TAL Education Group (TAL) 2011 Q3 法說會逐字稿

Hello, ladies and gentlemen.

This is Keisha and I will be your operator for this conference call.

I would like to welcome everyone to the TAL Education third-quarter fiscal year 2011 earnings conference call.

All lines have been placed on mute to prevent background noise.

After the presentation, there will be a question-and-answer session.

Please follow the instructions given at that time.

If you would like to ask a question, in fairness to all callers, please keep your questions limited to two.

I would now like to turn the call over to Mr.

Roger Hu, Investor Relations Manager of TAL Education Group.

Mr.

Hu, please proceed.

Thank you all for joining us today for TAL Education's third-quarter fiscal year 2011 earnings conference call.

Our third-quarter earnings release was distributed earlier today and you may find a copy on our companies IR website or through the newswires.

During this call, you will hear from Mr.

Bangxin Zhang, our Chairman and Chief Executive Officer, and Mr.

Joseph Kauffman, our Chief Financial Officer.

Following the prepared remarks, Mr.

Zhang and Mr.

Kauffman will be available to answer your questions.

Before we continue, please note that the discussion today 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 our public filings with the SEC.

For more information about these risks and uncertainties, please refer to our filings with the SEC.

TAL Education does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law.

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 would now like to turn the call over to Mr.

Bangxin Zhang.

(interpreted) Thank you, Roger, and thank you all for joining us on our third-quarter fiscal year 2011 earnings conference call.

We are very pleased to share with you strong quarterly results as we report earnings for the first time as a publicly traded company.

Our total student enrollments grew by approximately 25% from the same period last year with each of our three business formats -- small class, one-on-one, and online courses -- contributing to the overall enrollment growth.

These solid operational results highlight our efforts as a Company to continue to be disciplined in the execution of our growth strategy, which is to further penetrate existing cities with new learning centers, expand into new cities, and continuing to roll out our one-on-one business.

During the quarter, we added a total of nine new learning centers, seven of which were in Shanghai and the remaining two in Beijing.

Our efforts over the past three quarters in Beijing have been around improving classroom utilization in our existing facilities rather than rapidly increasing the number of centers.

We are encouraged by the progress we have seen in this regard since the Chinese New Year term last year and believe we are now ready to shift our focus back toward a new phase of investment in learning centers over the coming quarters.

By building out our capacity, we can continue to meet the ongoing demand from parents and students in this essential market.

I am also happy to report that we have begun our expansion into four new cities by establishing local website communities in each target market.

Those of you who are familiar with our story will remember that months before we enter a new city with a learning center, we will first set up a local website and begin to do pre-marketing with parents and students.

We expect to open our first learning centers in these new cities beginning in the first quarter of fiscal year 2012.

Our one-on-one business branded under the (inaudible) name has also been a source of positive momentum for our business, growing student enrollments by 62% in the quarter in Beijing.

We continue to add resources and staff to support one-on-one in preparation for continued growth in Beijing and expansion into additional cities in the coming quarters.

In addition to these ongoing efforts around our Company growth strategy, we also kicked off two new exciting initiatives in the third quarter.

We signed with McGraw-Hill Education a breakthrough agreement under which we will cooperate to codevelop and cobrand English materials for our junior high and high school students under our Le Jia Le offering.

Upon completion, the materials will fit into Le Jia Le's overall content and assessment system and be branded under its Le Jia Le (inaudible) or happy study happy test rubric.

The first set of course materials will be trialed in Q4 this fiscal year and the complete series of five levels is expected to be completed by the end of fiscal year 2012.

Additionally in November, we launched an innovative and proprietary classroom teaching solution called ICS, which stands for Intelligent Classroom System.

ICS makes in class learning more interactive and stimulating by facilitating the broadcast of our own proprietary multimedia content using projectors and whiteboards.

ICS was rolled out in Beijing during the quarter and expanded to Shanghai, Guangzhou, and Shenzhen beginning in December.

The content used by ICS is developed in-house and covers key subjects across the K-12 curriculum including math, English, biology, physics, chemistry, and Chinese.

From the initial feedback from students, parents, and teachers, we are encouraged that the ICS system has improved both the learning environment for our students and the in class efficiency of our teachers.

In summary, our combination of outstanding teaching quality with highly relevant proprietary content continues to drive strong academic achievements by our students.

I am confident that our ongoing ability to deliver these exceptional learning experiences and outcomes will allow us to benefit from the immense growth potential of the large and highly fragmented K-12 after school tutoring market we serve.

Before I pass the floor to Joe, let me take this opportunity once more to thank President Cao Yudong for his huge contribution to our Company since we cofounded together in 2003.

Joe, our CFO, and I will jointly take over Yudong's responsibilities to ensure a smooth continuation of operations.

Thank you all again for joining us today and I will now turn the call over to Joe, who will discuss our financial results for the third quarter.

Thank you, Bangxin.

Our third-quarter financial results were highly encouraging as we delivered robust top and bottom line growth.

Our disciplined focus on serving the unique needs of the K-12 after school tutoring market continues to drive consistent and profitable growth for our Company.

Our total revenues were $24.1 million, representing a 47.7% increase from $16.3 million in the third quarter of fiscal year 2010.

The increase in net revenues from the same period last year is primarily due to an increase in the number of total student enrollments and higher average selling prices versus the same period one year ago.

Total student enrollments increased 24.9% to approximately 94,100 from approximately 75,300 in the same period one year ago.

Operating costs and expenses were $21.6 million, a 56.7% increase from $13.8 million in the third quarter of fiscal year 2010.

Non-GAAP operating costs and expenses were $19.7 million, a 42.8% increase from $13.8 million in the third quarter of fiscal year 2010.

Cost of revenues increased 54.7% to $14 million from $9.1 million in the third quarter of fiscal year 2010.

Non-GAAP cost of revenues increased by 51.8% to $13.8 million from $9.1 million in the third quarter of fiscal year 2010.

The increase in cost of revenues is primarily due to the increased number of courses and the greater number of learning centers in operation.

We also incurred incremental costs to support the rollout in the quarter of the Intelligent Classroom System or ICS, which Bangxin mentioned in his remarks.

Selling and marketing expenses increased 65.9% year-over-year to $2.7 million from $1.6 million in the third quarter of fiscal year 2010.

Non-GAAP selling and marketing expenses increased 47.0% to $2.4 million from $1.6 million in the third quarter of fiscal year 2010.

The increase was primarily due to an increase in sales and marketing staff to support our expanded program and service offerings.

General and administrative expenses increased 57.6% to $4.8 million from $3.1 million in the third quarter of fiscal year 2010.

Non-GAAP general and administrative expenses increased 14.1% to $3.5 million from $3.1 million in the third quarter of fiscal year 2010.

The increase was mainly due to an increase in staff and corresponding rental and other expenses associated with the expansion of our operations.

Total share-based compensation expenses, which were allocated to related operating costs and expenses were $1.9 million in the third quarter of fiscal year 2011.

We did not incur share-based compensation expenses in the same period of the previous year.

Our gross profit increased 39.0% to $10.0 million from $7.2 million in the third quarter of fiscal year 2010.

Operating income decreased by 1.9% to $2.4 million from $2.5 million in the third quarter of fiscal year 2010.

Non-GAAP income from operations increased 74.9% to $4.3 million from $2.5 million in the third quarter of fiscal year 2010.

Income tax expense was $0.3 million in the third quarter of fiscal year 2011 as compared to $0.2 million in the third quarter of fiscal year 2010.

Net income from continuing operations increased 7.9% to $2.6 million from $2.4 million in the third quarter of fiscal year 2010.

Net income attributable to TAL decreased 2.2% to $2.3 million from $2.4 million in the third quarter of fiscal year 2010.

Non-GAAP net income attributable to TAL increased 77.3% to $4.3 million from $2.4 million in the third quarter of fiscal year 2010.

Basic and diluted earnings per ADS were $0.03 and $0.03 respectively in the third quarter of fiscal year 2011.

Non-GAAP basic and diluted earnings for ADS were $0.06 and $0.06 respectively.

As of November 30, 2010, we had $178.6 million in cash and cash equivalents as compared to $81.5 million as of August 31, 2010.

The increase in cash was mainly due to our successful initial public offering and listing of ADS's on the New York Stock Exchange on October 20, 2010.

Our deferred revenue balance as of November 30 was $38.0 million.

Moving on to guidance, based on the Company's current estimates, total revenues for the fourth quarter of fiscal year 2011 are expected to be between $29.5 million and $31.0 million, representing an increase of 46% to 53% on a year-over-year basis.

This estimate reflects the Company's current expectation, which is subject to change.

As we continue to enter into new markets, we are particularly encouraged by the appeal of our strong K-12 brand, leading small class model, and active online education platform.

Over the coming quarters, we will continue to invest in the foundation for the future growth of our Company by further penetrating existing markets with new learning centers, expanding into new cities, and gradually rolling out our high-growth one-on-one business model to markets outside Beijing.

That concludes our prepared remarks.

Operator, we are now ready to take questions.

(Operator Instructions) Philip Wan, Morgan Stanley.

Mr.

Zhang, Joe, and Roger, thank you for taking my questions.

First of all, congratulations.

Congrats on the good quarters.

A quick question.

You mentioned in your prepared remarks that the Company would staff up in terms of network expansion.

And could you please elaborate a little bit more in terms of the number of learning centers that you expect to build in the fourth quarter and next year?

More importantly, can you give us some guidance on your margin particularly in fourth quarter and also the trend going forward in the next two quarters?

Thank you.

Sure, Phil.

Thanks for your questions.

We're right on track in terms of our expansion strategy.

We're still planning to enter the four new cities beginning in fiscal year 2012 and open our first centers in these cities in Q1.

In terms of Q4, we are still on track for 120 learning centers for the year, so that number is still on track.

And then in terms of fiscal year 2012, we are still on track for the 50 new learning centers we expect to add in fiscal year 2012.

In terms of operating margins over the long-term, we still are expecting non-GAAP operating margins to be flattish in that early 20s range in the 20 to 22 range.

Thanks, Joe.

I will go back to the queue.

Mark Marostica, Piper Jaffray.

Thank you, just a follow-up to the last question or on operating margin.

With the results that we saw in Q3, the great margin performance that you had, as we looked at fiscal 2012 should we expect margins to be down year-over-year with the 50 plus or I guess 50 new learning centers being rolled out in the year?

Thanks, Mark.

In terms of fiscal year 2012, the 50 new learning centers, we do expect to have some pressure on margins.

However, we also do expect to have some benefit to margins given higher ASPs.

We will be cycling a non-ASP quarter in the first quarter of next year.

And then as we are able to continue to get improved utilization out of our existing centers, that could also be upside to margin.

While we don't see ourselves as a gross margin expansion story, we still expect gross margins to be relatively flat in that mid 40s range on a non-GAAP basis.

So net-net, Joe, on an operating margin basis, should we expect flattish operating margins year-over-year in fiscal 2012?

I know you're not giving detailed guidance.

But just trying to get a directional inclination as to how we should think about it.

Yes, directionally the only thing I would say is that we will be continuing to invest behind our one-on-one business and as we've talked about before, the sales and marketing expense for one-on-one is higher just given the nature of that business and the higher student acquisition costs for that business.

So we could see sales and marketing creep up to approaching 11% next year.

In terms of G&A, we do expect to get leverage over time.

But in the coming quarters, we will be adding staff in finance and IT support to support our headquarters operation.

So net-net, operating margins should be relatively flattish, but the sales and marketing is a little bit higher to support the one-on-one growth.

Fair enough, thanks for the color there.

I also wanted to ask you about the deferred revenue balance in the quarter.

I wanted to get a sense for how we should think about how it flows into revenue in the upcoming quarters, and at least near-term try to get an idea of how much visibility you have on the February quarter.

Sure, in terms of the February quarter, we expect over 70% of that $38 million deferred revenue balance to translate into the Q4.

Okay, great.

And then one last question and I will turn it over.

I noticed in the press release you talked about discontinuing a couple of locations and I wonder if you could go through your rationale there strategically and then give us a sense whether or not there are any other locations you may be looking at exiting?

Sure, those are really small places.

Jianli and Qianjiang are really small cities in Hubei province outside of Wuhan.

Historically the reason that we acquired those businesses in the first place is they came as kind of a package deal with the Wuhan business.

What we were interested in at the time was the Wuhan business and the decision was made to exit those businesses to allow us to focus more of our resources on the much bigger market, which is in Wuhan.

In terms of other plans, we don't see any plans at this time to exit any other locations.

Okay, thanks again.

Nice job on the quarter.

Ella Ji, Oppenheimer.

Thank you.

(Chinese) My first question is what is the mix of one-on-one class and small class enrollments in this quarter?

Thanks, Ella.

I don't have the number in front of me in terms of enrollments.

What we usually talk about is in terms of revenue and in terms of revenue the split was consistent actually with last year.

In this quarter, it was about 13%.

13% in the one-on-one class?

13% one-on-one in the Q3 quarter.

For the first nine months of this year, it's about 15% as a percentage of revenues.

Okay.

Thanks, and then the second question is about your enrollment in this quarter.

It is a little below my estimate and the absolute enrollment number is sequentially lower versus first half.

So could you explain if there's any reason for that?

And how should we think about the trend going forward?

Sure.

Thanks, Ella.

The most important reason is that according to our plan, we only added a small number of learning centers in Beijing and Shanghai this past year.

The reason we did this was to make sure that with the incremental centers we had added in the previous year we are still maintaining a consistent high quality learning experience for our students.

We believe this cycle of invest and harvest is critical for running a healthy and sustainable K-12 after school tutoring business.

After each cycle of new investment in new centers, we think there needs to be a harvest period when we focus back on to making sure that with the expansion of centers we are still maintaining the high quality learning experience for our students and also utilization of our centers.

So this is especially important for mostly small class business like ours driven off of word of mouth from outstanding achievements of our students.

So that's what really drove the slightly lower enrollment growth number that you saw in Q3.

Okay, and then going forward, how should we think about from what you can see, how should we think about the enrollment growth in the 4Q and maybe also talk a little bit about the growth in FY '12?

Sure, well, in terms of quarterly guidance, we will only be giving guidance on revenues.

We are not going to be giving guidance on enrollments.

But what I can say is that the factors that I talked about just now in terms of adding less centers in the first half of the year we expect also to carry into Q4.

On top of that, as far as CNY, we do believe that the shorter the holiday this year from four weeks to three weeks may have some impact on enrollments in the quarter.

Also some key junior high schools in Beijing have begun recruiting students one year earlier in the fifth grade instead of sixth grade.

So in the short term, our sixth-grade enrollments may see some impact but we expect that over time the trend should be that students come to our classes earlier which should have a positive effect on enrollments in the fourth and fifth grade.

And that's changed?

(multiple speakers) Joe, go ahead.

Go ahead, Ella.

That change in moving from sixth grade to fifth grade, is that going to be permanent or is that a temporary change?

It seems to me that it's a permanent change, but we expect the impact of that change to be relatively short-lived.

If you think about it, as students or as junior high start to recruit students right out a fifth grade, well then students will start to do training services with us, at least we expect, earlier, so in fourth and fifth grade.

So short-term, it could have an enrollment impact.

We hope and expect that over the long term, it could be beneficial for our fourth and fifth grade enrollments.

Okay, great.

My last question is about your ASP.

From my calculation, your ASP in this quarter is about 14% above your ASP in the first half of the year.

Is it because of the shift towards one-on-one or is there any other reasons for that?

Thank you.

Sure, I think it is a combination of factors.

One is that we took the price increase in May, so if you look at the full first-half number, that didn't include some time when we didn't have the price increase.

So the first quarter of last year, we didn't have a price increase.

So that's going to affect your overall first-half number.

So that's probably the main factor is that we took the price increase in May.

The other factors are that we've had more hours per enrollment and one-on-one continues to grow as a percentage of the mix.

So I think that the one-on-one impact is probably not that high as I mentioned before, that it was only 13% of revenue in Q3 versus 15% in the first half.

So I think it's really ASP-driven, meaning we took the hourly rate increase in May.

Got it.

Thank you very much and congratulations again.

Vivian Hao, Credit Suisse.

Thank you for taking my question.

I have a couple of -- I'm good.

I have a couple of questions.

Maybe just to start from the top lines.

Could you share with us with more color on each reflective business line?

Probably just like in high growth rates for a different business line.

And I understand that the one-on-one plus is growing faster than your small class.

So we just need a ballpark number, wouldn't need an exact number of growth rate for that.

Sure, we're not actually going to be disclosing by business line what our growth rates will be.

What I can tell you is that by the end of next year, fiscal year 2012, we do expect one-on-one to be between 20% and 25% of our business, which is right at the level that we think is right to manage the overall growth of our business.

Okay, and also for the new learning centers, do you have a split for those which is used for one-on-one and those for just the small classes?

No, we're not -- we don't have a split for that as well.

But we will be adding both small class and one-on-one centers.

And then as you know, some of our centers are actually mixed-use centers, where you will see one floor for one-on-one and another floor for small class.

But we are not breaking down the 50 centers by business format at this time.

Okay, so should we understand like so for all the learning centers you're sharing like for different class offerings.

Right.

50 new learning centers covers both the one-on-one and the small class.

Okay, okay.

And the second question goes to -- because of your expansion plan, what would you expect the CapEx as a percentage of your reported revenue?

We are still targeting CapEx in the 5% to 6% range that we have had historically.

Okay, yes.

Also on the new teaching materials that you partnered with McGraw-Hill, will that be only used to enhance the quality of the overall class offering?

Or that wouldn't be an alternative new revenue source, right?

That's right.

We are not expecting to get into the content, development and distribution business.

It's really about creating a nice differentiated offering that leverages the real strength of both sides of the partnership, McGraw-Hill Education and us.

And making our classroom experience just that much better for junior high and high school students who are studying English with us.

So that's right.

Is there are any extra marketing spending or any costs that you can partner with this partnership?

No, we don't foresee to have material incremental marketing expenses related to the partnership.

And it's really about helping to continue to develop our proprietary content.

This is an IP transfer agreement, so once it's developed, the IP will be ours and it will help to continue to build what we see as our real strength, which is having highly relevant proprietary content for our students.

Philip Wan, Morgan Stanley.

Thanks for taking my follow-up question.

You mentioned about the utilization improvement in Beijing.

Could you help us to quantify how the improvement helps in terms of topline growth and how much upside from this utilization improvement going forward from existing learning centers in Beijing that we can expect?

Thank you.

Right, we are not going to be giving utilization rates every quarter.

What we can say is that we saw really good improvement in utilization and that makes us feel comfortable with entering into this next new wave of learning center expansion.

So it's really about this invest and harvest cycle where we invest in a lot of new learning centers.

Check, make sure that we are getting improvements in utilization, make sure our teaching quality is there, and then we move to our next wave of learning center expansion.

So we feel comfortable at this point to move into that next new wave of learning center expansion starting in Q1 of next year.

And to move ahead with our plan of adding 50 new learning centers in the coming year.

Thank you.

With no further questions in the queue, I would now like to turn the call back over to Roger Hu for closing remarks.

You may proceed.

Thank you.

This is the end of the conference call.

The webcast replay will be available at EN.Xueersi.org under the IR section.

If you have any additional questions, please feel free to contact us at any time.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call.

The interpreter was provided by the Company sponsoring this Event.