New Oriental’s Thunderous Roar: The Uphill Road to Rebirth

$New Oriental EDU & Tech(EDU.US) On July 30th, Beijing time, New Oriental released its Q4 FY2025 earnings before the U.S. stock market opened, corresponding to the off-season operating conditions from March 2025 to May 2025.

This earnings review remains focused on the education business, with a key emphasis on guidance, including expectations for the entire year of 2026. Specifically, the outlook for the study abroad business is of utmost importance, followed by trends in the prosperity of new businesses and other issues. Beyond business, attention is also on changes in shareholder returns.

Specifically:

1. Guidance reveals a "bomb": Given the turbulent environment, the market's focus on $NEW ORIENTAL-S(09901.HK) has always been on guidance. However, the management's revenue growth guidance for 1Q26 and the entire year of 2026 fell short of expectations—next quarter's growth rate is 2-5%, and the entire year of 2026 is only about 5-10% growth, while the market expected a normal increase of over 10%.

This will undoubtedly hit market confidence. A month ago, during the company's preview, management insisted on not adjusting growth targets, which temporarily boosted capital sentiment. Why the sudden pessimism?

Of course, this may again be management's "expectation management," deliberately conservative to lower market expectations. It's best to listen to the explanations in the conference call.

2. Where are the hidden concerns?: From actual operations, Dolphin Research speculates that the main issues are in the study abroad and live-streaming e-commerce sectors. Dolphin Research has always been conservative about e-commerce expectations, with 4Q25 and 1Q26 still in the pain period of the year-on-year base after Dong Yuhui's departure (a 30% decline), not to mention that Q4's performance was also below expectations.

Our main concern is in the study abroad business. This quarter's study abroad performance (15% growth in test preparation, 8% growth in consulting) overall seems decent, but consulting demand often leads test preparation. Compared to Q3, the growth rate of study abroad consulting in Q4 slowed down too quickly (21% vs. 8%), indicating future pressure.

Of course, there are some short-term incidental impacts, such as the tightening of daily approval volume and difficulty after the resumption of U.S. visa approvals. Therefore, if relations ease later, some delayed demand may be released, but compared to last year's prosperity, the long-term trend will definitely be affected.

3. High growth in new business, but "volume" growth rate slows again: Q4 new business growth was 32.5%, still in a high growth range. However, from the enrollment numbers and per capita spending in quality training, this quarter's enrollment growth rate significantly slowed to only 5%. This means that this quarter's growth may mainly rely on increased per capita spending—either through price increases or enrollment in higher-priced courses.

The last abnormal change in enrollment was in Q1, when the company's explanation was that the adjustment of summer course enrollment schedules caused it. It is suggested to use the enrollment situation of two consecutive quarters for year-on-year comparison to smooth out seasonal fluctuations. But after handling it this way, the growth rate in the fourth quarter is still only 8%, which does not match the prosperity track.

4. The hot substitution effect of learning machines?: In the quality training industry, licenses have been continuously issued, indicating that supply is continuously increasing, but this speed (monthly increase of 0.3-0.5%) has not changed. Although the emergence of small black classes like mushrooms after rain also has an impact, in recent years, it is still a user group from a small peak of the second child ten years ago, and the population problem is still early, so saying that the industry supply and demand balance is a bit far-fetched.

Meanwhile, the popularity of learning machines remains high, which we believe may have had some substitution effect on quality training courses (borderline subjects). Although New Oriental also has learning machines, the year-on-year growth rate of Q4 learning machine membership subscriptions also slowed to 35%, due to its learning machines being mainly tied to offline courses, with sales not as good as peers like Xueersi.

5. Other businesses are normal: Other than that, other businesses are temporarily normal. Adult English grew by 17%, and high school subject training growth was over 20%.

6. Efficiency improvement within the group: Q4 profitability, after excluding the impact of goodwill impairment, actually slightly exceeded expectations. The non-GAAP operating profit margin in the fourth quarter was 6.6%, an increase of 3 percentage points year-on-year. Last quarter, management also made statements about improving input efficiency and optimizing cost expenditures.

7. New shareholder returns are insufficient to offset fundamental concerns: As of the end of Q4, the repurchase plan approved in 2022 expired, and the $700 million quota was also used up. In reality, only $700 million was spent on repurchases over nearly three years, which is not enough of a return rate.

This time, the new shareholder return plan approved in July is calculated based on more than half of the net profit attributable to the parent company in the previous fiscal year. For example, for FY2026, the expected repurchase scale should be greater than half of the FY2025 net profit attributable to the parent company, which is $1.8 billion.

If we assume the market's expectations of $500 million and $600 million in net profit attributable to the parent company for 26/27, it means that the total shareholder return for 26-28 years should be at least $750 million. Although the upper limit is high, the increase in the lower limit is too small (vs. $700 million), which is not enough to offset the negative sentiment brought by the fundamentals.

8. Overview of financial indicators

Dolphin Research's View

Dragged down by environmental turbulence, New Oriental has experienced multiple consecutive earnings disappointments. Last quarter, the uncertainty in the growth prospects of the study abroad business due to tariffs significantly increased, causing the valuation to hover at historical lows.

Although the possibility of absurd tariffs being implemented is low, and the marginal impact will gradually diminish as negotiations drag on, the suppression of sentiment and consecutive misses in guidance have weakened market confidence in the company's main business growth. The fundamental flaws will significantly reduce the potential for a subsequent undervaluation rebound.

Last quarter, Q3 coincided with the exhaustion of the previous round of shareholder return quotas, and a new plan was about to be announced. Therefore, Dolphin Research has been emphasizing for the past two quarters that in the short term, there is only a "dividend bottom" valuation opportunity under pessimistic expectations: the safety cushion of fundamental valuation is not high enough, but if the current repurchase + dividend execution strength is maintained, the market value of $7 billion at the time implied an annualized shareholder return of about 7%, with little downside space.

A month ago, the company's preview of the earnings report mainly released two positive signals: 1) Maintaining guidance for 4Q25 and FY2026; 2) Considering larger-scale shareholder returns. These two points compensated for the lack of confidence in the fundamentals and reinforced the "dividend bottom" valuation logic.

In the short term, sentiment warmed up, and this small round of valuation rebounded to a maximum of 25x in 2025 and 20x in 2026 P/NOPAT (post-tax operating profit, 20% comprehensive effective tax rate), which can be used as a reference for market valuation sentiment towards New Oriental.

Therefore, when New Oriental fell back to a market value of over $7 billion before the Q3 earnings report, Q4 only needed to deliver an inline performance and significantly improved shareholder returns to smoothly start a valuation recovery. But things did not go as planned, and the guidance miss is a bug that the market cannot accept.

Whether the problem is serious and harms the long-term logic depends on the management's explanation in the conference call. Dolphin Research tends to believe that there is a deliberate conservatism in management to guide expectation management. But at the same time, there are also issues with the study abroad and e-commerce businesses themselves.

Therefore, assuming FY2026 follows the upper limit of the guidance with a 10% growth rate, total revenue is nearly $5.4 billion, and under the trend of cost reduction and efficiency improvement, the non-GAAP OPM reaches 12%, with a 20% tax rate, resulting in an adjusted annual profit of about $520 million. Calculated at 15x P/E, the business valuation is $7.8 billion. At present, the fundamentals are not in a completely favorable period, and the $2.8 billion in available net cash value (excluding prepaid tuition) is not counted.

(Note: New Oriental's financial report only discloses the performance of some businesses, and most of the operating conditions & guidance are disclosed in the earnings conference call and small-scale institutional meetings, so the content of the conference call is relatively important. Dolphin Research will update in the comments section later.)

Detailed Commentary Below

1. Lingering Concerns in Study Abroad

Let's first look at the revenue situation affecting the main education business, especially the study abroad business, which faces significant short-term pressure, including study abroad test preparation and consulting.

From March through May, New Oriental’s core education revenue reached $1.089 billion, up 9.4% year-on-year—just above both the top end of its own guidance and market expectations.

But that guidance is a real trap: management now sees only 2–5% growth in Q1 of fiscal 2026 and just 5–10% for the full year—both firmly single-digit and well below the roughly 10% the market had anticipated.

If only Q1 had been under pressure, you could blame a tough-year-ago comparison. Yet by issuing a full-year forecast for the first time, they’ve effectively dashed any hopes that a later-year base-effect slowdown will spark a rebound.

The specific performance of the subdivided businesses is half announced in the conference call and half in small-scale institutional meetings. Dolphin Research currently provides estimated split values, and specific data will be clarified in the comments section later:

1) From Q4, study-abroad training and consulting grew by 15% and 8% respectively—solid results that beat both guidance and expectations. However, overall revenues are forecast to slide 4–5% next quarter.

Within that, growth in overseas consulting is decelerating too sharply, signaling a short-term cooldown in U.S. study demand. Some of that demand may shift to other destinations, but with the U.S. still the dominant market, overall volumes will inevitably be suppressed.

In April and May, U.S. and Australian student visa issuances fell by 9% and 6% year-on-year. As geopolitical tensions have ramped up between May and July, U.S. visa approvals have tightened further and caps have limited issuances—likely weighing on future U.S.-bound demand.

Conversely, if bilateral relations ease and approval throughput returns to normal, pent-up demand should begin to release. Yet, based on current guidance—and barring an overly conservative stance from management—a meaningful recovery probably won’t materialize until the back half of fiscal 2026.

2) Adult-English grew 17% year-on-year, with growth holding steady sequentially. Under a tougher year-ago comparison, management expects next quarter’s growth to decelerate to about 10%.

3）New-business revenue saw its Q4 year-on-year growth naturally ease to 33%, roughly in line with guidance and expectations. However, the outlook for 1Q 2026 is softer—management forecasts K9 foundational-training growth slowing to around 15–16%, though full-year growth is still pegged at about 20%.

In the fourth quarter, enrollments in non-academic programs reached 918,000. To smooth out the year-to-year shifts in Spring Festival and winter-break timing, Dolphin looks at the average growth over two back-to-back quarters. After hitting 23% in the prior pair of quarters, growth has slowed sharply to 8%, which—given its role as a sentiment indicator for the sector—is underwhelming.

Average spend-per-customer is Dolphin’s own estimate (and should be taken with a grain of salt), used here mainly to track trends. This quarter shows some signs that the “price-hike” effect may be kicking in again.

Subscriptions to learning devices totaled 255,000—a quarter-on-quarter decline. Competition in the learning-device market is fierce: rivals such as Xueersi are engaging in price wars or rolling out more cost-effective models, driving up overall shipments even as unit-spend keeps falling. New Oriental hasn’t kept pace—largely because its devices remain tethered to its offline courses rather than sold as standalone learning tools.

2. Profit Margin Improvement Exceeds Expectations

After a year-long arms race in capacity expansion that’s eroded profitability among the industry leaders, New Oriental not only had to climb the steep curve of utilization, but also grappled with pressure from slower growth in its study-abroad business and losses tied to its senior-focused cultural-tourism investments (primarily reflected in marketing spend).

Last quarter, management signaled they would, as circumstances dictate, dial back the original expansion pace and roll out cost-cutting and efficiency measures to relieve margin pressure. You can already see some of that this quarter: gross margin improved by 2 percentage points year-over-year, while the operating-expense ratio benefited largely from streamlined marketing costs. Stripping out this quarter’s goodwill impairments and excluding stock-based compensation, operating margin hit 6.6%—a 3-point year-over-year gain that comfortably beat market expectations.