New Oriental Education (EDU) reported Q2 FY2026 results on January 28, 2026, revealing a profitability inflection driven by operational discipline following China's tutoring crackdown.

Margin Expansion and Operating Leverage

Non-GAAP operating income surged 206.9% year-over-year, while net income increased 6,068.6%. Operating margin expanded 470 basis points. The company achieved this while slowing learning center expansion to 10% growth versus historical 20-30% rates.

Marketing expense declined 1.1% even as total revenue grew 14.7% to $1.47 billion, demonstrating meaningful operating leverage.

K-12 Business Acceleration

K-12 revenue growth accelerated to approximately 20% despite the slower capacity expansion. Management attributed this to improved student retention and word-of-mouth referrals, which reduced customer acquisition costs while accelerating growth—a compounding dynamic that emerged after shifting focus from aggressive expansion to service quality.

E-commerce and Diversification

Dongfang Zhenxuan (Eastbuy), the company's e-commerce subsidiary, expanded to 801 private label SKUs and is launching offline vending machines with a national rollout plan. This diversification reduces regulatory concentration risk in the education sector.

Guidance Raise and Capital Returns

Management raised full-year FY2026 revenue guidance to $5.29-5.49 billion (8-12% growth), stating they are "more optimistic" about trajectory. The company initiated a $1.20 per ADS annual dividend and executed $86.3 million of a $300 million share buyback program.

Balance sheet strength includes $3.9 billion in liquid assets and $2.16 billion in deferred revenue, up 10.2% year-over-year.

Strategic Restructuring

The overseas test preparation and consulting business continues to underperform, with management describing it as a "margin drag." The company is merging these units to reduce costs, though macro headwinds persist in this segment.

AI Investment

EDU is investing in AI-powered products expected to contribute to revenue within 1-2 quarters, focused on retention improvement and cost optimization. Management cited "positive feedback" from early initiatives but provided no quantitative metrics.

The earnings call demonstrates execution of a post-crackdown business model that prioritizes profitability and operational efficiency over market share expansion, with the K-12 segment showing particular strength in the new operating regime.