New Oriental: Pressure in the off-season, we believe we will rebound in the second half of the year (1Q25FY conference call minutes)

The following is the summary of the first quarter financial report conference call for $New Oriental EDU & Tech(EDU.US) in 2025. For financial report analysis, please refer to The Turmoil of New Oriental: Without Dong Yuhui, Will Education Collapse? 》

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1. Business Progress

Overall Revenue: This quarter, overall net revenue increased by 30.5%, excluding the private label products and live e-commerce business of East Buy, net accounts receivable increased by 33.5% year-on-year.

Core Education Business: The operating profit margin of the core education business was 23.7%, the non-GAAP operating profit margin was 24.4%, increasing by 370 and 220 basis points respectively year-on-year.

Overseas Exam Training and Consultation: Exam preparation business for overseas exams increased by 19% year-on-year this quarter, while overseas consultation business increased by 21%, and domestic exam preparation for college students increased by 30% year-on-year.

New Education Business: Revenue increased by 49.8%

a. Non-subject Tutoring Services: Launched in 60 cities nationwide, with approximately 484,000 registered students. The top ten cities contributed 60% of the business revenue.

b. Intelligent Learning Systems and Devices: The intelligent learning business is operating in 50 cities, with approximately 323,000 active paying users. The top ten cities contributed 55% of the revenue.

Cultural Tourism Related Business: Introduced diverse cultural tourism projects, including domestic and international study tours, with revenue increasing by 221% year-on-year for K-12 and college students. The business covers 35 cities, with the top ten cities contributing 55% of the revenue.

OMO Platform: The company continues to invest in the OMO platform, with a total investment of $24.6 million this quarter.

East Buy Business: East Buy has launched 488 private label SKUs, with a wide business coverage. Its live streaming channels have expanded to platforms such as Tmall and JD, with plans to enter offline markets Sales Channels.

Assets and Stock Repurchase:

a. New Oriental's cash reserves and equivalent assets total approximately $4.9 billion.

b. The new stock repurchase program, with a total amount increased from $400 million to $700 million, has repurchased stocks worth $457.9 million as of October 27, 2024.

2. Financial Performance

Expense Side

a. Operating costs: reached $1.142 billion, a year-on-year increase of 27.6%. Non-GAAP operating costs and expenses were $1.135 billion, a year-on-year increase of 32.18%.

b. Cost of revenue: reached $583.5 million, a year-on-year increase of 32.3%.

c. Sales and marketing costs: reached $193.7 million, a year-on-year increase of 42.3%.

d. Administrative expenses: reached $365.1 million, a year-on-year increase of 15%. Non-GAAP administrative expenses were $354.5 million, a year-on-year increase of 22.1%.

Equity Incentives Side: Stock-based compensation expenses reached $6.9 million, a year-on-year increase of 82.7%.

Profit Side:

a. Operating profit: Operating profit was $293.2 million, a year-on-year increase of 42.9%. Non-GAAP operating profit was $300 million, a year-on-year increase of 22.6%.

b. Net profit: Net profit attributable to New Oriental was $245.4 million, a year-on-year increase of 48.4%. Non-GAAP net profit was $264.7 million, a year-on-year increase of 39.8%.

c. Earnings per share: Basic and diluted earnings per ADS share were $1.49 and $1.48, respectively. Non-GAAP basic and diluted earnings per ADS share were $1.61 and $1.60, respectively.

d. Cash Flow and Capital Expenditure: Operating cash flow for the quarter was $183.2 million, with capital expenditures of $80.2 million.

2.2. Q&A Analyst Q&A

Q: By expanding the learning centers by over 30% year-on-year, performance in the second quarter has slowed compared to the first quarter. How should we interpret this gap? Can management share their outlook for growth in the second half of the year?

A: Regarding the second quarter guidance, in US dollars, we expect revenue to grow by 25% to 28% year-on-year. Due to the seasonal factors of the education business, the second quarter usually shows more stable performance. However, we remain confident that we can achieve approximately 30% year-on-year growth for the full year. Therefore, we expect revenue growth to accelerate in the third and fourth quarters, surpassing the growth rate of the second quarter. Despite the current economic environment affecting overseas operations, we expect to maintain around 30% revenue growth for the full year (excluding Oriental Select).

We opened more learning centers last year in the third and fourth quarters, and the pace of expansion is accelerating, expected to attract more students in the second half of the year. We are optimistic about revenue growth for the full year

Q: Given that the second quarter is usually the off-season, will capital expenditures be reduced to improve profit margins? Are there plans to increase capital expenditures in the first and fourth quarters of the 2025 fiscal year? Additionally, in the upcoming quarters, will you focus more on increasing market penetration in existing cities?

A: As of the end of this quarter (first quarter), we increased production capacity by approximately 6%. As I mentioned before, we plan to expand production capacity by 20% to 25% throughout the year. We opened more learning centers last year, but this year we will expand at a healthier pace, with an expected growth rate of 25%.

Therefore, from an annual perspective, we expect profit margins to improve. As for the second quarter, due to seasonal reasons (usually the off-season), we may face slight profit pressure in the second quarter, but we believe that profit margins will grow throughout the year, especially in the education business, excluding the Eastern Selection business.

Q: After the operating profit margin increased by 220 basis points year-on-year, reversing the trend of the previous quarter, can you provide detailed explanations of the main factors driving this improvement? How do you view the performance of these driving factors for the remainder of this year?

A: The operating profit base in the first quarter of last year was relatively high, so the comparison base for this quarter was large, but we still achieved a year-on-year profit expansion of 220 basis points. This was mainly driven by several factors: all business lines achieved positive revenue growth, demonstrating robust business performance; the expansion of learning centers last year began to show results, with overall utilization rates increasing, bringing more operating leverage; we implemented cost controls throughout the company, despite more investment in the new tourism business, the overall education business of New Oriental (excluding Eastern Selection) still achieved higher-than-expected profit margin expansion.

Regarding future profit outlook, due to the seasonal factors of the business, the second quarter is usually the off-season, so there may be some profit margin pressure. However, we are very confident in the performance of the third and fourth quarters, and expect the full-year non-GAAP operating profit margin of the education business to expand.

Q: Will the non-GAAP operating profit margin in the second quarter come under pressure, indicating a year-on-year decline in profit margin excluding the Eastern Selection business? Additionally, regarding the cultural tourism business, which saw revenue growth of over 200% year-on-year, can you inform us how much revenue the cultural tourism business contributed in this quarter? Was this business profitable or loss-making this quarter?

A: The profit margin pressure in the second quarter is mainly related to the education business. We expect revenue growth to be between 25% and 28%, but because the second quarter is the off-season for the education business, there will be some pressure on profit margins in this quarter. However, in the third and fourth quarters, as business volume increases, we will see more leverage effects. Therefore, we are optimistic about the overall profit margin performance in 2022.

As for the cultural tourism business, the first quarter is the peak season for the cultural tourism business, including camp business and overseas study tours. Therefore, the revenue of this business in the first quarter is approximately $90 million In the first quarter, due to the peak season effect, we achieved profitability. However, looking at the whole year, it is expected that this business will incur losses**. More time is needed to validate the products and business model. Nevertheless, we are confident in the future development of the tourism business.

Q: How did the revenue growth of non-academic tutoring and intelligent learning system devices and services perform? In addition, the quarterly registration number for K-12 tutoring grew by about 11% year-on-year, compared to nearly 40% in the previous quarter. Could you please provide detailed information on this growth, as well as the expected registration number growth for the next few quarters?

A: The non-academic tutoring and intelligent learning system device business grew by over 56% in the first quarter. Regarding the registration numbers, the first quarter's figures appear lower mainly because this year's summer classes started earlier than last year, resulting in more student registrations reported in the fourth quarter of last year, which is a timing difference. When combining the registration numbers from the fourth quarter and the first quarter, the growth is normal and very strong. Despite the second quarter being a low season, we remain confident in the full-year revenue growth and expect revenue growth to accelerate in the fourth quarter. For new businesses, we maintain a revenue growth guidance of 40% to 50% for the full year.

Q: Growth guidance for different businesses in the second quarter?

A: The study abroad business is expected to grow by over 20%, domestic university exam preparation business is expected to grow by 30% to 35%, and high school business is expected to grow by around 20%. In addition, the new business segment is expected to grow by about 50%.

Q: The revenue growth of new education businesses increased by 49.8% year-on-year, while the non-academic tutoring and intelligent learning device business grew by over 56% in the first quarter. Does this mean that this new education business initiative includes other content? Could you explain what other projects are included besides this? Also, could you provide specific revenue distribution, especially the revenue proportions or data from last year for non-academic tutoring and intelligent learning systems and devices, and other sub-businesses?

A: The composition is roughly similar each quarter, with non-academic tutoring accounting for over half of the new education business, and intelligent learning device business accounting for about one-third. The growth rates of these two businesses are faster than the other smaller categories.

Q: Regarding the breakdown of growth guidance for 2Q, is the growth data based on USD or RMB? Could you provide a similar breakdown of growth for each detailed business segment in the first quarter?

A: The exchange rate for Q1 was 7.22, and for Q2 it is 7.08.

Q: Regarding the profit margin in the second quarter, although it is the low season, the profit margin is still maintained at around 25% to 28% based on revenue growth. Why is the operating profit margin expected to decline or contract year-on-year? Are there additional investments, or plans to increase investments in certain areas?

A: The second quarter is the low season for all business lines of the company, including overseas business, K-12 education business, and cultural tourism business, especially the seasonal fluctuations in revenue from the cultural tourism business led to losses. Therefore, statistically, the profit margin of the company is lower in the second quarter every year. Additionally, although we opened more learning centers in the second half of last year, these centers still need time to fill up with students. Furthermore, the way we provide profit margin guidance is relatively conservative Q: How much is the loss or profit margin drag from the cultural tourism business in the second quarter?

A: Specific numbers are not available at the moment, but it can be confirmed that the tourism business did indeed have a certain drag on the profit margin. Additionally, our marketing expenses increased in the second quarter, which will also impact the profit margin performance. However, we expect to better control the profit margin in the second quarter than expected.

Q: If we exclude the impact of Eastern Selection and cultural tourism business, will the remaining business still experience a contraction in profit margin?

A: I believe that if we exclude the impact of cultural tourism and Eastern Selection business, the overall profit margin will perform better than the company's overall profit margin. However, we will not provide specific revenue growth guidance for Eastern Selection.

Q: Eastern Selection's revenue has significantly decreased on a quarter-on-quarter basis, can you explain the reasons and logic behind this? How should we view its revenue performance in the future?

A: Eastern Selection will release its semi-annual report next quarter, at which time we will together with the parent company release more detailed financial information.

Q: Based on the financial data of Eastern Selection in the previous half-year, the education business was around $30-40 million per quarter. Regarding the annual year-on-year growth guidance for the core education business, will the education business of Eastern Selection also be included in last year's data for the core education business?

A: When providing performance guidance, we ensure "like-for-like comparison", which includes the relevant parts of Eastern Selection's education business in both quarter-on-quarter and quarter guidance comparisons.

Q: You mentioned earlier that the growth guidance for new businesses in the next quarter exceeds 50%, does this include other smaller businesses, or only refers to non-subject tutoring and intelligent learning system equipment business? Compared to the growth of over 50% next quarter, how was the growth this quarter? The high school business is expected to grow by 20% next quarter, how was the growth this quarter?

A: For the guidance in the second quarter, the overall growth expectation for new businesses and new educational initiatives is around 45% to 46%. If we only look at the two core businesses of non-subject tutoring and intelligent learning devices, the growth rate exceeds 50%. As for the high school business, the growth rate in the first quarter was approximately 20% to 21%.

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