TAL Education Group (TAL) 2024 Q3 法說會逐字稿

Ladies and gentlemen, good day, and thank you for standing by. Welcome to TAL Education Group's Third Quarter Fiscal Year 2024 Earnings Conference Call. (Operator Instructions) Please be informed that 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.

Thank you. And thank you all for joining us today for TAL Education Group's Third Quarter Fiscal Year 2024 Earnings Conference Call. The earnings release was distributed earlier today, and you may find a copy on the company's IR website or through the newswires.

During this call, you will hear from Mr. Alex Peng, President and Chief Financial Officer; and myself, Investor Relations Director. Following the prepared remarks, Mr. Peng and I will be available to answer your questions.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC.

Also, our earnings release 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 turn the call over to Mr. Alex Peng. Alex, please go ahead.

Thank you, Jackson. I'd also like to thank all of you for participating in today's conference call. During this call, we'll review our financial performance and business progress in the third quarter of the fiscal year 2024. After that, I will share our thoughts for the next quarter's outlook.

Throughout this fiscal quarter, we continued to manage our core businesses while concurrently exploring additional opportunities for development. We witnessed Learning Services continuing on its development trajectory, enabling learners' growth and development with our enrichment learning programs, both online and offline. The advancement of Learning Services is underpinned by our execution on the quality of our service offerings and the capacity of our learning center network.

As for Content Solutions, we remain focused on the creation, curation and dissemination of quality content tailored to the unique learning pathways of our diverse user base. In an effort to empower learners with the solutions they need to excel, ensuring that each individual's journey is met with resources that resonate with and elevate their learning experience. We continue to execute on our product offerings as well as go-to-market capabilities for Content Solutions in this quarter.

We've been making programmatic advancements in our technological capabilities, laying a strategic foundation for future innovations. We recognize the transformative potential of this new wave of technologies for our business operations and will harness this power to serve our customers.

In terms of our financial performance, we reported net revenues of USD 373.5 million or RMB 2.7 billion for the quarter, representing an increase of 60.5% and 63.7% year-on-year in U.S. dollar and RMB terms, respectively. With respect to profitability, our non-GAAP loss from operations and non-GAAP net loss attributable to TAL for the quarter were USD 10.2 million and USD 1.9 million, respectively.

So with that overview, I'd like to hand the call over back to Jackson. He'll give you an update on our core business lines' operational developments and review our fiscal third quarter financial results. After that, I'll return to share more details regarding our outlook for the next quarter and then open the call for questions. Jackson, please go ahead.

Thank you, Alex. I'm pleased to share some details on the progress we made during the third fiscal quarter across our core business lines. Please note that all financial data for the quarter is unaudited.

Now let's start with our Learning Services and Others business, which consists of, among others, a broad range of learning programs for our consumers. For the third quarter of fiscal year 2024, Learning Services and Others business continued to achieve year-over-year revenue growth, driven by underlying development of multiple product lines.

The largest revenue contributor within Learning Services and Others is our enrichment learning programs. Through the design of our enrichment learning programs, we aim to nurture the full spectrum of learners' capabilities, enabling their well-rounded development that encompasses a breadth of competencies. And in our approach to enrichment learning, we place an emphasis on the cultivation of competencies, recognizing that it complements the mere acquisition of knowledge. These competencies equip learners with the necessary tools to navigate in practical real-world scenarios.

The revenue trend of Peiyou small class enrichment programs tends to correlate with the size of its learning center network. Year-over-year, the increase in capacity has led to enrollment growth. We take a dynamic approach in managing our learning center expansion plan, evaluating several factors such as market demand in each area, user acceptance of our products, our operating capability and efficiency, and etc.

In alignment with our strategic objectives, our online enrichment learning business has maintained its course of operations. In light of the evolving landscape and observable developments in user behaviors and preferences within the online learning sector over the last couple of years, we continued to innovate on our product offerings and service delivery offers. Our online enrichment learning programs aim to offer a unique digital learning experience to its customer base.

Regarding our overseas operations, Think Academy sustained continuous growth, exemplified by the addition of new learning centers during the fiscal quarter. As we progress, our strategy is to adopt a dual-focused approach that caters to our international learners by blending standardized educational frameworks with tailored local adoptions, in an effort to meet diverse educational needs while maintaining a coherent global learning experience and standard.

Let's transition to Content Solutions business, comprising of smart books, print books, learning devices and digital content. Content Solutions continued its year-over-year growth momentum in this quarter, driven by the developments in our product capabilities as well as go-to-market capabilities.

Learning devices and primarily Xueersi Xpad, is the leading revenue contributor within the Content Solutions business during this fiscal quarter. The Xpad series aims to offer a comprehensive learning experience for school-age users at home. Xpad is designed to combine extensive content library with interactive learning experience, powered by our application of AI technologies. We market Xpad through a range of go-to-market channels, such as online livestreaming and e-commerce platforms. Our ongoing efforts include the continuous expansion and management of our sales channels.

Throughout this quarter, we continue to work on our product development initiatives, iterating our existing products as well as introducing new products and features. Our investments in product and development includes software, hardware, AI and algorithms, contents and etc. Recently, we introduced a new product, featuring upgrades to both its hardware and software, offering users a range of configuration options. The product incorporates refinement on multiple use cases, including motion-detection-based interactions, instant question-and-answer, image-recognition-based learning feedback and etc.

In addition to Xpad, we're also exploring new product formats to meet the diverse demand of various use cases. One of our early education enlightenment product was awarded the latest TWICE Picks Award at CES 2024.

With that overview, I would now like to share our key financial results for the quarter. We recorded net revenues of USD 373.5 million and RMB 2,715.7 million, an increase of 60.5% and 63.7% year-over-year in USD and RMB terms. Our revenue growth is attributable to the growth of both our Learning Services and Others business and our Content Solutions business.

Gross profit also increased in the third quarter of fiscal year 2024, rising from USD 129.7 million for the same period last year to USD 200.3 million for this quarter. Gross margin decreased to 53.6% from 55.8% for the same period last year. The year-over-year decrease in gross margin is due to a combination of factors, including the change in revenue mix from each business line as well as changing gross margin of the underlying business lines themselves.

Selling and marketing expenses for the quarter were USD 122 million, an increase of 73.3% compared to USD 70.4 million for the fiscal third quarter last year. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 82.6% to USD 116.4 million from USD 63.8 million for the third quarter of fiscal year 2023. The growth of selling and marketing expenses is mainly driven by increased selling and marketing activities.

General and administrative expenses increased by 19% to USD 110.7 million from USD 93 million in the third quarter of fiscal year 2023. Non-GAAP general and administrative expenses, which excludes share-based compensation costs, increased by 29.3% year-over-year to USD 96.7 million from USD 74.8 million for the same period of fiscal year 2023.

Total share-based compensation expenses allocated to related operating costs and expenses decreased by 22.4% to USD 22 million in the third quarter of fiscal year 2024 from USD 28.3 million in the same period of fiscal year 2023.

Loss of operations was USD 32.2 million in the third quarter of fiscal year 2024 compared to a loss of operations of USD 32.9 million in the third quarter of fiscal year 2023. Non-GAAP loss from operations, which excluded share-based compensation expenses, was USD 10.2 million compared to Non-GAAP loss from operations of USD 4.5 million in the same period of the prior year.

Net loss attributable to TAL was USD 23.9 million in the third quarter of fiscal year 2024 compared to net loss attributable to TAL of USD 51.6 million in the third quarter of fiscal year 2023. Non-GAAP net loss attributable to TAL, which excluded share-based compensation expenses, was USD 1.9 million compared to a Non-GAAP net loss attributable to TAL of USD 23.2 million in the third quarter of fiscal year 2023.

Moving on to our balance sheet. As of November 30, 2023, we had USD 2,193.4 million of cash and cash equivalents, USD 974.2 million of short-term investments and USD 329 million in current and noncurrent restricted cash. Our deferred revenue balance was USD 507.7 million as of the end of the third fiscal quarter compared to USD 237.4 million as of February 28, 2023.

Now turning to our cash flow statement. Net cash provided by operating activities for the third quarter of fiscal year 2024 was USD 247.1 million.

In April 2023, the company's Board of Directors authorized to extend its share repurchase program launched in April 2021 by 12 months. Pursuant to the extended share repurchase program, the company may repurchase up to approximately USD 737.4 million in proceeds of its common shares through April 30, 2024.

When we last spoke as of August 31, 2023, the company has repurchased approximately 13.4 million common shares at an aggregate consideration of approximately USD 233.6 million under the share repurchase program. We did not make any additional purchase in this fiscal quarter three.

That concludes the financial section. I'll now hand the call back to Mr. Alex Peng to briefly update you on our business outlook. Alex, please go ahead.

Thanks, Jackson. As I mentioned earlier, despite a slight quarter-over-quarter revenue decrease, we made material progress with fiscal third quarter. Now I'd like to share some of my thoughts on our company's outlook of the fiscal fourth quarter.

Concerning our Learning Services and Other business, we will continue investing in learning services to bring our users' quality learning experience, both online and offline. The overseas market remains one of our new areas for development. Looking ahead, we'll keep extending our services to more customers with dynamic product formats while leveraging our online and offline capabilities.

In terms of Content Solutions, we target to iterate the functionality of our learning devices by harnessing AI technologies. This effort aims to transform these products, offering users a learning experience that integrates technology with learning content.

Founded in 2003, we're known as a learning technology company that focuses on the essence of education, explores the science of learning and assists individuals in approaching learning more scientifically. Over the past years, whenever new technology emerges, such as television, computers, the Internet, they've been applied to education. We are currently exploring the possibilities of educational transformation in the AI era, attempting to integrate AI with our existing products. We remain open to collaboration and sharing our findings with the hope of contributing some valuable insights to the global education community.

So that concludes my prepared remarks. Operator, we're now ready to open the call for questions.

(Operator Instructions) Our first question comes from the line of Timothy Zhao from Goldman Sachs.

Congrats on the strong quarter. My question is regarding capacity expansion. Just wondering if management can share any color regarding the capacity expansion for the past quarter. And into the longer-term, what is your longer-term growth plan of the offline learning center capacity expansion?

This is Jackson. I'll take this one. So you asked about capacity expansion in this last quarter. As we mentioned, the revenue from Peiyou small class business tends to correlate with its capacity expansion plan. So in the last quarter, our capacity expansion was in line with our revenue development.

You also asked about long-term development plan. Here's how we would look at it. We take a pretty dynamic approach in managing our offline learning center network. When we think about expansion plan for our offline learning centers, we consider several factors, for example, market demand in a particular area, for example, customer acceptance of our product, our own operating capability, operating efficiencies and etc. So it's a pretty dynamic and balanced approach when we think about capacity management.

Moving forward, when we think about the footprint of offline learning center network, it should more or less align with the overall pace of Peiyou small class, with the overall growth pace of revenue coming from Peiyou small class business. And efforts will be made to manage operating indicators while we expand our learning centers. I hope that answers your question, Timothy.

Our next question comes from the line of Eddy Wang from Morgan Stanley.

And also congratulations on the good results. So my question is regarding the smart device. So can you share with us your latest plan of the smart device business? And what are the considerations for the specific functions and the future development of the second generation of the smart devices?

This is Alex. Let me take this one on. So first, maybe let me take a step back and just share a little bit broadly speaking how we look at these devices. I think we're looking at these devices as an integration of high-caliber content, advanced AI technology and high-quality hardware. These three together will actually build a very compelling learning experience for students at home, where they will learn on their own at their own pace according to their own individual learning journey. I think that's kind of broadly speaking how we look at these, right?

So with that, basically, the three components, content, AI technology and hardware, they go hand in hand. And we're really looking at strategically and programmatically advance our offering across all of those three dimensions. So with the launch of our latest flagship product, you actually see the advancement across all these three while we continue to update and upgrade experiences across all our devices.

Just as an example, the flagship device we launched in December has a larger screen. It has more advanced eyesight protective technology for the screen. It introduces intelligence functions such as "AI dialog", "fingertip translation". It incorporates the capabilities from MathGPT. And really its aim is to facilitate a much more smooth and personalized learning experience for users at home.

I'll also speak on our go-to-market side. As you know and as I shared in prior calls, our primary sales channels are online, including both live streaming and e-commerce. We're obviously very proactively working on the existing channels, the efficiency and the reach of these channels, while exploring additional distribution models.

We see really our sales channel is not just a way to distribute our product, but it's also a way to engaging a dialog with our potential and existing customers on their learning journey, getting their feedback, getting how they're using these devices to help us continuously improve and enhance the features. So I hope that helps answer your question.

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

Congratulations on the strong quarter. My question is on AI, which you mentioned for one of the key pillars of your future strategy. Could you elaborate a bit more on how do you plan to apply AI to your existing businesses? You mentioned a few of the applications in your second-gen hardware. Do you see any other applications? And how do you plan to monetize such AI adoption? And also on your investment in AI, do you think we should expect an increase in AI investment or current level is already sufficient?

This is Alex. Again, I think Jackson mentioned CES earlier. I was there and I met with many colleagues from across the globe. I think there is really a consensus that this generation of generative AI is bringing a truly transformative moment to education, that we're able to provide high-quality learning experience, individualized pathways and affordable cost at the same time. But I think there is also an increasing realization that this is a long journey. It's not going to happen in just a few months, a few quarters or just a year.

So I think we're really in this for the long haul. And we're looking at where AI comes in, I think, across broadly speaking three dimensions. I think there's obviously huge opportunities to increase the efficiencies of all of our work. We do have a lot of knowledge workers in the company. I think there's this huge opportunity, and it's one of the most present opportunity that we're working on. I think AI provides a very different type of interaction along the learning journey.

As I mentioned earlier, in our smart devices I think we're already seeing the early forms of this type of interaction, where the device is able to be much more helpful along the learning journey. It's much more in tune in terms of where the students are, to understand the paths and challenges faced by individual students along their journey. I think thirdly, obviously, there's also exploration for AI-native use cases in education. So I think the effort will be along all these three dimensions.

Then again, I think if you look at in the past few quarters, I think we're able to really bring the synergy between a foundation model, our education knowhow, so domain knowledge and know-how, and put it into a device. So this really serves as a valuable reference point. AI in this context, honestly, it not only operates independently, but also contributes to the development of lots of existing business lines.

So we're really actively engaging the product design, operational improvement. And we're taking in a lot of user feedback from both internal employees and as well as our customers across the market and we'll be continuously on that journey pushing it forward. I hope that answers your question.

Our next question comes from the line of Caini Wang from CICC.

Congrats on the strong results again. And my question is regarding the cash using plans. We can see that our main business is really going well, and we are accumulating more cash on our balance. So I'm just wondering what is our subsequent plan, our buyback plans or any other cash plans.

And this is Jackson. I'll take this one. Maybe let me address the buyback plan part first. And I think I may have mentioned this earlier. Under the current extended share repurchase program, we have repurchased approximately 13.4 million common shares at an aggregate consideration of approximately USD 233.6 million. And as for this fiscal quarter 3, we did not make any additional repurchases.

Now if we take a step back and look at kind of broadly how we think about use of cash, we take pretty comprehensive considerations of both short-term and long-term shareholder return when we think about our use of cash. There are multiple potential uses of cash in the future, including investing into our core businesses via our Learning Services and Others business or Content Solutions business or other, also developing new initiatives as well as generating shareholder returns. I hope that answers your question, Caini.

Our next question comes from the line of Yiwen Zhang from China Renaissance.

First congrats on another strong quarter. So in prior you mentioned that the new products of the online enrichment business is launching this year. So can you discuss of how this has progressed there?

Yiwen, this is Jackson. I'll take this one. Yes. So as we talked about earlier the online enrichment space is an evolving landscape and there have been observable user behavior developments and preferences in the last couple of years. So as a result, we have been observing such developments and acting on innovating our product formats and our service delivery models.

When we think about these new products, we aim to deliver innovative and interactive online learning experiences through such new products. And we're focused on delivering products that create user value and societal benefits. So we'll continue to explore and innovate on these products, and we'll continue to observe how our customer preferences develop over time. I hope that answers your question, Yiwen.

So we have reached the end of the question-and-answer session. I'll now turn the conference back to the management team for closing comments.

Yes, operator. Thanks again, everyone, for joining the call today. As we approach Chinese New Year, just wish everybody a happy year of the dragon. And we'll see you next quarter. Bye-bye.

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.