TAL Education Group American Depositary Shares

Ladies and gentlemen, good day and thank you for standing by. Welcome to TEL Education Group's third quarter of fiscal year 2020 for earnings conference call. At this time, all participants are in listen-only mode after the speaker's presentation to 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, industry relations director. Thank you. Please go ahead, sir.

Thank you. And thank you all for joining us today for TAO Education Group's third quarter fiscal year 2024 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 newsletters. During this call, you will hear from Mr. Alex Peng, President and Chief Financial Officer, and myself, Investor Relations Director. Following the prepared remarks, Mr. Peng 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 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 turn the call over to Mr. Alex Poe. 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 our financial performance and business progress in the third quarter of the fiscal year 2024. After that, I will share our thoughts for the next quarter's outlook. Throughout this fiscal quarter, we continue to manage our core businesses while concurrently exploring additional opportunities for development. We've witnessed Learning Services continuing on its development trajectory, enabling learners' growth and development with our enrichment learning programs, both online and offline. The advancement of Learning Services is underpinned by our execution on the quality of our service offerings and the capacity of our Learning Center network. As for content solutions, we remain focused on the creation, curation, and dissemination of quality content tailored to the unique learning pathways of our diverse user base. In an effort to empower learners with the solutions they need to excel, ensuring that individual's journey is met with resources that resonate with and elevate their learning experience. We continue to execute on our product offerings as well as go-to-market capabilities for content solutions in this quarter. We've been making programmatic advancements in our technological capabilities, laying a strategic foundation for future innovations. We recognize the transformative potential of this new wave of technology for our business operations and will harness this power to serve our customers. In terms of our financial performance, we recorded net revenues of $373.5 million U.S. dollars, or 2.7 billion RMB for the quarter, representing an increase of 60.5% and 63.7% year-on-year in U.S. dollar and RMB terms respectively. With respect to profitability, our non-GAAP loss from operations and non-GAAP net loss attributable to TAL for the quarter or 10.2 million U.S. dollars and 1.9 million U.S. dollars respectively. So with that overview, I'd like to hand the call over back to Jackson who will give you an update on our core business lines operational development and review our fiscal third quarter financial results. After that, I'll return to share more details regarding our outlook for the next quarter and then open the call for questions. Jackson, please go ahead. Thank you, Alex.

I'm pleased to share some details on the progress we made during the third fiscal quarter across our whole business line. please note that all financial data for the quarter is unaudited. Now let's start with our Learning Services and Others business, which consists of, among others, a broad range of learning programs for consumers. For the third quarter of fiscal year 2024, Learning Services and Others business continue to achieve year-over-year revenue growth, driven by underlying development of multiple products. The largest revenue contributor within learning services and others is our enrichment learning programs. Through the design of our enrichment learning programs, we aim to nurture the full spectrum of learners' capabilities. enabling their well-rounded development that encompasses a breadth of competencies. In our approach to enrichment learning, we place an emphasis on the cultivation of competencies, recognizing that it complements the mere acquisition of knowledge. These competencies equip learners with the necessary tools to navigate impractical real-world scenarios. The revenue trend of pale small class enrichment programs tends to correlate with the size of its learning center network. Year over year, the increase in capacity has led to enrollment growth. we take a dynamic approach in managing our learning center expansion plan, evaluating several factors such as market demand in each area, user acceptance of all products, of operating capability and efficiency, and etc. In alignment with our strategic objectives, Our online enrichment learning business has maintained its course of operations. In light of the evolving landscape and observable developments in user behaviors and preferences within the online learning sector over the last couple of years, we continue to innovate on our product offerings and service delivery models. Our online enrichment learning programs aim to offer a unique digital learning experience to its customer base. Regarding our overseas operations, Think Academy sustains continuous growth, exemplified by the addition of new learning centers during the fiscal quarter. As we progress, Our strategy is to adopt a dual-focused approach that caters to international learners by blending standardized educational frameworks with tailored local adaptions in an effort to meet diverse educational needs while maintaining a coherent global learning experience and standards. Let's transition to content solutions. comprising of smart books, print books, learning devices, and digital content. Content Solutions continues its year-over-year growth momentum in this quarter, driven by its development in our product capabilities as well as go-to-market capabilities. Learning devices, and primarily Shiatsu XPath, is the leading revenue contributor within the content solutions business during this fiscal quarter. The XPath series aims to offer a comprehensive learning experience for school-age users at home. XPath is designed to combine extensive content library with interactive learning experience, powered by our application of AI technologies. we market Axpats through a range of go-to-market channels, such as online live streaming and e-commerce platforms. Our ongoing efforts include the continuous expansion and management of our sales channels. Throughout this quarter, we continue to work on our product development initiatives, iterating our existing products as well as introducing new products and features. Our investments in product and development includes software, hardware, AI and algorithms, contents, and etc. Recently, we introduced a new product featuring upgrades to both its hardware and software. offering users a range of configuration options. The product incorporates refinement on multiple use cases, including motion detection-based interactions, instant question and answer, image recognition-based learning feedback, and et cetera. In addition to XPath, We're also exploring new product formats to meet the diverse demand of various use cases. One of our early education enlightenment products was awarded the latest TWICE PIX award at CES 2024. With that overview, I would now like to share our key financial results for the quarter. We recorded net revenues of 373.5 million U.S. dollars and 2,715.7 million RMB, an increase of 60.5% and 63.7% year-over-year in USD and RMB terms. Our revenue growth is attributable to the growth of both our learning services and others business and our content solutions business. Growth profit also increased in the third quarter of fiscal year 2024, rising from 129.7 million US dollars for the same period last year to $200.3 million for this quarter. Gross margin decreased to 53.6% from 55.8% for the same period last year. The year-over-year decrease in gross margin is due to a combination of factors. including the changing revenue mix from each business line, as well as changing gross margin of the underlying business lines themselves. Selling and marketing expenses for the quarter were $122 million, an increase of 73.3% compared to $70.4 million for the fiscal third quarter last year. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, increased by 82.6% to $116.4 million from $63.8 million for the third quarter of fiscal year 2023. the growth of selling and marketing expenses is mainly driven by increased selling and marketing activities. General and administrative expenses increased by 19% to $110.7 million from $93 million in the third quarter of fiscal year 2023. Non-GAAP general and administrative expenses, which excludes share-based compensation costs, increased by 29.3% year-over-year to $96.7 million from $74.8 million for the same period of fiscal year 2023. Total share-based compensation expenses allocated to related operating costs and expenses decreased by 22.4% to $22 million in the third quarter of fiscal year 2024 from $28.3 million in the same period of fiscal year 2023. Loss of operations was 32.2 million US dollars in the third quarter of fiscal year 2024, compared to loss of operations of 32.9 million US dollars in the third quarter of fiscal year 2023. Non-GAAP loss from operations, which excluded share-based compensation expenses, was $10.2 million, compared to non-GAAP loss from operations of $4.5 million in the same period of the prior year. Net loss attributable to Tao was $23.9 million in the third quarter of fiscal year 2024, compared to net loss attributable to Tao of $51.6 million in the third quarter of fiscal year 2023. non-GAAP net loss attributable to TAO, which excluded share-based compensation expenses, was 1.9 million U.S. dollars compared to non-GAAP net loss attributable to TAO of 23.2 million U.S. dollars in the third quarter of fiscal year 2023. Moving on to a balance sheet, As of November 30th, 2023, we have $2,193.4 million of cash US dollars of cash and cash equivalents, $974.2 million US dollars of short-term investments, and $329 million US dollars in current and non-current restricted cash. Our deferred revenue balance was $507.7 million as of the end of the third fiscal quarter, compared to $237.4 million as of February 28, 2023. Now turning to our cash flow standards, net cash provided by operating activities for the third quarter of fiscal year 2024 was $247.1 million. In April 2023, the company's board of directors authorized to extend its share repurchase program launched in April 2021, that's a month. Pursuant to the extended share repurchase program, the company may purchase up to approximately 737.4 million US dollars in proceeds of its common shares through April 30th, 2024. When we last spoke, as of August 31st, 2023, the company has repurchased approximately 13.4 million common shares and an aggregate consideration of approximately $233.6 million under the Share Your Purchase program. We did not make any additional purchase in this fiscal year. That concludes the financial section. I'll now hand the call back to Mr. Alex Tong to briefly update you on our business outlook. Alex, please go ahead.

Thanks, Jackson. As I mentioned earlier, despite a slight quarter-over-quarter revenue decrease, we made material progress with fiscal third quarter. Now I'd like to share some of my thoughts. on our company's outline of the physical fourth quarter. Concerning our learning services and other business, we will continue investing in learning services to bring our users quality learning experience, both online and offline. The overseas market remains one of our new areas for development. Looking ahead, we'll keep extending our services to more customers with dynamic product formats while leveraging our online and offline capabilities. In terms of content solutions, we target to iterate the functionality of our learning devices by harnessing AI technology. This effort aims to transform these products, offering users a learning experience that integrates technology with learning concepts. Founded in 2003, we're known as a learning technology company that focuses on the essence of education, explores the science of learning, and assists individuals in approaching learning more scientifically. Over the past years, whenever new technology emerges, such as television, computers, the internet, they've been applied to education. We're currently exploring the possibilities of educational transformation in the AI era, attempting to integrate AI with our existing products. We remain open to collaboration and sharing our findings. with the hope of contributing some valuable insights to the global education community. 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 keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Once again, the star 11 for question. Our fifth question comes from the line of Timothy Chow from Goldman Sachs. Please ask your question, Timothy.

Hi, Alex. Hi, Jackson. Thank you for taking my question and congrats on the strong quarter. My question is regarding capacity expansion. Just wondering if Maginot can share any color regarding the capacity expansion for the past quarter and into the longer term, what is your longer term growth plan of the offline learning center capacity expansion? Thank you.

Timothy, thanks for the question. This is Jackson. I'll take this one. So you asked about capacity expansion in this last quarter. As we mentioned, the revenue from pale, small-class business tends to correlate with its capacity expansion plan. So in the last quarter, our capacity expansion was in line with our revenue developments. You also asked about long-term development plan. Here's how we would look at it. We take a pretty dynamic approach in managing our offline learning center network. When we think about expansion plans for offline learning centers, we consider several factors. For example, market demand in a particular area. For example, customer acceptance of our product, our own operating capability, operating efficiencies, and etc. So it's a pretty dynamic and balanced approach when we think about capacity management. Moving forward, when we think about the footprint of offline learning center network, it should more or less align with the overall pace of pay-of-small-class, with the overall growth pace of revenue coming from pay-of-small-class business. and efforts will be made to manage operating indicators while we expand our learning centers.

I hope that answers your question, Timothy. Yes, that's helpful. Thank you, Jackson.

Thank you, Tim. Our next question comes from the line of Eddie Wong from Morgan Stanley. Please ask your question, Eddie.

Hi. Hi, Alex and Jackson. Thank you for taking my question and also congratulations on the good results. So my question is regarding the smart device. So can you share with us your latest plan of the smart device business and what are the considerations for the specific functions and the future development of the second generation of the smart devices? Thank you.

Hi, Eddie. This is Alex. Thanks for that question. Let me take this one on. So first, maybe let me take a step back and just share a little bit, broadly speaking, of how we look at these devices. I think we're looking at these devices as an integration of high caliber content, advanced AI technology, and high quality hardware. These three together will actually build and, you know, a very compelling learning experience for students at home, where they will learn on their own, at their own pace, according to their own individual learning journey. I think that's kind of broadly speaking how we look at these. So with that, basically the three components, content, technology, AI technology, and hardware, They go hand in hand. And we're really looking at strategically and programmatically advanced our offering across all of those three dimensions. So with the launch of our latest flagship products, you actually see the advancement across all these three while we continue to update and upgrade experiences for, you know, across all our devices. You know, just as an example, the flagship device we launched in December has a larger screen. It has more advanced iSight protective technology for the screen. It introduces intelligence functions such as AI dialogue, fingertip translation. incorporates the capabilities from MapGPT. And it really is aimed to facilitate a much more smooth and personalized learning experience for users at home. I also speak on our go-to-market side. As you know, and as I shared in prior calls, Our primary sales channels are online, including both live streaming and e-commerce. We're obviously very proactively working on existing channels, the efficiency and the reach of these channels, while exploring additional distribution models. We see really our sales channel is not just a way to distribute our product, but it's also a way to engage in a dialogue with our potential and existing customers on their learning journey, getting their feedback, getting how they're using these devices to help us continuously improve and enhance the features. So I hope that helps answer your question.

Yes, thank you, Alex.

Thank you, Eddie.

Our next question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Hi, good evening, Alex and Jackson. Congratulations on the strong My question is on AI, which you mentioned for one of the key pillars of your future strategy. Could you elaborate a bit more on how do you plan to apply AI to your existing businesses? You mentioned a few of the applications in your second gen hardware. Do you see any other applications? And how do you plan to monetize such AI adoption? And also on your investment in AI, Do you think we should expect an increase in AI investment or current level is already sufficient? Thank you.

All right. Thanks for that question. This is Alex. Again, I think Jackson mentioned CES earlier. I was there and I met with many colleagues from across the globe. I think there is really a consensus that you know, this generation of generative AI is bringing a truly transformative moment to education that we're able to provide high-quality learning experience, individualized, you know, pathways, and affordable costs at the same time. But I think there is also an increasing realization that this is a long journey. It's not going to happen in just a few months, a few quarters, or just a year. So I think we're really in this for the long haul. And we're looking at where AI comes in, I think across, broadly speaking, three dimensions. I think there's obviously huge opportunities to increase the efficiencies of all of our work. We do have a lot of knowledge workers in the company. I think there's a huge opportunity and it's one of the most present opportunity that we're working on. I think AI provides a very different type of, you know, interaction along the learning journey. As I, you know, mentioned earlier in our smart devices, I think you already seen the early, you know, forms of this type of interaction where the device is able to be much more helpful along the learning journey. It's much more in tune in terms of where the students are to understand the tasks and challenges faced by individual students along their journey. I think thirdly, obviously there's also exploration for AI-native use cases in education. So I think the effort will be along all these three dimensions. Then again, I think if you look at in the past few quarters, I think we were able to really bring the synergy between the foundation model our education know-how, so domain knowledge and know-how, and put it into a device. So this really serves as a valuable reference point. AI in this context, honestly, it not only operates independently, but also contributes to the development of lots of existing business lines. We're really actively engaging the product design operational improvement and we're taking in a lot of user feedback from both internal employees and as well as our customers from across the market and we'll be continuously on that journey pushing it forward. I hope that answers your question.

Thank you. And congratulations again on the results. Thank you. Thank you.

Thank you, Phyllis. Our next question comes from the line of Tiny Wang from CICC. Please ask your question, Tiny.

Hi, Alex Jackson. So congrats on the strong results again. And my question is regarding the cash-using plans. We can see that our main business is really going well, and we are accumulating more cash on our balance. So I'm just wondering what is our subsequent plan, our buyback plans, or any other cash plans? Thank you.

Kanye, thanks for the question and this is Jackson. I'll take this one. Maybe let me address the buyback plan part first. And I think I may have mentioned this earlier. Under the current extended share repurchase program, we have repurchased approximately 13.4 million common shares. at an aggregate consideration of approximately $233.6 million. And as for this fiscal quarter three, we did not make any additional repurchases. Now, if we take a step back and look at broadly how we think about use of cash, we take pretty comprehensive considerations of both short-term and long-term investor, short-term and long-term shareholder return when we think about that there are multiple potential uses of cash in the future, including investing into core businesses via our learning services and others business or content solution businesses, business or other. Also developing new initiatives as well as generating shareholder returns. I hope that answers your question, Tanya.

Yeah, thank you, Jackson. That's very helpful.

Thank you, Tanya. Our next question comes from the line of Yiwen Zhang from China Renaissance. Please go ahead, Yiwen.

Hi, Alex. Hi, Jackson. Thanks for taking my question. First, congrats on another strong quarter. So in point of remarks, you mentioned that the new products of the online enrichment learning business is launching this year. So can you discuss our latest progress there? Thank you.

Ewan, this is Jackson.

I'll take this one. Yes, so as we talked about earlier, the online enrichment space is an evolving landscape. And there have been observable user behavior developments and preferences in the last couple of years. So as a result, we have been observing such developments and acting on innovating our product formats and our service delivery models. When we think about these new products, We aim to deliver innovative and interactive online learning experiences through such new products. And we're focused on delivering products that create user value and societal benefits. So we'll continue to explore and innovate on these products and we'll continue to observe how our I hope that answers your question, Yiwen.

Okay, yes, thank you, Jackson.

Thank you, Yiwen. So we have reached the end of the question and answer session. I'll now turn the conference back to the management team for closing comments.

Yes, operator, thanks again, everyone, for joining the call today. As we approach Chinese New Year, just wish everybody a happy year of the dragon, and we'll see you next quarter. Bye-bye.

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