TAL Education Group (TAL) on Q1 2023 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, good day, and thank you for standing by. Welcome to TAL Education Group First Quarter 2023 Earnings Conference Call. At this time, all participants are in a 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'd now like to hand the conference over to Mr. Jackson Ding, Investor Relations Director. Thank you. Please go ahead, sir. Jackson Ding: Thank you, operator. Thank you all for joining us today for TAL Education Group's First Fiscal Quarter 2023 earnings conference call. The earnings release was distributed earlier today. You may find a copy on the company 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 the discussions will contain forward-looking statements made under the safe harbor provisions of the US 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 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 and this call include 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'd like now to turn the call over to Mr. Alex Peng. Alex, please? Alex Peng: Thanks Jackson, and thank you all for joining us on today's call. I think it was exactly three months ago, to the date on April 29, which also happened to be a Friday that we last spoke and I really look forward to sharing with you today on some of the progress we've made in restructuring and transforming our business. Let's go first with the numbers. For the first quarter ending on May 31, 2022, we recorded $224 million in revenue for the quarter, $1.8 million in non-GAAP operating loss and $17.4 million in non-GAAP net loss attributable to TAL. As a reminder, we seize offering K-9 after-school tutoring services on academic subjects in the Mainland of China as of December 31, 2021. So all revenues for the first quarter were contributed by our current business, which also establishes a new starting point for our future development. Our performance this quarter we like to note, demonstrates the combined efforts of our experienced management team, innovative employees and our extensive business partners. In the process of our transformation, we're focused on developing new initiatives that match the megatrends in our industry and the broader ecosystem. I think this is really like the hockey phrase; skating to where the puck is going. Next; Jackson will update you on the operational developments in our current business and review the first quarter financial results. After that I'll update you on our business strategy and then we'll open the floor for questions. So Jackson, please go ahead. Jackson Ding: Thank you, Alex. Now I would like to share with you more details on the development of each of all three business lines; including one, learning services and other, two content solutions and three, learning technology solutions during this past quarter. Please note that the financial data for each business line mentioned below is based on unaudited data for the quarter. First is the learning services and other, which primarily includes the learning programs we provide in various class sizes; both online and offline. This includes ADS small class, share.com, Think Academy and other learning services businesses. During the quarter, learning services and other accounted for approximately 70% of our overall revenue, maintaining its position as our largest revenue contributor. Within learning services, I'd like to first talk about enrichment learning programs, which aimed at helping with learners all around development. In the first quarter, we improved products and services of our existing programs, leveraging our expertise in users' learning journey, as well as our knowledge in pedagogical methodologies. In addition to our current programs, covering science and creativity, coding and programming and humanity and aesthetics, we also wrote out new programs such as international chess, rhetoric and natural science learning. In a time when COVID-19 continues to pose complexities for offline operations, our OMO model demonstrated its resilience. Many of our offline customers opt to take their classes online with us, mitigating the impact of the pandemic. As the pandemic normalizes, we believe that being online will be an inevitable trend for learners going forward. I'd also like to share some progress of our overseas learning services, which achieved a year-over-year triple digit growth rate in the last quarter. We operate under the Think Academy brand outside of the Mainland of China by providing diversified programs for K to 12 students. In the last quarter, in addition to learning centers, we already have in Singapore, the United Kingdom and the United States, we also started doing businesses in new locations, such as Canada. Moving forward, we expect Learning Services to remain our primary revenue contributor. At the same time, we'll proactively explore new opportunities in terms of program expansion domestically and market expansion globally. Secondly, content solutions is one of the initiatives we have explored in depth since the beginning of our transformation into a small learning solutions provider. With this business line, we offer academic and non-academic learning content in both print and digital formats by leveraging the broad content library we accumulated over the company's history, as well as the content acquired or licensed from our domestic and global partners. Total revenue generated from our Content Solutions business for the quarter accounted for more than 10% of the overall net revenue driven by product expansion and sales growth. As for products, a product format that has been particularly well received by our customers is Smart Books or . Smart book is a product format where we embed videos on to print books. Operator, can you hear me? Operator: We can hear you. Please continue. Jackson Ding: I apologize for the technical difficulties here, and I hope you can all hear me alright. I would -- before I got cut off, I was last mentioning that Content Solutions business is still at its early stage. We remain committed to investing into business and developing our products and services. Thirdly, Learning Technology Solutions provides a full suite of enterprise-grade technology products and services for educational institutions. Total revenue for the quarter accounted for around 15% of our overall net revenue. Its offering cover the entire value chain across the learning experience, including our classroom, company development, teaching support and learning center management. It is gratifying to see in this last quarter, our products being adopted by our institutional clients and in turn, helping them improve their own user engagement and operational efficiency. We remain committed to fundamental R&D related to our business areas, which is why in this last quarter, we were delighted to see our AI vision research team won two Computer Vision championships as the CBPR the Computer Vision and Patent Recognition Conference posted by the Institute of electrical and electronics engineers. Moving on to financial results for the first quarter, our net revenue totaled $224 million, representing a 83.8% decrease from US$1,384.9 million in the same period last year. The declining revenue was primarily driven by the succession of K-9 academic, K-9 through nine AFT services on in the Mainland of China, Gross profit declined by 82.4% to US$135.5 million from US$771.8 million in the same year ago period, while our gross margin increased from 56% to 60%. Selling and marketing expenses decreased by 86.1% to US$60 million from US$431.3 million in the same period last year. Non-GAAP selling and marketing expenses, which excluded share-based compensations decreased by US$87.2 year-over-year to US$52 million from US$407.4 million in the same period last year. The year-over-year decrease was primarily a result of the reduction in marketing promotion activities. General and administrative expenses decreased by 66.3% to US$111.5 million from US$331.1 million in the first quarter last year. Non-GAAP general and administrative expenses, which excluded share-based compensation costs decreased year-over-year by US$66.9% to US$95.4 million from US$288 million in the same period last year last. Loss from operations for the quarter decreased by 77.7% year-over-year to US$28.3 million from US$126.9 million in this quarter. Non GAAP loss from operations, which excluded share-based compensation expenses was US$1.8 million compared to US$59.4 million in the same period last year. The year-over-year decrease in operating loss was primarily driven by the succession of K-9 academic AST services in the Mainland of China. At the same time, our new initiatives are still in their nascent stages of development. Net loss attributable to TAL was US$43.8 million US dollars in the quarter compared with US$102.1 million in the same period last year. Non-GAAP net loss attributable to TAL, which excluded share-based compensation expenses was US$17.4 million compared with US$34.6 million in the same period of last year US$0.4 million by the end of the first quarter, compared with US$187.7 million as of the end of February 28, 2022, representing an increase of 21.1%. Now I'll hand the call back over to Mr. Alex Peng to briefly update you on business strategy and outlook. Alex, please go ahead. Alex Peng Thanks, Jackson. Let me update you on our business and development strategy. As we continue to transform our business into a smart learning solutions provider, we're really encouraged by the trends demonstrated by our current business in the last quarter. We believe power's trusted brand, operational excellence, content and technology knowhow, all positioned the company for the transformation journey we are embarked on. As I mentioned last quarter, we look at our businesses in three buckets; learning services and other, content solutions and technology solutions. I'll go through those one by one with you. First of all, learning services and other business, continue to execute our existing programs while also launching a few new programs. We believe learning services are beginning to demonstrate a viable business model and will continue to drive the business around product portfolio expansion, experience optimization and operational efficiency. Secondly, for Content Solutions, we're seeing robust market demands for innovative prints and digital integrated product format. We'll continue to expand our product offerings and invest into building our diversified sales channels. Although the business results might fluctuate in certain quarters due to seasonality, moving ahead, we expect our Content Solutions business to contribute a more significant proportion to the overall revenues in FY 2023. Thirdly regarding learning technology; I think I mentioned last time, we're really looking at an opportunity on digital transformation for our whole industry and our extended ecosystem. We believe our learning technology solutions will help our institutional customers with their user experience and operational efficiency. In the porters to come, we aim to develop new customers and create more value for our existing customers. Last time I mentioned four which we believe really underlie the mega trends of the education industry globally. Those are online, digital, intelligence and open, and I think we have just begun this long and for sure our transformation journey toward that future. We're seeing not only new opportunities, but also new challenges; our focus at this current stage, really building a solid foundation for the business in the years to come. We'll remain patient and positive in this transformation journey. As I come to the end of my prepared remarks, I'd like to really paraphrase our mission statement. We ever more committed to love and technology grading a better future and better life. That concludes my prepared remarks. Operator, we're now ready to open for questions. Operator: First question comes from the line of . Please, ask your question. Unidentified Analyst: Can you hear me management? Jackson Ding: Yes. Unidentified Analyst: My question is about how has the pandemic and the lockdown situation of this quarter impacted company's business and how do you evaluate its impact in the future? Thanks. Alex Peng: Thank you for that question. This is Alex. Let me take that one along. So first of all, I think during this entire period, as we look at how instances of COVID spring up in different parts of China, our first thought go to all those who are affected by those and to our customers, to the students and parents. We've actually had the opportunity to talk with students and parents and guided them to continue with their learning online. We've also made efforts to ensure that the learning quality and experience remain high as students switch across different formats. We've also made upgrades to our technology systems and curriculum design to accommodate to a situation. In places where the conditions have improved, some of our offline learning centers have gradually reopened. Therefore I think, although the pandemic does have impact on our overall learning services, it does not change the viability of the business. I would also like to mention that this, the past few months, we've also seen disruptions to supply chains across many industries. I mentioned forward learning for Content Solutions, we are in printed books, which also rely on supply chain for production and delivery. I think we will also come through this period with more experience in operational knowhow to manage a distributed network of logistics for that business going forward. Lastly, I would just like to add, I think as the situation stabilizes, normalizes, really we focus on how the attitude and behaviors of students, how they change and really on building the infrastructure to deliver high quality services online and I think that really has become the consensus for the industry. In fact, in the last quarter online programs contributed to the majority of our overall revenue in Richmond learning program. I hope that answers your questions. Operator: Thank you. Our next question comes from the line of Candice Chan . Candace. Your line is now open. Please ask your question. Unidentified Analyst: Hello. Hi Alex and can you hear me? Jackson Ding: Yes, we can. Unidentified Analyst: Yeah. So thank you for taking my question and I see that this quarter, the gross margin actually has kept up at over 60%. And even though the revenue as it was done sequentially, which is very impressive. So may I know how many learning centers that TAL have now, and also what is your expansion plan for this year and also next year? And finally, and follow up is that, will the capacity become a constraint for us to grow the learning services? Thank you, Jackson Ding: Thanks for the question. Only the business restructuring last year we have undertaken a balanced approach to adjust our offline presence and in doing so, we wanted to ensure our offline learning centers offered sufficient geographic coverage and can also operate with efficiency. The way we look at learning centers is that they're not only an indispensable place, for us to communicate and engage with our parents and learners, but also is an effective channel to establish and enhance our brand awareness. At the end of this last quarter, we had somewhere between a 100 learning centers and 150 learning centers in more than 30 cities and regions. Also, as Alex mentioned earlier, we have seen a good number of students moving online and we believe online will continue to be the industry trend. So you asked about expansion plan earlier, as we're proactively developing our online programs and diversifying all products and business models, we believe that offline learning center is just one of the many ways we can grow our business. I hope that answers your question. Operator: Thank you. Our next question will come from Mark Lee from Citi. Mark, your line is now open. Please ask your question. Mark Lee: Hi management. Thank you very much for the presentation. This is Mark Lee from City. May I ask a question on the enrichment learning program? Could you share a bit more on the operating metrics, such as the retention rate and ASP and any more subjects or classes you may expand down the road? Thank you. Jackson Ding: Yeah, Mark. Thanks for question. I would say our enrichment learning team and business have been primarily focused on two things. One is product and service centre across various enrichment programs and two, finding the right learning processes and user journeys for our learners and improving their satisfaction. We believe operating metrics are end results of such operational focuses. At this point, enrichment learning business is still at its early stage. We're still in process of optimizing various operational metrics, but we also see some early trends of this business. ASP for the quarter remains relatively stable compared to that before business restructure. You also asked about retention; for certain subjects, retention rates are very close to that of academic tutoring in the last few years, while for other subjects, retention rates are still significantly below pre-restructure level. In terms of subject expansion, we did roll out rhetoric, international chess and natural science learning in the last three months and will continue to look for program expansion opportunities. We'll share more details as the business reaches its next development phase. I hope that answers your question, Mark. Operator: Thank you. Our next question comes from Liping Zhao from CICC. Liping, your line is now open. Please ask your question. Liping Zhao: Sure. Good evening, Alex and Jackson. Thanks for taking my questions. I'm wondering whether you could talk a little bit more on the development strategy of your Content Solution business. Thank you. Alex Peng: This is Alex. Let me take that one. I've actually had the opportunity to spend quite a bit of time with our Content Solutions teams. So let me talk about this across a few dimensions. First, I think from a strategic perspective, we look as one of the key, leading edge for our transformation toward a smart learning solutions provider. When we look at the customer demand, from the beginning of the pandemic to the last couple years, we've really seen an accelerated change in the learning habits. We've also seen very strong demand for high quality digitized content and content across an ever more diversified number of areas. So I think this is a really long-term and broad trend going forward as families look at the kind of help they need of books and digital content. We also believe that educational content needs to be matched with the appropriate interactive design services, processes and technology, to really ensure learning ethics. Looking forward, I think I mentioned this last time, we really strive to provide an integrated experience with world-class first party content and third party content across the entire learning journey. And lastly, I'll just also like to mention that as we look at Content Solutions business, we're really experimenting with new ways of sales channel and growth. For this business, we've been providing our products on eCommerce platforms. We've also started to roll out our products on new type of digital platforms such as . We are somewhat new to doing this, but I think it's really showing us a lot more opportunities and ways to create additional values and also to be much more responsive to customer demands in our product design. So I hope that answers your question. Operator: Thank you. Next question comes from the line of . Your line is now open. Please ask your question. Unidentified Analyst: Thank you, management for taking my questions. My question is related to your future investment. You mentioned that you plan to continue invest and could you give us more call about this plan and the direction and estimated size of the investment to support your new business? Thank you, Jackson Ding: Thank you for the question. This is Jackson. I'll take this. As of the end of last quarter, the company has more than $1.7 billion of cash and cash equivalence more than $1.1 billion in short term investments and some $181 million in current and non-current restricted cash. We believe this cash position provides us a solid foundation for both our business transformation and any future development. In terms of in investments, we're interested in investment areas that could further improve our existing products and services, supplement our capabilities or advance our business expansions. At the same time, we are always looking at -- looking for ways to create value for long-term shareholders. We have taken diversified measures in the past to generate return from shareholders and will continue to do so in accordance with the market conditions. I hope that answers your question. Operator: Thank you. And the next question comes from the line of Felix Liu from UBS. Felix, your line is now open. Please ask your question. Felix Liu: Thank you management for taking my question and congratulations on the margin despite the restructuring. Could you share more color on your expectation on the margin trend going forward as well as what's your expectation on the matured unit economics level of the new learning services and other business. Would that be comparable to the pre-regulation academic after school tutoring? Thank you. Jackson Ding: Thanks you the question Felix? I would say it's probably a bit too early to predict margin trends at this point, but I definitely can share some thoughts on our views of how our margin will be impacted by various factors. First gross margin, gross margin mostly depends on two things. One is our overall revenue structure and two, is gross margin profile for each business line. And we expect our overall revenue mix to continue to develop. As mentioned earlier, we expect content to contribute to -- to gradually contribute to market portion of our overall revenue. As for gross margin of each business, that will continue to adjust according to market conditions and we're operating that. As for operating margin, given our recent business restructuring and transformation, we remain focused on building our business assets through continuous investments to create value in the long run. I hope that answers your question Felix. Operator: Thank you very much for your questions. We have reached the end of the question-and-answer session. I'll now turn the call back to the management team for closing remarks. Jackson Ding: Thanks operator, and thanks for everybody on the line. And thanks for the great set of questions. As we conclude today's conference call, again, thank you all for joining and we look forward to seeing you next quarter. Operator: Great. Thank you. So this concludes today's conference call. Thank you for pariticipating. You may now disconnect. Jackson Ding: Looking forward to seeing you next quarter. Operator: Great. Thank you. So this concludes today's conference call. Thank you for be 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.
