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

Good evening, and thank you for standing by for New Oriental's FY 2026 Second Quarter Results Earnings Conference Call. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead.

Thank you. Hello, everyone, and welcome to New Oriental's Second Fiscal Quarter 2026 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 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 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. I'm pleased to report a strong set of results for the second fiscal quarter of 2026. Our continued focus on operational efficiency and disciplined resource management has been a key driver of our solid performance and continues to support our path to sustainable profitability. We're delighted to see strong profit growth accompanied by a significant improvement in non-GAAP operating margin, up more than 4 percentage points again exceeded our expectations. This quarter, total net revenue grew 14.7% year-over-year to $1.19 billion. Non-GAAP operating income more than tripled rising 206.9% to $89.1 million. Non-GAAP net income attributable to New Oriental increased 68.6% to $72.9 million. Our core business remains steady and I'm pleased to share that our new initiatives are gaining traction and making meaningful contribution to the group's overall performance. For the second fiscal quarter, our K-9 new educational business and high school tutoring business reported accelerated year-over-year revenue growth, outpacing the previous quarter. Overseas related business have shown resilience, delivered modest revenue growth despite the ongoing macro economy headwinds, exceeding our earlier conservative expectations. Overseas test prep business recorded a revenue increase of 4% year-over-year. Overseas study consulting business recorded a slightly decrease of about 3% year-over-year. Our adults and university students business recorded a revenue increase of 13% year-over-year. As for our continued investments in new education initiatives, including non-academic tutoring and our intelligent learning system and devices deliver solid sustainable results. Revenue from this business grew 22% year-over-year this quarter. Our non-academic tutoring business has strong been rolled out to around 60 existing cities. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of the revenue. As for our intelligent learning system and device business, that has been launched in around 60 cities. We're encouraged by improved customer retention and scalability of the new initiative. The top 10 cities contribute over 50% of this business. Turning to our integrated tourism related business. Our domestic and international study tours and research camp for K-12 and university students were held in 55 cities across China, where the top 10 cities contribute over 50% of the revenue. In parallel, our newly launched tourism offering for middle age and senior citizens have been well expanded -- has been well received now available in 30 key provinces international markets. We've expanded our product portfolio to include culture travel, ,China study tour, global study work and camp education, all designed to deliver enriching experience through culture and knowledge sharing and personal growth. We're now also exploring opportunities in-house in the wellness sector for seniors. Well patent -- we partner with the over 30 health and wellness spaces in locations such as Hainan, [ Yunnan ] and Guanxi piloting the segment with a light asset model. With regards to our OMO system, our efforts in developing and revamping our online merging offline teaching platform continues. These efforts aim to deliver more advanced and diversified education service to our customers of all ages. A total of $28.4 million has been invested during this quarter to upgrade and maintain our OMO teaching platforms. Beyond OMO, we continue to focus on our venture in AI, encouraged by the positive market feedback. We have been and will continue to refine an embedded AI across our offerings to strengthen New Oriental's core capabilities. Simultaneously, we're also leveraging AI to streamline internal operations thereby boosting efficiency and providing enhanced support for our teaching staff. As an industry leader, we are dedicated to driving long-term revenue growth through focus on product innovation and operational efficiency. In the upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investments in AI. Now turning to the East Buy's performance. I'm pleased to share that during the reporting period, East Buy remained customer-centric and made strong progress in both product development and supply chain enhancements. East Buy has expanded beyond its original focus on fresh foods and snacks to offer a broader, more diversified product range. As of the end of the period, private label SPUs reached 801. New categories include seafood, health care products, kitchen, condiments, meat, eggs, dairy and personal care, household and cleaning items, paper goods, home textiles, apparel and innerwear. These offerings are thoughtfully create to meet customers' growing demand to health, quality of life and convenience. They contribute to boost sales and profit growth to the group, while further optimizing its product mix beyond expanding SPUs, East Buy also focused on product iteration, cost efficiency and targeted marketing to build blockbuster products that resonates strongly with the customers. At the same time, East Buy began exploring off-line channels, leveraging strong brand recognition and New Orientals learning center network. With the vending machine model now profitable in select cities, we plan to scale this initiative nationwide. All in all, we are pleased to see East Buy refocused and back on track, making a positive contribution to the group both top line and bottom line. We expect East Buy to contribute more revenue and profits to the group in the future, while continuously enhancing our brand influence. Now I will turn the call over to Sisi to share with you about the key financials. Please go ahead, Sisi.

Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating cost and expenses for the quarter were $1,125.1 million, representing a 10.4% increase year-over-year. Cost of revenues increased by 11.8% year-over-year to $566.9 million. Selling and marketing expenses decreased by 1.1% year-over-year to $194 million. G&A expenses for the quarter increased by 15.2% year-over-year. to $374.3 million. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 156.8% to $21.4 million in the second fiscal quarter of 2026. Operating income were $66.3 million, representing a 244.4% increase year-over-year. Non-GAAP income from operations for the quarter was $89.1 million, representing a 206.9% increase year-over-year. Net income attributable to New Oriental for the quarter was $45.5 million, representing a 42.3% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.29 and $0.28, respectively. Non-GAAP net income attributable to New Oriental for the quarter were $72.9 million, representing a surge of 68.6% year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.46 and $0.45, respectively. Net cash flow generated from operations for the second fiscal quarter was approximately $323.5 million and capital expenditure for the quarter were $23.7 million. Turning to the balance sheet. As of November 30, 2025, New Oriental had cash and cash equivalents of $1,842.9 million. In addition, the company had $1,609.9 million in term deposits and $1,875.2 million in term deposit -- 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 service our goods were delivered at the end of the second quarter of fiscal year 2026 was $2,161.5 million, an increase of 10.2% as compared to $1,960.6 million year-on-year. Now I'll hand over to Stephen to go through our outlook and guidance.

Thank you, Sisi. We are very encouraged by the strong results we have achieved for this quarter and in the first half of the fiscal year 2026. These outcomes give us greater confidence in our operational resilience and growth trajectory. Looking ahead, we will continue to pursue a balanced approach to revenue and profitability growth. We remain committed to cost discipline and sustainable profitability across all business lines. At the same time, we will take a thoughtful strategic approach to capacity expansion and hiring, ensuring that growth does not come at the expense of quality. We plan to deepen our presence in cities that demonstrate strong top and bottom line performance while continuing to manage resources carefully. We will closely monitor the pace and scale for new openings, aligning them with operational needs and financial performance throughout the year. Given our positive momentum including the healthy growth of our K-12 business and the recovery of East Buy, we are now in a more optimistic position regarding our business outlook. We expect the total net revenue for the group, including East Buy in the third quarter of the fiscal year 2026, December 1, 2025 to February 28, 2026, to be in the range of $1,313.2 million to $ 1,348.7 million, representing a year-over-year increase in the range of 11% to 14%. As the full fiscal year 2026, we are raising our total net revenue guidance for the group to be in the range of $5,292.3 million to $5,488.3 million, representing a year-over-year increase in the range of 8% to 12%. These expectations reflect our current outlook, taking into account recent regulatory developments as well as our preliminary view of market conditions, they remain subject to change. I would like to give you an update on our shareholder return plan for fiscal year 2026. In October 2025, we announced that pursuant to the previous adopt 3-year shareholder return plan, the Board of Directors has approved an ordinary dividend of USD 0.12 per common share or USD 1.2 per ADS to be distributed in 2 installments as part of the shareholder return for fiscal year 2026. As of today, the first installment has been fully paid to shareholders and ADS holders. Details of the second installment will be determined and announced in due course. Additionally, we also announced a share repurchase program in which New Oriental is authorized to repurchase up to $300 million of its ADS or common shares over the subsequent 12 months. As of January 27, yesterday, we had repurchased a total of approximately 1.6 million ADS for grade consideration of approximately $86.3 million from open market under this share repurchase plan. To conclude, New Oriental remains firmly committed to sustainable growth, delivering high-quality offerings to our customers and creating long-term value for our shareholders. We also continue to work closely with government authorities across provinces and municipalities in China to ensure full compliance with the relevant policies, regulation and measures, and to adjust our operations as needed in this response. This is the end of our fiscal year 2026 Q2 summary. At this point, I would like with Sisi to open the floor for questions. Operator, please open the call for these. Thank you.

[Operator Instructions] [indiscernible] first question.

First of all, congratulations on the very solid second quarter results as well as on the lift to your full year guidance. My question is on your guidance. Can management provide some breakdown on the segment growth as much as you can? I'm keen to understand the key drivers for the lift to your full year guidance?

Yes. Thank you, Felix. So let us start with this quarter's revenue growth analysis. We are very pleased to see the acceleration, what I mean is the growth of the K-12 business. As you know, I think this -- our strategy this year is to improve the product quality and service quality. And we have seen good results in Q2. We have seen the higher student retention rates and the better feedback from the customers. And -- so this is the K-12 business. And so in Q3, I think the K-12 business will grow somewhere around 20% year-over-year or more. So let's say it's in 20% plus year-over-year growth. And overseas, yes, overseas related business, yes, we mean some of the revenue growth pressure. But I think we -- in the Q2, we still get the top line growth of the overseas test prep by 4% year-over-year growth. And we're quite resilient. And actually, I think we are taking the market share from the market. And so in the Q3, let's say, in the second half of the year, -- so I do believe the revenue growth will be flattish of the overseas-related business. It's still a drag, but I think we will do as good as we can. College business, let's say, the 14%, 15% top line growth. And yes, this is a breakdown. And so in the second half of the year, I think we're quite positive about the revenue growth and the -- even the higher merger. Because -- since last year, March 2025, we started to the cost control. And I think we have done a great job. And going forward, we will do more on cost control. So it will improve the margin expansion going forward in the second half of the year and the year after.

Our next question comes from Alice Cai of Citibank.

Congratulations on the strong results. We heard about the business integration between your test prep and consulting units, there I have 2 questions, quick questions. First, what is the expected margin expansion from this merger? And can it effectively offset the headwinds in the U.S. market? Second, regarding efficiency, how much reduction do you expect in the customer cost acquisition? And what is your target for the cross-selling rate?

Yes. Yes. I think, yes, I saw the news of the merging of the overseas test prep business and consulting business. And as you know, before the merging overseas test prep -- the unit and the consulting business provide the service to their clients, respectively. And each site has their own management teams, teachers, marketing staff, admin staff. And I think we -- now we put it together. We merged the overseas test prep and consulting business. And I think the merge -- so let's say, the restructuring aims to provide a customer with a one-stop service. And I think the -- we will provide even better service to the customers, and also to be reduced absolutely some cost expenses because we put it together, and I think the -- one person can do more jobs even stronger than before. So let's wait till the next quarter's earnings call. I will share with you about how much cost we can save or even the -- how much can get more revenue or improve the top end growth and to save some cost to have the margin profile.

Our next question comes from Lucy Yu from Bank of America Securities.

Congratulations. So my question is on the margin expansion in the second quarter, which has been more than 1 percentage point. Could you please elaborate on the margin expansion? What is driving that? And how should we think about the margin expansion magnitude in the second half?

Yes. Okay. Yes. Lucy, I think your question is about margin. Yes, even, as I said, even though we made some margin drag from the overseas related business, but we still got the full margin expansion in Q2. The non-GAAP OP margin was increased by 470 basis points year-over-year. I think the margin expansion was mainly driven by the better utilization, the higher operating leverage and cost control and the -- and also the profit contribution from the East Buy. I think we will continuously focus on operational efficiency and disciplined resource management, let's say, in cost control. We control the learning center expansion plan and we control the marketing expenses. You saw the numbers, the results -- and I think going forward, even the Q3 and the Q4 in the second half of the year, we will get the margin expansion. I don't want to give the detail guidance because typically, we don't give the margin guidance, but we are quite optimistic about the margin expansion in the second half of this year.

Next question will come from the line of Yikun Zheng from Citic.

Congrats on the strong results. So my question is about the overseas business. As you mentioned that the overseas business has like 4% of growth rate. Actually, the market condition is quite challenging. So just wondering the future trends and the main reason for the overseas that can get such good results?

Yes. I think yes. As I said, the overseas related business needs some impacts of the economy environment outside. But I think our team have done a great job. They have shown very resilient in the first half of the year. And we believe they will take the more market share from all the competitors. And also, I think the group gave the team more support than before because it needs some pressure. We should help them to do more jobs. And going forward, in the second half of the year, I think I just want to give the guidance, the flattish or little bit down a low single-digit growth because the outside environment has no change. But I believe our team will do the great job as they did in the first half of the year.

Our next question comes from D.S. Kim of JPMorgan.

Congrats on the great quarter. And I hope that -- this is first of many, many more quarters to come. Before I actually ask my question, can I double check on Lucy's earlier question on margin. Can we talk about how much of the margin expansion in 2Q, not the forward-looking, but 2Q came from core education versus East Buy to the extent that you can elaborate? And I have my question after this.

Yes. Actually, East Buy also reported their first year -- first half results, so you can roughly calculate. So if you take out East Buy all the rest together, margin expansion is roughly about 300 bps margin expansion year-over-year.

And my actual question is for our new education business is great that we printed more than 20% growth. What do you think in your view is like sustainable growth rate for this segment from here, say, assuming stable 10% capacity expansion for -- like next 3 to 5 years, say, like 10% for the group capacity expansion, maybe that means K-9 capacity can grow maybe 15% per annum and then we can add on maybe 4%, 5% of ASP growth and a couple more points for efficiency gain or utilization gain, if you will. Does that mean that can we continue to expect say, 20% plus growth, I'm not talking about second half, but like next few years, based on this level of capacity expansion or the growth algorithm or formula can change versus what we had in the past?

Yes. I think it's a great question. We changed our strategy before the starting of this fiscal year. We slowed down the learning center expansion from 20%, 30% the year before to, let's say, 10%. So that means we put more focus on the quality -- and quality improvement. So I think all the business line, even the high school and the K-9 business the student retention rate is getting higher. I think it's even better than expected. And also, that means we got the better word of mouth. So we don't need to spend like crazy marketing expenses to acquire the new student enrollment. That means we get the new student enrollment by better word of mouth. And so I think in the second half of the year, we guided the 20% plus the top line growth of the K-12 business, I believe we will keep the sustainable growth in the year after. Because the better quality and also the -- even the more -- the high -- the competitive edge of New Oriental, I think we deserve to get more -- new student enrollment even though we cut some marketing expenses. And also, definitely, we will see more leverage because we just opened less than 10% new learning centers, but the revenue growth is something -- somewhere around 20%. So it will -- you will see the higher utilization rate and the higher margin of the K-12 business. Yes.

I hope to see that coming through in many more years to come.

Yes. And also, I want to add one point to Sisi's comments. In the Q3, I do believe we got the margin improvement from both core business and East Buy.

[Operator Instructions] Our next question comes from Timothy Zhao of Goldman Sachs.

Congrats on the solid results. So my question is that I recall in the last quarter results, you mentioned that I think about some of the new AI initiatives that you are launching. Just wondering if you can share any tangible results or any updates on the AI investments that you are making, for example, of a new course format that you launched probably late last year. Just wondering if there's any progress on that.

I think in the last 3 months, I think our team have done a lot on the new offerings of the new AI product. And I think we need maybe 1 quarter to testify the new offerings. And also -- and I believe it will contribute more revenue going forward. And one more point is -- I think the AI technology help us on the existing product. You saw the higher student retention rate. Yes, we put more focus on the -- like the product quality and even the service quality, but I do believe the AI helps us to guide even higher student retention rate going forward. So -- and also the AI help us to get more operational efficiency to save some expenses and cost. So AI helps the whole group in 3 points, new offerings and the existing product improvement and cost savings. So I think we should spend a little bit more on AI technology, but it's not that much. And we will control the whole spending. But I think we will bear more fruit from the AI investments going forward.

Our next question comes from Elsie Sheng from CLSA.

Congratulations on the results. I have a follow-up question on the margin expansion because if we look into the details in the second quarter, the gross margin is going up and also the marketing expense ratio is also going down. And -- because I noticed that you earlier mentioned that you have initiated cross department customer service system to improve the service or efficiency and also reduce the customer acquisition cost. So I wonder if the decrease in the marketing expense ratio related to this initiative? And if it's so, how do we expect the impact of this going forward? Do you expect this trend of lower marketing expense ratio to continue in the next few quarters?

I think the situation will continue because -- yes, first of all, we put more focus on the product itself rather than spend more money on marketing, but growth is still very healthy. And also, as you said, we set up a new customer service department. And that means I think we will bring the information within New Oriental even the old departments, overseas, consulting, college, K-12 business, high school, K-9 and even other business and the tourism business at East Buy. So I think these new departments will bring us more traffic even within New Oriental customer resources. So this is -- I think, is a very good tool to save more marketing expenses. And also, we just set up the 10% new learning centers this year. So we don't need to spend more money on marketing. And yes, even in the Q1, some -- I know some competitors did some summer promotion or even the reports in the summer. But we are happy to see more students from our competitors came back to New Oriental in autumn. So that means our core competitor were these product quality or quality turns to be better. And going forward, I think the selling and marketing expenses as the percentage of the revenue will go down going forward, even the second half of the year and year after.

Thank you for the questions. We're now approaching the end of the conference call. I will now turn the call back to New Oriental's Executive President and CFO, Mr. 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. Thank you very much.

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