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 the first fiscal quarter of 2011 ended August 31, 2010. The filing was submitted on October 18, 2010. The Company operates a network of schools and learning centers offering K-12 tutoring, overseas test preparation, and English language training.
Key Financial Metrics
| Metric | Q1 FY2011 | Q1 FY2010 | YoY Change |
|---|---|---|---|
| Net Revenues | $192.3 million | $149.4 million | +28.8% |
| Net Income (GAAP) | $62.4 million | $57.1 million | +9.3% |
| Net Income (Non-GAAP) | $67.3 million | $60.8 million | +10.8% |
| Operating Income (GAAP) | $65.9 million | $60.9 million | +8.2% |
| Operating Income (Non-GAAP) | $70.9 million | $64.6 million | +9.7% |
| Operating Margin (GAAP) | 34.3% | 40.8% | -6.5 pts |
| Operating Margin (Non-GAAP) | 36.9% | 43.3% | -6.4 pts |
| Net Income per ADS (Basic/Diluted) | $1.64 / $1.61 | $1.52 / $1.47 | +8.2% / +8.9% |
| Student Enrollments | 704,500 | 647,500 | +8.8% |
| Cash and Equivalents | $293.3 million | $281.1 million (May 31) | N/A |
| Net Operating Cash Flow | $79.8 million | N/A | N/A |
| Deferred Revenue | $100.6 million | $57.9 million | +73.6% |
Capital expenditures for the quarter were $12.4 million. The Company held $194.3 million in term deposits as of August 31, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Driven by an 8.8% increase in student enrollments and higher average selling prices due to students selecting smaller, more expensive class options.
- Expense Expansion: Total operating costs and expenses rose 42.9% year-over-year to $126.4 million. This was primarily due to increased headcount (over 900 new customer service and marketing staff), expansion of the school network (net addition of 35 facilities), and higher course volumes.
- Margin Compression: GAAP operating margin declined from 40.8% to 34.3% due to aggressive investments in hiring, training, and facility expansion.
- Acquisition: On August 24, 2010, the Company signed an agreement to acquire 100% of Newave Education, the second-largest K-12 English language school in Shanghai. Results will be consolidated starting the quarter ending November 30, 2010.
Guidance, Outlook, and Management Commentary
Outlook: For the second fiscal quarter of 2011 (September 1 to November 30, 2010), New Oriental expects total net revenues between $82.6 million and $85.7 million, representing year-over-year growth of 35% to 40%.
Management Commentary:
- CEO Michael Yu attributed moderate bottom-line growth to active investments in K-12 teacher hiring and aggressive learning center expansion. He noted a strong rebound in September enrollments (up ~27% YoY) and revenues (up >40% YoY) following the conclusion of the Shanghai World Expo.
- Management reaffirmed its market leadership in K-12 tutoring, overseas test preparation (TOEFL/IELTS), and English language training.
- CFO Louis T. Hsieh highlighted the launch of new computerized testing systems and Kids programs, positioning the company as a "one-stop shop" for education.
Risks: Forward-looking statements are subject to risks including the ability to attract students without fee decreases, retention of qualified teachers, competition, Chinese government policies on private education, and general economic conditions.
Investor Verification Checklist
- Verify the sustainability of the 35-40% revenue growth forecast for Q2 FY2011 post-World Expo.
- Monitor the integration and financial impact of the Newave Education acquisition in the upcoming quarter.
- Assess whether operating margins can stabilize as the company shifts focus from expansion to utilization rates and cost control.
- Review the reconciliation of Non-GAAP measures to ensure share-based compensation exclusions are consistent with historical trends.
- Confirm the impact of the 73.6% increase in deferred revenue on future revenue recognition.