New Oriental Education (NYSE: EDU) reported Q4 EPS of $0.30, $0.05 worse than the analyst estimate of $0.35. Revenue for the quarter came in at $798.5 million versus the consensus estimate of $796.71 million.

Financial Highlights for the Fourth Fiscal Quarter Ended May 31, 2020

• Total net revenues decreased by 5.3% year-over-year to US$798.5 million for the fourth fiscal quarter of 2020.
• Operating income decreased by 86.7% year-over-year to US$10.3 million for the fourth fiscal quarter of 2020.
• Non-GAAP operating income ,which excludes share-based compensation expenses, decreased by 68.3% year-over-year to US$32.5 million for the fourth fiscal quarter of 2020.
• Net income attributable to New Oriental decreased by 69.5% year-over-year to US$13.2 million for the fourth fiscal quarter of 2020.
• Non-GAAP net income attributable to New Oriental, which excludes share-based compensation expenses and gain / (loss) from fair value change of long-term investments, decreased by 49.0% year-over-year to US$48.5 million for the fourth fiscal quarter of 2020.

Michael Yu, New Oriental's Executive Chairman, commented, "As we guided in the previous quarter, the outbreak of COVID-19 pandemics around the globe starting from March posed continuing pressure on our key business lines. We saw challenges on acquiring new customers during the pandemics, and the enrollment for summer courses has also been delayed. For the fourth quarter of fiscal year, net revenue was down 5.3%, or 1% if measured in Renminbi. We see a mix of results amongst business lines. Our U-Can middle and high school all-subjects after-school tutoring business grew by approximately 1%, or 5% if measured in Renminbi. Furthermore, our POP Kids program achieved a growth of approximately 10%, or 14% if measured in Renminbi. But our overseas related businesses, including test preparation and consulting business, faced the most difficult challenges, due to cancellation of overseas exams, suspension of overseas schools and restrictions on travels. The overseas test preparation business declined by approximately 52%, or 50% if measured in Renminbi. Overseas study consulting business grew by approximately 6%, or 11% if measured in Renminbi.

Going into the spring semester, we continued to leverage our self-developed OMO (online merging offline) system to provide highly interactive small size online live broadcasting classes to all students. The refund rates from cancellations have been stabilized at a normal level while our customer retention rates from winter to spring semester and from spring to summer semester were trending higher than the same periods last year, which demonstrated our customers' satisfaction and the effectiveness of our online courses through our OMO system. As the importance of online education becomes more apparent than ever before, we put more focus on our key growth driver OMO strategy, which will enable our service to virtually reach more Chinese cities and a broader pool of students, and offer low-cost experimental online classes to attract new customers. We believe this business direction can take advantage of the digital trend and will substantially boost our enrollment rate and profitability in the coming quarters. Besides our OMO system, we also continued to make strategic investments into our dual-teacher model classes as well as new initiatives in K-12 tutoring on our pure online education platform, Koolearn.com. During the past quarter, Koolearn proactively provided free spring-semester courses which enabled a large number of new students to experience Koolearn's online large class K-12 courses, and has successfully contributed a significant increase in new customers as a result. "

Mr. Yu continued, "Looking ahead, we are also pleased to see that we have gradually resumed our offline operation in over 90% of cities that we have presence in, with a vast amount of students returning to our offline learning centers. Despite the challenges in the near term, we remain optimistic about a recovery of business in the coming new fiscal year and a brighter prospect of our business in the long run. We are certain that with New Oriental's leading brand, superior education product and system and the best teaching resources, we will continue to capture more market share with our leading position in China's huge after-school tutoring and training market and deliver long-term value for our shareholders."

Chenggang Zhou, New Oriental's Chief Executive Officer, added, "During the fourth fiscal quarter, notwithstanding the disruptions to our daily operations, we remained committed to carrying out our expansion plan and added a net of 44 learning centers in cities we currently operate in and opened one new offline training school in a new city and four new dual-teacher model schools in four new cities. By the end of this fiscal year, the total square meters of classroom area increased by approximately 26% comparing with the end of fiscal year 2019. We target to increase about 20-25% capacity for the next fiscal year. We believe our fresh offline facilities and proven scalability will prepare us to capture the market consolidation opportunity post-COVID."

Mr. Zhou continued, "In addition, our summer promotion strategy also delivered outstanding results as the promotion enrollments before the start of the summer holiday by mid-July this year reached 986,000, achieving a 20% year-over-year increase. The encouraging result indicate the opportunity we have taken to increase our market share amid market consolidation, as certain players may lack the financial and digital capabilities to sustain their operations during such difficult times. "

Stephen Zhihui Yang, New Oriental's Chief Financial Officer, commented, "For the whole fiscal year 2020, despite being faced with huge challenges from the COVID-19 pandemic, we still delivered an expansion of Non-GAAP operating margin of 70 basis points year-over-year to 12.9%, compared to 12.2% for the previous fiscal year. During the quarter, due to the continuing pressure on our topline and the increased spending from offering free classes to promote Koolearn's online large class K-12 courses, our gross margin for the quarter was 51.0%, down 500 basis points year-over-year. Our Non-GAAP operating margin for the quarter was 4.1%, down 810 basis points year-over-year, and Non-GAAP net margin for the quarter was 6.1%, down 520 basis points year-over-year. In order to minimize the negative impact on our bottom line, we actively adjusted our operational strategy and made more efforts on cost control and reducing expenditures, especially for business lines facing bigger negative impact in the near term. We believe that our continuous efforts will sustain us through the crisis and hopeful that the adverse effects on our business from the pandemic will subside gradually."

GUIDANCE:

New Oriental Education sees Q1 2021 revenue of $911.2-953.5 million, versus the consensus of $1090 million.

The impact of the COVID-19 pandemic on our operations has proven to be significant and unpredictable. Not only has the pandemic caused delays in national exams and enrollments for our summer and autumn classes, the resurgence of the pandemic in certain cities, such as Beijing, has further delayed the resumption of schools, which in turn shortened the summer holiday. Under such uncertain circumstances, with less visibility of our business performance data, we have decided to take the most conservative approach to make our forecast for the first quarter of the fiscal year 2021.

New Oriental expects total net revenues in the first quarter of the fiscal year 2021 (June 1, 2020 to August 31, 2020) to be in the range of US$911.2 million to US$953.5 million, representing year-over-year decline in the range of 15% to 11%.

The projected decline of revenue in our functional currency Renminbi is expected to be in the range of 14% to 10% for the first quarter of the fiscal year 2021.

This forecast reflects New Oriental's current and preliminary view, which is subject to change.

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