Executive Summary / Key Takeaways

• New Oriental Education (EDU) has successfully pivoted to a diversified services model, with new ventures in non-academic tutoring, intelligent learning systems, and integrated tourism driving revenue growth.
• The company demonstrates strong financial health, supported by robust cash flow generation and a commitment to shareholder returns through a new 3-year plan allocating no less than 50% of GAAP net income to dividends and/or share repurchases.
• Significant investments in AI and its Online-Merge-Offline (OMO) platform are enhancing educational offerings, improving learning outcomes, and driving internal operational efficiencies.
• While macroeconomic headwinds and international relations changes are impacting the overseas business, core K-9 and high school segments are projected to maintain steady growth.
• Strategic capacity expansion in high-performing cities, coupled with ongoing cost control measures, are crucial for sustaining profitability and market share in China's competitive education landscape.

Introduction

New Oriental Education & Technology Group Inc. (EDU) has long been a cornerstone of China's private education sector, founded in 1993 with an initial focus on test preparation and overseas study consulting. In recent years, the company has undergone a profound transformation, strategically pivoting its business model in response to evolving market dynamics and regulatory shifts. This pivot has seen EDU diversify into non-academic tutoring, intelligent learning systems, and an integrated tourism-related business, all while leveraging its established brand and extensive operational footprint. The company's overarching strategy now centers on achieving sustainable growth through a blend of premium offerings, technological innovation, and disciplined profitability management, even amidst a competitive and sometimes challenging macroeconomic environment.

Technological Edge: Powering the Future of Learning

A cornerstone of New Oriental's revitalized strategy is its deep commitment to technological differentiation, particularly through the integration of Artificial Intelligence (AI) and its Online-Merge-Offline (OMO) platform. The company is actively leveraging a combination of open-source large language models, such as Deepseek and GPT, alongside its self-developed AI technologies, to create innovative educational solutions. This strategic investment is not merely theoretical; it translates into tangible benefits for students and operational efficiencies for the company.

New Oriental recently launched two key AI-powered products. The first is a new generation of AI-powered intelligent learning devices designed for K-9 students. These devices integrate AI deeply to provide multifunctional tools, including spoken language coaching, automated essay grading, dictation exercises, classical text recitation, and voice assessment functionality. These features are designed to enhance learning outcomes while simultaneously saving time for teachers, students, and parents. The second product is a new AI-driven smart study solution that combines premium global content with New Oriental's extensive teaching and research experience. These achievements mark significant progress in customer-focused education products, positioning New Oriental as a leader in applying AI to the education field.

The intelligent learning system and device business, a key component of the new education initiatives, has demonstrated strong performance, generating an operating margin of over 22% to 23% in fiscal year 2025. This profitability is comparable to the company's offline teaching class margins and holds potential for further enhancement due to increased technology involvement and labor cost savings. Management believes this business model is "better than even offline training formats" due to its scalability and efficiency.

Beyond student-facing applications, AI is also enhancing internal efficiency. New Oriental has deployed an AI content creation platform and a student performance feedback application to support lesson planning and strengthen home-school communication. An AI-powered FAQ database, built from day-to-day sales conversations, has significantly reduced training costs for the sales team and improved sales efficiency and conversion rates. The OMO teaching platform, which received $28 million in investment during Q4 FY2025 alone, further underpins these technological advancements, providing a flexible and advanced infrastructure for diversified education services across all age groups.

Diversified Business Segments: A Multi-faceted Growth Engine

New Oriental's strategic pivot has resulted in a diversified portfolio of educational services, each contributing to the company's overall growth.

The overseas test prep business saw a revenue increase of 15% year-over-year in Q4 FY2025, while overseas study consulting reported an 8% year-over-year increase. However, the macroeconomic environment and international relations changes have negatively impacted demand, with management expecting the overseas-related business revenue to decline by roughly 4% to 5% for the full fiscal year 2026. Overseas study consulting is projected to see zero or flat growth in FY2026.

The Adults and University Students business continues to show solid performance, with a 17% year-over-year revenue increase in Q4 FY2025. For fiscal year 2026, the college business is expected to maintain a 10% growth rate.

The New Education Business Initiatives, encompassing non-academic tutoring and the intelligent learning system and device business, are a primary growth driver. In Q4 FY2025, these initiatives collectively reported a robust 33% year-over-year revenue increase. The non-academic tutoring business, focused on comprehensive quality, has expanded to around 60 cities, with top 10 cities contributing over 60% of its revenue. The intelligent learning system and device business, leveraging technology for personalized learning, is also in approximately 60 cities, with top 10 cities contributing over 50% of its revenue. For the full fiscal year 2026, the K-9 business (elementary school non-academic tutoring and middle school learning pad business) is projected to grow by approximately 20%. The overall new educational initiatives are expected to achieve 25% to 30% growth.

The High School Business recorded an all-time high in the previous fiscal year, creating a high base for comparison. For fiscal year 2026, the high school business is anticipated to grow around 11% to 12%.

A relatively new venture, the Integrated Tourism-Related Business Line, includes study tours, research camps for K-12 and university students, and tours for middle-aged and senior audiences. It demonstrated exceptional growth, with a 71% year-over-year revenue increase in Q4 FY2025. In Q1 FY2025, this business generated approximately $90 million in revenue and was profitable during that peak season. However, for the full fiscal year 2025, it is expected to be loss-making as the company invests in building its business model. For fiscal year 2026, revenue growth is expected to moderate to 15% to 20% as the company refines its model.

While a separate entity, East Buy's (1797.HK) performance is now included in New Oriental's group-level guidance. East Buy focuses on private label products (green, healthy, high-quality) and has rapidly expanded its SKU count to 600 by November 2024, contributing approximately 37% of its total GMV for the six months ending November 2024. It employs a multichannel strategy, including its app, ministore, and various e-commerce platforms, and is exploring offline channels.

Financial Performance and Robust Liquidity

New Oriental's financial performance in fiscal year 2025 reflects a company successfully executing a strategic pivot while maintaining a strong balance sheet. For Q4 FY2025, total net revenue, excluding East Buy, increased by 18.7% year-over-year. The non-GAAP operating margin, excluding East Buy, reached 6.5%, representing a significant 410-basis-point year-over-year improvement, driven by operating leverage and efficiency enhancements. While the company reported an operating loss of $8.7 million in Q4 FY2025, its non-GAAP operating income surged by 116.3% year-over-year to $81.7 million. Net income attributable to New Oriental for the quarter was $7.1 million, a 73.7% decrease year-over-year, but non-GAAP net income attributable to New Oriental increased by 59.4% to $98.1 million.

For the full fiscal year 2025, the company's annual revenue stood at $4.31 billion, with a gross profit of $2.26 billion. Net income was $309.59 million. The TTM gross profit margin is 55.45%, operating profit margin is 8.74%, and net profit margin is 7.59%.

New Oriental maintains a robust liquidity position. As of May 31, 2025, the company held approximately $4.93 billion in cash and cash equivalents, term deposits, and short-term investments. Net cash flow generated from operations for Q4 FY2025 was approximately $399.1 million, demonstrating strong cash generation capabilities. Deferred revenue, representing cash collected upfront from customers, increased by 9.8% to $1,954.5 million at the end of Q4 FY2025, indicating healthy future revenue recognition. The company's current ratio of 1.58 and quick ratio of 1.55 further underscore its strong short-term financial health.

Strategic Outlook and Shareholder Returns

Looking ahead to fiscal year 2026, New Oriental is committed to driving revenue growth while placing greater emphasis on upholding profitability across all business lines. The company has introduced full-year guidance to provide a more stable and comprehensive view of its performance, smoothing out seasonal volatility.

For the first quarter of fiscal year 2026 (June 1 to August 31, 2025), total net revenue for the group, including East Buy, is expected to be in the range of $1,464.1 million to $1,507.2 million, representing a year-over-year increase of 2% to 5%. This conservative Q1 guidance is attributed to a high comparison base from the previous year and temporary class rescheduling due to an earlier Chinese New Year. However, management anticipates revenue growth to accelerate from the second quarter onwards.

For the full fiscal year 2026 (June 1, 2025, to May 31, 2026), total net revenue for the group, including East Buy, is projected to be in the range of $5,145.3 million to $5,390.3 million, representing a year-over-year increase of 5% to 10%. This guidance reflects the company's focus on sustainable growth. Management expects cost control and efficiency enhancement measures, initiated in March 2025, to contribute an estimated 100 to 150 basis points to margin expansion for the full year 2026. Capacity expansion will be disciplined, with plans to open 10% to 15% new learning centers, primarily in the second half of the year and only in cities demonstrating strong performance.

In a significant move to enhance shareholder value, the Board approved a 3-year shareholder return plan, effective from fiscal year 2026. Under this plan, no less than 50% of the company's GAAP net income attributable to New Oriental for the preceding fiscal year will be allocated to returning value to shareholders through dividend distributions and/or share repurchases. The company recently completed a $700 million share repurchase program and distributed a $100 million special dividend in September 2024.

Competitive Landscape and Strategic Positioning

New Oriental operates in a dynamic and competitive education market in China, primarily contending with major players like TAL Education Group and Gaotu Techedu , as well as numerous smaller, often privately held, entities.

TAL Education Group (TAL), a significant competitor, offers K-12 after-school tutoring and test preparation. While TAL has shown robust revenue growth and improved profitability post-regulatory adjustments, New Oriental's offerings in test preparation and K-12 tutoring benefit from a broader geographic reach and a well-established network of physical learning centers. New Oriental's integrated ecosystem, encompassing language training, overseas study consulting, and now diversified non-academic programs, provides a more holistic value proposition that fosters stronger customer loyalty compared to TAL's more focused approach.

Gaotu Techedu (GOTU), specializing in online education, represents a formidable digital competitor. GOTU's agility and emphasis on technology-driven education, such as interactive apps and virtual classrooms, allow for faster product development cycles and potentially greater efficiency in pure online segments. However, New Oriental's hybrid Online-Merge-Offline (OMO) model offers a versatile approach, appealing to students who value both digital convenience and in-person interaction. New Oriental's strategic investments in AI, particularly its intelligent learning devices and smart study solutions, directly address the need for technological innovation while leveraging its deep educational content and teaching experience to create sticky, recurring revenue streams. The company's learning pad device model, with its strong operating margins, is a testament to its ability to compete effectively in the digital learning space by combining technology with educational expertise.

The competition in the K-12 field is noted as "a little bit stronger" than the previous year, but "much less" intense than before policy changes. New Oriental believes it is "still taking the market share" in this environment. The company's strong brand recognition and extensive network of learning centers act as significant competitive moats, fostering customer loyalty and providing a strong foundation for its diversified offerings. These advantages help New Oriental maintain pricing power and generate robust cash flow, even as it faces challenges from competitors offering increasingly cheaper learning hardware. New Oriental's strategy in the learning hardware business focuses on leveraging its educational strengths to create interactive teaching and learning systems that build customer stickiness through content subscriptions and self-study, rather than solely competing on price.

However, New Oriental faces vulnerabilities, particularly from macroeconomic headwinds impacting its higher-end overseas businesses and the ongoing need for digital agility against pure-play online competitors. Regulatory risks, while currently stable, remain a factor in the Chinese education sector. The company's continuous investment in OMO and AI is a direct strategic response to these competitive forces, aiming to enhance its offerings, improve internal efficiency, and solidify its market position.

Risks and Challenges

Despite a strong strategic pivot and healthy financial standing, New Oriental faces several pertinent risks. The "economic environment and the international relations changes" continue to adversely affect the overseas test prep and consulting businesses, as some parents reconsider study abroad plans. This macroeconomic uncertainty could also impact demand for other high-end educational services. While the K-12 market remains "huge," competition is intensifying, requiring continuous innovation and efficient operations to maintain market share.

Regulatory measures in China, though currently stable, always present a potential risk for the education sector. The company's integrated tourism business, while showing high growth, is still in its early stages and is expected to be loss-making for the full fiscal year 2025, requiring time to establish a sustainable business model. Furthermore, the company recorded a one-time goodwill impairment loss of $60 million in Q4 FY2025 related to its kindergarten business, highlighting past challenges and the need for careful portfolio management.

Conclusion

New Oriental Education & Technology Group Inc. stands as a compelling investment narrative of resilient transformation and tech-driven growth in a dynamic market. The company has successfully navigated significant industry shifts by diversifying its offerings into promising new areas like non-academic tutoring, intelligent learning systems, and integrated tourism, all underpinned by substantial investments in AI and its OMO platform. This strategic pivot, coupled with disciplined cost control and a focus on operational efficiency, has enabled EDU to maintain a healthy financial position and expand its margins, even as it confronts macroeconomic headwinds and heightened competition.

With a clear full-year guidance for fiscal year 2026 that emphasizes both growth and profitability, and a robust shareholder return plan, New Oriental is poised to continue its evolution. Its technological leadership, particularly in AI-powered learning solutions, provides a strong competitive moat, enhancing both student outcomes and internal efficiencies. While challenges from a shifting global landscape and competitive pressures persist, EDU's adaptable strategy, strong liquidity, and commitment to innovation position it favorably for sustained long-term value creation for its shareholders.