TAL Education Group Q1 2025 Earnings Call Transcript

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August 1, 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 Fiscal 20 25 First Quarter Earnings Conference Call. Please be informed that today's conference is being recorded. I'd now like to hand the conference over to Ms. Fang Liu, Investor Relations Director.

Operator

Thank you. Please go ahead.

Speaker 1

Thank you all for joining us today for TAO Education Group's Q1 fiscal year 2025 earnings conference call. The earnings release was distributed earlier today, and you may find a copy on the company's IR website or through the news files. During this call, you will hear from Mr. Alex Peng, President and Chief Financial Officer and Mr. Jackson Ding, Deputy Chief Financial Officer.

Speaker 1

Following the prepared remarks, Mr. Peng and Mr. Ding 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.

Speaker 1

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 and this call include discussions of certain non GAAP financial measures.

Speaker 1

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 Peng. Alex, please go ahead.

Speaker 2

Thank you, Fang. I'd also like to thank all of you for participating in today's conference call. During this call, we'll discuss our financial performance and business progress and review some key results for the Q1 of fiscal year 2025. Following that, I'll briefly update you on our business strategy outlook. So throughout the fiscal quarter, we remain dedicated to operating and managing our core business lines, while actively exploring new initiatives and capitalizing on emerging opportunities.

Speaker 2

1st, we further refined our online and offline offerings within our Learning Services businesses to better meet user preferences. In the fiscal quarter, we further expanded our learning center network strategically for our Peiyou enrichment learning programs at a measured pace. Our focus on product offerings and operational capabilities has resulted in sustained user value creation through our products and services. Our endeavor is reflected in feedback from our learners and their parents and is also reflected by our operating metrics such as retention rates. For our content solutions, we are committed to continuously upgrading our hardware, software and content of our learning devices to meet the needs of our users.

Speaker 2

During the quarter, we remained focused on developing our learning device product offerings and go to market capabilities to serve more learners with our high quality learning resources. We integrated learning content, AI technology, quality hardware and software into our content solutions to deliver better learning experiences for learners. As our proprietary Math GPT Large Language model evolves, the AI driven features incorporated into our learning devices provide learners with accessible and reliable learning aids. As a result of our product capabilities, we've witnessed a steady level of user engagement for our learning devices on an expanded user base. Our learning devices empower children to engage in self directed learning, enabling their personal development.

Speaker 2

Efforts such as the above are driving our financial growth. Our net revenues were US414.2 million dollars or US2.99 billion dollars for the quarter, representing year over year increases of 50.4%

Speaker 3

and 56.9%

Speaker 2

in U. S. Dollar and RMB terms, respectively. Our non GAAP income from operations and non GAAP net income attributable to TAO for the quarter were 0 point $9,000,000 $29,600,000 respectively. So with that overview, I will hand the call to Jackson for an update on some of the operational advancements we've made in our core business lines and to review our financial performance for the 1st fiscal quarter.

Speaker 2

Jackson, please go ahead.

Speaker 4

Thank you, Alex. I'm pleased to share some details about the progress we made in the Q1 across our core business lines, including Peiyou, shares.com and our learning devices. Please note that all financial data for the quarter are unaudited. I'll start with our Learning Services and Others business, which include a broad range of learning programs for our customers. Learning services maintained its growth momentum in the Q1 of fiscal year 2025, Driven by advancements in multiple product lines, this sector's revenue grew year over year.

Speaker 4

The largest revenue contributor within Learning Services and Others remains our Peiyou small class offerings, which sustains their growth trajectory. Peiyou's performance was predominantly attributed to enrollment growth as we expanded our offline learning center network. In response to customer demand and in preparation for the summer vacation period, we scaled our operational capacity during the Q1 while managing our operating efficiency. Efficiency indicators such as retention rate and utilization rate were relatively stable quarter over quarter. As for online enrichment learning, we have been refining our offerings by focusing on our content, user interaction and engagement By steadily introducing new online enrichment learning programs aimed at diverse user groups, We continue to create value for our learners, providing them with the learning efficacy and experience they desire.

Speaker 4

Going forward, we'll continue to optimize our product offerings, elevate the user experience and refine our operational efficiency. Next is our Content Solutions business. Our Learning Devices business recorded year over year growth in this quarter, driven by our product development and go to market capabilities. In particular, we have continued to enrich our content and integrate additional AI features, creating value for our users. At the same time, we introduced new SKUs, bringing users a wider range of learning device products.

Speaker 4

In May this year, we launched the Expat Classic Model 2024, designed to offer a comprehensive and interactive learning experience. Compared with the Expat Classic 2023, the upgraded Classic model features a new version of hardware design, including features to protect users' vision and the hardware for overall operating performance. In the fiscal quarter, we also upgraded our classic models with software across multiple use cases to bring users personalized learning experiences. With that overview, I would like to share our key financial results for the 1st fiscal quarter. Our net revenues were US414.2 million dollars or US2.99 billion dollars an increase of 50.4 percent and 56.9 percent year over year in U.

Speaker 4

S. 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 revenue increased by 43.4 percent to US200 $1,000,000 from US139.5 million dollars in the Q1 of fiscal year 2024. Non GAAP cost of revenues, which excludes share based compensation expenses, increased by 44.2 percent to US197.6 million dollars from US137.1 million dollars in the Q1 of fiscal year 2024.

Speaker 4

Gross profit increased in the Q1 of fiscal 2025, rising by 57.6 percent year over year to US214.2 million dollars from US135.9 million dollars for the same period last year. Gross margin increased to 51.7 percent from 49.3% for the same period last year. Selling and marketing expenses for the quarter were US122.4 million dollars representing an increase of 25.4 percent from US97.7 million dollars for the same period last year. Non GAAP selling and marketing expenses, which exclude share based compensation expenses, increased by 30.8% to US118.1 million dollars from US90.2 million dollars for the same period last year. Selling and marketing expenses as a percentage of total net revenues decreased from 35.5 percent to 29.6% year over year.

Speaker 4

General and administrative expenses increased by 4.5% to US109.7 million dollars from US104.9 million dollars in the same period of last year. Non GAAP general and administrative expenses, which exclude share based compensation costs, increased by 10% year over year to US98.2 million dollars from US89.2 million dollars for the same period of last year. Non GAAP general and administrative expenses as a percentage of total revenues decreased from 32.4 percent to 23.7 percent year over year. Total share based compensation expense allocated to related operating costs and expenses decreased by 28.6 percent to US18.2 million dollars in the Q1 of fiscal year 2025 from US25.5 million dollars in the same period of last year. Loss from operations was US17.3 million dollars in the Q1 of fiscal year 2025 compared with a loss from operations of US57.8 million dollars in the same period of last year.

Speaker 4

Non GAAP income from operations, which excludes share based compensation expenses, was US0.9 million dollars compared with a non GAAP loss from operations of US32.3 million dollars in the same period last year. Net income attributable to TAO was $11,400,000 in the Q1 of fiscal year 2025, compared to net loss attributable to TAO of US45.0 million dollars in the same period of last year. Non GAAP net income attributable to Tau, which excludes share based compensation expenses, was US29.6 million dollars compared to a non GAAP net loss attributable to TAO of US19.5 million dollars in the same period of last year. Moving on to our balance sheet. As of May 2024, we had $2,222,600,000 in cash and cash equivalents, dollars 1,190 $6,000,000 in short term investments and $355,800,000 dollars in current and non current restricted cash.

Speaker 4

Our deferred revenue balance was US641.9 million dollars as of the end of the 1st fiscal quarter. Now turning to our cash flow statement. Net cash provided in operating activities for the Q1 of fiscal 2025 was US246.8

Speaker 2

million dollars

Speaker 4

That concludes the financial 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. So now I'd like to share some thoughts on our outlook for the next quarter. Q2 traditionally represents a peak season for us with seasonal factors in our benefit. As we look ahead to the next quarter, we anticipate that our growth momentum will continue, driven by the summer vacation and increased e commerce activities during the 6 18 festivals. For Learning Services, our core focus remains on delivering high quality products and managing our online and offline operations efficiently to serve learners effectively.

Speaker 2

We're committed to ongoing investments in learning services to provide our users with quality learning experiences, both online and in person. So looking forward, we'll expand our services to reach more customers with our product offerings, while leveraging our robust online and offline capabilities. Our business model, combined with our brand and operational efficiency, positions us to capitalize on market opportunities and deliver long term value to our customers and shareholders alike. We believe that enrichment learning not only aligns with user demand and societal trends, but also enables learners long term development. The path we have chosen in this regard has been consistently validated in recent quarters.

Speaker 2

We remain dedicated to refining our approach moving forward. And beyond learning services, we're also focused on providing learning content solutions. We believe integrating technologies such as artificial intelligence will enhance our content solutions offerings. We will continue to improve our learning devices and their functionality, while expanding our learning content library and exploring new product developments. At the same time, we'll continue optimizing our go to market strategies to better serve our customers.

Speaker 2

So with our expanded product matrix and go to market capabilities, we really aim to reach more users and empower them with self directed learning in their discretionary time. So that concludes my prepared remarks. Operator, I think we are 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 Felix Liu from UBS. Please ask your question, Felix.

Speaker 5

Good evening, Alex and Jackson. Congratulations on the strong quarter. My question is on your Peiyou enrichment learning program. Could you share any color regarding the recent operating metrics and demand for the upcoming summer peak season? Thank you.

Speaker 4

Thanks for the question. This is Jackson. I'll take this one. You asked about user demand and user preference. That's something we spend a lot of time focused on as we develop our products and services as well as when we operate our business.

Speaker 4

Maybe instead of just commenting on demand and operating metrics for the summer, which we will say for next quarter, let me provide you with more color on what we are seeing for user demand and operating metrics for the last few quarters and the trends we're seeing. When we talk to this generation of learners and their parents, we really see this set of multi dimensional development need developmental needs they're presenting, right. This generation of learners and their parents not only focus on in school performance, but also focus on well rounded development and overall kind of core competencies

Speaker 2

of the learners.

Speaker 4

They also focus on underlying skills such as critical thinking, such as cultural appreciation. And that's the trend we're seeing happening real time and it's in process. And that's what enrichment learning or enrichment learning programs are trying to address. We offer comprehensive learning programs to aid learners with their overall development. In doing so, we hope to capture some of the market opportunities presented by this broader trend.

Speaker 4

You also asked about operating metrics. We see operating metrics more as a result

Speaker 3

of

Speaker 4

both market demand and our own operating capabilities. So when we manage our business, our priorities have always been

Speaker 3

on 1,

Speaker 4

delivering products and services that create user value and address market demand and 2, delivering our services through an operational efficient way. So when you're looking at when you combine those two factors and look at our operating metrics such as retention rate, such as utilization rate, that they all have been fairly stable over the last few quarters. I hope that answers your question, Felix.

Speaker 5

That's clear. Thank you very much.

Operator

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

Speaker 3

Hi, good evening management. Thanks for taking my question. So my question is regarding our learning center. So how many new centers have we added during the quarter? And how should we think about the pace of the remaining quarters?

Speaker 3

And also over the longer term, what sort of expansion rate are we looking at? Thank you.

Speaker 4

Yiguan, thanks for the question. This is Jackson. I'll take this one. First, I'd just like to say a offline learning center network we think is critical to our overall user experience, right. When we think about how to manage our learning center network, as we've discussed during the last few quarters, we take a measured approach where we take into consideration market demand from certain areas that we're considering opening up new learning centers and also balancing that with our own operating capabilities, right?

Speaker 4

So as you see in the last couple of quarters, it's a dynamic and measured approach when we think about our offline footprint. In this quarter, we the number of our learning centers expanded, and that's partially in preparation for the upcoming summer vacation. So we don't expect the same level of growth for our client learning center in the future for every single quarter. I hope that answers your question, Yuan.

Speaker 3

That's helpful. Thank you.

Operator

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

Speaker 2

Great. Good evening, Alex, Jackson and Fang. Thank you for Congrats on the very strong set of results. My question is regarding the artificial intelligence. Just wondering if management can provide us with an overview on whether or how the AI technology has changed your business operation strategy?

Speaker 2

And I do notice that you as you put in the prepared remarks, you are integrating more AI features into the content solutions. And the company also released some AI driven apps over the past quarter. Just wondering if the company can share more specific product plans in the future in terms of the AI powered products. Thank you. Hey, Timothy, this is Alex.

Speaker 2

Let me take this one on. And I think for all the friends on the call, as you can recall in the last year and a half, we've been discussing the topic of artificial intelligence in education. So it's a topic that's very near and dear to our hearts. And let me try to unpack this question at a few different levels. So first of all, I think we really and we've been really looking forward to the power unleashed by the large language model and this next generation of artificial intelligence to really help us reimagine the future of education.

Speaker 2

And I think at the broadest level and at a societal level beyond ourselves as a company and our industry is really to think about redefining the goals of education and how do we help the next generation of youth children to grow up with artificial intelligence and develop into whole persons for the future. And that's an effort that we've really been working with a broad array of stakeholders across many different sectors of society. At the second level, I think it's really already reshaping how we develop product and services. And I think I discussed this in a previous call. We really think there is a huge opportunity to now make it possible to have high quality teaching, individualized learning and affordable cost altogether in our product and services.

Speaker 2

And the 3rd level, it's been very effective in terms of helping us improving operational efficiency in terms of how we develop education content and in terms of how we provide human to human services aided by AI as well as internal coding and development. As we look forward, I think we'll continue to embrace large language models and with our own effort on fine tuning and enhanced data quality in terms of model training to really make these models, I would say, appropriate in three regards. The first thing is they need to be age appropriate. If you think about the K-twelve period, really 1 or 2 years would define a major developmental milestone. So what's the right age appropriate way to align the model with a 5 year old versus a 10 year old versus a 15 year old.

Speaker 2

So that's the first age appropriate alignment for the model. The second thing is really subject and content appropriate. We've already had this experience in the last year and a half that for the model to tackle a mathematical problem versus for the model to answer questions about the humanities. These are require very different approach, right? So this is a subject and content appropriate.

Speaker 2

And the third one, I would say, it's scenario appropriate. You know, if it's a scenario while, the student is consuming content on our learning devices versus the student has an active question that it is putting to the AI versus some of the other scenarios we're looking at along the learning journey, that also needs the model to be very situational and scenario aware. So in the end, we really hope to bring a truly personalized experience to the students along the entirety of their learning journey. So in terms of examples on products, in this fiscal quarter, we launched a new mathematical search and Q and A tool, which helps students solve difficult math problems through guided inquiry. The artificial intelligence driven features incorporated into our learning devices are also providing learners with accessible and reliable learning aids.

Speaker 2

In the future, we really look forward to enhancing the productization of AI and leveraging different sorts of different forms of products to reach a broader user base. As I mentioned before, we'll continue to train models to be age subject content and scenario appropriate by utilizing larger and more diverse and higher quality data sets. So this comprehensive approach, we think, will really help our artificial intelligence solutions to be more reliable and capable of addressing a wider range of user needs across different scenarios. So Timothy, I hope that answers your question. Thank you.

Operator

Thank you. Our next question comes from the line of Xiaodong Zhang from CICC. Please go ahead Xiaodong. Hi. Thanks, Alex, Jackson and Fang for taking my question and congrats on the solid quarter.

Operator

So my question is regarding your cash usage plan. Could you give us some color on your future investment strategy as well as the shareholder return schemes? Thank you.

Speaker 4

Hey, Xiaobin, thanks for the question. This is Jackson. I'll take this one. Just to recap, as of May 31, 2024, the company had US3.8 billion dollars in cash and cash equivalents, short term investments and restricted cash, both current and non current combined. When we think about areas of investments, we're interested in investments areas that could further improve our existing products and services that could supplement our capabilities or advance our business expansions.

Speaker 4

Meanwhile, as our industry is evolving and as new technologies are developing, we'll seek opportunities to make strategic investments into adopting new technologies in our business. When we think about our investment strategy, we'll aim to adopt a balanced and prudent approach. Xiaobin, you asked about shareholder return. We're always looking for ways to create value for our long term shareholders. In the past, we have taken diversifying measures to generate shareholder returns, and we'll continue to seek opportunities to generate return for our shareholders.

Speaker 4

I hope that answers your question, Xiaopo.

Operator

Thank you. Thank you. That's helpful. Thank you. Our next question comes from the line of Alice Tai from Citi.

Operator

Please ask your question, Alice. Good evening, management teams. I'm Alice from Citi. And I have a question. First of all, congratulations on your strong results.

Operator

And I have a question. Wondering if you could provide an update on the XPAD's current strategy and your outlook for the business? And what's the key opportunities and challenges you foresee? Thank you so much.

Speaker 2

Hey, this is Alex. Let me take this question about XPAD. So as I mentioned in the earlier part of this call, the fundamental value our learning devices provide is this ability for students to have a self directed learning experience at home in their discretionary time, in their own pace. So I think that's just the really the grounding I'd like to start with. What we also see is that with a device that integrates hardware, software, content and artificial intelligence features, we're really providing a much more personalized experience, focus on the personal development of the children.

Speaker 2

And also it really fits much more seamlessly with the learning journey. With this integrated approach, the device is much more aware of the situation, of where the student is on the learning journey, what types of challenges and issues we need to help solve at that moment on demand from the students. So we really think that's a huge opportunity, And I think we are just starting to scratch the surface of the future potential of this. So in terms of how we look at the business strategy going forward, we really we continue to improve our the functionality of our devices, and this is an ongoing effort. We provide those updates regularly to all the installed base, to all the users who are currently using XPAD.

Speaker 2

We're increasing the learning content library, and we've been doing that in the last 6 quarters. We'll also expand our go to market capabilities. And we really aim to reach more users and empower them with the self directed learning scenario. So in May, I think Jackson mentioned earlier, in May, we introduced new SKUs. And so now we have a number of different SKUs on the market.

Speaker 2

We think this is really bringing users a wider range of options and choices in terms of learning device products. The XPAD Classic Model 2024, which we rolled out a couple of months ago, It really features a new version of hardware design. The vision protection, powerful processor for overall performance and especially AI features. So when you look at where things are and the key metric that we always look at is really user engagement market for a year and a half, our user base has really been expanding. This is an installed base perspective.

Speaker 2

It's really been expanding. And even with that expanded user base, I think we've witnessed a steady level of user engagement. And I think that's a validation that the product is providing the value to the customers. And we're really looking forward to continue to work on this user experience in the future. So I hope that answered your question.

Operator

Thank you so much for your detailed sharing. Thanks. Right. We have reached the end of the question and answer

Speaker 2

So again, thank you all for joining the call today, and we'll look forward to seeing you next quarter. Thank you. Bye bye.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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TAL Education Group Q1 2025
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