Earnings Call Transcript - EDU Q3 2025

Sisi Zhao, Host

Good evening, and thank you for standing by for New Oriental Education & Technology Group Inc.'s Third Fiscal Quarter 2025 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. On the line to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Hello, everyone, and welcome to New Oriental Education & Technology Group Inc.'s third fiscal quarter 2025 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 NewsWare services. Today, Stephen Yang, Executive President and Chief Financial Officer, and I will share New Oriental Education & Technology Group Inc.'s latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that 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 view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental Education & Technology Group Inc. does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental Education & Technology Group Inc.'s Investor Relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead.

Stephen Yang, Executive President and CFO

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Our Q3 results reflect a steady performance, reinforcing our ongoing commitment to long-term value creation and operational consistency. Despite our revenue decreased by 2% year over year, the total net revenue excluding revenues generated from Eastbuy increased by 21.2% year over year. The continued growth of our new ventures has contributed to the company's revenue, and we anticipate further progress in the future. New Oriental Education & Technology Group Inc.'s bottom line performance of our core educational business has also shown stable returns. To better reflect New Oriental Education & Technology Group Inc.'s core educational business, we have excluded the operating margin generated from Eastbuy for the quarter. Our operating margin and non-GAAP operating margin excluding operating margin generated from Eastbuy for the quarter reached 12.1% and 13.3%, respectively, resulting from the substantial efforts invested in our offerings and platforms. Now I would like to spend some time to talk about each business line and new initiatives to you in detail. Our key remaining businesses are showing promising trends, and our new initiatives have demonstrated positive momentum. Breaking it down, the overseas test drive business recorded a revenue increase of 7% in dollar terms year over year for this quarter. The overseas study consulting business reported a revenue increase of about 21% in dollar terms year over year for this quarter. The adults and university students business recorded a revenue increase of 17% in dollar terms year over year for this quarter. Meanwhile, our ongoing investments in new educational business initiatives primarily focused on facilitating students' all-around development have sustained steady growth, further driving the company's momentum. Firstly, we did not abandon the children business. We have now rolled out to around 60 cities for students. We are happy to see increased market penetration in those markets we have tapped into, especially in high-tier cities. The top ten cities contribute over 60% of this business. Secondly, the intelligent learning system and device business. We have tested the adoption of this new initiative in approximately 60 distinct cities, and we are pleased to see improvement in customer retention and scalability. The top ten cities contribute approximately 50% of the business. As for the smart education business, education material and digitalized smart study solutions, they have all continued healthy development. In summary, our new education business initiatives combined have recorded a revenue increase of 35% year over year for this quarter. With regards to our integrated tourism-related business line, it performed exceptionally with a revenue increase of 85% year over year for this quarter. We received very positive feedback with our range of culture travels, China study tour, global study tour, and CAP education products. We have also conducted study tours and research camps both internationally and domestically, for students of K-12 and university age in around 55 cities across the country. The top ten cities' revenue contribution is over 50%. Middle-aged, the senior audience, targeted towards and the products are also available in 30 feature products in China and internationally. This business line has begun to demonstrate its potential to contribute meaningful revenue to the group. While we are encouraged by positive achievements across our various business lines, we remain committed to providing the best to our customers. We have been and will continue strategically investing in our business to elevate the overall user's experience, driving greater efficiency and capacity. Building on the progress from the previous quarter, we have continued to refine our online merge offline teaching platform. $29.7 million have been invested in this quarter to improve and maintain our OMO teaching platform, which provides us the flexibility to continue our high-quality service to students. Beyond OMO, I would like to take this chance to highlight our investments in AI and how we integrate AI into our teaching ecosystem. It is an area we have looked at and invested in over a long period of time. New Oriental Education & Technology Group Inc. has leveraged a combination of open-source large language models such as DeepSeat and GPT, and self-developed AI technologies to develop innovative education solutions and enhance the learning experience. AI-powered tools such as essay grading, speaking assessment, and error correction notebooks deliver intelligence evaluations and customized learning plans, ultimately improving the students' outcomes while saving time for both teachers and parents. To further drive internal efficiency, we introduced an AI content creation platform and student performance feedback applications to support lesson planning and strengthen home-school communication. These tools have also allowed us to collect meaningful data on learning habits and user engagement, giving us deeper insights into how students and families interact with our services. In addition, we have built an AI-supported comprehensive FAQ knowledge database with analysis of our sales conversations. By using the database, we are able to reduce the training cost for our salespeople and boost the sales efficiency and conversion rates. As an industry leader, we are dedicated to driving long-term revenue growth by strengthening our product capability and optimizing management efficiency. We look forward to sharing tangible results from our investments in AI integration and their positive impact on our performance. Now I would like to take this opportunity to talk about our share repurchase actions. The company's board of directors further approved extending the effective time of the share repurchase program to May 31st, 2025, increasing the aggregate value of the shares that the company is authorized to repurchase from $400 million to $700 million. As of April 22nd, 2025, the company repurchased approximately 14.4 million ADS for approximately $695.5 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

Thank you, Stephen. Now I'd like to share our key financial details for the quarter. Operating costs and expenses for the quarter were $1,558.5 million, representing a 3.2% decrease year over year. Cost of revenues decreased by 17.6% year over year to $531.6 million. Selling and marketing expenses increased by 13.13% year over year to $182.2 million. G&A expenses for the quarter increased by 19.8% year over year to $344.7 million. Total share-based compensation expenses, which are allocated to related operating costs and expenses, decreased by 41.3% to $16.1 million in the third quarter of 2025. Operating income was $124.5 million, representing a 9.8% increase year over year. Non-GAAP income from operations excluding share-based compensation expenses and amortization of intangible assets resulting from business acquisitions was $142.1 million, representing a 0.2% decrease year over year. Net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $87.3 million, representing a 0.1% increase year over year. Basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were $0.54 and $0.54, respectively. Non-GAAP net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $113.3 million, representing a 14.3% decrease year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were $0.70 and $0.70, respectively. Net cash flow generated from operations for the third fiscal quarter of 2025 was approximately $1 million, and capital expenditures for the quarter were $52.4 million. Turning to the balance sheet, as of February 28, 2025, New Oriental Education & Technology Group Inc. had cash and cash equivalents of $1,418.8 million, $1,411.7 million in term deposits, and $1,853.6 million in short-term investments, totaling approximately $4.7 billion. The company is in a healthy financial position. New Oriental Education & Technology Group Inc.'s deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the services and goods are delivered, at the end of the third fiscal quarter of 2025 was $1,749.9 million, an increase of 15% compared to $1,521.7 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. With the evolving market dynamics, we remain committed to resilience and focus on achieving steady sustainable growth across our business lines in the coming quarter. Leveraging our experience in navigating shifting conditions, we are confident in our ability to advance our business lines as an industry leader. The strong performance of our diverse operations and the depth of the educational resources further strengthen our confidence in sustainable growth. We expect the total net revenue excluding revenue generated from Eastbuy in the coming quarter, March 1st, 2025 to May 31st, 2025, to be in the range of $1,009.1 million to $1,036.6 million, representing a year-over-year increase in the range of 10% to 13%. It projects the increase of the revenue in our functional currency, RMB, is expected to be in the range of 12% to 15% for the first quarter of fiscal year 2025. In addition, the slowdown of the revenue growth of our overseas-related business and the investments in newly integrated tourism-related business have led to the short-term impact on our operating margin this quarter. We have initiated initiatives for cost control and efficiency enhancement across all business lines since this quarter, and we expect these actions to take effect in the coming quarters. We anticipate the non-GAAP operating margin for the educational business will expand year over year in the coming fourth quarter. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measures, as well as the current and preliminary view, which is subject to change. To conclude, New Oriental Education & Technology Group Inc. is dedicated to delivering premium offerings to our customers while pursuing sustainable growth through a strategic blend of capabilities. We will continue investing in our business and the different application of advanced technologies, including AI. Our aim is to strengthen our competencies, driving growth and improving operating efficiency. We will also continue to seek guidance from and cooperate with the government authorities in China, ensuring compliance with the relevant policies, guidelines, and any related implementations, regulations, and measures. And not just our business operations as required. As always, we will work diligently to enhance the nation's education level to strengthen its leading position, unlocking further potential across all of our business lines and realizing our vision. This is the end of our fiscal year 2025 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for questions. Thank you.

Operator, Operator

Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to ask a question now. We will now take our first question from the line of Felix Liu from UBS. Please ask your question, Felix.

Felix Liu, Analyst

Thank you, and good evening, management. Thank you for taking my question. My question is on the overseas-related businesses. You mentioned that the slowdown in overseas test prep and consulting caused the deceleration in Q4 growth. May I just check, what has been the major drivers of the slowdown? Do you think the situation could get worse with these ongoing tariffs? And what is your outlook for this business, especially when do you think growth will bottom out? Thank you.

Stephen Yang, Executive President and CFO

Yeah. I think the overseas-related business, including the overseas test prep and the consulting business, the slowing down is due to the impacts of the macroeconomic situation and the international relationship change situation. And so, based on our current guidance of Q4, I think the overseas-related business will be growth in the range of 5% to 10% in Q4. And in the coming new year, we have not finished the budget, but we anticipate the overseas test prep business will grow by 5% to 10% in the new year. And the overseas consultant business, I think the growth will be zero or flattish in the coming new year. But what I'm saying now is based on our conservative estimation for the new year.

Felix Liu, Analyst

Right. Thank you. Thank you.

Operator, Operator

We will now take our next question from the line of Lucy Yu from Bank of America Securities. Please ask your question, Lucy.

Lucy Yu, Analyst

Thank you so much. So my question is more on the fourth quarter guidance. You did mention that overseas test prep is going to slow down. May we have a breakdown of the other business growth in the fourth quarter? Thank you.

Stephen Yang, Executive President and CFO

Yeah. So, roughly, based on our forecast for Q4, in RMB terms, the overseas-related business will grow around 8%. So and domestic university students business will grow maybe around 19%. And the high school business growth will be around 16%, 17%. And the new K to 9 new educational business will grow maybe around 30% to 35%. So that's the rough estimation based on our current forecast for Q4. This is RMB growth. And if you want US dollar growth, maybe each line roughly deduct by roughly 2% to 3%. But we must mention that we're using the conservative method. Keep the guidance for Q4.

Lucy Yu, Analyst

Understood. Thank you so much. Thank you.

Operator, Operator

Our next question comes from the line of Alice Cai from Citibank. Please ask your question, Alice.

Alice Cai, Analyst

I noticed that when enrollments grew by 15% year over year in the mid-quarter, which is slower than second quarter's increase by 54% year over year. Our learning device is starting to replace offline copies. And how much of the slower K-9 growth is simply because the base are getting bigger. Is that clear now?

Stephen Yang, Executive President and CFO

Yes. Actually, enrollment growth for the non-academic tutoring business this year is a little bit impacted by the timing difference of the cutoff of each quarter. And also, we have some enrollments that last year divided into two parts, for the spring quarter and autumn quarter. But this year, some cities combined as one enrollment. So that's also explained the relatively slower growth of the enrollments if you're comparing that with the revenue growth. And the learning path for middle school students mainly is also growing very, very fast. And this year, the number of users increased dramatically comparing with last year. Yes. Next year, we also continue to believe that the K to 9 business, including mainly the elementary school non-academic tutoring and the middle school learning pad business will continue to drive the overall growth, will be the fastest growth category. So within the Q4 guidance, you know, the K-9 business, I expect the K-9 business will grow by over 35% year over year in Q4.

Alice Cai, Analyst

Okay. Thank you so much. Very clear. Thank you.

Operator, Operator

We will now take our next question from Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.

Timothy Zhao, Analyst

Sure. Thank you, Steven, for taking my question. I think you mentioned that in the fourth quarter this year, you do expect the OP margin for the core business to expand on a year-on-year basis. Just wondering how do you think about the sustainability of the margin expansion into fiscal year 2026? And what kind of matters that you're going to take to increase the operating efficiency and either control cost and how this is about the balance? Yes, the balance and the revenue growth margin.

Stephen Yang, Executive President and CFO

As I said, we expect the margin expansion in the coming quarter, Q4. And I think this is mainly due to the following reasons. Number one, we started to do the cost control and the efficiency since this quarter. And we do believe will take effect to help the margin profile in Q4. And the next fiscal year. And secondly, I think we continue to focus on improving the utilization facilities. And so, we're doing the cost control in all those lines with the companies because of the slowing down, I think this is reasonable to do at this time. And for the new year, fiscal year 2026, we do believe we will have margin expansion for the education business, excluding the Eastbuy emerging venture in the new year.

Timothy Zhao, Analyst

Great. Thank you, Steven. Thank you.

Operator, Operator

Our next question comes from the line of Yiwen Zhang from Citrix. Please ask your question, Yiwen.

Yiwen Zhang, Analyst

Hello. Thank you for taking my question. My question is about the shareholder feedback plan. We are glad to see that we have almost finished our ongoing purchase plan. So do we have some more shareholder feedback in the future? By dividend or a new repurchase plan? Thank you.

Stephen Yang, Executive President and CFO

Yes. We have almost finished the $700 million share buyback. And we have already paid a $1 million special dividend in September last year. And so that means over the last two and a half years, we paid $800 million. And going forward, I think in the near future, I will discuss with the board about another capital allocation plan. It is reasonable for us to pay the capital allocation to investors, either some regular dividends, special dividends combined with the share buyback.

Yiwen Zhang, Analyst

Thank you. Thank you.

Operator, Operator

Thank you. Your next question comes from the line of Elsie Sheng from CLSA. Please ask your question, Elsie.

Elsie Sheng, Analyst

Thank you, Steven. Elsie, my question is more about the outlook next year. So you mentioned the expectation for the growth of overseas business in next financial year. Could you also update your expectation of growth for other business segments in next year? Thank you.

Stephen Yang, Executive President and CFO

I think Sisi will give you the guidance.

Sisi Zhao, Host

Yeah. Actually, I think it's reasonable to continue to estimate maybe similar growth with Q4's revenue growth for all the core business lines for next fiscal year. As we said, the continued pressure definitely is from the overseas-related business, but we do believe that this business will stabilize and based on so far's estimation, single-digit growth is okay for us, and it's already conservative. For the new business, K to 9 new business should grow at around 25 to 30% growth. You know the high end probably growth is from the middle school section, and also elementary school students because the higher base, our revenue scale is already bigger than before the policy level. The growth around this level is also something that we feel sustainable and healthy pace. High school business could continue maybe around 12, 13% growth conservatively as well. And the tourism business probably around 15 to 20% growth also. Conservative estimation for next year. That’s all the core business lines.

Elsie Sheng, Analyst

Thank you.

Operator, Operator

We will now take our next question from Charlotte Wei from HSBC. Please ask your question, Charlotte.

Charlotte Wei, Analyst

Thank you, management for taking my question. I have a question related to the new technology development. So how do you expect AI and large language models will reshape the education industry? Can you share with us your strategy and investment plan for this area? Thank you.

Stephen Yang, Executive President and CFO

Yeah. As I said, we started to use AI technology to help the whole process of the teaching and learning from both the teacher side and the students and parents side. We have issued some AI tools like essay grading, speaking assistance, and error correction notebooks. All these new technologies help us to grasp more data from the students and to help the students' study outcomes even better. But we don't have the plan to do the big model, and I think that the investments will be reasonable going forward. On the other hand, on the cost control side, I think AI technology can help us to do some of the sales, the salespeople and even some G&A. I think it will make us work more efficiently. We can save some expenses of telemarketing and G&A expenses. So it will help us drive the market up. This is another benefit from the AI technology.

Charlotte Wei, Analyst

Thank you. Very clear. Thank you.

Operator, Operator

We will now take our next question from DS Kim from JPMorgan. Please ask your question, DS.

DS Kim, Analyst

Hi, Steven. Hi, Sisi. Thanks for taking my question. I think most of my questions have already been answered, but two minor things. A, can we talk a bit about expansion of the center capacity expansion plan for next year? I got disconnected in the middle, so you may have already discussed that. I'm sorry if you did that already. That's a. And b, I think we talked a bit about course control starting this quarter. I'm just wondering what kind of course control we are planning to do. Like, would it involve some rationalization of our workforce? And if that were the case, would there be some one-off fixed expenses related to the workforce adjustment, or when we talk about course control, it's more about spending less than the previous budget? Hence, there wouldn't be any meaningful one-off expenses around there? And now that I think about it, can I ask one more thing? How do we think about the headquarters overhead cost for 2026? I think last year or this fiscal year, we are spending probably about mid to high teens more than last year on headquarters overhead. How shall we think about that overhead cost into 2026? Thank you so much, sir.

Stephen Yang, Executive President and CFO

Yes. Three questions. The learning center extension plan for the new year. Right? I think we plan to open ten to fifteen new capacities in the new year. It's a little bit less than fiscal year 2025. This is roughly around 20% plus. And next year, ten to fifteen percent. I think, you know, it will be almost backloaded in Q3 and Q4, to prepare for the year after next year. Our key job is to raise the utilization rates up for fiscal year 2026. The cost control assignment is not a one-time job. We started cost control through this quarter, and I think we will keep doing the cost control in all of fiscal year 2026. We're facing the challenging time of slowing down top-end growth. I think it's reasonable for us to do cost control continuously. It will help the higher efficiency and margin profile of the whole company. The headquarters expenses are roughly 6% of the total educational revenue, and the 6% of the total educational core business.

DS Kim, Analyst

Thank you, sir. Just to double-check, the six. Yeah. Six percent.

Stephen Yang, Executive President and CFO

So the ratio would be similar to this year versus next year. Next year, I think our job is to make the percentage even lower. Let's say, around 5% of the total revenue regarding the headquarters expenses. That means we will get leverage on the headquarters expenses in fiscal year 2026. It will help the margin up.

DS Kim, Analyst

Thank you, sir. I think it's really clear, and I agree that we should focus on utilization and efficiency in this hard time, and we can deliver margin expansion. Thank you so much.

Operator, Operator

Thank you. As a reminder, to ask a question, please press. Once again, this We now have a follow-up question from the line of DS Kim from JPMorgan. Please go ahead, DS.

DS Kim, Analyst

Sorry. I sent you just a follow-up since other students have questions. Since I think earlier you said K-9 new businesses next year, 2026, we expect about 25% to 30% growth environment return. Can I double-check if this is only for K-9 excluding other new businesses or new businesses including non-K-9 for 25% to 30%?

Sisi Zhao, Host

Including everything. So the key ones are the non-academic path, and also we added other minor things. Together.

DS Kim, Analyst

Thank you. That means K-9 should grow faster than what you give us, which is correct. It's not too bad. Actually, similar to this quarter. So thank you. Thank you so much.

Operator, Operator

Thank you. Next follow-up question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Felix Liu, Analyst

Thank you, management. I actually have one additional question on the learning hardware business. I noticed that recently, some of our competitors who also sell learning hardware launched new models at cheaper and increasingly cheaper prices. So how do you think about our strategy in the learning hardware business, and how should we think about competition pressure from price cuts from other players? Thank you.

Sisi Zhao, Host

Yeah. Actually, we're quite confident on the future of this learning path device model. Especially that we leverage our strengths in the educational sector. We have this interactive teaching and learning system. Our users create the stickiness of our customers. They not only buy the products, but also subscribe to the content and continue their self-study using our system. It creates stickiness and can generate recurring revenue. So we're still confident that this is the best model to leverage our educational strength. By using more AI technologies, we're now developing all kinds of apps and new functions embedded into our service process. So that's the learning experience of our customers will enhance going forward gradually and also provide them more technology support along with real teacher support in the learning process. We believe this business will continue to be a key growth driver for our overall revenue. This year, we have seen this business generate over 22%, 23% operating margin, similar to our offline teaching class margin. We are confident that it has the potential to continue to enhance the margin because of the involvement of more technology, allowing us to save more time from labor costs. Our teachers can serve more students than before, making this business model better than even offline training formats.

Felix Liu, Analyst

Thank you. That's very clear.

Operator, Operator

We are now approaching the end of the conference call. I'll now turn the call over to New Oriental Education & Technology Group Inc.'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

This concludes today's conference call. Thank you for participating. You may now disconnect.