New Oriental Education & Technology Group Inc. (NYSE:EDU) Q2 2025 Earnings Conference Call January 21, 2025 8:00 AM ET

Company Participants

Sisi Zhao - Investor Relations Director
Stephen Yang - Executive President and Chief Financial Officer

Conference Call Participants

Yiwen Zhang - China Renaissance
Felix Liu - UBS
Lucy Yu - Bank of America Securities
Timothy Zhao - Goldman Sachs
Elsie Sheng - CLSA
DS Kim - JPMorgan
Alice Cai - Citi

Operator

Good evening and thank you for standing by for New Oriental's FY 2025 Second Quarter Results Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session.

Today's conference is being recorded. If you have any objections, you may disconnect at this time. I 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

Thank you. Hello, everyone, and welcome to New Oriental's second fiscal quarter 2025 earnings conference call. Our financial results for the period were released earlier today and are available on the company's website as well as on 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 US 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. We're pleased to inform you that New Oriental has achieved a healthy growth in this quarter's financial performance, which has surpassed our expectations.

Revenue grew 19.4% year-over-year and total net revenues excluding revenues generated from East Buy's private label products and livestreaming business increased by 31.3% year-over-year. We're encouraged by the continued growth of our new ventures, which have bolstered company's revenue. We believe they will further progress positively moving forward.

New Oriental's bottom-line performance for our core education business has also shown solid returns. To better reflect New Oriental's core education business, we have exclude the operating margins generated from East Buy for this quarter. Our operating margin and non-GAAP operating margin reached 2.8% and 3.2% respectively.

Results from these substantial efforts invested in our offerings and platforms that have been shown effective. Our commitment to sustaining healthy profitability and market share remains strong as we continue to aim for long-term value creation for our customers and shareholders. Now, I'd like to spend some time to talk about the quarter's performance across our remaining business lines and new initiatives to you in detail. Our key remaining business have showcased a promising trend in adjacent to positive momentum across our new businesses.

Breaking it down, the overseas test prep business recorded a revenue increase of 21% year-over-year for the second fiscal quarter of 2025. The overseas study consulting business reported a revenue increase of about 31% year-over-year for the second fiscal quarter of 2025. The adults and the university students business recorded a revenue increase of 35% year-over-year for this quarter.

At the same time, our ongoing investments in new education business initiatives primarily focused on facilitating students all around development have also continued to thrive with steady growth fueling the company's momentum. Firstly, the non-academic tutoring business, which we have now expanded to around 60 existing cities focused on cultivating students' innovative ability and comprehensive quality. We have attracted high interest with a total approximately 994,000 student enrollments reported in this quarter.

The top 10 cities contribute over 60% of this business. Secondly, the intelligent learning system and device business utilized our path to teach experience data technology to provide personalized and targeted learning and exercise content, thereby improving students' learning efficiency. We have tested the adoption of this new business in around 60 existing cities and are pleased to see improved scalability.

The revenue contribution of this business from top 10 cities in China is around 50%. Our smart education business, educational materials and digitalized smart studies solutions have continued healthy development. In summary, our new education business initiatives have recorded a revenue increase of about 43% year-over-year for the second quarter. In addition, our newly integrated tourism related business line, which includes our rooted study tour and research camp business for K-12 and university students as well as our tourism business serving middle aged and senior audience have collectively recorded revenue increase of 233% year-over-year for the second quarter.

Study tour and research campuses are now operating in around 55 cities across the country with the top 10 cities in China offering over 50% of the revenue share of this new business. We're also facilitating a number of top-notch tourism offerings to all age groups, including the middle aged and elderly individuals across 30 featured province in China and globally. With regards to our OMO system, we have persisted in revamping our platform, leveraging our educational infrastructure and technology strengths in order to provide advanced diversified education service to our customers of all ages.

During this quarter, we invested $30.9% million to improve and maintain our OMO teaching platform, which enhance users' experience and supports the growth of our education offerings. Now let me share some updates on East Buy's performance. During the reporting period, East Buy expanded its product to range from fresh foods and snacks to diversified portfolio, launching 600 SKUs in private label products by November 2024.

This includes healthy care food, pet food and new Chinese style clothing contributing to approximately 37% of total GMV for the six months ending November 2024. We're pleased to see its multiplatform strategy has expanded its consumer base and increased brand awareness through enriched livestreaming products and online shops on platforms like Mini Program, WeChat Mini Store, Tmall, JD, Pinduoduo and RedNote. This multichannel approach has driven rapid growth with private label products.

Simultaneously, East Buy has began exploring offline channels with vending machines in New Oriental's learning centers. The company's app strategy has advanced quickly offering daily necessities and high quality products, leading to increased user contributions and strong loyalty. With regard to the company's latest financial position, I'm pleased to share that the company is in a healthy financial status with cash and cash equivalents, term deposit and short-term investments totaling approximately $4.8% billion.

On August 19, 2024, New Oriental announced its Board of Directors approved a special dividend of $0.06% per common share or $0.6% per ADS to holders of common shares and ADS of record as of the close of the business on September 9, 2024, Beijing and Hong Kong Time and New York Time respectively. The payment date was on or around September 23, 2024 for holders of common shares and September 26, 2024, for holders of ADS. The total cash dividend distributed was approximately $100 million.

Now, I would like to take the opportunity to highlight that the company's Board of Directors approved a share repurchase program in July 2022 under which the company is authorized to repurchase up to $400 million of the company's ADS or common shares through the next 12 months. The company's Board of Directors further approved to extend the effective time of the share repurchase program to May 31, 2025 and increasing the aggregate value of shares that the company is authorized to repurchase from $400 million to $700 million. As of January 20, 2025, the company repurchased an aggregate of approximately 11.2% million ADSs for approximately $542.8% million from the open market.

Now, I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead.

Sisi Zhao

Thank you, Stephen. Now I'd like to share our key financial details for this quarter. Operating cost expenses for the quarter were $1,019.4% million, representing a 20.2% increase year-over-year. Non-GAAP operating cost expenses for the quarter, which excludes share-based compensation expenses were $1,011.1% million, representing a 23.5% increase year-over-year.

The increase was primarily due to the cost and expenses related to the accelerated capacity expansion for education businesses and newly integrated tourism related business. Cost of revenue increased by 17.9% year-over-year to $498.3% million. Selling and marketing expenses increased by 26.6% year-over-year to $196.1% million. G&A expenses for the quarter increased by 20% year-over-year to $324.9% million. Non-GAAP G&A expenses, which exclude share-based compensation expenses were $319.4% million, representing a 24.7% increase year-over-year.

Total share-based compensation expenses, which were allocated to related operating cost and expenses decreased by 71.8% year-over-year to $8.3% million in this fiscal quarter. Operating income was $19.3% million, representing a 9.8% decrease year-over-year. Non-GAAP income from operations for the quarter were $27.6% million, representing a 45.8% decrease year-over-year.

Net income attributable to New Oriental for the quarter was $31.9% million, representing a 6.2% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.20% and $0.19% respectively. Non-GAAP net income attributable to New Oriental for the quarter was $35.5% million representing a 29.1% increase year-over-year.

Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.22% and $0.22% respectively. Net cash flow generated from operation for the second fiscal quarter of 2025 was approximately $313.3% million and capital expenditure for the quarter were $60.6% million. Turning to the balance sheet.

As of November 30, 2024, New Oriental had cash and cash equivalents of $1,418.2% million. In addition, the company had $1,443.2% million in term deposits and $1,951.4% million in short-term investments. New Oriental's deferred revenue, which represent cash collected upfront from customers and related revenue that will be recognized as the service or goods are delivered at the end of the second quarter of fiscal year 2025 was $1,960.6% million, an increase of 19.2% as compared to $1,645 million at the end of the second fiscal quarter of 2024.

Now, I'll hand over to Stephen to go through our outlook and guidance.

Stephen Yang

I repeated the paragraph that Sisi mentioned of the net income. Net income attributable to New Oriental for the quarter was $31.9% million, representing a 6.2% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.2% and $0.19%, respectively.

About the outlook and fiscal year '25 Q3 guidance. In light of the current economic uncertainties, we remain committed to achieving steady and sustainable growth for our core educational business in the coming quarter. Our confidence is bolstered by the solid performance of our diverse business lines and our extensive educational resources.

We're dedicated to diligently adhering to the latest guidance from the Chinese authorities, including the recently announced National Action Plan with the goals of establishing a high quality education system and unlocking potential across our business lines and innovative efforts. To balance revenue and profitability growth, we will carefully manage our capacity expansion and hiring strategies to support the development of our education business in the rest of this year. We plan to follow our euro pace to increase capacity with a focus on new offerings in cities with a robust local economy.

Simultaneously, we will continue to invest in developing our emerging tourism related ventures. The foundation we have established and the progress we've achieved so far strengthen our confidence in our future performance. We expect total net revenue excluding revenues generated from East Buy in the coming quarter, December 1, 2024 to February 28, 2025 to be in the range of $1,007.3% million to $1,032.5% million, representing year-over-year increase in the range of 18% to 21%. The projected increase of the revenue in our functional currency, renminbi is expected to be in the range of 20% to 23% for the third quarter of the fiscal year 2025.

To conclude, New Oriental is dedicated to delivering premium offerings to our customers while pursuing sustainable growth through a strategic blend of capabilities. We'll continue investing in research and applications of advanced technologies, including AI and ChatGPT to enhance our educational and product offering. Our aim is to strengthen our competencies, driving growth and operating efficiency.

We will also continue to seek guidance from and cooperate with the government authorities, comply with the relevant policies, guidelines and any related, including the regulations measures and adjust our business operation as required. As always, we will work diligently to enhance the nation's education level to strengthen its leading position so as to unveil further potential across all our business lines and realizing our vision. This is the end of our fiscal year 2025 Q2 summary.

At this point, Sisi and I like to open the floor for questions. Operator, please open the call for these. Thank you.

Operator

Thank you. The question-and-answer session of this conference call will start in a moment. [Operator Instructions] One moment for the first question.

Our first question comes from the line of Yiwen Zhang from China Renaissance. Please go-ahead.

Yiwen Zhang

Yes, perfect. Thanks for taking my question. So my question is about our Q3 revenue guidance.

I think you mentioned in RMB term is 20% to 23%. It seems a bit decelerating. Can we understand more which part of the business is actually driving that trend and how should we think about the rest of the year. Now also in light of this new guidance, how should we think about the learning center expansion pace as well.

Thank you.

Stephen Yang

Thank you, Yiwen. Yes, about the revenue guidance of Q3. Yes, we gave the guidance of the year-over-year growth in the range of 20% to 23% in RMB terms.

I must mention that we're using the conservative method to give the guidance of Q3. And the reasons for a little bit of slowdown in the revenue growth in Q3 are as follows. Number one, the uncertainty of the macroeconomy situation has a certain active -- negative impact on the demand of our high end education business, such as the overseas test prep and related business and some one-on-one business, which is also high-end business.

And number two, with the rapid recovery of the educational business in the last two to three years, I think the revenue base is gradually increasing. So I think the revenue growth in the Q3 will be a little bit slowdown. And number three, I think the impact of the exchange rate is approximately around the three percent point.

That's why we give the guidance in the range of 18% to 21% in dollar terms. And I think, yes, even though we are facing to the uncertainty of the macroeconomy situation change, but I think the management will try our best to grow the revenues. And so we expect to beat the guidance we gave to the investors in Q3.

And I think on the other hand, I think we will care more about the balance between the revenue growth and the operating efficiency at the same time for the long-term. As for the expansion plan, this quarter, we opened this quarter, the expansion, in Q2, the expansion was 5% Q-on-Q in Q2. And for the whole year, we have the second half of the year left. And in the whole year, we plan to open 20% to 25% of the new learning centers. And I think we only opened the new learning centers in the cities that the last year top line per -- top line and bottom line performance well and we allow them to open more learning centers.

And but we still care more about the utilization of the new learning centers. So, yes, that's why I said we care more about the top line growth and the margins. Thank you, Yiwen.

Operator

Thank you for the questions. Next question is from the line of Felix Liu from UBS. Please go ahead.

Felix Liu

Good evening and thank you management for taking my question. May I just follow up on one of the issues that you mentioned, which is macro impacting the higher end business. Do you see any potential risk to your more mass market services such as the new education businesses.

And can management comment on the competition landscape that you're observing on the ground across your business lines. Has competition played into a role in the growth deceleration. Thank you.

Stephen Yang

I think for the new business, we still guide the Q2 guidance about 40% in our mid-term year-over-year growth. And so it is still very strong. And as for the competition, yes, we have seen some a little bit strong competition in the market.

But I think we are fine. So we're still taking more market share from the market. And because of the base in the Q3, we guided 40% our mid-term year-over-year growth because of the high base, Felix.

Felix Liu

Clear. Thank you.

Operator

Thank you for the questions. One moment for the next question. Next question comes from the line of Lucy Yu from Bank of America Securities.

Please go ahead.

Lucy Yu

Thank you. So, Stephen, I remember earlier you gave the full year guidance for '25 of 30% revenue growth, excluding East Buy. So given that the next quarter, you are forecasting around like 21% to 23%.

So spending in that fourth quarter, we have to accelerate our revenue expansion -- revenue growth or we are aiming for a slower growth this year. Thank you.

Stephen Yang

Yeah, as I said, the uncertainty of the macro -- the economy situation, I think, we need one more quarter to see to give you the Q4 guidance. So I think for the whole year, yes, we are facing a little bit slowing down in Q3. And but for the whole year, I think, in RMB term, we still got the top line growth of year-over-year growth by less than 25% in RMB terms or more for the whole year guidance, Lucy.

Lucy Yu

Understood. Thank you so much.

Stephen Yang

Thank you.

Operator

Thank you for the questions. Our next question comes from Timothy Zhao of Goldman Sachs. Please go ahead.

Timothy Zhao

Thank you. Hi, Stephen. Hi, Sisi.

My question is regarding your new education initiatives. I noticed that when you report your student enrollment number, I think for this quarter, the non-academic tutoring, your enrollment growth was around 26%. Just wondering, could you further elaborate on that and what is the more normalized growth that we can expect in terms of the student enrollment for the non-academic tutoring.

And also a follow-up question, I think, on the learning center ramp-up. I think you mentioned that you see slightly more competition on the ground. Could you share, I think, what is the latest like learning center ramp up pace in terms of the time for breakeven, time to reach a more like mature stage and also the utilization rates that you see on the ground.

Thank you.

Sisi Zhao

Okay. Timothy, regarding your enrollments question, actually, if you look at the full-year roughly because quarterly enrollments number will be impacted by like the registration window et cetera. So there will be some fluctuation of growth.

And year-over-year actually the -- we're comfortable with roughly about 40% plus growth for new business, including the non-academic tutoring. And this business should grow similar or even faster. And roughly about 5% maybe 4% to 6% of ASP increase.

And if you deduct that, the rest are volume increase, which is mostly driven by the enrollment number that you can see from our release.

Operator

Thank you for the questions. One moment for the next question. Next question comes from the line of Elsie Sheng from CLSA.

Please go ahead.

Elsie Sheng

Hi. Thank you for taking my question. I would just want to follow up on the pressure that you mentioned on the overseas and more premium business, the one-on-one business.

So how do you measure the magnitude of this impact from macro because usually we understand that education in nature should be more resilient than other types of consumption. So how many -- how do you see the risk going forward for this business if we assume that the macro going forward continue to remain relatively in weak status.

Stephen Yang

Last quarter we gave the guidance of the overseas test prep business grow by, let's say, the 20%. And because we have seen some parents, actually some parents change their idea to send their kids to study abroad in future because of the macroeconomy situation change. So I think in the Q3, the overseas test prep business will grow by, let's say, somewhere around 15%.

And so it's a little bit decelerated. And but this is the real situation. And but for the K-12 business is okay and we gave the guidance of 40% year-over-year growth mainly in Q3.

And so let's see and to be let's see for another quarter, we will give the guidance for Q4 in next earnings call, Elsie.

Elsie Sheng

Okay. Thank you.

Stephen Yang

Thank you.

Operator

Thank you for the questions. Our next question comes from Alice Cai from Citi. Alice, your line is open.

Please go ahead. So I'm not hearing from Alice. I would like to take the next question.

We have our next question from the line of DS Kim from JPMorgan. Please go ahead.

DS Kim

Thank you. Hi, Stephen. Hi, Sisi.

Thanks for taking my question. And my name is DS Kim, sorry. Can I follow up on full year guidance again.

I guess now as you kind of briefly remarked, we can expect over 25% growth in renminbi term for the full year versus, I think previously market or management kind of expected about 30%, so about five point deceleration makes a lot of sense. But how about our OP margin. Can we still expect up to about 100 bps expansion for the education full year margin core business.

And if okay, can you also help elaborate a bit on the segment growth number baked in the full year revenue guidance, especially the new business. I think Sisi remarked, 40% plus growth there, but just wanted to double check other segment in a little more detail. Thank you.

Stephen Yang

Okay. Yes, let's -- DS, so let's start with the -- this quarter margin analysis in Q2. The non-GAAP OP margin for the educational business, which excluding the East Buy this quarter was expanded by 12 basis points year-over-year.

And I think it's mainly due to some reasons because of the top line growth are good in this quarter and we started to bear fruits of the learning center expansion last year, especially in the second half of last year. So it's driving utilization rates up and it gets more operational leverage. And yes, as I said, we started to make some cost and expense control within the company.

So this quarter we get the operating leverage and drive the margin up. And as for the margin outlook for the second half of the year, as I said, I think the -- we are facing some slowing down of the overseas related business. So I think the margin drag will be halved in the second half of the year from the overseas related business. And also the newly tourism business will drive the market in the second half of the year. And so I think in the second half of this year, we will meet some margin pressure.

And as the margin outlook for the next year, I think, we will still expect margin expansion for the whole company because the K-12 margin will be expanded in the new year and in the second half of the year as well. And in the second half of this year as well. And we will started to cut the cost and expenses of the overseas related business. And we expect the margin profile of the tourism business next year will be better than that of this year.

So this is the margin analysis.

DS Kim

Thank you.

Operator

Once again, we have the line from Alice Cai from Citi. Please go ahead.

Alice Cai

Thank you management for the opportunity to ask [Technical Difficulty].

Sisi Zhao

Alice, there's some echo in your side, so we cannot hear you clearly. Now it's better.

Alice Cai

Maybe now is okay. Thank you management for the opportunity to ask questions. I have two questions today.

The first one is, I noticed that, you are considering a regular dividend policy, which is quite interesting given the current strong market demand, right. In this regard, I'd like to ask does it signal any anticipated softening in demand and therefore a planned moderation in CapEx spending going forward. Additionally, do you have an estimated timeline for when this dividend policy might be declared.

Furthermore, how do you view this balance between business expansion and shareholder returns. Next regarding the reported improvement in breakeven timeline for recently opened learning centers. I would like to know, shall we expect similar efficiency levels for future new learning centers.

Thank you so much.

Stephen Yang

Yes, second question, answer first. I think typically we spend six months to get the breakeven point of the new learning centers. So the ramp up pace has not changed now.

And as for the shareholders' capital allocation, we announced $700 million share buybacks. And now we finished $542.8% million. And I think we'll keep buying the share buyback and in the open market.

And as for the special dividends, yes, we have paid $100 million in September as the special dividend. Typically the Board of Directors will discuss the new year capital allocation policy in July. And but anyway, it depends on the market cap, the stock price.

And but we -- I think the management will aim to create more value to the shareholders at the capital return. Thank you.

Operator

Thank you for the questions. Next question will come from the line of Yanbo [indiscernible] from ION Group. Please go ahead.

Unidentified Analyst

Hi. Can you hear me.

Stephen Yang

Yes, please go ahead, Yanbo.

Unidentified Analyst

Yes. Thank you. So my question is about how do you perceive the regulatory landscape on your core and non-core businesses such as the tourism business.

Do you see there -- are there any heightened or lessened regulatory risks in those business areas. Thank you.

Stephen Yang

On the regulation side, so there is no change now. And I think we're okay to open the new learning centers to get the license from the local government. And so that's why we want to change our expansion plan of this year.

And on front, on the regulation side, where our attitude is neutral to positive. I think as the list go, we'll apply for the requirement of the new government things three years ago, the policy change. Now the situation has now changed more recently.

So that's it. Thank you.

Operator

Thank you for the questions. We are now approaching the end of the conference call. I'll now turn the call over to the 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

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

Stephen Yang

Thank you.