Last quarter, management at New Oriental Education & Technology Group (NYSE: EDU) -- China's largest after-school tutoring network -- signaled to investors that it would be undergoing a massive expansion in the number of schools and learning centers that it runs.
After successfully pivoting from primarily training college-bound Chinese students to tutoring for younger kids, New Oriental wants to take advantage of its momentum to capture as much market share as possible.
Continue Reading Below
Management definitely followed through, increasing square footage nationwide by 38% to include 940 learning centers and schools by the time the most recent quarter ended at the end of November. While that investment has held back earnings growth -- and the company's stock -- there was still a lot to like in New Oriental's fiscal second-quarter earnings release this week.
New Oriental earnings: The raw numbers
No one likes to see revenue growing faster than earnings, as it signals to investors that a company will be keeping less and less of every dollar that it makes in sales. But that's where the aforementioned expansion comes in.
Because this square footage is being built out so quickly, there's no way these new schools and learning centers could be at capacity. But the overhead costs associated with them -- including building, maintenance, and teacher salaries -- need to be paid no matter the enrollment figures. Stephen Yang, New Oriental's CFO, said this will be a short-term concern: "We still managed to improve the utilization of facilities compared with last quarter. This helps to lessen the pressure on margins as we continued the investment in capacity expansion and as expected we are on the right track to recover from the impact on the margins in the previous quarter."
Instead of revenue or even earnings, there were two figures that stood out to me as most important:
- Enrollment grew by 43% to 1,877,100 across the company's offerings.
- Deferred revenue -- representing cash paid, mostly for tutoring throughout the year, that hasn't yet been recognized -- was up 49% to $1.14 billion.
There's no indicator more important for the health of a for-profit education company than these two metrics. The robust enrollment growth shows that New Oriental's offerings are at least getting students in the door, and the growth of deferred revenue means parents aren't just trying to take advantage of summer pricing deals -- they're sticking around and paying full price for tutoring services.
All of this is key because there are two moats New Oriental is looking to fortify: (1) its brand, which it is largely accomplishing via expansion, and (2) high switching costs, which come both from the familiarity forged between students, teachers and their classmates, as well as potential discounts for families that stay in the system.
What else happened during the quarter?
Here's a rundown of other highlights from the quarter:
- Revenue from K-12 after-school tutoring, the company's main growth driver, was up 47% on enrollment growth of 52%.
- Revenues from the more ancillary offerings of U-Can Middle and High School tutoring, POP Kids program, and Koolearn online-only learning were up 45%, 51%, and 60%, respectively.
- The company continued expanding -- albeit slowly -- its dual teacher program. This pairs a remote instructor broadcast over the internet with an in-classroom aide to assist. If successful, the initiative could drive down teaching costs and improve margins.
In the quarter ahead, management expects revenue to grow between 35% and 38% to a range of $591 million to $604 million. Investors should continue to keep an eye on enrollment numbers and deferred revenue, as they'll serve as excellent bellwethers for where the company is headed.
10 stocks we like better than New Oriental Education & Technology GroupWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and New Oriental Education & Technology Group wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 2, 2018