New Oriental Education & Technology Group (EDU) Q2 2024 Earnings Call Transcript

New Oriental Education & Technology Group (EDU 4.54%)
Q2 2024 Earnings Call
Jan 24, 2024, 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 FY 2024 second 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. And now, I turn the meeting over to your host for today's conference, Ms. Sisi Zhao.

Sisi Zhao -- Director, Investor Relations

Thank you. Hello, everyone, and welcome to New Oriental's second 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, 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.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Thank you. Hello, everyone, and thank you for joining us on the call. It's our pleasure to announce that New Oriental has delivered a set of fruitful financial results that have surpassed our expectations this quarter. Our diverse business lines have embarked a healthy recovery and anchored stable top line performance, while the enduring momentum of our new business has made meaningful contribution to the company's revenue and continue to pave the way for further acceleration.

New Oriental's bottom-line performance has achieved promising growth with operating margin and non-GAAP operating margin reaching 2.5% and 5.9% for this quarter, respectively. Thanks to our unwavering efforts to brush up operational efficiency and cost control, as well as the combined efforts of our restructured business model while utilizing resources and streamlining cost structure. Encouraged by the company's sustainable profitability, resilient business lines, and prospering new business, we reinforce our commitment to maintaining a healthy market share growth and creating sustainable value for customers and shareholders in the long term. Now, I'd 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 businesses have depicted a propitious trend, while the new initiatives secured a positive momentum. Breaking it down, the overseas test prep business reported a revenue increase of 47% in dollar terms, or 50% in RMB terms year over year for this quarter. The overseas study consulting business recorded the revenue increase of about 32% 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 43% in dollar terms, or 46% increase in RMB terms year over year for this quarter.

As mentioned in the past quarters, we have launched multi-pronged new initiatives, which mostly revolve around facilitating students around development. They have continued to prosper with consistent growth, delivering meaningful profits to the company. Firstly, the nonacademic tutoring courses, which we have offered in around 60 existing cities, focus on cultivating students' innovative ability and comprehensive quality. The markets we have tapped into have recorded elevated penetration, especially in higher tier cities, with a total of approximately 786,000 students enrollment recorded in this quarter.

The top 10 cities in China contribute over 60% of revenue of this business. Secondly, the intelligence learning system and device business, our service designed to provide a tailored digital learning experience for students to enhance learning efficiency, has been adopted in around 60 existing cities. We have observed enhanced customer retention rate and scalability of this new initiative. Approximately 181,000 active paid users recorded in the quarter.

The revenue contribution of this initiative from the top 10 cities in China is around 55%. Our smart education business, educational materials, and digitalized smart study solutions have continued to contribute material results to the overall. In summary, our new educational business initiatives reported a revenue increase of about 68% in dollar terms, or 72% increase in RMB terms year over year for this fiscal quarter. In addition, as mentioned in the last quarter, we have inaugurated a newly integrated tourism-related business line as one of our innovative ventures.

Tailored with diverse offerings of cultural trips, study tours in China overseas, as well as camp education, New Oriental's cultural tourism business share the spirit to provide premium quality travel experience that are infused with joy from cultural exchange, knowledge sharing, and personal fulfillment. Within this new business line, our study tour and research camp business for students of K-12 and university age enters encouraging growth this quarter, thanks to a strong post-COVID recovery of demand and resumed traveling. We have conducted study tours and research camp in over 50 cities across the country, with the top 10 cities in China offering over 55% revenue share of this new initiative. We also pilot a number of top-notch tourism offerings to expand our reach to all age groups, including the middle-aged and elderly individuals, across 17 featured provinces.

As we are still at preliminary stage of planning, testifying, and evaluating the viability of the business in select regions, we will keep you posted should there be timely updates. 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 $28.7 million has been invested in our OMO teaching platform, which equip us with the flexibility to maintain unrivaled service to students continuously. During the reporting period, East Buy has attained strong growth momentum through a series of new initiatives, aimed to further development of its private label products and upgrades on customer service.

A comprehensive detail optimization of product quality has been conducted, and East Buy has made remarkable breakthroughs in supply chain integration, boosting its private label products to a total of 264 SKUs. Furthermore, nationwide broadcast events across provinces were launched with the consistent support from local cultural and tourism authorities. East Buy also began introducing cultural tourism products and incorporated century-long history, culture, geographies, and folklore into our live streaming e-commerce broadcast, presenting lively introductions of historical monument, tourism attractions, and local specialties to their audience. We look forward to witnessing the continued growth of the East Buy and its positive reception within the community.

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 deposit, and short-term investments totaling approximately $4.8 billion. On July 26, 2022, the company's board of directors authorized a share repurchase of up to $500 million of the company's 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, 12 months through May 31, 2024. As of January 23, 2024, the company repurchased an aggregate of approximately $6 million ADS for approximately $194.2 million from the open market under the shared repurchase 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 $848.3 million, representing a 32.4% increase year over year. Non-GAAP operating costs and expenses for the quarter, which excludes share-based compensation expenses, were $818.7 million, representing a 31.6% increase year over year. The increase was primarily due to the cost and expenses related to the substantial growth in East Buy's private label products and live streaming e-commerce business.

Cost of revenue increased by 25.7% year over year to $422.6 million. Selling and marketing expenses increased by 62.2% year over year to $155 million. G&A expenses for the quarter increased by 29.6% year over year to $270.7 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $256.1 million, representing a 34.2% increase year over year.

Total share-based compensation expenses, which were allocated to related operating cost and expenses, increased by 57.3% to $29.6 million in the second fiscal quarter of 2024. Operating income was $21.3 million compared to a loss of $2.5 million in the same period of the prior fiscal year. Non-GAAP income from operations for the quarter was $50.9 million, representing a 212.2% increase year over year. Net income attributable to New Oriental for the quarter was $30.1 million, representing a 4,007.4% increase year over year.

Basic and diluted net income per ADS attributable to New Oriental were $0.18 and $0.18, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $50.2 million, representing a 182.6% increase year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.30 cents and $0.29, respectively. Net cash flow generated from operation for the second fiscal quarter of 2024 was approximately $300.6 million, and capital expenditure for the quarter were $43.4 million.

Turning to the balance sheet, as of November 30, 2023, New Oriental had cash and cash equivalents of $1,942.6 million. In addition, the company had $1,324.1 million in term deposit and $1,571.2 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 second quarter of fiscal year 2024, was $1,645 million, an increase of 44.4% as compared to $1,139.1 million at the end of the second fiscal quarter of 2023. Now, I'll hand over to Stephen to go through our outlook and guidance.

Stephen Yang -- Executive Vice President, Chief Financial Officer

As we enter the new quarter, we look forward to delivering assuring growth and ongoing margin expansion, building on the plan of our brand advantage, roots to history, influential teaching content resources, and solid foundation. We're also committed to working diligently, adhering to the latest guidance from the Chinese authorities on increasing the nation's education level to strengthen its leading position to further unveil our possibility across all business lines and creative endeavors. With regard to the learning center and classroom space, we plan to increase our capacity moderately by about 20% year over year. We will keep monitoring the pace and scale of new openings according to the local operation and our financial results in this fiscal year.

The groundwork we have laid and the progress we have made thus far have fulfilled our optimism of our performance in the future. We will be dedicated to achieving margin extension throughout the whole year. In the coming quarter, we expect total net revenue to be in the range of $1,070.9 million to $1,093.5 million, representing year-over-year increase in the range of 42% to 45%. To conclude, we're delighted to share our latest set of the results to all of you.

We're confident in our ability to drive our business toward an even more positive trajectory and enhance profitability throughout the remainder of the fiscal year 2024. While we cultivate new endeavors to build upon our capabilities, we will also devote resources to research and application of new technologies, such as AI and ChatGPT into our educational and product offerings to uplift our strengths and pursuit for further growth and operating efficiency. At the same time, we will continue to seek guidance from and cooperate with government authorities in various provinces in China, in alignment with its efforts to comply with the relevant policies, guidelines, and regulations, as well as to further adjust our business operations as required. I must say that these expectations and forecasts reflect our considerations of the latest regulatory measure, as well as our current and preliminary view, which is subject to change.

This is the end of our fiscal year 2024 Q2 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

[Operator instructions] Our first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Felix Liu -- UBS -- Analyst

Hi, good evening, Stephen. Congratulations again on a strong set of results. My question is on your very good third quarter guidance of 40% revenue growth. Could you give us a rough breakdown of what's driving this strong growth? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

OK, thank you, Felix. I think, you know, we believe in the top-line guidance in this quarter a lot as we did in previous quarters. So, as for the revenue guidance for the Q3, I think, you know, we are still taking a conservative approach in giving the Q3 growth guidance, you know, which will be in the range of 42% to 45% in dollar terms year over year. You know, given the strong demand in education sector and growth momentum we have seen so far in this fiscal year, so we're quite confident about the whole year's revenue growth will be better than we originally expected, especially in the coming Q3.

And so, for all, you know, the business lines, you know, the overseas-related business, on demand side, we have seen a very strong demand for overseas test prep and the consulting business. And on the supply side, you know, we have seen some players disappear from the market during the COVID. And so, that means we're facing less competition in the market. And for the other, you know, revenue contributor, the new businesses, I think, you know, the encouraging performance in this quarter, in Q2, proves that we're heading toward the right direction.

And so, we believe this business will be able to maintain, you know, the very good top-line growth in the Q3. And yeah, so overall, so that's why we give the guidance of the top-line growth by 42% to 45%. And Sisi will add the breakdown for the quarter.

Sisi Zhao -- Director, Investor Relations

Yeah, actually the revenue contribution from key business lines is pretty consistent in this year, very similar to last quarter. Like overseas-related business contributes like 20% to 21% of total revenue, like domestic test prep, 2% to 3%. And also the K-12, newly developed educational initiatives for K-9, and also some remaining other training -- tutoring business for high school together contribute over 41%, 42% of total revenue. So, the key drivers are growing very, very well, and we're seeing continued trend for all the key business lines as well.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Thank you, Felix.

Felix Liu -- UBS -- Analyst

OK, thank you very clear. Congratulations on the results.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Thank you again.

Operator

Thank you. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please ask your question, Yiwen.

Yiwen Zhang -- China Renaissance -- Analyst

Hey, good evening, management. Thanks for taking my question. Congrats on the strong quarter result. So, my question is about our, you know, learning center expansion.

You mentioned about, you know, whole year 20% capacity growth. If I take it correctly, that actually implies that in half, net add would slow down a bit. So, could you discuss what our considerations there, given the very strong demand? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Yeah. Yeah, this quarter, we added around 7% new capacity. And at this time -- you know, last quarter, we guided the capacity expansion will be somewhere around 15% to 20%. So this time, we'll raise the expansion guidance to somewhere around 20%.

So -- and -- I think we will open a reasonable amount of the new learning centers, you know, while some in the new classroom areas or some existing learning centers will be expanded in the second half of the year. And I think most of the new openings will be in the cities with the better top-line and bottom-line performance. And I think we will keep monitoring the pace and scale of the new openings according to the operation and financial results in the second half of the year. And I think maybe in the next quarter or just, you know, in Q4, I think we will share with you about the new -- our new decision of the learning center expansion, maybe we'll raise again.

Thank you.

Yiwen Zhang -- China Renaissance -- Analyst

Yes. OK. OK. Thank you.

Operator

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

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

Hi, Stephen. So, this is Lucy from BofA. So, a follow-up on earlier question on expansion. So, actually we have seen very, very strong demand on the ground.

Many of my friends trying to enroll to a learning center, but I was told it's already full. Even the learning center is still under reservation at the moment. So, I'm wondering what is the bottleneck for us to expand faster at the moment. Is it teacher recruitment, or is it like finding the right location or get the license? So, what is the bottleneck from preventing us expanding even faster? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Yes. Thank you, Lucy. I think the reason that we give the guidance of the learning center expansion about 20% because I think, you know, we do have the OMO system and the OMO model. So, that means the online site will help us to, like, take over more students into the existing classrooms and learning centers.

So, OMO model helped us a lot. And secondly, education is typically a long-term business. So, we care more about the top-line growth and the bottom-line growth, that means the margin expansion. So, we don't want to grow the business too fast.

So, what we're carrying is that the top-line growth -- you know, actually, we have already gave the guidance of 45% top-line growth in Q3. And also -- we also care about the margin expansion. So, it's the growth balance between the top-line and bottom-line, Lucy.

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

Thank you, Stephen. Just to follow up, you mean the OMO model, I know it's adopted for the high school, but for the noncurricular training, we are also using OMO at the moment?

Stephen Yang -- Executive Vice President, Chief Financial Officer

Yes.

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

So, what's the percentage of, like, online versus offline at the moment?

Stephen Yang -- Executive Vice President, Chief Financial Officer

Yes. Yes, Lucy, for some -- the nonacademic courses and the overseas test prep, even for some college students business, we do -- all of the businesses, we do have the OMO model, yes.

Sisi Zhao -- Director, Investor Relations

And also, the intelligent learning devices, which is also the one that we don't require too many new locations.

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

I see. Thank you so much.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Thank you, Lucy.

Operator

Thank you, Lucy. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.

Timothy Zhao -- Goldman Sachs -- Analyst

Thank you. Hi, Stephen. Hi, Sisi. This is Timothy from Goldman.

My question is on the margins. I saw this quarter the non-GAAP op margin expanded by around 3.3 percentage points. Just wondering if you can provide any color in terms of breakdown because on the other hand, I think, for East Buy, there was some pressure on the margin. Just wondering if we exclude the margin impact from East Buy, what kind of margin expansion that we are seeing for the core business? And then, after this quarter, how do we think about the full year op margin guidance? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

OK. Yes, let us start with the quarter -- this quarter margin analysis. Even though -- yeah, as you said, even though, East Buy saw margin drag in this quarter. We still got the non-GAAP op margin expansion by 330 basis points.

And I think the margin increase was mainly driven by the following reasons. Number one is, you know, the utilization rates improving of our facilities and the teaching resources increased the learning center margins on average. So, that means we have the lower fixed cost and expenses compared to the -- that of last year. And number two is, you know, the new business margin is over -- is around like the 19%, 20%.

So, we just started the new business two years ago. So, that means the ramping-up pace is much faster than we expected. And also, the remaining business, such as the overseas-related business and the college business, generated higher margin than that of last year. So, in the Q2, if we take out the East Buy's impact for education in non-GAAP margins for that.

Sisi Zhao -- Director, Investor Relations

Increased, actually is much higher than the overall margin, yeah. Because they don't -- actually, East Buy don't release quarterly earnings. So, you can look at the results after first half, so you can roughly get the calculation of the educational business margin expansion.

Stephen Yang -- Executive Vice President, Chief Financial Officer

[Technical Difficulty] and, you know, as we head into the Q3 with operating leverage and the higher utilization control, I think [Technical Difficulty] will get the margin expansion continuously even in the Q3 and in Q4. So, that means in the second half of the year, I think you will see the margin expansion in education business.

Timothy Zhao -- Goldman Sachs -- Analyst

Thank you, Stephen and Sisi. This is very helpful.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

Thank you, Tim. Our next question comes from the line of Tian Hou from T.H. Capital. Please ask your question, Tian.

Tian Hou -- T.H. Capital -- Analyst

Hi, Sisi, Stephen. Congratulations for the good quarter. I have actually two questions. One is, how does culture and tourism business is conducted? How do you record revenue from that? That's number one.

Number two, can you break down the result and guidance into different segments for both revenues and margin profiles? That's two. Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Thank you, Tian. I will take the question about tourism business, OK. Tian, as mentioned in the last quarter, we have started the tourism business, you know, as the -- one of our innovative ventures. And this -- the tourism business includes our well-grounded study tour and research camp business for the students, as well as the -- our new tourism business that serves the middle-aged and senior people.

We do have a lot of teachers. And I think our new tourism business will utilize our strength in knowledge sharing of those teachers. And as well, we have abundant sales channels including Dongfang JingYuan and online, offline channels in New Oriental. So, during this quarter, we piloted a number of tourism offerings to expand the -- to reach all ages people.

And the top-line growth is very good in this quarter because last year we did have the negative impact from the COVID. And, you know, we set up the new company named the New Oriental Cultural Tourism Group. And also, this group company set up the 100% -- the subsidiaries in all cities. So, you know, we divided the revenue and the financial statement from the education through the tourism business.

So, that means going forward, we will record the two business lines, you know, in two parts. And so, going forward, I think our goal is to be the leading the cultural tourism company in China and to provide the best service to the customers as much as we can. And I do hope, going forward, the tourism business will contribute more revenues and the profit to the whole group, Tian.

Tian Hou -- T.H. Capital -- Analyst

That's good. Yes.

Sisi Zhao -- Director, Investor Relations

Yeah, Tian, your second question on the guidance breakdown, as I mentioned earlier, for overseas-related business, for Q3, roughly distribution are similar with previous quarter, about 21%, 22%. And the domestic test prep is about 2% to 3%. And the K-12, including the new educational initiatives for K-9 and also remaining high school business, together contribute over 40% of total revenue. Yeah, so that's the key business line mix.

Tian Hou -- T.H. Capital -- Analyst

Thank you. Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Thank you, Tian.

Tian Hou -- T.H. Capital -- Analyst

That's all.

Operator

Thank you, Tian. [Operator instructions] Our next question comes from Candis Chan from Daiwa. Please ask your question, Candice.

Candis Chan -- Daiwa Capital Markets -- Analyst

Great. Hi, Sisi and Stephen. Congratulations on a very strong quarter and also the revenue guidance. My question is on the margins for longer term.

So, I think you just mentioned that for the new education businesses that actually we are looking at around 19% to 20% operating margin, which is pretty impressive as compared to what you mentioned in the previous quarters. And I just wondering -- I just wonder for -- in the longer term that we are talking about like two to three years down the road, what should we expect for this new education business for -- in terms of their operating margins? And also, for the overseas test prep business, what kind of margin should we be expecting, given that very strong demand out of the revenue here? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Yeah, we -- yeah, as you know, we started the new education business two years ago. And in this quarter, the margin of this business is roughly 19%. And going forward, I think, the margin will be over 20%. So, that means we expand the margin of this business.

We will expand the margin of this business in the second half of this year. And even in the new year, fiscal year '25, we expect the margin of the education business overall will be expanded because of the -- yes, as I said, because of the lower fixed cost and the higher utilization of the learning centers and the cost control. I think both these -- the existing business, such as the overseas related business and the college business and the new business -- new initiatives will expand the margin. So, going forward, even in the second half of this fiscal year and the fiscal year '25, I think the margin will be expanded, yeah.

So, yeah. And, you know, we care more about the top-line growth and the margin expansion, so we believe we will create more value to the shareholders, yeah. That's the bottom-line wise.

Candis Chan -- Daiwa Capital Markets -- Analyst

Great. Another question is about our cash. I think we are having almost $5 billion cash right now. So, in terms of shareholder returns, what are we going to do with the cash in the following years?

Stephen Yang -- Executive Vice President, Chief Financial Officer

Yeah. You.know, we announced $400 million share buyback program. And so far we finished $194 million. And I think we will buy the share back from the open markets going forward.

And, you know, this round we choose to buy the share back and -- you know, but historically we paid the several times special dividend and did several times share buyback. So, going forward next round, maybe we will choose the dividend again and worthy share buyback.

Candis Chan -- Daiwa Capital Markets -- Analyst

OK. Good to hear. Thank you, Stephen.

Stephen Yang -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

Thank you, Candis. [Operator instructions] Our next follow-up question comes from the line of Felix Liu from UBS. Please go ahead, Felix.

Felix Liu -- UBS -- Analyst

Hi. Good evening, Stephen and Sisi. I have a follow-up question on competition. You mentioned that the supply demand dynamics of the sector is very strong.

So, do you see any risk in competition intensifying? Do you see smaller players also ramping up capacity expansions, or, if not, what is happening on the graph? Thank you.

Stephen Yang -- Executive Vice President, Chief Financial Officer

You know, Felix, we have seen a lot of the competitors disappear from the market since two, three years ago. And especially [Technical Difficulty] you know, we are facing less competition. And so, I think this is true, you know, both for the K-12 business and the overseas-related business, even with the college business. And going forward, I think we expect the competition environment will be stabilized.

Felix Liu -- UBS -- Analyst

OK. Got it. Thank you.

Operator

Thank you, Felix. [Operator instructions] Our next follow-up question comes from the line of Timothy Zhao from Goldman Sachs. Please go ahead, Tim.

Timothy Zhao -- Goldman Sachs -- Analyst

Hi, Sisi. Hi, Stephen. Just a follow-up question, I think on the intelligent learning system and devices, I saw the number of active users, I think, for the past quarter is actually quite similar to the summer semester. Just wondering if you can share some color in terms of the seasonality of these business line.

And what is the, I think, profitability that we are seeing and how to think about, I think, the Q-on-Q growth, I think, into the third quarter, fourth quarter? That would be very helpful.

Sisi Zhao -- Director, Investor Relations

Yeah. Actually, the intelligent learning device business are developing also very well. You know, the growth is pretty strong. And we're seeing actually not very seasonal pattern for this business, quite similar with previous tutoring business, especially for middle school students.

And this year, the year-over-year increase of user is very high. And also, we have prepared a lot of new devices to cater the needs of customers. The key drivers -- growth drivers are new customers and also we're making efforts on expanding to more subjects for existing customers as well. Because this is a very good product that helping kids to enhance their self-study ability even without our teacher's instruction, but using the device and also benefiting from our very, very good content, you know, differentiating content embedded in the device that kids can also prepare for the academic study and do the process by themselves.

So, this is a good solution after the policy change and all the -- the restructuring of the whole company. So we're confident in the development of this new product. And also, the profitability is also -- currently, we're seeing the margins are similar with our tutoring business like the nonacademic tutoring business mostly for elementary school students. And also, we're seeing the potential for this kind of learning device business.

The margin potential is also quite strong. We can leverage more of our teacher resources. And also, we don't need to spend a lot of cost on the learning center openings. Yeah.

Timothy Zhao -- Goldman Sachs -- Analyst

That's clear. Thank you, Sisi.

Operator

Thank you, Tim. Our next follow-up question comes from the line of Tian Hou from T.H. Capital. Please go ahead, Tian.

Tian Hou -- T.H. Capital -- Analyst

Yes, Sisi and Stephen, just a follow-up question. It's also related to the seasonality. So, just not quite sure, you know, what's the seasonality under the current business structure. So, can you share some color?

Stephen Yang -- Executive Vice President, Chief Financial Officer

Yeah. The seasonality becomes more smooth than, you know, many years ago, and but the Q2 is still the low in the season. And so, the strongest season is Q1 and then followed by the Q3 and Q4, and then the Q2 is the lowest season.

Tian Hou -- T.H. Capital -- Analyst

Does the margin also follow the same trend?

Stephen Yang -- Executive Vice President, Chief Financial Officer

I think so, yeah. You look at the margin, you know, in Q2, the non-GAAP op margin is roughly 5.9%. I think the margin in Q3 definitely will be higher than Q2.

Tian Hou -- T.H. Capital -- Analyst

OK. OK. Got it. Thank you.

Thank you.

Operator

Thanks, Tian. We are now approaching the end of the conference call. I'll turn the call over to New Oriental's executive president and CFO, Mr. 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

Thank you. That concludes today's conference call. Thank you for participating. [Operator signoff]

Duration: 0 minutes

Call participants:

Sisi Zhao -- Director, Investor Relations

Stephen Yang -- Executive Vice President, Chief Financial Officer

Felix Liu -- UBS -- Analyst

Yiwen Zhang -- China Renaissance -- Analyst

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

Timothy Zhao -- Goldman Sachs -- Analyst

Tian Hou -- T.H. Capital -- Analyst

Candis Chan -- Daiwa Capital Markets -- Analyst

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