New Oriental (EDU) Q2 2026: Operating Margin Rises 470bps as K-12 Growth Surpasses 20%

2026-01-28 | By EarningsIQ Research

New Oriental delivered margin expansion and accelerated K-12 growth, outpacing macro and regulatory headwinds. The quarter saw strong profitability gains, disciplined cost control, and early traction in AI and new business lines, prompting a guidance raise for the year. Margin improvement and new initiatives signal a more durable, diversified growth path as the company leans into operational leverage and product innovation.

Summary

• K-12 Acceleration: Core education segment growth exceeded 20%, driving group outperformance and retention gains.
• Margin Expansion: Operating leverage and disciplined cost control delivered a 470 basis point non-GAAP margin increase.
• AI and Diversification: New initiatives and AI integration are strengthening both operational efficiency and future revenue streams.

Performance Analysis

New Oriental’s second quarter performance was defined by robust top-line growth and dramatic margin expansion. Total net revenue increased at a double-digit pace, with the flagship K-12 business (including K-9 and high school tutoring) accelerating to more than 20% year-over-year growth, a notable step up from the prior quarter. This segment now represents the company’s primary growth engine and is seeing higher student retention and improved customer feedback, which management attributes to a sharpened focus on service and product quality.

Profitability gains were broad-based and driven by both core education and the recovering East Buy commerce unit. Non-GAAP operating income more than tripled, and group non-GAAP operating margin rose by 470 basis points—about 300bps of which came from core education, according to management. This improvement was achieved despite continued pressure in overseas-related businesses, where macro headwinds persist. Cost discipline was evident through a decline in selling and marketing expenses and a measured approach to capacity expansion, with new learning center openings held to 10% growth. The company generated strong operating cash flow and maintained a robust balance sheet, with deferred revenue up 10% year-over-year, signaling healthy demand visibility.

• Segment Outperformance: K-12 and non-academic tutoring segments delivered higher growth and margin, while overseas and adult businesses remained resilient despite external pressures.
• Cost Structure Optimization: Marketing expense ratio declined as word-of-mouth and customer service investments replaced aggressive acquisition spending.
• East Buy Rebound: The e-commerce unit contributed positively to both top and bottom line, with product diversification and offline channel pilots gaining traction.

Overall, the quarter marked a successful pivot toward higher-margin, more sustainable growth, with new initiatives and operational efficiency setting the stage for continued margin gains.

Executive Commentary

Strategic Positioning

1. K-12 and Core Education Focus

New Oriental is doubling down on its K-12 education platform, which now anchors both growth and profitability. Management emphasized improved student retention, quality-driven product upgrades, and a measured approach to capacity expansion (limiting new learning centers to 10% growth), which together enable higher utilization and operating leverage. The segment’s momentum is expected to sustain 20%+ growth in the near term, supported by positive word-of-mouth and reduced marketing spend.

2. Diversification Through New Initiatives

Non-academic tutoring, intelligent learning systems, and devices delivered 22% revenue growth, with penetration expanding across 60 cities. These offerings are gaining traction, especially in top-tier cities, and are designed to supplement core academic programs while opening new revenue streams. The company is also piloting health and wellness tourism for seniors, signaling a willingness to explore adjacencies with scalable, asset-light models.

3. E-Commerce (East Buy) Recovery and Expansion

East Buy, the group’s e-commerce arm, has returned to growth and profitability, expanding its SKU base to 801 private label products and diversifying into new categories such as seafood, personal care, and household goods. The business is leveraging New Oriental’s learning center network for offline pilots (vending machines), which are now profitable in select cities and slated for national rollout. This unit is expected to be a more material contributor going forward.

4. Technology and AI Integration

Investments in AI and OMO (online-merge-offline) platforms are beginning to yield operational and product benefits. AI is being embedded across offerings to boost retention, personalize learning, and streamline internal operations. Management expects these investments to drive both cost savings and new revenue as AI-enabled products mature.

5. Operational Discipline and Resource Allocation

Leadership is prioritizing margin expansion and quality over rapid expansion, with a focus on cost control, measured hiring, and selective investments. The company’s resource allocation reflects a shift from aggressive growth to sustainable, profitable scaling, balancing innovation with financial discipline.

Key Considerations

The quarter marked a clear inflection in both growth quality and margin structure, as New Oriental’s pivot to operational discipline and product innovation began to bear fruit. Investors should focus on the durability of these trends as new initiatives scale and the regulatory environment remains volatile.

Key Considerations:

• Retention-Driven Growth: Higher student retention and positive customer feedback are reducing acquisition costs and sustaining top-line momentum.
• Margin Structure Reset: Cost controls, lower marketing spend, and operating leverage are driving a step-change in profitability, with further gains likely as new businesses mature.
• Resilient Balance Sheet: Strong cash generation and deferred revenue growth provide flexibility for continued investment and shareholder returns.
• AI as a Competitive Lever: Early AI integration is improving both learning outcomes and internal efficiency, positioning New Oriental to lead in digital education transformation.

Risks

Regulatory uncertainty remains a persistent risk, with ongoing compliance requirements in China’s education sector potentially impacting product offerings and growth rates. Overseas business faces macroeconomic headwinds and competitive pressures, leading to flat or low single-digit growth expectations. Execution risk exists in scaling new initiatives and maintaining quality while expanding into adjacent sectors. Investors should also monitor the sustainability of margin gains as the company balances innovation spend with profitability targets.

Forward Outlook

For Q3 2026, New Oriental guided to:

• Total net revenue of $1,313.2 million to $1,348.7 million (11% to 14% YoY growth)

For full-year 2026, management raised guidance:

• Total net revenue of $5,292.3 million to $5,488.3 million (8% to 12% YoY growth)

Management cited K-12 growth, East Buy recovery, and continued cost discipline as drivers of the improved outlook. The company will continue to align new openings and hiring with performance, maintain strict cost controls, and invest in AI and product innovation. Guidance incorporates current regulatory and macro conditions but remains subject to change.

• Focus on high-performing cities for expansion
• Margin expansion expected to continue, though no explicit margin guidance provided

Takeaways

New Oriental is demonstrating a successful pivot to quality-driven, high-margin growth, with K-12 and new initiatives leading the way. Margin expansion is structural, not cyclical, as operational discipline and product innovation take hold. Investors should watch for:

• Margin Durability: Whether cost controls and operating leverage can sustain or further improve profitability as new businesses scale.
• AI and Product Innovation: The pace and impact of AI-enabled offerings and their contribution to retention and revenue growth.
• Regulatory Navigation: The company’s ability to adapt to evolving policy and compliance demands while maintaining momentum.

Conclusion

New Oriental’s Q2 results confirm a step-change in both growth quality and profitability, underpinned by strong K-12 execution, disciplined cost management, and early traction in new business lines. The company’s raised outlook and operational resilience position it as a leader in China’s evolving education landscape, but ongoing regulatory and macro risks warrant continued scrutiny.

Industry Read-Through

New Oriental’s margin-driven growth and rapid adoption of AI highlight a broader shift in China’s education sector toward operational efficiency and digital transformation. The company’s success in reducing marketing spend while improving retention suggests that scale players with strong brands and tech investment can outcompete on both cost and quality. The e-commerce unit’s rebound also signals opportunity for education companies to diversify into adjacent consumer sectors, provided they leverage existing infrastructure and customer networks. Competitors reliant on aggressive expansion or heavy marketing may face margin compression, while those investing in AI and product quality are likely to gain share in a more regulated, mature market.

EDU Consumer Discretionary Education AI Margin Expansion K-12 Diversification China