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

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New Oriental Education & Technology Group Inc. (EDU)

F4Q 2011 Earnings Call

July 18, 2011 8:00 AM ET


Sisi Zhao – Senior IR Manager

Louis Hsieh – President and CFO


Mark Marostica – Piper Jaffray

Ella Ji – Oppenheimer & Co

Philip Wan – Morgan Stanley

Chao Wang – Bank of America Merrill Lynch

Chenyi Lu – Cowen and Company

Amy Junker – Robert W. Baird

Brandon Dobell – William Blair

Fei Fang – Goldman Sachs

Jessica Zhang – Flowering Tree Investments



Good evening, and thank you for standing by for the New Oriental’s Fourth Quarter and Fiscal Year 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 now disconnect at this time.

I would now like to turn the meeting over to your host for today’s call, Ms. Sisi Zhao. Please proceed.

Sisi Zhao

Hello everyone, and welcome to New Oriental’s fourth fiscal quarter and fiscal year 2011 earnings conference call. Our financial results for this 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 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 1994. 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 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

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

Louis Hsieh

Thank you, Sisi. Hello everyone, and thanks for joining us. Today I want to discuss some of the business highlights from the last quarter and give a quick overview of some of the key financial indicators for both the fourth quarter and the full fiscal year. I’ll keep today’s discussion of the financials brief at least to leave more time for questions.

Fiscal year 2011 has been another solid year for New Oriental on all fronts. And I am very pleased to note that we are closing out this year with a stellar set of financial results. Finally, some real operating leverage improvement. In the fourth quarter, our revenues grew by 58.7% while profits grew by 147.8% year-over-year. GAAP operating margin improved about 340 basis points to 7.6% for the quarter and would be up more than another 100 basis points if you exclude the disposal loss from the divestments of Mingshitang School and Tomorrow New Oriental – sorry Tomorrow Oriental. These impressive metrics are particularly pleasing because they really underscore the success of our strategy throughout the second half of fiscal year 2011 to harvest the benefits of our earlier expansion efforts and improve on bottom line performance through expense controls.

As you know in fiscal year 2009, 2010 and the first half of fiscal year 2011, we placed a stronger participant network expansion to roll out our new U-Can all-subjects training program for middle and high school students and our VIP services with one to maximum five students per class across China. As a result, in the past three years, we have grown schools and learning centers from 207 as of May 31, 2008 to 487 at the end of May 2011. However as I noted on last quarter’s call, in the second half of fiscal 2011 we have shifted our focus towards raising operational efficiencies across the networks in controlling costs.

So in the last quarter, we expanded at a deliberately more moderate pace, opening three new schools in the cities of Huaihua, Jilin and Guodong [ph] adding a net of 29 learning centers in existing cities. That compares a 43 learning centers opened in the same quarter of last year. Despite the slower pace of expansion, our fourth quarter results shows sustained rapid growth in revenues and profits even against very challenging comps from the fourth fiscal quarter of 2010 where revenues were up 46%, net income up 119%, enrollments up 32% compared to the same period in 2009.

We achieved this by raising operational efficiencies to better learning center utilization, a process that’s eased into our ongoing commitments to control expenses. Look at marketing cost, for example, as our recent quarter – as our recently opened facilities have become established in the local communities, they can rely less on marketing and promotion and more on reputation and word of mouth to drive enrollments which in turn allows reduced marketing costs. In fact, selling and marketing expenses for the fourth quarter increased by less than 30% year-over-year and direct actual brand promotion expenses increased by just 14% year-over-year while our top line grew by over 58%.

At the same time with more students in each classroom in these recently opened schools, we have enabled to improve utilization and efficiency against fixed cost. In line with this, we have also been able to successfully control headcount increases. We added a net of about 780 employees this quarter compared with 2,200 in the same quarter last year. Most of the new additions were teachers as opposed to administrative staff. We ended our 2011 fiscal year with about 22,100 total headcounts of which over 11,700 were teachers. But even though we continued to keep spending down in the last quarter, the success of our existing and recently opened facilities is driving very strong growth across our businesses particularly in our core business lines such as overseas test preparation, U-Can all-subjects training and POP Kids programs.

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