Earnings Call Transcript - EDU Q4 2022

Operator, Operator

Good evening and thank you for standing by for New Oriental's FY2022 Fourth Quarter Results Earnings Conference Call. At this time, all participants will be in listen-only mode. After management prepared remarks, there will be a question-and-answer session. Today's conference call 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. Sisi Zhao.

Sisi Zhao, Host

Thank you, operator. Hello everyone and welcome to New Oriental's fourth fiscal quarter 2022 earnings conference call. Our financial results for the periods were released earlier today and are available on the company's website, as well as on Newswire Services. Today, you will hear from Stephen Yang, Executive President and Chief Financial Officer. After his prepared remarks, 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 the conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org. I will now 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. Before going into details of our financial performance, I would like to take this opportunity to extend our gratitude to those who have been supporting and still believing in New Oriental. While our business in the previous quarters was largely affected by the government policies introduced last year, I'm glad to announce that we are now paving a new path in innovative business opportunities as the company embarks on a fresh journey that strives to encourage all-round development of students and the betterment of society while focusing on generating profits and returns for our shareholders. Now, I would like to spend some time to talk about the quarter's performance across our remaining business lines and introduce our new initiatives to you in detail. Our key remaining businesses have shown remarkable resilience and achieved promising trends. Breaking down the overseas test prep business recorded a revenue increase of 6% in dollar terms for the fiscal year 2022. The overseas study consulting business recorded a revenue increase of about 16% in dollar terms year-over-year for the fiscal year 2022. The adults and university students business recorded a rapid growth of approximately 30% year-over-year for the fiscal year 2022. As for our new business initiatives, as mentioned in the past quarter, we have launched several new initiatives throughout the year, which mostly revolve around facilitating students' all-around development. I'm glad to share with you that these new initiatives have shown positive momentum. Firstly, the non-academic tutoring business, which we have rolled out in over 50 existing cities, focused on cultivating students' innovative ability and comprehensive quality. We're happy to see increased market penetration in both markets we have tapped into. The top 10 cities in China have contributed more than 60% of the revenue of this business. Secondly, the intelligence learning system and device business is a service designed to provide a tailored digital learning experience for students, utilizing our past teaching experience, data, and technology to provide personalized and targeted learning and exercise content together with our teachers monitoring and assessing the learning curve of the students at the backend system. The new initiative education service not only greatly improves the students' learning efficiency but also cultivates students' proactive learning habits. We have tested adoption in around 60 cities and are delighted to see improved customer retention rates and scalability of this new initiative. The revenue contribution of this initiative from the top 10 cities in China is over 60%. Meanwhile, the study tour and the research camp business is an initiative that aims at offering students of K-12 and university ages the opportunity to fully leverage their free time and holidays to broaden their knowledge and cultivate subject interest. We have conducted study tours and research camps in over 50 cities across the country. The revenue contribution of this initiative from the top 10 cities in China is over 55%. At the same time, we have also been launching smart education business, which comprises smart teaching, smart hardware, science, and technology innovation education, and other services targeting local governments, educational authorities, primary and secondary schools, and kindergartens. Educational material and digitalized smart study solutions is a self-learning system leveraging advanced technology that will enable students to have complete control over the pace and flexibility of their learning in an age where remote learning becomes increasingly mainstream, as well as exam prep courses designed for students with junior college diplomas to obtain bachelor's degrees. The above-mentioned businesses have been gaining traction and contributing to the overall growth of the company. During the last fiscal quarter, we have been fully committed to complying with government policy. As a result, the total number of schools and learning centers was reduced to 744 by the end of this fiscal year. This significant change in our structure has underscored the importance of our industry-leading OMO system, which has been one of the constants during the company’s restructuring phase as we remain committed to investing in R&D. We got a lot cut in line as our OMO system has been instrumental during the restructuring process as well as during COVID-19 outbreaks in certain parts of China where strong flexibility is required in migrating students between online and offline classes to minimize learning disruption. We continued our efforts in developing and revamping our OMO teaching platform and kept leveraging our education infrastructure and technology strengths across the remaining key businesses and new businesses to provide more advanced and diversified education services to customers of all ages. We have invested $36 million in this quarter and $166 million in the full fiscal year to improve and maintain our OMO teaching platform, which ensures that we may continue to offer high-quality service and flexibility to our students during the pandemic. In response to the evolving industrial situation in China and in compliance with the latest regulations in the education space, we have been implementing structural changes to our pure online platform, Koolearn. We are actively exploring new initiatives and broadening its customer base and offerings by leveraging its existing technology that has been the core of its business. One good example of a potential business direction that has shown promising results to date is DONG FANG ZHEN XUAN, an e-commerce platform for selling agriculture and other products. Towards the end of December 2021, Koolearn began piloting live streaming events on various short video platforms, such as Douyin, which allows Koolearn to promote high-quality agriculture and other products such as books to the younger audience through social media. It also enables Koolearn to tap into a broader customer base. The new e-commerce live streaming generation brings our nation’s agriculture producers, farmers, and their products to the foreground where we believe they belong. This has resulted in notable user adoption and attraction to this platform, with DONG FANG ZHEN XUAN leading the way in this encouraging and optimistic direction. After the introduction of the government policy on after-school tutoring last year, which has undoubtedly impacted our business, we have received many inquiries and concerns from investors over the company’s financial position. As a company with a longstanding heritage, we have always made sure that we are prepared for and capable of weathering changes in the market. This is reflected in our ability to maintain a strong cash position throughout the whole restructuring process. By the end of this quarter, our cash and cash equivalents, term deposits, and short-term investments totaled approximately $4.2 billion. The company continued to seek opportunities to create more value for shareholders. On July 26, 2022, New Oriental’s Board of Directors authorized the repurchase of up to $400 million of the company’s common shares during the period from July 28, 2022, through May 31, 2023. This share repurchase program authorizes the company to purchase its American Depositary Shares (ADSs) or common shares from time-to-time on the open market in accordance with applicable rules and regulations. The timing and extent of any purchases will depend upon market conditions, the trading price of ADSs and common shares, as well as other factors. Now, I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead.

Sisi Zhao, Host

Okay. Now, I’d like to walk you through the other key financial details for the fourth quarter. Operating costs and expenses for the quarter were $629.7 million, representing a 52.1% decrease year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $600.9 million, representing a 53.6% decrease year-over-year. The decrease was mainly due to the reduction of facilities and numbers of staff as a result of the restructuring in the fiscal year. Cost of revenue decreased by 57.2% year-over-year to $247.8 million. Selling and marketing expenses decreased by 50.7% year-over-year to $95.8 million. G&A expenses for the quarter decreased by 43.9% year-over-year to $286.1 million. Non-GAAP G&A expenses, which exclude share-based compensation, were $257.2 million, representing a 47.4% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 42.9% to $28.8 million in the fourth quarter. The increase is due to the grant of restricted shares of the company to employees and directors in May 2021 with graded vesting over three years. Operating loss was $105.6 million, compared to the loss of $102.4 million in the same period of the last fiscal year. Non-GAAP operating loss for the quarter was $76.9 million, compared to the loss of $82.2 million in the same period of the prior fiscal year. Net loss attributable to New Oriental for the quarter was $189.3 million, compared to the loss of $45.5 million in the same period of the last year. Basic and diluted net loss per ADS attributable to New Oriental were $1.12 and $1.12, respectively. Non-GAAP net loss attributable to New Oriental for the quarter was $160.3 million, compared to the loss of $27.9 million in the same period of last year. Non-GAAP basic and diluted net loss per ADS attributable to New Oriental were $0.94 and $0.94, respectively. Net operating cash flow for the quarter was approximately $29.3 million and CapEx for the quarter was $22.3 million. Turning to the balance sheet. As of May 31, 2022, New Oriental had cash and cash equivalents of $1,148.6 million. In addition, the company had $1,140.1 million in term deposits and $1,902.3 million in short-term investments. New Oriental's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions were delivered, at the end of this quarter was $933.1 million, a decrease of 51.6% as compared to $1,926.4 million at the end of this quarter. The decrease is primarily due to the cessation of K-9 academic after-school tutoring services in compliance with the government’s policy in China. Now, I’ll hand over to Stephen to go through the outlook and guidance.

Stephen Yang, Executive President and CFO

Thank you, Sisi. Looking ahead into the first quarter of fiscal year 2023, with the process of school closures now largely completed, we expect that our school network will stabilize. The company has now entered a stage of exploring new opportunities with greater flexibility and strong cash flows. We’re confident in the sustainable profitability of all our remaining key businesses, as well as the growth and profit potential of our new initiatives. For new businesses, it’ll take time for them to come to full fruition, but as we saw in this quarter, the encouraging performance they have already achieved shows that we are heading in the right direction. We're confident that the business will start to contribute meaningful revenue from the next fiscal year onwards. As for the recent pandemic developments in China, thanks to our OMO system, we believe that the overall impact that would be caused to our business and financials will be limited. We have also had measures in place to control and handle lockdown situations should they arise again. In sum, we expect total net revenues in the first quarter of fiscal year 2023 to be in the range of $641.3 million to $680.6 million, representing a year-over-year decline in the range of 51% to 48%. Bottom line wise, we’re confident that we will achieve the turnaround and profitability in the first quarter as well as achieving operating profit in the full year of 2023 fiscal year. To conclude, we're now taking all kinds of operational actions to promote our key remaining businesses and cautiously investing in new businesses, which will be the new growth engines that will accelerate our recovery and seek profitable growth. At the same time, we will continue to seek guidance from and cooperate with government authorities in various provinces in China, in connection with these efforts to comply with relevant policies, guidelines, and any related implementation rules, regulations, and measures and to further adjust 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 limited review, which is subject to change. This is the end of our fiscal year 2022 Q4 summary. At this point, Sisi and I would like to open the floor for questions. Operator, please open the call for this. Thank you.

Operator, Operator

Yes. Thank you. And the first question comes from Mark Li with Citi.

Mark Li, Analyst

Hi, Stephen. May I ask — for one, would you have any breakdown of revenue for the guidance that you provide by the major categories?

Stephen Yang, Executive President and CFO

Sorry, Mark, as before, we don’t want to give the breakdown of the revenue in the next quarter.

Mark Li, Analyst

Got it. So maybe, I follow up with a quick question. I notice we have around 744 campuses and it should be stabilized going forward. It looks like it’s higher than the previous mention of 650 to 700 when you bottomed. So, would it mean there is a positive difference from the time we last spoke and what would be your outlook for this size?

Stephen Yang, Executive President and CFO

Yes. First of all, I must mention that our remaining businesses, you can call the traditional businesses, like the overseas related business in consulting and the adults and university students business, I think they are all remarkably resilient because you saw the numbers from fiscal year 2022. So, we do hope we can do better in fiscal year 2023. On the other hand, we launched some new initiatives, like the non-academic tutoring courses, the intelligent learning system and device services, and the study tour and research camps. The market demand is always there, and even for the new business, it started just a couple of months ago, but we have seen high customer retention rates, and we hope they can outperform in the fiscal year. That’s why we keep a somewhat higher number of learning centers than we expected three months ago. Yes, Mark.

Mark Li, Analyst

Just, I have a quick follow-up. How many of the learning centers do you have, both non-academic tutoring and existing business?

Stephen Yang, Executive President and CFO

We don’t have the detailed number, but as in more than 50 cities, we don’t have the new business, like the non-academic courses. So, you can say the non-academic courses will be the new growth engine going forward. Okay. Thank you. Thank you, Mark.

Operator, Operator

Thank you. And the next question comes from Felix Liu with UBS.

Felix Liu, Analyst

Thank you, Stephen. Thank you for taking my question and congratulations on the very resilient quarter post restructuring. I first wanted to ask a question about the new initiatives. You mentioned good progress on the non-academic tutoring as well as the study camps. So, if we look at this from a one to two to three year horizon, which one of these new initiatives do you expect the biggest revenue contribution, or could you rank your expectation on the revenue contribution from the bigger to the lower initiative? My second question is on DONG FANG ZHEN XUAN. I know this is a very good initiative that we launched under Koolearn. Have we seen any positive synergies between the live streaming e-commerce with our education businesses? Thank you.

Stephen Yang, Executive President and CFO

Okay. As for the non-academic children courses, we launched these courses focused on cultivating the students' innovative ability and comprehensive quality. We have a lot of courses to improve students' reading, presentation skills, programming, art, and sports. Yes, we have a lot of courses, and we have seen extremely revenue growth in the last couple of months. The market demand is there. After last year’s government policy, we saw that students have more spare time, so parents and students love to enroll in our new classes. Yes, it is a new business; the revenue contribution is very small, but it is growing very fast. We believe the new business will contribute more and more revenue going forward. Regarding DONG FANG ZHEN XUAN, we have seen positive synergies with our education businesses. Overall, while I can't share detailed performance data here, we have received recognition across media in China and even in other countries. Beyond financial gains, we’re pleased to see we have also generated intangible returns by helping farmers and agriculture producers. We expect Koolearn will become a key growth driver and gradually deliver meaningful contributions to new rental revenues and profit margins in the coming year, likely within the next two to three years. The audience loves the DONG FANG ZHEN XUAN platforms, and we think its performance helps our local schools and learning centers to attract more students.

Felix Liu, Analyst

Okay, great. Thank you for the color.

Stephen Yang, Executive President and CFO

Yes. Thank you.

Operator, Operator

Thank you. And the next question comes from Liping Zhao with CICC.

Liping Zhao, Analyst

Good evening, Stephen, Sisi. Thanks for taking my questions. I got two here. First, could you please share the revenue contribution of the new initiatives in 4Q FY 2022, and also in first quarter FY 2023 guidance? And second question is about the GP margin. Are we expecting the around 53% GP margin in 4Q FY 2022 to be in a relatively stable state for the coming quarters? Thank you.

Stephen Yang, Executive President and CFO

Okay. The new business I think will contribute around 20% of total revenue, excluding revenue from DONG FANG ZHEN XUAN from Koolearn. This is only from the education side, like the non-academic courses such as research and summer camps. For the GP margin side, I think we got a lock in this quarter in Q4, but we believe we can achieve higher gross margins in Q1 in the next quarter, or even for the next full fiscal year 2023. That’s why I said, bottom line-wise, we’re confident we will achieve turnaround and profitability in the first quarter next quarter, and we expect to be profitable in fiscal year 2023.

Liping Zhao, Analyst

Okay. Thanks. That’s helpful.

Stephen Yang, Executive President and CFO

Thank you.

Operator, Operator

Thank you. And the next question comes from Tian Houon with T.H. Capital, LLC.

Tian Houon, Analyst

Hi, Stephen, can you guys hear me?

Stephen Yang, Executive President and CFO

Thank you.

Tian Houon, Analyst

Hello?

Stephen Yang, Executive President and CFO

Yes.

Sisi Zhao, Host

Yes. We can hear you.

Stephen Yang, Executive President and CFO

Yes, I can hear you.

Tian Houon, Analyst

Yes. The question is that if you guys have moved to the new business and what is the new season now that you will be going forward?

Sisi Zhao, Host

Yes, actually as we restructure all the business lines, terminating K-9 academic training. The remaining key businesses, like the overseas-related business and also domestic test prep for university students, these businesses are much more seasonal than K-12. So actually, you will see going forward since next fiscal quarter, our Q1 revenue contribution for full year will increase compared to previous years. So, Q1 will be peak season, continuing to be the peak season and also Q3 will be set in peak season, while Q2 and Q4 will be relatively lower in terms of revenue contribution for the full year. Yes.

Tian Houon, Analyst

Okay. Thank you. That’s helpful.

Operator, Operator

Thanks. Thank you. And the next question comes from Lucy Yu with Bank of America.

Lucy Yu, Analyst

Thank you, Stephen. Thank you, Sisi for taking my question. My question is on the GP margin. So, can you please elaborate the margin expansion in the fourth quarter up from the 39% in the third quarter? And you also mentioned that a GP margin going forward might be higher than the 53%. What is the driver behind that? Thank you.

Stephen Yang, Executive President and CFO

Yes, Lucy, we have almost completed the learning center closures and some layoffs in the last year, the last three quarters. As I said, we will keep the same number of learning centers and will look to hire more new people. This means the fixed costs are there, but we’re seeing revenue growth. I think we will see more operating leverage going forward. In Q4, the overseas consulting business typically contributes more revenue. So, we have seasonality in Q4 for the overseas consulting business. Analyzing year-over-year, we believe that in fiscal year 2023, both the GP margin and profit margin will improve. As I said, we will be profitable in fiscal year 2023, Lucy.

Lucy Yu, Analyst

Thank you, Stephen.

Operator, Operator

Thank you. And the next question comes from Elsie Sheng with Morgan Stanley.

Elsie Sheng, Analyst

Thank you, management and congratulations. I want to ask about the new business. You mentioned positive momentum in your new business. Do you have any operational data that you could share, for example, on non-academic tutoring, new children recruitment in summer, retention, and student acquisition? Any details you could share? And also, how do you see the competition with the public schools since they also offer some non-academic courses or after-school services? Thank you.

Stephen Yang, Executive President and CFO

Yes, we have some data for the new business. Even though we started a couple of quarters ago, the business has developed very well. The student retention rates for courses like reading and presentation skills are almost on par with traditional K-12 academic courses, which is very promising. And regarding the margin side, I remember in the last earnings call, we guided our targets to breakeven for the new business, but this time, we feel better about our prospects. While it is too early to detail the numbers, we believe we can achieve profitability in the new fiscal year. Regarding competition, we have lots of data and systems, teaching experience, and we are starting to sell products to public schools, including kindergartens, primary, and secondary schools. It's just the beginning, but we believe we can do better because these public institutions need our services. If you follow us for so many years, you know we have invested heavily in human resources and content development to establish our systems.

Elsie Sheng, Analyst

Okay. Thank you.

Stephen Yang, Executive President and CFO

Thank you.

Operator, Operator

Thank you. And we are now approaching the end of the conference call. I’ll 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 Relation representatives. Thank you.

Operator, Operator

Thank you. This concludes today’s teleconference. Thank you for attending today’s presentation. You may now disconnect your lines.