TAL Education Group (TAL) 2011 Q4 法說會逐字稿

Hello, ladies and gentlemen, this is Stephanie. I'll be your operator for this conference call. I would like to welcome everyone to TAL Education's fourth quarter and fiscal year 2011 earnings conference call.

At this time, all lines are in a listen-only mode. 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 other callers, please keep your questions limited to two.

Now I would like to turn the call over to Ms. Willow Wu, Investor Relations Assistant of TAL Education Group. Ms. Wu, please proceed.

Thank you all for joining us today for TAL Education's fourth quarter and fiscal year 2011 earnings conference call. Our fourth quarter earnings release was distributed earlier today and you may find a copy on our Company's IR website or through the newswires.

During this call, you may hear from Mr. Bangxin Zhang, our Chairman and Chief Executive Officer, and Mr. Joseph Kauffman, our Chief Financial Officer. Following their prepared remarks, Mr. Zhang and Mr. Kauffman will be available to answer your questions.

Before we continue, please note that the discussions 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 risk 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 statements as the 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, Willow, and thank you all for joining us on our fourth quarter and fiscal year 2011 earnings conference call. We are very pleased to share with you another strong quarter of execution against our growth strategy.

Our total student enrollments grew by 18.1% from the same period last fiscal year. This solid enrollment growth in the quarter allowed us to end fiscal year 2011 with 27.2% enrollment growth, significantly above our full-year enrollment growth target of 22%.

During the fourth quarter we added 18 new learning centers, which brought our total number of learning centers to 132 for fiscal year 2011, well exceeding our full-year target of 120.

Over the previous three quarters we have focused our energies on improving classroom utilization in our existing facilities, building out our campus base and cultivating new teachers and school heads.

Our last quarter's earnings call you may recall that we said that we felt the time was now right to shift our focus back to accelerating investments in new learning centers, and that's what we did.

In the fourth quarter of fiscal year 2011 we added more learning centers than in the previous three quarters combined, with Beijing and Shanghai contributing over half of the learning centers we added in the quarter.

Over the coming quarters we intend to continue to target Beijing and Shanghai, the two largest K-12 markets in China, with the majority of our new learning center investment while expanding our center network in our other four existing cities and the four new cities we plan to enter next quarter.

Those four new cities are Hangzhou, Nanjing, Xi'an and Chengdu and we have already begun pre-marketing while continuing the build out of our local website in each location. In these new cities, we intend to replicate what has worked so well for us in our faster growing Guangzhou and Shenzhen markets.

In the first year our focus will be on ensuring outstanding outcomes for a limited initial batch of students, which we expect will stay a strong foundation for the word of mouth that will lead our future growth.

I'm also happy to report that the rollout of our one-on-one business is also right on track. We have a very fast-growing business in Beijing. To complement that, we began offering our one-on-one classes in Shanghai in the second half of fiscal year 2011 and are now prepared for further expansion into new cities.

In the past fiscal year, one-on-one grew from approximately 13% to over 16% of our overall business, with very little spend on advertising.

Given the rapid growth of our Beijing one-on-one business, we feel confident that we now have the model right and can accelerate our entry into new markets. By the end of fiscal year 2012, we intend to be in 10 Chinese cities for each of our two core business segments -- small class and one-on-one.

I'm delighted with our strong business results in fiscal year 2011 and, as importantly, with the preparation measures we have taken over the last fiscal year, particularly in the enhancement of our content and organizational capabilities to support our ongoing (inaudible) expansion and the continued sustainable growth of our business in fiscal year 2012.

Thank you all again for being with us today and I will now turn the call over to Joe who will discuss our financial results for the fourth quarter and fiscal year 2011.

Thank you, Bangxin. Good day, everyone, and thanks for joining us. As I want to discuss both the quarter and the fiscal year, I'm just going to touch on some key points.

In the fourth quarter of fiscal year 2011 we exceeded our previously offered guidance by delivering strong revenues from both our small class and one-on-one businesses.

The attractive unit economics of our leading small class format combined with our ongoing rollout of one-on-one classes together contributed to both rapid top line growth and sustained profitability for our Company.

We delivered $33.7 million in revenue in the quarter, representing revenue growth of 66.8% versus the same period of the previous year. Driving the quarter's revenues was a combination of both solid enrollment growth and increases in our average selling prices.

As Bangxin mentioned, we grew enrollments by over 18% in the quarter. We achieved this enrollment growth while simultaneously growing ASP by over 40%.

Our ASP growth in the quarter was primarily due to a combination of the price increase for small class in Beijing we took last May and a structural change in our class format for many of our classes from two hours to three hours, which we have been phasing in over the last few quarters.

The increase of one-on-one as a percentage of revenues in the quarter also contributed to higher ASPs.

We achieved this strong revenue growth while keeping our cost structure in check.

Gross margins reached 52.0% in the quarter and 52.4% on a non-GAAP basis, excluding the impact of share-based compensation. Selling and marketing expenses represented 9.0% of revenues in the quarter and 7.5% of revenues non-GAAP.

General and administrative expenses as a percentage of revenues were 19.1%, given the impact of share-based compensation, but only 13.7% non-GAAP, giving us over 200 basis points of G&A leverage on a non-GAAP basis in the quarter versus same period last year.

The above factors combined to give us 23.8% GAAP operating margins, and, excluding the impact of share-based compensation, we had 31.2% non-GAAP operating margins in the quarter.

Our net income for the quarter grew by 249.4% and non-GAAP net income, which excludes share-based compensation, increased by 352.0% compared to the same period of the last fiscal year. The year-over-year net income growth numbers are particularly high this quarter because we're [cycling] the fourth quarter of fiscal year 2010 in which margins were uncharacteristically low.

During the same period last fiscal year, our gross margins were only 38.6% and operating margins were 12.9%. These lower-than-normal margins last fiscal year were due to a rapid increase in our hiring at that time, primarily to enhance our training and content development capabilities. In Q4 of last year our one-on-one business also was not yet operating at scale, which had an impact on margins.

All else being equal, margins in the second and fourth quarters of each fiscal year will tend to be higher as we are able to achieve greater utilization of our centers during the vacation periods in summer and Chinese New Year each year when we can schedule students to attend our classes during the week days rather than just on weekends.

Moving to the year as a whole, fiscal year 2011 was an outstanding year for our business in which we drove approximately 60% revenue growth while, at the same time, delivering approximately 69% net income growth year over year.

TAL's net revenues reached $110.6 million for the year from $69.3 million in the fiscal year 2010. And net income attributable to TAL was $24.4 million from $14.2 million in the previous fiscal year.

I was particularly pleased with this operating leverage that our business model demonstrated in fiscal year 2011. For the full year we achieved gross margins of 49.2% and gross margin expansion of over 300 basis points versus the prior fiscal year, putting ourselves in an excellent position to increase investment and accelerate the pace of our center expansion in fiscal year 2012.

Selling and marketing expenses were 9.0% as a percentage of revenues for the year. On a non-GAAP basis, excluding share-based compensation, selling and marketing expenses as a percentage of revenues were 8.1% or flat versus fiscal year 2010 levels.

The strength of our [trusted] brand is built upon the high quality of the tutoring services we deliver and continues to allow us to grow primarily by word of mouth, while spending a relatively small percentage of revenues on marketing compared with our peers. Over the coming year we plan to increase our spend on selling and marketing as one-on-one becomes a greater percentage of our revenue mix and we move into new markets.

However we still expect to retain an advantage over our peers in the amount we need to spend in this area given the proven track record of outstanding outcomes for our students that our brand represents, the strength of our large and active online education community and the higher barriers to entry we believe to surround the small class business which represents the bulk of our revenues.

Moving to G&A. General and administrative expenses increased by 75.8% in fiscal year 2011 to $19.1 million from $10.9 million in the fiscal year 2010. Non-GAAP general and administrative expenses, which excludes share-based compensation expenses, increased by 40.7% to $15.3 million from $10.9 million in fiscal year 2010.

On a non-GAAP basis, G&A as a percentage of revenues was 13.8%, giving us 180 basis points of leverage in our general and administrative expenses versus fiscal year 2010, when excluding the impact of share-based compensation.

Our operating margins in fiscal year 2011 were 23.0% versus 22.2% last year and, on a non-GAAP basis, we achieved non-GAAP operating margins of over 27% for the year.

Net income from continuing operations increased by 71.6% to $24.4 million from $14.2 million in fiscal year 2010.

Loss from the discontinued operations in Qianjiang and Jianli in Hubei province was a total of $0.3 million for the fiscal year 2011. Qianjiang and Jianli are both very small places in a China context; one is a county-level city and one is a county.

Last quarter we decided to close the three learning centers in these two locations, which were included as part of the Wuhan acquisition back in fiscal year 2009, in order to focus our energies on the much higher potential Wuhan City market.

Net income attributable to TAL increased by 68.8% to $24.0 million from $14.2 million in fiscal year 2010, giving us 21.7% net margins for the year versus 20.6% net margins in fiscal year 2010.

Non-GAAP net income attributable to TAL, which excludes share-based compensation expenses, increased by 106.0% to $29.3 million from $14.2 million in fiscal year 2010, giving us non-GAAP net margins of 26.5% for the year.

Basic and diluted net income per ADS were $0.36 and $0.35 respectively in the fiscal year 2011. Non-GAAP basic and diluted net income per ADS, which excludes share-based compensation expenses, were $0.43 and $0.43 respectively.

From the balance sheet I would like to highlight our strong cash position and growing deferred revenue balance. As of February 28, 2011, the Company had $199.0 million of cash and cash equivalents as compared to $50.8 million as at February 28, 2010.

As of February 28, 2011, the Company's deferred revenue balance was $50.7 million versus $29.4 million as of February 28, 2010, representing a 72.3% increase over the same period of the previous year.

Moving onto guidance. Based on the Company's current estimates, total revenues for the first quarter of fiscal year 2012 are expected to be between $29.0 million and $30.5 million, representing an increase of 41% to 49% on a year-over-year basis. This estimate reflects the Company's current expectation which is subject to change.

That concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions). Philip Wan, Morgan Stanley.

Congrats on the first strong quarter.

I have two questions. Let me start off with the first one, which is I would like to know more about your pricing strategy in fiscal 2012. Should we expect any price adjustment this year?

In fiscal year 2012, as you know, we won't be taking a price increase for small class. The reason for that is because typically for small class we'll take a price increase every two years. Because we took a price increase last year, this year we are unlikely to take a price increase across all of our markets.

That said, in Q1 we will still be cycling a non-ASP increase quarter, because we took the price increase in May of last year. So you should still expect ASP to make a significant contribution to revenues in the first quarter.

Going forward, after the first quarter, the price increase, so the ASP increase that you should expect, will be from a couple of different factors. One is that we may be able to continue to increase the number of hours per enrollment.

The second is that we have some of our existing students who enjoyed a discount to the price increase last year. So in Beijing they may have gone from RMB45 to RMB50 an hour instead of the full price increase that all the other students took. So this year those existing students will be taking the full price increase.

Finally, one-on-one, as it continues to be a larger percentage of our business, will make an increase -- a contribution, to our ASP increase.

But, overall, the way to think about it is that ASP increase will make a good contribution to Q1, but then for the rest of the year, from Q2 onwards, we'll be dependent more on enrollment growth than ASP increase to reach our overall revenue target.

Right. That's helpful, Joe.

And then my second question is, could you please comment on your network expansion plan going into fiscal year 2012? And I understand that you previously guided that you may add 50 learning centers. Any change to that? And, also, you added more centers than expected in the fourth quarter, and what is the impact on your margins in, for example in the (inaudible) quarters?

So to answer your first question, we're still right on track to grow 50 new centers for fiscal year 2012. There may be some upside to that number, but right now it looks like we're right on track with that number for the year.

In terms of the impact of the 18 new learning centers that we added in Q4, we don't expect that to have a big impact on gross margins in Q1 because, as I mentioned before, we had the impact of the ASP increase in the first quarter. So we're not expecting that to put too much downward pressure on margins in the first quarter.

Right. Thank you. I'll get back to the queue.

Mark Marostica, Piper Jaffray.

Thank you, and nice job on the quarter, guys.

My first question is also tied to the new center openings and I'm curious where you stand right now in terms of number of centers in Beijing and [severally] Shanghai? And where do you think you can get to in terms of the lid on the number of centers in each of those markets?

In terms of the overall where we can get in terms of each of those markets, we don't have a difference in terms of our opinion versus the last quarter. We still think that, overall, we have an opportunity to double our center growth from that 80-plus level in Beijing over a period of time. And in Shanghai we think we can get to at least Beijing levels. So that hasn't really changed over this quarter versus last quarter.

Okay, fair enough. And then, Joe, you talked about fiscal '11 from a profitability perspective, positioning the Company well to increase investment and expansion. And I also heard you talk about your target of 170 learning centers maybe having some upside.

But I'm just curious, with this being the situation, what does this portend for overall operating margins in fiscal '12? Should we see some progression upward in terms of margin expansion in fiscal '12? Or how do you think about running the business, in terms of operating margin targets?

For fiscal year 2012, I still feel comfortable with the gross margin target that I offered on last quarter's call, mid-40%s non-GAAP, 44% to 46% level on a non-GAAP basis. I'm still not prepared to say that we'll have gross margin expansion in fiscal year '12.

The reason for that is that this past year we had a combination of increasing our ASP while, at the same time, we intentionally reduced the number of learning centers that we added. Next year we're not going to have as much of a bump with ASP, and then we're also going to be rapidly increasing learning centers and growing one-on-one as a percentage of revenue.

So I'm not expecting that margins will have expansion, certainly from this year. I think that they'll probably come in closer to the levels of fiscal year 2010, which were 45.9%.

The good thing is that with the [out] delivery on margins that we achieved this year we have more of a cushion, in terms of our margins next year, as we continue to invest heavily in our learning center expansion, and as one-on-one becomes a greater percentage of the business.

And, Joe, just a quick follow up on that comment. Could you extend that discussion down to the operating margin line for us?

Yes. In terms of operating margins, I still feel comfortable with the 20% to 22% range non-GAAP that I offered last quarter. I still think that sales and marketing, on a non-GAAP basis, could go to 10% to 11% next year versus 8.1% non-GAAP, which we achieved in this year.

The reason for that is because, up until now, one-on-one we haven't been applying very much sales and marketing expenditure at all, and we think that, given the difference in that consumer and their purchasing behavior, we can afford to put a lot more sales and marketing against that.

Even without spending a lot on sales and marketing, that business is growing extremely quickly for us and is already 16% of revenues. And it's really just in Beijing to this point; we only moved into Shanghai in the second half of last year. So we think, as we move in to new cities and continue to add sales and marketing to one-on-one, we have a real opportunity to grow that business.

So that's why I'm saying that sales and marketing could go up, which would affect the overall operating margin levels.

G&A we expect to be relatively flat. We think that the opportunity for increased leverage, versus the leverage we already got this year, may be limited, especially as we continue to add IT, finance and audit personnel over the next year as a listed company.

Great. Thank you so much for the color. I'll turn it over.

Vivian Hao, Credit Suisse.

Congratulations on a great quarter. Just a quick question on the enrollments. What's the percentage of one-on-one as a percentage of total enrollments so far? And how do you see that trend in physical [autol]?

So we're not going to break down our business formats by enrollment, but in terms of as a percentage of revenue one-on-one is already 16% of revenue, which is up from 13% last year. So it's grown over this year, and I still think pretty consistently with what I said last quarter, that I expect one-on-one as a percentage of revenue to get to 20% to 25% of our business next year.

Okay. And there's a second question on the pricing. So what's the pricing discount for the new markets comparable with the existing markets, especially comparable with the Beijing and Shanghai markets, both for small class and one-on-one class?

Okay. So for small class, on average, would be at about RMB40 per hour in the new markets we're entering this year. We're at about RMB50 an hour in Shanghai and RMB55 an hour in Beijing. For one-on-one, we're still going to be at RMB200 to RMB250 an hour in the new cities, and our average in Beijing is about RMB240 EB an hour.

Okay. Thank you.

(Operator Instructions). Ella Ji, Oppenheimer.

Congratulations on a very strong quarter. It's very encouraging to see that your learning center opening is running a little ahead of your schedule, so could you comment on how's the fill-up rate for the 18 new learning centers that you opened?

And also, since now you opened more learning centers than you planned to, I think you opened 12 more learning centers and that's 10% above your original total target, how's that going to contribute to your total enrollment growth in fiscal year '12?

These are great questions. In terms of the ramp up of our learning centers, I think that Q3 learning centers are probably the better to talk about because they've had a chance to ramp up. So those nine learning centers that we put in in Q3 are already at 35% to 40% utilization, which is pretty good utilization levels, because, as we've talked about before, our average utilization across the business is just about 60%.

In terms of Q4, it's still a little bit early in terms of the ramp-up cycle for them.

Now, in terms of what that means, in terms of enrollment growth, we're still targeting enrollment growth of 22% for fiscal year 2012 for the year as a whole.

Okay, thank you. And the next question is about pricing. So you mentioned that you may consider increased price for one-on-one offerings. Could you comment on the price increase range?

Yes. One-on-one is interesting because you have a lot of opportunity to increase prices in a number of different ways. You can increase by year, by subject, by the study environment that they're in, whether they're studying for certain competitions. So, unlike our small class business where we have the same price regardless of year, regardless of subject, with one-on-one we may see an ASP increase without actually raising the hourly rate; it just may be a change of mix between our different subjects and grades.

In terms of the hourly rate increase, we already think that we're priced at a premium to much of the market for one-on-one. With the increase that [EDU's] taken in terms of one-on-one price increase, we're about parity with them for, especially, the middle and high school; we still think we're at a premium for the primary school one-on-one offering. So we'll be looking at the competitive situation and see if there's opportunities to continue to increase price.

Got it. And also I think you mentioned previously that you reached average enrollment hour from two hours to three hours per class. Could you remind us when did you start to have these longer hours per enrollment? And was it that you intentionally increased the teaching hours? Or is it because of the higher demand from the students?

It's a combination of factors. We went from two hours to three hours in pieces over the course of the year.

One of the impetuses for going to three hours was the implementation of ICS, which, as you know, we did last quarter. And with the implementation of ICS, or Intelligent Classroom System, which is our multimedia solution which uses interactive whiteboards in the classroom, having three hours of class time gives more time for interaction using the multimedia technology.

Got it. And lastly, could you comment, given China's high inflation rate, are you seeing pressures in your teachers' salaries and also your rental expenses for your new learning centers?

In terms of rental expenses, we're only growing on a per square meter basis in low single digits versus the same period of last year. So we're not seeing pressure there.

In terms of teaching expenses, we, of course, continue to give our teachers raises over time. We like to compensate our teachers the best in the industry; that's how we're able to continue to maintain our high teaching quality. But those teaching increases have been lower than the ASP increases that we've taken, so we feel comfortable with teaching expenses as a percentage of revenue going forward.

Got it. Thank you for taking my questions.

Vivian Hao, Credit Suisse.

I have a follow-up question on the newly added 18 centers. Could you break down for the geographic distribution of these 18 centers and also what's the rough split between small classes -- I mean specifically for small classes and one-on-one, if this applicable?

I'm not going to break that down by city, but what I will say is that the majority of those new centers were still added in Beijing and Shanghai, which is consistent with our strategy of adding most of our centers in Beijing and Shanghai over the first half of next year.

And then in terms of small class and one-on-one, it was a combination of both formats. I believe it was slightly skewed towards small class versus one-on-one.

Okay. Thank you.

There are no further questions at this time. I would like to turn the call over to Mr. Joseph Kauffman for any closing remarks. Please proceed.

Thank you. Before we end the conference call, I would like to once again emphasize the key highlights from the year.

Fiscal year 2011 was another strong year for TAL Education Group. We achieved robust top line growth of approximately 60% and bottom line growth of approximately 69%.

Fiscal year 2011 was a harvest year in which we refocused on the key drivers of our business, developing outstanding content and curriculum and cultivating top teachers and school heads to run our businesses.

While we added only a net 16 learning centers nationwide in the first three quarters of the year, we still achieved strong annual enrollment growth of over 27%, well beating our annual enrollment growth target of 22%.

The preparation steps we've taken this year, together with our improved margin profile, put us in an excellent position to increase investment and accelerate in the pace of our center expansion, which we believe will drive the continued solid growth of our business in fiscal year 2012.

Thank you all for joining us today and I hope you won't hesitate to reach out to me or Willow with any further questions you may have.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. 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.