New Oriental Education & Tech Grp (ADR) Proves It's Gaining Popularity, but Will It Matter?

Chinese for-profit educator New Oriental Education continues its relatively successful transition from an English-language test prep factory to a provider of after-school tutoring services for K-12 students in the Middle Kingdom, giving investors its Q4 and full-year results Tuesday. The company also announced a one-time special cash dividend of $0.40 per share, which equates to about a 1.8% yield.

The most important demographic surgesLet's tackle the school's core performance before touching on the special dividend. For any for-profit education business, nothing is more important for long-term investors than enrollment numbers.

Companywide, enrollment was up 35% last quarter, with much of that growth coming from the after-school tutoring programs -- which showed 57% growth. That's incredibly important for investors, as management has bet the farm on tutoring -- and not English language proficiency tests -- being the future of the company. For the first time, the tutoring business represented almost half of all revenues.

With enrollment growth having been stagnant for much of the past year, these numbers demonstrate that New Oriental has been able to entice a great many Chinese parents to put money down to have their children attend the company's learning centers. By the end of the quarter, New Oriental had 2.9 million students -- up 8.5% from the same time last year.

Perhaps just as important, management feels that the time is right to reaccelerate its learning center build-out -- given the popularity of the after-school tutoring programs. Stephen Zhihui Yang, the company's CFO, stated, "[W]e aim to enter 3 to 4 new cities and open 30 to 40 new learning centers for our K-12 after-school tutoring business."

Overall, management said it expects the company to show revenues totaling between $441 and $457 million during the current quarter. The midpoint represents a forecast that is slightly ahead of what analysts were expecting.

But still experiencing a profit dropHere's the sobering part for investors: A transition like the company is going through isn't cheap. Not only are there infrastructure shifts, but New Oriental is offering a rewards program to entice new K-12 parents into the tutoring system, and teacher salaries are rising to ensure the company attracts top candidates.

As I've highlighted before, net margins have continued to be under pressure. The current quarter's 10.6% figure is the company's lowest in years.

The increase in costs is coming from two different areas. First, the company is heavily investing in its O2O online program, which is helping build a mixed on-line, off-line educational ecosystem for all of its services. The second cost increase -- mentioned above -- comes from increased teacher salaries.

While such increases in teacher salaries might irk those on Wall Street, it's important to point out that the in-person interaction students get with their teachers is an important differentiator for New Oriental, and a necessary expense for the company's long-term viability.

Yang prepped investors to see more of the same in the next fiscal year: "[G]oing forward, I think the gross margin will keep flat or a little bit lower in next fiscal year."

What to expect moving forwardFor the time being, management is choosing not to raise average prices for the burgeoning tutoring program. That's because the company believes there's an enormous market-share opportunity on its hand, and gaining share will take priority over profitability for the time being. To me, that makes all the sense in the world.

It's important to note that investors should be expecting enrollment growth to come in at much lower levels -- around 10% to 15%, according to management -- in the year ahead. The 35% boost seen last quarter was aided by a change in the date of the Chinese New Year from one fiscal quarter to another in 2015.

Investors should also be reassured that the company has no plans to go private anytime soon -- a move that's been fairly common over the past year for Chinese companies. This may help explain why management decided to offer up a small special dividend -- as reassurance for the fact that they still have shareholders' interests in mind.

The overall takeaway for the company remains positive, though Wall Street will eventually want to see gross margins expanding and the company taking advantage of its leading market share through higher selling prices.

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Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends New Oriental Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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