New Oriental Education & Technology Group - Q4 2023

Transcript

Operator (participant)

Good evening, thank you for standing by for New Oriental's FY 2023 fourth quarter results earnings conference call. At this time, all participants are in 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'd now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao.

Sisi Zhao (Director of Investor Relations)

Okay, thank you. Hello, everyone, welcome to New Oriental's fourth fiscal quarter 2023 earnings conference call. Our financial results for the period were released earlier today and are available on the company's websites as well as on Newswire services. Today, Stephen Yang, Executive President and Chief Financial Officer, 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 return 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 great pleasure to announce that New Oriental has managed to conclude this fiscal year with a set of remarkable financial results this quarter, and with our top-line performance beating the expectations. Our existing business lines and new initiatives have pivoted towards a stable recovery and anchored fruit-bearing growth, mainly benefiting from the strong post-COVID recovery of demand and the resumption of the consumption. Our bottom line performance has also achieved a solid growth, with operating margin and non-GAAP operating margin reaching 5.6% and 9.1% respectively for this quarter, depicting a well-grounded resilience across our business lines, thanks to our ongoing efforts in enhancing operational efficiency and cost control. In particular, I would like to highlight that the solid recovery has been embodied in the growth of our.

Our bottom line performance has also achieved a solid growth, with operating margin and non-GAAP operating margin reaching 5.6% and 9.1%, respectively, for this quarter, depicting a well-grounded resilience across our business lines. Thanks to our ongoing efforts in enhancing operational efficiency and cost control. In particular, I would like to highlight the solid recovery has been embodied in the growth of our overseas test prep and overseas study consulting businesses, which have recorded a steady increments in revenues and enrollments. The dedicated plan of our restructured business model, better utilize the facility and streamlined cost structure, have not only helped us yield better-than-expected margins in this fiscal quarter, but also enlivened our continued exploration of new potential ventures as we unfold a new chapter of innovative endeavors.

The company's sustainable profitability, resilient business lines, and emerging new initiatives have reaffirmed our belief in maintaining a healthy growth of our market share amid the recurring environmental recovery. I would like to spend some time to talk about the quarter's performance across our remaining business lines and the new business to you in detail. Our key remaining business secured a promising trend, coupled with a positive momentum in our new initiatives. Breaking it down, the overseas test prep business reported a revenue increase of 52% in dollar terms, or 62% in RMB terms year-over-year for the first quarter.

The overseas study consulting business recorded the revenue increase of about 6% in USD terms, or 13% in RMB terms year-over-year for this quarter. The adults and university students business recorded a revenue increase of 34% in dollars terms, or 43% increase in RMB terms year-over-year for this quarter. As mentioned in the previous quarters, we have launched several new initiatives, which mostly revolve around facilitating students' all-round development. I'm pleased to share with you that these initiatives have continued to exceed our expectations by sustaining a promising growth and generating meaningful profit to the company. Firstly, the non-academic children courses, which we have offered in around 60 existing cities, focus on cultivating students' innovative ability and comprehensive quality.

We're happy to see further rise of market penetration in those markets we have tapped into, especially in higher-tier cities, with a total of 629,000 student enrollments recorded in this quarter. The top 10 cities in China have contributed about 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, has been adopted in around 60 existing cities, with 99,000 active paid users reported in this quarter. The revenue contribution of this new business from the top 10 cities in China is around 60%.

Thirdly, our study tour and research camp business, an initiative that aims at offering students of K-12 and university ages, the opportunity to fully leverage their free time to broaden the scope of knowledge and cultivate subject interest, has also achieved encouraging results. 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% of revenue contribution to this new business. Last but not least, our smart education business, educational materials, and utilize the smart study solutions, as well as exam prep courses, have also contributed meaningful results to the overall growth of the company, and have attained instrumental profits since the previous quarters.

With regard to our OMO system, our persistence in revamping our platforms and advancing the technology capability has enabled us to continue to provide high-quality service to our customers and successfully capture the new business opportunity during the transition period. During the reporting period, a total of $31.7 million has been invested into the system. I would like to spend a bit of time to give you an update on East Buy latest performance. Fiscal year 2023 marks an adventurous beginning for East Buy. Since inception, it has achieved significant breakthroughs in both business operations and financial performance through proactive redesigning of its strategic plan and the implementation of a series of the initiatives to strengthen the long-term sustainability.

During the reporting period, the company introduced a change of its name from Koolearn Technology Holding Limited to East Buy Holding Limited, for closer alignment with its long-term core business direction, which is to offer top-quality agriculture products under our private label, Dongfang Zhenxuan, create a live streaming platform which safeguards product caliber and use experience for customers, as well as nurture nationwide cultural appreciation. Throughout fiscal year 2023, East Buy continued to expand product variety to provide customers with high quality and cost-effective offerings. The extremely stringent standard is applies in selecting prime suppliers and manufacturers, have ensured outputs are always created a better craftsmanship with similar ingredients. In terms of private label products, we are insisting to introduce only high-quality products that are price-worthy. East Buy elevated user experience by applying advanced technology to safeguard the entire process, from product development, sales, to after-sales service.

Furthermore, with a vision to foster content innovation and knowledge sharing with customers, East Buy began leading on-site live streaming events in various provinces in China, joined by the cultural celebrities from all walks of life to document a rich variety of intangible cultural heritage. We are also grateful for the support to East Buy's exploration in cultural tourism, and it's inspiring to see that the platform has since roused world's public attention, awareness, and most importantly, affection on Chinese cultural assets. We will continue to explore the area of business and provide updates when suited. With regard to the company's latest financial position, I'm confident to share with you that the company is in a healthy financial status, with cash and cash equivalent, term deposit, and short-term investments totaling approximately $4.5 billion.

On July 26th, 2022, the company's board of directors authorized the share repurchase of up to $400 million of the company 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 of 2022, by 12 months through May 31st, 2024. As of July 25th, 2023, the company repurchased an aggregate of approximately 5.9 million ADS for approximately $191.7 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)

I'd like to walk you through the key, but other key financial details for this quarter. operating costs and expenses for the quarter were $812.5 million, representing a 29% increase year-over-year. non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $782 million, representing a 30.1% increase year-over-year. The increase was primarily due to the cost and expenses related to the substantial growth in East Buy's private label products and its live streaming e-commerce business. Cost of revenue increased by 58% year-over-year to $391.6 million. Selling and marketing expenses increased by 54.3% year-over-year to $147.8 million.

G&A expenses for the quarter decreased by 4.5% year-over-year to $273.1 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $249.5 million, representing a 3% decrease year-over-year. Total share-based compensation expenses, which were allocated to related co-operating costs and expenses, increased by 6.1% to $30.5 million in the fourth fiscal quarter of 2023. Operating income was $48.1 million, compared to a loss of $105.6 million in the same period of the prior fiscal year. Non-GAAP income from operations for the quarter was $78.6 million, compared to the loss of $76.9 million in the same period of prior fiscal year.

Net income attributable to New Oriental for the quarter was $29 million, compared to the loss of $189.3 million in the same period of last year. Basic and diluted net income per ADS attributable to New Oriental were $0.18 and $0.17, respectively. Non-GAAP net income attributable to New Oriental for the quarter were $62.1 million, compared to the loss of $160.3 million in the same periods of the prior fiscal year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.38 and $0.37, respectively.

Net cash flow generated from operation for the fourth fiscal quarter of 2023 was approximately $421.6 million, and CAPEX, capital expenditure for the quarter, were $68.4 million. Turning to the balance sheet. As of May 31, 2023, New Oriental had cash and cash equivalents of $1663 million. In addition, the company had $1318.5 million in term deposits and $1477.8 million in short-term investments.

New Oriental's deferred revenue balance, which is cash collected upfront from customers and related revenue, will be recognized as the service or goods, as the service and goods are delivered, at the end of the fourth fiscal quarter of 2023, was $1337.6 million, an increase of 43.4% as compared to $933.1 million at the same, at the end of the fourth quarter of fiscal year 2022. Now, I'll hand over to Stephen to go through our outlook and guidance.

Stephen Yang (Executive President and CFO)

Thank you, Sisi. Heading into the first quarter of fiscal year 2024, we firmly believe that our business will progress on a healthy trajectory of growth, which will be reflected in our performance in the new fiscal year. The surge in demand we observed as a result of post-COVID reception and economic recovery, has heightened our conviction in leveraging our brand advantage, rooted history, influential, the teaching content and resources, and our long-established solid foundation. We will continue to work diligently adhering the latest guidance from the Chinese authorities on enhancing the nation's education level to strengthen its leading position, to further unveil our potential in all business lines, and seize new opportunities as they arise.

With regard to learning center and classroom space, we plan to increase our capacity by about 15%-20% in the new year, by which a small quantity of new learning centers is expected to be opened, while classroom areas of some existing learning centers will be expanded in a few major cities. Most of the new openings will be launched in the city with better top line and bottom line performance in fiscal year 2023. We will keep monitoring the pace and scale of new openings according to the local operation and financial results during the new year.

In summary, we expect total net revenue in the first quarter of fiscal year 2024 to be in the range of $983.2 million-$1,005.5 million, representing year-over-year increase in the range of 32%-35%. To conclude, the financial results we recorded in fiscal year 2023, and performance of our new business, have reaffirmed our confidence in achieving the satisfactory level of the operating profit and the improvement of the profitability in the first quarter and the whole year of fiscal year 2024. New Oriental placed great determination to invigorate new endeavors with our existing capabilities.

Simultaneously, we will also devote reasonable resources on research and application of new technologies such as AI and ChatGPT into our educational and product offerings, with a vision to uplift our strength in pursuit of growth in opening and operating efficiency. At the same time, we will continue to stay committed to seek guidance from and cooperate with government authorities in various provinces, in alignment with its 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 forecasts reflect our considerations of the latest regulatory matter, as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2023 Q4 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. 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. Once again, that's star one one for question. Our first question comes from the line of Felix Liu from UBS. Please go ahead, Felix.

Felix Liu (Executive Director)

Hi, good evening. Thank you, management, for taking my question, and congratulations on the strong quarter and guidance. My question is on capacity. I noticed that your capacity expansion have picked up this quarter, and that you guided the 15%-20% capacity increase for FY 2024, which I think is an acceleration from previous plans. May I ask you to share more color on this capacity re-acceleration? Are they in existing cities or in new cities? Are they for just for our new K-12 businesses, or are they multipurpose in covering, you know, overseas test prep? For the plan of 15%-20% this year, do you see that as a sustainable level if we were to project this into, you know, a few years down the road? Thank you.

Stephen Yang (Executive President and CFO)

Yeah. Thank you, Felix. I think as for the expansion plan, yeah, we raised a little bit about the capacity expansion plan compared to that of the last quarter earnings call. In the last quarter, you know, I shared with you guys about the 10% capacity, expansion. I think the reason is, you know, is because we have seen the strong demand in education sector, especially in overseas test prep business and non-academic courses. Also, you know, I think that's why we raised the guidance of the capacity expansion. I think most of the new opening will be happened in the existing cities. We don't have the plan to open the new cities.

But I must mention that, you know, we will open these small quality of the new learning centers in existing cities. You know, we will expand some classroom area for some existing cities, because, you know, it's almost full of the existing some learning centers.

You know, the most of the new learning centers or the new areas will be used by the K-12 non-academic courses and overseas related business, and some domestic test prep courses. As for the, you know, this is our fiscal year 2024 plan, and I think in the next two to three years, I think we'll keep the same pace of the expansion plan, and it depends on the whole market environment and our the developments of the business. Felix?

Felix Liu (Executive Director)

Thank you very much.

Operator (participant)

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

Yiwen Zhang (Research Analyst)

Hey, thank you. Good evening. Thanks for taking my question. Congrats on a very strong set of results. Just a general question on our guidance. Your August quarter guidance is quite impressive, and even more so in the immediate term. Actually, what is driving such a strong growth? Can you like describe more, maybe by segments? Thank you.

Stephen Yang (Executive President and CFO)

Okay. Yeah, we, I think we remain confident and optimistic about the business performance in the coming Q1 and even for the new fiscal year, 2024. You know, as the post-COVID reception and the whole economy recovery, I think we have seen a strong demand of the, you know, of our product, like the oversea-related courses and the non-academic courses, some new businesses. So I think with leveraging our brand advantage and the, you know, the good teaching content and resources and our long-established solid foundation, I think we will continue to seize the market opportunity in the market. That means we will take the market share.

You know, for example, as for the overseas-related business, on demand side, we have seen a strong demand for the overseas test prep business. On supply side, you know, we have seen some players disappear from the market, so that means we're facing less competition. For our new business, like the non-academic courses, you know, I think we, the encouraging performance in this quarter or in even in the last year, you know, proves that we're heading towards the right direction. In the coming Q1, you know, we guided the top line growth will be, it will be in the range of 32%-35% in dollar terms.

Yeah, in RMB terms, that might be somewhere around 40%-45%. Also, as for the bottom line-wise, we're confident, you know, achieving the greater, the profit in the coming Q1. That means we're quite optimistic about the operating margin expansion in the Q1 and the whole new year. Yiwen?

Yiwen Zhang (Research Analyst)

Thank you. Thank you very much.

Stephen Yang (Executive President and CFO)

Thank you.

Operator (participant)

All right, thank you. Our next question comes from the line of Lucy Yu from Bank of America Securities. Please go ahead, Lucy.

Lucy Yu (Equity Research Analyst)

Thank you. Hi, Stephen. This is Lucy from Bank of America. One question on your selling expense. I noticed that the selling expense has been up quite a lot Q on Q and Y on Y. Could you please elaborate what is driving that? How should we think about selling expense trend in the new fiscal year? Thank you.

Stephen Yang (Executive President and CFO)

Yeah. Thank you, Lucy. You know, I think we spend a little bit more money on selling marketing expenses because, you know, we're seeing the strong demand in the market. Yeah, I think you saw our top line growth in this quarter is 64% in dollar terms. Even though we spend a little bit more on selling marketing expense, but I think we do have the operating leverage in hand. Going forward, even in the Q1, the new year, I think we'll spend a little bit more on the selling marketing expenses, but I think we do have the operating leverage on the cost and SG&A side. That means you will see the margin improvement in the coming new year.

Lucy Yu (Equity Research Analyst)

Just to follow up, Stephen, so, your selling expense up is mainly driven by which business? Is it non-academic and the overseas or any other business?

Stephen Yang (Executive President and CFO)

Both, it's by the education business and East Buy.

Lucy Yu (Equity Research Analyst)

Okay, thank you.

Operator (participant)

Thank you, Lucy. Our next question comes from the line of Candis Chan from Daiwa. Please ask your question, Candis.

Candis Chan (Equity Research Analyst)

Hi, Stephen and Sisi. Good evening, this is Candis from Daiwa. Firstly, congratulations on the very strong revenue guidance for the coming quarter. I would like to follow up on your comments about the operating margin. Would you mind sharing a little bit more on the margin side by different businesses, such as the non-academic tutoring and also the overseas test prep, et cetera? My second question is about the revenue this quarter. Would you mind to break it down into different segments as well? Thank you.

Stephen Yang (Executive President and CFO)

Yeah. You know, yeah, let's start with the margin analysis of this quarter. You know, because of the downsizing of the learning centers and laying off some employees last year, led to the lower fixed cost per learning centers. It drives the margin up. As for the different business lines, you know, the overseas test prep, you know, the growth is very good in this quarter. You know, with the higher utilization of the classrooms and the operating leverage and the margin was up. Going forward, I think that both the overseas related business and the new business, the margin will go up in the coming quarter and the coming new year. The question on the different business line revenue?

Candis Chan (Equity Research Analyst)

Yeah.

Stephen Yang (Executive President and CFO)

Sisi, can you take the question, please?

Sisi Zhao (Director of Investor Relations)

You mean for Q4, right?

Candis Chan (Equity Research Analyst)

Right, mainly for Q4, but if you can also provide some colors on the 1Q, that would be very great. Thank you.

Sisi Zhao (Director of Investor Relations)

For Q4, the revenue mix is roughly like Q4, the overseas related business contributes like test prep is about 11%, the consulting business is 17%, because it's the seasonality, seasonally high quarter. For university students business, the revenue contribution in Q4 is about 2%-3%. The new business together is about 18%, roughly same for the whole fiscal year as well. The rest are high school and some other business, and also including Dongfang Zhenxuan.

Candis Chan (Equity Research Analyst)

Thank you, Sisi. May I ask one more question that is about the coming quarter? I think that we do see that on the ground, the demand for the research camps and also the study tours have been very strong. Would you mind share a little bit more on the, like, what we are seeing for this, and what is our plan for the full year and going forward for this new business? Thank you.

Sisi Zhao (Director of Investor Relations)

Yeah. Actually we give the strong guidance for Q1 revenue. The key driver, if you look at by each categories of businesses, like overseas related business, in both including the overseas test prep and consulting, are growing faster. Also, we're seeing accelerating trends of the growth for overseas related business because of the post-COVID recovery. The trend is very clear. Also, you know, the some other new business definitely is a key driver, you know, even higher than our original expectation, because we are seeing strong demand during the summer's registration. According to our current forecast, this portion can also grow very, very fast. These are the key driver. Definitely other business, rest of the remaining businesses, and also Dongfang Zhenxuan are also contributing good revenue, growth as well for Q1.

Candis Chan (Equity Research Analyst)

Great. Thank you very much.

Operator (participant)

Right. Thank you. Our next question comes from the line of Tony Wang from CICC. Please go ahead, Tony.

Tony Wang (Senior Associate)

Hi, Sisi and Stephen, good evening. Thank you for taking my questions. My question is, since we have announced to offer cultural and tourism services that target middle-aged and older people, could you mind share more color on this? Like, how do we expect to enter this market, and to which extent do we expect this business to contribute to revenue? Thank you.

Stephen Yang (Executive President and CFO)

Yeah, as for the new, the cultural tourism business, yeah, I think, you know, first of all, you know, we think it has a big potential, you know, the market opportunity in the country. We do have, we do have a lot of the good teachers. You know, some of them are star teachers. By leveraging the knowledge of the teachers and in, like, the general studies, history or Chinese history or some cultural studies, I think we believe we'll be able to present, you know, a one of a kind cultural, the tourism offerings. You know, combine both entertainment and cultural education for the, like, the middle or the elder, the older age group, people.

In addition, you know, I think we may also be able to leverage our extensive, the online platforms and the school networkers, as the distribution channel. We have newly developed a couple of the top quality cultural tourism offerings in some feature, in some feature tourism cities and provinces such as Hangzhou, Chengdu, Xian and Gansu. I think these offerings are gaining the increasing traction from the market. Yeah, we're still in the very early stage, and, you know, We're testing file the product and the service process. So I will keep you posted, you know, for any updates on the new business.

I mean, I, you know, we're exciting for the new business, you know, as we did in the, you know, the year before last year, we started the business of East Buy. You know, East Buy, in general, a lot of the top line growth and the profits to the group, you know, in fiscal year 2023. You know, we're very exciting about the new business of the tourism business. Thank you.

Operator (participant)

Right. Thank you. As a reminder, to ask a question, please press star one one on your telephone. Once again, to ask a question, please press star one one on your telephone. Reminder, to ask a question, please press star one one on your telephone. All right, there are no further questions. I'll now turn the call over to New Oriental's Executive President and CFO, 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. This concludes today's conference call. Thank you for participating. You may now disconnect.