New Oriental Education & Technology Group, Inc. (EDU)

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New Oriental Education & Technology Group Inc. (EDU)

F2Q 2013 Earnings Conference Call

January 29, 2013 08:00 ET

Executives

Sisi Zhao - Senior Investor Relations Manager

Louis Hsieh - President and Chief Financial Officer

Analysts

Philip Wan - Morgan Stanley

Jeff Meuler - Baird

Mark Marostica - Piper Jaffray

Ella Ji - Oppenheimer

Jin Yoon - Nomura

Steve Zhang - Macquarie

Fei Fang - Goldman Sachs

Vivian Hao - Deutsche Bank

Presentation

Operator

Good evening and thank you for standing by for New Oriental’s Second Quarter of Fiscal Year 2013 Earnings Conference Call. At this time, all participants are in a 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. Sisi Zhao. Thank you. Please go ahead.

Sisi Zhao

Hello everyone, and welcome to New Oriental’s second quarter of fiscal year 2013 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, you will hear from Louis Hsieh, New Oriental’s President and CFO. After his prepared remarks, Louis 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 view expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental does not undertake any obligation to update any forward-looking statements, except as required under applicable laws. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on New Oriental’s Investor Relations website at investor.neworiental.org.

I will now turn the call over to New Oriental’s President and CFO, Louis Hsieh. Louis, please.

Louis Hsieh

Thank you, Sisi and thanks everyone for joining today’s call. We once again posted healthy revenue growth this quarter. Our bottom line performance was lower however, largely as a result of a slower performance in Beijing and Shanghai as well as cost and expense overhang following the aggressive network expansion we undertook in the last few quarters of fiscal year 2012.

As we flagged last quarter, we are now focused on pursuing a Harvest the Market strategy meaning our priority is to maximize utilization in our existing network. It’s important to note that in the four quarters prior to Q2 of this year during our Occupy the Market phase of our expansion, we added a net of 238 learning centers compared to just 86 in the four quarters before that. Headcount during that period increased by almost 10,000 from approximately 24,500 to 34,300. So, this gives you a sense of the cost pressure we are dealing with, but it will take some time to fully realign our cost structure and bring ourselves back to more acceptable levels of profitability.

We are confident as ever in the strength of the New Oriental offering and we are confident about our long-term future. In fact, our Occupy the Market strategy seems to have achieved its intended purpose benefiting New Oriental’s market position making us number one or number two in most key geographic markets where we have been established for over five years. And deterring most of our public and private company competitors from entering our key geographic markets are slowing their expansion plans.

Before we go through the business lines, I want to first give you a bit more color on our bottom line for the quarter. In line with our Harvest the Market strategy, we added a net of just 18 new schools and learning centers this quarter. Beginning in late October 2012, all new learning centers openings required the approval of my finance department and we will strictly control the number of new center openings. Almost all the 18 learning centers opened in the quarter occurred before the new approval process. During the quarter, we have started a strict headcount review school-by-school and department-by-department in an effort to reduce staff cost.

During the quarter, we were able to reduce headcount by around 1500 staffs. While this will aid long-term efficiency, we incurred additional severance cost in the short-term related to these reductions. In the next two quarters, we’ll look to reduce headcount by another 1,000 to 1,500 mainly in the administrative side, which will mean additional severance expenses. It will take a couple of more quarters for these measures to bear fruit on the bottom line.

Another reason for the slower bottom line this quarter was the continued slowdown in Beijing and Shanghai. There are a few reasons for this. As I have said, as our network outside these cities have grown many students who previously have attended our classes in Beijing or Shanghai are now opting to go to the New Oriental learning centers in their local areas, where they can get a comparable level of education. So, that is one factor. And second is that we are still working on integrating the new management teams that we have put in place in Beijing and Shanghai. We are confident that we are making progress here, but it’s going to take a couple of more quarters before we get to where we want to be. And on top of that, we are also seeing increased competition in these largest two cities. So, it’s a tough market in Beijing and Shanghai right now, but we are balancing this out by investing in Tier 2 and Tier 3 cities.

Read the rest of this transcript for free on seekingalpha.com