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New Oriental Education & Technology Group (NYSE: EDU)
Q2 2025 Earnings Call
Jan 21, 2025, 8:00 a.m. ET
Prepared Remarks Questions and Answers Call Participants
Operator
Good evening, and thank you for standing by for New Oriental’s FY 2025 second-quarter results earnings conference call. [Operator instructions] Today’s conference is being recorded. [Operator instructions] I would now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao.
Thank you. Please go ahead.
Sisi Zhao — Director, Investor Relations
Thank you. Hello, everyone, and welcome to New Oriental’s second fiscal quarter 2025 earnings conference call. Our financial results for the period were released earlier today and are available on the company’s website as well as on Newswire services. Today, Stephen Yang, executive president and chief financial officer, and I will share New Oriental’s latest earnings results and business updates in detail with you.
After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.
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As such, our results may be materially different from the view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded.
In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead.
Stephen Yang — Executive Vice President, Chief Financial Officer
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. We’re pleased to inform you that New Oriental has achieved a healthy growth in this quarter’s financial performance, which has surpassed our expectations. Revenue grew 19.4% year over year, and total net revenues, excluding revenues generated from East Buy’s private label products and live streaming business increased by 31.3% year over year.
We’re encouraged by the continued growth of our new ventures, which have bolstered company’s revenue. We believe they will further progress positively moving forward. New Oriental’s bottom line performance for our core education business has also shown solid returns. To better reflect New Oriental’s core education business, we have excluded the operating margins generated from East Buy for this quarter.
Our operating margin and non-GAAP operating margin reached 2.8% and 3.2%, respectively. Results from these substantial efforts investing in our offerings and platforms that have been shown effective. Our commitment to sustaining healthy profitability and market share remains strong as we continue to aim for long-term value creation for our customers and shareholders. Now I’d like to spend some time to talk about the quarter’s performance across our remaining business lines and new initiatives to you in detail.
Our key remaining business have showcased a promising trend in adjacent to positive momentum across our new businesses. Breaking it down, the overseas test prep business recorded a revenue increase of 21% year over year for the second fiscal quarter of 2025. The overseas study consulting business recorded a revenue increase of about 31% year over year for the second fiscal quarter of the 2025. The adults and the university students business recorded a revenue increase of 35% year over year for this quarter.
At the same time, our ongoing investment in new education business initiatives, primarily focused on facilitating students all around development, have also continued to thrive with steady growth fueling the company’s momentum. Firstly, the non-academic tutoring business, which we have now expanded to around 60 existing cities, focused on cultivating students’ innovative ability and comprehensive quality. We have attracted high interest with a total of approximately 994,000 student enrollments reported in this quarter. The top 10 cities contribute over 60% of this business.
Secondly, the intelligent learning system and device business utilizes our past teaching experience data technology to provide personalized and targeted learning and exercise content, thereby improving students’ learning efficiency. We have tested the adoption of this new business in around 60 existing cities and are pleased to see improved scalability. The revenue contribution of this business from top 10 cities in China is around 50%. Our smart education business, educational materials, and digitalized smart study solutions have continued healthy development.
In summary, our new education business initiatives have recorded a revenue increase of about 43% year over year for the second quarter. In addition, our newly integrated tourism-related business line, which includes our rooted study tour and research campuses for K-12 and university students as well as our tourism business serving middle-aged and senior audience have collectively recorded a revenue increase of 233% year over year for the second quarter. Study tour and research campuses are now operating in around 55 cities across the country, with the top 10 cities in China offering over 50% of the revenue share of this new business. We’re also facilitating a number of top-notch tourism offerings to all age groups, including the middle-aged and elderly individuals across 30 featured province in China and globally.
With regards to our OMO system, we have persisted in revamping our platform, leveraging our educational infrastructure and technology strength in order to provide advanced, diversified education service to our customers of all ages. During this quarter, we invested $30.9 million to improve and maintain our OMO teaching platform, which enhanced users experience and supports the growth of our education offerings. Now let me share some updates on East Buy’s performance. During the reporting period, East Buy expanded its product range from fresh food and snacks to diversified portfolio, launching 600 SKUs in private label products by November 2024.
This includes healthcare foods, pet food, and new Chinese-spell clothing contributing to approximately 37% of total GMV for the six months ending November 2024. We are pleased to see multi-platform strategy has expanded its consumer base and increased brand awareness to enrich the live streaming products and online shops on platforms like mini program, which have mini store, Taobao, JD, Pinduoduo, and Rednote. This multichannel approach has driven rapid growth with product — label products. Simultaneously, East Buy has begun exploring offline channels with vending machines in New Oriental’s learning centers.
The company’s app strategy has advanced quickly offering daily necessities and high-quality products, leading to increased user contributions and strong loyalty. With regard to the company’s latest financial position, I’m pleased to share that the company is in a healthy financial status with cash and cash equivalents, term deposits, and short-term investments totaling approximately $4.8 billion On August 19th, 2024, New Oriental announced its board of directors approved a special dividend of $0.06 per common share or $0.6 per ADS to holders of common shares and ADS of record as of the close of the business on September 9th, 2024, Beijing and Hong Kong Time and New York time, respectively. The payment date was on or around September 23rd, 2024 for holders of common shares in September 26th, 2024, for holders of ADS. The total cash dividend distributed was approximately $100 million.
Now I would like to take the opportunity to highlight that the company’s board of directors approved the share repurchase program in July 2022, in which the company is authorized to purchase — to repurchase up to $400 million of the company’s ADSs or common shares through the next 12 months. The company’s board of directors further proved to extend the effective time of the share repurchase program to May 31st, 2025, and increasing the aggregate value of shares that the company is authorized to repurchase from $400 million to $700 million. As of January 20th, 2025, the company repurchased an aggregate of approximately 11.2 million ADSs for approximately $542.8 million from the open market. Now I will turn the call over to Sisi to share with you about the key financials.
Sisi, please go ahead.
Sisi Zhao — Director, Investor Relations
Thank you, Stephen. Now I’d like to share our key financial details for this quarter. Operating cost expenses for the quarter were $1,019.4 million, representing a 20.2% increase year over year. Non-GAAP operating cost and expenses for the quarter, which exclude share-based compensation expenses were $1,011.1 million, representing a 23.5% increase year over year.
The increase was primarily due to the cost and expenses related to the accelerated capacity expansion for education businesses and newly integrated tourism-related business. Cost of revenue increased by 17.9% year over year to $498.3 million. Selling and marketing expenses increased by 26.6% year over year to $196.1 million. G&A expenses for the quarter increased by 20% year over year to $324.9 million.
Non-GAAP G&A expenses, which exclude share-based compensation expenses were $319.4 million, representing a 24.7% increase year over year. Total share-based compensation expenses, which were allocated to related cost expense — operating costs and expenses decreased by 71.8% year over year, to $8.3 million in this fiscal quarter. Operating income was $19.3 million, representing a 9.8% decrease year over year. Non-GAAP income from operations for the quarter were $27.6 million, representing a 45.8% decrease year over year.
Net income attributable to New Oriental for the quarter was $31.9 million, representing a 6.2% increase year over year. Basic and diluted net income per ADS attributable to New Oriental were $0.20 and $0.19, respectively. Non-GAAP net income attributable to New Oriental for the quarter were $35.5 million, representing a 29.1% increase year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.22 and $0.22, respectively.
Net cash flow generated from operations for the second fiscal quarter of 2025 was approximately $313.3 million, and capital expenditures for the quarter were $60.6 million. Turning to the balance sheet. As of November 30th, 2024, New Oriental had cash and cash equivalents of $1,418.2 million. In addition, the company had $1,443.2 million in term deposits and $1,951.4 million in short-term investments.
New Oriental’s deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the service or goods are delivered at the end of the second quarter of fiscal year 2025 was $1,960.6 million, an increase of 19.2%, as compared to $1,645 million at the end of the second fiscal quarter of 2024. Now I will hand over to Stephen to go through our outlook and guidelines — guidance.
Stephen Yang — Executive Vice President, Chief Financial Officer
I repeat the paragraph that the Sisi mentioned of the net income. Net income attributable to New Oriental for the quarter was $31.9 million, representing a 6.2% increase year over year. Basic diluted net income per ADS attributable to New Oriental were $0.20 and $0.19, respectively. About the outlook in fiscal year ’25 Q3 guidance.
In light of the current economic uncertainties, we remain committed to achieving steady and sustainable growth for our core educational business in the coming quarter. Our confidence is bolstered by the solid performance of our diverse business lines and our extensive educational resources were dedicated to diligently adhering to the latest guidance from the Chinese authorities including the recently announced the national action plan with the goal of establishing a high-quality education system and unlocking potential across our business lines and innovative efforts. To balance revenue and profitability growth, we will carefully manage our capacity expansion and hiring strategies to support the development of our education business in the rest of this year. We plan to follow our usual pace to increase capacity with a focus on new offerings in cities with a robust local economy.
Simultaneously, we will continue to invest in developing our emerging tourism-related ventures. The foundation we have established and the progress we’ve achieved so far strengthen our confidence in our future performance. We expect total net revenue, excluding revenues generated from East Buy. In the coming quarter, December 1st, 2024 to February 28th, 2025, to be in the range of $1,007.3 million to $1,032.5 million, representing a year-over-year increase in the range of 18% to 21%.
The projected increase of the revenue in our functional currency Renminbi is expected to be in the range of 20% to 23% for the third quarter of the fiscal year 2025. To conclude, New Oriental is dedicated to delivering premium offerings to our customers while pursuing sustainable growth through a strategic blend of capabilities. We’ll continue investing research and applications of advanced technologies, including AI and ChatGPT to enhance our educational and product offering. Our aim is to strengthen our competencies, driving growth and operating efficiency.
We will also continue to seek guidance from and cooperate with the government authorities, complied with the relevant policies, guidelines, and any related regulations, measures, and adjust our business operations as required. As always, we will work diligently to enhance the nation’s education level to strengthen its leading position so as to unveil further potential across our business lines and realizing our vision. This is the end of our fiscal year 2025 Q2 summary. At this point, Sisi and I like to open the floor for questions.
Operator, please open the call for these. Thank you.
Operator
Thank you. [Operator instructions] Our first question comes from the line of Yiwen Zhang from China Renaissance. Please go ahead.
Yiwen Zhang — China Renaissance Securities — Analyst
Yeah, perfect. Thanks for taking my question. So my question is about our Q3 revenue guidance, I think you mentioned in RMB terms is 20% to 23%. It seems a bit decelerating.
Can we understand more which part of the business is actually driving that trend? And how should we think about the rest of the year? Now also, in light of this new guidance, how should we think about the learning center expansion pace as well? Thank you.
Stephen Yang — Executive Vice President, Chief Financial Officer
Thank you, Yiwen. Yeah, about the revenue guidance of Q3, yes, we gave the guidance of the year-over-year growth in the range of 20% to 23% in RMB terms. I must mention that we are using the conservative method to give the guidance of Q3. And the reasons for a little bit of slowdown in the revenue growth in Q3 are as follows: number one, the uncertainty of the macroeconomy situation has a certain negative impact on the demand of our high-end education business, such as the overseas test prep and related business and some one-on-one business, which is also high-end business; and number two, with the rapid recovery of the educational business in the last two to three years, I think the revenue base is gradually increasing.
So I think the revenue growth in Q3 will be a little bit slow down; and number three, I think the impact of the exchange rate is approximately around 3% point. That’s why we gave the guidance in the range of 18% to 21% in dollar terms. And I think yes, even though we’re facing to the uncertainty of the macroeconomy situation change, but I think the management will try our best to grow the revenues. And so we expect to beat the guidance we gave to the investors in Q3.
And I think on the other hand, I think we will care more about the balance between the revenue growth and the operating efficiency at the same time for the long term. As for the expansion plan, this quarter, we opened — this quarter, the expansion — in Q2, the expansion was 5% Q-on-Q in Q2. And for the whole year, we have the second half of the year left. And in the whole year, we plan to open 20% to 25% of the EDU learning centers.
I think we will only open the New Oriental centers in the cities that the last year in top line and bottom line performance as well, and we allow them to open more learning centers. And — but we still care more about the utilization of the new learning centers. So yes, that’s why I said we care more about the top-line growth and the margins.
Operator
Thank you. Next question is from the line of Felix Liu from UBS. Please go ahead.
Felix Liu — UBS — Analyst
Good evening and thank you for taking my question. May I just follow up on one of the issues that you mentioned, which is macro impacting the higher-end business. Do you see any potential risk to your more mass-market services, such as the new education businesses? And can management comment on the competition landscape that you’re observing on the ground across your business lines? Has competition played into a role in the growth deceleration? Thank you.
Stephen Yang — Executive Vice President, Chief Financial Officer
I think for the new business, we still guide the Q2 guidance about 40% in RMB term year-over-year growth. And so it is still very strong. And as for the competition, yes, we have seen some — a little bit strong competition in the market. But I think we are fine.
So we’re still taking more market share from the market. And because of the base in the Q3, we guided 40% in RMB term year-over-year growth because of the high base, Felix.
Felix Liu — UBS — Analyst
Thank you.
Operator
Thank you. Next question comes from the line of Lucy Yu from Bank of America Securities. Please go ahead.
Lucy Yu — Bank of America Merrill Lynch — Analyst
Thank you. So, Stephen, I remember earlier, you gave the full-year guidance for 25% or 30% revenue growth, excluding East Buy, so given that the next quarter, you are forecasting around like 21% to 23%. So the spending in that fourth quarter, we have to accelerate our revenue expansion — revenue growth or we are aiming for a slower growth this year? Thank you.
Stephen Yang — Executive Vice President, Chief Financial Officer
Yeah. As I said, the uncertainty of the macroeconomy situation, I think we need one more quarter to see to give you the Q4 guidance. So I think for the whole year, yes, we’re facing a little bit slowing down in Q3, but for the whole year, I think in RMB terms, we still got the top line growth of the year over year growth by, let’s say, the 25% in RMB terms or more for the whole year guidance, Lucy.
Lucy Yu — Bank of America Merrill Lynch — Analyst
That’s good. Thank you so much.
Operator
Thank you. Our next question comes from Timothy Zhao of Goldman Sachs. Please go ahead.
Timothy Zhao — Goldman Sachs — Analyst
Thank you. Hi, Stephen.
Stephen Yang — Executive Vice President, Chief Financial Officer
Hi.
Timothy Zhao — Goldman Sachs — Analyst
My question is regarding your new education initiative. I noticed that when you report your student enrollment number, I think for this quarter, the non-academic tutoring enrollment growth was around 26%. Just wondering, could you further elaborate on that? And what is the more normalized growth that we expect in terms of the student enrollment for the non-academic tutoring. And also a follow-up question, I think, on the learning center ramp-up.
I think you mentioned that you see slightly more competition on the ground. Could you share, I think, what is the latest learning center ramp-up pace in terms of the time for breakeven time to reach a more — like a mature stage and also the utilization rates that you see on the ground? Thank you.
Sisi Zhao — Director, Investor Relations
OK. Timothy, regarding your enrollment question, actually, if you look at the full year roughly, because quarterly enrollment number will be impacted by like the registration window, etc. So there will be some fluctuation of growth. And year over year, actually, the — we are comfortable with roughly about a 40% plus growth for new business including the non-academic tutoring.
And this business should grow similar or even faster. And roughly about 5%, maybe 4% to 6% of ASP increase. And if you deduct that, the rest are volume increase, which is mostly driven by the enrollment number that you can see from our release.
Operator
Thank you for the questions. One moment for the next question. Next question comes from the line of Elsie Sheng from CLSA. Please go ahead.
Unknown speaker — — Analyst
Hi. Thank you for taking my question. I just want to follow up on the pressure that you mentioned on the overseas and more premium business, the one-on-one business. So how do you measure the magnitude of this impact from macro? Because usually, we understand that education in nature should be more resilient than other type of consumption.
So how do you see the risk going forward for this business if we assume that macro going forward continue to remain relatively in a weak status?
Stephen Yang — Executive Vice President, Chief Financial Officer
Last quarter, we gave the guidance of the overseas test prep business grown by less than 20%. And because we have seen some parents — some parents changed their idea to send their kids to study abroad in the future because of the macroeconomy situation change. So I think in the Q3, the overseas test prep business will grow by, let’s say, somewhere around 15%. And so it’s a little bit decelerated.
And — but this is the real situation. And — but K-12 business is OK. And we give the guidance of 40% year-over-year growth in Q3. And so let’s see for another quarter, we will give the guidance for Q4 in next earnings call.
Unknown speaker — — Analyst
OK. Thank you.
Operator
Thank you. Next question comes from Alice Cai from Citibank. Alice, your line is open. Please go ahead.
All right, as I’m not hearing from Alice, I would like to take the next question. We have our next question from the line of DS Kim from J.P. Morgan. Please go ahead.
DS Kim — JPMorgan Chase and Company — Analyst
Thank you. Hi, Steven. Thanks for taking my question. My name is DS Kim.
Can I follow up on the full-year guidance again. I guess — now as you kind of briefly remarked, we can expect over 25% growth in Renminbi term for the full year versus I think previously, markets or management kind of expected about 30%, so about 5-point deceleration makes a lot of sense. But how about our OP margin, can we still expect up to about 100 bps expansion for the education full-year margin core business. And if OK, can you also help elaborate albeit on the segment growth number baked in the full-year revenue guidance, especially the new business? I think Sisi remarked, 40% plus growth there, but just wanted to double check other segment and a little more details? Thank you.
Stephen Yang — Executive Vice President, Chief Financial Officer
OK. Yeah, DS, let’s start with this quarter margin analysis in Q2. The non-GAAP OP margin for the educational business, which excluding the East Buy this quarter was expanded by 12 basis points year over year. And I think it’s mainly due to some reasons because of the top-line growth are good in this quarter, and we started to bear fruit of the learning center expansion last year, especially in the second half of last year.
So it’s driving utilization rates up and get more operational leverage. And yes, as I said, we started to make some cost and expense control within the company. So this quarter, we get the operating leverage and drive the margin up. And as for the margin outlook for the second half of the year, as I said, I think the — we are facing some slowing down of the overseas-related business.
So I think the margin drag will be in the second half of the year from the overseas-related business. And also the newly tourism business will drive the market in the second half of the year. And so I think in the second half of this year, we will meet some margin pressure. And as the margin outlook for the next year, I think we will still expect the margin expansion for the whole company.
Because the K-12 margin will be expanded in the new year and in the second half of the year as well. And in second half of this year as well. And we will — started to cut the cost and expenses of the overseas-related business. And we expect the margin profile of the tourism business next year will be better than this year.
So this is the margin analysis —
DS Kim — JPMorgan Chase and Company — Analyst
Thank you.
Operator
Once again, we have the line from Alice Cai from Citi. Please go ahead.
Alice Cai — Citi — Analyst
Thank you management for the opportunity —
Sisi Zhao — Director, Investor Relations
Alice, there is some echo in your side. So we cannot hear you clearly. Now, it is better.
Alice Cai — Citi — Analyst
OK. Thank you management for the opportunity to ask questions. I have two questions today. The first one is I noticed that you are considering a regular dividend policy which is quite interesting given the current strong market demand, right? In this regard, I’d like to ask does it signal any anticipated softening in demand and therefore, a planned more duration in capex spending going forward.
Additionally, do you have an estimated time line for when this dividend policy might be declared. Furthermore, how do you view this balance between business expansion and shareholder returns. Just regarding the reported improvement in breakeven time line for recent opened — recently opened learning centers, I would like to know, shall we expect similar efficiency levels for future new learning centers? Thank you so much.
Stephen Yang — Executive Vice President, Chief Financial Officer
Yeah. Second question answered first. I think the — typically, we will spend six months to get the breakeven point of the new learning centers. So the ramp-up pace has not changed.
And as for the shareholders’ capital allocation, we announced $700 million share buyback. And now we finished $542.8 million. And I think we’ll keep buying the share buyback and in the open market. And as for the special dividend, yes, we have paid $100 million in September as a special dividend.
Typically, the board of directors will discuss the new year capital allocation policy in July. But anyway, it depends on the market cap, the stock price. And — but we — I think the management will aim to create more value to the shareholders as the capital return.
Operator
Thank you for the questions. Next question will come from Yanbo Cheng the line of ION Group. Please go ahead.
Unknown speaker — — Analyst
Hi. Can you hear me?
Stephen Yang — Executive Vice President, Chief Financial Officer
Yes, please go ahead, Yanbo.
Unknown speaker — — Analyst
Yes. Thank you. So my question is about how do you perceive the regulatory landscape on your core and noncore businesses, such as the tourism business. Do you see there — are there any heightened or lessen regulatory risks in those business areas? Thank you.
Stephen Yang — Executive Vice President, Chief Financial Officer
On the regulation side, there is no change now. And I think we’re OK to open the new learning centers to get the license from the local government. And so that’s why we want to change our expansion plan of this year. And on front, on the regulation side, our attitude is neutral to positive.
I think as on this call will apply for the requirement of the government things since three years ago, the policy change. Now the situation has no change more recently, so that’s it. Thank you.
Operator
Thank you for the questions. We are now approaching the end of the conference call. I will now turn the call over to New Oriental’s executive president and CFO, Mr. Stephen Yang, for his closing remarks.
Stephen Yang — Executive Vice President, Chief Financial Officer
Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you.
Operator
[Operator signoff]
Duration: 0 minutes
Sisi Zhao — Director, Investor Relations
Stephen Yang — Executive Vice President, Chief Financial Officer
Yiwen Zhang — China Renaissance Securities — Analyst
Felix Liu — UBS — Analyst
Lucy Yu — Bank of America Merrill Lynch — Analyst
Timothy Zhao — Goldman Sachs — Analyst
Unknown speaker — — Analyst
DS Kim — JPMorgan Chase and Company — Analyst
Alice Cai — Citi — Analyst
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