New Oriental Education & Technology Group Inc. Q3 2023 Earnings Call

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Good evening and thank you for standing by for New Orientals, FY 2023 third quarter results earnings Conference call.

At this time all participants are in a listen only mode. After management's prepared remarks, there will be question and answer session Today's conference.

<unk> is being recorded.

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 C. C. Zhao. Thank you. Please go ahead.

Hello, everyone and welcome to New Orientals third fiscal quarter 2023 earnings Conference call. Our financial results for the period were released earlier today and are available on the company's website as well as unusual or services today, Steven young, except President and Chief Financial Officer and I.

Well sure New Orientals 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.

And reform Act of 1995.

Forward looking statements involve inherent risks and.

Certainties as such our results may be materially different from the view expressed today.

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 your end.

Towards your Investor Relations website at Investor adopt new Oriental Dot Org.

Now I'll first turn the call over to Mr. Yang Stephen Please go ahead.

Thank you Susie Hello, everyone and thank you for joining us on the call.

It's a great pleasure to announce that upon the completion of the restructuring process and the introduction of our new businesses.

As a manager to deliver a set of remarkable financial result, this quarter with both topline and bottomline fits them, but it's positive.

Tax expectations.

The result is also boosted by the macro trends of the economy recovery as the pandemic subsides.

So presuming.

Zooming in the people and their confidence.

While we've observed.

Our products and services is gradually increasing.

We have also achieved a GAAP operating margin and non-GAAP operating margin of eight 8% an 11.7% respective lethal this.

Archie with many businesses have continued to demonstrate solid recovery.

In particular.

Our overseas test prep and overseas study consulting business performed exceptionally in reported continuous year over year revenue equipment. Thanks to the strong COVID-19 recovery across.

The structured model streamlining the cost structure.

Coupled with the emergence of new business has not only helped us even better is that you expect margins in this physical clutter.

Effectively diversified our business and enable us to off site search and historical seasonality.

As we head into the fourth quarter, our solid profitability strong performing a Romanian business alliance and the emerging new business initiatives in this quarter, we affirm our belief in sustaining a healthy growth of our market share and pursuing innovative endeavors.

The rest of it lately, so encouraging environments of recovery.

No I like to spend some time to talk about the performance across all business.

This is lines and the new initiatives to you okay.

Our key remaining business got a promising trends and the new initiatives have shown positive momentum.

Breaking it down.

The oversea test prep business recorded a revenue increase of 13% in dollar terms or 23% in RMB terms year over year for this quarter.

The overseas.

Okay.

But I mean in dollar terms were 13% in RMB terms year over year for this quarter.

And also the University students business recorded a revenue decrease of 3% in dollar terms or 5% increase in RMB terms year over year for this quarter.

As mentioned in the previous quarters. We have also launched several new initiatives with mostly revolve around stupidity deemed students or round developments I'm.

I'm glad to share with you that these new initiatives have continued to exceed our expectations by sustaining a positive momentum and are generating meaningful profits to the group.

First please.

Vietnam.

Children courses, which were offered to you.

Please focus on cultivating students.

Okay.

Chris.

Okay.

Okay.

Hundreds 18, salt and student enrollments recorded in this quarter.

10 cities in China has contributed about 60% of the rubbing off this business.

Secondly, the intelligence learning system and device business is the service designed to provide a tailored digital learning experience for students.

As we utilize our past the teaching experience data technology to provide personalized targeted learning and exercise contents.

Our continuous investments in technology has built up competitive ash, which drives our navigation amidst the changes challenges from the past year.

Ill pass it its adoption around 60 lives in cities with 108000 actually pay users in this quarter and are delighted to see improved customer retention and scalability of this new business.

The revenue contribution from the top 10 cities in China, it's around 60%.

Meanwhile, the study tour and the research comps business.

Initiatives that aim sites offering students of K 12, and University agents the opportunity to fully leverage their free time broadened the scope knowledge and cockpit subject to interest.

We'll have conducted the study tour and research comps you oversee key cities across the country. The revenue contribution from the top 10 cities.

From the top 10 cities in China is over 55%.

Last but not least our smart education business, which comprises smart teaching smart hardware science technology innovation education and other services serves the local governments education authorities schools and kindergartens.

Education materials and to utilize the smart study solutions, a self learning system, which Leverages advanced technology.

The students to have complete control over the pace and the flexibility of learning age where remote learning becomes increasingly mainstream.

We also offer exam prep courses designed for students with Junior College diplomas 12, 10 debenture are steep reefs.

Abbas mentioned the business has been gaining wider traction and contributes to the overall growth of the company and has a chance instrumental profits since the last quarter.

With regards to our old Atmos system, we're continuing our efforts in developing a revamping the platform and capture leveraging our educational infrastructure and technology strengths of our remaining key business and new business to provide more advanced and diversified educational service our customers.

During the reporting period, we invested 26 point.

$8 million for the Clos in the quarter to further improve and maintain an hour or more teaching platform.

No.

I'd like to give you all updates Easter biased latest performance.

During the reporting periods is the bias has proved itself as a successful business model was instrumental breakthroughs impulse business operations and financial performance.

Our business has continued to offer a remarkable contribution to the company's overall revenue and profit growth.

If the by continuing to invest substantial resources, improving product quality and variety.

And there is private label fund two and this customer centric strategy and content to caliber during the reporting periods.

He used to bite romance rigorous applying stringent centered in supplier selection. So all these floors products of top notch quality and the safeguards active collaborations with SF Express and J D group, so continuously refined delivery process and service.

So set itself apart from conditional livestreams used to buy also uphold its unique feature of integrating intelligence.

Desalination alongside product sales with a vision to full third nationwide cultural and knowledge sharing.

A serious of the east biased in person left screaming and public spaces, and cultural governance arrays and exhibitions helps not only increase the topics we used to buy a platform and bolster sales, but also elevated the audience engagement and awareness on the preservation of Chinese culture resources.

It's inspiring to see that east to buy has grown significantly since inception.

And have not only become a well known platform for promoting healthy top quality and cost effective products with loyal.

Customer base, but also out of a case appreciation of the country's cultural assets for the betterment of the community.

With regards to the company's latest financial position I am confident to share with you that the company has seen a healthy financial status with cash and cash equivalents term deposits and short term investments totaling approximately four $3 billion.

On July 26, 2006, 2022 of the company's board of directors authorized a share repurchase of up to $400 million of the company Avs, where common shares during the period from Poland July 28, 2022 through May 31 2023.

I still say April 18th 2023, the company repurchased an aggregate of approximately $5 1 million ads for approximately 157 six.

$6 million from the open market and the share repurchase program.

Now I will turn the call over to <unk> to share with you on all the key financials.

Please go ahead.

I'd like to walk you through the other key financial details for this quarter operating costs and.

<unk> expenses for the quarter or $687 $7 million, representing a 9% decrease year over year, non-GAAP operating cost and expenses for the quarter, which exclude share based compensation expenses were $666 $3 million, representing an eight 1%.

<unk> year over year. The decrease was primarily due to the reduction of facilities and number of staff as a result of the downsizing in the fiscal year 2022.

Cost of revenue decreased by 0.9% year over year to $369 $6 million selling and marketing.

<unk> increased by nine 5% year over year to $102 $6 million G&A expenses for the quarter decreased by 25, 4% year over year to $215 $5 million non.

non-GAAP G&A expenses, which he.

As for the share based compensation expenses were 100.

$94 $5 million, representing a 25, 1% decrease year over year total share based compensation expenses, which were allocated to related operating costs and expenses decreased by 28, 6% to $21 $4 million.

In the third fiscal quarter of 2023 operating income were $66 $5 million, representing 147, 1% increase year over year non-GAAP operating income for the quarter was $87 $9 million, representing a 179% increase.

Year over year.

Net income attributable to new Oriental for the quarter was $81 $6 million, representing a 166, 7% increase year over year basic and diluted net income per ads attributable to new Oriental or 49 cents and 48, respectively non-GAAP net income.

Actual defaults on new Oriental for the quarter was $95 4 million, representing a 199, 9% increase year over year.

non-GAAP basic and diluted net income per ads attributable to new Oriental were 57 says and 56, respectively.

Net operating cash flow for the third fiscal quarter of 2023, whereas the approximately $195 million and capital expenditure for the quarter or $49 $2 million.

Turning to the balance sheet as of February 28, 2023, New Oriental has cash and cash equivalents of 13.

<unk> hundred $29 $5 million. In addition, the company had 410 hindered in $13.5 million in term deposit and <unk> hundred $68 $1 million and short term investments new orientals deferred revenue balance, which is the cash collected from registered students for core.

And recognized proportionally as revenue as the instructions are delivered at.

The end of the third fiscal quarter.

After that twenty-three, whereas 1100 $63 $2 million, an increase of 19, 8% as compared to 971 3 million.

At the end of the third fiscal quarter of fiscal year 2022, now I'll hand over to Stephen to go through our outlook and guidance.

Looking ahead to the fourth quarter.

Which has historically been one of our seasonal peak quarter.

Our key remaining business.

In the process of recovery with the opportunity of further taking up market share as the pandemic subsides.

As Euro the company remains tireless and seeking new opportunities with greater flexibility and strong cash flows and we're confident in embarking on a journey that to ensure sustainable growth.

For our new businesses the encouraging performance that these businesses have achieved in the previous quarters proof that we are heading towards the right direction. We firmly believe that the business will sustain a healthy growth and that generates meaningful profit to the company in the fourth quarter.

Going forward.

With regards to the learning center and classroom space, we're planning to increase our capacity mother, Italy, which we expect a small quantity of the new learning centers will be opens and the classroom areas of some existing learning centers will be expanded in a few major cities.

In summary, we expect total net revenue in the fourth quarter of fiscal year. Two 103 March 1st of 2023 to May 31, 2023 to be in the range of 800, and the $1.8 million to $822 $7 million representing year over year increase in the rental.

53% to 57%.

As the profitability would recorded year to date has re affirm our success and dedication in turning a new page. We're also confident achieving a satisfactory operating profit level in the full year of fiscal year 2023.

To conclude we are not taking a multi pronged operational excellence to accelerate our recovery and anchor sustainable growth.

Simultaneously we will.

Cautiously research and anvil, the potential new market opportunity and try to apply to new technologies, such as AI and chats GPT into our education, and our product offerings with a vision to uplift our innovative capability in pursuit of profitable growth.

And increasing the operating efficiency.

Let's take a minute to seek guidance from the coverage with the government authorities in alignment with their efforts to comply with the relevant policies as well as to further adjust our business operations as required.

I must say that these expectations and forecast reflects our consideration of the latest regulatory matters as well as the current and preliminary view, which is subject to change.

This is the end of our fiscal year 2023, Q3 summary.

At this point I would like to open the floor for questions. Operator. Please open the call for this thank you.

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 questions here again. After your first question has been addressed.

Ask a question. Please press star one on your telephone keypad.

Then here an automated message advising yohan is raised to withdraw your question. Please press star one one again.

Our first question comes from the line of Philip <unk> from UBS. Please ask your question for lakes.

Hi, good evening Stephen.

Congratulations on the very strong results.

My question is on your forward looking guidance for the fourth quarter.

I know the younger growth looks very impressive my I know what are the key drivers are the pro.

Performing business segments that are driving the fourth quarter oak wealth and if we look at slightly it beyond the next quarter for it in the next fiscal year. What are the business segment that you expect the fastest close in.

In FY 'twenty four thank you.

Okay.

Thank you for that I think we.

Remain confident and optimistic about the business performance in the Q4, the fourth quarter and the new.

New physical year fiscal year 2024.

Firstly, I think the macro trend of the economy recovery after the pandemic subsides.

We're seeing that people reduce their confidence in consumption.

And we're also seeing our the products and the demand and the requirement of our.

The service is gradually increasing.

And as for the different business lines.

The remaining business such as the oversea related business and demand sides. We have seen the strong demand for overseas test prep and consulting business.

And on the supply side.

We have seen some players disappear from the market that means we're facing less competition. So that's the way that's why we're optimistic about the overseas with his business.

Going forward and for our new business.

I think really the group Inc.

<unk> performance in the Q in.

Q3 in this quarter and even the last couple of quarters.

So on the.

That we're heading towards the right direction and we believe the business will will.

We will be able to maintain the very strong <unk>.

Top line growth and generates more profit to the whole for the company.

And.

So that's why we guided the very strong top line growth in Q4 to be in the range of 53% to 57% in dollar terms.

It sounds like it seems RMB terms like that that would be much more higher ASP.

And as for the bottom line wise I think we're confident in achieving greater operating profit in the you mean, the Q4 and the new year.

And next year I think are the key growth driver.

It will be will be the number one it's a random number what should be the new business.

We started the new business.

Such as to be not done of course, it seems 16, 15 16 months ago, and it's growing very fast in the last in this year and also believe next year the growth rates will be very high end.

So you wanted to add something.

Just one thing that if you look at Q4s guidance, because if you look at historically last year. Since Q4 is the first very first quarter that we did not have the we.

Terminated.

Hey, Tonight academic triggering.

So that's the first quarter to be like for like.

Increased though that that's why you are comparable with previous quarters the gross rates.

Higher.

Okay.

Thank you feel like that's very clear thank you.

Okay.

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

Oh, Hi, Stephen system, you'll see from BMO.

One question on <unk>.

Sure. So looking at the minority interest it seems that the net profits for hone.

J J has decrease Q on Q.

Could you. Please elaborate the reason behind that and how should we think about that.

Earnings contribution from auto margins going forward. Thank you.

I've been doing this quarter.

If the pie has proved.

Itself as a successful business model and you know this business contributes to offer the remarkable contribution to the company overall revenue and the profit margin and.

This quarter.

Yes, the by continuing to invest the substantial resources in improving the product quality and collaborates with the J D and E. The SF express to provide a better delivery services and so.

Yeah, the invest some money.

But I think I can't.

To tell the detail of the margin analysis worthy Provident analysis because of the.

The compliance and so I think next quarter. The tone Foundation management is the best management, we're sharing.

With you guys more information in detail.

Lucy.

And that's it thank you Stephen.

Thank you.

Thank you.

Next question comes from the line of Kansas Chen from Dai Walke. Please ask your question Kansas.

Great Hi, Steven Thank you for taking my question and congratulations on the very strong set of results. My question is related to the new businesses. So firstly may I note that a rough breakdown of our new initiatives with revenue and my second question is about.

The long term longer term, our business direction going forward and now we see that our business has become more diversified not only by has done very well even for new Oriental at lifetime channels until you can also see very decent JMP.

JMP trend so.

Michael also talked about to enter into the cultural tourism as well. So I just wondering like what will be the key development areas. When you Oriental in the following years and I would like to know more about whether we have any plans to enter into the learning device market as well or some other new area.

<unk>.

Okay as far as the new initiative education nature of new initiatives.

If you look at the revenue contribution the biggest one is the non academic tutoring.

So the this is the one that we're using our existing teaching resources and <unk>.

Eloping the content very very quickly and also use our own existing channels to get students. So this year is.

Actually the year Eurobond, two largely developed this new.

Our kind of our initial.

Initiatives.

And we are seeing that the demand is very strong and also the.

The the retention and also the operating data are trending towards a very good.

And also where our confidence for this business to continue.

We're all very nicely and also contribute more and more meaningful revenue and also get very good profitability as well.

And also the second biggest education nature New initiative.

Intelligent learning device business also this is a good way to.

Have students to do with the self study using our technology.

To assess to our teaching system using the.

The hardware.

They're learning machine. So this is also something very.

New and it's a new model and new product, but also gaining a lot of.

Interest from our customers and we're also using our existing a channel like are the local schools and learning centers to a two two to roll out this new products and also get getting such facts rate retention and renewal renewal of tuition.

Fees and also this is a business that we are also feeling confidence to contribute more and more revenue and also have good profitability as well and next to these two actually these two already comfortable with vast majority of our educational and new initiatives.

And we do have confidence in several other ones like Oh.

The the study tour business campaign business, which actually have some negative impacts during the pandemic period in last one year, there where our confidence for the future for this new initiative because the high demand we're seeing from local markets.

And also we also have very strong resources to develop this new business and together with several other ones that we have mentioned on the call. So we have we keep making efforts on developing.

Developing all these new initiatives and hopefully all of this directions, Ken are all Oh, right and also contribute more and more meaningful revenue and profit okay.

Let me answer your.

Last question about the cultural tourism.

Some of you may have read the online.

Michael sides that we are considering extending the cultural tourism business I think it's indeed, a big potential in it.

In the country.

And as you know we don't have a lot of teachers some of them are star teachers.

I didn't going forward by leveraging our teachers knowledge in general studies cultural studies and history.

We believe would be able to offer.

One of our cats cultural tourism offering.

Combined with the entertainment and the educational.

The cultural education for all age groups the case the.

The college students and be the.

Some like.

Like the IBP.

People right and for for all Ages and addition, I think we may also be able to leverage our district distribution channel like competition is the buy and the other online streaming channels.

Within the company and also we do have a lot.

A lot of schools and learning centers as the distribution channel for the new business.

But no we're still at a very early stage of the planning and evaluating the new business at the moment. So if you have any updates we will keep you updated thank you.

That's very clear thank you.

Thank you.

As a reminder to ask a question. Please press star one one on your telephone keypad.

Okay.

Yeah.

Again to ask a question. Please press star one one on your telephone keypad.

Our next question comes from the line of Linda Huang from Macquarie. Please ask your question Linda.

Hi, Manny this is Linda Macquarie My questions question, Paul My key questions regarding free cash because I still see that.

Keep piling up the cash and all of the operating cash flow generation ability is also quite strong.

In addition to the a.

The share buyback, how we think about use the other way such as like a special dividend or we tend to the shareholder so that would be the first one and the second question is regarding four hour the tutoring.

Tutoring business. So this is.

Thank you I've got that right. We are also seeing very good retention rates. So why does the retailer right now and how does appear to be regulation.

Thank you.

Thank you Lee.

No we enough 1 million share buyback program last year. So so.

Till now you know we.

We purchased the $157 million and from the open markets two to repurchase share back.

And.

You know I think our thinking is about the evaluation at this time, we true Steve we choose the sharp buyback excuse me.

He is totally sometimes we we boldly back sometimes we pay the special dividend. So this time share buyback next time I think it depends on the it depends on the decision made by the board of director.

For the year.

And the retention rates for the course.

I think for the diamond triggering the courses the retention rate is over 70% in this quarter.

We're driving up the retention rate.

Compared to before and for the intelligence of learning system devices. You know I suggest that you are using the renewal rates this over 60% already.

Yeah.

Thank you very much.

Thank you Nick.

So we have a follow up question from the line of Kansas Chen from Daiwa.

Please go ahead Candice.

Hi, Suzanne and Steven I, just wanted to follow up on the profitability question as Jeff mentioned for new business does naturally they are now contributing very odd.

Our strong revenue and also the good profitability can you share a little bit more on the margins of the new business, particularly with the <unk> or the intelligent devices. Thank you.

Yes, I think the new business overall, the new business margins over 10% already.

We started the business with the just the 15 16 months ago. So.

It is quite a new business and but you know we.

As we thought you know we've made culturally about these days.

New investments of the new business. So it takes less time to make profitable for the new business and I think we are I think we expect that the margin of new business.

Well I will go it will go up in the Q4 and the next Oh, the new year and.

Excellent that's okay.

It was a clear yes.

Yes, that's correct.

Thank you. Thank you.

Thank you our next.

Next follow up question comes from the line of select Snow from UBS. Please ask your questions Alex.

Oh, Hi, Thank you management for taking my question again.

I just wanted to have a follow up on the the market landscape.

Now academic tutoring.

I know we have the most of our revenue coming from the top 10 cities.

Where do you see as the biggest opportunity ahead do you think it's more about ramping up our market share in existing top cities or do you see it.

A lot of opportunity in other cities, especially in lower tier cities for non academic tutor Inc. Thank you.

I think our society.

Seeing the less competition for the downtime at <unk>.

The children's business.

Actually we're taking market share in both the top tier cities on a low tier cities and go forward I think almost all the cities the growth will be will be fast and.

So if you do all that.

Yeah actually now we're seeing the top 10 cities contributing like.

Over 60% of overall revenue for this category and I think the growth will come from Bose, taking continue to expand and taking shares.

It's very very early stage for this kind of new services and also the new market and where we definitely have opportunity.

Take market share in all of the existing cities, especially these kind of major cities top tier cities and also our feeling is that the demand for this kind of academic tutoring.

Not only for higher tier cities, but also like all.

All the existing cities, where we are in like around 70 to 80 cities that.

We still have all the schools and learning centers and we use our existing.

Educational infrastructure and also leveraging keep leveraging our brand name educational brand name, we have the advantage to expand this kind of new business and the Mt is a it's a very high.

Okay got it thank you.

Thank you.

Thank you once again to ask a question. Please press star one one on your telephone keypad.

Yeah.

Okay.

Yes.

Yeah.

As a reminder to ask a question. Please press star one one.

And Thats Star one one quick question.

Alright. Thank you. So we now approach the end of the conference call I will now turn the call over to new Orientals executor.

The president and CFO , Stephen Yang for his closing remarks.

Again, thank you for joining us today.

We will have any further questions. Please do not hesitate to contact me or any of our Investor Relations Representatives. Thank you.

Okay.

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

Yeah.

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