New Oriental Education & Technology Group Inc.EDUNYSE
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Operator: Good evening, and thank you for standing by for New Oriental Education & Technology Group Inc.'s FY2026 Second Quarter Results Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Alice Chow. Thank you. Please go ahead. Thank you. Hello, everyone, and welcome to New Oriental Education & Technology Group Inc.'s
Alice Chow: Second Fiscal Quarter 2026 Earnings Conference Call. Our financial results for the period were released earlier today and are available on the company's website as well as on newswire services. Today, Stephen Yang, Executive President and Chief Financial Officer, and I will share New Oriental Education & Technology Group Inc.'s latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of The U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental Education & Technology Group Inc. does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental Education & Technology Group Inc.'s Investor Relations website at investor.neworiental.org. I will now first turn the call over to Mr. Yang. Stephen, please go ahead.
Stephen Yang: Thank you, Alice. Hello, everyone. And thank you for joining us on the call. I'm pleased to report a strong set of results for 2026. Our continued focus on operational efficiency and disciplined resource management has been a key driver of our solid performance and continues to support our path to sustainable profitability. We are delighted to see strong profit growth accompanied by a significant improvement in non-GAAP operating margin, up more than four percentage points. Again, exceeded our expectations. This quarter, total net revenue grew 14.7% year over year, to $1.19 billion. Non-GAAP operating income more than tripled, rising 206.9% to $89.1 million. Non-GAAP net income attributable to New Oriental Education & Technology Group Inc. increased 6068.6% to $72.9 million. Our core business remains steady, and I'm pleased to share that our new initiatives are gaining traction and making meaningful contributions to the group's overall performance. For the second fiscal quarter, our K-9 new educational business and high school tutoring business reported accelerated year-over-year revenue growth, outpacing the previous quarter. Overseas-related business has shown resilience, delivering modest revenue growth despite the ongoing macroeconomic headwind, exceeding our earlier conservative expectations. Overseas test prep business recorded a revenue increase of 4% year over year. Overseas study consulting business recorded a slight decrease of about 3% year over year. Our adults and university students business recorded a revenue increase of percent year over year. As for our continued investments in new education initiatives, including non-academic tutoring and our intelligent learning system and devices, deliver solid, sustainable results. Revenue from this business grew 22% year over year this quarter. Our non-dynamic two-front business has been rolled out to around 60 existing fees. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of the revenue. As for our intelligent learning system and device business, that has been launched in around 60 cities. We are encouraged by improved customer retention and scalability of the new initiative. The top 10 cities contribute over 50% of this business. Turning to our integrated tourism-related business. Our domestic and international study tours and research camp for K-12 and university students were held in 55 cities across China, with the top 10 cities contributing over 50% of the revenue. In parallel, our newly launched tourism offering for middle-aged and senior citizens has been well expanded and well received, now available in 30 key provinces in international markets. We have expanded our product portfolio to include culture travel, China study tour, global study tour, and camp education, all designed to deliver enriching experiences through culture and knowledge sharing and personal growth. We are now also exploring opportunities in the health and wellness sector for seniors. We will partner with over 30 health and wellness spaces in locations such as Hainan, Yunnan, and Guangxi, piloting the segments with a light asset model. With regards to our OMO system, our efforts in developing and revamping our online merging offline teaching platform continue. These efforts aim to deliver more advanced and diversified education services to our customers of all ages. A total of $28.4 million has been invested during this quarter to upgrade and maintain our OMO teaching platforms. Beyond OMO, we continue to focus on our venture in AI. Encouraged by the positive market feedback, we have been and will continue to refine and embed AI across our offerings to strengthen New Oriental Education & Technology Group Inc.'s core capabilities. Simultaneously, we are also leveraging AI to streamline internal operations, thereby boosting efficiency and providing enhanced support for our teaching staff. As an industry leader, we are dedicated to driving long-term revenue growth through a dual focus on product innovation and operational efficiency. In upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investment in AI. Now turning to the East device performance. I'm pleased to share that during the reporting period, ESA buy remained customer-centric and made strong progress in both product development and supply chain enhancements. EsterBio has expanded beyond its original focus on fresh foods and snacks to offer a broader, more diversified product range. As of the end of the period, private label SPUs reached 801. New categories include seafood, healthcare products, kitchen condiments, meat, eggs, dairy, personal care, household and cleaning items, paper goods, home textiles, apparel, and underwear. These offerings are thoughtfully created to meet customers' growing demand for health, quality of life, and convenience. They have contributed to both sales and profit growth for the group while further optimizing its product mix. Beyond expanding SDUs, Eastbay also focused on product iteration, cost efficiency, and targeted marketing to build blockbuster products that resonate strongly with the customers. At the same time, Easter buy began exploring offline channels leveraging strong brand recognition and New Oriental Education & Technology Group Inc.'s learning center network. With the vending machine model now profitable in select cities, we plan to scale this initiative nationwide. All in all, we are pleased to see Easter buy refocused and back on track, making a positive contribution to the group, both top line and bottom line. We expect Easter buy to contribute more revenue and profits to the group in the future while continuously enhancing our brand's influence. Now I will turn the call over to Alice to share with you about the key financials. Please go ahead, Alice.
Alice Chow: Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating costs and expenses for the quarter were $1.1251 billion, representing a 10.4% increase year over year. Cost of revenues increased by 11.8% year over year to $556.9 million. Selling and marketing expenses decreased by 1.1% year over year to $194.1 million. G&A expenses for the quarter increased by 15.2% year over year to $374.3 million. Total share-based compensation expenses were allocated to related operating costs and expenses increased by 156.8% to $21.4 million in 2026. Operating income was $66.3 million, representing a 244.4% increase year over year. Non-GAAP income from operations for the quarter was $89.1 million, representing a 206.9% increase year over year. Net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $45.5 million, representing a 42.3% increase year over year. Basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were 29¢ and 28¢, respectively. Non-GAAP net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $72.9 million, representing a surge of 68.6% year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were 46¢ and 45¢, respectively. Net cash flow generated from operations for the second fiscal quarter was approximately $323.5 million, and capital expenditure for the quarter was $23.7 million. Turning to the balance sheet. As of November 30, 2025, New Oriental Education & Technology Group Inc. had cash and cash equivalents of $1.8429 billion. In addition, the company had $161.6 million in term deposits and $1.8752 billion in short-term investments. New Oriental Education & Technology Group Inc.'s deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as services or goods are delivered, at the end of 2026, was $2.1615 billion, an increase of 10.2% as compared to $1.9606 billion year over year. Now I'll hand over to Stephen to go through our outlook and guidance.
Stephen Yang: Thank you, Alice. We are very encouraged by the strong results we have achieved this quarter and in the first half of the fiscal year 2026. These outcomes give us greater confidence in our operational resilience and growth trajectory. Looking ahead, we will continue to pursue a balanced approach to revenue and profitability growth. We remain committed to cost discipline and sustainable profitability across all business lines. At the same time, we will take a thoughtful strategic approach to capacity expansion and hiring, ensuring that growth does not come at the expense of quality. We plan to deepen our presence in cities that demonstrate strong top and bottom line performance while continuing to manage resources carefully. We will closely monitor the pace and scale of new openings, aligning them with operational needs and financial performance throughout the year. Given our positive momentum, including the healthy growth of our K-12 business and the recovery of Easter buy, we are now in a more optimistic position regarding our business outlook. We expect total net revenue for the group, including Easter buy, in the 2026 fiscal year to be in the range of $1.3132 billion to $1.3487 billion, representing a year-over-year increase in the range of 11% to 14%. For the full fiscal year 2026, we are raising our total net revenue guidance for the group to be in the range of $5.2923 billion to $5.4883 billion, representing a year-over-year increase in the range of 8% to 12%. These expectations reflect our current outlook, taking into account recent regulatory developments as well as our preliminary view of market conditions, and they remain subject to change. I would like to give you an update on our shareholder return plan for fiscal year 2026. In October 2025, we announced that pursuant to the previously adopted three-year shareholder return plan, the board of directors had approved an ordinary dividend of $0.12 per common share, or $1.20 per ADS, to be distributed in two installments as part of the shareholder return for fiscal year 2026. As of today, the first installment has been fully paid to shareholders and ADS holders. Details of the second installment will be determined and announced in due course. Additionally, we also announced a share repurchase program in which New Oriental Education & Technology Group Inc. is authorized to repurchase up to $300 million of its ADS or common shares over the subsequent twelve months. As of January 27, we had repurchased a total of approximately 1.6 million ADS for a consideration of approximately $86.3 million from the open market under this share repurchase plan. To conclude, New Oriental Education & Technology Group Inc. remains firmly committed to sustainable growth, high-quality offerings to our customers, and creating long-term value for our shareholders. We also continue to work closely with government authorities across provinces and municipalities in China to ensure full compliance with the relevant policies, regulations, and measures, and to adjust our operations as needed in response. This is the end of our fiscal year 2026 summary. At this point, I would like with Alice to open the floor for questions. Operator, please open the call for this. Thank you.
Operator: Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please re-enter the queue. To cancel your request, you can press star 11 again. For the first question,
Felix Liu: Hi. Good evening, Steven. This is Felix Liu from UBS. First of all, congratulations on the very solid second quarter results as well as on the lift to your full-year guidance. My question is on your guidance. Can management provide some breakdown on the segment growth as much as you can? I'm keen to understand the key drivers for the lift to your full-year guidance. Thank you.
Stephen Yang: Yes. Thank you, Felix. So let us start with this quarter's revenue growth analysis. You know, we are very pleased to see the acceleration. What I mean is the growth of the K-12 business. You know, as you know, I think this our strategy this year is to improve the product quality and service quality. And I we have seen good results in Q2. You know? We have seen the higher student retention rates and the better feedback from the customers. And so this is the K-12 business. And so in the in Q3, I think the K-12 business will be grow somewhere around 20%. Year over year. Yep. Or or more. So let's say it's in 20% plus year over year growth. And overseas, yeah, overseas relative yeah, we meet some the the revenue growth pressure. But I think, you know, we in the Q2, you know, we still got the top line growth. Of the overseas test prep by, you know, 4% year over year growth. And, you know, we're quite resilient. And, actually, I think we we are taking the market share. From the, from the market. And, so in the Q3, let's say, in the second half of the year, so I do believe you know, the revenue growth will be flattish. Of the overseas related business. There's still a drag but it is but I think we will do as you know, as good as we can. College business you know, let's say the 14, 15% top line growth. And, yeah, this is a breakdown. And so in the second half of the year, I think, you know, we're quite positive about the revenue growth. And the you you know, even the higher margin. Because, you know, since last year, you know, March 2025, we started to the cost control. And I I think we have done a great job. And going forward, we'll do more on cost control. So it will improve the margin expansion going forward. In the second half of the year and the year after. Then it's
Felix Liu: Okay. This is great progress, and thank you
Stephen Yang: Thank you.
Operator: Our next question comes from Alice Cai of Citibank. Please go ahead.
Alice Cai: Good evening, management. Thank you for taking my questions, and congratulations on the strong results. We heard about the business unit integration between your tech and consulting units. There, I have two quick questions. First, what is the expected margin expansion from this merger? And can it effectively offset the headwinds in the U.S. market? Second, regarding efficiency, how much reduction do you expect in the customer acquisition cost? And what is your target for the cross-selling rate? Thank you so much.
Stephen Yang: Yeah. Yeah. Yeah. Would you yeah. I think, yeah, we we I saw the news, you know, of the merging of the overseas test prep business and the consultant business. And as you know, before the merging, overseas test prep you know, the the the unit and the consulting business, you know, provide the service to their clients respectively. And each side has their own management teams teachers, marketing staff, admin staff. I think you know, we now we put it together. You know, we merged the overseas test lab and consultant business. I think the merge so let's say the restructuring aims to provide a customer with a one-stop service. And I think the we will provide even the better service to the customers. And also, to be reduced absolutely some cost and expenses. Because, you know, we put it together, and I think the, you know, one person can do more jobs, you know, in in stronger than before. So let's wait till the next quarter's earnings call I will share with you about the like, how much cost we can save or even the the to how much can get more revenue or improve the top end growth and to save some cost to help the margin profile.
Alice Cai: Thank you. Okay. Thanks. It's very helpful.
Operator: One moment for the next question. Next question comes from Lucy Yu from Bank of America Securities. Please go ahead.
Lucy Yu: Thank you. Hi, Steven. This is Lucy Yu. Congratulations. So my question is on the margin expansion in the second quarter, which has been more than one percentage point. Could you please elaborate on the margin expansion? What is driving that? How should we think about the margin expansion magnitude in the second half? Thank you.
Stephen Yang: Oh, yeah. Okay. Yeah. Lucy, you know, I think your question about margin. Yeah. Even as I said, even though we missed some margin drag, from the overseas related business, but we we still got the Group margin expansion in Q2. You know? The non-GAAP OP margin was increased by four hundred seventy basis points. I think the margin expansion was mainly driven by the better utilization, the higher operating leverage, and cost control. And also the profit contribution from the InstaBuy. And I think you know, we will, you know, continuously focus on operational efficiency and discipline resource management. Let's say, in a cost control. You know, we control the learning center expansion plan. And we control the marketing expenses. You you you saw the numbers, you know, the result. And I think going forward, even the Q3, and the Q4, the second half of the year, we will get the margin extension. You know? I won't give the detailed guidance because, you know, typically, we don't give the margin guidance. But, you know, we are quite optimistic about the margin expansion in the second half of this year. Lucy?
Lucy Yu: Understood. Thank you so much, Steven.
Stephen Yang: Thank you. For the next question.
Operator: Next questions will come from the line of Yikun Zheng from Citi. Please go ahead. Good evening. This is Yikun Zheng. Thank you for taking my question, and also congrats on the strong results. So my question is about the overseas business. As you mentioned, that's the OSC business have
Stephen Yang: or like, 4% of growth rates.
Operator: Actually, the market condition is quite challenging. So just wondering the future trends and the main reason for the for the for this over the business that I can get such a good result. Thank you.
Stephen Yang: Yeah. I think yeah. As I said, you know, the the overseer of the business, you know, needs some impacts of the economy environment, you know, outside. But I think our team have done a great job. You know? They have shown very resilient you know, in the first half of the year. And and we believe they will take in the more market share from you know, all the competitors. And, and also, you know, I think the group gave the team more support than before because it needs some pressure. We should help them to do more jobs. And going forward, in the in the second half of the year, you know, I think I just want to give the guidance. The flattish or little bit of a at low single digit growth because, you know, the the outside environment, you know, has no change. But I believe our team will do the great job as they did in the first first half of the year. Thank you, Steven.
Operator: For the next question, Our next question comes from D. S. Kim of JPMorgan. Please go ahead. Hi, Stephen. Hi, Alice. Congrats on the great quarter, and I hope that this is first of many, many more quarters to come. Before I actually ask my question, can I double check on Lucy's earlier question? On margin? Can we talk about how much of the margin expansion in 2Q, not the forward-looking, but 2Q came from Core Education versus East Bay to the extent that you can elaborate? And I have my question after this.
Alice Chow: Yeah. Actually, Ethiopi also reported their first year first half results, so you can roughly calculate. So if takeout is to buy all the rest together, our margin expansion is roughly about three per 300 bps. Margin expansion year over year.
Operator: Thank you. And my actual question is for our new education business, it's great that we printed more than 20% growth.
D. S. Kim: What do you think, in your view, is, like, sustainable growth rate for the segment from here? Say, assuming stable 10% capacity expansion for, like, next three to five years, say, you know, like, 10% for the group capacity expansion, maybe that means K-9 capacity can grow maybe 15% per annum and then we can add on maybe four, 5% of ASP growth and couple more points for efficiency gain or utilization gain, if you will. Does that mean that can we continue to expect say, 20% plus growth? Not I I'm not talking about second half, but like, next few years, based on this level of capacity expansion or, you know, the growth algorithm or formula can change versus what we had in the past.
Stephen Yang: Yes. I think that it's a great question. You know, we changed our strategy you know, before the starting of this fiscal year. You know, we slowed down the learning center expansion. From 20, 30%, you know, the year the year before to, let's say, the 10%. So that means we put more focus on the quality and quality improvement. So I think all the business line, even the high school and the K-9 business, the student retention rate is guiding higher. You know? I think even better than we expected. And, also, that means we got a bit better word-of-mouth So we don't need to spend, like, crazy marketing expenses to acquire the new student enrollment. That means, you know, we get the new student enrollment by better word marks, And so I think in the second half of the year, you know, we got is the 20% plus top end growth of the K-12 business. I believe we will keep the the the sustainable growth during the year after. Because, you know, the better quality, and and also the even the more the high the competitive the ads of New Oriental Education & Technology Group Inc. I think we we deserve to get more student news. Student enrollment. You know, we we we cut some marketing expenses. And and also, you know, definitely, will see more leverage. Because, you know, we'll we'll just open, like, let's say, 10% new learning centers, but, you know, the revenue growth is something somewhere around 20%. So it will you will see the higher utilization rate and the higher margin of the catalyst.
D. S. Kim: Yes. That thank you so much, sir, and I hope to I I I hope to see that coming through in many more years to come. Thank you.
Stephen Yang: Yeah. And and, also, you know, I want to I do believe we got the add one point to Steve's comments. You know, in the Q3, margin improvement improvement from both core business. And Easter die.
Operator: Thank you, sir. Thank you for the questions. As a reminder, to ask a question, please press 11 and wait for your name to be announced. Our next question comes from Timothy Zhao of Goldman Sachs. Please go ahead. Great. Hi, Steven. Hi, Alice. Congrats on the study results. So my question is that I recall in the last quarter results, you mentioned that think about some of the new AI initiative that you are launching. Just wondering if you can share any tangible results or any updates on the AI investments that you are making? For example, of of a new course format, that you launched probably in the late last year. Just wondering if there's any progress on that. Thank you.
Stephen Yang: I think, you know, in the last three months, I think our team, you know, have done a lot on the new offerings of the new AI product. And I think we we need one maybe one quarter to testify, you know, the, new offerings. And, also, you know, and I I believe it will contribute more revenue going forward. And one more point is, you know, even the I think the AI technology help us on the existing product You know, you saw the higher student return for rate. Yeah. We we put more focus on the, like, the product quality and even the service quality. But I do believe the AI helps us to guide the even higher the student retention rate going forward. So and also the AI help us to get more efficient and efficiency to save some, you know, expenses and cost So AI helps the whole group, you know, three points new offerings and the the the existing products improvement and the cost of saving. So, you know, I think we should spend a little bit more on AI technology, but it's not that it's not that much. And we'll control the the the whole the spending. But I think we will bear more fruit from the AI. Investment going forward.
Timothy Zhao: Got it. Thank you, Steven. Moment four, the next question. Our next question comes from Elsie Sheng from CLSA. Please go ahead.
Elsie Sheng: Stephen and Alice, congratulations on the results. I have a follow-up question on the margin expansion because if we look into the details, in the second quarter, the gross margin is going up and also the marketing expense ratio is also going down. And because I noticed that you all earlier mentioned that you have initiated a cross-department customer service system to improve the service efficiency and also reduce the customer acquisition cost. So I wonder if the decrease in the marketing expense ratio is related to this initiative. And if so, how do we expect the impact of this going forward? Do we expect this trend of lower marketing expense ratio to continue in the next few quarters? Thank you.
Stephen Yang: I think the situation will continue. Because, you know, yeah, first of all, we put more focus on the product itself. Rather than spend, you know, more money on marketing. But growth is still very healthy. And also, as you said, you know, we set up a new customer service department. And, you know, that means I think we will bring the information within New Oriental Education & Technology Group Inc. or even the old departments overseas consulting college, K-12 business, high school, K-9. And even other business, and the tourism business that needs to buy. So I think this new department will bring us, you know, more traffic even within New Oriental Education & Technology Group Inc. customer resources. So this is a I think that is a very good tool to save more marketing expenses. And also, you know, we we just to set up the 10% new learning center this year. So we don't need to spend more money on marketing. And, yeah, even in the Q1, you know, some I know some competitors, you know, did some summer promotion even the free course in the summer. But, you know, we we are happy to see more students from our competitors came back to New Oriental Education & Technology Group Inc. in autumn. So that means, you know, our core competency will be product quality quality turns to be better. And going forward, I think the selling marketing expenses as the percentage of the revenue will go down. Going forward. In the second half of the year and the year after.
Elsie Sheng: Thank you. It's very helpful.
Operator: Thank you for the questions. We are now approaching the end of the conference call. I will now turn the call back to New Oriental Education & Technology Group Inc.'s Executive President and CFO, Mr. Stephen Yang, for his closing remarks.
Stephen Yang: Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you. Thank you very much.
Operator: That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.