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.
spk10: Good evening and thank you for standing by for New Orientals FY20-24 Second Quarter Results Earnings Conference Call. At this time, all participants are in a listen-only mode. After mentions, prepare remarks to be questioned and answered sessions. 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. Sisi Zhao.
spk11: Thank you. Hello, everyone, and welcome to New Oriental's second fiscal quarter 2024 earnings conference call. Our financial results for the first were released earlier today and are available on the company's website as well as on our services. Today, Stephen Yellen, 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and assiduities. 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 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. Yang. Stephen, please go ahead.
spk03: Thank you, Cici. Hello, everyone, and thank you for joining us on the call. It's our pleasure to announce that New Rental has delivered a set of fruitful financial results that have surpassed our expectations this quarter. Our diverse business lines have embarked on healthy recovery and anchored stable top-line performance, while the enduring momentum of our new business has made meaningful contribution to the company's revenue and continue to pave the way for further acceleration. New Rental's bottom line performance has achieved promising growth, with operating margin and non-GAAP operating margin reaching 2.5% and 5.9% for this quarter, respectively, thanks to our unwavering efforts to brush up on operational efficiency and cost control. as well as the combined efforts of our restructured business model while utilizing resources and streamlined cost structure. Encouraged by the company's sustainable profitability, resilient business lines, and prospering new business, we reinforce our commitment to maintaining healthy market share growth and creating sustainable value for customers and shareholders in the long term. Now I'd like to spend some time to talk about the quarter's performance across our remaining business lines and new initiatives to you in detail. Our key remaining businesses have depicted a propitious trend, while the new initiatives secured a positive momentum. Breaking it down, the oversea test drive business recorded the revenue increase of 47% in dollar terms or 50% in RMB terms year-over-year for this quarter. The overseas study consulting business recorded the revenue increase of about 32% in dollar terms or 35% in RMB terms year-over-year for this quarter. The adults and university students business recorded the revenue increase of 43% in dollar terms or 46% increase in RMB terms year-over-year for this quarter. As mentioned in the past quarters, we have launched multi-pronged new initiatives, which mostly revolve around facilitating students around development. They have continued to prosper with consistent growth, delivering meaningful profits to the company. Firstly, the dynamic tutoring courses, which we have offered in around 60 existencies, focus on cultivating students' innovative ability and comprehensive quality. The markets we have tapped into have recorded elevated penetration, especially in higher tier cities, with a total of approximately 786,000 students enrollment recorded in this quarter. The top 10 cities in China contribute over 60% of revenue of this business. Secondly, the intelligence learning system and device business A service designed to provide a tailored digital learning experience for students to enhance learning efficiency has been adopted in around 60 existing cities. We have observed enhanced customer retention rate and scalability of this new initiative. Approximately 181,000 active paid users reported in this quarter. The revenue contribution of these initiatives from the top 10 cities in China is around 55%. Our smart education business, educational materials, and digitalized smart study solutions have continued to contribute material results to the overall. In summary, our new educational business initiatives reported a revenue increase of about $63 eight percent in dollar terms or 72 percent increase in r b terms of year for this physical quarter in addition as mentioned in the last quarter we have inaugurated a newly integrated tourism related business line as one of our innovative ventures tailored with diverse offerings of cultural trips study tours in china overseas as well as camp education New Rental's cultural tourism business share the spirit to provide premium quality travel experience that are infused with joy from cultural exchange, knowledge sharing, and personal fulfillment. Within this new business line, our study tour and research camp business for students of K-12 and university age anchors encouraging growth this quarter. thanks to a strong post-COVID recovery of demand and resumed traveling. We have conducted study tours and research camps in over 50 cities across the country, with the top 10 cities in China offering over 55% revenue share of this new initiative. We also piloted a number of top-notch tourism offerings to expand our reach to all age groups including the middle-aged and elderly individuals across 17 featured provinces. As we are still at a preliminary stage of planning, testifying, and evaluating the viability of the business in select regions, we will keep you posted should there be timely updates. With regard to our OMO system, we have perceived in revamping our platform and leveraged our educational infrastructure and technology edge of remaining key business and new business with a vision to provide advanced diversified education service to customers of all ages. During this reporting period, a total of $28.7 million has been invested in our OMO teaching platform, which equip us with the flexibility to maintain rivaled surveys to students continuously. During the reporting period, EASTBuy has attained strong growth momentum through a series of new initiatives aimed to foster the development of its private label products and upgrades on customer service. A comprehensive detailed optimization of product quality has been conducted And East Bay has made remarkable breakthroughs in supply chain integration, boosting its private label products to a total of 2,000, no, a total of 264 SKUs. Furthermore, nationwide broadcast events across provinces were launched with the consistent support from local cultural and tourism authorities. EasyBuy also began introducing cultural tourism products and incorporate century-long history, culture, geographies, and folklore into the hours of live streaming e-commerce broadcasts, presenting lively introductions of historical monuments, tourism attractions, and local specialties to their audience. We look forward to witnessing the continued growth of the Easter Buy and its positive reception within the community. With regard 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 $4.8 billion. On July 26, 2022, the company's board of directors authorized a share repurchase of up to $500 million of the company's ADS or common shares during the period from July 28, 2022 through May 31, 2023. The company's board of directors further authorized the company to extend its share repurchase program launched in July 2022 12 months through May 31st, 2024. As of January 23rd, 2024, the company repurchased an aggregate of approximately $6 million ADS for approximately $194.2 million from the open market under the Shared Repurchase Program. Now I will turn the call over to Cici to share with you about the key financials. Cici, please go ahead.
spk11: Now, I'd like to go through the other key for this quarter. Operating costs and expenses for the quarter were $848.3 million, representing a 32.4% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $818.7 million, representing a 31.6% increase year-over-year. The increase was primarily due to the cost and expenses related to the substantial growth in East Dubai's private label products and live streaming e-commerce business. Cost of revenue increased by 25.7% year-over-year to $422.6 million. Setting and marketing expenses increased by 62.2% year-over-year to $155 million. G&A expenses for the quarter increased by 29.6% year over year to $270.7 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $256.1 million, representing a 34.2% increase year over year. Total share-based compensation expenses, which were allocated to Related operating cost and expenses increased by 57.3% to $29.6 million in the second fiscal quarter of 2024. Operating income was $21.3 million compared to a loss of $2.5 million in the same period of the prior fiscal year. Non-GAAP income from operations for the quarter was $50.9 million, representing a 212.2% increase year-over-year. Net income attributable to New Oriental for the quarter was $30.1 million, representing a 4,007.4% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were 18 cents and 18 cents respectively. Non-GAAP net income attributable to New Oriental for the quarter was $50.2 million, representing a 182.6% increase year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.30 and $0.29, respectively. Net cash flow generated from operation for the second fiscal quarter of 2024 was approximately $300.6 million, and capital expenditure for the quarter were $43.4 million. Turning to the balance sheet, as of November 30, 2023, New Oriental had cash and cash equivalents of $1,942.6 million. In addition, the company had $1,324.1 million in term deposits and $1,571.2 million in short-term investments. New Rental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the services or goods are delivered, at the end of the second quarter of fiscal year 2024 was $1,645 million, an increase of 44.4% as compared to $1,139.1 million at the end of the second fiscal quarter. of 2023. Now, I'll hand over to Stephen to go through our outlook and guidance.
spk03: As we enter the new quarter, we look forward to delivering assuring growth and ongoing margin expansion, building on the blend of our brand advantage, roots to history, influential teaching content resources, and solid foundation. We're also committed to working diligently, adhering to the latest guidance from the Chinese authorities, on the nation's education level to strengthen its leading position to further unveil our possibility across all business lines and creative endeavors. With regard to the learning center and classroom space, we plan to increase our capacity moderately by about 20% year over year. We will keep monitoring the pace and scale of new openings according to the local operation and our financial results in this fiscal year. The groundwork we have laid and the progress we have made thus far have fulfilled our optimism, our performance in the foreseeable future. We remain dedicated to achieving margin extension throughout the whole year. In the coming quarter, we expect total net revenue to be in the range of $1,070.9 million to $1,093.5 million, representing year-over-year increase in the range of 42% to 45%. To conclude, we're delighted to share our latest set of the results to all of you. While confident in our ability to drive our business toward an even more positive trajectory, and enhance profitability throughout the remainder of the fiscal year 2024. While we cultivate new endeavors to build upon our capabilities, we will also devote research and application of new technologies such as AI and in our educational and product offerings to uplift our strengths in pursuit of further growth and operating efficiency. At the same time, we will continue to seek guidance from and cooperate with government authorities in various provinces in China in alignment with its efforts to comply with the relevant policies, guidelines, and regulations, 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 measure, as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2024 Q2 summary. At this point, I'd like to open the floor for questions. Operator, please open the call for these. Thank you.
spk10: 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 now, 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 11 again. Our first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.
spk12: Hi, good evening, Stephen. Congratulations again on that strong set of results. My question is on your very good third quarter guidance of 40% revenue growth. Could you give us a rough breakdown of what's driving this strong growth? Thank you.
spk03: Okay. Thank you, Philip. I think, you know, we beat the top-line guidance in this quarter a lot, as we did in previous quarters. So as for the revenue guidance for the Q3 quarter, I think we are still taking a conservative approach in giving the Q3 growth guidance, which will be in the range of 42% to 45% in dollar terms year over year. Given the strong demands in education sector and growth momentum we have seen so far in this fiscal year, so we're quite confident about the whole year's revenue growth. will be better than we originally expected, especially in the coming Q3. And so for the, you know, all the business lines, you know, the overseas related business, on demand side, we have seen this very strong demand for overseas test drive and consulting business. And on supply side, you know, we have seen some players, you know, disappear from the market, you know, during the COVID. And so that means we're facing less competition in the market. And for the other revenue contributor, the new businesses, I think the incurring performance in this quarter, in Q2, proves that we're heading towards the right direction. And so we believe this business will be able to maintain the very good top-line growth in the Q3. So overall, that's why we give the guidance of the top-line growth by 42% to 45%. So Cici, do you want to add the breakdown?
spk11: Yeah. Actually, the revenue contribution from key business lines is pretty consistent in this year, very similar to last quarter. Like overseas related business country builds like 20, 20, 20 to 21% of total revenue. Like domestic test prep, 2 to 3%. And also the K to 12 newly developed educational initiatives for K to 9 and also some remaining other training, tutoring business for high school together country build over 41, 42% of total revenue. So the key drivers are growing very, very well, and we're seeing continued trend for all the key business minds as well.
spk07: Thank you, Felix. Okay, thank you, very clear. Congratulations on the results. Thank you, again.
spk10: Thank you. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please ask your question, Yiwen.
spk04: Hey, good evening, management. Thanks for taking my question. Congrats on that strong quarter result. So my question is about our, you know, learning center expansion. You mentioned about, you know, whole year 20% capacity growth. If I calculate correctly, that actually implies second half net add would slow down a bit. So could you discuss what are our considerations there, given the very strong demand? Thank you.
spk03: Yeah, this quarter we added around 7% new capacity. And at this time, last quarter we guided the capacity expansion will be somewhere around 15% to 20%. So this time we raised the expansion guidance to somewhere around 20%. You know, I think we will open a reasonable amount of the new learning centers, you know, while some of the new classroom areas or some existing learning centers, you know, will be expanded in the second half of the year. And I think most of the new openings will be in the cities with a better top line and bottom line performance. And I think we will keep monitoring the pace and scale of the new openings according to the operation and financial results in the second half of the year. And I think maybe in the next quarter or just in Q4, I think we will share with you about our new decision of the Learning Center expansion.
spk07: Maybe we'll raise again. Thank you. Okay. Okay. Thank you.
spk06: Thank you, Yuen.
spk10: Our next question comes from the line of Lucy Yu from Bank of America Securities. Please ask your question, Lucy.
spk09: Hi, Steven. This is Lucy from BOFA. So follow up on the earlier question on the expansion. So actually, we have seen very, very strong demand on the ground. Many of my friends trying to enroll to a learning center but was told it's already full. even the learning center is still under reservation at the moment. So I'm wondering what is the bottleneck for us to expand faster at the moment? Is it teacher recruitment or is it like finding the right location or get the license? So what is the bottleneck from preventing us expanding even faster? Thank you.
spk03: Yeah. Thank you, Lucy. I think the reason that we give the guidance of the learning center expansion about 20% because I think we do have the OMO system and the OMO model. So that means the online sites will help us to take over more students into the existing classrooms and the learning centers. So OMO model helps a lot. And secondly, education is typically long-term business. So we care more about the top-line growth and the bottom-line growth. That means the margin expansion. So we don't want to grow the business too fast. So what we're carrying is that the top-line growth, Actually, we have already given the guidance of 45% top line growth in Q3. And we also care about the margin expansion.
spk07: So it's the growth balance between the top line and bottom line. Lucy.
spk09: Thank you, Stephen. Just to follow up, you mean the OMO model, I know it's adopted for the high school, but for the non-curricular training, we are also using OMO at the moment? So what's the percentage of online versus offline at the moment?
spk03: Yes, Lucy. For some of the non-adamant courses and the overseas test labs, even for some college students' business, all of the business, we do have the OMO model.
spk11: And also the intelligent learning devices, which is also the one that we don't require too many new locations.
spk09: I see. Thank you so much.
spk03: Thank you, Lucy.
spk10: Thank you, Lucy. Our next question comes from the line of Timothy Chow from Goldman Sachs. Please ask your question, Timothy.
spk00: Thank you. Hi, Stephen. Hi, this is Timothy from Goldman. My question is on the margins. I saw this quarter the Nangai OP margin expanded by around 3.3 percentage point. Just wondering if you can provide any color in terms of breakdown, because on the other hand, I think for eSPI there was some pressure on the margin. Just wondering if we exclude the margin impact from eSPI, what kind of margin expansion that we are seeing for the core awareness? And then after this quarter, how do we think about the full year OP margin guidance? Thank you.
spk03: Okay, you know, yeah, let's start with the quarter, this quarter margin analysis. Even though, yeah, as you said, even though it's the bias margin drag in this quarter, we still got the non-GAAP OP margin expansion by 330 basis points. And I think the margin increase was mainly driven by the following reasons. Number one is the, you know, the utilization rates improving of our facilities and the teaching resources. increase the learning center margins on average. So that means we have to lower fixed cost and expenses compared to that of last year. And number two is the new business margin is over, is around like the 19, 20%. So we just started the new business two years ago. So that means the ramping up pace is much faster than we expected. And also the remaining business such as the overseas related business and the college business, generally higher margin than that of last year. So in the Q2, if we take out the East Vice impact education, the non-GAAP open margin is what was that?
spk11: Increased, actually, it's much higher than the overall margin, yeah. Because they they don't they don't actually if the buy don't release quarterly earnings So you can you can you can look at the results of their first half so you can you can roughly get the calculation of the educational business marketing expansion and One and you know as we head into the Q3 With the option leverage and the prior you like control and
spk03: I think the will get the margin expansion continuously, even in the Q3 and Q4. So that means that the second half of the year, I think you will see the margin expansion in education business.
spk07: Thank you, Steven. This is very helpful.
spk00: Thank you.
spk10: Thank you, Tim. Our next question comes from the line of Tian Ho from TH Capital. Please ask your question, Tian.
spk01: Hi, Cici, Stephen. Congratulations for a good quarter. I have actually two questions. One is, how does culture and tourism business is conducted? How do you record the revenue from that? That's number one. Number two, Can you break down the results and guidance into different segments for both revenues and the margin profiles? That's two. Thank you.
spk03: Thank you, Tian. I will take the question about tourism business. Tian, as mentioned in the last quarter, we have started the tourism business as one of our innovative ventures. And the tourism business includes our well-grounded study tour and the research camp business for the students, as well as our new tourism business that serves the middle-aged and senior people. We don't have a lot of teachers, and I think that our new tourism business will utilize our strengths in knowledge sharing of those teachers. And as well, we have abundant sales channel, including Dongfang Zhenxuan and online, offline channels in New Oriental. So during this quarter, we piloted a number of tourism offerings to expand to reach all ages people. And the top line growth, you know, It's very good in this quarter because in the last year, we did have the negative impact from the COVID. We set up the new company named the New Oriental Cultural Tourism Group. Also, this group company set up the 100% the subsidiaries in all cities. So we divided the revenue and the financial statement from the education to the tourism business. So that means going forward, we will record the two business lines in two parts. And so going forward, I think our goal is to be the leading the cultural tourism company in China and to provide the best service to the customers as much as we can. And I do hope going forward, the tourism business will contribute more revenues and the profits to the whole group.
spk11: Tian. Tian, your second question on the guidance breakdown, as I mentioned earlier, For overseas-related business, for Q3, roughly the contributions are similar with previous quarter, about 21%, 22%. And the domestic test prep is about 2% to 3%. And the K-12, including the new educational initiatives for K-9, and also remaining high school business together, contribute over 40% of total revenue. Yeah, so that's the key business lies mix.
spk01: Thank you. Thank you. Thank you.
spk07: Thank you, Tian.
spk01: That's all.
spk10: Thank you, Tian. Before we take the next question, a reminder to press star 11 if you have any questions. Our next question comes from Candice Chen from Daiwa. Please ask your question, Candice.
spk08: Hi, Xixi and Stephen. Congratulations on a very strong quarter and also the revenue guidance. My question is on the margins for longer term. So I think you just mentioned that for the new education businesses that actually we are looking at around 19 to 20% operating margin, which is pretty impressive as compared to what you mentioned in the previous quarters. And I'm just wondering, in the longer term that we are talking about, like two to three years down the road, what should we expect for this new education business in terms of their operating margins and also for the overseas test prep business? What kind of margins should we be expecting given the very strong demand and also the revenue here? Thank you.
spk03: Yeah, as you know, we started the new education business three years ago. And, you know, in this quarter, the margin of this business is roughly 19%. And going forward, I think the margin will be over 20%. You know, so that means we expand the margin of this business. You know, we will expand the margin of this business in the second half of this year. And even in the new year, fiscal year 25, you know, we expect the margin of the education business overall will be expanded. Because of the lower fixed cost and the higher utilization of the learning centers and the cost control, I think both the existing business such as the overseas-led business and the college business and the new business, new initiatives, will expand the margin. So going forward, even the second half of this fiscal year ends, the fiscal year 25, I think the margin will be expanded. And we care more about the top line growth and the margin expansion. So we believe we will create more value to the shareholders as the bottom line-wise.
spk08: Another question is about our cash. I think we are having almost $5 billion cash right now. So in terms of shareholder returns, what are we going to do with the cash in the following years?
spk03: Yeah, we announced the $400 million share buyback program. And so far, we finished $194 million And I think we will buy the share back, you know, from the open markets going forward. And, you know, this round, we choose to buy the share back. And, you know, but historically, you know, we paid the several times special dividend and did several times share buyback. So going forward, you know, next round, maybe we will choose the dividend again and order the share buyback.
spk08: Okay, good to hear. Thank you, Stephen.
spk10: Thank you, Candice. As a reminder, to ask a question, please press star 11 on your telephone keypad. Our next follow-up question comes from the line of Felix Liu from UBS. Please go ahead, Felix.
spk12: Hi, good evening, Stephen. I have a follow-up question on competition. You mentioned that the supply-demand dynamics of the sector is very strong. So do you see any risk in competition intensifying? Do you see, you know, smaller players also ramping up capacity expansions or is not what is happening from the ground? Thank you.
spk03: You know, Felix, you know, we have seen, you know, a lot of the competitors disappear from the market, you know, since two, three years ago. And especially, you know, we are facing less competition. And so I think this is true, you know, both for the K-12 business and the overseas related business, even with the college business. And going forward, I think we expect the competition environment will be stabilized.
spk12: Okay, got it. Thank you.
spk10: Thank you, Felix. Once again, to ask a question, please press star 1 1 on your telephone keypad. Our next follow-up question comes from the line of Timothy Chow from Goldman Sachs. Please go ahead, Tim.
spk00: Hi, Steven. Just a follow-up question, I think, on the intelligent learning system and devices. I saw the number of active users, I think, for the past quarter is actually quite similar to the summer semester. Just wondering if you can share some color in terms of the seasonality of these business lines and what is the, I think, probability that we are seeing and how do you think about the, I think, the Q and Q growth, I think, into the third quarter, fourth quarter. That would be very helpful.
spk11: Yeah. Actually, the intelligent learning device business are developing also very well. You know, the growth is pretty strong. And we're seeing actually not very seasonal pattern for this business, quite similar with previous tutoring business, especially for middle school students. And, you know, this year, the year-over-year increase of user is very significant. high and also where we have prepared a lot of new devices to cater the needs of customers. The key drivers, growth drivers, are new customers and also we're making efforts on expanding to more subjects for existing customers as well. because this is a very good product that's helping kids to enhance their self-study ability, you know, even without our teachers' instruction, but using the device and also benefiting from our very, very good content, you know, differentiating content embedded in the device that kids can also prepare for the academic study and do the process by themselves. So this is a good solution after the policy change and all the restructuring of the whole company. So we're confident in the development of this new product. And also, you know, the profitability is also currently we're seeing the margin are similar with our tutoring business, like the non-academic tutoring business for mostly for elementary school students. And also, we're seeing the potential for this kind of learning device business. The margin potential is also quite strong. We can leverage more of our teacher resources, and also, we don't need to spend a lot of cost on the learning center opening.
spk05: Yeah.
spk07: That's clear. Thank you, Sissi.
spk10: Thank you, Tim. Our next follow-up question comes from the line of Tian Ho from TH Capital.
spk01: Please go ahead, Tian. Yes. Steven, just a follow-up question. It's also related to the seasonality. So just not quite sure what's the seasonality under the current business structure. So can you share some color?
spk03: Yeah, Q decisibility becomes more smooth than many years ago. But the Q2 is still the lowest season. And so the strongest season is Q1, then followed by the Q3 and Q4, and then the Q2 is the lowest season.
spk01: Is the margin also full of the same trends?
spk03: I think so, yeah. You look at the margin in Q2, the non-GAAP OB margin is roughly 5.9%. I think the margin in Q3 definitely will be higher than Q2.
spk01: Okay, okay, got it. Thank you, thank you.
spk10: Thanks, Tian. We are now approaching the end of the conference call. I'll turn the call over to New Oriental's Executive President and CFO, Mr. Steven Yang, for his closing remarks.
spk03: 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.
spk10: Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer