New Oriental Education & Technology Group (EDU) Q1 2024 Earnings Call Transcript

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New Oriental Education & Technology Group (EDU 4.54%)
Q1 2024 Earnings Call
Oct 25, 2023, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good evening, and thank you for standing by for New Oriental's fiscal year 2024 first quarter results earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded.

If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host today, Ms. Sisi Zhao. Please go ahead.

Sisi Zhao -- Director, Investor Relations

Hello, everyone, and welcome to New Oriental's first fiscal quarter 2024 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 we express 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.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. It's a great pleasure to announce that New Oriental has painted an encouraging start of fiscal year 2024 by delivering a set of robust financial results this quarter, with top-line performance beating the high end of our expectations. Following a tireless year of trial and development, our multipronged business lines have pivoted toward a stable recovery and anchored fruitful yields, mainly benefiting from the strong post-COVID recovery of demand, consumption, and traveling.

While our new business has begun making meaningful contributions to the company's revenue, thereby invigorates growth and margin expansion, our bottom-line performance has also achieved a promising growth, our operating margin and non-GAAP operating margin reaching 18.6% and 22.3%, respectively, for this quarter, depicting a solid resilience across our business lines, thanks to our ongoing efforts in brushing up on operational efficiency and cost control. The delicate blend of our restructured business model, better utilized resources, and streamlined cost structure has sharpened our capability to yield better-than-expected margins in this fiscal quarter, as well as enlivens our exploration and ingenious ventures. Coupled with the company's sustainable profitability, resilient business lines, and emerging new initiatives, we have firm conviction in maintaining a healthy growth of our market share and creating sustainable value for our customers and shareholders in the long term. Now, I would like to spend some time to talk about the quarter's performance across our remaining business lines and new initiatives to you in detail.

Our key remaining business secured a promising trend coupled with the positive momentum in our new initiatives. Breaking down, the overseas test prep business recorded a revenue increase of 52% in dollar terms or 62% in RMB terms year over year for the fiscal quarter of 2024. The overseas study consulting business recorded a revenue increase of about 27% in dollar terms or 35% in RMB terms year over year for this quarter. The adults and university students business recorded a revenue increase of 26% in dollar terms or a 34% increase in RMB terms year over year for this quarter.

As mentioned in the past quarters, we have launched several new initiatives, which mostly revolve around facilitating students' all-around development. I'm pleased to share that these initiatives have continued to exceed our expectations by yielding consistent growth and meaningful profit to the company. Firstly, the nonacademic tutoring business, which we have offered in around 60 existing cities, focused on cultivating students' innovative ability and comprehensive quality. We're happy to see increased penetration in those markets we have tapped into, especially in higher-tier cities, with a total of approximately 438,000 student enrollment recorded in this fiscal quarter.

The top 10 cities in China contributed over 60% of the revenue of this business. Secondly, the intelligent learning system and device business, a service designed to provide tailored digital learning experience for students, has been adopted around 60 cities. We're thrilled to see improved customer retention and scalability of this new business with approximately 181,000 active paid users reported in this quarter. The revenue contribution of this initiative from the top 10 cities in China is around 60%.

Our smart education business, educational materials, and digitalized smart study solutions have continued to contribute material results to the overall advancement of the company. In summary, our new education business initiatives recorded a revenue increase of 103% in dollar terms or 117% increase in RMB terms year over year for the first quarter of 2024. In addition, beginning in this fiscal year, we're pleased to announce a newly integrated business line, which will be comprised of all of our tourism-related business targeting diverse age groups. This includes our well-rounded study tour and research camp business for students of K-12 and university ages, as well as our newly established tourism business that mainly serve middle-aged and senior audience.

Upon consolidation, this tourism-related business line will utilize New Oriental's strength of knowledge sharing, star teachers, and reputable branding to visualize our capability in serving customers for all age groups. It's our great pleasure to share the performance of new business line in detail. Our study tour and research camp business, an initiative that aims to offering students of K-12 and university ages the opportunity to utilize their free time to broaden the scope of knowledge and cultivate subject interest, has achieved encouraging growth in this summer, thanks to the strong post-COVID recovery of demand, resumed consumption, and traveling. We have conducted study tour and research camp in over 50 cities across the country, with the top 10 cities in China offering over 55% of the revenue share of this new initiative.

We finally expect the new business to contribute meaningful revenue in this fiscal year. In addition to success of our study tour and the research camp offerings, we also began venturing into the tourism business to expand our reach to all age groups, including the middle-aged and elderly individuals. During this fiscal quarter, we piloted a number of top-quality tourism offerings in featured provinces, including Zhejiang, Xinjiang, Shaanxi, Hangzhou, and Hunan, and we're sincerely grateful for the increasing traction that these novel adventures have gained. As we are still at a very preliminary stage of planning, justifying, and evaluating the visibility of this business in selected districts, we will keep you posted should there be timely updates on this new voyage.

With regard to our OMO system, we have persisted in revamping our platform and leveraged our educational infrastructure and technology edge on remaining key business and new business with a vision to provide advanced diversified education service to customers of all ages. During this reporting period, a total of $45.6 million has been invested in our OMO teaching platform, which equips us with the flexibility to maintain top-notch service to students during the pandemic. During this reporting period, East Buy has embraced a multi-platform strategy through our official debut on new platforms, including Taobao and its own app, in order to enlarge its customer base and amplify its brand inflows. East Buy consistently adhere to developing its private label products that are healthy, thrifty, high quality with good value for money and has attained instrumental breakthroughs with streams of new products rollout each month.

From groceries to daily necessities, East Buy's live streaming e-commerce has not only helped customers reap good bargains but also helped farmers, producers, and local enterprise sell their products through strategic marketing strategies. In addition, the brand continued to join hands with local governments to promote unique agriculture products from region to region, nurturing public appreciation toward diverse cultures through inventive content. It also pioneered a new mode of live streaming that's incorporated with the product traceability by which our lead teams would unearth regions of our private label products, factories, and [Inaudible]. Our live streams have thereby offered assurance to the customers through guaranteeing products' authenticity and visibility.

With regard to the company's latest financial position, I'm confident to share with you that the company is in a healthy financial status, with cash and cash equivalents, term deposits, and short-term investments totaling approximately $4.6 billion. On July 26, 2022, the company's board of directors authorized a share repurchase of up to $200 million of the company ADS or common shares during the period from July 28, 2022 through May 31, 2023. The company's board of directors further authorized the company to extend its share repurchase program launched in July 2022 by 12 months through May 31, 2024. As of October 24, 2023, the company repurchased an aggregate of approximately 6 million ADS for approximately $193.3 million from the open market under this program.

Now, I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead.

Sisi Zhao -- Director, Investor Relations

Now, I'd like to walk you through the other key financial details for this quarter. Operating costs and expenses for the quarter were $894.9 million, representing a 34.2% increase year over year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $855.3 million, representing a 32% increase year over year. The increase was primarily due to the costs and expenses related to the substantial growth in East Buy private label products and live streaming e-commerce business.

Cost of revenue increased by 41.4% year over year to $441.2 million. Selling and marketing expenses increased by 37.9% year over year to $136.1 million. G&A expenses for the quarter increased by 24% year over year to $317.6 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $290.3 million, representing a 22.3% increase year over year.

Total share-based compensation expenses which were allocated to related operating costs and expenses increased by 108% to $39.6 million in the first quarter of 2024. Operating income was $205.1 million, representing a 163% increase year over year. Non-GAAP income from operations for the quarter was $244.8 million, representing a 152.2% increase year over year. Net income attributable to New Oriental for the quarter was $165.4 million, representing a 150.6% increase year over year.

Basic and diluted net income per ADS attributable to New Oriental were $1.99, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $189.3 million, representing a 126.2% increase year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $1.15 and $1.13, respectively. Net cash flow generated from operations for the first fiscal quarter of 2024 was approximately $335.8 million and capital expenditure for the quarter were $132.5 million.

Turning to the balance sheet. As of October 31, 2023, New Oriental have cash and cash equivalents of $1,748.9 million. In addition, the company had $1,399.4 million in term deposits and $1,423.9 million in short-term investments. New Oriental's deferred revenue balance at the end of the first fiscal quarter of 2024 was $1,401.4 million, an increase of 38.4% as compared to $1,012.5 million at the end of the first fiscal quarter of last fiscal year.

Now, I'll hand over to Stephen to go through our outlook and guidance. Stephen?

Stephen Yang -- Executive Vice President, Chief Financial Officer

We're confident embarking a healthy journey of sustainable growth for the rest of this fiscal year, building on the combination of our brand advantage, rooted history, influential teaching content and resources, and solid foundation. We're also committed to work diligently, adhering to the latest guidance from the Chinese authorities on enhancing the nation's education level to strengthen its leading position to further unveil our potential in all business lines and creative endeavors. With regards to the learning center and classroom space, we plan to increase our capacity by about 15% to 20%, by which a reasonable amount of new learning centers is expected to be opened. World-class areas of some existing learning centers will be expanded in a few major cities.

Most of the new openings will be launched in the cities with better top-line and bottom-line performance. We will keep monitoring the pace and scale of new openings according to the local operation and financial results in this fiscal year. Despite the historical seasonality of some New Oriental's major businesses, which will usually result in a slower period for every second quarter, we remain confident in sustaining a healthy growth across all business lines. In summary, we expect total net revenue in the second quarter of fiscal year 2024 to be in the range of $785.0 million to $804.2 million, representing a year-over-year increase in the range of 23% to 26%.

To conclude, we're confident in achieving satisfactory operating profit level and improving our profitability in the rest of fiscal year 2024. As always, New Oriental place great determination to cultivate new endeavors and have bolstered our existing capabilities. Simultaneously, we'll devote reasonable resources on research and application of new technologies such as AI and ChatGPT into our educational and product offerings, with a vision to uplift our strengths and pursue the growth and operational efficiency in the future. We will also continue to seek guidance from and cooperate with government authorities aligned with these efforts to comply with the relevant policies, regulations, and measures, as well as to further adjust our business operations as required.

I must say that these expectations and forecasts reflect our consideration of the latest regulatory measures, as well as current and preliminary view, which is subject to change. This is the end of our fiscal year 2024 Q1 summary. At this point, I'd like to open the floor for questions. Operator, please, open the call for these.

Thank you.

Questions & Answers:

Operator

Thank you. The question and answer of this conference will begin in a moment. In order to be fair, all callers who wish to ask a question, we will take one question at a time from each caller. If you have more than one question, please rejoin the queue after your first question has been addressed.

[Operator instructions] Please stand by while we compile the Q&A roster. One moment for our first question, please. Our first question comes from Yiwen Zhang with China Renaissance. Your line is now open.

Yiwen Zhang -- China Renaissance Securities -- Analyst

Hey, thank you. Good evening, management. Thanks for taking my question. So, my question is about November quarter revenue guidance.

If we look at the YOY growth, there was a bit of deceleration versus the August quarter. Can you walk through us what are the drivers behind? And then probably, you can also talk about -- how do we see the growth outlook across different segments? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Yeah. As for the revenue guidance for Q2, actually, it's not a deceleration. I want to emphasize the following points of the Q2 guidance. Firstly, as always, we take a conservative approach in giving the guidance of Q2.

Secondly, the exchange rates negatively impact the revenue growth guidance by approximately three basis points. Thirdly, I think it also needs to be noticed that typically, Q2 is our seasonally slow quarter for most of our education business with lower-than-usual revenue and profit. Given the strong -- the demand -- the growth momentum we have seen so far this year, we are quite confident that the whole year's revenue growth will be better than we originally expected, especially in last quarter. We give the guidance on the top-line growth.

And this quarter, I think we gave the guidance or higher guidance than that of the last quarter, OK, for the whole year. And lastly, East Buy will start to have a higher base comparison since Q2 this year. And overall, I think benefiting from the post-COVID, the economy recovery, we have seen strong demand in education sector, especially in the overseas-related business and nonacademic tutoring business. And by leveraging our brand, the advantage of New Oriental and the good content and resources, and our long-established solid foundation, I think we'll continue to see great opportunity and to take more market share in the future.

Thank you.

Operator

Thank you. One moment for your next question. Our next question comes from the line of Felix Liu with UBS. Your line is open.

Felix Liu -- UBS -- Analyst

Hey, good evening, management, and thank you for taking my question. And congratulations on the very strong first-quarter results. My question is on your capacity plan. I noticed that in this quarter, your capacity, your Q-on-Q new learning center expansion accelerated from fourth quarter last year.

So, may I check your plan -- capacity plan from here? Do we expect this Q-on-Q new addition pace to maintain throughout this year? Or are there any seasonalities with capacity expansions quarter by quarter? And how do you see the regulation landscape or regulation environment around capacity expansion? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

This quarter, we added 6% new capacity in this quarter. And as you know, we increased our capacity expansion by about 15% to 20% for the whole year, fiscal year '24. And as I said, we will open a reasonable amount of new learning centers were new classroom areas in the top-tier cities with the good performance of the top line and the bottom line. And as I said, the market -- the demand in the education sector is very strong.

That's why we've raised the guidance of the whole year of the top-line growth and the learning center expansion plan for the whole year. As for the regulation side, I think so far, so good. And I think going forward, we expect the regulations will be stabilized in the future. And that's it.

And one more point I want to add. I think for the Q2, Q3, and Q4, I think we will -- following the guidance of the learning center expansion for the whole year of 15% to 20%, and maybe in the Q4, when we look at the budgets of fiscal year '25, maybe we will raise the guidance, the learning center expansion plan again in Q4. Yeah. Thank you.

Felix Liu -- UBS -- Analyst

OK. Thank you.

Operator

One moment for our next question, please. Our next question comes from the line of Lucy Yu with Bank of America Securities. Your line is now open. 

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

Hi, Stephen. This is Lucy. I have a question on the margin. So, this quarter, we have seen the OP margin expanded a lot and reached like 22%, which is a pretty high level even compared to our historical kind of OP margin, especially in Q1.

So, how could we be holding the margin expansion? And how should we think about the margin expansion for the rest of the year? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

OK. Thank you, Lucy. Let us start with this quarter margin analysis. The OP margin increased a lot in this quarter, was mainly driven by the following reasons.

Number one, the utilization improving of our learning centers and teaching resources increased the learning center margin. That means we have lower fixed cost expenses compared to that of last year. And number two, new business margin is over 20% in this quarter. The profit growth is faster than we expected two years ago.

We started the business two years ago. And the recovery of the remaining business, especially in the overseas-related business, generally, the higher margin in this quarter is higher, definitely higher than that of last year. And number three is East Buy enjoys a higher margin. And as we head into the fiscal year '24 Q2, I think with the operating leverage and higher utilization, the remaining business lines and the new business lines will generate more profit to the group, and I think we are optimistic on margin expansion and sustainable profitability in Q2 and in the rest of the whole year.

The whole team will continue to work together to seek profitable growth in fiscal year '24, and I think we believe we'll create more value to the shareholders over the long run. Thank you, Lucy.

Operator

Thank you. One moment for our next question, please. Our next question comes from the line of DS Kim with JPMorgan. Your line is now open. 

DS Kim -- JPMorgan Chase and Company -- Analyst

Hi, Stephen. Hi, Sisi. Good evening, and thanks for taking my question. And by the way, congrats on the quarter I think $245 million OP was the second best level on record, which is pretty amazing.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Thank you.

DS Kim -- JPMorgan Chase and Company -- Analyst

Anyway, I have a high-level question on long-term growth if that's OK. I guess we talked a lot about the new businesses, which are completely different animal and can continue to grow triple digit, I'm sure. But for old the businesses, existing businesses like overseas study, high schools, how shall we think about the sustainable growth from here, i.e., I mean, segment revenues. I think both of them are probably at record-high level, so it's no longer recovery phase.

And what's going to drive the growth further from here, say, if you were to break out different levers, like center expansions we discussed, 15%, 20% versus utilization growth, how much further room can we drive here and the price hikes, if any? And how should we think about, say, next two to three years annual growth for the old businesses from here? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

I think, yeah, for the existing business such as the overseas test prep, overseas consulting, and the adults and the university students business, I think let's analysis market like this. On demand side, we have seen the strong demand for the overseas test prep, consulting business, and for the college business. And on the supply side, after the COVID and the policy, we have seen a lot of players disappear from the market. So, that means we are facing less competition.

So, I think the existing business, including the overseas-related business and the adult and college students business, I think we will generate the top-line growth very good in the next two to three years. So, we are quite optimistic about the top-line growth and the margin expansion for the existing business. And as for the utilization rate, right, and for overall, in this quarter, in Q1 -- Q1 is the high season of the educational products. So, in Q1, the utilization rate in Q1 is somewhere around 65%.

So, that means the two-thirds. But I think we have a long way to go. And yeah, as I said, in this fiscal year, we'll plan to open 15% to 20% new capacity. But our top-line growth is -- we'll beat the guidance every quarter, and we raised guidance of the whole year top-line growth.

I think the top line -- the healthy top-line growth will cover the rentals of the new capacity. So, that means we do have the operating leverage in hand. And going forward, I think we will see -- you will see more operating leverage for all business lines. It will drive the margin up.

Thank you, DS.

Operator

Thank you. [Operator instructions] We are now approaching the end of the conference. I would now turn the call over to New Oriental's executive president and chief financial officer, Stephen Yang, for his closing remarks.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Again, thank you for joining us today. If you have any further questions, please do -- is that?

Sisi Zhao -- Director, Investor Relations

Operator, we probably have one more question from one analyst. Let's take that.

Operator

All right. OK. Thank you. One moment for our next question.

The question is from Caini Wang with CICC. Your line is now open.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Go ahead, please.

Caini Wang -- CICC -- Analyst

Hi, Stephen. Good evening. This is Caini Wang from CICC. So, congrats on a very strong set of results.

So, I just have a quick question on intelligent learning devices. So, we've seen that the active users this quarter had a quite impressive growth, like double Q-on-Q. Actually, what is driving such a strong growth? And how would we expect this business in the medium term? Thank you.

Sisi Zhao -- Director, Investor Relations

OK. Yeah. Actually, we're very satisfied with the development the new initiatives, especially for this kind of targeting younger kids, like K-12 students. New initiatives, like the new intelligent learning device business, last year, we rolled out in almost all the cities.

And now, we're seeing a huge demand for the service. It's quite innovative in terms of the offering using our -- all the technologies that we accumulated in the last several years that we have the cutting-edge technology and content as well and offering students a unique experience that helps students to enhance their academic study ability, especially self-study ability as well. Actually, the demand in all kinds of cities, high tiers, low tiers, are also -- are all very strong, and we are confident in this kind of user number increase improvement year over year. And definitely, we are also in the process of enhancing the quality of our products and the services as well.

So, we will make efforts in increasing the user number, as well as enhancing the tuition, like this kind of subscribing fee renewal rates as well. And also, we want to expand to more subjects for all the existing users. So, in summary, actually, the high demand and also the best content and technology and all the service are the fundamental for the development for this new initiative. And we will try to continue to enhance the quality and try to maintain this kind of healthy growth for this new initiative, OK?

Caini Wang -- CICC -- Analyst

Thank you, Sisi.

Operator

One moment for our next question. Our next question will come from the line of DS Kim with JPMorgan. Your line is now open. 

DS Kim -- JPMorgan Chase and Company -- Analyst

Sorry, can I follow up one more question here regarding shareholder return policy? I think -- I do think that our stock is very, very cheap still, but I noticed that the buyback activity the past three months has been pretty minimal. I'm just wondering, given the stock value so far, have you considered shifting the policy a little toward dividend or some other way? Or are we going to keep reiterating this buyback policy for the rest of the year and next year? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Yeah. As you know, we announced a $400 million share buyback plan. And so far, we finished $193.4 million, and I think we will buy more shares going forward in the rest of this year. And as always, we aim to create more values to the shareholders on capital return side.

Thank you, DS.

Operator

Thank you. [Operator instructions] And at this time, I'm showing no further questions. We are approaching the end of the conference call. I would now turn the call over to New Oriental's executive president and chief financial officer, Stephen Yang, for his closing remarks.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Sisi Zhao -- Director, Investor Relations

Stephen Yang -- Executive Vice President, Chief Financial Officer

Yiwen Zhang -- China Renaissance Securities -- Analyst

Felix Liu -- UBS -- Analyst

Lucy Yu -- Bank of America Merrill Lynch -- Analyst

DS Kim -- JPMorgan Chase and Company -- Analyst

Caini Wang -- CICC -- Analyst

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