Earnings Review: New Oriental passes the test but costs are high
- Reaction to New Oriental's results was mooted despite beating expectations
- Its customer loyalty program aided results
- The high enrolment figures for the quarter are slightly misleading
- Operating expenses are growing due to higher R&D costs
Headline results beat
New Oriental posted revenue of $328.8 million, which beat management’s guidance midpoint of $327.8m and analysts’ consensus of $326.8m. This represented 14.3% sequential growth and 14.4% annual growth.
The company announced revenue guidance of between $441.3m and $457m for the fiscal first quarter, which implies sequential growth of between 34.2% and 39%, and annual growth of between 12% and 16%. This suggests that investors will see a continuation of the slower revenue growth that dogged the fiscal year 2015.
Student enrolments appear to show big increase
The fiscal first quarter is typically when New Oriental experiences strong student enrolment growth, but the firm posted a 29.9% sequential increase to 783,400 during the fourth quarter. It should be noted that due to the late timing of the Chinese New Year, which concluded at the end of the fiscal third quarter in February, the firm didn’t record the post-New Year enrolment growth that it typically does. However, it was instead recorded in the fiscal fourth quarter, at the start of March, hence why New Oriental posted the notably high enrolment figures for the quarter.
As you can see, the fiscal third quarter is typically the second strongest of the year, compared to the weakest being in the fiscal second quarter. The average combined increase in student enrolment numbers in the third and fourth quarters over the second quarter is approximately 120,000 over the past three years, and 150,000 when the unusually low 2014 figure is excluded. 2015 saw a combined increase of 143,400, so the large enrolment number isn’t as impressive as it initially seems.
Fiscal year 2016 should see a return to standard enrolment trends, and this should allow investors to see the true performance of the different business segments. The K-12 after-school tutoring business saw 57% enrolment growth during the quarter, and 21% revenue growth, but this growth was distorted by the enrolment growth during the quarter.
Growing operating expenses may be a concern
The firm has been focusing on building out its online and O2O services, but this has caused a notable increase in R&D costs. Operating income fell 26.9% annually to $22.49m. This is a disappointing result for the firm, as it had been increasing its operating income over the past three ears.
I have long been bullish over New Oriental’s partnership with Tencent, which has seen the release of an English learning app called uDa, specifically for the Gaokao (Chinese university entrance exam). The intention is to launch a similar app for each Gaokao subject.