New Oriental turns in mixed report card of rising revenue, falling profits

The education services provider’s latest quarterly report reflected its largely steady but unspectacular performance

Key Takeaways:

• New Oriental Education reported revenue for its fiscal quarter through August reached $1.52 billion, up 6% year-on-year
• The education services provider’s revenue for its fiscal year through May is expected to reach up to $5.4 billion

By Lau Chi Hang

As report cards go, the latest quarterly update from New Oriental Education & Technology Group Inc. (9901.HK, EDU.US) won’t earn the company any gold stars. The leading education services provider reported last week its revenue for the three months through August, the first quarter of its fiscal year, rose 6.1% year-over-year to $1.52 billion, while its operating profit increased 6% to $310 million.

Among its various segments, revenue for overseas test preparation and overseas study consulting grew just 1% and 2% year-over-year, respectively. Its domestic exam prep business for adults and university students performed better, up 14.4% year-on-year, while its new educational business initiatives grew 15.3%.

While revenue slightly exceeded the upper end of its previous guidance for up to $1.51 billion, investors were left unimpressed by a 1.9% decline in its net profit to $240 million.

Stock tumbles

The falling profit spooked investors, with New Oriental’s U.S.-listed shares plummeting over 9% in intra-day trade after the announcement, before paring those losses to close down 3.4% for the day at $58.56. Its Hong Kong-listed shares also fell the day after the report’s release.

Despite the selloff, the stock currently trades more than 20% higher from its six-month lows, showing investors haven’t abandoned the company just yet. Equally significant, the shares now trade above the roughly HK$50 level where they were when New Oriental and its peers took a beating in 2021 after Beijing banned them from their main business of providing after-school tutoring to K-12 students in core curriculum areas.

Investors have rewarded the company for a resilience that saw it post $4.9 billion in revenue for its 2025 fiscal year, exceeding the $4.28 billion level from before the crackdown. Such milestones underscore Chairman Yu Minhong’s steady leadership during the crackdown and resulting industry upheaval, which allowed the company to chart a rapid and difficult transformation into areas not banned under the new rules.

But momentum during that recovery period appears to have plateaued, making meaningful expansion going forward elusive.

One of the biggest constraints is uncertainty surrounding overseas study-related services that have become one of New Oriental’s biggest revenue sources. Protectionist pivots by President Donald Trump in the U.S., one of the most popular overseas study destinations, have placed restrictions on immigrants and international students since the start of the year, putting a damper on New Oriental’s related business.

Growth for the company’s overseas test preparation segment cooled to just 1% year-over-year in its latest fiscal quarter from 14.6% the previous quarter. Similarly, growth for overseas study consulting services slowed to just 2% from 8.2% over that period.

Cost-cutting at the fore

In the absence of potential for major revenue growth, New Oriental is taking a different approach to jumpstart its profits, at least in the short term.

“Despite the challenges posed by the continued slowdown in our overseas businesses, we delivered a year-over-year improvement in our non-GAAP operating margin, driven by our relentless focus on cost optimization and operational efficiency enhancements,” said New Oriental CFO Yang Zhihui.

“We will continue to exercise this discipline and extend our cost and efficiency initiatives across all business lines for the remainder of the fiscal year, positioning ourselves for more sustainable and profitable growth,” he added. In other words, New Oriental looks set to rely primarily on cost-cutting to boost its profit this fiscal year, rather than relying on revenue growth.

New Oriental forecast its revenue would range between $1.13 billion and $1.16 billion in its current fiscal quarter through November, representing 9% to 12% year-over-year growth. The company also reaffirmed its full fiscal-year revenue guidance of $5.15 billion to $5.39 billion, representing annual growth between 5% and 10%.

Such forecasts looked decidedly underwhelming, showing revenue growth is likely to remain in mid- to high-single-digit territory for the next year and maybe longer. A bigger concern, as reflected by the latest quarterly profit backtracking, is that earnings may not necessarily expand alongside revenue growth.

U.S. overhang

New Oriental’s growth prospects rely heavily on its new educational business initiatives, which include things like non-academic tutoring courses. But growth for that segment has slowed notably, dropping to 15.3% in the latest fiscal quarter from 32% in the previous quarter, suggesting slowing momentum. Meanwhile, U.S.-related factors will continue to weigh on the company’s overseas study business. Despite a recent thaw in relations and willingness for a meeting between Trump and Chinese President Xi Jinping, ongoing U.S.-China tensions and Trump’s unpredictability will continue to create uncertainty around the overseas study business.

Earlier this year, CFO Yang said on an earnings call that New Oriental expects its overseas test preparation business revenue to grow 5% to 10% in the current fiscal year, while its overseas study consulting business revenue will be flat, representing significant slowdowns from previous double-digit growth. Such tepid outlook is clearly behind this year’s conservative forecasts, meaning investors shouldn’t expect too much from the company.

Its current stock price in the HK$50 range gives New Oriental a forward price-to-earnings (P/E) ratio of 25 times, similar to China Education Group (0839.HK). Such a valuation seems to reflect the company’s steady operations, even as it lacks immediate catalysts, meaning its reward-versus-risk profile looks fairly balanced.

The bottom line is that New Oriental has established an efficient operating system and strong track record as well, which is why it’s earned a reputation as a leader in its space. CEO Yu Minhong’s capabilities as CEO are undoubtedly one of its biggest assets, and his keen market acumen has repeatedly saved the company as it navigates through choppy regulatory waters. Under his leadership, New Oriental should remain a formidable enterprise set to make new breakthroughs when market conditions line up in its favor again.

To subscribe to Bamboo Works weekly free newsletter, click here