New Oriental Education Technology Stock

Good evening, and thank you for standing by for New Oriental's FY 2026 Fourth Quarter Results Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd now 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 Fourth 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 view 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 will 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. We're pleased to bring you another quarter of remarkable results with revenue and income growth that have once again exceeded expectations. Our performance this quarter reflects not only the continued strength of our core business, but also the outstanding contributions of East Buy and our new creative ventures.

Taken together, these assets have energized our strategic ambitions as we look ahead with confidence in the year to come. We're particularly pleased that despite the economic headwinds and external challenges, our relentless efforts to deliver the very best to our customers are yielding strong results. In this quarter, total net revenue grew 23% year-over-year to $1,529.5 million. Non-GAAP operating income rose 34.7% to $110 million, while operating margins for both the quarter and the fiscal year 2026 showed healthy increments.

Both our core business and new initiatives continue to score meaningful traction this quarter. Breaking it down, overseas test prep business recorded a revenue increase of 6% year-over-year for the fourth quarter of 2026. Overseas study consulting business recorded a revenue increase of about 1% year-over-year for this quarter.

Our adults and university students business recorded a revenue increase of 29% year-over-year for this quarter. Our non-academic tutoring business has been rolled out to around 60 existing cities. Market penetration has signed steady growth, particularly across high-tier cities. The top 10 cities contributed around 60% of this business.

Our intelligent learning system and device business that leveraged our teaching expertise and data analytics to provide adaptive learning solutions has been launched in around 60 cities. We're encouraged by the enhanced customer retention and scalability with top 10 cities contributing over 50% of this business.

In summary, our new educational business initiatives delivered a 25% year-over-year revenue increase in this quarter. Moving on to our integrated tourism-related business; encompassing study tours and research camp for K-12 and university students as well as cultural tours for middle age and senior travelers, for culture travel, Chinese study tour, global study tour and camp education products continue to deliver meaningful value to customers through knowledge generation, personal growth and deep cultural [ emissions ].

Our student programs now operate in about 55 cities nationwide with the top 10 cities generates over 50% of the segment revenue. And our premium adult tourism offerings span around 30 provinces domestically and select international destinations. We're also expanding into senior health and wellness tourism with an asset-light model, forging partnerships with over 45 wellness facilities across key destinations, including Hainan, Yunnan and Guanxi.

With our OMO teaching platform, we have continued to invest in revamping and upgrading the system. During this quarter, we invested $31.2 million to improve and maintain our OMO platform, which enable us to provide and interrupt high-quality instructions to students that cater to their individual learning needs.

Beyond upgrading the OMO system, we continue to embed AI across our ecosystem, including driving product innovation and transforming our internal operations to enhance capabilities, improve efficiency and provide greater support to our staff.

In terms of the product innovation, we are proud to share that our proprietary AI-powered personalized learning platform has successfully completed the first phase of deployment, achieving meaningful sales with just 25 days of inauguration. Unlike a general proposed large language model, our AI platform is built on a highly specialized vertical learning system, proposedly designed to reflect rooted assets of New Oriental.

This encouraging initial performance is a validation of the platform's market traction and product market fit. We look forward to propelling the development of the AI-driven products and solutions to further broaden our operational excellence and market impact. Turning to the East Buy's fiscal year 2026 performance.

East Buy remains firmly committed to the 3 high product standards, high safety standards, high product quality and high cost performance while delivering attentive customer service for families. On the platform front, East Buy made significant strides in its multi-platform live streaming strategy on Douyin, launching 11 new vertical live streaming accounts and expanding its channel matrix to 18 channels in total.

East Buy also launched a suite of the innovative operational programs, including streamer recruitment campaigns and annual suppliers that has proven effective to strengthen internal operational teams, deepen long-term strategic partnerships with suppliers and elevate the customer engagement.

Charting the new course in fiscal year 2027, East Buy will accelerate its expansion of its private label portfolio across food and daily necessities, scale up product R&D and quality control to uphold 3 high standards and advance its app membership ecosystem.

By leveraging New Oriental's extensive nationwide network, East Buy will further expand its offline experience footprint to engage a broader customer base, collectively optimizing operational efficiency, its supply chain network and laying a solid foundation for sustainable long-term growth. Now I would like to share the latest updates of an exciting new strategic initiative that we have been piloting since the last quarter.

New Oriental Home, a platform designed to serve the entire family unit from children to parents to seniors through a full life cycle, full spectrum approach. New Oriental Home assembled our education service, East Buy offerings and cultural tourism products into one unified ecosystem in a single app.

Families can conveniently access, manage and redeem service tailored to each member, enable seamless cross-category engagement and deeper household level relationships. The platform has demonstrated strong early traction with scenario-based marketing and integrated service anchoring solid user activation, retention and acquisition.

Notably, we have seen retention for Grade 7 students increased by 10 basis points from summer to autumn this year. Customers find the earn and redeem experience rewarding and are engaged to explore a broader range of the offerings within our ecosystem, thereby lowering our cost of spend on customer acquisition as well. This integrated loyalty framework has been particularly effective as it's not only strengthen retention, but also transform customer engagement into actionable data, enabling us to create incentives for our customers and staff.

At the same time, the leverage synergies New Oriental Home generated across all business lines, including East Buy, combined with highly personalized offerings have overall accelerated cross-selling, improved conversion efficiency and optimized overall operating cost. We have launched this pilot program in 69 cities as test beds, including Hangzhou, Suzhou, Xi'an and [indiscernible] with over 950,000 registered families by the end of this quarter.

The platform has achieved cumulative activity participation rates of around 70% and the latest campaign activation rate is 23%, significantly outperforming many public domain e-commerce platforms. These results affirm the high reach and precision advantage of our education-focused private domain ecosystem, and we look forward to build on the promising momentum in the quarter ahead.

Now I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead.

Okay. Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating costs and expenses for the quarter were $1,443.7 million, representing a 15.3% increase year-over-year. Cost of revenues increased by 25.9% year-over-year to $717.3 million. Selling and marketing expense increased by 23.9% year-over-year to $262.5 million.

G&A expenses for the quarter increased by 13.2% year-over-year to $463.9 million. Impairment of goodwill was nil compared to $60.3 million in the same period of the prior fiscal year. Total share-based compensation expenses, which were allocated to related operating costs and expenses, decreased by 20.7% to $22.7 million in this quarter.

Operating income was $85.8 million compared to an operating loss of $8.7 million in the prior-year period. Non-GAAP income from operations for the quarter, excluding share-based compensation expenses, amortization of intangible assets resulting from business acquisition and impairment of goodwill was $110 million, representing a 34.7% increase year-over-year.

Net income attributable to New Oriental for the quarter was $62.2 million, representing a 775.8% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.40 and $0.39, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $87.8 million, representing a decrease of 10.5% year-over-year.

Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.56 and $0.55, respectively. Net cash inflow generated from operations for the fourth quarter of 2026 was approximately $518.7 million and capital expenditure for the quarter were $99 million. Turning to the balance sheet. As of May 31, 2026, New Oriental had cash and cash equivalents of $1,821.2 million.

In addition, the company had $1,366.8 million in term deposits and $2,372.3 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 services or goods are delivered at the end of the fourth quarter of fiscal year 2026 was $2,242.9 million, an increase of 14.8% as compared to $1,954.5 million year-over-year.

Now I'll hand over to Stephen to go through our outlook and guidance.

Thank you, Sisi. The healthy results we have delivered in fiscal year 2026 have given us both the fuel and conviction to pursue resilience, sustainable growth and ever-improving service in the year ahead.

Approaching summer vacation, we're particularly confident in sustaining momentum for the coming first quarter of fiscal year 2027, with expectations that improving enrollment trends will drive an accelerated revenue growth and the higher overall operational efficiency will bolster our optimism in growing our margins.

We will continue to strategically expand capacity and talent, deepening our presence in markets with proven top and bottom line performance while maintaining rigorous resource allocation. Expansion decision will be carefully calibrated throughout the year, guided by the operational readiness and financial results.

Alongside our pursuit of new creative initiatives, sustainable profitability and cost discipline remain cornerstones of our business. In the coming quarter, we expect meaningful cost improvement to emerge from the restructuring of our overseas business, which will pave the way for the greater operational efficiency and stronger margin profile in the new year.

Looking ahead, we enter fiscal year 2027 with deep confidence in our core education business and new initiatives driven by a genuine passion to create lasting value. We will continue to drive sustainable and healthy growth through product enhancements and quality improvement while further optimizing cost structure and to enhance efficiency and profitability.

Our focus remains on long-term value creation, offering investors a clearer view of our strategic trajectory and durable growth we're building for the future. Considering the positive momentum and cost management measures across our business line, we expect total net revenue for the Group in fiscal year 2027 to be in the range of $6,453.9 million to $6,680.3 million, representing a year-over-year increase in the range of 14% to 18%.

These expectations reflect our current outlook based on the recent regulatory development and prevailing market conditions, both of which remain subject to change. Additionally, we announced a share repurchase program under which New Oriental is authorized to purchase -- to repurchase up to $300 million of its ADS or common shares over the subsequent 12 months.

As of July 28, 2026, yesterday, we had repurchased a total of approximately 51.5 million common shares, including common shares represented by ADS for aggregate consideration of the approximately $274 million from the open market and the share repurchase program. We expect to roll out the share repurchase program for the remainder of the duration in accordance with its terms.

Furthermore, to implement our 3-year shareholder return plan adopted in July 2025 for fiscal year 2027, the Board of the Directors of the company has approved an ordinary cash dividend and a new share repurchase program with the total amount of the capital return for the fiscal year 2027 is expected to be approximately $500 million. I would like to go through details in the following.

The aggregate amount of the cash dividend for the fiscal year 2027 is expected to approximately $300 million to be paid in 2 installments in December 2026 and June 2027, respectively. Further details regarding the cash dividend program will be decided by the Board of Directors and announced by the company in due course.

Pursuant to the share repurchase program for fiscal year 2027, the company may repurchase up to $200 million of its ADS or common shares over the subsequent 12 months following the Board approval.

The company's proposed repurchase may be made from time-to-time in the open market at prevailing market price in privately negotiated transactions in block trades and/or through other legally permissible means, depending on market conditions and in accordance with the applicable rules and regulations.

The Board of Directors of the company will review this share repurchase program periodically and may authorize adjustment of term and size. The company expects to fund the repurchase out of its existing cash balance.

To conclude, New Oriental is steadfastly committed to driving sustainable growth, promising exceptional value to our customers and shareholders and generating long-term returns to our shareholders. We continue to collaborate closely with government authorities across province and municipalities in China, ensuring full compliance with the relevant policies and regulations while adapting our operations responsibly to meet evolving requirements. This is the end of our fiscal year 2026 Q4 summary.

At this point, I would like to open the floor for questions. Operator, please open the call for these.

[Operator Instructions] We will now take our first question from the line of Elsie Sheng from CLSA.

Congratulations on the very strong results. And it seems the guidance on the 2027 financial year is also higher than expectation. So my question is, can you help us break down the financial year '27 guidance into quarters, especially the trend that you expect in the first quarter of the financial year '27 in terms of revenues and margin?

Okay. Thank you. Yes. As you know, I think our strategy in fiscal year 2026 is to enhance the product and service quality. And I think we have seen the good results. The better quality drives the student retention rate up and the Q4 marks another quarter with solid results.

And so given the positive momentum, I think including the healthy growth of our K-12 business and the recovery of the East Buy, I think we are now in a more optimistic position regarding our business outlook in fiscal year 2027. So we gave the guidance of the annual guidance in fiscal year 2027 in the range of 14% to 18%.

I must mention that, as always, we're still conservative to give the annual guidance. We do expect to beat our annual guidance in fiscal year '27. And from this year, we are making a change to give the guidance on an annual basis. I think it's more -- I think we believe this change better reflects our long-term strategic focus and encourage the investors to evaluate our business performance over a longer term than -- rather than the quarter-to-quarter.

And I believe you still interested in the Q1 forecast. And I must say that we are quite confident in sustaining our momentum for the coming first quarter of fiscal year 2027. You saw our deferred revenue at Q4 end was increased by roughly 15%. So I think that's a good sign of the coming quarter of the revenue growth.

And we expect the improving summer enrollment trends that we have seen will drive accelerated revenue growth of the education business and the higher operational efficiency. And also, I do believe the East Buy will -- the revenue will be accelerated in Q1. So East Buy will contribute more profit and revenue to the group.

And so the -- yes, repeat again, we're quite optimistic about the Q1 performance. Your question is about the margin as well. The margin, we got the margin expansion in Q4 in this quarter, even though we need some margin drag from the overseas-related business and the one-off expenses, roughly $10 million to $15 million from our internal management restructuring in this quarter, but we still getting good margin expansion by 60 basis points up in this quarter.

And the -- as for the margin outlook for the next year, fiscal year 2027, I think we'll continue to focus on profitability across all business lines. We'll keep doing the cost control, and we will -- I think we will improve the operational efficiency and to bring more operating leverage in the coming year. So we expect the margin will be expanded in the coming year. And the Q1 margin outlook, I think we're quite confident on the margin expansion in the coming Q1.

We will now take our next question from the line of Jenny Yuan from UBS.

Congrats on the strong quarter results. So my question regarding our revenue outlook, specifically for our K-12 business. So [indiscernible] service acceleration in the fourth quarter, how should we project the revenue growth outlook for the upcoming first quarter and next fiscal year 2027?

Yes, we -- I think we had a strong year of the K-12 business growth in fiscal year '26. And as for the guidance of the K-12 business in the new year, I think we -- I would like to guide the K-12 business in total, the K-9 and high school in total, roughly will be expected to increase roughly close to 20%, or around 20% year-over-year.

And because I think this enrollment growth trend is good. And also, I think the Q1 revenue growth will be stronger. So this is my guidance of the K-12 business. And don't forget, I think the K-12 business will bring us the higher margin in the coming new year.

We will now take our next question. And the next question comes from Alice Cai from Citi.

Congratulations on the solid and strong result. My question is about the capacity expansion in FY '27 because you've talked about discipline on capacity expansion in FY '26, and that's been part of the margin story. So what -- wondering what's the plan for FY '27?

And where is the utilization running now? And also, I have another question about the compliance because we've seen some reports about inspection and individual learning centers. Wondering if there is any risk we should be aware of?

Okay. Yes. Thank you, Alice. We -- in fiscal year '26, we added 13% new capacity in total. I think it's based on the expansion control, and we -- I think we did well in the last year. And in the coming new year, we plan to open 10% to 15% new capacity.

I think most of the new openings will be in the performance with the top performance of the bottom line and top line in the last year. I think we're happy to see the student retention rate improvement, which will drive the utilization rate up in the existing learning centers.

And I think we're quite optimistic on the OMO or some online business development. And so that means we don't need to open too many learning centers in the coming new year. So in one word, I think the top line growth in the coming new year will be higher than the learning center expansion.

So it will drive the average utilization rate up again in the coming new year. Your second question is about the regulation. I think, yes, anyway, I think the -- we obey the rules, the policy requirements, I think it's fine because in the last 4, 5 years, we passed all the requirements of the government. I think going forward, my personal view is on the regulation side, I think for me, it's neutral to positive on the regulatory environment.

We will now take our next question. And our next question comes from Timothy Zhao from Goldman Sachs.

Congrats on the very solid results. I think my question is regarding the overseas test prep and consulting business. Just wondering if you can give us an update on what you are seeing on the ground and what you have seen from the summer vacation period in terms of the overseas test prep growth?

And how do you think about the growth trajectory for this year for this specific segment? And I believe last year, you did a segment merger or integration between the 2 separate business. Just wondering -- wonder if you can give us our -- some margin outlook for this business line? What was the operating margin or contribution margin for the overseas business really last year? And what is your expectation for this year?

Thank you, Tim. Your question is about the overseas-related business. I think, yes, everybody knows due to the impact of the economic environment and the international situation, our overseas-related business need some growth pressure in last year. But I think we have shown the resilience in last year.

And we believe that we were taking -- I think we are taking the market share, as I said, as always. And so in the coming new year, we expect our overseas-related business will be flattish or low single-digit growth in the coming new year. And I think the Q1 -- roughly the Q1, we -- I think we still believe that we can get some low single-digit growth of the overseas-related business.

Yes, we merged the overseas test prep business and the consulting business in Q3 last year. I think the reason that we put it together is to restructure the 2 different management team and to provide the customers one-stop service and to enhance the cost control, reduce some cost and expenses. And roughly the margin of the overseas-related business last year is roughly 15% roughly last year.

Including both test prep and consulting.

Yes, we put it together. And in the coming year, we believe the margin will be expanded for the overseas-related business because of the cost control, because of the merge of the restructuring, the new team. So yes, we -- I think we have done a lot of jobs, and we will keep doing the cost control in the coming new year. It will drive the margin up of the overseas-related business in the coming new year.

We will now take our next question from the line of Lucy Yu from Bank of America Securities.

I have a question on the sales and marketing distribution expense in the last quarter. It was up a bit both on a Q-on-Q and Y-o-Y basis. Could you elaborate why is that? And how should we think about the selling and distribution expense in FY '27, especially we have the Oriental Home in place?

I think in Q4, the East Buy spend a little bit more money on the marketing that -- it drive the revenue growth up a lot. And so in the coming new year, I do believe the selling and marketing expenses as a percentage of the revenue for the whole group will be down. So it will drive the margin up in the coming new year, Lucy.

And maybe one more. So for the fourth quarter non-GAAP operating margin expansion, if we excluding East Buy, how about the rest of the education? Is it like flattish or expand as well?

If we take out the East Buy's contribution of the Q4, the margin contribution from the East Buy, I think our education business margin roughly flattish. But don't forget, we take the one-off expenses of the restructuring merge of the overseas-related business in Q4. So roughly, we recorded $10 million to $15 million as a one-off expenses in Q4. So if you add it back, the margin is up of the core business, Lucy.

We will now take our next question from the line of D. S. Kim from JPMorgan.

Thanks for another strong [ dividend ] rate. I think this is now third time in a row. I have a very quick 2 questions, if okay. First, you just mentioned about the cost optimization initiative. And can I ask if this is already done behind us or shall we expect, I don't know, like $5 million, $10 million or some more of this one-off in first quarter? And more importantly, can we try to quantify roughly how much fixed cost savings can we enjoy in 2027 from this? And I have one small follow-up.

Thank you D. S. Your question is about the cost control. We started to do the cost control since March last year. And I think we did a great job in the whole year, fiscal year '26. Roughly, we saved $100 million roughly in fiscal year '26. So now we're closely to the end of the Phase 1, cost control Phase 1. So we're [ steady ] into the Phase 2.

As I said, in the cost control Phase 2, we will do more like the restructuring of the management teams to do more cost control. And we will use more AI to save the legacy staff cost or extra. So I think in the coming year, we expect the cost control can save more amount than that of last year. So this is our target.

That's very helpful. Second, a small question. Can I ask, I saw we spent $250 million CapEx, capital expenditure last year. And can I check if we have a budget for 2027?

Yes. The CapEx, yes, last year, roughly $250 million. In the coming new year, roughly $250 million to $300 million as the new capacity or some -- the CapEx on the learning path model or some others. So roughly $250 million to $300 million.

Got it. Just on that, I mean, not to pick on this, but last year, I think our new opening like absolute number of stores were down 40% from a year ago. I think we opened like 170 stores. The year before it was like 270, yet CapEx was flat.

And this coming year, CapEx to go up. Is that the delta, the gap because of East Buy? Can I understand that way or if you could comment on that, is it related to new initiative of the East Buy offline store or anything else I'm missing?

East Buy is offline store, the CapEx is very tiny. It's very, very, very small number. And I think the -- yes, as I said -- last year, we opened 13% new capacity in terms of the square meters. And in the coming new year, we plan to open 10% to 15% new capacity.

And we believe the new capacity growth or new capacity numbers will be lower than the top line growth. So that means it will drive the utilization rate up. And your question about the CapEx, yes, we're building up the new headquarters in [ Chongqing ] and it cost a little bit more money. So the CapEx in the new year will be a little bit more higher than that of last year.

That makes a lot of sense. Yes, that makes a lot of sense.

We will now go to our next question. And our next question comes from Yikun Zheng from CITIC.

Congrats on the strong results. My question is about the competition. Well, last year, the competition in summer season is quite strong. So how do you think of the competition for this summer? And considering the impact of the decline in population and the competition, can we have a 3-year outlook for the K-12 business?

The competition, I think in this summer, I think the competition is less than that of last year. I remember in last year's summer, the competition situation. And this year, I think it's better. And so that's why we can give the Q1 guidance higher revenue acceleration in the coming Q1. And so the K-12 business in the coming Q1 and even the whole new year will be accelerated than that of last year.

And as for the population, I think, yes, it's an issue. But I think the parents will choose the education company for their kids will be more healthy. And I think the parents love to give their kids the best education in the coming new like 3 or 5 years. And so that means the big players will take more market share from the market. So this is in my opinion based on the current estimation.

[Operator Instructions] We will now take our next question. And the next question comes from Jing Yuan from CICC.

My question is about the AI adoption, like with the rapid development of AI technology and could management share how the company is leveraging AI in its teaching and learning process? And do you see AI primarily as a tool to transform the teaching model or like a way to improve operational efficiency?

Yes. Actually, as for the AI, we have been devoting a lot of efforts and resources into implementing the AI technology into education sector. And in total, for 3 aspects. One is that for all the existing educational products, we are implementing AI technology to enhance the product quality and also enhance the student learning experience. For example, like we embedded AI new functions into our learning device business and also even in class we use the AI tools to help students to improve the teaching and learning efficiency and the learning experience.

And also after school, they can use the AI new tools to enhance the learning efficiency. So all these are differentiating us much more than before, more differentiating from all the other competitors because we have enough capital and also we have the technology and all the -- and also the teaching knowledge to use the AI technology to make our products better. So this is one aspect.

And the other thing is that we are using AI is even more exciting is that we are piloting a lot of new AI new products. It's not only products, but as we announced this quarter that we have a new platform launched recently. And to use the AI technology and also using our teaching and learning experience and all the teaching and learning settings that we have all these combined together to come up with some new solution.

So it's based on the -- to help students how to learn and how to use our teaching knowledge and using all the new AI tools to have some new products. So this is something that we are piloting and still in early stage, but we believe that the platform will be more and more better in the future. And also, we have a series of new products coming.

So that's some exciting ones. And also third thing that we are doing is using our -- using the AI technology to improve the working efficiency so that we can save more labor cost. For all functions, like all the teachers and also our teacher assistants and from the -- for all aspects of their working process, we can use AI tools to help them to improve the efficiency so that we don't need to hire as much as new staff -- as many as new staff as before so that we can handle more work than before.

So the HR cost can be saved more and efficiency can be improved and also a function of supporting staff as well. So that's all the things that we are using AI to do. And I think in total, we are more differentiating and have more advantage than other competitors in terms of using AI. Yes. So we have the good solution and also can have the AI technology used more and more, better and better in the education sector.

Thank you. That's very comprehensive.

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 very much.

This concludes today's conference call. Thank you for participating. You may now disconnect your lines.

Thank you for standing by for New Oriental's FY 2026 Third Quarter Results Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I'd now 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 Third 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. I'm glad to share with you that Q3 of this fiscal year marks another quarter of solid results and consistent growth. We're pleased to see that after several consecutive quarters of the revenue growth exceeding expectations, this quarter has once again surpassed expectations. This reinforced our confidence in the correctness of our strategy and our optimism about future performance. We're even more delighted to see the margin expansion in our core business, along with the significant contribution from the outstanding performance of East Buy.

Our focus on operational efficiency and investment on strategic initiatives have again driven satisfactory performance and continue to lead our path to sustainable profitability. This quarter, total net revenue grew by 19.8% year-over-year to $1,417.3 million. Non-GAAP operating income rose 42.8% to $202.9 million, while non-GAAP net income attributable to New Oriental increased 34.3% to $152.2 million.

Both our core business and new initiatives are gaining meaningful traction this quarter. Breaking down, overseas test prep business recorded a revenue increase of 7% year-over-year for this quarter. Overseas study consulting business recorded revenue decrease of about 4% year-over-year for this quarter. Our adults and university students business recorded a revenue increase of 15% year-over-year this quarter.

As for our new education initiatives, including nonacademic tutoring and our intelligent learning system and devices to deliver sustainable revenue that grew 23% year-over-year this quarter. Our nonacademic tutoring business has been rolled out to around 60 existing cities. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of this business.

Our intelligent learning system and device business that leverages our teaching expertise and data analytics to provide adaptive learning solutions has been launched in around 60 cities. We're encouraged by enhanced customer retention and scalability of this new business. The top 10 cities contribute over 50% of the business.

Turning to our integrated tourism-related business, which includes study tours and research camps for K-12 and university students as well as new cultural tours for middle age and senior travelers. We're delighted to -- we're delighted that the culture Travel China Study Tour, global study tour and camp education products continues to be well received, providing customers with valuable knowledge, personal growth and cultural enrichment.

Our student programs now operate in approximately 55 cities nationwide, with the top 10 cities generate over 50% of the revenue. And our other top-notch adult tourism offerings span around 30 provinces domestically and selected international destinations. We're also expanding into senior health and wellness tourism through partnership with over 40 wellness facilities in Hainan, Yunnan and Guangxi, utilizing an asset-light model to pilot the emerging opportunity.

We continue to invest in our online merge offline teaching platform, leveraging our educational infrastructure and technology capabilities to deliver advanced personalized learning experience across all age groups. This quarter, we invested $30.6 million to enhance and maintain our OMO platform, which enabled us to provide high-quality instruction to students while adapting to their individual learning needs.

Turning to East Buy. East Buy remains committed to delivering premium products and service to Chinese families. It has advanced its multi-platform, multi-account strategy by launching specialized vertical live streaming channels on Douyin, including East Buy Home, East Buy Food and Vegetables and East Buy Nutrition and Health. It also continuously optimized its live streaming content and introduced innovative engagement initiatives, including large-scale live campaigns for streamer recruitment and supplier conferences as part of its efforts to strengthen team capabilities, supplier partnership and customer engagement.

Looking ahead, East Buy will look to expand its private label portfolio, enhance product R&D and quality control, accelerate app membership ecosystem development and grow its offline footprint steadily through vending machines and experience stores. Together, these initiatives will drive greater operational efficiency and advance supply chain excellence, supporting sustainable long-term growth.

Besides upgrading our OMO system, encouraged by the positive feedback on our AI applications, we continue to integrate AI across our offerings to strengthen core capabilities. Simultaneously, we're expanding the use of AI to streamline internal operation, thereby boosting efficiency and elevating the support from our teachers and staff. Driving innovation in product capabilities and operational excellence continues to fuel our pursuit of the sustainable revenue growth. We look forward to sharing measurable results from our AI investments in the quarters ahead.

I would also like to take this opportunity to share a new strategic initiative with you. Historically, New Oriental has focused on serving our customers as each individual. Going forward, we're extending the perspective to serve the entire family unit. Given our diversified offering across different age groups and demographics, we're uniquely positioned to adopt full life cycle, full spectrum approach that addresses the evolving needs of each family member from children to parents to seniors.

To support the shift, we launched the new Oriental Home, a private domain platform that integrates our education service each by East Buy offerings and culture tourism products into one unified ecosystem. Through a single app, families can conveniently access, manage and redeem service tailored to different members, enabling seamless cross-category engagement and deeper household level relationships.

This platform is already demonstrating strong user engagement and retention through scenario-based marketing and integrated service offerings, significantly enhancing customer lifetime value. At the same time, the precision-driven operations improve conversion efficiency and optimize overall operating cost. We have now launched this pilot program in 12 cities as test beds, including Hangzhou, Suzhou, Xi'an and Wuhan. With over 330,000 registered families, the platform has achieved campaign activation rates of 10% to 15%, significantly outperforming many public domain e-commerce platforms. This performance demonstrates the high reach and precision advantages of our education-focused private domain ecosystem.

Now I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead.

Yes. Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating costs and expenses for the quarter were $1,237 million, representing a 16.9% increase year-over-year. Cost of revenue increased by 23.4% year-over-year to $656.2 million. Selling and marketing expenses increased by 9.1% year-over-year to $198.8 million. General and administrative expenses for the quarter increased by 10.8% year-over-year to $382.1 million.

Total share-based compensation, which were allocated to related operating costs and expenses, increased by 30.9% to $21.1 million in the third quarter of fiscal year 2026. Operating income was $180.3 million, representing a 44.8% increase year-over-year. Non-GAAP income from operations for the quarter was $202.9 million, representing a 42.8% increase year-over-year.

Net income attributable to New Oriental for the quarter was $126.8 million, representing a 45.3% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.80 and $0.79, respectively. Non-GAAP net income attributable to New Oriental for the quarter was $152.2 million, representing an increase of 34.3% year-over-year.

Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.97 and $0.95, respectively. Net cash outflow generated from operation for the third quarter of fiscal year 2026 was approximately $7.5 million, and capital expenditure for the quarter were $68.8 million.

Turning to the balance sheet. As of February 28, 2026, New Oriental had cash and cash equivalents of $1,783.4 million. In addition, the company had $1,491.7 million in term deposits and $1,953.2 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 services or goods are delivered at the end of the third fiscal quarter of 2026 was $1,885.9 million, an increase of 7.8% as compared to $1,749.9 million year-over-year.

Now I will hand over to Stephen to go through our outlook and guidance.

Thank you, Sisi. The healthy results we achieved this quarter reinforce confidence in our operational resilience and growth trajectory. Looking ahead, we remain focused on balanced growth, advancing both revenue and profitability in parallel. We will expand capacity and talent strategically, ensuring the growth does not come at the expense of quality. We plan to deepen our presence in markets with proven top and bottom line performance while maintaining disciplined resource allocation.

We will calibrate the pace and scale of new openings throughout the year, aligning expansion decisions with operational needs and financial results. Cost discipline and sustainable profitability across all business lines continue to be foundational to our strategy. In the coming quarter, what I mean is, in the coming Q4, we expect greater cost control to be realized as a result of restructuring and consolidation of our overseas business. A certain level of fixed expense will be reduced, enabling us to pave the way for higher operational efficiency and better margin profile next year.

There will be certain one-off expenses in the coming quarter related to the structural adjustments. Even so, we remain confident in our fourth quarter profit margin. Looking ahead next fiscal year, we have strong confidence in our core education business and East Buy. We will continue to drive sustainable and healthy growth through product enhancement and quality improvement while further optimizing operational costs and enhance the efficiency and profitability.

Considering the positive momentum and cost management measures across our business lines, we expect the total net revenue for the group in the fourth quarter of fiscal year 2026 to be in the range of $1,429.6 million to $1,466.9 million, representing year-over-year increase in the range of 15% to 18%. Driven by the encouraging growth across various business lines, New Oriental raised the full year guidance of total net revenue in fiscal year 2026, June 1, 2025 to May 31, 2026, to be in the range of $5,561.4 million to $5,598.7 million, representing year-over-year increase in the range of 13% to 14%. These expectations reflect our current outlook based on recent regulatory developments and prevailing market conditions, both of which remain subject to change.

I'd also like to give you an update on our shareholder return plan for fiscal year 2026. In October 2025, we announced that pursuant to its previously adopted 3-year shareholder return plan, the Board of Directors had approved an ordinary dividend of $0.12 per common share or $1.2 per ADS to be distributed in 2 installments as part of the shareholders' return for the fiscal year 2026. As of today, the first installment has been fully paid to shareholders and ADS holders. The second installment $0.06 per common share or $0.6 per ADS will be paid to holders of common shares and holders of ADS of record as of the close of business on May 15, 2026, Beijing, Hong Kong time and New York Time, respectively, with expected payment date to be on or around June 2, 2026 or June 5, 2026, for holders of common shares and holders of ADS, respectively.

Additionally, we announced that a share repurchase program in which New Oriental is authorized to repurchase up to $300 million of ADS or common shares over the subsequent 12 months in the open market. As of April 21, 2026, yesterday, we had repurchased a total of approximately 3.3 million ADSs for an aggregate consideration of approximately $184.3 million from the open market under this share repurchase program.

In closing, New Oriental remains firmly committed to sustainable growth, delivering exceptional value to our customers and generating long-term returns to our shareholders. We continue to maintain close collaboration with the government authorities in China, ensuring full compliance with relevant policies and regulations and adapting our operations to evolving requirements.

This is the end of our fiscal year 2026 Q3 summary. At this point, I would like to open the floor for questions. Operator, please open the call for these. Thank you.

[Operator Instructions] We will now take our first question from the line of Jenny Yuan from UBS.

[Foreign Language] Congrats on a strong set of results this quarter. My question is about margin trend. So we noted OP margin expanded meaningfully by 2.3 percentage points this quarter, which is very impressive. So could management please help us break down the key drivers behind this margin expansion? And in addition, what is your view, your outlook for margin trends in this quarter and for the next fiscal year?

Yes. Thank you, Jenny. I think it's a good question about margin. Let us start with the margin analysis of this quarter. Even though we missed some margin drag from the overseas-related business, but we still have group margin expansion by 230 basis points up. And I think the margin expansion was mainly due to the better utilization, operating leverage and the cost control, and as well the more profit contribution from East Buy.

As you know, we started to do the cost control since March 2025 last year. So in the last 11 months, I think we have seen the very good results and which helps to drive the margin up. And so our focus on operational efficiency and disciplined resource management has been the key driver of the margin expansion. Next quarter margin, the Q4, I think we remain optimistic on margin expansion in Q4, even though we will -- there will be some like certain one-off expenses in the coming quarter in Q4 related to the structural adjustments, the consolidation between the overseas test prep and the consulting. This is one-off expenses.

Even so, we still remain confident in the fourth quarter margin expansion for the whole group. So this is Q4 margin guidance. As for the margin outlook for the next year, the new fiscal year, I think we will focus on the profitability across all the business lines. and drive to the achieved margin expansion in the coming new year. I think we are quite optimistic about the margin expansion for core educational business and we expect the East Buy will generate more profits in the coming new year, Jenny.

We will now take our next question from Alice Cai from Citi.

Congratulations on the strong results. May I ask the question on capacity expansion plan for Q4 and also for FY '27?

Yes. The expansion, I think as we guided at the starting time of this fiscal year, we plan to open 10% to 15% new capacity. I think the net add of the new learning centers in first 3 quarters was 8%. So this is -- that means in the first 3 quarters, the net adds 8%. So I think the whole year is the net expansion is somewhere around 10% to like 13%, 14%. As I said, we only allow the cities with the good performance of the top line and bottom line last year to open more the learning centers. And we care more about the better utilization and the margins of the whole group. So I think we still focus on the -- we put the new student enrollments into the existing learning centers.

And so I think if you show the utilization rate, it will be up for the group. And next year, I think we will continue to open somewhere around 10% or even a little bit more learning centers in the new year. But on the other hand, don't forget, we do have a lot of the online and the OMO products and offerings. We don't -- for some online business, we even don't need the existing learning centers. So I do believe in the coming new year, the utilization rate will continuously go up going forward.

We will now take our next question from Lucy Yu from Bank of America Securities.

This is Lucy from Bank of America. I have a question on margin as well. So you mentioned that there will be one-off restructuring expense in the coming quarter. Would you please quantify how much would that be in either U.S. dollar term or in the margin or as a percentage of revenue that's in the May quarter. And also, you mentioned a new strategy that will possibly lower the selling and distribution expense or the marketing expense next year. So what's our target on the sales and marketing expense for '27?

Yes. I think the one-off the expenses in the coming Q4 related to the structural adjustments of the overseas business. I think the negative impact on margin, it's roughly 50 bps to 100 bps. So roughly $10 million to $15 million is one-off. But even we -- even so, but we still remain confident to get the margin expansion for the whole group in the coming Q4. What I mean is we include the -- even though we include the one-off expenses into the forecast, we still get the margin expansion in Q4.

And your question about the marketing expenses plan next year, yes, I think the next -- we're doing the cost control. And also, we put more focus on the product quality enhancement. So we don't need to spend crazy money on marketing going forward, like what we did in the last 3 quarters. And in the coming year, we expect that the marketing expenses as a percentage of the revenue will be down. So it's another factor to drive the margin.

We will now take our next question from Yikun Zheng from CITIC.

Congratulations on the strong results. My question is about the momentum of K-12 business. I remember last summer, our K-12 business has gone through some deceleration. So how do we think of the growth trend and the competition for K-12 business in this summer?

On the K-12 business. Yes, I think we beat the guidance again of the K-12 business in Q3. I think we -- actually, we beat the guidance in like 2 to 3 quarters in a row. And I think in the Q4, we still -- we are very optimistic about the K-12 revenue growth. I think the reason is, this year we changed the strategy. We put more focus and resources on the product quality enhancement. And so, I think it drives the student retention rate up and drive the utilization rate up.

And so in the Q4, I think our K-12 business still got the revenue growth about, let's say, 15% to 20%; K-9, let's say, 20% top line growth plus, 20% plus top line growth and high school business, let's say, 15% to 20%. So I think going forward, even in the next year or year after, I think we still get the very healthy growth of the K-12 business. Because now I think our quality is better than that of last year and also the student retention rate is up. And so that's why we don't need to spend crazy money on marketing to recruit the new student enrollment. And so I think we're quite optimistic about the K-12 business, the growth going forward.

And we will now take the next question from Elsie Sheng from CLSA.

Congratulations on the strong results. My question is about the overseas business. So I noticed that the revenue growth of the overseas test prep has been accelerating over the past 2 quarters. Could you give us more color on the reason behind? And is it because the demand is coming back? Or is it because we take more market share? And what's the outlook for the overseas growth in the fourth quarter and next year?

Yes. Due to the negative impact of the economic environment and the international situation, I think, our overseas business was negatively impacted by the outside environment. But I think the -- our team of the overseas has shown the resilience in almost everything. And so we -- even in the coming Q4, I think the overseas related business will get like the year-over-year will be flattish or low single digit up when the revenue increase. And so thanks for the -- we have a great team to do the great job in almost all the cities.

And next year, I do believe we can do even better because since last quarter, we started to do consolidation of the overseas test lab and the overseas consulting. So going forward, I think we will provide a better one-stop service and products to the students. And also, we will do some cost control to save some fixed cost and expenses. And also in the coming new year, I do believe the overseas related business margin will be up.

We will now take our next question from D.S. Kim of JPMorgan.

Congrats on the strong beat. Actually, all my questions have been answered already. So let me just ask a couple of follow-ups. First, you mentioned a $10 million, $15 million one-off expense in 4Q. Can I just double check, it would be purely contained in 4Q? Or can it be additional one-off spilling over into next year? I think it's just one-off, but just to provide some confidence and comfort to the market on our margin expansion next year, just to clarify.

Second, you mentioned the expansion, 10% to 13%, 14% expansion. Can I double check is that number of centers or the size of classroom like area size expansion? And more importantly, what does this group level expansion mean specifically for K-9 like class capacity, if you will, this and next year?

I think the one-off expenses, what I said is I think majority of the one-off expenses, it will be happened in Q4. So it's a one-off. But even we consider the one-off expenses drag, but we still get the hope of margin expansion in Q4. And -- but it is better to the future because we spent some -- the one-off expenses in Q4. But as a result, we reduced the fixed cost and expenses in the coming new year. So that's why I said, we will drive the margin up of the overseas business in the coming year.

And your second question is about the capacity. Yes, square meter -- yes, what I'm saying is in square meter size. So this is a net add. And then most of the new capacity we build up is in the K-12 business. And -- but don't forget the K-12 business, the top line growth will -- let's -- it's not an official guidance. But based on the -- our current estimation, I think the next year top line growth will be somewhere around 15% or 20%, let's say, close to 20% or even more. So we still have the leverage. If we open like 10% to 15% of the new capacity, we still have the leverage to drive the average utilization rate up going forward. So -- and I think the -- as for the cost and expansion discipline, I think the local teams support my job. I believe they will do the better job in the coming new year. Even they have done a great job in this year. So I do believe they will do more or better job in the coming new year on the cost control and the control of the expansion plan.

I think I absolutely agree with you that like it's kind of -- we need to do that hard to make the hard decision to optimize our cost structure into next year. But just to double check, I know it could be a little sensitive, but broadly speaking, the one-off, when we say it is kind of optimization of our workforce and the staff, that's one-off, right? So it's not like we are ongoing spending money on restructuring. It's just really that we had to make hard decision, and there was some related cost to it in 4Q. Is that fair understanding?

Yes. Yes, correct.

We will now take our next question from Jane Yuan of CICC.

Congratulations on this quarter's strong performance. I noticed that on the new Education business side, revenue top line growth remains strong, but I see a slight moderation in the member of paid user growth for the learning device. So could you help us understand what's behind the shift?

The paid user. Yes. I think because of this disclosure, the difference. So I think the paid user -- what I'm saying is the one students -- the one paid users pay more money and enroll more subjects at the same time. So it's better than before. And secondly, we do have some like the seasonal or the timing difference issue. And so I suggest you look at the enrollment and the deferred revenue and the GAAP revenue in more long term. So that's why we gave the whole year guidance since this year. And so I think the trend is good of the K-12 business. And the Q4, I do believe the revenue growth will be very healthy and we'll continue to grow the business even in the Q4 and the new year.

We will now take the next question from Charlotte Wei of HSBC.

Congrats on a really strong quarter of results. So my question is regarding AI impact. On one hand, we can see AI clearly improve like operational efficiency and support margin expansion. On the other hand, so how do we expect like AI can change the core tutoring formats that EDU is currently offering. So like over the next 12 to 24 months, what kind of opportunities and threats do you see from the AI?

I will ask Sisi to answer your question. Sisi is AI expert.

Okay. Yes. So actually, we are excited about the opportunity to implement AI technology into our business. It's a big opportunity for companies like us with capital advantages and also we can hire top people and also have the best educational experience in this industry. So we have the best position to implement AI technology into our area.

And 3 things we're doing, and we are making progress and also want to share with each of you. Firstly, we are implementing AI technology into all key business lines. So for not only those online products or hardware products like our intelligent learning device, we have all the AI functions in it embedded into it and keep monetizing it and enhancing students' learning experience and improve the learning efficiency of our customers as well.

And even offline classes, for young people, for young students and all ages, actually, they can implement some AI functions in the class, and we are collecting the data and combining it with our teaching and learning experience to have all the data to possess more and more value to help us to even explore even more product opportunities in the future. So existing products are enhancing the quality and also enhancing the comparative -- competitive advantage using the AI, implementing the AI technology.

And second thing we are doing is to help us this year, especially this year and coming 1 to 2 years, our key theme is to enhance the overall efficiency, bring the healthy growth plus the profitability enhancement. The AI can put a lot of -- can give us a lot of help for each progress of our daily work for all the teachers, salespeople and teacher assistants, even functional department staff, the whole working process can implement AI technology to enhance the efficiency. So we have already seen some certain business, labor costs got reduced or the labor hours got reduced. And also, we are doing some restructuring for certain business, for example, the overseas-related business and also some other business as well.

So we want to use -- implement more and more AI technology into the working process to benefit from this efficiency improvement. So this is the second thing. It's an ongoing work. So we will continue closely following the trend of AI technologies evolvement and keep using it into the whole working process. Teachers are saving more and more time so that our teachers utilization can also improve together with the trend.

And third biggest thing, actually, we are also excited and waiting for the results is that we have several piloting team. They're working on some new products implementing purely AI technology, so we can get rid or depends very, very little on human resource, but we can combine the AI technology with our teaching and learning experience and certain content so that we can come up with some innovative actually educational products, which is different from currently what we are doing for offline, but using the AI technology to bring students the learning experience, similar with offline face-to-face teaching but using AI technology.

So we're exploring some opportunities here now. And hopefully, in coming several months, maybe we can see some new products coming. Yes. So actually, the company are devoting a lot of new resources into the AI area. It's an ongoing process, but definitely, together with our strategy, we will put more -- implement more of the AI technology, keep catching up the trend and benefit more going forward.

We will now take our next question from Timothy Zhao of Goldman Sachs.

Congrats on the solid results. My question is regarding your longer-term margin profile. As you have discussed a lot about the new initiatives, expanding the full life cycle of the customers and AI can help improve the overall operating efficiency and including the overseas test prep and integration. Just wondering if you can share any updates on your view on the longer-term operating margin of EDU business and EDU's educational business.

Thank you, Tim. The margin question. As I said, the coming new year, I think we're quite optimistic about the margin expansion because of the higher the utilization rates and even the better the leverage -- operation leverage and also the -- because of the cost control, we reduced the fixed cost and expenses. And so in the next year, the margin will be up. And I do believe we will get the margin expansion in next 3 years. So we do hope we can get better margin step-by-step in the next 3 or even long term. So -- and I think next quarter, I will give the guidance of the detailed guidance on margin next quarter for the next year, but we're quite optimistic about the long-term margin expansion going forward.

And 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 don't 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.

Good evening, and thank you for standing by for New Oriental's FY 2026 Second Quarter Results Earnings Conference Call. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Ms. Sisi Zhao. Thank you. Please go ahead.

Thank you. Hello, everyone, and welcome to New Oriental's Second 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 will now 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. I'm pleased to report a strong set of results for the second fiscal quarter of 2026. Our continued focus on operational efficiency and disciplined resource management has been a key driver of our solid performance and continues to support our path to sustainable profitability. We're delighted to see strong profit growth accompanied by a significant improvement in non-GAAP operating margin, up more than 4 percentage points again exceeded our expectations.

This quarter, total net revenue grew 14.7% year-over-year to $1.19 billion, non-GAAP operating income more than tripled rising 206.9% to $89.1 million. Non-GAAP net income attributable to New Oriental increased 68.6% to $72.9 million. Our core business remains steady and I'm pleased to share that our new initiatives are gaining traction and making meaningful contribution to the group's overall performance.

For the second fiscal quarter, our K9 new educational business and high school tutoring business reported accelerated year-over-year revenue growth, outpacing the previous quarter. Overseas related business have shown resilience, delivered modest revenue growth despite the ongoing macro economy headwinds, exceeding our earlier conservative expectations. Overseas [indiscernible] business recorded a revenue increase of 4% year-over-year. Overseas study consulting business recorded a slightly decrease of about 3% year-over-year.

Our adults and university students business recorded a revenue increase of 13% year-over-year. As for our continued investments in new education initiatives, including nonacademic tutoring and our intelligent learning system and devices deliver solid sustainable results. Revenue from this business grew 22% year-over-year this quarter. Our nondynamic tutoring business has shown been rolled out to around 60 existing cities. market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of the revenue.

As for our intelligence learning system and device business, that has been launched in around 60 cities. We're encouraged by improved customer retention and scalability of the new initiative. The top 10 cities contribute over 50% of this business.

Turning to our integrated tourism related business. Our domestic and international study tours and research camp for K-12 and university students were held in 55 cities across China, where the top 10 cities contribute over 50% of the revenue. In parallel, our newly launched tourism offering for middle age and senior citizens have been well expanded -- has been well received now available in 30 key provinces international markets. We've expanded our product portfolio to include culture travel, ,China Study Tour, global study work and cap education, all designed to deliver enriching experience through culture and knowledge sharing and personal growth.

We're now also exploring opportunities in-house and wellness sector for seniors -- well patent with partners with the over 300 wellness spaces in locations such as Hainan, in [indiscernible] the segment with a light asset model.

With regards to our OMO system, our efforts in developing and revamping our online merge offline teaching platform continues. These efforts aim to deliver more advanced and diversified education service to our customers of all ages. A total of $28.4 million has been invested during this quarter to upgrade and maintain our OMO teaching platforms. Beyond OMO, we continue to focus on our venture in AI, encouraged by the positive market feedback. We have been and will continue to refine an embedded 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 are dedicated to driving long-term revenue growth through focus on product innovation and official efficiency. In the upcoming quarters, we look forward to sharing tangible results and positive highlights on performance that are backed by our investments in AI.

Now turning to the East Buy performance. I'm pleased to share that during the reporting period, East Buy remain customer-centric and made strong progress in both product development and supply chain enhancements. East Buy has expanded beyond its original focus on [indiscernible] food and snacks to offer a broader, more diversified product range. As of the end of the period, private label as PUs reached 801. New categories include seafood, health care products, kitchen, condiments, needs, X, dairy and personal care, household and cleaning items, paper growth, home textiles, apparel and [indiscernible]. These offerings are thoughtfully create to meet customers' growing demand to health, quality of life and convenience.

They contribute to both sales and profit growth to growth while further optimizing its product mix beyond expanding SDUs, East Buy also focused on product iteration, cost efficiency and targeted marketing to build blockbuster products that resonated strongly with the customers. At the same time, East Buy began going off-line channels. leveraging strong brand recognition and New Orientals learning center network. With the vending machine model now profitable in select cities, we plan to scale this initiative nationwide. All in all, we are pleased to see East Buy focused and back on track, making a positive contribution to the group, both top line and bottom line. We expect East Buy to contribute more revenue and profit to the group in the future, while continuously enhancing our brands in food.

Now I will turn the call over to Sisi to share with you about the key financials. Please go ahead, Sisi.

Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating cost and expenses for the quarter were $1,125.1 million, representing a 10.4% increase year-over-year. Cost of revenues increased by 11.8% year-over-year to $566.9 million, Selling and marketing expenses decreased by 1.1% year-over-year to $194 million. G&A expenses for the quarter increased by 15.2% year-over-year. to $374.3 million. Total share-based compensation expenses, which were allocated to related operating costs and expenses, increased by 156.8% to $21.4 million in the second fiscal quarter of 2026.

Operating income were $66.3 million, representing a 244.4% increase year-over-year. Non-GAAP income from operations for the quarter was $89.1 million, representing a 206.9% increase year-over-year. Net income attributable to New Oriental for the quarter was $45.5 million, representing a 42.3% increase year-over-year. Basic and diluted net income per ADS attributable to New Oriental were $0.29 and $0.28, respectively. Non-GAAP net income attributable to New Oriental for the quarter were $72.9 million, representing a search of 68.6% year-over-year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental were $0.46 and $0.45, respectively. Net cash flow generated from operations for the second fiscal quarter was approximately $323.5 million and capital expenditure for the quarter were $23.7 million.

Turning to the balance sheet. As of November 30, 2025, New Oriental had cash and cash equivalents of $1,842.9 million. In addition, the company had $1,609.9 million in term deposits and $1,875.2 million in term deposit -- 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 our goods were delivered at the end of the second quarter of fiscal year 2026 was $2,161.5 million, an increase of 10.2% as compared to $1,960.6 million year-on-year.

Now I'll hand over to Stephen to go through our outlook and guidance.

Thank you, Sisi. We are very encouraged by the strong results we have achieved this quarter and in the first half of the fiscal year 2026. These outcomes give us greater confidence in our operational resilience and growth factory. Looking ahead, we will continue to pursue a balanced approach to revenue and profitability growth. We remain committed to cost discipline and sustainable profitability across all business lines. At the same time, we will take a thoughtful strategic approach to capacity expansion in hearing, ensuring that growth does not come at the expense of quality. We plan to deepen our presence in cities that demonstrate strong top and bottom line performance while continuing to manage resources carefully.

We will closely monitor the pace and scale of the new offerings, aligning them with operational needs and financial performance throughout the year. Given our positive momentum, momentum, including the healthy growth of our K-12 business and the recovery of East Buy, we are now in a more optimistic position regarding our business outlook. We expect the total net revenue for the group, including East Buy in the third quarter of the fiscal year 2026, December 1, 2025 to February 28, 2026, and to be in the range of $1,313.2 million to $ 1,348.7 million, representing a year-over-year increase in the range of 11% to 14%.

As the full fiscal year 2026, we are resting our total net revenue guidance for the group to be in the range of $5, 292.3 million to $5,488.3 million, representing a year-over-year increase in the range of 8% to 12%. These expectations reflect our current outlook, taking into account recent regulatory developments as well as our preliminary view of market conditions, they remain subject to change. I would like to give you an update on our shareholder return plan for fiscal year 2026. In October 2025, we announced that pursuant to the previous adopt 3-year shareholder return plan, the Board of Directors has approved an ordinary dividend of USD 0.12 per common share or USD 1.2 per ADS to be distributed in 2 installments as part of the shareholder return for fiscal year 2026.

As of today, the first installment has been fully paid to shareholders and ADS holders. Details of the second installment will be determined and announced in due course. Additionally, we also announced a share repurchase program in which New Oriental is authorized to repurchase up to $300 million of its ADS or common shares over the subsequent 12 months. As of January 27, yesterday, we had repurchased a total of approximately 1.6 million ADS for grade consideration of approximately $86.3 million from open market in this share repurchase plan.

To conclude, New Oriental remains firmly committed to sustainable growth, delivering high-quality offerings to our customers and creating long-term value for our shareholders. We also continue to work closely with government authorities across provinces and municipalities in China to ensure full compliance with the relevant policies, regulation measures, and to adjust our operations as needed in this response. This is the end of our fiscal year 2026 Q2 summary.

At this point, I would like with Sisi to open the floor for questions. Operator, please open the call for these. Thank you.

[Operator Instructions] [indiscernible] first question.

First of all, congratulations on the very solid second quarter results as well as on the [indiscernible] to your full year guidance. My question is on your guidance. Can management provide some breakdown on the segment growth as much as you can. I'm again to understand the key drivers for the lift to your full year guidance?

Yes. Thank you, Felix. So let us start with this quarter's revenue growth analysis. We are very pleased to see the acceleration, what I mean is the growth of the K-12 business. As you know, I think this -- our strategy this year is to improve the product quality and service quality. And we have seen good results in Q2. We have seen the higher student retention rates and the better feedback from the customers. And -- so this is the K-12 business.

And so the -- in Q3, I think the K-12 business will be grown somewhere around 20% year-over-year or more. So let's say it's in 20% plus year-over-year growth. And overseas -- overseas related business, yes, we mean some the revenue growth pressure. But I think we -- in the Q2, we still get the top line growth of the overseas [ test prep ] by 4% year-over-year growth. And we're quite resilient. And actually, I think we are taking the market share from the market.

And so in the Q3, let's say, in the second half of the year, -- so I do believe the revenue growth will be flattish of the overseas-related business. It's still a drag, but I think we will do as good as we can. College business, let's say, the 14%, 15% top line growth. And yes, this is a breakdown.

And so in the second half of the year, I think we're quite positive about the revenue growth. and the -- even the higher margin. Because since last year, March 2025, we started to the cost control. And I think we have done a great job. And going forward, we will do more on cost control. So it will improve the margin expansion going forward in the second half of the year and the year after, Felix?

Our next question comes from Alice Cai of Citibank.

Congratulations on the strong results. We heard about the business integration between your [indiscernible] and consulting units, then I have 2 questions, quick questions. First, what is the expected margin expansion from this merger? And can effectively offset the headwinds in the U.S. market.

Second, regarding efficiency, how much reduction do you expect in the customer cost acquisition? And what is your target for the cross-selling rate?

Yes. Yes. I think, yes, I saw the news of the emerging of the overseas [indiscernible] business and consulting business. And as you know, before the merging overseas test prep -- the unit and the consulting business provide the service to their clients, respectively. And each site has their own management teams, teachers, marketing staff, admin staff. And I think we -- now we put it together. We merged the overseas test prep and consulting business. And I think the merge -- so let's say, the restructuring aims to provide a customer with a one-stop service. And I think the -- we will provide even better service to the customers. and also to be reduced absolutely some cost expenses because we put it together, and I think the -- one person can do more jobs even stronger than before. So let's wait till the next quarter's earnings call. I will share with you about the how much cost we can save or even the -- how much can get more revenue or improve the top end growth and to save some cost to have the merger profile. Alex? Thank you.

Our next question comes from Lucy Yu from Bank of America Securities.

Congratulations. So my question is on the margin expansion in the second quarter, which has been more than 1 percentage point. Could you please elaborate on the margin expansion? What is driving that? And how should we think about the margin expansion magnitude in the second half.

Yes. Okay. Yes. Lucy, I think your question is about margin. Yes, even, as I said, even though we made some margin drag from the overseas related business, but we still got the full margin expansion in Q2. The non-GAAP OP margin was increased by 470 basis points year-over-year. I think the margin expansion was mainly driven by the better utilization, the higher operating leverage and cost control and the -- and also the profit contribution from the East Buy.

And I think we will continuously focus on operational efficiency and disciplined resource management, let's say, in cost control. We control the learning center expansion plan and we control the marketing expenses. You saw the numbers, the results -- and I think going forward, even the Q3 and the Q4 in the second half of the year, we will get the margin expansion.

I don't want to give the digital guidance because typically, we don't give the margin guidance, but we are quite optimistic about the margin expansion in the second half of this year. Lucy?

Next question will come from the line of Yikun Zheng from Citic.

Congrats on the strong results. So my question is about the overseas businesss. As you mentioned that the overseas business has like 4% of growth rates. Actually, the market condition is quite challenging. So just wondering the future trends and the main reason for this overseas that can get such good results.

Yes. I think yes. As I said, the overseas business needs some impacts of the economy environment outside. But I think our team have done a great job. They have shown very resilient in the first half of the year. And we believe they will take the more market share from all the competitors. And also, I think the group gave the team more support than before because it needs some pressure. We should help them to do more jobs. And going forward, in the second half of the year, I think I just want to give the guidance, the flattish or little bit down a low single-digit growth because the outside environment has no change. But I believe our team will do the great job as they did in the first half of the year.

Our next question comes from D.S. Kim of JPMorgan.

Stephen, congrats on the great quarter. And I hope that -- this is first of many, many more quarters to come. Before I actually ask my question, can I double check on Luc's earlier question on margin. Can we talk about how much of the margin expansion in 2Q, not forward-looking, but 2Q came from core education versus East Buy to the extent that you can elaborate? And I have my question after this.

Yes. Actually, East Buy also reported their first year -- first half results, so you can roughly calculate. So if you take out East Buy all the rest together, margin expansion is roughly about 300 bps margin expansion year-over-year.

And my actual question is for our new education business is great that we printed more than 20% growth. What do you think in your view is like sustainable growth rate for this segment from here, say, assuming stable 10% capacity expansion for like next 3 to 5 years, say, like 10% for the group capacity expansion, maybe that means K-9 capacity can grow maybe 15% per annum and then we can add on maybe 4%, 5% of ASP growth and a couple more points for efficiency gain or utilization gain, if you will. Does that mean that can we continue to expect say, 20% plus growth, I'm not talking about second half, but like next few years, based on this level of capacity expansion or the growth algorithm or formula can change versus what we had in the past?

Yes. I think it's a great question. We changed our strategy before the starting of this fiscal year. we slowed down the learning center expansion from 20%, 30% the year before to, let's say, 10%. So that means we put more focus on the quality -- and quality improvement. So I think all the business line, even the high school and the K-9 business the student retention rate is getting higher. I think it's even better than expected. And also, that means we got the better word of mouth. So we don't need to spend like quizzy marketing expenses to acquire the new student enrollment.

That means we get the new student enrollment by better word of mouth. And so I think in the second half of the year, we guided the 20% plus the top line growth of the K-12 business, I believe we will keep the sustainable growth in the year after. Because the better quality and also the -- even the more -- the high -- the competitive edge of New Oriental, I think we deserve to get more new student enrollment [indiscernible] cut some marketing expenses.

And also, definitely, we will see more leverage because we just opened less than 10% new learning centers, but the revenue growth is something -- somewhere around 20%. So it will -- you will see the higher utilization rate and the higher margin of the K-12 business. Yes.

I hope to see that coming through in many more years to come.

Yes. And also, I want to add one point to Sisi's comments. In the Q3, I do believe we got the margin improvement from both core business and East Buy.

[Operator Instructions] Our next question comes from Timothy Zhao of Goldman Sachs.

Congrats on the solid results. So my question is that I recall in the last quarter results, you mentioned that I think about some of the new AI initiatives that you are launching. Just wondering if you can share any tangible results or any updates on the AI investments that you are making, for example, of a new course format that you launched probably late last year. Just wondering if there's any [indiscernible] that.

I think in the last 3 months, I think our team have done a lot on the new offerings of the new AI product. And I think we need maybe 1 quarter to testify the new offerings. And also -- and I believe it will contribute more revenue going forward. And one more point is -- I think the AI technology help on the existing product.

You saw the higher student retention rate. Yes, we put more focus on the -- like the product quality and even the service quality. but I do believe the AI helps us to guide the even higher the student retention rate going forward. So -- and also the AI helps us to get more official efficiency to save some expenses and cost. So AI has the whole group [indiscernible] new offerings and the existing product improvement and cost savings.

So I think we should spend a little bit more on AI technology, but it's not that much. And we will control the whole the spending. But I think we will bear more fruit from the AI investments going forward.

Our next question comes from Elsie Sheng from CLSA.

Congratulations on the results. I have a follow-up question on the margin expansion because if we look into the details, the -- in the second quarter, the gross margin is going up and also the marketing expense ratio is also going down. And -- because I noticed that you earlier mentioned that you have initiated cross department customer service system to improve the service or efficiency and also reduce the personal acquisition cost. So I wonder if the decrease in the marketing expense ratio related to this initiative? And if it's so, how do we expect the impact of this going forward? Do you expect this trend of lower marketing expense ratio to continue in the next few quarters?

I think the situation will continue because -- yes, first of all, we put more focus on the product itself rather than spend more money on marketing, but growth is still very healthy. And also, as you said, we set up a new customer service department. And that means I think we will bring the information within New Oriental even the old departments, overseas, consulting, college, K-12 business, high school, K-9 and even other business and the tourism business at East Buy. So I think these new departments will bring us more traffic even within new rental customer resources. So this is -- I think, is a very good tool to save more marketing expenses.

And also, we just set up the 10% new learning centers this year. So we don't need to spend more money on marketing. And yes, even in the Q1, some -- I know some competitors did summer promotion or even the free ports in the summer. But we are happy to see more students from our competitors came back to New Oriental in autumn. So that means our core competitor were the product quality or quality turns to be better. And going forward, I think the sale and marketing expenses as the percentage of the revenue will go down going forward, even the second half of the year and year after.

Thank you for the questions. We're now approaching the end of the conference call. I will now turn the call back to New Oriental's Executive President and CFO, Mr. 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. Thank you very much.

That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.

Good evening, and thank you for standing by for New Oriental's FY 2026 First Quarter Results Earnings Conference Call. [Operator Instructions] 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 view 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 has 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 focused 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, 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 camp for K-12 and university students were connected across 55 cities nationwide, with the top 10 cities contributed 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 tour, global study tour and camp education. With regards to our OMO system, our efforts in developing and revamping our online merging offline teaching platform continued. These efforts aim to deliver more advanced and diversified education service to our customers of all ages. A total of $28.5 million have 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 marks significant steps of 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 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 the 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 has particularly stood out.

We have strengthened our capability through rigorous end-to-end quality management from sourcing to aftersales service, which resulted a greater market recognition for our private label products.

During the reporting period, East Buy further advanced its East Buy 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.

Now, I will turn the call over to Sisi to share with you about the key financials. Sisi, please go ahead.

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. G&A 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 $1.5, 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 were $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 were 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 effect cost control and sustainable profitability across our all 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 the 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 year-over-year increase in the range of 9% to 12%.

In the second quarter, we projected a notable acceleration of revenue growth in 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 to 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 the fiscal year 2026 has begun. The Board of Directors has approved an ordinary cash dividend and new share repurchase program.

Regarding the ordinary share dividend, the ordinary cash dividend of $0.12 per common share or $1.2 per ADS will be paid in two installments with an aggregate amount of approximately $190 million. The first installment with $0.06 per common share or $0.6 per ADS will be paid to holders of common shares or ADS of recorded as of the close of business on November 18, 2025, Beijing and Hong Kong time and New York time, respectively.

The second installment $0.06 per common share or $0.6 per ADS is expected to be paid around 6 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 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 province and municipalities in China, ensuring compliance with the relevant policies, guidelines and any related implementations, regulations and measures and adjusting our business operation 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.

[Operator Instructions] We will now take our first question from the line of Felix Liu from UBS. Please ask your question, Felix.

I'm glad to hear that you mentioned or expect a notable acceleration in your K-12 business in the upcoming quarter. I know previously, there are market concerns over increased competition, especially over the summer. So, could management elaborate on how is the latest competition landscape in K-12 that you're feeling at the moment? What are the -- have you made any adjustments to your strategy? And what is 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 the good result. 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 missed some competition pressure in the summer, because of 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 our classes in autumn. So, that's why we raised the guidance of the K-12 business.

So, let's divide the K-12 business one by one. And so, we expect the K9 new business revenue growth will be around 20% year-over-year growth in Q2. And for the high school business, I think in the Q2, the growth rate will return to double-digit growth. So, I think you see the revenue acceleration since Q2. And so, I think the high student retention rate and the better word of mouth will drive the revenue growth acceleration. And I think, I believe the revenue growth acceleration will continuously since Q2 and throughout the year.

So for -- yes, so for the whole year, 2026, I think the K9 business will be -- the year-over-year growth will be over 20%. And for the high school, like double-digit growth. So, I think, our strategy is correct, because the student retention rate, both for the primary school students and middle school students and high school students, all this is why the student retention rate is 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 into 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. I think, Alice, your question is about the SBC, the share-based compensation. I think in the second half of the last fiscal year, we issued -- we grant the ADS shares to the management and the staff and teachers in the next 3 years. So, it's driving the SBC up. And yes, so the number of the SBC in this quarter is bigger than that of last year. And yes, but as you know...

Yes. You can roughly estimate going forward, every quarter, the SBC expenses will be similar with this quarter and at this kind of level for the coming several quarters.

Yes. But I think typically, the first year we recorded more SBC expenses, more in first year and then less in second and third year.

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 break down by subsegment? How should we think about the overseas sustainability growth? And will that impact your guidance for the full year?

Yes. As for the overseas-related business, as you know, we are adversely affected by the external environment. Last quarter, we guided in Q1, the revenue of the overseas-related business would be down by 5%. But in Q1, I think overseas test prep still grew by 1%. Overseas consulting business grew by 2%. I think, we will strive to minimize the negative impact going forward.

And so, in the Q2, we still guide the overseas-related business will be down by low single digits in Q2, which were still use the conservative method to make the forecast. And I think, yes, the negative impact from the -- like the international relationship, even the outside environment changed a lot. But I think, we will strive to minimize the impact. And so, we do expect we can beat our guidance, because we do the guidance in Q2, even for the whole year more conservatively. Lucy.

Stephen, just to follow up. So for example, your test prep is positive. So by age group, like younger age, high school and like, 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 like background raising. So which part of that is better than expected?

Within the overseas test prep, the younger age students group, the business of that part grew very fast, even more than 25% year-over-year. So, that's why the makeup of the like the adults or even the college students business is down. And 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 improving the business still grew very fast. So as a whole, I think the overseas test prep and consulting business, we will still give the guidance like the 4% or 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 actually wanted to ask why the share price is down 6%, 7% pre-market, but I guess that's a question for the market not you. I actually have a question regarding shareholder return policy, if that's okay. How shall we think about the policy going forward, say, is this based on your projected or budgeted net profit and payout ratio? Or is it more based on our expectation on cash flows and whatnot?

The reason why I'm asking is, if I use my own estimated the GAAP EPS, what you announced is roughly about 100% payout, say, like 40% payout for the dividend and 60% for buyback based on my GAAP net profit or EPS. Is that what we should think about going forward, i.e., like we could pay regularly over 50% as you guided, but more like 100% payout going forward based on this earnings and payout? Or shall we treat the buyback as one-off only for current year, because of the stock price is low and we only -- we can only expect 50% going forward? Like can we walk us through how we can think about the payout ratio or shareholder return going forward?

Thank you, D. S. It's a good question. I think last quarter, our Board approved 3-year shareholder return plan. And this -- we announced earlier today, we paid $190 million dividend, which amounted to the 50% of net profit, we generated last year. And combined with the $300 million, the new share buyback program.

So let's do the math. We -- I think, the payout ratio this year is over 130% if you compare the capital allocation with the net profit we made last year. And the dividend plus the share buyback yield is over 5%. So, I think the -- going forward, next year, I think the dividend we will pay, because I think, it is a regular dividend. And the $300 million share buyback we announced this year is not onetime. It's not onetime.

I think, next year, I think, I will discuss with the Board and to push the Board to approve the new capital allocation program. And I think, we will keep the high level of the payout ratio and the yield, because think about that, we meet some pressure slowing down the top line. And -- but we can still like the 10% or plus topline growth and generate higher margin. And also, we are piling up the cash.

So, that's why the Board support the management to pay more capital allocation to investors. And I think the investors deserve to get more money the capital allocation from the company. And so we announced the 3 years -- the shareholder return plan. So, I think in the next year, we will pay more.

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 say 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 1-year delay? And is that how we should think about? Or I guess, it's all flexible, but just wanted to get your thoughts.

I think, this is our internal policy. Because we make the calculation based on the last year net profit. So, we -- last quarter, we announced that we paid no less than 50%. But finally, we paid about 30% -- 30%. And next year, I think 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 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, but we still got the group margin expansion by 100 basis points in Q1. And I think the margin expansion was mainly driven by the better utilization, operating leverage and the cost control and the profit contribution from East Buy. As you know, we started to do the cost control since March in the last fiscal year, this year March. And we have seen the good results.

And I think, it will help the margin expansion even in the rest of the year, this fiscal year. And we look ahead into the Q2 margin guidance. I think, we are quite optimistic about the margin expansion for the whole group in Q2. And so that means the core business and the East Buy business, both of the business, the margin will be up in Q2. And I believe the margin expansion in Q2 will be greater than that of Q1.

And as for the margin outlook for the whole year, I think the whole group are focusing on the profitability across all business lines. We are doing the cost control in all business lines. So, we do hope we can get the margin expansion for the whole year for the group.

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. So, could you let us -- so what should we 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 the -- since the second half of last year and Q1, we paid dividend from the WFOE to ListCo. And so, we need to pay the withholding tax to the tax bureau. So, it drive the ETR up in Q1. So it was 27%. And typically, we paid 25% of the ETR. And going forward, I think we probably -- we will do more -- pay more dividends from WFOE to ListCo. So, I think in this year, the ETR will be higher than that of last year or normal. But I think the reason is that, you saw, we announced earlier today, we raised the capital allocation to investors roughly $490 million as the capital allocation total. So, we need more dollars, and that's why it drives the ETR up.

[Operator Instructions] We now take our next question from the line of 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, I think, 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, the revenue growth of the junior high school business is a little bit faster than the primary schools business. Because, first of all, it's a little bit low base than the kids' business. And secondly, we spent a lot of the efforts and resources in the last 3, 4 years to open a new business of the middle school business. And I think, the whole team contribute a lot of the -- provide a better the product to the customers and the students love the new product. That's why the revenue growth is better.

And so going forward, I think we believe the revenue growth of the middle school business will be a little bit higher than the kids' business. But as a whole, the K9 new business growth, you saw our guidance for Q2 and even for the whole year. I think definitely, it's the revenue acceleration is coming. And so as I said, in Q2, the K9 business roughly 20% top line growth. And 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.