New Oriental Education & Technology Group Inc (EDU) 2022 Q4 法說會逐字稿

Good evening and thank you for standing by for New Orientals FY 2022 Fourth Quarter Results Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. (Operator Instructions)

I would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao.

Hello everyone and welcome to New Oriental's fourth fiscal quarter 2022 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 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 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 turn the call over to Mr. Yang. Stephen, please go ahead.

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 were largely affected by the government policies introduced the last year.

I'm glad to announce that we are now paving a new path, innovative business opportunity as the company embarks on our fresh journey that strives to encourage all round development of students and for the betterment of the society. And at the same time focus on generating profit and returns for our shareholders.

Now I would like to spend some time to talk about the quarter performance across our remaining business lines and introducing our new initiatives to you in detail. Our key remaining business have shown remarkable resilience and achieve the promising trends. Breaking down the overseas test prep business recorded that 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 rapid growth of approximately 30% year-over-year for the fiscal year 2022. As for our new business initiatives, as mentioned in past quarter, we have launched the several new initiatives throughout the year, which mostly revolve around facilitating students all-round 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 it out in over 50 existing cities focused on cultivating students' innovative ability and a comprehensive ability. We're happy to see increased market penetration in those 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 tailor digital learning experience for students, utilize our past teaching experience data and technology to provide personalized and targeted learning exercise content, together with our teachers monitoring and assessing the learning curve of the students at the back-end system.

The new initiative education service not only greatly improves the student's learning efficiency, but also cultivates students proactive learning habits, we have tested adoption in around the 60 cities and are delighted to see improve the customer retention rates and scalability of this new initiative. The revenue contribution of this initiatives 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 a university ages of the opportunity to fully leverage their free time and holidays to broaden the scope of knowledge and cultivate subject of interest. We have conducted the study tours and research camp 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 our service targeting local governments, educational authorities, primary or secondary schools and kindergartens, educational material and digitalized smart study solutions, the self-learning system leveraging advanced technology that will enable students to have complete control over the pace and the flexibility of the learning in age where remote learning becomes increasingly mainstream, as well as exam prep course designed for students with junior college diplomas to obtain bachelor's degree.

The abovementioned business have been gaining traction and contributing to the overall growth of the company. During the last few fiscal quarters, we have been fully committed to comply with government policy. And 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 the R&D of the technology.

This is operator, please continue to hold the line. We will reestablish the speaker's connection shortly. Thank you. Please continue to hold the line.

Thank you for standing by, the speakers have reestablished the connection. We have the speakers on the line again.

So yeah, we got lost on the line. So I repeat it again. Okay. Sorry. I started from the -- okay. So, before going into the detail of our financial performance, I would like to take this opportunity to extend our gratitude to those who have been supporting and believing in New Oriental, while our business in the previous quarters were largely affected by the government policies introduced last year.

I'm glad to announce that we're now paving a new path in innovative business opportunities, as the company embarks on a fresh journey that strive to encourage all round development of students and for the betterment of the society. And at the same time, focuses on generating profits and returns for our shareholders.

Now, I would like to spend some time to talk about this quarter performance across our remaining business line and introduce our new initiatives to you in detail. Our key remaining business have shown remarkable resilience and achieve the promising trends. Breaking it down. The oversea test prep business recorded the 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 the 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 round development. I am 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 ability. We're happy to see increased market penetration in those 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. It utilizes our past teaching experience, data and technology to provide personalized and targeted learning exercise content together with our teachers monitoring and accessing the learning curve of our students at the back-end system.

The new innovative education service not only greatly improves the students' learning efficiency but also cultivate students' proactive learning habits. We have tested adoption in around the 60 cities and are delighted to see improve the customer retention rates and scalability of this new initiative. The revenue contribution of this 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 of the opportunity to fully leverage their free time and holidays to broaden the scope of knowledge and to cultivate the subject interest. We have conducted the study tours and research camp in over 50 cities across the country. The revenue contribution of this 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, education authority, primary and secondary schools and kindergardens, educational material and digitalized smart study solutions, a self-learning system leveraging advanced technology that will enable students to have complete control over the pace and the flexibility of the learning in age where remote learning becomes increasingly mainstream as well as exam prep courses designed for students with junior college diplomas to obtain bachelor's degree. The above mention business have been gaining traction and contributing to the overall growth of the company.

During the last fiscal quarter, we have been fully committed to comply with the government policies. And as a result, the total number of the schools and learning centers was reduced to 744 by the end of this fiscal year. This significant changes 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 the R&D of the technology.

The OMO has been instrumental during the restructuring process, as well as COVID-19 outbreaks in certain part of China, where a strong flexibility is required in migrating students between online and offline classes to minimize the learning disruption. We continue our efforts in developing and revamping our OMO teaching platform and kept leveraging our education infrastructure and technology strength across the remaining key business and new business to provide more advanced and diverse educational service to the customers for all ages.

We have invested $36 million in this quarter and $166 million in full fiscal year to improve and maintain our OMO teaching platform, which ensures that we may continue to offer high quality service and the flexibility toward 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're actively exploring new initiative and broadening its customer base and offerings by leveraging its existing technology that has been the core of this business. One good example of the potential business direction that has shown promising results to date is DongFangZhenXuan - 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 agricultural and other products from China to the younger group of audience through the social medium. It also enabled Koolearn to tap into the broader customer base, the new e-commerce live streaming generation, whilst bringing our nation's agricultural producers, farmers and their products to the foreground, where we believe they belong. This has resulted in today's a notable user adoption and attraction to this platform with DongFangZhenXuan heading the way in an encouraging and optimistic direction.

After the introduction of the government policy on after-school tutoring last year, which has no doubt posed direct impact on our business. We have received many enquiries and concerns from investors over the company's financial position. As a company with a long-standing heritage, we have always made sure that we are prepared for and capable in weathering changes in the market, and that 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 to 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 ADS or common shares from time-to-time on open market in accordance with applicable rules and regulations. The timing and extent of any purchase will depend upon market conditions, the trading price of ADS and its common shares as well as the other factors.

Now I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead.

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 excludes share-based compensation expenses, were USD 600.9 million, representing a 53.6% decrease year-over-year.

The decrease was mainly because of the reduction of the facilities and numbers of staff as the result of the restructuring in this 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 USD 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 represents a 47.4% decrease year-over-year.

Total share-based compensation expenses, which were allocated to related operating cost and expenses, increased by 42.9% to $28.8 million in the fourth quarter. The increase is due to the grants of restricted shares of the company to employees and directors in May 2021 with graded vesting over the 3 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 were $76.9 million compared to a 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 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 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 the short-term investments. New Oriental's deferred revenue balance, which is cash collected from the registered students for the 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 last year.

The decrease is primarily due to the cessation of K-9 academic after-school tutoring services with compliance with the government policy in China.

Now I'll hand over to Stephen to go through the outlook and guidance.

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 to become stabilized. The company has now entered a stage of starting a fresh, exploring new opportunities with greater flexibility and strong cash flows. We're confident in the sustainable profitability of all our remaining key business as well as the growth and profit potential of our new initiatives.

For our new businesses, it will take time for them to come to full fruition. But as we saw in this quarter, the encouraging performance they have already achieved to showing proves that we are heading towards the right direction and we're confident that the business will be starting to contribute meaningful revenue from the next fiscal year onwards.

As for the recent pandemic development in China, thanks to our OMO system, we believe that the overall impact that would cause to our business and financials will be limited. We have also had measured in place to control and handle lockdown situation should they ever arise again.

In sum, we expect the 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 are confident that we will achieve turnaround and profitable in the first quarter as well as achieving operating profit in the full year of 2023 fiscal year.

To conclude, we are now taking all kinds of operational actions to promote our key remaining business and cautiously investing in new business, which will be the new growth engines that accelerates our recovery and to seek profitable growth. At the same time, we will continue to seek guidance from and corporate with government authorities in various province in China in connection with its efforts to comply with the relevant policies, guidelines and any related implementation rules, regulations and measures and to further adjust our business operations required.

I must say that these expectations and forecasts reflect our considerations of the latest regulatory measure as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2022 Q4 summary. At this point, Sisi and I like to open the floor for questions. Operator, please open the call for these. Thank you.

(Operator Instructions) And the first question comes from Mark Li with Citi.

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

Sorry, Mark. As before, we don't want to give the revenue breakdown in next quarter.

So maybe I follow-up with a quick question is, I noticed we have around 744 campus, and it should be stabilized going forward. It looks like it's higher than the previously mentioned 650 to 700 when in bottom. So would it mean there is a positive difference from the time we last spoke? And what would be your outlook for this side?

Yes. First of all, I must mention that our remaining business, or you can call the traditional business like the overseas related business and the consulting business, and the adult and university students business. I think they have all remarkable resilience because you saw the numbers of this fiscal year 2022. So we do hope we can do better in fiscal year 2023 in the new year.

And on the other hand, we launched some new initiatives like the non-academic tutoring courses and like the intelligent learning system and devices they service to the students and as well the study tour and research camp. So I think the market demand is always there. And even for the new business, we started in this fiscal year in just a couple of months ago. But we have seen the customer retention rate is very high. And we do hope they can do better in the new fiscal year. So that's why we do keep a little bit more number or a higher number of the learning centers than we expected 3 months ago and Mark.

Just I have a quick follow-up is how many of the learning centers you have both non-academic tutoring and the existing business?

We don't have a detailed number. But in more than 50 cities, we do 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.

And the next question comes from Felix Liu with UBS.

And congratulations on the very resilient quarter post restructuring. First, I wanted to ask a question about the new initiatives. You mentioned good progress on the non-academic tutoring as well as study camp. So if we look at this from a 1-year to 2- to 3- year horizon, which one of these initiatives do you expect to be the biggest revenue contribution or could you rank your expectation on the revenue contribution from the bigger to the lower initiatives?

My second question is on DongfangZhenxuan. I know this is a very good initiative that we launched under Koolearn. Have you seen any positive synergies between the livestreaming income with our education businesses?

Okay. As for the non-academic tutoring courses, we launched these courses focused on cultivating the students in this innovative ability and comprehensive ability. And so we do have a lot of courses, like the courses to improve the students' reading and the presentation skill and something like the programming robot, the art, sports. We have a lot of courses. But we have seen extremely the revenue growth in the last couple of months.

And because as I said, the market demand is always there. And after the government policy last year, we saw some students, they do have more spare time. So the parents and students love to enroll our new classes. And yes, it's new business. The revenue contribution is very small, but it grows very fast. So we believe the new business will contribute more and more revenue going forward. And DongfangZhenxuan, yes, I share with you more information about DongfangZhenxuan. But I have to say, I can't share the business performance in detail with you. I will leave it to DongfangZhenxuan management, the Koolearn management to share with you more information in the earnings release announcements in this month, right, in next months.

But as I mentioned earlier, DongfangZhenxuan is an innovative blend of the knowledge sharing and the agriculture product promotion. You can check the numbers like the followers and GMV on third-party data platforms as referenced, but we are also grateful to be widely recognized across the media in China and even in the other countries. And beyond the financial gains, I think we're pleased to see we have also generated intangible returns which is to fulfill the social responsibility by helping the farmers and the agriculture product producers. And so this new business model has been exceeding our expectations. You saw what happens in the last month.

And we expect Koolearn will become a key growth driver and gradually deliver meaningful contribution to the New Oriental's revenue and profit margin in the new year or even in the next 2 to 3 years. And yes, I think the audience loves the DongfangZhenxuan platforms. So I think the DongfangZhenxuan performance helps the local schools and the learning centers to get more students into our classrooms even for the traditional business or the new business. So this is very good for us. Felix?

And the next question comes from Liping Zhao with CICC.

I got 2 here. First, could you please share the revenue contribution of the new initiatives in the first Q4 FY '22 and also in first quarter FY '23 balance? And second question is about the GP margin. Are we expecting the around 53% GP margin in 4Q FY '22 to be relatively stable sales for the coming quarters?

Okay. The new business, I think the revenue contribution from the new business will contribute around 20% of total revenue. This does not include the revenue from the DongfangZhenxuan or from Koolearn. So this is all on the EDU side, like the non-academic courses, or the research, the summer camps, something like that, or some other new business. This does not include the DongfangZhenxuan. And yes, on the GP margin side, I think we got a lot in this quarter, in Q4. But we do believe, we can get the higher gross margin in Q1 in the next quarter or even for the next full year fiscal year 2023, so that's why I said, at the bottom line-wise, we're confident we will achieve turnaround and be profitable in the first quarter, next quarter. And also, I think we expect we will be profitable in the full year of fiscal year 2023.

(Operator Instructions) And the next question comes from Tianxiao Hou with TH Capital LLC.

Yes. The question is, you got (inaudible) [0:39:53] to the new business. And what was the new season (inaudible) [0:39:58] be going forward?

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

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

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 the GP margin going forward might be higher than the 53%. And what is the driver behind that?

Yes. Lucy, we have already -- we almost have done the learning center closure and some layoffs in the last year, last 3 quarters. So as, I said, we will keep the same number of the learning centers. And we want to hire more new people. And so that means the fixed cost is there. And we're seeing the revenue growth is recovered. And I think we will do -- we will see more and more the operating leverage going forward. And in the Q4, because the overseas consulting business typically contribute more revenue in Q4. So we do have the seasonality in Q4 for the overseas consulting business. So let's do the analysis year-over-year. So we do believe the -- in fiscal year 2023, both the GP margin and the profit margin, we will get better for the new year. As I said, we will be profitable in fiscal year 2023, Lucy?

And the next question comes Sheng Zhong with Morgan Stanley.

I want to ask about the new business that you see positive momentum in your new business. Do you have any operation data that you could share about, for example, the non-academic tutoring the new tutoring equipment in summer and the retention and also like the student acquisition, any detail that you could share? And also, how do you see the competition is the public schools because they also offer some non-academic courses or after school service?

Yes. So for these data for the new business. Even though we started business a couple of quarters ago. But as I said, the business developed very good. And the student retention rate for something like the reading and the presentation skill courses is almost closely to the traditional K-12 academic courses. So it sounds very good, right? And on the margin side, I remember in the last earnings call, we guided the -- our target is to get a breakeven for the new business. But this time, we feel better. So I think we do believe we can get the profit for the new business. But it's too early to say the detailed numbers what is the margin for the new business. But we do believe we can get profitable in the new fiscal year.

Okay. And then also on the commutation with the public schools, do you have the view on our advantage with them?

Yes, because we do have a lot of data and systems and the teaching experience or even some data in hand. So we set up a new department to sell the product to the public schools or even the kindergarten, primary and secondary schools. And it's just a new start, but we do believe we can do better. And because I do believe the public schools and kindergartens, they need our service because if you follow us for so many years, and we spend a lot of money and invest a lot of the human resource, IT workers and content writers to build on our system and even the customer base. So I think we will find a new way to monetize this.

Thank you. And we are now approaching the end of the conference call. I would now like to turn the call over to New Oriental's Executive President and CFO, Stephen Yang, for his closing remarks.

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