New Oriental Education and Technology Group Inc. ( EDU) F3Q12 Earnings Conference Call April 17, 2012 8:00 AM EST Executives Cynthia He – Investor Contact, Brunswick Group LLC Louis Hsieh – President and CFO Analysts Catherine Leung – Goldman Sachs Chenyi Lu – Cowen & Company Mark Marostica – Piper Jaffray Philip Wan – Morgan Stanley Ella Ji – Oppenheimer Brandon Dobell – William Blair Eric Wen – Mirae Asset Anita Chen – Jefferies Chao Wang – Merrill Lynch Jeff Mueller – Baird Paul Ginocchio – Deutsche Bank Charles Cartledge – Sloane Robinson Ruby Zhang – Nomura Securities Vina Satiadhi – Moon Capital Presentation Operator Good evening and thank you for standing by for the New Oriental’s third fiscal quarter 2012 earnings conference call.
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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 our 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 turn the call over to New Oriental’s President and CFO, Louis Hsieh. Louis, please. Louis Hsieh Thank you, Cynthia. Hello, everyone, and thank you for taking the time to join us today. As you have seen from our earnings release, our third quarter performance was disappointing and unacceptable to us. While our net revenues were affected by the early timing of Chinese New Year, which flows through to the P&L negatively impacted our profit margins as well. Now, profit margins were also affected by our efforts to increase penetrate in the K to college segment in our 50-city school network that we compete in with the addition of 81 learning centers in the quarter. We will strive to do better and are committed to maintaining a strong balance between growth and profitability in the quarters ahead. I will now walk you through the details of our third quarter. First, as we predicted in January, this quarter’s financial results were negatively impacted by the early timing of Chinese New Year festival in 2012. Chinese New Year fell on January 23 rd, which was a couple of weeks earlier than usual. Thus, our normal two-week early sessions before Chinese New Year were shortened by just to one week. Thus, many students who would normally signup for the New Oriental’s training courses doing one or both sessions before and after Chinese New Year elected not to enroll in the early sessions, but instead enrolled in the second session after Chinese New Year or chose to wait until the spring quarter, which has a longer course duration. Consequently, student enrollments and net revenues for the first two months in the first quarter and in this third quarter were soft. You may recall that in the third quarter of 2009 when the Chinese New Year fell on January 26 th, our performance was similarly affected. Encouragingly, we’ve seen a strong bounce back in enrollments and deferred revenues in February as students signed up for spring courses in order to prepare for the major exams in the summer, such as the college entrance exam or gaokao and the high school entrance exam or zhongkao. The back-loaded demand drove enrollments for language training and test preparation courses in the quarter to approximately 596,100, an increase of 21.6%. Furthermore, as of February 29 th, 2012 our deferred revenue balance was $239.8 million, an increase of 59.2% year-over-year. This level of deferred revenue implies strong financial performance for the next fiscal quarter. In order to take advantage of the strong demand for our services and the hugely promising market in China, we accelerated the implementation of our "fill in" strategy of building small learning centers in the 50 cities where we already have a presence. During the quarter, we opened a net 81 learning centers in about 25 existing cities. About 50% of the new facilities are small sized learning centers under 500 square meters and about 20% are medium sized learning centers between 500 square meters to 1000 square meters. In the past six months, we have added a net of 120 learning centers in total, with over 80 percent of them outside of Beijing and Shanghai. We also hired approximately 4,200 teacher and staff in the past half a year.
These expansionary efforts resulted in a significant decline in our non-GAAP operating margin to 21.4% for the nine-month period year-to-date as compared to 23% in the year-ago period. We’ve recognized the importance of balancing growth and profitability and we will manage the pace of learning center and staff expansion accordingly in the quarters ahead.Read the rest of this transcript for free on seekingalpha.com