This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good evening, and thank you for standing by for New Oriental's FY 2022 Fourth Quarter Results Earnings Conference Call. At this time, all participants will be 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 would now like to turn the meeting over to your host for today's conference, Ms. Cici Zhao.
spk05: Thank you, Operator. Hello, everyone, and welcome to New Oriental's fourth fiscal quarter 2022 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 Young, Executive President and 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 US 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 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 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.
spk02: Stephen Yang Thank you, Cici. Hello, everyone, and thank you for joining us on the call. Before going into details of our financial performance, I would like to take this opportunity to extend our gratitude to those who have been supporting and still believing in New Oriental. While our business in the previous quarters were largely affected by the government policies introduced last year, I'm glad to announce that we are now paving a new path innovative business opportunity as the company embarks on a fresh journey that strives to encourage all around development of students and for the betterment of the society. And at the same time, focuses on generating profit and returns for our shareholders. Now, I would like to spend some time to talk about the quarter performance across our remaining business lines and introducing our new initiatives to you in detail. Our key remaining businesses have shown remarkable resilience and achieved a promising trend. Breaking it down, the overseas test prep business recorded the revenue increase of 6% in dollar terms for the fiscal year 2022. The overseas study consulting business recorded a revenue increase of about 16% in dollar terms year-over-year for the fiscal year 2022. The adults and university students' business recorded a rapid growth of approximately 30% year-over-year for the fiscal year 2022. As for our new business initiatives, as mentioned in the past quarter, we have launched several new initiatives throughout the year. which mostly revolve around facilitating students around development. I'm glad to share with you that these new initiatives have shown positive momentum. Firstly, the non-academic tutoring business, which we have rolled out in over 50 existing cities, focused on cultivating students' innovative ability and comprehensive ability. We're happy to see increased market penetration in those markets we have tapped into. The top 10 cities in China have contributed more than 60% of the revenue of this business. Secondly, the intelligence learning system and device business is a service designed to provide a tailored digital learning experience for students. It utilizes our past teaching experience, data, and technology to provide personalized and targeted learning and exercise content together with our teachers monitoring and accessing the learning curve of the students at the back end system. The new initiative education service not only greatly improves the students' learning efficiency, but also cultivates students' proactive learning habits. We have tested adoption in around 60 cities. and are delighted to see improved customer retention rate and scalability of this new initiative. The revenue contribution of this initiative from the top 10 cities in China is over 60%. Meanwhile, the study tour and the research camp business is an initiative that aims at offering students of K-12 and university ages the opportunity to fully leverage their free time and holidays to broaden the scope of knowledge and cultivate a subject's interest. We have conducted a study towards the research cap in over 50 cities across the country. The revenue contribution of this initiative from the top 10 cities in China is over 55%. At the same time, we have also been launching smart education business, which comprises smart teaching, smart hardware, science, technology, innovation, education, and other services, targeting local governments, educational authorities, primary, secondary schools, and kindergartens. Educational material and digitalized smart study solutions, the self-learning system leveraging advanced technology that will enable students to have complete control over the pace and flexibility of the learning in an age where remote learning becomes increasingly mainstream. as well as exam prep course designed for students with junior college diplomas to obtain bachelor's degree. The above-mentioned businesses have been gaining traction and contributing to the overall growth of the company. During the last fiscal quarter, we have been fully committed to complying with government policy, and as a result, the total number of schools and learning centers was reduced to 744 by the end of this fiscal year. This significant change in our structure has underscored the importance of our industry-leading OMO system, which has been one of the constants during the company's restructuring phase as we remain committed to investing in the R&D. So, yeah, we got lost. So I repeat again. Okay. Sorry. Before going into the detail of our financial performance, I would like to take this opportunity to extend our gratitude to those who have been supporting and believing in New Rental. While our business in the previous quarters were largely affected by the government policies introduced last year, I'm glad to announce that we are now paving a new path in innovative business opportunities as the company embarks on a fresh journey that strives to encourage all-round development of students and for the betterment of the society. And at the same time, focuses on generating profit and returns for our shareholders. Now, I would like to spend some time to talk about this quarter performance across our remaining business line and introduce our new initiatives to you in detail. Our key remaining business have shown remarkable resilience and achieved a promising trend. Breaking it down, the oversea task rep business recorded a revenue increase of 6% in dollar terms for the fiscal year 2022. The overseas study consulting business recorded a revenue increase of about 16% in dollar terms year-over-year for the fiscal year 2022. The adults and university students business recorded a rapid growth of approximately 30% year-over-year for the fiscal year 2022. As for our new business initiatives, as mentioned in the past quarter, we have launched several new initiatives throughout the year. which mostly revolve around facilitating students' all-round development. I'm glad to share with you that these new initiatives have shown positive momentum. Firstly, the non-academic children business, which we have rolled out in over 50 existing cities, focuses on cultivating students' innovative ability and comprehensive quality. We're happy to see increased market penetration in those markets we have tapped into. The top 10 cities in China have contributed more than 60% of the revenue of its business. Secondly, the intelligence learning system and device business is a service designed to provide a tailored digital learning experience for students. It utilizes our past teaching experience, data, and technology to provide personalized and targeted learning and exercise content, together with our teachers' monitoring and accessing the learning curve of our students as a back-end system. This new innovative education service not only greatly improves students' learning efficiency, but also cultivates students' proactive learning habits. We have tested its adoption in around 60 cities and are delighted to see improved customer retention rate and scalability of this new initiative. The revenue contribution of this from the top 10 cities in China is over 60%. Meanwhile, the study tour and the research camp business is an initiative that aims at offering students of K-12 and university ages of the opportunity to fully leverage their free time and holidays to broaden the scope of knowledge and cultivate the subject's interest. We have conducted a study tour and a research cap in over 50 cities across the country. The revenue contribution of this from the top 10 cities in China is over 55%. At the same time, we have also been launching smart education business, which comprises smart teaching smart hardware, science and technology innovation, education, and other services, targeting local governments, education authority, primary and secondary schools, and kindergartens. Educational material and digitalized smart study solutions, a self-learning system leveraging advanced technology that will enable students to have complete control over the pace and the flexibility of learning in an age where remote learning becomes increasingly mainstream, as well as exam prep courses designed for students with junior college diplomas to obtain bachelor's degree. The above-mentioned businesses have been gaining traction and contributing to the overall growth of the company. During the last fiscal years, we have fully committed to complying with government policies. And as a result, the total number of schools and learning centers was reduced to 744 by the end of this fiscal year. The significant changes in our structure have underscored the importance of our industry-leading OMO system, which has been one of the constants during the company's restructuring phase. as we remain committed to investing in the R&D of the technology. The OMO has been instrumental during the restructuring process, as well as COVID-19 outbreaks in certain part of China, where a strong flexibility is required in migrating students between online and offline classes to minimize the learning disruption. We continued our efforts in developing and revamping our OMO teaching platform and kept leveraging our education infrastructure and technology strengths across the remaining key business and new business to provide more advanced and diversified education service to the customer for all ages. We have invested $36 million in this quarter and $166 million dollars in full fiscal year to improve and maintain our OMO teaching platform, which ensures that we may continue to offer high-quality service and flexibility to our students during the pandemic. In response to the evolving industrial situation in China and in compliance with the latest regulations in the education space, we have been implementing structural changes to our pure online platform, CoolLearn. We're actively exploring new initiatives and broadening its customer base and offerings by leveraging its existing technology that has been the core of its business. One good example of the potential business direction that has shown promising results to date is Dongfang Zhenxuan. an e-commerce platform for selling agriculture and other products. Towards the end of December 2021, CoolLearn began piloting live streaming events on various short video platforms, such as Douyin, which allows CoolLearn to promote high quality agriculture and other products, such as books, to the younger group of the audience through the social medium. It also enabled CoolLearn to tap into the broader customer base, the new e-commerce live streaming generation, whilst bringing our nation's agricultural producers, farmers, and their products to the foreground where we believe they belong. This has resulted in, to date, a notable user adoption and attraction to this platform with the Dongfang Zhenxuan, heading the way in an encouraging and optimistic direction. After the introduction of the government policy on after-school children last year, which has no doubt posed a directional impact on our business, we have received many inquiries and concerns from investors over the company's financial position. As a company with longstanding heritage, we have always made sure that we are prepared for and capable in weathering changes in the market. And that is reflected in our ability to maintain a strong cash position throughout the whole restructuring process. By the end of this quarter, our cash and cash equivalent term deposits and short-term investments totaled approximately $4.2 billion. The company continued to seek opportunities to create more value to shareholders. On July 26, 2022, New Oriental's Board of Directors authorized the repurchase of up to $400 million of the company's common shares during the period from July 28, 2022 through May 31, 2023. This share repurchase program authorized the company to purchase its ADS or common shares from time to time on open market in accordance with applicable rules and regulations. The timing and extent of any purchase will depend upon market conditions, the trading price of ADS, and its common shares, as well as the other factors. Now I will turn the call over to Cici to share with you about the key financials. Cici, please go ahead.
spk05: Okay. Now I'd like to walk you through the other key financial details for the first quarter. Operating costs and expenses for the quarter were $629.7 million, representing a 52.1% decrease year-over-year. Non-GAAP operating costs and expenses for the quarter, which excludes share-based compensation expenses, were $609 million, representing a 53.6% decrease year-over-year. The decrease was mainly because of the reduction of the facilities and numbers of staff as the results of the restructuring in this fiscal year. Cost of revenue decreased by 57.2% year-over-year to $247.8 million. Setting and marketing expenses decreased by 50.7% year-over-year to $95.8 million. G&A expenses for the quarter decreased by 43.9% year-over-year to $286.1 million. Non-GAAP G&A expenses, which exclude share-based compensation, or $257.2 million, represent a 47.4% decrease year-over-year. total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 42.9 percent to $28.8 million in the first quarter. The increase is due to the grant of restricted shares of the company to employees and directors in May 2021 with graded vesting over the three years. Operating loss was $105.6 million compared to the loss of $102.4 million in the same period of the last fiscal year. Non-GAAP operating loss for the quarter was $76.9 million compared to a loss of $82.2 million in the same period of the previous fiscal year. Net loss attributable to New Oriental for the quarter was $189.3 million compared to the loss of $45.5 million in the same period of last year. Basic and diluted net loss per ADS attributable to New Oriental were $1.12 and $1.12 respectively. Non-GAAP net loss attributable to New Oriental for the quarter was $160.3 million compared to the loss of $27.9 million in the same period last year. Non-GAAP basic and diluted net loss per ADS attributable to New Oriental were $0.94 and $0.94 respectively. Net operating cash flow for the quarter was approximately $29.3 million and capex for the quarter was $22.3 million. Turning to the balance sheet, as of May 31, 2022, New Oriental had cash and cash equivalents of $1,148.6 million. In addition, the company had $1,140.1 million in term deposits and $1,902.3 million in the short-term investment. New Oriental's deferred revenue balance, which is cash collected from the registered students for the courses and recognized proportionally as revenue as the instructions were delivered. this quarter was $933.1 million, a decrease of 51.6% as compared to $1,926.4 million at the end of this quarter. The decrease is primarily due to the succession of K-9 academic after-school tutoring services with compliance with the government's policy in China. Now I'll hand over to Stephen to go through the outlook and guidance.
spk02: Thank you, Cici. Looking ahead into the first quarter of fiscal year 2023, with the process of school closures now largely completed, we expect that our school networks to become stabilized. The company has now entered a stage of starting afresh, exploring new opportunities with greater flexibility and strong cash flows. We're confident in the sustainable profitability of all our remaining key business, as well as the growth and profit potential of our new initiatives. For our new businesses, it will take time for them to come to full fruition. But as we saw in this quarter, the encouraging performance they have already achieved, showing proof that we are heading towards the right direction. and we're confident that the business will be starting to contribute meaningful revenue from the next fiscal year onwards. As for the recent pandemic development in China, thanks to our OMO system, we believe that the overall impact that would cause to our business and financials will be limited. We have also had measures in place to control and handle and handle lockdown situations should they ever arise again. In sum, we expect the total net revenues in the first quarter of fiscal year 2023 to be in the range of $641.3 million to $680.6 million, representing an year-over-year decline in the range of 51% to 48%. Bottom line-wise, We're confident that we will achieve turnaround and profitable in the first quarter, as well as achieving operating profit in the full year of 2023 fiscal year. To conclude, we're now taking all kinds of operational actions to promote our key remaining business and cautiously investing in new business, which will be the new growth engines that accelerates our recovery and to seek profitable growth. At the same time, we will continue to seek guidance from and cooperate with government authorities in various provinces in China in connection with these efforts to comply with the relevant policies, guidelines, and any related implementation rules, regulations, and measures, and to further adjust our business operations as required. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measure, as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2022 Q4 summary. At this point, CC and I would like to open the floor for questions. Operator, please open the call for these.
spk00: Thank you. Yes, thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again and your question will be addressed then. In order to ask a question, please press star then 1 on your touch-tone phone. Press star then 2 to remove yourself from the list. Once again, star then 1 will allow you to ask a question. star then two will remove your question. Thank you. Please hold while we assemble the list. And the first question comes from Mark Lee with Citi.
spk04: Hi, Steven. May I ask for one, would you have any breakdown of revenue for the guidance that you provide by the major categories?
spk02: Sorry, Mark. You know, as before, we don't want to give the breakdown of the revenue breakdown in next quarter.
spk04: Got it. So maybe I follow up with a quick question. I noticed we have around 744 campus and it should be stabilized going forward. It looks like it's higher than the previous mention, 650 to 700 when it bottom. So would it mean there is a positive difference from the time we last spoke? And what would be your outlook for this size?
spk02: Yes. You know, first of all, I must mention that, you know, our remaining business, You can cover the traditional business like the overseas related business and the consulting business and the adult and university student's business. You know, I think they are all remarkable in resilience because, you know, you saw the numbers of this fiscal year 2022. So we do hope we can do better in fiscal year 2023, the new year. On the other hand, we launched some new initiatives like the non-academic children courses and some new intelligent learning system and devices, the service to these students, and as well the study tour and research camp. I think the market demand is always there. Even for the new business, we started in fiscal year just a couple of months ago, but we have seen the customer retention rate. is very high. We do hope they can do better in the new fiscal year. That's why we do keep the higher number of the learning centers than we expected three months ago at Merck.
spk04: Just have a quick follow-up. How many of the learning centers you have both non-academic tutoring and the existing business?
spk02: We don't have a detailed number, but in more than 50 cities, we do have the new business. like the non-academic courses. So you can say the non-academic courses will be the new growth engine, you know, going forward.
spk04: Thank you, Stephen.
spk02: Okay, thank you. Thank you, Mark.
spk00: Thank you. And the next question comes from Felix Liu with UBS.
spk03: Thank you, Stephen. Thank you for taking my question and congratulations on the very resilient quarter post-restructuring. First, I want to ask a question about the new initiative. You mentioned good progress on the non-academic tutoring as well as study camps. So if we look at this from a one-year to the three-year horizon, Which one of these initiatives do you expect the biggest revenue contribution, or could you rank your expectations on the revenue contribution from the bigger to the lower initiatives? My second question is on Dongfang Zhenxuan. I know this is a very good initiative that we launched under Cooler. Have we seen any, you know, positive synergies between the live-streaming e-commerce with our education businesses? Thank you.
spk02: Okay. You know, as for the non-academic children courses, you know, we launched these courses is focused on cultivating the students' innovative ability and comprehensive ability. And so, you know, we do have a lot of courses. like the courses to improve the students' reading and the presentation scale, and some like the programming, robots, the arts, sports. We have a lot of courses. But, you know, we have seen extremely the revenue growth in the last couple of months. As I said, the market demand is always there. After the government policy launched last year, we saw some students, they do have more spare time. The parents and students love to enroll in our new classes. And yeah, it's new business. The revenue contribution is very small, but it grows very fast. So we do believe the new business will contribute more and more revenue going forward. And Dongfang Zhenxuan, yeah, I share with you more information about Dongfang Zhenxuan. But I have to say, I can't share the business of performance in detail with you. I will leave the Dongfang Zhenxuan's management, the cooler management, to share with you more information in the earnings release announcement in this month, in next month. As I mentioned earlier, Dongfang Zhenxuan reinvents an innovative blend of the knowledge sharing and the agriculture product promotion. You can check the numbers like the followers and the GMA on third-party data platforms as reference. We are also grateful to be widely recognized across the media in China and even in the other countries. And beyond the financial gains, I think we're pleased to see we have also generated intangible returns, which is to fulfill the social responsibility by helping the farmers and some like the agriculture product producers. And so this new business model has beaten our expectations. You saw what happens in last month. And we expect the cooler will become a key growth driver and gradually deliver meaningful contribution to the new rentals revenue and profit margin in the new year or even in the next two or three years. And yeah, I think the audience loves the Dongfang Zhenxuan platforms. So I think the Dongfang Zhenxuan's performance helps the local schools and the learning centers to get more students into our classrooms, even for the traditional business or the new business. So this is very good for us. Felix. Okay, great.
spk03: Thank you for the call.
spk00: Thank you. Thank you. And the next question comes from Linping Zhao with CICC.
spk08: Good evening, Steven. Thanks for taking my questions. I've got two here. First, could you please share the revenue contribution of the new initiatives in the first quarter FY22 and also in first quarter FY23 guidance? And second question is about the GP margin. Are we expecting the around 53% GP margin in 4Q FY22 to be in the relatively stable state for the coming quarters? Thank you.
spk02: Okay. The new business You know, I think the revenue contribution from the new business will contribute around 20% of total revenue. This does not include the revenue from the Dongfang Zhenxuan, from the cooler. So this is all on the EDU side, like the nanodynamic course or the research, the summer camp, something like that, or the other business, the new business. This does not include the Dongfang Zhenxuan. And yeah, on the GP margin side, I think we got a lot in this quarter, in Q4. But we do believe we can get the higher gross margin in Q1 in the next quarter, or even for the next full year, fiscal year 2023. So that's why I said, as a bottom line wise, we're confident we will achieve turnaround and profitable in the first quarter and next quarter. And also, I think we expect we will be profitable in the full year of fiscal year 23.
spk08: Okay, thanks. That's helpful.
spk00: Thank you. Thank you. And once again, we ask you please leave yourself to one question. If you have a follow-up, please return to the question queue. And the next question comes from Tian Hao with TH Capital LLC.
spk09: Hi Steven. Can you guys hear me? Thank you. Hello?
spk07: Yes, we can hear you.
spk09: Yes, the question is if you guys have moved on to the new business, what is the new Season 92 will be going forward?
spk05: Yeah, actually as we restructured all the business lines, you know, terminated K-9 academic training, the remaining business, remaining key businesses like overseas related business and also domestic test prep for university students, these business are much more seasonal than the K-12. So actually you will see going forward since next fiscal quarter, our Q1 revenue contribution for full year will increase compared with previous years. So Q1 will be peak season, continue to be the peak season, and also Q3 will be second peak season, and Q2 and Q4 will be relatively less in terms of the revenue contribution for full year, yeah.
spk09: Okay, thank you. That's helpful.
spk00: Thank you. And the next question comes from Lucy Yu with Bank of America.
spk06: Thank you, Stephen. Thank you so much for taking my question. My question is on the GP margin. So can you please elaborate the margin expansion in the fourth quarter up from the 39% in the third quarter? And you also mentioned that a GP margin going forward might be higher than the 53%. And what is the driver behind that? Thank you.
spk02: Yeah, you know, Lucy, you know, we have already, we almost have just done the learning center closure and some layoffs in the last year, last three quarters. And as I said, we will keep the same number of the learning centers. And we want to hire more new people. And so that means, you know, the fixed cost is there. And we're seeing the revenue growth just get recovered. And I think we will see more and more the operating leverage going forward. And in the Q4, because the overseas consulting business typically contribute more revenue in Q4. So we do have the seasonality in Q4 for the Q4. for the overseas consulting business. So let's do the analysis year over year. So we do believe in fiscal year 23, both the GP margin and the profit margin will get better for the new year. As I said, we will be profitable in fiscal year 2023. Lucy.
spk07: Thank you, Steven.
spk00: Thank you. And the next question comes from with Morgan Stanley.
spk07: Thank you, and congratulations. I want to ask about the new business that you see in your new business. Do you have any operation data that you could share about, for example, the non-academic tutoring? on the new student recruitment in summer and the retention and also like the student acquisition any details that you could share and also how do you see the competition is the public schools because they they also offer some non-academic courses or after school service thank you
spk02: Some business data for the new business, even though we started business a couple of quarters ago, but as I said, the business has developed very good. The student retention rate for some like the reading and the presentation skill courses is almost closely to the traditional K-12 academic courses. It sounds very good, right? And on the margin side, I remember in the last earnings call, we got it. Our target is to get a break even for the new business. But this time, we feel better. So I think we do believe we can get the profit for the new business. But it is too early to say the detailed numbers, what is the margin for the new business. But we do believe we can get profitable in the new fiscal year.
spk07: Okay, thank you. And also on the commission with the public schools, do you have any view on our advantage with them?
spk02: Yeah, because we do have a lot of data and system and the teaching experience or even some data in hand. We set up a new department to sell the product to the public schools or even the kindergartens, primary and secondary schools. It's just a new start, but we do believe we can do better. And because, you know, I don't believe the public schools and kindergartens, they need our service because, you know, if you follow us for so many years and we spend a lot of money and invest a lot of the human resource ID workers and counter writers to build our system and even the questionnaire base. So I think we will find a new way to monetize
spk01: Okay, thank you.
spk00: Thank you. Thank you. We are now approaching the end of the conference call. I will now turn the call over to New Oriental's Executive President and CFO Steven Yang for his closing remarks.
spk02: Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you.
spk00: Thank you. This concludes today's teleconference. Thank you for attending today's presentation. We now disconnect your lines.
Disclaimer