After-school programs have been a huge boon for New Oriental. Image source: WANG Honying.

New Oriental Education (NYSE:EDU) released earnings last week. The outfit, transitioning from a company focused on English language learners to after-school programs for Chinese youth, continued a trend of positive reports that should leave investors feeling good.

Just the numbers
Both revenue and earnings came in ahead of projections. Just as important when it comes to for-profit education companies, overall enrollment as well as enrollment in its after-school tutoring program showed surprising strength.




Total Enrollment

Tutoring Enrollment

Q3 2015

$458.5 M




YOY Growth





Data source: E*Trade, SEC filings. YOY: year-over-year comparison with Q3 of 2014.

The solid enrollment growth in after-school programs was the key for the impressive results, and it will remain the most important metric for investors to follow moving forward.

Equally important, the company has shown that its investments in the future are paying off, and margins are inching upward after more than a year of contraction.

What else happened with New Oriental this quarter

  • The company opened a net of 10 new schools and learning centers, bringing its total to 721 across the Middle Kingdom.
  • Deferred revenue was up an impressive 28% to $512 million.
  •, New Oriental's pure online education platform, saw revenue increase 32% and paid users jump 150%.

What management had to say
Founder and CEO Michael Yu stated that even though the Chinese economy might be faltering, spending on education remains robust:

We have found in other periods of economic downturn that education spending proves to be more resilient than most of the other consumer discretionary categories in China and this is being proven once again in the current environment.

Yu also made it clear that the company is walking -- and will continue to do so -- a tightrope between heavy investments in its O2O initiatives and cost controls:

We... continued to focus on cost control across the organization. This meant that despite the heavy investment in our O2O integrated ecosystem, operating margin increased by 20 basis points from a year ago to 28.3%. 

Looking forward
Investors should be happy with the direction New Oriental is taking. The company has proven that its K-12 after-school tutoring program can be sustainably profitable. Management sees revenue next quarter coming in between $267 million and $276 million. The midpoint is well above the analyst average of $268 million. Furthermore, this increase would be even more pronounced were it not for the recent depreciation of the renminbi against the dollar.

Shares of New Oriental now trade for 19 times trailing non-GAAP earnings but only 11 times trailing free cash flow. That price is more than fair for a company that's clearly found a winner with its new strategy.