New Oriental: Riding the live streaming trend, while education is heating up

$New Oriental EDU & Tech(EDU.US) Before the US stock market opened on July 31, it released the performance of the fourth quarter of the 2024 fiscal year, corresponding to the operating conditions from February to May 24.

First of all, for the Q4 performance, the market's expectations are not low (exceeding the upper limit of the company's guidance), and the expectations for the performance boost in the next quarter's summer heat are also very high. At the same time, funds are still very concerned about New Oriental's profit margin. In the previous quarter's financial report, the significant revenue guidance exceeding expectations led to a sharp drop due to the pressure on profit margins as indicated.

However, the revenue performance of New Oriental in Q4 is only within expectations, with no surprises in the guidance. Instead, the profit margin once again slid below expectations, with a Non-GAAP operating profit margin of 3.2%, lower than the market's expectations and management's guidance of 6%.

Breaking down the expenses:

1) The gross profit margin slightly exceeded expectations. Although there was positive promotion from the Huitong segment (commission income from 3P consignment sales business, recognized as net income, with a higher gross profit margin), looking at the revenue composition level, maintaining a stable education gross profit margin is the real "magic wand".

The costs of the education segment mainly include teacher salaries, rent, property equipment depreciation, and other costs. In Q4, 114 new learning centers were added, continuing to accelerate expansion. Being able to stabilize the gross profit margin under these circumstances indicates that the demand for education has not diminished.

2) The actual difference of $0.2 billion in profit from expectations mainly comes from overspending on sales and administrative expenses. The company explained in the financial report that this was due to the promotion of self-operated live broadcasting business such as Dongfang Zhenxuan, and secondly, the expansion of learning centers, which inevitably led to an increase in operational management personnel and group employee compensation and rewards.

Although Dolphin Jun is not optimistic about live broadcasting and ignores the valuation of New Oriental's sub-businesses when valuing, we are not overly concerned about the mismatch of short-term investment in education. However, it must be acknowledged that most funds still care about the company's profit performance at present. Therefore, the market's feedback on the Q4 performance is unlikely to be positive. If the company does not express enough confidence in the performance outlook and profit recovery in conference calls and subsequent small meetings, it is not ruled out that New Oriental will still linger in the undervalued range for a period of time (for specific valuation ranges from Dolphin Jun, please refer to the relevant content in the latest comments " Evaluation of Huitong's Sale ").

However, from a medium-term perspective, the demand for education will not slow down quickly, especially in quality education, which is still in a high-speed expansion phase of user penetration. According to our estimates, the revenue from quality education in the previous quarter has been able to rival the second-highest period in 2019-2020, basically making up for the shortfall in K9 subject training revenue. And following this growth trend, surpassing the peak level of 2021 should not be a problem.

As for the concerns about the increase in supply and the alleviation of the supply-demand imbalance, Dolphin believes there is no need to worry for now. Although the issuance of licenses for quality education is indeed accelerating, the licenses are issued by region. Currently, the monthly nationwide increase of 1-2% in quantity is still insufficient to support the current demand growth.

In addition, New Oriental has a strong brand awareness and influence in the education industry, with relatively high competitive barriers. Relevant departments have also set high thresholds and regulations for running schools. Many small and micro educational institutions that are currently emerging may face policy risks in the future due to non-compliance with school premises/curriculum standards.

During the profit pressure period caused by investment misalignment, Dolphin suggests not being overly pessimistic; on the contrary, during the mature period of capacity expansion slowdown and profit realization, caution is truly needed.

(Note: New Oriental's financial reports only disclose partial business performance. Most of the operating conditions and guidance are disclosed in performance disclosure conference calls and institution-specific meetings, so the content of the upcoming conference calls is relatively important.)

Detailed Comments Below

1. Education Demand Remains Strong, Laying the Foundation for High Growth

Total revenue in the fourth quarter was 1.137 billion, with a year-on-year growth of 32% in USD and 39% in RMB, exceeding the upper limit of the company's guidance, but market expectations were not low, so it was basically inline.

The decrease in growth rate from the previous quarter is not due to weakened demand but rather the impact of the base effect (last year's third quarter corresponded to the final peak of the epidemic in early 2023, with a low base. Subsequently, revenue in the fourth quarter of the 2023 fiscal year rebounded rapidly, leading to a higher base).

The detailed breakdown of business segments will be announced half during the conference call and half during institution-specific meetings. Dolphin currently provides estimated values for the latter, and specific data will be clarified in the comments section later.

In the same period last year, which was 3Q23FY, corresponding to the period from November 2022 to February 2023, it was the final wave of infections during the epidemic. Therefore, the base in Q3 was low, and the year-on-year growth rate compared to the previous quarter is not significant. Dolphin mainly compares it with Q2.

1) The new business (quality education, learning machines) continues to maintain high growth, estimated by Dolphin Jun to be over 40% (in USD).

Among them, the growth rate of non-academic business is 50% (in USD) and 57% in RMB. The growth is mainly driven by the number of class registrations, with 875,000 class registrations in Q4, a year-on-year increase of 39%. Calculated backwards, the tuition fee price increased by 3.3% year-on-year, and it is expected that the unit price will accelerate in the next quarter during the peak summer season.

In other details of the new business, learning machines are relatively weaker, and the operation projects are still in a high-growth range due to just being launched.

2) In the existing businesses, the growth rates of study abroad and adult education are slowing down due to a high base, reflecting the gradual reduction of post-epidemic dividends. However, the exchange rate factor has also magnified the slowdown.

Specifically, the growth rate of study abroad business (consultation and exam preparation) in USD is between 17% to 18%, and in RMB, the year-on-year growth rate is 23%; the growth rate of adult English in USD is 16.4%, and in RMB, it is 21%.

3) The growth rate of K12 high school tutoring is not disclosed, but it may have decreased significantly due to the off-season and the impact of a high base. However, the company's outlook for next year is optimistic, indicating a growth of 25% to 30%.

4) Due to the opening of an account with Hui Tongxing at the end of last year, the live streaming revenue has contributed significantly in terms of GMV. Dolphin Jun estimates that this part of the revenue increment has reached over 500 million RMB, but with the separation from Hui Tongxing, discussing the current increment is meaningless.

Regarding the revenue guidance for 1Q25FY, there has been a change in the company's guidance methodology. Perhaps to weaken the short-term impact of adjustments to the live streaming business, the focus is on the growth of the education business itself. This time, the guidance excludes self-operated product revenue and live broadcast commission revenue from the group's revenue. In simple terms, the focus is on the performance of the education sector.

Next quarter, due to the peak summer season, the education business will definitely perform well. For example, the company mentioned in a conference call that the growth rate of quality education in RMB has reached 57%, and the entire new business also has a high growth of 45-50%.

We can also see from the financial indicator - deferred revenue (reflecting the demand for class registrations in the next quarter) that there is no need to worry about the effect of this year's peak summer season.

Of course, market expectations are also positive. Overall, the company's guidance range is $1.255 to $1.284 billion, corresponding to the market's consensus expectation of about $1.266 billion, which is considered as no surprise. However, as the summer vacation is halfway through, combined with the actual educational needs, the market clearly had higher expectations.**

During the conference call, the company's outlook for 2025 is still positive, with the growth guidance for some RMB-denominated businesses as follows:

(1) New businesses year-on-year growth rate of 45%~50%;

(2) Study abroad preparation 20%~25%, study abroad consultation 15%;

(3) High school subject tutoring 25%~30%;

In fact, in addition to tracking the management's guidance every quarter, Dolphin believes that the qualitative judgment of New Oriental has always been that, as New Oriental, which has always been cautious in expansion after the dual reduction policy, is now accelerating its expansion. This indicates that the education veterans who have been immersed in the industry for many years have growing confidence in both the industry and the company itself, reflecting the sustained high demand at present.

2. Profits lower than expected, where did the money go?

The Q4 profit margin once again fell below expectations, with a Non-GAAP operating profit margin of 3.2%, lower than the market's expectation and the management's guidance of 6%. However, Dolphin believes that there is a short-term misalignment in investment, and the direction of stable profit margin improvement in the medium to long term should not change.

Breaking down the expenditure details:

1) The gross profit margin slightly exceeded expectations. Although there was positive promotion from the 3P consignment business with Hui Tong (commission income, recognized as net income, with a higher gross profit margin), looking at the revenue composition, maintaining a stable gross profit margin in education is the real "magic weapon".

The costs in the education sector mainly include teacher salaries, rent, property equipment depreciation, and other costs. In Q4, 114 new learning centers were added, continuing to accelerate expansion. Being able to stabilize the gross profit margin under such circumstances indicates that the demand for education has not diminished.

2) The actual difference of $20 million in profit compared to expectations mainly came from overspending on sales and administrative expenses. The company explained in the financial report that this was due to the advancement of self-operated businesses such as Dongfang Zhenxuan and cultural tourism live broadcasting, followed by the expansion of learning centers, which inevitably led to an increase in operational management personnel and group employee compensation and rewards.

3. Business model conducive to stable cash flow

Although profits were under pressure in the fourth quarter, the current cash flow situation is still acceptable. On one hand, summer course fees are generally paid in advance, leading to a discrepancy between revenue recognition and cash inflow. On the other hand, there may also be some upfront investments.

Capital expenditures in Q4 fell to USD 27 million, with operating cash net inflow of USD 377 million, a slight decrease from last year's USD 422 million, which is related to the increased marketing expenses and personnel salaries in the current period.

Ultimately, the free cash flow in 4Q24 was only USD 349 million. As of the end of May 2024, the company had a net cash balance of USD 4.9 billion (cash + deposits + short-term investments), with nearly USD 3.2 billion of cash available for discretionary use after deducting deferred revenue of USD 1.78 billion (mostly tuition fees, subject to special regulations and cannot be used freely).

However, the amount of cash used by the company for stock repurchases has always been limited. As of July 39th before the financial report was released, there was a small amount of repurchases during the fourth quarter, totaling 1.3 million shares of company stock, consuming nearly USD 1 billion, with an average repurchase price of USD 77 per share. In the current round of repurchase plan approved in 2022, the company has repurchased a total of 7.3 million shares, consuming USD 296 million.

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Dolphin "New Oriental" Historical Articles:

Financial Reports

April 24, 2024 - "New Oriental: Improved Resource Utilization, Raised Expansion Goals (3Q24FY Conference Call)"

April 24, 2024 - "New Oriental: Live Streaming Drags Down Profits, Education Supports Bottom Line Again"

January 25, 2024 - Conference Call - "New Oriental: Education Demand Overwhelming, But We Don't Want to Expand Too Fast, Profit Margin First (2Q24FY Conference Call)"

January 25, 2024 - Financial Report Review - "New Oriental: Enjoying the Fruits of Labor"

October 27, 2023 - Conference Call - "New Oriental: Actively Expanding, Demand Stronger Than Originally Expected (1Q24FY Performance Meeting Summary)" 2023 年 10 月 27 日财报点评《 Education is the true face of New Oriental》

2023 年 7 月 28 日电话会《 New Oriental: Strong Demand for Education (4Q23FY Conference Call Summary)》

2023 年 7 月 26 日财报点评《 New Oriental: The Reversal Logic of New and Old Businesses is Gradually Being Fulfilled》

2023 年 4 月 20 日电话会《 New Oriental: Repair is not complete yet, growth is still ahead (3Q23FY Conference Call Summary)》

2023 年 4 月 19 日财报点评《 New Oriental: How many more times of exceeding expectations are needed to regain market faith?》

2023 年 1 月 18 日电话会《 New Oriental: Increasing investment while focusing more on group profit margin (FY2Q23 Conference Call Summary)》

2023 年 1 月 17 日财报点评《 New Oriental: After making money from live streaming, old businesses are back to investment》

In-depth

2023 年 4 月 4 日《 Building a solid foundation with cash, Dong Yuhui can't control New Oriental》

2023 年 1 月 13 日《 Dong Yuhui joins the Spring Festival Gala, can New Oriental still rely on education in the future?》

Hot Comments

2024 年 7 月 26 日《 [Dong Yuhui's departure causes New Oriental to collapse, who is the real victim?](https://longportapp.com/zh-CN/topics/22727321? invite-code=032064)》

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