New Oriental: Non-academic growth is strong but continues to slow down, study abroad pressure will drag down profitability (2Q25FY conference call)

The following is the summary of the 2Q25FY earnings conference call for $New Oriental EDU & Tech(EDU.US). For financial report commentary, please refer to “Another explosion! Can New Oriental still be 'chickened' up by parents?”

1. Core Information

This quarter, New Oriental's financial performance exceeded expectations, with new businesses driving revenue growth. Revenue increased by 19.4% year-on-year, and total net revenue, excluding EastBuy's proprietary brand products and live streaming business, grew by 31.3% year-on-year. The core education business is profitable, and management is confident about future development, aiming to balance revenue and profit growth while advancing business and adjusting operations in accordance with policies. The profitability of New Oriental's core education business also shows robust returns, with operating profit margin and non-GAAP profit margin reaching 2.8% and 3.2%, respectively, after excluding operating profits generated by EastBuy.

Regarding non-core and new businesses, the overseas exam preparation business grew by 21% year-on-year in the second quarter. In the second quarter of FY2025, revenue from overseas learning consulting business increased by approximately 31% year-on-year. This quarter, revenue from adult and college student businesses grew by 35% year-on-year. Meanwhile, continuous investment in new education business plans will primarily focus on promoting the comprehensive development of students. The tutoring business has now expanded to approximately 60 existing cities, focusing on cultivating students' innovative abilities and comprehensive qualities. The total number of students enrolled reported this quarter was approximately 994,000, with the top ten cities contributing over 60% of this business. Additionally, the smart learning system and equipment business provides personalized and targeted learning practice content to enhance students' learning efficiency, and this new business has been tested in about 60 existing cities, contributing approximately 50% of revenue in China's top ten cities. The smart education business, educational materials, and digital intelligent learning solutions continue to develop healthily.

In summary, the new education business plan saw revenue growth of approximately 43% year-on-year in the second quarter. The newly integrated travel-related business line, including root study tours and research campuses for K-12 and college students, as well as travel services, experienced a total revenue growth of 233% year-on-year in the second quarter, launching a series of top-tier travel products across 30 provinces nationwide, targeting groups including middle-aged and elderly individuals.

Regarding the OMO system, New Oriental insists on leveraging educational infrastructure and technological advantages to provide advanced and diversified educational services for customers of all ages. This quarter, an investment of $30.9 million was made to improve and maintain our OMO teaching platform, enhancing user experience and supporting the growth of our educational productsDuring the reporting period, EastBuy expanded its product range from fresh food and snacks to a diversified portfolio. By November 2024, EastBuy launched 600 SKUs in its private label products, including health and wellness foods and new Chinese-style clothing, accounting for approximately 37% of the total GMV over the six months ending November 2024. The multi-platform strategy has broadened the consumer base, increased brand awareness, and driven rapid growth of private label products. At the same time, EastBuy has begun exploring offline channels in collaboration with VanDmachines from New Oriental Learning Center, providing daily necessities and high-quality products, thereby increasing user contribution and strong loyalty.

Regarding the company's latest financial status: the company's financial condition is good, with cash and cash equivalents, time deposits, and short-term investments totaling approximately $4.8 billion. On August 19, 2024, New Oriental announced that the board of directors approved the distribution of a special dividend of $0.06 per share or $0.6 per ADS to holders of common stock and ADS registered as of the close of business on September 9, 2024, Beijing time, Hong Kong time, and New York time. For common stockholders, the payment date is around September 23, 2024; for ADS holders, the payment date is around September 26, 2024. The total cash dividend distributed is approximately $1 million. Meanwhile, the company's board of directors approved a stock repurchase plan in July 2022, under which the company is authorized to repurchase shares within the next 12 months. The board further confirmed the extension of the stock repurchase plan's validity until May 31, 2025, and increased the total value of shares authorized for repurchase from $400 million to $700 million. As of January 20, 2025, the company has repurchased a total of approximately 11.2 million ADS from the open market, valued at approximately $542.8 million.

II. Financial Report Data Interpretation

(1) Revenue Situation

Total revenue increased by 19.4% year-on-year, and excluding the business related to Dongfang Zhenxuan, it increased by 31.3% year-on-year. Revenue from overseas exam training business increased by 21% year-on-year; overseas study consulting business increased by approximately 31% year-on-year; adult and college student business increased by 35% year-on-year; revenue from new educational initiatives increased by approximately 43% year-on-year; newly integrated tourism-related business revenue increased by 233%.

(2) Profit Margin Situation

The operating profit margin of the core education business and the non-GAAP profit margin reached 2.8% and 3.2%, respectively (excluding Dongfang Zhenxuan business). Overall operating income decreased by 9.8% year-on-year, and non-GAAP operating income decreased by 45.8% year-on-year.

(3) Costs and Expenses

Operating costs and expenses increased by 20.2% year-on-year to $1.0194 billion, and non-GAAP operating costs and expenses increased by 23.5% year-on-year to $1.0111 billion. Cost of revenue increased by 17.9% year-on-year to $498.3 million; sales and marketing expenses increased by 26.6% year-on-year to $196.1 million; general and administrative expenses increased by 20% year-on-year to $324.9 million.

(4) Profit Situation

Net profit increased by 6.2% year-on-year to $31.9 million, with basic and diluted net profit per American Depositary Share of $0.20 and $0.19, respectivelyNon-GAAP net profit increased by 29.1% year-on-year to $35.5 million, with both non-GAAP basic and diluted net profit per American Depositary Share at $0.22.

(5) Cash Flow and Assets

In the second quarter of fiscal year 2025, the net cash flow generated from operating activities was approximately $330.3 million, with capital expenditures of $60.6 million. As of November 30, 2024, cash and cash equivalents totaled $1.4182 billion, with time deposits and short-term investments at $1.9514 billion, and deferred revenue at $196.6 million, an increase of 19.2% year-on-year.

Outlook

Given the current economic uncertainty, New Oriental is committed to achieving stable and sustainable growth in its core education business in the coming quarter. Total net revenue (excluding revenue generated by EastBuy) is expected to grow between 18% and 21% year-on-year in the next quarter from December 1, 2024, to February 28, 2025. For the third quarter of fiscal year 2025, revenue in functional currency is expected to grow between 20% and 23%.

III. Q&A

(1) Related to Q3 Revenue Guidance

Question: What are the reasons for the slowdown in the Q3 revenue guidance of 20%-23% (RMB), 18%-21% (USD) year-on-year, and how does it affect the expansion of learning centers?

Answer:

Reasons for the slowdown: First, the uncertainty of the macroeconomic situation has had a negative impact on the demand for high-end education services, such as overseas exam preparation and related services, as well as some one-on-one services; second, with the rapid recovery of the education business over the past 2 to 3 years, I believe the revenue base is gradually increasing. Therefore, I think the revenue growth in the third quarter will slow slightly; third, the impact of exchange rates is about 3%. This is why we provided a USD guidance of 18% to 21%. However, despite the uncertainties posed by changes in the macroeconomic situation, the CFO stated that he believes management will begin to increase revenue again. Therefore, the revenue in the third quarter is expected to exceed the guidance given to investors. On the other hand, in the long term, the company will focus more on balancing revenue growth and operational efficiency.

Expansion plan: The company expanded this quarter, with a 5% quarter-on-quarter expansion in the second quarter. There is still time in the second half of the year for the full year. The plan is to open 20% to 25% more EDU learning centers for the year. Last year, new centers were only opened in cities with good revenue and net profit performance, while this year will allow for more learning centers to be opened. However, there will still be a greater focus on the utilization rate of the new learning centers.

(2) Related to New Business and Competition

Question: Are there any risks from the macroeconomic environment for the new education business in the mass market, and can management comment on the competitive landscape observed in your business line? Is competition one of the reasons for the slowdown in growth?

Answer: For the new business, the year-on-year growth rate in RMB for the second quarter is expected to be around 40%, which remains very strong. Although competition in the market is somewhat intense, I believe the company is in good shape. Therefore, we will continue to capture more market share. Due to the base effect in the third quarter, the year-on-year growth rate in RMB is expected to be 40%(3) Full-year revenue growth related

Question: New Oriental previously provided a full-year revenue growth forecast of 25% or 30%, excluding EastBuy. Considering the next quarter, do you predict growth will be around 21% to 23%? Will the spending growth in the fourth quarter exceed revenue growth, or is our goal this year to slow down growth?

Answer: Although Q3 has slowed down, full-year year-on-year growth in RMB is still expected to reach 25% or higher. We need to observe for another quarter before providing Q4 guidance.

(4) New education business enrollment and learning center related

Question: This quarter, the enrollment in academic tutoring increased by about 26%. Can you provide further details? What is the expected more normalized growth in terms of the number of students enrolled in tutoring? Additionally, a follow-up question regarding the growth of learning centers. You mentioned that competition has slightly intensified. Can you share the latest growth rate of learning centers in terms of reaching a more mature stage of breakeven and the utilization rate you see in the group?

Answer: Quarterly enrollment numbers will be affected by the registration time window, so growth will have some fluctuations. In fact, we are satisfied with the growth of over 40% in new businesses, including non-academic tutoring, compared to the same period last year.

The growth rate of this business should be similar to or even faster than this, with an average price increase of about 4% to 6%. If we exclude this part, what remains is our sales growth, which is mainly driven by the enrollment numbers seen in our press releases.

(5) High-end business impact related

Question: What is the degree of impact and risk of overseas and high-end one-on-one business from macroeconomic factors?

Answer: The overseas exam training business is expected to grow about 15% in Q3, showing some slowdown. We will observe further and provide Q4 guidance in the next earnings call.

(6) Profit margin and business growth related

Question: Can the full-year core education business profit margin expand by 100 basis points, and what are the growth details of each business segment?

Answer: In Q2, the non-GAAP operating profit margin of the education business expanded by 12 basis points year-on-year. This quarter's revenue growth is good, and we started to see the results of learning center expansion since last year, especially in the second half of last year. It has driven an increase in utilization and gained more operational leverage.

The company has begun to implement some cost and expense controls internally, thus achieving operational leverage and improving profit margins this quarter. As for the profit margin outlook for the second half of the year, we face a slowdown in overseas-related businesses, which will drag down profit margins in the second half. Additionally, the new tourism business will drive the market in the second half.

Therefore, in the second half of this year, we will face some profit pressure. Regarding next year's profit outlook, we still expect the overall company's profit margin to expand. The K1 profit margin will expand in the new year and the second half of the year. The same goes for the second half of this year. We will begin to cut costs and expenses related to overseas businesses. It is expected that the profit margin of the tourism business next year will be better than this year.

(7) Dividends and learning center efficiency related

Question: Noticing that you are considering a regular dividend policy, given the current strong market demand, may I ask if you expect demand to weaken in this regard, and therefore plan to increase capital expenditures in the future?Do you have a timeline for announcing this dividend policy? How do you view the balance between business expansion and shareholder returns? Regarding the improvement in the breakeven timeline report for the recently opened learning centers, can future new learning centers achieve similar efficiency levels?**

Answer: It usually takes about 6 months to reach the breakeven point for new learning centers. The growth rate has not changed. As for shareholder capital allocation, the company announced a $700 million stock repurchase. So far, $542.8 million has been completed. The CFO believes that stock repurchases will continue in the open market. Regarding the special dividend, we paid $10 million as a special dividend in September. Typically, the board will discuss the new year's capital allocation policy in July. However, it ultimately depends on market capitalization and stock price, and management is expected to be committed to creating more value for shareholders as a capital return.

(VIII) Regulatory Related

Question: What is the regulatory situation for core and non-core businesses? Has the regulatory risk in these business areas increased or decreased?

Answer: There has been no change in regulation. It is believed that new learning centers can be opened with local government approval. This is the reason for wanting to change this year's expansion plan. The attitude towards regulation is neutral to positive.

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