New Oriental Education & Technology Group Inc (EDU) 2023 Q3 法說會逐字稿

Good evening and thank you for standing by for New Oriental's FY 2023 Third Quarter Results Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I'd now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead.

Hello, everyone, and welcome to New Oriental's third fiscal quarter 2023 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, Stephen Yang, Executive President and Chief Financial Officer, and I will share New Oriental's latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the view 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.

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. It's our great pleasure to announce that upon the completion of the restructuring process and the introduction of our new businesses, we have managed to deliver a set of remarkable financial results this quarter with both top line and bottom line beating the expectations. This result is also boosted by the macro trends of economy recovery as the pandemic subsides. Business activity is resuming as people raise their confidence in consumption while we observe the demand for our products and services is gradually increasing. We have also achieved a GAAP operating margin and non-GAAP operating margin of 8.8% and 11.7%, respectively, for this quarter. Our key remaining business have continued to demonstrate solid recovery.

In particular, our overseas test prep and overseas study consulting business have performed exceptionally and recorded continuous year-over-year revenue increment thanks to the strong post COVID recovery across (technical difficulty). Our restructured business model, streamlined cost structure coupled with the emerging new business have not only helped us yield better than expected margins in this fiscal quarter; but also effectively diversify our business and enable us to offset certain historical seasonality. As we head into the fourth quarter; our solid profitability, strong performing remaining business lines and emerging new business initiatives in this quarter reaffirm our belief in sustaining a healthy growth of our market share and pursuing innovative endeavors as we restlessly sail in an encouraging environment of recovery.

Now I'd like to spend some time to talk about the quarter's performance across our main business lines and new initiatives to you in detail. Our key remaining business got a promising trend and the new initiatives have shown positive momentum. Breaking it down, the overseas test prep business recorded a revenue increase of 13% in dollar terms or 23% in RMB terms year-over-year for this quarter. The overseas (technical difficulty) of about 5% in dollar terms or 13% in RMB terms year-over-year for this quarter. The adults and university students business recorded a revenue decrease of 3% in dollar terms or 5% increase in RMB terms year-over-year for this quarter. As mentioned in the previous quarters, we have also launched several new initiatives, which mostly revolve around facilitating students' all-round development. I'm glad to share with you that these new initiatives have continued to exceed our expectations by sustaining a positive momentum and generating meaningful profits to the group.

First, the nonacademic tutoring courses, which we have offered in over 60 cities, focuses on cultivating students (technical difficulty). We're happy to see (technical difficulty) [218,000] student enrollments recorded in this quarter. The Top 10 cities in China have contributed about 60% of the revenue of this business.

Secondly, the intelligent learning system and device business is a service designed to provide a tailored digital learning experience for students as we utilize our past teaching experience, data, technology to provide personalized target learning and exercise content. Our continuous investments in technology has built a competitive edge, which drives our navigation amidst changes and challenges from the past year. We have tested this adoption in around 60 existing cities with 108,000 active paid users in this quarter and are delighted to see improved customer retention and scalability of this new business. The revenue contribution from the Top 10 cities in China is around 60%.

Meanwhile, the study tour and research camp business is an initiative that aims at offering students of K12 and university ages the opportunity to fully leverage their free time to broaden the scope knowledge and cultivate subject interest. We have conducted these study tour and research camps in over 50 cities across the country. The revenue contribution from the Top 10 cities in China is over 55%.

Last, but not least, our smart education business; which comprises smart teaching, smart hardware, science, technology, innovation, education and other services; serves the local governments, education authorities, schools and kindergartens. Our education materials and digitalized smart study solutions, a self-learning system which leverages the advanced technology, enable students to have complete control over the pace and flexibility of learning in an age where remote learning becomes increasingly mainstream.

We also offer exam prep courses designed for students with junior college diplomas to obtain bachelor's degrees. The above mentioned business have been gaining wide traction and contributes the overall growth of the company and has attained incremental profits since the last quarter.

With regards to our OMO system, we continued our efforts in developing and revamping the platform and kept leveraging our educational infrastructure and technology strength over our remaining key business and new business to provide more advanced and diversified educational service for our customers. During the reporting period, we invested $26.8 million in the quarter to further improve and maintain our OMO teaching platform.

Now I'd like to give you all an update on East Buy's latest performance. During the reporting period, East Buy has proved itself as a successful business model with instrumental breakthroughs in both business operations and financial performance.

The business has continued to offer a remarkable contribution to the company's overall revenue and profit growth. East Buy continued to invest substantial resources in improving product quality and variety under its private label and finetune its customer-centric strategy and content caliber during the reporting period. East Buy remains rigorous in applying stringent standard in supplier selection to only source products of top-notched quality and safeguards active collaborations with SF Express and the JD Group to continuously refine delivery process and service. To set itself apart from conventional livestreams, East Buy also upholds its unique feature of integrating intelligence dissemination alongside product sales with the vision to foster nationwide cultural and knowledge sharing. The series of the East Buy's in-person live streaming and participation in cultural documentaries and exhibitions have not only increased the traffic to East Buy's platform and boost sales, but also elevated audience engagement and awareness on the preservation of Chinese cultural resources.

It's inspiring to see that East Buy has grown significantly since inception and has not only become a well-known platform for promoting healthy top quality and cost effective products with loyal customer base, but also advocates appreciation of the country's cultural assets for the betterment of the community.

With regards to the company's latest financial position, I'm confident to share with you that the company is in a healthy financial status with cash and cash equivalents, term deposits and short-term investments totaling approximately $4.3 billion.

On July 26, 2022 the company's Board of Directors authorized a share repurchase of up to $400 million of the company ADS or common shares during the period from July 28, 2022 through May 31, 2023. As of April 18, 2023 the company repurchased an aggregate of approximately 5.1 million ADS for approximately $157.6 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, please go ahead.

I'd like to walk you through the other key financial details for this quarter. Operating cost and expenses for the quarter were $687.7 million, representing a 9% decrease year-over-year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation expenses, were $666.3 million, representing an 8.1% decrease year-over-year. The decrease was primarily due to the reduction of facilities and number of staff as a result of the downsizing in the fiscal year 2022. Cost of revenue decreased by 0.9% year-over-year to $369.6 million. Selling and marketing expenses increased by 9.5% year-over-year to $102.6 million. G&A expenses for the quarter decreased by 25.4% year-over-year to $215.5 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $194.5 million, representing a 25.1% decrease year-over-year.

Total share-based compensation expenses, which were allocated to related operating cost and expenses, decreased by 28.6% to $21.4 million in the third fiscal quarter of 2023. Operating income was $66.5 million, representing a 147.1% increase year-over-year. Non-GAAP operating income for the quarter was $87.9 million, representing a 179% increase year-over-year. Net income attributable to New Oriental for the quarter was $81.6 million, representing a 166.7% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.49 and $0.48, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $95.4 million, representing a 199.9% increase year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.57 and $0.56, respectively.

Net operating cash flow for the third fiscal quarter of 2023 was approximately $190.5 million and capital expenditure for the quarter were $49.2 million. Turning to the balance sheet. As of February 28, 2023 New Oriental has cash and cash equivalents of $1,329.5 million. In addition, the company had $1,413.5 million in term deposits and $1,568.1 million in short-term investments. New Oriental's deferred revenue balance, which is the cash collected from registered students for courses and recognized proportionally as revenue as instructions are delivered, at the end of the third fiscal quarter of 2023 was $1,163.2 million, an increase of 19.8% as compared to $971.3 million at the end of the third fiscal quarter of fiscal year 2022.

Now I will hand over to Stephen to go through our outlook and guidance.

Looking ahead to the fourth quarter, which has historically been one of our seasonal peak quarter, our key remaining business are in the process of recovery with the opportunity of further taking up market share as the pandemic subsides. As usual, the company remains tireless in seeking new opportunities with greater flexibility and strong cash flows and we are confident embarking on all-round journey that ensures sustainable growth. For our new businesses, the encouraging performance that these business have achieved in the previous quarters proved that we are heading towards the right direction. We firmly believe that business will sustain a healthy growth and generate meaningful profit to the company in the fourth quarter and going forward.

With regards to the learning center and classroom space, we are planning to increase our capacity moderately, which we expect a small quantity of the new learning centers will be opened and classroom areas of some existing learning centers will be expanded in a few major cities. In summary, we expect total net revenue in the fourth quarter of fiscal year 2023, March 1 of 2023 to May 31 of 2023, to be in the range of $801.8 million to $822.7 million, representing year-over-year increase in the range of 53% to 57%. As the profitability we recorded year-to-date has reaffirmed our success and dedication in turning a new page, we're also confident in achieving a satisfactory operating profit level in the full year of fiscal year 2023.

To conclude, we are now taking multipronged operational excellence to accelerate our recovery and anchor sustainable growth.

Simultaneously, we will cautiously research and unveil the potential in new market opportunity and try to apply to new technologies such as AI and ChatGPT into our education and product offerings with the vision to uplift our innovative capability in pursuit of profitable growth and increasing the operating efficiency. We stay committed to seek guidance from and cooperate with the government authorities in [various provinces and municipalities in China, in] (added by the company after the call) alignment with its efforts to comply with the relevant policies as well as to further adjust our business operations as required. I must say that these expectations and forecasts reflect our consideration of the latest regulatory measures as well as the current and preliminary view, which is subject to change.

This is the end of our fiscal year 2023 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for this. Thank you.

(Operator Instructions) Our first question comes from the line of Felix Liu from UBS.

Congratulations on the very strong results. My question is on your forward-looking guidance for the fourth quarter. I know the year-on-year growth looks very impressive. May I know what are the key drivers or the good performing business segments that are driving this fourth quarter growth. And if we look at slightly beyond the next quarter for the next fiscal year, what are the business segments that you expect the fastest growth in FY '24?

I think we remain confident and optimistic about the business performance in the Q4 or the fourth quarter and the new fiscal year 2024. And firstly, I think the macro trend of the economy recovery as the pandemic subsides where we're seeing the people rebuild their confidence in consumption and we're also seeing the products and the demand and the requirement of the service is gradually increasing. And as for the different business lines, the remaining business such as the overseas related business, on demand side we have seen the strong demand for overseas test prep and consulting business. And on supply side, we have seen some players disappear from the market. That means we're facing less competition. So that's why we're optimistic about the overseas related business going forward.

And for our new business, I think the encouraging performance in the Q3 in this quarter and even the last couple of quarters have shown that we are heading towards the right direction and we believe the business will be able to maintain the very strong top line growth and generate more profit for the company. And so that's why we guided the very strong top line growth in Q4 to be in the range of 53% to 57% in dollar terms. If you translate into RMB terms, that would be much more higher. And as for the bottom line wise, I think we're confident in achieving the greater operating profit in the Q4 and the new year. And next year I think the key growth driver will be the number one -- if I run them, the number one should be the new business. We started the new business such as the nonacademic courses since 15, 16 months ago and it grows very fast in this year and also we believe next year the growth rate will be very high. And Sisi, you want to add something?

Just one thing that if you look at Q4's guidance because if you look at historically last year since Q4 is the very first quarter that we did not have the -- we terminated the K-9 academic tutoring. So that's the first quarter to be like-for-like increase. So that's why you compare with previous quarters, the growth rate is higher

Our next question comes from the line of Lucy Yu from Bank of America.

This is Lucy from BAML. I have 1 question on DONG FANG ZHEN XUAN. So if we're looking at the minority interest, it seems that the net profit for DONG FANG ZHEN XUAN has decreased Q-on-Q. Could you please elaborate the reason behind that and how should we think about the earnings contribution from DONG FANG ZHEN XUAN going forward?

I think during this quarter the East Buy has proved itself as a successful business model and this business contributes to offer the remarkable contribution to the company overall revenue and profit margin. And this quarter East Buy continued to invest the substantial resources in improving the product quality and collaborates with the JD and the SF Express to provide better delivery services and so they invested some money. But I think I can't tell the detail of the margin analysis or the profit analysis because of the compliance. And so I think next quarter the DONG FANG ZHEN XUAN management -- East Buy's management will share with you guys more information in detail.

Our next question comes from the line of Candis Chan from Daiwa.

Congratulations on the very strong set of results. My questions are related to the new businesses. So firstly, may I know the rough breakdown of our new initiatives revenue? And my second question is about the longer-term business direction going forward. Just now we see that our business has become more diversified and not only East Buy has done very well, even for New Oriental livestream channels on Douyin also see very decent GMV trend. So Michael like also talked about you enter into the cultural tourism as well. So I'm just wondering like what will be the key development areas for New Oriental in the following years and I would like to know more about whether we have any plans to enter into the learning device market as well or some other new areas?

Okay. As for the education nature new initiatives actually if you look at the revenue contribution, the biggest one is the nonacademic tutoring. So this is the one that we're using our existing teaching resources and developing the content very, very quickly and also use our own existing channels to get students. So this year is actually the year 1 to largely develop these new kind of initiatives and we are seeing that the demand is very strong and also the retention and also the operating data are trending towards a very good situation. And also we are confident for this business to continue to grow very nicely and also contribute more and more meaningful revenue and also get very good profitability as well. And also the second biggest education nature new initiative is the intelligent learning device business. Also this is a good way to have students to do the self-study using our technology, get access to our teaching system using the hardware, the learning machine.

So this is also something very new and it's a new model and new product, but also gaining a lot of interest from our customers and we're also using our existing channel like all the local schools and learning centers to roll out these new products and also getting satisfactory retention and renewal of tuition fees. And also this is a business that we are also feeling confidence to contribute more and more revenue and also have good profitability as well. And next to these 2 -- actually these 2 already contribute vast majority of our educational new initiatives. We do have confidence in several other ones like the study tour business, camping business which actually had some negative impacts during the pandemic period in last 1 year. But we're confident for the future for this new initiative because the high demands we're seeing from local markets and also we also have very strong resources to develop this new business and together with several other ones that we have mentioned on the call. So we keep making efforts on developing all these new initiatives and hopefully, all these directions are all right and also contribute more and more meaningful revenue and profit.

And let me answer your last question about the cultural tourism. I think some of you may have read online that Michael said that we are considering expanding the cultural tourism business. I think it's indeed a big potential in the country. And as you know, we do have a lot of teachers, some of them are star teachers. I think going forward by leveraging our teachers' knowledge in general studies, cultural studies and history; I think we believe we would be able to offer one of a kind cultural tourism offering. Combined with the entertainment and the educational -- the cultural education for all age groups; the kids, the college students and like the old people, right, and for all ages. And in addition, I think we may also be able to leverage our distribution channel like DONG FANG ZHEN XUAN and East Buy and the other online streaming channels within the company and also we do have a lot of schools and learning centers as the distribution channel for the new business. But now we are still at a very early stage of planning and evaluating the new business at the moment. So if we have any updates, we'll keep you updated.

(Operator Instructions) Our next question comes from the line of Linda Huang from Macquarie.

This is Linda from Macquarie. My question is quite simple. My key question is regarding for our cash because I still see that we keep piling up the cash and already operating cash flow generation ability is also quite strong. So in addition to the share buyback, we think about use the other ways such as like a special dividend return to the shareholder? So that would be the first one. And the second question is regarding about the nonacademic tutoring business. So Sisi just mentioned about that we're also seeing very good retention rate. So what is this retention right now and how does this compare to the regulation period?

As you know, we announced $400 million share buyback program last year so till now we purchased $157 million from the open market to repurchase the share back. And I think our thinking is about the valuation. At this time, we should see the share buyback. Historically, sometimes we bought the share back, sometimes we pay the special dividend. So this time the share buyback. Next time I think it depends on the decision made by the Board of Directors next year. And the retention rates for the nonacademic course, I think for the nonacademic tutoring courses, the retention rate is over 70% in this quarter. You saw we are driving up the retention rate compared to before. And for the intelligent learning system devices, I suggest that the renewal rate is [around] (corrected by the company after the call) 60% already.

Next we have a follow-up question from the line of Candis Chan from Daiwa.

I just want to follow up on the profitability because you just mentioned for new businesses essentially they are now contributing very strong revenue and also good profitability. Can you share a little bit more on the margins of the new businesses, particularly for the nonacademic tutoring or the intelligent learning devices?

Yes. I think the new business -- overall, the new business margin is over 10% already. We started business just 15, 16 months ago so it's a quite new business. As we said, we made cautiously about the new investments of the new business so it takes less time to make it profitable for the new business. And I think we expect the margin of new business will go up in the Q4 and the new year. It's okay? Is it clear?

Yes, that's very helpful. Thank you.

Our next follow-up question comes from Felix Liu from UBS.

I just want to have a follow-up on the market landscape of nonacademic tutoring. I know we have most of our revenue coming from the Top 10 cities. What do you see as the biggest growth opportunity ahead? Do you think it's more about ramping up our market share in existing top cities or do you see a lot of opportunity in other cities especially lower tier cities for nonacademic tutoring?

I think as I said, we're seeing less competition for the nonacademic tutoring business. Actually we are taking market share in both top tier cities and low tier cities and going forward, I think almost all the cities the growth will be fast. And Sisi, you want to add?

Yes. Actually now we're seeing the Top 10 cities contributing like [around] (corrected by the company after the call) 60% of overall revenue for this category. And I think the growth will come from both taking continued expense and taking shares. It's very, very early stage for this kind of new services and also the new market and we definitely have opportunity to take market share in all the existing cities especially these kind of major cities, top tier cities. And also our feeling is that the demand for this kind of nonacademic tutoring is not only for higher tier cities, but also like all the existing cities we are in. Like around 70, 80 cities that we still have all the schools and learning centers and we use our existing educational infrastructure and also leveraging our brand name, educational brand name. We have the advantage to expand this kind of new business and the demand is very high.

(Operator Instructions) Thank you. So we now approach the end of the conference call. I will now 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 conference call. Thank you for participating. You may now disconnect.