TAL Education Group (NYSE:TAL) Q3 2024 Earnings Call Transcript January 25, 2024
TAL Education Group isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, good day, and thank you for standing by. Welcome to TAL Education Group’s Third Quarter of Fiscal Year 2024 Earnings Conference Call. At this time all participants are in 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.
Jackson Ding: Thank you. And thank you all for joining us today for TAL 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 newswires. 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 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 filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with the SEC. Also, our earnings release in this call includes 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.
Alex Peng: 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 each individual’s journey is not with resources that resonate with and elevate their learning spirit. 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’ve recognized the transformative potential of this new wave of technologies for our business operations and will harness this power to serve our customers.
In terms of our financial performance, we reported net revenues of US$373.5 million, or RMB2.7 billion for the quarter, representing an increase of 60.5% and 63.7% year-over-year in US 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 were US$10.2 million and US$1.9 million respectively. So, with that overview, I’d like to hand the call over back to Jackson, who’ll give you an update on our core business line, operational developments, 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.
Jackson Ding: Thank you, Alex. I’m pleased to share some details on the progress we made, during the third fiscal quarter across all four business lines. 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 continued 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 program. Through the design of an enrichment learning programs, we aim to nurture the full spectrum of learner’s capabilities, enabling their well-rounded development that encompasses a breadth of competencies.
And 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 equipped learners with the necessary tools to navigate in practical real-world scenarios. The revenue trends of Peiyou 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 our operating capability, and efficiency, and et cetera. In alignment with our strategic objectives, our online enrichment learning business has maintained its cost 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 our product offerings as service delivery models. Our online and virtual learning programs aim to offer a unique digital learning experience to its customer base. Regarding our overseas operations, Zinc Academy sustained continuous growth, exemplified by the addition of new learning centers during the fiscal quarter. As we progress, our strategy is to adopt a build focused approach that caters to our international learners by blending standardized educational frameworks with tailored local adoptions, in an effort to meet diverse educational needs, while maintaining a coherent, global learning experience and standard.
Let’s transition to Content Solutions segment. Comprising of smart books, print books, learning devices and digital content. Content Solutions continued its year-over-year growth momentum in this quarter, driven by development in our product capabilities, as well as go-to-market capabilities. Learning devices, and primarily shares the 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 aged users at home. XPath is designed to combine extensive content library with interactive learning experiences, powered by our application of AI technologies. We market XPath 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 all sales channels. Throughout this quarter, we continue to work on 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 et cetera. Recently, we introduced a new product, featuring upgrades to both this 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 enlargement product was awarded the latest TWICE Picks award at CES 2024. With that overview, I would now like to share our key financial results for the quarter. We reported net revenues of US$373.5 million and RMB27157 billion. 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. Gross profit also increased in the third quarter of fiscal year 2024. Rising from US$129.7 million for the same period last year to US$200.2 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 change in revenue mix from each business, as well as changing gross margin of the underlying business loss themselves.
Selling and marketing expenses for the quarter were US$122 million, an increase of 73.3% compared to US$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 US$116.4 million, from US$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 US$110.7 million from US$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 US$96.7 million, from US$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 US$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 US$32.2 million in the third quarter of fiscal year 2024, compared to loss of operations of US$32.9 million in the third quarter of fiscal year 2023. Non-GAAP loss from operations, which excluded share-based compensation expenses was US$10.2 million compared to non-GAAP loss from operations of US$4.5 million in the same period of the prior year. Net loss attributable to TAL was US$23.9 million in the third quarter of fiscal year 2024, compared to net loss attributable to TAL of US$51.6 million in the third quarter of fiscal year 2023.
Non-GAAP net loss attributable to TAL which excluded share-based compensation expenses was US$1.9 million, compared to non-GAAP net loss attributable to TAL of US$23.2 million in the third quarter of fiscal year 2023. Moving now to balance sheet. As of November 30, 2023, we have US$2,193.4 million of cash and cash equivalents. US$974.2 million of short-term investments and US$329 million in current and non-current restricted cash. Our deferred revenue balance was US$507.7 million, as of the end of the third fiscal quarter, compared to US$237.4 million as of February 28, 2023. Now turning to our cash flow statement. Net cash provided by operating activities for the third quarter of fiscal year 2024 was US$247.1 million. In April 2023, the Company’s Board of Directors authorized to extend its share repurchase program, launched in April 2021 by 12 months.
Pursuant to the extended share repurchase program, the company may purchase up to approximately US$737.4 million in proceeds of its common shares through April 30, 2024. When we last talk, as of August 31 2023, the company has repurchased approximately 13.4 million common shares at an aggregate consideration of approximately US$233.6 million under the share repurchase program. We did not make any additional purchase in this fiscal quarter three. That concludes the financial section. I’ll now hand the call back to Mr. Alex Peng, to briefly update you our business outlook. Alex, please go ahead.
Alex Peng: Thanks, Jackson. As I mentioned earlier, despite a slight quarter-over-quarter revenue decrease, we made material progress this fiscal third quarter. Now I’d like to share some of my thoughts, of our company’s all of the typical 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 functionalities of our learning devices by harnessing AI technologies.
This effort aims to transform these products, offering users a learning experience that integrates technology with learning content. 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 individual 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.
Operator: Thank you. [Operator Instructions]. Our first question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.
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