New Oriental Education & Technology Group Inc (EDU) 2022 Q3 法說會逐字稿

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

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 Third 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 we begin, I would like to convey our sympathy to all the people who have been impacted by the pandemic and thank all the health care heroes and local authorities for their hard work and commitment during this difficult time. It's been a while since our last earnings conference call and we would like to take the opportunity to extend our gratitude to those who have been supporting and believing in New Oriental. While our business in the previous quarters was perhaps characterized by the significant cost incurred from cancellation of class, close of the schools and learning centers and employee layoffs as a result of government's policy introduced last year. This quarter was about turning over a new leaf with new and decisive endeavors in innovative business opportunities as the company embarks on a fresh journey that's strived to encourage along development of students.

Despite the challenges the company is facing during this restructuring phase, we are pleased to see a promising trend in our key remaining businesses and positive momentum emerging across many of our new initiatives, as we announced the latest set of financial results.

Our key remaining business have shown remarkable resilience, as oversea test prep business and overseas study consulting business recorded a year-over-year revenue growth of about 8% and 26% respectively for the first nine months of the current fiscal year. In same period, our adult and university students business has performed exceptionally and recorded a rate growth of approximately 59% year-over-year.

Simultaneously, our management team's entrepreneurial spirit has come to the forefront as such time of change. And we have been exploring new business opportunities, including non-academic tutoring, intelligent learning system device, study tour and research camp, educational material and digitalized smart study solutions, as well as exam prep courses designed for the students with junior college diplomas to obtain bachelor's degree.

Now I would like to spend some time to talk about this quarter performance across our remaining business lines and introducing our new initiatives in detail.

Our key remaining business got a promising trend, breaking it down.

The overseas test drive business recorded a revenue increase of about 8% in dollar terms for the first nine months of the fiscal year. The overseas study consulting business recorded revenue increase about 26% in dollar terms year-over-year for the first nine months of this year. Domestic test prep business targeting adults and the university students recorded rapid growth of approximately 59% year-over-year for the first nine months of this year.

As for our new business initiatives, we have launched five new initiatives in the past months which mostly revolve around facilitating students all around 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 out in over 60 existing cities focused on cultivating students' innovative ability and comprehensive quality. We're happy to see increased market penetration in those market 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, utilized our past teaching experience, data and technology to provide personalized and targeted learning and exercise content, together with our teachers monitoring and assessing the learning curve for our students at the back-end system. The new educational service not only greatly improves students' learning efficiency, but also cultivate students' proactive learning habits. We have tested this adoption in over 50 existing cities and are delighted to see improved customer retention and scalability of this new initiative. The revenue contribution of these initiatives from the top 10 cities in China is over 65%.

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

We're also very excited about the prospects of the educational material and digitalized smart study solutions, a self-learning system leveraging advanced technology that enables students to have complete control over the pace and flexibility of learning in an age where remote learning becomes increasingly mainstream.

In addition, New Oriental smart education business comprised smart teaching, smart hardware, science and technology innovation, education and other service, providing high-quality educational resources and comprehensive service for local governments, educational authorities primary and secondary schools and kindergartens. The products and services relate to scientific alignment, aerospace feature and artificial intelligence, smart education business have presence in over 2,000 kindergartens and over 500 primary secondary schools across the country.

Last but not least, one other new initiative I would like to share is exam prep course designed for students with junior college diplomas to obtain bachelor's degree. It has become a very common goal among many associated degree holders in the country to progress further in their education ladder by applying to university and we saw this gap in the market is providing them prime service to these diplomas and college students, who would require support in taking that leap forward to the university level. We're piloting such courses in some higher-tier cities now and plan to roll it out to more cities in the next fiscal year.

During the last two fiscal quarters, we have been fully committed to comply in the government policy. And as a result, the total number of schools and learning centers was reduced to 847 by the end of this fiscal quarter. The significant change in our structure has underscored the importance of our industry-leading OMO system, which have been one of the consistent during the company's restructuring phase as we remained committed to investing in the R&D of the technology.

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

We invested US$27 million in the quarter and US$129 million in the first three quarters of this fiscal year to improve and maintain our OMO teaching platform, which ensure that our high-quality service to students during the pandemic is uncompromised.

Regarding the performance of our pure online platform, Koolearn, in light of the changing landscape of the education industry in China, Koolearn has been actively seeking new market opportunities by leveraging existing infrastructure and technology shifting strategic focus and adjusting existing business lines and service offerings. On one hand, Koolearn continue to expand the developments of existing college and institution business segment, as well as online education products and service offering. On the other hand, it's implementing structural changes to meet the needs of the changing regulatory and educational environment, by actively exploring new initiatives to broaden customer base and offerings. Some of the new initiatives that Koolearn have been exploring, including livestream marketing of the traditional Chinese culture and high-quality agriculture and other products from different players of our origin in China, seeking institutional cooperation and developing new intelligent learning innovations.

After the introduction of the tightened government policy on after last year, which has no doubt post a direct impact to our business. We have received many inquiries and concerns from investors over the company's financial position. As a company with 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 process. By the end of the quarter, our cash and cash equivalent term deposit and short-term investments totaled approximately US$4.4 billion.

In the second and third quarter of this fiscal year, the company incurred considerable cost from the termination of its leasing agreements in relation to the closure of the learning centers and the employee layoffs. We believe that this cost generated during restructuring phase are temporary as they are non-recurring losses.

With the process of school closure now largely completed, it signals that the company has now entered stage of starting fresh, exploring new opportunities with greater flexibility and strong cash flows. We're confident that in the sustainable profitability of the all the remaining key business, as well as the growth and profit potential of our new initiatives. The company's management team will continue to work together to seek profitable growth. We believe our continued commitment to high-quality service and operational efficiency will generate more values to our customers, society and shareholders over the long-term.

Now I will turn the call over to Sisi to go through our key financials. Sisi?

Okay. Now I'd like to walk you through the other key financial details for the quarter. Operating cost and expenses for the quarter were US$755.3 million, representing a 30.6% decrease year-over-year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation were US$725.3 million, representing a 32.5% decrease year-over-year. The decrease was primarily due to the reduction of facilities and number of staff as a result of the restructuring in the last two quarters.

Cost of revenue decreased by 30.9% year-over-year to US$372.7 million. Selling and marketing expenses decreased by 40% year-over-year to US$93.7 million. G&A expenses for the quarter decreased by 26.6% year-over-year to US$288.8 million. Non-GAAP G&A expenses which exclude share-based compensation were US$259.6 million, representing 32.3% decrease year-over-year. Total share-based compensation expenses which were allocated to related operating cost and expenses increased by 107.8% to US$30 million in the quarter. The increase is due to the grants of restricted share units to public company to employees and directors in May 2021 with graded vesting over three years.

Operating loss was US$141.2 million compared to an income of US$101.5 million in the same period of the prior fiscal year.

Non-GAAP loss from operations for the quarter was US$111.2 million compared to an income of US$115.9 million in the same period of last fiscal year. Net loss attributable to New Oriental for the quarter was US$122.4 million compared to an income of US$151.3 million in the same period last year. Basic and diluted net loss per ADS attributable to New Oriental were US$0.72 and US$0.72 respectively.

Non-GAAP net loss attributable to New Oriental for the quarter was US$95.5 million compared to an income of US$163.2 million in the same period last year. Non-GAAP basic and diluted net loss per ADS attributable to New Oriental were US$0.56 and US$0.56 respectively.

Net operating cash outflow for the quarter was approximately US$235 million and the CapEx for the quarter were US$37.4 million.

Turning to the balance sheet, as of February 28, 2022, New Oriental had cash and cash equivalents of US$1,466.8 million. In addition, the company had US$915.1 million in term deposits and US$2,028.1 million in short-term investment.

New Oriental's deferred revenue balance which is the cash collected from registered students for the courses and recognized proportionally as revenue as the instructions are delivered at the end of the quarter was US$971.3 million, a decrease of 47.9% as compared to the end of the third quarter of fiscal year 2021. The decrease is primarily due to the cessation of K-9 academic after-school tutoring services in order to comply with the government's policy in China.

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

Looking ahead into the next quarter of fiscal year 2022, having adopted measures in response to the latest policies and regulations, we now have a clearer picture about the recovery trend of the company's near-term financial performance and are prepared for a new beginning as we identify new and profitable market opportunities for the long run. As a stage of the closure of the schools and learning centers nearing its end, we're left with a relatively small portion of the lease terminations to be executed in the coming months. The non-recurring one-off costs related to the closure were already accrued in the first half of the current fiscal year. In the meantime, our strong performing key remaining business are all profitable and will continue to serve as a solid foundation for business performance that will provide us with the feel to explore new possibilities in the market. Our strategic focus and investment approach going forward aim at expanding our new initiatives, which will be nurtured into key growth engines for our business.

We're confident about the future success of these initiatives as they echo with the current trends in the market, with the likes of non-academic tutoring and study tour and research camp targeting the facilitation of the overrun development of students, which is to generate -- which is a general goal that the industry is striving to achieve.

Meanwhile, intelligent learning system and device and digitalized smart study solutions are offering students' digital, personalized and remote learning experience, which is a trending theme in the current teach-enabled and post-pandemic education industry. It will take time for this new business to come to full fruition. But as we saw in this quarter, the encouraging growth trajectory that they have already been showing proof 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.

We will like to note that our guidance is taking into consideration of the recent pandemic development in Shanghai and some small other small cities, as the lockdown of these cities since March has inevitably impacts our business operation locally. Student recruitments is where we experienced some disruption as students and customers were unable to access our service centers to sign up for courses. Though the overall impact on the business has been limited, thanks to our OMO system, which enable us to swiftly migrate students from offline to online classes, although within much of the learning disruption.

We also don't expect the disruption in Shanghai and some other small cities would have significant effect on our overall revenue growth as we have a wide presence across many cities in China. Although, the pandemic situation in China remains fluid, our operation infrastructure led by the OMO system has shown its strength and flexibility in the past couple of years to weather disruptions, while our staff across the country have got the experience to prepare for and respond to COVID outbreaks. Therefore, we're confident that any future outbreaks in other cities will only have limited impact on our business.

Experience stands the test of time. One of the strengths about New Oriental is experience and legacy we have built over the years and this has proven to be the differentiation between us and other players during the challenging period. Leveraging our experience and brand recognition, as well as the very healthy cash balance that has been unharmed during a very difficult time. We have great confidence that the overall business will turn profitable again in the near future.

To conclude, we are now taking all kinds of operational actions to promote our key remaining business and investing in the new initiatives, which will be the new growth engine that accelerate our recovery. At the same time, we will continue to seek guidance from and cooperate with the 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 measures and to further adjust our business operations as required.

With our investments in different strategies, we're optimistic on brighter prospects of our business and believe new company structure falling in the restructuring phase will bring us fruitful returns in the long run. I must mention that these expectations reflect our considerations of the latest regulatory measures in the pandemic situation, as well as our current and preliminary view, which is subject to change.

At this point, I would like to open the floor for questions. Operator, please open the call for these.

Thank you. (Operator Instructions) Our first question comes from Felix Liu from UBS. Please ask your question.

Thank you management for taking my question and I'm very pleased to see the resilience you have shown and the tough restructuring due to the external environment. My first question is on the restructuring progress. So you mentioned that most of the restructuring are almost finished. So may I know the learning center that you have by the end of the Q3 will be more or less sustainable into the future or do you expect more closure in the upcoming months? And secondly -- my second part of the question is on the accounting of the restructuring cost. Unfortunately -- unfortunately I noticed that you have termed loss-making in this quarter. So may I know how much of the cost this quarter is related to the one-off restructuring and how much will be ongoing? And maybe any color on the unit economics of your new initiatives will be much appreciated? Thank you.

Thank you, Felix. Your first question is about learning center. In the last fiscal year end, we had the 1,669 learning centers in total. And in this quarter end, we have 847 learning centers. And we plan to close down some of the learning centers. So we expect the learning center number will be decreased to 650 to 700 in this fiscal year-end. So this is my answer for the learning center number of your question.

And yeah and yes, we're in the restructuring phase and I think the one-off cost relate to the learning center close down and the employee layoff were already accrued in the first half of this year. So that means we have already recorded most of the one-time cost into the first half this year, yeah, you saw the loss in this quarter. But I think it's mainly due to the new investments for the new initiatives for the future.

So you know, but I think it's worthy because we started to fight the new kinds of the business like the non-academic tutoring, like the intelligence learning system devices and study tour camps were some like the exams for the college students to get bachelor's degree. So those new initiatives need our new investments to build up the good future. And so now we are in a new the investment phase, but we do believe those new initiatives will make profitable in the near -- will make profit in the near future.

So I think we do believe in the near future we can be profitable because first of all, our remaining business, the domestic test prep, the adult English and the [overseas] (corrected by company after the call) test prep and the overseas consultant business, all the business are profitable. And we do believe the new business will be profitable. So I think the margin profile will be optimistic in the coming new fiscal year, Felix.

Thank you. (Operator Instructions) Our next question comes from DS Kim from J.P. Morgan. Please ask your question.

Hi, Stephen. Hi, Sisi. Thanks for resuming the result call and hope you are safe and well in Beijing. I actually have a couple of questions but because of the reminder, I would ask one question here and I will try to ask again later. In terms of the revenues in third quarter, if you look into the details, number one, how much of that third quarter revenue happened in December versus Jan, Feb of this year? And in relation to that, how much of the -- roughly how much was the new initiative those that you mentioned like non-academic intelligent learning systems and whatnot? How big was it the revenue contribution in third quarter?

Okay. For the revenue contribution in this quarter, I think the December revenue is a little bit higher than the revenue of the January and February because we closed down the K-9 business by the end of the calendar year. So in December, we did have some the K-9 the tutoring courses and we reported revenue. So yeah, and the new business of course, it's quite new. We just launched the business, the non-academic courses a couple of months ago. And now it's a little bit small, but it's grown very fast.

So the new business, what I mean, including the like the non-academic courses and some like the new service relate to the intelligent learning system I think will contribute more revenue in next year. So I believe the new business will contribute over 20% of the revenue contribution next year. So you saw the growth is extremely high.

Thank you. Our next question comes from [LC Zhang] from Morgan Stanley. Please ask your question.

Thank you, management. My question is also related to the new business. So is there any operation data that you could share, for example, like the retention rate for the new non-academic courses? And also, how do you see the competition in this area? Thank you.

Actually, we started the new business a couple of months ago, but it developed very quickly. And we have seen the student retention rate is getting higher and higher. So in some new main cities, we are seeing the student retention rate of the non-academic courses is close to the retention rate that we had of the academic courses last year. So it's a good result, good news for us. And yeah, I know the revenue contribution is small, but it grows very fast.

And the second on the competition, I think the competition is still there, but upon the whole market environment changes, so I do believe the competition will become less because we have seen a lot of our competitors disappear from the market. So the competition is not a problem for us.

Thank you.

Thank you. The next question comes from Candis Chan from Daiwa. Please ask your question.

Hello, Sisi and Stephen, thank you for taking my question and I would like to ask about the recovery of the overseas and domestic test prep businesses so far because of the easing of cross border control in other countries. And at the same time, I also noticed that the domestic test prep business has revenue growth looks very strong. So overall for next fiscal year, how does this est prep business revenue growth will look like? And what kind of development for the domestic test prep has been done over the past year to achieve that strong growth? Thank you.

Yeah, great question. Yeah, despite we are in the restructuring phase, but we're happy to see the domestic test prep business and oversea related business with very fast in the last couple of months. And oversea test prep and consulting business, the revenue increase is about 15% year-over-year, overseas test prep 8% and consulting business 26% in the first nine months of this year. And yeah, we know the pandemic still in some other countries even in China. But actually, what we're seeing some students still enroll our the overseas test prep classes because for most of our overseas test prep the students are the high school students and college student.

And they made the decision to study abroad someday, so they don't have to change their decision. So and I do believe the human beings can beat the coronavirus. So I do believe our overseas test prep business and consulting business will be broad in a meaningful rate in the coming new year in fiscal year 2023. And the domestic test prep, there's a news recently in China, more and more the university and college students choose to take the Chinese GRE, the like Chinese exam. So I think the market is booming.

And I think we are one of the dominator of this part of the business. And since two years ago, internally, we arranged internal solution of the Chinese GRE department, the English and the master test prep. And we moved some talent people from the K-12 business to the domestic test prep. So I think we prepared for this new market for like just for the last two to three years. So I do believe the mass test prep will grow very fast and will generate more and more the profit for New Oriental. Thank you.

Thank you. Our next question comes from Lucy Yu from Bank of America. Please ask your question.

Thank you, Stephen for taking my question. My question is more on the margin side. You mentioned the remaining business is profitable. So can you share us the profitability of those remaining business? And for the new business, you also mentioned it will turn profitable next fiscal year. So what's our expectation of the margin for those new business in the upcoming year? Thank you.

Okay. The remaining business, the overseas test prep and consulting business, typically the margin is the 15% to 20%. And domestic test prep the margin is about to -- is around 10%. And the new business we suffered a little bit loss, but I do believe [in the near future] (corrected by company after the call) will be profitable for the new business. And I do believe theoretically the margin of new business will together be around 20% somewhere. And so it's a good business.

Thank you. Our next question comes from Li Ping from CICC. Please ask your question.

Thanks, Stephen, Sisi for taking my question. So glad to see that you have made progress in some new initiative. So may I know which one will most likely be the future key revenue contributor? And what's EDU's competitive advantage in that direction? Thank you.

Yeah, we're exploring new business opportunities including like the five the new business. So firstly, non-academic tutoring focus on helping the students to improve their innovative ability and comprehensive quality and such as programming, present skill, our exposure to grow very fast because since the double deduction new policy last year, we're seeing that the students have more time during the weekend, during the holidays. So -- and the parents love to see their kids to improve their OP comprehensive ability and so this is number one.

Number two, we launched the intelligent learning system and device, utilize our past teaching experience and data technologies to help the students to do this like self study by them self. I think the system help them a lot and the students and parents love the new product. And so those two are the products the non-academic courses and the intelligent learning system devices will contribute more revenue going forward.

Right. Thank you. 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, 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. That does conclude our conference for today. Thank you for participating. You may all disconnect.