New Oriental Education & Technology Group, Inc.

Good evening and thank you for standing by for the New Orientals FY 2020 second quarter and interim results earnings conference call. At this time, all participants are in a 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. Cici 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 Newswire services. Today, you will hear from Stephen Yang, Chief Financial Officer. After his prepared remarks, Stephen 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 Rental's Investor Relations website at investor.newrental.org. I'll now turn the call over to Mr. Yang. Stephen, please go ahead.

Thank you, Cici. Hello, everyone, and thank you for joining us on the call. We are very pleased to report a set of solid financial results in the second fiscal quarter of this year, delivering both accelerated top-line growth and continued operating margin expansion. Total net revenue growth was $785.2 million, representing a growth of 31.5% or 34.8% if measured in RMB. exceeding the high end of our expected range. Net revenues from educational programs and services for the second quarter were $723.3 million, representing a 33.0% increase year-over-year. The growth was mainly driven by increases in student enrollment in K-12 after-school tutoring courses, which continued its strong momentum and achieved year-over-year revenue growth of approximately 46% in dollar terms or 49% if computed in RMB. We continue to be guided by our optimized market strategy in this quarter and carry out our capacity expansion in cities where we see potential for rapid growth and strong profitability. During this quarter, we added another 41 learning centers in existing cities opened a new training school in the city of Huizhou and a new teacher model school in the city of Chengde. By the end of this quarter, the total square meters of classroom area increased by approximately 25% year-over-year and 6% quarter-over-quarter. For the student enrollment, economics, subjects, tutoring, and test prep courses in the second fiscal quarter of 2020 increased by 63.3% year-over-year to approximately 3,789,200. Please note that the higher than normal increase in student enrollments is primarily due to the division of the autumn semester into two parts, meaning that the student enrollments are recorded separately and fall into separate quarters. At the same time, We continued our efforts in upgrading our online merger offline standardized classroom teaching system while the interactive courseware and podcast program was rolled out to more cities. We are very encouraged to have received positive feedback from our customers and see sustained improvement in customer retention rate. We also continue to make strategic investments into our due teacher model classes, as well as new initiatives in K-12 tutoring, our peer online education platform, CoolLearn.com, to leverage our advanced teaching resources in local cities and those in remote areas. Following last quarter's strong bottom line performance, we once again achieved year-over-year operating margin extension in this quarter. During this quarter, we reported non-GAAP operating income of $36.5 million compared to a loss of $14.9 million in the same period of last year. Non-GAAP operating margin rose by 720 basis points to 4.7% from negative 2.5% a year ago. The continued margin expansion is mainly driven by better leverage in classroom rental and related operating expenses, just as we consistently improve the utilization of facilities. In addition, supported by a standardized, modularized, and systemized operating process, we achieved an outstanding improvement in operational efficiency within each key business unit. We're confident that we will be able to deliver continued margin expansion and generate sustainable long-term value to our customers and shareholders. Per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 10% year-over-year. We'd like to note that the lower the normal blended ASP is primarily due to the change in the tuition fee collection schedule. for K-12 after-school tuition courses. As explained above, the number of students we recruited and the amount of fee collected during the quarter reflected the second half of the autumn semester, winter semester, and the first half of the spring semester. Therefore, our blended ASP for the second quarter of 2020 appears to be lower. Already blended ASP, which is gap revenue divided by total teaching hours, increased by approximately 6% year-over-year in RMB terms. To provide a breakdown of the hourly blended ASP, please note that UCAN program increased by 7%, POPCASE increased by 11%, and OVT Test Track program increased by 7% all year-over-year in RMB terms. Now, let's move on to the second quarter performance across our individual business lines. As mentioned earlier, Our key revenue driver, K-12 old-subjects after-school children's business, achieved year-over-year revenue growth of 46% in dollar terms or 49% in R&B terms. Breaking it down, the UCM Middle School high school old-subjects after-school children's business recorded a revenue increase of 43% in dollar terms or 46% in R&B terms for the quarter. Our student enrollment grew approximately 55% year-over-year for the quarter. Our podcast program delivered outstanding results with revenue up by about 51% in dollar terms or 55% in RMB terms for the quarter. Enrollment in the program went up about 87% for the quarter. The oversea test graph recorded the revenue increase of 3% in dollar terms or 5% in RMB terms for the quarter. The consulting business recorded revenue growth of about 1% in dollar terms or 4% in RMB terms year-over-year for the quarter. Finally, we actually personalized the cloud assistance, recorded revenue growth of about 37% year-over-year in dollar terms or 40% in RMB terms year-over-year for the quarter. Next, I will provide some updates on the progress we are making with our optimized market strategy. Beginning with our offline business this quarter, as mentioned earlier, we added a net of 41 learning centers in 16 cities, opened a new training school in the city of Huizhou, and a new teacher model school in the city of Chengde. Altogether, this increased the total square meters of classroom area by approximately 25% year-over-year. and 6% quarter-over-quarter by the end of this quarter. By the end of Q2 2020, the two-teacher class model has been introduced into the PubKids program in 48 existing cities, for UCAN program in 30 existing cities, and for both PubKids and UCAN K-12 business in seven new cities. The initiative supported increased market penetration in those markets we have tapped into. We also saw improved customer retention rate and scalability of this new model. With these proven results, we will continue this strategy in the rest of the year. On the digital technologies front, we invested $44 million in the quarter to improve and maintain our online merged offline called OMO, standardized classroom teaching system. Most of the investments were recorded under GNA expenses. Furthermore, we also made stable progress in the Pure Online Cooler.com business line and other supplementary online education products, which is experiencing growing market demands. More resources are investing to executing new initiatives in Pure Online K-12 after-school children's business in fiscal year 2020. The investments include constant development, teaching, reporting, and training, sales marketing, R&D, and other necessary costs and expenses to drive the growth for new pure online programs. With these programs, we're able to reach more students in low-tier cities in an interactive and scalable manner. We believe this will help the CoolLearn.com to gain new market share in the online education space and drive top-line growth. Now, let me walk you through the other key financial details for the second quarter. Offering cost expenses for the quarter were $759.9 million, representing a 21.1% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which excludes share-based compensation expenses, were $748.7 million, representing a 22.0% increase year-over-year. Cost of revenue increased by 8%. 19.6% year-over-year to $359 million, primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation. Selling marketing expenses increased by 17.7% year-over-year to $107.8 million, GNA expenses for the quarter increased by 24.4% year-over-year to $293.1 million. Non-GAAP GNA expenses, which exclude share-based compensation expenses, were $282.1 million, representing a 27.1% increase year-over-year. Total share-based compensation expenses which were allocated to relate operating cost and expenses decreased by 18.1% to $11.2 million in the second fiscal quarter of 2020. Operating income was $25.3 million, representing a 188.6% increase year-over-year. Non-gap income from operations for the quarter was $36.5 million, representing a 345.6% increase every year. Operating margin for the quarter was 3.2%, compared to a negative 4.8% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 4.7%, compared to a negative 2.5% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $53.4 million, representing a 306.9% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental was $0.34 and $0.34 respectively. Non-gas net income attributable to New Oriental for the quarter was $57 million, representing a 147.8% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental was $0.36 and $0.36, respectively. Next, operating cash flow for the second quarter of 2020 was approximately $291.8 million, Capital expenditures for the quarter were $52.4 million, which were primarily attributable to the opening of 78 facilities, annual learning centers, and renovations at the existing learning centers. Turning to the balance sheet, as of the November 30th, 2019, New York rental had cash and cash equivalent of $1,047.6 million. as compared to $1,414.2 million as of May 31, 2019. In addition, the company had $348.3 million in term deposits and $221.5 million in short-term investments. New Orient's deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered at the end of the second quarter of fiscal year 2020 was $1,570.4 million, an increase of 25.6% as compared to $1,150.3 million at the end of the second quarter of fiscal year 2019. Before moving on to our outlook and guidance, For the third quarter, I would like to provide some updates on the Cooler. Cooler Technology Holdings Limited, a subsidiary of New Oriental, which provides online extracurricular education service in China, also announced its interim results for fiscal year 2020 earlier today. I'd like to emphasize that Cooler is a very important platform for New Oriental. and were optimistic about the opportunities in the online education market and confident in our investment into the platform. During the period, CoolLearn has undergone a process of restructuring its college education business line, which had some negative impact on CoolLearn's near-term revenue growth. CoolLearn also continued to invest more resources in executing new initiatives in the areas of content development, teachers recruitment and training, sales marketing, research and development, and other necessary cost and expenses to drive the growth of new online programs. For the first six months in November 30, 2019, Cooler recorded an 18.8% year-over-year increase in revenue to RMB 567.6 million, or $81 million U.S. dollars. Gross profits was RMB $317.1 million or $45.2 million. Losses of the period was RMB $87.5 million. I'm sorry. Loss of the period was RMB $87.5 million or $12.5 million compared to a profit of RMB $36.2 million in the same period of prior fiscal year. It's encouraging that one of its K-12 business new initiatives, location-based live interactive after-school children courses, were Dongfang Youbo, DFUD, have been rolled out to 128 cities in China and recorded the enrollment growth of 186.2% year-over-year. For more details, please refer to Cooler's financial results and outstanding info. Looking ahead into the next quarter and the rest of the fiscal year 2020, we'll continue to be guided by our optimized market strategy and further ride upon the success and momentum we have viewed. We're confident about capturing a wider range of the market opportunity moving forward to provide more detail on our areas of focus for the rest of the year. First, we will continue to expand our offline business We aim to add around 20% to 25% capacity, including new learning centers and exciting, expanding classroom area of some existing learning centers for kids in our business in existing cities. In addition, we'll continue to roll out our due teacher model schools to a number of new low-tier cities in certain provinces for the whole year. Second, we'll continue to leverage our investments into digital technologies and introduce our online-merge-offline system to more offline language training and test offerings, especially for our K-12 children and overseas test drive key businesses. We will continue to make investments and we believe that total spending in absolute dollar terms in fiscal year 2020 will increase compared to with the prior fiscal year. Furthermore, We will continue to invest in and execute new initiatives, including product development, teachers recruiting training, R&D, as well as sales marketing expenses in pure online K-pop after-school children's business, ourcooler.com. Third, our top priority will remain as the focus on optimizing utilization of facilities and controlling cost and expenses across the company to drive the continued margin expansion and increased operational efficiency. The new facilities built in the last two years are being ramped up more efficiently than before. We expect our non-GAAP operating margin of the offline language training and test prep doses to continue to expand in the second half of fiscal year 2020. This improvement is expected to cover the margin pressure resulting from our online investments in the coolrun.com. On the whole, we expect our overall non-GAAP operating margin to continue to improve year-over-year in fiscal year 2020 compared to the year-over-year decline last two fiscal years. Fourth, as of today, we have decided to move two days of classes in our Wuhan new rental school from before the Chinese New Year to after the Chinese New Year in view of the disease cases. Classes will be taught via our online lab forecasting technology if the learning center's operations remain suspended after the Chinese New Year. Please note that classes in the cities except Wuhan have not been adjusted or suspended. The health and safety of our students is our top priority, and we will continue to closely monitor the situation and cooperate with the relevant authorities. Also note, we have taken the impact from the conditions in Wuhan into consideration in our third quarter's guidance. The impact is immaterial based on our current estimation. Finally, the recent RMB depreciation against the U.S. dollar might cause impacts on our earnings in dollar terms for the third quarter of 2020. Finally, I would like to emphasize that we have great confidence in fundamentals of our business, which we believe will continue to remain strong. As we continue to execute our optimized market strategy, We are certain that New Oriental will continue to capture the 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 third quarter of fiscal year 2020 to be in the range of $983 million. to $1,006.4 million, representing yield-year growth in the range of 23% to 26%. If not taking into consideration the impact of the potential exchange rate between RMB and the U.S. dollars, it protects the revenue growth rate in our functional RMB. In our functional currency, RMB is expected to be in the range of 26% to 29% for the third quarter of fiscal year 2020. The exchange rate used to calculate expected revenue for the third quarter for fiscal year 2020 is 6.95. The historical exchange rate used to calculate revenues for the third quarter of fiscal year 2019 was 6.81. I must mention that These expectations reflect New Orleans' current and preliminary view, which is subject to change. At this point, I will take your questions. Officer, please open the call for this. Thank you.