Good evening and thank you for standing by for New Oriental’s FY 2023 Fourth Quarter Results Earnings Conference Call. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. [Operator Instructions] I’d now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao..

Okay. Thank you. Hello, everyone and welcome to New Oriental’s fourth fiscal quarter 2023 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. As such, our results may be materially different from the views 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..

Thank you, Sisi. Hello, everyone and thank you for joining us on the call. It’s our great pleasure to announce that New Oriental has managed to conclude this fiscal year with a set of remarkable financial results this quarter and with our top line performance beating the expectations.

Our existing business lines and new initiatives have pivoted towards a stable recovery and anchored fruit-bearing growth, mainly benefiting from the strong post-COVID recovery of demand and the resumption of the consumption.

Our bottom line performance has also achieved a solid growth with operating margin and non-GAAP operating margin reaching 5.6% and 9.1%, respectively, for this quarter, depicting a well-grounded resilience across our business lines, thanks to our ongoing efforts in enhancing operational efficiency and cost control.

In particular, I would like to highlight that the solid recovery has been embedded in the growth of our overseas [Technical Difficulty] Our bottom line performance has also achieved a solid growth with operating margin and non-GAAP operating margin reaching 5.6% and 9.1% respectively for this quarter, depicting a well granted resilience across our business lines, thanks to our ongoing efforts enhancing operational efficiency and cost control.

In particular, I would like to highlight the solid recovery has been valid in the growth of our overseas test prep and overseas study consulting businesses, which have recorded steady increments in revenues and enrollments.

The dedicated blend of our restructured business model better utilize the facility and streamlined cost structure have not only helped us yield better than expected margins in this fiscal quarter, but also enlivened our continued exploration of new potential ventures as we unfold a new chapter of innovative endeavors.

The company’s sustainable profitability, resilient business lines and emerging new initiatives have reaffirmed our belief in maintaining a healthy growth of our market share amid the encouraging environmental recovery.

Now, I would like to spend some time to talk about the quarter’s performance across our remaining business lines and new business to you in detail. Our key remaining business secured a promising trend, coupled with the positive momentum in our new initiatives.

Breaking it down, the overseas test drive business reported a revenue increase of 52% in dollar terms or 62% in RMB terms year-over-year for the first quarter. The overseas study consulting business recorded a revenue increase of about 6% in dollar terms or 13% in RMB terms year-over-year for this quarter.

The adults and university students business reported a revenue increase of 34% in dollar terms or a 43% increase in RMB terms year-over-year for this quarter. As mentioned in the previous quarters, we have launched several new initiatives, which mostly revolve around facilitating students all around development.

I am pleased to share with you that these initiatives have continued to exceed our expectations by sustaining our promising growth and generating meaningful profit to the company.

Firstly, the non-academic tutoring courses, which we have offered in around 60 existing cities focused on cultivating students’ innovative ability and comprehensive quality.

We are happy to see further rise market penetration in those markets we have tapped into, especially in higher tier cities, with a total of 629,000 student enrollments recorded in this quarter. The top 10 cities in China have contributed about 60% of revenue of this business.

Secondly, the intelligent learning system and device business or service designed to provide a tailored digital learning experience for students has been adopted in around 60 existing cities, with 99,000 active paid users reported in this quarter. The revenue contribution of this new business from the top 10 cities in China is around 60%.

Thirdly, our study tour and research cap business, an initiative that aims at offering students of K-12 and university ages the opportunity to fully leverage their free time to broaden the scope, knowledge and cultivate subject interest, has also achieved encouraging results.

We have conducted study towards a research attempt in over 50 cities across the country with the top 10 cities in China offering over 55% of revenue contribution to this new business.

Benefiting from the post-COVID recovery of demand, we have seen strong enrollment trends and expect the new business to contribute meaningful revenue in the coming new fiscal year.

Last but not least, our smart education business, educational materials and digitalized smart study solutions, as well as exam private courses, have also contributed meaningful results to the overall growth of the company and has attained instrumental profit since the previous quarters.

With regard to our OMO system, our positions in revamping our platforms and advancing the technology capability has enabled us to continue to provide high-quality service to our customers and successfully capture the new business opportunity during the transition period.

During the reporting period, a total of $31.7 million has been invested into the system. Now, I would like to spend a bit of time to give you updates on East Buy latest performance. Fiscal year 2023 marks adventures beginning for East Buy.

Since inception, it has achieved significant breakthroughs in both business operations and financial performance through proactive redesigning of strategic plan and the implementation of a series of the initiatives to strengthen the long-term sustainability.

During the reporting period, the company introduced a change of its name from Koolearn Technology Holding Limited to East Buy Holding Limited for closer alignment with its long-term core business direction, which is to offer top-quality agriculture products under our private label, DongFang JingYuan [ph] creates a live streaming platform which safeguards product caliber and use experience for customers as well as nurture nationwide cultural appreciation.

Throughout fiscal year 2023 East Buy continued to expand the product variety to provide customers with high-quality and cost-effective offerings. The extremely stringent standard it applies in selecting suppliers and manufacturers have ensured outputs are always created a better craftmanship with similar ingredients.

In terms of private label products, we are existing to introduce only high-quality products that are price worthy. East Buy elevated user experience by applying advanced technology to safeguard the entire process from product development sales to after sales service.

Furthermore, with the vision to foster content innovation and knowledge sharing with customers, East Buy began leading onsite live streaming events in various province in China, joined by the cultural celebrities from all works of life to document a rich variety of intangible cultural heritage.

We are also grateful for the support to East Buy’s exploration in cultural tourism and it’s inspiring to see that the platform has since rose while public attention, awareness and most importantly, affection on Chinese cultural assets. We will continue to explore the area of business and provide updates when suited.

With regard to the company’s latest financial position, I am confident to share with you that the company is seeing healthy financial status with cash and cash equivalents, term deposits and short-term investments totaling approximately $4.5 billion.

On July 26, 2022, the company’s Board of Directors authorized a share repurchase of up to $400 million of the company ADS were common shares during the period from July 28, 2022 through May 31, 2023.

The company’s Board of Directors further authorized the company to extend its share repurchase program launched in July 2022 by 12 months through May 31, 2024. As of July 25, 2023, the company repurchased aggregate of approximately 5.9 million ADS for approximately $191.7 million from the open market under the share repurchase program.

Now I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead..

Now I’d like to walk you through the key – other key financial details for this quarter. Operating costs and expenses for the quarter were $812.5 million, representing a 29% increase year-over-year.

Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $782 million, representing a 30.1% increase year-over-year. The increase was primarily due to the cost expenses related to the substantial growth in East Buy’s private label products and the live streaming e-commerce business.

Cost of revenue increased by 58% year-over-year to $391.6 million. Selling and marketing expenses increased by 54.3% year-over-year to $147.8 million. G&A expenses for the quarter decreased by 4.5% year-over-year to $273.1 million.

Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $249.5 million, representing a 3% decrease year-over-year. Total share-based compensation expenses, which were allocated to related operating cost expenses, increased by 6.1% to $30.5 million in the fourth fiscal quarter of 2023.

Operating income was $48.1 million compared to a loss of $105.6 million in the same period of the prior fiscal year. Non-GAAP income from operations for the quarter was $78.6 million compared to the loss of $76.9 million in the same period of prior fiscal year.

Net income attributable to New Oriental for the quarter was $29 million compared to the loss of $189.3 million in the same period of last year. Basic and diluted net income per ADS attributable to New Oriental were $0.18 and $0.17, respectively.

Non-GAAP net income attributable to New Oriental for the quarter were $62.1 million compared to the loss of $160.3 million in the same period of the prior fiscal year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.38 and $0.37, respectively.

Net cash flow generated from operations for the fourth fiscal quarter of 2023 was approximately $421.6 million and capital expenditure for the quarter were $68.4 million. Turning to the balance sheet. As of May 31, 2023, New Oriental had cash and cash equivalents of $1,663 million.

In addition, the company had $1,318.5 million in term deposits and $1,477.8 million in short-term investments.

New Oriental’s deferred revenue balance, which is cash collected upfront from customers and related revenue will be recognized as a service or goods as the services and goods are delivered at the end of the fourth fiscal quarter of 2023 was$1,337.6 million, an increase of 43.4% as compared to $933.1 million and the same at the end of the fourth quarter of fiscal year 2022.

Now I’ll hand over to Stephen to go through our outlook and guidance..

Thank you, Sisi. Heading into the first quarter of fiscal year 2024, we firmly believe that our business will progress on a healthy trajectory of growth, which will be reflected in our performance in the new fiscal year.

The surge in demand we observed as a result of post-COVID reception and economic recovery has heightened our conviction in leveraging our brand advantage rooted influential the teaching content and resources and our long established solid foundation.

We will continue to work diligently and having the latest guidance from the Chinese authorities on enhancing the nation’s education level to strengthen its leading position to further unveil our potential in all business lines and these new opportunities as they arise.

With regard to learning center and classroom space, we plan to increase our capacity by about 15% to 20% in the new year, of which a small quantity of new learning centers is expected to be opened. While classroom areas of some existing learning centers will be expanded in a few major cities.

Most of the new options will be launched in the city with a better top line and bottom line performance in fiscal year ‘23. We will keep monitoring the pace and scale of new offerings according to the local operation and financial results during the new year.

In summary, we expect total net revenue in the first quarter of fiscal year 2024 and to be in the range of $983.2 million to $1,005.5 million, representing a year-over-year increase in the range of 32% to 35%.

To conclude, the financial results we recorded in fiscal year ‘23 and performance of our new business have reaffirmed our confidence in achieving the satisfactory level of the operating profit and the improvement of the profitability in the first quarter and the whole year of fiscal year ‘24.

New Oriental placed great determination to invigorate new endeavors with our existing capabilities.

Simultaneously, we will also devote reasonable resources on research and application of new technologies such as AI and ChatGPT into our educational and product offerings with the vision to uplift our strength and pursue growth in opening and operating efficiency.

At the same time, we will continue to stay committed to seek guidance from and corporate with government authorities in various provinces. In alignment with its efforts to comply with the relevant policies as well as the further just in our business operations as required.

I must say that these expectations and forecasts reflect our considerations of the latest regulatory measures as well as our current and preliminary view, which is subject to change. This is the end of our fiscal year 2023 Q4 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you..

Thank you. [Operator Instructions] Our first question comes from the line of Felix Liu from UBS. Please go ahead, Felix..

Hi, good evening. Thank you, management, for taking my question. And congratulations on the strong quarter and guidance. My question is on capacity. I noticed that your capacity expansion had picked up this quarter and that you guided a 15% to 20% capacity increase for the next – for FY ‘24, which I think is an acceleration from previous plans.

So may I ask you to share more color on this capacity reacceleration? Are they in existing cities or in new cities? And are they for – just for our new K-12 businesses? Or are they multi purpose in covering overseas test prep.

And for the plan of 15% to 20% this year, do you see that as a sustainable level if we were to project this into a few years down the road? Thank you..

Yes. Thank you, Felix. I think as for the expansion plan, yes, we raised a little bit about the capacity expansion plan compared to that of the last quarter earnings call. Last quarter, I shared with you guys about the 10% capacity expansion.

I think the reason is it’s because we have seen the strong demand in education sector, especially in overseas test prep business and non-academic courses. So that’s – and also, I think that’s why we raised the guidance of the capacity expansion. And I think most of the new opening will be happened in the existing cities.

We don’t have the plan to open the new cities. And – but I must mention that we will open these small quality of the new learning centers in certain cities, and we will expand some classroom area for some existing cities because it’s almost a full of the existing some learning centers.

And most of the new learning centers or the new areas will be used by the K-12 non-academic process and overseas-related business and some domestic test at courses. And as for the – this is our fiscal year ‘24 plan. And I think in the next 2 to 3 years, I think we will keep the same pace of the expansion plan.

And it depends on the whole market environment and the development of the business, Felix..

Thank you very much..

Thank you. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please ask your question, Yiwen..

Yes. Good evening. Thanks for taking my questions. Congrats on very strong set of results. So, just a general question on our guidance. So, your August quarter guidance is quite impressive and even also in the medium-term. So actually, what is driving such a strong growth? Can you like to describe more maybe by segment? Thank you..

Okay. Yes. I think we remain confident and optimistic about the business performance in the coming Q1 and even for the new fiscal year ‘24. And as the post-COVID reception and the whole economy recovery, I think we have seen a strong demand of our product like the overseas related courses and not for some new business.

And so I think with leveraging our brand advantage and the good teaching content and resources and our long established solid foundation, I think we will continue to seize the market opportunity in the market. That means we will take a big market share.

And for example, as for the overseas related business, on demand side, we have seen a strong demand for the overseas test prep business. On supply side, we have seen some players disappear from the market. So, that means, we are facing less competition.

And for our new business, like the non-academic courses, I think we are – the encouraging performance in this quarter or even in the last year, proved that we are heading towards the right direction. So, in the coming Q1, we guided the top line growth will be in the range of 32% to 35% in dollar terms.

And in RMB terms, there might be somewhere around 40%, 45%. And so – and also as for the bottom line wise, we are confident in achieving the greater profit in the coming Q1. That means we are quite optimistic about the operating margin expansion in the Q1 and the whole New Year.

Yiwen?.

Thank you. Thank you very much..

Thank you..

Thank you. Our next question comes from the line of Lucy Yu from Bank of America Securities. Please go ahead, Lucy..

Thank you. Hi Stephen, this is Lucy from BAM. One question on your selling expense, so I noticed that the selling expense has been up quite a lot Q-on-Q and Y-o-Y, could you please elaborate what is driving that? And how should we think about the selling expense trend in the new fiscal year? Thank you..

Yes. Thank you, Lucy. I think yes, we spend a little bit more money on selling and marketing expenses, because we are seeing the strong demand in the market. And yes, I think you saw our top line growth in this quarter is 64% in dollar terms. And even though we will spend a little bit more on selling and marketing expenses.

But I think we do have the operating leverage in hand. And going forward, even in the Q1, the New Year, I think we will spend a little bit more on the selling and marketing expense. But I think we do have the operating leverage on the costs and SG&A side. So, that means you will see the margin improvement in the coming New Year..

Just a follow-up, Stephen, so your selling expense up is mainly driven by which business? Is it non-academic in overseas or any other business?.

Both despite the education business and East Buy..

Okay. Thank you..

Thank you, Lucy. Our next question comes from the line of Candis Chan from Daiwa. Please ask your question, Candis..

Hi Stephen and Sisi. Good evening. This is Candis from Daiwa. So, firstly, congratulations on the very strong revenue guidance for the coming quarter. And I would like to follow-up on your comments about the operating margin.

Would you mind sharing a little bit more on the margins by different businesses for it such as the non-academic tutoring and also the overseas test prep, etcetera. And my second question is about the revenue this quarter, would you mind to break it down into different segments as well? Thank you..

Yes, let’s start with the margin analysis of this quarter. Because of the downsizing of the learning centers and laying off the – some employees last year led to the lower fixed cost per learning centers, it drives the margin up. And as for the different business lines, the overseas test prep the growth is very good in this quarter.

And with the higher utilization of the classrooms and the operating leverage and the margin was up. And going forward, I think both the overseas business and the new business, the margin will go up in the coming quarter and the coming New Year. And the question really, the different business lines revenue, Sisi can take it..

Yes.

You mean for Q4, right?.

Right. Mainly for Q4, but if you can also provide some colors on the 1Q, that would be very great. Thank you..

Okay. Yes. So, for Q4, the revenue mix is roughly like – in Q4, the overseas-related business contributes, like test prep is about 11%. And the consulting business is like 17%, because it’s the seasonality – seasonally high quarter. And also for our university students business, the revenue contribution in Q4 is about 2% to 3%.

And the new business together is about – new business together is about 18%, so roughly same for the whole fiscal year as well. And the rest are high school and some other business and also including DongFang JingYuan [ph], yes..

Thank you, Sisi. And may I ask one more question that is about the coming quarter. So, I think that we do see that on the ground, the demand for the research camps and also the study tours have been very strong.

Would you mind to share a little bit more on the like what we are seeing for this? And what is our plan for this New Year and going forward for this new business? Thank you..

Yes. So actually, we give the strong guidance for Q1’s revenue. The key driver, if you look at by each categories of businesses, like overseas related business, both including the overseas test prep and consulting are growing faster.

And also, we are seeing accelerating trends of the growth for overseas related business, because of the post-COVID recovery, the trend is very clear. And also, the – some other new business definitely is a key driver, even higher than our original expectation because we are seeing strong demand during the summer’s registration.

And according to our current forecast, this portion can also grow very, very fast. So, these are the key driver. Definitely, other business of the remaining businesses and also Tung-Jung Hsieh [ph] are also contributing good revenue growth as well for Q1..

Great. Thank you very much..

Alright. Thank you. Our next question comes from the line of Tony Wang from CICC. Please go ahead, Tony..

Hi Stephen and Sisi. Good evening. Thank you for taking my questions.

My question is since you have announced to offer cultural and tourism services that target middle-aged and older people, so could you mind share more color on this, like how do we expect to enter this market? And to which extent do we expect this business to contribute to revenue? Thank you..

Yes. As for the new, the cultural tourism business, yes, I think first of all, we think the – it has a big potential, the market opportunity in the country. And we do have a lot of the good teachers, some of them are star teachers.

And by leveraging the knowledge of the teachers and in like the general study is Q3, or Chinese Q3, were some cultural studies, I think we believe we will be able to present one of a kind of culture the tourism offerings. Combined both the entertainment and cultural education for the – like the middle or the older aged people.

In addition, I think we may also be able to leverage our extensive the online platforms and the school networks, the distribution channel. We have newly developed a couple of the top quality cultural tourism offerings in some feature in some future tourism cities and provinces such as Hangzhou, Chengdu, Tianjin and Gansu.

I think these offerings are gaining the increase in the traction from the market. And yes, we are still in the very early stage. And in the – we are testing finally the product and the service process. And so – and I will keep you posted for any updates on the new business. But we are excited for the new business as we did in the year before last year.

We started the business of the East Buy. And the East Buy generally, a lot of the top line growth and the profit to the group in fiscal year ‘23. And this rounds for the – we are very excited about the new business of the tourism business. Thank you..

Alright. Thank you..

[Operator Instructions] There are no further questions. 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. Thank you..

Thank you. This does conclude today’s conference call. Thank you for participating. You may now disconnect..