New Oriental Education & Technology Group Inc. (EDU)
Q1 2013 Earnings Call
October 29, 2012, 08:00 am ET
Sisi Zhao - Senior Investor Relations Manager
Louis Hsieh - President & CFO
Philip Wan - Morgan Stanley
Mark Marostica - Piper Jaffray
Jinkyu Yoon - Nomura
Steve Zhang - Macquarie
Ella Ji - Oppenheimer
Vivian Hao - Deutsche Bank
Jeff Meuler - Baird
Chao Wang - Merrill Lynch
Tian Hou - T.H. Capital
Previous Statements by EDU
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I would now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao.
Hello everyone, and welcome to New Oriental’s first 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 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 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 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.
Thank you, Sisi. Hello everyone and thank you for taking the time to join us today. We at New Oriental would like to take a moment to wish all of you on the US East Coast well as Hurricane Sandy approaches. Please stay inside, stay dry and stay safe.
Now back to business. We are pleased that we maintained topline growth in the first quarter against tough comps from a year ago when revenues were up 41% and net income was up 45% year-over-year. We continued expansion into rapidly growing second and third tier cities and strengthen our market leading position. And we've shown tremendous versatility in terms of the reach of our network in a variety of our program offerings and an ability to ramp up utilization in our new facilities and locations. We continue to be resilient in the slowing macro economy in China as New Oriental brand name is as strong as ever.
Our focus going forward will be on a better management of our crucial network expansion to ensure we are growing in a profitable manner. A key part of this is moving from our Occupy-the-Market strategy which allowed us to double the centers in just over two years from 367 to 726 as of August 31, 2012. We are now shifting to harvest the market strategy that focuses on increasing utilization at learning centers and driving profitability; more on this in a moment.
Results of the quarter were a bit disappointing. Total revenues increased 25.8% year-over-year to $336 million and we added a net of 62 learning centers largely in high growth lower tier cities. Enrollment growth was 11.3% which is slightly lower than anticipated. We believe that part of the enrollment softness can be attributed to a slowdown in Beijing and Shanghai schools as the China macro economy slowdown effects consumer discretionary spending like education even though education is more resilient than normal consumer discretionary category. Furthermore, enrollments from our Chinese College English Test Level 4 and 6 actually declined almost 20% year-over-year from about 97,000 last year to 78,000 this past quarter.
Finally, the negative media coverage and negative publicity in the aftermath of the baseless and false allegations made by short seller Muddy Waters on July 18th certainly hurt our reputation and contributed to student enrollment softness. The good news is that New Oriental has been a subject of very positive Chinese media coverage after we filed our Annual Report on Form-20F on October 12th and a clean auditor’s opinion from Deloitte Touche Tohmatsu and no historical accounting or financial restatement.
The Special Committee’s investigation by Independent Counsel Simpson Thacher who was assisted by before forensic auditor, Ernst & Young and leading PRC counsel, Commerce & Finance concluded no substantive basis for the main Muddy Waters allegations.
Now that we've been effectively exonerated media coverage has been much more positive and we are confident that there won't be any long-term impact on New Oriental’s reputation, which for years has been second to none in the education sector.
Year-on-year net income growth was just 5.7%, which was very disappointing. This was partly the result of poor performance in Beijing and Shanghai as well as investment in our network expansion and we incurred significant expenses related to the SEC investigation and defending ourselves against the Muddy Waters unfounded allegations.
In the first fiscal year of 2012, we were still focused on building our presence in high growth lower tier cities and we are pleased that the new centers we have in these areas are making an immediate contribution to the topline. Revenue from second and third tier cities grew 35% in Q1 which gave us a sense of both the speed of our expansion and how quickly we have been able to utilize new learning centers. As I mentioned before, the new additions are performing, are predominantly centers of 500 square meters or less which tend to come online quicker and are generally profitable within a year.