TAL Education Group American Depositary Shares

Ladies and gentlemen, good day, and thank you for standing by. Welcome to TAL Education Group's 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 question and answer session. Please be informed 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.

Thank you, operator.

Thank you all for joining us today for TAO Education Group's first fiscal quarter 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 news wires.

During this call, you will hear from Mr. Alex Peng, President and Chief Financial Officer, and myself, Investor Relations Director. Following the prepared remarks, Ms. Supong 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 Security 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. Special risks and uncertainties include, but are not limited to, those outlined in public findings with the SEC.

For more information about these risks and uncertainties, please refer to our findings with the SEC.

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 to turn the call over to Mr. Alex Poon. Alex, please. Thanks, Jackson, and thank you all for joining us on today's call. I think it was exactly three months ago to the date on April 29th, which also happened to be a Friday that we last spoke. And I really look forward to sharing with you today on some of the progress we've made in restructuring and transforming our business. Let's go first with the numbers. For the first quarter, ending on May 31st, 2022, We recorded $224 million in revenue for the quarter, $1.8 million in non-GAAP operating loss, and $17.4 million in non-GAAP net loss attributable to TAO. As a reminder, we cease offering K-9 after-school tutoring services on academic subjects in the mainland of China. as of December 31st, 2021. So all revenues for the first quarter were contributed by our current business, which also establishes a new starting point for our future development. Our performance this quarter, I would really like to note, demonstrates the combined efforts of our experienced management team innovative employees, and our extensive business partners. In the process of our transformation, we're focused on developing new initiatives that match the mega trends in our industry and the broader ecosystem. I think this is really like the hockey phrase, skating to where the puck is going. Next, Jackson. We'll update you on the operational developments in our current business and review the first quarter financial results. After that, I'll update you on our business strategy, and then we'll open the floor for questions. So, Jackson, please go ahead.

Thank you, Alex.

Now, I would like to share with you more details on the development of each of our three business lines. including one, learning services and other, two, content solutions, and three, learning technology solutions during this past quarter. Please note that the financial data for each business line mentioned below is based on unaudited data for the quarter. First is the learning services and other, which primarily includes the learning programs we provide in various class sizes, both online and offline.

This includes payo small class, shiars.com, Think Academy, and other learning services businesses.

During the quarter, learning services and other accounted for approximately 70% of our overall revenue.

Maintaining its position as our largest revenue contributor. Within learning services, I'd like to first talk about enrichment learning programs, which aimed at helping with learners all around development.

In the first quarter, we improved products and services of all existing programs, leveraging our expertise in users' learning journey as well as our knowledge in pedagogical methodologies. In addition to our current programs covering science and creativity, coding and programming, and humanity and aesthetics, we also rolled out new programs such as international chess, rhetoric, and natural science learning. In a time when COVID-19 continues to pose complexities for offline operations, our OMO model demonstrated its resilience. Many of our offline customers opt to take their classes online with us, mitigating the impact of the pandemic. As the pandemic normalizes, we believe that being online will be an inevitable trend for learners

going forward.

I would also like to share some progress of our overseas learning services, which achieved a year-over-year triple-digit growth rate in the last quarter. We operate under the Think Academy brand outside of the mainland of China by providing diversified programs for K-12 students. In the last quarter, In addition to learning centers we already have in Singapore, the United Kingdom, and the United States, we also started doing businesses in new locations, such as Canada. Moving forward, we expect learning services to remain our primary revenue contributor. At the same time, we'll proactively explore new opportunities in terms of program expansion domestically and market expansion globally. Secondly, Content Solutions is one of the initiatives we have explored in depth since the beginning of our transformation into a smart learning solutions provider. With this business line, we offer academic and non-academic learning content in both print and digital formats by leveraging the broad content library we accumulated over the company's history, as well as the content acquired or licensed from our domestic and global partners. Total revenue generated from our content solutions business for the quarter accounted for more than 10% of the overall net revenue.

driven by product expansion and sales growth. For products, a product format that has been particularly well received by our customers is Smart Books or 智能教训.

Smart Book is a product format where we embed videos onto print books. content solutions business is still at its early stage. We remain committed to investing into business and developing our products and services. Thirdly, learning technology solutions provides a full suite of enterprise-grade technology products and services for educational institutions. Total revenue for the quarter accounted for around 15% of our overall net revenue. Its offerings cover the entire value chain across the learning experience, including online classroom, content development, teaching support, and learning center management. It is gratifying to see in this last quarter how products being adopted by our institutional clients and in turn helping them improve their own user engagement and operational efficiency. We remain committed to fundamental R&D related to our business areas, which is why in this last quarter we were delighted to see our AI vision research team won two computer vision championships at the CVPR, the Computer Vision and Patent Recognition Conference hosted by the Institute of Electrical and Electronics Engineering. Moving on to financial results for the first quarter, our net revenue totaled $224 million, representing a 83.8% decrease from $1,384.9 million in the same period last year. The declining revenue was primarily driven by the succession of K-9 AST services on academic projects in the mainland of China. Gross profit declined by 82.4% to $135.5 million from $771.8 million in the same year-old period. while our gross margin increased from 56% to 60%. Selling and marketing expenses decreased by 86.1% to $60 million from $431.3 million in the same period last year. Non-GAAP selling and marketing expenses, which excluded share-based compensations, decreased by 87.2 year-over-year to $52 million from $407.4 million 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 66.3% to $111.5 million from $331.1 million in the first quarter last year. Non-GAAP general and administrative expenses, which excluded share-based compensation costs, decreased year over year by 66.9% to $95.4 million from $288 million in the same period last year. Loss from operations for the quarter decreased by 77.7% year over year to $28.3 million from $126.9 million in this quarter. Non-GAAP loss from operations. which excluded share-based compensation expenses was US$1.8 million compared to US$59.4 million in the same period last year. The year-over-year decrease in operating loss was primarily driven by the succession of all K-9 academic AST services in the mainland of China. At the same time, our new initiatives are still in their nascent stages of development. Net loss attributable to Cal was 43.8 million US dollars in the quarter. compared with 102.1 million in the same period last year. Non-GAAP net loss attributable to TAO, which excluded share-based compensation expenses, was 17.4 million compared with 34.6 million in the same period of last year. by the end of the first quarter, compared with 187.7 million as of the end of February 28th, 2022, representing an increase of 21.1%. Now, I'll hand the call back over to Mr. Alex Polin to briefly update you on our business strategy and the outcome. Alex, please go ahead. Thanks, Josh. Let me update you on our business and development strategy. As we continue to transform our business into a smart learning solutions provider, we're really encouraged by the trends demonstrated by our current business in the last quarter. We believe Tao's trusted brand, operational excellence, content assets, and technology know-how well-positioned the company toward the transformation journey we are embarked on. As I mentioned last quarter, we look at our businesses in three buckets, learning services and other, content solutions, and technology solutions. I'll go through those one by one with you. First of all, learning services and other business continue to execute our existing programs while also launching a few new programs. We believe learning services are beginning to demonstrate a viable business model and will continue to drive the business around product portfolio expansion, experience optimization, and operational efficiency. Secondly, for content solutions, we're seeing a robust market demand for innovative print and digital integrated product formats. We'll continue to expand our product offerings and invest into building our diversified SIS channels. Although the business results might fluctuate in certain quarters due to seasonality, Moving ahead, we expect our constant solutions business to contribute in more significant proportion to the overall revenues in FY2023. And thirdly, regarding learning technology, I think I mentioned last time, we're really looking at an opportunity on digital transformation for our whole industry and our extended ecosystem. We believe our learning technology solutions will help our institutional customers with their user experience and operational efficiency. In the quarters to come, we aim to develop new customers and create more value for our existing customers. Last time, I mentioned four words. which we believe really underlie the megatrends of the education industry globally. Those are online, digital, intelligent, and open. And I think we have just begun this long and for sure arduous transformation journey toward that future. We're seeing not only new opportunities, but also new challenges. Our focus at this current stage is really building a solid foundation for the business in the years to come. We remain patient and positive in this transformation journey. As I come to the end of my prepared remarks, I would like to really To paraphrase our mission statement, we're ever more committed to love and technology creating a better future and better life. That concludes my prepared remarks. Operator, we're now ready to open for questions.

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1 1 on your telephone. please limit to one question at a time. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Liang from Huatai Securities. Please ask your question.

Can you hear me, management team? Yes. Okay. Thanks, management, for the invitation, and congratulations on the business performance. My question is about how has the pandemic and the lockdown situation of this quarter impacted companies' business, and how do you evaluate the impact in the future? Thanks.

Thank you for that question. This is Alex. Let me take that one on. So first of all, I think during this entire period, as we look at how instances of COVID spring up in different parts of China, our first calls go to all those who are affected by this and to our customers, to the students and parents. We have actually had the opportunity to talk with students and parents and guided them to continue with their learning online. We've also made efforts to ensure that the learning quality and experience remain high as students switch across different formats. We've also made upgrades to our technology systems and curriculum design to accommodate the situation. In places where the conditions have improved, some of our offline learning centers have gradually reopened. Therefore, I think although the pandemic does have impact on our overall learning services, it does not change the viability of the business. I would also like to mention that this, you know, the past few months, we've also seen disruptions to supply chains across many industries. I mentioned for learning for content solutions, we are in printed books. which also rely on supply chain for production and delivery. I think we've also come through this period with more experience and operational know-how to manage a distributed network of logistics for that business going forward. Lastly, I would just like to add, I think as the situation stabilizes and normalizes, really we focus on how the attitude and behaviors of students, how they change. and really on building the infrastructure to deliver high quality services online. And I think that really has become the consensus for the industry. In fact, in the last quarter, online programs contributed to the majority of our overall revenue in enrichment learning programs. I hope that answers your questions.

Thank you. Our next question comes from the line of Candice Chan. Candice, your line is now open. Please ask your question.

Hello. Hi, Alex. Can you hear me?

Yes, we can.

Yeah. So thank you for taking my question. And I see that this quarter the gross margin actually has kept up at over 60%. And even though the revenue actually was down sequentially, which is very impressive. So may I know how many learning centers that TAO have now? And also, what is your expansion plan for this year and also next year? And finally, in follow up, is that will the capacity become a constraint for us to grow the learning services? Thank you.

Kenneth, thanks for the question. Following the business restructuring last year, we have undertaken a balanced approach to adjust our offline presence. And in doing so, we wanted to ensure our offline learning centers offer sufficient geographic coverage and can also operate with efficiency. The way we look at learning centers is that they're not only an indispensable place for us to communicate and engage with our parents and learners, but also an effective channel to establish and enhance our brand awareness. At the end of this last quarter, we had somewhere between 100 and 150 learning centers. in more than 30 cities and regions. Also, as Alex mentioned earlier, we have seen a good number of students moving online and we believe online will continue to be the industry trend. So you asked about expansion plan earlier. As we're proactively developing our online programs and diversifying our products and business models, We believe that offline learning center is just one of the many ways we can grow our business.

I hope that answers your question.

Thank you. Our next question will come from Mark Lee from CT. Mark, your line is now open. Please ask your question.

Hi, management. Thank you very much for the presentation. This is Mark Lee from CITI. May I ask a question on the enrichment learning program? Could you share a bit more on the operating metrics such as the retention rate and the ASP? And any more subjects or classes you may expand down the road? Thank you.

Yeah, Mark. Thanks for the question. I would say our enrichment learning team and business have been primarily focused on two things. One is product and service standardization across various enrichment programs. And two, finding the right learning processes and user journeys for learners and improving their satisfaction. We believe operating metrics are end results of such operational focuses. At this point, enriched minority business is still at its early stage. We're still in process of optimizing various operational metrics. But we also see some early trends of this business. ASP for the quarter remained relatively stable compared to that before all business restructure. You also asked about retention. For certain subjects, retention rates are very close to that of academic tutoring in the last few years. While for other subjects, retention rates are still significantly below pre-restructure level. In terms of subject expansion, We did roll out rhetoric, international chess, and natural science learning in the last few months and will continue to look for program expansion opportunities. We'll share more details as the business reaches its next development phase. I hope that answers your question for me.

Thank you. Our next question comes from Li Ping Zhao from CICC. Li Ping, your line is now open. Please ask your question.

Sure. Good evening, Alex and Jackson. Thanks for taking my questions. I'm wondering whether you could talk a little bit more on the development strategy of your content solution business. Thank you.

Thanks, Li Ping. This is Alex. Let me take that one long. I've actually had the opportunity to spend quite a bit of time with our content solutions teams. So let me talk about this across a few dimensions. First, I think from a strategic perspective, we look at this as one of the key, you know, leading edge for our transformation. toward a smart learning solutions provider. When we look at the customer demand, from the beginning of the pandemic to the last couple of years, we've really seen an accelerated change in the learning habits. We've also seen very strong demand for high quality digitized contents and constant across an ever more diversified number of areas. So I think this is a really long-term and broad trend going forward. As families look at the kind of help they need, and digital content. We also believe that educational content needs to be matched with the appropriate interactive design, services, processes, and technology to really ensure learning efficacy. Looking forward, I think I mentioned this last time, We really strive to provide an integrated experience with world-class first-party constants and third-party constants across the entire learning journey. And lastly, I would just also like to mention that as we look at content solutions, we're really experimenting with new ways of sales channel and growth. for this business. We've been providing our products on e-commerce platforms. We've also started to roll out our products on new type of digital platforms such as We are somewhat new to doing this, but I think it's really showing us a lot more opportunities and ways to create additional values and also to be much more responsive to customer demands in our product design. So I hope that answers your question.

Thank you. Next question comes from the line of Elsie Sheng. Elsie, your line is now open. Please ask your question.

Thank you, management, for taking my question. My question is related to your future investment. You mentioned that you plan to continue to invest, and could you give us more color about this plan? the direction and estimated size of the investment to support your new business? Thank you.

Thank you for the question. This is Jackson. I'll take this. As of the end of last quarter, the company has more than 1.7 billion of cash and cash equivalents, more than 1.1 billion in short-term investments, and 781 million in current and non-current restricted cash. We believe this cash position provides us a solid foundation for both our business transformation and any future development. In terms of investments, we're interested in investment areas that could further improve our existing products and services, supplement our capabilities, or advance our business expansions. At the same time, we are always looking for ways to create value for long-term shareholders. We have taken diversifying measures in the past to generate return from shareholders and will continue to do so in accordance with the market conditions. I hope that answers your question, Elsie.

Thank you. And next question comes from the line of Felix Liu from UBS. Felix, your line is now open. Please ask your question.

Thank you, management, for taking my question. And congratulations on the good keeping margin despite the restructuring. Could management share more color on your expectation on the margin trend going forward as well as, you know, what's your expectation on the matured unique economic level of the new learning services and other business. Will that be comparable to the pre-regulation academic after school tutoring? Thank you.

Thanks for the question for this. I would say it's probably a bit too early to predict margin trends at this point, but I definitely can share some thoughts on our views of how our margin will be impacted by various factors. First, gross margin. Gross margin mostly depends on two things. One is our overall revenue structure, and two is gross margin profile for each business line. And we expect our overall revenue mix to continue to develop. As Alex mentioned earlier, we expect content to contribute portion of our overall revenue. As for gross margin of each business, that will continue to adjust according to market conditions and operating standards. As for operating margin, given a recent business restructuring and transformation, we'll remain focused on building our business assets through continuous investments to create value in the long run.

I hope that answers your question folks.

Thank you very much for your questions. We have reached the end of the question and answer session. I'll now turn the call back to the management team for closing remarks.

Thanks, operator, and thanks for everybody on the line, and thanks for the great set of questions. As we conclude today's conference call, again, thank you all for joining, and we look forward to seeing you next quarter.

Great. Thank you. So this concludes today's conference call. Thank you for participating. You may now disconnect.