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 29, 2008. The filing, submitted on April 17, 2008, also covers the nine-month period ended February 29, 2008. The Company changed its reporting currency to the U.S. Dollar effective December 1, 2007, and prior period data has been restated for comparison.
Key Financial Metrics
Third Fiscal Quarter Ended February 29, 2008
- Net Revenues: US$48.1 million (up 46.9% year-over-year).
- Net Income (GAAP): US$11.6 million (up 38.1% year-over-year).
- Net Income (Non-GAAP): US$13.9 million (up 52.7% year-over-year), excluding share-based compensation.
- Operating Income: US$10.2 million (up 46.1% year-over-year).
- Operating Margin: 21.2% (GAAP); 25.9% (Non-GAAP).
- Earnings Per ADS: US$0.31 basic / US$0.29 diluted (GAAP); US$0.37 basic / US$0.35 diluted (Non-GAAP).
- Cash and Cash Equivalents: US$230.1 million as of February 29, 2008.
- Net Operating Cash Flow: US$16.3 million.
- Deferred Revenue: US$35.8 million (up 105.2% year-over-year).
Nine Months Ended February 29, 2008
- Net Revenues: US$160.8 million (up 49.1% year-over-year).
- Net Income (GAAP): US$47.3 million (up 56.8% year-over-year).
- Net Income (Non-GAAP): US$53.2 million (up 63.8% year-over-year).
- Operating Margin: 28.2% (GAAP); 32.0% (Non-GAAP).
Material Changes Versus Prior Period
- Revenue Growth: Driven primarily by a 34.8% increase in student enrollments for language training and test preparation courses (268,400 students vs. 199,100 in the prior year).
- Expense Increases: Selling and marketing expenses rose 90.8% year-over-year due to brand promotion for new programs (U-Can and IELTS) and headcount increases to support network expansion. General and administrative expenses increased 50.5%.
- Share-Based Compensation: Increased significantly to US$2.3 million from US$0.7 million in the prior year quarter.
- Network Expansion: Total schools and learning centers increased to 181 from 128 in the prior year, with a net addition of 17 learning centers in the quarter.
Guidance, Outlook, and Strategic Developments
Strategic Initiatives
- U-Can Launch: Introduced "New Oriental U Can," a middle and high school training program targeting the "gaokao" (college entrance exam) market. Initial enrollment exceeded 8,100 students in non-English subjects.
- Acquisition: Signed a definitive agreement on April 14, 2008, to acquire a 60% equity stake in Mingshitang, a Beijing-based school specializing in gaokao re-takers. The transaction is expected to close in June 2008.
- Expansion Plan: Management intends to roll out the U-Can program in over 30 cities and continue rapid facility expansion.
Outlook for Fourth Quarter Fiscal 2008
New Oriental expects total net revenues for the fourth quarter (March 1 to May 31, 2008) to range between US$32.1 million and US$33.4 million, representing year-over-year growth of 29% to 34%.
Management Commentary
Management noted that despite severe winter storms in China in late January and early February which forced temporary closures of dozens of centers, the Company exceeded its revenue guidance. Most affected students deferred enrollments rather than canceling, contributing to a record deferred revenue balance.
Investor Verification Checklist
- Verify the closing of the Mingshitang acquisition and the integration timeline for the gaokao re-taker business.
- Monitor the conversion rate of deferred revenue (US$35.8 million) into recognized revenue in subsequent quarters.
- Assess the scalability and profitability of the new "U-Can" middle/high school program as it expands to 30+ cities.
- Review the impact of continued share-based compensation expenses on future GAAP net income margins.
- Confirm the Company's ability to maintain enrollment growth rates amidst potential regulatory changes in the Chinese private education sector.