In fiscal year 2025, New Oriental will prudently expand its production capacity to seek a balance between revenue and earnings growth.
Source: Know
Author|Xu Jingjing
On August 1, New Oriental (NYSE: EDU; 09901.HK) today announced its unaudited financial results for the fourth quarter of fiscal 2024 (March 1, 2024 to May 31, 2024) and the full fiscal year.
In the fourth quarter of fiscal year 2024, New Oriental's revenue was US$1,136.7 million, an increase of 32.1% year-on-year; Net profit attributable to shareholders was US$27 million, down 6.9% year-on-year. In fiscal year 2024, New Oriental's revenue will be US$4,313.6 million, an increase of 43.9% year-on-year; Net profit attributable to shareholders was US$309.6 million, an increase of 74.6% year-on-year.
Subsequently, Yang Zhihui, CEO and Chief Financial Officer of New Oriental, attended the analyst meeting and disclosed the growth rate of each core business line and the growth expectation of the segmented business in fiscal 2025.
Regarding the performance growth expectation of each business line in fiscal 2025, Yang Zhihui said that it is conservatively estimated that the revenue growth of the overseas test preparation business will be between 20% and 25%; The growth rate of overseas consulting business revenue will be about 15%; The growth of new business revenue in education will be between 45% and 50%; High school business, revenue growth will be between 25 and 30 percent.
In the current fiscal year, New Oriental expanded its production capacity by about 37%, and in fiscal 2025, New Oriental will increase its production capacity by 20% to 25% to seek a healthy balance between revenue growth and earnings growth.
Yang Zhihui also revealed that in fiscal year 2024 and last year (only began to explore the cultural tourism business since last year), the cultural tourism business revenue was 380 million yuan, and it is expected that the cultural tourism business revenue in fiscal 2025 will be about 1.2 billion yuan, and the loss will be about 100 million yuan, but by fiscal year 2026, the cultural tourism business will be profitable.
At the analyst meeting, Yang Zhihui also emphasized that "Dongfang Selection's decision to split up with Hui was made after a lot of transparent communication with Dong Yuhui, who has always been our beloved colleague and has driven the important growth of Dongfang Selection." Oriental Selection will continue to be committed to building a stable and healthy development path, and a multi-pronged strategy to expand its business is being formulated. ”
He also revealed that the expense of compensation to Dong Yuhui will be incurred in the fourth quarter of this fiscal year and the first quarter of the next fiscal year, and is a one-time expense, and the specific amount will be announced at the next analyst meeting.
"Over the years, New Oriental has always been regarded as a tenacious explorer, constantly moving forward in change." Yang Zhihui said.
01
New business revenue from education increased by 57% year-on-year
In the fourth quarter of fiscal 2024, New Oriental's operating profit was $10.5 million, down 78.1% year-on-year. Non-GAAP operating profit was $36.3 million, down 53.8% year-over-year. GAAP operating margin was 0.9% and non-GAAP operating margin was 3.2%.
"In addition to Oriental Selection's investment in self-operated products and the costs and expenses associated with the Hui Peer Platform, the investment accelerated the expansion of the education space and the newly integrated cultural tourism business, as well as the enhancement of management and employee compensation incentives, which have had a short-term impact on our operating margin in the quarter," Yang said. We expect that with our continuous improvement in facility utilisation and operational efficiency, the margin pressure on our education business will be reduced in the next financial year. ”
In the fourth quarter of fiscal 2024, New Oriental's traditional core business maintained an encouraging trend, and new initiatives in the education sector also showed positive momentum.
In terms of breakdown, among the traditional core businesses, the revenue of the overseas test preparation business increased by 18% year-on-year in US dollar terms and 23% year-on-year in RMB terms.
The revenue of overseas consulting business increased by approximately 17% year-on-year in US dollar terms and 23% year-on-year in RMB terms.
Domestic test preparation for adults and university students increased by 16% year-on-year in US dollar terms and 21% year-on-year in RMB terms.
During the quarter, the new education business continued to maintain strong momentum in their respective areas, with revenue up 50% year-over-year in USD terms and 57% year-over-year in RMB terms.
First of all, New Oriental's non-academic tutoring business was launched in about 60 cities this fiscal quarter, focusing on cultivating students' innovation ability and comprehensive quality. The markets in which it operates have already achieved higher penetration, particularly in high-tier cities. The number of registrations in the quarter was about 875,000. China's top 10 largest cities contribute more than 60% of the business's revenue.
Second, smart learning systems and devices were adopted in about 60 cities, with approximately 188,000 active paying users in the quarter. According to reports, the customer retention rate of this business has been improved. China's top 10 cities contribute more than 55% of the business's revenue.
Third, smart education business, teaching materials and digital smart learning solutions continue to contribute to the overall development of New Oriental.
In addition, the cultural tourism business line provides customers with customized cultural trips, domestic and foreign study tours, as well as camp education. Study tours and research camps for K-12 and university students continued to grow sustainably during the quarter. It has carried out study tours and research camps in more than 65 cities across the country, with the top 10 cities in China contributing more than 55% of the revenue to this business. In addition, New Oriental has also piloted some high-end tourism products in 27 characteristic provinces, expanding the scope of services to all age groups, including middle-aged and elderly people. At present, the cultural tourism business is still in the preliminary stage of planning, validating and evaluating the availability in selected regions.
New Oriental also continues to invest resources in the development of the OMO system and the application of new technologies to improve education and product quality. In the current quarter, it invested a total of $30.5 million in the OMO teaching platform (compared to $25.5 million in the previous quarter).
New Oriental will, as always, invest reasonable resources in researching and applying new technologies such as artificial intelligence and ChatGPT in education and products.
02
The company plans to increase production capacity by 20% to 25% in FY2025, seeking a healthy balance between revenue growth and earnings growth
Looking ahead to 2025, Yang Zhihui said that New Oriental's education business will be on a healthy growth track, driven by continued strong demand.
New Oriental expects total revenue for the first quarter of fiscal 2025 (June 1, 2024 to August 31, 2024) (excluding Oriental Selection's self-operated live streaming e-commerce business) to be between $1,254.7 million and $1,283.5 million, an increase of between 31% and 34% year-on-year.
Regarding the performance growth expectation of each business line in fiscal 2025, Yang Zhihui said that it is conservatively estimated that the revenue growth of the overseas test preparation business will be between 20% and 25%; The growth rate of overseas consulting business revenue will be about 15%; New business in education will grow by between 45% and 50%; As for the high school business, revenue growth will be between 25 and 30 percent.
New Oriental is confident that it will achieve operating margin growth (excluding Oriental Selection) in the first quarter of 2025, with operating margin expanding by 200 basis points year-on-year and achieving satisfactory operating profit for the full fiscal year.
In the current quarter, the number of New Oriental Learning Centers increased by 42% year-on-year, but the number of non-academic tutoring business enrollment increased by only 39%, and the difference between the growth rates of the two is not large, and in the past few quarters, New Oriental's enrollment growth rate has always been faster than the expansion rate.
In this regard, Yang Zhihui explained that part of the reason is the time factor, such as the time difference between the enrollment window of students and the opening time of the outlets. At the end of the fiscal year, New Oriental added about 37% of new capacity, which is a bit larger than expected, but these will bear fruit in the next fiscal quarter. For example, in the quarter, revenue from new business in education increased by 57% year-on-year in RMB. In the next fiscal quarter, new business in education will achieve year-over-year growth of 45% to 50%. As a result, strong revenue growth will cover the increase in the cost of renting new classrooms. On the other hand, the rent per square metre of each learning centre has gone down because the market is very volatile, so there is a leverage on rent, on other costs and expenses.
Yang also highlighted that most of the newly opened cities have performed better in terms of revenue growth and profit expansion in FY2024. However, in order to ensure a healthy balance between revenue growth and earnings growth in the education business, New Oriental will be cautious about capacity expansion and recruitment. New Oriental plans to increase production capacity by about 20% to 25% in fiscal 2025. Most of the newly opened learning centers will open in cities with better revenue and profit performance, and the pace and size of new learning centers will be closely monitored internally.
"In the new financial year, we will continue to maintain utilization rates as we expand our new learning centers by 20 to 25 percent. In the new year, strong revenue growth will cover the increase in the cost of renting new classrooms. Yang Zhihui said.
Regarding the competitive landscape of the education business, Yang Zhihui said that although he noticed that some competitors have invested some money or opened more learning centers in the top cities. However, it believes that the current competitive situation is much less than it was before the policy was introduced a few years ago, and the competition is relatively reduced, and the new learning center will occupy more market share. Student enrollment in the summer (next fiscal quarter) education business, in dollar terms, revenue growth will be between 31% and 34%.
03
It is expected that the revenue of the cultural tourism business in fiscal year 2025 will be about 1.2 billion yuan, and the cultural tourism business will be profitable in fiscal year 2026
Yang Zhihui revealed that in fiscal year 2024 and last year (which only began to explore the cultural tourism business since last year), the revenue of the cultural tourism business is 380 million yuan.
In FY2025, it is expected that the annual revenue of the cultural tourism business will be around 1.2 billion yuan. In the next fiscal quarter, the revenue growth rate of the cultural tourism business will reach about 180%.
In fiscal year 2025, the cultural tourism business will still be loss-making, and the loss will be around 100 million yuan. After all, the cultural tourism business is still in the investment period. But in FY2026, the cultural tourism business will be profitable.
04
New Oriental's financial results for the fourth quarter and full fiscal year of 2024
New Oriental's fourth quarter fiscal year 2024 results highlights:
Revenue was US$1,136.7 million, up 32.1% year-on-year. The increase in revenue was mainly due to the new business of education attributes, as well as the self-operated products of Dongfang Selection and the live broadcast e-commerce business.
Operating costs and expenses increased by 38.6% year-on-year to US$1,126.2 million. Non-GAAP operating costs and expenses, excluding share-based compensation expense, increased 40.7% year-over-year to $1,100.4 million. The increase was mainly attributable to the continuous growth of Dongfang Selection's self-operated products and live streaming e-commerce business, as well as the increase in related costs and expenses due to the accelerated expansion of teaching space.
The cost of revenue was US$542.4 million, an increase of 38.5% year-on-year.
Sales and marketing expenses were US$208.2 million, an increase of 40.9% year-on-year.
General and administrative expenses for the quarter were $375.5 million, an increase of 37.5% year-on-year. Non-GAAP general and administrative expenses, excluding share-based compensation expense, increased 42.3% to $355.2 million.
Operating profit for the quarter was $10.5 million, down 78.1% year-over-year. Non-GAAP operating profit was $36.3 million, down 53.8% year-over-year.
Operating margin was 0.9% in the quarter, compared to 5.6% for the same period last fiscal year. Non-GAAP operating margin, excluding share-based compensation expense, was 3.2% for the quarter, compared to 9.1% for the same period last fiscal year.
Net profit attributable to New Oriental shareholders for the quarter was US$27 million, down 6.9% year-on-year. Basic and diluted earnings per ADS attributable to New Oriental shareholders were $0.16 and $0.16, respectively. Non-GAAP net income attributable to New Oriental shareholders for the quarter was $36.9 million, down 40.5% year-over-year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental shareholders were $0.22 and $0.22, respectively.
Net operating cash flow was approximately $376.8 million and capital expenditures were $27.4 million.
As of May 31, 2024, New Oriental's cash and cash equivalents, term deposits and short-term investments totaled approximately $4.9 billion. Of this amount, cash and cash equivalents amounted to $1,389.4 million. In addition, fixed deposits amounted to $1,489.4 million and short-term investments amounted to $2,065.6 million.
New Oriental's deferred revenue balance (i.e., cash collected from customers and recognized as revenue at the time of delivery of the relevant service or goods) was $1,780.1 million at the end of the fourth quarter of fiscal 2024, an increase of 33.1% compared to $1,337.6 million in deferred revenue at the end of the fourth quarter of fiscal 2023.
As of May 31, 2024, the total number of New Oriental Schools and Learning Centres was 1,025, an increase of 114 compared to 911 as of February 29, 2024. This represents an increase of 277 compared to 748 as of May 31, 2023. As of May 31, 2024, the total number of schools is 81.
New Oriental's 2024 fiscal year performance highlights:
Revenue was $4,313.6 million, an increase of 43.9% year-on-year.
Operating profit was US$350.4 million, an increase of 84.4% year-on-year. Non-GAAP operating profit for fiscal year 2024 was $472.9 million, an increase of 69% year-over-year.
Operating margin was 8.1 percent, compared to 6.3 percent for the same period last fiscal year. Non-GAAP operating margin, excluding share-based compensation expense, was 11% in fiscal 2024, compared to 9.3% for the same period last fiscal year.
The net profit attributable to shareholders of New Oriental was US$309.6 million, an increase of 74.6% year-on-year. Basic and diluted net income per ADS attributable to New Oriental shareholders for fiscal year 2024 was $1.87 and $1.85, respectively. Non-GAAP net profit attributable to New Oriental shareholders was US$381.1 million, an increase of 47.2% year-on-year. Basic and diluted non-GAAP net income per United States depositary share attributable to New Oriental shareholders for fiscal 2024 was $2.3 and $2.27, respectively.
New Oriental's board of directors authorized a share repurchase program in July 2022 authorizing the company to repurchase up to US$400 million of the Company's United States depositary shares or ordinary shares over the next 12 months. The Company's Board of Directors further approved the extension of the validity period of its share repurchase program until May 31, 2025. As of July 30, 2024, the Company has cumulatively repurchased approximately 7.3 million United States Depositary Shares in the open market under the share repurchase program, with a total value of approximately US$296.1 million.
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Author: Xu Jingjing
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