New Oriental Education & Technology Group, Inc.

Good evening and thank you for standing by for New Orientals FY 2025 First Quarter Results Earnings Conference Call. At this time all participants are in listening only mode. After management's prepared remarks there will be a question and answer session. Today's conference is being recorded. If you have any objections you may disconnect at this time. I'd now like to turn the meeting over to your host for today's conference, Ms Sisi Zhao.

Thank you. Hello everyone and welcome to New Orientals First Fiscal Quarter 2025 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 Orientals 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 Security Mitigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainty. 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 findings with the SEC. New Orientals does not undertake any obligation to update any forward-looking statements except as required under applicable law. I should remember this conference is being recorded. In addition a webcast of this conference call will be available on the New Orientals Minister Relations website at .neworientals.org. I will now first turn the call over to Mr. Yang. Stephen please go ahead.

Thank you Sisi. Hello everyone and thank you for joining us on the call. We're pleased to announce that the company has forged a healthy growth across our key business line in alignment with the expectations with a top-line growth of .5% this quarter. Total net revenues excluding revenues generated from -sub-buy private label products and the live streaming business increased by .5% year over year. In particular we're impressed by the highly encouraging growth that the new endeavors have anchored which has significantly contributed to the core building blocks of the company. At the same time New Orientals bottom line performance for our core educational business has also achieved healthy yields. Operating margin wise we have excluded operating margins generated from -sub-buy for this quarter for a better reflection of the performance of New Orientals core educational business. The operating margin and non-GAD operating margin for this quarter have reached .7% and .4% representing 370 and 220 basis point improvements year over year respectively. We're pleased to see the tremendous efforts that we devoted into our offerings and platforms sparking positive growth across our business line. Our commitment to maintaining a healthy profitability and market share 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 existing business lines and new initiatives to you in detail. Our key remaining business continue to encourage trends this quarter breaking it down. The Overseas Has-Fab business recorded a revenue increase of 19% year over year for the fiscal first quarter of 2025. The Overseas Study Consulting business recorded revenue increase of about 21% year over year for this quarter. The Adults and University Students business recorded the revenue increase of 30% year over year for this quarter. The ongoing investments are new educational business initiatives which mostly revolve around facilitating students all around development have propelled the company's engine to innovation having secure strong momentum in their respective ventures. Firstly the non-adamic children courses which we have offered in around 60 existing cities focuses on cultivating students innovative ability and comprehensive quality. We're pleased to receive solid interest with a total of approximately 484,000 student moments recorded in this quarter. The top 10 cities in China contribute over 60% of this business. Secondly the Intelligent Learning System and Device business has been adopted in around 60 cities. We're happy to see elevated customer retention and scalability with approximately 323,000 active 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 material and digitalized smart study solutions have continued to contribute material yields to the overall advancement of the company. In summary our new educational business initiatives have recorded the revenue increase of 50% year over year for this quarter. In addition our newly integrated tourism related business line is now comprised of diverse offerings of culture trips, study tours in China and overseas as well as the camp education. Within the business line our study tour and research camp business for students of k-12 and university age achieved tremendous growth this quarter with an increase of 221% in revenue year over year for this quarter. We have operated study tours and research camp business in over 55 cities across the country. With the top 10 cities in China offering over 55% of revenue share of this new business. The number of top-notch tourism offerings were also piloted to expand our reach to all age groups including the middle-aged and elderly individuals around 30 featured provinces in China and globally. The inspiring growth this quarter has affirmed our devotion to deliver premium offerings to our valued customers and we believe this new business line will contribute continuously meaningful revenue from this fiscal year. With regards to our OMO system we have persisted in revamping our platform and leveraged our educational infrastructure and technology edge on remaining key business and new initiatives with a vision to provide advanced diversified education service to customers of all ages. In this quarter a total of $24.6 million has been invested in our OMO teaching platform which equips us with the flexibility to maintain a rival service to students. In terms of the Easter Buy's performance since April 2022 Easter Buy has launched a total of 488 SKUs in private label products in just two years. Our products categories have expanded into well-diversified product mails today. During the reporting period Easter Buy also uplifts the significance of the offering only product with a high cost performance which has proven effective in reiterating Easter Buy's value in the minds of our current and new users. In addition thanks to our multi-channel strategy that has driven sustainable growth, Easter Buy's footprints have expanded from our live streaming channels to the like of Tmo, JD, Kindodo and Xiaohongshu as they amplify our reach to a wider customer base. In the new year Easter Buy will explore offline channels by examining the partnership with offline schools owned by New Rental Grants and other parties. As part of our vision to initiate offline sales network and enhance our brand awareness to the great extent. With regards to the company's latest financial position I'm pleased to share that company is seeing a healthy financial status with the cash and cash equivalent term deposit and short-term investments totaling approximately 4.9 billion dollars. Now I would also like to take the opportunity to highlight that the company's board of directors approved a share repurchase program in July 2022 under which the company is authorized to repurchase up to $400 million of the company's ADS for common shares through the next 12 months. The company's board of directors further approved to extend the effective time of the share repurchase program to May 31st 2025 and increasing the aggregate value of the shares that the company is authorized to repurchase from $400 million to $700 million. As of October 27th, 2024 the company repurchased an aggregate of approximately $9.8 million ADS for approximately $457.9 million from the open market. Now I will turn the call over to Cici to share with you about the key financials. Cici please go ahead.

Thank you, Steven. I'd like to share our key financial details for this quarter. Operating costs and expenses for the quarter were ,142.3 million dollars representing a 27.6 percent increase year over year. Non-GAAP operating cost and expenses for the quarter which exclude share-based compensation expenses were ,135.4 million dollars representing a 32.8 percent increase year over year. The increase was primarily due to the cost and expenses related to accelerated capacity expansion for educational business and newly integrated tourism related business. Cost of revenues increased by 32.3 percent year over year to $583.5 million dollars. Selling and marketing expenses increased by 42.3 percent year over year to $193.7 million dollars. GNA expenses for the quarter increased by 15 percent year over year to $365.1 million dollars. Non-GAAP GNA expenses which exclude share-based compensation expenses were $354.5 million dollars representing a 22.1 percent increase year over year. Total share-based compensation expenses which were allocated to related operating costs and expenses decreased by 82.7 percent to $6.9 million dollars in the first fiscal quarter of 2025. Operating income was $293.2 million dollars representing a 42.9 percent increase year over year. Non-GAAP income from operations for the quarter was $300 million dollars representing a 22.6 percent increase year over year. Net income attributable to NeurIENTO for the quarter was $245.4 million dollars representing a 48.4 percent increase year over year. Basic and diluted net income per ADS attributable to NeurIENTO were $1.49 and $1.48 respectively. Non-GAAP net income attributable to NeurIENTO for the quarter was $264.7 million dollars representing a 39.8 percent increase year over year. Non-GAAP basic and diluted net income per ADS attributable to NeurIENTO were $1.61 and $1.60 respectively. Net cash flow generated from operations for the first fiscal quarter of 2025 was approximately $183.2 million dollars and capital expenditure for the quarter were $80.2 million dollars. Turning to the balance sheet as of August 31st, the 31st, 2024 NeurIENTO had cash and cash equivalents of $1,147 million dollars. In addition the company had ,513.8 million in term deposit and ,248.6 million dollars in short investment. NeurIENTO's deferred revenue which representing cash collected upfront from customers and related revenue that will be recognized as the service or goods are delivered at the end of the first quarter of fiscal year 2025 was $733.1 million dollars an increase of 23.7 percent compared to ,141.4 million dollars at the end of the first quarter of last fiscal year.

With the encouraging performance achieved from our diverse business alliance backed by our solid educational resources that have stood the test of time, we are bullish on maintaining a healthy growth for our core educational business. Simultaneously we will devote ongoing investments in expanding our new tourism related business in belief that this impulse will nourish more expenses nationwide throughout of our tours in this fiscal year. While we strive to safeguard a healthy balance between revenue and profitability growth, we will also cautiously manage our capacity expansion and hiring to underpin the development of our educational business in this new year. We plan to increase our capacity by around 20 to 25 percent for this fiscal year. The most new openings will be launched in cities with better top line and bottom line performance. Rest assured that we will closely monitor the pace and scale of new openings in accordance to the local operations and financial performance during the year. Every second quarter of our financial year tends to be a slower period due to the seasonality of our business. That means that we remain confident in attending a steady growth and a satisfactory operating profit for the full fiscal year. We expect total net revenues excluding revenues generated from Easter by in the second quarter of the fiscal year 2025, September 1st, 2024 to November 30th, 2024 to be in the range of $851.4 million to $871.8 million representing an -over-year increase in the range of 25% to 28%. In addition, based on our current estimation, we expect the operating margin for the whole company except for Easter by for the fiscal year 2025 will expand year over year. 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. To conclude, Neorental will always pursue premium offerings to our customers simultaneously achieve sustainable growth. To achieve that, we will continue to devote necessary resources on research and application of new technologies such as AI and CHAP CPD into our education and product offerings with a vision to uplift our strengths to pursue the growth and operating efficiency. We will also continue to seek guidance from the from and operate with the government authority, comply with the relevant policies, guidelines, and any related regulations as well as to further adjust our business operations as required. As always, we will work diligently to enhancing the nation's education level to strengthen the leading position so as to unveil further potential across all our business line and our vision. This is the end of our fiscal year 2025 Q1 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you.

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 each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. If you would like to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Thank you. We will now take our first question. This is from the line of Felix Liu from UBS. Please go ahead.

Good evening, management. Thank you for taking my question. My question is on your second quarter guidance. We noticed that in the first quarter, your capacity expansion was over 30% young year by the number of learning centers. However, if we look at your second quarter guidance, it's slower than your capacity expansion in the first quarter. So how should we think about the gap between capacity growth and revenue guidance? And can management share your outlook for second half growth? Do we expect to see the revenue growth to converge with capacity? Thank you.

Thank you, Felix. As for the Q2 guidance, we give the guidance of the top-line growth will be in the 25 to 28% in dollar terms year over year. But as you know, every second quarter tends to be a slower quarter due to the seasonality of our education business. But we will remain confident in attaining a steady growth of around 30% year over year for the whole year. So that means we expect the revenue growth, including Easter by Q3 and Q4, will be accelerated compared to the growth of Q2. So, you know, as you know, even though we have seen some impacts of the existing economic environment, like the overseas business, we will expect the full fiscal year revenue growth which, you know, except for Easter by will be around 30% year over year. And, yeah, you know, we opened more learning centers in last year, Q3 and Q4. And we have seen we run up the learning centers much faster than before. And so I think we will feel the learning since more students into learning centers, especially in the Q3 and Q4. So we're quite optimistic about the top-line growth for the whole year. Thank you, Felix.

Thank you.

Thank you. We will now take our next question. This is from the line of Alice Cai from Citi. Please go ahead.

Good evening, Stephen and Citi. Thanks for taking my question. I have a question about capacity expansion. Since Q2 is typically a low season, are you considering slowing down capacity expansion during this period to increase margins? And do you expect capacity to be concentrated in Q1 and Q4 for FY25? And for the upcoming quarters, will you focus on encouraging penetration in existing cities rather than entering new ones? Thanks.

Yeah, you know, by the end of this quarter, Q1, we have added around 6% capacity. And so, as I said, we plan to increase our capacity expansion by 20% to 25% for the whole year. Last year, we opened more learning centers, but this year, I think we will open the learning center at a more healthy pace, 20% to 25%. And yeah, as I said, we run up the learning centers much faster than before. And so, I think as the whole year wise, I think the margin, you will see the margin expanded for the whole year. And in the Q2, yeah, we might meet some tiny margin pressure in the Q2 because of the seasonality. Q2 is the low season. But we do believe for the whole year, the margin will be expanded for the educational business except for for Easter by. Thank you, Alice.

Thank you. We'll now take our next question. And this is from Yuan Zhang from China Renaissance. Please go ahead.

Yeah, great. Thanks for taking my question. So, my question is about the margin. So, you know, very good to see our just OP margin increase 220 bits. Why is this reversing in the previous quarter? So, can you discuss more about what are driving this improvement? And how should we think about the drivers to play out in the rest of the year? Thank you.

Thank you, Yiven. You asked the question about the margin. You know, let us start with the margin analysis of this quarter. The non-GAAP OP margin for educational business, which excluding Easter by, was expanded by 220 bits per year. As you know, I think, you know, last year Q1 OP margin was high base. So, that means we have a hard comparison this quarter. But I would still go with the margin extension by 220 bits per year. I think this is mainly due to the following reasons. Number one, we're pleased to see that business alliance achieved the positive top line growth for all business alliance. And number two is, we started to bear fruit of the learning center expansion of last year. It's trapped the overall utilization rate up and get more operating leverage. Number three, you know, we started to make cost control in the whole company and we leverage more overhead in this quarter. Even though we spend more money on the new tourism business, but, you know, the educational business except for Easter by, we still got the margin extension higher than we expected. And I saw the outlook, you know, due to the seasonality of the business, every second quarter is the low season. So, we're likely to experience some minor pressure in the second quarter. But as I said, you know, we were quite confident about Q3 and Q4. So, we're optimistic on the margin profile for the educational business, including Easter by in the whole year. And I think we expect that the whole year, the non-GAAP OP margin will be expanded, you know, for the whole year. Thank you,

Yilun.

Thank you. We will now

take our next question. This is from Lucy Yu from Bank of America. Please go ahead.

Hi, Steven. Just to clarify, Steven, you said the second quarter non-GAAP OP margin will be the pressure. Do you mean that excluding Easter by, we're going to see margin contraction on a -over-year basis? So, just to clarify on that. And actually, my question is on the cultural tourism. You did mention that a camp revenue was up by over 200 percent -over-year. So, may I know, like, how much revenue that cultural tourism contributed this quarter? And is that business segment loss-making or profit-making for this quarter? Thank you.

Yeah, you know, the margin, the tiny margin pressure in Q2, you know, what I said is only related to the educational business. And because, you know, we got it to 25 to 28 percent the top line growth, and the Q2 is the low season of the educational business. So, I think that you will see more leverage in Q3 and Q4. And so, this is the, so, as I said, we're quite optimistic about the margin profile in Q3 and Q4. And the tourism business, yeah, the Q1 was the peak season for the tourism business, you know, such as the camp business and the overseas study tour, the domestic study tour business. So, the revenue of the Q1 was somewhere around 90 million dollars of the tourism business. This is the revenue in Q1. And yeah, we are profitable in Q1 because of the peak season. But for the whole year, I think we will feel loss-making of the tourism business. And, you know, it's just the first year. We need more time to testify the product and the business models for the tourism business. But we're quite confident about the development of the tourism business. Thank you, Lucy.

Thank you, Stephen.

Thank

you.

We'll now take our next question. This is from Timothy Schell from Goldman Sachs. Please go ahead.

Hi, Stephen. Thank you for taking my question. My question is regarding your K-12 new initiatives. Just wondering if you can break down in terms of the revenue growth between the non-academic tutoring and intelligent learning devices and services. And related question on the specific segment is I do notice that I think for the non-academic tutoring, the quarterly enrollment for the past quarter grew by around 11 percent. Young year compared to close to 40 percent of quarter ago. Just wondering if you can elaborate more on the growth and what kind of growth that we expect on the enrollment I think for the following quarter versus only 11 percent for this quarter. Thank you.

Lucy, you share with the team about the revenue breakdown within the new business.

Yeah, the new K-9 educational related, including the non-academic tutoring and intelligent learning device business, grew by over 50 percent in Q1, 56 percent. And both are growing at similar rates.

And your second question about the enrollment. Yeah, the enrollment growth of the K-12 seems to be low in this quarter because we opened the summer enrollment window earlier than that of last year. So that means we reported more student enrollment in last year, it's a kind of the timing difference. And so if you combine the Q4 and Q1, the enrollment growth will be normal and it's very strong. Absolutely. And even though the Q2 will be low season, but we're quite confident about the whole year the top-line growth. And I think we will see even the top-line growth in Q3 and Q4. And for the new businesses, I think we still keep the same guidance of the 40 to 50 percent top-line growth for the new businesses for the full year.

Thank you, Stephen. Thank you, Cicely.

Thank

you. Thank you.

We'll now take the next question. This is from Charlotte Way from HSBC. Please go ahead.

Congratulations on your strong results. Thank you, Stephen and Cicely, for taking my question. Could you please share more color on the growth in different business segments in the second quarter? Thank you.

Yeah, actually, you're asking the guidance for the guidance.

Okay,

yeah. Overseas related business will grow like about over 20 percent and domestic test prep university students business grow will be over 30 percent, 30, 35 percent. And high school business grow like 20 percent. And the new business will grow like over 50 percent, around 50 percent.

Thank you. Very clear. Thank you. Thank

you. We'll now take our next question. This is from DS Kim from JP Morgan. Please go ahead.

Hi, Stephen. Hi, Cicely. Thanks for taking my question. I just have a follow-up on all your points that you made on new businesses, if I may. Did you say this past quarter new businesses grew over 56 percent? Did I hear it correctly? Because from the press release, I think, I mean, it's a minor thing, but a press release seems to say 49.8 percent this quarter. So just wanted to double check if I'm looking.

Yeah, that's the growth for non-academic tutoring and intelligent learning device, the over 55 percent.

Oh, okay. So that means this new educational business initiative has something else as well. May I ask what else is here? And also, can you, if you could give us the breakdown in terms of like current revenue or last year revenue between a non-academic tutoring versus intelligent and some others, how's the mix within this subsegment?

Yeah, the actually every quarter, the contribution is similar. So the non-academic tutoring is roughly about more than half of the new educational business. And roughly about one third is the intelligent learning device business. And these two are growing faster than the rest smaller categories.

And smaller category, if I may, is like book sales or may I check what else we have here?

Yeah, intelligent books and also some to-be business.

Got it. Thank you very much. And if I may follow up on earlier you mentioned and kindly gave us a breakdown of the growth momentum for two Q guidance, can I double check whether that was based on US dollar versus renminbi? And if you could provide this first quarter similar breakdown between a segment growth, if possible, it would be great. Thank you so much. And I'll go back to the Q.

Q1 guidance and just to share about the exchange rates we're using. Yeah,

I can share with you the exchange rate that we're using for Q1 quarter and the guidance quarter. Is that okay?

Yes, earlier growth was it based on US? Yes.

Yeah, Q1 exchange rate is 7.22. And Q2 is 7.08 roughly.

Thank

you very much.

Thank you. As a reminder, if you would like to ask a question, you can press star 1 and 1 on your telephone and wait for your name to be announced. Once again, that's star 1 and 1 if you would like to ask a question. Once again, if there are any further questions, please press star 1 and 1 on your keypad.

We have another question coming through. Please

stand by. This is from the line of Lucy Yu from Bank of America. Please go ahead.

Steven, sorry, just want to follow up on the second quarter margin. I know that you said it's a low season, but if you're looking at the top line, it's still growing at over 25% to like 28%, which is not low. So why should we think that the OP margin will decline or contract on a -over-year basis? Is there any other investment that you're going to step up or some other reasons? Thank you.

The Q2 is the low season for all business lines, the overseas related, even for the K-pop business and the tourism business. We have tiny revenue from the tourism business, so we suffer the loss of the tourism business in Q2. If you saw the numbers, you know, historically, every year will be the low margin profile for the whole company. As I said, we will open more learning centers in the second half of the last year, but we will still need more time to fill the students into the new learning centers. So, yeah, and I must mention that we're using the conservative approach to give the margin guidance,

as always. Lucy. Just

may I follow up that how much loss or margin drag have you sucked in from tourism in the second quarter? Thank you.

I think it's too early to say that, but it is still the margin drag. Also, we spend some more expenses, even in the marketing and in the coming Q2. But I think we will, yeah, as you said, we spend more money on the marketing in Q1, but we started to control the selling market in Q2, who are still in the process. So that's why we got the margin tiny pressure in Q2. But we expect we will do better than we expected on margin

wise in Q2. Understood, Stephen. So let's

put it this way. So if we exclude E-SPY, if we exclude cultural tourism, will the rest of the business still see margin contraction in the second quarter?

Yes, I think so. I think if we take off the impact of the tourism business, I think the margin will be better than the overall company margin profile, except for E-SPY. We don't get the guidance of the E-SPY by top-line roles in

the

Thank you, Lucy.

Thank you. We'll now take our next question. This is from Timothy from Goldman Sachs. Please go ahead.

Great. Thank you, Stephen. So I think a follow-up question on E-SPY. I think one is on I think your revenue guidance. I guess I think there was a transaction between E-DU parent company and E-SPY regarding the E-SPY's education previously. Just wondering in your guidance for the E-DU core, basically the E-DU educational services, does that include the E-SPY's previous education business? And secondly, I think for E-SPY, I think the implied revenue for E-SPY actually dropped quite significantly on a Q on Q basis. Just wondering if you can elaborate what is the background or the rationale behind that and how should we think about the going forward? Thank you.

The guidance of Q2 top-line roles in the range of 25% to 28% is the core education business except for E-SPY. And I'm very glad to hear from you about the question of the E-SPY. But I'm afraid I'm unable to share the latest financial results of the E-SPY because they will announce their half-year report in next quarter. So next quarter, I think we, the post party, the parent company and E-SPY will announce the E-SPY's financial status in much more detail next quarter.

Sure, sure. So just to clarify on the guidance, I think if you look at E-SPY's previous half-year financials for their education business, which is now part of EDU core business, it's around like 30, 40 million US dollars per quarter. Just wondering when you talk about the guidance for EDU core education business, so when you look at it on a young year basis, the last year number for EDU core education business, that also includes the E-SPY's education business, right?

Yeah, correct. So your understanding is totally correct. So when we gave guidance, we do Apple to iPhone comparison. So both the comparison quarter and the guidance quarter, both includes the educational portion of E-SPY's business. Is that clear?

Yes, thank you. Thank you, Stacey. Thank you, Steve.

Thank you. We'll now take our next question. This is from DS Kim from JP Morgan. Please go ahead.

Hello, sir. Hi. Sorry, I didn't mean to beat a dead horse here, but some ambassadors were asking me just now on this. So I thought it would be better to clarify things on new businesses. Again, sorry. So just to be clear, when you earlier commented that next quarter growth guidance of new businesses of over 50%, did you mean to include other smaller businesses or only non-academic and intelligent learning devices, i.e. if you compare that 50% or over 50% growth next quarter, how does that number look for this quarter of this quarter? And then similarly, for high school businesses, we expected 20% growth as you said next quarter. How was the growth this quarter? Would you be able to comment on that? Sorry for a redundant question.

Yeah, to make it clear, for Q2's guidance for overall new initiatives, new educational initiative, including all the things, so together is around -46% growth. And if you only look at non-academic tutoring and the intelligent learning device, the tool P wants the growth is over 50%. Okay, and the high school business Q1's growth is about 20% to 21%.

Thank you. That's very clear. So about -5% deceleration for the new businesses in terms of Apple's capital, which I think is pretty great given that the pay scale, the comps got much tougher. So thank you for the clarification.

Okay. Thank you. We are now approaching the end of the conference call. I will now turn the call over to New Orientals Executive President and CFO Stephen Yang for his closing remarks.

Thank you again for joining us on today. If you have any further questions, please do not hesitate to contact me or any of our master relations representatives. Thank you.

Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.