New Oriental Education & Technology Group, Inc.

Good evening, and thank you for standing by for New Orientals FY 2020 Third 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 like to turn the meeting over to your host for today's conference, Ms. Cici Zhao. Thank you. Please go ahead. Thank you.

Hello, everyone, and welcome to New Oriental's third 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 Yao, 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 assiduities. As such, our results may be materially different from the views expressed today. A number of potential risks and assiduities are outlined in our public filings 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 will now turn the call over to Mr. Yang. Stephen, please go ahead.

Thank you, Cece. Hello, everyone, and thank you for joining us on the call. Before we kick off the call, I would like to firstly convey our deepest condolences to the people who have sadly passed away and to their loved ones during this global health crisis. We would like to express our sincere gratitude to medical staff around the world for their dedication and commitment in these difficult times. Thank you. Let us all play our part and stay healthy Together, we can overcome the challenge. In response to the outbreak of the COVID-19, New Oriental has immediately transferred more than 1 million students to online programs through New Oriental cloud-based classrooms. We have also actively assumed social responsibility by donating 20 million RMB in cash to Hubei province and providing fully small-sized offline courses to the children of nearly 20,000 medical staff, as well as providing the public with tens of millions of free, high-quality educational resources that can benefit over 10 million people, including students of all levels, parents, teachers, and entrepreneurs. Back to our business, we are very pleased to report a set of encouraging financial results in the third fiscal quarter of this year, delivering a top-line growth and continuing the operating margin extension. Despite COVID-19 pandemic causing massive impact to all those industries across the globe, total revenue growth was $923.2 million, representing a growth of 15.9% in dollar terms, or 18.7% if computed in RMB. Net revenues from education programs and services for the first fiscal quarter were $845.7 million, representing a 16.3% increase year-over-year. The growth was mainly driven by K-12 after school courses, which achieved a year-over-year revenue growth of approximately 24% in dollar terms, or 27% if compared to the RMB. We continue to be guided by our optimized market strategy in this quarter and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability. This quarter, We added a net of 110 learning centers in existing cities, opened two new training schools in the city of Zhangjiagang and Nanjing. Altogether, this increased the total square meters of classroom area by approximately 30% year-over-year, 11% quarter-over-quarter, and 21% comparing with the end of the fiscal year 2019. Total student enrollment in the Examinate Subjects Tutoring and Testcraft courses in the first fiscal quarter of 2020 increased by 2.3% year-over-year, approximately 1,606,000. The lower than normal increase in the number of student enrollment is primarily due to a bigger portion of the enrollment for the winter semester falling into the second fiscal quarter. because of the earlier timing of Chinese New Year this year compared with the last year, as well as the higher than normal cancellation for winter classes. The outbreak of COVID-19 has also caused challenges on acquiring the new customers in the second half of the quarter, while the enrollment for classes in Q4 and summer classes have also been delayed. At the same time, we continue to our efforts in improving and maintaining our online-offline OMO standardized classroom teaching system, especially during the outbreak of COVID-19. All the offline classes have been translated smoothly to online classes since the beginning of February, and we are very encouraged to have received positive feedback from our customers. We also continue to make strategic investments into our new initiatives in K-12 tutoring, our peer online education platform, CoolLearn.com, to leverage our advanced teaching resources in lower-tier cities and those in remote areas. Following last quarter's strong bottom-line performance, we once again achieved year-over-year operating margin expansion in this quarter. During the quarter, we recorded a non-gap operating income of $106. and $34.8 million, compared to $113.8 million in the same period of last year. Non-GAAP operating margin rose by 30 basis points year-over-year to 14.6%, and non-GAAP net margin rose by 240 basis points year-over-year to 16.1%. The continued operating margin extension is mainly driven by the federal leverage in closing rental and related operating expenses, just as we consistently improve the utilization of the facilities before the outbreak of COVID-19. The next margin extension is also due to the VAT exemption approved by the government during the pandemic, and the net loss is cooler and subsidiary undertaken by the non-controlling interest of shareholders. We're confident that we will be able to deliver continued margin expansion after the pandemic is over and generate sustainable long-term value for our customers and shareholders. Per program blended ASP, which is cash revenue divided by total student enrollment, increased by about 2.7% year-over-year in dollar terms. As for hourly blended ASP, which is cash revenue divided by total teaching hours, increased by approximately 3% year-over-year in R&D terms. To provide the breakdown of the already planned ASP, please note that UCAN Middle School High School program increased by 4%, Top Kids increased by 6%, and Overseas High School High School program increased by 7% year-over-year in R&D terms. Comparing with our normal price increase of 5% to 8%, This quarter's hourly planning AFP increase was 2% to 3% lower than normal level, mainly because of the discount we provided to the customers to support the migration from offline class to online, as well as the bigger slowdown of the VIP personalized class assistance. At the same time, to show gratitude to the medical staff who traveled to Wuhan to offer help. They offered special complimentary classes to their children. This has inevitably contributed a slight decrease of the ASP. Now let's move on to the third quarter, performance across our individual business lines. As mentioned earlier, our key revenue drivers, K-12, all subjects after school children's business, achieved year-over-year revenue growth of 24% in dollar terms or 27% in R&D terms. breaking it down. When you came into school, high school, all subjects, after school, children's business, recorded a revenue increase of approximately 23% in dollar terms, or 26% in R&D terms for the quarter. Student enrollment grew approximately 23% a year for the quarter. Our pop case program delivered outstanding results, with the revenue up by about 26% in dollar terms, or 29% in R&D terms for the quarter. Enrollment decreased by 23% for the quarter. The decline is due to the bigger portion of the enrollment for the winter semester falling to the second physical quarter because of the earlier timing of the Chinese New Year this year compared with last year. The overseas test lab business recorded the revenue decrease of 14% in dollar terms for 12% in RMB terms for the quarter. Consulting business recorded revenue growth of about 27% in dollar terms, worth 13% in R&D terms year-over-year for the quarter. Finally, VIP personalized process business recorded revenue growth of about 10% year-over-year in dollar terms, worth 13% in R&D terms year-over-year for the quarter. Next, I will provide some updates on progress we're making with our optimized market strategies. Beginning with our offline business this quarter, as mentioned earlier, we added a net of 110 learning centers in business cities, opened two new training schools. Altogether, this increased the total square meters of classroom error by approximately 30 percent year-over-year, 11 percent quarter-over-quarter, and 21 percent compared with the end of the fiscal year 2019. The expansion of our offline education network has also made sure that we are fully prepared for when the pandemic is over, and our service can resume with the strong presence across the different Chinese cities. The two-teacher class model has been introduced into the practice program in 48, in season B. For UCAN program, in 28 existing cities, and for both top KFC and UCAN to develop business in seven new cities. The initiative supported increased market penetration in those markets we have tapped into. We also saw improved customer retention and scalability of the new model. With these proven results, we will continue this strategy in the rest of the year. On the digital technology front, We invested $40 million in this quarter to improve and maintain our OMO education ecosystem. And as the outbreak of the COVID-19 has highlighted the importance of the demand of online education, the investment also supported the migration of our online classes to small-sized online offices of the offline class to small-sized online lab broadcasting classes during the pandemic. Apart from the OMO infrastructure, we have allocated a part of the resources for teacher training to ensure they are all well-equipped to be managing the online classes. As a result, the OMO ecosystem manages to cushion the most of the impact on our service and operation caused by the pandemic. Most of the investments were recorded in the GMA census. Furthermore, we also made stable progress in the Pure Online Cooler.com business line and other supplementary online education products, which is experiencing growth through market demand. More resources are invested into executing the new initiatives in online K-12 after-school children's business in the Cooler 2020. The investment includes content development, teachers recruiting training, self-marketing, R&D, and other necessary cost incentives to drive the growth of the new Pure Online programs. With these programs, we are able to reach out to more students in both your cities in an interactive and scalable manner. We believe this will help Kulin.com to gain new market share in the online education space and grab top-line roles. In addition, during the COVID-19 pandemic, Cool Learn did a large-scale market promotion by offering three large-sized online live broadcasting classes to the public and attracted several times more traffic than normal times. To capture the new market opportunity, Cool Learn also added a meaningful amount of the customer representatives and marketing staff to support the new initiatives in K-12 children. have consequently raised our spending on the market front, but we believe these are necessary and understandable measures as we found ourselves in a usual pandemic situation. Now let me work through the other key financial details for the third quarter. Operating cost expenses for the quarter were $806.0 million, representing a 15.0% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which exclude share-based compensation expenses, were $788.4 million, representing a 15.4% increase year-over-year. Cost of revenue increased by 18.1% year-over-year to $398.6 million, primarily due to increase in teacher's compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation. Center marketing census increased by 35.2% year-over-year to $118.2 million, primarily due to a significant increase of the promotion census and the number of the customer service representatives and marketing staff for the new initiative in K-12 tutoring on coolant.com. General administrative expenses for the quarter increased by 4.8 percent year-over-year to $289.1 million. Non-GAAP GMA expenses, which exclude share-based compensation expenses, were $273.3 million, representing a 5.9 percent increase year-over-year. Total share-based compensation expenses, which were allocated to relate operating costs and expenses decreased by 2.4 percent to $17.5 million in the third fiscal quarter of 2020. Operating income was $117.3 million, representing a 22.4 percent increase year-over-year. Non-GAAP income from operations for the quarter was $134.8 million, representing an 18.5 percent increase year-over-year. Operating margin for the quarter was 12.7% compared to 12.0% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 14.6% compared to 14.3% in the same period of prior fiscal year. Net income attributable to new rental for the quarter was $137.7 million, representing a 41.4 percent increase from the same period of prior fiscal year. Basic and value-added earnings per ADS attributed to the new rental were $0.87 and $0.86, respectively. Non-GAS net income attributed to the new rental for the quarter was $148.5 million, representing a 36.4% increase from the same period of prior fiscal year. Non-GAAP basic values of earnings per ADS, typically new rental, were $0.94 and $0.93, respectively. Net margin for the quarter was 14.9% compared to 12.2% in the same period of prior fiscal year. Non-GAAP net margin for the quarter was 16.1% compared to 13.7% in the same period of prior fiscal year. Net operating cash flow for the third quarter of 2020 was approximately $39.7 million. Capital expenditures for the quarter were $103.2 million, which were primarily attributed to the opening of 27 facilities and renovations at the existing learning centers. Turning to the balance sheet, as of February 29, 2020, New Rental had cash and cash equivalent of $1,057.1 million, as compared to $1,414.2 million as of May 31, 2019. In addition, the company had $269.2 million in term deposit and $2,241.0 million in short-term investments. The ORIMTO's preferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as the revenue as the instructions are delivered at the end of the quarter of 2020, was $1,375.0 million, an increase of 15.4% as compared to $1,191.8 million at the end of the fourth quarter of fiscal year 2019. Looking ahead to the fourth quarter of this fiscal year, despite the continued challenges from the COVID-19 pandemic, we're still optimistic towards the company's business and will continue to focus on the following key areas. We will continue to expand our offline business. We still aim to add around 20% to 25% capacity, including new learning centers and extending cross-minorities of some existing learning centers for case law business in existing cities. We believe our capacity extension will support us to hold more student-owned facilities in the coming summer. which will very likely be shortened by one or two weeks due to the delayed start of the second semester of all public schools in China to combat the academics. More importantly, it will prepare us to further take market share from our other players after COVID-19 subsides gradually as some small players without strong financial position and online cloud capability may not be able to sustain their business during the period and will be forced to cease operations. The expatriate industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we're a major player with strong financial capacity and fresh offline facilities allow us to further strengthen our market-leading position and penetration. In addition, we'll continue to roll out our new teacher model schools to a number of new local cities in certain provinces for the whole year. Second, we'll continue to leverage our investment into digital technologies and reintroduce our OMO systems to more offline language training and test offerings, especially for our K-12 business and over-the-top web business. We will broaden the usage of the online tools and content in our OMO system for all business lines throughout the whole network. We will continue to invest in developing the best teaching content and courseware to cater to online-offline integrated education methods. At the same time, we will provide more advanced training programs to our teachers and enhance their online-offline integrated teaching skills. We will continue to make lessons And we believe the total spending in absolute dollar terms in fiscal year 2020 will increase compared with the previous fiscal year. Furthermore, we will continue to invest in and execute new initiatives, including product with constant development, teachers recruiting training, R&D, as well as marketing in pure online K-12 after-school business on our cool1.com platform. As mentioned earlier, during the COVID-19 pandemic, CoolLearn encountered several times more traffic than normal times by offering free online live broadcasting classes to the public during the winter and spring seasons. CoolLearn also added a meaningful amount of customer service representatives and tutors. This near-term investment enhanced our competitive advantage to capture the new online education market activity. Third, our top priority will remain as the focus on controlling costs and reducing the expenditures across the company to minimize the negative impact from COVID-19 pandemic on our bottom line. Although we expect the margin to climb year-over-year in the fourth quarter of fiscal year 2020, we believe we can still maintain non-gap operating margin for the full year of fiscal year 2020 at a similar level as last year. and achieve expansion of non-GAAP net margin for the full year of 2020 compared to the year-to-year decline in the last two fiscal years. Finally, the recent R&D depreciation against the U.S. dollars might cause impact on earnings in dollar terms for the fourth quarter fiscal year 2020. Finally, I would like to emphasize we have great confidence in the fundamentals of our business. Although we are facing the next impact from the pandemic for the near term, we remain optimistic of the brighter prospects of our business over the long run. We're certain that with the new rental leading brand, superior education products and systems, and best future resources, we'll keep taking market share with the leading position in China's huge after-school tutoring market and deliver long-term value for our shareholders and customers. Looking at the near term and our expectations for the next quarter, we expect the total revenue to be in the range of $774 million to $806.2 million. We present a year-over-year decline in the range of 8% to 4%. If not taken into consideration, the impact, the potential change in exchange rates between RMB and U.S. dollars The projected decline of revenue is expected to be in the range of 4% to 0% for the first quarter of fiscal year 2020. To provide a breakdown of the expected top-line growth for key business lines, K-12, all subjects after school children business, is expected to grow around 10% to 11%. 18% to 19% excluding the IT 101 business. Overseas test lab program is expected to decline around 45%, and overseas study consulting business is expected to grow 12% to 13% all year-on-year in R&D terms. The expected significant decline of the overseas test lab business and slowdown of the overseas consulting business is due to the outbreak of the COVID-19 pandemic around the globe, starting from March, with the cancellation of the overseas exams, suspension of the overseas schools, and restrictions on travel. We expect the negative impact of overseas business will affect the entire education industry in China, not only New Oriental, and will last over the coming one to two quarters. That said, in contrast, China's effective control of the pandemic situation has shed a more positive light on our business domestically. We're optimistic over the trend of the K-12 after-school children's business. I've tracked from the public news that 30 provincial-level governments, that's 88% of the total, have announced a public school resumption plan. We're confident that demand for the after-school children's business will pick up after the reception of the schools, and the short-term impact from the school hour changes and short-term summer holidays will be manageable. The estimated exchange rate used to calculate expected revenue for the fourth quarter of fiscal year 2020 is 7.07%. The historical exchange rate used to calculate revenue for the fourth quarter of the fiscal year 2019 was 6.76. I must mention that this expectation reflects New Rental's current preliminary view, which is subject to change, especially in the pandemic period. At this point, I will take some questions. Operator, please open the call for these. Thank you.