Earnings Call Transcript - TAL Q3 2024

Operator, Operator

Ladies and gentlemen, good day, and thank you for standing by. Welcome to TAL Education Group's Third Quarter of Fiscal Year 2024 Earnings Conference Call. At this time all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer 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, Investor Relations Director

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 discussions 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 in this call includes 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 turn the call over to Mr. Alex Peng. Alex, please go ahead.

Alex Peng, President and CFO

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 continue to manage our core businesses, while concurrently exploring additional opportunities for development. We’ve 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 equipped with resources that resonate with and elevate their learning spirit. 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’ve recognized 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 US$373.5 million, or RMB2.7 billion for the quarter, representing an increase of 60.5% and 63.7% year-over-year in US 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 US$10.2 million and US$1.9 million respectively. So, with that overview, I'd like to hand the call back to Jackson, who’ll give you an update on our core business line, 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.

Jackson Ding, Investor Relations Director

Thank you, Alex. I'm pleased to share some details on the progress we made during the third fiscal quarter across all four 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 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 products. The largest revenue contributor within learning services and others is our enrichment learning program. Through the design of an enrichment learning program, 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 practical real-world scenarios. The revenue trends of Peiyou Small Class enrichment programs tend 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 all products, our operating capability, efficiency, and others. In alignment with our strategic objectives, our online enrichment learning business has maintained its cost 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 continue to innovate our product offerings and service delivery models. Our online and virtual learning programs aim to offer a unique digital learning experience to our customer base. Regarding our overseas operations, Zinc 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 build-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 the Content Solutions segment. Comprising smart books, print books, learning devices, and digital content, Content Solutions continued its year-over-year growth momentum in this quarter, driven by development in our product capabilities as well as go-to-market capabilities. Learning devices, primarily shared in the XPath series, is the leading revenue contributor within the Content Solutions business during this fiscal quarter. The XPath series aims to offer a comprehensive learning experience for school-aged users at home. XPath is designed to combine an extensive content library with interactive learning experiences, powered by our application of AI technologies. We market XPath through a range of go-to-market channels, such as online live streaming and e-commerce platforms. Our ongoing efforts include the continuous expansion and management of all sales channels. Throughout this quarter, we continue to work on product development initiatives, iterating our existing products, as well as introducing new products and features. Our investments in product development include software, hardware, AI, algorithms, content, and more. Recently, we introduced a new product featuring upgrades to both its hardware and software, offering users a range of configuration options. The product incorporates refinements on multiple use cases, including motion detection-based interactions, instant question and answer, image recognition-based learning feedback, and more. In addition to XPath, we're also exploring new product formats to meet the diverse demands of various use cases. One of our early education enhancement products 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 reported net revenues of US$373.5 million and RMB27.157 billion. 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 US$129.7 million for the same period last year to US$200.2 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, as well as changing gross margins in the underlying business losses themselves. Selling and marketing expenses for the quarter were US$122 million, an increase of 73.3% compared to US$70.4 million for the fiscal third quarter last year. Non-GAAP selling and marketing expenses, which exclude share-based compensation expenses, increased by 82.6% to US$116.4 million, from US$63.8 million for the third quarter of fiscal year 2023. The growth in selling and marketing expenses is mainly driven by increased selling and marketing activities. General and administrative expenses increased by 19% to US$110.7 million from US$93 million in the third quarter of fiscal year 2023. Non-GAAP general and administrative expenses, which exclude share-based compensation costs, increased by 29.3% year-over-year to US$96.7 million, from US$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 US$22 million in the third quarter of fiscal year 2024, from US$28.3 million in the same period of fiscal year 2023. The loss from operations was US$32.2 million in the third quarter of fiscal year 2024, compared to a loss from operations of US$32.9 million in the third quarter of fiscal year 2023. The non-GAAP loss from operations, which excludes share-based compensation expenses, was US$10.2 million compared to a non-GAAP loss from operations of US$4.5 million in the same period of the prior year. Net loss attributable to TAL was US$23.9 million in the third quarter of fiscal year 2024, compared to a net loss attributable to TAL of US$51.6 million in the third quarter of fiscal year 2023. The non-GAAP net loss attributable to TAL, which excludes share-based compensation expenses, was US$1.9 million, compared to a non-GAAP net loss attributable to TAL of US$23.2 million in the third quarter of fiscal year 2023. Moving now to our balance sheet. As of November 30, 2023, we had US$2,193.4 million of cash and cash equivalents, US$974.2 million of short-term investments, and US$329 million in current and non-current restricted cash. Our deferred revenue balance was US$507.7 million as of the end of the third fiscal quarter, compared to US$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 US$247.1 million. In April 2023, the Company's Board of Directors authorized extending its share repurchase program, launched in April 2021, by 12 months. Pursuant to the extended share repurchase program, the company may purchase up to approximately US$737.4 million in proceeds of its common shares through April 30, 2024. When we last spoke, as of August 31, 2023, the company had repurchased approximately 13.4 million common shares at an aggregate consideration of approximately US$233.6 million under the share repurchase program. We did not make any additional purchases 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.

Alex Peng, President and CFO

Thanks, Jackson. As I mentioned earlier, despite a slight quarter-over-quarter revenue decrease, we made material progress this fiscal third quarter. Now I'd like to share some of my thoughts on our company’s outlook for the upcoming fourth quarter. Concerning our learning services and other business, we will continue investing in learning services to bring our users a 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 functionalities 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, and the internet, they have been applied to education. We're 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 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, Operator

Thank you. Our first question comes from Timothy Zhao from Goldman Sachs. Please go ahead, Timothy.

Timothy Zhao, Analyst

Hi, Alex. Hi, Jackson. Thank you for taking my question, and congrats on the strong quarter. My question is regarding capacity expansion, just wondering if you can share any color regarding the capacity expansion for the past quarter and into the longer term, what is your longer-term growth plan for the offline learning center capacity expansion? Thank you.

Jackson Ding, Investor Relations Director

Timothy, thanks for the question. This is Jackson, I'll take this one. So you asked about capacity expansion in this last quarter. You know, 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 plans. 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 the expansion plan for 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 capabilities, operating efficiencies, and so forth. So it's a pretty dynamic and balanced approach when we think about capacity management. Moving forward, when we think about the footprint of the offline learning center network, it should more or less align with the overall pace of the Peiyou Small Class and the overall growth pace of revenue coming from the Peiyou Small Class business. Efforts will be made to manage operating indicators while we expand our learning centers. I hope that answers your question, Timothy.

Timothy Zhao, Analyst

Yes, that's helpful. Thank you, Jackson.

Operator, Operator

Thank you, Tim. Our next question comes from the line of Eddy Wang from Morgan Stanley. Please ask your question, Eddy.

Eddy Wang, Analyst

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

Alex Peng, President and CFO

Hi, Eddy, this is Alex, thanks for that question. Let me take this one. So first, maybe let me take a step back and just share a little bit. You know, 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 components 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 things. So, the three components—content, technology, AI technology, and hardware—go hand in hand, and we're really looking at strategically and programmatically advancing our offering across all of those three dimensions. So, with the launch of our latest flagship product, you will actually see advancements across all these three aspects 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, more advanced eyesight protective technology for the screen, introduces intelligence functions such as AI dialogue and fingertip translation, and incorporates capabilities from MathGPT. Its aim is to facilitate a much smoother and more personalized learning experience for users as a whole. I will also speak on our go-to-market side. As you know, and as I've shared in prior calls, our primary sales channels are online, including both live streaming and e-commerce. We’re obviously very proactively working on existing channels, improving their efficiency and reach, while exploring additional distribution models. We see our sales channel not just as a way to distribute our products, but also as a way to engage in dialogue with our potential and existing customers about their learning journey, getting their feedback, and understanding how they're using these devices to help us continuously improve and enhance the features. So, I hope that answers your question.

Eddy Wang, Analyst

Yes. Thank you, Alex.

Operator, Operator

Thank you, Eddy. Our next question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Felix Liu, Analyst

Hi, good evening, Alex and Jackson. Congratulations on the strong quarter. My question is on AI, which you mentioned as one of the key pillars of your future strategy. Could you elaborate a bit more on how you plan to apply AI to your existing businesses? You mentioned a few of the applications in your second-generation 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 is the current level already sufficient? Thank you.

Alex Peng, President and CFO

All right, thanks for that question. This is Alex. Again, you know, I think Jackson mentioned CES earlier. I was there and 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. We're able to provide high-quality learning experiences, individualize pathways, and affordable costs at the same time. But I think there's also an increasing realization that this is a long journey; it's not going to happen in just a few months, 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 across three broad dimensions. There's obviously huge opportunities to increase the efficiencies of all of our work; we have a lot of knowledge workers in the company, and I think there's a huge opportunity there. One of the most prevalent opportunities that we're working on is how AI provides a very different type of interaction along the learning journey. As I mentioned earlier, in our smart devices, we have already seen early forms of this type of interaction, where the device is able to be much more helpful along the learning journey, much more in tune with the students and their challenges. Thirdly, there's also exploration for AI-native use cases in education. So, the efforts will be along all these three dimensions. If you look at the past few quarters, we've been able to really bring the synergy between foundational models, our education know-how, and domain expertise into our devices. In this context, AI not only operates independently but also contributes to the development of our existing businesses. We're actively engaging in product design, operational improvements, and taking in user feedback from both our internal employees and customers across the market. We're continuously on that journey, pushing it forward. I hope that answers your question.

Felix Liu, Analyst

Thank you, and congratulations again on the results. Thank you.

Operator, Operator

Thank you, Felix. Our next question comes from the line of Caini Wang from CICC. Please ask your question, Caini.

Caini Wang, Analyst

Hi, Alex, Jackson. So congrats on the strong results again. My question is regarding cash and balance. We can see that our main business is really doing well, and we are accumulating more cash on our balance. So I'm just wondering what is our plan regarding buyback plans or any other cash uses. Thank you.

Jackson Ding, Investor Relations Director

Caini, thanks for the question. This is Jackson, I'll take this one. Maybe on the adjusted buyback plan part first. 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 US$233.6 million. As for this fiscal quarter three, we did not make any additional repurchases. Now, if we take a step back and look at how we think about the use of cash, we take comprehensive considerations of both short-term and long-term shareholder returns when we think about it. There are multiple potential uses of cash in the future, including investing in our core businesses—our learning services, content solutions businesses, or developing new initiatives, as well as generating shareholder returns. I hope that answers your question, Caini.

Caini Wang, Analyst

Yes, thank you, Jackson. That's very helpful.

Operator, Operator

Thank you, Caini. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please go ahead, Yiwen.

Yiwen Zhang, Analyst

Hi, Alex, thanks for taking my question. First, congrats on another strong quarter. You pointed out in your remarks, you mentioned that the new products of the online enrichment business you're launching this year. So can you discuss the progress there? Thank you.

Jackson Ding, Investor Relations Director

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 innovating our product roadmaps and service delivery models. When we think about these new products, we aim to deliver innovative and interactive online learning experiences. We’re focused on delivering products that create user value and societal benefits. So, we'll continue to explore our handling of these products and observe how our customer practices develop over time. I hope that answers your question, Yiwen.

Yiwen Zhang, Analyst

Yes. Thank you, Jackson.

Operator, Operator

Thank you, 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.

Jackson Ding, Investor Relations Director

Yes, thanks again, everyone for joining the call today. As we approach the Chinese New Year, I wish everybody a Happy New Year of the Dragon, and we'll see you next quarter. Bye-bye.

Operator, Operator

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