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 fourth quarter and fiscal year ended May 31, 2009. The filing, submitted on July 21, 2009, covers the period following the global economic slowdown, the Sichuan earthquake, and the H1N1 flu outbreak.
Key Financial Metrics
Fourth Quarter Ended May 31, 2009
- Net Revenues: US$59.4 million (up 47.9% year-over-year).
- GAAP Net Income: US$2.6 million (up 49.8% year-over-year).
- Non-GAAP Net Income: US$7.1 million (up 58.0% year-over-year).
- GAAP Operating Income: US$2.5 million (improved from a loss of US$0.2 million).
- Non-GAAP Operating Income: US$7.0 million (up 175.1% year-over-year).
- Earnings Per ADS (GAAP): US$0.07 (basic and diluted).
- Earnings Per ADS (Non-GAAP): US$0.19 (basic and diluted).
- Student Enrollments: Approximately 330,200 (up 8.2% year-over-year).
Fiscal Year Ended May 31, 2009
- Net Revenues: US$292.6 million (up 45.6% year-over-year).
- GAAP Net Income: US$61.0 million (up 24.5% year-over-year).
- Non-GAAP Net Income: US$77.8 million (up 34.6% year-over-year).
- GAAP Operating Income: US$60.9 million (up 34.4% year-over-year).
- Non-GAAP Operating Income: US$77.7 million (up 43.6% year-over-year).
- Earnings Per ADS (GAAP): US$1.64 basic / US$1.59 diluted.
- Earnings Per ADS (Non-GAAP): US$2.09 basic / US$2.03 diluted.
- Student Enrollments: Approximately 1,519,500 (up 19.5% year-over-year).
Liquidity and Balance Sheet
- Cash and Cash Equivalents: US$254.8 million as of May 31, 2009.
- Term Deposits: US$59.8 million.
- Net Operating Cash Flow (Q4): Approximately US$28 million.
- Deferred Revenue: US$74.8 million (up 26.3% from the prior year).
- Capital Expenditures (Q4): US$2.9 million.
Material Changes vs. Prior Period
The company reported significant growth across all major financial metrics compared to the prior fiscal year. Revenue growth was driven primarily by an increase in student enrollments in language training and test preparation courses. Operating costs increased by 41.0% (GAAP) due to higher course volumes, expansion of the school network (270 total facilities as of May 31, 2009), and increased headcount. Share-based compensation expenses rose 63.3% to US$4.5 million in the quarter, largely due to a year-end adjustment for lower-than-expected employee forfeiture rates.
Guidance, Outlook, and Management Commentary
Share Repurchase Program
On July 20, 2009, the Board authorized a share repurchase program of up to US$30 million of ADSs, effective from August 5, 2009, through December 31, 2009. The program will be funded from available cash balances.
Outlook for Q1 Fiscal Year 2010
Management expects total net revenues for the first quarter of fiscal year 2010 (June 1 to August 31, 2009) to range between US$146.6 million and US$152.6 million, representing year-over-year growth of 24% to 29%.
Operational Highlights
- Expansion: Added 63 new facilities in fiscal 2009 (7 schools, 56 learning centers).
- New Programs: The "U-Can" middle/high school program exceeded enrollment targets with over 58,000 enrollments for the fiscal year. The "POP Kids" English program saw 50% year-over-year growth.
- Management Commentary: CEO Michael Yu attributed strong results to the resilience of the New Oriental brand and the priority Chinese families place on education despite economic and health challenges.
Investor Verification Checklist
- Non-GAAP Adjustments: Verify the impact of share-based compensation (US$16.75 million for the fiscal year) on reported profitability.
- Deferred Revenue: Confirm the sustainability of the 26.3% increase in deferred revenue, which indicates future revenue recognition.
- Share Repurchase Execution: Monitor the actual execution of the US$30 million buyback program against market conditions.
- Enrollment Quality: Assess whether the 19.5% enrollment growth is driven by price increases or volume, and the retention rates for new programs like U-Can and POP Kids.
- Regulatory Risks: Review potential impacts of Chinese government policies on private educational services as noted in the safe harbor statement.