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, 2006. This period coincides with the company's initial public offering (IPO) on the New York Stock Exchange on September 7, 2006. The company primarily offers English and foreign language training, test preparation, and primary/secondary education.
Key Financial Metrics
Quarter Ended November 30, 2006
- Net Revenues: RMB169.0 million (US$21.6 million), a 32.9% increase year-over-year.
- Net Income: RMB8.2 million (US$1.0 million), compared to a net loss of RMB8.7 million in the prior year quarter.
- Non-GAAP Net Income: RMB16.2 million (US$2.1 million) excluding share-based compensation.
- Earnings Per ADS: RMB0.23 basic / RMB0.22 diluted (GAAP); RMB0.46 basic / RMB0.44 diluted (Non-GAAP).
- Operating Margin: 0.2% (GAAP); 4.9% (Non-GAAP).
- Cash and Equivalents: RMB1,166.5 million (US$148.8 million) as of November 30, 2006.
- Debt: The company used IPO proceeds to clear remaining debt; no long-term or current debt is reported on the balance sheet as of November 30, 2006.
- Student Enrollments: Approximately 217,500 in language training and test preparation, up 20.3% year-over-year.
Six Months Ended November 30, 2006
- Net Revenues: RMB598.4 million (US$76.4 million), a 31.8% increase year-over-year.
- Net Income: RMB173.3 million (US$22.1 million), a 135.7% increase year-over-year.
- Operating Margin: 30.2%.
Material Changes vs. Prior Period
- Profitability Turnaround: The company moved from a net loss of RMB8.7 million in Q2 FY2006 to a net income of RMB8.2 million in Q2 FY2007.
- Expense Reclassification: Selling and marketing expenses increased 90.8% year-over-year, while general and administrative expenses decreased 8.7%. Management attributed this to a refinement in accounting processes that reallocated certain personnel and other expenses from G&A to selling and marketing.
- Cost of Revenues: Increased 40.5% year-over-year due to a larger student base and expanded school network.
- Liquidity: Cash and cash equivalents surged from RMB294.9 million (August 31, 2006) to RMB1,166.5 million (November 30, 2006) primarily due to net IPO proceeds.
- Share Count: Common shares used in EPS calculations increased due to the issuance of 34.5 million new shares during the IPO.
Guidance, Outlook, and Risks
Outlook
For the third fiscal quarter of 2007 (December 1, 2006 to February 28, 2007), New Oriental expects total net revenues to range from RMB202 million to RMB212 million (US$25.8 million to US$27.1 million), representing year-over-year growth of 19.8% to 25.8%.
Management Commentary
Management highlighted strong growth in student enrollments and revenues, exceeding guidance. They noted the opening of two new schools (North Star in Beijing and a campus in Taixing) and the use of IPO proceeds to eliminate debt. The second quarter is typically the slowest revenue period due to the start of the formal school year.
Risks and Contingencies
Forward-looking statements are subject to risks including the ability to attract students without fee decreases, 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
- Accounting Reclassification: Verify the impact of the reclassification of expenses from G&A to Selling and Marketing on year-over-year expense comparisons.
- Non-GAAP Adjustments: Review the reconciliation of share-based compensation expenses (RMB8.0 million for the quarter) to understand the difference between GAAP and Non-GAAP profitability.
- Debt Elimination: Confirm the complete payoff of prior debt obligations using IPO proceeds as stated in management commentary.
- Seasonality: Assess the impact of the "slowest" second quarter on the full-year revenue trajectory compared to the strong first quarter.
- Share Dilution: Monitor the effect of the 34.5 million new shares issued in the IPO on future earnings per share calculations.