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spk03: Good evening, and thank you for standing by for New Oriental's FY 2023 Third Quarter Results Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be question-and-answer sessions. Today's conference is being recorded. If you have any objections, you may disconnect at this time. And I'd like to turn the meeting over to your host for today's conference, Ms. Cici Zhao. Thank you. Please go ahead.
spk02: Hello, everyone, and welcome to New Oriental's third 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, Stephen Yang, Executive President and Chief Financial Officer, and I will share New Oriental's latest earnings results and business updates in detail with you. After that, 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 Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the view expressed today. A number of potential risks and uncertainties are outlined in our public filings 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 this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I will now first turn the call over to Mr. Young. Stephen, please go ahead.
spk09: Thank you, Cici. Hello, everyone, and thank you for joining us on the call. It's our great pleasure to announce that upon the completion of the restructuring process and the introduction of our new businesses, we have managed to deliver a set of remarkable financial results this quarter, with both top line and bottom line beating the expectations. The result is also boosted by the macro trends of economy recovery as the pandemic subsides. Business activities are resuming and people regain their confidence in consumption. While we observe the demand for our products and services is gradually increasing. We have also achieved a gap operating margin and non-gap operating margin of 8.8% and 11.7% respectively for this quarter. our key remaining business have continued to demonstrate solid recovery. In particular, our overseas test prep and overseas study consulting business have performed exceptionally and recorded continuous year-over-year revenue increments, thanks to the strong post-COVID recovery across our restructured business model, streamlined cost structure, coupled with emerging new business have not only helped us yield better than expected margins in this physical quarter, but also effectively diversify our business and enable us to offset certain historical seasonality. As we head into the fourth quarter, our solid profitability, strong performing remaining business lines, and emerging new business initiatives in this quarter reaffirm our belief in sustaining a healthy growth of our market share. and pursuing innovative endeavors as we restlessly serve the encouraging environment of recovery. Now, I'd like to spend some time to talk about the quarter's performance across our main business lines and new initiatives to you in detail. Our key remaining business got a promising trend, and the new initiative has shown positive momentum. Breaking it down, The overseas test drive business recorded the revenue increase of 13% in dollar terms, or 23% in RMB terms EOB year for this quarter. The overseas test drive business recorded the revenue increase of about 5% in dollar terms, or 13% in RMB terms EOB year for this quarter. The adults and university students business recorded the revenue decrease of 3% in dollar terms, or 5% increase in RMB terms year-over-year for this quarter. As mentioned in the previous quarters, we have also launched several new initiatives which mostly revolve around facilitating students or around development. I'm glad to share with you that these new initiatives have continued to exceed our expectations by sustaining a positive momentum and generating meaningful profits to the group. First, the academic tutoring courses which we have offered in .
spk13: Focuses on cultivating students .
spk09: 118,000 student enrollment recorded in this quarter. The top 10 cities in China have contributed about 60% of the revenue of this business. Secondly, the intelligent 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, technology to provide personalized target learning and exercise content. Our continuous investment in technology has built a competitive edge which drives our navigation amidst the changes and challenges from the past year. We have tested its adoption in around 60 existing cities with 108,000 active pay users in this quarter and are delighted to see improved customer retention and scalability of this new business. The revenue contribution from the top 10 cities in China is around 60%. Meanwhile, the study tour and 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 to broaden the scope, knowledge, and cultivate subject interest. We have conducted the study tour and research camps in over 50 cities across the country. The revenue contribution 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 the local governments, education authorities, schools, and kindergartens. Our education materials and digitalized smart study solutions, a self-learning system which leverages the advanced technology, enable the students to have complete control over the pace and 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 the bachelor's degrees. The above mentioned business have been gaining wide traction and contribute the overall growth of the company and has attained instrumental profits since the last quarter. With regard to our OMO system, we continued our efforts in developing and revamping the platform and kept leveraging our educational infrastructure and technology strengths over our remaining key business and new business to provide more advanced and diversified educational service for our customers. During the reporting period, we invested $26.8 million in the quarter to further improve and maintain our OMO teaching platform. I'd like to give you all an update on Easterby's latest performance. During the reporting period, Easterby has proved itself as a successful business model with instrumental breakthroughs in both business operations and financial performance. The business has continued to offer a remarkable contribution to the company's overall revenue and profit growth. Easterby continued to invest substantial resources in improving product quality and variety under its private label, fine-tuning its customer-centric strategy and content caliber during the reporting period. Easterby remains rigorous in applying stringent standards in supplier selection to only source products of top-notch quality and safeguards active collaborations with SF Express and JD Group to continuously refine delivery process and service. To set itself apart from conventional live streams, EAST Buy also upholds its unique feature of integrating intelligence dissemination alongside product sales with a vision to foster nationwide cultural and knowledge sharing. The series of the EAST Buy's in-person live streaming and participation in cultural documentaries and exhibitions have not only increased traffic to East Bay's platform and boosted sales, but also elevated audience engagement and awareness on the preservation of Chinese culture resources. It's inspiring to see that East Bay has grown significantly since inception and has not only become a well-known platform for promoting healthy, top quality, and cost-effective products with loyal customer base, but also out of the case appreciation of the country's cultural assets for the betterment of the community. With regards 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 the share repurchase of up to $100 million of the company ADS or common shares during the period from July 28, 2022 through May 31, 2023. As of April 18, 2023, the company repurchased an aggregate of approximately 5.1 million ADS, for approximately $157.6 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.
spk02: I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $687.7 million representing a 9% decrease year over year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $666.3 million, representing an 8.1% decrease year over year. The decrease was primarily due to the reduction of facilities and number of staff as a result of the downsizing in the fiscal year 2022. Cost of revenue decreased by 0.9% year over year. to $369.6 million. Setting and marketing expenses increased by 9.5% year-over-year to $102.6 million. G&A expenses for the quarter decreased by 25.4% year-over-year to $215.5 million. Non-GAAP G&A expenses, which is full share-based compensation expenses, were $194.5 million. representing a 25.1% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 28.6% to $21.4 million in the third fiscal quarter of 2023. Operating income was $66.5 million, representing a 147.1% increase year-over-year. Non-GAAP operating income for the quarter was $87.9 million, representing a 179% increase year-over-year. Net income attributable to New Oriental for the quarter was $81.6 million, representing a 166.7% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were 49 cents and 48 cents, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $95.4 million, representing a 199.9% increase year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were 57 cents and 56 cents, respectively. Net operating cash flow for the third fiscal quarter of 2023 was approximately $190.5 million, and capital expenditure for the quarter were $49.2 million. Turning to the balance sheet, as of February 28, 2023, New Oriental has cash and cash equivalents of $1,329.5 million, In addition, the company had $1,413.5 million in term deposits and $1,568.1 million in short-term investments. New Oriental's deferred revenue balance, which is the cash collected from registered students for courses and recognized proportionally as revenue as instruction are delivered. At the end of the third fiscal quarter of 2023, was $1,163.2 million, an increase of 19.8% as compared to $971.3 million at the end of the third fiscal quarter of fiscal year 2022. Now, I'll hand over to Stephen to go through our outlook and guidance.
spk09: Looking ahead to the fourth quarter, which has historically been one of our seasonal peak quarters, our key remaining business are in the process of recovery with an opportunity of further taking up market share as the pandemic subsides. As Euro, the company remains tireless in seeking new opportunities with greater flexibility and strong cash flows, and we are confident in embarking on an all-round journey that ensures sustainable growth. For our new businesses, The encouraging performance that this business has achieved in the previous quarters proves that we are heading towards the right direction. We firmly believe that the business will sustain a healthy growth and generate meaningful profit to the company in the first quarter and going forward. With regards to the learning center and classroom space, we're planning to increase our capacity moderately. at which we expect a small quantity of the new learning centers will be opened, and classroom areas of some existing learning centers will be expanded in a few major cities. In summary, we expect total net revenue in the first quarter of fiscal year 2023, March 1, 2023, to May 31, 2023, to be in the range of $801.8 million to $822.7 million. representing year-over-year increase in the range of 53% to 57%. As the profitability we recorded year-to-date has reaffirmed our success and dedication in turning a new page, we're also confident in achieving a satisfactory operating profit level in the full year of fiscal year 2023. To conclude, we are now taking multi-pronged operational actions to accelerate our recovery and anchor sustainable growth. Simultaneously, we will cautiously research and unveil the potential in new market opportunity and try to apply to new technologies such as AI and chat GPT into our education and product offerings with a vision to uplift our innovative capability in pursuit of profitable growth and increasing the operating efficiency. We take minutes to seek guidance from the corporate with the government authorities in alignment with these efforts to comply with the relevant policies, as well as to further adjust our business operations as required. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measures, as well as the current and preliminary view, which is subject to change. This is the end of our fiscal year 2023 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for this. Thank you.
spk03: 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. To ask a question, please press star 1 1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Our first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.
spk16: Hi, good evening, Stephen. Congratulations on the very strong results. My question is on your forward-looking guidance for the fourth quarter. I know the young year growth looks very impressive. May I know what are the key drivers or the performing business segments that are driving the fourth quarter growth? And if we look at slightly beyond the next quarter for the next fiscal year, what are the business segments that you expect the fastest growth in FY24? Thank you.
spk09: Thank you, Felix. I think we remain confident and optimistic about the business performance in the Q4 of the first quarter and the new fiscal year, fiscal year 2024. And, you know, firstly, I think the macro trend of the economy recovery as the pandemic subsides, you know, where we're seeing the people rebuild their confidence in consumption, you know, and we're also seeing the products and the demand, you know, the requirement of the service is gradually increasing. And as for the different business lines, you know, the remaining businesses such as the oversea related business. On demand side, we have seen this strong demand for oversea testbed and consulting business. And on supply side, we have seen some players disappear from the market. That means we're facing less competition. So that's why we're optimistic about the oversea related business going forward. And for our new business, I think the encouraging performance in the Q3 in this quarter and even the last couple of quarters have shown that we're heading towards the right direction. We believe the business will be able to maintain the very strong top-line growth and generate more profit for the company. So that's why we guided the very strong top-line growth in Q4 to be in the range of 53% to 57% in dollar terms. If you translate into RMB terms, that would be much more higher. And as for the bottom line-wise, I think we're confident in achieving the greater operating profit even in the Q4 and the new year. And next year, I think the key growth driver will be the number one, if I run them, the number one should be the new business. We started the new business, such as the non-academic courses, since 15, 16 months ago, and it grows very fast in this year, and also, I believe next year, the growth rates will be very high. And Cecilia, you want to add something?
spk02: Just one thing that if you look at Q4's guidance, because if you look at historically last year, since Q4 is the first, the very first quarter that we did not have the, we terminated the K-9 academic tutoring. So that's the first quarter to be like-for-like increase. So that's why you compare with previous quarters, the growth rate is higher.
spk14: Got it. That's very clear. Thank you. Thank you.
spk03: Thank you. Our next question comes from the line of Lucy Yu from Bank of America. Please ask your question, Lucy.
spk18: Hi, Stephen. This is Lucy from BAMO. I have one question on Dongfang Zhenxuan. So if we're looking at the minority interest, it seems that the net profit for BAMO Dongfang Zhenxuan has decreased queue-on-queue. Could you please elaborate the reason behind that, and how should we think about the earnings contribution from Dongfang Zhenxuan going forward? Thank you.
spk09: I think during this quarter, the Easter buy has proved itself as a successful business model. And this business contributes to offer the remarkable contribution to the company overall revenue and profit margins. And this quarter, the East Dubai continue to invest the substantial resources in improving the product quality and collaborates with the JD and the SF Express to provide better delivery services. And so, yeah, they invested some money. But I think I can't tell the detail of the margin analysis or the profit analysis. because of the compliance. And so, you know, I think next quarter, the Dongfang Zhenxuan management, is the best management. We'll share with you guys more information in detail.
spk13: Thank you, Lucy. Understood. Thank you, Stephen. Thank you.
spk03: Thank you. Our next question comes from the line of Candace Chen from Daiwa, please ask your question, Candice.
spk04: Great. 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 businesses. So firstly, may I know the rough breakdown of our new initiatives revenue? And my second question is about the longer-term business directions going forward. As now we see that our business has become more diversified, not only East By has done very well, even for New Oriental live stream channels on Douyin also see very decent GMB trend. So founder Michael also talked about to enter into the cultural tourism as well. So I just wondering what will be the key development areas for New Oriental in the following years. And I would like to know more about whether we have any plans to enter into the learning device market as well or some other new areas. Thank you.
spk02: Okay, as for the new initiative, education nature new initiatives, actually if you look at the revenue contribution, the biggest one is the non-academic tutoring. So this is the one that we're using our existing teaching resources and developing the content very, very quickly and also use our own existing channels to get students. So this year is actually the year one to largely develop this new kind of initiatives. And we're seeing that the demand is very strong and also the retention and also the operating data are trending towards a very good situation and also we're confident for this business to continue to grow very nicely and also contribute more and more meaningful revenue and also get very good profitability as well and also the second biggest education nature new initiative It's the intelligent learning device business. Also, this is a good way to have students to do the self-study using our technology, get access to our teaching system using the hardware, the learning machine. So this is also something very new and it's a new model and new product. but also gaining a lot of interest from our customers and we're also using our existing channel like all the local schools and learning centers to roll out these new products and also getting satisfactory retention and renewal of tuition fees and also this is a business that we are also feeling confidence to contribute more and more revenue and also have good profitability as well. And next to these two, actually these two already contribute the vast majority of our educational new initiatives. And we do have confidence in several other ones like the study tour business, campaign business, which actually have some negative impacts during the pandemic period in Vesta. one year but we're confident for the future for this new initiative because the high demands we're seeing from local markets and also we also have very strong resources to develop this new business and together with several other ones that we have mentioned on the call so we have we keep making efforts on developing all these new initiatives and hopefully all these directions are all right and also contribute more and more meaningful revenue and profit.
spk09: Let me answer your last question about the cultural tourism. I think some of you may have read the online that Michael said that we're considering expanding the cultural tourism business. I think it's indeed a big potential in the country. And as you know, we don't have a lot of teachers. Some of them are star teachers. I think going forward, by leveraging our teachers' knowledge in general studies, cultural studies, and history, I think we believe we would be able to offer one of a kind cultural tourism offering. Combined with the entertainment and the educational, the cultural education for old age groups, the kids, the college students, and the old people, right? And for all ages. And in addition, I think we may also be able to leverage our distribution channel like Dongfang Zhenxuan, Easterby, and the other online streaming channels within the company. And also, we do have a lot of schools and learning centers as the distribution channel for the new business. But now, we're still at a very early stage of the planning and evaluating the new business at the moment. So if we have any updates, we'll keep you updated. Thank you.
spk05: That's very clear. Thank you.
spk03: Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone keypad.
spk13: Again, to ask a question, please press star 1 1 on your telephone keypad. Our next question comes from the line of Linda Huang from Macquarie.
spk03: Please ask your question, Linda.
spk06: Hi, Manish. This is Linda from Macquarie. My question is quite simple. My key question is regarding for our cash because I still see that we keep piling up the cash and our operating cash flow generation ability is also quite strong. So in addition to the share buyback, Have we think about use the other way, such as like a special dividend return to the shareholder? So that would be the first one. And the second question is regarding for our non-academic tutoring business. So since we just mentioned about that, Ryan, we also see very good retention rate. So what is this retention rate and how does it compare to the regulation period? Thank you.
spk09: Thank you, Liz. You know, as you know, we, enough $100 million share buyback program last year. So, till now, you know, we repurchased the $157 million from the open market to repurchase the share back. And, you know, I think our thinking is about evaluation. At this time, you know, we choose the share buyback. You know, historically, Sometimes we both share back. Sometimes we pay the special dividends. So this time, we share back. Next time, I think it depends on the decision made by the board of directors next year. And the retention rates for the non-academic course, I think for the non-academic tutoring courses, the retention rate is over 70% in this quarter. You know, we're driving up. the retention rate compared to before. And for the intelligent learning system devices, I suggest that you are using the renewal rate. It's over 60% already. Thank you. Linda.
spk11: Thank you very much.
spk03: Thank you. Next, we have a follow-up question from the line of Candice Chen from Daiwa. Please go ahead, Candice.
spk04: Great. Hi, Suzanne and Steven. I just want to follow up on the profitability, because you just mentioned for new businesses, actually, they are now contributing very strong revenue and also good profitability. Can you share a little bit more on the margins of the new businesses, particularly for the non-academic tutoring or the intelligent devices? Thank you.
spk09: Yeah, I think the new business, overall, the new business, the margin is over 10%. already. We started business just 16 months ago, so it's quite a new business. But as we said, we made cautiously about the new investments of the new business. So it takes less time to make profitable for the new business. And I think we expect the margin of new business will go up in the Q4 and the next, the new year.
spk13: And next question. That's okay? Is it clear? Yep, that's very helpful. Thank you.
spk15: Thank you.
spk03: Thank you. Our next follow-up question comes from Linus Felix Liu from UBS. Please ask your question, Felix.
spk16: Thank you, management, for taking that question again. I just want to have a follow-up on the market landscape of non-academic tutoring. I know we have most of our revenue coming from the top 10 cities. Where do you see as the biggest growth opportunity ahead? Do you think it's more about ramping up our market share in existing top cities? Or do you see a lot of opportunity in other cities, especially lower tier cities, for non-academic tutoring? Thank you.
spk09: I think, as I said, we're seeing less competition for the non-academic tutoring business. Actually, we're taking market share in both the top tier cities and the low tier cities. And going forward, I think almost all the cities, the growth will be fast.
spk02: Yeah, actually now we're seeing the top 10 cities contributing like over 60% of overall revenue for this category. And I think the growth will come from both taking continued expands and taking shares. You know, it's very, very early stage for this kind of new services and also the new market. And we definitely have opportunity to take market share in all the existing cities, especially these kind of major cities, top tier cities. And also, our feeling is that the demand for this kind of non-academic tutoring is not only for higher tier cities, but also like all the existing cities we're in, like around 70, 80 cities that we still have all the schools and learning centers and we use our existing educational infrastructure and also leverage and keep leveraging our brand name, educational brand name. We have the advantage to expand this kind of new business And the demand is very high.
spk15: Okay, got it. Thank you. Thank you.
spk03: Thank you. Once again, to ask a question, please press star 1-1 on your telephone keypad.
spk13: As a reminder, to ask a question, please press star 1-1. And that's star 1-1 for questions. All right, thank you. So we now approach the end of the conference call.
spk03: I will now turn the call over to New Oriental's Executive President and CFO Stephen Yang for his closing remarks.
spk09: 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.
spk03: thank you this concludes today's conference call thank you for participating you may now disconnect you Thank you. So, Thank you. you Good evening, and thank you for standing by for New Oriental's FY 2023 Third Quarter Results Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be question-and-answer sessions. Today's conference is being recorded. If you have any objections, you may disconnect at this time. And I'd like to turn the meeting over to your host for today's conference, Ms. Cici Zhao. Thank you. Please go ahead.
spk02: Hello, everyone, and welcome to New Oriental's third 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, Stephen Yang, Executive President and Chief Financial Officer, and I will share New Oriental's latest earnings results and business updates in detail with you. After that, 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 Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the view expressed today. A number of potential risks and uncertainties are outlined in our public filings 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 this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I will now first turn the call over to Mr. Young. Stephen, please go ahead.
spk09: Thank you, Cici. Hello, everyone, and thank you for joining us on the call. It's our great pleasure to announce that upon the completion of the restructuring process and the introduction of our new businesses, we have managed to deliver a set of remarkable financial results this quarter, with both top line and bottom line beating the expectations. The result is also boosted by the macro trends of economy recovery as the pandemic subsides. Business activities are resuming and people regain their confidence in consumption. While we observe the demand for our products and services is gradually increasing. We have also achieved a gap operating margin and non-gap operating margin of 8.8% and 11.7% respectively for this quarter. our key remaining business have continued to demonstrate solid recovery. In particular, our overseas test prep and overseas study consulting business have performed exceptionally and recorded continuous year-over-year revenue increments, thanks to the strong post-COVID recovery across the board. Our restructured business model streamlined the cost structure, coupled with emerging new business have not only helped us yield better than expected margins in this physical quarter, but also effectively diversify our business and enable us to offset certain historical seasonality. As we head into the fourth quarter, our solid profitability, strong performing remaining business lines, and emerging new business initiatives in this quarter reaffirm our belief in sustaining a healthy growth of our market share. and pursuing innovative endeavors as we restlessly serve the encouraging environment of recovery. Now, I'd like to spend some time to talk about the quarter's performance across our main business lines and new initiatives to you in detail. Our key remaining business got a promising trend, and the new initiative has shown positive momentum. Breaking it down, The overseas test drive business recorded the revenue increase of 13% in dollar terms, or 23% in RMB terms year over year for this quarter. The overseas test drive business recorded the revenue increase of about 5% in dollar terms, or 13% in RMB terms year over year for this quarter. The adults and university students business recorded the revenue decrease of 3% in dollar terms, or 5% increase in RMB terms year-over-year for this quarter. As mentioned in the previous quarters, we have also launched several new initiatives, which mostly revolve around facilitating students or around development. I'm glad to share with you that these new initiatives have continued to exceed our expectations by sustaining a positive momentum and generating meaningful profits to the group. First, the academic tutoring courses which we have offered in .
spk13: Focuses on cultivating students . 118,000 student enrollment recorded in this quarter.
spk09: The top 10 cities in China have contributed about 60% of the revenue of this business. Secondly, the intelligent 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, technology to provide personalized target learning and exercise content. Our continuous investment in technology has built a competitive edge which drives our navigation amidst the changes, challenges from the past year. We have tested its adoption in around 60 existing cities with 108,000 active pay users in this quarter and are delighted to see improved customer retention and scalability of this new business. The revenue contribution from the top 10 cities in China is around 60%. Meanwhile, the study tour and 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 to broaden the scope, knowledge, and cultivate subject interest. We have conducted the study tour and research camps in over 50 cities across the country. The revenue contribution 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 the local governments, education authorities, schools, and kindergartens. Our education materials and digitalized smart study solutions, a self-learning system which leverages the advanced technology, enable the students to have complete control over the pace and 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 the bachelor's degrees. The above mentioned business have been gaining wide traction and contribute the overall growth of the company and has attained instrumental profits since the last quarter. With regard to our OMO system, we continued our efforts in developing and revamping the platform and kept leveraging our educational infrastructure and technology strengths over our remaining key business and new business to provide more advanced and diversified educational service for our customers. During the reporting period, we invested $26.8 million in the quarter to further improve and maintain our OMO teaching platform. I'd like to give you all an update on Easterby's latest performance. During the reporting period, Easterby has proved itself as a successful business model with instrumental breakthroughs in both business operations and financial performance. The business has continued to offer a remarkable contribution to the company's overall revenue and profit growth. Easterby continued to invest substantial resources improving product quality and variety under its private label, fine-tuning its customer-centric strategy and content caliber during the reporting period. Easterby remains rigorous in applying stringent standards in supplier selection to only source products of top-notch quality and safeguards active collaborations with SF Express and JD Group to continuously refine delivery process and service. To set itself apart from conditional live streams, EAST Buy also upholds its unique feature of integrating intelligence dissemination alongside product sales with a vision to foster nationwide cultural and knowledge sharing. The series of the EAST Buy's in-person live streaming and participation in cultural documentaries and exhibitions have not only increased traffic to East Bay's platform and boosted sales, but also elevated audience engagement and awareness on the preservation of Chinese culture resources. It's inspiring to see that East Bay has grown significantly since inception and has not only become a well-known platform for promoting healthy, top quality and cost-effective products with loyal customer base, but also out of a case appreciation of the country's cultural assets for the betterment of the community. With regards 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 the share repurchase of up to $100 million of the company ADS or common shares during the period from July 28, 2022 through May 31, 2023. As of April 18, 2023, the company repurchased an aggregate of approximately 5.1 million ADS, for approximately $157.6 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.
spk02: I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $687.7 million, representing a 9% decrease year over year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $666.3 million, representing an 8.1% decrease year over year. The decrease was primarily due to the reduction of facilities and number of staff as a result of the downsizing in the fiscal year 2022. Cost of revenue decreased by 0.9% year over year. to $369.6 million. Setting and marketing expenses increased by 9.5% year-over-year to $102.6 million. G&A expenses for the quarter decreased by 25.4% year-over-year to $215.5 million. Non-GAAP G&A expenses, which is full share-based compensation expenses, were $194.5 million. representing a 25.1% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 28.6% to $21.4 million in the third fiscal quarter of 2023. Operating income was $66.5 million, representing a 147.1% increase year-over-year. Non-GAAP operating income for the quarter was $87.9 million, representing a 179% increase year-over-year. Net income attributable to New Oriental for the quarter was $81.6 million, representing a 166.7% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were 49 cents and 48 cents, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $95.4 million, representing a 199.9% increase year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were 57 cents and 56 cents, respectively. Net operating cash flow for the third fiscal quarter of 2023 was approximately $190.5 million, and capital expenditure for the quarter was $49.2 million. Turning to the balance sheet, as of February 28, 2023, New Oriental has cash and cash equivalents of $1,329.5 million. In addition, the company had $1,413.5 million in term deposits and $1,568.1 million in short-term investments. New Oriental's deferred revenue balance, which is the cash collected from registered students for courses and recognized proportionally as revenue as instruction are delivered. At the end of the third fiscal quarter of 2023, was $1,163.2 million, an increase of 19.8% as compared to $971.3 million at the end of the third fiscal quarter of fiscal year 2022. Now, I'll hand over to Stephen to go through our outlook and guidance.
spk09: Looking ahead to the fourth quarter, which has historically been one of our seasonal peak quarters, our key remaining business are in the process of recovery with an opportunity of further taking up market share as the pandemic subsides. As Euro, the company remains tireless in seeking new opportunities with greater flexibility and strong cash flows, and we are confident in embarking on an all-round journey that ensures sustainable growth. For our new businesses, The encouraging performance that this business has achieved in the previous quarters proves that we are heading towards the right direction. We firmly believe that the business will sustain a healthy growth and generate meaningful profit to the company in the first quarter and going forward. With regards to the learning center and classroom space, we're planning to increase our capacity moderately. at which we expect a small quantity of the new learning centers will be opened and classroom areas of some existing learning centers will be expanded in a few major cities. In summary, we expect total net revenue in the first quarter of fiscal year 2023, March 1st, 2023 to May 31st, 2023, to be in the range of $801.8 million to $822.7 million. representing year-over-year increase in the range of 53% to 57%. As the profitability we recorded year-to-date has reaffirmed our success and dedication in turning a new page, we're also confident in achieving a satisfactory operating profit level in the full year of fiscal year 2023. To conclude, we are now taking multi-pronged operational actions to accelerate our recovery and anchor sustainable growth. Simultaneously, we will cautiously research and unveil the potential in new market opportunity and try to apply to new technologies such as AI and chat GPT into our education and product offerings with a vision to uplift our innovative capability in pursuit of profitable growth and increasing the operating efficiency. We take minutes to seek guidance from the corporate with the government authorities in alignment with these efforts to comply with the relevant policies, as well as to further adjust our business operations as required. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measures, as well as the current and preliminary view, which is subject to change. This is the end of our fiscal year 2023 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for this. Thank you.
spk03: 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. To ask a question, please press star 1 1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Our first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.
spk16: Hi, good evening, Stephen. Congratulations on the very strong results. My question is on your forward-looking guidance for the fourth quarter. I know the young year growth looks very impressive. May I know what are the key drivers or the good performing business segments that are driving the fourth quarter growth? And if we look at slightly beyond the next quarter for the next fiscal year, what are the business segments that you expect the fastest growth in FY24? Thank you.
spk09: Thank you, Felix. I think we remain confident and optimistic about the business performance in the Q4, the fourth quarter, and the new fiscal year, fiscal year 2024. And, you know, firstly, I think the macro trend of the economy recovery as the pandemic subsides, you know, where we're seeing the people rebuild their confidence in consumption, you know, and we're also seeing the products and the demand, you know, the requirement of the service is gradually increasing. And as for the different business lines, you know, the remaining businesses such as the oversea related business. On demand side, we have seen this strong demand for oversea test files and consulting business. And on supply side, we have seen some players disappear from the market. That means we're facing less competition. So that's why we're optimistic about the oversea related business going forward. And for our new business, I think the encouraging performance in the Q3 in this quarter and even the last couple of quarters have shown that we're heading towards the right direction and we believe the business will be able to maintain the very strong top-line growth and generate more profit for the company. So that's why we guided the very strong top-line growth in Q4 to be in the range of 53% to 57% in dollar terms. If you translate into RMB terms, that would be much more higher. And as for the bottom line-wise, I think we're confident in achieving the greater operating profit even in the Q4 and the new year. And next year, I think the key growth driver will be the number one, if I run them, the number one should be the new business. We started the new business, such as the non-academic courses, since 15, 16 months ago, and it grows very fast in this year, and also, I believe next year, the growth rates will be very high. And Cecilia, you want to add something?
spk02: Just one thing that if you look at Q4's guidance, because if you look at historically last year, since Q4 is the first, the very first quarter that we did not have the, we terminated the K-9 academic tutoring. So that's the first quarter to be like-for-like increase. So that's why you compare with previous quarters, the growth rate is higher.
spk14: Got it. That's very clear. Thank you. Thank you.
spk03: Thank you. Our next question comes from the line of Lucy Yu from Bank of America. Please ask your question, Lucy.
spk18: Hi, Stephen. This is Lucy from BAMO. I have one question on Dongfang Zhenxuan. So if we're looking at the minority interest, it seems that the net profit for BAMO Dongfang Zhenxuan has decreased queue-on-queue. Could you please elaborate the reason behind that, and how should we think about the earnings contribution from Dongfang Zhenxuan going forward? Thank you.
spk09: I think during this quarter, the Easter pie has proved itself as a successful business model. And this business contributes to offer the remarkable contribution to the company overall revenue and profit margins. And, you know, this quarter, the East Dubai continue to invest the substantial resources in improving the product quality and collaborates with the JD and the SF Express to provide better delivery services. And so, yeah, they invested some money. But I think I can't tell the detail of the margin analysis or the profit analysis. because of the compliance. And so, you know, I think next quarter, the Dongfang Zhenxuan management is the best management. We'll share with you guys more information in detail.
spk13: Thank you, Lucy. Understood. Thank you, Stephen. Thank you.
spk03: Thank you. Our next question comes from the line of Candice. Chen from Daiwa, please ask your question, Candice.
spk04: Great. 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 businesses. So firstly, may I know the rough breakdown of our new initiatives revenue? And my second question is about the longer-term business directions going forward. As now we see that our business has become more diversified, not only East By has done very well, even for New Oriental livestream channels on Douyin also see very decent GMB trend. So founder Michael also like talked about to enter into the cultural tourism as well. So I just wondering like what will be the key development areas for New Oriental in the following years and I would like to know more about whether we have any plans to enter into the learning device market as well or some other new areas. Thank you.
spk02: Okay, as for the new initiatives, education nature new initiatives, actually if you look at the revenue contribution, the biggest one is the non-academic tutoring. So this is the one that we're using our existing teaching resources and developing the content very, very quickly and also use our own existing channels to get students. So this year is actually the year one to largely develop this new kind of initiatives. And we're seeing that the demand is very strong and also the retention and also the operating data are trending towards a very good situation and also we're confident for this business to continue to grow very nicely and also contribute more and more meaningful revenue and also get very good profitability as well and also the second biggest education nature new initiative It's the intelligent learning device business. Also, this is a good way to have students to do the self-study using our technology, get access to our teaching system using the hardware, the learning machine. So this is also something very new and it's a new model and new product. but also gaining a lot of interest from our customers and we're also using our existing channel like all the local schools and learning centers to roll out these new products and also getting satisfactory retention and renewal of tuition fees and also this is a business that we are also feeling confidence to contribute more and more revenue and also have good profitability as well. And next to these two, actually these two already contribute the vast majority of our educational new initiatives. And we do have confidence in several other ones like the study tour business, campaign business, which actually have some negative impacts during the pandemic period in Vesta. one year but we're confident for the future for this new initiative because the high demands we're seeing from local markets and also we also have very strong resources to develop this new business and together with several other ones that we have mentioned on the call so we have we keep making efforts on developing all these new initiatives and hopefully all these directions are all right and also contribute more and more meaningful revenue and profit.
spk09: Let me answer your last question about the cultural tourism. I think some of you may have read the online that Michael said that we're considering expanding the cultural tourism business. I think it's indeed a big potential in the country. And as you know, we don't have a lot of teachers. Some of them are star teachers. I think going forward, by leveraging our teachers' knowledge in general studies, cultural studies, and history, I think we believe we would be able to offer one of a kind cultural tourism offering. Combined with the entertainment and the cultural education for all age groups, the kids, the college students, and the old people, right? And for all ages. And in addition, I think we may also be able to leverage our distribution channel like Dongfang Zhenxuan, East By, and the other online streaming channels within the company. And also, we do have a lot of schools and learning centers as the distribution channel for the new business. But now, we're still at a very early stage of the planning and evaluating the new business at the moment. So if we have any updates, we'll keep you updated. Thank you.
spk05: That's very clear. Thank you.
spk03: Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone keypad.
spk13: Again, to ask a question, please press star 1 1 on your telephone keypad.
spk03: Our next question comes from the line of Linda Huang from Macquarie. Please ask your question, Linda.
spk06: Hi, management. This is Linda from Macquarie. My question is quite simple. My key question is regarding for our cash, because I still see that we keep piling up the cash, and our operating cash flow generation ability is also quite strong. So in addition to the share buyback, Have we think about use the other way, such as like a special dividend return to the shareholder? So that would be the first one. And the second question is regarding for our non-academic tutoring business. So since we just mentioned about that, Ryan, we also see very good retention rate. So what is this retention rate and how does it compare to the regulation period? Thank you.
spk09: Thank you, Liz, enough. You know, as you know, we, enough $100 million share buyback program last year. So, till now, you know, we repurchased the $157 million from the open market to repurchase the share back. And, you know, I think our thinking is about evaluation. At this time, you know, we choose the share buyback. You know, historically, Sometimes we both share back. Sometimes we pay the special dividends. So this time, we share back. Next time, I think it depends on the decision made by the board of directors next year. And the retention rates for the non-dynamic course, I think for the non-dynamic tutoring courses, the retention rate is over 70% in this quarter. You know, so we're driving up. the retention rate compared to before. And for the intelligent learning system devices, I suggest that you are using the renewal rate. It's over 60% already. Thank you. Linda.
spk11: Thank you very much.
spk03: Thank you. Next, we have a follow-up question from the line of Candice Chen from Daiwa. Please go ahead, Candice.
spk04: Great. Hi, Suzanne and Steven. I just want to follow up on the profitability, because you just mentioned for new businesses, actually, they are now contributing very strong revenue and also good profitability. Can you share a little bit more on the margins of the new businesses, particularly for the non-academic tutoring or the intelligent devices? Thank you.
spk09: Yeah, I think the new business, overall, the new business, the margin is over 10%. You know, we started business just 15, 16 months ago. So it's quite a new business. But, you know, as we said, you know, we made cautiously about the new investments of the new business. So it takes less time to make profitable for the new business. And I think we expect the margin of new businesses will go up in the Q4 and the next, the new year.
spk13: And that's okay. Is it clear? Yep, that's very helpful.
spk03: Thank you.
spk15: Thank you.
spk03: Thank you. Our next follow-up question comes from Linus Felix Liu from UBS. Please ask your question, Felix.
spk16: Thank you, management, for taking that question again. I just want to have a follow-up on the market landscape of non-academic tutoring. I know we have most of our revenue coming from the top 10 cities. Where do you see as the biggest growth opportunity ahead? Do you think it's more about ramping up our market share in existing top cities? Or do you see a lot of opportunity in other cities, especially lower tier cities, for non-academic tutoring? Thank you.
spk09: I think, as I said, we're seeing less competition for the non-academic children's business. Actually, we're taking market share in both the top tier cities and the low tier cities. And going forward, I think almost all the cities, the growth will be fast.
spk02: Yeah, actually now we're seeing the top 10 cities contributing like over 60% of overall revenue for this category. And I think the growth will come from both taking continued expand and taking shares. You know, it's very, very early stage for this kind of new services and also the new market. And we definitely have opportunity to take market share in all the existing cities, especially these kind of major cities, top tier cities. And also, our feeling is that the demand for this kind of non-academic tutoring is not only for higher tier cities, but also like all the existing cities we're in, like around 70, 80 cities that we still have all the schools and learning centers and we use our existing educational infrastructure and also leverage and keep leveraging our brand name, educational brand name. We have the advantage to expand this kind of new business And the demand is very high.
spk15: Okay, got it. Thank you. Thank you.
spk03: Thank you.
spk13: Once again, to ask a question, please press star 1-1 on your telephone keypad. As a reminder, to ask a question, please press star 1-1. And that's star 1-1 for questions. All right, thank you.
spk03: So we now approach the end of the conference call. I will now turn the call over to New Oriental's Executive President and CFO, Stephen Yang, for his closing remarks.
spk09: 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.
spk03: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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