New Oriental Education & Technology Group Inc. ($EDU)

Thank you for standing by for New Oriental's FY 2026 Third 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'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 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 glad to share with you that Q3 of this fiscal year marks another quarter of solid results and consistent growth. We're pleased to see that after several consecutive quarters of the revenue growth exceeding expectations. This quarter has once again surpassed expectations. This reinforces our confidence in the correctness of our strategy and our optimism about future performance. We are even more delighted to see the margin expansion in our core business along with the significant contribution from the outstanding performance of Easter Bay. Our focus on operational efficiency and investment on strategic initiatives have begun driven satisfactory performance and continue to lead our path to sustainable profitability. This quarter, total net revenue grew by 19.8% year-over-year to 1,473 million. Non-GAAP operating income rose 42.8% to and $202.9 million, while non-GAAP net income attributable to New Oriental increased 34.3% to $152.2 million. Both our core business and new initiatives are gaining meaningful traction this quarter. Breaking down, overseas test prep business recorded a revenue increase of 7% year-over-year for this quarter. Overseas study consulting business recorded revenue decrease of about 4% year-over-year for this quarter. Our adults and university students business recorded a revenue increase of 15% year-over-year this quarter. As for our new education initiatives, including nonacademic tutoring and our intelligent learning system devices to deliver sustainable revenue that grew 23% year-over-year this quarter. Our non-dynamic tutoring business have been rolled out to around 60 existing cities. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contributed over 60% of this business. Our intelligent learning system and device business that leverages our teaching expertise and data analytics to provide adaptive learning solutions has been launched in around 60 cities. We're encouraged by enhanced customer retention and scalability of this new business. The top 10 cities contribute over 50% of the business. Turning to our integrated tourism related business. which includes study tours and research camp for K-12 and university students as well as new cultural tours for middle aged and senior travelers. We're delighted to -- we are delighted that the culture 12 China study tour global study tour and camp education products continues to be well received, providing customers with valuable knowledge, personal growth and cultural enrichment. Our student programs now operate in approximately 55 cities nationwide with the top 10 cities generate over 50% of the revenue. And our other top-notch adult tourism offering spread around 30 province domestically and select international destinations. We're also expanding into senior health and wellness tourism through partnership with over 40 wellness facilities in Hainan, Una and Guangxi, utilizing an asset-light model to pilot the emerging opportunity. We continue to invest in our online merge offline teaching platform, leveraging our educational infrastructure and technology capabilities to deliver advanced personalized learning experience. across our OH groups. This quarter, we invested $30.6 million to enhance and maintain our OMO platform, which enables us to provide high-quality instruction to students, while adapting to their individual learning needs. Turning to East Buy. East Buy remains committed to delivering premium products and service to Chinese families. It has advanced its multi-platform multi-constrategy by launching specialized vertical live streaming channels on doing, including East Buy home, East Buy food and vestable and East Buy Nutrition and Health. It also continuously optimize its live streaming content and introduce innovative engagement initiatives, including large-scale live campaigns for streamer recruitment and supplier conferences as part of its efforts to strengthen team capabilities, supplier partnership and customer engagement. Looking ahead, East Buy will look to expand its private label portfolio enhanced product R&D and quality control, accelerate app membership ecosystem development and grow its off-line footprint steadily through vending machines and experienced stores. Together, these initiatives will drive greater operational efficiency and advanced supply chain excellence, supporting sustainable long-term growth. Besides upgrading our OMO system increased by the positive feedback on our AI applications, we continue to integrate AI across our offerings to strengthen core capabilities. Simultaneously, we are expanding the use of AI to streamline internal operation, thereby boosting efficiency and elevating the support from our teachers and staff. Driving innovation in product capabilities and official excellence continue to fuel our pursuit of the sustainable revenue growth. We look forward to sharing measurable results from our AI investments in the quarters ahead. I would also like to take this opportunity to share a new strategic initiative with you. Historically, New Oriental has focused on serving our customers as each individual. Going forward, we're expanding the perspective to serve the entire family units. Given our diversified offering across different age groups and demographics, we're uniquely positioned to adopt full life cycle full spectrum approach that addresses the evolving needs of each family member from children to parents to seniors. To support the shift, we launched a new Oriental home, a private domain platform that integrates our education service each by East Buy offerings and cultural tourism products into one unified ecosystem. Through a single app, families conveniently access, manage and redeem service tailored to different members, enabling seamless cross-category engagement and deeper household level relationships. This platform is already demonstrating strong user engagement and retention to scenario-based marketing and integrated service offerings, significantly enhancing customer lifetime value. At the same time, the precision driven operations, improve conversion efficiency and optimize overall operating cost. We have now launched this pilot program in 12 cities as test beds, including Hangzhou, Suzhou, Xian and Wuhan, with over 330,000 registered families. The platform has achieved campaign activation rates of 10% to 15%, significantly outperforming many public domain e-commerce platforms. This performance demonstrates the high reach and position advantages of our education folks private domain ecosystem. Now I will turn the call over to Sisi to share with you about the key financials. Please go ahead.

Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating costs and expenses for the quarter were $1,237 million, representing a 16.9% increase year-over-year. Cost of revenue increased by 23.4% year-over-year to $656.2 million. Selling and marketing expenses increased by 9.1% year-over-year to $198.8 million. General and administrative expenses for the quarter increased by 10.8% year-over-year to $382.1 million. Total share-based compensation which were allocated to related operating costs and expenses, increased by 30.9% to $21.1 million in the third quarter of fiscal year 2026. Operating income was $180.3 million, representing a 44.8% increase year-over-year. Non-GAAP income from operations for the quarter was $202.9 million, representing a 42.8% increase year-over-year. Net income attributable to New Oriental for the quarter was $126.8 million, representing a 45.3% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.80 and $0.79, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $152.2 million, representing an increase of 34.3% year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.97 and $0.95, respectively. Net cash outflow generated from operations for the third quarter of fiscal year 2026 was approximately $7.5 million. And capital expenditure for the quarter were $68.8 million. Turning to the balance sheet. As of February 28, 2026, New Oriental had cash and cash equivalents of $173.4 million. In addition, the company had $1,491.7 million in term deposits and $1,953.2 million in short-term investments. New Oriental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the services or goods are delivered at the end of the third fiscal quarter of 2026 was $1,885.9 million, an increase of 7.8% as compared to $1,749.9 million year-over-year. Now I'll hand over to Stephen to go through our outlook and guidance.

Thank you, Sisi. Behalf the results we achieved this quarter reinforced confidence in our operational resilience and growth trajectory. Looking ahead, we remain focused on balanced growth, advancing both revenue and profitability in parallel. We will expand capacity and talent strategically, ensuring the growth does not come at the expense of quality. We plan to deepen our presence in markets with proven top and bottom line performance while maintaining disciplined resource allocation. We will calibrate the pace and scale of new openings throughout the year, aligning expansion decisions with official needs and financial results. Cost discipline and sustainable profitability across all business lines continue to be foundational to our strategy. In the coming quarter, what I mean is in the coming Q4, we expect greater cost control to be realized as a result of restructuring and the consolidation of our overseas business, a certain level of fixed expense will be reduced enable us to pave the way for higher operational efficiency and a better margin profile next year. There will be certain one-off expenses in the coming quarter related to the structural adjustments. Even so, we remain confident in our fourth quarter profit margin. Looking ahead to next fiscal year, we have strong confidence in our core education business and Easter Buy. We will continue to drive sustainable and healthy growth through product enhancements and quality improvements, while further optimizing operational costs and enhance the efficiency and profitability. Considering the positive momentum and cost management measures across our business lines, we expect the total net revenue for the group in the fourth quarter of fiscal year 2026 to be in the range of 1,429.6 million to $1,466.9 million, representing a year-over-year increase in the range of 15% to 18%, driven by the encouraging growth across various business lines, new oriental raised the full year guidance of total net revenue in fiscal year 2026. June 1, 2025 to May 31, 2026, to be in the range of $5,561.4 million. to $5,598.7 million, representing year-over-year increase in the range of 13% to 14%. These expectations reflect our current outlook based on recent regulatory developments and the prevailing market conditions also risks remain subject to change. I'd also like to give you an update on our shareholder return plan for fiscal year 2026. In October 2025, we announced that pursuant to its privilege adopt a 3-year shareholder [indiscernible] plan, the Board of Directors has approved the outer dividend of $0.12 per common share or $1.2 per ADS to be distributed in 2 installments as part of the shareholders' return for the fiscal year 2026. As of today, the first installment has been fully paid to shareholders and ADS holders. The second installment $0.06 per common share or $0.6 per ADS will be paid to holders of common shares and holders of ADS of record as of the close of business on May 15, 2026, Beijing, Hong Kong time and New York time, respectively. We expect the payment date to be on or around June 2, '26, or June 5, 2026 for holders of common shares and holders of ADS, respectively. Additionally, we announced that a share repurchase program and which new Oriental is authorized to repurchase up to $300 million of its ADS or common shares over the sequence months in open market. As of April 21, 2026 yesterday, we had repurchased a total of approximately 3.3 million ADS was aggregate consideration of approximately $184.3 million from the open market, and this share repurchase per well. In closing, New Oriental remains firmly committed to sustainable growth, delivering exceptional value to our customers and generating long-term returns to our shareholders. We continue to maintain close collaboration with the government authorities in China, ensuring full compliance with relevant policies and regulations and adapting our operations to evolving requirements. This is the end of our fiscal year 2026 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 Jenny Yang from UBS.

[Foreign Language] Congrats on the strong set of results this quarter. My question is about margin trends. So we know that OP margins been meaningful by 2.3 percentage points this quarter, which is very impressive. So could management fees help us break down the key drivers behind this margin expansion. And in addition, what is your view, your outlook for margin trends in next quarter and for the next fiscal year?

Yes. Thank you, Jenny. I think there's a good question about margin. Let us start with the margin analysis this quarter. Even though we meet some margin drag from the overseas related business, but we still have good margin expansion by 230 basis points up. And I think the margin expansion was mainly due to the better utilization, operating leverage and the cost control and as well the more profit contribution from Easter Buy. As you know, we started to do the cost control since March 2025 last year. So in the last 11 months, I think we have seen a very good result and which helps to drive the margin up. And so our focus on operational efficiency and discipline, the resource management has been the key driver of the margin expansion. Next quarter margin the Q4, I think we remain optimistic on margin expansion in Q4, even though we will -- there will be some -- like certain one-off expenses in the coming quarter in Q4 related to the structural adjustments, the consolidation between the overseas test prep and the consolidated. This is one-off expenses. Even so, we still remain confident in the fourth quarter margin expansion for the whole group. So this is Q4 margin guidance. As for the margin outlook for the next year, the new fiscal year, I think we will focus on the profitability across all the business lines and drive to be achieved margin expansion in the coming years. I think we are quite optimistic mistake about the margin expansion for core educational business and the -- we expect to be East Buy will generate more profits in the coming new year. Jenny?

We will now take our next question from Ali Cai from Citi.

Stephen, congratulations on the strong result. And may I ask the question on capacity expansion plan for Q4 and also for FY '27.

Yes. The expansion, I think as we guided the starting time of this fiscal year, we plan to open 10% to 15% new capacities. I think the net add of the new learning centers in the first 3 quarters was 8%. And -- so this is -- that means in the first 3 quarters, the net adds 8%. So I think the whole year is the net expansion is somewhere around 10% to like 13%, 14%. As I said, we only allow the cities with the good performance of the top line, bottom line last year to open more the learning centers. And we care more about the better utilization and the margins of the hope -- so I think we still focus on the -- we put the new student enrollments into the existing learning centers. And so I think if you show the utilization rate, it will be up for the group. And next year, I think we will continue to open somewhere around 10% or even a little bit more learning centers in the new year. But on the other hand, don't forget, we do have a lot of the online and the OMO products and offerings. We do -- for some online, this is -- we even don't need the existing learning centers. So I believe in the coming new year, the utilization rate will continuously go up going forward. Alice?

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

This is Lucy Yu from Bank of America. I have a question on margin as well. So you mentioned that there will be one-off restructuring expense in the coming quarter. Would you please like quantify how much would that be in either U.S. dollar term or in the margin or as a percentage of revenue, but that's in the May quarter. And also, you mentioned your new strategy that will possibly lower the selling and distribution expense or the marketing expense next year. So what's our target on sales and marketing expense for '27?

Yes. I think the one-off, the expenses in the coming Q4 relate to the structural adjustments of the overseas on the business. I think the negative impact on margin is roughly 50 bps to 100 bps. So roughly $10 million to $15 million is a one-off. But even we -- even so, but we still remain the confidence to get the margin expansion for the whole group in the coming Q4. What I mean is we include the -- even though we include the one-off expenses into the forecast, we still get margin expansion in Q4. And your question about marketing expenses plan next year, yes, I think the next -- we are doing the cost control. And also, we put more focus on the products quality has band. So we don't need to spend crazy money on marketing going forward, like what we did in the last 3 quarters. And then in the coming year, we expect that the marketing expenses as the percentage of the revenue will be down. So it's another factor to help the margin. Lucy?

We will now take our next question from Yikun Zheng from Citic.

Congratulations on the strong results. My question is about the momentum of Qtel business. And remember, last summer, our K2 business has gone through some deceleration. So how do we think of the growth trend and competition for Katusa business in December to our business.

Yes, I think we'll be the guidance again of the K1 business in Q3. I think we -- actually, we beat the guidance in like 2 to 3 quarters in a row. And I think in the Q4, we still -- we are very optimistic about the K-12 revenue growth. I think the reason is, this year, we changed the strategy. We put more focus and resource on the product quality enhancement, and so I think it drives the student retention rate up and drive the utilization rate up. And so in the Q4, I think our K-12 business still got the revenue growth about, let's say, 15% to 20%. [indiscernible] 20% content growth plus 20% plus top line growth and high school business let's say, 15% to 20%. So I think going forward, even in the next year, we're next year after, I think we still get a very healthy growth of K-12 business. Because now I think our quality is better than that of last year and also the student retention rate is up. And so that's why we don't need to spend pretty money on marketing to recruit a new student enrollment. And so I think we're quite optimistic about the K-12 business, the growth going forward. Yikun.

We will now take a next question from Elsie Sheng from CLSA.

Stephen, congratulations on the strong results. My question is about overseas business. So I noticed that the revenue growth of the overseas tax prep has been accelerating over the past 2 quarters. Could you give us more color on the reason behind? And is it because the demand is coming back? Or is it because we take more market share? And what's the outlook for the overseas growth in the fourth quarter and next year?

Yes. Due to the negative impact of the economic environment and the international situation. I think yes, our overseas business was negatively impacted by the outside environment. But I think the -- our team of the overseas have shown the resilience in almost every -- and so we -- given the coming Q4, I think the overseas business will get like year-over-year will be flattish or low single digits up when is the revenue increase. And so thanks for the -- we have a great team to do the great job in almost all the cities. And next year, I do believe we can do even better. Because since last quarter, we started to be consolidation of the overseas test prep and the overseas consulting. So going forward, I think we will provide a better one-stop service and product to students. And also, we will do some cost control to save some fixed cost expenses. And also in the coming new year, I do believe the overseas in this margin will be up.

We will now take our next question from D.S. Kim of JPMorgan.

Stephen, congrats on the strong did. Actually, all my questions have been answered already. So let me just ask a couple of follow-ups. First, you mentioned a $10 million, $15 million one-off expense in 4Q. Can I just double check, it would be purely contained in 4Q or can it be additional one-off spilling over into next year? I think it's just one-off, but just to provide some confidence and going forward to the market on our margin expansion next year, just to clarify. Second, you mentioned the expansion 10% to 13%, 14% expansion. Can I double check is that number of centers or the size of classroom, like area size expansion? And more importantly, what does this group level expansion means specifically for K-9, like class capacity, if you will, this and next year?

I think the one-off expenses, what I said is I think majority of the one-off expenses, it will be high than into Q4. So it's a one-off. But even we consider the one-off expense drag, but we still get the hope of margin expansion in Q4. And -- but it's better to the future because we spent some one-off expenses in Q4. But as a result, we reduced the fixed cost expenses in the coming year. So that's why I said we will drive the margin up of the overseas business in the coming year. And your second question is about the capacity. Yes, what was -- yes, what I'm saying is in square meter size. So this is a net add. And then most of the capacity we build up as in the K-12 business. And -- but don't forget the K12 business, the top line growth will let's -- it's not official guidance, but it's based on our current estimation, I think the next year top line growth will be somewhere around 15% or 20%, let's say, close to 20% or even more. So we still have the leverage. If we open like 10% to 15% of the new capacity, we still have the leverage to drive the average utilization rate up going forward. So -- and I think the -- as for the cost and expansion discipline, I think the local team is going to support my job I believe they will do a better job in the coming year, even they have done a great job in this year. So I do believe they will do more or better job in the coming new year on cost control and control of the expansion plan.

Yes. I think I absolutely agree with you that like it's kind of -- we need to do that hard to make the hard decision to optimize our cost structure into next year. But just to double check, I know it could be a little sensitive, but broadly speaking, the one-off, when we say this kind of optimization of our workforce and the staff that's one-off, right? So it's not like we are ongoing spending money on restructuring. It's just really that we had to make our decision, and there was some related cost to it in 4Q. Is that fair understanding?

Yes. Yes, correct.

We will now take a next question from [indiscernible] of CICC.

Stephen and Sisi, congratulations on this quarter's strong performance. I noticed that on the new allocation business side, revenue top line growth remained strong, but I see a slight moderation in the number of paid user growth for the learning device. So could you help us understand what's behind the shift?

Yes, I think this -- because of the disclosure, the difference -- so I think the pause -- what I'm saying is we want students -- the 1 [indiscernible] pay more money and enroll more subjects at the same time. So it's better than before. And secondly, we do have some -- like the seasonal or the timing difference issue. And so I suggest that you will look at the enrollment and the deferred revenue and the GAAP revenue in more long term. So that's why we gave the whole year guidance since this year. And so I think the trend is worth of big K-12 business. And in Q4, I believe the revenue growth will be very healthy, and we'll continue to grow the business even in the Q4 and the new year.

We will now take the next question from Charlotte Wei of HSBC.

Stephen and Sisi, congrats on a really strong quarter of results. So my question is regarding AI impact. SP225745012 On 1 hand, we can see AI clearly improve like operational efficiency and support margin expansion. On the other hand, so how do we expect like AI can change the core tutor formats, the EDU is currently offering. So like over the next 12 to 24 months, what kind of opportunities and threats do you see from the AI?

I will ask Sisi to answer your question, Sisi is AI expert.

Okay. Yes. So actually, we are excited about the opportunity to implement AI technology into our business, it's a big opportunity for companies like us with capital advantages and also we can hire top people and also have the best educational experience in this industry. So we have the best position to implement AI technology into our area. And 3 things we're doing. And we are making progress and also want to share with each of you. Firstly, we are implementing AI technology into all key business lines. So for not only those online products or hardware products like our intelligent learning device, we have all the AI functions in it, embedded into it and keep monetizing it and enhancing students' learning experience and improve the learning efficiency of our customers as well. And even in offline classes for young people, for young students and all ages, actually, they can implement some AI functions in the class, and we are collecting the data and combining it with our teaching and learning experience to have all the data to process more and more value to help us to even explore even more product opportunities in the future. So existing products are enhancing the quality and also enhancing the comparative -- competitive advantage using the AI, implementing the AI technology. And second thing we are doing is to help us this year, especially this year and coming 1 to 2 years, our key SIM is to enhance the overall efficiency, bring the healthy growth plus the profitability enhancement. The AI can put a lot of -- can give us a lot of help for each progress of our daily work for all the teachers, salespeople and teacher assistants, even functional department staff, the whole working process can implement AI technology to enhance the efficiency. So we have already seen some business, labor costs got reduced, or labor hours got reduced. And also we are doing some restructuring for certain business, for example, the overseas-related business and also some other business as well. So we want to use -- implement more and more ad technology into the working process to benefit from this efficiency improvement. So this is the second thing. It's an ongoing work. So we will continue closely following the trend of AI technologies evolvement and keeping -- using it into the whole working process. Teachers are saving more and more time so that our teachers utilization can also improve together with the trend. And third biggest thing, actually, we are also exciting and waiting for the results is that we have several palleting team. They're working on some new products, implementing purely AI technology. So we can get rid of or depends very, very little on humor source, but we can combine the AI technology with our teaching and learning experience and certain content so that we can come up with some innovative, actually educational products, which is different from currently what we are doing for offline. But using the AI technology to bring students the learning experience similar with offline face-to-face teaching but using AI technology. So we're exploring some opportunities here now. And hopefully, in coming several months, maybe we can see some new products coming. Yes. So -- actually, the company are devoting a lot of new resources into the AI area. It's an ongoing process. But definitely, together with our strategy, we'll put more -- implement more of the AI technology keep catching up the trend and benefit more going forward.

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

Great. Congrats on the solid results. My question is regarding your longer-term margin profile as you have discussed a lot about the new initiatives, expanding the full life cycle of the customers and AI can help improve our operating efficiency and including the overseas test prep and cannot integration. I'm just wondering if you can share any updates on your view on the longer-term operating margin of EDU business and use educational business.

Thank you, Tim. The margin question. As I said, the coming new year, I think we're quite optimistic about the margin expansion because of the higher the utilization rates and even the better leverage -- operation leverage and also the -- because of the cost control, we reduced the fixed cost and expenses. And so in the next year, the margin will be up. And I don't believe we will get the margin expansion in the next 3 years. So we do hope we can get better margin step by step in next 3 long term. So -- and I think next quarter, I will give the guidance of the -- detailed guidance of the margin next quarter, for the next year, but we're quite optimistic about the long-term margin expansion going forward. Tim?

As we are now approaching the end of the conference call, I'll 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 don't hesitate to contact me or any of our Investor Relations representative. Thank you.

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