New Oriental Education & Technology Group Inc. (NYSE:EDU) Q2 2023 Earnings Call Transcript

New Oriental Education & Technology Group Inc. (NYSE:EDU) Q2 2023 Earnings Call Transcript January 17, 2023

Operator: Good evening and thank you for standing by for New Oriental’s Fiscal Year 2023 Second Quarter Results Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. 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.

Sisi Zhao: Thank you. Hello, everyone and welcome to New Oriental’s second fiscal quarter 2020 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 Newsware 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’ll now first turn the call over to Mr. Yang Stephen. Please go ahead.

Stephen Yang: Thank you, Sisi. Hello, everyone and thank you for joining us on the call. This second quarter is a successful phase of minification as we have turned over a new lease in our business and embarks on an innovative journey for which business opportunities since the beginning of fiscal year 2023. Before going into details of our financial performance for this quarter, I would like to take this opportunity to extend our gratitude to those who have been believing and supporting New Oriental along the way. I’m delighted to share with you that after a year of restructuring process, New Oriental has successfully generated fruitful yields from our new business ventures, combined with our existing business and innovative business opportunities.

Despite the seasonality of some major businesses which has historically resulted in a slower period for every second quarter. It’s immensely encouraging to see that we have achieved a meaningful profitability and better-than-expected margins in the second quarter. We have achieved a non-GAAP operating margin of 2.6% for this quarter as compared to negative 112.0 in the same period of prior fiscal year. which was characterized by the several significant one-off expenses incurred from class cancellations, school closures and employee layoffs. Our key remaining business have continued to demonstrate remarkable resilience. In particular, overseas test price business and overseas study consulting business have recorded remarkable year-over-year revenue increase as global COVID restriction eases and overseas study market is recovering.

Our solid profitability, strong performing remaining business lines and emerging new business initiatives in this quarter have again strengthened our confidence in preferring innovative endeavors and profitable growth through the rest of the year. Now, I would like to spend some time to talk about the quarter’s performance across our remaining business lines and new initiatives to you in detail. Our key remaining business have achieved promising trends while our new initiatives have shown a positive momentum. Breaking down, the overseas test prep business recorded a revenue increase of 17% in dollar terms or 30% in RMB terms year-over-year for the second quarter. The overseas study consulting business recorded a revenue increase of about 14% in dollar terms or 27% in RMB terms year-over-year for the second quarter.

The adult University students business recorded a revenue decrease of 9% in dollar terms or 2% increase in RMB terms year-over-year for the second quarter. As for our new business initiatives, as mentioned in the past quarter, we have launched several new initiatives which mostly revolve around facilities and students all around development. I’m glad to share with you that these new initiatives have further exceed our expectations by sustaining a positive momentum and generating meaningful profits to the company. Firstly, the non-academic tutoring business which we have rolled out in over 60 cities, focused on cultivating students innovative ability and comprehensive quality. We’re happy to see increased market penetration in those markets we have tapped into, especially higher tier cities with a total of 477,000 enrollments recorded in this quarter.

The top 10 cities in China have contributed about 60% of the revenue of this business. Secondly, the intelligence learning system and device business is a service designed to provide a tailored digital learning experience for students. It utilizes our past teaching experience, data and technology to provide a personalized targeted learning and exercise content. Our continuous investment in technology has built a competitive edge which drives our navigation amidst the change challenges from the last year. Together with the — our teachers monitoring and accessing the learning curve for students at the back-end system, this new innovative education service not only greatly improves students’ learning efficiency but also cultivate students proactive learning habits.

We have tested adoption in over 60 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 top 10 cities in China is around 60%. Last but not least, our smart education business which compromise smart teaching smart hardware, science technology innovation, education and other service serves local government, education authorities schools and kindergartens. Our educational material and utilize the SMART study solution, a self-learning system which leverages advanced technology enables students to have complete control over the pace and the flexibility of learning and age where remote learning becomes increasingly mainstream.

We also offer exam pride courses designed for students with junior college diplomas to obtain bachelor’s degrees. The above mentioned business has been gaining wide traction and contribute to the overall growth of the company and have attained instrumental profits since the last quarter. Coming to our OMO system. We continuously invest in developing and revamping our OMO teaching platform and have leveraged our educational infrastructure and technology strength over the remaining business and new initiatives to provide more advanced and diversified education service to our customers for all ages. Our OMO system has been a poor support to our business, especially when some of the strict social control measures were implemented in the past months, we have invested a total of $21 million in the quarter on our OMO teaching platform which provides us the flexibility to continue to offering high-quality service to students during the pedantic.

Now, I would like to give you an update on Koolearn’s latest performance. In the first half of this fiscal year, Koolearn has achieved instrumental breakthroughs in both business operations and financial performance. This significant progress was made as a result of Koolearn’s strategic transformation from focusing on online education to live streaming e-commerce. In 2021, cooler expanded its live streaming e-commerce business and established Dongfang which has since become a well-known platform for promoting healthy top quality and cost-effective products to the public. The platform has formed a part of the tight supply and chain management and after sales service system. — which is strictly abided by a set of relevant laws and regulations.

Leveraging our deep understanding of customer needs, Dongfang continues to expand its product selection and SKUs through proactive cooperation with third parties, coupled with the development of our unfunded private label products. The platforms business development has gratefully benefited from the maturity of China’s social infrastructure and contributions and support from the community. To summarize the Koolearn growth and profitability with our financial performance for the first 6 months of this fiscal year, Koolearn recorded revenue of approximately RMB2,081 million. which represents a 59.2% increase from revenues from continuing operations of $301.4 million in the same period of last — prior fiscal year. Koolearn recorded RMB585.3 million of net profit of 638.5% increase from the — from net loss from the continuing operation of $108.7 million in the same period of prior fiscal year.

In the first 6 months of fiscal year, the gross profit of Koolearn reached around RMB982.5 million, accounting for 47.2% in terms of the GP margin. As we continuously map the platform’s strategic transformation, the fast-growing foundation is also committed to give back to customers and the community. Since its launch, Dong Foundation has stood the firm to not charge commissions from customers or any fees. It has always taken close reference to industry standards, focusing on expecting the mutual beneficial long-term collaboration with the various parties so as to maximize benefits to customers. Dupont also ensures attained cost-effective performance as one of its development principle — on one hand, on foundation focused on enhancing product capability will continue to establish its casual content.

On the other hand, Dongfang has also organized to diversify diverse outdoor live streaming activities to promote the special agricultural products and contribute to the cultural tourism. Through unyielding exploration to create value in related industries which has also attracted and retained a larger pool of talent co-operators as well as followers and members. Dongfang has successfully received in return millions of revenues and a loyal customer base during the reporting period. With regard 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 equivalent term deposits and short-term investments totaling approximately $4.2 billion. On July 26, on July 26, 2022, the company’s Board of Directors authorized a share repurchase of up to $400 million of the company ADS were common shares during the period from July 28, 2022, through May 31, 2023.

As of January 16, 2023, the company repurchased an aggregate of approximately 3.1 million ADS for approximately $79 million from the open market and the share repurchase program. Now, I will turn the call over to SC to share with you about the key financials. Sisi, please go ahead.

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Sisi Zhao: Okay. Now I’d like to walk you through the other key financial details for this quarter. Operating cost and expenses for the quarter were US$640.7 million, representing a 55.1% decrease year-over-year. Non-GAAP operating costs and expenses for the quarter which exclude share-based compensation expenses, were $621.9 million, representing a 55.4% 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 31.6% year-over-year to $336.2 million. Selling and marketing expenses decreased by 15% year-over-year to $95.5 million. G&A expenses for the quarter decreased by 74.6% year-over-year to $209 million.

Non-GAAP G&A expenses which exclude share-based compensation expenses, were $190.9 million, representing a 75.7% decrease year-over-year. Total share-based compensation expenses which were allocated to related operating cost and expenses, decreased by 39.5% on to $18.8 million in the second fiscal quarter of 2023. Operating loss was US$2.5 million, compared to a loss of $768.1 million in the same period of prior fiscal year. Non-GAAP income from operations for the quarter was $16.3 million compared to a loss of $737.1 million in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $0.7 million, represent compared to the loss of $936.5 million in the same period of last year — last fiscal year. Basic and diluted net income per ADS attributable to New Oriental were dollars, respectively.

Non-GAAP net income attributable to New Oriental for the quarter were $17.8 million compared to the loss of $901.6 million in the same period of last year. Non-GAAP basic and diluted net loss per ADS attributable to New Oriental were $0.11 and $0.10, respectively. Net cash flow generated from operation for the second fiscal quarter of 2023 was approximately $173.7 million and capital expenditure for the quarter were US$11.4 million. Turning to the balance sheet. As of November 30, 2022, New Oriental had cash and cash equivalents of $129.9 million. In addition, the company has 1,033.2 million in term deposits and $2,145.7 million in short-term investments. New Oriental’s deferred revenue balance which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions were delivered.

At the end of the second quarter of fiscal year 2023 was $1,139.1 million, an increase of 6.9% as compared to $1,065.8 million at the end of the second quarter of fiscal year 2022. Now, I’ll hand over to Stephen again to go through our outlook and guidance with you.

Stephen Yang: Thank you, Sisi. Looking ahead into the rest of fiscal year 2023, with the restructuring process largely completed and our new business in their early stage, we expect our school network and geographic coverage to stabilize. The company remains tireless in seeking new opportunities with greater flexibility and strong cash flows. We’re confident in the sustainable profitability of all our remaining key businesses as well as the growth and prospects of our new initiatives. For our new business, as we observed in the first half of this fiscal year, the encouraging performance that this business have achieved proof that we are heading towards the right direction. And we firmly believe that the business will be able to maintain an upward growth trajectory and generate meaningful profit to the company in fiscal year 2023.

As for evolving panamax development in China since late November in 2022, many cities are experiencing certain level of disruption on business operations, although we are expecting a negative impact our financials in the coming 1 or 2 quarters, we remain confident and optimistic that overall impact will be temporary and manageable. Hence we expect total net revenue in the third quarter of the fiscal year 2023 to be in the range of $702.8 million to $719.8 million, representing a year-over-year increase in the range of 14% to 17%. The projected increase of revenue in our functional currency, RMB, is expected to be in the range of 24% to 27%. As the profitability we recorded in this fiscal quarter has reaffirmed our success and dedication in turning a new page and generating profit for the rest of the year.

Bottom line-wise, we’re confident in achieving greater operating profit in the full year of fiscal year 2023. I — to conclude, we are now taking multiple operational actions to promote our key remaining businesses, while we cautiously invest in new initiatives which will remain new growth engines that accelerate our recovery and pursue profitable growth. At the same time, we will continue to seek guidance from and corporate with government authorities in various province in China in alignment with the efforts to comply with the relevant policies and regulations 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 our current and preliminary view which is subject to change.

This is the end of our fiscal year 2023 Q2 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these.

Q&A Session

Operator: The question-and-answer session of this conference call will start in a moment. Our first question comes from the line of Felix Liu from UBS.

Felix Liu: Congratulations on the strong top line as well as the guidance. My question is on the COVID impact. I know the COVID has come pretty viciously in December but now we are past the peak. So I’m just wondering how has COVID impacted our February quarter? If there is any quantifiable metrics that will be very helpful. And my second question is on growth expectation of our various big businesses from here. If you were to rank the fastest to more stable business. How would you rank your various business segments.

Stephen Yang: Thank you, Felix. Yes, as for the evolving pedantic development in China since the last December. Yes, I know the peak past already. And yes, in many cities, I think some of our business are effectively impacted. But as our current estimation, I think the negative impact is small. And so we remain confident and I’m optimistic that overall impact from the pandemic will be temporary and manageable. And yes, you look at our guidance for Q3, it’s very strong. And the different business lines be in the revenue outlook for Q3, right? Can you repeat the second question?

Felix Liu: Yes. So maybe for Q3 and for the whole year which are the business lines that you think will grow the fastest? And which are the ones that are more stable?

Stephen Yang: I think the — we have two kinds of business. The numbers, the traditional business, the Romanian business the overseas-related business, including the overseas test prep and consulting business which contributes the 24%, 25% of the total revenue. What I’m saying is for the whole year, 24% or 20% to 25% of the total revenue. I think the — we got suffered the executive impact from the last year. But this year, I think we’re seeing the revenue growth is booming since two quarters ago. And the new business within the schools, we started the new business last year — the year before last year, right, November 2020. yes, in the last fiscal year. And the growth is — we just started the business one year ago and the growth is extremely high.

So this is the rent number one, the revenue growth within all business lines. And also, we don’t have the Dongfang — yes, I don’t want to be reported the management of the Dongfang reported where the first half year reports today and you saw the growth in so the numbers. And so very exciting for the exciting performance for Dongfang . And so yes, the new business within the EDs, schools and two top performers within the business lines.

Felix Liu: Got it. And congratulations on the results, again.

Operator: Thank you. We’ll now move on to our next question. Please stand by. Our next question comes from the line of Kane Wang from CICC.

Unidentified Analyst: So congrats on the private sales for this quarter. And my question is since coming restrictions have been lifted in China, do we expect a higher growth rate of our new business line in the next quarter and also in the next fiscal year? And is there any new opportunity for our new initiated business?

Stephen Yang: Yes. For the new business, yes, as we saw in this quarter and last quarter the encouraging performance proof that we are having towards the right direction. And we firmly believe the new business will be able to maintain upward growth in the Q3 and Q4 and the next fiscal year, what I mean is the fiscal year 2024. And we started the new business in the last year. But I think we ramped up the new business very quickly. And the good news for us is the margin for the new business in this quarter is already over 10%. So think about that. We started business the last year and is just spend like the three — two to three quarters to get the breakeven point and then we make it profitable. So it sounds very good. And I think we are on the good track.

And I think the management of New Oriental will pay more efforts will create more opportunity — business opportunities to develop the new business as we did in topotecan and the new business in this year. And so we will do to do more creative in the future.

Sisi Zhao: Yes. Actually, the new pandemic situation with the gradual opening up after these recent developments of the new situation, I think probably we can see more opportunities in some certain kind of new initiatives such as the study tour and research camping business that we mentioned one to two quarters ago that as one of the new initiative. But as the pandemic situation happened into two quarters, we do not have a very good chance to roll out that business domestically. But with the new situation, we have confidence that there’s more opportunity for this business to perform better.