TAL Education Group Q4 2024 Earnings Call Transcript

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April 25, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, good day and thank you for standing by. Welcome to Tele Education Group's 4th Quarter and 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'd now like to hand the conference over to Mr. Jackson Ding, Investor Relations Director. Thank you. Please go ahead, sir.

Speaker 1

Thank you, operator, and thank you all for joining us today for TAO Education Group's Q4 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.

Speaker 1

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.

Speaker 1

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. I would like to turn the call over now to Mr.

Speaker 1

Alex Peng. 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. In this call, we'll discuss our financial performance and business progress for the Q4 and review some of the key results from the full fiscal year 2024. Following that, I'll briefly update you on our business strategy outlook. Throughout the fiscal quarter, we continued to manage our learning services programs to serve users who seek engaging and effective learning experiences.

Speaker 2

Our Peiyou Small Class and shares.com enrichment learning programs continue to receive positive feedback from users for the quality of their product and services. Our efforts to offer quality learning experience along with our learning center network expansion and increased enrollment led to continued growth in our Learning Services business. For Learning Devices, we extended our products and services to a broader user base, enabling more users to find the suitable learning solutions for their needs. We aim to help users with their self learning journey by leveraging the smart features and abundant resources integrated into our learning devices. With this objective in mind, we launched 2 new versions of learning devices in this fiscal quarter with enhanced hardware and software capabilities, XPath 2 Pro and XPath 2 Pro Max.

Speaker 2

Both have gained early market traction and received solid user engagement feedback since their launch. Going forward, we remain committed to developing both our product capabilities and our go to market capabilities. To that end, we continue to pursue new technologies and refine our existing research and development endeavors. In a recent national collaborative initiative dedicated to comprehensively assessing large language models' mathematical abilities, our mass GBT large language model recently ranked number 1 in national rankings. From basic arithmetic to advanced series of mathematics, the Math GPT LMM delivers responses to a student's learning experience.

Speaker 2

In terms of our financial performance, we recorded net revenues of US429.6 million dollars or RMB3.08 billion for the quarter, representing an increase of 59.7 percent and 66.9% year over year in U. S. Dollar and RMB terms. With respect to profitability, our non GAAP income from operations and non GAAP net income attributable to TAO for the quarter were US9.4 million dollars US48.0 million dollars respectively. For the full fiscal year of 2024, we reported net revenues of US1.5 billion dollars or RMB10.7 billion, representing 46.2 percent and 53.7% year over year growth in U.

Speaker 2

S. Dollar and RMB terms, respectively. Our non GAAP income from operations and non GAAP net income attributable to TAO for the quarter were $19,700,000

Speaker 1

$85,300,000

Speaker 2

respectively. We also reported positive non GAAP net profit during the whole year, which was $84,800,000 And with that, I will now hand over the call back to Jackson. He will provide an update on the operational advancements within our core business lines and discuss our financial performance for the 4th fiscal quarter. Jack, back to you.

Speaker 1

Thank you, Alex. I'm pleased to share some details of the progress we made in the Q4 across our core business lines. Please note that all financial data for this quarter is unaudited. Let me start with our Learning Services and Others Business, which comprises a broad range of learning programs for consumers, amongst other things. In the Q4 of fiscal year 2024, we extended Learning Services and Others' year over year growth momentum through continued investments across our various product lines.

Speaker 1

Our online and offline enrichment learning programs continue to serve as a primary revenue generator for our learning services. Through our systematic teaching design, up to date learning content and interactive classroom design, we help users develop multifaceted capabilities and apply what they've learned into real life situations. Our enrichment learning programs enable students to build their own thoughts from diverse perspectives, fostering comprehensive development with engaging and effective learning experience. Our offline Peiyou small class programs maintained its trajectory of year over year growth in this period. This was attributable to, amongst other factors, our learning center network expansion.

Speaker 1

Our decision to add learning centers during the quarter was supported by an assessment of market demand as well as our operational capabilities and efficiency. Notably, efficiency indicators such as retention rate have been relatively stable as we expanded our capacity and enrolled more learners. We see a visible growth path for offline small class enrichment learning. In alignment with our strategic objectives, our online enrichment learning business has maintained its course of operations. To enhance teaching effectiveness, we tailored our online programs to differentiate them from offline offerings and applied smart interactive features to motivate users and enhance their engagement.

Speaker 1

These programs are designed not only to align with online learning habits, but also fully leverage online education's unique advantages, bringing scarce, high quality educational resources to a broader audience. Looking ahead, we'll continue to innovate and iterate our products and services to meet evolving new user demand for digital learning experiences. Next is our content solutions business, which encompasses smart books, print books, learning devices and digital content. Our product portfolio and go to market capabilities drove continued year over year growth momentum during this fiscal quarter. As in previous quarters, Sureza XPAD stood out as a key contributor to our content solutions business revenue growth.

Speaker 1

Revenue generated from our learning devices continued on its path of growth in fiscal Q4, thanks to our launch of a couple of new products in our XpAD series, XPath 2 Pro and XPath 2 Pro Max. The latest XPath feature enhanced hardware and software capabilities, abundant embedded learning resources and AI functions from our self developed large language model, Math GPT. For example, customers can use our AI enabled learning tools for math problem solving. Chinese or English essay review, step by step answer explanation and much more. Together, these upgrades provide an improved human machine interaction experience and more precise and efficient learning solutions, while delivering consistent user engagement level.

Speaker 1

Meanwhile, we focus on managing our sales channels and optimizing our marketing strategies. While we're closely monitoring the efficiency of our online channels, we also started to explore opportunities in offline channels to expand our products market. With that overview, I would now like to share our key financial results for the quarter. We recorded net revenues of US429.6 million dollars or RMB3.08 billion, an increase of 59.7 percent and 66.9% year over year in the U. S.

Speaker 1

Dollar and RMB terms, respectively. The increase was attributable to the growth in both our Learning Services business and our Content Solutions business. Cost of revenues increased by 58.4% to US202.2 million dollars from US127.7 million dollars in the Q4 of fiscal year 2023. Non GAAP cost of revenues, which included which excluded share based compensation expenses, increased by 59.8% to US199.6 million dollars from US124.9 million dollars in the Q4 of fiscal year 2023. Gross profit also increased in the Q4 of fiscal 2024, rising by 60.9 percent from US141.3 million dollars for the same period last year to US227.3 million dollars for this quarter.

Speaker 1

Gross margin increased to 52.9% from 52.5% for the same period last year. Selling and marketing expenses for the quarter were 100 and $25,900,000 representing an increase of 69% from $74,500,000 for the same period last year. Non GAAP selling and marketing expenses, which excluded share based compensation expenses, increased by 80.1 percent to US120.4 million dollars from US66.9 million dollars for the same period last year. The uptick in selling and marketing expenses was primarily driven by increased selling and marketing activities. Selling and marketing expenses as a percentage of total net revenues increased from 27.7%

Speaker 2

to 29.3%

Speaker 1

year over year. General and administrative expenses increased by 4.5 percent to US117.2 million dollars from US112.2 million dollars in the same period of last year. Non GAAP general and administrative expenses, which excludes share based compensation costs, increased by 8.9% year over year to US104.9 million dollars from US96.3 million dollars for the same period of last year. Non GAAP general and administrative expenses as a percentage of total net revenues decreased from 35.8% to 24.4% year over year. Total share based compensation expense allocated to the related operating costs and expenses decreased by 22.1 percent to US20.5 million dollars in the Q4 of fiscal year 2024 from US26.3 million dollars in the same period of last year.

Speaker 1

Loss from operations was US11.1 million dollars in the Q4 of fiscal year 2020 4 compared to loss from operations of $44,400,000 in the same period of last year. Non GAAP income from operations, which excluded share based compensation expenses, was $9,400,000 compared to non GAAP loss from operations of US18.1 million dollars in the same period of last year. Net income attributable to TAO was $27,500,000 in the Q4 of fiscal year 2024 compared to net loss attributable to TAO of US39.4 million dollars in the same period of last year. Non GAAP net income attributable to TAO was which excluded share based compensation expenses was US48.0 million dollars compared to non GAAP net loss attributable to Tau of US13.1 million dollars in the same period of last year. Moving on to our balance sheet.

Speaker 1

As of February 29, 2024, we had US2208.7 billion dollars of cash and cash equivalents, US1.94.6 million dollars in short term investments and US248.7 million dollars in current and non current restricted cash. Our deferred revenue balance was US428.3 million dollars as of the end of the 4th fiscal quarter. Now turning to our cash flow statement. Net cash used in operating activities for the Q4 of fiscal year 2024 was US23.7 million dollars Now let's switch gears and move on to full fiscal year 2024 financial results. Let me briefly review some key financials as follows.

Speaker 1

Fiscal year net revenue increased to US1 $490,400,000 or RMB10.7 billion, representing a 46.2% and 53.7 percent year over year increase in U. S. Dollar and RMB terms, respectively. Gross profit increased by 38.2 percent to US806.1 million dollars Loss from operations was US69.2 million dollars in the fiscal year 2024, compared to loss of operations of $90,700,000 in the prior year. Non GAAP income from operations, which excluded share based compensation expenses, was $19,700,000 for the fiscal year 2024 compared to non GAAP income from operations of $17,800,000 for the fiscal year 2023.

Speaker 1

Net loss attributable to TAO was US3.6 million dollars in the fiscal year 2024 compared to net loss attributable to TAO of $135,600,000 in the previous fiscal year. Non GAAP net income attributable to TAO, which excluded share based compensation expenses, was US85.3 million dollars compared to non GAAP net loss attributable to TAO of US27 $1,000,000 in fiscal year 2023. That concludes the financial highlights section. In April 2023, the company's Board of Directors authorized a 12 month extension of the company's share repurchase program launched in April 2021. Pursuant to the extended share repurchase program, the company may purchase up to approximately US737.4 million dollars of its common shares through April 30, 2024.

Speaker 1

As of August 31, 2023, the company had repurchased 13 point 4,000,000 common shares and an aggregate consideration of approximately US233.6 million dollars under the share repurchase program. We did not make any additional purchases in the Q4 of fiscal year 2024. In April 2024, NITAO's Board of Directors has authorized to extend its share repurchase program by 12 months. That concludes the financial section. I'll now hand the call back to Alex to briefly update you on our business outlook.

Speaker 1

Alex, please go ahead.

Speaker 2

Thanks, Jackson. As highlighted throughout this call, during fiscal year 2024, for Learning Services, we expanded our learning center footprint, developed additional learning programs catering to various user groups' specific needs and also managed our operational efficiency. So as a result, the business experienced year over year growth in the last few quarters. Our content solutions also made progress through offering high quality learning devices and engaging in conversations with our target customers through various go to market channels. We believe fiscal 2024 laid a foundation for our future development.

Speaker 2

So now I would like to share some insights on the company's strategy and the objectives for fiscal year 2025. First of all, we remain focused on further refining our mature businesses. We will continue to uphold high quality standards for our offline and online learning products and services. Our goal is to make our learning experience engaging and effective by applying technology and improving teaching content and student interaction. Among our mature businesses, we expect our various learning services programs to continue to serve as our largest revenue contributor in the new fiscal year.

Speaker 2

We'll also continue to innovate and explore during fiscal year 2025. To keep up with our customers' ever evolving needs, we'll explore and design differentiated products and services. We'll also continue to invest in artificial intelligence to optimize our model, improving its response speed and accuracy and working to integrate artificial intelligence with our existing products and services. We keep a close eye on industry trends and how education is transforming in the AI era, staying keenly attuned to how we can interact with other players and identify potential areas where we can seize new opportunities. We remain open to explore collaboration and share our findings with the hope of contributing some valuable insights to the global education community.

Speaker 2

Finally, we'll focus on refining the details of our operations to enhance overall efficiency and profitability. We believe our dedication to providing learning services and products will create value for our users and our society, while driving our business forward. We also closely monitor our efficiency metrics in all different factors and make timely adjustments to optimize each step in our operations, including content generation, product R and D, sales and marketing and more. So that concludes my prepared remarks. Operator, I think we're now ready to open the call for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from the line of Candice Chan from Daiwa. Please ask your question. Candice?

Speaker 3

Great. Jason and Alex, thanks for taking my question and also congratulations on this very strong set of results. After achieving a robust 46% revenue growth for this year, can you share some colors on the revenue growth target for the new fiscal year? And also, what will be the key investment focus for this year? Thank you.

Speaker 2

Thanks, Candace. This is Alex. Let me take this one. So I think at a very high level, I would say growth is really the output of investment input. I think that the investment input is going to span from product and services innovation, technology, channel and network and last but not least, our people and our organization.

Speaker 2

So at a very high level, I think I'll just sort of answer both of your questions in that one go. And if I would unpack it a little bit further, I think, obviously, we'll remain focused on further revitalizing and refining our mature businesses. I would really expect our various learning services programs to continue to serve as our largest revenue contributor in the new fiscal year and continues to show robust growth. We'll obviously continue to innovate to explore and design differentiated products and services that really fits with all segments of our customers and all learning scenarios and to provide them with an integrated experience and an integrated learning journey. We'll obviously continue to invest in artificial intelligence.

Speaker 2

I think I mentioned earlier on the call, it's an area that we pay huge amount of attention to. And we believe that, that AI era and its transformative impact on education is just starting. We'll continue to refine the details of our operations to enhance overall efficiency and profitability. And this really, I think, goes across the entire chain of operation. You go from content generation to product R and D, to sales and marketing.

Speaker 2

So Candace, I hope that answers your question.

Operator

All right. Thank you, Candace. Our next question comes from the line of Linda Huang from Macquarie. Please ask your question, Linda. Thank you very much.

Operator

Hi, management. So my question is regarding for the learning center expansion. I remember that in the previous the conference call, our learning center number is 250 to 300. So can you share with us more color regarding for your other learning center expansion at the end of the previous quarter? And then for FY 'twenty five, how do you gauge the market demand and expansion plan?

Operator

Thank you very much.

Speaker 2

Thanks, Linda. This is Alex. Let me take this one as well. So first of all, we expanded for capacity in the past quarter, which was in line with our expectation. And with retention rate being relatively stable, as we expanded our capacity and enrolled more students, I think we're increasingly feel good about that line of growth for the future.

Speaker 2

Now just to share a bit more color on how we look at this for the upcoming year. I think this is a theme that I've addressed in the past couple of years. Enrichment learning, it's got a new product market fit, and we always would adopt a balanced approach. We'll look at the demand. We'll look at the geographical density of that demand.

Speaker 2

We'll look at user response to our product and services, whether it's positive. And obviously, there are metrics such as user retention, which will tell us whether it's hitting our expectation. We'll also obviously be very mindful of the operational metrics, such as classroom utilization rate and teacher utilization rate. And these are all the things that we consider together, right? So I would say, when I look at our Peiyou enrichment learning programs, they're really designed to help users develop a multifaceted set of capabilities.

Speaker 2

They need to apply what they've learned into real life situations. They need to develop their own thoughts from different perspectives and really foster a full person development approach. So, so far, I think we've observed really positive user feedback related to this enhancement in the capabilities mentioned above. And we believe our dedication, quality and effectiveness will continue to drive our sustained growth. So for the next year, I think we're seeing signs, very good signs of visible growth path.

Speaker 2

We'll continue to expand our learning center network to meet user demand in the upcoming year. I think we'll stick to a dynamic and balanced approach, right, really taking market demand in a particular area, in particular city or district, how customers are responding to our product and services, our own operating capabilities, especially our teams on the ground, the frontline capabilities that they're building and enhancing and also those operational metrics, efficiency metrics that I mentioned about, we'll take all of those into consideration. So I think just to summarize it, we expect to further expand our network, and we'll continue to manage this in a dynamic and balanced approach. So Linda, I hope that answers your question.

Operator

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

Speaker 4

Hi, good evening, management. Thank you for taking my question and congratulations on the strong Q4 results. You just talked about our offline strategy, offline expansion strategy. May I just shift the focus to online? How do you think of your strategy with online enrichment learning?

Speaker 4

Do you plan to similar to your commitment to offline expansions, do you plan to increase your investments in the online enrichment learning segment? Thank you.

Speaker 1

Thanks for the question. And this is Jackson. I'll take this one. When we look at the online enrichment learning business or the industry really, we see this as a dynamic market landscape, especially over the last couple of years, we see user experiences gradually evolve in this particular landscape. Now before I get into the future, maybe let me just talk a little bit about kind of what happened in this quarter with our online enrichment business.

Speaker 1

And this past fiscal Q4, our online enrichment learning business maintained its course of operations. We also refined our operational efficiency, while at the same time, explored new SKUs as well. Online enrichment learning remains a strategic area for us, not only because of the market opportunity itself, but also because we see it as a unique opportunity to leverage interactive online features to provide an engaging and effective and a digital learning experience to a broader audience, right? You asked about investment plan. I would say it's less about increase or decrease investments.

Speaker 1

It's more about making sure that we deploy the resources needed to provide our customers with high quality learning experience. So looking forward, we online enrichment learning remains a strategic area for us. We're focused on delivering quality products and services to our customers, while leveraging the benefits of online learning. And we'll continue to bring scarce, high quality educational resources to a broader audience, while enhancing user value and social benefits. I hope that answers your question, Felix.

Operator

Thank you, Felix. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.

Speaker 5

Great. Hi, Alex. Hi, Jackson. Thank you for taking my question and congrats on the very strong results. So my question is on the content solutions business line.

Speaker 5

Just wondering, could management share some colors on the sales and the user engagement of the latest hardware that you launched all the quarter? And what are the, I think, your plan to further make the business line more sustainable into the longer term? Thank you.

Speaker 2

Thanks, Timothy. This is Alex. Let me take this one. So first of all, just to address this past quarter, as you mentioned and I alluded to earlier on the call, we launched 2 new products in this quarter, XPAD2 Pro and XPath 2 Pro Max. So in this quarter, I really look at growth being driven by increasing volume and higher ASP.

Speaker 2

But in reality, there is another set of metrics, which I keep a very close eye to, which is the engagement. So in general, we look at the average weekly usage time. It remains relatively stable despite ever larger user base and that's credible. And I think another interesting thing that we're observing, this new set of products that we launched in the quarter because they came with enhancements in the hardware and enhancement in artificial intelligence learning tools, we're really seeing an uptick in the usage of those tools. And I think that's showing early signs that these tools actually become great competitors for students as they learn on their own in their homes, according to their own style and learning profile.

Speaker 2

So going forward, I really look at sort of 2 main directions. I think obviously the first one is to continue to improve our products. We just launched a hardware, a new hardware. This is coming on about 10 months since we first launched XPath 1. But actually, the software and the content continue to be upgraded on these devices.

Speaker 2

And I think what really drives us the North Star is that engagement, learning engagement and learning impact, right? So we look at further improvement on the hardware design, additional high quality content and those artificial intelligence learning tools to continue to enhance the learning engagements, the human machine interaction and provide a much more effective and impactful learning journey for our customers. And if I may add, I think this journey has just begun. I think there's a huge amount of additional potential as we make further investment into artificial intelligence, our large language model, it's going to become better and better for the future. The other main direction I will look at is obviously we need to continue to build our brand.

Speaker 2

Our shares brand is a very strong and well known brand, but we're new to hardware. So we'll continue to drive brand building and also to expand our sales channels. We'll obviously continue to monitor closely the efficiency of our online sales channels, which really goes from live streaming to the mainstream e commerce platforms. But we'll also start to explore opportunities in more offline channels. We believe these channels will actually bring opportunity for more customers to engage in the conversation with us, right, to look at what are the possible impact that this device could bring to their kids.

Speaker 2

And I think we'll also be able to reach a larger set of customer segments in the future. So Timothy, I hope that answers your question.

Operator

All right. Thank you, Timothy. Our next question comes from the line of Chi Minh Huang from CICC. Please ask your question, Chanye.

Speaker 3

Good evening, Alex and Jackson. Thank you for taking my question. Actually, my question is the company still has a big amount of cash in hand. So how are we considering our cash usage? And do we have any plans on further improving the shareholder returns?

Speaker 3

Thank you.

Speaker 1

Hi, Yi. Thanks for the question. And this is Jackson. I'll take this one. Look, like you said, we the company has almost US3.6 billion dollars in cash and cash equivalents, short term investments and restricted cash as of February 29, 2024.

Speaker 1

When we think about potential use of cash, there are several factors we think about and we try to balance, right? One is we try to kind of balance between short term and long term development. And second is that we try to balance reinvest into the business and generate shareholder returns. As of now, a few areas of cash usage that are on our mind are, 1, is that we'll maintain a kind of steady investment pace into our core business segments, to deliver high quality products and create value for customers and their learning journey. And second is, we found new business initiatives that are still some of them I talked about on the call or during our previous conversations.

Speaker 1

We want to fund these new business initiatives that are still in exploratory phases. And we'll continue to explore new opportunities as the industry evolves. And lastly, we always seek diversified means to generate shareholder returns, one of which could be stock repurchase. I talked about the buyback program that the Board authorized, which was extended for another year and allow us to purchase up to $500,000 roughly $504,000,000 in considerations. So that's kind of how we think about cash usage for now.

Speaker 1

I hope that answers your question, Tien tsin.

Operator

Thank you, Jamie. We have now reached the end of the question and answer session. I'd now like to turn the conference back to the management team for closing comments.

Speaker 2

So, this is Alex again. Thanks everybody for participating in today's call, and we'll see you next quarter. Thanks and bye bye.

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