New Oriental Education & Technology Group Inc (EDU) 2026 Q2 法說會逐字稿

Good evening and thank you for standing by for New Oriental's FY 2026 second-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 would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead.

Thank you. Hello, everyone, and welcome to New Oriental's second fiscal quarter 2026 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 involving 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 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. I am pleased to report a strong set of results for the second fiscal quarter of 2026. Our continued focus on our operational efficiency and disciplined resource management has been a key driver of our solid performance and continues to support our path to sustainable profitability.

We are delighted to see strong profit growth, accompanied by a significant improvement in non-GAAP operating margin, up more than 4 percentage points. Again, exceeded our expectations. This quarter, total net revenue grew 14.7% year over year to $1.19 billion. Non-GAAP operating income more than tripled, rising 206.9% to $89.1 million. Non-GAAP net income attributable to New Oriental increased 68.6% to $72.9 million.

Our core business remains steady, and I am pleased to share that our new initiatives are gaining traction and making meaningful contribution to the group's overall performance. For the second fiscal quarter, our K-9 new educational business and high school tutoring business reported accelerated year-over-year revenue growth, outpacing the previous quarter.

Overseas-related business have shown resilience, delivered modest revenue growth despite the ongoing macroeconomy headwind, exceeding our earlier conservative expectations. Overseas test prep business recorded a revenue increase of 4% year over year. Overseas study consulting business recorded a slight decrease of about 3% year over year. Our adults and university students business recorded a revenue increase of 13% year over year.

As for our continued investments in new education initiatives, including non-academic tutoring and our intelligent learning system and devices, delivered solid, sustainable results. Revenue from these business grew 22% year over year this quarter.

Our non-academic tutoring business have been rolled out to around 60 existing cities. Market penetration has grown steadily, particularly across high-tier cities. The top ten cities contribute over 60% of the revenue.

As for our intelligent learning system and device business that has been launched in around 60 cities, we are encouraged by improved customer retention and scalability of the new initiative. The top 10 cities contributed over 50% of this business.

Turning to our integrated tourism-related business. Our domestic and international study tours and research camp for K-12 and university students were held in 55 cities across China, with the top 10 cities contributed over 50% of the revenue.

In parallel, our newly launched tourism offering for middle aged and senior citizens has been well received, now available in 30 key provinces and international markets. We've expanded our product portfolio to include culture travel, China study tour, global study tour, and camp education, all designed to deliver enriching experience through culture and knowledge sharing and personal growth.

We're now also exploring opportunities in health and wellness sector for seniors with partners in over 30 health and wellness bases in locations such as Hainan, Yunnan, and Guangxi piloting the segment with a light-asset model.

With regards to our OMO system, our efforts in developing and revamping our online merger offline teaching platform continues. These efforts aim to deliver more advanced and diversified education service to our customers of all ages. A total of $28.4 million has been invested during this quarter to upgrade and maintain our OMO teaching platforms.

Beyond OMO, we continue to focus on our venture in AI encouraged by the positive market feedback. We have been and will continue to refine and embed AI across our offerings to strengthen New Oriental's core capabilities. Simultaneously, we're also leveraging AI to streamline internal operations, thereby boosting efficiency and providing enhanced support for our teaching staff.

As an industry leader, we are dedicated to driving long-term revenue growth through focus on products in innovation and operational efficiency. In the upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investments in AI.

Now turning to the East Buy's performance. I'm pleased to share that during the reporting period, East Buy remained customer-centric and made strong progress in both product development and supply chain enhancements.

East Buy has expanded beyond its original focus on fresh food and snacks to offer a broader, more diversified product range. As of the end of the period, private label SPUs reached 801. New categories include seafood; healthcare products; kitchen condiments; meats; eggs; dairy; personal care, household, and cleaning items; paper goods; home textiles; apparel; and underwear. These offerings are thoughtfully curated to meet customers' growing demands on health, quality of life, and convenience. They've contributed to both sales and profit growth while further optimizing product mix.

Beyond expanding SPUs, East Buy also focused on product iteration, cost efficiency, and targeted marketing to build blockbuster products that resonates strongly with the customers. At the same time, East Buy began exploring offline channels, leveraging strong brand recognition and New Oriental's learning center network. With the vending machine model now profitable in select cities, we plan to scale this initiative nationwide.

All in all, we are pleased to see East Buy refocused and back on track, making a positive contribution to the group, both top-line and bottom line. We expect East Buy to contribute more revenue and profit to the group in the future while continuously enhancing our brand influence.

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

Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating costs and expenses for the quarter were $1,125.1 million, representing a 10.4% increase year over year. Cost of revenues increased by 11.8% year over year to $556.9 million. Selling and marketing expenses decreased by 1.1% year over year to $194 million. G&A expenses for the quarter increased by 15.2% year over year to $374.3 million.

Total share-based compensation expenses which were allocated to related operating costs and expenses increased by 156.8% to $21.4 million in the second fiscal quarter of 2026. Operating income was $66.3 million, representing a 244.4% increase year over year. Non-GAAP income from operations for the quarter was $89.1 million, representing a 206.9% increase year over year.

Net income attributable to New Oriental for the quarter was $45.5 million, representing a 42.3% increase year over year. Basic and diluted net income per ADS attributable to New Oriental were $0.29 and $0.28, respectively.

Non-GAAP net income attributable to New Oriental for the quarter was $72.9 million, representing a surge of 68.6% year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.46 and $0.45, respectively.

Net cash flow generated from operation for the second fiscal quarter was approximately $323.5 million and capital expenditure for the quarter was $23.7 million.

Turning to the balance sheet. As of November 30, 2025, New Oriental had cash and cash equivalent of $1,842.9 million. In addition, the company had $1,609.9 million in term deposit and $1,875.2 million in short-term investment.

New Oriental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as a service or goods were delivered at the end of the second quarter of fiscal year 2026, was $2,161.5 million, an increase of 10.2% as compared to $1960.6 million year on year.

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

Thank you, Sisi. We are very encouraged by the strong results we've achieved this quarter and in the first half of the fiscal year 2026. These outcomes give us greater confidence in our operational resilience and the growth trajectory.

Looking ahead, we will continue to pursue a balanced approach to revenue and profitability growth. We remain committed to cost discipline and sustainable profitability across all business lines. At the same time, we will take a thoughtful strategic approach to capacity expansion and hiring, ensuring that growth does not come at the expense of quality.

We plan to deepen our presence in cities that demonstrate strong top and bottom line performance， while continuing to manage resources carefully. We will closely monitor the pace and scale of the new openings, aligning them with operational needs and the financial performance throughout the year.

Given our positive momentum, including the healthy growth of our K-12 business and the recovery of East Buy, we are now in a more optimistic position regarding our business outlook. We expect the total net revenue for the group, including East Buy, in the third quarter of fiscal year 2026, December 1, 2025, to February 28, 2026, to be in the range of $1,313.2 million to $1,348.7 million, representing year-over-year increase in the range of 11% to 14%.

As for full fiscal year 2026, we are raising our total net revenue guidance for the group to be in the range of $5,292.3 million to $5,488.3 million, representing a year-over-year increase in the range of 8% to 12%.

These expectations reflect our current outlook. Taking into account recent regulatory developments as well as our preliminary view of market conditions, they remain subject to change.

I would like to give you an update on our shareholder return plan for fiscal-year 2026. In October 2025, we announced that pursuant to the previous adopted three-year shareholder return plan, the Board of Directors had approved the ordinary dividend of $0.12 per common share or $1.20 per ADS to be distributed in two installments as part of the shareholder return for the fiscal-year 2026.

As of today, the first installment has been fully paid to shareholders and ADS holders. Details of the second installment will be determined and announced in due course. Additionally, we also announced a share repurchase program in which New Oriental is authorized to repurchase up to $300 million of its ADS or common shares over the subsequent 12 months.

As of January 27, yesterday, we had repurchased a total of approximately 1.6 million ADS for an aggregate consideration of approximately $86.3 million from open market under this share repurchase plan.

To conclude, New Oriental remains firmly committed to sustainable growth, delivering high-quality offerings to our customers and creating long-term value for our shareholders. We also continue to work closely with government authorities across provinces and municipalities in China to ensure full compliance with the relevant policies, regulation measures, and to adjust our operations as needed in business response.

This is the end of our fiscal-year 2026 Q2 summary. At this point, I would like for Sisi to open the floor for questions. Operator, please open the call for this. Thank you.

(Operator Instructions)

Hi. Good evening, Stephen and Sisi. First of all, congratulations on the very solid second quarter results as well as on the lift to your full-year guidance. My question is on your guidance. Can management provide some breakdown on the segment growth as much as you can? I'm keen to understand the key drivers for the lift to your full-year guidance. Thank you.

Yeah. Thank you, Felix. So let us start with this quarter's revenue growth analysis. We are very pleased to see the acceleration. What I mean is the growth of the K-12 business. As you know, our strategy this year is to improve the product quality and service quality. And we have seen good results in Q2. We have seen the higher student retention rates and the better feedback from the customers. So this is the K-12 business. So in Q3, I think the K-12 business will grow somewhere around 20% year over year or more, let's say, it's 20% plus year-over-year growth.

Overseas. Yeah, overseas business, we met some revenue growth pressure. But I think, in the Q2, we still got the top line growth of the overseas test prep by 4% year-over-year growth and we're quite resilient. Actually, I think we are taking the market share from the market. And so in the Q3, let's say that in the second half of the year, I don't believe the revenue growth will be flattish on the overseas-related business. It's still a drag, but I think we will do as good as we can.

College business, well, let's say, 14%, 15% top line growth. Yeah, this is the breakdown.

And so in the second half of the year, I think, we're kind of positive about the revenue growth and the even higher margin because since last year, March 2025, we started to do the cost control and I think we have done a great job. And going forward, we'll do more on cost control. So it will improve the margin expansion going forward in the second half of the year and the year after, Felix.

Okay. This is great progress and thank you.

Alice Cai, Citibank.

Good evening, management. Thank you for taking my questions and congratulations on the strong results. We heard about the business integration between your test prep and consulting units. I have two quick questions.

First, what is the expected modern expansion from this merge? And can it effectively offset the headwinds in the US market? Second, regarding efficiency, how much reduction do you expect in the customer acquisition? And what is your target for the cross-selling rate? Thank you so much.

Yeah. I saw the news of the emerging of the overseas test prep business and the consulting business. As you know, before the merging, overseas test prep units and consulting business provide service to their clients, respectively. And each site has their own management teams, teachers, marketing staff, admin staff.

Now, we put it together. We merged the overseas test prep and consulting business. And I think the merge, let's say, the restructuring aims to provide the customer with a one-stop service. I think we will provide even better service to the customers and also to reduce absolutely some costs and expenses. Because we put it together and I think one person can do more jobs even stronger than before.

So let's wait until the next quarter's earnings call, I will show how much cost we can save or how much can get more revenue or improve the top line growth and save some costs to help the group margin profile. Alice, thank you.

Okay. Thanks. It's very helpful.

Lucy Yu, Bank of America Securities.

Thank you. Hi, Stephen and Sisi. Congratulations. My question is on the margin expansion in the second quarter which has been more than 1 percentage point. Could you please elaborate on the margin extension? What is driving that? And how should we think about the margin expansion magnitude in the second half? Thank you.

Okay. Lucy, your question about the margin, as I said, even though we missed some margin drag from the overseas-related business, we still got good margin expansion in Q2. The non-GAAP OP margin was increased by 470 basis points year over year. I think the margin expansion was mainly driven by the better utilization, the higher operating leverage and cost control, and also the profit contribution from the East Buy.

I think we will continuously focus on operational efficiency and disciplined resource management, let's say, in cost control. We control the learning center expansion plan and we control the marketing expenses. You saw the numbers, the result.

And I think that going forward, Q3 and Q4, the second half of the year, we will get the margin expansion. I won't give the detailed guidance because, typically, we don't give the margin guidance, but we are quite optimistic about the margin expansion in the second half of this year, Lucy.

Understood. Okay. Thank you so much, Stephen.

Yikun Zhen, CITIC.

Good evening, Sisi and Stephen. Thank you for taking my question and also congrats on the strong results. My question is about the overseas business. As you mentioned, overseas business has 4% of cost rates. Actually, the market condition is quite challenging, so just wondering the future trends and the main reasons for the overseas business having such a good result. Thank you.

Yeah. As I said, the overseas-related business needs some impacts of the economy, environments, outside. But I think our team has done a great job. They have shown very resilient in the first half of the year. And we believe that we're taking more market share from all the competitors. Also, I think the group gave the team more support than before because it means some pressure. We should help them to do more jobs.

Going forward, in the second half of the year, I just want to give guidance. Flat is a little bit [dark], low single-digit growth, because the outside environment has not changed. But I believe our team will do a great job as they did in the first half of the year.

Thank you, Stephen.

DS Kim, J.P. Morgan.

Hi, Stephen. Hi, Sisi. Congrats on the great quarter and I hope that this is first of many, many more quarters to come. Before I actually ask my question, can I double check Lucy's earlier question on margin? Can we talk about how much of the margin expansion in 2Q, not the forward-looking, but 2Q came from core education versus East Buy to the extent that you can elaborate? And I have my question after this.

Yeah. Actually, East Buy also reported their first-half results, so you can roughly calculate. So if you take out East Buy, all the rest together, margin extension is roughly about 300 bps margin extension year over year.

Thank you. And my actual question is for our new educational business. It's great that we (inaudible) more than 20% growth. What do you think in your view is the sustainable growth rate for the segment from here? Say, assuming stable 10% capacity expansion for the next three to five years, say, 10% for the group capacity expansion, maybe that means K-9 capacity can grow maybe 15% per annum. And then we can add on maybe 4% or 5% of ASP growth and a couple more points for efficiency gain or utilization gain, if you will.

Does that mean that can we continue to expect, say, 20% plus growth, I'm not talking about second half, but next few years, based on this level of capacity expansion or the growth algorithm or formula can change versus what we had in the past?

Yes. I think that it's a great question. We changed our strategy. Before the start of this fiscal year, we slowed down the learning center expansion from 20%-30% the year before to, let's say, 10%. So that means we put more focus on the quality improvement.

I think all the business lines, even the high school and the K-9 business, the student retention rate is guiding higher, I think even better than we expected.

Also, that means we got the better word of mouth. So we don't need to spend crazy marketing expenses to acquire new student enrollment. That means we get the new study enrollment by better word of mouth.

And so I think in the second half of the year, we got the 20% plus top line growth of the K-9 business. I believe we will keep the sustainable growth during the year after because the better quality and even the high, competitive edge of New Oriental, I think we deserve to get more new student enrollment. We could cut some marketing expenses.

Also, definitely, we will see more leverage because we just opened 10% new learning centers, but revenue growth is somewhere about 20%. So you will see the higher utilization rates and the higher margin of the K-12 business, DS.

Thank you so much, sir, and I hope to see that coming through in many more years to come. Thank you.

Yeah. Also, I want to add one point to Sisi's comments. In Q3, I do believe we got the margin improvement from both core business and East Buy.

Thank you, sir.

(Operator Instructions)

Timothy Zhao, Goldman Sachs.

Great. Hi, Stephen. Hi, Sisi. Congrats on the strong results. My question is that, I recall in the last quarter results, you mentioned about the new AI initiative that you are launching. Just wondering if you can share any tangible results or any updates on the AI investments that you are making, for example, a new course format that you launched probably late last year. Just wondering if there's any improvements on that. Thank you.

In the last three months, I think our team has done a lot on the new offerings of the new AI product. And I think we need maybe one quarter to testify the new offerings. And I believe it will contribute more revenue going forward.

One more point is I think the AI technology helps us on the existing product. You saw the higher student retention rate. Yeah, we put more focus on the product quality and even service quality. But I do believe that AI helps us to get even higher student retention rate going forward. Also, the AI helps us to get more operationally efficient to save some expenses and costs. So AI helps the whole group (inaudible) new offerings and the existing products' improvement and cost saving. So I think we should spend a little bit more on AI technology, but it's not that much and we'll control the spending. But I think we will bear more fruit from the AI investment going forward.

Got it. Thank you, Stephen.

Elsie Sheng, CLSA.

Hi, Stephen and Sisi. Congratulations on the result. I have a follow-up question on the margin expansion because if we look into the details, in the second quarter, the gross margin is going up and also the marketing expense ratio is also going down.

And because I noticed that you earlier mentioned that you have initiated cross-dependent customer service system to improve the service efficiency and also reduce the customer acquisition cost, so I wonder if the decrease in the market expense ratio is related to this initiative. And if it's so, how do you expect the impact of this going forward? Do you expect this trend of lower margin expense ratio to continue in the next few quarters? Thank you.

I think the situation will continue because, first of all, we put more focus on the product itself rather than spend even more money on marketing. But growth is still very healthy. As you said, we set up the new customer service department. And that means, I think, we will bring the information within New Oriental, even all departments, overseas, consulting, college, K-12 business, high school, K-9, and even the other business and the tourism business and the East Buy.

So I think this new department will bring us more traffic, even within New Oriental customer resources. So I think it's a very good tool to save more marketing expenses. Also, we just setup the 10% new learning center this year. So we don't need to spend more money on marketing.

And yeah, even in Q1, I know some competitors, there's summer promotion or even free course in the summer. But we are happy to see more students from our competitors came back to New Oriental in autumn. So that means our core competency or the product quality turns to be better. And going forward, I think the sales and marketing expenses as the percentage of revenue will go down going forward, even in the second half of the year and the year after.

Thank you. It's very helpful.

Thank you for the questions. We're now approaching the end of the conference call. I will now turn the call back to New Oriental's Executive President and CFO, Mr. 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 very much.

Let us conclude today's conference call. Thank you for your participation. You may now disconnect your lines.