New Oriental Education & Technology Group Inc. (EDU) on Q3 2023 Results - Earnings Call Transcript
Operator Good evening and thank you for standing by for New Oriental’s FY 2023 Third Quarter Results Earnings Conference Call. At this time, all participants are in a listen-only mode. After managements’ prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.I’d now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao. Thank you. Please go ahead.Sisi Zhao Hello, everyone. And welcome to New Oriental’s third fiscal quarter 2023 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 Newswire 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 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.Stephen Yang Thank you, Sisi. Hello, everyone and thank you for joining us on the call. It’s our great pleasure to announce that upon the completion of the restructuring process and the introduction of our new businesses, we have managed to deliver a set of remarkable financial result this quarter, with both topline and bottomline beating the expectations.These results also bolstered by the macro trends of economy recovery as the pandemic subsides, business activities resuming and people [Technical Difficulty] their confidence in consumption, while we observe the demand for our products and services is gradually increasing. We have also achieved a GAAP operating margin and non-GAAP operating margin of 8.8% and 11.7%, respectively, for this year.Our key remaining business have continued to demonstrate solid recovery. In particular, our overseas test prep and overseas study consulting business have performed exceptionally and recorded continuous year-over-year revenue increments. Thanks to the strong COVID recovery across the globe.Our restructured business model, streamlined cost structure coupled with the emerging new business have not only helped us yield better than expected margins in this fiscal quarter, but also effectively diversify our business and enables us to offset certain historical seasonality.As we head into the fourth quarter, our solid profitability, strong performing remaining business lines and the emerging new business initiatives in this quarter reaffirm our belief in sustaining a healthy growth of our market share and pursuing innovative endeavors as we relentlessly see the encouraging environments of recovery.Now, I’d like to spend some time to talk about our performance across our many business lines and new initiatives to you in detail. Our key remaining business got a promising trend and the new initiatives have shown positive momentum.Breaking it down, the overseas test prep business recorded a revenue increase of 13% in dollar terms or 23% in RMB terms year-over-year for this quarter. The overseas test prep business [Technical Difficulty] up 5% in dollar terms, or 13% in the RMB terms year-over-year for this quarter. The adults and university students’ business recorded a revenue decrease of 3% in dollar terms or 5% increase in RMB terms year-over-year for this quarter.As mentioned in the previous quarters, we have also launched several new initiatives, which mostly revolve around facilitating student’s or around developments. I am glad to share with you that these new initiatives have continued to exceed our expectations by sustaining a positive momentum and generating meaningful profits to the Group.Further, the non-academic tutoring courses which we have offered [Technical Difficulty] focuses on cultivating students [Technical Difficulty] 218,000 student enrollment recorded in this quarter. The top 10 cities in China have contributed about 60% of the revenue of this business.Secondly, the intelligence learning system and device business, is a service designed to provide a tailored digital learning experience for students. It utilized our path to teaching experience, data and technology to provide a personalized targeted learning and exercise content. Our continuous investments in technology has fueled our comparative edge which drives our navigation amidst the chain of challenges from the past year.We have tested its adoption in around 60 existing cities, with 108,000 active paid users in this quarter and are delighted to see improved customer retention and scalability of this new business. The revenue contribution from the top 10 cities in China is around 60%.Meanwhile, the study tour and research camp business is an initiative that aims at offering students of K12 and university ages, the opportunity to fully leverage their free time, broaden the scope knowledge and cultivate subject interest. We have conducted the study tour and research camps in over 50 cities across the country. The revenue contribution from the top 10 cities in China is over 55%.Last but not least, our smart education business, which comprises smart teaching, smart hardware, science, technology and innovation education and other service serves local governments, education authorities, schools and kindergartens.Our educational material utilizes the smart study solutions, the self-learning system, which leverages the advanced technology, enables students to have complete control over the pace and the flexibility of the learning age where remote learning becomes increasingly mainstream.We also offer exam prep courses designed for students with junior college diplomas to obtain bachelor’s degrees. The above-mentioned business has been gaining wide traction and contributes the overall growth of the company and has attained instrumental profit since the last quarter.With regards to our OMO system, we continued our efforts in developing and revamping the platform and capture leveraging our educational infrastructure and technology strength all our remaining key business and the new business to provide more advanced and diversified educational service for our customers. During the reporting period, we invested $26.8 million for the -- in the quarter to further improve and maintain our OMO teaching platform.Now, I like to give you all an update on East Buy latest performance. During the reporting period, East Buy has proved itself as a successful business model with instrumental breakthroughs in both business operations and financial performance. The business has continued to offer a remarkable contribution to the company’s overall revenue and profit growth.East Buy continue to invest a substantial resources in improving product quality and variety under its private label Fun Too and its customer-centric strategy and content to caliber during the reporting period.East Buy remains rigorous in applying stringent standard in supplier selection to only source products of top notch quality and safeguards active collaborations with SF Express and the JD Group to continuously refine delivery process and service.To set itself apart from conventional live streams, East Buy also upholds its unique feature of integrating intelligence dissemination alongside product sales, with a vision to foster nationwide cultural and knowledge sharing.The series of the East Buy’s in-person live-streaming and participation in cultural documentaries and exhibitions have not only increased the traffic to East Buy’s platform and boosted sales, but also elevated audience engagement and awareness on the preservation of Chinese culture resources.It’s inspiring to see that East Buy has grown significantly since inception and has not only become a well-known platform for promoting healthy top quality and cost effective products with loyal customer base, but also out of the case appreciation of the country’s cultural assets for the betterment of the community.With regards to the company’s latest financial position, I am confident to share with you that the company is in a healthy financial status, with cash and cash equivalents, term deposits and short-term investments totaling approximately $4.3 billion.On July 26, 2022, the company’s Board of Directors authorized a share repurchase of up to $400 million of the company ADS or common shares during the period from July 28, 2022, through May 31, 2023. As of April 18, 2023, the company repurchased in aggregate of approximately 5.1 million ADS for approximately $157.6 million from the open market under the share repurchase program.Now, I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead.Sisi Zhao Okay. I’d like to walk you through the other key financial details for this quarter. Operating cost and expenses for the quarter were $687.7 million, representing a 9% decrease year-over-year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation expenses were $666.3 million, representing an 8.1% decrease year-over-year. The decrease was primarily due to the reduction of facilities and number of staff, as a result of the downsizing in the fiscal year 2022.Cost of revenue decreased by 0.9% year-over-year to $369.6 million. Selling and marketing expenses increased by 9.5% year-over-year to $102.6 million. G&A expenses for the quarter decreased by 25.4% year-over-year to $215.5 million. Non-GAAP G&A expenses which excludes share-based compensation expenses were $194.5 million, representing a 25.1% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses decreased by 28.6% to $21.4 million in the third fiscal quarter of 2023.Operating income was $66.5 million, representing 147.1% increase year-over-year. Non-GAAP operating income for the quarter was $87.9 million, representing 179% increase year-over-year. Net income attributable to New Oriental for the quarter were $81.6 million, representing a 166.7% increase year-over-year.Basic and diluted net income per ADS attributable to New Oriental were $0.49 and $0.48, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $95.4 million, representing 199.9% increase year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.57 and $0.56, respectively.Net operating cash flow for the third fiscal quarter of 2023 was approximately $190.5 million and capital expenditure for the quarter were $49.2 million.Turning to the balance sheet. As of February 28, 2023, New Oriental had cash and cash equivalents of $1,329.5 million. In addition, the company had $1,413.5 million in term deposits and $1,568.1 million in short-term investments.New Oriental’s deferred revenue balance, which is the cash collected from registered students for courses and recognized proportionally as revenue as instructions was -- were -- are delivered at the end of the third fiscal quarter of 2023 was $1,163.2 million, an increase of 19.8% as compared to $971.3 million at the end of the third fiscal quarter of fiscal year 2022.Now, I will hand over to Stephen to go through our outlook and guidance.Stephen Yang Looking ahead to the fourth quarter, which have historically been one of our seasonal peak quarter, our key remaining business are in the process of recovery with an opportunity of further taking up market share as the pandemic subsides.As you know, the company remains tireless in seeking new opportunities with greater flexibility and strong cash flows, and we are confident in embarking on all around journey that ensures sustainable growth.For our new businesses, the encouraging performance that this business had achieved in the previous quarters proved that we are heading towards the right direction. We firmly believe that business will sustain a healthy growth and generates meaningful profit to the company in the fourth quarter and going forward.With regards to the learning center and classroom space, we are planning to increase our capacity moderately, by which we expect a small quantity of the new learning centers will be opened and classroom areas of some existing learning centers will be expanded in a few major cities.In summary, we expect total net revenue in the fourth quarter of fiscal year 2023, March 1, 2023 to May 31, 2023, to be in the range of $801.8 million to $822.7 million, representing year-over-year increase in the range of 53% to 57%.As a profitability were recorded year-to-date has reaffirmed our success and dedication in turning a new page, we are also confident in achieving a satisfactory operating profit level in the full year of fiscal year 2023.To conclude, we are now taking multipronged operational excellence to accelerate our recovery and anchor sustainable growth. Simultaneously, we will cautiously research and anvil the potential in new market opportunity and try to apply to new technologies such as AI and the ChatGPT into our education and product offerings with a vision to uplift our innovative capability in pursue of profitable growth and increasing the operating efficiency.We stay committed to seek guidance from the cooperate with the government authorities in alignment with these efforts to comply with the relevant policies, as well as to further adjust our business operations as required. I must say that these expectations and forecast reflects our considerations of the latest regulatory measures, as well as the current and preliminary view, which is subject to change.This is the end of our fiscal year 2023 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for this. Thank you.Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.Felix Liu Hi. Good evening, Stephen and Sisi. Congratulations on the very strong results. My question is on your forward-looking guidance for the fourth quarter. I know the year-on-year growth outlook is very impressive. May I know what are the key drivers or the good performing business segments that are driving the fourth quarter growth? And if we look at slightly beyond the next quarter for the next fiscal year, what are the business segments that you expect the fastest growth in FY 2024? Thank you.Stephen Yang Okay. Thank you, Felix. I think we remain the confident and optimistic about the business performance in the Q4, the fourth quarter and the new fiscal year 2024. And firstly, I think, the macro trend of the economy recovery as the pandemic subsides, where we are seeing the people rebuild their confidence in consumption and we are also seeing our -- the products and the demand, the requirement of our -- the service is gradually increasing.And as for the different business lines, the remaining business such as the oversea related business, on demand side, we have seen the strong demand for oversea test prep and consulting business.And on supply side, we have seen some players disappear from the market. That means, we are facing less competition. So that’s way -- that’s why we are optimistic about the overseas related business going forward.And for our new business, I think, the encouraging performance in the Q3 -- in this quarter and even the last couple of quarters have shown the -- that we are heading towards the right direction. And we believe the business will be able to maintain the very strong the topline growth and generates more profit to the whole company -- for the company.And so, that’s why we guided the very strong topline growth in Q4 to be in the range of 53% to 57% in dollar terms. If you translate into RMB terms that would be much more higher. And as for the bottomline wise, I think, we are confident in achieving the greater profit -- operating profit in the Q4 and the new year.And next year, I think, the key growth driver will be the number one, if I run them the number wise should be the new business. As -- we started the new business, such as the non-academic courses since 15 months, 16 months ago and it grows very fast in the last -- in this year and also we believe next year it -- the growth rates will be very high. And Sisi, do you want to add something.Sisi Zhao Just one thing that if you look at Q4’s guidance, because if you look at historically last year, since Q4 is the first -- very first quarter that we did not have the -- we terminated the K9 academic tutoring, so that’s the first quarter to be like-for-like increase. So that’s why you compare with previous quarters, the growth rate is higher.Stephen Yang Thank you, Felix.Felix Liu Got it. That’s very clear. Thank you.Stephen Yang Thank you.Operator Thank you. Our next question comes from the line of Lucy Yu from Bank of America. Please ask your question, Lucy.Lucy Yu Hi, Stephen and Sisi. This is Lucy from BAM. I have one question on Tung-Jung Hsieh [ph]. So if we looking at the minority interest, it seems that the net profits for Tung-Jung Hsieh has decreased Q-on-Q. Could you please elaborate the reason behind that and how should we think about the earnings contribution from Tung-Jung Hsieh going-forward? Thank you.Stephen Yang I think, during this quarter, the East Buy has proved itself as a successful business model and this business contributes to offer the remarkable contribution to the company overall revenue and the profit margin.And this quarter, the East Buy continue to invest the substantial resources in improving the product quality and collaborates with the JD and the SF Express to provide better delivery services and so, they invested some money.And -- but I think I can’t to tell the detail of the margin analysis or the profit analysis, because of the compliance. And so, I think, next quarter, the Tung-Jung Hsieh management, East Buy management will share you -- with you guys more information in detail. Thank you, Lucy.Lucy Yu Understood. Thank you, Stephen.Stephen Yang Thank you.Operator Thank you. Our next question comes from the line of Candis Chan from Daiwa. Please ask your question, Candis.Candis Chan Great and hi, Stephen and Sisi. Thank you for taking my question and congratulations on the very strong set of results. My question is related to the new businesses. So, firstly, may I know the rough breakdown of our new initiatives revenue? And my second question is about the long-term -- longer term our business direction going forward, as now we see that our business has become more diversified on not only East Buy has done very well, even for new Oriental live team channels until you don’t also see very decent GMP trend. So I mean, founder, you and Michael also talked about to enter into the cultural tourism as well. So I am just wondering like what will be the key development areas for New Oriental in the following years? And I would like to know more about whether we have any plans to enter into the learning device market as well or some other new areas? Thank you.Sisi Zhao Okay. As for the new initiatives education nature, new initiatives, actually if you look at the revenue contribution. The biggest one is the non-academic tutoring. So this is the one that we are using our existing teaching resources and developing the content very, very quickly and also use our own existing channels to get students.So this year is actually the year one to largely develop this new kind of initiatives and we are seeing that the demand is very strong and also the retention and also the operating data are trending towards a very good situation and also we are confident for this business to continue to grow very nicely and also contribute more and more meaningful revenue and also get very good profitability as well.And also the second biggest education nature new initiative is the intelligent learning device business. Also, this is a good way to have students to do the self-study using our technology, get access to our teaching system using the hardware, their learning machine.So this is also something very new and it’s a new model and new product, but also gaining a lot of interest from our customers and we are also using our existing channel, like all the local schools and learning centers to rollout these new products and also get -- getting satisfactory retention and renewal of tuition fees and also this is a business that we are also feeling confident to contribute more and more revenue, and also have good profitability as well.And next to these two -- actually these two already contribute vast majority of our educational new initiatives. And we do have confidence in several other ones like the study tour business, campaign business, which actually have some negative impacts during the pandemic period in last one year, but we are confident for the future for this new initiative, because the high demands we are seeing from local markets.And also -- we also have very strong resources to develop this new business and together with several other ones that we have mentioned on the call. So we have -- we keep making efforts on developing all these new initiatives and hopefully all these directions can -- are all right and also contribute more and more meaningful revenue and profit, okay.Stephen Yang And let me answer the -- your last question about the cultural tourism. I think some of you may have read the online that Michael said that we are considering the expanding the cultural tourism business. I think it’s indeed a big potential in the country. And as you know, we do have a lot of teachers, some of them are star teachers.I think going forward by leveraging our teachers’ knowledge in general studies, cultural studies, and history. I think we believe we would be able to offer out one-off that can’t cultural tourism offering, combined with the entertainment and the educational -- the cultural education for all age groups, the kids, the college students and the, like, the old people, right, and for all ages.And in addition, I think, we may also be able to leverage our distribution channel, like, Tung-Jung Hsieh, East Buy and the other online streaming channels within the company. And also we do have a lot of schools and learning centers as the distribution channel for the new business. But now, we are still at a very early stage of the planning and evaluating the new business at the moment. So if we have any updates, we will keep you updated. Thank you.Candis Chan That’s very clear. Thank you.Operator Thank you. [Operator Instructions] Our next question comes from the line of Linda Huang from Macquarie. Please ask your question, Linda.Linda Huang Hi, management. This is Linda from Macquarie. My question is quite simple. My two question is regarding for our cash, because I still see that we keep pouring up the cash and already operating cash flow generation abilities also quite strong. So the reason to the share buyback, have we think about use the other ways such as like a special dividend to return to the shareholder? So that will be the first one. And the second question is regarding for all the non-academic tutoring business. So, Sisi, just mentioned about that when we also see very good retention rate. So what is this retention rate now and how does it compare to the regulation period? Thank you.Stephen Yang Thank you, Linda. And as you know we announced $400 million share buyback program last year. So till now we will purchase the $157 million and from the open market to repurchase a share back. And I think our thinking is about the evaluation. At this time, we should see the share buyback.Historically, sometimes we bought the share back, sometimes we will pay the special dividend. So this time, the share buyback, next time I think it depends on the decision made by the Board of Directors next year.And to the retention rates for the non-academic course. I think for the non-academic children’s’ the courses, the retention rate is over 70% in this quarter. It was solely were driving up the retention rate compared to before. And for the intelligence learning system devices, I suggest that you are using the renewal rates that’s over 60% already. Thank you, Linda.Linda Huang Thank you very much.Operator Thank you. Next we have a follow-up question from the line of Candis Chan from Daiwa. Please go ahead, Candis.Candis Chan Great. Hi, Sisi and Stephen. I just wanted to follow-up on the profitability, because you just mentioned for new businesses eventually they are now contributing very strong revenue and also the good profitability. Can you share a little bit more on the margins of the new businesses, particularly for the non-academic tutoring or the intelligence system devices? Thank you.Stephen Yang Yeah. I think the new business -- overall, the new businesses the margins over 10% already. We started businesses at the -- just a 15 month, 16 months ago. So it’s quite new business. And but we -- as we said, we made cautiously about the investment -- new investments of the new business. So it takes less time to make profitable for the new business. And I think we are -- I think we expect that the margin of new business were going up -- will go up in the Q4 and the next -- the new year and that’s okay. Was it clear?Candis Chan Yes. Yeah. That’s very helpful.Stephen Yang Thank you.Candis Chan Thank you.Stephen Yang Thank you.Operator Thank you. Our next follow-up question comes from the line of Felix Liu from UBS. Please ask your question, Felix.Felix Liu Thank you management for taking my question again. I just want to have a follow-up on the market landscape of non-academic tutoring. I know we have most of our revenue coming from the top 10 cities. Do you -- where do you see as the biggest growth opportunity ahead? Do you think it’s more about ramping up our market share in existing top cities or do you see a lot of opportunity in other cities, especially in lower tier cities for non-academic tutoring? Thank you.Stephen Yang I think, as I said, we are seeing the less competition for the downtime in -- the children business. Actually, we are taking market share in both the top tier cities and the low tier cities. And going forward, I think, almost all the cities for the growth will be fast. And Sisi, do you want to add?Sisi Zhao Yeah. Actually, now we are seeing the top 10 cities contributing, like, over 60%...Stephen Yang Yeah.Sisi Zhao … of overall revenue for this category and I think the growth will come from both taking continued expand and taking shares. It’s very, very early stage for this kind of new services and also the new market and where we definitely have opportunity to take market share in all the existing cities, especially these kind of major cities, top tier cities.And also our feeling is that the demand for this kind of non-academic tutoring is not only for higher tier cities, but also like all the existing cities where we are in, like, around 70, 80 cities that we still all have all the schools and learning centers and we use our existing educational infrastructure and also leveraging -- keep leveraging our brand name, educational brand name. We have the advantage to expand this kind of new business and the demand is very high.Felix Liu Okay. Got it. Thank you.Stephen Yang Thank you.Operator Thank you. [Operator Instructions] All right. Thank you. So we now approach the end of the conference call. I will now turn the call over to New Oriental’s Executive President and CFO, Stephen Yang for his closing remarks.Stephen Yang 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.Operator Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.EDU Ratings Summary
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Goldman Sachs Sees Attractive Valuation For New Oriental Education
Goldman Sachs analysts began coverage of New Oriental Education (NYSE:EDU), giving it a Buy rating and setting a price target of $85.00. They noted that New Oriental is a resilient and growing force in China's education industry, consistently gaining market share. With its wide range of educational services and successful investments beyond education, the company is seen as having a balanced revenue stream.
It's expected to be in the early stages of a multi-year period of scaling and profit growth, with revenue and EPS compound annual growth rates (CAGRs) of 23% and 44%, respectively, from fiscal 2023 to 2026. The valuation of New Oriental is considered attractive at 21 times its 2024 P/E, which is below its historical median of 23 times its 12-month-forward P/E from 2010 to July 2021.
