Business Context and Reporting Period
New Oriental Education & Technology Group Inc. (NYSE: EDU), the largest provider of private educational services in China, filed a Form 6-K on September 27, 2010. The filing announces preliminary unaudited financial results for the first fiscal quarter of 2011, ended August 31, 2010. Final results are scheduled for release on October 18, 2010.
Key Financial Metrics
| Metric | Q1 FY2011 (Preliminary) | Q1 FY2010 | YoY Change |
|---|---|---|---|
| Net Revenues | $191.4M - $192.9M | $149.4M | 29% |
| Cost of Revenues | $65.7M - $66.6M | $47.7M | 39% |
| Selling & Marketing Expenses | $23.1M - $23.6M | $15.5M | 51% |
| General & Administrative Expenses | $36.3M - $37.2M | $25.3M | 45% |
| Operating Income | $65.1M - $66.6M | $60.9M | 8% |
| Net Income (Attributable to New Oriental) | $62.2M - $63.5M | $57.1M | 10% |
| Diluted EPS per ADS | $1.60 - $1.64 | $1.47 | 10% |
| Total Student Enrollments | 685,000 - 715,000 | 647,500 | 8% |
Liquidity and Deferred Revenue: Deferred revenue balance stood at over $100 million at the end of the quarter, a 74% increase from $57.9 million in the prior year period. The filing does not provide specific data on total debt or free cash flow for this period.
Material Changes and Operational Drivers
- Revenue vs. Enrollment Divergence: While revenue grew 29%, total student enrollments grew only 8%. Management attributed the enrollment shortfall to a shorter summer break, the Shanghai World Expo deterring students from Shanghai, and an 11% decline in adult English program enrollments.
- Expense Expansion: Significant increases in Selling & Marketing (51%) and G&A (45%) expenses were driven by an aggressive network expansion strategy. The company added 33 new learning centers and 2 new schools, bringing the total to 402 facilities. Headcount increased by 64% year-over-year to over 18,800 employees, including over 4,200 new teachers.
- Segment Growth: Enrollments for students aged 6 to 18 increased over 25% year-over-year to over 360,000. Non-English "U-Can" programs for this demographic grew approximately 140% to over 80,000 enrollments.
Outlook, Risks, and Management Commentary
Management views the rapid expansion as a preemptive strategy to increase barriers to entry against competitors. Despite "anemic" net income growth of 9-10% due to elevated operating costs, the company expressed confidence in its long-term growth strategy and the success of its transformation into a "one-stop shop" for all-subject tutoring.
Risks and Contingencies: The filing highlights risks including the ability to attract students without fee reductions, retention of qualified teachers, brand maintenance, execution of network expansion, competition, and changes in Chinese governmental policies regarding private education.
Investor Verification Checklist
- Verify the final audited financial results scheduled for release on October 18, 2010, to confirm the preliminary revenue and income ranges.
- Monitor the sustainability of the 25%+ growth in the 6-18 age demographic versus the decline in adult English programs.
- Assess the impact of the 64% increase in headcount on future operating margins and profitability.
- Review the final deferred revenue balance to gauge future revenue recognition potential.
- Track enrollment trends in Shanghai post-World Expo to determine if the 6% decline was a temporary anomaly.