New Oriental Education & Technology Group, Inc.

Good evening, and thank you for standing by for New Oriental's FY 2020 Fourth Quarter Results Earnings Conference Call. At this time, all participants are in the 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. Please go ahead.

Thank you. Hello, everyone, and welcome to New Oriental's fourth 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 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 full-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, Sissi. Hello, everyone, and thank you for joining us on the call. Despite the outbreak of COVID-19 pandemic starting from March posed continuing pressure on all businesses across the globe, including ours, we're pleased to report a set of financial results in the fourth fiscal quarter of this fiscal year, that is in line with our expectation. Total net revenue was $798.5 million, a slight decrease of 5.3% in dollar term or 1% in RMB term. A mix of results amongst various business line were reported, which I will elaborate each of them shortly. Total student enrollment in academic subjects tutoring and test-rack courses in the fourth quarter of fiscal year 2020 decreased by 6.2% year-over-year to approximately 2,585,600. The lower than normal increase in the number of student enrollments is primarily due to the outbreak of the COVID-19, which has made new customer acquisition in the quarter much more challenging. while the enrollment for the summer and autumn classes have also been delayed. In terms of the bottom line performance, for the entire fiscal year of 2020, we managed to deliver an extension of non-GAAP operating margin of 70 basis points year-over-year to 12.9% compared to 12.2% for the prior fiscal year. However, for the fourth quarter of 2020, Due to the negative impacts from the pandemic on our top-line performance and the increased spending from offering free classes to promote our cooler to a lot of large classes with the aim of taking more market share, our gross margin recorded for the quarter was 51% down 506 points year-over-year. Our non-gap of the margin for the quarter was 4.1% down 810 basis points year-over-year. and non-GAAP net margin for the quarter was 6.1%, down by 520 basis points year-over-year. In order to minimize the negative impact caused by the COVID-19 pandemic to our bottom line, we actively adjusted our operational strategy and made more efforts on cost control and reducing expenditures, especially for business lines facing bigger negative impacts in the near term. We believe that our continuous efforts will sustain us through the crisis, and hopefully that the adverse effect on our business from the pandemic will subside gradually. Per program-planned ASP, which is cash revenue divided by total student enrollment, decreased by 14.8% year-over-year in dollar terms. As for hourly-planned ASP, which is cash revenue divided by the total teaching hours, decreased by approximately 3.5% year-over-year in IRB terms. To provide the breakdown of the already-planned ASP, please note that UCAN class increased by 0.2%. UCAN VIP classes increased by 3.5%. Top kids increased by 6.4%. And Overseas Task Force Program increased by 16.1% year-over-year in IRB terms. Comparing with the normal price increase of 5% to 8%, this quarter's hourly blended ASP decrease was lower than normal level, mainly because of the bigger decline of the overseas test prep program and the UK and VIP personalized classes business, which hourly blended ASP are much higher than the other programs, as well as the use of the coupons as we provided to the customer to support the migration from offline classes to online OMO class during the winter. Now, I would like to spend some time to talk about fourth quarter performance across our individual business line in detail. In this unprecedented period, we see a mix of the results among each of the business line. Our key revenue for our K-12 after school business achieved the year-over-year growth revenue growth of approximately 4% in dollar terms or 8% in R&B terms. Breaking down, the U.K. Middle School, High School, Old Subjects, Afterschool, Children business recorded a revenue increase of approximately 1% in dollar terms or 5% in R&B terms for the quarter. Suing enrollment grew approximately 0.1% year-over-year for the quarter. Excluding VIP 101 business, UCAN small-class business grew by approximately 15% in dollar terms or 20% if measured in RMB. Our podcast program delivered outstanding results, with revenue up by about 10% in dollar terms or 14% in RMB terms for the quarter. Enrollment decreased by 9% for the quarter, though as the outbreak of the COVID-19 has caused the challenges on acquiring new customers in the quarter, while the enrollment for the summer and autumn classes have been delayed. Our overseas-related business, including test flags and consulting business, faced the most difficult challenges due to the cancellation of the overseas exams, suspension of the overseas schools, and restriction on travels. The overseas test flag business revenue declined by approximately 52% in dollar terms, or 50%. if measured in RMB. However, despite the challenges, the consulting business grew by approximately 6% in dollar terms or 11% in RMB terms. And finally, VMP personalized class assistance reported revenue decline of about 36% year-over-year in dollar terms or 34% in RMB terms year-over-year for the quarter. Our summer promotion strategy also delivered outstanding results. We offered low-price experiential courses for multiple subjects in total of about 69 cities, targeting entry grades of primary and secondary school students, customers, before they start this new school year. The promotion price is similar to last year at around 400 RMB. Even though we launched the summer promotion campaign almost one month later than we did last year due to the pandemic situation, the summer promotion remains very well received by the market. We're pleased to see that the promotion enrollment we brought in before the start of the summer holiday by mid-July this year achieved a 20% increase comparing the same period of last year. reaching 986,000 enrollments. The encouraging results have proven that such sound and highly profitable strategy enables us to capture and increase our market share in high-growth K-12 after-school children markets, also puts us in a more favorable position during this market consolidation period, and certain players may lack financial or digital capabilities to sustain their operation during these challenging times. As these students move to the higher grades, we expect the continuing improvement in retention rates and customer loyalty will drive revenue growth in the next three to six years. We continue to be guided by our optimized market strategy in this quarter and carry out capacity expansion in cities where we see potential for rapid growth and strong profitability. This quarter, we added a net of 44 learning centers in visiting cities, opened a new training school in the city of Weihai, as well as four dual-teacher model schools in the city of Hebi, Xintai, Zhongmabian, and Xuchang. Altogether, this increased the total square meter of classroom area by approximately 26% year-over-year, 5% quarter-over-quarter by the end of this quarter. Despite such challenging times, we didn't put our extension plan on hold as we wanted to ensure that we are fully prepared when the pandemic is over. Our service will resume with strong presence across different Chinese cities. As the outbreak of COVID-19 has highlighted the importance and demand of online education, we have placed more resources in this area and invested $36 million in the quarter to improve and maintain our OMO integrated education ecosystem. The investments also supported the migration of our offline class to small size online class during the pandemic. Apart from the OMO infrastructure, we have allocated part of the resources in advanced training programs for our teachers to enhance their online and offline integrated teaching skills in response to the growing demand in the market. At the same time, we continue to upgrade our technology platforms and will broaden the usage of the online tools and content in our OMO system for all business line through the whole network, as well as further develop the best teaching content and courseware to cater on online-offline integrated education methods. We're glad to see that our industry-leading OMO ecosystem has not only successfully managed to cushion most of the impact our service and operation caused by the pandemic, but we also see the refund rate from the cancellations have been stabilized at a normal level as we entered into the spring semester, while our customer retention rates from winter to spring semester and from spring to summer semester were trending higher than the same period last year, which further demonstrated that our customer satisfaction and effectiveness of our online course through our whole MO system. To further tap into the huge market opportunity in online education, we continue to place more resources in cooler in executing new initiatives in our K-12 online afterschool children's business in fiscal year 2020. This includes content development, teachers recruiting training, sales marketing, R&D, and other necessary cost expenses to drive the growth of the new online programs. With these programs, we're able to reach out to more students in low-tier cities in an interactive and scalable approach. We believe this will help CoolLearn.com to gain new market share in the online education space and drive up health and growth. In the past quarter, CoolLearn did a large-scale market promotion by offering three large-size online-level testing classes to the public. and attracts several times more traffic than normal time. Cooler also added a meaningful amount of customer service representatives and marketing staff to support the new initiatives in K-12 tutoring. These moves have raised our standing on the marketing front, but we believe those are necessary and understandable measures as we found ourselves in a Europe pandemic situation. The two-teacher class model has been offered for podcast program in 48 existing cities, UCAN program in 29 existing cities, and for both podcasts in UCAN head office business in 10 new cities. We're glad to see the model has proven to be successful as there is an increased market penetration in those markets we have tapped into. We also saw improved customer retention and scalability. With these probate results, we will continue this strategy going forward. Now, let me walk you through the other key financial details for the fourth quarter. Offering costs and expenses for the quarter was $788.2 million, representing a 2.9% increase year-over-year. Non-guide offering costs and expenses for the quarter, which includes share-based compensation expenses, were $765.9 million, representing a 3.5% increase year-over-year. Cost of revenue increased by 5.3% year-over-year to $391.1 million, primarily due to increased 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 11.4% year-over-year to $118.0 million, primarily due to the addition of a number of customer service representatives and marketing staff with the aim of capturing the new market opportunity during the pandemic, especially for the new initiative being changed to our pure online education platform, Cooler.com. General administrative expenses for the quarter decreased by 3.3% year-over-year to $279.2 million. Non-gas general administrative expenses, which include share-based compensation expenses, were $261.0 million, representing a 1.3% decrease year-over-year. Total share-based compensation expenses, which were allocated to relate to operating costs and expenses, decreased by 13.5% to $22.3 million in the first quarter of fiscal year 2020. Operating income was $10.3 million, and an 86.7% decrease from $77 million in the same period prior to fiscal year. Non-GAAP operating income for the quarter was $32.5 million, a 68.3% decrease from $102.7 million in the same period of prior fiscal year. Operating margin for the quarter was 1.3%, compared to 9.1% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 4.1%, compared to 12.2% in the same period of prior fiscal year. Net income attributable to new rental for the quarter was $13.2 million, representing a 69.5% decrease from the same period of prior fiscal year. Basics that load the earnings per ADF attributable to new rental were $0.08 and $0.08, respectively. Non-gas net income attributable to new rental for the quarter was $48.5 million, representing a 49% decrease from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributed to new rental were $0.31 and $0.30, respectively. Net margin for the quarter was 1.7%, compared to 5.1% in the same period of prior fiscal year, Non-gap net margin for the quarter was 6.1% compared to 11.3% in the same period of five fiscal year. Net operating cash flow for the fourth quarter of 2020 was approximately $108.5 million. Capital expenditures for the quarter were $89.7 million, which were primarily attributable to the opening of 73 facilities and renovations at the existing learning centers. Turning to the balance sheet, as of May 31st, 2020, New Rental had cash and cash equivalents of $915.1 million compared to $1,414.2 million as of May 31st, 2019. In addition, the company had $284.8 million in term deposits and $2,315.3 million in short-term investments. New Oriental's different revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instruction delivers, at the end of the fourth quarter of fiscal year 2020 was $1,324.4 million, an increase of 1.8% from $1,301.1 million at the end of the fourth quarter of prior fiscal year. We are now approaching to the new fiscal year. Despite the continued challenges from the COVID-19 pandemic, I expect to remain. We're still optimistic towards the company's business in the long run, and we'll continue to focus on the following key areas. First, we will continue to expand our offline business. We aim to add around 20% to 25% including new learning centers and expanding classroom area of some existing learning centers for K-12 business. We believe it will prepare us to further take more market share from other players post-COVID, as we believe some small players without strong financial position and online class capability may not be able to sustain its business during the hard period. And we expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with strong financial capacity and fresh offline facility enable us to further strengthen our market leading position and penetration. Second, we will continue to leverage our investment into digital technologies and to introduce our OMO system in more offline language training and test offerings especially for our K-12 business. The usage of the online tools and contents in our OMO system for all business lines throughout the whole network will be enhanced. To uplift the whole OMO teaching experience, we will place more efforts in developing the best teaching content and courseware, and also developing more advanced training programs to our teachers. For some who might not be very familiar with our OMO business model, allow me to spare a few minutes now to elaborate the four key OMO strategy we have in place. Number one, the online system is mainly used to supplement the offline classes we have in existing cities with hybrid format. Number two, for the cities we have presence but might not have enough learning centers to cater all our customers, our OMO system enables us to reach out to more students and customers. Number three, for some provinces where we don't have centers in all of the cities, our OMO system allows us to reach out to students of the surrounding satellite cities. Number four, we offer a series of complimentary low-cost experimental online classes for people and students to experience our classes, hoping to attract new customers. Here, I have to highlight that all of these OMO products are supported by our offline classes. They supplement each other. As a teaching content, courseware, materials, as well as our teachers and technology, developed and originated from our existing offline centers and resources. We believe that the above-mentioned OMO initiatives will be one of our growth engines to increase our customer acquisition post-COVID and enabling us to capture the market consolidation opportunity. This advanced new business model will also accelerate our margin recovery in the rest of the year and further extend our long-term margin target. Furthermore, we will continue to invest in and implement new initiatives including product concept development, teachers recruiting training, R&D, as well as sales marketing in K-12 after-school children's business on CoolLearn.com. Third, our top priority will remain as the focus on controlling cost and reducing expenditures across the company to minimize the negative impact from the pandemic, our bottom line. We believe we will resume the extension of overall non-GAAP operating margin year-over-year as COVID-19 subsides gradually. Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong. Although we are facing various short-term negative impacts from the pandemic, and we have been increasing our investment in different strategy, we remain optimistic of a brighter perspective of our business, and I believe our investments now will bring us fruitful returns in the long run. We're certain that with Neolinto's leading brand, superior education products and system, and the best of teachers' resources, we have the ability to take further market share in China's huge after-school children's market and deliver long-term value for our customers and shareholders. When looking at the near-term and our expectations for the next quarter, we have factors in various considerations, including the one-month delay of National Gaokao and Zhongkao, the delayed enrollments for summer and autumn classes this year in many major cities, and the shortening of the summer holiday in many major cities by one to two weeks. Summer courses in July and August will be trimmed down to three to four terms only. which we typically have four to five terms historically. The recent reemergence of the COVID-19 cases in cities such as Beijing has delayed the resumption of both public schools and our tutoring schools in these areas. Inevitably, all these unprecedented situations have caused a lower visibility of our business performance data for the summer quarter, hence, We take most conservative approach to make our forecast for Q1 2021. We expect total revenue to be in the range of $911.2 million to $953.5 million, representing a year-over-year decline in the range of 15% to 11% in dollar terms. If not taken into consideration, of the impact of potential change in training rates between RMB and US dollar, the projected revenue decline rate is expected to be in the range of 14% to 10% for the first quarter of fiscal year 2021. To provide a breakdown of the expected top line growth for key business line, K-12 all subjects after school children's business is expected to be growth 3% to 7%. Overseas test prep program is expected to decline 55% to 51%. And Overseas Study Consulting Business is expected to decline 7% to 11% all year-over-year in RMB terms. We also expect Overseas Related Business including Overseas Task Force and Consulting Service will continue to decline due to the pandemics around the globe caused by the cancellation of the Overseas exams and suspension of the overseas schools and restriction on travels. The negative impact on those overseas-related businesses will affect the entire education, the overseas health threat related to industry in China, not only new rental, and may last over the coming one or two quarters. That's right. In contrast, China's effective control of the pandemic situation has shed a more positive light on our business domestically. We're pleased to see that we have gradually resumed our offline operation in over 90% of cities that we are in, and vast majority of students in these cities have successfully migrated back to our learning centers from OMO online classes. We have also seen significant pick-up in the year-over-year trend of student enrollment and test proceeds from students in July this month for the summer quarter, which is a positive sign of recovery. To conclude, we're now taking all kinds of the additional actions to boost the enrollments and the classroom utilization for the summer and autumn semester and speed up recovery of business after the resumption of the schools and learning centers. We're confident that demand for afterschool tutoring business will pick up gradually in the summer and in the rest of the fiscal year. I must mention that these expectations reflect New Rental's current and preliminary view, which is subject to change. At this point, I will take your questions. Operator, please open the call for these. Thank you.