TAL Education Group (TAL) Q2 2027 Earnings Call Transcript

Ladies and gentlemen, good day and thank you for standing by. Welcome to TAL Education Group's fiscal 2027 second quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please be informed today's conference is being recorded. I would now like to hand the conference over to Ms. Fang Liu, Investor Relations Director. Please go ahead.

Thank you all for joining us today for TEL Education Group's second quarter fiscal year 2027 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 newswire. During this call, you will hear from Mr. Alex Pong, President and Chief Financial Officer, and Mr. Jackson Dean, Deputy Chief Financial Officer. Following the prepared remarks, Mr. Pong and Ms. Dean will be available to answer your questions. Before we continue, please note that today's discussion will contain forelooking statements made under the C-Hubble provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forelooking 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 FDC. For more information about these risks and uncertainties, please refer to our filings with the FDC. Also, our earnings release and this call include discussions of certain non-gap financial measures. Please refer to our earnings release, which contains a reconsideration 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, Peng, and thanks to everybody for joining today's conference call. For more than 20 years, TAL has been committed to helping students learn and grow. Today, we do this through our learning services, content solutions, and other products. Across all of these offerings, we remain committed to delivering meaningful learning experiences and building lasting relationships with the students and families we serve. Let me start with an overview of our second quarter performance. Our overall Revenue continue to grow, although at a slower pace than in previous quarters. As our business has grown in scale, we expect our overall growth rate to moderate. The picture across our businesses, however, is different. Our PAU offline programs continue to grow at a healthy pace. Demand for face-to-face learning remains solid, and student retention remains We believe that interaction between teachers and students continues to play an important role in learning. Our learning device business, on the other hand, is facing a challenging industry environment. Respectable competition, shifting consumer sentiment, and rising component costs have put pressure on the market. These conditions have affected our business and have become A drag on our overall revenue growth. Despite these near-term challenges, we continue to see a strategic role for learning devices in helping students learn independently at home. We're focused on improving our content and product experience while managing the business with discipline. Turning briefly to our financial results, second quarter net revenues were $995 million U.S. dollars or $6.7 billion RMB, representing a year-over-year increase of 15% and 9% in U.S. dollar and RMB terms, respectively. Our non-GAAP income from operations was $248 million, representing a year-over-year increase of more than 100%. Our non-GAAP operating margin increased to 24.9% from 12.5% for the same period The continued improvement in our operating margin reflects operating leverage, efficiency gains, and disciplined resource allocation. With that, I will turn the call over to Jackson, who will cover operational progress across our core business lines and review our financial performance for the second fiscal quarter.

Jackson, over to you. Thank you, Alex. I will start with the operational progress across our core business lines and then review our financial results, starting with our payout offline programs. Revenue grew by double digits year over year in the second quarter. Enrollment growth was the largest growth contributor of revenue growth in this business line. Take payout enrichment learning classes as an example. The retention rate was over 80%, reflecting the continued trust from students and families.

We continue to see steady demand for face-to-face learning.

Beyond helping students build knowledge, the classroom gives them a place to interact with teachers and peers, ask questions, and develop confidence. These interactions are an important part of the learning experience.

And they remain at the heart of our pay-off programs.

Our learning center network was well positioned to serve our students and families. We continued to focus on teaching quality, teacher development, and the consistency of our services across learning centers. As the business grows, our priority is to remain a high quality experience for students Our online enrichment learning business, we continued to develop learning experiences that respond to students' interests and needs. In our science-related courses, for example, we combined online learning with hands-on activities to help students explore science and technology beyond the classroom.

During the quarter, we launched our first National Youth Makersoft.

The event encouraged students to draw inspiration from everyday life, develop their own ideas, and turn those ideas into practical projects. We believe these experiences can help students build

curiosity and learn through practice. Learning device business is going through a challenging period.

The overall market has contracted by double digits year over year,

and competition remains intense. At the same time, rising chip costs

are putting pressure on device pricing and adding to the challenges facing the industry.

These conditions are affecting our business as well.

Our learning device business has grown in recent years. The current market environment is weighing on its performance, especially on the top line.

In this quarter, learning device was a

drag on our company-level growth rate. We expect this business to continue to face pressure as the industry works through these challenges. Against this backdrop, we remain focused on serving our users and improving the learning experience through our learning devices. As a result, user engagement remains stable during the quarter. The average weekly active rate across our learning device user base was around 80%, and the active devices were used for an average of one hour per day. This reflects the value our products continue to provide to students, even as the market faces pressure.

Here are our key financial results for the second fiscal quarter. Please note that all financial data for the quarter are unaudited.

Our net revenues were $995 million U.S. dollars or $6.7 billion RMB, representing a year-over-year increase of 15% and 9% in U.S. dollar and RMB terms, respectively. Cost of revenues increased by 8% year-over-year to $400 million. On a non-GAAP basis, excluding share-based compensation expenses, cost of revenues also increased by 8% year-over-year to $399 million.

Growth profit increased by

21% year-over-year to $595 million. Growth margin for the second quarter fiscal year 2027 was 59.8% compared to 57.0% in the same period of the prior year.

Operating expenses.

Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, decreased by 16% to US$223 million from US$264 million in the second quarter of fiscal 2026.

Non-GAAP general and administrative expenses,

which excluded share-based compensation expenses, increased by 4% to $124 million from $119 million in the second quarter fiscal year of 2026. Non-GAAP income from operations, which excluded share-based compensation expenses, was $249 million compared to non-GAAP income from operations of $108 million in the same period of the prior year. Her expense was $190 million for the second quarter of fiscal year 2027, compared to other income of $67 million in the second quarter of fiscal year 2026. The change was mainly driven by fluctuations

in the fair value of certain investments. Income tax expense was

$136 million in the second quarter of fiscal 2027, compared to $51 million of income tax expense in the second quarter of fiscal year 2026. The increase in income tax expense was mainly due to changes in deferred tax liabilities relating to withholding tax.

Non-GAAP net loss attributable to TAO,

which excluded share-based compensation expenses, was $36 million U.S. compared to non-GAAP net income attributable to TAO of $136 million U.S. in the second quarter of fiscal year 2026. On to our balance sheet, 31st, 2026. The company had approximately $2.0 billion of cash and cash equivalents, $96 million of short-term investments, and $254 million in current and non-current restricted cash. Our deferred revenue balance was approximately $930 million as of the end of the second fiscal quarter.

Net cash used in operating

activities for the second quarter of fiscal year 2027 was $179 million.

Finally, a brief update on shareholder returns, including our cash dividend. Between July 29, 2026

and October 23, 2026, the company repurchased approximately $64,226 common shares and an aggregate consideration of approximately $2 million. The company's board of directors has approved the declaration and payment of a special cash dividend to shareholders out of the company's cash balance in an amount of 30 cents U.S. dollars per common share equivalent to 10 cents U.S. dollars per ADS, representing an aggregate dividend payment of Approximately 55.2 million U.S. dollars to all shareholders of the company. That concludes my review. I will now hand the call back to Alex for his comments on a strategy and outlook. Alex, please go ahead.

Thanks, Jackson. Let me close with a few thoughts on our strategy and outlook. Our businesses serve students in different ways. In our learning services, teachers help students develop knowledge, confidence, and curiosity through direct interaction. In our content and technology products, we help students build the ability to learn more independently. We believe both are important parts of a student's learning journey. We'll continue to bring together our experience in education and our capabilities in technology to improve the learning experience. Looking ahead, we expect our overall revenue growth to moderate as our business grows in And our learning device business continues to face industry headlines. As the educator Jiang Duwei wrote in his Reconstruction in Philosophy, a person is always in process of growth. At TAL, we are grateful for the opportunity to support our students in that process, and we remain committed to learning and growing alongside that. So, that concludes my prepared remarks. Operator, we are ready to open the call for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. And our first question comes from Eddie Wong from Morgan Stanley. Please go ahead.

Thank you, Alex and Jackson, for taking my question.

My question is regarding the revenue growth. We saw the year-over-year revenue growth moderate in the second quarter, and you walk us through the top-line performance across the major business lines, and how should we think about the growth outlook going forward?

Thank you.

Yeah, Eddie, this is Alex. Let me take that one on. So, as we just mentioned, our overall revenue growth moderated in the second quarter. And we expect growth to become more moderate going forward. This really reflects both the increasing scale of our business and the different conditions we're seeing across our business lines. So, our PayU offline programs continue to perform well. The business delivered double-digit revenue growth in the quarter, supported primarily by enrollment growth. Student retention remained healthy, and we continue to see steady demand for face-to-face learning experience. Our learning device business, as both myself and Jackson just mentioned, their business is facing a more difficult market. The industry as a whole for learning devices has contracted, as noted by several independent third-party market reports, and these conditions have affected our performance. So, as a result, learning devices have become a drag on our overall revenue growth. We also saw growth in our online enrichment business moderate during the quarter. So, overall, we see our learning services business continue to develop on a healthy foundation, while the learning device business works through a more challenging period in the broader industry environment. So, Eddie, I hope that answers your question.

And the next question comes from Jenny Yuan from UBS. Please go ahead.

Hi, Alex. Hi, Jackson. So thank you for taking my question. And my question is on our learning device business. Given the current challenges in the market, how are you navigating the business, and how should we think about the trade-off between revenue growth and profitability? And are you prioritizing one over the other? Thank you.

Thanks, Jenny. This is Alex.

Let me take this question on as well. So let me start by saying that we continue to believe learning devices have a strategic role to play in supporting students' learning at home. Over the past few years, we've built a sizable user base, and we remain committed to providing these students and families with quality content and a great learning experience. That said, the industry is going through a challenging period, as we just talked about. The market has contracted. Competition remains intense, and rising component costs have added pressure across the industry. Um, our business has not been really, it has not been immune to these conditions. We expect learning devices to continue to weigh on the company's overall revenue growth rate. So in this environment, um, what's our focus? Our focus is on managing the business in a disciplined way. We'll continue to invest in content, technology, and the product experience, but we'll also be thoughtful about how we allocate resources and manage costs. We do not anticipate significant losses from the learning device business for the full fiscal year. Looking ahead, what do we see? We believe there is still a strategic opportunity to use technology to support students' independent learning. We want to continue developing this business with a long-term perspective while making sure that our near-term decisions reflect the market conditions we're facing today.

So, Jenny, I hope that answers your questions.

Okay, thank you.

And the next question comes from Timothy Zhao from Goldman Sachs. Please go ahead.

Hi, Jackson. This is Eunice Liu from Goldman Sachs. I'm asking a question on behalf of our analyst, Timothy Zhao. Thank you for taking the question. In this quarter, companies' operating margin improved significantly. We want to ask what drove the improvement, and how should we think about the profitability going forward? Thank you.

Jonas, thank you for the question. This is Jax, and let me take this one. The improvement this quarter in operating margin reflects That's progress across several areas. As our business has grown on a scale, we have been able to serve more students and users, while also managing our costs more efficiently. We've also become more disciplined in how we allocate our resources across the organization. Looking ahead, improving profitability remains a priority for us. We'll continue to invest in our products and services while also driving greater operating efficiency. And as you've seen in the last couple of quarters, we expect our operating margin for fiscal 2027 to improve compared with fiscal 2026. At the same time, as always, profitability may vary from quarter to quarter due to seasonality, market conditions, and the timing of our investments. We believe it is more useful to look at our progress over a longer period of time.

Yunus, I hope that answers your question.

Thank you, Jackson. This is very helpful.

Again, if you'd like to ask a question, please press star, then one. And our next question comes from Elsie Shang from CLSA. Please go ahead.

Thank you, management, for taking my question. I'm Elsie, and my question is about other income and shareholder return. So I noticed that other income declined significantly this quarter, and the company also declared a cash dividend for the first time. So, could you explain what is the driver behind the change in other income, and also share how you think about the shareholder return? Thank you.

Elsie, thank you for the question.

This is Jackson again. Let me take this. And that sounds like a two-part question. The first part about other income, and the second part about shareholder return. So then maybe let me tackle them piece by piece. So first, on the income, as part of our capital allocation strategy, look, we maintain an investment portfolio that includes a variety of investment products, ranging from wealth management products to minority equity investments and others. During the quarter, the fair value of certain investments declined, which was the primary driver of the sequential decrease in other income. The value of these investments can change with market conditions, so other income line may fluctuate from quarter to quarter. The second part of the question was about shareholder returns. Returning value to shareholders is and has always been an important part of our capital allocation strategy. The dividend declared this quarter complements our ongoing share repurchase program. Looking ahead, we intend to make shareholder returns a more systematic part of our capital allocation approach, using both dividends and share repurchases. Our decisions on the form and the scale of returns will take into account our financial position, the needs of our business, investment opportunity, and market conditions.

Elsie, I hope that answers your question.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

So, again, thanks to everybody for joining us today, and we'll see you next quarter. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.