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 second fiscal quarter ended November 30, 2009. The filing was submitted on January 21, 2010. The company operates 48 schools in 40 cities and 250 learning centers, offering language training, test preparation, and primary/secondary education.
Key Financial Metrics
| Metric | Q2 FY2010 | Q2 FY2009 | YoY Change |
|---|---|---|---|
| Net Revenues | $61.2 million | $49.4 million | +23.8% |
| GAAP Net Income | $1.1 million | $3.1 million | -63.9% |
| Non-GAAP Net Income | $5.5 million | $7.4 million | -25.8% |
| GAAP Operating Income (Loss) | ($0.9 million) | $0.9 million | -204.7% |
| Non-GAAP Operating Income | $3.5 million | $5.2 million | -33.4% |
| GAAP Operating Margin | -1.5% | 1.8% | -3.3 pts |
| Non-GAAP Operating Margin | 5.6% | 10.5% | -4.9 pts |
| Student Enrollments (Language/Test Prep) | 307,000 | 292,200 | +5.1% |
Liquidity and Balance Sheet: As of November 30, 2009, cash and cash equivalents totaled $210.6 million, with an additional $141.7 million in term deposits. Net operating cash flow for the quarter was $9.6 million. Deferred revenue increased 34.9% year-over-year to $71.1 million.
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 13.8% increase in blended average selling price due to demand for one-to-one and small class offerings, and a 5.1% increase in student enrollments.
- Profitability Decline: GAAP net income dropped significantly due to a $4.4 million share-based compensation expense and increased operating costs. Operating costs rose 27.9% year-over-year.
- Expense Drivers: Selling and marketing expenses increased 40.8% to $11.7 million, primarily for brand promotion of new programs (U-Can and customized learning). General and administrative expenses rose 21.9% due to headcount expansion.
- Operational Expansion: The company added a net of 11 new learning centers during the quarter.
Guidance, Outlook, and Risks
Outlook: Management expects Q3 FY2010 net revenues to range between $82.5 million and $85.1 million, representing 26% to 30% year-over-year growth. This forecast accounts for the late timing of the 2010 Chinese New Year (February 14), which may shift some enrollments to Q4.
Strategic Initiatives: The company plans to accelerate expansion of its "U-Can" non-English programs to over 110 learning centers by May 31, 2010. This includes hiring over 1,000 teachers and 250 staff members, with incremental costs estimated at $4-5 million for the remainder of the fiscal year.
Risks and Contingencies:
- H1N1 Impact: The flu outbreak negatively impacted Q2 enrollments, though management noted a stabilization and a 30% weekly increase in cash receipts since early December 2009.
- Forward-Looking Risks: Risks include the ability to retain teachers, maintain brand reputation, manage network expansion, and navigate Chinese government policies regarding private education.
Investor Verification Checklist
- Verify the sustainability of the 13.8% increase in average selling price as competition in the premium one-to-one market intensifies.
- Monitor the impact of the $4-5 million incremental investment in U-Can expansion on future operating margins.
- Assess the accuracy of the Q3 revenue guidance given the historical volatility caused by the timing of the Chinese New Year.
- Review the reconciliation of Non-GAAP measures to ensure share-based compensation ($4.4M in Q2) is appropriately excluded for cash-flow analysis.
- Track the deferred revenue balance ($71.1M) as a leading indicator for future revenue recognition.