New Oriental Education & Technology Group, Inc.

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 2026 earnings conference call. Our financial results for the bid period were released earlier today and are available on the company's website as well as NewsWare services. Today, Stephen Young, Executive President and Chief Financial Officer, and I will share New Rental'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 Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public findings with ASCC. 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. I'm pleased to report a strong set of results for the second fiscal quarter of 2026. Our continued focus on operational efficiency and disciplined resource management has been a key driver of our solid performance and continues to support our path to sustainable profitability. We're delighted to see strong profit growth accompanied by a significant improvement in non-GAAP operating margin, up more than 4 percentage points. Again, exceeded our expectations. This quarter, total net revenue grew 14.7% year-over-year to 1.19% Non-GAAP operating income more than tripled, rising 206.9% to $89.1 million. Non-GAAP net income attributable to New Oriental increased 68.6% to $72.9 million. Our core business remains steady, and I'm pleased to share that our new initiatives are gaining traction and making meaningful contribution to the group's overall performance. For the second physical quarter, our K-9 new educational business and high school tutoring business reported accelerated year-over-year revenue growth, outpacing the previous quarter. Overseas related businesses have shown resilience delivered modest revenue growth despite the ongoing macroeconomy headwind, exceeding our earlier conservative expectations. Overseas tax practice recorded the revenue increase of 4% year-over-year. Overseas study consulting business recorded a slightly decrease of about 3% year-over-year. Our adults and university students business recorded the revenue increase of 13% year-over-year. As for our continued investments in new education initiatives, including non-academic tutoring and our intelligent learning system and devices, deliver solid, sustainable results. Revenue from this business grew 22% year-over-year this quarter. Our non-academic tutoring business has shown being rolled out to around 60 existencies. Market penetration has grown steadily Particularly across high-tier cities, the top 10 cities contribute over 60% of the revenue. As for our intelligence learning system and device business, that has been launched in around 60 cities. We're encouraged by improved customer retention and scalability of the new initiative. The top 10 cities contribute over 50% of this business. Turning to our integrated tourism-related business, our domestic and international study tours and research camp for K-12 and university students were held in 55 cities across China, where the top 10 cities contribute over 50% of the revenue. In parallel, our newly launched tourism offering for middle-aged and senior citizens have been well-received now available in 30 key provinces in international markets. We've expanded our product portfolio to include culture travel, China study tour, global study tour, and camp education, all designed to deliver enriching experience through culture and knowledge sharing and personal growth. We're now also exploring opportunities in the health and wellness sector for seniors. We'll patent We'll partner with the over 30 health and wellness spaces in locations such as Hainan, Yunnan, and Guangxi, piloting the segment with a light asset model. 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 service to our customers of all ages. A total of $28.4 million has been invested during this quarter to upgrade and maintain our OMO teaching platforms. Beyond OMO, we continue to focus on our venture in AI. 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 an industry leader, we're dedicated to driving long-term revenue growth through dual focus on products in innovation and operational efficiency. In upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investment in AI. Now, turning to the Easterby's performance, I'm pleased to share that during the reporting period, Easterby remained customer-centric and made strong progress in both product development and supply chain enhancement. Easter by has expanded beyond its original focus on fresh foods and snacks to offer a broader, more diversified product range. As of the end of the period, private label SPUs reached 801. New categories include seafood, health care products, kitchen condiments, meat, eggs, dairy, and personal care household and cleaning items. paper goods, home textiles, apparel, and underwear. These offerings are thoughtfully created to meet customers' growing demands to health, quality of life, and convenience. They've contributed to both sales and profit growth to the group. While further optimizing its product mix, beyond expanding SPUs, East By also focused on products iteration, cost efficiency, and targeted marketing to build blockbuster products that resonate strongly with the customers. At the same time, Easterby began exploring offline channels, leveraging strong brand recognition, and new oriental learning center network. With the vending machine model now profitable in select cities, we plan to scale this initiative nationwide. All in all, We are pleased to see East Dubai refocused and back on track, making a positive contribution to the group, both top line and bottom line. We expect East Dubai to contribute more revenue and profit to the group in future, while continuously enhancing our brand influence. Now, I will turn the call over to Cici to share with you about the key financials. Please go ahead, Cici.

Thank you, Stephen. Let me now work you through the key financial highlights for the quarter. Operating cost and expenses for the quarter were $1,125.1 million, representing a 10.4% increase year-over-year. Cost of revenues increased by 11.8% year-over-year to $556.9 million. Selling and marketing expenses decreased by 1.1% year-over-year to $194 million, G&A expenses for the quarter increased by 15.2% year-over-year to $374.3 million. Total share-based compensation expenses, which were allocated to related operating cost expenses, increased by 156.8% to $21.4 million in the second fiscal quarter of 2026. Operating income was $66.3 million, representing a 244.4% increase. year-over-year. Non-GAAP income from operations for the quarter was $89.1 million, representing a 206.9% increase year-over-year. Net income attributable to New Oriental for the quarter was $45.5 million, representing a 42.3% increase year-over-year. Basic undiluted net income per ADS attributable to New Oriental were 29 cents and 28 cents, respectively. Non-GAAP net income attributable to New Oriental for the quarter were $72.9 million, representing a surge of 68.6% year over year. Non-GAAP basic undiluted net income per ADS attributable to New Oriental were $0.46 and $0.45, respectively. Net cash flow generated from operation for the second fiscal quarter was approximately $323.5 million, and capital expenditure for the quarter were $23.7 million. Turning to the balance sheet, as of November 30, 2025, New Oriental had cash and cash equivalents of $1,842.9 million. In addition, the company had $1,609.9 million in term deposits and $1,875.2 million in short-term investments. New Oriental deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as a service or goods were delivered at the end of the second quarter of fiscal year 2026, was $2,161.5 million, an increase of 10.2% as compared to $1,960.6 million year-on-year. Now, I'll hand over to Stephen to go through our outlook and guidance.

Thank you, Susie. We're very encouraged by the strong results we've achieved this quarter and in the first half of fiscal year 2026. These outcomes give us greater confidence in our operational resilience and growth trajectory. Looking ahead, we will continue to pursue a balanced approach to revenue and profitability growth. We remain committed to cost of discipline and sustainable profitability across all business lines. At the same time, we will take a thoughtful, strategic approach to capacity expansion and hiring, ensuring that growth does not come at the expense of quality. We plan to deepen our presence in cities that demonstrate strong top and bottom line performance while continuing to manage the resource carefully. We will closely monitor the pace and scale of the new openings, aligning them with operational needs and financial performance throughout the year. Given our positive momentum, including the healthy growth of our K-12 business and the recovery of East Dubai, we are now in a more optimistic position regarding our business outlook. We expect the total net revenue for the group, including East Dubai, in the third quarter of the fiscal year 2026, December 1st, 2025, to February 28th, 2026, to be in the range of $1,313.2 million to $1,348.7 million, representing year-over-year increase in the range of 11% to 14%. As the full fiscal year 2026, we are addressing our total net revenue guidance for the group to be in the range of $5,292.3 million to $5,488.3 million, representing a year-over-year increase in the range of 8% to 12%. These expectations reflect our current outlook. Taking into account recent regulatory developments, as well as our preliminary view of market conditions, they remain subject to change. I would like to give you an update on our shareholder return plan for fiscal year 2026. In October 2025, we announced that, pursuant to the previous adopted three-year shareholder return plan, the board of directors had approved an ordinary dividend of 0.12 US dollar per common share or 1.2 US dollar per ADS to be distributed in two installments as part of the shareholder return for the fiscal year 2026. As of today, the first installment has been fully paid to shareholders and ADS holders. Details of the second installment will be determined and announced in due course. Additionally, we also announced a share repurchase program in which new rental is authorized to repurchase up to $300 million of its ADS or common shares over the subsequent 12 months. As of January 27th yesterday, we had repurchased a total of approximately 1.6 million ADS for a great consideration of approximately $86.3 million from open market and this share repurchase plan. To conclude, New Oriental remains firmly committed to sustainable growth, delivering high quality offerings to our customers and creating long-term value for our shareholders. We also continue to work closely with government authorities across province provinces and municipalities in China to ensure full compliance with the relevant policies, regulations, measures, and to adjust our operations as needed in response. This is the end of our fiscal year 2026 Q2 summary. At this point, I would like with Cici to open the floor for questions. Operator, please open the call for this. 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 your name to be announced. To cancel requests, you can press star 11 again. Welcome to the first question.

Hi, good evening, Stephen and Sissy. First of all, congratulations on the very solid second quarter results as well as on the lift to your four-year guidance. My question is on your guidance. Commencement provides some breakdown on the segment growth as much as you can. I'm keen to understand the key drivers for the lift to your four-year guidance. Thank you.

Thank you, Felix. Let us start with this quarter's revenue growth analysis. We're very pleased to see the acceleration, what I mean is the growth of the K-12 business. As you know, I think our strategy this year is to improve the product quality and service quality. We have seen good results in Q2. we have seen the higher student retention rates and the better feedback from the customers. This is the K-12 business. In Q3, I think the K-12 business will grow somewhere around 20% year-over-year or more. Let's say it's in 20% plus year-over-year growth. Overseas, Yeah, overseas related business, yeah, we meet some of the revenue growth pressure. But I think, you know, we, in the Q2, you know, we still got the top-line growth of the overseas test prep by, you know, 4% of your growth. And, you know, we're quite resilient. And actually, I think we are taking the market share from the market. And so in the Q3, let's say in the second half of the year, so I don't believe the revenue growth will be flattish of the overseas related business. It's still a drag, but I think we will do as good as we can. College business, let's say the 14, 15% top line growth. And yeah, this is a breakdown, and so In the second half of the year, I think we're quite positive about the revenue growth and even the higher margin. Because things last year, March 2025, we started to the cost control. And I think we have done a great job. And going forward, we'll do more on cost control. So it will improve the margin expansion going forward.

in the second half of the year and the year after.

Okay, this is great progress and thank you.

Thank you.

Moment for the next questions. Our next question comes from Alice Chai of Citibank. Please go ahead.

Good evening, management. Thank you for taking my questions and congratulations on the results. We heard about the business unit integration between your test plan and consulting units. Then I have two quick questions. First, what is the expected margin expansion from this merge and can it effectively offset the headwinds in the US market? Second, regarding efficiency, how much reduction do you expect in the customer cost acquisition? And what is your target for the cross-selling rate? Thank you so much.

Yeah, I think, yeah, I saw the news, you know, of the emerging of the overseas test wrap business and the consulting business. And as you know, before the merging, overseas test wrap, you know, the unit and the consulting business, you know, provide the service to their clients, respectively. And each site has their own management teams, teachers, marketing staff, admin staff. And I think, you know, we, now we put it together. You know, we merged Overseas Test Labs and Consulting Business. And I think the merge, so let's say the restructuring aims to provide a customer with a one-stop service. And I think we will provide even the better service to the customers. And also to be reduced absolutely some cost and expenses because we put it together and I think one person can do more jobs even stronger than before. So let's wait till the next quarter earnings call. I will share with you about the how much cost we can save or even how much can get more revenue or improve the top-end growth and to save some cost to help the margin profile. Alice, thank you.

Okay, thanks. It's very helpful.

One moment for the next question.

Next question comes from Lucy Yu from Bank of America Securities.

Please go ahead.

Thank you. Hi, students. Congratulations. So my question is on the margin expansion in the second quarter, which has been more than one percentage point. Could you please elaborate on the margin expansion? What is driving that? And how should we think about the margin expansion magnitude in the second half? Thank you.

Oh, yeah. Okay. Yeah, Lucy, I think your question is about margin. Yeah, as I said, even though we made some margin drag from the overseas related business, but we still got the group margin expansion in Q2. The non-GAAP OP margin was increased by 470 basis points over the year. I think the margin expansion was mainly driven by the better utilization, the higher operating leverage, and cost control. and also the profit contribution from the Easter buy. And I think we will continuously focus on operational efficiency and discipline resource management, let's say in a cost control. We control the learning center expansion plan, and we control the marketing expenses. You saw the numbers, the results. And I think going forward, even the Q3 and the Q4, in the second half of the year, we will get the margin extension. I don't want to give the detail guidance, because typically we don't give the margin guidance.

But we are quite optimistic about the margin extension in the second half of this year.

Lucy? Thank you so much, Stephen.

Thank you. For the next question.

Next question will come from the from Citix. Please go ahead. Good evening.

Thank you for taking my question and also congrats on the strong results. So my question is about the overseas business. As you mentioned that the overseas business has earned like 4% of growth rates. Actually, the market condition is quite challenging. So just wondering the future trends and the main reasons for this overseas business that can get such good results. Thank you.

Yeah, I think, yeah, as I said, you know, the overseas business, you know, needs some impacts of the economy environment, you know, outside. But I think our team have done a great job. They have shown very resilient in the first half of the year. And we believe they will take in the more market share from all the competitors. And also, I think the group gave the team more support than before, because they need some pressure. We should help them to do more jobs. And going forward, in the second half of the year, I think I just want to give the guidance that FLAT is a little bit of a job, as low single-digit growth, because the outside environment has no change. But I believe our team will do a great job, as they did in the first half of the year.

Thank you, Steven. For the next question.

Our next question comes from Diaz Kim of JP Morgan. Please go ahead.

Hi, Stephen. Hi, sister. Congrats on the great quarter, and I hope that this is first of many, many more quarters to come. Before I actually ask my question, can I double-check on Lucy's earlier question on margin? Can we talk about how much of the margin expansion in Tokyo, not the forward-looking, but the Q came from core education versus EastBuy to the extent that you can elaborate, and I have my question after this.

Yeah, actually, EastBuy also reported their first half results, so you can roughly calculate. So if you take out EastBuy, all the rest together, margin expansion is roughly about 300 bits margin expansion year over year.

Thank you. And my actual question is for... Our new education business is great that we printed more than 20% growth. What do you think, in your view, is sustainable growth rate for the segment from here? Say, assuming stable 10% capacity expansion for next three to five years, say 10% for the group capacity expansion, maybe that means k9 capacity can grow maybe 15 percent per annum and then we can add on maybe four or five percent of asp growth and couple more points for efficiency gain or utilization gain if you will does that mean that can we continue to expect say 20 plus growth not i'm not talking about second half but like next few years based on this level of capacity expansion or you know the growth

algorithm or formula can change versus what we had in the past yes i think that is a great question you know we change our strategy you know uh before the starting of this physical year you know we uh you know we slow you know we slow down the learning center expansion from 20 30 you know the year uh the year before to let's say the 10 so that means we put more focus on the quality and quality improvement. So I think all the business line, even the high school and the K-9 business, the student retention rate is getting higher. I think it's even better than we expected. And also, that means we got the better word of mouth. So we don't need spend like crazy marketing expenses to acquire the new student enrollment. That means we get the new student enrollment by better word of mouth. And so I think in the second half of the year, we got into the 20% plus the top-line growth of the K-12 business. I believe we will keep the sustainable growth even in the year after. Because the better quality and also even the competitive edge of new rental, I think we we deserve to get more student, new student enrollment. You know, we cut some market expenses. And also, you know, definitely we will see more leverage because, you know, we just opened, let's say, 10% new learning centers, but the revenue growth is somewhere around 20%. So you will see the higher utilization rate and the higher margin of the K-12 business.

Yes.

Thank you so much, sir. And I hope to see that coming through in many more years to come. Thank you.

Yeah. And also, you know, I want to add one point to CECI's comments. You know, in the Q3, I don't believe we got the margin improvement from both core business and Easterby.

Thank you, sir. Thank you for the questions. As a reminder, to ask questions, please press star 11 and wait for our name to be announced. Our next question comes from Timothy Chao of Goldman Sachs. Please go ahead.

Great. Hi, Stephen. Congrats on the study results. So my question is that I recall in the last quarter results, you mentioned that I think about the some of the new AI initiatives that you are launching. Just wondering if you can share any tangible results or any updates on the AI investments that you are making. For example, the new course format that you launched probably in the late last year. Just wondering if there's any progress on that.

Thank you. I think, you know, in the last three months, I think our team, you know, have done a lot on the new offerings of the new AI product. And I think we need maybe one quarter to testify, you know, the new offerings. And also, you know, and I believe it will contribute more revenue going forward. And one more point is, you know, even I think the AI technology help us on the existing product. You know, you saw the higher student retention rate. yeah, we put more focus on the product quality and even the service quality. But I do believe the AI helps us to get even higher the student retention rate going forward. And also the AI helps us to get more efficient efficiency to save some expenses and cost. So AI helps the whole group, three points, new offerings and the existing products uh improvement and the cost facility so you know i think we should spend a little bit more on ai technology but it's not uh it's not that much and we'll control the the the whole uh the spending but i think we will uh bear more fruit from the ai investment going forward got it thank you stephen

One moment for the next question. Our next question comes from Elsie Sheng from CLSA. Please go ahead.

Hi, Stephen. Congratulations on the results. I have a follow-up question on the margin expansion because if we look into the details, In the second quarter, the gross margin is going up and also the marketing expense ratio is also going down. And because I noticed that you earlier mentioned that you have initiated cross-department customer service system to improve the service efficiency and also reduce the customer acquisition cost. So I wonder, is the decrease in the marketing expense ratio related to this initiative? And if it's so, how do we expect the impact of this going forward? Do we expect this trend of lower marketing expense ratio to continue in the next few quarters? Thank you.

I think the situation will continue because, you know, yeah, first of all, we put more focus on the product itself rather than spend more money on marketing. But growth is still very healthy. And also, as you said, we set up a new customer service department, and that means I think we will bring the information within New Oriental, even the old departments, overseas, consulting, college, K-12 business, high school, K-9, and even other business, and the tourism business that needs to buy. So I think this new department uh will bring us you know more traffic even within new oriental customer resources so this is a i think that is a very good tool to save uh more marketing expenses and also you know we we just set up the uh 10 new learning center this year so we don't need to spend more money on marketing and yeah even in the q1 you know some i know some competitors you know, did some summer promotion or even the free course in the summer. But, you know, we are happy to see more students from our competitors came back to New York Rental in autumn. So that means, you know, our core competency where the product quality turns to be better. And going forward, I think the selling marketing expenses as the percentage of the revenue will go down going forward, even the second half of the year and the year after.

Thank you. It's very helpful.

Thank you. Thank you for the questions. We're now approaching the end of the conference call. I'll now turn the call back to New Arrentals Executive President and CFO, Mr. Steven Yang, for his closing remarks.

Again, thank you for joining us today. If you have any further questions, please do not hesitate contact me or any of our investor relations representatives. Thank you. Thank you very much.

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