New Oriental Education & Technology Group - Q2 2024

Transcript

Operator (participant)

Good evening, and thank you for standing by for New Oriental's FY 2024 second quarter results earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there'll be 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.

Sisi Zhao (Director of Investor Relations)

Thank you. Hello, everyone, and welcome to New Oriental's second fiscal quarter 2024 earnings conference call. Our financial results for the quarter were released earlier today and are available on the company's website as well as on our services. Today, Stephen Yang, 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 views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC.

New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's investor relations website at investor.neworiental.org. I'll now first turn the call over to Mr. Yang. Stephen, please go ahead.

Stephen Yang (Executive President and CFO)

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. It's our pleasure to announce that New Oriental has delivered a set of fruitful financial results that have surpassed our expectations this quarter. Our diverse business lines have embarked on a healthy recovery and anchored stable top-line performance, while the enduring momentum of our new business has made meaningful contribution to the company's revenue and continue to pave the way for further acceleration. New Oriental's bottom-line performance has achieved promising growth, with operating margin and non-GAAP operating margin reaching 2.5% and 5.9% for this quarter, respectively. Thanks to our unwavering efforts to brush up on operational efficiency and cost control, as well as the combined efforts of our restructured business model, more utilized resources, and streamlined cost structure.

Encouraged by the company's sustainable profitability, resilient business lines, and prospering new business, we've reinforced our commitment to maintaining a healthy market share growth and creating sustainable value for customers and shareholders in the long term. 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 depicted a propitious trend, while the new initiatives secured a positive momentum. Breaking it down, the overseas test prep business recorded the revenue increase of 47% in dollar terms, or 50% in RMB terms year over year for this quarter. The overseas study consulting business recorded a revenue increase of about 32% in dollar terms, or 35% in RMB terms year over year for this quarter.

The adults and university students business recorded a revenue increase of 43% in dollar terms, or 46% increase in RMB terms year-over-year for this quarter. As mentioned in the past quarters, we have launched multi-pronged new initiatives, which mostly revolve around facilitating students' all-round development. They have continued to prosper with consistent growth, delivering meaningful profits to the company. Firstly, the nine- tutoring courses, which we have offered in around 60 existing cities, focus on cultivating students' innovative ability and comprehensive quality. The markets we have tapped into have recorded elevated penetration, especially in higher-tier cities, with a total of approximately 786,000 students enrollments recorded in this quarter. The top 10 cities in China contribute over 60% of revenue of this business.

Secondly, the intelligent learning system and device business, a service designed to provide a tailored digital learning experience for students to enhance learning efficiency, has been adopted in around 60 existing cities. We have observed enhanced customer retention rate and scalability of this new initiative, with approximately 181,000 active paid users recorded this quarter. The revenue contribution of these initiatives from the top 10 cities in China is around 55%. Our smart education business, educational materials, and digitalized smart study solutions have continued to contribute material results to the overall. In summary, our new educational business initiatives reported a revenue increase of about 68% in dollar terms, or 72% increase in RMB terms year-over-year for this fiscal quarter.

In addition, as mentioned in the last quarter, we have inaugurated a newly integrated tourism-related business line as one of our innovative ventures, tailored with diverse offerings of cultural trips, study tours in China and overseas, as well as camp education. New Oriental's cultural tourism business shares a spirit to provide premium quality travel experience that are infused with joy from cultural exchange, knowledge sharing, and personal fulfillment. Within this new business line, our study tour and research camp business for students of K-12 and university-age enters encouraging growth this quarter, thanks to a strong post-COVID recovery of demand and resumed traveling. We have conducted study tours and research camp in over 50 cities across the country, with the top 10 cities in China offering over 55% revenue share of this new initiative.

Also pilots a number of top-notch tourism offerings to expand our reach to all age groups, including the middle-aged and elderly individuals across 17 featured provinces. As we are still at a preliminary stage of planning, testing, and evaluating the viability of the business in select regions, we will keep you posted should there be timely updates. With regard to our OMO system, we have persisted in revamping our platform and leveraged our educational infrastructure and technology edge on remaining key business and new business, with a vision to provide advanced, diversified education service to customers of all ages. During this reporting period, a total of $28.7 million has been invested in our OMO teaching platform, which equip us with the flexibility to maintain unrivaled service to students continuously.

During the reporting period, East Buy has attained strong growth momentum through a series of new initiatives aimed to foster the development of its private label products and upgrades on customer service. A comprehensive detail optimization of product quality has been conducted, and East Buy has made remarkable breakthroughs in supply chain integration, boosting its private label products to a total of 264 SKUs. Furthermore, nationwide broadcast events across provinces were launched with the consistent support from local cultural and tourism authorities. East Buy also began introducing cultural tourism products and incorporates century-long history, culture, geographies, and folklore into hours of live streaming e-commerce broadcast, presenting lively introductions of historical monuments, tourism attractions, and local specialties to their audience.

We look forward to witnessing the continued growth of the East Buy and its positive reception within the community. With regard to the company's latest financial position, I'm confident to share with you that the company is a healthy, is in a healthy financial status, with cash and cash equivalents, term deposits, and short-term investments totaling approximately $4.8 billion. On July 26th, 2022, the company's board of directors authorized a share repurchase of up to $500 million of the company's ADS or common shares during the period from July 28th, 2022, through May 31st, 2023. The company's board of directors further authorized the company to extend its share repurchase program, launched in July 2022, by 12 months through May 31st, 2024.

As of January 23rd, 2024, the company repurchased an aggregate of approximately 6 million ADS for approximately $194.2 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 (Director of Investor Relations)

Now, I'd like to go through the details for this quarter. Operating costs and expenses for the quarter were $848.3 million, representing a 32.4% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which excludes share-based compensation expenses, were $818.7 million, representing a 31.6% increase year-over-year. The increase was primarily due to the costs and expenses related to the substantial growth in East Buy's private label products and live streaming e-commerce business. Cost of revenue increased by 25.7% year-over-year to $422.6 million. Selling and marketing expenses increased by 62.2% year-over-year to $155 million.

SG&A expenses for the quarter increased by 29.6% year-over-year to $270.7 million. Non-GAAP SG&A expenses, which exclude share-based compensation expenses, were $256.1 million, representing a 34.2% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 57.3% to $29.6 million in the second fiscal quarter of 2024. Operating income was $21.3 million, compared to a loss of $2.5 million in the same period of the prior fiscal year. Non-GAAP income from operations for the quarter was $50.9 million, representing a 212.2% increase year-over-year.

Net income attributable to New Oriental for the quarter was $30.1 million, representing a 4,007.4% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.18 and $0.18, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $50.2 million, representing a 182.6% increase year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.30 and $0.29, respectively. Net cash flow generated from operation for the second fiscal quarter of 2024 was approximately $300.6 million, and capital expenditure for the quarter were $43.4 million. Turning to the balance sheet.

As of November 30th, 2023, New Oriental had cash and cash equivalents of $1,942.6 million. In addition, the company had $1,324.1 million in term deposits and $1,571.2 million in short-term investments. New Oriental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the services or goods are delivered, at the end of the second quarter of fiscal year 2024, was $1,645 million, an increase of 44.4% as compared to $1,139.1 million at the end of the second fiscal quarter of 2023. Now I'll hand over to Stephen to go through our outlook and guidance.

Stephen Yang (Executive President and CFO)

As we enter the new quarter, we look forward to delivering assuring growth and ongoing margin expansion, building on the plan of our brand advantage, roots to history, influential teaching content resources, and solid foundation. We're also committed to working diligently, adhering to the latest guidance from the Chinese authorities on increasing the nation's education level to strengthen its leading position, to further unveil our possibility across all business lines and creative endeavors. With regard to the learning center and classroom space, we plan to increase our capacity moderately by about 20% year-over-year. We will keep monitoring the pace and scale of new openings according to the local operation and our financial results in this fiscal year. The groundwork we have laid and the progress we have made thus far have fulfilled our optimism, our performance future.

We remain dedicated to achieving margin expansion throughout the whole year. In the coming quarter, we expect total net revenue to be in the range of $1,070.9 million-$1,093.5 million, representing year-over-year increase in the range of 42%-45%. To conclude, we're delighted to share our latest set of the results to all of you. We have confidence in our ability to drive our business towards an even more positive trajectory and enhance profitability throughout the remainder of the fiscal year 2024. While we cultivate new endeavors to build upon our capabilities, we will also devote reasonable research and application of new technologies such as AI and ChatGPT into our educational and product offerings to uplift our strength in pursuit of the further growth and operating efficiency.

At the same time, we will continue to seek guidance from and cooperate with government authorities in various provinces in China, in alignment with its efforts to comply with the relevant policies, guidelines, and regulations, as well as to further adjust our business operations as required. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measure, as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2024 Q2 summary. At this point, I'd like to open the floor for questions. Operator, please open the calls for this. Thank you.

Operator (participant)

Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again, after your first question has been addressed. To ask a question now, please press star one one on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Our first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Felix Liu (Executive Director)

Hi, good evening, Stephen, Sisi. Congratulations again on a strong set of results. My question is on your very good third quarter guidance of over 40% revenue growth. Could you give us, you know, a rough breakdown of what's driving this strong growth? Thank you.

Stephen Yang (Executive President and CFO)

Okay. Thank you, Felix. Yeah, I think, you know, we beat the top-line guidance in this quarter a lot, as we did in previous quarters. So as for the revenue guidance, for the Q3, I think, you know, we are still taking a conservative approach in giving the Q3 growth guidance, you know, which will be in the range of 42%-45% in dollar terms year-over-year. You know, given the strong demand in education sector and growth momentum we have seen so far in this fiscal year, so we're quite confident about the whole year's revenue growth will be better than we originally expected, especially in the coming Q3.

And so for the, you know, all the business lines, you know, the overseas related business, on demand side, we have seen this very strong demand for overseas test prep and consulting business. And on supply sides, you know, we have seen some players, you know, disappear from the market, you know, during the COVID. And so that means we're facing less competition in the market. And for our, the other, you know, the revenue contributor, the new businesses, I think, you know, the encouraging performance in this quarter, in Q2, proves that we're heading towards the right direction. And so we believe this business will be able to maintain, you know, the very good top-line growth in the Q3.

Yes, so, you know, overall, so that's why we give the guidance of the top-line growth by 42%-45%. And so Sisi, you want to add the breakdown for-

Sisi Zhao (Director of Investor Relations)

Yeah, actually, the revenue contribution from key business lines is pretty consistent in this year, very similar to last quarter. Like, overseas related business contributes, like, 20%-21% of total revenue. Like, domestic test prep, 2%-3%. And also the K-12 newly developed educational initiatives for kids, and also some remaining other training, tutoring business for high school, together contribute over 41%-42% of total revenue. So the key drivers are growing very well, and we're seeing continued trend for all the key business lines as well.

Stephen Yang (Executive President and CFO)

Thank you, Felix.

Felix Liu (Executive Director)

Okay, thank you.

Sisi Zhao (Director of Investor Relations)

Thank you.

Felix Liu (Executive Director)

Very clear. Congratulations on the work.

Stephen Yang (Executive President and CFO)

Thank you again.

Operator (participant)

Thank you. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please ask your question, Yiwen.

Yiwen Zhang (VP)

Hey, good evening, management. Thanks for taking my question. Congrats on another strong quarter result. So my question is about our, you know, learning center expansion. You mentioned about, you know, whole year, 20% capacity growth. If I calculate correctly, that actually implies second half, net add would slow down a bit. So could, could you discuss what are our considerations there, given the, the very strong demand? Thank you.

Stephen Yang (Executive President and CFO)

Yeah, yeah, this quarter we added around 7% new capacity. And you know, at this time, you know, you know, last quarter, we guided the capacity expansion will be you know, somewhere around 15%-20%. So this time we raised the expansion guidance to you know, somewhere around 20%. And so, you know, I think we will open a reasonable amount of the new learning centers, you know, while some the new classroom areas or some existing centers, you know, will be expanded in the second half of the year. And I think most of the new openings will be in the cities with a better top line and bottom line performance.

I think we will keep monitoring the pace and scale of the new openings according to the operation and financial results in the second half of the year. I think maybe in the next quarter or just you know in Q4, I think we will you know share with you about the new—our new decision of the learning center expansion. Maybe we'll raise again. Thank you.

Tian Hou (Founder and CEO)

Yeah. Okay. Okay, thank you.

Operator (participant)

Thank you, Ewan. Our next question comes from the line of Lucy Yu from Bank of America Securities. Please ask your question, Lucy.

Lucy Yu (Equity Research Analyst)

Hi, Stephen. This is Lucy from BofA. So, follow up on the earlier question on expansion. So actually we have seen very, very strong demand on the ground. Many of my friends trying to enroll to our learning center, but was told it's already full, even the learning center is still under renovation at the moment. So, I'm wondering, what is the bottleneck for us to expand faster at the moment? Is it teacher recruitment, or is it like finding the right location, or get the license? So what is the bottleneck from preventing us expanding even faster? Thank you.

Stephen Yang (Executive President and CFO)

Yeah, thank you, Lucy. You know, I think the reason that we give the guidance of the learning center expansion about 20%, because I think, you know, we do have the OMO system and the OMO model. So that means the online sites will help us to like, take over more students into the existing classrooms and learning centers. So OMO model helps a lot. And secondly, you know, education is typically long-term business, so we care more about the top line growth and the bottom line growth. That means the margin expansion. So we don't want to grow the business too fast.

So, you know, what we're carrying is that the top line growth, you know, actually, we have already given the guidance of 45% top line growth in Q3. And also, we also care about the margin expansion. So it's the growth balance between the top line and the bottom line, Lucy.

Lucy Yu (Equity Research Analyst)

Thank you, Stephen. Just to follow up, you mean the OMO model, I know it's adopted for the high school, but for the non-curricular training, we are also using OMO at the moment?

Stephen Yang (Executive President and CFO)

Yes.

Lucy Yu (Equity Research Analyst)

So what's the percentage of, like, online versus offline at the moment?

Stephen Yang (Executive President and CFO)

Yes. Yes, Lucy, for some of the non-academic courses and the overseas test prep, even for some college students business, we do all of the business, we do have the OMO model. Yeah.

Sisi Zhao (Director of Investor Relations)

And also the intelligent learning devices-

Stephen Yang (Executive President and CFO)

Yeah.

Sisi Zhao (Director of Investor Relations)

- which is also the one that we don't require too many new locations.

Stephen Yang (Executive President and CFO)

Yes.

Lucy Yu (Equity Research Analyst)

I see. Thank you so much.

Stephen Yang (Executive President and CFO)

Thank you, Lucy.

Operator (participant)

Thank you, Lucy. Next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.

Timothy Zhao (Equity Research Analyst)

Thank you. Hi, Stephen. Hi, this is Timothy from Goldman. My question is on the margins. I saw this quarter, the non-GAAP operating margin expanded by around 3.3 percentage point. Just wondering if you provide, can provide any color in terms of breakdown, because on the other hand, I think for East Buy, there was some pressure on the margin. Just wondering if we exclude the margin impact from East Buy, what kind of margin expansion that we are seeing for the core business? And then after this quarter, how do we think about the full year OP margin guidance? Thank you.

Stephen Yang (Executive President and CFO)

Okay. You know, yeah, let us start with the quarter, this quarter margin analysis. Even though, yeah, as you said, even though East Buy is a margin drag in this quarter, we still got the non-GAAP OP margin expansion by 330 basis points. And I think the margin increase was mainly driven by the following reasons: number one, you know, the utilization rates improving of our facilities and the teaching resources increased the learning center margins on average. So that means we have to lower fixed cost and expenses compared to that of last year. And number two is, you know, the new business margin is over, is around like the 19%-20%.

So, you know, we just started the new business two years ago, so that means the ramping up pace is much faster than we expected. And also the remaining business, such as the overseas-related business and the college business, you know, generally higher margin than that of last year. So in the Q2, if we take out the East Buy's impact to education, the non-GAAP margin is what was that?

Sisi Zhao (Director of Investor Relations)

Increased, actually, it's much higher than the overall margin. Yeah. Because they don't actually East Buy don't release quarterly earnings, so you can look at the results of their first half. So you can roughly get the calculation of the educational business margin expansion.

Stephen Yang (Executive President and CFO)

Sure. And, you know, as we head into the Q3 with the operating leverage and the higher utilization control, I think the remaining will, you know, will get the margin expansion continuously, you know, in the Q3 and in Q4. So that means that the second half of the year, I think you will see the margin expansion in education business.

Timothy Zhao (Equity Research Analyst)

Thank you, Stephen. This is, this is very helpful.

Stephen Yang (Executive President and CFO)

Thank you.

Operator (participant)

Thank you, Tim. Our next question comes from the line of Tian Hou from T.H. Capital. Please ask your question, Tian.

Tian Hou (Founder and CEO)

Hi, Sisi, Stephen, congratulations for a good quarter. I have actually two questions. One is, how does culture and tourism business is conducted? You know, how do you record the revenue from that? That's number one. Number two, can you break down the results and guidance into different segments for both revenues and the margin profiles? That's two. Thank you.

Stephen Yang (Executive President and CFO)

Thank you, Tian. I will take the question about tourism business. Okay. You know, Tian, as mentioned in the last quarter, we have started the tourism business, you know, as the one of our innovative ventures. And you know, this tourism business includes our well-grounded study tour and the research camp business for the students, as well as our new tourism business that serves the middle-aged and senior people. You know, we do have a lot of good teachers, and I think our new tourism business will utilize our strength in knowledge sharing of those teachers. And as well, we have abundant sales channel, including ..., and online/offline channels in New Oriental.

So, during this quarter, we piloted a number of tourism offerings to expand the, to reach all, ages people. And, the top-line growth, you know, is very, very good in this quarter, because, you know, last year, you know, we, we do have the neg-- we, we did have, the, the, negative impact from the COVID. And, yeah, you know, we, we set up the new company, named the New Oriental Cultural Tourism Group. And also, this, group company set up the, the 100%, the, the subsidiaries in OCs. So, you know, we divided the, revenue and, the fi- the financial statement, you know, f- from the education to the educa- to the tourism business.

So that means going forward, we will record the two business lines, you know, in two parts. And so going forward, I think our goal is to be the leading the cultural tourism company in China, and to provide the best service to the customers as much as we can. And I do hope the... going forward the tourism business will contribute more revenues and the profit to the whole group. Tian.

Sisi Zhao (Director of Investor Relations)

Yeah.

Tian Hou (Founder and CEO)

That's good.

Sisi Zhao (Director of Investor Relations)

Uh-

Tian Hou (Founder and CEO)

Yeah.

Sisi Zhao (Director of Investor Relations)

Yeah, Tian, your second question on the guidance, breakdown. So as I mentioned earlier, for overseas-related business, for Q3, roughly the distribution are similar with previous quarter, about 21%-22%. And, the, domestic test prep is about 2%-3%. And, the K-12, including the new educational initiatives for K-9, and also remaining, high school business together, contribute over 40% of total revenue. Yeah, so that's the key, key, business-wise mix.

Tian Hou (Founder and CEO)

Thank you. Thank you.

Stephen Yang (Executive President and CFO)

Thank you, Tian.

Tian Hou (Founder and CEO)

That's all.

Operator (participant)

Thank you, Tian. Before we take the next question, a reminder to press star one one if you have any questions. Our next question comes from Candice Chen from Daiwa. Please ask your question, Candice.

Candice Chen (Equity Research Analyst)

Great. Hi, Sisi and Stephen. Congratulations on a very strong quarter and also the revenue guidance. My question is on the margins for longer term. So I think you just mentioned that for the new education businesses, that actually we are looking at around 19%-20% operating margin, which is pretty impressive as compared to what you mentioned in the previous quarters. And I just wonder for the, in the longer term that we are talking about, like 2 years-3 years down the road, what should we expect with this new education business, for in terms of the operating margins?

Also, for the overseas test prep business, what kind of margin should we be expecting, given the very strong demand out of the revenue here? Thank you.

Stephen Yang (Executive President and CFO)

Yeah, as you know, we started the new education business two years ago. You know, in this quarter, the margin of this business is roughly 19%. And going forward, I think what the margin will be over 20%. You know, so that means we expand the margin of this business, you know, we will expand the margin of this business in the second half of this year. And even in the new year, fiscal year 2025, you know, we expect the margin of the education business overall will expanded.

Because of the lower fixed cost and the higher utilization of the learning centers and the cost control, I think, you know, both the existing business, such as the overseas-led business and the college business and the new business, new initiatives, will expand the margin, you know. So, going forward, even the second half of this fiscal year and the fiscal year 2025, I think the margin will be expanded. Yeah. So yeah, and, you know, we care more about the top-line growth and the margin expansion. So we believe we will create more value to the shareholders. Yeah, that's the bottom line-wise.

Candice Chen (Equity Research Analyst)

Great. So, another question is about our cash. I think we are having, like, almost $5 billion cash right now. So in terms of shareholder returns, what are we going to do with the cash in the following years?

Stephen Yang (Executive President and CFO)

Yeah, you know, we announced the $400 million share buyback program. So far, we finished $194 million. I think we will buy the share back, you know, from the open markets going forward. You know, this round, we choose to buy the share back, you know, but historically, you know, we paid several times special dividends and did several times share buyback. So going forward, you know, next round, maybe we will choose the dividend again, or the share buyback.

Candice Chen (Equity Research Analyst)

Okay. Good to hear. Thank you, Stephen.

Operator (participant)

Thank you, Candice. As a reminder, to ask a question, please press star one one on your telephone keypad. Our next follow-up question comes from the line of Felix Liu from UBS. Please go ahead, Felix.

Felix Liu (Executive Director)

Hi, good evening, Stephen, Sisi. I have a follow-up question on competition. You mentioned that the supply and demand dynamics of the factory is very strong. So do you see any risk in competition intensifying? Do you see, you know, smaller players also ramping up capacity expansions, or it's not what is happening on ground? Thank you.

Stephen Yang (Executive President and CFO)

You know, Felix, you know, we, we have seen, you know, a lot of the, the competitors disappear from the market, you know, since, since, 2-3 years ago. And especially in, in this, you know, we are facing less competition. And, so, I think this is true, you know, both for the K-12 business and the overseas related business, even with the college business. And going forward, I think we expect the competition environment will be stabilized. Yeah.

Felix Liu (Executive Director)

Okay, got it. Thank you.

Operator (participant)

Thank you, Felix. Once again, to ask a question, please press star one one on your telephone keypad. Our next follow-up question comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead, Tim.

Timothy Zhao (Equity Research Analyst)

Hi, Sisi. Hi, Stephen. Just a follow-up question, I think on the intelligent learning system and devices. I saw the number of active users, I think for the past quarter is actually quite similar to the summer semester. Just wondering if you can share some color in terms of the seasonality of this business lines and what is the, I think, profitability that we are seeing, and how to think about the, I think the Q-on-Q growth, I think into the third quarter, fourth quarter, that, that would be very helpful.

Sisi Zhao (Director of Investor Relations)

Yeah. Actually, the intelligent learning device business are developing also very well. You know, the growth is pretty strong, and we're seeing actually not very seasonal pattern for for this business, quite similar with previous tutoring business, especially for middle school students. And you know the this year, the year-over-year increase of user is very very high. And also we're we have prepared a lot of new devices to cater the needs of customers. The key drivers, growth drivers, are new customers, and also we're making efforts on expanding to more subjects for existing customers as well.

Because this is a very good products that helping kids to enhance their self-study ability, you know, even without our teachers instruction, but using the device and also benefiting from our very, very good content, you know, differentiating content embedded in the device, that kids can also prepare for the academic study and do the process by themselves. So this is a good solution after the policy change and all the new the restructuring of the whole company. So we're confident in the development of this new product. And also, you know, the profitability is also... Currently, we're seeing the margin are similar with our tutoring business, like the non-academic tutoring business for mostly for elementary school students.

And also we're seeing the potential for this kind of learning device business. The margin potential is also quite strong. And we can leverage more of our teacher resources and also we don't need to spend a lot of cost on the learning center opening. Yeah.

Timothy Zhao (Equity Research Analyst)

That's clear. Thank you, Sisi.

Operator (participant)

Thank you, Tim. Our next follow-up question comes from the line of Tian Hou from T.H. Capital. Please go ahead, Tian.

Tian Hou (Founder and CEO)

Yes. Sisi and Stephen, just a follow-up question. It's also related to the seasonality. So, just not quite sure, you know, what's the, you know, the seasonality under the current business structure. So can you share some color?

Stephen Yang (Executive President and CFO)

The seasonality, you know, becomes more smooth, you know, than many years ago. But the Q2 is still the lowest season. So the strongest season is Q1, then followed by the Q3 and Q4, and then the Q2 is the lowest season.

Tian Hou (Founder and CEO)

So is the margin also follow the same trend?

Stephen Yang (Executive President and CFO)

I think so. Yeah. If you look at the margin, you know, in Q2, it's, you know, the non-GAAP operating margin is roughly 5.9%. I think the margin in Q3 definitely will be higher than Q2.

Tian Hou (Founder and CEO)

Okay. Okay, got it. Thank you. Thank you.

Operator (participant)

Thanks, Tian. We are now approaching the end of the conference call. I'll turn the call over to New Oriental's Executive President and CFO, Mr. Stephen Yang, for his closing remarks.

Stephen Yang (Executive President and CFO)

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 (participant)

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.