New Oriental Education & Technology's Management Presents Q4 2012 Results - Earnings Call Transcript

New Oriental Education & Technology Group Inc. ( EDU)

Q4 2012 Earnings Call

July 17, 2012 8:00 AM ET

Executives

Sisi Zhao - Senior Investor Relations Manager

Louis Hsieh - President &CFO

Analysts

Philip Wan - Morgan Stanley

Chenyi Lu - Cowen & Company

Jeffrey Meuler - Robert W. Baird & Co

Steve Zhang - Macquarie Funds Group

Mark Marostica - Piper Jaffray

Ella Ji - Oppenheimer & Co., Inc

Trace Urdan - Wells Fargo Securities

Eric Wen - Mirae Asset Securities

Anita Chen - Jefferies & Co

Brandon Dobell - William Blair & Company

Chao Wang - Merrill Lynch

Fei Fang - Goldman Sachs

Kevin Tan - Joho Capital

Jin Yoon - Nomura Securities

Presentation

Operator

Good evening and thank you for standing by for New Oriental’s Fourth Quarter and 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’d 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 fourth quarter and 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 statements, 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 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, Sisi. Hello everyone and thank you for joining us today. This is been another successful year for New Oriental and I’m pleased to report that we’re moving into a new fiscal year in a stronger position than ever before.

Over the last 12 months we’ve extended our undisputed leadership position in China’s private education sector and put even more distance between New Oriental and our competitors in terms of brand recognition, market share, service quality and reputation and we’ve achieved this far successfully sorry, it was a tooling up our business to take advantage of major growth opportunities in new geographies and fast growing segments.

Our results for the first fiscal year speak to its success; student enrollments hit 2.4 million, up 15% year-over-year. Revenue grew 38.3% year-over-year to $771.7 million and in spite of heavy investment and expansion with net of 177 new facilities, bringing our total to 664. We delivered a very impressive increase in GAAP net income of 30.4% to $132.7 million and non-GAAP net income increased 32.5% to $156.8 million.

I would like to spend a couple of minutes talking about the key drivers of this growth and highlight some of the exciting trends that we’re building on. First and foremost, I want to address the tremendous growth opportunity beyond China’s Tier-1 cities. This has been a major factor in our success in fiscal year 2012 and I’m confident this will be a vital engine of our growth in fiscal year 2013 and beyond.

As we’ve stated previously that in addition to enhancing our market leading brand name and maintaining the highest standards in teaching and content quality. One of our other primary goals is to establish New Oriental as the number one or number two language and test prep tutoring service providers for K-12 in every one of our lucrative and fast growing city markets.

To achieve this strategic imperative, we must invest in growing learning centers at a rapid pace to achieve critical mass and economies of scale, which will drive long-term sustained and increasing profitability.

In fiscal year 2012, second and third tier cities achieved about 43% of revenue growth, contributing around 48% of our total revenue, whereas Beijing and Shanghai collectively recorded about 29% revenue growth and accounted for about 37% of total revenue.

The cities around Beijing like [Shijiazhuang and Zhangjiakou] are good examples of an emerging paradigm within student attitude. Previously many students from these cities would take – would have traveled to Beijing during the summer and winter break to take classes at one of boarding schools in the capital. But now New Oriental has branches across these cities where we offer the same or comparable premium standard education that a student can get in Beijing. So, now more and more students choose to stay in their home town, taking New Oriental courses locally instead of traveling into Beijing during the holidays. A similar behavior and it is occurring with New Oriental Shanghai schools and in the surrounding areas.

Looking longer term, I believe we have only began to scratch the massive opportunity of these fast growing markets. Over the next fiscal year, we will continue to aggressively invest in penetrating these lower tier cities and in fiscal ’13 we intend to open over 200 new learning centers. The vast majority of them will be small centers, 300 to 700 square meters, designed for our VIP and K-12 classes, rather than large scale test prep courses.

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