Can a for-profit education business model survive in today's world? After five years of deteriorating results from for-profit educators state-side, New Oriental Education (NYSE:EDU) is trying to prove that the model can work in the Middle Kingdom. Based on results released today by the company, they are moving much closer to that goal.
Wall Street showed that it was somewhat pleased with the news, as shares traded about 3% higher when the market opened this morning.
The long-term figures are looking good
When it comes to for-profit educators, there is no metric more important to watch than enrollment. On that front, New Oriental disappointed somewhat, but with an important caveat: overall, the number of enrolled students was flat year-over-year, but that was largely due to a shift in the timing of the Chinese New Year. Management included enrollment growth through the first six weeks of the current quarter to provided a fuller view, and when that is taken into consideration the picture looks very good.
This helps explain why the company was able to guide for revenue to come in at a mid-point of $328 million for the current quarter. Not only is that figure ahead of the consensus estimate of $323 million, but it also includes a $5 million discount the company took because of its customer rewards program.
Because New Oriental is trying to transition away from adult English-language classes -- and toward K-12 programs -- the rewards program is very important. It offers a 2-5% discount for current K-12 families enrolling in future courses. Revenue from after-school tutoring programs within this K-12 framework was up 22% last quarter, far outpacing New Oriental's overall revenue growth.
But margins remain under pressure
Last quarter, I pointed out that while enrollment figures were looking good, it might not mean much if the company's net profit margins didn't start expanding. Unfortunately for investors, the trend towards shrinking margins continued.
The company addressed this issue head-on in its quarterly release. CFO Zhihui Yang said, "During the third quarter we continued to allocate capital to the development of digitalized educational content...as a result our operating margin and net margin have been facing short term pressure as expected. However, we are very confident that these efforts will further differentiate New Oriental in a competitive market and it will allow our student customers access to fresh, new online offerings, greater efficiencies and a better overall learning experience."
What's impressive about New Oriental is that it has been able to succeed with both a traditional educational model -- where students and teachers meet face to face on a regular basis -- and an online model. Investors should be willing to cut the company some slack and see if these investments in technology really do add to the company's enrollment figures. At some point, however, Wall Street will want to see net margins expand once again.
As a whole, it was a very good quarter for the company, and investors should expect to see some fantastic enrollment numbers show up when the company reports results in its next release three months from now.
Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends New Oriental Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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