New Oriental Education & Technology Group, Inc.

Good evening and thank you for standing by for New Orientals FY 2021 First 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 call is being recorded. If you have any objections, you may disconnect at this time. I'd like to turn the meeting over to your host for today's conference, Ms. Cici Zhao.

Hey, hello everyone and welcome to New Rental's first fiscal quarter 2021 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as our news bar services. Today you will hear from Stephen Young, 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 filings with 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 will now turn the call over to Mr. Stephen Yeung. Please go ahead, Stephen.

Thank you, Cici. Hello, everyone, and thank you for joining us on the call. Although the impact of the pandemic continues to raise hurdles for business across the globe, We're pleased to kick off the fiscal year with a set of encouraging financial results in the first quarter of this year that is in line with our expectation. While it's showing signs of the recovery in some of our business lines as domestic markets begin its path to normalization, total net revenue was $986.4 million dollars. representing an 8% decrease year-over-year, which is better than we got it in the previous quarter. Net revenues from education programs and services for the first quarter were $935.6 million, representing a 6.1% decrease year-over-year. Our UCAN middle school, high school, old subjects, after school, children's business showed a positive light with a growth of approximately 9%. while our PubKids program reported the growth of approximately 4%. Our industry-leading OMO system has been vital in the previous quarters to ensure our service runs smoothly, and it has once again proved to be instrumental in this quarter. As it provides our operation with strong flexibility to help the vast majority of our students migrate from OMO online classes back to offline learning centers, which have gradually resumed service amid the easing of the pandemic restriction measures. Encouraged by its effectiveness, we have put more focus on executing our OMO strategy, including piloting the OMO online courses in around 26 cities and attract a promising number of new customers in the summer quarter. Total student enrollments in dynamic subjects tutoring and test drive courses in the fourth quarter of 2021 increased by about 13.5% year-over-year to approximately 2,961,100. The lower the normal increase in the number of student enrollments is primarily due to the delay of the enrollment for summer and autumn classes and shortening in the summer holiday in many major cities by one or two weeks this year, as well as the delayed resumption of the offline operation in cities such as Beijing due to the reemergence of the COVID-19 cases before the summer holiday. A key highlight in this quarter is the highly successful summer promotion campaign. Despite the challenge of the shortened summer holiday, we're delighted to see the total promotion enrollment reached $1,079,000, a 31% increase year-over-year, accompanied by improved student retention year-over-year. In terms of the pricing, per program blended ASP, which is cash revenue divided by total student enrollment, decreased by about 10% year-over-year in dollar terms. As for hourly blended ASP, which is cash revenue divided by the total teaching hours, decreased by approximately 2% year-over-year. To provide a breakdown of the already-blended ASPs, please note that UCAN classes increased by 2%, UCAN VIP courses increased by 3%, POP Kids decreased by 1%, and Overseas Test Drive Programs increased by 7% all year-over-year in dollar terms. Comparing with our normal price increase of 5% to 8%, This quarter's hourly blended ASP decrease was mainly because of, firstly, a bigger decline of Overseas Task Force Program, which hourly blended ASP was much higher than other programs. Secondly, the piloting of promotional OMO online courses in some major cities with discounted price in summer. And thirdly, a bigger portion of the enrollments on promotional courses to encourage students to register for more subjects. Now, I would like to spend some time to talk about the quarter performance across our individual business line in detail. As the pandemic gradually fades in China, encouraging signs of recovery have started to emerge across our business lines with significant jump in student enrollment. Our key revenue driver, K-12 after-school children's business, achieved the year-over-year revenue growth of approximately 8% in dollar terms. Breaking it down, the UCAN middle school, high school, all subjects, after school, children's business recorded the revenue increase of approximately 9% in dollar terms for the quarter. Student enrollment grew 23% year-over-year for the quarter. Our top kids program recorded the revenue increase of about 3.5% in dollar terms for the quarter. Enrollment increased by 17% for the quarter. Our overseas related business, including test track and consulting and study tour business, continue to face the difficult challenges due to the cancellation of the overseas exams and restrictions on travel, while the unpredictability of the pandemic situation in different parts of the world has raised the students' hesitance to study abroad. The overseas test track business recorded a revenue decrease of about 51% in dollar terms for the quarter, while the oversea consulting and oversea study tour business recorded revenue decrease of about 31% in dollar terms year-over-year for the quarter. And finally, VIP personalized class business recorded cash revenue decline of about 10% in dollar terms year-over-year for the quarter. We're pleased to see that our summer promotion strategy delivered outstanding results. We offered low-price experiential courses for multiple subjects in a total of about 70 cities, targeting grade seven secondary school and grade three primary school student customers before they start their new school year. The promotion price is similar with that of last year at around RMB 400. It's very encouraging that even we launched the summer promotion almost one month later than last year because of the huge challenge from the pandemic on our daily operation. The summer promotion remains very well received by the market. The complete promotion enrollment we brought in this year recorded a 31% increase year-over-year, reaching 1,079,000 enrollments. The encouraging results indicated the opportunity of the market consolidation as the COVID-19 pandemic fades and certain players may lack financial and digital capabilities to sustain their operations. It was well proven that under this strategy, we're able to better identify and retain customer with higher loyalty. Please note that these promotion enrollments are not recorded in our current reported enrollment. Going into the ultimate semester, we have returned about 60% of the students following the promotion, which will boost the revenue and margin recovery throughout the whole fiscal year 2021. And we do not foresee any negative impact of the promotions operating margin throughout the whole fiscal year. As these students move to the higher grades, the continual 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 the cities while we see potential for rapid growth and strong profitability. This quarter, we opened seven new offline training schools in the city of Changzhou, Huayan, Kaizhou, Yixing, Wuhu, and Jiaxing. Altogether, this increased the total square meters of classroom area by approximately 23% year-over-year, 1% quarter-over-quarter by the end of this quarter. This live increase is in line with our expectation. as we tend to achieve a more modest growth in capacity in the first quarter of the year and ramp up our expansion efforts in the latter part of the year to prepare us for recruiting more new student enrollment at the start of the following academic year. 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 a strong presence across different Chinese cities. We rolled out our due teacher class model for PubKey's program in 46 existing cities, for UCAN's program in 28 existing cities, and for both PubKey's and UCAN's in 10 new cities by end of this quarter. We're happy to see increased market penetration in those markets we have tapped into. We also saw the improved customer retention and scalability of this new model. With this proven result, we will continue this strategy in the rest of the year. As the outbreak of COVID has highlighted the importance and demand of online education, we have placed more resources in this area and invested $39 million in the quarter. to improve and maintain our OMO integrated education ecosystem. And as the COVID, outbreak of the COVID-19 has highlighted the importance and demand of the online education. Apart from the OMO infrastructure, we have allocated part of the resources in advance to training programs for our teachers to enhance their online, offline integrated teaching skills in response to the growing demand. At the same time, we continue to upgrade our technology platforms and will broaden the usage of online tools and content in our OMO system for all business lines throughout the whole network, as well as further develop the best teaching content and courseware to cater to online, offline education methods. We're glad to see that industry-leading OMO ecosystem has not only successfully managed to cushion most of the impacts on our service operation caused by the pandemic, but we also see the customer retention rates from spring to summer semester and from the summer to autumn semester were trending higher than the same period last year, which further demonstrated our customer satisfaction and effectiveness of our online courses throughout the OMO system. We believe those OMO initiatives will effectively boost the enrollment and speed up the recovery of business in the rest of the year. To capture the huge market opportunity in the online education space, we continued investing more resources in executing the new initiatives, the online K12 AdWords School Children's Business Physical Year 2021. During the COVID-19 pandemic, CoolLearn the large-scale market promotion by offering three large-size online lab broadcasting classes to the public and attracted several times more traffic than normal times. To capture this new market opportunity, Kulin also added a meaningful number of customer service representatives and marketing staff to support the new initiatives in K-12 tutoring. These moves have consequently raised our spending on the marketing front, but we believe these are necessary and understandable measures as we find ourselves in a euro-pandemic situation. Our Dongfang Youbo small-size class currently enjoys a significant first-mover advantage and stands to benefit from the increase in demand in larger cities. Cooler and larger-sized K-12 courses are able to offer the best in-class learning experience through the investment in upgrading the app and online platforms, introducing new education technologies, and adding more interactive features on online courses. Cooler also continues to establish teaching training centers in other locations to attract more qualified teachers and tutors to provide systematic training programs. At the same time, Cooler has dedicated a significant amount of investment to marketing and service enhancement in the past two quarters to attract customers during the peak of the pandemic. But we expect spending to be normalized in the coming quarter as we will be cautious in identifying high ROI marketing channels and evaluate their units' economics in real time, which will, in return, keep the average user acquisition cost at a relatively low level. We believe, as a result of the improvement of operational teams, as well as positive word-of-mouth promotion and brand loyalty, CoolLearn will continue to quickly acquire new users while enhancing the student retention rate. Now let me walk you through the other key financial details of the quarter. Offering cost expenses for the quarter were $836.1 million, representing a 1.3% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which exclude the share-based compensation expenses, were $820.2 million, representing a 0.7% increase year-over-year. Cost of revenue increased by 5.6% year-over-year to $464.9 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. Studying marketing expenses increased by 15.5% year-over-year to and $16.9 million, primarily due to the addition of number of customer service representatives and marketing staff with the aim of capturing the new market opportunity, especially for new in K-12 tutoring our pure online education platform, CoolLearn.com. General administrative expenses for the quarter decreased by 10.5% year-over-year to $254.3 million, Non-GAS GNA expenses, which exclude share-based compensation expenses, were $242.6 million, representing an 11.3% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 43.7% to $15.8 million in the fiscal quarter of 2021. Operating income was $150.3 million, representing a 38.9% decrease year-over-year. Non-GAAP income from operations for the quarter was $166.1 million, representing a 35.4% decrease year-over-year. Operating margin for the quarter was 15.2%, compared to 23.0% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 16.8% compared to 24% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $174.7 million, representing a 16.4% decrease from the same period of prior fiscal year. Basic and dilutive earnings per ADS attributable to New Oriental were $1.10 and $1.09, respectively. Non-GAAP non-income attributed to new rental for the quarter was $184.5 million, representing a 19.8% decrease from the same period prior fiscal year. Non-GAAP basic and dilutive earnings per ADF attributed to new rental were $1.16 and $1.15. Net operating cash flow for the first quarter of 2021 was approximately $391.6 million. Capital expenditures for the quarter were $95.2 million, which were primarily attributed to the opening of 42 facilities and renovations at existing learning centers. Turning to the balance sheet, as of August 31, 2020, New Rental had cash and cash equivalents of $1,047.6 million, as compared to $915.1 million as of May 31, 2020. In addition, the company had $291.8 million in term deposits, $2,778.4 million in short-term investments, New Orientals deferred revenue balance, which is cash collected from registered students for courses and recognized proportionally as revenue as the instruction delivered at the end of the first quarter of fiscal year 2021 was $1,563.1 million, an increase of 17.5% as compared to $1,330.7 million. at the end of the first quarter of fiscal year 2020. Looking ahead into the next quarter and the rest of the fiscal year 2021, despite the continued challenge from the COVID-19 pandemic are expected to remain. We're more clear about the recovery trends of the company near-term financial performance and the market opportunity over the long run. Our strategic focus an investment approach this year aimed at improving product quality, increasing teacher salaries, and enhancing our industry-leading system, which fully reflects our ethos of focusing on the essence of education. In view of market competition and opportunities to take advantage of post-COVID market consolidation, we firmly maintain a stable and balanced investment strategy that would improve the quality of our education service with aim to achieve sustainable and long-term growth as opposed to unhealthy short-term growth that often requires excessive investment and a higher cost to acquire customers. As such, we will 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% capacity, including new learning centers and expanding classroom area of some existing learning centers for K-12 business in this fiscal year. We believe our class expansion will prepare us to further take market share from the other players post-COVID, as we believe some small players without strong financial position and online class capability may not be able to sustain their business during the period. We expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with a strong financial capability and a fresh offline facility enable us to further strengthen the market leading position and penetration. We will continue to leverage our investment into digital technologies and introduce our OMO system in more offline language training and test offerings, especially for the K-12 business and overseas test labs key business. The usage of the online tools and content in our OMO system for all business lines throughout the whole network will be enhanced. the whole OMO teaching experience will place more efforts developing the best teaching content and coursework, and also developing more advanced training programs to our teachers. With all the above mentioned infrastructure in place, we'll continue to pilot our OMO online initiatives in some major cities with high demand and higher operational efficiency. We believe that our 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 revamped new business model will also accelerate our margin recovery in the rest of the year and further extend our long-term margin target. Here, I have to highlight that all of these OMO products are supported by our offline classes that supplement each other in a hybrid format. All the teaching content, coursework, materials, as well as our teachers and technologies are developed and are regionally from our existing offline centers and resources. This integrative system continues to be broad in our customer base. as it enables us to reach students in satellite cities as well as the cities where we have fewer learning centers to cater all our customers. Furthermore, we will continue to invest in and implement new initiatives, including product content development, teachers recruiting training, R&D, as well as the sales marketing in pure K-12 after-school children's business our coolant.com platform. Third, our top priority will remain as the focus on controlling cost and reducing expenditures across the company to minimize the negative impact from pandemic on bottom line. We believe we will resume the expansion of the overall non-GAAP operating margin this 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 strategies, we remain optimistic of the brighter prospects of our business and believe our investments now bring us fruitful returns in the long run. As the pandemic situation and residual measures begin to ease in China, the timely reopening of all schools and our offline learning centers in September, the start of the new fiscal year, is seemingly to be a massive boost for our business. We believe this will enable us enable our recovery to pick up the momentum, which will likely to be reflected in the results in the coming quarters. We're certain that with New Rental's leading brand, superior education products and system, and the best teacher resources, we have the ability to further into market share in China's huge after-school children market. and deliver long-term value for our shareholders. We're looking at the near-term and our expectations for the next quarter. The expected total revenue to be in the range of $863.7 million to $887.3 million, representing year-over-year increase in the range of 10% to 13%. to provide the breakdown of the expected top-line growth for key business lines. K-12 business is expected to grow around 25%. Overseas test fire program is expected to decline 30% to 35%. And overseas study consulting and study tour business is expected to decline 0% to 5%. year-over-year in dollar terms. We also expect the overseas related businesses including overseas test labs and consulting service will continue to decline due to the pandemic around the globe caused by the cancellation of the overseas exams, suspension of the overseas schools, and restriction on travel. The negative impact on these overseas related businesses will affect the entire education industry in China, not only for New Oriental. and may last over the coming one or two quarters. That's that. 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 gradually resume our offline operation in all cities that we are in by mid-September, and vast majority of the students in these cities have successfully migrated back to our learning centers from our OMO online classes. To conclude, we are now talking on all kinds of the operational actions to boost the enrollment and classroom utilization for the autumn semester and speed up the recovery of the business after the resumption of the schools and learning centers. We're confident that the demands for after-school tutoring will gradually pick up and trend toward normalized level in the rest of this fiscal year. I must mention that this expectation reflects New Entra's current and preliminary view, which is subject to change. At this point, I will take two questions. Operator, please open the call for this.