Earnings Call Transcript - TAL Q4 2024

Operator, Operator

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

Jackson Ding, Investor Relations Director

Thank you, operator, and thank you all for joining us today for TAL Education Group's fourth 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 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 now 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. In this call, we'll discuss our financial performance and business progress for the fourth quarter and review some of the key results from the full fiscal year 2024. Following that, I'll briefly update you on our business strategy outlook. Throughout the fiscal quarter, we continued to manage our Learning Services programs to serve users who seek engaging and effective learning experiences. Our Peiyou small class and xueersi.com enrichment learning programs continue to receive positive feedback from users for the quality of their products and services. Our efforts to offer quality learning experiences, along with our learning center network expansion and increased enrollment, led to continued growth in our Learning Services business. For learning devices, we extended our products and services to a broader user base, enabling more users to find suitable learning solutions for their needs. We aim to help users with their self-learning journey by leveraging the smart features and abundant resources integrated into our learning devices. With this objective in mind, we launched two new versions of learning devices in this fiscal quarter with enhanced hardware and software capabilities. The xPad2 Pro and xPad2 Pro Max have gained early market traction and received solid user engagement feedback since their launch. Going forward, we remain committed to developing both our product capabilities and our go-to-market capabilities. To that end, we continue to pursue new technologies and refine our existing research and development endeavors. In a recent national collaborative initiative dedicated to comprehensively assessing large language models' mathematical abilities, our MathGPT large language model recently ranked number one in national rankings. From basic arithmetic to advanced series of mathematics, the MathGPT LLM delivers responses to a student's learning experience. In terms of our financial performance, we recorded net revenues of $429.6 million or RMB3.08 billion for the quarter, representing an increase of 59.7% and 66.9% year-over-year in U.S. dollar and RMB terms. With respect to profitability, our non-GAAP income from operations and non-GAAP net income attributable to TAL for the quarter were $9.4 million and $48.0 million, respectively. For the full fiscal year of 2024, we reported net revenues of $1.5 billion or RMB10.7 billion, representing 46.2% and 53.7% year-over-year growth in U.S. dollar and RMB terms, respectively. Our non-GAAP income from operations and non-GAAP net income attributable to TAL for the quarter were $19.7 million and $85.3 million, respectively. We also reported a positive non-GAAP net profit during the whole year, which was $84.8 million. And with that, I will now hand over the call back to Jackson, who will provide an update on the operational advancements within our core business lines and discuss our financial performance for the fourth fiscal quarter.

Jackson Ding, Investor Relations Director

Thank you, Alex. I'm pleased to share some details of the progress we made in the fourth quarter across our core business lines. Please note that all financial data for this quarter is unaudited. Let me start with our Learning Services and others business, which comprises a broad range of learning programs for consumers amongst other things. In the fourth quarter of fiscal year 2024, we expanded Learning Services and others year-over-year growth momentum through continued investments across our various product lines. Our online and offline enrichment learning programs continue to serve as a primary revenue generator for Learning Services. Through our systematic teaching design, up-to-date learning content, and interactive classroom design, we help users develop multifaceted capabilities and apply what they've learned into real-life situations. Our enrichment learning programs enable students to build their own thoughts from diverse perspectives, fostering comprehensive development with engaging and effective learning experience. Our offline Peiyou small class programs maintained their trajectory of year-over-year growth in this period. This was attributable to, amongst other factors, our learning center network expansion. Our decision to add learning centers during the quarter was supported by an assessment of market demand, as well as our operational capabilities and efficiency. Notably, efficiency indicators such as retention rate have been relatively stable as we expanded our capacity and enrolled more learners. We see a visible growth path for offline small class enrichment learning. In alignment with our strategic objectives, our online enrichment learning business has maintained its course of operations. To enhance teaching effectiveness, we tailored our online programs to differentiate them from offline offerings and applied smart interactive features to motivate users and enhance their engagement. These programs are designed not only to align with online learning habits, but also fully leverage online education's unique advantages, bringing scarce, high-quality educational resources to a broader audience. Looking ahead, we'll continue to innovate and iterate our products and services to meet evolving user demand for digital learning experiences. Next is our Content Solutions business, which encompasses smart books, print books, learning devices, and digital content. Our product portfolio and go-to-market capabilities drove continued year-over-year growth momentum during this fiscal quarter. As in previous quarters, Xueersi xPad stood out as a key contributor to our Content Solutions business's revenue growth. Revenue generated from our learning devices continued on its path of growth in fiscal fourth quarter, thanks to our launch of a couple of new products in our xPad series, the xPad2 Pro and xPad2 Pro Max. The latest xPads feature enhanced hardware and software capabilities, abundant embedded learning resources, and AI functions from a self-developed large language model, MathGPT. For example, customers can use our AI-enabled learning tools for math problem-solving, Chinese or English ethic review, step-by-step answer explanation, and much more. Together, these upgrades provide an improved human-machine interaction experience and more precise and efficient learning solutions while delivering consistent user engagement levels. Meanwhile, we focus on managing our sales channels and optimizing our marketing strategies. While we're closely monitoring the efficiency of our online channels, we also started to explore opportunities in offline channels to expand our products market. With that overview, I would now like to share our key financial results for the quarter. We recorded net revenues of $429.6 million or RMB3.08 billion, an increase of 59.7% and 66.9% year-over-year in U.S. dollar and RMB terms, respectively. The increase was attributable to the growth in both our Learning Services business and our Content Solutions business. Cost of revenues increased by 58.4% to $202.2 million from $127.7 million in the fourth quarter of fiscal year 2023. Non-GAAP cost of revenues, which excluded share-based compensation expenses, increased by 59.8% to $199.6 million from $124.9 million in the fourth quarter of fiscal year 2023. Gross profit also increased in the fourth quarter of fiscal 2024, rising by 60.9% from $141.3 million for the same period last year to $227.3 million for this quarter. Gross margin increased to 52.9% from 52.5% for the same period last year. Selling and marketing expenses for the quarter were $125.9 million, representing an increase of 69% from $74.5 million for the same period last year. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 80.1% to $120.4 million from $66.9 million for the same period last year. The uptick in selling and marketing expenses was primarily driven by increased selling and marketing activities. Selling and marketing expenses as a percentage of total net revenues increased from 27.7% to 29.3% year-over-year. General and administrative expenses increased by 4.5% to $117.2 million from $112.2 million in the same period of last year. Non-GAAP general and administrative expenses, which excludes share-based compensation costs, increased by 8.9% year-over-year to $104.9 million from $96.3 million for the same period of last year. Non-GAAP general and administrative expenses as a percentage of total net revenues decreased from 35.8% to 24.4% year-over-year. Total share-based compensation expense allocated to the related operating costs and expenses decreased by 22.1% to $20.5 million in the fourth quarter of fiscal year 2024 from $26.3 million in the same period of last year. Loss from operations was $11.1 million in the fourth quarter of fiscal year 2024 compared to a loss from operations of $44.4 million in the same period of last year. Non-GAAP income from operations, which excluded share-based compensation expenses, was $9.4 million compared to a non-GAAP loss from operations of $18.1 million in the same period of last year. Net income attributable to TAL was $27.5 million in the fourth quarter of fiscal year 2024 compared to a net loss attributable to TAL of $39.4 million in the same period of last year. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses, was $48.0 million compared to a non-GAAP net loss attributable to TAL of $13.1 million in the same period of last year. Moving on to our balance sheet, as of February 29, 2024, we had $2,208.7 million of cash and cash equivalents, $1,094.6 million in short-term investments and $248.7 million in current and non-current restricted cash. Our deferred revenue balance was $428.3 million as of the end of the fourth fiscal quarter. Now turning to our cash flow statement. Net cash used in operating activities for the fourth quarter of fiscal year 2024 was $23.7 million. Now let's switch gears and move on to full fiscal year 2024 financial results. Let me briefly review some key financials as follows. Fiscal year net revenue increased to $1,490.4 million or RMB10.7 billion, representing a 46.2% and 53.7% year-over-year increase in U.S. dollar and RMB terms, respectively. Gross profit increased by 38.2% to $806.1 million. Loss from operations was $69.2 million in the fiscal year 2024 compared to loss of operations of $90.7 million in the prior year. Non-GAAP income from operations, which excluded share-based compensation expenses, was $19.7 million for the fiscal year 2024 compared to non-GAAP income from operations of $17.8 million for the fiscal year 2023. Net loss attributable to TAL was $3.6 million in the fiscal year 2024 compared to a net loss attributable to TAL of $135.6 million in the previous fiscal year. Non-GAAP net income attributable to TAL, which excluded share-based compensation expenses, was $85.3 million compared to non-GAAP net loss attributable to TAL of $27 million in fiscal year 2023. That concludes the financial highlights section. In April 2023, the company's Board of Directors authorized a 12-month extension of the company's share repurchase program launched in April 2021. Pursuant to the extended share repurchase program, the company may purchase up to approximately $737.4 million of its common shares through April 30, 2024. As of August 31, 2023, the company had repurchased 13.4 million common shares at an aggregate consideration of approximately $233.6 million under the share repurchase program. We did not make any additional purchases in the fourth quarter of fiscal year 2024. In April 2024, TAL's Board of Directors authorized extending its share repurchase program by 12 months. That concludes the financial section. I'll now hand the call back to Alex to briefly update you on our business outlook.

Alex Peng, President and CFO

Thanks, Jackson. As highlighted throughout this call, during fiscal year 2024, for Learning Services, we extended our learning center footprint, developed additional learning programs catering to various user groups' specific needs and also managed our operational efficiency. So as a result, the business experienced year-over-year growth in the last few quarters. Our Content Solutions also made progress by offering high-quality learning devices and engaging in conversations with our target customers through various go-to-market channels. We believe fiscal 2024 laid a foundation for our future development. So now, I would like to share some insights on the company's strategy and objectives for fiscal year 2025. First of all, we remain focused on further refining our mature businesses. We will continue to uphold high-quality standards for our offline and online learning products and services. Our goal is to make our learning experience engaging and effective by applying technology and improving teaching content and student interactions. Among our mature businesses, we expect our various Learning Services programs to continue to serve as our largest revenue contributor in the new fiscal year. We'll also continue to innovate and explore during fiscal year 2025. To keep up with our customers' ever-evolving needs, we'll explore and design differentiated products and services. We'll also continue to invest in artificial intelligence to optimize our model, improve its response speed and accuracy and work to integrate artificial intelligence with our existing products and services. We keep a close eye on industry trends and how education is transforming in the AI era, staying keenly attuned to how we can interact with other players and identify potential areas where we can seize new opportunities. We remain open to exploring collaborations and sharing our findings with the hope of contributing some valuable insights to the global education community. Finally, we'll focus on refining the details of our operations to enhance overall efficiency and profitability. We believe our dedication to providing Learning Services and products will create value for our users and our society while driving our business forward. We'll also closely monitor our efficiency metrics in all business sectors and make timely adjustments to optimize each stock in our operations, including content generation, product R&D, sales and marketing, and more. So that concludes my prepared remarks. Operator, I think we're now ready to open the call for questions.

Operator, Operator

Our first question comes from Candis Chan from Daiwa. Please go ahead with your question, Candis.

Candis Chan, Analyst

Great. Hi, Jackson and Alex. Thanks for taking my question and also congratulations on the strong set of results. After achieving a robust 46% revenue growth for this year, can you shed some light on the revenue growth target for the new fiscal year? And also, what will be the key investment focus for this year? Thank you.

Alex Peng, President and CFO

Thanks, Candis. This is Alex. Let me take this one. I think at a very high level, I would say growth is really the outcome of investment input. I think this investment input is going to stem from product and services innovation, technology, channel and network, and last but not least, our people and our organization. So, at a very high level, I think I'll just sort of answer both of your questions in that one go. And if I were to unpack it a little bit further, I think, obviously, we'll remain focused on further revitalizing and refining our mature businesses. I would really expect our various Learning Services programs to continue to serve as our largest revenue contributor in the new fiscal year and continue to show robust growth. We'll continue to innovate, explore, and design differentiated products and services that really fit with all segments of our customers and all learning scenarios to provide them with an integrated experience and a cohesive learning journey. We'll also continue to invest in artificial intelligence. I think I mentioned earlier on the call, it's an area that we pay a huge amount of attention to, and we believe that the AI era and its transformative impact on education is just starting. We'll continue to refine the details of our operations to enhance overall efficiency and profitability. And this really, I think, goes across the entire chain of operation. You go from content generation to product R&D to sales and marketing. So Candis, I hope that answers your question.

Operator, Operator

All right. Thank you, Candis. Our next question comes from the line of Linda Huang from Macquarie. Please ask your question, Linda.

Linda Huang, Analyst

Thank you very much. Hi, management. So my question is regarding the learning center expansion. I remember that in the previous conference call, our learning center number was 250 to 300. So can you share with us more details regarding your learning center expansion at the end of the previous quarter? And then, for FY '25, how do you gauge the market demand and the expansion plan? Thank you very much.

Alex Peng, President and CFO

Thanks, Linda. This is Alex. Let me take this one as well. First of all, we expanded our capacity in the past quarter, which was in line with our expectations. With a relatively stable retention rate as we expanded our capacity and involved more students, we increasingly feel good about that line of growth for the future. Now, just to share a bit more context on how we look at this for the upcoming year, I think this is a theme that I've addressed in the past couple of years. Look, enrichment learning has got a new product market fit, and we always adopt a balanced approach. We'll look at the demand, we'll look at the geographical density of that demand, and we'll look at user response to our products and services, whether it's positive. Obviously, there are metrics such as user retention, which will tell us whether it's hitting our expectations. We'll also be very mindful of operational metrics such as classroom utilization rates and future utilization rates. These are all the things that we consider together, right. So I would say, when I look at our Peiyou enrichment learning programs, they are really designed to help users develop multifaceted capabilities. They need to apply what they've learned into real-life situations and develop their own thoughts from different perspectives, fostering a full-person development approach. So far, I think we've observed really positive user feedback related to these enhancements in the capabilities mentioned above, and we believe our dedication, quality, and effectiveness will continue to drive our sustained growth. For the next year, I think we're seeing very good signs of a visible growth path. We'll continue to expand our learning center network to meet user demand in the upcoming year. I think we'll stick to a dynamic and balanced approach, taking into account market demand in a particular area, how customers are responding to our products and services, our own operational capabilities, especially our teams on the ground, and the operational efficiency metrics I mentioned. We'll take all of those into consideration. So I think, just to summarize, we expect to further expand our network and continue to manage this in a dynamic and balanced approach. So Linda, I hope that answers your question.

Operator, Operator

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

Felix Liu, Analyst

Hi, good evening, management. Thank you for taking my question and congratulations on the strong fourth quarter results. You just mentioned your offline expansion strategy. May I shift the focus to online? How do you view your strategy regarding online investment learning? Similar to your commitment to offline expansion, do you plan to increase your investment in the online enrichment learning segment? Thank you.

Jackson Ding, Investor Relations Director

Felix, thanks for the question. And this is Jackson. I'll take this one. You know, when we look at the online enrichment learning business or the industry, we see this as a dynamic market landscape. Especially over the last couple of years, we have seen user experiences gradually evolve in this particular landscape. Now, before I get into the future, let me just talk a little bit about what happened in this quarter with our online enrichment business. In this past fiscal Q4, our online enrichment learning business maintained its course of operations. We also refined our operational efficiency while, at the same time, exploring new SKUs as well. Online enrichment learning remains a strategic area for us, not only because of the market opportunity itself but also because we see it as a unique opportunity to leverage interactive online features to provide an engaging and effective digital learning experience to a broader audience. You asked about our investment plan. I would say it's less about increasing or decreasing investments. It's more about making sure that we deploy the resources needed to provide our customers with high-quality learning experiences. So looking forward, online enrichment learning remains a strategic area for us. We're focused on delivering quality products and services to our customers while leveraging the benefits of online learning and continuing to bring scarce, high-quality educational resources to a broader audience while enhancing user value and social benefits. I hope that answers your question, Felix.

Operator, Operator

Thank you, Felix. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.

Timothy Zhao, Analyst

Great. Hi, Alex. Hi, Jackson. Thank you for taking my question and congrats on the very strong results. So my question is on the Content Solutions business line. Just wondering could management share some insights on the sales and the user engagement of the latest hardware that you launched over the quarter? And what is your plan to further make this business line more sustainable into the longer term? Thank you.

Alex Peng, President and CFO

Thanks, Timothy. This is Alex. Let me take this one. First of all, just to address this past quarter, as you mentioned and then I alluded to earlier on the call, we launched two new products in this quarter, the xPad2 Pro and xPad2 Pro Max. Growth this quarter was driven by increasing volume and higher average selling price. But in reality, there is another set of metrics, which I keep a close eye on, which is engagement. Overall, the average weekly usage time remains relatively stable, despite the ever-larger user base, which is impressive. Another interesting observation with the new set of products we launched is the enhancements in hardware and artificial intelligence learning tools. We're really seeing an uptick in the usage of those tools. It's showing early signs that these tools are becoming great companions for students as they learn on their own in their homes according to their individual style and learning profile. Going forward, I see two main directions. First, we need to continue to improve our products. We just launched new hardware, and this is around 10 months since we first introduced the xPad1. However, the software and content continue to be upgraded on these devices. Our North Star is engagement, learning engagement, and learning impact. We look for continued improvement in hardware design, additional high-quality content, and those artificial intelligence learning tools to enhance learning engagement and provide a more effective educational journey for our customers. If I may add, this journey has just begun. I think there is considerable potential as we further invest in artificial intelligence and our large language model, which will only get better over time. The second main direction is to build our brand. Our brand is strong and well-known, but we are new to hardware, so we’ll continue to drive brand building and expand our sales channels. We will monitor closely the efficiency of our online sales channels, from live streaming to mainstream e-commerce platforms, but we’ll also start to explore opportunities in offline channels. We believe these channels will provide opportunities for more customers to engage in the conversation with us and examine the potential impacts this device could bring to their kids. So Timothy, I hope that answers your question.

Operator, Operator

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

Caini Wang, Analyst

Good evening, Alex and Jackson. Thank you for taking my question. Actually, my question is, the company still has a big amount of cash on hand. So, how are we considering our cash usage and do we have any plans on further improving shareholder returns? Thank you.

Jackson Ding, Investor Relations Director

Caini, thanks for the question. And this is Jackson. I'll take this one. Look, as you said, the company has almost $3.6 billion in cash and cash equivalents, short-term investments, and restricted cash as of February 29, 2024. When we think about potential use of cash, there are several factors we consider and try to balance. One is we try to balance short-term and long-term development. And second, we aim to balance reinvestment into the business with generating shareholder returns. Currently, a few areas of cash usage that are on our mind include maintaining a steady investment pace in our core business segments to deliver high-quality products and create value for customers in their learning journeys. We will fund new business initiatives that are still in exploratory phases, which I discussed on the call or during previous conversations. We want to expand these new business initiatives as the industry evolves. Lastly, we continually seek diversified means to generate shareholder returns, including stock repurchase. I talked about the buyback program authorized by the Board, which was extended for another year and allows us to purchase up to roughly $504 million in considerations. So that's how we think about cash usage for now. I hope that answers your question, Caini.

Operator, Operator

Thank you, Caini. We have now reached the end of the question-and-answer session. I'd now like to turn the conference back to the management team for closing comments.

Alex Peng, President and CFO

So this is Alex again. Thanks everybody for participating in today's call, and we'll see you next quarter. Thanks and bye-bye.

Operator, Operator

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