New Oriental Education & Technology Group Inc. current report, Q2 FY2010

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Business Context and Reporting Period

New Oriental Education & Technology Group Inc. (NYSE: EDU), the largest provider of private educational services in China, reported unaudited financial results for its third fiscal quarter ended February 28, 2010. The company offers English and foreign language training, test preparation, and primary/secondary school education across 48 schools and 276 learning centers in 40 cities.

Key Financial Metrics

Third Fiscal Quarter 2010 (Ended Feb 28, 2010)

  • Net Revenues: US$89.2 million (up 36.2% year-over-year).
  • Net Income (GAAP): US$13.8 million (up 33.0% year-over-year).
  • Non-GAAP Net Income: US$18.7 million (up 29.1% year-over-year).
  • Operating Income (GAAP): US$13.6 million (up 57.0% year-over-year).
  • Operating Margin (GAAP): 15.3% (up from 13.3% in prior year).
  • Non-GAAP Operating Margin: 20.7% (up from 19.5% in prior year).
  • Net Income per ADS (Basic/Diluted): US$0.37 / US$0.36.
  • Non-GAAP Net Income per ADS (Basic/Diluted): US$0.50 / US$0.48.
  • Student Enrollments: Approximately 416,000 (up 18.3% year-over-year).
  • Cash and Cash Equivalents: US$250.8 million (as of Feb 28, 2010).
  • Term Deposits: US$120.4 million.
  • Net Operating Cash Flow: US$22.7 million.
  • Deferred Revenue: US$69.8 million (up 25.9% from prior year quarter).

First Nine Months of Fiscal Year 2010

  • Net Revenues: US$299.7 million (up 28.6% year-over-year).
  • Net Income (GAAP): US$72.0 million (up 23.4% year-over-year).
  • Non-GAAP Net Income: US$84.9 million (up 20.2% year-over-year).
  • Operating Margin (GAAP): 24.6% (down from 25.1% in prior year).
  • Non-GAAP Operating Margin: 28.9% (down from 30.3% in prior year).

Material Changes vs. Prior Period

  • Revenue Growth: Driven by an 18.3% increase in student enrollments and a ~10% increase in blended average selling price.
  • Segment Performance: Strong growth reported in POP Kids English (>50% growth), Middle/High School English and U-Can all-subjects training (>70% growth), and Overseas Test Preparation (>34% growth).
  • Cost Structure: Operating costs increased 33.1% year-over-year, primarily due to increased course offerings, expansion of the school network (26 new learning centers added in the quarter), and higher headcount.
  • Share-Based Compensation: Total expenses increased to US$4.9 million from US$4.1 million, partly due to a one-off adjustment for lower-than-expected forfeiture rates.
  • U-Can Program: Non-English U-Can enrollments reached over 83,300 for the first nine months (over 80% YoY growth), with revenues of US$20 million (triple the prior year figure).

Guidance, Outlook, and Risks

Outlook for Fourth Quarter FY2010

Management expects total net revenues for the fourth quarter (March 1, 2010 to May 31, 2010) to range between US$75.5 million and US$78.4 million, representing year-over-year growth of 27% to 32%.

Management Commentary

CEO Michael Yu noted an "impressive bounce back" in business following the subsiding of H1N1 fears. CFO Louis T. Hsieh expressed confidence in exceeding the US$25 million revenue target for the U-Can program for the full fiscal year.

Risks and Contingencies

  • Forward-Looking Statements: Subject to risks including health epidemics, government policy changes regarding private education, competition, and the ability to retain qualified teachers.
  • Non-GAAP Measures: The company highlights that Non-GAAP measures exclude share-based compensation, which is a significant recurring expense.

Investor Verification Checklist

  • Verify the sustainability of the 18.3% enrollment growth rate given the difficult year-over-year comparison in Q3 2009 caused by the early timing of Chinese New Year.
  • Confirm the execution of the expansion strategy, specifically the integration and profitability of the 26 new learning centers added in the quarter.
  • Monitor the realization of the US$25 million revenue target for the U-Can program in the remaining quarter of FY2010.
  • Assess the impact of share-based compensation expenses (US$4.9 million in Q3) on future GAAP profitability as the company continues to expand.
  • Review the deferred revenue balance (US$69.8 million) as an indicator of future revenue recognition stability.