Good evening and thank you for standing by for New Oriental’s FY 2021 Second Quarter Results Earnings Conference Call. At this time all participants are in a listen-only mode. After the managements' prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded.

If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao. Thank you, please go ahead..

Thank you. Hello everyone, and welcome to New Oriental’s second fiscal quarter 2021 earnings conference call. Our financial results for the periods were released earlier today and are available on the Company’s website as well as on Newswire Services. Today, you will hear from Stephen Yang, Executive President and Chief Financial Officer.

After his prepared remarks, Stephen and I will be available to answer your questions..

Thank you, Sisi. Hello everyone, and thank you for joining us on the call. Although the impact of the pandemic continues to raise hurdles for business across the globe, we're pleased to announce a set of financial results in the second quarter of this year that are in line with our expectations.

While reflecting strong signs of recovery in some of our business lines, as certain cities began its path to normalization. Total net revenue was $887.7 million, representing a 13.1% increase year-over-year, which is encouraging results despite the challenges.

Our key revenue growth driver, K-12 after-school tutoring business, achieved year-over-year revenue growth of approximately 26%. Our U-Can middle school and high school all-subjects after-school tutoring business continued its momentum with a growth of approximately 27%, while our POP Kids program recorded a growth of approximately 24%.

Our industry leading OMO system has been vital in the previous quarters to ensure our classes ran smoothly and it has once again proved to be instrumental in this quarter, as it provides our operation with strong flexibility to help the vast majority of our students migrate from OMO online class back to offline learning centers.

We have gradually resumed service amid easing of the pandemic restriction measures.

Encouraged by its effectiveness, we have been committed to expand the reach of our OMO system and are delighted to say that we have piloting OMO online courses in vast majority of existing cities and trending new surrounding satellite cities in the autumn semester, attracting a promising number of new customers and students while the OMO system contributed single digits to the overall revenue in this quarter.

With its ability to virtually reach both major and satellite cities across China, we have no doubt that it will grow rapidly in the coming quarters and become a major driver for our business growth in the future..

Okay. Operating cost and expenses for the quarter were US$919.8 million, representing a 21% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share based compensation expenses were $901.4 million, representing a 20.4% increase year-over-year.

Cost of revenue increased by 26.4% year-over-year to US$453.7 million, primarily due to the increases in teachers' compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation.

Selling and marketing expenses increased by 23.9% year-over-year to US$133.6 million, primarily due to the addition of a number of customer service representatives and marketing staff with the aim of capture the new market opportunity during COVID-19 period, especially for the new initiatives in K-12 tutoring on our pure online education platform Koolearn.com.

G&A expenses for the quarter increased by 13.5% year-over-year to US$332.6 million. Non-GAAP general and administrative expenses, which exclude share-based compensation expenses were US$319.8 million, representing a 13.4% increase year-over-year.

Total share-based compensation expenses which were allocated to related operating costs and expenses increased by 64.8% to US$18.5 million in the second fiscal quarter of 2021. Operating loss for the quarter was US$32.1 million compared to an increase of US$25.3 million.

Non-GAAP loss from operating operations for the quarter were US$13.7 million, compared to an increased income of US$36.5 million. Operating margin for the quarter was negative 3.6% compared to 3.2% in the same period of the prior fiscal year.

Non-GAAP operating margin which excludes share-based compensations for the quarter were was negative 1.5% compared to 4.7% in the same period of the prior fiscal year..

Looking ahead into next quarter and the rest of fiscal year 2021, despite the continued challenges from the pandemic and the concerns covered the new wave of outbreak emerging in China, we are more clear about the recovery trends of the company's near term financial performance and the market opportunity over the long run.

Our strategic focus and investment approach this year aimed at improving product quality, increasing teacher salaries and enhancing our industry leading system, which fully reflects our ethos of focusing on the essence of education.

In view of market competition and opportunity to take advantage of post-COVID market consolidation, we firmly maintain a stable and balanced investment strategy that would improve the quality of our education service, with aim to achieve a sustainable and long term growth, as opposed to unhealthy short term growth that often requires excessive investments and higher costs to acquire customers.

As such, we will continue to focus on the following key areas. First, we will continue to expand our offline business. We aim to add around 20% to 25% capacity, including new learning centers, and expanding classroom area of some existing learning centers to K-12 business in this fiscal year.

We believe our capacity expansion will prepare us to further take market share from other players post-COVID, as we believe some smaller players without strong financial position in online class capability may be able to sustain its business during this period.

We expect the industry will undergo a wave of market consolidation upon the pandemic phase. The fact that we are a major player with a strong financial capacity and fresh offline facilities enable us to further strengthen our market leading position and penetration.

Second, we will continue to leverage our investments into digital technologies and introduce our OMO system in more offline language training and test offering, especially our K-12 tutoring and overseas test prep key business.

The usage of online tools and contents in our OMO system for all business lines throughout the whole network will be enhanced. It is our belief the whole OMO teaching experience, we will place more efforts in developing the best teaching content and courseware and also developing more advanced training programs to our teachers.

With all the above mentioned infrastructure in place we will continue to pilot our OMO online initiatives in major cities with a high demand and higher operational efficiency and in the surrounding satellite cities.

We believe that our OMO initiatives will be one of the -- our growth engines to increase our customer acquisition post-COVID as we can quickly replicate in different parts of China, enabling us to capture the market consolidation opportunities.

This revamped new business model will also accelerate our margin recovery when the pandemic is over and further expand our long term margin target. Here I have to highlight all of these OMO products are supported by our offline classes. These supplement each other in a hybrid format.

All the teaching content and coursework materials, as well the teachers are developed and originated from our existing offline centers and resources.

Furthermore, we will continue to invest in and implement new initiatives including productive content development, teachers recruiting and training, R&D as well as self marketing expenses in pure online K-12 after-school tutoring business on our Koolearn.com platform.

Third, our top priority will remain as the focus on controlling costs and reducing expenditures across the organization to minimize the negative impact from the pandemic on the bottom line. We believe, we will resume the expansion of overall non-GAAP operating margin year-over-year, as COVID-19 subsides gradually.

Here, I would like to stress that we have great confidence in the fundamentals of our business, which we believe will continue to remain strong.

Although we are facing various negative impacts from the pandemic, we have been increasing our investments in different strategies and we remain optimistic of a brighter prospect of our business and believe our investments now will bring us fruitful returns in the long run.

Due to the concerns that a new wave of COVID-19 outbreak is emerging in North China, as of today, we have moved our offline classes to small sized online broadcasting classes through the OMO system in over 10 cities, including the major cities such as Beijing, and.

Despite these challenges, our OMO system enables us to migrate classes between offline and online platforms swiftly and seamlessly. And therefore the impact on our business will be cushioned should there be a significant outbreak.

In the meantime, the unpredictability of the pandemic has also reminded us to plan ahead of the future as we continue to build new learning centers to ensure we will be ready to accommodate a large number of students when situations normalized. We're looking ahead near term our expectations for the next quarter.

We expect total revenue to be in the range of $1098.6 million to $1144.8 million, representing a year-over-year increase in the range of 19% to 24%. To provide a breakdown of the expected topline growth for the key business units. K-12 after-school children business is expected to grow in the range of 27% to 32%.

Overseas test prep program is expected to decline 25% to 20%. Overseas study, consulting and study tour business is expected to be decline 5% to 0% and the growth of the Koolearn.com pure online education platform is expected to accelerate all year-over-year in dollar terms.

Despite the fact that our overseas test prep and consulting service for the second quarter fared better than the first fiscal quarter, we still expect the overseas related business to continue to behave the harder due to the pandemic around the globe, caused by the cancellation of the overseas exams, suspension of the overseas schools and restrictions on travels.

The next year's the impact on this overseas related business will affect the entire educational industry in China, not only New Oriental, and may last over the coming one or two quarters.

Thus with that, we're pleased to see that China has been controlling the pandemic situation relatively well, which shed a more positive light on our business domestically.

To conclude, we're now taking all kinds of operational actions to boost the enrollments and classroom utilization for the autumn semester and speed up the recovery of business after the resumption of the schools and learning centers.

We're confident that the demand for after school tutoring will gradually pick up and trend toward a normalized level gradually. I must mention that these expectations reflect our considerations of the latest pandemic situation as well as our current and preliminary view which is subject to change. At this point, Sisi and I will take your questions.

Operator, please open the call for this. Thank you..

Thank you. Your first question comes from the line of Tian Hou of T.H. Capital. Please ask your question..

Sisi, Stephen, congratulations on the good quarter. So, in your opening remarks, you talk about OMO and it also shows the positive results in your last quarter's earnings and your offline enrollment growth, revenue growth is much more higher than peers.

So, I wonder, can you elaborate how important OMO strategy is for you in fiscal 2021, as well as next couple of years? And by the end of this year, this fiscal year or next fiscal year, what proportion of OMO is going to be in your total enrollment or revenue? So basically is that, elaborate on your OMO strategy for the future?.

Thank you, Tian. This is a great question. On the market front, actually we are seeing the great business opportunity originally, because more and more players disappeared from the market. And we put more efforts on our offline business combined with the OMO model.

And we have piloted the market leading OMO model in vast majority of the cities, and to set up the OMO business, in 20 new satellite cities nearby the core city. And the key is I think the student retention rate and the satisfaction from the customers are better than we expected in the summer.

And so, this quarter the OMO contributed single digits to the overall revenue contribution. That's, you know, we believe the OMO model will grow rapidly going forward and will become a major driver to our business growth. So, that means the OMO will help the topline growth of our traditional offline business.

And let me repeat some advantage of the OMO model, okay? The OMO model typically has the lower customer acquisition cost. That means we do have very strong marketing teams and so that means we do need to spend crazy money on the Internet or something like the channels -- the online channels.

And second, I think it's very easy for us to replicate the OMO model in the other provinces in China. And third, I think our content of the OMO model are more localized than the -- like the typical super large, the online broadcasting classes.

I think this is our advantage and all the coursework, all the like materials are reasonable from the local, our local staff. So I think this makes the students -- they love our OMO courses more and pull them through more engaged in the classes.

And the last one is, I do believe the OMO model will bring us the -- even the opportunity of the cross selling. We can cross sell the OMO or the online course and the offline course, each other. So, I spent too much time on the OMO model, but I think this is very important.

Tian, is it clear?.

Yes. Thank you so much Stephen..

In fiscal year -- in next fiscal year, will be more than that of this year. And I think we will see one or two more quarters to ultimate the revenue contribution, but I do believe the revenue contribution from the OMO model will be a meaningful number next year. Thank you..

Okay, great. Thank you so much..

Thank you, Tian..

Your next question comes from the line of Mark Li of Citi. Please ask your question..

Hi Stephen and Sisi and thanks for the presentation. I want to ask at this point, could you give us some color for the FY22 guidance like in terms of the revenue growth or the capacity expansion or the lower tier city penetration and any color would be helpful? Thank you..

Yes. I think we have done very well to run a business during the COVID -- the hard time. And we expanded our capacity by 20% to 25%, and also we raised the salary of the teachers during the hard time and I think we’re ready for the New Year. And so, in the fiscal year 2022, I think the revenue growth will be booming. Okay.

And in the fiscal year 2022, I believe the margin will be expanded.

Because, first of all, we have a low base this year and second, I do believe the China will control the pandemic relatively well and I do believe that most of the students can go back to our learning centers, and some new cities -- lower tier city students can enjoy the service of our OMO model and yes.

Mark?.

Sure. Thank you, Stephen..

Thank you, Mark..

Your next question is from Felix Liu of UBS. Please ask..

Good evening management and congratulations on the results. My question is on COVID-19 impact.

I know your guidance of 15% to 24% revenue growth for the next quarter, has that reflected in the current level of COVID-19 lockdown or are we expecting potentially more cities to roll out similar measures? And for this round of COVID-19 you mentioned that you're better prepared than last time? May I know, well it’s the new enrollment growth, or the May quarter be impacted or are we okay with new enrollment growth at this time? Thank you..

Felix, due to the concerns of a new wave of the COVID-19 outbreak in North China, I think we are -- today, we have moved all the offline classes to online in over 10 cities, such as the major city like Beijing, Xian and and all these cities in northeast region.

And so, I think the, yes well, I think there's the negative impacts, but the key is decide the challenge. I think our OMO system enabled us to migrate class between offline/online. And I think this time we prepared better, face the challenge, compared to that of last year.

And one more point, the Q3 because of the late Chinese New Year holiday, the Q3 or the class scheduling will be negatively impact, to some extent.

But anyway, even we face to the challenge of the new wave of the COVID, I think the Q3 radicals will be accelerated than the Q2 and we're kind of optimistic about the business performance in Q4, and next year.

And the last one, I want to add is, we are using the conservative way to make the guidance of forecast, because the environment changed almost every day..

Okay, thank you very much..

Next question comes from the line of Alex Xie of Credit Suisse. Please ask your question..

Hi management, thank you for taking my questions. So my first question will be about OMO.

Stephen, you’ve mentioned you covered 20 satellite cities, may I ask how many core cities and does that involve to cover 20 satellite cities? And what will be your plan to extend in the next fiscal year for the OMO model to cover more satellite cities and core cities? And secondly, congratulations Stephen on your new role as Executive President.

Would you please share with us what's the responsibility with this new role and your thoughts about the implication for the corporate governance about this new role? Thank you..

Okay, thank you first of all. I think, yes I think I'm happy to take the role of the Executive President and the CFO. And yes, I believe I will spend more time on my job. And but the good news for me, I have very strong teams. We worked together for so many years. And I think all the managers and my staff like Sisi will support me stronger than before.

And also, actually things are two years ago I spent some time on the operations side. I think that some investors knew that. So, I love to spend more time with the business with the operational team because it makes me to more familiar with the business and to give them the better instructions and guidance.

And yes, I think I was in the back to this new job and to create more value to the shareholders and our customers. And the, yes the OMO portal. Yes, I think we are running the seven provinces of the OMO model, we call this.

We started from the Hangzhou in the Zhejiang province and like the Shandong, Shaanxi and Fujian and some of the key provinces followed and so far so good. Actually most of the provinces performed better than we expected. So I believe they will do better going forward and we will probably new OMO model in more provinces going forward. Thank you..

Got it, very helpful. Thank you..

Your next question comes from the line of Sheng Zhong of Morgan Stanley. Please ask your question..

Hi, good evening. Thank you for taking my question. Just one question about your offline price. You mentioned that it's increased very strong. So wondering, the reasons of the price increase, especially, there are a lot of competition from the online. And also we see the supply, the smaller institutions, they also provide price discount.

Is it because you see the offline supply decrease post COVID-19 or for some other reasons, that your pricing strategy? Thank you..

Hi, Zhong. So I think our price strategy has been very consistent and this quarter's hourly blended ASP was flat. And yes, we raised the price of the U-Can program by 8% and VIP, U-Can VIP price increase was 5% top case, we keep the same price. I don't think the online platforms competition will impact our, the price strategy.

I'm not sure you remember, clearly, we're not. We did the very good successful summer promotion half year ago and during the summer, we got more than 1 million, the summer promotion enrollment.

And, we charged RMB 400, I think it's much expensive than the online players, most of them are providing, we're providing the free course, we're like the and so, but you know our retention rates were over 60%.

So, I think the Chinese parents and students, they care more about the teaching quality, and the study results of their kids, and rather than the price. So going forward, I think our price strategy won't be consistent..

Thank you..

Thank you..

Your next question comes from the line of Lucy Yu of Bank of America. Please ask your question..

Hi Steven. I just got a very quick question. You mentioned that in the third quarter, there will be some negative impact from cost scheduling.

Could you please quantify that for us, please?.

Yes, typically the delay Chinese New Year will impact the revenue by 5% to 6% because yes K-12 business, because last year, the first clock, the first of the two courses in the spring semester, what's happens in the Q3. But this year, we started all the courses in March.

So that means we sacrificed 5% to 6% of revenue of the POP Kids and U-Can, but it's just the one time impact just the timing difference..

So, - just to make sure that your guidance on the third quarter K-12 is 27% to 32%.

So if we're adding a 5% to 6% back, it should be like low 30s to high 30s kind of gross right?.

Yes..

Yes, thank you..

Your next question comes from the line of Christine Cho of Goldman Sachs. Please ask your question..

Hi, thank you. Thank you, Stephen. I know that you are dual listing. You just given this is - I know to do listing, you've built up quite a substantial net cash position.

So could you give us some color as to your capital allocation strategy going forward? And then secondly, just very quickly Stephen, do you have any thoughts on your midterm guidance of 17% to 18% operating profit margin, any problems related to that? Thank you..

Yes, Christine, the capital allocation? Yes, we raised money last year in November in Hong Kong market, from the second listing. And we love to pay capital allocation to investors. Historically, we've been several times special dividends and several times share buybacks.

And the use of the money, I think we prefer to use the money to make some the potential valuable investments, if we can find some potential synergy between the targeted company and us worldwide, but we will do it very carefully. And the second will, we will have to pay the investors. And this is the -- your number one question.

Number two question is about - yes, we don’t want to change our near and long term margin guidance. Let me start with the revenue first, I think if you run the growth recovery is in the process and I think we still need one to two quarters to go back to the normal.

And on the market front, we're seeing the great opportunity everywhere, because the small players disappeared from the market. And I do believe it's a great opportunity for New Oriental going forward. So that's why we tend to firmly make more investment now.

We make the Learning Center expansion by 20%, 25% during a hard time, and we raise the teachers' salary. And we hired more marketing staff to do the ground promotion, which is more effective than the online channels. And also, we spent some R&D on the OMO model. And so only above the investment plus the from the Overseas test prep.

And the Koolearn attracts the margin four time, but we're confident that we'll be able to deliver the continuing the margin expansion upon the pandemic phase. And that's why I said, I don't want to change our mid long from guidance..

Thank you, so much..

Your next question comes from the line of Alex Liu of China Renaissance. Please ask your question..

Hi, yes thanks Yang, thanks Sisi.

I think you kind of just answered my question, but actually, my question was that, in terms of margin, if you're looking at a non-GAAP operating margin, I think this quarter was still slightly declined year-over-year, but just how fast or specifically around what time should we expect the margin to bottom out in the next few quarters? Thank you..

I think, yes as I said, to answer the questions from Christine, last round and because, our revenue recoveries still need to get go back to normal still need maybe one or two quarters. You know the topline, where it will be to draw, like it should be very bottom line.

And also, we're in the investing phase, to hire more to spend more on the teachers down the expansion. And that's, yes especially for the impact of the new wave for the COVID in North China, like Beijing, and and all provinces in. I think we’ll see that a little bit in the Q3, so adjustment time.

I don't believe the China will manage the COVID relatively well in the going forward and I do believe our performance in the coming quarters, and even in the next year will be better than the Q2. Thank you..

Okay. Thank you. I actually have a quick follow up. Just on the teacher compensation I think we changed the teacher compensation structure a bit in the past, in this fiscal year.

I am just wondering, how should we think about the teacher compensation clause in the next few quarters? Is it fair to say that, given we might be already past the time, when the competition pressure on teacher compositions is already, is the most some of your online players?.

Yes, I think it's a great question. The reason that we raised the teacher salary is not because of the competition from the online players. The online players they just need like a few teachers and we have a lot of teachers. And I think this decision was totally made by Michael.

He think, he think, he discussed a lot internally with all the managers in school has just raised the teachers' salary, because this is our most advantage, not only for the short time, but also for the long time. So, we fully, internally we fully support Michaels position.

And even during the hard time, and our topline growth was negatively impacted to some extent, but we firmly raised the teachers' salary. I don't think it will attract the margin. Because, I think the high -- we pay the teachers higher will bring out the higher the utilization rates, and the student retention rates in the mail long term..

Thank you..

Okay..

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, Stephen Yang for his closing remarks..

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 here. Thank you very much..

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect..