New Oriental: Focus on Group Profit Margin as Investment Increases (FY2Q23 Conference Call Minutes)

The following is a summary of the $New Oriental.US FY2Q23 earnings conference call, and the financial report interpretation can be reviewed in "New Oriental: After earning money from live streaming, the old business returns to investment".

I. Remarks by Management

1. Looking at the segmented business situation, in 23Q2:

1. Overseas examination business revenue increased by 17% YoY in US dollars and 30% YoY in RMB.

2. Revenue from overseas study consulting business increased by approximately 14% YoY in US dollars and 27% YoY in RMB.

3. Adult and college student business revenue decreased by 9% YoY in US dollars and increased by 2% YoY in RMB.

4. Regarding non-disciplinary education business, we launched it in more than 60 cities this quarter, with a total of 477,000 enrollments. High-line cities that rank in the top 10 in China contribute about 60% of the revenue for this business-remarkable progress has been made in market penetration rates in high-line cities.

5. With regard to intelligent learning systems and device business, this quarter, we have tested the adoption of 108,000 active paid users in more than 60 cities and are pleased to see improvements in customer retention and scalability of this new business. The income contribution rate of the top 10 cities in China is about 60%.

We have invested a total of 21 million US dollars in the OMO teaching platform, which enables us to provide high-quality services to students flexibly during the epidemic period.

1. New Oriental Online has made significant breakthroughs in business operations and financial performance in the first half of the 2023 fiscal year. This significant progress is the result of New Oriental Online's strategic transformation from focusing on online education to live broadcast e-commerce. In the first half of the year, New Oriental Online's revenue was approximately RMB 20.801 billion, net profit was RMB 5.853 billion, gross profit was RMB 9.825 billion, and gross profit margin was 47.2%.

Regarding the company's latest financial condition, I am confident to share with you that the company has a good financial condition, and the total amount of cash, cash equivalents, time deposits, and short-term investments is about 4.2 billion US dollars.

3. Repurchase Situation

On July 26, 2022, the company's board of directors authorized the repurchase of the company's shares for an amount not exceeding 4 million US dollars. As of January 16, 2023, the company repurchased a total of approximately 3.1 million ADSs for a total of approximately 79 million US dollars from the public market and the stock repurchase plan.

4. Q3 Outlook:

Although we expect that the development of the epidemic situation may have a negative impact on our financial situation in one or two quarters in the future, we still have confidence and optimism that the overall impact will be temporary and controllable. Therefore, we expect that the total revenue of Q3 of fiscal year 2023 will be between 700.28 million US dollars and 719.8 million US dollars, an increase of 14% to 17% YoY in US dollars and an expected increase of 24% to 27% YoY in RMB. 2. Analyst Q&A

Q1: Regarding the impact of COVID-19, how do you expect the Q3 to be affected?

A1: The development of the epidemic in China has undergone some changes since December. In many cities, I think some of our businesses have been negatively affected. But according to our current estimates, I believe the negative impact is small, so we still have confidence and optimism that the overall impact of the epidemic will be temporary and controllable.

Q2: Which business lines do you think will grow the fastest for Q3 and all of 2023, and which ones will be relatively stable?

A2: We have two major businesses - traditional businesses, including overseas exam business and consulting business, is expected to account for 24-25% of total annual revenue. We suffered from negative impact on expenses last year, but this year we see that revenue has grown vigorously since the past two quarters. New businesses within schools, as well as new businesses we started last year, have achieved very high growth.

We also have the Dolphin, and the management of the Dolphin reported on their first half results today, and we are delighted with the exciting performance. So the (new businesses in traditional business expansion, K12 schools) and the Dolphin will be the two best performing business lines.

Q3: China has relaxed epidemic control measures. Will we expand the growth rate of new business lines in the next quarter and next fiscal year? Are there any new opportunities for our new business?

A3: As we have seen this quarter and last quarter, encouraging performance proves that we are moving in the right direction. We firmly believe that these new businesses will be able to maintain upward growth in Q3, Q4, and the next fiscal year. The profit margin of new businesses this quarter has exceeded 10% - it took only 2 to 3 quarters to reach breakeven, and then we can make it profitable. I think we are on a good track.

Regarding the new epidemic situation and the recent developments that have gradually opened up, I think we may see more opportunities in specific new initiatives such as study abroad and camping, which we prepared one to two quarters ago, but due to the specific situation of the epidemic, we did not have a good chance to promote this business domestically. But with the new situation, we are confident that we will have more opportunities to perform better.

Q4: Could you give us an overview of the revenue details and profit margin of different business lines for this quarter, 2Q23?

A4: Overseas exam and consulting businesses account for about 21% of total revenue; domestic exams, adult and college careers contribute about 6%; and school-related businesses, including our remaining high school businesses and new initiatives for younger students (non-subject training), contribute a total of 43-44% of total revenue. The remaining 30% or so is New Oriental Online and some other businesses.

As for the profit margin of different business lines, the profit margin of overseas related businesses for the entire fiscal year 2023 will be around 10% to 15%. I believe that adult and university businesses will achieve breakeven this year. The profit margin of school business, including the new business and initiatives mentioned above, should be around 20% to 25% or even higher. New Oriental Online and other business situations can be found in New Oriental Online's financial report for more information.

Q5: Can you give us a rough breakdown of Q3 revenue? In terms of operating profit margin, how should we view Q3 given strong revenue?

A5: In the second quarter, you can see that our GP profit margin and OP profit margin increased a lot compared to last year. I think this is most important because we had one-time costs related to course cancellations, learning center closures, and layoffs in the past three quarters. But in this quarter, and even in this fiscal year, we don't have one-time costs.

Secondly, the reduction in the number of learning centers led to lower fixed costs. So it increased the profit margin of each learning center.

The third is new business - the profit margin this year exceeds 10%. I think this is good news for us and the recovery of the remaining business, such as the profit margin generated by overseas-related business is higher than last year.

The last reason is Oriental Selection/New Oriental Online. Fewer e-commerce businesses have higher profit margins, so they bring profits to the entire group.

Looking ahead, I think our traditional business lines will contribute higher profits and drive the overall profit margin up. Therefore, we are quite optimistic about the profit margin situation for the entire 2023 fiscal year.

Q6: Regarding the new regulations at the end of December, we saw a new document on non-disciplinary tutoring activities. Does this have any impact on our business?

A6: In fact, we have been actively exploring new business directions since the government issued the policy last year. And comply with all central and local government authorities and rules. I think last year's new regulations will not have any substantive or negative impact on our business.

Q7: Regarding the learning center network, we noticed that the company opened two new learning centers in this quarter. Can you share the prospects for this expansion?

A7: I think we don't have a big plan to establish new learning centers in the remaining time of this fiscal year, and the number of learning centers will stabilize. Because we have invested a lot of money in the OMO system in the past few years. We transferred many courses from offline to online. So it saved the classroom and various regions. We also turned some traditional business classroom areas into new business areas. So this is an internal change.

Next year (fiscal year 2024, from September 2023), we do hope that we can open more learning centers. But so far, I think it is too early to say how many learning centers we have set up for the new year. Because we have not completed the budget for the new year. I hope to share the new learning center expansion plan in the next quarter's earnings conference call.

Q8: Regarding the ratio of teachers to students, can you share the teacher-student ratio for each learning service department? In the next two years, does the company plan to recruit more teachers? A8: As of the end of this quarter, we have a total of 26,000 teachers. We started new businesses last year, so I think it's too early to calculate the student-to-teacher ratio right now. Perhaps we will announce this ratio next quarter.

We will hire new teachers because we are starting these new businesses. For some non-academic courses or other new businesses, we do need to hire more teachers, but the key is that we won't hire too many teachers - if we care more about the overall utilization and efficiency of the company. We believe that in the future, we will maintain higher utilization and higher operational efficiency for the entire company.

Q9: What is our expectation for the percentage of company expenses at this stage? Considering that the revenue base is much smaller now, I would like to know how much of the percentage of expenses we should expect this year?

A9: Since last year, we have had some fixed costs and expenses at the headquarters, and I think the percentage of headquarters expenses as a percentage of total revenue will stabilize, accounting for about 7% of total revenue.

Q10: In terms of non-academic tutoring courses, where do we see incremental demand opportunities in terms of geographical scope?

A10: I think the new business development in first- and second-tier cities is better than in low-end cities. This is what we have seen in the past few quarters. I believe that some low-level cities will catch up because their starting point is slower than that of first- and second-tier cities. Almost everywhere sees business opportunities for non-academic courses.

At present, we have no central expansion plan - until next quarter or even until the end of this fiscal year. Perhaps next year we will expand some new learning centers, but so far we have not done so.

Q11: It was noticed that the enrollment of non-academic tutoring in Q2 has significantly increased. Could you introduce the full-year expectations and enrollment targets?

A11: I think the market has always been there. We do have well-known brands and good teachers. We started new businesses only a year ago, and the exciting news for us is that the profitability of the new business is exciting. This is much better than we expected. I believe that the growth rate of new business revenue will accelerate again for the remainder of this fiscal year. Even in the next fiscal year of 2024, I believe the revenue growth of new businesses will be high. We are optimistic about these academic courses.

Regarding non-academic tutoring, based on our experience in the past few quarters, we believe that its seasonality is not as obvious as other exam and study abroad businesses, so the enrollment rate for each quarter may be relatively stable. If you compare quarter by quarter and look at the new business development in all local cities, you may see a strong momentum. As we have seen, the growth or enrollment trend in the second quarter is similar to or even better than that in the first quarter.

Q12: Can you share anything about the retention performance of each business line?

A12: I think the retention rate is related to traditional K12 business. We closed all K9 businesses last year. But for new businesses like non-academic courses, we only track user retention rates. The good news is that we see higher and higher user retention rates. For non-academic courses, the current retention rate is between 65% and 70%. We've just started new businesses and the current retention rate is better than expected. We believe that future user retention rates will be even higher. Overseas exams, adult education and college student businesses are probably one-off deals.

Risk Disclosure and Statement: Dolphin Analyst Disclaimer and General Disclosure