TAL Education Group

Ladies and gentlemen, good day and thank you for standing by. Welcome to TAL Education Group 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 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 with TAO Education Group's third 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 news wires. During this call, you will hear from Mr. Alex Pung, President and Chief Financial Officer, and myself, Investor Relations Director. Following the prepared remarks, Mr. Pung 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 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. Potential 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. 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 to Mr. Alex Pong. Alex, please go ahead. Thank you, 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 really take this opportunity to with you and your families a very happy Chinese New Year. One of the traditions of Chinese New Year is to recap the past and plan 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 while developing our go-to-market capabilities. We recorded 232.7 million US dollars and 1,568.5 million RMB in net revenues for the quarter. The net revenues decreased by 16% and 21% in RMB and USD terms compared to Q2, respectively. Historically, our fiscal Q2 tend to benefit from seasonality effects in terms of revenue. So if we look at a quarter that's more comparable to Q3, for example, Q1, the net revenues increased 4% in US dollar terms and 14% in RMB terms. We expect to continue our development in the next quarter. In terms of profitability, for the fiscal quarter ended on November 30th, 2022, we reported 4.5 million US dollars and 23.2 million US dollars in non-GAAP operating laws. and non-GAAP net loss attributable to CAL, respectively. You may have noticed that our operating income decreased by $47.6 million quarter over quarter. The decrease in operating income was primarily driven by the reduction in revenue due to seasonality, as well as our investment into new initiatives. So with that overview, I'd like to give Jackson this floor to share more color on the operational developments and the financial performance of our core business lines. Afterward, I will update our business strategy for you, and then we'll open the call for questions. Jackson, please go ahead. Thank you, Adam. Thanks. I'm pleased to share more details on the progress we made in our three main business lines this quarter. Before we start, please note that the financial data is based on our inaudited results for the quarter. I'll start with our learning services and other business. Learning services and other continues to be our largest revenue stream. and it 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'll continue to monitor our learner retention and optimize our offerings to drive healthy retention level. In terms of learner enrollment, we recorded a quarter over quarter decrease in average learner enrollment from Q2. primarily due to seasonal fluctuation. However, if we compare the enrollment of Q3 to that of Q1, we recorded growth in learning enrollment between these two periods. Further, some recently rolled out enrichment programs, such as Rhetorix and International Chess, demonstrated initial customer reception in this past quarter. Like I mentioned in our prior conversations, our enrichment programs are designed to facilitate learners' all-around development. This is a concept that requires some time for the market to digest and accept. Aside from operating metrics, we're also closely monitoring customer feedback on our enrichment programs. We're encouraged by our customers' feedback and appreciated trust and support. We'll continue to fine-tune our enrichment offerings to deliver value to our customers. In this past quarter, we also witnessed recovery in our 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 grew slightly. In this day and age where OMO learning experience continues to proliferate, we see online and offline presence both as important components in our 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 continue to optimize our learning center network and will gradually and cautiously increase the number of our learning centers in the next few quarters to come. While our domestic learning services business continues on its development path, Think Academy, our overseas learning services business, maintains its momentum. With online operations covering a global market and offline operations in countries such as US and Singapore, Think 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 on to our content solutions 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 loans. I talked about small books in the last couple of quarters, the products where we embed videos into print books to supplement learning experience of our users. In this quarter, we're glad to see that a significant portion of the users who purchased and activated the online features of the SmartBooks are learners who historically never enrolled in our learning program, to the best of our knowledge. We see this as a positive sign in that our content products are reaching 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 technologies. will continue to enrich our products, base our insights into users' learning habits and their learning demand. In addition to product development, we also continue 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 are sold through online channels, such as e-commerce and live streaming. We're embracing these new distribution channels and will continue to build our capabilities within these channels. Finally, let's look at our learning technology solutions business. Total revenue for learning technology solutions businesses In this past quarter, we updated 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 the private sector before and will shed more light on our effort in the public sector today. In this past quarter, we released a new sub-brand called Meixiao Smart Education, which targets the market for schools. Our solution for schools primarily includes smart homework, smart lesson preparation, integrated teaching platform, and smart after-school care. This business is still in its early stage and we'll provide more details as the business matures. After updating the above business progress, now let me take you through the key financial results for the quarter. Our net revenues totaled $272.7 million, representing a 77.2% decrease from $1.02 billion in the same period last year. The declining revenue was a result of K-9 academic services in the mainland of China. Cost of revenue decreased by 80.2% to $103 million from $519.5 million in the third quarter of fiscal year 2022. Non-GAAP cost of revenues, which excluded share-based compensations, decreased by 80.9% to $99.4 million from $519.2 million in the third quarter of fiscal year 2022. Gross profit declined by 74.1% to $129.7 million from $501.4 million 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 from $273.6 million in the 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 $258.6 million in the same period last year. The year-over-year decrease was primarily the result of a reduced number of selling and marketing activities. General and administrative expenses decreased by 69.0% from 93.0 million US dollars from 300 million US dollars in the third quarter of last fiscal year. Non-GAAP general and administrative expenses, which excluded share-based compensations, decreased year over year by 72.7% to 74.8 million U.S. dollars from 274.4 million U.S. dollars in the same period last year. Law firm operations was 32.9 million U.S. dollars compared to law firm operations of 108.4 million U.S. dollars in the third quarter of fiscal year 2022. Non-GAAP law firm operations, which excluded share-based compensations, was 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 TAO was 51.6 million U.S. dollars in this quarter compared with net loss attributable to TAO of 99.4 million U.S. dollars in the same period last year. non-GAAP net income attributable to TAO, which excluded, excuse me,

Excuse me. Operator, can you hear us all right?