Earnings Call Transcript - EDU Q1 2024

Operator, Operator

Good evening and thank you for standing by for New Oriental's fiscal year 2024 First Quarter Results Earnings Conference call. At this time, all participants are in a 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 over to your host today, Ms. Sisi Zhao.

Sisi Zhao, Host

Hello, everyone, and welcome to New Oriental's first 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 US 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, 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 made an encouraging start to fiscal year 2024 by delivering a robust set of financial results this quarter, with top line performance beating the high end of our expectations. Following a tireless year of trial and development, our multipronged business lines have pivoted towards a stable recovery and are yielding fruitful results. Many are benefiting from the strong post-COVID recovery in demand for education and travel, while our new business initiatives have begun making meaningful contributions to the company's revenue, invigorating growth and margin expansion. Our bottom line performance has also achieved promising growth with our operating margin and non-GAAP operating margin reaching 18.6% and 22.3%, respectively, for this quarter, depicting solid resilience across our business lines. Thanks to ongoing efforts in operational efficiency and cost control, the blend of our restructured business model, better utilization of resources, and streamlined cost structure has sharpened our capability to achieve better-than-expected margins this fiscal quarter. Coupled with our sustainable profitability, resilient business lines, and emerging new initiatives, we have firm conviction in maintaining healthy growth in our market share and creating sustainable value for our customers and shareholders in the long term. Now, I would like to take some time to discuss the quarter's performance across our remaining business lines and new initiatives in detail. Our key remaining business segments secured a promising trend coupled with positive momentum in our new initiatives. The Overseas Test Prep Business recorded a revenue increase of 52% in dollar terms or 62% in RMB terms year over year for the fiscal quarter of 2024. The Overseas Study Consulting Business recorded a revenue increase of about 27% in dollar terms or 35% in RMB terms year over year for this quarter. The Adults and University Students business recorded a revenue increase of 26% in dollar terms or a 34% increase in RMB terms year over year for this quarter. As mentioned in previous quarters, we have launched several new initiatives which mostly revolve around facilitating students' overall development. I'm pleased to share that these initiatives have continued to exceed our expectations by yielding consistent growth and meaningful profit for the company. Firstly, the non-dynamic children business we have offered in around 60 existing cities focuses on cultivating students' innovative ability and comprehensive quality. We see increased penetration in the markets we have tapped into, especially in higher-tier cities. With approximately 438,000 student enrollments recorded in this fiscal quarter, the top ten cities in China contribute over 60% of the revenue for this business. Secondly, the Intelligent Learning System and Device Business, designed to provide tailored digital learning experiences for students, has been adopted in around 60 cities. We are thrilled to see improved customer retention and scalability of this new business with approximately 181,000 active paid users reported this quarter. The revenue contribution from the top ten cities in China is around 60%. Our Smart Education business, which includes educational materials and digitalized smart study solutions, continues to contribute materially to the overall advancement of the company. In summary, our new education business initiatives recorded a revenue increase of 103% in dollar terms or a 117% increase in RMB terms year over year for the first quarter of 2024. Additionally, beginning this fiscal year, we are pleased to announce a newly integrated business line that will comprise all of our tourism-related businesses, targeting diverse age groups. This includes our well-grounded Study Tour and Research Camp Business for K-12 and university students, as well as our newly established tourism business that primarily serves middle-aged and senior audiences. Upon consolidation, this tourism-related business line will utilize New Oriental’s strengths, including knowledge-sharing star teachers and reputable branding, to enhance our capability in serving customers of all ages. It is our great pleasure to share the performance of this new business line in detail.

Sisi Zhao, Host

Now, I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $894.9 million, representing a 34.2% increase year over year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $855.3 million, representing a 32% increase year over year. The increase was primarily due to the cost expenses related to the substantial growth in East Buy, a private label products and live streaming e-commerce business. Cost of revenue increased by 41.4% year over year to $441.2 million. Selling and marketing expenses increased by 37.9% year over year to $136.1 million. General and administrative expenses for the quarter increased by 24% year over year to $317.6 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $290.3 million, representing a 22.3% increase year over year. Total share-based compensation expenses, which were allocated to related operating cost expenses, increased by 108% to $39.6 million in the first quarter of 2024. Operating income was $205.1 million, representing a 163% increase year over year. Non-GAAP income from operations for the quarter was $244.8 million, representing a 152.2% increase year over year. Net income attributable to New Oriental for the quarter worth $165.4 million, representing a 150.6% increase year over year. Basic and diluted net income per ADS attributable to New Oriental were $0.99, respectively. Net non-GAAP net income attributable to New Oriental for the quarter was $189.3 million, representing a 126.2% increase year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $1.59 and $1.13, respectively. Net cash flow generated from operations for the first fiscal quarter of 2024 was approximately $335.8 million, and capital expenditure for the quarter was $132.5 million. Turning to the balance sheet at the end of October 31, 2023, New Oriental had cash and cash equivalents of $1,748.9 million. In addition, the company had $1,399.4 million in term deposits and $1,423.9 million in short-term investments. New Oriental's deferred revenue balance at the end of the first fiscal quarter of 2024 was $1,401.4 million, an increase of 38.4% compared to $1,012.5 million at the end of the first fiscal quarter of last year.

Stephen Yang, CFO

We're confident in embarking on a healthy journey of sustainable growth for the rest of this fiscal year. Building on the combination of our brand advantage, rooted history, influential teaching, content and resources, and a solid foundation. We are also committed to diligently adhering to the latest guidance from the Chinese authorities on enhancing the nation's education level to strengthen its leading position and further unveil our potential across all business lines and creative endeavors. Regarding the learning center and classroom space, we plan to increase our capacity by about 15% to 20%, whereby a reasonable amount of new learning centers is expected to open. Classroom areas of some existing learning centers will be expanded in a few major cities, while most of the new openings will be launched in cities with strong top line and bottom line performance. We will keep monitoring the pace and scale of the new openings according to local operations and financial results in this fiscal year. Despite the historical seasonality of some of New Oriental's major businesses that usually results in a slower period for every second quarter, we remain confident in sustaining healthy growth across all business lines. In summary, we expect total net revenue in the second quarter of fiscal year 2024 to be in the range of $785.0 million to $804.2 million, representing a year-over-year increase in the range of 23% to 26%. To conclude, we are confident in achieving satisfactory operating profit levels and improving our profitability in the rest of fiscal year 2024. As always, New Oriental is determined to cultivate new endeavors and bolster our existing capabilities, while simultaneously devoting reasonable resources to research and application of new technologies such as AI and Chat GPT into our educational and product offerings with the vision to uplift our strengths and pursue growth and operational efficiency in the future. We will also continue to seek guidance from and cooperate with government authorities 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 emphasize that these expectations and forecasts reflect our considerations of the latest regulatory measures, which are subject to change.

Operator, Operator

Thank you. Our first question comes from Yiwen Zhang with China Renaissance. Your line is now open.

Yiwen Zhang, Analyst

Hey, thank you. Good evening management. Thanks for taking my question. So my question is about our November quarter revenue guidance. If we look at the worldwide growth, there was a bit of deceleration versus the August quarter. Can you walk us through the drivers behind this? And could you also discuss the growth outlook across different segments? Thank you.

Stephen Yang, CFO

Regarding the revenue guidance for Q2, it's not a deceleration. I want to emphasize the following points on the Q2 guidance. Firstly, as always, we take a conservative approach in providing the guidance of Q2. Secondly, exchange rates have negatively impacted the revenue growth guidance by approximately 3 basis points. Thirdly, it's worth noting that typically Q2 is our seasonally slow quarter for most of our education business, with lower revenue and profit. Given the strong demand and growth momentum we have seen so far this year, we are quite confident that the whole year's revenue growth will be better than we originally expected. Especially last quarter we provided guidance for top-line growth, and this quarter we've given an even higher guidance than that of the last quarter for the whole year. Lastly, East Buy will start to see a higher base comparison since Q2 this year. Overall, benefiting from the post-COVID economic recovery, we have seen strong demand in the education sector, particularly in the overseas related business and the non-dynamic children business. By leveraging our brand advantage and the solid foundation of New Oriental, I believe we will continue to capture significant market opportunities moving forward. Thank you.

Operator, Operator

Thank you. One moment for our next question. Our next question comes from the line of Felix Liu with UBS. Your line is now open.

Felix Liu, Analyst

Hi, good evening, management. Thank you for taking my question, and congratulations on the very strong first quarter results. My question is on your capacity plan. I noticed that in this quarter, your capacity or Q on Q new learning center expansion accelerated from the fourth quarter last year. Could you share your capacity plan from here? Do we expect this Q on Q new addition pace to maintain throughout this year? Or are there any seasonalities with capacity expansions quarter by quarter? How do you view the regulatory landscape around capacity expansions? Thank you.

Stephen Yang, CFO

This quarter we added 6% new capacity. As you know, we are aiming to increase our capacity expansion by about 15% to 20% for the entire fiscal year '24. We will open a reasonable amount of new learning centers or classroom areas in the top-tier cities with good performance in both the top line and bottom line. The demand in the education sector is robust, which is why we have raised our guidance for top-line growth this year. In terms of regulations, I believe it remains stable, and we expect the regulatory environment to stabilize going forward. For Q2, Q3, and Q4, we will adhere to the guidance of a 15% to 20% expansion plan, and in Q4, as we assess the budgets for fiscal year '25, we may raise our guidance for the Learning Center expansion plan again. Thank you.

Operator, Operator

One moment for our next question, please. Our next question comes from the line of Lucy Yu with Bank of America Securities. Your line is now open.

Lucy Yu, Analyst

Hi, Steven. This is Lucy. I have a question on the margin. So this quarter we have seen the operating margin expand significantly and reach 22%, which is a pretty high level, even compared to our historical operating margins, especially for Q1. How should we decode this margin expansion and how should we think about margin expansion for the rest of the year? Thank you.

Stephen Yang, CFO

Thank you, Lucy. Let’s start with this quarter’s margin analysis. The gross profit margin and operating margin increased significantly this quarter mainly due to the following reasons: firstly, improving utilization of our Learning Centers and teaching resources has increased the Learning Center margin. This means we have lower fixed costs and expenses compared to last year. Secondly, the margin has been enhanced by the recovery of the remaining business, especially in the overseas related business, which generated a higher margin this quarter and is definitely higher than last year. Thirdly, East Buy enjoys higher margins. As we head into fiscal year '24, in Q2, I believe operating leverage and higher utilization in both existing and new business lines will continue to generate profit for the group. We remain optimistic about margin expansion and sustainable profitability in Q2 and throughout the rest of the year. Our team is committed to pursuing profitable growth in fiscal year '24, and we believe we will create more value for shareholders over the long run. Thank you.

Operator, Operator

Thank you. One moment for our next question, please. Our next question comes from the line of DS Kim with JP Morgan. Your line is now open.

DS Kim, Analyst

Hi, Stephen. Hi, Sisi. Good evening and thanks for taking my question. By the way, congrats on the quarter. I think $245 million operating income is the second-best level on record, which is pretty amazing. Anyway, I have a high-level question on long-term growth, if that's okay. I guess we talked a lot about new businesses, which are completely different animals and can continue to grow triple digits, I’m sure. But for old businesses, existing businesses like overseas study high schools, how should we think about sustainable growth from here? I.e., segment revenues, I think both of them are probably at high levels now, so it's no longer a recovery phase. What are the drivers for the future growth? If you were to break down different drivers like center expansions, we discussed 15% to 20%, versus utilization growth, how much further room can we drive here? Utilization growth, how much further can we drive here? And regard to price hikes, if any? How should we think about, say, the next two to three years for annual growth in the old businesses? Thank you.

Stephen Yang, CFO

For existing businesses such as the overseas test prep, overseas consulting, and the adult and university students business, let's analyze the market as follows. On the demand side, we have seen strong demand for overseas test prep consulting and for college business. On the supply side, after the COVID and policy changes, we have seen many competitors exit the market. This reduction in competition means we can expect good top line growth in the existing businesses over the next two to three years. We are quite optimistic about the top line growth and margin expansion for the existing businesses. As for utilization rates, in Q1, we achieved a utilization rate of about 65%, indicating there is room for improvement. This fiscal year, we plan to open 15% to 20% of new capacity. With steady top line growth exceeding expectations every quarter and adjustments to our overall guidance for top line growth, we see healthy top line growth covering the rentals of new capacity. Therefore, we anticipate that operating leverage will continue to drive margins up. Thank you.

Operator, Operator

Thank you. We are now nearing the conclusion of the conference. I will now hand the call over to New Oriental's Executive President and Chief Financial Officer Stephen Yang for his closing remarks.

Stephen Yang, 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

This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a wonderful day.