New Oriental Education (EDU) is trading roughly flat after it reported 3Q17 (Feb) earnings this morning. In terms of quick background, EDU is largest provider of private educational services in China. It offers a wide range of educational programs, consisting primarily of English training and test prep courses for major admissions tests in the US and China. EDU also provides primary and secondary school education, software and online education services.
Turning to the 3Q17 (Feb) results, non-GAAP EPS rose 41% YoY to $0.48, which was a good bit above market expectations. Revenue rose 26.2% year/year to $437.9 mln, which was above prior guidance of $408.7-421.8 mln. In terms of guidance, EDU expects Q4 (May) revenue to come in at $465.1-479.9 mln. Non-GAAP operating margin came in at 15.0%, which was better than 13.5% last year. This is EDU's second slowest seasonal quarter so its margins are not as robust as they are in MayQ and AugQ.
The main driving force for growth was a significant increase in student enrollments in the recent two quarters, which reached a YoY growth of 32% for NovQ and FebQ. For its key revenue driver, K-12 all-subjects after-school tutoring business, the year-to-date 2017 momentum has been strong and continuing, with the revenue up approximately 41%.
Furthermore, its U-Can middle and high school all-subjects after-school tutoring business recorded revenue growth of approximately 36%, and the POP Kids program grew by approximately 52% YoY. EDU says it was also encouraging to see a continuing strong momentum in enrollments in the first seven weeks of the current quarter: Q4 (May).
EDU has been making great strides in building out its online and offline integrated education ecosystem. During FebQ, EDU added a net of ten learning centers in existing cities, opened a new kindergarten in Beijing, and rolled out three dual-teacher model schools in the city of Kaifeng, Cangzhou and Qinhuangdao in order to bring its offerings to more remote areas in China.
The stock took a bit of a hit in early December 2016 on a Reuters article that alleged that some of EDU's counselors had been accused of conducting college application fraud, including writing/editing personal statements and falsifying high school transcripts on behalf of students.
EDU responded by noting that it overseas study consulting division, New Oriental Vision Overseas Consultancy (NOVO), is a small part of its business (8% of FY16 revenue). EDU also said its operations, including those carried out by NOVO, are governed by robust policies/procedures to guard against any unendorsed behavior by employees. With that said, EDU did not rule out that some counselors may have done this. The stock has been charging higher on EDU's strong results, so it seems investors are not too worried about it.
In sum, the stock has been making a big move in recent months, it's up nearly 50% on a YTD basis. Strong earnings results and impressive student enrollment numbers are driving the stock higher. Also, from a broader perspective, an attractive aspect of education names is that history has shown that education spending in China tends to be resilient even during economic downturns.