Prepared remarks
Good evening, and thank you for joining New Oriental's FY 2026 First Quarter Results Earnings Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I'd like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao.
Thank you. Hello, everyone, and welcome to New Oriental's First Fiscal Quarter 2026 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, Stephen Yang, Executive President and Chief Financial Officer; and I will share New Oriental's latest earnings results and business updates in detail with you. After that, Stephen and I 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 U.S. 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 law. 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'll now first turn the call over to Mr. Yang Stephen. Please go ahead.
Thank you, Sisi. Hello, everyone, and thank you for joining us on the call. Before diving into the details of our first quarter results, I would like to share that after periods of testing and trialing various business models and offerings, formulating the right strategy and direction for New Oriental. We're pleased to see that the company has now entered a stable growth trajectory. This quarter, we recorded an encouraging set of results that exceeded our expectations, mainly driven by our strong capabilities, enhancing operational resilience and sustainable profitability. This quarter's total net revenue has increased by 6.1% year-over-year. Bottom line-wise, we're delighted to see that our efforts to manage costs and streamline efficiency have yielded tangible success with non-GAAP operating margin reaching 22% this quarter, representing a year-over-year improvement of 100 basis points. Our key remaining business remains solid, while our new initiatives have continuously demonstrated positive momentum. Breaking it down for the first fiscal quarter of 2026. Overseas test prep business recorded a revenue increase of about 1% year-over-year. Overseas study consulting business recorded a revenue increase of about 2% year-over-year. Our adults and university students business recorded a revenue increase of 14% year-over-year. At the same time, our continued investments in new education business initiatives primarily centered on facilitating students' all-around development have delivered consistent progress, further driving the company's overall momentum. Firstly, the non-academic tutoring business, which focuses on cultivating students' innovative ability and comprehensive qualities, has now been rolled out to around 60 cities. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of this business. Secondly, the intelligent learning system and device business, which utilize our past teaching experience and data technology to provide personalized and targeted learning and exercise content to improve students' learning efficiency, has been tested in around 60 existing cities. We're encouraged by the improved customer retention and scalability of these new initiatives. The top 10 cities contribute over 50% of this business. In summary, our new educational business initiatives recorded a revenue increase of about 15% year-over-year for the first quarter of 2026. Moving to the integrated tourism-related business line and breaking it down, both domestic and international study tours and research camps for K-12 and university students were conducted across 55 cities nationwide, with the top 10 cities contributing over 50% of our revenue. In parallel, we provide a series of premium tourism offerings primarily designed for middle-aged and senior audiences across 30 featured provinces in China and internationally. Our product range has also been expanded to now include cultural travel, China study tours, global study tours, and camp education. With regard to our OMO system, our efforts in developing and revamping our online merging with offline teaching platform continued. These efforts aim to deliver more advanced and diversified education services to our customers of all ages. A total of $28.5 million has been invested during the quarter to upgrade and maintain our OMO teaching platform. Beyond OMO, we continue to focus on our venture in AI. Our newly launched AI-powered intelligent learning device and smart study solution mark significant steps in our ongoing pursuit to transform education through technology. Encouraged by the positive market feedback, we have been and will continue to refine and embed AI across our offerings to strengthen New Oriental's core capabilities. Simultaneously, we're also leveraging AI to streamline internal operations, thereby boosting efficiency and providing enhanced support for our teaching staff. As an industry leader, we're dedicated to driving long-term revenue growth through a dual focus on product innovation and operational efficiency. In upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investments in AI. Now with regards to East Buy's performance. In fiscal year 2026, East Buy strategically invested in its private label portfolio centered around the promise to deliver products that are healthy, high quality, and good value for money. As we enrich East Buy's product categories, our blockbuster offerings, namely the nutritious food product line, have particularly stood out. We have strengthened our capability through rigorous end-to-end quality management from sourcing to after-sales service, which resulted in greater market recognition for our private label products. During the reporting period, East Buy further advanced its app and membership platform, connecting our loyal customer base to premium products and services. As the business continued to evolve steadily, East Buy has intensified its focus on improving operational efficiency and profitability metrics to align closely with the group's corporate strategy.
Thank you, Stephen. Now I'd like to share our key financial details for this quarter. Operating costs and expenses for the quarter were $1,212.2 million, representing a 6.1% increase year-over-year. Cost of revenues increased by 9.3% year-over-year to $637.8 million. Selling and marketing expenses increased by 3.6% year-over-year to $200.6 million. General and administrative expenses increased by 2.4% year-over-year to $373.8 million. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 239.8% to $23.3 million in the first fiscal quarter of 2026. Operating income was $310.8 million, representing a 6% increase year-over-year. Non-GAAP operating income, excluding share-based compensation expenses and amortization of intangible assets resulting from business acquisitions, was $335.5 million, representing an 11.3% increase year-over-year. Net income attributable to New Oriental for the quarter was $240.7 million, representing a 1.9% decrease year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $1.52 and $1.50, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $258.3 million, representing a 1.6% decrease year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $1.63 and $1.61, respectively. Net cash flow generated from operations for the first fiscal quarter of 2026 was approximately $192.3 million, and capital expenditure for the quarter was $55.4 million. Turning to the balance sheet. As of August 31, 2025, New Oriental had cash and cash equivalents of $1,282.3 million, $1,570.2 million in term deposits and $2,178.1 million in short-term investments. New Oriental's deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the service or goods are delivered at the end of the first fiscal quarter of 2026, was $1,906.7 million, an increase of 10% as compared to $1,733.1 million at the end of the first fiscal quarter of 2025. Now, I will hand over to Stephen to go through our outlook, guidance, and our new shareholder return plan. Stephen?
Thank you, Sisi. Following a strong start to the fiscal year, we're optimistic about further improving our margins and operational efficiency while staying committed to effective cost control and sustainable profitability across all our business. As part of these efforts, we are taking a thoughtful and strategic approach to capacity expansion and hiring, ensuring that we continue to grow without compromising the quality of our offerings. We plan to increase our presence in cities with stronger top-line and bottom-line performance last year while carefully managing resources. Rest assured, we will closely monitor the pace and scale of new openings, aligning them with local official needs and financial results throughout the year. Guidance-wise, we expect total net revenue for the group, including East Buy, in the second quarter of fiscal year 2026, September 1, 2025, to November 30, 2025, to be in the range of $1,132.1 million to $1,263.3 million, representing a year-over-year increase in the range of 9% to 12%. In the second quarter, we project a notable acceleration of revenue growth in the K-12 business, driven by our enhanced service quality, which has led to steady year-on-year and quarter-on-quarter improvement in student retention rates. As for the full fiscal year 2026, we are very confident that our previously provided guidance of total net revenue for the group, also including East Buy will be in the range of $5,145.3 million to $5,390.3 million will be realized, representing a year-over-year increase in the range of 5% to 10%. As part of our appreciation for our shareholders' unwavering support, we today announced that the shareholder return plan for fiscal year 2026 has begun. The Board of Directors has approved an ordinary cash dividend and a new share repurchase program. Regarding the ordinary share dividend, the ordinary cash dividend of $0.12 per common share or $1.20 per ADS will be paid in two installments with an aggregate amount of approximately $190 million. The first installment of $0.06 per common share or $0.60 per ADS will be paid to holders of common shares or ADS recorded as of the close of business on November 18, 2025, Beijing and Hong Kong time and New York time, respectively. The second installment of $0.06 per common share or $0.60 per ADS is expected to be paid around six months after the payment date of the first installment to holders of common shares and ADS of the record date to be further determined by the Board of Directors. Details of the second installment will be announced in due course. Regarding the share repurchase program, pursuant to the new share repurchase program, the company may repurchase up to $300 million of its ADS or common shares from the open market over the next 12 months. To conclude, New Oriental remains committed to our trajectory of sustainable growth, delivering premium offerings to our customers and sharing the fruits of our success with our shareholders. We're also in close collaboration with the government authorities in various provinces and municipalities in China, ensuring compliance with the relevant policies, guidelines, and any related implementations, regulations, and measures, and adjusting our business operations as required. This is the end of our fiscal year 2026 Q1 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you.
Questions and answers
We will now take our first question from Felix Liu at UBS. Please go ahead, Felix.
I'm glad to hear that you're expecting a significant acceleration in your K-12 business in the upcoming quarter. There were previously market concerns about increased competition, particularly over the summer. Could management explain the current competitive landscape in K-12? Have you made any adjustments to your strategy? What do you consider a reasonable level of sustainable growth for your K-12 business in the mid- to long-term?
Thank you, Felix. First of all, I'm very happy to see the revenue growth acceleration in our K-12 business since Q2. As you know, started in Q1 and even for the whole year, I think our target is to enhance our quality of product and service in K-12 business. And I think since Q2, we will see good results. I think the better quality drives the student retention rate up after the summer. So, that means more and more students chose our Q2 course and also the better word of mouth attracts new student enrollment of our autumn classes. Yes, as you know, we faced some competition pressure in the summer, because some competitors were using the low price or even the free course strategy. But now we are happy to see students came back to New Oriental to enroll in our classes in autumn. So, that's why we raised the guidance for the K-12 business. So, let's divide the K-12 business one by one. We expect the K9 new business revenue growth will be around 20% year-over-year growth in Q2. For the high school business, I think in Q2, the growth rate will return to double-digit growth. You will see the revenue acceleration since Q2. The high student retention rate and better word of mouth will drive the revenue growth acceleration. I believe the revenue growth acceleration will continue since Q2 and throughout the year. For the whole year, 2026, I expect the K9 business year-over-year growth will be over 20%. For high school, we anticipate double-digit growth. Our strategy is correct because the student retention rates for primary, middle, and high school students are getting higher year-over-year.
Our next question comes from the line of Alice Cai from Citibank.
I have two quick questions. First on SBC. It jumped a lot to $23 million this quarter. I'm wondering what drove this increase and what's the outlook? The other increase, $21 million, would you break down what the driver is for the SBC?
Yes, Alice, your question is about share-based compensation. In the second half of last fiscal year, we granted ADS shares to management, staff, and teachers for the next three years, which has contributed to the increase in share-based compensation. Therefore, the share-based compensation this quarter is higher than last year.
Yes. You can roughly estimate going forward, every quarter, the SBC expenses will be similar to this quarter and at this kind of level for the coming several quarters.
Yes. Typically, the first year we record more SBC expenses, and then we will see less in the second and third years.
We will now take our next question from the line of Lucy Yu from Bank of America Securities.
Stephen, I have a question on overseas. It looks like overseas has been stronger than your earlier expectation. Could you please break down the test prep growth by age and also the consulting growth breakdown by subsegment? How should we think about the overseas sustainability growth? And will that impact your guidance for the full year?
Yes. Regarding the overseas-related business, as you know, we were adversely affected by the external environment. Last quarter, we guided in Q1 that the revenue of the overseas-related business would be down by 5%. But in Q1, I think overseas test prep still grew by 1%. The overseas consulting business grew by 2%. I think we will strive to minimize the negative impact going forward. In Q2, we still guide that the overseas-related business will be down by low single digits. We are still using a conservative method to make the forecast. I believe we can minimize the impact and do better than our guidance.
Stephen, just to follow up. So for example, your test prep is positive. So by age group, like younger age, high school, and college students, which one of them is better than expected? And also for the consulting business, I believe that 60% is around pure consulting and the other 40% is background raising. So which part of that is better than expected?
Within the overseas test prep, the younger age students' business grew very fast, even more than 25% year-over-year. That's why the makeup of the adults or even college students' business is down. Within the overseas consulting business, I think the non-U.S. and U.K. business, especially for the Asia country consulting business and the background improvement business still grew very fast. So as a whole, I think the overseas test prep and consulting business, we will still give the guidance for a 4% to 5% down year-over-year. But I believe we will do better than our guidance, Lucy.
Our next question comes from the line of D.S. Kim from JPMorgan.
I wanted to ask why the share price is down 6% or 7% pre-market, but I guess that's a question for the market rather than for you. I do have a question about the shareholder return policy, if that's alright. How should we think about the policy going forward? Is it based on your projected or budgeted net profit and payout ratio, or is it more aligned with our expectations on cash flows? I'm asking because, based on my own estimated GAAP EPS, it appears that what you've announced represents about a 100% payout, with around 40% allocated to dividends and 60% to buybacks based on my GAAP net profit or EPS. Should we anticipate a similar approach going forward, meaning we could maintain a payout of over 50% as you've guided, but potentially aim for a 100% payout based on this earnings and payout? Or should we consider the buyback as a one-time action for the current year due to the low stock price, expecting only a 50% payout in the future? Can you clarify how we should approach the payout ratio or shareholder return going forward?
Thank you, D.S. It's a good question. Last quarter, our Board approved a 3-year shareholder return plan. We announced earlier today that we paid a $190 million dividend, which amounted to 50% of the net profit generated last year, combined with the $300 million new share buyback program. So let's do the math. The payout ratio this year is over 130% if you compare the capital allocation with the net profit we made last year. The dividend plus the share buyback yield is over 5%. Going forward, next year, I think the dividend we will pay will be regular. The $300 million share buyback we announced this year is not a one-time event. I will discuss with the Board to push for a sustainable capital allocation program. We will keep a high level of the payout ratio and yield, as we still see a top-line growth of 10% or more, generating higher margins and piling up our cash. The Board supports management to allocate more capital to investors. That's why we announced this 3-year shareholder return plan. We will aim to pay more next year.
If I may follow up just on that part, just to clarify, when I said 100%, that was based on fiscal year '26, my EPS. Because the wording of the announcement says this is a dividend for fiscal year 2026. But based on what you say, shall we, going forward, expect that, like, what you announced is actually coming out of fiscal year '25 earnings and what you are going to announce next year will be coming out of fiscal '26? So will there be a one-year delay? Is that how we should think about it? Or I guess, it's all flexible, but just wanted to get your thoughts.
I think this is our internal policy. We make the calculation based on last year's net profit. Last quarter, we announced that we paid no less than 50%, and eventually, we paid about 30%. Next year, we will calculate based on the net profit we made in fiscal year 2026, and we will do the same thing.
I think that's actually much, much better than what I had expected. So, I am again wondering why the stock is down 6%, not up 6%. But anyway, let's see how it goes.
Next question comes from the line of Yikun Zheng from Citic.
Congratulations on the strong results. My question is regarding the operating margin. Since the operating margin in Q1 is quite good, I'm not sure if it was mainly due to the cost reduction plan or some other reasons? And how can we expect the contribution of the cost reduction plan for the next season or for the full year? And how do we expect the operating margin for the full year?
It's a good question about margin. Let us start the margin analysis of Q1 this quarter. Even though we meet some margin pressure from the slowdown of the overseas-related business, we still got the group margin expansion by 100 basis points in Q1. The margin expansion was mainly driven by better utilization, operating leverage, cost control, and profit contribution from East Buy. As you know, we started implementing cost control since March last fiscal year. We have seen good results. I think it will help the margin expansion even in the rest of the year. Looking ahead into Q2 margin guidance, we are quite optimistic about margin expansion for the whole group in Q2, meaning both the core business and East Buy business margins will improve in Q2. I believe the margin expansion in Q2 will be greater than that of Q1. Regarding the margin outlook for the whole year, the whole group is focusing on profitability across all business lines. We are implementing cost control across all business lines. We hope to achieve margin expansion for the group for the whole year.
We'll take our next question from the line of Elsie Sheng from CLSA.
Congratulations on the very good results. I have a quick question on the tax rate because I noticed that the tax rate in the first quarter is higher. Could you let us know what we should look at the tax rate in the next quarter and also for the full year?
In Q1, I think the situation is special because even since the second half of last year and Q1, we paid dividends from the WFOE to ListCo. We needed to pay the withholding tax to the tax bureau. So, it drove the effective tax rate up in Q1 to 27%. Typically, we pay around 25% ETR. Going forward, we will likely pay more dividends from WFOE to ListCo. This year, I think the effective tax rate will be higher than last year or normal. But I think the reason is that, as we announced earlier today, we raised the capital allocation to investors roughly $490 million as the total capital allocation, so we need more dollars. That's why it drives the effective tax rate up.
We now take our next question from Timothy Zhao from Goldman Sachs.
My question is regarding the Q2 K9 new initiatives. When I look at the enrollment growth for this quarter, I still noticed a pretty big gap between the non-academic tutoring and the intelligent learning system and devices. Just wondering, can we use that gap to model the revenue growth gap between these two segments for the first quarter or the second quarter? And do we think that this gap may sustain going forward, given I think for the intelligent learning system, I think it's a very good business. It's probably also margin accretive to you.
I think the growth rate of the revenue in the junior high school business is a little bit faster than that of the primary schools business. First of all, it's at a lower base than the younger kids' business. Secondly, we have invested a lot of efforts and resources in the last three to four years to open new business in the middle school segment. The entire team has contributed significantly to provide better products to the customers, and the students love the new product. That's why the revenue growth is better. Going forward, I believe the revenue growth of the middle school business will be a little bit higher than that of the kids' business. Overall, for K9 new business growth, you saw our guidance for Q2 and even for the whole year. I think the revenue acceleration is coming. In Q2, we anticipate K9 business will have roughly 20% top line growth. We do hope we can do better in the second half of the year.
We are now approaching the end of the conference call. I'll now turn the call over to New Oriental's Executive President and CFO, Stephen Yang, for his closing remarks.
Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect your lines.