Stephen Yang
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Before we kick off the call, I would like to firstly convey our deepest condolences to the people who have sadly passed away and to their loved ones during this global health crisis. We would like to express our sincere gratitude to medical staff around the world for their dedication and commitment in this difficult time. Thank you. Let us all play out hard and stay healthy. Together, we can overcome the challenge. In response to the outbreak of the COVID-19, New Oriental has immediately transferred more than 1 million students to online programs through New Oriental cloud-based classrooms. We have also actively assumed social responsibilities by donating RMB20 million in cash to Hubei province and providing free small size offline courses to the children of nearly 20,000 medical staffs as well as providing the public with tens of millions of free high-quality educational resources that can benefit over 10 million people, including students of all levels, parents, teachers and entrepreneurs. Back to our business, we are very pleased to report a set of very encouraging financial results in the third fiscal quarter of this year, delivering a top line growth and continued preparing margin expansion – and continued operating margin expansion despite COVID-19 pandemic putting negative impact to all those industries across globe. Total revenue growth was $923.2 million, representing a growth of 15.9% in dollar terms or 18.7% if computed in RMB. Net revenues from education programs and services for the third fiscal quarter were $845.7 million, representing a 16.3% increase year-over-year. The growth was mainly driven by K-12 after-school tutoring courses, which achieved a year-over-year revenue growth of approximately 24% in dollar terms or 27% if computed in RMB. We continue to be guided by our Optimize the Market strategy in this quarter and carried out capacity expansion in cities where we see potential for rapid growth and strong profitability. This quarter, we added a net of 110 learning centers in existing cities, opened 2 new training schools in the city of Zhangjiagang and Nanjing. Altogether, this increased the total square meters of classroom area by approximately 30% year-over-year, 11% quarter-over-quarter and 21% comparing with the end of the fiscal year 2019. Total student enrollments in academic subjects tutoring and test prep courses in the third fiscal quarter of 2020 increased by 2.3% year-over-year to approximately 1,606,000. The lower-than-normal increase in the number of student enrollment is primarily due to a bigger portion of the enrollment for the winter semester falling into the second fiscal quarter because of the earlier timing of Chinese New Year this year compared with the last year as well as the higher-than-normal cancellation for winter classes. The outbreak of COVID-19 has also caused challenges on acquiring the new customers in the second half of the quarter, while the enrollment for classes in Q4 and summer classes have also been delayed. At the same time, we continued our efforts in improving and maintaining our online/offline OMO standardized classroom teaching system, especially during the outbreak of COVID-19. All the offline classes have been transited smoothly to online classes since the beginning of February, and we are very encouraged to have received positive feedback from our customers. We also continue to make strategic investments into our new initiatives in K-12 tutoring on our pure online education platform, koolearn.com, to leverage our advanced teaching resources in lower tier cities and those in remote areas. Following last quarter’s strong bottom line performance, we once again achieved year-over-year operating margin expansion in this quarter. During the quarter, we recorded non-GAAP operating income of $134.8 million compared to $113.8 million in the same period of last year. Non-GAAP operating margin rose by 30 basis points year-over-year to 14.6% and non-GAAP net margin rose by 240 basis points year-over-year to 16.1%. The continued operating margin expansion is mainly driven by the better leverage in classroom rental and related operating expenses, just as we consistently improved the utilization of the facilities before the outbreak of COVID-19. The net margin expansion is also due to the VAT exemption approval by the government during the pandemic and the net loss of Koolearn subsidiary undertaken by the non-controlling interest to shareholders. We are confident that we will able to deliver continued margin expansion after the pandemic is over and generate sustainable long-term value to our customers and shareholders. Per program blended ASP, which is cash revenue divided by total student enrollments, increased by about 2.7% year-over-year in dollar terms. As for hourly blended ASP, which is GAAP revenue divided by total teaching hours, increased by approximately 3% year-over-year in RMB terms. To provide the breakdown of the hourly blended ASP, please note that U-Can middle school/high school program increased by 4%, POP Kids increased by 6% and overseas test prep program increased by 7%, all year-over-year in RMB terms. Comparing with our normal price increase of 5% to 8%, this quarter’s hourly blended ASP increase was 2% to 3% lower than normal levels, mainly because of the discount we provided to the customers to support the migration from offline class to online as well as the bigger slowdown of the VIP personalized class business. At the same time, to show gratitude to the medical staff who traveled to Wuhan to offer help, we offered special complementary classes to their children. This has inevitably contributed a slight decrease of the ASP. Now let’s move on to the third quarter performance across our individual business lines. As mentioned earlier, our key revenue driver, K-12 all-subjects after-school tutoring business, achieved year-over-year revenue growth of 24% in dollar terms or 27% in RMB terms. Breaking down, the U-Can middle school/high school all-subjects after-school tutoring business recorded a revenue increase of approximately 23% in dollar terms or 26% in RMB terms for the quarter. Student enrollments grew approximately 23% year-over-year for the quarter. Our POP Kids program delivered outstanding results, with revenue up by about 26% in dollar terms or 29% in RMB terms for the quarter. The enrollment decreased by 23% for the quarter. The decline is due to the bigger portion of the enrollment for the winter semester falling to the second fiscal quarter because of the earlier timing of the Chinese New Year this year compared with last year. The overseas test prep business recorded a revenue decrease of 14% in dollar terms or 12% in RMB terms for the quarter. The consulting business recorded revenue growth of about 27% in dollar terms or 30% in RMB terms year-over-year for the quarter. Finally, VIP personalized class business recorded revenue growth of about 10% year-over-year in dollar terms or 13% in RMB terms year-over-year for the quarter. Next, I will provide some updates on progress we’re making with our Optimize the Market strategy. Beginning with our offline business this quarter, as mentioned earlier, we added a net of 110 learning centers in existing cities, opened 2 new training schools. Altogether, this increased the total square meters of classroom area by approximately 30% year-over-year, 11% quarter-over-quarter and 21% compared with the end of the fiscal year 2019. The expansion of our offline education network has also made sure that we are fully prepared for when the pandemic is over and our service can resume with the strong presence across the different Chinese cities. The dual-teacher class model has been introduced into the POP Kids program in 48 existing cities, for U-Can program in 28 existing cities and for both POP Kids and U-Can K-12 businesses in 7 new cities. The initiative supported increased market penetration in those markets we have tapped into. We also saw improved customer retention and scalability of the new model. With this program result, we will continue this strategy in the rest of the year. On the digital technology front, we invested $40 million in this quarter to improve and maintain our OMO education ecosystem. And as the outbreak of the COVID-19 has highlighted the importance of demand of online education, the investment also supported the migration of our online classes to small size online – of the offline classes to small size online live broadcasting classes during the pandemic. Apart from the OMO infrastructure, we have allocated part of the resources to teacher streaming to ensure they are all well equipped to be managing the online classes. As a result, the OMO ecosystem managed to cushion most of the impact on our service and operation caused by pandemic. Most of the investments were recorded in the G&A expenses. Furthermore, we also made stable progress in the pure online koolearn.com business line and other supplementary online education products, which is experiencing growing market demand. More resources are invested into executing new initiatives in online K-12 after-school tutoring business in fiscal year 2020. The investment includes content development; teachers recruiting and training; sales, marketing, R&D and other necessary cost incentives to drive the growth of the new pure online programs. With these programs, we are able to reach out to more students in low-tier cities in an interactive and scalable manner. We believe this will help koolearn.com to gain new market share in the online education space and drive top line growth. In addition, during COVID-19 pandemic, Koolearn did a large-scale market promotion by offering free large size online live broadcasting classes to the public and attracted several times more traffic than normal times. To capture the new market opportunity, Koolearn also added a meaningful amount of the customer representatives and marketing staff to support the new initiatives in K-12 tutoring. This move has consequently raised our spending on the marketing front, but we believe these are necessary and understandable measures as we found ourselves in an unusual pandemic situation. Now, let me walk you through the other key financial details for the third quarter. Operating cost and expenses for the quarter were $806.0 million, representing a 15.0% increase year-over-year. Non-GAAP operating costs and expenses for the quarter, which exclude share-based compensation expenses, were $788.4 million, representing a 15.4% increase year-over-year. Cost of revenue increased by 18.1% year-over-year to $398.6 million, primarily due to increase in teachers’ compensation for more teaching hours and higher rental costs for the increased number of schools and learning centers in operation. Selling and marketing expenses increased by 35.2% year-over-year to $118.2 million, primarily due to a significant increase of the promotion expenses and a number of the customer service representatives and marketing staff for the new initiatives in K-12 tutoring on koolearn.com. General and administrative expenses for the quarter increased by 4.8% year-over-year to $289.1 million. Non-GAAP G&A expenses, which exclude share-based compensation expenses, were $273.3 million, representing a 5.9% increase year-over-year. Total share-based compensation expenses, which were allocated to related operating costs and expenses decreased by 2.4% to $17.5 million in the third fiscal quarter of 2020. Operating income was $117.3 million, representing a 22.4% increase year-over-year. Non-GAAP income from operations for the quarter was $134.8 million, representing an 18.5% increase year-over-year. Operating margin for the quarter was 12.7% compared to 12.0% in the same period of prior fiscal year. Non-GAAP operating margin, which excludes share-based compensation expenses for the quarter, was 14.6% compared to 14.3% in the same period of prior fiscal year. Net income attributable to New Oriental for the quarter was $137.7 million, representing a 41.4% increase from the same period of prior fiscal year. Basic and diluted earnings per ADS attributable to New Oriental were $0.87 and $0.86, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $148.5 million, representing a 36.4% increase from the same period of prior fiscal year. Non-GAAP basic and diluted earnings per ADS attributable to New Oriental were $0.94 and $0.93, respectively. Net margin for the quarter was 14.9% compared to 12.2% in the same period of prior fiscal year. Non-GAAP net margin for the quarter was 16.1% compared to 13.7% in the same period of prior fiscal year. Net operating cash flow for the third quarter of 2020 was approximately $39.7 million. Capital expenditures for the quarter were $103.2 million, which were primarily attributable to the opening of 127 facilities and renovations at existing learning centers. Turning to the balance sheet, as of February 29, 2020, New Oriental had cash and cash equivalents of $1,057.1 million as compared to $1,414.2 million as of the May 31, 2019. In addition, the company had $269.2 million in term deposits and $2,241.0 million in short-term investments. New Oriental’s deferred revenue balance, which is cash collected from the registered students for courses and recognized proportionally as the revenue as the instructions are delivered, at the end of the third quarter of fiscal year 2020, was $1,375.0 million, an increase of 15.4% as compared to $1,191.8 million at the end of the third quarter of fiscal year 2019. Looking ahead to the fourth quarter of this fiscal year, despite the continuing challenges from the COVID-19 pandemic, we’re still optimistic towards the company’s business, and we’ll continue to focus on the following key areas. First, we will continue to expand our offline business. We still aim to add around 20% to 25% capacity, including new learning centers, and expanding classroom areas of the some existing learning centers for K-12 business in existing cities. We believe our capacity expansion will support us to hold more students in our facilities in the coming summer, which will very likely be shortened by 1 or 2 weeks into the delayed start of the second semester of all public schools in China to combating the epidemics. More importantly, it will prepare us to further take market share from other players after COVID-19 subsides gradually as some small players without strong financial position and online cloud capability may not be able to sustain their business during the period and will be forced to cease operations. We expect the industry will undergo ways of market consolidation upon the pandemic phase. The fact that we are a major player with strong financial capacity and fresh offline facilities allows us to further strengthen our market-leading position and penetration. In addition, we will continue to roll out our dual-teacher model schools to a number of new low-tier cities in certain provinces for the whole year. Second, we will continue to leverage our investments into digital technologies, and we introduced our OMO systems to more offline member training and test offerings, especially for our K-12 business and overseas test prep business. We will broaden the usage of the online tools and content in our OMO system for all business lines throughout our whole network. We’ll continue to invest in developing the best teaching content and courseware to cater to online and offline integrated education methods. At the same time, we will provide more advanced training programs to our teachers and enhance their online/offline integrated teaching skills. We will continue to make investments, and we believe the total spending in absolute dollar terms in fiscal year 2020 will increase compared with the previous fiscal year. Furthermore, we will continue to invest in and execute the initiatives, including productive content development, teachers recruiting and training, R&D as well as sales and marketing in pure online K-12 after-school tutoring business on our koolearn.com platform. As mentioned earlier, during the COVID-19 pandemic, Koolearn encountered several times more traffic than normal times by offering free online live broadcasting classes to the public during the winter and spring season. Koolearn also added a meaningful amount of customer service representatives and tutors. This near-term investment enhanced our competitive advantage to capture the new online education market opportunity. Third, our top priority will remain as to focus on controlling costs and reducing the expenditures across the company to minimize the negative impact from COVID-19 pandemic on the bottom line. Although we expect the margin decline year-over-year in the fourth quarter of fiscal year 2020, we believe we can still maintain non-GAAP operating margin for the full year of fiscal year 2020 at a similar level as last year and achieve expansion of non-GAAP net margin for the full year of 2020 compared to the year-over-year decline in last two fiscal years. Finally, the recent RMB depreciation against the U.S. dollars might cause impact on earnings in dollars terms for the fourth quarter of fiscal year 2020. Finally, I would like to emphasize, we have great confidence in the fundamentals of our business. Although we are facing the negative impact from the pandemics for the near term, we remain optimistic of the brighter prospects of our business over the long run. We’re certain that with the New Oriental leading brand, superior education products and the best teacher resources, we’ll keep taking market share with the leading position in China’s huge after-school tutoring market and deliver long-term value for our shareholders and customers. Looking at the near-term and our expectations for the next quarter, we expect total revenue to be in the range of $774 million to $806.2 million, representing year-over-year decline in the range of 8% to 4%. If not taking into the consideration the impact of the potential change in exchange rate between RMB and the U.S. dollars, the projected decline of revenue is expected to be in the range of 4% to 0% for the fourth quarter of fiscal year 2020. To provide a breakdown of the expected top line growth for key business lines, K-12 all-subjects after-school tutoring business is expected to grow around 10% to 11% or 18% to 19%, excluding VIP one-on-one business. Overseas test prep program is expected to decline around 45%. And overseas study consulting business is expected to grow 12% to 13% all year-over-year in R&D terms. We expect the significant decline of the overseas test prep business and slowdown of the overseas study consulting business is due to the outbreak of the COVID-19 pandemic around the globe, starting from March, with the cancellation of the overseas exams, suspension of the overseas schools and restriction on travels. We expect the negative impact of overseas related business will affect the entire education industry in China, not only New Oriental, and will last over the coming one to two quarters. That said, in contrast, China’s effective control of the pandemic situation has shed a more positive light on our business domestically. We are optimistic over the trend of the K-12 after-school tutoring business. I’ve tracked from the public news that 30 provincial level governments, that’s 88% of the total, have announced the public school resumption plan. We’re confident that demand for the after-school tutoring business will pick up after the resumption of the schools, and the short-term impacts from the school hour changes and short-term summer holiday will be manageable. The exchange rate used to calculate expected revenue for the fourth quarter of fiscal year ‘20 is CNY 7.07. The historical exchange rate used to calculate revenue for the fourth quarter of the fiscal year 2019 was CNY 6.76. I must mention that these expectations reflect New Oriental’s current and preliminary view, which is subject to change, especially in the pandemic period. At this point, I will take some questions. Operator, please open the call for this. Thank you.
