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 third fiscal quarter ended February 28, 2007. The company primarily offers English and foreign language training, test preparation, and primary/secondary education. The filing also includes results for the nine months ended February 28, 2007.
Key Financial Metrics
Fiscal Quarter Ended February 28, 2007
- Net Revenues: RMB255.1 million (US$33.0 million), a 51.3% year-over-year increase.
- Net Income: RMB65.3 million (US$8.4 million), a 543.5% year-over-year increase.
- Non-GAAP Net Income: RMB70.9 million (US$9.2 million), excluding share-based compensation.
- Earnings Per ADS: Basic RMB1.79 (US$0.23); Diluted RMB1.72 (US$0.22). Non-GAAP Basic RMB1.94 (US$0.25); Diluted RMB1.86 (US$0.24).
- Operating Margin: 21.2% (GAAP) and 23.4% (Non-GAAP).
- Cash and Cash Equivalents: RMB3,432.6 million (US$443.4 million) as of February 28, 2007.
- Net Operating Cash Flow: RMB49.1 million (US$6.3 million).
- Student Enrollments: Approximately 199,100 in language training and test preparation courses (8.0% increase year-over-year).
- Network: 34 schools and 128 total learning centers.
Nine Months Ended February 28, 2007
- Net Revenues: RMB853.4 million (US$110.2 million), a 37.1% year-over-year increase.
- Net Income: RMB238.6 million (US$30.8 million), a 185.2% year-over-year increase.
- Operating Margin: 27.5% (GAAP).
- Student Enrollments: Approximately 754,300 (19.0% increase year-over-year).
Material Changes vs. Prior Period
- Revenue Growth: Driven by an 8.0% increase in student enrollments and a 49.3% increase in revenue from educational programs and services.
- Profitability Surge: Net income grew 543.5% due to operating efficiency improvements where revenue growth outpaced cost growth. Operating margin expanded from 5.8% to 21.2%.
- Cost Structure: Total operating costs increased 26.5% year-over-year. Cost of revenues rose 44.0% due to increased course offerings and facility expansion. Selling and marketing expenses increased 37.7% due to brand promotion.
- Share-Based Compensation: Increased to RMB5.6 million from RMB1.0 million in the prior year quarter.
- Liquidity: Cash balances increased significantly from RMB1,166.5 million to RMB3,432.6 million, largely due to a follow-on offering in February 2007. Approximately RMB2,068 million of proceeds were distributed to selling shareholders.
Guidance, Outlook, and Risks
Outlook for Fiscal Fourth Quarter 2007
Management expects total net revenues for the fourth quarter (March 1, 2007 to May 31, 2007) to range between RMB177 million (US$22.9 million) and RMB185 million (US$23.9 million). This represents year-over-year growth of 19.9% to 25.3%.
Management Commentary
Management attributed strong results to brand recognition, a later-than-usual Chinese New Year in 2007 which extended the winter holiday study period, and the scalability of their "hub and spoke" business model. Expansion included new learning centers in Shanghai, Wuhan, Shenyang, Taiyuan, Jinan, and Shijiazhuang.
Risks and Contingencies
Forward-looking statements are subject to risks including the ability to attract students without fee reductions, retention of qualified teachers, brand maintenance, effective management of network expansion, competition in the Chinese private education sector, and changes in Chinese governmental policies regarding private education.
Investor Verification Checklist
- Verify the sustainability of the 51.3% revenue growth rate given the seasonal impact of the Chinese New Year timing in 2007.
- Confirm the utilization of the RMB2,244 million in net proceeds from the follow-on offering, noting that the majority was distributed to selling shareholders rather than retained for operations.
- Monitor the trend in share-based compensation expenses, which increased significantly (RMB5.6 million vs RMB1.0 million) and impact GAAP margins.
- Assess the impact of government policy changes on the private education sector in China as a primary risk factor.
- Review the reconciliation of Non-GAAP measures to ensure consistency in excluding share-based compensation for future comparisons.