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spk11: Good evening, and thank you for standing by for New Oriental's FY 2024 Third Quarter Results Earnings Conference Call. At this time, all participants are in listen-only mode. After matchments prepared remarks, there will be questions and discussion. 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.
spk10: Thank you. Hello, everyone, and welcome to New Oriental's third fiscal quarter 2024 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 Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public findings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations websites at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead.
spk06: Thank you, Cici. Hello, everyone, and thank you for joining us on the call. We're pleased to announce that New Oriental has achieved robust growth this quarter that has surpassed our expectations. The remarkable top-line performance this quarter has spoken volumes about sustained recovery across our diverse business lines, while steady expansion of our new business made healthy contributions to the company's revenue. invigorating our portfolio of innovative endeavors. New Oriental's bottom line performance has achieved encouraging yields, with operating margin and non-GAAP operating margin reaching 9.4% and 11.7% for this quarter, respectively. Thanks to the combined efforts of our restructured business model, by the utilized resources and streamline cost structure. Bolstered by a vital growth across all business line, our commitment to maintaining a healthy market share growth stands firm as we strive to create sustainable value for our customers and shareholders in the long term. Now, I would like to spend some time to talk about the quarter's performance across our remaining business line and new initiatives to you in detail. our key remaining business have attended a promising upward trajectory while the new initiatives secure positive momentum. Breaking it down, the oversea test drive business recorded the revenue increase of about 53% in dollar terms or 59% in RMB terms year-over-year for the third fiscal quarter of 2024. The overseas study consulting business recorded the revenue increase of about 26% in dollar terms, or 31% in RMB terms year-over-year for this quarter. The adults and university students business recorded the revenue increase of 53% in dollar terms, or 60% increase in RMB terms year-over-year for this quarter. Our multi-pronged new initiatives, which mostly revolve around facilitating students around development have continued to deliver continued growth and meaningful profits to the company. Firstly, the non-academic children's courses, which we have offered in around 60 visiting cities, focuses on cultivating students' innovative ability and comprehensive quality. The markets we have tapped into have reported elevated penetration, especially in higher tier cities. With a total of approximately $355 student enrollment recorded in this quarter, the top 10 cities in China contribute over 60% 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 cities. We have observed enhanced customer retention rate and scalability of this new initiative business with approximately 188,000 active paid users recorded in this quarter. The revenue contribution of this initiative from the top 10 cities in China is over 55%. Our smart education business, educational material and digitalized smart study solutions have continued to contribute material results to the overall advancements of the company. In summary, our new educational business initiatives reported a revenue increase of 73% in dollar terms or 80% increase in RMB terms year over year for this quarter. In addition, as mentioned in the past quarters, we inaugurated a newly integrated tourism related business line as one of our creative ventures. tailored with diverse offerings of cultural trips, study tours in China and overseas, as well as camp education. New Oriental's cultural tourism business shared the spirit to provide premium quality travel experience that are infused with joy from cultural exchange, knowledge sharing, and personal fulfillment. Within the new business line, Our study tour and research camp business for students of K-12 and university age achieved inspiring growth in this quarter. We have conducted study tours and research camp in over 50 cities across the country, with the top 10 city in China offering over 55% of revenue share of this business. We also pilot a number of top-notch tourism offerings to expand our reach to all age groups, including the middle-aged and elderly individuals across 25 featured provinces. As we're still at the preliminary stage of the planning, testifying, and evaluating the availability of this business in select regions, we will keep you posted should there be timely updates. With regards to our OMO system, online merge offline system, we have to persist in revamping our platform and leverage our educational infrastructure and technology edge on remaining key business and new initiative with the vision to provide advanced diversified education services to customers of all ages. During this reporting period, a total of $25.5 million has been invested in our OMO teaching platform. which equips us with flexibility to maintain arrival service to students. With regards to the Easter Buy, Easter Buy attained sustainable growth momentum in this quarter thanks to a rapid development of its private label products. As part of the ongoing expansion strategy for an early venture like Easter Buy, we have devoted substantial investments to support the growth of the company including the optimization of the Easterby's multi-platform strategies, supply chains, product offerings, as well as quality control to safeguard on product quality and regions. We're glad to see the Easterby has further enlarged its customer base following the latest establishment of time with the Yuhui channel on Douyin. In addition, Further enhancements in Easterby have been made through our comprehensive organizational structure, strategy hands for professional talents and app upgrades. All of which strengthened Easterby's private label products and live streaming e-commerce. The resources we committed into Easterby have thankfully nourished improved user management and loyalty. And we look forward to leverage these inputs to propel further growth of the platform that promise premium offerings and sustainable growth for our customers. With regards to the company's latest financial position, I'm confident to share with you that the company is in a healthy financial state 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 the share repurchase of up to $500 million of the company ADS work common shares during the period from July 28, 2022 to May 31, 2023. The company's board of directors further authorized the company to extend its share repurchase program launched in July 2022 by 12 months to May 31, 2024. As of yesterday, April 23, 2024, the company repurchased an aggregate of approximately $6 million ADS for approximately $195.3 million from the open market and then 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.
spk10: Now I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter for $1,093.9 million, representing a 59.1% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which excludes share-based compensation expenses, were $1,066.4 million, representing a 60.1% increase year-over-year. The increase was primarily due to the cost expenses related to substantial growth in East Dubai's private label products and live streaming e-commerce business. Cost of revenue increased by 74.5% year-over-year to $644.8 million, Selling and marketing expenses increased by 57.1% year over year to $161.3 million. G&A expenses for the quarter increased by 33.6% year over year to $287.8 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $273.6 million, representing a 40.7% increase year over year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 28.3% to $27.5 million in the third fiscal quarter of 2024. Operating income was $113.4 million, representing a 70.6% increase year-over-year. Non-GAAP income from operations for the quarter worth $140.9 million, representing a 60.3% increase year-over-year. Net income attributable to New Oriental for the quarter was $87.2 million, representing a 6.8% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were 53 cents and 52 cents, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $104.7 million, representing a 9.8% increase year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were 63 cents and 63 cents, respectively. Net cash flow generated from operation for the third fiscal quarter of 2024 was approximately $109.4 million, and capital expenditure for the quarter were $80.1 million, Turning to the balance sheet, as of February 29, 2024, New Oriental had cash and cash equivalents of $2,013.6 million. In addition, the company had $1,570.8 million in term deposit and $1,175.3 million in short-term investments. New Orleans deferred revenue, which represent cash collected upfront from customers and related revenue that will be recognized as the services or goods are delivered at the end of the third quarter of fiscal year 2024 was $1,521.7 million, an increase of 30.8% as compared to $1,163.2 million at the end of the third quarter of last fiscal year. Now I'll hand over to Stephen to go through our outlook and guidance.
spk06: Thank you, Cici. As we progress into the fourth quarter, which is typically expected as a slower quarter comparing with the third quarter in terms of the revenue growth and profitability due to varied seasonality of our key educational businesses, we place confidence in sustaining a healthy growth building on the collective breaks of our rooted foundation, brand advantage, and influential teaching resources. Our strategic focus and investment approach aim at achieving satisfactory operating profits in the rest of the year, coupled with the year-over-year margin expansion for the full year. As always, we will work diligently to adhere to the latest guidance from the Chinese authorities on enhancing the nation's education level to strengthen its leading position, to further strengthen our edge on all business lines and creative endeavors. With regards to the learning center and classroom space, as part of the continued evolution of our offering across business line, we plan to increase our capacity by around about 30% for this fiscal year. by which a reasonable amount of new learning centers is expected to be opened, while classroom areas of some existing learning centers will be expanded in a few major cities. Most of the new openings will be launched in the city with better top-line and bottom-line performance in this year. At the same time, we will continue to hire new teachers and staff to match our capacity expansion and support our revenue growth, especially for new education business initiatives and newly integrated tourism-related business. We expect total net revenue in the fourth quarter 2024, March 1st, 2024, to May 31st, 2024, to be in the range of $1,101.5 million to $1,200 million. $127.3 million, representing year-over-year increase in the range of 28% to 31% in dollar terms. The projected increase of revenue in our functional currency RMB is expected to be in the range of 34% to 37% for the fourth quarter of this fiscal year, 2024. New Oriental is determined to persistently expand our existing offerings and fertilize new endeavors, dedicating strategic inputs to sharpen our capability. We will also continue to devote reasonable resources on research and application of new technologies, such as AI and chat GPT-involved offerings, in strong belief that we could uplift our strengths to favor further growth, better margin, and operate operating efficiency. At the same time, we will also continue to seek guidance from and cooperate with the government authorities in various provinces and municipalities in China in alignment with these efforts to comply with the relevant policies, regulations, and measures, 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 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you.
spk11: 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. Your first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.
spk00: Hi, good evening, management. Thank you very much for taking my question and congratulations on the strong growth and guidance. My question is on growth. So first, I understand that Q4, we will have a bit of seasonality in the education business. So maybe could you just share more color on the growth in different business segments in Q4? And also you mentioned that the capacity guidance, the expansion guidance for the year is now lifted to 30%. How do you see that as a capacity expansion pace going forward? Do you think 30% is a sustainable expansion that we can maybe keep for two to three years? Thank you. Thank you, Felix.
spk06: Yeah, as you know, we did the top line guidance this quarter a lot, you know, just like the past couple of quarters. And, you know, as for the revenue guidance in Q4, which seems to be a little bit lower than the Q3 year-over-year revenue growth, there are three reasons. You know, number one, as always, we're quite conservative to give the guidance. So this is number one. And number two, yeah, as you know, Q4 typically affect at a slower quarter compared to the Q1 and Q3. And because of the seasonality, for example, like for the K-12 related business and the overseas related business, typically Q4 is the low season. And number three is, in last year Q4, without the impact of the pandemic, I think our business in last year Q4 was basically back to normal. So that's why we give the Q4 top line guidance seems to be a little bit lower. But I think in my personal view, I think the guidance You know, in dollar terms, it's 28 to 31%. In RMB terms, it's 34 to 37%. I think it's still very strong. And I think in the coming new fiscal year, that means the fiscal year 25, we're quite optimistic on revenue growth with the margin station for the whole fiscal year 25. As for the extension plan, yeah, we raised the guidance of the capacity extension by 30% year-over-year this time. Because actually, we're taking market share. And I think the demands from the customers are very strong. And that's why we raised the guidance of the extension plan again this quarter. and going forward next year i think we will keep uh almost the same pace to open the new learning centers because you know the uh because we when we made when we made the analysis of the uh the market demand and uh and this supply so i think we're still on the pace to take more murky shares And as for the revenue growth of the different businesses, can we disclose it in the next quarter?
spk10: Just roughly, for key business lines, like overseas related, including the test prep and consulting, will grow roughly about 15% to 20% range. And domestic test prep, university students' business revenue growth will be around 20% to 25% range. You know, high school tutoring will grow moderately, and the new business, new initiative, which is the key growth driver, will be over maybe 60% revenue growth. This is based on the exchange rate that's estimated by us when we do the projection.
spk00: Okay. Okay, that's very clear. Thank you. Thank you.
spk11: Thank you, Felix. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please ask your question, Yiwen.
spk01: Good evening, management. Thanks for taking my question. So my question regarding our margin, if we look at the group level operation, address operation margin, it was 11.7%, which was slattish on a worldwide basis. Understood, you know, a lot of incremental, you know, OPAS was due to the East Bay expansion. So if we just look at the education rate margin, how does it expand on a one-to-one basis? And how would you expand to China in the next two quarters? Thank you.
spk06: Yeah, the group non-GAP OP margin was slattish in this quarter. But within the education business, I think we're seeing the meaningful GP margin and non-GAAP OP margin extension for education business in this quarter. I think that thanks to the combined, the newly business structure model and the higher utilized resources and the better utilization for the learning centers, and the streamlined cost structure. So it makes the education business margin expansion again this quarter. And so going forward, I think in the coming Q4, and even for the whole year, the new year, fiscal year 25, I think we do have the operating leverage in hand. As you know, we raised the guidance of the Learning Center expansion by 30%, and we hired more teachers and staff to match with the new expansion. But I think the top-line growth in the new fiscal year 25 will be very strong. And we do have the leverage in fiscal year 25. we expect you will see the market expansion with the healthy top-line growth for education business in fiscal year, in the new fiscal year, 2025. Yeah, and the Easter buy, yeah, I think the cost of the expenses, especially for the selling market expenses, this quarter increase was primarily due to, partly due to the Easter buys, the investment. And Yeah, I think, you know, you showed very strong the growth in East Dubai's top line, especially for the private label products and the e-commerce business. And I think East Dubai has devoted substantial investment to support the growth of the company, including the optimization of the multi-platform strategies in Douyin, Taobao, and the other platform, supply chain, and product offerings, and the quality control. And also, if the buyer recruits some more professional, talented people from the market. And so we are optimistic if the buyer's development going forward. And we look forward to leverage this investment or input this time and going forward. So in summary, the margin. profile for the whole group. So we're quite optimistic about the margin extension for the whole group for the education business and in fiscal year 25. And also, as well, we do think the Easter buy will generate more revenue, top-line growth, and more profit to the company going forward.
spk03: OK, thank you. That's very clear. Thank you.
spk11: Thank you, Yuen. Our next question comes from the line of Lucy Yu from Bank of America. Please ask your question, Lucy.
spk12: Thank you, Steven. So my question is still on the margins. So it looks like judging from the minority interest is that EastBuy might be loss-making for the quarter. So how should we think about the E-SPY margin volatility impact on our group level in the upcoming quarter and upcoming fiscal year? So Stephen, how do you plan those margins for the next fiscal year? Thank you.
spk06: Lucy, I'm glad to hear from you the questions about the E-SPY. But I'm afraid. unable to share with you about the latest financial results at this moment and our guidance for the Easter buy. And you know, in the next quarter, in July, I think the Easter buy will announce the whole year report, half year report, and the whole year report. And so at that time, I think the management of Dongfang Zhenxuan of Easter buy will share more color with you about the margins and the top line growth Yeah, but I must mention that we're still quite optimistic about the EastBuy's investment in this quarter. And over the long run, I think the EastBuy will bear fruit from this long investment and will generate more revenue and profit to the whole group.
spk08: We'll see.
spk03: Thank you, Stephen.
spk09: Thank you.
spk11: Thank you, Lucy. Our next question comes from the line of Tian Hou from TH Capital. Please ask your question, Tian. Hello.
spk07: Yes. Hi, Steven, Cece. The question is related to the high school learning center expansion and also the non-academic course learning center expansion. you know, what's the retention rate and utilization rate for both of them? Thank you.
spk06: I think for the utilization rate and the student retention rate for both the high school business and the non-examine courses for K-9 are still improving, you know, year over year, actually quarter by quarter. And so, The good news for us is we're seeing the trend is still there. And so going forward, I think we will see the higher utilization rates for this business, for the existing learning centers, and the higher the student retention rates. And a couple of years ago, typically it will span us for 12 months to get the break-even point, you know, after we open the new learning center. But now I think roughly it will take the half year, let's say the six months, to get the break-even point. And so I think going forward, we expect the better, the higher utilization rate for learning centers and the higher student retention rate for all business lines. Thank you.
spk07: Yeah. So one follow-up question. So before the double reduction, so when you guys do the learning center expansion, so there's a tricky line. So how much you do the expansion? If you do a little bit bigger, more, then will we impact the growth profit margin? So I saw this quarter the growth profit margin relative to last year's same time was down like a five percentage points. Is that because the learning center expansion or is it because the eSPI?
spk06: Yeah, I think the learning center expansion, we raised, again, the learning center expansion by 30%. I think it's the result that we analyzed the whole picture of this business for the last two to three quarters. And as I said, on the math side, it's very strong, especially for the courses for the kids. And on the competition side, the competition environment is different compared to a couple of years ago. And so I think the key is we only choose the top performance cities both the bottom line and the top line and the bottom line to allow them to open more learning centers or expand the new classroom area for the existing learning centers. So I think it will not drag the whole margin. In opposite, it will help the margin expansion going forward.
spk07: Got it. Thank you so much, Stephen. Good quarter. Thank you.
spk11: Thank you, Tim. Our next question comes from the line of Timothy from Goldman Sachs. Please ask your question, Timothy.
spk04: Great. Hi, Stephen. Thank you for taking my question. My question is regarding the cash flow statement. So basically one is on the operating cash flow. I noticed that for this quarter, I think the operating cash flow dropped a little bit on a year-on-year basis. Just wondering if you can share some color on the rationale or the reason behind that. And second, also on the financing cash flow, I do notice that the existing share purchase program is about to expire. Just wondering regarding your capital allocation and the shareholder return, any thoughts on the shareholder policy going forward in terms of potential dividend or further share purchase programs? Thank you.
spk06: As for the operating cash flow, I think, you know, I suggest the investors to make the analysis of the cash flow by year on year, not queue on queue. Because of the business decisionality or the student enrollment window changed, you know, quarter by quarter. So that's why I suggest to your guys to make the analysis year on year. So if you solve the deferred revenue balance year on year, the increase is still very strong. And so, yeah, that's it. And that's why we give the very strong, the top line guidance for Q4, yeah. Even though Q4 is a weak, is the slow quarter, yeah. And for the share buyback plan, Yeah, I think, you know, we keep to create more value to the shareholders. And I think we will keep buying the share back. And, you know, this one, you know, we announced the share repurchase plan two years, roughly two years ago. And we finished almost half, $194, $195 million. And I think we'll keep buying in this quarter. And at this fiscal year end, I think we will discuss with the board to decide whether or not to extend the share repurchase plan. But historically, we made a couple of times share buyback and several times the special dividend. So our aim is to create more value to the investors
spk08: as the capital return, either share buyback or dividend. Thank you, Tim. Thank you. Thank you, Stephen. That's helpful.
spk11: Thank you, Timothy. Our next question comes from the line of Tiny Wang from CICC.
spk03: Please ask your question, Tiny. Hi, Stephen and Sisi.
spk02: So actually I have a question about the financials. So we saw a larger loss from equity method investments this quarter as well as a less investment interest this quarter compared to the same period last year. So I'm just wondering which factors led to these changes. Thank you.
spk06: I think, yeah, in this quarter we made the, you know, two, the the investor company entire loss in this quarter. So I think we do have the one-time impact on the very bottom line this quarter. I think all those two companies was negatively impacted by the deduction policy two and a half years ago. But it is one time. It's not, you know, it's just one time.
spk03: Thank you.
spk02: Just a follow-up question about the, as also we saw less investment interest this quarter, Q and Q. So I'm just wondering the reason.
spk06: I'm sorry? Can you repeat again? The investment one?
spk02: Yeah. Yeah, as you saw, less other income, which I suppose is mainly our investment interest this quarter, and it decreased.
spk06: Yeah, I think the interest rate in China has been down in this quarter. And so I think it impacts some interest income. Yeah.
spk10: Actually, the interest income is the absolute dollar number are similar with previous one to two quarters.
spk09: Yeah.
spk10: Yeah. It's pretty stable.
spk03: That's it. Thank you, Stephen. Congrats on the results again.
spk08: Thank you.
spk11: Thank you. As a reminder, to ask a question now, please press star 11 on your toes on your keyboard.
spk09: Once again, to ask a question, please press star 11 on your telephone keypad. Once again, that's star 11 for questions, ladies and gentlemen. All right, we are now approaching the end of the conference call.
spk11: We do have one more question from DS Kim from JP Morgan. Please ask your question, DS Kim.
spk05: Hello, sir. Good evening and congrats on amazing top-line growth again. Actually, I wanted to ask about margins and expansion. I think you already discussed all of that. So just wanted to follow up on one small thing, if that's okay. You mentioned earlier that new center expansions are now could be a margin of corrective because it's primarily expansion of the existing center. But if we only look at, say, newly opened location, newly opened centers for non-academic courses, how long do you think, how long does it take for those new centers to hit break even and then to ramp up to the full level on the center level? I think Back in the days, it took about a year to turn break, even for the new learning center, K-12 AST, and another couple more quarters to fully ramp up. And I'm wondering how this has changed now versus now that the courses have changed to primarily for non-academic.
spk06: I think, you know, now, typically, on average, it will take the six months to kind of break you down That means we then have the learning centers more faster than before. And so in the second year, typically the margin of the new learning centers depends on the different areas. But I think the margin of that new learning centers gets somewhere around 15% to 20%. So it's much faster. That's why we make the decision to raise the learning center expansion guidance by 30%. And so I think this is a good trade-off. This round, in this quarter, in Q3, Q4, even for the whole year, in fiscal year 24, we open more earnings than the 30%. But it will drive the top-end growth up in the new fiscal year, 25. And I believe that for the whole business, education business, the whole margin of the education business will be improved in the fiscal year 2024 because of the better utilization and the higher student retention.
spk05: Thank you, sir. I think it's not just good, it's an amazing trade-off to have. But if I may follow up here, do you think that faster ramp-up or faster break-even is is just a timing thing, earlier recovery, earlier ramp up in utilization, and or do you think that even after the ramp up, the ultimate level of center level margin can be actually higher than the back in the days, the academic, i.e. like on a center level, do you think that five years down the road, some of the non-academic centers can make more than 20% margins better than the K-9 academic of the past, or just the timing is all there?
spk06: Both. As I said, it will take the shorter time to get the even point. This is number one. And number two is, theoretically, I think the ultimate or the margin of the new learning centers, I think will be a little bit higher. than a couple of years ago. So it's a good trade-off for us to open more learning centers for non-academic courses, or even for the overseas related business.
spk05: Well, sure, sir. It's an amazing trend, and congrats again. Thank you. Thank you.
spk11: Thank you, Diaz. We have now approached the end of the conference call. We'll now turn the call over to New Oriental's Executive President and CFO, Steven Yang, for his closing remarks.
spk06: 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.
spk11: Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.
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