New Oriental Education (NYSE:EDU) released Q2 FY2015 earnings results that included top-line growth of +13% YoY, but lower -40% QoQ somewhat due to seasonality. Second quarter revenue was at the low end of management’s earlier guidance, but beat consensus estimates. Non-GAAP earnings were approximately 0.5 USD per ADS, missing the consensus expectation of 0.07 USD. The earnings miss was due to the combination of cost pressures at the classroom level (higher pay for teachers), as well as increased general and administrative expenses, which resulted in an operating loss.

Operating metrics showed signs of some improvement, with student enrollments increasing +10% YoY and revenue per school +13% higher than Q2 FY2014.

Management’s Q3 outlook included revenue of about 287 million USD, weaker than the 293 million USD consensus estimate, reflecting growth of about +13% YoY.

Recent Quarterly Performance       FY2015  
(000) USD Q2 Q3 Q4 Q1 Q2
Revenue 208,330 254,407 287,487 393,982 236,243
Gross profit 110,856 146,640 173,668 245,506 121,642
Operating profit 664 30,655 30,780 110,521 -12,982
Net income 4,266 42,080 42,882 112,360 2,390
Earnings per share (Fully diluted, U.S. GAAP basis) 0.03 0.27 0.27 0.71 0.02
Comparison YoY          
Revenue 26% 16% 20% 1% 13%
Gross profit 30% 15% 19% -4% 10%
Operating profit n.a. 31% 26% -18% n.a.
Net income n.a. 50% 52% -11% -44%
Earnings per share n.a. 50% 52% -12% -44%
Comparison QoQ          
Revenue -46% 22% 13% 37% -40%
Gross profit -57% 32% 18% 41% -50%
Operating profit -100% 4517% 0% 259% n.a.
Net income -97% 886% 2% 162% -98%
Earnings per share -97% 883% 2% 162% -98%
Margin analysis          
GPM 53% 58% 60% 62% 51%
OPM 0% 12% 11% 28% -5%
NPM 2% 17% 15% 29% 1%

The company generated approximately 27 million USD of operating cash flow during the quarter, and spent approximately 15 million USD on capital expenditures.

At the end of Q2, New Oriental Education held approximately 1.1 billion USD of highly liquid assets on the balance sheet (cash and cash equivalents, term deposits, short term investments).

Outlook

The company’s Q3 FY2015 outlook included the following:

  • Revenue: approximately 280-290 million USD

Adjusting for the approximately 5 million USD deferred revenue charge expected next quarter, management’s Q3 revenue outlook reflects growth of about 13% YoY (20% QoQ, using an adjusted Q2).

Operating Metrics

The company reported 713 schools and learning centers at the end of Q2 (57 schools, 656 learning centers).

Financial Performance

Income Statement       FY2015  
(000) USD Q2 Q3 Q4 Q1 Q2
Revenue          
Educational program and services 188,483 228,191 236,239 361,371 211,951
Books, others 19,847 26,216 51,248 32,611 24,292
Total revenue, net 208,330 254,407 287,487 393,982 236,243
YoY 26% 16% 20% 1% 13%
Cost of revenues -97,474 -107,767 -113,819 -148,476 -114,601
Gross profit 110,856 146,640 173,668 245,506 121,642
YoY 30% 15% 19% -4% 10%
Gross profit margin 53% 58% 60% 62% 51%
Selling and marketing -36,782 -37,922 -51,666 -49,532 -44,188
General and administrative -73,410 -78,063 -94,843 -85,453 -90,436
Gain on disposal of subsidiaries     3,621 0 0
Operating profit 664 30,655 30,780 110,521 -12,982
YoY n.a. 31% 26% -18% n.a.
Operating profit margin 0% 12% 11% 28% -5%
Other income, net 9,701 11,689 14,014 16,092 16,816
Loss from equity method investment -537 -456 0 -60 -219
Pretax income 9,828 41,888 44,794 126,553 3,615
Income tax expense/benefit -5,562 192 -1912 -14,193 -1,225
Net income 4,266 42,080 42,882 112,360 2,390
YoY n.a. 50% 52% -11% -44%
Net profit margin 2% 17% 15% 29% 1%