New Oriental Education & Technology Group, Inc.

Good evening, and thank you for standing by for Neil Arento's FY2025 Second Quarter Results Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Cici Zhao. Thank you. Please go ahead.

Thank you. Hello, everyone, and welcome to New Oriental's second 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 Newsbird 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 view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking payments, 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.

Thank you, Cici. Hello, everyone, and thank you for joining us on the call. We're pleased to inform you that New Oriental has achieved a healthy growth in this quarter's financial performance, which has surpassed our expectations. Revenue grew 19.4% year-over-year, and total net revenues, excluding revenues generated from East Bay's private label products and live streaming business, increased by 31.3% year-over-year. were encouraged by the continued growth of our new ventures, which have bolstered companies' revenue. We believe they will further progress positively moving forward. New Oriental's bottom-line performance for our core educational business has also shown solid returns. To better reflect New Oriental's core educational business, we have excluded the operating margins generated from Easterbite for this quarter. Our operating margin and non-GAAP operating margin reached 2.8% and 3.2% respectively. Results from these substantial efforts invested in our offerings and platforms that have been shown effective. Our commitment to sustaining healthy profitability and market share remains strong as we continue to aim for long-term value creation for our customers and shareholders. 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 business have showcased a promising trend in adjacent to positive momentum across our new businesses. Breaking it down, The oversea test prep business recorded the revenue increase of 21% year-over-year for the second physical quarter of 2025. The oversea study consulting business recorded the revenue increase of about 31% year-over-year for the second physical quarter of 2025. The adults and university students business recorded the revenue increase of 35% year-over-year for this quarter. At the same time, our ongoing investments in new education business initiatives, primarily focused on facilitating students' all-around development, have also continued to thrive with steady growth, fueling the company's momentum. Firstly, the non-dynamic children's business, which we have now expanded to around 60 existing cities, focused on cultivating students' innovative ability and comprehensive quality. we have attracted high interest with a total approximately 994,000 student enrollments reported in this quarter. The top 10 cities contribute over 60% of this business. Secondly, the intelligent learning system and device business utilize our past teaching experience, data, technology to provide personalized and targeted learning and exercise content thereby improving students' learning efficiency. We have tested the adoption of this new business in around 60 existing cities and are pleased to see improved scalability. The revenue contribution of this business from top 10 cities in China is around 50%. Our smart education business, educational materials, and digitalized smart study solutions have continued healthy developments. In summary, our new education business initiatives have recorded a revenue increase of about 43% year-over-year for the second quarter. In addition, our newly integrated tourism related business line, which includes our rooted study tour and research campus for K-12 and university students, as well as our tourism business serving middle-aged and senior audience, has collectively recorded a revenue increase of 233% year-over-year. for the second quarter. Study tour and research campuses are now operating in around 55 cities across the country, with the top 10 cities in China offering over 50% of the revenue share of this new business. We're also facilitating a number of top-notch tourism offerings to old age groups, including the middle aged and elderly individuals across 30 featured province in China and globally. With regard to our OMO system, we have persisted in revamping our platform, leveraging our educational infrastructure and technology strengths in order to provide advanced diversified education service to our customers of all ages. During this quarter, we invested $30.9 million to improve and maintain our OMO teaching platform, which enhanced users' experience and supports the growth of our education offerings. Now, may I share some updates on East Bayh's performance. During the reporting period, East Bayh expanded its product range from fresh food and snacks to diversified portfolio, launching 600 SKUs in private label products by November 24th. This includes healthy care food, pet food, and new Chinese-style clothing contributing to approximately 37% of total GMV for the six months and the . We're pleased to see multi-platform strategy has expanded its consumer base and increased the brand awareness through enriched live streaming products and online shops on platforms like MiniProgram, WeChat MiniStore, Teemo, JD, Pinduoduo, and Red Note. This multi-channel approach has driven rapid growth of its product label products. Simultaneously, Easterby has begun exploring offline channels with vending machines in New Oriental's learning centers. The company's app strategy has advanced quickly, offering daily necessities and high-quality products, leading to increased user contributions and strong loyalty. With regard to the company's latest financial position, I'm pleased to share 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 August 19, 2024, New Oriental announced its board of directors approved a special dividend of $0.06 per common share or $0.6 per ADS to holders of common shares and ADS of record as of the close of the business on September 9th, 2024, Beijing and Hong Kong time and New York time respectively. The payment date was on or around September 23rd, 2024 for holders of common shares in September 26th, for holders of ADS. The total cash dividend distributed was approximately $100 million. Now, I would like to take the opportunity to highlight that the company's board of directors approved a share repurchase program in July 2022, in which the company is authorized to repurchase up to $100 million of the company's ADS or 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 shares that the company is authorized to repurchase from $400 million to $700 million. As of January 20th, 2025, the company repurchased an aggregate of approximately 11.2 million ADA assets for approximately $542.8 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, Stephen. Now, I'd like to share our key financial details for this quarter. Operating cost expenses for the quarter were $1,019.4 million, representing a 20.2% increase year over year. Non-GAAP operating cost and expenses for the quarter, which is school share-based compensation expenses, were $1,011.1 million, representing a 23.5% increase year over year. The increase was primarily due to the cost and expenses related to the accelerated capacity expansion for education businesses and newly integrated tourism-related business. Cost of revenue increased by 17.9% year over year, to $498.3 million. Selling and marketing expenses increased by 26.6% year-over-year to $196.1 million. G&A expenses for the quarter increased by 20% year-over-year to $324.9 million. Non-GAAP G&A expenses which exclude share-based compensation expenses were $319.4 million. representing a 24.7% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 71.8% year-over-year to $8.3 million in this fiscal quarter. Operating income was $19.3 million, representing a 9.8% decrease year-over-year. Non-GAAP income from operations for the quarter were $27.6 million, representing a 45.8% decrease year-over-year. Net income attributable to New Oriental for the quarter was $31.9 million, representing a 6.2% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were 20 cents and 19 cents, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $35.5 million, representing a 29.1% increase over the year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.22 and $0.22, respectively. Net cash flow generated from operation for the second fiscal quarter of 2025 was approximately $313.3 million, and capital expenditure for the quarter was $68.6 million. Turning to the balance sheet, as of November 30, 2024, New Oriental had cash and cash equivalents of $1,418.2 million. In addition, the company had $1,443.2 million in term deposits and $1,951.4 million in short-term investments. New Oriental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the service or goods are delivered at the end of the second quarter of fiscal year 2025, was $1,960.6 million, an increase of 19.2% as compared to $1,645 million at the end of the second fiscal quarter of 2024. Now I'll hand over to Stephen to go through our outlook and guidelines.

I repeated the paragraph that the CCE mentioned of the net income. Net income attributable to New Rental for the quarter was $3,100 million. $0.9 million, representing a 6.2% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.2 and $0.19, respectively. About outlook and fiscal year 2025 Q3 guidance. In light of the current economic uncertainties, we remain committed to achieving steady and sustainable growth for our core educational business in the coming quarter. Our confidence is bolstered by the solid performance of our diverse business lines and our extensive educational resources. We're dedicated to diligently adhering to the latest guidance from the Chinese authorities, including the recently announced National Action Plan with the goals of establishing a high-quality education system and unlocking potential across our business lines and innovative efforts. To balance revenue and profitability growth, we will carefully manage our capacity expansion and hiring strategies to support the development of our educational business in the rest of this year. We plan to follow our usual pace to increase capacity with a focus on new openings in cities with a robust local economy. Simultaneously, we will continue to invest in developing our emerging tourism-related ventures. The foundation we have established and the progress we've achieved so far strengthens our confidence in our future performance. We expect total net revenue, excluding revenues generated from East Dubai, in the coming quarter December 1st, 2024 to February 28th, 2025, to be in the range of $1,007.3 million to $1,032.5 million, representing year-over-year increase in the range of 18% to 21%. The projected increase of the revenue in our functional currency, MNB, is expected to be in the range of 20% to 23% for the third quarter of the fiscal year 2025. To conclude, New Oriental is dedicated to delivering premium offerings to our customers while pursuing sustainable growth through a strategic blend of capabilities. We'll continue investing in research and applications of advanced technologies, including AI and chat GPT, to enhance our educational and product product offering. Our aim is to strengthen our competencies, driving growth and operating efficiency. We will also continue to seek guidance from and cooperate with the government authorities, comply with the relevant policies, guidelines, and any related regulations measures, and adjust our business operation as required. As always, we will work diligently to enhance the nation's education level. to strengthen its leading position so as to unveil further potential cross our business lines and realizing our vision. This is the end of our fiscal year 2025 Q2 summary. At this point, CC and I 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 from each caller. If you have more than one question, please request to join the questions queue again after your first question has been addressed. To ask a question, please press star 11 and wait for a name to be announced. One moment for the first question. Our first question comes from the line of Yiwen Zhang from China Renaissance. Please go ahead.

Yeah, perfect. Thanks for taking my question. So my question is about our Q3 revenue guidance. I think, you know, you mentioned our NB term is 20% to 23%. It seems a bit decelerating. Can we understand more which part of the business is actually driving that trend? And how should we think about the rest of the year? Now, also, in light of this new guidance, you know, how should we think about the learning center expansion pace as well? Thank you.

Thank you, Yifan. Yeah, about the revenue guidance of Q3. Yeah, we gave the guidance of the year-over-year growth in the range of 20% to 23% in IRB terms. I must mention that we're using the conservative method to give the guidance of Q3. And the reasons for a little bit of slowdown in the revenue growth in Q3 are as follows. Number one, the uncertainty of the macroeconomy situation has a certain negative impact on the demand of our high-end education business, such as the oversea test prep and related business, and some one-on-one business, which is also high-end business. And number two, with the rapid recovery of the educational business in the last two to three years, I think the revenue base is gradually increasing. So I think the revenue growth in the Q3 will be a little bit slowed down. And number three, I think the impact of the exchange rates is approximately around the 3% point. That's why we give the guidance in the range of 18% to 21% in dollar terms. And I think, yeah, even though we're facing to the uncertainty of the macroeconomy, situation change. But I think the management will try our best to grow the revenues. And so we expect to be the guidance we give to the investors in Q3. And I think on the other hand, I think we will care more about the balance between the revenue growth and the operating efficiency at the same time for the long term. As for the expansion plan, you know, this quarter we opened, this quarter we, you know, the expansion in Q2, the expansion was 5% Q on Q in Q2. And for the whole year, you know, we have the second half of the year left. And in the whole year, you know, we plan to open 20 to 25% of the new learning centers. I think, you know, we will only, opening new learning centers, you know, in the cities that the last year, you know, top-line and bottom-line performance well, and we allow them to open more learning centers. And, you know, we still care more about the utilization of the new learning centers. So, yeah, that's why I said we care more about the top-line growth and the margins. Thank you, Clémence.

Thank you for the questions. Next question is from the line of Felix Liu from UBS. Please go ahead.

Good evening, and thank you, Benjamin, for taking my question. May I just follow up on one of the issues that you mentioned, which is macro impacting, you know, the higher-end business? Do you see any, you know, potential risk to your more mass market services, such as the new education businesses? And can Benjamin comment on the competition landscape that you are observing on the ground across your business lines? Has competition played into a role in the growth deceleration? Thank you.

I think for the new business, you know, we still guide the Q2 guidance about, you know, 40% in our midterm year-to-year growth. And so it's still very strong. And as for the competition, yeah, we have seen a little bit strong competition in the market. But I think we are fine. So we're still taking the more market share from the market. And because of the base in the Q3, we've gotten 40% in our midterm year-over-year growth because of the high base.

Felix?

Thank you. Thank you for the questions. One moment for the next question. Next question comes from Lucy Yu from Bank of America Securities. Please go ahead.

Thank you. So, Stephen, I remember earlier you gave the full year guidance for 25 or 30% revenue growth, excluding eSPAC. so given that the next quarter you are forecasting around like 21 to 23 percent so defending that fourth quarter we have to accelerate our revenue expansion uh uh revenue growth or uh we are uh aiming for a slower growth uh this year thank you yep yeah uh as i said you know the uncertainty of the macro econ the economy situation i think we need one more quarter to see to give you the

to give you the Q4 guidance. So I think for the whole year, yeah, we're facing a little bit of slowing down in Q3. But for the whole year, I think in RMB term, you know, we still got the top line growth of the year growth by, you know, let's say the 25% in RMB terms or more for the whole year guidance. Lucy.

And that's it. Thank you so much.

Thank you. Our next question comes from Timothy Chao of Goldman Sachs. Please go ahead.

Thank you. Hi, Steven. My question is regarding your new education initiative. I noticed that when you report your student enrollment number, I think for this quarter, the academic tutoring enrollment growth was around 26%. Just wondering, could you further elaborate on that, and what is the more normalized growth that we can expect in terms of the student enrollment for the academic tutoring. And also a follow-up question, I think, on the Learning Center ramp-up. I think you mentioned that you see slightly more competition on the ground. Could you share, I think, what is the latest Learning Center ramp-up pace in terms of the time for break-even, time to reach a more mature stage, and also the utilization rates that you see on the ground? Thank you.

OK, Timothy, regarding your enrollment question, actually, if you look at the full year, roughly, because quarterly enrollment number will be impacted by the registration window, et cetera. So there will be some fluctuation of growth. And year over year, actually, we're comfortable with roughly about 40% plus growth for new business. including the non-academic tutoring. And this business should grow similar or even faster. And roughly about 5%, maybe 4% to 6% of ASP increase. And if you'll deduct that, the rest are volume increase, which is mostly driven by the enrollment number that you can see from our release.

Thank you for the questions. One moment for the next question. Next question comes from the line of LC Shing from CLSA. Please go ahead.

Hi, thank you for taking my question. I would just want to follow up on the pressure that you mentioned on the overseas and more premium business. the one-on-one business. So how do you measure the magnitude of this impact on macro? Because usually we understand that education in nature should be more resilient than other types of consumption. So how do you see the risk going forward for this business if we assume that the macro going forward continue to remain relatively in a weak status?

You know, last quarter, we gave the guidance of the overseas test lab. This has grown by less than 20%. And because, you know, we have seen, you know, some parents, some parents changed their idea to send their kids to study abroad in the future because of the macroeconomy situation change. So, you know, I think in the Q3, the overseas test lab business will grow by somewhere around 15%. And so it's a little bit decelerated. But this is the real situation. But for the K-12 business, it's OK. And we give the guidance of 40% yield year growth, mainly Q3. And so let's see for another quarter, we will give the guidance of Q4 in next earnings call.

Okay, thank you.

Thank you for the question. Our next question comes from Alice Chai from CTV. Alice, your line is open. Please go ahead. I'm not hearing from Alice. I would like to take the next question. We have a next question from JPMorgan. Please go ahead.

Thank you. Hi, Steven. Nice to see you. Thanks for taking my question. And my name is T.S. Kim. Sorry. Can I follow up on a full year guidance again? I guess now, as you kind of briefly remarked, we can expect over 25% growth in rent and I think previously market or management kind of expected about 30%, so about five-point deceleration makes a lot of sense. But how about OP margin? Can we still expect up to about 150 expansion for the education four-year margin core business? And if okay, can you also help elaborate a bit on the segment growth number baked in the four-year revenue guidance, especially the new business? I think Susie remarked 40% plus growth there, but just wanted to double-check other segment and a little more detail. Thank you.

Okay. Yes, let's start with this quarter margin analysis in Q2. The non-GAAP OP margin for the educational business, which is excluding the Easter buy this quarter, was expanded by 12 basis points year-over-year. And I think it's mainly due to some reasons. Because of the top-line growth are good in this quarter, and we started to bear fruit of the learning center expansion last year, especially in the second half of last year. So it's driving the utilization rate up and get more operational leverage. And yeah, as I said, we started to make some cost and expense control within the company. So this quarter, we'll get the operating leverage and drive the margin up. And as for the margin outlook for the second half of the year, as I said, I think we're facing some slowing down of the overseas-related business. So I think the margin drag will be added in the second half of the year from the overseas-related business. And also, you know, the newly tourism business will drive the market in the second half of the year. And so I think in the second half of this year, we will meet some margin pressure. And as the margin outlook for the next year, I think we will still expand the margin expansion for the whole company because, you know, the K-12 margin will be expanded in the new year. in the second half of the year as well. And it's the second half of this year as well. And we will start to cut the cost and expenses of the overseas related business. And we expect the margin profile of the children's business next year will be better than that of this year. So this is the margin analysis. Thank you.

Once again, we have the line from at this time from city.

Alice, go ahead. Thank you, for the opportunity to ask. I'm sorry.

Well, Alice, there's some echo in your side, so we cannot hear you clearly.

Now is better. Thank you, management, for the opportunity to ask questions. I have two questions today. The first one is, I noticed that you are considering a regular dividend policy, which is quite interesting given the current strong market demand, right? In this regard, I'd like to ask, does XSIM know any anticipated softening in demand and therefore a planned moderation in capacity spending going forward? Additionally, do you have an estimated timeline for when this dividend policy might be declared? Furthermore, how do you view this balance between business expansion and shareholder returns? Next, regarding the reported improvement in breakeven timeline for recently opened learning centers, I would like to know, shall we expect similar efficiency levels for future new learning centers? Thank you so much.

Second question, answer first. You know, I think the, you know, typically we spend six months to get a break-even point of the new learning centers. So the ramp-up pace has not changed. And as for the shareholders, you know, capital allocation, you know, we announced $700 million share buybacks. And now we're finished with $540 $2.8 million, and I think we'll keep buying the share buyback in the open market. And as for the special dividends, yeah, we have paid $1 million in September as the special dividend. Typically, the board of directors will discuss the new year capital allocation policy in July. But anyway, it depends on the market cap, the stock price. But I think the management will aim to create more value to the shareholders at the capital return. Thank you.

Thank you for the questions. Next question will come from the line of Yanbo Jing from Iron Group. Please go ahead.

Hi, can you hear me?

Yes, please go ahead.

Yes. Oh, thank you. So my question is about how do you perceive the regulatory landscape on your core and non-core businesses, such as the tourism business? Do you see there, are there any heightened or lessened regulatory risks in those business areas? Thank you.

On the regulation side, there's no change. you know, now. And I think we're okay to open the new learning centers, you know, to get the license from the local government. And so that's why we want to change our expansion plan of this year. And on the front, you know, on the regulation side, you know, our attitude is to neutral to positive. You know, as the list goes, we'll apply for the requirement of the new government, you know, things, you know, three years ago, the policy change. Now the situation has no change, you know, recently. So that's it. Thank you.

Thank you for the questions. We are now approaching the end of the conference call. I'll now turn the call over to New Oriental's Executive President and CFO, Mr. Stephen Young, for his closing remarks.

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.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.