TAL Education Group (TAL) on Q3 2024 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, good day, and thank you for standing by. Welcome to TAL Education Group's Third Quarter of Fiscal Year 2024 Earnings Conference Call. At this time all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. Please be informed today's conference is being recorded. I would now like to hand the conference over to Mr. Jackson Ding, Investor Relations Director. Thank you. Please go ahead, sir. Jackson Ding: Thank you. And thank you all for joining us today for TAL Education Group's third quarter fiscal year 2024 earnings conference call. The earnings release was distributed earlier today and you may find a copy on the company's IR website or through the newswires. During this call, you will hear from Mr. Alex Peng, President and Chief Financial Officer; and myself, Investor Relations Director. Following the prepared remarks, Mr. Peng and I will be available to answer your questions. Before we continue, please note that today’s discussions 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 are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC. Also, our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. I would like to now turn the call over to Mr. Alex Peng. Alex, please go ahead. Alex Peng: Thank you, Jackson. I'd also like to thank all of you for participating in today's conference call. During this call, we'll review our financial performance and business progress in the third quarter of the fiscal year 2024. After that, I will share our thoughts for the next quarter's outlook. Throughout this fiscal quarter, we continue to manage our core businesses, while concurrently exploring additional opportunities for development. We’ve witnessed learning services continuing on its development trajectory, enabling learners’ growth and development with our enrichment learning programs, both online and offline. The advancement of learning services is underpinned by our execution on the quality of our service offerings, and the capacity of our learning center network. As for Content Solutions, we remain focused on the creation, curation and dissemination of quality content tailored to the unique learning pathways of our diverse user base. In an effort to empower learners with the solutions they need to excel, ensuring that each individual's journey is not with resources that resonate with and elevate their learning spirit. We continue to execute on our product offerings, as well as go-to-market capabilities for Content Solutions, in this quarter. We've been making programmatic advancements in our technological capabilities, laying a strategic foundation for future innovations. We’ve recognized the transformative potential of this new wave of technologies for our business operations and will harness this power to serve our customers. In terms of our financial performance, we reported net revenues of US$373.5 million, or RMB2.7 billion for the quarter, representing an increase of 60.5% and 63.7% year-over-year in US dollar and RMB terms respectively. With respect to profitability, our non-GAAP loss from operations, and non-GAAP net loss attributable to TAL, for the quarter were US$10.2 million and US$1.9 million respectively. So, with that overview, I'd like to hand the call over back to Jackson, who’ll give you an update on our core business line, operational developments, and review our fiscal third quarter financial results. After that, I'll return to share more details regarding our outlook for the next quarter, and then open the call for questions. Jackson, please go ahead. Jackson Ding: Thank you, Alex. I'm pleased to share some details on the progress we made, during the third fiscal quarter across all four business lines. Please note that all financial data for the quarter is unaudited. Now, let's start with our learning services and others business, which consists of, among others a broad range of learning programs for consumers. For the third quarter of fiscal year 2024, learning services and others business continued to achieve year-over-year revenue growth, driven by underlying development of multiple products. The largest revenue contributor within learning services and others is our enrichment learning program. Through the design of an enrichment learning programs, we aim to nurture the full spectrum of learner’s capabilities, enabling their well-rounded development that encompasses a breadth of competencies. And in our approach to enrichment learning, we place an emphasis on the cultivation of competencies, recognizing that it complements the mere acquisition of knowledge. These competencies equipped learners with the necessary tools to navigate in practical real-world scenarios. The revenue trends of Peiyou Small Class enrichment programs tends to correlate with the size of its learning center network. Year-over-year, the increase in capacity has led to enrollment growth. We take a dynamic approach in managing our learning center expansion plan, evaluating several factors, such as market demand, in each area, user acceptance of all products our operating capability, and efficiency, and et cetera. In alignment with our strategic objectives, our online enrichment learning business has maintained its cost of operations. In light of the evolving landscape, and observable developments in user behaviors and preferences within the online learning sector over the last couple of years, we continue to innovate our product offerings as service delivery models. Our online and virtual learning programs aim to offer a unique digital learning experience to its customer base. Regarding our overseas operations, Zinc Academy sustained continuous growth, exemplified by the addition of new learning centers during the fiscal quarter. As we progress, our strategy is to adopt a build focused approach that caters to our international learners by blending standardized educational frameworks with tailored local adoptions, in an effort to meet diverse educational needs, while maintaining a coherent, global learning experience and standard. Let's transition to Content Solutions segment. Comprising of smart books, print books, learning devices and digital content. Content Solutions continued its year-over-year growth momentum in this quarter, driven by development in our product capabilities, as well as go-to-market capabilities. Learning devices, and primarily shares the XPath is the leading revenue contributor within the Content Solutions business during this fiscal quarter. The XPath series aims to offer a comprehensive learning experience for school aged users at home. XPath is designed to combine extensive content library with interactive learning experiences, powered by our application of AI technologies. We market XPath through a range of go-to-market channels, such as online live streaming, and E-commerce platforms. Our ongoing efforts include the continuous expansion and management of all sales channels. Throughout this quarter, we continue to work on product development initiatives, iterating our existing products, as well as introducing new products and features. Our investments in product and development includes software, hardware, AI and algorithms, contents, and et cetera. Recently, we introduced a new product, featuring upgrades to both this hardware and software, offering users a range of configuration options. The product incorporates refinement on multiple use cases, including motion detection-based interactions, instant question and answer, image recognition-based learning feedback and et cetera. In addition to XPath, we're also exploring new product formats to meet the diverse demand of various use cases. One of our early education enlargement product was awarded the latest TWICE Picks award at CES 2024. With that overview, I would now like to share our key financial results for the quarter. We reported net revenues of US$373.5 million and RMB27157 billion. An increase of 60.5% and 63.7% year-over year, in USD and RMB terms. Our revenue growth is attributable to the growth of both our learning services and others business and our Content Solutions business. Gross profit also increased in the third quarter of fiscal year 2024. Rising from US$129.7 million for the same period last year to US$200.2 million for this quarter. Gross margin decreased to 53.6% from 55.8% for the same period last year. The year-over-year decrease in gross margin is due to a combination of factors, including the change in revenue mix from each business, as well as changing gross margin of the underlying business loss themselves. Selling and marketing expenses for the quarter were US$122 million, an increase of 73.3% compared to US$70.4 million for the fiscal third quarter last year. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses increased by 82.6% to US$116.4 million, from US$63.8 million for the third quarter of fiscal year 2023. The growth of selling and marketing expenses is mainly driven by increased selling and marketing activities. General and Administrative expenses increased by 19% to US$110.7 million from US$93 million in the third quarter of fiscal year 2023. Non-GAAP general and administrative expenses, which excludes share based compensation costs, increased by 29.3% year-over-year to US$96.7 million, from US$74.8 million for the same period of fiscal year 2023. Total share-based compensation expenses allocated to related operating costs and expenses decreased by 22.4% to US$22 million in the third quarter of fiscal year 2024, from $28.3 million in the same period of fiscal year 2023. Loss of operations was US$32.2 million in the third quarter of fiscal year 2024, compared to loss of operations of US$32.9 million in the third quarter of fiscal year 2023. Non-GAAP loss from operations, which excluded share-based compensation expenses was US$10.2 million compared to non-GAAP loss from operations of US$4.5 million in the same period of the prior year. Net loss attributable to TAL was US$23.9 million in the third quarter of fiscal year 2024, compared to net loss attributable to TAL of US$51.6 million in the third quarter of fiscal year 2023. Non-GAAP net loss attributable to TAL which excluded share-based compensation expenses was US$1.9 million, compared to non-GAAP net loss attributable to TAL of US$23.2 million in the third quarter of fiscal year 2023. Moving now to balance sheet. As of November 30, 2023, we have US$2,193.4 million of cash and cash equivalents. US$974.2 million of short-term investments and US$329 million in current and non-current restricted cash. Our deferred revenue balance was US$507.7 million, as of the end of the third fiscal quarter, compared to US$237.4 million as of February 28, 2023. Now turning to our cash flow statement. Net cash provided by operating activities for the third quarter of fiscal year 2024 was US$247.1 million. In April 2023, the Company's Board of Directors authorized to extend its share repurchase program, launched in April 2021 by 12 months. Pursuant to the extended share repurchase program, the company may purchase up to approximately US$737.4 million in proceeds of its common shares through April 30, 2024. When we last talk, as of August 31 2023, the company has repurchased approximately 13.4 million common shares at an aggregate consideration of approximately US$233.6 million under the share repurchase program. We did not make any additional purchase in this fiscal quarter three. That concludes the financial section. I'll now hand the call back to Mr. Alex Peng, to briefly update you our business outlook. Alex, please go ahead. Alex Peng: Thanks, Jackson. As I mentioned earlier, despite a slight quarter-over-quarter revenue decrease, we made material progress this fiscal third quarter. Now I'd like to share some of my thoughts, of our company’s all of the typical fourth quarter. Concerning our learning services and other business, we will continue investing in learning services, to bring our users quality learning experience, both online and offline. The overseas market remains one of our new areas for development. Looking ahead, we'll keep extending our services to more customers with dynamic product formats, while leveraging our online and offline capabilities. In terms of Content Solutions, we target to iterate the functionalities of our learning devices by harnessing AI technologies. This effort aims to transform these products, offering users a learning experience that integrates technology with learning content. Founded in 2003, we’re known as a learning technology company that focuses on the essence of education. Explores the science of learning, and assists individual in approaching learning more scientifically. Over the past years, whenever new technology emerges, such as television computers, the internet, they've been applied to education. We're currently exploring the possibilities of educational transformation in the AI era, attempting to integrate AI with our existing products. We remain open to collaboration and sharing our findings with the hope of contributing some valuable insights to the global education community. So that concludes my prepared remarks. Operator, we're now ready to open the call for questions. Operator: Thank you. [Operator Instructions]. Our first question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy. Timothy Zhao : Hi, Alex. Hi, Jackson. Thank you for taking my question, and congrats on the strong quarter. My question is regarding capacity expansion, just wondering if you can share any color regarding the capacity expansion for the past quarter and into the longer term, what is your longer-term growth plan of the offline learning center capacity expansion? Thank you. Jackson Ding: Timothy, thanks for the question. This is Jackson, I'll take this one. So you asked about capacity expansion in this last quarter. You know, as we mentioned, the revenue from Peiyou Small Class business tends to correlate with its capacity expansion plan. So in the last quarter, our capacity expansion was in line with our revenue development. You also asked about long-term development plan. Here's how we would look at it. We take a pretty dynamic approach in managing our offline learning center network. When we think about expansion plan for offline learning centers, we consider several factors. For example, market demand in a particular area. For example, customer acceptance of our product, our own operating capabilities, operating efficiencies, and et cetera. So it's a pretty dynamic and balanced approach when we think about capacity management. Moving forward, when we think about the footprint offline learning center network, it should more or less aligned with the overall pace of Peiyou Small Class, was the overall growth pays of revenue coming from Peiyou Small Class business. And efforts will be made to manage operating indicators while we expand our learning centers. I hope that answers your question, Timothy. Timothy Zhao: Yes, that's helpful. Thank you, Jackson. Operator: Thank you, Tim. Our next question comes from the line of Eddy Wang from Morgan Stanley. Please ask your question, Eddy. Eddy Wang : Hi, Alex and Jackson, thank you for taking my question. And also congratulations on the good results. So my question is, regarding the smart device, so can you share with us your latest plan of the smart device business? And what some of the considerations for the specific functions and the future development of the second generation of the smart devices? Thank you? Alex Peng: Hi, Eddy, this is Alex, thanks for that question. Let me take this one off. So first, maybe let me take a step back and just share a little bit. You know, broadly speaking, how we look at these devices. I think we were looking at these devices as an integration of high caliber content, advanced AI technology, and high-quality hardware, these three together will actually build a very compelling learning experience for students at home, where they will learn on their own at their own pace, according to their own individual learning journey. I think that's kind of broadly speaking, how we look at things, right. So that, basically the three components, content, technology, AI technology, and hardware, they go hand in hand, and we're really looking at strategically and programmatically advance our offering across all of those three dimensions. So once the launch of our latest flagship product, you actually see the advancements across all these three, while we continue to update and upgrade experiences across all our devices. Just as an example, the flagship device we launched in December, it has a larger screen, it has more advanced eyesight protective technology for the screen, it introduces intelligence functions such as AI dialogue, fingertip translation, it incorporates the capabilities from math GPT. And it's really its aim is to facilitate a much more smooth and personalized learning experience for users as a whole. I also speak on our go-to-market side. As you know, and as I share in prior calls, our primary sales channels are online, including both live streaming and E-commerce. We’re obviously very proactively working on existing channels, the efficiency and the reach of these channels, while exploring additional distribution models. We see really our sales channel as not just a way to distribute our products, but it's also a way to engage in a dialogue with our potential and existing customers on their learning journey, getting their feedback, getting how they're using these devices to help us continuously improve and enhance the features. So I hope that answer your question. Eddy Wang: Yes. Thank you, Alex. Operator: Thank you, Eddy. Our next question comes from the line of Felix Liu from UBS. Please ask your question, Felix. Felix Liu : Hi, good evening, Alex and Jackson. Congratulations on those strong quarter. My question is on AI, which you mentioned for your one of the key pillars of your future strategy. Could you elaborate a bit more on how do you plan to apply AI to your existing businesses? You mentioned a few of the applications in your second gen hardware? Do you see any other applications, and how do you plan to monetize such AI adoption? And also on your investment in AI, do you think we should expect an increase in AI investment or current level is already sufficient? Thank you. Alex Peng: All right, thanks for that question. This is Alex. Again, you know, I think Jackson mentioned CES earlier. I was there and met with many colleagues from across the globe, I think there is really a consensus that this generation of generative AI is bringing a truly transformative moment to education, that we're able to provide high quality learning experience, individualize pathways and affordable costs at the same time. But I think there's also an increasing realization that this is a long journey, it's not going to happen in just a few months, few quarters, or just a year. So I think we're really in this for the long haul. And we're looking at where AI comes in, I think across broadly speaking, you know, three dimensions, I think there's obviously huge opportunities to increase the efficiencies of all of our work, we do have a lot of knowledge workers in the company, I think there's a huge opportunity and that, you know, one of the most prevalent opportunities, that we're working on. I think AI provides a very different type of interaction along the learning journey. As I mentioned earlier, in our smart devices, I think we already seen the early forms of this type of interaction where the device is able to be much more helpful along the learning journey, it's much more in tune in terms of where the students are and withstand the path for them challenges faced by individual students along their journey. I think, thirdly, obviously, there's also explorations for AI native, use cases and education. So I think, the efforts will be along all these three dimensions. Then again, I think if you look at in the past few quarters, I think we were able to really bring the synergy between foundation model, our education knows how, some domain knowledge in know how, and put it into a device. So, this really services are valuable reference point. AI in this context, honestly, it is not only, it not only operates independently, but also contributes to the development of lots of existing businesses. So, we're really actively engaging the product design, operational improvements. And we're taking in a lot of user feedback from both internal employees, and as well as our customers from across the market, and we'll be continuously on that journey, pushing it forward. I hope that answers your question. Felix Liu: Thank you, and congratulations again, on the results. Thank you. Operator: Thank you, Felix. Our next question comes from the line of Caini Wang from CICC. Please ask your question, Caini. Caini Wang: Hi, Alex, Jackson. So congrats on the strong results again. And my question is regarding the cash and balance. We can see that our main business is really going well and we are accumulating more cash on our balance. So I'm just wondering what is our plan our buyback plans or any other cash terms. Thank you. Jackson Ding: Caini, thanks for the question. And this is Jackson, I'll take this one. Maybe on the adjusted buyback plan part first. And I think I may have mentioned this earlier, under the current share repurchase -- current extended share repurchase program, we have repurchased approximately 13.4 million common shares at an aggregate consideration of approximately US$233.6 million. And as well as this fiscal quarter three, we did not make any additional repurchases. Now, if we take a step back and look at broadly how we think about use of cash, we take pretty comprehensive considerations of both short term and long-term investor -- long term shareholder returns when we think about the use of cash. There are multiple potential uses of cash in the future, including investing into a core business, our learning services and others business, our content solution businesses, business or other, also developing new initiatives, as well as generating shareholder returns. I hope that answers your question, Caini. Caini Wang: Yes, thank you, Jackson. That's very helpful. Operator: Thank you, Caini. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please go ahead, Yiwen. Yiwen Zhang: Hi, Alex, thanks for taking my question. First, congrats on another strong quarter. So you point out in your remarks, you mentioned that the new products of the online enrichment, any business you're launching this year. So can you discuss a while that is progress there? Thank you. Jackson Ding: Yiwen, this is Jackson. I’ll take this one. Yes, so as we talked about earlier, the online enrichment space is an involving Netscape. And there have been observable user behavior developments and preferences in the last couple of years. So as a result, we have been observing such developments and acting on innovating our product roadmaps, and our service delivery models. When we think about these new products, we aim to deliver innovative and interactive online learning experiences through such new products. And we’re focused on delivering products that create user value and societal benefits. So, we'll continue to explore our handling on these products. And we'll continue to observe how our customer practices develop over time. I hope that answers your question, Yiwen. Yiwen Zhang: Yes. Thank you, Jackson. Operator: Thank you, Yiwen. So we have reached the end of the question-and-answer session, I'll now turn the conference back to the management team for closing comments. Jackson Ding: Yes, thanks again, everyone for joining the call today. As we approach Chinese New Year, just wish everybody, a Happy New Year of the Dragon and we'll see you next quarter. Bye-bye. Operator: Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.TAL Ratings Summary
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TAL International Upgraded to Overweight at JPMorgan Following Q4 Beat
JPMorgan analysts upgraded TAL International (NYSE:TAL) from Neutral to Overweight and increased their price target from $10.00 to $15.00 following the company’s reported strong Q4 results.
The upgrade is influenced by the strong performance and outlook of New Oriental Education (EDU), which they believe indicates a favorable environment in the post-policy tutoring business, characterized by advantageous supply/demand dynamics and a stable policy setting. The analysts suggest that TAL International may be experiencing a shift to what they term 'supernormal' growth, as evidenced by the company's recent performance.
Consequently, the analysts revised TAL's revenue forecasts upwards for the next three years by over 30%, positioning these estimates at the highest among Street forecasts. They anticipate that TAL's earning potential will continue to surprise the market in the coming years.
TAL International Started With Buy Rating at Goldman Sachs
Goldman Sachs analysts started covering TAL International (NYSE:TAL) with an optimistic outlook, assigning it a Buy rating and setting a price target of $11.70. The analysts highlighted TAL's strengths as a K-12 focused company with competitive edges in educational content and technology. They noted TAL's rapid capacity growth, revitalization of its main offline business, and ventures into new educational areas.
The analysts anticipate a 28% sales compound annual growth rate (CAGR) from fiscal 2023 to fiscal 2026 and expect the net profit margin (NPM) to rise to 10-11% by 2026, up from -3% in 2023.
