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New Oriental (EDU) Q2 Earnings Beat Estimates, Margins High

Zacks Equity Research

New Oriental Education & Technology Group Inc. EDU reported better-than-expected earnings in second-quarter fiscal 2020 (ended Nov 30, 2019). The bottom line not only outpaced the Zacks Consensus Estimate but also grew on a year-over-year basis.

During the quarter under review, the company reported adjusted earnings of 36 cents per ADS, surpassing the consensus estimate of 23 cents by 56.5%. Also, the reported figure increased a whopping 147.3% on a year-over-year basis, backed by Optimize the Market strategy and capacity expansion in potential cities.

Delving Deeper

Total revenues during the quarter totaled $785.2 million, which grew 31.5% from the year-ago period. The K-12 after-school tutoring business remained strong and achieved year-over-year revenue growth of nearly 46%. Also, U-Can middle and high school all-subjects after-school tutoring business grew 43%, and the POP Kids program rose 51% year over year.

New Oriental Education & Technology Group, Inc. Price, Consensus and EPS Surprise

New Oriental Education & Technology Group, Inc. Price, Consensus and EPS Surprise
New Oriental Education & Technology Group, Inc. Price, Consensus and EPS Surprise

New Oriental Education & Technology Group, Inc. price-consensus-eps-surprise-chart | New Oriental Education & Technology Group, Inc. Quote

Net revenues from educational programs and services were $723.3 million in the quarter, up 33% from the prior year, driven by increase in student enrollments in K-12 after-school tutoring courses.

Total student enrollment in academic subjects tutoring and test preparation courses increased 63.3% year over year to approximately 3,789,200 students. The higher-than-normal increase in enrollments was primarily attributable to the division of the autumn semester into two parts.

As of Nov 30, 2019, total number of schools and learning centers were 1,304, reflecting an increase of 179 from the comparable year-ago period and 43 from the last reported quarter. Moreover, total number of schools was 97 at the end of the fiscal second quarter.

During the reported quarter, the company added 41 learning centers in existing cities, opened a new training school in the city of Huizhou and launched a dual-teacher model in a school in the city of Chengde.

Operating Highlights

Cost of revenues grew 19.6% year over year due to increase in teachers' compensation for more teaching hours, and higher rental costs for increased number of schools and learning centers in operation.

Selling and marketing expenses increased 17.7% from the prior-year quarter. Non-GAAP general and administrative expenses, which exclude share-based compensation costs, also rose 27.1% from the prior-year period.

Non-GAAP operating income during the quarter totaled $36.5 million versus the prior year’s non-GAAP operating loss of $14.9 million. Non-GAAP operating margin rose an impressive 720 basis points to 4.7% against negative 2.5% reported a year ago.

The upside was mainly driven by better leverage in classroom rental and related operating expenses. In addition, the company achieved operational efficiency within each key business unit, supported by a standardized, modularized and systemized operating process.

Financials

As of Nov 30, 2019, the company had total cash and cash equivalents of approximately $1,047.6 million compared with $1,414.1 million at the end of fiscal 2019.

Third-Quarter Fiscal 2020 Guidance

The company expects total revenues between $983.0 million and $1,006.4 million, indicating 23-26% growth from a year ago. It remains confident to deliver continued margin expansion going forward, and generate sustainable long-term value to customers and its shareholders.

Zacks Rank

New Oriental — which shares space with Laureate Education Inc. LAUR, Strategic Education, Inc. or SEI STRA and Adtalem Global Education Inc. ATGE in the Zacks Schools industry — currently carries a Zacks Rank #2 (Buy). You can the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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