TAL Education Group (NYSE:TAL) Q2 2024 Earnings Call Transcript

TAL Education Group (NYSE:TAL) Q2 2024 Earnings Call Transcript October 26, 2023

TAL Education Group beats earnings expectations. Reported EPS is $0.1, expectations were $0.09.

Operator: Ladies and gentlemen, good day, and thank you for standing by. Welcome to TAL Education Group's Second Quarter of Fiscal Year 2024 Earnings Conference Call. At this time all participants are on listen-only mode. After the speaker's presentation there will be a Q&A session. Please be informed today's conference is being recorded. I would now like to hand the conference over to Mr. Jackson Ding, Investor Relations Director. Thank you. Please go ahead, sir.

Jackson Ding: Thank you, operator. Thank you all for joining us today for TAL Education Group's second 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 discussions will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.

A student concentrate on their laptop in the library, taking advantage of an educational program online.

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 do 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 turn the call over to Mr. Alex Peng. Alex, please go ahead.

Alex Peng: 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 the financial performance and business progress of the second quarter of this fiscal year 2024. After that, I'll share some thoughts on the outlook for the next quarter. During this quarter we continued to operate and manage our core business lines while exploring new initiatives and seizing new opportunities. With respect to our learning services and others business we further optimized our online and offline offerings for very user preferences and expanded our learning center network at a measured pace. As for the Content Solutions business, our learning devices launched near the end of the last fiscal year, maintained their growth momentum and delivered solid user engagement performance.

In addition to our core business, our innovative endeavors have made progress in this fiscal quarter. We have rolled out the beta version of MathGPT and we intend to continuously improve the model's efficiency guided by the feedback we receive from selected users to whom we provided test invitations of this experimental version. In terms of our financial performance, we reported net revenues of US$411.9 million and RMB2.9659 billlion for the quarter, representing an increase of 40.1% and 49.5% year-over-year in US dollar and RMB terms respectively. With respect to profitability our non-GAAP income from operations and non-GAAP net income attributable to TAL for the quarter of US$52.7 million and US$58.8 million respectively. So with that overview, I'd like to hand the call over to Jackson.

He'll give you an update on our core business lines operational developments and review our second quarter financial results. After that, I'll return to share more details regarding our outlook for the next quarter. And then I'm really looking forward to opening the call for questions. Jackson please go ahead.

Jackson Ding: Thank you, Alex. I'm pleased to share some details on the progress we made during the second fiscal quarter across our core business lines. Please note that all financial data for the quarter is unaudited. Let me start with our learning services and others business, which consists of a broad range of learning programs for consumers, as well as technology solutions for institutional customers. In the second quarter of fiscal year 2024, our learning services and others business contributed to our year-over-year growth momentum. Within learning services, our enrichment learning business achieved double-digit revenue growth year-over-year during the quarter, driven by continued increase in our offline learning center networks capacity and seasonal benefits of summer vacation, which led to a year-over-year increase in enrollments in this quarter.

We continue to expand our offline learning center network to better adapt to users' needs. Our learning centers reached approximately 220 at the end of the second quarter, which increased from roughly 200 at the end of the previous quarter. Furthermore, efficiency metrics such as learning center utilization rate illustrate the overall level of business health. We believe off-line small class enrichment learning has a viable business model and a clear path for future development. In addition, our online large class enrichment learning business continued to make progress this quarter. Operational efficiency indicators such as retention rate have been consistently at a viable level. We have been expanding our learning program offerings over the last few quarters.

While these new programs still constitute a small percentage of our total revenue they have shown year-over-year growth in this fiscal quarter. Moving on, let's discuss Tinkercad, our overseas learning services business. Our overseas business also continued to expand during the second quarter. In this fiscal quarter, we have established new learning centers in the United States, Singapore and Hong Kong. We are committed to serving the overseas markets with Zinc Academy while balancing our standard of service and our locally customized content. As we look forward to the next quarter, we expect a quarter-on-quarter decrease in revenue from our learning services and others business driven by seasonal influences. However, we remain committed to the ongoing development of our learning center network, managing our product offerings and sustaining operational efficiency.

Moving on to our Content Solutions business. This business primarily consists of sales of smart books, print books, learning devices and digital contents. In this quarter, smart and print books combined delivered year-over-year double-digit growth. As for learning devices, it is a relatively new business for us. So year-over-year growth rate will be less relevant. If we look at the growth trend for learning devices from Q1 to Q2, the business experienced quarter-over-quarter sequential growth driven by both seasonal benefits and business progress. The learning devices business remains one of the main revenue contributors to our Content Solutions business. During this quarter, we continued to receive recognition for its functions and contelibrary.

While we continue to develop our capabilities in supply chain and sales and marketing, we are also iterating new features for learning devices based on user feedback, in order to meet their diverse learning needs. As an example, we have fine-tuned our product functionalities and AI-based precision learning, targeting students from a broader range of age groups including Elementary School and Junior High School. Beyond improvement in software and hardware functionalities, we're also exploring possibilities in diversifying our business model and our go-to-market channels. Looking ahead to the next quarter, we intend to serve more customers with better experiences, through our Content Solutions business. Our goal is to offer customers Content and formats suitable to their learning needs and serve them in their self-learning journeys.

We expect Content Solutions to contribute to a larger proportion of our total net revenues in the next quarter. With that overview, I would now like to share our key financial results for the quarter. We recorded net revenues of US$411.9 million and 2.9659 million RMB this quarter, an increase of 40.1% and 49.5% year-over-year in USD and RMB terms. Our revenue growth is attributable to the steady increase in our learning services business and the continued growth in sales of the products in the Content Solutions business. Gross profit also increased in the second quarter of fiscal 2024 rising from US$176.9 million for the same period last year to US$242.5 million for this quarter. Gross margin decreased to 58.9% from 60.2% for the same period last year, mainly due to a higher revenue contribution from our Content Solutions business which currently has a lower margin percentage.

Sales and marketing expenses for the quarter were US$116.3 million, an increase of US$48.9 million compared to US$78.1 million for the fiscal second quarter last year. Selling and marketing expenses as a percentage of total revenue, increased to 28.2% from 26.6% for the same period last year. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses increased by 57.8% to US$110.1 million from US$69.8 million for the second quarter of fiscal year 2023. The year-over-year increase was primarily due to increased selling and marketing activities. General and administrative expenses for the quarter have been relatively stable decreasing by 0.1% to US$97.1 million from US$97.2 million for the fiscal second quarter last year.

Income from operations expanded by, 113.5% to US$31.8 million from US$14.9 million for the second quarter of fiscal year 2023. Non-GAAP income from operations which excludes share-based compensation expenses was US$52.7 million, compared with US$42.3 million in the same period of the prior fiscal year. Net income attributable to TAL was US$37.9 million for the quarter compared with the net loss attributable to TAL of US$0.8 million for the same period of the prior fiscal year. Non-GAAP net income attributable to TAL, which excludes share-based compensation expenses was US$58.8 million compared with US$26.6 million for the same period of the prior fiscal year. Moving on to our balance sheet. As of August 31, 2023 we had US$2.1959 billion of cash and cash equivalents US$767.6 million of short-term investments and US$281.2 million in current and noncurrent restricted cash.

Our deferred revenue balance was 325.4 million as of the end of the second fiscal quarter compared with 387.7 million a quarter ago. Now, turning to our cash flow statement. Net cash used in operating activities for the second quarter of fiscal year 2024 was US$42.7 million. In April 2023, the company's Board of Directors authorized to expand its share repurchase program launched in April 2021 by 12 months. Pursuant to the expenditure repurchase program the company may spend up to approximately US$337.4 million to repurchase its common shares through April 30, 2024. As of August 31, 2023 the company has repurchased approximately 13.4 million common shares and an aggregate consideration of approximately US$233.6 million under the share repurchase program.

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

Alex Peng: Thanks Jackson. As I mentioned earlier, I think we made encouraging progress during the quarter. Now, I would like to share some thoughts on our strategic plans for the next quarter of this fiscal year. So looking ahead to the third quarter as previously noted by Jackson, we anticipate a quarter-over-quarter decrease in revenue due to the seasonal nature of our business. In terms of our learning services, our focus remains on developing our learning center network in a balanced way and persistently introducing appropriate products across both online and offline platforms. As for our Content Services our focus will be on enhancing product functionalities enriching the breadth of learning content and exploring opportunities for developing new products.

As we move ahead, we intend to continue to invest in AI. We will continue to optimize our model to improve its response speed and accuracy. Recently, we've collaborated with a number of technology companies and academic institutions, leveraging the national new generation artificial intelligence open innovation platform for smart education to cohost the AAAI-2024 Global Large Model Mathematical Reasoning Competition. This competition invites AI experts developers and math enthusiasts worldwide to use large language models to automatically solve challenging math problems for primary and secondary school students. In addition, we continue to explore the application of artificial intelligence technology in specific use cases. In the near future, we really intend to launch applications based on MapGPT.

This represents our ongoing endeavors, to leverage advanced technology to enhance learning experiences. So to sum it up, in this quarter our major business lines delivered material development both in terms of product offerings and operational capabilities. Our posted financial results are a manifestation of such developments. We've been observing customers' evolving needs, in their learning journeys and intend to serve them through a variety of products in our learning services and content solutions portfolios. So, that concludes my prepared remarks. Operator, we're now ready to open the call for questions.

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