New Oriental Education & Technology Group, Inc.

Good evening and thank you for standing by for New Oriental's FY2026 5th Quarter Results Earnings Conference Call. At this time, all participants are in 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. Now I'd like to turn the meeting over to your host for today's conference, Ms. Cici Zhao.

Thank you. Hello, everyone, and welcome to the first fiscal quarter 2026 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 Rantos' 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 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 filings 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'll 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. Before diving into the details of our first quarter results, I would like to share that after periods of testing and trawling various business models and offerings, formulating the right strategy and direction for New Oriental, We're pleased to see that the company has now entered a stable growth trajectory. This quarter, we recorded an encouraging set of the results that exceeded our expectations, mainly driven by our strong capabilities, enhancing operational resilience and sustainable profitability. This quarter's total net revenue has increased by 6.1% year over year. Bottom line wise, We are delighted to see that our efforts to manage costs and streamline efficiency has yielded tangible success, with non-GAAP operating margin reaching 22% this quarter, representing a year-over-year improvement of 100 basis points. Our key remaining business remains solid, while our new initiatives have continuously demonstrated positive momentum. Breaking it down, for the first physical quarter of 2026, oversea test practice recorded the revenue increase of about 1% year-over-year. Oversea study consulting business recorded the revenue increase of about 2% year-over-year. Our adults and university students' business recorded the revenue increase of 14% year-over-year. At the same time, our continued investments in new education business initiatives, primarily centered on facilitating students' all-around development, have delivered consistent progress, further driving the company's overall momentum. Firstly, the non-academic children's business, which focuses on cultivating students' innovative ability and comprehensive qualities, has now been rolled out to around 60 cities. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of this business. Secondly, the intelligent learning system and device business, which utilize our past teaching experience, data, technology to provide personalized and targeted learning and exercise content to improve students' learning efficiency has been tested in around 60 existing cities. We're encouraged by the improved customer retention and scalability of these new initiatives. The top 10 cities contribute over 50% of this business. In summary, our new educational business initiatives recorded the revenue increase of about 15% year-over-year for the first quarter of 2026. Moving to the integrated tourism-related business line and breaking it down, both domestic and international study tours and research camps for K-12 and university students were conducted across 55 cities nationwide, where the top 10 cities contributed over 50% of our revenue. In parallel, we provide a series of premium tourism offerings primarily designed for middle-aged and senior audiences. across 30 feature province in China and internationally. Our product range has also been extended to now include cultural travel, China study tour, global study tour, and camp education. With regards to our OMO system, our efforts in developing and revamping our online merging offline teaching platform continues. These efforts aim to deliver more advanced and diversified education services to our customers of all ages. A total of $28.5 million have been invested during the quarter to upgrade and maintain our OMO teaching platform. Beyond OMO, we continue to focus on our venture in AI. Our newly launched AI-powered intelligent learning device and smart study solution marks significant steps of our ongoing pursuit to transform education through technology. Encouraged by the positive market feedback, we have been and will continue to refine and embed AI across our offerings to strengthen New Oriental's core capabilities. Simultaneously, we're also leveraging AI to streamline internal operations thereby boosting efficiency and providing enhanced support for our teaching staff. As the industry leader, we're dedicated to driving long-term revenue growth through dual focus on products innovation and operational efficiency. In upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investments in AI. Now, with regards to the EastBuy's performance, in fiscal year 2026, EastBuy strategically invested in its private label portfolio, centered around a promise to deliver products that are healthy, high quality, and good value for money. As we reach EastBuy's product categories, our blockbuster offerings namely the nutritious food product line, has particularly stood out. We have strengthened our capability through rigorous end-to-end quality management from sourcing to after-sales service, which resulted a greater market recognition for our private label products. During the reporting period, EastBuy further advanced its EastBuy app and membership platform, connecting our loyal customer base to premium products and services. As the business continues to evolve steadily, Easterby has intensified its focus on improving operational efficiency and profitability metrics to align closely with the group's corporate strategies. 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 and expenses for the quarter were $1,212.2 million, representing a 6.1% increase year-over-year. Cost of revenues increased by 9.3% year-over-year to $637.8 million. Selling and marketing expenses increased by 3.6% year-over-year to $200.6 million. G&A expenses increased by 2.4% year-over-year to $373.8 million. Total share-based compensation expenses which were allocated to related operating costs and expenses increased by 239.8% to $23.3 million in the first fiscal quarter of 2026. Operating income was $310.8 million, representing a 6% increase year-over-year. Non-GAAP operating income, excluding share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, was $335.5 million, representing a 11.3% increase year-over-year. Net income attributable to New Oriental for the quarter was $240.7 million, representing a 1.9% decrease year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $1.52 and $1.5 respectively. Non-GAAP net income attributable to New Oriental for the quarter was $258.3 million, representing a 1.6% decrease year-over-year. Non-GAAP basic undiluted net income per ADIS attributable to New Oriental were $1.63 and $1.61, respectively. Net cash flow generated from operation for the first fiscal quarter of 2026 was approximately $192.3 million, and capital expenditure for the quarter, or $55.4 million. Turning to the balance sheet, as of August 31st, 2025, New Oriental had cash and cash equivalents of $1,282.3 million, $1,570.2 million in term deposits, and $2,106.2 million $78.1 million in short-term investment. New Oriental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the service or goods were delivered at the end of the first fiscal quarter of 2026, was $1,906.7 million. an increase of 10% as compared to $1,733.1 million at the end of the first fiscal quarter of 2025. Now, I'll hand over to Stephen to go through our outlook, guidance, and our new shareholder return plan.

Stephen. Thank you, Cici. Following a strong start to the fiscal year, we're optimistic about further improving our margins and operational efficiency. while staying committed to effect cost control and sustainable profitability across our old business. As part of this effort, we're taking a thoughtful and strategic approach to capacity expansion and hiring, ensuring that we continue to grow without compromising the quality of our offerings. We plan to increase our presence in cities with stronger top-line and bottom-line performance last year, while carefully managing resources. Rest assured, we will closely monitor the pace and scale of new openings, aligning them with local official needs and financial results throughout the year. Guidance-wise, we expect total net revenue for the group, including East Bay, in the second quarter of the fiscal year 2026. September 1st, 2025 to November 30th, 2025, to be in the range of $1,132.1 million to $1,263.3 million, representing a year-over-year increase in the range of 9% to 12%. In the second quarter, we projected a notable acceleration of revenue growth in K-12 business, driven by our enhanced service quality, which has led to steady year-on-year and quarter-on-quarter improvements in student retention rates. As for the full fiscal year 2026, we are very confident that our previously provided guidance of total net revenue for the group, also including East Bank, to be in the range of $5,145.3 million to $5,390.3 million will be realized representing a year-over-year increase in a range of 5% to 10%. As part of our appreciation for our shareholders' unwavering support, we today announce that the shareholder return plan for fiscal year 2026 has begun. The board of directors has approved an ordinary cash dividend and new share repurchase program. Regarding the ordinary share dividend, the ordinary cash dividend of $0.12 per common share or $1.2 per ADS will be paid in two installments with an aggregate amount of approximately $190 million. The first installment was $0.06 per common share were $0.6 per ADS will be paid to holders of common shares or ADS of reported as of the close of business on November 18, 2025, Beijing and Hong Kong time and New York time, respectively. The second installment, $0.06 per common share or $0.6 per ADS, is expected to be paid around six months after the payment date of the first installment to holders of common shares and ADS of the required date to be further determined by the board of directors. Details of the second installment will be announced in due course. Regarding the share repurchase program, pursuant to the new share repurchase program, the company may repurchase up to $300 million of its ADS or common shares from open market over the next 12 months. To conclude, New Oriental remains committed to our trajectory of sustainable growth, delivering premium offerings to our customers and sharing the fruits of our success with our shareholders. We're also in close collaboration with the government authorities in various provinces and municipalities in China, ensuring compliance with the relevant policies, guidelines, and any related implementation regulations and measures. and adjusting our business operation as required. This is the end of our fiscal year 2026 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 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.

Hi, good evening, management. Thank you for taking my question. I'm glad to hear that you mentioned or expected notable acceleration in your K-12 business in the upcoming quarter. I know previously there are market concerns over increased competition, especially over the summer. So could management elaborate on how's the latest competition landscape in K-12 that you're feeling at the moment? Have you made any adjustments to your strategy? And what is a reasonable level of sustainable growth for your K-12 business in the mid to long term? Thank you.

Thank you, Felix. First of all, I'm very happy to see the revenue growth acceleration in our K-12 business. since Q2. As you know, started in Q1 and even for the whole year, I think our target is to enhance our quality of product and service in K-12 business. And I think since Q2, we will see the good result. I think the better quality drives the student retention rate up after the summer. So that means more and more students chose our Q2 course. And also the better word of mouth attracts new student enrollment of our autumn classes. Yeah, as you know, we meet some competition pressure in the summer because some competitors were using the low price or even the free course strategy. But now we're happy to see students came back to New Oriental to enroll our class in autumn. So that's why we raised the guidance of the K-12 business. So let's divide the K-12 business one by one. And so we expect the K-9 new business revenue growth will be around 20% year-over-year growth in Q2. And for the high school business, I think in the Q2, the growth rate will return to double-digit growth. I think you see the revenue acceleration in Q2. And so I think the high student retention rate and the better word of mouth will drive the revenue growth acceleration. And I think, I believe the revenue growth acceleration you know, will continuously, you know, in Q2 and throughout the year. So for, yeah, so, you know, for the whole year, 2026, I think the K-9 will be, you know, the real growth will be over 20%. And for the high school, you know, like the double digit, the growth. So I think our strategy is correct. Because, you know, the student retention rates, both for the primary school students and the middle school students and high school students, always lie the student retention rate is getting higher, you know, year over year.

Thanks. Okay. Thank you.

Thank you. Our next question comes from the line of Alice Tai from Citibank. Please go ahead, Alice.

Thank you. Good evening, Steven. I have a quick question first on FBC. It jumped a lot to 23 million. I'm wondering what you have to think, Chris, and what's the outlook? Oh.

I think, Alice, your question is about the SPC, the Share Based Compensation. I think in the second half of the last fiscal year, we grant the AES shares to the management and the staff and teachers in the next three years. So it's driving the SPC up. And yeah, so the number of the SPC in this quarter, you know, is bigger than that of last year. And yeah, but you know,

Yeah, you can roughly estimate going forward every quarter the SBC expenses will be similar with this quarter and at this kind of level for the coming several quarter.

Yeah, but I think typically the first year will record more SBC expenses, more in first year, and then less in second and third year.

Alex?

Thanks so much. Thank you. We will now take our next question from the line of Lucy Yu from Bank of America Securities. Please go ahead, Lucy.

Stephen, I have a question on overseas. It looks like overseas has been stronger than your earlier expectation. Could you please break down the test path growth? by age, and also the consulting growth is done by sub-segment. How should we think about the overseas sustainability growth, and will that impact your guidance for the full year? Thank you.

As for the overseas business, as you know, we are adversely affected by the external environment. You know, last quarter we guided in Q1 the revenue of the overseas related business would be down by 5%. But in Q1, I think, you know, overseas test graph still grow by 1%. Overseas consulting business grow by 2%. I think we will strive to minimize the negative impact going forward. And so in the Q2, we still guide the overseas related businesses will be done by low single digit EQ2. We will still use the conservative method to make the forecast. And I think, yeah, the negative impact from the international relationship, even the outside environment changes a lot. But I think we will strive to minimize the impact. And so, you know, we do expect we can beat our guidance because we do the guidance in Q2 even for the whole year more, you know, conservatively.

Lucy.

Steven, just to follow up. So, for example, your test prep is positive. So, By age group, like younger age, high school, and college students, which one of them is better than expected? And also for the consulting business, I believe that 60% is pure consulting, and the other 40% is like background raising. So which part of that is better than expected?

Within the Overseas Hasbro app, the younger age students who, you know, the business of that part grows very fast, you know, even more than 25% a year. So that's why, you know, in the makeup of the, like the adults or even the college students, you know, business style. And within the overseas consulting business, I think the non-US and UK business, especially for the Asia country consulting business and the background improving business the business, you know, still, you know, grow very fast. So as a whole, I think the overseas test lab and consulting business, we will still give the guidance like the four or five percent down year over year.

But I believe we will do better than our guidance.

We'll see. Okay. Thank you so much, Stephen.

Thank you.

Thank you. Our next question comes from the line of DS Kim from JP Morgan. Please go ahead, DS.

Hi, Steven. Hi, Cece. Good evening, and thanks for taking my question. I actually wanted to ask why the share price is down 6%, 7% pre-market, but I guess that's a question for the market, not you. I actually have a question regarding shareholder return policies. That's okay. How do we think about the policy going forward? Say, is this based on your projected or budgeted net profit and payout ratio, or is it more based on our expectation on cash flows and whatnot? The reason why I'm asking is, if I use my own estimated gap EPS, what you announced is roughly about 100% payout, say like 40% payout for the dividend and 60% for buyback based on my GAAP net profit or EPS, is that what we should think about going forward? I.e., we could pay regularly over 50% as you guided, but more like 100% payout going forward based on this earnings and payout, or shall we treat that buyback as one-off? only for current year because of the stock price is low and we can only expect 50% going forward. Can you walk us through how we can think about the payout ratio or shareholder return going forward?

Thank you, Diaz. It's a good question. I think you know last quarter our board approved three years shareholder return plan. And we announced earlier today, we paid $190 million dividend, which amounted to the 50% of net profits we generated last year. And combined with the $300 million, the new share buyback program. So let's do the math. I think the payout ratio This year, it's over 130%, if you compare the capital allocation with the net profits we made last year. And the dividends plus the share buyback yield is over 5%. So I think going forward next year, I think the dividends we will pay, because I think this is a regular dividend. And the $300 million share buyback we announced this year is not one time. It's not one time. I think next year, I think I will discuss with the board and to push the board to approve the new capital allocation program. And I think we will keep the high level of the payout ratio and the yield. Because think about that. we meet some pressure of slowing down the top line. But we can still like the 10% or plus top line growth and generate higher margin. And also we are piling up the cash. So that's why the board support our management to pay more capital allocation to investors. And I think the investors deserve to get more money, the capital allocation from the company. And so we announced three years the shareholder return plan. So I think in the next year, we will pay more.

Thank you, sir. If I may follow up just on that part, just to clarify, when I said 100%, that was based on fiscal year 26, my EPS, because the wording of the announcement says This is a dividend for fiscal year 2026. But based on what you say, shall we going forward expect that like what you announced is actually coming out of fiscal year 25 earnings and what you're going to announce next year will be coming out of fiscal 26. So will there be one year delay? And is that how we should think about or, you know, I guess it's all flexible, but just wanted to get your thoughts.

I think this is our internal policy. Because, you know, we make the calculation based on the last year net profit. So, you know, last quarter we announced that we paid no less than 50%. But finally, we paid 30%. 130%. And next year, I think we will calculate based on the net profit we made in fiscal year 2026. And we will do the same thing.

Thank you, sir. I think that's actually much, much better than what I had expected. So I am, again, wondering why stuff down six, not up six. But anyway, let's see how it goes. And thank you so much, sir. Okay. Thank you. Yes.

Thank you. Next question comes from the line of Yikun Zheng from Citix. Please go ahead, Yikun.

Good evening, management. Thank you for taking that question. And congratulations on the strong results. My question is regarding the operating margin. Since the operating margin in Q1 is quite good, I'm not sure if it was mainly due to the cost reduction plan or some other reasons. And how can we expect the contribution of the cost reduction plan for the next season or for the full year? And how do we expect the operating margin for the full year? Thank you.

It's a good question about margin. Let us start the margin analysis of Q1 this quarter. Even though we meet some margin pressure from the slowdown of the overseas related business, but we still got the group margin expansion by one base point in Q1. And I think the margin extension was mainly driven by the better utilization operating leverage and the cost control and the profit contribution from Easterby. As you know, we started to do the cost control since March, the last fiscal year, this year, March. And we have seen the good results. And I think it will help the margin extension, you know, even in the rest of the year, this fiscal year. And we look ahead into the Q2 margin guidance. I think we are quite optimistic about the margin extension for the whole group in Q2. And so that means the core business and the ease to buy business, both of the business, the margin will be up in Q2. And I believe the margin extension in Q2 will be greater than that of Q1. And as for the margin outlook for the whole year, You know, I think, you know, the whole group are focusing on the profitability, you know, across all business lines. We are doing the cost control in all business lines. So, you know, we do hope we can get the margin expansion for the whole year for the group.

Thank you. Thank you, Stephen.

Thank you. We'll take our next question from the line of Elsie Sheng from CLSA. Please go ahead, Elsie.

Hi, Stephen. Thank you. Congratulations on the very good result. I have a quick question on the tax rates because I noticed that the tax rate in the first quarter is higher. So what should we look at the tax rate in the next quarter and also for the full year?

The Q1, I think the situation is special because even in the second half of last year and Q1, we paid dividends from the WUFIs to LISCO. And so we need to pay the withholding tax to the tax bureau. So it's drive the, the ETR up in Q1. So, you know, it was 27% and typically we'll pay 25% of the, the ETR. And going forward, I think we probably, we will do more, pay more dividends, you know, from WUFI to LISCO. So I think in this year, the ETR will be higher than that of last year were, were normal. But I think the, The reason is that, you know, we announced earlier today, you know, we raised the capital allocation to investors, you know, roughly $490 million as the capital allocation total.

So we need more dollars, and that's why it drives the ETR up.

Okay, I understand. It's very clear. Thank you.

Thank you.

Thank you. As a reminder, to ask a question now, please press star 11 on your telephone keypad. We now take our next question from the line of Timothy Chow from Goldman Sachs. Please ask your question, Timothy.

Hi, Stephen. Hi, sister. Thank you for taking my question. My question is regarding the K-9 new initiatives. When I look at the enrollment growth for this quarter, I do notice a pretty big gap between the non-academic tutoring and the intelligent learning system and devices, just wondering Can we use that gap to model the revenue growth gap between these two segments for the first quarter or the second quarter? And do we think that this gap may sustain, I think, going forward, given, I think, for the intelligence learning system, I think it's very good business. It's probably also margin of credit to you. Thank you.

I think the growth rate, the revenue growth of the junior high school business you know, it's a little bit faster than the primary schools as the business. Because, you know, first of all, you know, it's a little bit low base than the kids' business. And secondly, you know, we, you know, spend a lot of the efforts and resources in the last three, four years to open a new business of the middle school business. And I think, you know, the whole team, you know, contribute a lot of the, you know, provide a better product to the customers and the students love the new product. That's why the revenue growth is better. And so going forward, I think, you know, you know, we believe the revenue growth of the middle school business will be, you know, a little bit higher than the kids business. But, you know, as a whole, the K9 new business, you know, you saw our guidance for Q2 and even for the whole year. I think, yeah, definitely it's the revenue acceleration that's coming. And so, you know, as I said, in Q2, the K9 business, roughly 20% top line growth. And, you know, we do hope we can do better in the second half of the year.

Tim? Understood. Thank you. Thank you, Stephen.

Thank you.

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 Yang 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 your lines.