TAL Education Group (TAL) Q2 2024 Earnings Call

TAL Education Group (NYSE:TAL) Q2 2024 Earnings Conference Call October 26, 2023 8:00 AM ET

Company Participants

Jackson Ding - Investor Relations Director

Alex Peng - President & Chief Financial Officer

Conference Call Participants

Felix Liu - UBS

Linda Huang - Macquarie

Candis Chan - Daiwa

Caini Wang - CICC

Lucy Yu - Bank of America

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. 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

Question-and-Answer Session

Operator

[Operator Instructions] Now first question coming from the line of Felix Liu with UBS. Your line is open.

Felix Liu

Good evening, management. Thank you for taking my questions and congratulations on this growth results. So in the most recent quarterly results especially the strong performance of Learning Service, and under the context of good non-academic tutoring market demand, how do you see your long-term strategic priority? If you would rank these businesses in terms of future resource allocations, how would you rank them namely domestic learning service business hardware AI and overseas? How would you think of these in terms of future resource allocations? Thank you.

Alex Peng

Thanks, Felix. This is Alex. Let me take that one. So let me try to unpack this question. To start with our company strategy, I think it will really revolve around providing world-class learning products for our users. These products are going to come in various form factors. So, they're going to include, but not limited to for example learning services, learning devices, smart and printed books, and other learning content in various form factors, right. I think this really -- we believe that collection that portfolio of products really give the parents and learners a set of choices that fit with their needs and fit what the stages they're on their own learning journeys.

So, under that context I would say it's not necessarily an issue of priority, but more so that these different business models and business lines are in different phases, in their development path. So if we take these three that you named, I would say, learning services business, it's really demonstrated the fact that it has some viable business models. It's got a clear development path going forward. We really anticipate that it will continue to show growth momentum in the future. We'll obviously, continue to invest resources in our learning centers network and in our factoring staff teams.

This is an area, where we've had and we've built up strong operational capabilities that will actually continue to hone in every evolving environment. And so with that, we really expect this business to be profitable. So that's the first one.

If I look at the second that you brought up content solutions, right. It's really addressing a different use case. It's self-learning at home, it's self-learning at the time that's oftentimes somewhat fragmented times that's available to the learners. So, beyond the growth in sales volume for our hardware business, we really fundamentally aim to leverage our understanding of learning content, hardware and artificial intelligence to provide unique value to our users and we continue to look out both engagement and learning impact from this new set of solutions to address these different use cases.

So the final set is really artificial intelligence and overseas. I would say look they are really still in the exploration phase. We look forward to the long-term trends that these businesses are operating within and we'll look forward to keeping you guys updated on our progress. So Felix, I hope that answers your question?

Felix Liu

Yeah. Thank you very much.

Operator

Thank you. One moment for our next question. And our next question coming from the line of Linda Huang with Macquarie. Your line is open.

Linda Huang

Thank you very much. So I just have a question regarding for the learning devices. So can management share the self-performance of the hardware product during the quarter, and then any change in the user engagement data? I think that will be great, if you can share more about that. Thank you.

Alex Peng

Thanks Linda. This is Alex again. Let me address that question. So to start with the sales of our hardware in this quarter have increased compared to the first quarter. So there's quarter-on-quarter growth in the sales volume. And we really believe this is largely due to the overlapping factors of the shopping festival in June and the summer vacation.

I would say on the engagement side, we're seeing some pretty encouraging user activity data and user feedback. Our users continue to spend a significant amount of time learning on our devices. And additionally, we've noticed that the users are exploring multiple features that we're bringing to the devices and they're making use of both first-party and third-party learning content in all kinds of manners that really they feel that's more suitable to their learning style.

And I think, Linda, I would just emphasize the second point I think for us, the engagement is really paramount. We want to make sure the learning devices are used and they're helpful and they may come in, in a way that's most suitable for the individual learning journey.

And I think as I mentioned in a call a number of quarters ago and we're also really looking forward to working with a number of world-class content players to continue to build up third-party content that's valuable and that's engaging for our learners. So Linda, I hope that answers your question.

Linda Huang

Yes, very clear. Thank you very much.

Operator

Thank you. And our next question coming from the line of Candis Chan with Daiwa. Your line is open.

Candis Chan

Good evening Alex and Jackson. Congratulations on a very strong set of results. I just have a question related to MapGPT. Can you share with us the progress of MapGPT commercialization, and also how this will be applied to our services? Thank you.

Alex Peng

Hey, Candis, this is Alex. So thanks for that question MapGPT, and let me just share some thoughts on that. So to start with we really think that the product design of generative AI is a crucial part of its ability to create value for users. I think we started mentioning this topic and discussing this topic from a number of calls in the past quarters.

And as we continue to engage in conversations with developers, experts and industry players in China and across the world, I think globally we see that application is really receiving more and more attention across all the domains in industries, right? I think this is really critical as we think about artificial intelligence for the future and the generative AI for the future.

So there are really a lot of opportunities worth exploring for the implementation of generative AI in the learning field, especially for K-12 learners. And we think that the collaboration of AI with human faculty and staff can really improve the efficiency of supply and accessibility of high-quality learning content. As I mentioned earlier, we're still and I think really for that matter across so many industries, we're still in the early stages of this and we're working on the product design and we'll have some user test in the very near future. So Candis I hope that answer your question.

Candis Chan

Great. Thank you.

Operator

Thank you. And our next question coming from the line of Caini Wang with CICC. Your line is now open.

Caini Wang

Good evening, Alex, Jackson. This is Caini Wang from CICC. So again, congrats on the results this quarter. So you have consistently mentioned that extending our learning centers would be a balanced approachs, so my question is like what kind of factors would you consider before deciding to increase the number of learning centers? Thank you.

Jackson Ding

Thanks for the question. This is Jackson. I'll take this one. I think there are two broader sets of factors that we consider when we think about managing our learning center network, one on the demand side and the other more on the operating side or supply side if you will, right?. So on demand side first, I think at this stage of a business, if you look at the size of the business and you look at the population for the corresponding age group, it is not the potential size of the market mostly that we mostly consider, but it's more so to what extent can we have a suitable product market fit between our products and our users in certain markets, right? Be it in certain cities, be it in China be it outside of China. So that's kind of the demand side factor we are considering. In the last few quarters, we have been seeing development of the product itself and development on product market fit.

Now, moving on to the operating side on the supply side, when we speak to a balanced approach, what we mean is that we're not only focused on building out capacity for future business development, but we also want to make sure that as we expand our learning centers, we can still provide a sustainable level of quality of service and a sustainable level of operational efficiency, as we manage our own learning center network. So these are the few factors we tend to consider when it comes on to making decisions on learning center expansion. I hope that answers your question Caini.

Caini Wang

That's it for today. Thank you very much.

Operator

Thank you. Our next question coming from the line of Lucy Yu with Bank of America. Your line is now open.

Lucy Yu

Hi, Alex, hi, Jackson. This is Lucy from Bank of America. I have a question on margins. So I noticed that our GP margin and OP margin has been quite volatile. You already explained that this quarter the GP margin contraction is largely due to the business mix change. But how should we think about the GP margin in the future? And if we're looking at SIM business on a like-for-like basis, how is the margin trends at the moment? Thank you.

Jackson Ding

Lucy, thank you for the question. This is Jackson. And I will take this one. When we talk about gross margin trend, I think, it would be mostly helpful if we dial back a couple of quarters and look at the trend over time, right? So just to set the stage, I think, if we look at last fiscal year, right, for most quarters our gross margin bounced between 50% to 60% range, right? And in fiscal Q1 so a quarter ago our gross margin was 49.3%, and in this quarter our gross margin was 58.9%, which was down year-over-year, but up quite a bit quarter-over-quarter, right?

And when I look at gross margin of the overall company two things -- I would say have the most – two factors I would say have the most influence on gross margin eventually. One is the overall business mix of various business lines. And two is the kind of, the intrinsic gross margin right, if you will of the underlying businesses.

So maybe let me explain to you first what happened in Q1 and that will probably help us understand what happened in Q2. So in Q1 what we saw was a gross margin dip to just below 50%. And that was primarily a result of shift in underlying business mix, right with some of our lower-margin business constituting a larger portion of our total revenue.

Now from Q1 to Q2 the mix stayed relatively stable. So it was a factor of the underlying business picking up on the gross margin. I will caution you though Q2 is given the summer vacation and seasonal influences Q2 tends to be a quarter where our offline learning centers are at a fairly high utilization at has resulting in a relatively high gross margin if you look across the quarters. So in the next quarter I do expect a decrease in gross margin in general. I hope that answers your question, Lucy?

Lucy Yu

Thank you, Jackson. Just two follow-ups. When you mentioned decrease I assume you mean Q-on-Q decrease, but if we're looking on a Y-o-Y basis how should we think about the margin in the third quarter?

Jackson Ding

Yes. I'll just leave it as we do see a quarter-over-quarter decrease. Honestly, when we manage the business I'd say less focus on Y-o-Y gross margin change because the underlying business shape is just less comparable Y-o-Y at this point.

Lucy Yu

Understood. Thank you so much.

Operator

Thank you. And I will now turn the call back over to management for any closing remarks.

Jackson Ding

All right. Thanks, operator. And again thanks everybody for joining today and thanks for your questions. And we look forward to speaking with everybody next quarter. Have a good day. Bye-bye.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.