Q2 2023 TAL Education Group Earnings Call

October 28, 2022

Yeah.

Good day and thank you for standing by welcome to T. A L Education Group second quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a Q&A session. Please.

Please be informed that today's conference is being recorded.

I would now like to hand, the conference over to Mr. Jackson Day Investor Relations director. Thank you. Please go ahead Sir.

Thank you operator.

Ladies and gentlemen, and thank you all for joining us today for Tal Education group's first quarter fiscal year 2023 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.

Here from Mr. Alex <unk>, President and Chief Financial Officer of Tau.

And myself Investor Relations director.

Following the prepared remarks, Alex and I will be available to answer your questions.

Before we continue please note that today's discussion will contain forward looking statements made under the safe Harbor provisions of the U S. Private Securities Litigation Reform Act of $19 95.

Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.

Risks and uncertainties include but are not limited to those outlined in 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 discussion of certain non-GAAP financial measures.

Please refer to our earnings release, which contains a reconciliation of that.

non-GAAP measures to the most directly comparable GAAP measures.

I would like to now turn the call over to Mr. Alex pump Alex please thank.

Thank you Jackson.

Thank you all for joining us on today's call.

I would like to again take this opportunity to express my gratitude.

For your continued attention to support <unk> transformation journey.

This quarter, we continue to execute our development strategy.

We proceed on our new journey and have made meaningful progress.

Let's first start with the numbers.

We recorded.

$294 1 million.

Dollars and revenue for the quarter.

As a result of our top line expansion for.

For the fiscal quarter ended August 31 2022.

We recorded $42 3 million U S dollars.

And $26 6 million U S dollars.

non-GAAP operating income and non-GAAP net income attributable to Tau respectively.

This quarter, we updated our mission statement.

Lager technology make education better.

Two to empower lifelong growth.

And technology.

This update of our mission statement reflects our continued commitment toward caring for our customers and for technological innovations.

It also reflects our exploration of new initiatives in and beyond the learning solutions market.

We believe this new mission inherits our traditions.

While studying the path for our future developments.

Empowering our users lifelong growth through providing learning services learning content solutions and.

And learning technology solutions.

Option.

We will continue to empower their lifelong growth through learning and beyond.

Now I will pass the floor to Jackson.

To share more color on our operational developments and the financial performance of each of our core business lines.

Afterwards.

I will update you on our business strategy.

Then we'll open the floor for questions.

Jackson. Please go ahead.

Thank you Alex.

I am pleased to share with you some more details on the progress we made.

Our three main business lines in this quarter.

Before we start.

Please note that the financial data for each business line mentioned had been level is based on unaudited data for the quarter.

Let's start with the learning services and other which primarily consists of learning programs, we provide in various class sizes, both online and offline.

This includes payoffs small class.

<unk> Dot com, Thank academy and other learning services businesses.

This quarter learning services and other accounted for approximately 75% of the total net revenue.

Maintaining our status as our largest revenue contributor.

Quarter over quarter revenue from learning services showed a healthy growth momentum.

The topline growth of our learning services business was a result of our effort to fine tune, our product offerings and operational efficiency.

Compounded by seasonal fluctuation due to school holidays.

Within learning services for in wood for enrichment learning, we continue to optimize our user experience and operating metrics by improving service quality.

Existing programs.

While also expanding our program offerings.

And this quarter, we saw increase in retention rates in multiple programs.

While retention rates still vary by program.

We are working towards achieving healthy retention rates across the board.

At the same time, we also continue to launch new enrichment programs.

Some newly launched courses.

Such as natural <unk> learning and international Chess have shown a good momentum.

In terms of enrolment growth.

With respect to our overseas and learning services.

Im delighted to share with you that think academy is still maintaining a triple digit year over year growth rate.

While the ongoing epidemic has profoundly impacted the learning habits of students and parents around loans.

It also created incredible opportunities across all aspects of learning.

Spurring demand for high quality learning products and services.

To better adjust if market demand in various overseas markets. We have focused on developing effective localized learning service offerings, leveraging our technology capabilities.

Our expertise in learning.

Moving on to our learning content solutions business.

Which provides learning content in print digital and hardware formats too.

To adjust diverse demand across various user groups.

The content themselves either created in house licensed or acquired from global and domestic partners.

And this quarter, our content solutions business accounted for around 15% of the total net revenue.

Representing a larger share of our overall revenue and exhibiting encouraging quarter over quarter growth.

The topline growth of our content solutions business was a result of our products and go to market channel expansion.

Compounded by seasonality fluctuation due to school holidays and shopping holidays.

And the last quarter I talked about Smartbooks.

Products, where we embed videos into print books.

Supplement the learning experience of our users.

We continue to receive positive customer feedback on smart books.

For this past summer holidays, we rolled out some of our specific smartbooks that decomposed the learning experience into weekly.

And in some instances daily programs.

As smartbooks break the learning experience into engaging and interactive bite sizes studer.

Students are more likely to engage and finished the programs.

We sell hundreds of thousands in volumes of smart books and this quarter.

Finally, let's look at our learning technology solutions business, which provides a full suite of enterprise grade technology products and services for learning institutions.

It's revenue accounted for less than 10% of our total net revenue.

<unk> due to seasonal demand fluctuation from our institutional clients driven by school holidays.

Now, let's switch gears a bit and let me talk you through the key financial results for the quarter.

Our total net revenue.

Was.

$294 1 million us dollars, representing a 79, 6% decrease.

1 billion $443 $9 million in the same period last year.

The decline in revenue was primarily driven by the secession of our K through <unk> services on the academic subjects in our mainland of China.

Year over year gross profit declined by 69% to $176 9 million U S. Dollars from 571 3 million U S dollars in the same period last year.

Our gross margin increased from 39, 6% to 62%.

Selling and marketing expense decreased by 74, 8% to $78 1 million U S dollars from $309 7 million in the same period last year.

non-GAAP, selling and marketing expenses, which excluded share based compensation decreased by 75 five year over year to 50.

$59 8 million in U S dollars from $285 2 million in U S dollars in the same period last year.

The year over year decrease was primarily a result of the reduction in marketing promotion activities.

General and administrative expenses decreased by 70%.

7%.

297, 2 million U S dollars from $356 5 million U S dollars and risk.

Second quarter last year.

non-GAAP general and administrative expenses, which excluded share based compensation cost decreased year over year by 74, 4% to $80 7 million U S dollars from $314 9 million in U S dollars.

And at the same period last year.

Income from operations was <unk>.

$14 9 million U S dollars.

Compared to loss of operating loss from operations of $379 9 million U S dollars in the second quarter of fiscal year 2022.

non-GAAP income from operations, which excluded share based compensation expenses was $42 3 million U S dollars.

Compared to non-GAAP loss from operations of $313 4 million in U S dollars in the same period last year.

The year over year, increasing operating profitability was primarily driven by.

By our continuing effort to optimize our operation efficiency.

Net loss attributable to Tao.

8 million U S dollars in this quarter.

Paired with net loss attributable to Tal.

$826 5 million U S dollars in the same period last year.

non-GAAP net income attributable to cow, which excluded share based compensations.

$26 6 million U S dollars compared with non-GAAP net loss attributable to Tal.

$716 1 million in U S dollars in the same period of last year.

From the balance sheet.

As of August 31, 2022.

The company had.

1 billion $759 3 million of cash and cash equivalents.

$1 billion.

3 million and 20 X.

It gives me.

1 billion $327 3 million.

Dollars of short term investments.

And $366 2 million in U S dollars.

Current and non current restricted cash.

The company's deferred revenue balance was 177 5 million in U S dollars by the end of the second quarter.

Now I'll hand, the call back to Mr. Alex pump to briefly update you on our business strategy.

Alex. Please go ahead, thanks, Jack so let.

Let me continue the call with updating you on our business and development strategy.

As we continue to transform our business into a smart learning solutions provider.

We're committed to executing our company's long term strategy.

I'll provide more details on our strategy of each of our business lines.

First for our learning services business will continue with our efforts in advancing product development opt.

Optimizing our go to market strategy.

And further exploring opportunities in overseas markets.

We believe it's healthy business model combined with our strong branding and operational efficiency.

Enable us to be well positioned to capture the market opportunities and deliver long term value.

Hunter solutions remains an important initiative important strategic initiative for <unk>.

We believe continental will play an important role in our users' learning journey as.

And we will continue to expand our product portfolio.

Provide our customers with diversified and innovative learning experiences.

And as I mentioned on our previous call, we look forward to Parker.

Third parties from around the world to delivering world class content to our customers.

Regarding learning technology.

By adhering to our key words.

In line.

<unk> intelligence and open.

We will stay committed to enhancing our technological competitiveness.

And empower our institutional customers.

Deliver a better learning experience.

Technology and innovation.

As we look at this last quarter's performance.

We're really encouraged by the progress.

And we are really thankful to our customers' trust in us.

Although the financial performance.

It was partially.

The results of.

Furthermore, fluctuations.

Could see some early signs of positive customer reception of our new products and services.

We look forward to optimizing our product and services and delivering.

Better experience to our customers.

As I come to the end of my prepared remarks, just wanted to take a moment to reflect all of.

The mission statement.

As I mentioned before we changed our mission statement.

So empower lifelong growth.

From the technology.

That's not just the mission to our customers.

But all for a constant reminder to ourselves.

So look at a setback and every challenge with a growth mindset.

To be humble to be resilient and to be open to new possibilities.

So that concludes my prepared remarks.

Operator, we're now ready to open the floor for questions.

Thank you to ask a question at this time. Please press star one one on your telephone please standby as we compile the Q&A roster.

Our first question comes from the line of <unk>.

Mark Li of Citi.

Please go ahead Mark Lee.

Hi management, congratulations for the results and improving margins for this quarter.

Also for what is our pocket market size of the content business and how do we think about the cost and the margin profile for this business. Thank you.

Thanks Mark.

Great question. This is Alex let me I'll take the first one.

So first of all I think we believe that the scope of our console business.

Not really limited.

To print books.

It also includes a series of learning technologies.

Many of our content solutions actually coupled with interactive.

And engaging digital features and so as a result, they can drive up the average ASP.

We see this fiscal.

The learning content developer and distributor.

So it's.

Not really.

It's really different from traditional book publishers.

So our content solutions our eventful.

A kind of end to end learning solutions, so our users.

These content they can guide users.

Along their learning experience.

Either a self directed page.

And I think as I mentioned last quarter.

We're also.

On the GTS side continued should double down of some of the most dynamic e-commerce and content platform. So with all of that combined we really think.

As this business matures.

It will have more upside than the traditional publishing industry.

Mark I hope that answers your question.

Thank you.

Thank you our next question.

Comes from the line of.

Kansas Chen of <unk>.

Please go ahead Candice Chen.

Hi.

Hi, Alex and gentlemen, congratulations on the solid results.

You mentioned the new Damon further for Paul can you share a little bit more on the new business in missile tubes, and what is the investment focus and the related bucket and how would that impact our cash flow. Thank you.

Kenneth Thanks for the question this is Jack and I'll take this.

I would say we're still.

In the early stages of our business transformation.

So in this past quarter in the next few quarters to come.

Continue to invest in new initiatives.

Such as overseas the money services.

And certain new product categories within content solutions.

You asked about investment size and budget.

I would say as we look at these new initiatives the company's management.

<unk>, a balanced and prudent investment strategy.

Typically we aim to achieve product market fit before deploying a significant amount of capital into any new initiatives.

In terms of new initiatives impact on the company's cash.

Cash flow.

I will say by the end of this past quarter the company had.

More than $3 billion.

When we combined cash and cash equivalent and short term investments and current and non current restricted cash so with Iowa.

We are confident that our current cash position will be sufficient to support our transformation.

I hope that answers your question Candace.

Great. Thank you.

Thank you our next question.

Comes from the line of.

Long EHR CIC. Please go ahead, Hong you Chao.

In the annex on Jackson. Thank you for taking my question and congratulations.

Morning.

My question is about <unk>.

So we're very much engaged earn that mill and the profitability can you share more color on how is everyone.

In Tampa.

Thank you.

Only effect sort of question and this is Jackson and I will take this.

<unk>.

As each of our business line.

In the early stage of exploration, where we are still closely following.

Impact of seasonality throughout the year.

Let me talk through each business line respectively.

Learning services.

Similar to the past we've.

Witnessed higher demand in winter and summer holidays. So as a result of fiscal Q2, and Q4 tend to benefit from seasonality.

Does Q2 tend to tending to be the peak season.

As for content solutions.

We are still in the early stages of understanding the market demand pattern.

This business is impacted by school holidays, as well as shopping holidays in China, such as <unk> and the volume of it.

For technology solutions Q.

Q2 tends to have lower market demand because some of our institutional clients offer last tutoring services during our summer school holidays.

I hope that answers your question.

Thank you.

Our next question.

Comments from Crystal Li of China merchants. Please go ahead Crystal Li.

Hi management congratulations on this general results.

Could you please share with us with patients on the <unk>.

Okay <unk>.

For next quarter and for the whole year. Thank you.

Chris Thanks for the question. This is Jackson again.

And that's a good question and this past quarter, we're glad to see that the company achieved.

Profitability in terms of operating profit.

This is a combined effect of business growth.

Fluctuation in all cost optimization measures.

When we look at next quarter.

Our best guess is that profitability level in the next quarter will likely be lower than this quarter.

And that is because we expect revenue to decline quarter over quarter.

Due to seasonality.

At the same time, we'll continue to take measures to drive business growth and optimize cost efficiency.

I hope that answers your question Crystal.

Thank you.

Thank you our next question.

Come from the line of.

The undrawn of what Sai.

Please go ahead <unk>.

Okay.

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

Could you please share some new progress off the content business and we noticed that Tom has launched some new hardware products such as <unk>.

Could management teams through some color on product idea.

Business model, how do we our products, especially <unk>.

Some of the <unk> pipeline assumptions can be replaced by <unk> on the mobile phone.

Yes. Thanks for that question. This is Alex for me unpack that question.

I think first of all I think on a previous question.

Are the discussed a bit on the.

On the console plus.

And I think there is a key takeaway from that.

We're seeing a shift.

<unk> and consumer behavior toward more self directed.

<unk> paced learning and we think that's a long term secular trend.

And concurrently look thoughts.

What I'm also seeing.

In an increasingly digitally connected world.

We need to provide to young people.

Benefit of online commerce.

<unk> through digital devices, while safeguarding the health.

So underpinned by.

Improvement in AI technology, and other innovations from the hardware industry.

Such as disclaimers that are more protective of the user's ISI.

We believe that intelligent devices.

Miller to the needs of the young people.

And increasingly important role in this industry.

We recently launched.

A couple of new hardware products.

Which were the volume based on those as the size of this belief.

They provide.

A new way for users.

To seamlessly consume.

Growth of third party printed and digital conference.

On a more interactive and more personalized basis.

I think for the for the vessels model, we lookout for each particular use case.

There are other places where it's.

It's paid upfront that's a piece of hardware, they're all four vessels, where there are recurrent revenue streams are subscription renewal.

I hope that answers your question.

Okay. Thank you.

Yes.

Thank you. Our next question comes from the line of.

Felix Liu of UBS. Your line is open.

Thank you management.

Regulation is now turning profitable this quarter.

And then any reporting a great pipeline.

Sure.

My question is on the on your overseas business.

You mentioned that I think academy.

Pointing at Triple digits.

This quarter only I guess.

To break down the driver out this wells.

Is it.

Capacity expansion in new markets or is it more about ramping up our ISP and clean and could you see here and then more of our.

Overseas strategy from here.

What level of <unk>.

<unk>.

Pat.

Obviously business. Thank you.

Thanks <unk>. This is Alex let me take that one law.

I think first of all the revenue share.

This is Phil.

Low single digit level.

But as we mentioned before the growth rate is high.

<unk>.

We provide online and offline courses under the thing Thats, having a brand and <unk>.

Several regions or countries.

But we really look at those as only the initial phase of the company in the overseas market.

After the outbreak of the epidemic, we noticed that there are many opportunities worth exploring in the overseas market.

Such as the development and distribution of digital content.

The highly interactive teaching AIDS or smart books, and the high quality online.

Offline teaching services.

We believe that the company's rich.

Rich content library and business know how accumulated in the past two decades of operations will help us find scalable growth opportunities.

In key overseas markets.

So I hope that answers your question.

Okay.

Thank you at this time I would like to turn the call back over to management for closing remarks.

Thanks, operator, and thanks to everyone again for joining us today, and we'll talk to you next quarter Bye bye.

And that does conclude the conference.

Thank you for participating you may now disconnect.

Okay.

The conference will begin shortly to raise Johan during Q&A, you can dial star one one.

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Q2 2023 TAL Education Group Earnings Call

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