New Oriental Education & Technology Group, Inc.

Ladies and gentlemen, good evening and thank you for standing by for New Oriental's first fiscal quarter 2020 earnings conference call. At this time, all participants are in a listen on the 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. Tissie Jowell.

Thank you. Hello, everyone, and welcome to New Oriental's first 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, you will hear from Stephen Yang, 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 U.S. Private Security 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 findings with the SEC. New Rental 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 turn the call over to Mr. Yang. Stephen, please go ahead.

Thank you, Sissi. Welcome, everyone, and thank you for joining us on the call. We're very pleased to begin fiscal year 2020 with a robust top line growth, which exceeded the high end of our expected range in RMB terms. For the first quarter of 2020, New Oriental reported net revenue of $1,071.8 million, representing a growth of 24.6% or 29.7% if measured in RMB. Net revenues from educational programs and services for the quarter were $996.5 million, representing a 25% increase year-over-year, or 30% if measured in RMB. Our key growth driver, K-12 after-school tutoring business, reported significant increase in student involvement, together with overwhelming responses received from the summer promotion campaign. Both segments made great contributions to this quarter's outstanding performance. In the first quarter of fiscal year 2020, we continued to implement our well-proven optimized market strategy and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability. During this quarter, we added a net of seven learning centers in existing cities The total square meters of classroom area by the end of the quarter increased approximately 24% year-over-year and 3% quarter-over-quarter, in line with our extension plan. Our total student enrollment, academic subjects, tutoring, and test prep courses in the first fiscal quarter of 2020 increased by 50.4% year-over-year to approximately $2 million On this point, please note the higher than normal increases in the number of student enrollments is primarily due to the split of the autumn semester into two sections, a change we adopt to meet the latest regulatory requirements since November 2018, which means student enrollments for each half of the autumn semester were calculated separately. To explain, the number of student recruitment and fees collected for the first half of the autumn semester were both in previous quarter, while those for the second half were both in both current reported first quarter as well as the following second quarter. Prior to the change, we historically collected the full sum of the tuition fees and recorded the student enrollment who ultimately semester in the fourth quarter of the prior fiscal year. Meanwhile, we also continue to deepen our online merge offline standardized classroom teaching system. And in particular, roll out an innovative interactive courseware for the Pop Kids program in some main cities, creating more interactive and high quality learning experience for our students. We also made further strategic investments into teacher model classes and new initiatives for pure online K-12 tutoring through CoolLearn.com. With our core competency in both offline and online education service, we're confident to capture the substantial business opportunities in low-tier cities and remote areas in China moving forward. Furthermore, we would like to take this opportunity to highlight the success of our summer promotion campaign. as briefly mentioned earlier. Similar with the previous years, we offered low-cost offline trial courses for multiple subjects across most of our existing cities during the summer period, targeting the students before they begin secondary school. The largest scale promotion this year was launched in 43 cities, and we're very encouraged to see that even with a double average promotion price compared to last year, our total promotion enrollments reached 820,000, an 8% increase year-over-year, accompanied by improved student retention rate year-over-year. Please note that these promotion enrollments were not included in our reported enrollments. Overall, 59% of students recruited from the summer promotion campaign were successfully retained as customers for our full-price courses for the autumn semester. which is 5% higher than the rate of last year. We're confident that this will boost our revenue and drive profit growth throughout the whole fiscal year 2020. We have firm belief in our summer promotion strategy in generating long-term benefits and foresee this to continue to be a successful and effective strategy to rapidly capture market share and acquire long-term loyal students, customers, in K-12 after-school digital markets. As these students move from grade 7 through grade 12, we expect the continued improvement in retention rates and customer loyalty will further drive revenue growth in the next three to six years. These investments lay down a solid foundation for stronger growth in the long term and further cement our leadership in the market. Another highlight of the first quarter of fiscal year 2020 is our year-over-year operating margin expansion, which is compounded by a strong bottom line performance. Our non-GAAP operating income increased by 46.8 percent year-over-year in dollar terms to approximately $267.2 million, while non-GAAP operating margin rose by 360 basis points to 24.0% from 20.4% a year ago, which is due to a strong utilization rate and operational efficiency, in addition to our one-off summer promotion drive. We will continue to focus on furthering this improvement, and we are confident in our ability to deliver stable and positive market expansion this year and create sustainable long-term value for our customers and shareholders. I will now turn to pricing. Per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 13% year-over-year. We like to note that the lower than normal blended ASP is primarily due to the change in tuition fee collection schedule for our K-12 after-school tutoring courses. As explained above, the number of students we recruited and the amount of fees collected during the quarter only reflects the second half of the autumn semester. Therefore, our blended ASP for the quarter of 2020 appears to be lower. Hourly blended ASP, which gap revenue divided by the total teaching hours, increased by approximately 5% year-over-year in RMB terms. Breaking down our hourly blended ASP, the UCAN middle school high school rate increased by 7 percent, pop case increased by 9 percent, and overseas high-stakes program increased by 7 percent, all year-over-year in RMB terms. Now, we will move on to the first quarter performance across our individual business lines. Our key revenue driver, K-12, all subjects after-school tutoring business, achieved year-over-year revenue growth of 35 percent in U.S. dollar terms or 40% in RMB terms to provide a breakdown of the growth. The UCAN middle school, high school, or subjects after school-children business reported a revenue increase of 33% in dollar terms or 38% in RMB terms for the quarter. Student enrollment grew approximately 55% year-over-year for the quarter. Our Pop Kids program delivered outstanding results with revenue up about 38% in dollar terms or 44% in RMB terms for the quarter. Enrollment was up about 70% for the quarter. Overseas tax credit assistance recorded a revenue increase of 5% in dollar terms or 10% in RMB terms for the quarter. Our consulting assistance recorded revenue growth of about 23% in dollar terms or 28% in RMB terms year-over-year for the quarter. Finally, VIP personalized classes business recorded revenue growth of about 19% year-over-year in dollar terms or 24% in RMB terms year-over-year for the quarter. Next, I'll provide some updates on the progress we're making with our optimized market strategy. In terms of offline expansion, as mentioned earlier, this quarter we added a net of seven learning centers in existing cities. Altogether, the increase of total square meters of the classroom area by approximately 24% year-over-year, and 3% quarter-over-quarter by the end of this quarter. Our DoTeacher model has been proven successful. It has been introduced into the podcast program in 46 existing cities, and UCAN programming in 30 existing cities, and for both programming in seven new cities, further deepening our market penetration in both markets we have tapped into. The model also supported the further improvement in our customer retention and scalability of the new model. With this program result in mind, we'll continue this strategy in the coming quarters. On the digital technology front, we invested $30 million in the first quarter to improve and maintain our online merge offline standardized classroom teaching system. Most of our investments were recorded to enter GNA expenses. In particular, we would like to highlight the implementation of our digital interactive courseware for podcast program in some major cities. The digitally-enabled courseware strengthened and standardized our teaching and learning quality, boosted classroom efficiency, and delivered improved student experience and satisfaction, which also means higher thickness of our enrollment student customers. Furthermore, we also made stable progress in the pure online CoolLearn.com business line and other supplementary online educational products. which is experiencing growing market demands. More resources are invested into the executing new initiatives in online K-12 after-school children's business in fiscal year 2020. The investment includes content development, teachers recruiting and training, sales marketing, R&D, and other necessary cost expenses to drive the growth of new pure online programs. With these programs, were able to reach more students in low tier Cs in an interactive and scalable manner. We believe this will help CoolLearn.com to gain new market share in our online education area and drive up top-line growth. Now let me walk you through the other key financial details for the first quarter. Operating cost expenses for the quarter were $825.6 million. representing a 17.9 percent increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which excludes share-based compensation expenses, were $814.6 million, representing an 18.7 percent increase year-over-year. Cost of revenue increased by 19.8 percent year-over-year to $440.2 million, primarily due to increase in teachers' compensation for more teaching hours and rental cost for the increased number of schools and learning centers in operation. Selling marketing expenses increased by only 1.9 percent year-over-year to $101.2 million. General administrative expenses for the quarter increased by 21.6 percent year-over-year to $284.2 million. Non-GAAP GNA expenses, which exclude share-based compensation expenses, were $273.5 million, representing a 24.5% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 20.8% to $11 million in the first quarter of 2020. Operating income was $246.2 million, representing a 52.6% increase year over year. Non-GAAP income from operations for the quarter was $257.2 million, representing a 46.8% increase year over year. Operating margin for the quarter was 23.0%. compared to 18.8% in the same period of the prior fiscal year. Non-GAAP operating margin, which includes the share-based compensation expenses for the quarter, was 24%, compared to 20.4% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $209.0 million, representing a 69.6 percent increase from the same period of prior fiscal year. Basic and diluted earnings per ADF attributable to New Oriental were $1.32 and $1.31, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $230.2 million, representing a 25.0% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $1.45 and $1.44, respectively. Next, operating cash flow for the first quarter of 2020. was approximately $364.6 million. Capital expenditures for the quarter were $64.3 million, which were primarily attributable to opening of 43 facilities and renovations of existing learning centers. Turning to the balance sheet, as of August 31, 2019, New Oriental had cash and cash equivalent of $973.2 million. In addition, the company had $361.6 million in term deposit and $210.7 million in short-term investment as of August 31, 2019. New Oriental's deferred revenue balance, which is cash collected from graduate students for courses and recognized proportionally as revenue as the structures delivered. At the end of the first quarter of fiscal year 2020 was $1,330.7 million, an increase of 16% as compared to $1,146.7 million at the end of the first quarter of fiscal year 2019. The lower than Euro increase was due to the change of the tuition fee collection schedule for K-12 business in complying with the latest regulatory requirements. This change was implemented during the second quarter of fiscal year 2019. Before moving on to our priority for the second quarter, I would like to take a moment to reiterate our broader goals and our optimized market strategy. First, we will continue to focus on expansion of our offline business. We aim to add around 20% of capacity in fiscal year 20, which includes new learning centers and growing classroom area of some existing learning centers for K-12 business mainly. we will continue to roll out our dual teacher model schools to a number of new low-tier cities in certain provinces for the whole year. Second, we will continue to leverage our investments in the digital technologies front, extending new features of our OMO system to more offline language training and test prep offerings, especially for our K-12 tutoring and oversea test prep key businesses. We will continue to make such investments and we believe that the total spending in absolute dollar terms in fiscal year 2020 will increase moderately compared with the prior fiscal year. Furthermore, we will also continue to invest in and execute new initiatives, including product content development, teachers recruiting training, R&D, as well as sales marketing, and our pure online K-12 children's business. our coolant.com platform. At this point, I would like to reiterate that we believe the strong growth in our offline business will offset the online investment expenses on our bottom line. Third, our top priority will remain as the focus on optimizing the utilization of facilities and controlling cost and expenses across the organization to drive continued margin expansion and increased operational efficiency. The new facilities built in fiscal year 2018 and 2019 are being ramped up at a more efficient level. We expect our non-GAAP operating margin of the offline language training and test for private business to continue to expand in the rest of the fiscal year 2020. With a strong operating leverage consistently improved utilization rate, our robust offline business growth we'll be able to cover the margin pressure from our online investment. On the whole, we expect our overall non-GAAP operating margin to improve year-over-year in fiscal year 2020 compared to the year-over-year decline left to fiscal years, reflecting a healthy, strong growth trend. Finally, the recent RMB depreciation against the U.S. dollars will also impact our earnings in dollar terms for the first quarter of 2020 and the second quarter of 2020. Again, I would like to emphasize that the fundamentals of our business remain strong as we believe. With our optimized market strategy being the focus as always, we're confident that the new Oriental will continue to capture sustainable growth opportunities in the market and deliver long-term value for our shareholders. Looking at the near term and our expectations for the next quarter, we expect total net revenues in the second quarter of fiscal year 2020 to be in the range of $753.6 million to $771.0 million, representing a year-over-year growth in the range of 26 percent to 29 percent in dollar terms. The projected growth rate of revenue in our functional currency RMB is expected to be in the range of 30 percent to 33 percent for the second quarter of fiscal year 2020. The exchange rate used to calculate expected revenue for the second quarter of fiscal year 2020 is 7.11, while historical exchange rates used to calculate revenues for the second quarter of fiscal year 2019 was 6.90. I must mention that these expectations reflect New Orleans' current and preliminary view, which is subject to change. At this point, I will take no questions with Cici. Operator, please open the call for this.