New Oriental Education & Technology Group Inc. (EDU) on Q3 2021 Results - Earnings Call Transcript
Operator: Good evening and thank you for standing by for New Oriental’s FY 2021 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 would now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao. Thank you, please go ahead. Sisi Zhao: Okay, thank you. Hello everyone, and welcome to New Oriental’s third fiscal quarter 2021 earnings conference call. Our financial results for the periods were released earlier today and are available on the Company’s website as well as on Newswire Services. Stephen Yang: Thank you, Sisi. Hello everyone, and thank you for joining us on the call. With the pandemic largely controlled in China, albeit it’s a small wave of outbreak in the northern part of the country, our business navigated the challenges and saw strong momentum in recovery. We are pleased to announce a set of financial results in the third quarter of this year that exceeds our expectations. Total net revenue was $1,190 million, representing a 29% increase year-over-year, which is a very encouraging reflection affirming the business strategy that we have taken during the difficult period. Our key growth driver, K-12 all-subjects after-school tutoring business, achieved year-over-year revenue growth of approximately 37%. Our U-Can middle school high school all-subjects after-school tutoring business continued its momentum with a growth of approximately 35%, while our POP Kids program recorded a growth of approximately 40%. Our overseas related businesses, despite being under continued pressure due to the uncertainty of the pandemic situation and travel restrictions around the globe showed strong resilience. Although the overseas test prep recorded revenue decrease of about 12% for the quarter, this result that is better than we expected while the overseas consulting and study tour business recorded a revenue increase of about 11% year-over-year which is a very positive result. Our industry-leading OMO system has been our core strategy since the start of the pandemic early last year and it has once again proved to be instrumental in this quarter. Sisi Zhao: Yes. Now, let me walk you through the key financial details for the third quarter. Operating cost and expenses for the quarter were US$1089 million, representing a 35.1% increase year-over-year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation expenses were $1074.6 million, representing a 36.3% increase year-over-year. Cost of revenue increased by 35.3% year-over-year to US$539.5 million, primarily due to increase in teachers' compensation for more teaching hours and higher rental costs for the increasing number of schools and learning centers in operation. The increase in teacher’s compensation would also put us in a greater position in keeping teaching talent who are the mostly prudent assets in the education industry. Selling and marketing expenses increased by 32% year-over-year to US$156.1 million, represent primarily due to the addition of marketing staff with the aim of executing our OMO strategy to capture the new market opportunity post COVID. G&A expenses for the quarter increased by 36.1% year-over-year to US$383.4 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses were US$383.3 million, representing a 40.3% increase year-over-year. Total share-based compensation expenses which were allocated to related operating cost and expenses decreased by 17.8% year-over-year to US$14.4 million. Operating income for was US$101.5 million representing a 13.5% decrease year-over-year. Non-GAAP operating income for the quarter was US$115.9 million representing a 14% decrease year-over-year. Operating margin for the quarter was 8.5%, compared to 12.7% in the same period of the prior fiscal year. Non-GAAP operating margin which excludes share-based compensation expenses for the quarter was 9.7% compared to 14.6% in the same period of the prior fiscal year. Net income attributable to New Oriental for the quarter was US$151.3 million representing a 9.9% increase from the same period of the prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.09 and $0.09 respectively. Non-GAAP net income attributable to New Oriental for the quarter was US$163.2 million representing a 9.9% increase from the same period of the prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental was $0.10 and $0.10 respectively. Net operating cash flow for the third fiscal quarter of 2021 was approximately US$23.3 million. Capital expenditure for the quarter were US$105.8 million, which were primarily attributable to opening of 142 facilities and renovations at existing learning centers. Stephen Yang: Looking ahead into the next quarter of fiscal year 2021, we are more clear about the recovery trend of the company’s near-term financial performance and the market opportunity over the long run. Our strategic focus and investment approach this year aim at improving the product quality, increasing the teachers’ compensation and enhancing our industry-leading system, which fully reflects our ethos of focusing on the essence of education. In view of the market competition and opportunity to take advantage of the post-COVID market consolidation, we firmly maintain a stable and balanced investment strategy that will improve the quality of our education service with aim to achieve a sustainable and long-term growth, as opposed to unhealthy short-term growth that often requires excessive investments and higher cost to acquire customers. As such, we will continue to focus on the following key areas: First, we will continue to expand our offline business. We aim to add around 20% capacity, including the new learning centers, and expanding classroom area of some existing learning centers to K-12 business in this fiscal year. We believe our capacity expansion will prepare us to further take market share from other players post-COVID, as we believe some smaller players without strong financial position and online class capability may not be able to sustain their business during the period. We expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with a strong financial capacity and fresh offline facilities enable us to further strengthen our market-leading position and penetration. Second, we will continue to leverage our investments into digital technologies and introduce our OMO system in more offline language training and test offerings, especially for our K-12 tutoring business and overseas test prep key business. The usage of our online tools and contents in our OMO system for all business lines throughout the whole network will be enhanced. It is our belief that the whole OMO teaching experience, we will place more efforts in developing the best teaching content and courseware and also developing more advanced training programs to our teachers. With all the above mentioned infrastructure in place, we will continue to pilot our OMO online initiatives in major cities with a high demand and higher operational efficiency and in the surrounding satellite cities. We believe that our OMO initiatives will be one of the – our growth engines to increase our customer acquisition post-COVID as we can quickly replicate in different parts of China, enabling us to capture the market consolidation opportunity. This revamped new business model will also contribute to our margin recovery when the pandemic is over and to further expand our long-term margin target. Here I have to highlight all of these OMO products are supported by our offline classes. These supplement each other in a hybrid format. Third, during the peak of the pandemic, we saw the necessary needs to ramp up the spending on different areas of the business aimed at migrating the challenges from the pandemic. Now, the business – now that the business readily recovers to a normal level. Going forward, we will closely the rise of the comp expenditure across the company to improve overall operational operating efficiency. Here I would like to stress that we have great confidence in the fundamentals of our business which we believe we will continue to remain strong. We have been increasing our investments in different strategies and we remain optimistic of the brighter prospects of our business and believe our investments now will bring us recovery trends in the long run. We're looking at the near-term and our expectations for the next quarter, we expect total revenue to be in the range of $1101.9 million to $1141.8 million, representing year-over-year increase in the range of 38% to 43%. To provide a breakdown of the expected top-line growth for the key business lines, K-12 business is expected to be – to grow in the range of 45% to 50%. Overseas test prep program is expected to grow at around 30%. Overseas study, consulting and study tour business is expected to be flattish and the growth of the Koolearn.com pure online education platform is expected to accelerate all year-over-year in dollar terms. To conclude, we are now taking all kinds of operational actions to boost the enrollments and classroom utilization for the spring semester and speed up the recovery of the business after the resumption of the schools and learning centers. We are confident that the demand for after school tutoring business are gradually picking up and in the process of trending toward the normalized level. I must mention that these expectations reflect our considerations of the latest pandemic situation and regulatory situation, as well as our current and preliminary view, which is subject to change. At this point, Sisi and I will take your questions. Operator, please open the call for this. Thank you. Operator: Your first question comes from Felix Liu from UBS. Please go ahead. Felix Liu : Good evening, management. Thank you very much for taking my questions and congratulations on the sound quarter. My question is on regulation. I know during the past few months the regulator has made some relatively strict comments after instituting regulation. So, could you share some color about your take on potential regulation direction? Will there be any tightening in terms of the new learning center license ASP as well as after considering scheduling? Thank you very much. Stephen Yang: Felix, it’s a good question. Actually, the government’s intention to tighten after the after-school tutoring business policy is not a surprise to us. It has been discussed for a long time since 2018. And we believe the regulations efforts will foster a positive environment for the whole market to improve the market standard and enhance the average teaching quality of the whole market. And I think we are aligned with the government policy and also and fully committed to work together with the government to build a better – the education market in China. I think the reform details are yet to be announced. So now we are able to provide a full analysis on our business impacts. But at this stage, we do not foresee any material impacts on top-line. And we believe that some of the main cost may impact in the short-term to meet the new requirements. As the largest provider New Oriental, I think we have the strong – to be compliant with the potential reform – the policy reform and at the same time, we expect China’s after-school tutoring market to further be consolidated. And we have the preparation for this and we are ready to further take more market share from the other players, Felix. Operator: Thank you. Our next question comes from Mark Li from Citi. Please ask your question. Mark Li : Hi management, congratulations on the very strong results. May I ask for the upcoming summer promotion what’s our plan or any target? Especially, I see maybe with the rising synergy with our OMO model? Thank you Stephen Yang: Yes. We started to do the summer promotions four, five years ago. And last year, we got over 1 million student enrollments from the summer promotion campaign and the retention rate after the summer was somewhere around 60% as was the good number. And this year, I think we will do the same thing. And we do expect to be summer promotion enrollments will be booming in the coming summer and we believe the retention rate after summer will be higher than that of last year. Simply, we are regarded to be doing enrollments from the summer promotion temporarily which is RMB400, RMB500 per course, actually it’s not a free course just like some of the department courses. And I think the summer promotions will bring up the whole year the enrollment growth and it will not hit the margins for the full year, Mark. Operator: Thank you. Our next question comes from Candis Chan from Daiwa. Please go ahead. Candis Chan: Hi, Sisi and Stephen. Thank you for taking my question and congratulations on this very strong set of results. So, my question is regarding the OMO. So can you share with us the revenue contribution of OMO currently? And also, what would be the percentage of OMO contribution in long run as you expect? And how would be the long-term margin profile for OMO? Thank you. Stephen Yang: You know, while the OMO model only contributed single-digits for the other revenue this quarter, that you know with the ability to work or reinforce later on some of that fees in China is unpromising. I think it will grow rapidly in the coming quarter and becomes a major driver to the – to our business growth. We expect the revenue contribution from the OMO next year will be similar around the 10%. And the margin profile of the OMO, if you ask me of the OMO model, the margin of the OMO model should be a little bit higher than the traditional offline classes. But we took the start of the OMO model since the last year so we still need more time to intensify the business model and the margin profile. We are so far so good. I think the progress of the OMO business as they expect – is better than we expected and the OMO model will contribute more and more revenue going forward in the next fiscal year and in the next two to three years. Operator: Thank you. Our next question comes from Tian Hou from T.H. Capital. Please ask your question. Tian Hou : Hi, Sisi, Stephen. Congratulations on the strong quarter. So, I see the overseas recover pretty nicely and also some data shows even though this year was a pandemic. However, the students applied to overseas schools, the number for that was really high. So, I wonder what’s the outlook for the overseas testing and consulting this part of the business, what’s the outlook for that? What do you see from today’s data? Thank you. Stephen Yang: Thanks, Tian. I think the overseas test prep, overseas related business recovery is coming. And revenue decline of the overseas test prep this quarter was 12%. Last quarter, the revenue decline was 29% and two months ago the revenue decline was 50% in dollar terms. So it’s showing the encouraging sign of the recovery of the overseas test prep business. And we gave that item. We gave that item in the Q4. The overseas test prep business will be increased by somewhere around the 30% - 3 0 percent. So, I think you will see the higher recovery of the overseas test prep business. And yes, I know we have the low base last year, but anyway, I think we are in the process of the recovery of the overseas test prep business. In the consulting business, this quarter we got it increased by 11% and last year we guided the revenue growth for consulting business will be flattish. Typically, Q4 will be the high seasonal of the overseas consulting business. But during the hard time, I think the performance of the overseas test prep and the consulting business, I think it’s much better than we expected several quarters ago. And last year, I believe the overseas business will grow to some extent for the fiscal year 2022. Thank you, Tian. Operator: Thank you. Our next question comes from Sheng Zhong from Morgan Stanley. Please ask your question. Sheng Zhong : Hi. Thank you for taking my question. So, my question is, looking at Beijing, I think the learning centers were opening slightly slow. So, any color on this government approval process? What the key items during the inspection now? And do you think also based on this what’s your – do you have capacity expansion plan for next year can be shared with us now. Thank you. Stephen Yang: So far, we opened almost all the learning centers except for Beijing City. And in Beijing I’ll tell, we had over 100 learning centers in Beijing, but we opened our super bigger learning centers now. And – but, we started more – we will open more learning centers or we will open up more learning centers in Beijing. And this year, we plan to open 20% of the capacity – plus for each quarter we open 17% and last year so far, we haven’t finished our budget of last year of the exact plan. So, I think the next earnings call in the next quarter I will share with our expansion plan. And so far, we want to change our expansion plan for the next year. But we still need more time to finalize our budget for next year. Sisi Zhao: Yes. Sheng Zhong, in addition to the Beijing situation, I want to remind you all that, because we have the OMO system, so that we have all the students doing the spring course online very smoothly actually even with the closure of the offline learning centers, but still all the students can take their classes online and the retention is very stable. And also you know overall the – since the pandemic, we are seeing Beijing’s situation is harder than other cities and revenue declined. But the reported Q3 quarter and forecasted Q4 quarter Beijing’s revenue trend is better – getting better and better. Operator: Thank you. Our next question comes from Alex Xie from Credit Suisse. Please ask your question. Alex Xie : Hi, management. Thank you for taking my questions and congratulations on very strong set of results. So, please comment on the margin trend in the next quarter and also for the next fiscal year. I think here we have a low base in the fourth quarter of last fiscal year. Thank you. Stephen Yang: Yes. I think the revenue growth recovery is in the process, this is the first. And on the market front, I think we do have the – I think we have the business opportunity in the market front. And we are doing the – several – the investments now, actually since the two quarters ago. We make the learning center expansion by 20% this year and we firmly raised the teacher salary twice this year. And also we spend more money on the R&D for the OMO. And also, we hired more people on the marketing team to do the marketing activities. So – but, I think the all the above mentioned expense will make us be fully prepared for the future. So, I think it will – I think it will impact the margin for the short-term. But I still believe the margin decline for the Q4 will be narrowed down compared to this quarter. And we are confident that we are able to deliver the margin expansion after the pandemic is over. And we don’t want to change the long-term margin guidance. Thank you. Operator: Great. Thank you. Our next question comes from DS Kim. J.P. Morgan. Please ask your question. DS Kim: Hi, good evening and congrats on the strong beat across the wood. Maybe differently term my question, can I just follow on your point that when you say margin decline was been narrowed versus this quarter, are you referring to last year or pre-COVID level? And I have my own question to this. Stephen Yang: I mean, it’s a year-over-year comparison. DS Kim: Year-over-year, okay. Thank you. Thank you. My question is regarding Koolearn and there seems to be some reports locally that there are some business adjustments et cetera and to see according to some media and could you help us understand what the key change in priority here plus potential margin impacts, say, for instance, Koolearn has been making about US$40 plus million operating losses every quarter in the past five, six quarters. But shall we expect the absolute size of the losses from US$40 million plus to narrow into fiscal year 2022 or shall we only think about the margin improvement, not the absolute size of the losses? Thank you again. Stephen Yang: DS Kim, I can’t say too much about the detailed numbers of the Koolearn. But I can share with you our strategy. Koolearn has spent more money on the R&D and marketing in the past quarter. But we started to control the marketing activities and money in this quarter. And going forward, I think we will be very cautious on the marketing spending. Okay? And as I said, our strategic focus is to invest more money on – to improve the teaching quality, we are training the teachers, we are hiring talented people rather than we having spending on the marketing. So, we call it this is the essence of the education. And so, I do believe the revenue of the Koolearn of next quarter will be accelerated. And the margin drive from the Koolearn to the EDU will be smaller and smaller going forward, Kim. Thank you. Operator: Thank you. Our next question comes from Lucy Yu from Bank of America Securities. Please ask your question. Lucy Yu : Thank you, Stephen. I have a follow-up question on the margins. So, in the fourth quarter, we have a relatively lower base and especially with the K-12 start to grow like 45% to 50%, should we expect some outbreak in that bridge of the K-12 side? And the K-12 margin should be improving right? So, what is actually driving the margin to be lower than the same period of last year? Thank you. Stephen Yang: Yes. We believe we have the leverage on the K-12 business, because of the – that business recovered very, very fast. And – but, as I said, we are doing some of the investment for the future like – we’d be lifting the future salary and open more learning centers and also to invest more on the OMO model. We hired a meaningful number of the marketing staff to do the ground promotion. And so, I think, you still need maybe more time to see the margin expansion, maybe one more quarter. But I will believe the margin profile in the Q4 will be better than this quarter, than Q3, Lucy. Operator: Thank you. Our next question comes from Jessie Xu from Nomura. Please ask your question. Jessie Xu: Good evening, management. Thank you for taking my question and congratulations for a very strong quarter and also very strong revenue target for 4Q. My question is also regarding offline normalization in Beijing. I want to understand what is our best scenario here and what about the worst scenario? And if Beijing learning centers cannot be opened before summer, what will be the impact to our summer promotional campaign? Thanks. Stephen Yang: So far, we finished the 17% expansion in the first three quarters of this fiscal year. So, we still need 2% to 3% new capacity in Q4 to get the point – to get the number of the 20% capacity expansion. I think we are prepared for the capacity – the capacity is prepared for the coming summer promotion. And don’t forget, we have the OMO model compared to last year. Our OMO model is much better than that of last year. And I think we will do some of the summer promotion by the OMO model. I think the online elements will help us to do the summer promotion around the traditional typical 100% offline to the format. Operator: Thank you. Our next question comes from Christine Cho from Goldman Sachs. Please ask your question. Christine Cho : Thank you so much. Congrats on the solid results this quarter, Stephen and Sisi. It seems that the capacity growth this quarter of 70% looks a bit faster and also it seems like you are targeting around 20% growth which seems to be kind of the low end of the 20% to 25% mid-term target. Just wondering if this is temporary or are there any lasting consideration such as for example like, OMO expansion plans or any regulatory concerns that you have there? Thank you. Stephen Yang: Yes, we aim at around 20%, in fact the expansion for the full year – fiscal year 2021 this year. And in the last year, we expanded 26% new learning centers. Typically, we ramp up the learning centers from zero to 100% by three to four years. So that means we have enough – the capacity to ramp up and also since the last year, we moved some classroom area of the overseas test prep to K-12 business, because we suffered the net of the impact from the overseas test prep business. And actually it will help us to prepare for the potential – the growth of the K-12 business. Operator: Great. Thank you. So we are now approaching the end of the conference call. I will turn the call back to New Oriental's Executive President and CFO, Mr. 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: Great. Thank you. So this conclude our conference for today. Thank you for participating. You may now all disconnect.EDU Ratings Summary
EDU Quant Ranking
Related Analysis
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.
