New Oriental Education & Technology Group, Inc.

Good evening and thank you for standing by for New Oriental's third fiscal quarter 2025 earnings conference call. At this time, all participants are in the 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'd now like to turn the meeting over to your host for today's conference, Ms. Cici Zhao.

Thank you.

Hello, everyone, and welcome to New Oriental's third 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 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 permissions of the U.S. Private Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and assiduities. As such, our results may be materially different from the view expressed today. A number of potential risks and assiduities are outlined in our public findings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead.

Thank you, Cici. Hello, everyone, and thank you for joining us on the call. Our Q3 results reflect a steady performance, reinforcing our ongoing commitment to long-term value creation and official consistency. Despite our revenue decreased by 2% year-over-year, but the total net revenue, excluding revenues generated from Easter buy, increased by 21.2% year-over-year. The continued growth of our new ventures has contributed to the company's revenue, and we anticipate further progress in the future. New Oriental's bottom line performance of our core educational business has also shown stable returns. To better reflect New Oriental's core educational business, we have excluded the operating margin generated from Easter buy for this quarter. Our operating margin and non-GAAP operating margin, excluding operating margin and non-GAAP operating margin generated from Easter buy for the quarter reached 12.1% and 13.3% respectively, resulted from the substantial efforts invested in our offerings and platforms. Now I would like to spend some time to talk about each business line and new initiatives to you in detail. Our key remaining business are showing promising trends and our new initiatives have demonstrated positive momentum. Breaking it down, the oversea test drive business recorded a revenue increase of 7% in dollar terms year-over-year for this quarter. The oversea study consulting business recorded the revenue increase of about 21% in dollar terms year-over-year for this quarter. The adults and university students business recorded a revenue increase of 17% in dollar terms over the year for this quarter. Meanwhile, our ongoing investments in new educational business initiatives, primarily focused on facilitating students' overall development, have sustained steady growth, further driving the company's momentum. Firstly, the non-academic children business, we have now rolled out to around 60 cities for students. We're happy to see increased market penetration in those markets we have tapped into, especially in high-tier cities. The top 10 cities contribute over 60% of this business. Secondly, the intelligent learning system and device business. We have tested the adoption of this new initiative in approximately 60 existing cities, and we're pleased to see improvement to customer retention and scalability. the top 10 cities contribute approximately 50% of the business. As for the smart education business, education material and digitalized smart study solutions, they have all continued healthy development. In summary, our new education business initiatives combined have recorded the revenue increase of 35% year-over-year for this quarter. With regards to our integrated tourism-related business line, it performed exceptionally with a revenue increase of 85% year-over-year for this quarter. We received very positive feedback with our range of cultural travel, China study tour, global study tour, and CAP education products. We have also conducted study tours and research camps, both internationally and domestically, from students of Q12 and university age in around 55 cities across the country. In the top 10 cities, revenue contribution is over 50%. Middle-aged and senior audience targeted tours and products are also available in 30 future provinces in China and internationally. this business line has began to demonstrate its potential to contribute meaningful revenue to the group. While we're encouraged by positive achievements across our various business line, we remain committed to provide the best to our customers. We have been and will continue strategically investing in our business to elevate the overall user's experience driving greater efficiency and capacity. Building on the progress from the previous quarter, we have continued to refine our online merge offline teaching platform. $29.7 million have been invested in this quarter to improve and maintain our OMO teaching platform, which provide us the flexibility to continue our high quality service to students. Beyond OMO, I would like to take this chance to highlight our investments in AI and how we integrate AI to our teaching ecosystem. It is an area we have looked at and invested in over a long period of time. New Oriental has leveraged a combination of open source large language models, such as DeepSeq and GPT, and self-developed AI technologies to develop innovative education solutions and enhance learning experience. AI-powered tools such as essay grading, speaking assessment, and error correction notebooks deliver intelligent evaluations and customized learning plans, ultimately improving the students' outcomes while saving the time for both teachers and parents. To further drive internal efficiency, We introduced an AI content creation platform and student performance feedback applications to support lesson planning and strengthen home-school communication. These tools have also allowed us to collect meaningful data on learning habits and user engagement, giving us deeper insights into how students and families interact with our services. In addition, We have built an AI-supported comprehensive FAQ knowledge database with analysis of our sales conversations. By using the database, we're able to reduce the training cost for our salespeople and boost the sales efficiency and conversion rates. As an industry leader, we're dedicated to driving long-term revenue growth by strengthening our product capability and optimize management efficiency. We look forward to sharing tangible results from our investment in AI integration and their positive impact on our performance. Now, I would like to take this opportunity to talk about our share repurchase actions. The company's board of directors further approved extending 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 April 22, 2025, the company repurchased an aggregate of approximately $14.4 million ADS for approximately $695.5 million from the open market, under 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.

Thank you, Stephen. Now, I'd like to share our key financial details for the quarter. Operating costs and expenses for the quarter were $1,058.5 million, representing a 3.2% decrease year over year. Cost of revenues decreased by 17.6% year over year. to $531.6 million. Selling and marketing expenses increased by 13% year-over-year to $182.2 million. G&A expenses for the quarter increased by 19.8% year-over-year to $344.7 million. Total share-based compensation expenses, which are allocated to related operating costs and expenses, decreased by 41.3% to $16.1 million in the third quarter of 2025. Operating income was $124.5 million, representing a 9.8% increase year-over-year. Non-GAAP income from operations, excluding share-based compensation expenses and amortization of intangible assets resulting from business acquisitions was $142.1 million, representing a 0.2% decrease year-over-year. Net income attributable to New Oriental for the quarter was $87.3 million, representing a 0.1% increase year over year. Basic and diluted net income per ADS attributable to New Oriental were $0.54 and $0.54, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $113.3 million, representing a 14.3% decrease year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.70 and $0.70, respectively. Net cash flow generated from operation for the third fiscal quarter of 2025 was approximately $1 million, and capital expenditure for the quarter were $52.4 million. Turning to the balance sheet, as of February 28, 2025, New Oriental had cash and cash equivalents of $1,418.8 million, $1,411.7 million in term deposits, and $1,853.6 million in short-term investments, totaling approximately $4.7 billion. The company is in a healthy financial position. New Rental's deferred revenue, which representing cash collected upfront from customers and related revenue that will be recognized as the services and goods are delivered at the end of the third fiscal quarter of 2025, was $1,749.9 million, an increase of 15% compared to $1,521.7 million at the end of the third quarter of last fiscal year. Hand over to Stephen to go through our outlook and guidance.

Thank you, Sisi. With the evolving market dynamics, we will remain committed to resilience and focus on achieving steady, sustainable growth across our business line in the coming quarter. Leveraging our experience in navigating shifting conditions, we're confident in our ability to advance our business lines as an industry leader. The strong performance of our diverse operations and the depth of the educational resources further strengthen our confidence in the sustainable world. We expect the total net revenue, excluding revenue generated from the Easter buy in the coming quarter, March 1st, 2025, to May 31st, 2025, to be in the range of $1,009.1 million to $1,000 $36.6 million, representing an year-over-year increase in the range of 10% to 13%. It projects the increase of the revenue in our functional currency RMB is expected to be in the range of 12% to 15% for the first quarter of fiscal year 2025. In addition, it slows down the revenue growth of our overseas-related business and the investment in newly integrated tourism-related business. have led to the short-term impact on our operating margin this quarter. We have initiated our cost control and efficiency enhancement across all business lines since this quarter and expect these actions to take effect in the coming quarters. We anticipate the non-GAAP operating margin for educational business will expand year over year in the coming fourth quarter. I must say that these expectations and forecasts reflect our considerations of latest regulatory measures, as well as the current and preliminary view, which is subject to change. To conclude, New Oriental is dedicated to delivering premium offerings to our customers who are pursuing sustainable growth through a strategic blend of capabilities. We will continue investing in our business and different applications of advanced technologies, including AI. Our aim is to strengthen our competencies, driving growth, and improve operating efficiency. We will also continue to seek guidance from and cooperating with government authorities in China. ensuring the compliance with the relevant policies, guidelines, and any related implementations, regulations, and measures, and adjust our business operations as required. As always, we will work diligently to enhance the nation's education level to strengthen its leading position, unlocking further potential across all of our business lines and realizing our vision. This is the end. of our fiscal year 2025 Q3 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 our 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 11 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 11 again. We will now take our first question from the line of Felix Liu from UBS. Please ask your question, Felix.

Thank you, and good evening, management. Thank you for taking my question. My question is on the overseas-related businesses. You mentioned that the slowdown in overseas test prep and consulting caused the deceleration in Q4 growth. May I just check what has been the major drivers of the slowdown? Do you think the situation could get worse with these ongoing tariffs? and what is your outlook for this business, especially when do you think growth will bottom out? Thank you.

Yeah, I think the oversea related business, including the oversea test reps and the consultant business, that the slowing down is due to the impact of the macroeconomy situation and the international relation change situation. And so based on our current guidance of the Q4. I think the overseas related business will be growth in the range of 5% to 10% in the Q4. And in the coming new year, we have not finished the budget, but we anticipate the overseas task force business will grow by 5% to 10% in the new year. And the overseas consultant business, I think the growth will be zero or flattish in the coming new year. But what I'm saying now is based on the conservative estimation for the new year.

Thanks. Great. Thank you. Thank you. We will now take our next question from the line of Lucy Yu from Bank of America Securities. Please ask your question, Lucy.

Thank you so much. So my question is more on the fourth quarter guidance. You did mention that overseas tax prep is going to slow down. May we have a breakdown of the other business growth in the fourth quarter? Thank you.

Yeah, so roughly, based on our forecast for Q4, in the R&B term, the overseas-related business will grow around 8%. And domestic university students' business will grow maybe around 19%. And the high school business growth will be around 16%, 17%. And the new K-9, new business, educational business will grow maybe around 30% to 35%. So that's the rough estimation based on our current forecast for Q4. This is RMB growth. And if you want US dollar growth, maybe each line roughly deducts by roughly 2% to 3%.

But we must mention that we're using the conservative methods to keep the guidance of Q4.

Yes. Understood.

Thank you so much.

Thank you.

Thank you. Our next question comes from the line of Alice Tsai from Citibank. Please ask your question, Alice.

I noticed that we cannot apply enrollment through by 15% yield in this quarter, which is lower than expected. Will our limited by users increase by 15% Can you repeat again?

I think we cannot hear you very clearly. Can you repeat the question again?

Your line is not clear, Alice. Can you hear me now? A bit better. Yeah. Please say again of your question. Thank you.

Okay. I noticed that the K9 offline enrollment grew by 15% year-over-year this quarter, which is lower than expected. While learning device users increased by 54% year-over-year, are learning devices starting to replace offline courses? And how much of this lower K9 growth is simply because the bays are getting bigger? Is that clear now?

Yes.

Yeah.

Actually, the enrollment growth for the non-academic tutoring business this year is a little bit impacted by the timing difference of cutoff of each quarter. Also, because we have some enrollments that last year divided into two parts for the spring quarter and autumn quarter, but this year some cities combined as one enrollment. That also explains the relatively slower growth of the enrollments if you're comparing that with the revenue growth. The learning path for middle school students mainly is also growing very, very fast. And this year, the number of users increased dramatically compared with last year. Yes. And next year, we also continue to believe that the K-9 business, including mainly the elementary school, non-academic, tutoring and the middle school learning path business will continue to drive the overall growth will be the fastest growth category.

Yeah. So within the Q4 guidance, you know, the K-9 business, you know, we expect the K-9 business will grow by over 35% year-over-year in the Q4.

Alex?

Okay. Thank you so much, Berkeley. Yes.

Thank you. We will now take our next question from Timothy Chow from Goldman Sachs. Please ask your question, Timothy.

Sure. Thank you, Magdalene, for taking my question. I think you mentioned that in the fourth quarter this year, you do expect the OP margin for the Corbin is to expand on a year-on-year basis. Just wondering how do you think about the sustainability of the margin expansion into fiscal year 2026? and what kind of measures are you going to take to increase the operating efficiency and the control cost, and how do you think about the balance? The balance between the revenue growth and the margins.

As I said, we expect the margin expansion in the coming quarter, Q4. I think this is mainly due to following reasons. Number one, we started to to do the cost control and the efficiency enhancement since this quarter. And we do believe it will take effect to help the margin profile in Q4 and the next fiscal year. And secondly, I think we continue to focus on improving the utilization facilities. And so we're doing the cost control in all business lines with the companies because of the flow being down. I think it's reasonable to do at this time. And for the new year, fiscal year 26, we do believe we will get the margin extension for the education business, which includes in the Easter buy, the margin extension in the new year.

Kim.

Great. Thank you, Stephen.

Thank you.

Thank you. Our next question comes from the line of Equin Zheng from Citix. Please ask your question, Equin.

Hello, Stephen. Thank you for taking my question. My question is about the shareholder feedback plan. We are glad to see that we have almost finished our ongoing purchase plan. So do we have some more shareholder payback bank in the future, like dividend or a new repurchase bank? Thank you.

Yes. You know, we almost finished the $700 million share payback. And, you know, as well, we have already paid $100 million special dividend in September last year. And so that means the last two years, two and a half year, we paid $800 million already. And going forward, I think in the near future, I think I will discuss with the board to do another capital allocation plan to the investors. And yeah. I know we're piling up the cash and we generate the net cash flow and make profit every year. So I think it's reasonable for us to pay the capital allocation to investors, either the some dividends, the regular dividends or the special dividend combined with the share buyback.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Elsie Sheng from CLSA. Please ask your question, Elsie.

Thank you, Stephen and Susie. My question is more about the outlook next year. So you mentioned the expectation for the growth of overseas business in next financial year. Could you also update your expectation of growth for other business segments in the next year. Thank you.

I think Cici will give you the guidance.

Yeah, actually, I think it's reasonable to continue to estimate maybe similar growth with Q4's revenue growth for all the core business lines for next fiscal year. As we said, the continued pressure definitely is from the overseas related business and But we do believe that this business will stabilize, and based on so far's estimation, the single-digit growth is okay for us, and it's already conservative for us. And for the new business, K-9 new business should grow at around maybe 25% to 30% growth. The high-end probably growth is from the middle school session and also elementary school students because the higher base, our revenue scale is already bigger than before the policy level. And the growth around this kind of level is also something that will feel sustainable and healthy paced. And high school business continue, maybe around 12% to 13% growth, conservatively speaking as well. And the tourism business, probably around 15% to 20% growth, also conservative estimation for next year. OK, that's all the core business lines.

OK, thank you. It's very clear.

Thank you. As a reminder, to ask a question now, please press star 11 on your telephone keypad. We will now take our next question from Charlotte Wei from HSBC. Please ask your question, Charlotte.

Thank you, management, for taking my question. I have a question related to the new technology developments. So how do you expect the AI and large language model will reshape the education industry? Can you share with us your strategy and investment plan for this area? Thank you.

Yeah, you know, as I said, you know, actually we started to use the AI technology to help the, you know, the whole process of the teaching and learning, you know. from both the teacher's side and the students' and parents' side. Yeah, as I said, we have issued some AI tools like the essay grading, speaking assessments, and some error correction notebooks. All this behavior, all this new technology help us to grasp the more data from the students and to help the students, their study outcome even better. But we don't have the plan to do the big model. I think that the investment will be reasonable going forward. And on the other hand, on the cost control side, I think the AI technology can help us to do, like some of the sales people and even some on the GNA side, I think it will make Make us the work more efficiency and we can save some you know You know people and expenses all these sending marketing expenses and GNA expenses So it will help us to drive the margin up.

So this is another benefit from the egg technology Thank you very clear Thank you

As a reminder, to ask a question, please press Stop 1 on your telephone. We will now take our next question from Diaz Kim from JPMorgan. Please ask your question, Diaz.

Hi, Steven. Hi, Cece. Thanks for taking my question. I think most of my questions have already been answered, but two minor stuff. A, can we talk a bit about expansion, the Center Capacity Expansion Plan for next year? I got disconnected in the middle, so you may have already discussed that. Sorry if you did that already. That's A. And B, I think we talked a bit about cost control starting this quarter. I'm just wondering what kind of cost control we are planning to do. Would it involve some rationalization of our workforce? And if that were the case, would there be some one-off expenses related to like the workforce adjustment? Or when we talk about cost control, it's more about like spending less than previous budget, hence there wouldn't be any meaningful one-off around there. And now that I think about it, can I ask one more thing? how do we think about the headquarter overhead cost for 2026? I think last year, or this fiscal year, we are spending probably about mid to high teens more than last year on headquarter overhead. How shall we think about that overhead cost into 2026? Thank you so much, sir.

Yeah, three questions. The learning center expansion plan for the new year, right? And so, you know, I think we plan to open 10% to 15% new capacity in the new year. You know, it's a little bit less than fiscal year 25. You know, this is roughly 20% plus. And next year, 10% to 15%. And I think, you know, it will be almost, you know, backloaded into three and into four to prepare for the year after next year. And so I think our key job is to raise the utilization rates up for the new year, fiscal year 26. The cost control. I think the cost control assignment is not a one-time job. So we started to do the cost control through this quarter. And I think we will keep doing the cost control in the whole year. fiscal year 26. I know we're facing the challenging time of the slowing down of the top line growth. So I think it's reasonable for us to do the cost control continuously. And so it will help the higher efficiency and the margin profile of the whole company. The headquarters expenses. This is roughly the headquarters expenses

expenses is roughly six percent of the total educational revenue and the six percent of the total uh the educational core business thank you sir just to double check the six yeah six percent thank you so uh the ratio would be similar to this year this year uh versus next year where sorry i missed that part

Next year, I think our job is to make the percentage even lower. Let's say the 5% plus or 5% of the total revenue as the headquarters of the expenses. So that means we will get the leverage on the headquarters expenses in the fiscal year 26. It will help the margin up.

Thank you, sir. I think it's really clear, and I agree that we should focus on utilization and efficiency in this hard time, and we can deliver margin expansion. Thank you so much.

Okay. Thank you.

As a reminder, to ask a question, please press star 11 on your telephone keypad.

Once again, that's star 11 for questions.

We now have a follow-up question from the line of DS Kim from JP Morgan. Please go ahead, DS.

Sorry, and thank you. Just a follow-up since others don't seem to have questions. I think earlier you said K-9 new businesses next year, 2026, we expect about 25% to 30% growth in renminbi term. Can I double-check if this is only for K-9, excluding other new businesses or new businesses including non-K-9 for 25% to 30%?

Including everything. So the key ones are the non-academic and PET. And also we added other minor things together.

Thank you. That means K9 should grow faster than what you give us, which is not too bad. Actually similar to this quarter. So thank you. Thank you so much.

Thank you. Our next follow-up question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Thank you, Benjamin. I actually have one additional question on the learning hardware business. I noticed that recently some of our competitors who also sell learning hardware, they launched new models at increasingly cheaper and cheaper prices. So how do you think about our strategy in the learning hardware business and how should we think about competition pressure from, you know, price cuts from other players? Thank you.

Actually, we're quite confident on the future of these learning paths device model, especially that we leverage our strengths in the educational sector. You know, we have this kind of interactive model teaching and learning system. So we have our users create the stickiness of our customers. They not only buying the products, but also they subscribe the content and the process of using our system to continue their self-study and create the stickiness and can generate recurring revenue. So we're still confident that this is the best model to use and also to leverage our education strengths. And also, by using more and more AI technologies, we're now developing all kinds of apps and new functions embedded into our service process. So that's the learning experience of our customers will enhance going forward gradually and also provide them more and more technology supported and also with the real teachers supporting learning process for them. So we believe that these business will continue to be the key growth driver for our overall revenue. And also the operating margin This year, we have already seen this business to generate over 22%, 23% operating margin, which is similar with our other offline teaching class margin. And also, we have confidence that it has potential to continue to enhance the margin because of the involvement of more technology and we can leverage and save more time for our labor costs. And also our teachers can serve more students than before. So the business model is better than even offline training format. Yeah.

Thank you. That's very clear.

Thank you. We are now approaching the end of the conference call. I'll now turn the call over to New Orientals Executive President and CFO, 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.

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