New Oriental Education & Technology Group Inc (EDU) 2025 Q1 法說會逐字稿

Good evening and thank you for standing by for New Oriental's FY 2025 first quarter results earnings conference call.

(Operator Instructions) Today's conference is being recorded.

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

Thank you.

Hello, everyone and welcome to New Oriental's first fiscal quarter 2025 earnings conference call.

Our financial results for the period were released earlier today and available on the company's website as well as on newswire services.

Today, Stephen Yang, Executive President and Chief Financial Officer and I will share New Oriental's latest earnings results and business updates in detail with you.

After that Stephen and I will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the US Private Security Litigation Reform Act of 1995.

Forward-looking statements involved 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 findings with the SEC.

New Oriental's 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 the 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.

We're pleased to announce that the company has forged a healthy growth across our key business line in alignment with the expectations with the top line growth of 30.5% this quarter.

Total net revenues excluding revenues generated from East Buy private label products and live streaming business increased by 33.5% year over year.

In particular, we're impressed by the highly encouraging growth that the new endeavors have anchored, which has significantly contributed to the core building blocks of the company.

At the same time, New Oriental's bottom line performance for our core educational business has also achieved healthy yields.

Operating margin wise, we have excluded the operating margins generated from East Bay for this quarter for a better reflection of the performance of New Oriental's core educational business.

The operating margin and non-GAAP operating margin for this quarter have reached 23.7% and 24.4% representing 370 basis points and 220 basis points improvement year over year, respectively.

We're pleased to see the tremendous efforts that we devoted into our offerings and platforms sparking positive growth across our business lines.

Our commitment to maintaining a healthy profitability and market share stands firm as we strive to create sustainable value for our customers and shareholders in the long term.

Now, I would like to spend some time to talk about the quarter's performance across our existing business lines and new initiatives to you in detail.

Our key remaining business continued to secure encouraging trends this quarter.

Breaking it down, the overseas test prep business recorded a revenue increase of 19% year over year for the fiscal -- first fiscal quarter of 2025.

The overseas study consulting business recorded revenue increase of about 21% year over year for this quarter.

The adults and university students business recorded a revenue increase of 30% year over year for this quarter.

The ongoing investments on our new educational business initiatives which mostly revolve all round facilitating students all around development have propelled the company's engine to innovation, having secured strong momentum in their respective ventures.

Firstly, the non-academic tutoring courses which we have offered in around 60 existing cities focuses on cultivating students innovative ability and comprehensive quality.

We're pleased to receive solid interest with a total of approximately 484,000 student enrollments recorded in this quarter.

The top 10 cities in China contribute over 60% of this business.

Secondly, the intelligent learning system and device business has been adopted in around 60 [existing] (added by company after the call) cities.

We're happy to see elevated customer retention and scalability with approximately 323,000 active paid users reported in this quarter.

The revenue contribution of these initiatives from the top 10 cities in China is around 55%.

Our smart education business, educational material and digitalized smart study solutions have continued to contribute material yields to the overall advancement of the company.

In summary, our new educational business initiatives have recorded a revenue increase of 50% year over year for this quarter.

In addition, our newly integrated tourism related business line is now comprised of diverse offerings of cultural trips, study tours in China and overseas, as well as the camp education.

Within the business line, our study tour and research camp business for students of K-12 and university age achieved tremendous growth this quarter with an increase of 221% in revenue year over year for this quarter.

We have operated study tour and the research camp business in over 55 cities across the country.

With the top 10 cities in China offering over 55% of revenue share of this new business.

The number of top notch tourism offerings were also piloted to expand our reach to all aged groups including the middle age and elderly individuals around 30 featured provinces in China and globally.

This inspiring growth this quarter has affirmed our devotion to deliver premium offerings to our valued customers.

And we believe this new business line will contribute continuously meaningful revenue from this fiscal year.

With regards to our OMO system, we have [persisited] (corrected by company after the call) in revamping our platform and leveraged our educational infrastructure and technology edge on remaining key business and new initiatives with a vision to provide advanced diversified educational service to customers of all ages.

In this quarter, a total of $24.6 million has been invested in our OMO teaching platform, which equips us with the flexibility to maintain unrivalled service to students.

In terms of the East Buy performance, since April 2022 East Buy has launched a total of 488 SKUs in private label products in just two years.

Our product categories have expanded into well diversified product mix to date.

During the reporting period, East Buy also uplifts the significance of offering only product with high cost performance which has proven effective in reiterating East Buy's values in the minds of our current and new users.

In addition, thanks to our multichannel strategy that has driven sustainable growth.

East Buys footprint have expanded from our live streaming channels to the likes of Tmall, JD, Pinduoduo and Xiaohongshu, as they amplify our reach to a wider [consumer] (corrected by company after the call) base.

In the [upcoming] (corrected by company after the call) year, East Buy will explore offline channels by examining the partnership with offline schools owned by new Oriental brand and other parties,as part of our vision to initiate offline sales network and enhance our brand awareness to a greater extent.

With regards to the company's latest financial position, I'm pleased to share that the company is in a healthy financial status with the cash and cash equivalents, term deposit and short term investments totaling approximately $4.9 billion.

Now, I would also like to take the opportunity to highlight that the company's Board of Directors approved a share repurchase program in July 2022 under which the company is authorized to repurchase up to $400 million of the company's ADS or common shares through the next 12 months.

The company's Board of Directors further approved to extend the effective time of the share repurchase program to May 31, 2025, and the increasing the aggregate value of the shares that the company is authorized to repurchase from $400 million to $700 million.

As of October 22, 2024 the company repurchased an aggregate of approximately 9.8 million ADS for approximately $457.9 million from the open market.

Now, I will turn the call over to Sisi to share with you about the key financial.

Sisi, please go ahead.

Thank you, Stephen.

I'd like to share our key financial details for this quarter.

Operating costs and expenses for the quarter were $1,142.3 million representing a 27.6% increase year over year.

Non-GAAP operating costs and expenses for the quarter, which excludes share based compensation expenses were $1,135.4 million, representing a 32.8% increase year over year.

The increase was primarily due to the cost and expenses related to accelerated capacity expansion for educational business and newly integrated tourism related business.

Cost of revenues increased by 32.3% year over year to $583.5 million.

Selling and marketing expenses increased by 42.3% year over year to $193.7 million. G&A

expenses for the quarter increased by 15% year over year to $365.1 million.

Non-GAAP G&A expenses which exclude share based compensation expenses were $354.5 million, representing a 22.1% increase year over year.

Total share based compensation expenses which were allocated to related operating costs and expenses [decreased] (corrected by company after the call) by 82.7% to $6.9 million in the first fiscal quarter of 2025.

Operating income was $293.2 million, representing a 42.9% increase year over year.

Non-GAAP income from operations for the quarter was $300 million representing a 22.6% increase year over year.

Net income attributable to New Oriental for the quarter was $245.4 million, representing a 48.4% increase year over year.

Basic and diluted net income per ADS attributable to New Oriental were $1.49 and $1.48, respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $264.7 million, representing a 39.8% increase year over year.

Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $1.61 and $1.60, respectively.

Net cash flow generated from operation for the first fiscal quarter of 2025 was approximately $183.2 million and capital expenditures for the quarter were $80.2 million.

Turning to the balance sheet, as of August 31, 2024, New Oriental had cash and cash equivalents of $1,147 million.

In addition, the company had $1,513.8 million in term deposit and $2,248.6 million in short term investments.

New Oriental deferred revenue which representing cash collected upfront from customers and related revenue that will be recognized as the service or goods are delivered at the end of the first quarter of fiscal year 2025 was [$1,733.1 million], an increase of 23.7% as compared to $1,401.4 million at the end of the first quarter of last fiscal year.

Now I'll head over to Stephen to go through our outlook and guidance.

Thank you, Sisi.

With the encouraging performance achieved from our diverse business lines backed by our solid educational resources that have stood the test of time.

We are bullish on maintaining a healthy growth for our core educational business.

Simultaneously, we will devote ongoing investments in expanding our new tourism related business.

We believe that these inputs will nourish more expensive nationwide rollout of our tours in this fiscal year.

While we strive to safeguard a healthy balance between revenue and profitability growth, we will also cautiously manage our capacity expansion and hirings to underpin the development of our educational business in this new year.

We plan to increase our capacity by around 20% to 25% for this fiscal year.

The most new openings will be launched in the cities with better topline and bottom line performance.

Rest assured that we will closely monitor the pace and scale of new openings in accordance to the local operations and financial performance during the year.

Every second quarter of our financial year tends to be a slower period due to the seasonality of our business.

That being said, we remain confident in attaining a steady growth and satisfactory operating profit for the full fiscal year.

We expect total net revenues excluding revenues generated from East Buy in the second quarter of the fiscal year 2025 September 1, 2024 to November 30, 2024 to be in the range of $851.4 million to $871.8 million, representing year over year increase in the range of 25% to 28%.

In addition, based on our current estimation, we expect the operating margin for the whole company except for East Buy for the fiscal year 2025 will expand year over year.

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.

To conclude, New Oriental will always pursue premium offerings to our customers simultaneously achieve sustainable growth.

To achieve that we will continue to devote necessary resources on research and application of new technologies such as AI and ChatGPT into our educational and product offerings with a vision to uplift our strengths to pursue the growth and operating efficiency.

We will also continue to seek guidance from the -- from and cooperate with the government authorities, comply with the relevant policies, guidelines and any related regulations as well as to further adjust our business operation as required.

As always, we will work diligently on enhancing the nation's education level to strengthen the leading position.

So as to unveil further potential across all our business line and realizing our vision, this is the end of our fiscal year 2025 Q1 summary.

At this point, I would like to open the floor for questions.

Operator, please open the call for these.

Thank you.

(Operator Instructions)

Felix Liu, UBS.

Good evening, management.

Thank you for taking my question.

My question is on your second quarter guidance.

We noticed that in the first quarter, your capacity expansion was over 30% year on year by the number of learning center.

However, if we look at your second quarter guidance, it's slower than your capacity expansion in the first quarter.

So how should we think about the gap between capacity growth and the revenue guidance.

And could management share your outlook for second half growth?

Well, do we expect to see the revenue growth to converge with capacity?

Thank you.

Yeah, I think -- thank you, Felix.

As for the Q2 guidance, we give the guidance of the top line growth will be in the range of the 25% to 28% in dollar terms year over year.

But as you know, every second quarter tends to be a slower quarter due to the seasonality of our education business.

And -- but we will remain confident in attaining a steady growth of around 30% year over year for the whole year.

So that means we expect the revenue growth excluding East Buy in Q3 and Q4 will be accelerated compared to the growth of the Q2.

So as you know even though we have seen some impacts of the existing economic environment like the overseas related business.

But we will expect the full fiscal year revenue growth which except for East Buy will be around 30% year over year.

And yeah, we opened more learning centers in last year's Q3 and Q4, but we have seen -- we ramped up the learning centers much faster than before.

And so -- and I think we will fill the new learning centers with more students into the learning centers especially in the Q3 and Q4.

So we're quite optimistic about the top end growth for the whole year.

Thank you, Felix.

Thank you.

Thank you.

Alice Cai, Citi.

Good evening, Stephen and Sisi.

Thanks for taking my question.

I have a question about the capacity expansion.

Since Q2 is typically a low season, are you considering slowing down capacity expansion during this period to improve margins?

And do you expect CapEx capacity to be concentrated in Q1 and Q4 for FY25?

And for the upcoming quarters, will you focus on encouraging penetration in existing cities rather than entering new ones?

Thanks.

Yeah, by the end of this quarter Q1, we have added around 6% new capacity.

And so yeah, as I said, we plan to increase our capacity expansion by 20% to 25% for the whole year.

And last year we opened more learning centers, but this year, I think we will open the learning center by more healthy pace 20% to 25%.

And yeah, as I said, we ramped up the learning centers much faster than before.

And so I think as the whole year wise, I think the margins, you will see the margins expand for the whole year.

And in the Q2, yeah, we might need some like margin -- like tiny margin pressure in the Q2 because of the seasonality, Q2 is the low season.

But we do believe for the whole year, the margin will be expanded for the education business except for East Buy.

Thank you, Alice.

Thanks.

Yiwen Zhang, China Renaissance.

Yeah, great.

Thanks for taking my question.

So my question is a follow up on the margin.

So it's very glad to see our adjusted operating margin increase 220 bps on YoY basis, reversing the dip in the previous quarter.

So can you discuss more about what is driving this improvement?

And how should we think about the drivers to play out in the rest of the year?

Thank you.

Thank you, Yiwen.

You asked the question about the margin.

Let us start with the margin analysis of this quarter.

That the non-GAAP OP margin for the educational business, which excluding East Buy was expanded by 220 basis points year over year.

As you know, I think last year Q1 OP margin was high based.

So that means we have a hard comparison this quarter, but we still got the margin expansion by 220 basis points year over year.

I think this is mainly due to the following reasons.

Number one, we're pleased to see that the business alliance achieved the positive topline growth for all business lines.

And number two is we started to bear fruit of the learning center expansion of last year.

It has perhaps the overall utilization rate up and get more operating leverage.

Number three, we started to make cost control in the whole company and we leveraged more overhead in this quarter.

Even though we even spend more money on the new tourism business, but the educational business except for East Buy, we still got margin extension higher than we expected.

And for the margin outlook, due to the seasonality of the business every second quarter is the low season.

So we're likely to experience some minor pressure in the second quarter.

But as I said, we were quite confident about the Q3 and Q4.

So we are optimistic on the margin profile for the educational business excluding East Buy in the whole year.

And I think we expect that the whole year, the non-GAAP OP margin will be expanded for the whole year.

Thank you, Yiwen.

Lucy Yu, Bank of America.

Hi, Stephen.

Just to clarify, Stephen, you said the second quarter, non-GAAP OP margin will be under pressure.

Do you mean that excluding East Buy, we're going to see margin contraction on a year over year basis?

So just to clarify on that.

And actually my question is on the cultural tourism.

You did mention that camp revenue was up by over 200% year over year.

So may I know like how much revenue that cultural tourism contributed this quarter?

And is that business segment loss making or profit making for this quarter?

Thank you.

Yeah, the margin -- the tiny margin pressure in Q2.

What I said is only related to the educational business.

And because we guided for 25% to 28% top line growth and the Q2 is the low season of the educational business.

So I think that you will see more leverage in Q3 and Q4.

And so this is the -- so as I said, we were quite optimistic about the margin profile in Q3 and Q4.

And the tourism business, yeah, the Q1 was the peak season for the tourism business, such as the camp business and the overseas study tour, even domestic study tour business.

So the revenue of the Q1 was somewhere around $90 million of the tourism business, this is the revenue in Q1.

And yeah, we are profitable in Q1 because of the peak season.

But for the whole year, I think we will see losses in the tourism business.

And it's just the first year, we need more time to testify the products and the business models for the tourism business.

But we're quite confident about the development of the tourism business.

Thank you, Lucy.

Thank you, Stephen.

Timothy Zhao, Goldman Sachs.

Hi, Stephen.

Thank you for taking my question.

My question is regarding your K-12 new initiatives.

Just wondering if you can break down in terms of the revenue growth between the non-academic tutoring and the intelligent learning devices and services.

And the related question on the specific segment is I do notice that I think for the non-academic tutoring, the quarterly enrollment for the past quarter grew by around 11% year on year compared to close to 40% a quarter ago.

Just wondering if you can elaborate more on the growth and what kind of growth that we should expect on the enrollment.

I think for the following quarters versus only 11% for this quarter.

Thank you.

Sisi, you share with the team about the revenue breakdown within the new business?

Yeah, the new K-9 educational related, including the non-academic tutoring and intelligence learning device business grew by over 50% in first quarter-- 56% and both are growing at similar rates.

And

--

Yeah.

And to your second question about the enrollment.

Yeah, the enrollment growth of the K-12 seems to be low in this quarter because we open the summer enrollment window earlier than that of last year.

So we -- so that means we reported more student enrollment in last year Q4.

This is kind of the timing difference.

And so if you combine the Q4 and Q1, the enrollment growth will be normal and is very strong, absolutely.

And as I said, even though the Q4 -- the Q2 will be the low season, but we're quite confident about the whole year the top line roles.

And I think we will see even the accelerating top line growth in Q3 and Q4.

And for the new businesses, I think we still keep the same guidance of the 40% to 50% top line growth for the new businesses for the full year.

Thank you, Stephen.

Thank you, Sisi.

Thank you.

Charlotte Wei, HSBC.

Congratulations on your strong results.

Thank you, Stephen and Sisi for taking my question.

Could you please share more color on the growth in different business segments in the second quarter?

Thank you.

Yeah, actually

--

Second quarter?

Yeah, you're asking the guidance -- for the guidance quarter -- Q2?

Guidance breakdown.

Yeah.

Okay.

Yeah, overseas related business will grow about over 20%.

And domestic test prep university students business will grow over 30% -- 30%, 35% and high school business grow by 20%.

And the new business will grow -- by around 50%.

Thank you very clear.

Thank you.

DS Kim, JP Morgan.

Hi, Stephen.

Hi, Sisi.

Thanks for taking my question.

I just have a follow up on all your points that you made on new businesses if I may.

Did you say, this past quarter, new businesses grew over 56%, did I hear it correctly?

Because from the press release, I think, I mean, it's a minor thing but a press release seems to say 49.8% this quarter.

So just wanted to double check if I'm looking

--

Yeah.

That's the growth for non-academic tutoring and intelligent learning device, over 55%.

Oh, okay.

So that means that this new educational business initiative has something else as well.

And may I ask what, what else is here.

And also, can you -- if you could give us the breakdown in terms of like current revenue last year revenue between non-academic tutoring versus intelligence and some others?

How to mix within this subsegment?

Yeah.

Actually every quarter the contribution is similar.

So the non-academic tutoring is roughly about more than half of the new educational business.

And roughly about one-third is from the intelligent learning device business and these two are growing faster than the rest smaller categories.

And smaller category if I may is like book sales or may I check out what else we have here?

Just to double check.

Yeah, intelligent books and also some to be business.

Got it.

Thank you very much.

And if I may follow up on earlier, you mentioned and kindly gave us a breakdown of the growth momentum for 2Q guidance.

Can I doublecheck whether that was based on US dollar versus renminbi?

And if you could provide this first quarter, similar breakdown between a segment growth, if possible, it would be great.

Thank you so much and I'll go back to the queue.

Q1 guidance and just to share about the exchange rates we are using.

Yeah, we -- can share with you the exchange rate that we're using for Q1 quarter and the guidance quarter.

Is that okay?

Yes.

Earlier growth, was it based on USD?

Yes.

Yeah, Q1 exchange rate is [$7.22. And Q2 is $7.08] roughly.

Thank you very much.

(Operator Instructions)

Lucy Yu, Bank of America.

Stephen, sorry, just wanted to follow up on the second quarter margins.

I know that you said it's a low season, but if you're looking at the top line is still growing at over 25% to like 28% which is not low.

So why would -- should we think that the margin will decline or contract on a year over year basis?

Is there any other like investment that you're going to step up or some other reasons?

Thank you.

Yeah, Q2 is the low season for all business lines, the overseas related even for the K-12 business and the tourism business, we have tiny revenue from the tourism business.

So we said we will suffer the loss of the tourism business in Q2.

And so if you look at the numbers that historically, -- Q2 every year will be the low margin profile for the whole company.

And yeah, as I said, we opened more learning centers in the second half of the last year, but we will still need more time to bring the students into the new learning centers so yeah.

And I must mention that, we're using the conservative approach to give the margin guidance as always, Lucy.

Understood.

Just may I follow up that how much like loss or margins drag have you sucked in from tourism in second quarter?

Thank you.

I think it's too early to say that, but it is still a margin drag.

And also, we will spend some more expenses even in the marketing and in the coming Q2.

But I think we will -- yeah, as you said, we will spend more money on the marketing in Q1.

But we started to control the [selling and marketing] in Q2.

We are still in the process.

And so that's why we guided the margin timing pressure in Q2.

But we expect we will do better than we expected on margin wise in Q2.

Understood, Stephen.

So let's put it this way.

So if we excluding East Buy, if we're excluding culture tourism, will the rest of the revenue -- rest of the business still see margin contraction in second quarter.

Yes, I think so.

I think the -- if you take out the impact of the tourism business, I think the margin will be better than the overall company margin profile except for East Buy.

We don't give the guidance of the East Buy by top-line growth and the margin.

Understood.

Thank you so much.

Thank you, Lucy.

Timothy Zhao, Goldman Sachs.

Great.

Thank you, Stephen and Sisi.

I think a follow up question on East Buy.

I think one is on, I think your revenue guidance, I guess I think there was a transaction between EDU, your parent company and East Buy regarding the East Buy's education period previously.

Just wondering in your guidance for the EDU core, basically the EDU educational services, does that include the East Buy's previous education business?

And secondly, I think for East Buy, I think the implied revenue for East Buy actually dropped quite significantly on a Q on Q basis.

Just wondering if you can elaborate what is the background or the rationale behind that, and how should we think about the revenue going forward?

Thank you.

The guidance of Q2 top line growth in the range of 25% to 28% is the core education business except for East Buy, okay.

And I'm very glad to hear from you about the question of the East Buy.

But I'm afraid I'm unable to share the latest financial results of the East Buy details.

They will announce their half year report next quarter.

So next quarter, I think we -- the both party, the parent company and East Buy will announce the East Buy's financial status in much more detail next quarter.

Sure.

So just to clarify on the guidance, I think if you look at East Buy's previous half year financials for their education business, which is now part of EDU core business is around like a USD30 million, USD40 million per quarter.

Just wondering when you talk about the guidance for EDU core education business.

So when you look at on a year on year basis, the last year number for EDU core education business that also includes the East Buy's education business, right?

Yeah, correct, Timothy.

So your understanding is totally correct.

So when we give guidance, we do an apple to apple comparison.

So both the comparison quarter and the guidance quarter, both include the educational portion of East Buy's business.

Is that clear?

Yes.

Thank you, Sisi.

Thank you, Stephen.

DS Kim, JP Morgan.

Hello, sir.

Hi.

Sorry, I didn't mean to beat a dead horse here.

But some investors were asking me just now on this.

So I thought it would be better to clarify things on new businesses again, sorry.

So just to be clear when you earlier commented that next quarter growth guidance of new businesses of over 50% and you mean to include other smaller businesses or only non-academic and intelligent learning devices, i.e., if you compare that 50% or over 50% growth next quarter, how does that number look for this quarter -- August quarter?

And then similarly for high school business, we expected a 20% growth as you said next quarter.

How was the growth this quarter?

Would you be able to comment on that?

Sorry for a redundant question.

Yeah, to make it clear, for Q2's guidance on overall new initiatives, new educational initiatives including all the things the growth is around 45%, 46%.

And if you only look at non-academic tutoring and the intelligent learning device, the two key ones, the growth is over 50%, okay.

And the high school business Q1's growth is about 20% -- 20% to 21%.

Thank you.

That's very clear.

So about 4%, 5% deceleration for the new businesses in terms of apple to apple, which I think is pretty great given that the base got -- the coms got much tougher.

So thank you for the clarification.

Okay.

Thank you.

We are now approaching 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.

Thank you again for joining us on 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 and you may now disconnect.