Business Context and Reporting Period
New Oriental Education & Technology Group Inc. (NYSE: EDU), the largest provider of private educational services in China, filed this Form 6-K on July 26, 2007. The filing reports unaudited financial results for the fourth quarter and full fiscal year ended May 31, 2007. The company operates a network of schools and learning centers offering language training, test preparation, and primary/secondary education.
Key Financial Metrics
Fourth Quarter Ended May 31, 2007
- Net Revenues: RMB190.6 million (US$24.9 million), a 29.1% year-over-year increase.
- Net Loss: RMB11.9 million (US$1.6 million), a 65.3% decrease from the prior year.
- Non-GAAP Income: RMB5.6 million (US$0.7 million), an 88.8% increase year-over-year.
- Operating Margin: Negative 14.1% (GAAP); Negative 4.9% (Non-GAAP).
- Student Enrollments: Approximately 314,000 for the quarter, up 31.5% year-over-year.
- Cash and Equivalents: RMB1,563.8 million (US$204.4 million) as of May 31, 2007.
Fiscal Year Ended May 31, 2007
- Net Revenues: RMB1,044.0 million (US$136.4 million), a 35.5% year-over-year increase.
- Net Income: RMB226.7 million (US$29.6 million), a 359.1% increase year-over-year.
- Non-GAAP Income: RMB263.5 million (US$34.4 million), a 198.4% increase year-over-year.
- Operating Margin: 19.9% (GAAP), compared to 8.3% in the prior year.
- Student Enrollments: Approximately 1,067,000 for the year, up 22.4% year-over-year.
- Operating Cash Flow: Approximately RMB450 million (US$58.8 million).
Material Changes vs. Prior Period
The company reported significant growth in both revenue and profitability for the full fiscal year, driven by a 22.4% increase in student enrollments. However, the fourth quarter resulted in a GAAP net loss due to a 47.7% year-over-year increase in selling and marketing expenses (RMB38.5 million) associated with a nationwide summer course campaign, and a 9.1% increase in general and administrative expenses due to headcount expansion. Cost of revenues increased 27.0% due to the larger student base and expanded school network. Share-based compensation expenses decreased significantly in the quarter to RMB17.5 million from RMB37.3 million in the prior year.
Guidance, Outlook, and Risks
Outlook
For the first fiscal quarter of 2008 (June 1 to August 31, 2007), New Oriental expects total net revenues to range between RMB520.0 million and RMB550.0 million (US$68.0 million to US$71.9 million), representing year-over-year growth of 21.1% to 28.1%.
Management Commentary
Management highlighted the successful execution of a strategic expansion plan, including the opening of a new school in Nanchang and an expansion of the mobile learning platform with Nokia. The company achieved the milestone of over RMB1 billion in annual net revenues and over one million student enrollments.
Risks and Contingencies
Forward-looking statements are subject to risks including the ability to attract students without decreasing fees, retaining qualified teachers, managing network expansion, competition in the Chinese private education sector, and changes in Chinese governmental policies regarding private education. The filing also notes potential litigation risks related to intellectual property.
Investor Verification Checklist
- Cash Position: Verify the significant decrease in cash and cash equivalents from RMB3,432.6 million (Feb 28, 2007) to RMB1,563.8 million (May 31, 2007), attributed to the distribution of follow-on offering proceeds to selling shareholders.
- Non-GAAP Reconciliation: Review the reconciliation of GAAP net loss to Non-GAAP net income for the fourth quarter, noting the exclusion of RMB17.5 million in share-based compensation.
- Deferred Revenue: Confirm the increase in deferred revenue to RMB330.8 million, indicating future revenue recognition potential.
- Debt Status: Note that the company reported no short-term borrowings or long-term debt as of May 31, 2007, having paid off prior obligations.
- Share Count: Verify the impact of the IPO and follow-on offering on the weighted average shares outstanding used in EPS calculations.