Business context and reporting period
New Oriental Education & Technology Group Inc. filed this Form 20-F for the fiscal year ended May 31, 2015. Although the request identifies “2014 Q4,” the filing is an annual report, not a standalone quarter filing; it does not provide a clear standalone Q4 financial summary. The company provides education services in China, mainly language and test-preparation courses, K-12 tutoring, schools, educational materials and online learning. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
At May 31, 2015, the company reported 60 schools, 664 learning centers, 28 bookstores and approximately 17,200 teachers across 50 cities. It recorded approximately 2.9 million student enrollments for the year.
Financial and operating metrics
| Metric (US$ millions, except per-share data) | FY2015 | FY2014 |
|---|---|---|
| Revenue | 1,246.8 | 1,138.9 |
| Operating income | 153.5 | 197.6 |
| Net income attributable to New Oriental | 193.0 | 215.7 |
| Diluted earnings per share | 1.23 | 1.37 |
| Operating cash flow | 374.1 | 361.3 |
| Cash and cash equivalents at year-end | 531.3 | 371.6 |
| Total assets | 1,951.5 | 1,603.5 |
| Total liabilities | 727.7 | 577.8 |
Revenue grew 9.5%; education programs and services contributed US$1,103.0 million and books and other revenue US$143.8 million. Cost of revenue rose 16.5% to US$526.3 million, and total operating costs and expenses rose 15.7% to US$1,093.2 million. Approximate gross margin fell to 57.8% from 60.3%; operating margin was 12.3% versus 17.3%, and net margin was 15.5% versus 18.9%. The prior-year operating result included a US$3.6 million disposal gain.
Net income declined 10.7%, despite higher revenue, as costs grew faster than sales. Management attributed higher cost of revenue mainly to teacher fees and performance bonuses, higher selling and marketing expense to added personnel, and higher general and administrative expense mainly to personnel and operating costs. Interest income increased to US$66.6 million from US$44.9 million.
Operating cash flow increased 3.5%. Higher deferred revenue, up US$117.1 million, supported cash generation as students paid course fees in advance. Investing cash outflow was US$173.4 million, including investment purchases and US$55.3 million in property and equipment. Financing cash outflow was US$44.3 million, including US$59.4 million of share repurchases.
Current assets were US$1,348.9 million against current liabilities of US$725.2 million. Cash, term deposits and short-term investments totaled approximately US$1,200.3 million. The balance sheet lists no material interest-bearing borrowings; operating lease commitments were US$532.9 million, including US$135.9 million due in FY2016. Deferred revenue was US$501.2 million. No standalone quarterly margin or cash-flow figures are provided.
Changes, outlook, risks and unusual items
- Student enrollments increased from more than 2.6 million in FY2014 to approximately 2.9 million in FY2015. Language training and test-preparation revenue grew 7.3%; those activities remained the main revenue source.
- The average class size for short-term language and test-preparation courses declined to approximately eight from nine students, a possible margin pressure. The company opened 87 learning centers and closed 66 during FY2015.
- The company acquired a Qingdao kindergarten chain for US$12.9 million in December 2014. It contributed US$1.8 million in FY2015 revenue and had a US$99,000 net loss. Goodwill increased to US$11.2 million, largely reflecting this acquisition.
- Management said current cash and expected operating cash flow should meet anticipated needs for the foreseeable future, and planned to accelerate new school and learning-center openings. No quantified revenue or earnings guidance is provided. A US$0.40-per-ADS special dividend, totaling approximately US$63 million, was declared after year-end for payment in October 2015.
- Nearly all operations depend on contractual arrangements with variable interest entities (VIEs), which generated 97.9% of FY2015 revenue. The filing highlights uncertainty around PRC regulation of foreign investment and VIE structures, including a draft Foreign Investment Law published in 2015.
- Other key risks include competition, teacher recruitment and retention, smaller class sizes, changing admissions policies, regulatory permits and tax preferences, RMB and currency controls, and the concentration of 40.4% of revenue in Beijing, Shanghai, Wuhan and Xi’an. The company reported no liability or business-disruption insurance.
- The SEC notified the company in September 2014 that its investigation was complete and that staff did not intend to recommend enforcement action. Shareholder securities litigation was settled and dismissed in November 2014; the company paid US$4.75 million, of which US$3.5 million was covered by directors’ and officers’ insurance. Management and the auditor reported effective internal control over financial reporting as of May 31, 2015; the financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Confirm the intended period: this filing covers FY2015, not 2014 Q4, and does not provide a distinct Q4 result.
- Assess whether enrollment growth can outpace teacher, marketing and administrative costs, and whether margins stabilize.
- Review liquidity quality and accessibility: much of the cash and investments sit within the group structure, while PRC rules restrict distributions; also assess deferred revenue and lease commitments.
- Evaluate the VIE structure and potential effects of PRC legal or regulatory changes on control, consolidation and access to operating cash flows.
- Check the sustainability of tax benefits, including school tax treatment and preferential rates, and the effect of withholding taxes.
- Verify the post-year-end dividend payment and subsequent developments in the Qingdao acquisition and other investments.