New Oriental Education & Technology Group Inc. (EDU) Earnings Call Transcript & Summary

Good evening, and thank you for standing by for New Oriental's Third Fiscal Quarter 2025 Earnings Conference Call. [Operator Instructions] 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.

Thank you. Hello, everyone, and welcome to New Oriental's Third Fiscal Quarter 2025 Earnings Conference Call. Our financial results for the period were released earlier today and are available on the company's website as well as on Newswire services. Today, Stephen Yang, Executive President and Chief Financial Officer, and I will share New Oriental's latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the 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 view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead.

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Our Q3 results reflect a steady performance, reinforcing our ongoing commitment to long-term value creation and operational consistency. Despite our revenue decreased by 2% year-over-year, but the total net revenue, excluding revenues generated from East Buy increased by 21.2% year-over-year. The continued growth of our new ventures has contributed to the company's revenue, and we anticipate further progress in the future. New Oriental's bottom line performance of our core educational business has also shown stable returns. To better reflect New Oriental's core educational business, we have excluded the operating margin generated from East Buy for this quarter. Our operating margin and non-GAAP operating margin, excluding operating margin and non-GAAP operating margin generated from East Buy for the quarter reached 12.1% and 13.3%, respectively, resulted from the substantial efforts invested in our offerings and platforms. Now I would like to spend some time to talk about each business lines and new initiatives to you in detail. Our key remaining business are showing promising trends and our new initiatives have demonstrated positive momentum. Breaking down, the overseas test prep business recorded a revenue increase of 7% in dollar terms year-over-year for this quarter. The overseas study consulting business recorded a revenue increase of about 21% in dollar terms year-over-year for this quarter. The adults and university students business recorded a revenue increase of 17% in dollar terms year-over-year for this quarter. Meanwhile, our ongoing investment in new educational business initiatives, primarily focused on facilitating students all-round development have sustained a steady growth, further driving the company's momentum. Firstly, the non-academic tutoring business, we have now rolled out to around 60 cities for students. We're happy to see increased market penetration in those markets we have tapped into, especially in high-tier cities. The top 10 cities contribute over 60% of this business. Secondly, the intelligent learning system and device business, we have tested the adoption of this new initiative in approximately 60 existing cities, and we are pleased to see improvement to customer retention and scalability. The top 10 cities contribute approximately 50% of the business. As for the smart education business, education material and digitalized smart study solutions, they have all continued healthy development. In summary, our new education business initiatives combined have recorded a revenue increase of 35% year-over-year for this quarter. With regards to our integrated tourism-related business line, it performed exceptionally with a revenue increase of 85% year-over-year for this quarter. We received very positive feedback with our range of culture travel, China study tour, global study tour and cap education products. We have also conducted study tours and research camp both internationally and domestically for students of K-12 and university age in around 55 cities across the country. And top 10 cities revenue contribution is over 50%. Middle age and senior audience targeted tours and products are also available in 30 feature provinces in China and internationally. This business line has begun to demonstrate its potential to contribute meaningful revenue to the group. While we are encouraged by the positive achievements across our various business lines, we remain committed to provide the best to our customers. We have been and will continue strategically investing in our business to elevate the overall user experience, driving greater efficiency and capacity. Building on the progress from the previous quarter, we have continued to refine our online merge offline teaching platform. $29.7 million have been invested in this quarter to improve and maintain our OMO teaching platform, which provide us the flexibility to continue our high-quality service to students. Beyond OMO, I would like to take this time to highlight our investments in AI and how we integrate AI to our teaching ecosystem. It is an area we have looked at and invested in over a long period of time. New Oriental has leveraged a combination of open source large language models such as DeepSeek and GPT and self-developed AI technologies to develop innovative education solutions and enhance learning experience. AI-powered tools such as essay grading, speaking assessment and error correction notebooks, deliver intelligent evaluations and customized learning plans, ultimately improving the students' outcomes while saving the time for both teachers and parents. To further drive internal efficiency, we introduced an AI content creation platform and students performance feedback applications to support lesson planning and strengthen home-school communication. These tools has also allowed us to collect meaningful data on learning habits and user engagement, giving us deeper insights into how students and families interact with our services. In addition, we have built an AI-supported comprehensive FAQ knowledge database with the analysis of our sales conversations. By using the database, we're able to reduce the training cost for our salespeople and boost the sales efficiency and conversion rates. As an industry leader, we are dedicated to driving long-term revenue growth by strengthening our product capability and optimize management efficiency. We look forward to sharing tangible results from our investment in AI integration and their positive impact on our performance. Now I would like to take this opportunity to talk about our share repurchase actions. The company's Board of Directors further approved extending the effective time of the share repurchase program to May 31, 2025, and increasing the aggregate value of the shares that the company is authorized to repurchase from $400 million to $700 million. As of April 22, 2025, the company repurchased aggregate of approximately 14.4 million ADSs for approximately $695.5 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.

Thank you, Stephen. Now I'd like to share our key financial details for the quarter. Operating costs and expenses for the quarter were $1,058.5 million, representing a 3.2% decrease year-over-year. Cost of revenues decreased by 17.6% year-over-year to $531.6 million. Selling and marketing expenses increased by 13% year-over-year to $182.2 million. G&A expenses for the quarter increased by 19.8% year-over-year to $344.7 million. Total share-based compensation expenses, which are allocated to related operating costs and expenses decreased by 41.3% to $16.1 million in the third quarter of 2025. Operating income was $124.5 million, representing a 9.8% increase year-over-year. Non-GAAP income from operations, excluding share-based compensation expenses and amortization of intangible assets resulting from business acquisitions was $142.1 million, representing a 0.2% decrease year-over-year. Net income attributable to New Oriental for the quarter was $87.3 million, representing a 0.1% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.54 and $0.54, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $113.3 million, representing a 14.3% decrease year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.70 and $0.70, respectively. Net cash flow generated from operations for the third fiscal quarter of 2025 was approximately $1 million and capital expenditure for the quarter were $52.4 million. Turning to the balance sheet. As of February 28, 2025, New Oriental had cash and cash equivalents of $1,418.8 million, $1,411.7 million in term deposits and $1,853.6 million in short-term investments, totaling approximately $4.7 billion. The company is in a healthy financial position. New Oriental's deferred revenue, which representing cash collected upfront from customers and related revenue that will be recognized as the services and goods are delivered at the end of the third fiscal quarter of 2025 was $1,749.9 million, an increase of 15% compared to $1,521.7 million at the end of the third quarter of last fiscal year. Now I'll hand over to Stephen to go through our outlook and guidance.

Thank you, Sisi. With the evolving market dynamics, we will remain committed to resilience and focus on achieving steady sustainable growth across our business line in the coming quarter. Leveraging our experience in navigating shifting conditions, we're confident in our ability to advance our business lines as an industry leader. The strong performance of our diverse operations and the depth of the educational resources further strengthen our confidence in the sustainable growth. We expect the total net revenue, excluding revenue generated from the East Buy in the coming quarter, March 1, 2025 to May 31, 2025, to be in the range of $1,009.1 million to $1,036.6 million, representing a year-over-year increase in the range of 10% to 13%. The projected increase of the revenue in our functional currency RMB is expected to be in the range of 12% to 15% for the fourth quarter of fiscal year 2025. In addition, the slowdown of the revenue growth of our overseas-related business and investments in newly integrated tourism-related business have led to the short-term impact on our operating margin this quarter. We have initiated our cost control and efficiency enhancement across all business lines since this quarter and expect these actions to take effect in the coming quarters. We anticipate the non-GAAP operating margin for educational business will expand year-over-year in the coming fourth quarter. I must say that these expectations and forecasts reflect our considerations of latest regulatory measures as well as the current and preliminary view, which is subject to change. To conclude, New Oriental is dedicated to delivering premium offerings to our customers while pursuing sustainable growth through a strategic blend of capabilities. We will continue investing in our business and the different application of advanced technologies, including AI. Our aim is to strengthen our competencies, driving growth and improve operating efficiency. We will also continue to seek guidance from and cooperating with government authorities in China, ensuring the compliance with the relevant policies, guidelines and any related implementations, regulations and measures and adjust our business operations as required. As always, we will work diligently to enhance the nation's education level to strengthen its leading position, unlocking further potential across all of our business lines and realizing our vision. This is the end of our fiscal year 2025 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you.

[Operator Instructions] We will now take our first question from the line of Felix Liu from UBS.

My question is on the overseas-related businesses. You mentioned that the slowdown in overseas test prep and consulting was caused the deceleration in Q4 growth. May I just check what has been the major drivers of the slowdown? Do you think the situation could get worse with these ongoing tariffs? And what is your outlook for this business, especially when do you think growth will bottom out?

Yes. I think the overseas-related business including the overseas test prep and the consulting business, the slowing down is due to the impact of the macro economy situation and the international relation change situation. And so based on our current guidance for the Q4, I think the overseas-related business will be growth in the range of 5% to 10% in the Q4. And in the coming new year, we have not finished the budget, but we anticipate the overseas test prep business will grow by 5% to 10% in the new year. And overseas consulting business, I think the growth will be 0 or flattish in the coming year. But what I'm saying now is based on our the conservative estimation for the new year, Felix.

We will now take our next question from the line of Lucy Yu from Bank of America Securities.

So my question is more on the fourth quarter guidance. You did mention that overseas test prep is going to slow down. May we have a breakdown of the other business growth in the fourth quarter?

Yes. So roughly, like based on our forecast for Q4, in the RMB term, the overseas-related business will grow around 8% and domestic university students business will grow maybe around 19%. And the high school business growth will be around 16%, 17%. And the new K-9 new business, educational business will grow maybe around 32% to 35%. So that's the rough estimation based on our current forecast for Q4. This is RMB growth. And if you want U.S. dollar growth, maybe each line roughly deduct by roughly 2% to 3%.

But we must mention that we are using the conservative method to give the guidance of Q4.

Yes.

Our next question comes from the line of Alice Cai from Citibank.

I noticed that K-9 off-line enrollment grew by 15% year-over-year this quarter, which has been slower than expected, while learning device users increased by 54% year-over-year. Are learning device starting to replace offline courses? And how much of this slower K-9 growth is simply because the base are getting bigger?

Can you repeat again? I think we cannot hear you very clearly. Can you repeat the question again? I think that your...

Your line is not clear, Alice.

Can you hear me now?

A bit better. Yes, please say again of your question.

Okay. I noticed that K-9 offline enrollment grew by 15% year-over-year this quarter, which has been slower than expected, while learning device user increased by 54% year-over-year. Are learning device starting to replace offline courses? And how much of this slower K-9 growth is simply because the base are getting bigger? Is that clear now?

Yes. Actually, the enrollment growth for the non-academic tutoring business this year is a little bit impacted by the timing difference of cutoff of each quarter. And also because we have some enrollments that last year divided into 2 parts for the spring quarter and autumn quarter. But this year, some cities combined as one enrollment. So that's also explained the relatively slower growth of enrollments if you're comparing that with the revenue growth. And the learning pad for middle school students mainly is also growing very, very fast. And this year, the number of users increased dramatically compared with last year, yes. And next year, we also continue to believe that the K-9 business, including mainly the elementary school, non-academic tutoring and the middle school learning pad business will continue to drive the overall growth will be the fastest growth category.

Yes. So within the Q4 guidance, the K-9 business, we expect the K-9 business will grow by over 35% year-over-year in Q4, Alice.

We will now take our next question from Timothy Zhao from Goldman Sachs.

I think you mentioned that in the fourth quarter this year, you do expect the OP margin for the core business to expand on a year-on-year basis. Just wondering how do you think about the sustainability of the margin expansion into fiscal year 2026? And what kind of measures that are you going to take to increase the operating efficiency and [indiscernible] control costs? And how do you think about the balance in the revenue growth margin? Yes.

As I said, we expect the margin expansion in the coming quarter, Q4. And I think this is mainly due to following reasons. Number one, we started to do the cost control and the efficiency enhancements since this quarter. And we do believe it will take effect to help the margin profile in Q4 and the next fiscal year. And secondly, I think we continue to focus on improving the utilization of facilities. And so we are doing the cost control in all business lines with the companies because of the slowing down. I think it's reasonable to do at this time. And for the new year, fiscal year '26, we do believe we will get the margin expansion for the education business, which excluding the East Buy, the margin expansion in the new year.

Our next question comes from the line of [indiscernible] from Citic.

My question is about the shareholder payback plan. We are glad to see that we have almost finished our ongoing repurchase plan. So do we have some more shareholder payback plan in the future like dividend or a new repurchase plan?

Yes. We almost finished the $700 million share buyback. And as well, we have already paid $100 million special dividend in September last year. And so that means the last 2 years, 2.5 years, we paid $800 million already. And going forward, I think in the near future, I think I will discuss with the Board to do another -- the capital allocation plan to the investors. And yes, I know we're piling up the cash, and we generate the net cash flow and make profit every year. So I think it's reasonable for us to pay the capital allocation to investors, either some dividends, the regular dividend or the special dividend combined with the share buyback.

Your next question comes from the line of Elsie Sheng from CLSA.

My question is more about the outlook next year. So you mentioned the expectation for the growth of overseas business in next financial year. Could you also update your expectation of growth for other business segments in the next year?

I think Sisi will give you the guidance, yes.

Yes. Actually, I think it's reasonable to continue to estimate maybe similar growth with Q4's revenue growth for all the core business lines for next fiscal year. As we said, the continued pressure definitely is from the overseas-related business. And -- but we do believe that this business will stabilize. And based on so far estimation, the single-digit growth is okay for us, and it's already conservative for us. And for the new business, K-9 new business should grow at around 25% -- maybe 25% to 30% growth. The high end probably growth is from the middle school session and also elementary school students because of the higher base, our revenue scale is already bigger than before the policy level. And the growth around this kind of level is also something that we feel sustainable and healthy pace. And high school business continue maybe around 15% -- 12% to 13% growth conservatively speaking as well. And the tourism business, probably around 15% to 20% growth, also conservative estimation for next year, okay? That's all the core business lines.

[Operator Instructions] We will now take our next question from Charlotte Wei from HSBC.

I have a question related to the new technology development. So how do you expect AI and large language model will reshape the education industry? Can you share with us your strategy and investment plan for this area?

Yes. As I said, actually, we started to use the AI technology to help the whole process of the teaching and learning from both the teacher side and the students and parents side. Yes. As I said, we have issued some AI tools like the essay grading, speaking assessment and some error correction notebooks. All this behavior or all these new technologies help us to grasp the more data from the students and to help the students the study outcome even better. But we don't have the plan to do the like the big model. I think the investment will be reasonable going forward. And on the other hand, on the cost control side, I think the AI technology can help us to do like some of the sales the salespeople and even some on the G&A side, I think it will make us the work more efficiency. We can save some people and expenses on the selling and marketing expenses and G&A expenses. So it will help us to drive the margin up. So this is another benefit from the AI technology.

[Operator Instructions] We will now take our next question from D. S. Kim from JPMorgan.

I think most of my questions have already been answered, but 2 minor stuff. A, can we talk a bit about expansion, the center capacity expansion plan for next year? I got disconnected in the middle, so you may have already discussed that. Sorry if you did that already. That's A. And b, I think we talked a bit about cost control starting this quarter. I'm just wondering what kind of cost control we are planning to do? Like would it involve some rationalization of our workforce? And if that were the case, would there be some one-off expenses related to like the workforce adjustment? Or when we talk about a cost control, it's more about like spending less than previous budget. Hence, there wouldn't be any meaningful one-off around there. And now that I think about it, can I ask one more thing? How do we think about the headquarter overhead cost for 2026? I think last year or this fiscal year, we are spending probably about mid- to high teens more than last year on headquarter overhead. How should we think about that overhead cost into 2026?

Yes, 3 questions. The learning center expansion plan for the new year, right? And so I think we plan to open 10% to 15% new capacity in the new year. It's a little bit less than fiscal year '25. This is roughly 20% plus and next year, 10% to 15%. And I think it will be almost backloaded in Q3 and Q4 to prepare for the year after next year. And so I think our key job is to raise the utilization rates up for the new year, fiscal year '26. The cost control, I think the cost control assignment is not a onetime job. So we started to do the cost control through this quarter. And I think we will keep doing the cost control in the whole year of the fiscal year '26. I know we're facing the challenging time of the slowing down of the top line growth. So I think it's reasonable for us to do the cost control continuously. And so it will help the higher efficiency and the margin profile of the whole company. The headquarters expenses, this is roughly -- the headquarters expenses is roughly 6% of the total educational revenue and 6% of the total -- the educational core business. Yes, 6% Yes.

So the ratio would be similar to this year versus next year or -- sorry, I missed that part.

Next year, I think our job is to make the percentage even lower, let's say, the 5% plus or 5% of the total revenue as the headquarters of the expenses. So that means we will get the leverage on the headquarters expenses in the fiscal year '26. It will help the margin up.

I think it's really clear, and I agree that we should focus on utilization and efficiency in this hard time and we can deliver margin expansion.

Okay.

[Operator Instructions] We now have a follow-up question from the line of D. S. Kim from JPMorgan.

Just a follow-up since others don't seem to have question. Sisi, I think earlier you said K-9 new businesses next year, 2026, we expect about 25% to 30% growth in renminbi term. Can I double check if this is only for K-9, excluding other new businesses or new businesses, including non-K-9 for 25% to 30%?

Including everything. So the key ones are the non-academic and pad and also we added other minor things together.

That means K-9 should grow faster than what you gave us, which it's not too bad, actually similar to this quarter.

Our next follow-up question comes from the line of Felix Liu from UBS.

I actually have one additional question on the learning hardware business. I noticed that recently, some of our competitors who also sell learning hardwares, they launched new models at cheaper -- increasingly cheaper and cheaper prices. So how do you think about our strategy in the learning hardware business? And how should we think about competition pressure from price cuts from other players?

Yes. Actually, we're quite confident on the future of these learning pad device model, especially that we leverage our strength in the educational sector. We have this kind of interactive teaching and learning system. So we have our users like create the stickiness of our customers. They're not only buying the products, but also they subscribe the content and the process of using our system to continue their self-study and create the stickiness and can generate recurring revenue. So we're still confident that this is the best model to use and also to leverage our education strength. And also by using more and more AI technologies, we are now developing all kinds of apps and new functions embedded into our service process so that the learning experience of our customers will enhance going forward gradually and also provide more and more technology supported and also with the real teacher supporting learning process for them. So we believe that this business will continue to be the key growth driver for our overall revenue. And also the operating margin this year, we have already seen this business to generate over 22%, 23% operating margin, which is similar with our other offline teaching class margin. And also, we have confidence that it has potential to continue to enhance the margin because of the involvement of more technology, and we can leverage and save more time for our labor cost and also our teachers can serve more students than before. So the business model is better than even offline training format. Yes.

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

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.

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