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

EDU 
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Industry: Consumer Services
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New Oriental Education & Technology Group, Inc. ADR (EDU)

Q2 2011 Earnings Call

January 18, 2011 8:00 a.m. ET

Executives

Sisi Zhao - Senior IR Manager

Louis Hsieh - President and CFO

Analysts

Catherine Leung - Citi

Philip Wan - Morgan Stanley

Chenyi Lu - Cowen and Company

Ingrid Yin - Brean Murray

Mark Marostica - Piper Jaffray

Ella Ji - Oppenheimer

Amy Junker - Robert W. Baird

Jeff Lee - Signal Hill

Paul Ginocchio - Deutsche Bank

Brandon Dobell - William Blair

Chao Wang - Bank of America

Tracey Urdan - Samuel Hill

Presentation

Operator

Good evening and thank you for joining New Oriental’s second fiscal quarter 2011 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. Sisi Zhao. Please proceed.

Sisi Zhao

Hello everyone and welcome to New Oriental’s second fiscal quarter 2011 earnings conference call. Our second fiscal quarter earnings results were released earlier today and are available on the company’s Web site as well as on Newswire Services. Today you will hear from Louis Hsieh New Oriental's President and Chief Financial Officer. 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 US 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 statement 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's investor relations Web site at investor.neworiental.org. I would now turn the call over to New Oriental's President and CFO Louis Hsieh. Louis please.

Louis Hsieh

Thank you Sisi. Hello everyone and thank you for joining us today. I will start by taking you through the highlights for our fiscal Q2 2011 and then move to the financial results before finishing with Q&A. As you know, in Q1 2011 our business was affected by a slow down in enrollments due to disruption caused by the Shanghai World Expo and as we expected there has been a strong bounce back since the event finished, which helped drive year over year revenue growth of 56.3% to $95.7 million and an earnings increase of 65.9% to $1.8 million in the second quarter.

Q2 is typically our slowest quarter as Chinese school children go back to class for their first semester of their academic year. Nevertheless, we saw very strong year over year growth in our key business segments of K to 12 all subject after school tutoring, overseas test prep and English language training, which grew revenues by 80%, 75% and 40% respectively. Enrollments were also strong, growing by 32.2% to about 405,800 during the second fiscal quarter of 2011, demonstrating the enduring brand strength of New Oriental and the market appreciation for our convenient integrated, one-stop offerings.

Blended ASP increased as well, growing over 25% to over $250 per enrollment. New Oriental is the only truly one-stop education service provider for K to college in China with the most complete nationwide coverage and a wide range of subjects and class formats, which students can benefit from throughout their lives. We do not endeavor to direct students to one particular academic subject or class format - class formats such as one to one or one to small classes, large classes or online.

Since we offer all of the aforementioned class formats and we offer the largest selection of subjects, this is unlike many of our other training companies in China, which typically focus on one of the class formats or on one academic subject. Instead, we work with individual students to customize an academic program that best fits his or her individual needs. Furthermore, we believe our one-stop shop solution is superior to other market providers in that it offers students the convenience and continuity of remaining within the same academic system for all of their supplemental learning needs.

Our one-stop shop model also allows us to be well positioned to quickly take advantage of shifts in market trends. For example, we are currently seeing growing market demand for more personalized tutoring and enrollment in our one to one and one to five VIP classes. For the first half of fiscal year 2011 our VIP business has recorded year over year enrollment growth of more than 114% to 28,600 students and year over year revenue growth of over 240% to $55 million. These VIP classes are the primary reason for the increase in blended ASP across the business.

As you know, we have been investing heavily in the past 2-1/2 years in our K to 12 all subjects VIP programs and in fiscal Q2 we continue to expand our network and recruit the best new teachers and support staff. During the quarter we opened one new school in Luoyang, a city in Hunan province, as well as a net of 24 learning centers in 20 existing cities within our network. These new learning centers have mainly been opened in larger cities and are relatively smaller, about 1/4 to 1/2 the size of New Oriental’s typical learning centers, with between eight and 15 classrooms each.

Opening these more streamlined centers allows us to fill in the gaps in our network by targeting areas where there is growing demand for our offerings yet these areas are not large enough to cost effectively support larger learning centers. To service our expanding network and to help develop our K to 12 all subjects after school tutoring and enhance our one-stop shop product offerings, we have been hiring and training new teachers and customer service representatives.

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