New Oriental Education (EDU) Misses Q1 EPS by 13c; Will Launch 'Optimize the Market' Strategy

New Oriental Education (NYSE: EDU) reported Q1 EPS of $0.73, $0.13 worse than the analyst estimate of $0.86. Revenue for the quarter came in at $394 million versus the consensus estimate of $417.2 million.

Operating Highlights for the First Fiscal Quarter Ended August 31, 2014

• Total student enrollments in academic subjects tutoring and test preparation courses decreased by 3.4% year-over-year to approximately 888,400 for the first fiscal quarter of 2015.
• The total number of schools and learning centers was 711 as of August 31, 2014, down from 713 as of August 31, 2013, and an increase of 8 compared to 703 as of May 31, 2014. The total number of schools was 56 as of August 31, 2014.

Update on Strategic Initiatives and Go-Forward Growth Strategy

During the last five years, New Oriental's "Occupy the Market" and "Harvest the Market" strategies helped the Company grow and perform very well at various stages in the evolution of its business. More specifically, these initiatives allowed for aggressive growth of both revenues and profitability given well-timed strategies and areas of focus. As a result, New Oriental achieved major milestones by the end of the recently concluded fiscal year 2014, a period during which the Company achieved over $1.1 billion in revenue for the first time and record high net income of over $215 million.

Looking to the future, it is clear that in order to optimize market opportunities and achieve sustainable and balanced growth overall, the Company must again recalibrate slightly and take certain focused steps to cultivate new driving forces for its business growth going forward. At the same time, New Oriental's online education initiatives, which aim to establish an online and offline integrated education ecosystem, are off to a great start.

Therefore, starting in fiscal year 2015 the Company will launch its "Optimize the Market" strategy, transitioning to a focus on maintaining a healthy balance between top-line and bottom-line growth as well as meeting the growing demand for online education services in China. The Company will execute new initiatives to develop both the core offline and online businesses in order to reinforce New Oriental's strong market position, gain new market share, drive the top line, and maintain the solid margin expansion that occurred in the last fiscal year.

Michael Yu, New Oriental's Chairman and Chief Executive Officer, commented, "The start of the new fiscal year was challenging as expected and previously communicated to the market. Our lower-than-expected revenue growth of 1.4% year-over-year was mainly due to several challenges in the first fiscal quarter of 2015. First, our English summer camp and dorm tutoring classes for middle and high school students in the first fiscal quarter decreased by approximately 30% year-over-year. In addition, our Adult Comprehensive English enrollments decreased 31% year-over-year. This was mainly due to the uncertainty about the implementation of the new policies released earlier this year relating to the English test for Gaokao (China's college entrance exam). The new Gaokao guideline was formally announced by the government just last month, which provided some clarity on how the reform will be carried out. From the new Gaokao guidelines, we see many opportunities we are poised to capture, and we believe that it will boost the demand for our business and benefit New Oriental in the long-term. Lastly, we are still in the midst of revamping our POP kids program and experienced 9% revenue decrease year-over-year. As our new POP Kids program will be rolled out across our school network in the months ahead we hope to reverse recent declines and return to sustained growth in this important business segment in the second fiscal quarter of 2015."

Mr. Yu continued, "Starting in fiscal year 2015, we have decided to shift from our 'Harvest the Market' strategy to an 'Optimize the Market' strategy that will allow us to focus equally on driving both top-line and bottom-line growth. As a start, in the first fiscal quarter, we increased our penetration in existing markets by adding capacity in cities where we are experiencing rapid growth and strong profitability. We added a net of eight learning centers and expanded some existing learning centers by adding a total of 3,800 square meters of additional classroom area. In addition, we will continue to make aggressive efforts to build our online and offline integrated education ecosystem. As the clear market leader in K-College online education market in China we were pleased to see a 180% increase in online users to over 410,500 and a 51% increase in paid online enrollments to over 50,400 in the first quarter. We now have approximately 9.6 million cumulative online registered users, multiples more than any other online education company in China. We believe that with these comprehensive approaches, supported also by our strong business fundamentals, we will continue to enhance our clear leadership position in China's education market."

Louis T. Hsieh, New Oriental's President and Chief Financial Officer, commented, "Although we had a disappointing first fiscal quarter for the reasons stated previously, we are encouraged by a nice rebound in late July and August as evidenced by our deferred revenue balance (which is cash collected from registered students for courses and recognized proportionally as revenue as the instructions are delivered) at the end of the first fiscal quarter of US$398.9 million, an increase of 23.2% as compared to US$323.7 million at the end of the first quarter of fiscal year 2014."

For earnings history and earnings-related data on New Oriental Education (EDU) click here.

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