers will be a little bit higher than a couple of years ago, so it's a good trade-off for us to open more learning centers for non-academic courses or even for the overseas related business.
DS Kim, Analyst
Sure, sir. It's an amazing trend and congrats again. Thank you.
Stephen Yang, Executive President and CFO
Thank you.
Operator, Operator
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. Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.