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

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

Q1 2011 Earnings Call

April 27, 2011 8:00 am ET

Executives

Sisi Zhao – Senior Investor Relations Manager

Louis Hsieh – President and Chief Financial Officer

Analysts

Catherine Leung – Goldman Sachs & Co.

Philip Wan – Morgan Stanley

Mark Marostica – Piper Jaffray

Ella Ji – Oppenheimer & Co.

Chenyi Lu – Cowen and Company

Jeff Lee – Signal Hill Group LLC

Tom Dillon – William Blair & Company

Chao Wang – Bank of America Merrill Lynch Global Research

Eric Wen – Mirae Asset Securities (HK) Limited

Vivian Hao – Credit Suisse

Presentation

Operator

Good evening, and thank you for standing by for New Oriental’s Third Fiscal Quarter 2011 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. Please proceed, ma’am.

Sisi Zhao

Hello, everyone, and welcome to New Oriental’s third fiscal quarter 2011 earnings conference call. Our third fiscal quarter earnings results 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 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 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 views 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 website at investor.neworiental.org.

I’ll now turn the call over to New Oriental's President and Chief Financial Officer, Louis Hsieh. Louis, please.

Louis Hsieh

Thank you, Sisi. Hello, everyone, and thanks for joining us today. I will start by taking you through the highlights for our fiscal Q3 2011 and then move on to the financial results before finishing with Q&A.

We’re pleased to report strong results for this quarter and particularly excited that we are reporting excellent performance on both the top and bottom lines. Especially pleasing is the growth in our GAAP profit margin, which improved to 17.6% from 15.5% in the year-ago period, which reflects a successful implementation of the expense control initiative that we outlined last quarter.

We placed at the end of the Q2, we placed a very strong emphasis in Q3 on improving utilization of our existing facilities and staff, and scaling back to expenditures on new facility, staffing and marketing. In addition to improving utilization of our existing facilities, these efforts have enabled us to increase profits by 68.1% year-over-year for Q3 on top of a very healthy revenue growth of 48.6% year-on-year.

A core focus for expense control during the last quarter has been a prudent approach to expanding our facilities. In Q3, we only added one new school in Nantong city, Jiangsu province and a net of eight learning centers in seven existing cities. Whereas in the previous three quarters, we had built 43, 35 and 24 new schools and learning centers respectively. As of February 28, 2011, we had a total of 456 schools and learning centers nationwide versus 447 in the previous quarter.

While we have slowed down the pace of expansion, this should not be interpreted and mean that we are missing out on the market growth opportunity. Having very successfully extended our network of schools and learning centers during previous quarters, we have ensured that we already have a very strong presence in the key markets where we want to be.

So our focus in Q3 for the coming quarters is on improving our utilization and improving [class] offerings in these facilities it will enable us to improve operating efficiencies.

In Q3, we have also kept a firm hand on headcount increases, in particular of non-teaching staff. Naturally, we continue to focus on hiring, training and retaining the most talented teachers in the industry to ensure that we consistently provide the best-in-class service quality at New Oriental students have to come to expect from us. But as we do so, we have also been very conscious of the need to improve internal efficiencies so that we control the number of non-teaching staff we hired. As a result of this effort, in Q3, we added a net of 4 -600 employees, of whom the vast majority or about 470 were teachers.

This emphasis on achieving HR efficiency extends to existing staff as well as new hires. In Q3, we effected more than 1460 terminations, both voluntary and voluntary. At the end of the quarter, we had a total headcount of about 21,300 including about 11,300 teachers.

Another important driver of our improved margin last quarter was our strict control over marketing expenses in Q3. Marketing cost totaled $18.3 million, which is down significantly from $23.3 million in the first quarter of fiscal quarter 2011, and also less than the $18.6 million we spend in Q2. Of our total marketing spend last quarter, only about $7.5 million was non-headcount related or direct marketing or direct brand promotion spending and this represent an increase of only 12% or approximately $6.7 million in the same period last year.

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