TAL Education Group (TAL) 2023 Q1 法說會逐字稿

Ladies and gentlemen, good day, and thank you for standing by. Welcome to TAL Education Group First Quarter 2023 Earnings Conference Call. (Operator Instructions) I'd now like to hand the conference over to Mr. Jackson Ding, Investor Relations Director. Thank you. Please go ahead, sir.

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, 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 the discussions today 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 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 would like to now to turn the call over to Mr. Alex Peng. Alex, please.

Thanks, Jackson, and thank you all for joining us on today's call. I think it was exactly 3 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 ceased 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 developments.

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 are focused on developing new initiatives that match the mega trends 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.

Thank you, Alex. Now I would like to share with you more details on the development of each of our 3 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 our unaudited data for the quarter.

First is Learning Services and Other, which primarily includes the learning programs we provide in various class sizes, both online and offline. This includes PeiYou small class, xueersi.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 rolled out new programs such as International Chess, Rhetoric and Natural Science Learning.

In a time when COVID-19 continues to post complexities for offline operations our OMO model demonstrated its resilience. Many of our offline customers opted 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 would 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-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 smart 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 Smartbooks. SmartBook is a product format where we embed videos on to print books. These videos often offer supplemental learning materials in additional to what has been printed out on hard copies. As for our go-to-market strategy, we are building a diversified portfolio of sales channels, including live streaming, e-commence and social media.

Content Solutions business is still at its early stage. We remain committed to investing in the 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 offerings cover the entire value chain across the learning experience, including online classroom, content 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 efficiencies. 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 2 computer vision championships at the CVPR, a computer vision and patent recognition conference hosted by the Institute of Electrical and Electronic Engineers.

Moving on to financial results for the first quarter. Our net revenue totaled $224 million, representing an 83.8% decrease from $1.3849 billion in the same period last year. The decline in revenue was primarily driven by the succession of our K-9 academic -- K-9 AST services on academic projects in the Mainland of China.

Gross profit declined by 82.4% to $135.5 million from $771.8 million in the same period last year, while our gross margin increased from 56% to 60%. Selling and marketing expenses decreased by 86.1% to $60 million from $431.3 million in the same period last year. Non-GAAP selling and marketing expenses, which excluded share-based compensation, decreased by 87.2% year-over-year to $52 million from $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 $111.5 million from $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 66.9% to $95.4 million from $288 million in the same period last year. Loss from operations for the quarter decreased by 77.7% year-over-year to $28.3 million from $126.9 million in this quarter.

Non-GAAP loss from operations, which excluded share-based compensation expenses, was $1.8 million compares to $59.4 million in the same period last year. The year-over-year decrease in operating loss was primarily driven by the cessation of our 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 $43.8 million in the quarter compared with $102.1 million in the same period last year. Non-GAAP net loss attributable to TAL, which excluded share-based compensation expenses, was $17.4 million compared with $34.6 million in the same period of last year.

From the balance sheet, as of May 31, 2022, the company had $1.736 billion of cash and cash equivalents, $1.156 billion of short-term investments and $781 million in current and noncurrent restricted cash. The company's deferred revenue balance was $227.4 million by the end of the first quarter compared with $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 our business strategy and outlook. Alex, please go ahead.

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 TAL's trusted brand, operational excellence, content assets and technology know-how, well positioned the company for the transformation journey we are embarked on.

As I mentioned last quarter, we look at our businesses in 3 buckets: learning services and other, content solutions and technology solution. 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 we'll continue to drive the business around product portfolio expansion, experience optimization and operational efficiency.

Secondly, for Content Solutions, we're seeing robust market demand for innovative, print and digital integrated product formats. 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.

Then 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 quarters to come, we aim to develop new customers and creating more value for our existing customers.

Last time, I mention four words, which we believe really underline the megatrend of the education industry globally. Those are "Online", "Digital", "Intelligence" and "Open". And I think we have just begun this long and for sure, arduous transformation journey toward that future. We are seeing not only new opportunities but also new challenges. Our focus at this current stage is 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 would like to really paraphrase our mission statement. We're ever more committed to love and technology, creating a better future and better life. That concludes my prepared remarks. Operator, we're now ready to open the questions.

(Operator Instructions) Our first question comes from the line of Duan Lian from Huatai Securities.

My question is about how has the pandemic and lockdown situation of this quarter impacted TAL's business? And how do you evaluate the impact in the future?

Thank you for that question. This is Alex. Let me take that one. So first of all, I think during this entire period, as we look at how instances of COVID spring off in different parts of China, our first thoughts to all those who are affected by this and to our customers, to the students and parents. We have 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 the situation. In places where the conditions have improved, some of our off-line 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 for learning for content solutions, we are in printed books, which also rely on supply chain for production and delivery. I think we'll also come through this period with more experience and operational know-how 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 or 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 enrichment learning programs. I hope that answers your question.

Our next question comes from the line of Candis Chan.

And I see that this quarter, the gross margin actually has kept up at over 60%. And even though the revenue actually was down sequentially, which is very impressive. So may I know how many learning centers that TAL has now? And also what is your plan -- expansion plan for this year and also next year? And finally, a follow-up is that - would the capacity become a constraint for us to grow the learning services?

Thanks for the question. Following the business restructuring last year, we have undertaken a balanced approach to adjust an offline presence. And in doing so, we wanted to ensure our offline learning centers offer 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 an effective channel to establish and enhance our brand awareness.

At the end of this last quarter, we had somewhere between 100 and 150 learning centers in more than 30 cities and regions. Also, as Alex mentioned earlier, we have spent 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 are proactively developing our online programs and diversifying our 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.

Our next question will come from Mark Li from Citi.

This is Mark Li from Citi. May I ask a question on the enrichment learning program? Could you share a bit more on the operating metrics such as retention rate and ASP? And any more subjects or classes you may expand down the road?

Yes, Mark, thanks for the question. I would say our enrichment learning team and business have been primarily focused on 2 things. One is product and service standardization across various enrichment programs; and two, finding the right learning properties and user journeys for our learners and improving in 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 remained relatively stable compared to that before our 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 few months and we'll continue to look for program expansion opportunities. We'll share more details as the business reaches its next development phases. I hope that answers your question for me.

Our next question comes from Liping Zhao from CICC.

I'm wondering whether you could talk a little bit more on the development strategy of your Content Solutions business.

Thanks, Liping. This is Alex. Let me take that one on. 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 at it -- 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 of years, we've really seen an accelerated change the learning habit. 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 really a long-term and broad trend going forward. As families look at the kind of help they need (inaudible) 0:33:26 and digital content. We also believe that educational content needs to be matched with the appropriate interactive design, services process and technology to really ensure learning efficacy.

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 contents across the entire learning journey. And lastly, I would just also like to mention that as we look at content solutions business , we're really experimenting with new ways of sales channel growth for this business. We've been providing our products on e-commerce platforms. We've also started to roll out our products on new type of digital platforms such as Douyin, 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 demand in our products. So I hope that answers your question.

Our next question comes from the line of Elsie Sheng.

My question is related to your future investment. You mentioned that you plan to continue to invest. And could you give us more color about this plan and the direction and estimated size of the investment to support your new business?

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 equivalents, more than $1.1 billion in short-term investments and $781 million in current and noncurrent restricted cash. We believe this cash position provides us a solid foundation for both our business transformation and any future development.

In terms of 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 for ways to create value for our long-term shareholders. We have taken diversifying measures in the past to generate return for our shareholders, and we'll continue to do so in accordance with the market conditions. I hope that answers your question.

Our next question comes from the line of Felix Liu from UBS.

And congratulations on the good GP margin despite the restructuring. Could you share more color on your expectations on the margin trend going forward, as well as what was your expectation on the matured unit economics of the new learning services and other business. Will that be comparable to the pre-regulation academic after school tutoring?

Thanks for your 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 2 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 Alex mentioned earlier, we expect content to contribute -- to gradually contribute to a large portion of our overall revenue. As for gross margin on each business, that will continue to adjust according to market conditions and operating status.

As for operating margin, given our recent business restructuring and transformation, we will remain focused on building our business assets through continuous investments to create value in the long run. I hope that answers your question for us.

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.

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.

Great. Thank you. So this concludes today's conference call. Thank you for participating. You may now disconnect.