TAL Education Group American Depositary Shares

Ladies and gentlemen, good day and thank you for standing by. Welcome to tele-education group fourth quarter and fiscal year 2023 earnings conference call. At this time, all participants are in a listen-only mode. After speaker's presentation, there will be question and answer session. Please be informed that 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 TAL Education Group's fourth fiscal quarter and full 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 Poon, President and Chief Financial Officer, and myself, Investor Relations Director. Following the prepared remarks, Mr. Pony 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 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. Potential risks and uncertainties include, but are not limited to, those outlined in our 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 now turn the call over to Mr. Alex Peng. Alex, please go ahead. Yes, Jackson. I appreciate you all for joining us on today's call. I'd like to take this opportunity to share with you our progress for the fourth fiscal quarter, as well as review some key results from the full fiscal year 2023. Let's start with our financial performance for the fourth fiscal quarter of 2023. We continue to improve our service offerings, develop new initiatives, and progress our strategic transformation roadmap. As a result, for the fourth fiscal quarter ending on February 28, 2023, we recorded $269 million U.S. dollars and 1.845 billion RMB in net revenues for the quarter. The net revenues increased by 11% and 16% in RMB and U.S. dollar terms. compared to the third fiscal quarter, respectively. In terms of profitability, for the fiscal quarter ended on February 28th, 2023, we recorded 18.1 million US dollars and 13.1 million US dollars in non-GAAP loss from operations and non-GAAP net loss attributable to TAL, respectively. For the full fiscal year of 2023, we recorded net revenues of more than $1 billion and generated positive non-GAAP operating profits. Fiscal year 2023 was a year of transformation for TAO. This was the first full fiscal year of our operations following the cessation of offering academic subjects to students from kindergarten through grade nine in the mainland of China. In fiscal year 2023, some of our newer initiatives, such as enrichment learning, smart books, and smart devices exhibited material development. While we are encouraged by these developments, we continue to upgrade our product offerings and improve our operational efficiency. We believe the combination of these efforts by our team and all of our partners laid a solid foundation for our long-term sustainable development. As the industry evolves and technology advances, we'll endeavor to explore and seize new opportunities. At the same time, we would like to take this opportunity to express our gratitude to all of you for your continuous support during our transformation journey. As the whole industry undergoes technological evolution, we look forward to Charles' next stage of development. With that overview, I would like to hand the call over to Jackson, who will give you an update on the operational development of our core business line and review our core personal order and fiscal year's financial results. After that, I'll give an update on our go forward strategy and plans for fiscal year 2024.

We'll then open the call for questions. So Jackson, please go ahead. Thank you, Alex.

I'm pleased to share some details on the progress we made in our three main business lines this past quarter. Before we start, please note that the financial data are based on our inaudible resource report. First of all, let me talk about our learning services, which accounted for around 75% of our total revenues this fiscal quarter. Our enrichment learning programs continue to develop in this quarter, and it is our largest revenue contributor within learning services. The net revenues generated from the enrichment learning programs grew quarter over quarter, primarily as a result of an increase in long-term course learner enrollment. During this quarter, we have observed signs of recovery in offline activities, which have had a positive impact on offline enrichment learning services.

As a result, we expanded our learning center network in this quarter.

Going forward, we'll continue to manage our network expansion plan in accordance with market demand and business efficiency. With our domestic learning services business continues on its development path, Think Academy, our overseas learning service business, also maintained its growth momentum. For the fourth quarter of fiscal year 2023, Think Academy once again realized a year-over-year triple-digit growth. in both total revenues and long-term learning enrollment. Moving on to our content solutions business, which accounted for more than 15% of total net revenues for the quarter. In this quarter, content solutions recorded year-over-year growth, driven by our product development and go-to-market capabilities. we continued to roll out new SKUs based on learner demand during different times of the year. In the fourth fiscal quarter, we launched a new smartphone that provides learners with a comprehensive and interactive learning experience for the winter break. A total of more than 40,000 copies, sorry, a total of more than 400,000 copies

have been sold in the fourth fiscal quarter.

A key element of our content solutions is to combine quality learning content with product format that applies innovative technology.

In February, we launched Shares the XPath, an AI-driven learning device with an 11-inch screen display designed with eye protection function.

The content library of XPath includes both self-developed content and content from external partners. By combining intelligent functions such as personalized assessment, learners can have a personalized and interactive learning experience. We have been selling this product through live streaming, e-commerce, and other channels. We have received some positive feedback from our customers on this product and will continue to upgrade the product based on user input and our understanding of the market.

With that overview, I would now like to walk you through our key financial results.

Our net revenues totaled $269 million, representing a 50.3% decrease from $541.2 million in the same period last year. The declining revenue was a result of the cessation of offering academic subjects to students from kindergarten through night break in the mainland of China. Cost of revenues decreased by 35.5% year-over-year to $127.7 million from $198.1 million in the fourth quarter of fiscal year 2022. Non-GAAP cost of revenues, which excludes share-based compensation expenses, decreased by 36.9%. to $124.9 million from $197.9 million in the fourth quarter of fiscal year 2022. Growth profits decreased by 58.8% to $141.3 million from $343.1 million in the fourth quarter of fiscal year 2022. Selling and marketing expenses decreased by 28% to $74.5 million from $103.5 million in the same period last year. Non-GAAP selling and marketing expenses, which excludes share-based compensation, decreased by 40.9% year-over-year to $56.9 million from $113.1 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 47.1% to $112.2 million from $212.1 million in the fourth fiscal quarter last year. Non-GAAP general and administrative expenses which includes share-based compensation costs decreased by 52.5% year-over-year to 96.3 million US dollars from 202.5 million US dollars in the same period Lost from operations was 44.4 million U.S. dollars compared with an income of 0.6 million U.S. dollars in the fourth fiscal quarter of fiscal year 2022.

Non-GAAP lost from operations, which includes share-based compensation expenses, was 18.1 million U.S.

dollars compared with an income of 0.8 million US dollars in the same period of the prior fiscal year. The year-over-year decrease in operating loss was primarily a result of the cessation of offering academic subjects to students from kindergarten through ninth grade in mainland China annual investments and several initiatives in this quarter designed to Net loss attributable to Powell was $39.4 million in this quarter, compared with a net loss of $108.1 million in the same period of the prior fiscal year. Non-GAAP net loss attributable to Powell, which excludes share-based compensation expenses, was $13.1 million. compared with the loss of 108.0 million U.S. dollars in the same period. Turning to a balance sheet, as of February 28, 2023, we had 2,022,000,000 U.S. dollars of cash and cash recruits. $1.15 billion of short-term investment and $273 million in current and non-current restricted cash. Our deferred revenue balance was $237 million as of the end of the fourth fiscal quarter. comparing with 187.7 million us dollars as of february 28 2022. turning now to the fiscal year 2023 financial results let me briefly review some key financials as follows fiscal year net revenues decreased by 76.8 percent to $1,019.8 million. World's profit decreased by 37.7% to $583.4 million. Lost from operations was $90.7 million in the fiscal year 2023, compared to the loss of operations of $614.5 million in the prior year. Non-GAAP income from operations, which excluded share-based compensation expenses, was $17.8 million for the fiscal year 2023, compared to non-GAAP loss from operations of $439.7 million for the fiscal year 2023. Net loss attributable to PAL was 135.6 million in the fiscal year 2023, compared to net loss attributable to PAL of $1,136.1 million in the previous fiscal year. Non-GAAP net loss attributable to PAL, which excluded share-based compensation expenses, was $27 million compared to non-GAAP net income of $961.3 million in fiscal year 2022. That concludes the financial highlights section. I'll now hand the call back to Alex to briefly update you on our business strategy outline. Alex, please go ahead. Thanks, Jackson. As we move into fiscal year 2024, I would like to share with you three key directions that are really central to our strategy. First, in terms of execution of our current business, some of our businesses, such as enrichment learning, really demonstrated a viable business model, while others are still in exploratory phases. As for the more mature businesses, we plan to balance growth and profitability and manage our operational efficiency. For the businesses still in exploratory phases, such as learning to buy, we'll focus more on product market fit and creating value for our customers. We expect our overall revenue exhibit year-over-year growth in FY24 and will manage our profitability growth. Second, AI technologies have brought and continue to bring profound changes to the learning industry, particularly with regard to how content will be developed and how services will be delivered. The adoption of AI technologies will create a new paradigm in our industry and will present significant opportunities as well as challenges. We'll continue to innovate our business, adopt new technologies, and aim to seize new opportunities brought forth by this new wave of technology. Last but not least, We look for ways to generate shareholder returns. In the last 12 months, under the share repurchase program from April 2022 to April 2023, the company spent approximately $56.4 million to repurchase 17.9 million shares of its American depository shares, representing 2.81% of total share outstanding on February 28, 2023. Powell's Board of Directors has authorized to extend its share repurchase program by 12 months. But to come to the end of my prepared remarks, I'd just like to share with everyone that I've actually been doing quite some reading on artificial intelligence.

Academic papers, articles, and actually books.

And I actually found a particularly fitting quote that is widely attributed to Alan Kane. The American Institute of Sciences was often accredited for inventing objects, object-oriented learning.

The best way to predict the future is to invent it. The best way to predict the future is to invent it.

We live in an era where technology can evolve at unprecedented speed. And rather than reacting to the new opportunities brought forth by evolving technologies, we intend to proactively create them. So that concludes my prepared remarks. Operator, we're now ready to open the call for questions.

Thank you. We will now begin the question and answer session. To ask a question, please press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Once again, that's star 1 1 for questions. Our first question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Thank you, Jackson, and thank you, Alex, for taking my question. I understand that we are investing a lot into the future, as you mentioned, and one of this area includes smart hardware. I noticed that you recently launched a new tablet, so good development there. So I think my question is on the long-term addressable market for learning hardware. What do you think how big the market is? What is the unit economics that you would predict? And what are the impact to our margin for the next fiscal year? Thank you.

Thanks, Felix. This is Alex. Let me take on that question. I think on the TAM question, You know, we've obviously been reading and doing research. And I think if you go with the narrow definition of smart learning pad, we are looking at an annual shipment of about four to five million units per year. But I would also add to that that the actual target market is not just that narrow definition of learning path. We're obviously seeing a lot of general purpose tablets are being used for the learning scenario. And if you add that to the total TAM, we're probably looking at maybe 10 million and even north of 10 million in terms of shipment. So this is a significant market. in terms of TAM. Right now, I think our focus is really on optimizing the functionality of smart devices to enable students to use them more actively. We're also paying a lot of attention to managing the supply chain and optimizing costs. Right now, the business is really in pretty early stages and we're confident that they will have a positive impact on our revenue growth.

So I hope that answers your question.

Okay, thank you.

Thank you. Our next question comes from the line of Howard Sun from Macquarie. Please ask your question, Howard.

Hi, can you hear me?

Yes.

Okay. I wanted to ask on the company's cash balance. So I see that you have a strong cash balance continuing as before. What is going to be the future direction in terms of investment? And could you elaborate more on how and when you're going to progress with your share repurchase plan? Thank you.

All right. Thank you for the question. And this is Jackson. I'll take this one. We have about 3.4 billion in cash, cash equivalents, short-term investment, and restricted cash, both current and non-current. In terms of use of cash, there are three main areas in this new fiscal year where we intend to use our cash. One is that some of initiatives are still in exploratory phases, such as learning device, such as overseas learning services. So we'll continue to fund these initiatives. And secondly, as Alex talked about earlier, our industry is evolving and new technologies are developing. So we'll seek opportunities to make strategic investments into adopting new technologies in our business. And lastly, we continue to look for ways to generate shareholder returns. We used about a total of $66 million in total considerations in the last year in our share buyback program. will continue to seek opportunities to generate return for shareholders through our share buyback program. I hope that answers your question, Howard.

Yeah, thank you for the detailed explanation.

Thank you. Our next question comes from the line of Tommy Wong from CMS. Please ask your question, Tommy.

Hi, can you hear me? Yes.

Okay, thank you.

Thanks for answering my question. I just have two questions. First, can you share with us any operating data on the enrichment learning program? And my second question is that, you know, recently investors have a kind of very mixed feeling about kind of consumption recovery in China, you know, some good, some bad. I'm just wondering what's your feel on the ground And how is that looking going into the summer high season? Thank you.

Hey, Tommy. This is Jackson. I'll take this one. And just to clarify, the second part of your question was with regard to our perspective on consumer behaviors in China or consumption recovery in China. Was that your question?

Yeah, but kind of more to obviously to our business, relating to our business, not the overall macro, obviously, yes. Right, got it.

Okay, so I'll take the first part of your question first. Operating metrics for enrichment learning. I would say if we look at the quarter-over-quarter trend, enrichment learning grew both in terms of revenue and long-term course learner enrollment. And if we look at retention, I would say at the current retention rate, enrichment learning has a viable business model. Quarter over quarter retention rate has been fairly stable and various variants in retention rate across different subject areas for enrichment learnings has also been converging. With regard to the second part of your question, general consumption behavior, I'll just limit that question to how that reflects in our business. I would say in this last quarter, we did see some signs of increasing offline activities. And that has had a positive impact on our offline learning services business. I hope that answers your question, Tommy.

Okay, that's great. Thank you. Thank you.

Thank you. Our next question comes from the line of Lucy Yu from Bank of America Securities. Please ask your question, Lucy.

Thank you, Alex and Jackson. This is Lucy from BAML. Two questions here. First of all, we are approaching the new year of FY24. Could you please give us some guidance on the outlook in terms of revenue and margins? And secondly, is that on the enrichment courses or enrichment segment, how should we think about the expansion in the following year as well? So like how many teachers We are going to recruit how many learning centers that we are going to expand.

Thank you. Thank you, Lucy, for the question. I'll take the second part. This is Jackson again. I'll take the second part of the question first in terms of expansion plan. I guess first on the capacity side, we did expand our learning center network in this past quarter. And going forward in the new fiscal year, we'll manage our expansion plan according to market demand and operating efficiency. You also asked about personnel and specifically teacher recruiting plan. I would just say that that will be a, you know, we will, we do intend to recruit additional teachers. And the pace at which we do that will primarily depend on our business progression for enrichment learning. Lucy, the first part of your question was about guidance for fiscal 24. I would just say in fiscal 24, We do expect revenue to grow year over year and will manage profitability closely.

I hope that answers your question, Lucy.

Thank you, Jackson.

Thank you. Our next question comes from the line of Li Ping Zhao from CICC. Please go ahead, Li Ping.

Sure. Good evening, Alex and Jackson. Thanks for taking my question. So AI and large language model are really hot topics these days. Just wondering whether AIGC will change your business and does the company have any specific product plans in the future? Thank you.

Thanks, Flipping. This is Alex. Let me take this one on. I think the short answer is yes. Yes. I think the long answer, I've actually been traveling overseas, spent about 10 days overseas very recently, talking to a number of mature and developed companies and startups, and really people in academics, in the technology area. I think there's a profound sense of how the long-term impact of generative AI and large language model to the learning space. I think, you know, philosophically speaking, humans have managed to help machines learn. and this is very important and this actually can come back and help us rethink and reimagine how we help other humans work. I think this is a very interesting but important context to this. Fundamentally learning is based on knowledge and content and this is exactly in the area of generative AI and large language models. So we think the impact will be very fundamental to the industry and to every learner's experience. Cal will for sure actively and proactively embrace these changes. I think it's going to come in a few different areas. First of all, we are a large services provider, and a number of operational efficiencies can come from utilizing a large language model to assist, to become essentially co-pilots to our teachers' assistants and service providers. Secondly, as we mentioned before, we are also a content solutions provider. So again, there's going to be, I think, improvement in both the quality and quantity, and then as a result, the operational efficiency in terms of content production. And thirdly, I think we really look forward to bringing a new type of interaction between students and content based on the large language model and natural language interface. So all of these, I think, will have pretty profound impact to the industry. Now, I would hasten to add that this is going to be a journey. It's not going to happen tomorrow. It's going to be a continued journey. And I think we're going to see the impact in the coming months and years to come. So I think I hope that answers your question.

Got it. Thanks, Alex.

Great. We have reached the end of the question and answer session. We thank you all very much for your questions. I'd now like to turn the conference back to the management team for closing remarks.

Thank you, operator. One quick clarification before we end this call. Non-GAAP net loss attributable to top. When I was going over the full fiscal year financial performance, I want to clarify that Non-GAAP loss attributable to TAO, which excluded share-based compensation expenses, was $27.0 million compared to non-GAAP net loss attributable to TAO of $961.3 million in the fiscal year 2022. With that, thank you again for taking your time today, and we look forward to speaking with you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.