Business context and reporting period
New Oriental Education & Technology Group Inc. filed an audited annual report on Form 20-F for the fiscal year ended May 31, 2011, prepared under U.S. GAAP. This is not a 2010 Q4 filing; the supplied filing reports full fiscal years, principally comparing FY2011 with FY2010. Amounts below are in U.S. dollars unless noted.
The company provides language training, test preparation, K-12 education, educational materials and online education in China. It reported approximately 2.09 million student enrollments in FY2011 and operated 54 schools and 433 learning centers. Its China education operations are conducted largely through a variable interest entity (VIE) and contractual arrangements.
Financial and operating metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net revenue | $557.9 million | $386.3 million | +44.4% |
| Operating income | $95.5 million | $77.3 million | +23.5% |
| Net income attributable to New Oriental | $101.8 million | $77.8 million | +30.8% |
| Basic / diluted earnings per share | $0.66 / $0.65 | $0.52 / $0.50 | — |
| Operating cash flow | $215.8 million | $141.9 million | +52.1% |
| Investing cash flow | $(198.2) million | $(97.9) million | Greater cash use |
| Cash and cash equivalents at year-end | $317.3 million | $281.1 million | +12.9% |
- Educational programs and services generated $508.4 million, about 91% of revenue; books and other sales generated $49.4 million. Language training and test preparation together accounted for about 87% of total revenue.
- Gross margin, calculated from reported revenue and cost of revenues, was approximately 60.1%, down from 61.9%. Operating margin was approximately 17.1%, down from 20.0%; net margin was 18.2%, down from 20.1%.
- Cost of revenues rose 51.1%; selling and marketing rose 41.8%; general and administrative expense rose 50.4%. Management attributed cost growth to network and staff expansion, including more than 3,500 new teachers and over 600 added sales and marketing personnel.
- Current assets were $675.3 million and current liabilities $288.0 million, implying a current ratio of about 2.34. Current liabilities included $194.3 million of deferred revenue, primarily fees collected before instruction was delivered. Total liabilities were $289.1 million; the filing does not identify material interest-bearing borrowings.
- Cash, term deposits and short-term investments totaled approximately $613.6 million at year-end. Short-term investments were $143.7 million, and term deposits were $152.7 million. The filing notes that consolidated cash is not necessarily directly accessible to the holding company.
Material changes versus the prior comparable year
- Revenue growth reflected enrollment expansion, higher average revenue per student as more students selected smaller, higher-priced classes, and additional centers. Enrollments increased from approximately 1.81 million to 2.09 million; learning centers increased from 319 to 433.
- Margin pressure reflected smaller average class sizes—about 15 students versus 21 in the prior year—which management said were somewhat less profitable on average than larger classes, along with investment in expansion.
- Operating cash flow increased substantially, with a $76.6 million increase in deferred revenue a major contributor. Capital spending rose to $49.1 million from $19.6 million, and investing cash outflow also included $139.9 million of short-term investment purchases.
- Cash and cash equivalents increased by $36.2 million. Total assets rose to $863.4 million from $596.4 million; total shareholders’ equity increased to $574.2 million from $427.6 million.
Outlook, commentary, risks and unusual items
- Outlook: No quantified revenue or earnings guidance is provided. Management expected demand for private education and English training to continue growing with China’s economy, planned further school and learning-center expansion, and stated that cash and expected operating cash flow should meet anticipated needs for the foreseeable future.
- Key risks: The filing highlights competition and pricing pressure; dependence on qualified teachers and brand quality; seasonality; changes in admissions tests; concentration of about half of FY2011 revenue in Beijing, Shanghai, Wuhan and Guangzhou; and exposure to RMB movements and PRC regulatory and tax changes.
- VIE and regulatory exposure: Foreign ownership restrictions mean core education operations depend on contractual control and service arrangements with New Oriental China. The filing warns that PRC authorities could challenge the arrangements or restrict related-party payments, potentially impairing control or cash transfers.
- Acquisitions and disposals: FY2011 included a $1.537 million loss on disposal of Mingshitang and Tomorrow Oriental. The company acquired Newave Education in September 2010; after alleging seller breach, it sought arbitration for a refund of the $1.792 million paid. The filing states the arbitration was accepted in August 2011 and management believed recovery was more likely than not; the remaining acquisition consideration was contingent and could range from zero to $11.577 million.
- Tax dependence: The reported effective tax rate was 7.5%. Management estimated that loss of certain tax holidays would have increased FY2011 income tax expense by $24.8 million and reduced basic EPS by $0.16. Tax treatment and applicability of preferential rates were subject to uncertainty.
- Other disclosures: FY2011 operating cash flow benefited from advance course-fee receipts and non-cash expenses. The company reported no material off-balance-sheet arrangements, no material legal proceedings expected by management to adversely affect it, and effective disclosure controls and internal control over financial reporting as of May 31, 2011. No dividends were planned for the near future.
Important facts for investors to verify
- Confirm the reporting period: the filing is for the year ended May 31, 2011, not 2010 Q4.
- Assess whether enrollment growth and pricing can offset rising teaching, rent, marketing and administrative costs, and whether margins stabilize as smaller classes expand.
- Review cash-flow quality, particularly the contribution from deferred student fees, and distinguish cash and investments held in operating entities from cash accessible to the parent.
- Track the Newave arbitration outcome, contingent consideration, and the financial effects of the Mingshitang and Tomorrow Oriental disposals.
- Monitor continuation of preferential tax treatment, PRC education regulation and the enforceability of VIE arrangements and related-party service payments.
- Check subsequent disclosures for expansion costs, lease commitments—$294.8 million of future minimum operating lease payments—and any changes in liquidity or financing needs.