Q3 2023 TAL Education Group Earnings Call

January 19, 2023

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

[music].

Yeah.

Ladies and gentlemen, good day and thank you for standing by walking to Tal education groups third quarter fiscal year 2023 earnings conference call.

At this time all participants are in a 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.

I'd like to hand, the conference over to Mr. Jackson thing Investor Relations director. Thank you. Please go ahead Sir.

Thank you operator.

Thank you all for joining us today for Tal education groups third.

Third quarter fiscal year 2023 earnings conference call.

The earnings release was distributed earlier today.

Find a copy on this call.

Companies.

Lifestyle.

So they use ours.

Evidence and Chief Financial Officer.

And myself Investor Relations director.

Following the prepared remarks.

Paul and I will be available to answer your question.

Okay.

Before we continue please.

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 1995.

Forward looking statements are subject to risks and uncertainties that may cause actual results to differ much much to differ materially.

Current expectations.

Potential risks.

Okay.

But are not limited to those.

Online in public filings with the FCC.

For more information about these risks and uncertainties.

Please refer to our filings with SEC.

Okay.

Also our earnings release and this call include discussions start to 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 to Mr. Alex Paul Alex. Please go ahead.

Thanks Jackson.

I appreciate you all for joining us on today's call, especially as we are approaching the Chinese new year's holidays I'd like to hear about really taking this opportunity.

Wish you and your families a very happy retirement scheme here.

One of the traditions of Chinese new year is to recap the past and plans for the future on this call I'd also like to share with you our performance in the last quarter as well as our expectations for the quarters to come.

During this fiscal Q3, we continue to enhance our offerings.

Developing our go to market capable.

We reported <unk>.

$232 7 million U S dollars.

And 138 five.

R&D in net revenues for the quarter.

Net revenues decreased by 16% and 21%.

RMB in USD terms compared to Q2, respectively.

Historically, our fiscal Q2 tend to benefit from seasonality effects in terms of Robert.

So if we look at a quarter, that's more comparable to Q3 for.

For example, Q1 does that.

Revenues increased 4% in us dollar terms and 48% in RMB terms.

We expect to continue our development in the next quarter.

In terms of profitability.

For the fiscal quarter ended on November 30 of 2022.

We reported $4 five oriented U S dollars and 22.

Great.

In U S dollars in.

non-GAAP operating loss.

non-GAAP net loss attributable to Tal respectively.

You may have noticed that our operating income decreased by $47 6 million quarter over quarter.

Decrease in operating earnings was primarily driven by the reduction in revenue due to seasonality.

Well, that's our investment into the new initiatives.

So with that overview I'd like to Jeff Jackson with floor to share more color on the operational developers and the financial performance of our core business lives afterward, I will update our business strategy and then we will open the call for questions.

Jackson. Please go ahead.

Yes.

Thank you Alex.

I'm pleased to share more details on the progress we've made.

Three main business lines this quarter.

Before we start please note that the financial data based on our audited results for the quarter.

I'll start with our learning services and other business.

Turning to services and the other continues to be our largest revenue stream.

And a coffee.

Accounted for slightly more than two thirds of our total revenues for the quarter.

Within learning services.

We continue to fine tune, our enrichment learning programs.

And as a result saw an increase in average retention rate for two consecutive quarters.

We believe a healthy retention rate is key to the long term sustainable growth of our enrichment learning programs.

We will continue to monitor our learner with passion and optimize our offerings to drive healthy retention level.

In terms of learner enrolment.

We recorded a quarter over quarter decrease in average learner enrollments from Q2.

Primarily due to seasonal fluctuation.

However, if we compare the enrollment of Q3 to that of Q1.

We recorded growth in learner into enrollment between these two periods.

Further.

<unk> recently rolled out enrichment programs, such as <unk> and international Chess demonstrated initial customer reception and this past quarter.

Okay.

Like I mentioned in a prior in prior conversations.

Our enrichment programs are designed to facilitate a nurse or around development.

This is a cause that require some time for the market to digest and expense.

Aside from operating metrics were.

We're also closely monitoring customer feedback on our enrichment programs.

We're encouraged by our customers' feedback and appreciate their trust and support.

We will continue to fine tune, our enrichment offerings to deliver value to our customers.

And this past quarter, we also witness recovery and offline learning centers.

In fact revenue generated from offline enrichment programs increased in Q3, when compared with Q2.

Despite that typically and historically Q3 has been a down quarter from Q2.

We increased our offline learning centers by single digit in this past quarter.

This is the second consecutive quarter, where the number of our learning centers.

Slightly.

And this the NIH, where oma's learning experience continues to proliferate with the online and offline presence both as important components.

Learning services business.

Our online presence reaches customers despite their geographic locations.

While our offline presence provides us the opportunity to interact with our customers face to face.

We.

To optimize our learning center network and will gradually and cautiously increase the number of our learning centers in the next few quarters to call.

While our domestic learning services business continues on its development path.

Thank economy, our overseas and learning services business maintained its momentum.

With online operations, covering a global market and offline operations in countries such as U S.

The port.

Thank academy again booked a year over year triple digit growth in this quarter.

We see significant market potential for think Academy and will continue to drive the growth of this business.

Moving onto our content solutions business.

Which accounted for roughly 20% of total net revenue.

Compared to slightly more than 15% a quarter ago.

Revenue from content solutions grew quarter over quarter, driven by growth from multiple product lines.

Okay.

I talked about small books in the last couple of quarters.

Alex where we embarked videos and to print books to supplemental learning experience of all users.

And this quarter, we're glad to see that a significant portion of the users who purchased and activated the online features.

The Smartbooks a.

Our school historically never Ingold and are learning programs.

To the best of luck.

We see this as a positive sign and that our cotton products are reaching new customers and increasing our total addressable market.

Within content solutions.

We also made progress on the exploration of smart learning devices.

We tend to think of smart learning devices as comprehensive content solutions that combine our exclusive learning content and personalized learning experience supported by AI technology.

We will continue to enrich our products based on our insights into learning users' learning habits and they are learning demand.

In addition to product development.

We also continued to build our go to market capabilities for our content solutions business.

In an industry, where offline distribution channels typically constitute a large portion of the total volume.

The majority of our content solutions.

Through online channels.

E Commerce online.

Streaming.

We're embracing the new distribution channels, and we will continue to build our capabilities within these channels.

Finally, let's look at our learning technology solutions business.

Total revenue for our learning technology solutions business accounted for more than 10% of our total net revenues in Q3.

And this past quarter, we update our products and further developed our selling and marketing efforts.

For learning technology solutions, we sell to both private and public sectors.

I talked about prior.

Private sector before and will shed more light on our effort in the public sector today.

And this past quarter, we released a new sub brand called made shell Mark education.

Which targets the market for schools.

Our solution for schools, primarily includes smart homework smart locks in preparation integrated teaching platform Smart afterschool care.

This business is still in its early stage and we'll provide more details as the business matures.

After updating the about business progress now let me take you through the key financial results for.

For the quarter.

Our net revenues totaled.

$272 7 million U S dollars.

Representing a 77, 2% decrease.

From one point or $2 billion in the same period last year.

Declining revenue that will be resolved.

Progression of our K through nine academic.

Services in the mainland of China.

Cost of revenue decreased by 82% to 103, maybe in U S dollars.

$519 5 million U S dollars in the third quarter of fiscal year 2022.

non-GAAP cost of revenues, which excluded share based compensation decreased by 89% to $99 4 million U S dollars from $519 2 million U S dollars.

Third quarter of fiscal year 2022.

Gross profit declined by 74, 1% to $129 seven many of U S dollars.

<unk> $501 4 million U S dollars in the same period last year.

While our gross margin increased from $49.

1% to 55, 8%.

Selling and marketing expenses decreased by 74, 3% to $70 4 million in U S dollars from $273 6 million U S dollars.

Same period last year.

non-GAAP, selling and marketing expenses, which excluded share based compensations.

Decreased by 75, 3% year over year to 63.

$8 million from 208, $258 six minute U S dollars.

Very much.

The year over year decrease was primarily the result of a reduced number of selling and marketing activities.

General and administrative expenses decreased by 69 point.

The oil percent.

From $93 1 million U S dollar strong.

Many of you guys.

Third quarter of last fiscal year.

non-GAAP general and administrative expenses, which excluded share based compensation decreased year over year by 72, 7% to $74 8 million in U S dollars from $274 4 million in U S dollars in the same period last year.

Loss from operations was.

$32 9 million in U S dollars compared to loss from operations.

$108 4 million U S dollars in the third quarter of fiscal year 2022.

non-GAAP loss from operations, which excluded share based compensations.

$4 5 million U S dollars compared to non-GAAP loss of operations of.

$67 6 million U S dollars in the same period last year.

Net loss attributable to Tal was $51 $6 million in this quarter.

Compared with net loss attributable to Tao.

$99 4 million in U S dollars in the same period last year.

non-GAAP net income attributable to Tal.

Which excluded <unk>.

Excuse me.

Operator can you hear us all right.

Yes, youll commentary lighting CLIA.

Right.

And then.

I think I got cut off when I said non-GAAP net loss attributable to <unk>, which excluded share based compensations.

$23 2 million in U S dollars compared with non-GAAP net loss attributable to Tal of $58 6 million in U S dollars in the same period of last year.

Turning to the balance sheet.

As of November 32022, the company had.

186 billion U S dollars.

Cash and cash equivalents.

118 billion of strict and divestments.

And $447 4 million in U S dollars and current and non current restricted cash.

The company's deferred revenue balance was $278 million by the end of the third quarter.

Now I'll hand, the call back to Mr. <unk> to briefly update you.

Thats a strategy outlook Alex. Please go ahead.

Thanks Jackson.

I think Jackson has just given everybody.

Our previously detailed picture and lots of numbers.

So what I'll try as to maybe take a step back and paint.

Picture as.

As we continue to transform our before.

Our smart energy solution provider.

We remain committed to executing our <unk> long term growth strategies.

<unk> of our core business lines.

Although the revenue this quarter was affected by exchange rate fluctuation reflects seasonality.

Lucas will maintain the lump sum of casinos default.

We expect our marine business.

Continue to develop in the next few quarters.

So first our learning services and other customers.

We will continue to strengthen the quality of the products and services, while also rapidly rollout more programs and increased our physical footprint.

We are a believer of enrichment learning and all of our developments.

The market for enrichment, garnering big box.

We plan to leverage our expertise.

We ended our operational Knowhow to further our store our customers.

<unk>.

For our content solutions business.

We're really encouraged by the progress.

But we also do understand that we have a long way to go.

Four will become competitive gives us relatively new market for us.

We intend to increase our Tam through serving our customers with quality Barclays and various form factors.

In the next few quarters will rollout new product accused while investing in our go to market capabilities.

It's all on shops.

Turning to learning technology solutions.

We're committed to enhancing our services for clients in both private and public sectors with quality content innovative devices and technologies.

Our goal is to work with our clients to deliver a better learning experience.

To end customers.

How about the outlook for Q4.

We expect development to continue in the fourth quarter.

We do not expect to breakeven in the next quarter.

Continuing to invest in certain new initiatives.

We believe the transformation into a smart learning solutions provider <unk>.

Long term.

And are currently focused on creating value for our customers through our offering.

And as I come to the end of my remarks, I'd like just.

Just to say.

Mike.

We're just a few days away from Chinese new year.

And there is another name for Chinese new year, which is spring festival.

Spring is the fever auto renewal and the world.

I think on the previous call with you all I reflect our little rock.

That we changed our mission statement.

And how critical it is for us to adopt a growth mindset going forward.

So as we head into the spring season.

It is with that growth mindset that will increase the future.

So that concludes my prepared remarks, operator, we're now ready to open the call for questions.

Thank you as a reminder to ask a question you will need to press star one and one on your telephone and wait for your name to be announced.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Lucy Li from Bank of America. Please go ahead. Your line is open.

Alright. Thank you. Thank you Alex Thank you Jackson loss sharing the details of that.

Question on margin. So can you share a bit more color on the margin for the quarter and also expectation of the main business operating margins going forward. Thank you.

Lucy Thanks for the question and this is Jackson I'll I'll take this one.

But before I say more about the numbers I would just say as.

As we transform our business and how we think about profitability, we probably focus more.

Creating more value for customers and have structurally healthy business model.

As opposed to focusing our near term operating profitability.

Yes.

But let me break this down for you at that went out and look at the three main business lines.

For learning services and other.

And this past quarter, we had a positive operating margin.

For learning technology solutions.

We are also operating profit and double digit operating margin.

For content solutions, if we look at the more mature skus there that they are profitable on a contribution margin basis.

But some of the newer skus are still in investment phase.

You also asked about the margin outlook in the future.

I would say as we look at a lot of ROI.

When we think about learning services and other and we tend to think operating margin will have some fairly small room for margin improvement as the business scales up.

And the improvement will be quite gradual.

Content solutions will carefully manage our operating profitability as we manage the balance between mature and new <unk>.

Okay.

Lucy I hope that answers your question.

Thank you so much Jackson.

Okay.

We will take our next question.

Okay.

Yes.

Our next question comes from the line of the Ping Zhang from CIBC. Please go ahead. Your line is open.

Good evening, Alex Ben Jackson, Thanks for taking my question.

Adding to your introduction report the content installation business.

In the investment period can you share the main direction of investments.

And could you also share your.

About how the company becomes an industry Sir thank you.

Let me start.

A question.

So in terms of the directional for inbox spreads.

It will come in a few areas.

Firstly.

A couple of previous calls our aim is really Cisco.

Our world class content.

Much of slippage built in house.

We're going to also increase our cooperation with our partners for bringing those products to market.

Think about that.

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