Q2 2024 TAL Education Group Earnings Call
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Ladies and gentlemen, good day and thank you for standing by welcome to tell indication group's second quarter of fiscal year 'twenty 'twenty four 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 be informed today's conference is being recorded.
I'd now like to hand, the conference over to Mr. Jackson doing Investor Relations director. Thank you. Please go ahead Sir.
Yeah.
Thank you operator, thank you all for joining us today for Tal Education group's second quarter fiscal year 2020 for our next 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 poem.
President and Chief Financial Officer.
Myself Investor Relations director.
Following the prepared remarks, Mr. <unk> will be available to answer your questions.
Before we continue please.
<unk> 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 materially.
From our current expectations.
Okay.
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 now turn the call over to Mr. Alex Paul Alex. Please go ahead.
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 the financial performance and business progress of the second quarter of this fiscal year 2024.
After that I'll share some thoughts on the outlook for the next quarter.
During this quarter, we continue to operate and manage our core business lines.
While exploring new initiatives and seizing new opportunities.
With respect to our learning services and other specialists, we further optimized our online and offline offerings for very user preferences and expanded our learning center network at a measured pace.
As for the content solutions business.
Our learning devices launched near the end of the last fiscal year maintained their growth momentum and deliver solid user engagement performance.
In addition to our core business, our innovative endeavors have made progress in this fiscal quarter.
We have rolled out the beta version of map GPT and.
And we intend to continuously improve the model's efficiency.
Guided by the feedback we receive from selected users to whom we provide a test invitations of this experimental version.
In terms of our financial performance.
We recorded net revenues of 411 9 million U S dollars.
And 2 billion $965 9 million RMB for the quarter.
Representing an increase of 41% and 49, 5% year over year in U S dollar and RMB terms, respectively.
With respect to profitability, our non-GAAP income from operations and non-GAAP net income attributable to Tao.
Okay.
So with that overview.
To hand, the call over to Jackson to give you.
An update on our core business lines operational developments and review our second quarter financial results.
After that I'll.
Our return to share more details regarding our outlook for the next quarter.
And then.
I'm really looking forward to opening the call for questions Jack.
Jackson. Please go ahead.
Okay.
Thank you Alex.
I am pleased to share some details on the progress we made during the second fiscal quarter across our core business lines. Please.
Please note that all financial data for the quarter is unaudited.
Let me start with our learning services and others business.
Which consists of a broad range of learning programs for consumers as well as technology solutions for institutional customers.
In the second quarter of fiscal year 2024.
Our learning services and others business contributed to our year over year growth momentum.
Within learning services our.
Our enrichment learning business achieved double digit revenue growth year over year during the quarter.
Driven by continued increase.
<unk> offline learning Center network capacity.
And seasonal benefits of summer vacation.
Which led to a year over year increase in enrollments in this quarter.
We continue to expand our offline learning center network to better adapt to users' needs.
Our learning centers reached approximately 220 at the end of the second quarter, which increased from roughly 200 at the end of the previous quarter.
Furthermore.
Efficiency metrics, such as learning center utilization rate.
Australia, the overall level of business.
We believe <unk> offline small class enrichment learning has a viable business model and a clear path for future development.
In addition, our online large class enrichment learning business continued to make progress this quarter.
Operational efficiency indicators, such as retention rate.
<unk> consistently at a viable level.
We have been expanding our learning program offerings over the last few quarters.
While these new programs still.
Still constitute a small percentage of our total revenue.
They have shown year over year growth in this fiscal quarter.
Okay.
Moving on let's discuss think academy, our overseas learning services business.
Our overseas business also continued to expand during the second quarter.
In this fiscal quarter, we have established a new learning centers and <unk>.
States, Singapore and Hong Kong.
We are committed to serving the overseas markets, We think academy, while balancing our standard of service and our locally customize contents.
Yes.
As we look forward to the next quarter.
We expect a quarter on quarter decrease in revenue from our learning services and others business.
Driven by seasonal influences.
This business primarily consists of sales of Smartbooks print books learning devices digital content.
And this quarter smart and print books combined delivered year over year double digit growth.
As for learning devices. It is a relatively new business for us so year over year growth rate will be less relevant.
If we look at the growth trends for learning devices from Q1 to Q2, the business experienced quarter over quarter sequential growth.
Given by both seasonal benefits and business progress.
The learning devices business remains one of the main revenue contributors to our content solutions business.
During this quarter, we continue to receive recognition puts functions and content library.
While we continue to develop our capabilities in supply chain and sales and marketing.
We are also Iterating new features for learning devices based on user feedback in order to meet the diverse learning needs.
As an example, we have fine tuned our product functionality.
And AI based position learning targeting students from a broader range of age groups, including Elementary School and Junior High School.
Beyond the improvements in software and hardware functionalities, we're also exploring possibilities and diversifying our business model and our go to market channels.
Looking ahead to the next quarter, we intend to serve more customers was better experiences through our content solutions business.
<unk> has to offer customers content.
Formats suitable to their learning needs and serve them and their self learning journeys.
We expect content solutions to contribute to a larger proportion of.
Our total net revenues in the next quarter.
Yes.
With that overview.
I would now like to share our key financial results for the quarter.
We recorded net revenues of.
$411 9 million U S dollars.
And 2 billion $965 9 million RMB.
This quarter, an increase of 41% and 49, 5% year over year.
And USD in RMB term.
Our revenue growth is attributable to the steady increase in our learning services business and the continued growth in sales of the products and our content solutions business.
Gross profit also increased in the second quarter of fiscal 2024.
Rising from $176 $9 million for the same period last year to $242 5 million U S dollars for this quarter.
Gross margin decreased to 58, 9% from 62% for the same period last year.
Mainly due to a higher revenue contribution from our content solutions business, which currently has a lower margin percentage.
Sales and marketing expenses for the quarter were.
100.
And $16 $3 million, an increase of $48 nine compared to $78 $1 million for the fiscal second quarter last year.
Selling and marketing expenses as a percentage of total revenue increased to 28, 2% from 26, 6% for the same period last year.
non-GAAP, selling and marketing expenses, which excluded share based compensation expenses increased by 57, 8% to $110 $1 million from $69 $8 million for the second quarter of fiscal.
Year 2023.
The year over year increase was primarily due to increased selling and marketing activities.
General and administrative expenses for the quarter had been relatively stable.
Decreasing by 1% to $97 1 million U S dollars from 97 $2 million for the fiscal year.
Second quarter last year.
Okay.
Income from operations expanded by 113, 5%.
$31 8 million in U S dollars.
From $14 $9 million for the second quarter of fiscal year 2023.
non-GAAP income from operations, which excludes share based compensation expenses was $52 $7 million compared with $42 $3 million in the same period of the prior fiscal year.
Net income attributable to Tao was $37 9 million U S dollars for the quarter.
Compared with the net loss attributable to Tal.
$8 million for the same period of the prior fiscal year.
non-GAAP net income attributable to Tau, which excludes share based compensation expenses was $58 $8 million compared with $26 six minute U S dollars for the same period of the prior fiscal year.
Moving onto our balance sheet as of August 31, 2023.
We have.
We had $2 billion $195 $9 million of cash and cash equivalents.
767, 6 million U S dollars and short term investments.
$281 2 million in U S dollars and current and non current restricted cash.
Our deferred revenue balance was $325 4 million.
As of the end of the second fiscal quarter.
Compared with $387 7 million a quarter ago.
Okay.
Now turning to our cash flow statement net cash used in operating activities for the second quarter of fiscal year 2024 was $42 7 million U S dollars.
In April 2023, the company's board of directors authorized to expand its share repurchase program launched in April 2021 by 12 months.
Pursuant to the extend the share repurchase program.
The company May spend up to approximately 337 4 million U S dollars to repurchase common shares through April 32024.
As of August 31, 2023, the company has repurchased approximately 13 4 million common shares at an aggregate consumer consideration of approximately $233.
6 million U S dollars under the share repurchase program.
Yes.
That concludes the financial section.
I'll now hand, the call back to Alex to briefly update you on our business outlook. Alex. Please go ahead.
Thanks Jackson.
As I mentioned earlier.
I think we've made.
Now I'd like to share some thoughts on our strategic plans for the next quarter of this fiscal year.
So looking ahead to the third quarter.
Previously noted by Jackson.
We anticipate a quarter over quarter decrease in revenue.
Due to the seasonal nature of our business.
In terms of our learning services, our focus remains on developing our learning center network in a balanced way and persistently introducing appropriate products across both online and offline platforms.
As far as Hunton services, our focus will be on enhancing product functionalities.
Enriching the breadth of learning content and exploring opportunities for developing new products.
As we move ahead, we intend to continue to invest in AI.
We will continue to optimize our model to improve his response speed and the accuracy.
Recently, we've collaborated with <unk>.
A number of technology companies.
And academic institutions.
Leveraging the national New generation artificial intelligence open innovation platform for Smart education.
Two co hosts.
<unk>.
Triple AI 2024, global large model mathematical reasoning competition.
This competition invites AI experts developers and map enthusiasm worldwide to use large language models to automatically solve challenging problems for primary and secondary school students.
In addition, we continue to explore the application of artificial intelligence technology in specific use cases.
In the near future, we're really intend to launch applications based on map GPT.
Technology certainly.
Hans learning experiences.
So to sum it up.
In this quarter, our major business lines delivered material development.
In terms of product offerings and operational capabilities.
Our poster financial results are a manifestation of such developments.
We have been observing customers' evolving needs in their learning journeys and intend to serve them through a variety of products in our learning services and content solutions portfolios.
So that concludes my prepared remarks.
Operator, we're now ready to open the call for questions.
Ladies and gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced soon.
To withdraw your question you May press Star one again.
Based on mine will be compile the Q&A roster.
First question coming from the line of Felix.
With UBS your line is now open.
Good evening management and thank you for taking my question and congratulations on the strong results.
So in the lung.
Our most recent quarterly results, especially the strong performance of learning service and under the context of good non academic tutoring market demand.
How do you see your long term strategic priority.
If you would rank these businesses in terms of feature.
Or is the allocation how would you rank them.
Namely domestic learning service business hardware AI and overseas.
Would you think of these in terms of teacher resource allocation. Thank you.
Thanks Felix this is Alex let me take that one on.
So let me let me try to unpack this question.
So star Wars, our company's strategy I think it will really revolve around providing world class learning products for our users.
These products kind of come in various form factors right. So they're not they're going to include but not limited to for example, learning services learning devices.
Smart on the books.
In other.
Learning content in various form factors.
This list really.
We believe that collection that portfolio.
Our products really kept the parents are learners.
Set of choices.
What their needs and.
Stages, they're all on their own learning journeys.
Under that contract I would say, it's not necessarily an issue already.
But more so that the es.
Current business models and business lines are in different phases and their development path.
So.
If we take these three main I would say learning services best plus it's really demonstrated.
The fact that it has to have a viable business model.
It's got a clear development path going forward.
We really anticipate that it will continue to show growth momentum in the future.
We will obviously continue to invest resources in our learning Center network and in our factored in staff teams.
This is an area where.
We've had and we've built up strong operational capabilities that we actually continue to home.
In the ever evolving.
Environment.
And so what's that we really expect those vessels to be profitable.
So that's the first one.
If I look at the.
The effect on that.
You brought our content solutions right.
It's really addressing a different.
Use case.
Self learning itself.
It's self learning at home is self learning at the time.
Oftentimes somewhat Franklin the times Thats available still learners.
So beyond the growth in sales volume for our hardware business.
We really fundamentally aim to leverage our understanding of learning content.
Hardware.
And artificial intelligence to provide a unique value to our users and we continue to to look at.
Both engagement and.
Learning impact.
From this this.
New set of solutions to address these different use cases.
So the final set is really artificial intelligence and overseas I would say look there are really still in the exploration phase.
We.
We are.
We look forward.
For the long term trends.
<unk>.
These businesses are operating within and.
I will look forward to.
Keeping you guys updated on our progress.
So first I hope that answers your question.
Yes, thank you very much.
Thank you Amit.
Our next question.
And our next question coming from the line of.
Linda Huang with Macquarie. Your line is now open.
Thank you very much so.
Just have a question regarding slide our learning devices. So can management share the sales performance of the hardware product during the quarter and then any change in user engagement data.
I think that would be great. If you can share more about that thank you.
Thanks, Linda this is Alex again, let me.
Address that question.
Star Wars, the sales of our hardware in this quarter.
Have increased compared to the first quarter, alright, so theres quarter on quarter growth in the sales volume.
Volume and we really believe this was largely due to the overlapping factors of the shopping festival in June.
June and the summer vacation.
I would say on the engagement side.
We're seeing some.
Pretty encouraging user activity data and user feedback.
Our users continue to spend a significant amount of time learning our all our devices.
And Additionally, we've noticed that the users are exploring multiple features that we're bringing to the device.
And they're making use of both first party and third party.
Learning Constance.
In all kinds of manner, so that really they feel thats more suitable.
So they're learning style.
And I think just Lynn I would just emphasize the second point I think too for us.
The engagements.
Really paramount.
We wanted to make sure. The learning devices are used and there are helpful and they come in in a way that's more suitable.
For the individual learning journey, and I think as I mentioned in.
In our call a number of quarters ago.
And we also really looking forward to working.
A number of.
World class content players.
To continue to build up third party content.
That's valuable and engaging.
Our learners.
So and that helped that answers your question.
Yes, very clear thank you very much.
Thank you.
And our next question coming from the line of.
Candace Cheng.
<unk> Your line is now open.
Thanks, and good evening.
Gentlemen, congratulations on the very strong set of results and Mr. I have a question related to your much GTT can you share with us the progression of Marc Jacobs at GPT commercialization and also on holiday will be applied to our surface day. Thank you.
Thanks Candice.
Alex.
So thanks for that question.
Map GPT and let me just share some thoughts on the Star Wars.
We really think that the product design of generative AI.
A crucial part of its ability to create values for users.
I think we started mentioning those topics and discussing those topics.
From a number of calls in the past quarters and as we continue to engaging conversation was.
Developers experts and industry players.
In China across the World I think globally, we see that application is really receiving more and more attention.
Across all domains and industry right. I think this is really protocol is way to think about.
Artificial intelligence for the future and then genotype AI for the future.
So there are really.
A lot of opportunity it's worth exploring.
Sure.
The implementation of generative AI in the learning field, especially for key 12 learners.
And we think that the co operation of AI.
West.
Humor faculty and staff can really improve the efficiency.
Supply and accessibility of high quality learning concepts.
As I mentioned earlier, we're still and I think really for that matter.
So many industries, we're still in the early stages of those and we're working on the product design and.
We'll have some user test in the very near future.
So I hope that answered your question.
Yes.
Well thank you.
Thank you.
And our next question coming from the line of.
Tiny Wang with Cc. Your line is now open.
Hey, good evening, Alex Jefferson.
Kenny welcome.
So again congrats on Borgwarner is totally wrong this quarter.
Yes.
Management debt extending our learning centers would it be a balanced approach. So my question is.
Like what kind of factors would you consider before deciding to increase.
Number of learning centers. Thank you.
Pardon me effect sort of question. This is Jack and I'll take this one.
I think there are two.
Broader set of factors that we consider when we think about managing our learning Center network try one on the demand side and the other more on the operating side our supply side.
Right.
So demand is soft for us.
This stage of our business if you looked at.
The population.
The corresponding age group.
Not the potential size of the market.
Mostly that we mostly consider but it's more so to what extent can we have a suitable product in market.
Switching our products and our users.
Certain markets right.
Cities.
In China, albeit outside of outside of China.
So that's kind of the demand side factor. We are we are considering in the last few quarters, we had been seeing development on.
On the product itself.
Bottom of non product market fit.
Now moving on to the operating side or the supply side.
When we speak to a balanced approach will remain is that we're not only focused on building our capacity for future business development.
But we also want to want to make sure that as we.
So it provides a.
Sustainable level.
Quality of service and.
And a sustainable level of.
Operational efficiency as we manage our.
Thank you.
Sure that's very clear thank you very much.
Okay.
Thank you.
And our next question coming from the line of.
Lucy you with Bank of America. Your line is now open.
Hi, Alex Alright, excellent Youll see from up America I have a question on margins. So I noticed that our GP margin and op margin.
A lot of trial.
You already explained that this quarter that should be margin contraction is largely due to the.
Should we think about the GP margin.
Chuck.
And if we're looking at seeing business on a like for like basis I'll ask the margin trends at the moment. Thank you.
Lucy Thank you for the question this is Jack.
Take this one.
When we talk about gross margin I think it would be mostly helpful. If we.
<unk> back a couple of quarters I look at the trend over time right. So just to set the stage.
I think if we look at last fiscal year right for most quarters, our gross margin bounce between 50% to 60% range.
Fiscal Q1, so a quarter ago, our gross margin was 49 three.
This quarter, our gross margin was $58 nine which was down year over year, but up quite a bit quarter over quarter alright.
And when I look at gross margin of the overall company.
Two things.
I would say the most.
Two factors I would say have the most influence on gross margin. Eventually one is the overall business mix of various business lines and two is that kind of.
And then the ink.
<unk> gross margin rate, if you will of the underlying businesses. So maybe let me explain to you first of all what happened in Q1 and that will probably.
Help us understand what happened in Q2 so.
Q1, what we saw was gross margin dipped to below 50, just below 50%.
And that was primarily a result.
Shifting underlying business mix right with some of our lower margin business constitution constituting a larger portion of our total revenue.
Now from Q1 to Q2.
The mix stayed relatively stable.
It was a factor of the underlying business.
Up on their gross margin.
I will caution you though.
Q2, Q2 is given the summer vacation is seasonal influences Q2 tend to be a quarter, where our offline learning centers are.
At a fairly high utilization.
Hence, resulting in a relatively high gross margin if you look across the quarters. So in the next quarter I do expect a decrease in gross margin in general.
I hope that answers your question.
Thank you Jackson just to follow up you mentioned decrease I assume you meant Q on Q decrease.
If we look at on a Y O Y basis, how should we think about the margin this quarter.
Yes, I'll just leave it as.
We do see a quarter over quarter decrease honestly, what we're when we manage the business I pay less.
Look as a Y O Y gross margin change because the underlying business shape is just less comparable worldwide at this point.
Thank you so much.
Okay.
Thank you.
And I will now turn the call back over to management for any closing remarks.
Alright, thanks, operator, and again, thanks, everybody for joining today.
And thanks for your questions.
And.
We look forward to speaking with everybody next quarter.
Have a good day bye bye.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
Okay.
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