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spk04: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
spk06: Good evening and thank you for standing by for New Orientals FY 2023 First 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'd now like to turn the meeting over to your host for today's conference, Ms. Cici Zhao. Thank you. Hello everyone and welcome to New Oriental's first fiscal quarter 2023 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, 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 U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and assurances. As such, our results may be materially different from the views expressed today. A number of potential risks and assurances are outlined in our public findings with the SEC. New Rental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Rental's investor relations website at investor.newrental.org. I will now turn the call over to Mr. Yang. Stephen, please go ahead.
spk02: Thank you, Cici. Hello, everyone, and thank you for joining us on the call. This first quarter has not only marked a fresh beginning of our 2023 fiscal year, but also a new page to New Oriental. Before going into detail of our financial performance for this quarter, I would like to take this opportunity to extend our gratitude to those who have been believing and supporting New Oriental along the way. I'm delighted to share with you that the restructuring process has been largely completed, and New Rental has successfully derived a new business model combined with a certain existing business and a new innovative business opportunity. Our new business ventures have been performing well and are starting to generate positive results to New Rental. Furthermore, it's even more encouraging to see that we have achieved turnaround in profitability and better than we expect margin this quarter. Our non-GAAP operating margin for the quarter was 13%, and non-GAAP net margin for the quarter was 11.2%, both higher than last year's same period. We believe the company has embarked on a fresh journey that strives to encourage all-round development of students and customers and foster the betterment of the society, and at the same time, generate profit and fruitful returns for our shareholders. Now, I would like to spend some time to talk about this quarter's performance across our remaining business lines and the new initiatives to you in detail. Our key remaining businesses have shown remarkable resilience and achieved promising trends, breaking it down The overseas test drive business recorded a revenue increase of 2% in dollar terms year over year for the first quarter, 2023, fiscal year. The adult university students business recorded a revenue growth of about 2% in dollar terms year over year for the quarter. The overseas study consulting business recorded a revenue increase of about 21% in dollar terms year over year for the quarter. As for our new business initiatives, as mentioned in past quarter, we have launched several new initiatives, which mostly revolve around facilitating students all around development. I'm glad to share with you that these new initiatives have shown positive momentum and have started to generate revenue to the group. Firstly, the non-academic children business which we have rolled out in over 60 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, with 297,000 enrollments in the first quarter. The top 10 cities in China have to contribute about 60% of the revenue of this business. The intelligent learning system and device business is a service designed to provide a tailored digital learning experience for students. It's utilized our past teaching experience, data, and technology to provide personalized, 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 education service not only greatly improve students' learning efficiency, but also cultivate students' proactive learning habits. We have tested in adoption in around 60 cities with 131,000 active pay users in this quarter and are delighted to see improved customer retention rate and scalability of these new initiatives. The revenue contribution of this business 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 students the opportunity to fully leverage their free time and holidays to broaden the school's knowledge and cultivate subject interest. We have conducted the study tour and the research camp business in over 50 cities across the country. The revenue contribution of this initiative from the top 10 cities in China is over 55%. Last but not least, our smart education business, which comprises smart teaching, smart hardware, science, technology, innovation, education, and other services, serves local governments, education authorities, schools, and kindergartens. Our educational material and digitalized smart study solution A self-learning system which leverages advanced technology enables students to have complete control over the pace and the flexibility of learning in an age where remote learning becomes increasingly mainstream. We also offer exam prep courses designed for students with junior college diplomas to obtain bachelor's degrees. The above-mentioned businesses have been gaining the traction. and contribute the overall growth of the company. Our OMO system has continued to be instrumental post our restructuring process. We continued our efforts in revamping and maintaining the OMO teaching platform and kept leveraging our education infrastructure and technology strengths across key remaining business and new initiatives to provide more advanced and diversified education service to our customers at all ages. We have invested $31 million in the quarter on our OMO teaching platform to ensure that we continue to offer high quality service and flexibility to our students. In response to an evolving industry landscape in China, we have implemented structural changes to our pure online education platform, Cooler, as previously mentioned. While Cooler continues to extend its online education offerings to adults and university students, it has also actively sought business opportunities in new areas, leveraging on the technology developed for live broadcast classrooms with our existing teams of talent Cooler has established an e-commerce platform under the brand name Dongfang Zhenxuan for the sale of agriculture and other products and offer premium service for tens of millions of followers through its tight supply chain ecosystem, innovative live streaming marketing, and diversified cooperation with the suppliers and producers to maximize the full potential and social values of this new business. Cooler has placed the strategic focus to develop a high-quality and cost-effective e-commerce platform offering agriculture products and daily necessities so as to bring better quality of life and promote healthy lifestyles to its customers. During the reporting period, Dongfang Zhenxuan has broadened its product selection and SKUs. thereby continuously improving shopping experience of its customers. The platform does not only serve as an alternate outlet for farmers and local companies to sell their high-quality farmer goods and other products to a broader customer base, but also provides platform which offers a range of top-notch products with transparency in pricing to customers. leveraging the well-developed production capacity and commercial infrastructure, such as logistic centers and the communication networks in China. Cooler has also successfully launched its own During the reporting period, Dongfang Zhenxuan has broadened its product selection SKUs, thereby continuously improving shopping experience of its customers. The platform does not only serve as the alternate allies for farmers and local companies to sell their high-quality farm goods and other products to the broader customer base, but also provide a platform which offers a range of top-notch products with the transparency in pricing to customers. Leveraging the well-developed production capacity and commercial infrastructure, such as logistics centers and communication network in China, Cooler has also successfully launched its own private label products and established a high-quality supply chain management system within a short period of time. a variety of the product selection and product quality continued to grow. Dongfang Zhenxuan has earned a prominent position within the industry and gained a strong traction and brand loyalty from its customers. Looking forward, Cooler will strengthen its team of talents to continuously create positive, unique, interesting content to attract users to its platform and promote traditional Chinese culture. Cooler will also place additional investments to its products and technology upgrades, so as to concentrate on selecting and launching top-quality products from different origins in China through the third-party cooperation and private labels to create values for customers, partners, and wider society. to the company's latest financial position, I'm confident to share with you that the company is in a healthy financial status with cash and cash equivalent term deposits and short-term investments totaling approximately $4.3 billion. On July 26, 2022, the company's board of directors authorized a share repurchase plan of up to $400 million of the company ADS or common shares during the period from July 28th, 2022 through May 31st, 2023. After the October 25th, 2025, the company accumulatively repurchased and aggregates approximately 1.6 million ADS. for approximately $39.6 million from the open market and the share repurchase program. Now, I will turn the call over to Cici to share with you about the key financials. Cici, please go ahead.
spk06: Now, I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $666.8 million, representing a 47.8% decrease year-over-year. Non-GAAP operating costs and expenses for the quarter, which includes share-based compensation expenses, were $647.8 million, representing a 47.5% decrease year-over-year. The decrease was primarily due to the reduction of facilities and numbers of staff as a result of the restructuring in fiscal year 22. Cost of revenues decreased by 51.4% year-over-year to $312.1 million. Selling and marketing expenses decreased by 40.2% year-over-year to $98.7 million. G&A expenses for the quarter decreased by 45.4% year-over-year to $256 million. Non-GAAP G&A expenses, which includes share-based compensation expenses, were $237.4 million, representing a 44.5% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating cost and expenses, decreased by 55.9% to $19.1 million in the first fiscal quarter of 2023. Operating income were $78 million, representing a 140.5% increase year-over-year. Non-GAAP income from operations for the quarter was $97 million, representing a 28.3% increase year-over-year. Net income attributable to New Oriental for the quarter was $66 million, representing a 9% increase year-over-year. Basic and downloaded net income per ADS attributable to New Oriental were $0.39 and $0.38, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $83.7 million, representing a 24.7% decrease year-over-year. Non-GAAP basic and diluted net loss per ADS attributable to New Oriental net income per attributable to New Oriental were 49 cents and 48 cents, respectively. Net operating cash flow for the first fiscal quarter of 2023 was approximately 185.2 million U.S. dollars, and capital expenditure for the quarter were 14 million U.S. dollars. Turning to the balance sheet, as of August 31st, 2022, New Oriental has cash and cash equivalents of 1103.9 million U.S. dollars. In addition, the company had $1,054.7 million in term deposits and $2,092.3 million in short-term investments. New Rental's deferred revenue balance, which is primarily cash collected from registered students for courses and recognized proportionally as revenue as the instruction are delivered at the end of the first quarter of fiscal year 2023 was $1,012.5 million, a decrease of 30.3% as compared to $1,453.3 million at the end of the first quarter of fiscal year 2022. The decrease is primarily due to the succession of K-9 academic after-school tutoring services in compliance with the government's policies in China. Now, I'll hand over back to Stephen to go through our outlooks and guidance.
spk02: Thank you, Cici. Looking ahead into the second quarter of fiscal year 2023, with the restructuring process now largely completed, we expect that our school network and geographic coverage to become stabilized. The company has now entered a stage of starting a fresh page exploring new opportunity 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 prospect of our new initiatives. For our new businesses, as we observed in this quarter, the encouraging performance that these businesses have achieved proves that we are heading towards the right direction. And we're confident that business will be able to contribute meaningful revenue to the company this fiscal year, 2023. As for the continued pandemic developed in China, thanks to our OMO system, we believe that overall impacts that would cause to our business and financial will be limited. We have also have measures in place to control and handle lockdown situations should be right. However, due to the seasonality of some of our business, such as test prep courses and overseas study consulting service, new rental generally record lower revenue in the second quarter of the fiscal year, with the revenue typically below those of the first quarter. We expect total net revenue in the second quarter of the fiscal year 2023, September 1st, 2022 to November 30th, 2022 to be in the range of $601.4 million to $619.2 million, representing year-over-year decline in the range of 9% to 6%. The projected increase of the revenue in our functional currency RMB is expected to be in the range of 1% to 4%. This is the increase for the second quarter of the fiscal year 2023. Bottom line wise, we're confident that we will achieve operating profit in the full year of fiscal year 2023. To conclude, we're now taking all kinds of official actions to promote our key remaining business while we consciously design the new initiatives, which will be new growth engines that accelerate our recovery and pursue the profitable growth in future. At the same time, we will continue to seek guidance from and cooperate with the government authorities in various provinces in China, in alignment with the efforts to comply with the relevant policies, guidelines, and relative implementations, regulations, and measures, as well as to further adjust our business operation as required. I must say that these forecasts reflect our considerations of latest regulatory measure, as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2023 Q1 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these.
spk06: 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 after your first question has been addressed. So to ask a question now, please press star 11 on your telephone. So once again, that's star 11 questions. Our first question comes from the line of Mark Lee from Citi. Please ask your question.
spk01: Hi, Stephen. Congratulations on the profitable status for this quarter. May I ask, I noticed that we have disclosed 297,000 non-academic enrollment. I think it's the first time we disclosed. May I know how was the number for last quarter or for last financial year? And would you have any target for this new financial year for the enrollment?
spk02: Thank you, Mark. So we just launched the non-examinal courses. You know, this is a pure new product since the second quarter of last year. So the last year's numbers was very small, very small. So that means, you know, this quarter, you know, this quarter, our non-examinal courses, this is, you know, performed very well. And the revenue growth, you know, was booming. so and we we expect the not dynamic courses business you know will grow uh the uh the very fast uh in the future mark mark can you press star one one again
spk09: Go ahead, Mark. Could you hear me? Yes, we can.
spk01: I just want to follow up for the Q1 number. Would we have any seasonality for the full year? Can we just, you know, multiply the numbers for the full year for the non-academic enrollment, or could you share a bit more color on this year? Thank you.
spk06: Yeah, for non-academic courses specifically, actually the seasonality should not be very apparent. It's not like other business like overseas test prep and domestic test prep business, which is quite seasonal. So I think this will be similar to other K-9, K-12 business. So it should be pretty smooth throughout the whole year. But actually, now this year is the beginning of these new initiatives, so we should start to see each quarter start to contribute more and more revenue, overall revenue from these new businesses. All right, thank you. Our next question comes from the line of Felix Liu from UBS. Felix, please ask your question.
spk00: Hi, good evening, management. Thank you for taking my question and congratulations for the very strong results. And it's very impressive amidst the macro weakness and considering the magnitude of the restructuring that you have just completed. So my question is on margin. We noticed that the GP margin of this quarter is very strong. May I know the driver behind? Is it due to mix or any particular cost saving that we have achieved? And is there any margin seasonality that we should keep in mind for the rest of this year? Thank you.
spk02: Okay. Thank you, Felix. As for the margins, yeah, as you saw in this quarter, the growth margin and operating margin have increased both. The increase was mainly driven by four reasons. Number one, the downsizing of the learning centers and the employee layoff led to the lower fixed costs. You know, we did a lot of the learning center closed down and the employee layoff last fiscal year. And it makes the, it drives the margin up per learning centers and the whole group. So this is the first reason. Secondly, the revenue from the cooler, from the Dongfang Chenxuan grew since this quarter, since this quarter. And it helps the margin up for the whole group. And lastly, you know, we didn't do the summer promotion classes this quarter. You know, in last year, the summer quarter, you know, we did some of the summer promotion. And this year, we didn't do that. So it helps the margin up. And so those above mentioned three reasons drives the whole margin up. And as I said, we have entered a stage of starting a fresh page of new rental. And so as for the remaining business, we keep it there and to keep the profitability of that. And as for the new initiatives you know, as I said, we will invest very cautiously. So the good news for us is the new businesses, you know, grow very fast and will be profitable very quickly. And so going forward, I think the margin, I suppose the margin-wise, the bottom-up-wise, we're confident that we will be profitable in the full year of the 2023. I want to give the guidance of the next quarter Q2's guidance for the margins. Felix.
spk06: Right. Thank you. Next question comes from Tian Hou from TH Capital. Please ask your question, Tian.
spk05: Hi, Stephen. Congratulations. So each line of the business growth is, how to say, really positive. What's the outlook for each line of the business, the growth outlook for each line of the business going forward? So that is number one. And also, I'm not sure I know the composition of your revenue. For each line of the business, how much shall they contribute to the total revenue? If it's possible, Steve, can you give some detail on that part? That's the question.
spk02: Yeah, looking ahead into the second quarter, or even the quarters after the Q3 and Q4, and I think, as I said, the restructuring process is now largely completed. And going forward, I think the remaining businesses such as the oversea related business and domestic test prep, college students business will grow, especially for the oversea related business will grow faster. And because in this quarter, we have seen the strong enrollment growth for the oversea related business. And the new business, like the learning device, and like the summer calves, also, and the other new businesses, it's grown very fast. We started the business last year, but this year we started to bear fruit of this business. So the growth will be extremely high in this whole year. And the cooler, Dongfang Zhenxuan, I'm afraid I can't share the numbers of the cooler, But I can say, Dongfang Zhenxuan has developed an innovative plan like a broadcasting model of the knowledge sharing and the selling agriculture and other products. And this quarter, Dongfang Zhenxuan achieved a remarkable, the official result and started to contribute local revenue and profit to the group. And going forward, I think Dongfang Zhenxuan will do the better. Because, you know, look at the trend and the very good response from the customers. And, yeah, this is the trends of the different business lines. As for the revenue contribution for the whole year, for the new year, you know, the – let me give you the revenue contribution here. I think the overseas related business will contribute 30% of the total revenue. And the K-12, including the traditional business and the new business, will contribute 45% of total revenue. And the college students, the tech private business, will contribute 5% of the revenue. And all the others, including the cooler and the others, will contribute the more than 30 percent of total revenue because cooler you know grows very fast and the others the other uh small businesses grow you know of course it's okay so this is the breakdown revenue contribution of the from different business lines okay and if you have follow-up questions please press star one one
spk06: All right, so we'll move to our next question from Candice Chen from Daiwa. Please ask your question.
spk03: Hello. Hi, Stephen and Cece. Thank you for taking my question. And congratulations on the very strong set of results. My question is related to the new business intelligence learning system and devices. And may I know who are our target customers? And the 130,000 active users, are they mainly charged by subscription? And I just want to see whether this part of revenue will be recurring, and how significant will the revenue contribution could be for this new business? Thank you.
spk06: Yeah. The Intention Learning Device System actually is something new after we comply with the government policy terminated the academic training for K-9 students. But we realized that we still got some students have the demand for studying the academic subjects. So we use actually we have the content strengths and targeted those students who have the demands for academic study and we use our technology and content strengths to embed our existing like digitalized content into the hardware and hand over to students and let students to use the study machine to do the self-study and it can actually help students to enhance their academic results and also to help them to drive them to enhance their proactive study habits so this is something this is a new business model and nowadays we are mostly using the rent the device to students and let customers subscribe the content from from the platform and we believe that this revenue this business should be generic recurring revenue Because students, if they think the machine is helpful and they can use it to do the efficient self-study, then they can resubscribe, continue to subscribe new content from the platform.
spk02: Yeah. Yeah. And sorry, let me clarify the revenue contribution for the new year. So, you know, the revenue from others will contribute 20% of the total revenue.
spk09: Yeah. Sorry.
spk06: Thank you. Our next question comes from the line of Hongyi Tao from CICC. Please ask your question, Hongyi.
spk08: Okay. Good evening, Stephanie and Stacey. Thank you for taking my question. First, congratulations on the strong performance for the first quarter. So I have a follow-up question. You mentioned the revenue breakdown before, and I'm wondering, can you share the number contributed by the non-academic tutoring? And maybe could you share more color on what kind of courses you see it has the most strong performance? Thank you.
spk02: The numbers, I think CC will give you the numbers of the non-academic courses. You asked the revenue contribution for Q1 of the whole year.
spk08: For Q1, sir.
spk02: For Q1.
spk06: All the new business together are country building roughly about, yeah, for, oh, sorry. Let me check the detailed numbers. For all new business together are contributing roughly about 16% of total revenue. And, you know, among all the new businesses, non-academic tutoring is the biggest one, have the biggest contribution. And next to it is the learning device business.
spk02: Yeah. And I think the non-academic tutoring focus only to help the students to improve their innovative ability, and comprehensive quality. And we do have a lot of subjects, like the reading, programming, robot design, presentation skill, art, sports. Now the reading and programming contribute a little bit more revenue within all the products.
spk03: Okay, thank you.
spk09: Thank you.
spk06: Our next question will come from the line of Lucy Yu from Bank of America. Please ask your question, Lucy.
spk07: Thank you, Stephen. Thank you, sister, for taking my question. Two questions. First is the first quarter revenue breakdown. You just mentioned a new business is 16%. How about the rest, like test prep, consulting, et cetera? Second question is on the second quarter revenue guidance, What is the breakdown of different business in the second quarter? Thank you.
spk06: For Q1, I can give you the rough contributions. So for overseas-related business like test prep and consulting together, contributing roughly about 24%, 25% of total revenue. And we have new business roughly about 16%. And, you know, all the adults, university students, business, tutoring, and new business together, country building roughly like 55%, 55%, 57% of total revenue. And the remaining are others, mostly the online platform and some other businesses like book, content, et cetera. Okay.
spk07: And also Q2.
spk02: Okay. The Q2 revenue bias breakdown. The overseas related business will contribute 20% of total revenue. And college and university students' business contributes 6% of total revenue. And the K-12, you know, and new businesses will contribute 40% of the revenue. The others, roughly 25-30% of total revenue, including the cooler and the others.
spk06: Right. Thank you. Next follow-up question comes from the line of Tian Ho from TH Capital. Please ask your question, Tian.
spk05: Hi, Steven. Hi, Steven. Just another question. The business is really totally new, so what's the different line seasonality? Do they have a different seasonality?
spk02: Most of the new businesses don't have the seasonality impact. I think the only one new business, the summer camp and the research camp business do have the seasonality. you know, summer and winter, the revenue contribute more. But, you know, as you know, you know, while launching some weekends, the camps, the study camps, during the weekends, so the seasonality impacts becomes less than before.
spk05: Got it. That's it. Thank you. Thank you.
spk06: 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, Mr. 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.
spk06: Cole, thank you for attending today's presentation. You may now disconnect your lines.
spk04: The conference will begin shortly. To raise your hand during Q&A, you can dial star 11. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
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