Choice Hotels International Q1 2024 Earnings Call Transcript

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July 27, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, good day and thank you for standing by. Welcome to the Talent Education Group First Quarter of Fiscal Year 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be informed that today's conference is being recorded.

Operator

I would now like to hand the conference call over to Mr. Jackson Ding, Investor Relations Director. Thank you. Please go ahead, sir.

Speaker 1

Thank you, operator. Thank you all for joining us today for TAO Education Group's Q1 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.

Speaker 1

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.

Speaker 1

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 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.

Speaker 1

I would like to turn the call over to Mr. Alex Kung. Alex, please go ahead.

Speaker 2

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 the financial performance and business progress of the Q1 of the fiscal year 2024. After that, I will share some thoughts on the outlook for the next quarter. So first, in this quarter, this ongoing effort to fine tune our core offerings and optimize our operations such as enrichment learning.

Speaker 2

We also achieved progress in some of our newer initiatives. Taking the example of XPAD, our smart device, which we launched to the market at the end of last quarter, that has really demonstrated satisfactory sales performance and has received positive customer feedback over the past few months. Furthermore, we've been making progress in our artificial intelligence strategy and are working towards a rollout of AI products in the future. In terms of financial performance, we recorded net revenues of US275.4 million dollars and RMB1,906,700,000 for the quarter, which is an increase of 22.9% and 31.1% year on year in U. S.

Speaker 2

Dollar and RMB terms, respectively. In terms of profitability, our non GAAP loss from operations and non GAAP net loss attributable to TAO for the quarter were US32.3 million dollars US19.5 million dollars respectively. So with that overview, I'd like to hand the call over to Jackson. He will give you an update on our core business lines, operational developments and review our Q1 financial results. After that, I'll return to share more details regarding our outlook for next quarter and then open the call for questions.

Speaker 2

Jackson, please go ahead.

Speaker 1

Thank you, Alex. I'm pleased to share some details on the progress we made in this quarter across our core business lines. Please note that all financial data for this quarter is unaudited. 1st, let's take a look at our Learning Services and Others business, which consists of a broad range of learning programs for consumers as well as technology solutions for institutional customers. In the Q1 of fiscal year 2024, our Learning Services and Others business accounted for just less than 75% of our net revenues.

Speaker 1

Within learning services, enrichment learning continued to make material progress with net revenues achieving double digit year over year growth. The progress was predominantly attributed to enrollment growth from our offline small class offerings. In response to the notable demand from our customers, we expanded our learning center network this quarter, increasing the total number of learning centers from roughly 170 to north of 200. Through our network expansion, we conscientiously managed our operating efficiency. Efficiency indicators such as retention rate have been relatively stable quarter over quarter.

Speaker 1

At the current level of operating efficiency, our offline small class enrichment learning services business has a viable business model. As for online large class enrichment learning business, we are focused on sustaining our existing level of operating efficiency, while introducing a new array of offerings to the market. On our last few calls, I discussed some new programs such as eloquence training and natural science learning. These programs, although only contributing a fraction of our total revenues, garnered incremental customer traction in the last couple of quarters. When we look at the next couple of quarters to come, for enrichment learning, we'll continue to optimize our product offerings, user experience and operational efficiency to further develop suitable and differentiated strategies for both online and offline business.

Speaker 1

Moving on, let's discuss Think Academy, our overseas learning services business. We continue to apply our industry know how to the overseas market during this quarter, delivering another consecutive quarter of triple digit year over year growth. We added another learning center for Think Academy this quarter and will further manage our network expansion plan overseas in the next quarter. Now let's talk about our content solutions business, which accounted for more than 25% of total net revenues for the quarter. The revenue generated by content solutions has well more than doubled year over year.

Speaker 1

This revenue growth was a result of the combined effects of our product and go to market capabilities. Smart books and print books, which were the key growth drivers last fiscal year, continue to exhibit material development year over year. A significant growth contributor for content solutions was Xueersi XPAD, an AI driven learning device we launched towards the end of last quarter. XPAD has proven attractive to learners by virtue of its personalized learning experiences powered by intelligent functions and expansive quality content library. In fiscal Q1, not only did we ship a considerable number of expats, but we also witnessed month to month growth in shipment volume for all 3 months in Q1.

Speaker 1

Moving forward, we'll pay close attention to customer feedback and upgrade software and hardware functions for our Xpads to better meet the demand of our learners. We're closely monitoring several key indicators such as average time spent and frequency of usage to understand user behaviors and manage our product updates accordingly. Additionally, we have continued to build content supply through both internal development and external partnerships. In this quarter, we have established strategic collaborations with 10 publishing houses to jointly promote innovative exploration in the content industry. Together, we aim to create diverse and high quality content for learners.

Speaker 1

In the next quarter, we anticipate that content solutions business will continue to grow with revenues derived from content solutions expanding year over year. Other than shipping more units of products to our consumers, we also endeavor to provide our learners holistic learning experience through our device and our content. We'll closely observe user behaviors and provide more content services through our device. With that overview, I would now like to share our key financial results for the quarter. We recorded net revenues of US275.4 million dollars and 1,900,000 and RMB 1,900,000,000 for this quarter, an increase of 22.9% and 31.1% year over year in U.

Speaker 1

S. Dollar and RMB terms respectively. The revenue growth was driven by the steady growth of Learning Services and Others Business and the release of new products within the content solutions business. Gross profit also increased in the Q1 of fiscal year 2024, rising slightly from US135.5 million dollars for the same period last year to US135.9 million dollars in this quarter. Gross margin decreased to 49.3% from 60.5% for the same period last year, mainly due to a higher revenue contribution from our content solutions business, which currently has lower gross margin percentage.

Speaker 1

Sales and marketing expenses for the quarter were US97.7 million dollars increased by 62.7 percent compared to US60.0 million dollars in the fiscal Q1 last year. Selling and marketing expenses as a percentage of total revenue increased to 35.5 percent from 26.8% for the same period last year. Non GAAP selling and marketing expenses, which exclude the share based compensation expenses, increased by 73.7 percent to US90.2 million dollars from US52 $1,000,000 in the Q1 of fiscal year 2023. The year over year increase was primarily due to increased selling and marketing activities. General and administrative expenses for the quarter decreased by 5.9 percent to US104.9 $1,000,000 from US111.5 million dollars in the fiscal Q1 last year.

Speaker 1

Non GAAP general and administrative expenses, which excludes share based compensation costs, decreased by 6.5% year over year to US89.2 million dollars from US95.4 million dollars in the same period of fiscal year 2023. Loss from operations expanded by 104% to US57.8 million dollars from US28.3 million dollars in the Q1 of fiscal year 2023. Non GAAP loss from operations, which excludes share based compensation expenses, was US32.3 million dollars compared with US1.8 million dollars in the same period of the prior fiscal year. Net loss attributable to TAO was US45 $1,000,000 in the quarter, compared with US43 $800,000 in the same period of the prior fiscal year. Non GAAP net loss attributable to TAO, which excludes share based compensation expenses, was US19.5 million dollars compared with US17.4 million dollars in the same period of the prior fiscal year.

Speaker 1

Moving on to our balance sheet, as of May 31, 2023, we had US2 $185,400,000 of cash and cash equivalents, US959.3 million dollars of short term investments, and US340.2 million dollars in current and non current restricted cash. Our deferred revenue balance was $387,700,000 as of the end of the 1st fiscal quarter, compared with $237,400,000 as of February 28, 2023. Now turning to cash flow statement, net cash provided by operating activities for the Q1 of fiscal year 2024 was US125.5 million dollars In April 2023, the company's Board of Directors authorized to extend its share repurchase program by 12 months. Pursuing to the extended share repurchase program, the company may spend up to approximately $737,400,000 to purchase shares through April 30, 2024. As of May 31, 2023, the company repurchased an aggregate of approximately 25,900,000 ADSs for approximately US151.3 million dollars from the open market under the share repurchase program.

Speaker 1

That concludes the financial highlights section. I'll now hand the call back to Alex to briefly update you on our business outlook. Alex, please go ahead.

Speaker 2

Thanks, Jackson. As we introduced before, some of the achievements in this quarter are just a start to this fiscal year. Next, I would like to share some thoughts on our outlook for the next quarter. About the outlook for the upcoming Q2, we expect that development momentum will continue as the next quarter will cover the summer vacation and e commerce shopping of festivals. We expect Q2 to be a high season with seasonality having a positive impact on our revenues.

Speaker 2

On a non GAAP basis, we anticipate an improvement in operating profit compared to this quarter. As generative AI is on the cusp of redefining our industry, I'd also like to speak a bit more about our endeavor in artificial intelligence. We'll apply AI technology and launch learning products in a number of learning subjects in the near future. We'll update you on the progress in this area after the products are launched. We'll continue to invest in the artificial intelligence technologies to innovate our business.

Speaker 2

We really sit at a very interesting time in our industry. When I look back at TALES track record in the last 20 years, I see a pattern of providing high quality affordable services to customers through technology and or business model innovations. We really believe AI has the potential to enable us to provide more accessibility to our customers and redefine the industry paradigm for decades to come. And that concludes my prepared remarks. Operator, we're now ready to open the call for questions.

Operator

And our first question comes from the line of Ewan Zhong from China Renaissance. Your question please.

Speaker 3

Hey, good evening management. Thanks for taking my question. So my question is regarding the learning device. Glad to say we have made a considerable progress on XPAD. So how do you view the current market dynamics?

Speaker 3

And what is our company's competitive advantage in XPAD? Thank you.

Speaker 2

Thanks, Ewan. This is Alex. Let me take this question. So I think first of all, we are really striving to meet the daily learning needs of our young learners and be their trusted companion on their journey of growth. I think this is a journey that goes across multiple years.

Speaker 2

It's intense in terms of what the young learners need to learn. So there's quite a bit of support they need along the way. What we found is that their learning needs are really very diversified across different age groups, across different types of students, their personal learning journey up to date and so on. So in addition to attending classes, I think hardware products can really be an effective way to meet that kind of personal needs in different scenarios and really lots of self learning needs. So that's the first thought.

Speaker 2

So in terms of our competitive advantages, I think there are a few things. One is there's 20 years of pedagogical and education research experience. And through that 2 decades of experience, I think the company has developed a set of tailored contents for the learning devices. This not only ensures consistently high quality content, but also serves to students different types of what they're accustomed to in terms of utilizing fragmented time for learning. So I think that's really an important foundation.

Speaker 2

Now on top of that, as I mentioned before, we continue to strive and seize this the secular trend around artificial intelligence, we think that AI combined with our content that we've developed over the years can really be a powerful support for students, especially for their personalized learning needs across that learning journey. And lastly, I think the users have given us pretty positive feedback regarding both the content and the personalized user experience. We realized this is still fairly early in our endeavor into the learning devices space. And we just take these feedback as further encouragement and guidance for our continued endeavor and further polish our products, bring additional content and artificial intelligence experience to this product in the future. So, Yvon, hopefully that answers your question.

Speaker 3

Yes, sure. That's very clear. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Candice Chan from D. Wang.

Speaker 4

Note that Jason just mentioned that we actually added roughly 30 new learning centers this quarter. And how would be the pace for the remaining quarters? And in the longer term, what sort of expansion rate that we should expect? Thank you.

Speaker 1

Candace, thanks for the question. This is Jackson. I'll take this one. Maybe before I go into the specific plan, I think it would be helpful to kind of share with you all thoughts behind how we manage our learning center network, right? So when I think about managing our learning center network, a general rule of thumb we have is that we want to and maintain operating efficiencies of our existing centers as we open up new centers to the extent that there is market demand and we have operating capabilities.

Speaker 1

In the last couple of quarters on these calls, I think I've talked about how we're gradually adding new learning centers. And you can see this pattern continue this quarter. Now this quarter, the number of learning centers did continue to grow. Our total number of learning centers has increased from roughly 170 at the end of the previous quarter to north of 200 at the end of Q1. I would caution you though that the growth of learning number of learning centers in this quarter is partially in preparation for the peak season during the summer.

Speaker 1

So we don't necessarily expect to see the same level of increase at this pace every single quarter from now on. As to the future, we'll expand our learning centers at a steady pace to ensure a smooth and balanced growth. I hope that answers your question, Janice.

Speaker 4

Thank you, Jason.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Felix Leal from UBS. Your question please.

Speaker 5

Good evening and thank you management for taking my question. Congratulations on the fast growth of the hardware and that's where my question is. So first, I'd like to get your thought on the potential addressable market of our hardware business. Could you share a bit more about our target demographics or what are which part of the student population are our learning hardware popular among? And a second part of the question is on the margin.

Speaker 5

Can management provide more color on the margin profile of the learning hardware currently? And where do you expect the margin to eventually arrive at? Thank you.

Speaker 1

Thanks for the question. This is Jackson. I'll take this one. So the first part of the question was related to TAM. When I look at if I limit this conversation to the China market, in terms of TAM, I think on an annual basis, we see shipments of 4000000 to 5000000 units of learning tablets every year.

Speaker 1

And that's the kind of existing market size. And if we but then when we look at our products, we not only we believe we not only tackle the existing market, we also have an opportunity to serve the broadly speaking learning industry. We really look at this as customers should wallet how much they spend learning on supplemental learning in general and how much of that use case and use scenarios could be served through a learning tablet by offering more intelligent functionalities as well as high quality and personalized content. So the short answer to the TAM questions is, depending on what you look at, the current TAM is probably 4000000 to 5000000 units per year. If you look at the broadly speaking wallet for the learning industry, it's a higher potentially could be a much higher number.

Speaker 1

The second part of the question was related to margin profile. Let me break that down for you a little bit. First, it may be helpful to understand how we book our top line. I think it's worth noting that a meaningful portion of the revenue from a hardware business will be recognized as deferred revenue and will be deferred over the next year or 2 depending on the product. Whereas substantially all costs and expenses would be recognized upfront.

Speaker 1

So this accounting technicality would have a negative impact on margin profile while the business is growing. That's number 1. 2 is, when we look at fixed costs for this business, we have we've made upfront investments in fixed costs, predominantly in the form of building a team who manage and develop the product as well as producing content for our devices. So that part of the fixed cost is there. Now our hardware business is still in its early stage of development.

Speaker 1

So as sales increases, we believe there will be potential upside to the profitability of this business. I hope that answers your question, Philips.

Speaker 5

Okay. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Koo hyun Jung from CICC. Your question please. Hi,

Speaker 4

Alex Jackson. Thank you for taking my question. So just a quick one. Could the management team provide an overview of the specific plans and future trends for the share buyback program? Thank you.

Speaker 1

Tan Yu, thanks for the question. This is Jackson. I'll take this. We always look for ways to generate shareholder returns and share buyback is one of those tools that from time to time we deploy when conditions fit. If we dial back a year ago in fiscal year 2023, we repurchased close to 18,000,000 ADSs and an aggregate consideration of approximately US66 $1,000,000 In April now this year, in April 2023, the company's Board of Directors extended the share repurchase program from the previous year.

Speaker 1

The current program authorized the company to spend up to approximately RMB 737,000,000 in proceeds in share repurchase through April 30, 2024. In this fiscal year, as of May 31, 2023, the company has repurchased 25,900,000 ADSs and an aggregate consideration of approximately 151,300,000 under the share repurchase program. In the next quarter, we'll continue to buy back and the amount spent will be subject to market and business conditions. I hope that answers your question.

Speaker 4

Yes. Thank you very much.

Operator

Thank you. One moment for our next question. And our final question for today comes from the line of Howard Zune from Macquarie. Your question please. Howard, you might have your phone on mute.

Operator

Hello? Yes, we can hear you now.

Speaker 5

Okay, okay. Sure. So I have a question on AI products. Wondering if management could share more on the details of AI product and if there is current like what's the current R and D status? And when do you plan to launch the product?

Speaker 2

Hey, Howard, this is Alex. Let me take that one on. But let me just actually add one point before we get to the specific R and D progress and product launch roadmap. I think this is really truly a long term secular trend. As I mentioned in the last call with all of you, really in the time about 7 months since generative AI has broken to the public discourse.

Speaker 2

We've spent tons of time discussing with players across the entire ecosystem from dedicated large language model, odd developers to leading technology companies, startups, researchers. We've spent that time both in China and have taken a few trips to the United States as well. I think this is pretty much of a consensus looking forward that the power unleashed by the large language model would really redefine and help us reimagine the future of education. So it's absolutely exciting and it's the area where I think the management team and the company as a whole have already embraced and will continue to embrace for many years to come. So as that's a long journey, right, hey, that's again, I think a decade long journey as all of us learn how to grow and develop and build a world with artificial intelligence.

Speaker 2

So the products that we have, it's just the very, very start of it. It's in the internal testing phase now for our employees and a very limited set of customers are testing them. And we're continuously optimizing obviously the performance of the product and improving the user experience and in preparation for the future launch. So moving forward, we plan to extend the capabilities of these large language models with a few things. I think, obviously, there is a large set of proprietary data that we have accumulated over the years through our pedagogical experience and customer service.

Speaker 2

I think that's invaluable in terms of helping the large language model to become more suitable for the various scenarios across the learning journey. I think we would need to continue to work on better alignment for the model for the type of interactions with students on various types of subjects. And lastly, I think it's just in terms of features and functionalities across our learning services type of business models as well as our content and learning devices business models to meet the diversified learning needs of our customers. So Howard, I hope that answers your question.

Speaker 5

Yes. Thank you for the update.

Operator

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to management for any further remarks.

Speaker 2

Great. Again, thanks to everybody for joining us today, and we look forward to talking to you next quarter. Bye bye now.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Earnings Conference Call
Choice Hotels International Q1 2024
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