New Oriental Education & Technology Group Inc. ( EDU)

F1Q2012 (Qtr End 31/10/2011) Earnings Call

October 18, 2011 08:00 am ET


Sisi Zhao - Senior Investor Relations Manager

Louis Hsieh - President &CFO


Chenyi Lu - Cowen &Company

Philip Wan - Morgan Stanley

Eugene Yeoh - Deutsche Bank

Mark Marostica - Piper Jaffray

Catherine Leung - Goldman Sachs

Amy Junker - Robert W. Baird

Ella Ji - Oppenheimer

Tom Dillon - William Blair

Chao Wang – Merrill Lynch

Jennifer Kao - Credit Suisse



Good evening and thank you for standing by for New Oriental’s first quarter of fiscal year 2012 earnings conference call. At this time all participants are in listen-only mode. After management’s 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.

Sisi Zhao

Hello everyone, and welcome to New Oriental’s first quarter of fiscal year 2012 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, you will hear from Louis Hsieh, New Oriental’s President and Chief Financial Officer. After his prepared remarks, Louis 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 statement, except as required under applicable laws. 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

I will now turn the call over to New Oriental’s President and CFO, Louis Hsieh.

Louis Hsieh

Thank you Sisi. Hello everyone and thanks for joining us. I will start today with an overview of the business highlights from the last quarter and then quickly review some of the key financial indicators. We are starting the fiscal year on a really strong footing with an exceptional set of results for the first quarter. As you know over the last few quarters we have set ourselves the challenge of striking the ideal balance of increasing profits while continuing to invest for growth and I think our results for the quarter really speak to the success of achieving the right mix. New Oriental continues to grow at a stellar rate with revenues increasing by 41.4% year over year to $272 million. Combined with this our efforts to control spending continue to bear fruit enabling us to increase net income by 45.8% to $90.7 million. At the same time we recorded improved gross margin of 65.9% up 40 basis points and a very healthy operating margin of 34.8% up 50 basis points. For the last 12 months our results are very impressive with revenue growth of over 48% to over $637 million, enrollment growth of approximately 17.6% to almost 2.2 million students, GAAP net income growth of over 56% to $138 million, GAAP net profit margin of about 20.4% and non-GAAP net income growth of approximately 48% to over $148 million and for the non-GAAP profit margin of 23.3% over the trailing 12 months.

Underpinning these excellent overall performances were really strong results across each of our key business segments. Overseas test preparation programs recorded year-over-year enrollment growth of more than 19% to about 107,800 students and year over year gross revenue growth of over 48% to over $92 million. We continue to see particularly strong demand for our TOEFL, IO, GRE, GMAT and SAT test prep classes. The K-12 all subjects after school tutoring business recorded year-over-year enrollment growth of more than 24% to over 436,600 students and year-over-year gross revenue growth of over 50% to over $94 million. This is particularly hardening given that the summer quarter is not the peak season for K-12 all-subjects tutoring. Rather the six months before the Gaokao and [Xunkao] test which are administered in June of each year, namely the winter and spring quarters, typically are stronger K-12 and test prep tutoring demand.

And once again, we see very rapid growth in our VIP personalized profits. Year-over-year enrollment growth increased more than 46% to about 21,200 and year-over-year cash revenue growth was over 65% to over $42 million. Finally, our Vision Consulting, overseas study consulting business, had another great quarter with year-over-year gross revenue growth of approximately 110% to $13.4 million.

We are extremely pleased with the rapid growth of our smaller class sizes offerings, particularly in the VIP sector. These are premium offerings at a premium price. So our ability to get traction here is quickly, really speaks to the strength of the New Oriental brand in the high quality of our courses.

I want to highlight though that these smaller classes obviously have lower margins. So as our product mix shift, our overall operating margins will be negatively impacted. In addition as Beijing and Shanghai are now less than 50% of our revenues, many of the other schools, as a whole, are growing faster than Beijing and Shanghai, our margins will also be negatively impacted as Beijing and Shanghai, traditionally, have enjoyed higher gross and operating margins. These negative impacts can be offset in large part over time by higher ASPs, higher learning centre utilization rates and economies of the skill advantages that New Oriental enjoys.

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