TAL Education Group

NYSE:TAL

Earnings Call Analysis

Strong revenue growth led by learning services and content solutions

In the first fiscal quarter of 2025, net revenues rose by 50.4% YoY to $414.2 million, driven by strong performance in learning services and content solutions. The company achieved a non-GAAP net income of $29.6 million, reversing a loss of $19.5 million from the previous year. Peiyou small class enrollment grew as the offline learning network expanded. Additionally, the launch of the xPad classic model 2024 contributed to sales, offering enhanced AI features. The company anticipates continued momentum in Q2, aided by summer vacation and e-commerce activities.

Strong Financial Performance with Rising Revenues

The quarter showed impressive financial growth for the company, with net revenues reaching USD 414.2 million, an increase of 50.4% year-over-year. This performance was bolstered by advancements in both learning services and content solutions. Furthermore, the gross profit surged by 57.6%, and the gross margin edged up to 51.7% from 49.3% the previous year, reflecting improved operational efficiency and value generation.

Positive Operating Income and Reduced Losses

The company managed to significantly cut its loss from operations to USD 17.3 million, compared to a loss of USD 57.8 million in the same quarter of the previous year. On a non-GAAP basis, which excludes share-based compensation expenses, the company posted an income from operations of USD 0.9 million, a turnaround from a non-GAAP loss of USD 32.3 million. This indicates a marked improvement in operational management and cost efficiency.

Improved Bottom Line with Net Income

Net income attributable to the company was USD 11.4 million, reversing a net loss of USD 45.0 million from the previous year's same quarter. Non-GAAP net income also saw a significant uptick, moving from a loss of USD 19.5 million to a gain of USD 29.6 million. This strong bottom-line performance underscores the effectiveness of the company’s cost-management strategies and revenue growth initiatives.

Robust Cash Flow and Strong Balance Sheet

Net cash provided by operating activities was a robust USD 246.8 million for the quarter. As of May 2024, the balance sheet remained strong with cash and cash equivalents totaling USD 2,222.6 million, short-term investments of USD 1,196 million, and a deferred revenue balance of USD 641.9 million. This financial solidity provides a strong foundation for future investments and strategic initiatives.

Expanding Learning Services and Content Solutions

The company continues to scale its learning services by expanding its offline learning center network, driven by growing enrollment in Peiyou small class offerings. Online enrichment learning programs are being refined to enhance user interaction and engagement. The content solutions segment also saw growth, with notable product developments such as the launch of the xPad classic model 2024, which integrates improved hardware and AI-driven features to offer a more personalized learning experience.

Strategic Outlook and Future Growth

Looking ahead, the company anticipates continued growth momentum in the next quarter, driven by seasonal factors such as the summer vacation and e-commerce activities. Investments in high-quality learning services and content solutions, including leveraging AI for enhancing product offerings, are expected to cater to rising user demand. The company remains committed to delivering long-term value to its customers and shareholders by refining its business model and exploring new market opportunities.

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and thank you for standing by. Welcome to TAL Education Group's Fiscal 2025 First Quarter Earnings Conference Call. [Operator Instructions] Please be informed that today's conference is being recorded.

I'd now like to hand the conference over to Ms. [ Fong Liu ], Investor Relations Director. Thank you. Please go ahead.

[Unknown Executive]

Thank you all for joining us today for TAL Education Group's first quarter 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 Newswire's.

During this call, you will hear from Mr. Alex Peng, President and Chief Financial Officer; and Mr. Jackson Ding, Deputy Chief Financial Officer. 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. 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. 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. Alex Peng. Alex, please go ahead.

[Zhuangzhuang Peng, executive]

Thank you, [ Fong ]. 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 first quarter 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. First, 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.

During the quarter, we remain 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 MathGPT 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.

Efforts such as the above are driving our financial growth. Our net revenues were USD 414.2 million or RMB 2.99 billion for the quarter representing year-over-year increases of 50.4% and 56.9% in U.S. dollar and RMB terms, respectively. Our non-GAAP income from operations and non-GAAP net income attributable to TAL for the quarter were USD 0.9 million and USD 29.6 million, 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 first fiscal quarter. Jackson, please go ahead.

[Jackson Ding, executive]

Thank you, Alex. I'm pleased to share some details about the progress we made in the first quarter across our core business lines, including Peiyou, xueersi.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 includes a broad range of learning programs for our customers. Learning services maintained its growth momentum in the first quarter of fiscal year 2025. Driven by advancements in multiple product lines, this sector's revenue grew year-over-year. The largest revenue contributor within learning services and others remains our Peiyou small class offerings, which is a tentative 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 first quarter 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. 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 users. At the same time, we introduced new SKUs, bringing users a wider range of learning device products.

In May this year, we launched the xPad classic model 2024, designed to offer a comprehensive and interactive learning experience. Compared with the xPad 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 first fiscal quarter. Our net revenues were USD 414.2 million or RMB 2.99 billion, an increase of 50.4% and 56.9% year-over-year in U.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% to USD 200 million from USD 139.5 million in the first quarter of fiscal year 2024. Non-GAAP cost of revenues, which excludes share-based compensation expenses, increased by 44.2% to USD 197.6 million from USD 137.1 million in the first quarter of fiscal year 2024.

Gross profit increased in the first quarter of fiscal 2025, rising by 57.6% year-over-year to USD 214.2 million from USD 135.9 million for the same period last year. Gross margin increased to 51.7% from 49.3% for the same period last year. Selling and marketing expenses for the quarter were USD 122.4 million, representing an increase of 25.4% from USD 97.7 million for the same period last year. Non-GAAP selling and marketing expenses, which excludes share-based compensation expenses, increased by 30.8% to USD 118.1 million from USD 90.2 million for the same period last year. Selling and marketing expenses as a percentage of total net revenues decreased from 35.5% to 29.6% year-over-year.

General and administrative expenses increased by 4.5% to USD 109.7 million from USD 104.9 million 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 USD 98.2 million from USD 89.2 million for the same period of last year. Non-GAAP general and administrative expenses as a percentage of total revenues decreased from 32.4% to 23.7% year-over-year. Total share-based compensation expense allocated to related operating costs and expenses decreased by 28.6% to USD 18.2 million in the first quarter of fiscal year 2025 from USD 25.5 million in the same period of last year.

Loss from operations was USD 17.3 million in the first quarter of fiscal year 2025 compared with a loss from operations of USD 57.8 million in the same period of last year. Non-GAAP income from operations, which excludes share-based compensation expenses, was USD 0.9 million compared with a non-GAAP loss from operations of USD 32.3 million in the same period last year.

Net income attributable to TAL was USD 11.4 million in the first quarter of fiscal year 2025 compared to net loss attributable to TAL of USD 45.0 million in the same period of last year. Non-GAAP net income attributable to TAL, which excludes share-based compensation expenses, was USD 29.6 million compared to a non-GAAP net loss attributable to TAL of USD 19.5 million in the same period of last year.

Moving on to our balance sheet. As of May 2024 we had USD 2.222.6 million in cash and cash equivalents, USD 1.196 million in short-term investments and USD 355.8 million in current and noncurrent restricted cash. Our deferred revenue balance was USD 641.9 million as of the end of the first fiscal quarter. Now turning to our cash flow statement. Net cash provided in operating activities for the first quarter of fiscal 2025 was USD 246.8 million.

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.

[Zhuangzhuang Peng, executive]

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 618 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. 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 learner's long-term development. The path we have chosen in this regard has been consistently validated in recent quarters. 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. 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]

[Operator Instructions] Our first question comes from the line of Felix Liu from UBS.

[Felix Liu, analyst]

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?

[Jackson Ding, executive]

Felix, 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 products and services as well as when we operate our business. Maybe sort 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 multidimensional 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 of the learners. 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 -- our enrichment learning programs are trying to address. We offer comprehensive learning programs to aid learners with their overall development. And doing so, we hope to capture some of the market opportunities presented by this broader trend.

You also asked about operating metrics. We see operating metrics more as a result of both market demand and our own operating capabilities. So when we manage our business, our priorities have always been on, one, delivering products and services that create user value and address market demand; and two, delivering our services through an operational efficient way. So when you're looking at -- when you combine those 2 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.

[Operator]

Our next question comes from the line of Yiwen Zhang from China Renaissance.

[Yiwen Zhang, analyst]

So my question is regarding our learning center. So how many centers we added during the quarter and how should we think about pace of the remaining of the quarters? And also, over the longer term, what sort of expansion rate are we looking at?

[Jackson Ding, executive]

Yiwen, this is Jackson. I'll take this one. First, I'd just like to say an 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 on the -- 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? 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, 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 offline learning center in the future for every single quarter.

[Operator]

Our next question comes from the line of Timothy Zhao from Goldman Sachs.

[Timothy Zhao, analyst]

My question is regarding the artificial intelligence. Just wondering if management can provide us with an overview on whether -- how the AI technology has changed your business operation strategy. 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.

[Zhuangzhuang Peng, executive]

Timothy, this is Alex. Let me take this one on. And I think for all the friends on the call, as you can recall in the last 1.5 years, we've been discussing the topic of artificial intelligence in education. So it's a topic that's very near and dear to our heart. And let me try to unpack those questions 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 in this next generation of artificial intelligence to really help us reimagine the future of education. And I think at the broadest level and at a societal level beyond ourselves as a company in 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.

As a second level, I think it's really already reshaping how we develop product and services. And I think I discussed this in the 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 all together in our product and services. And the third 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 efforts on fine-tuning and enhance data quality, in terms of model training to really make these models, I would say, appropriate in 3 regards. The first thing is they need to be age appropriate. If you think about the K-12 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. 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 1.5 years that for the model to tackle a mathematical problem versus for the model to answer a question about the humanities. These require very different approach, right? So this is a subject and content appropriate.

And the third one, I would say, it's scenario appropriate. If it's a scenario while the student is consuming content on our learning devices versus the student has an active question that is putting to the AI versus some of the other scenarios we're looking at along the learning journey, that also need 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&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.

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. Well, 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.

[Operator]

Our next question comes from the line of Xiaodan Zhang from CICC.

[Xiaodan Zhang, analyst]

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?

[Jackson Ding, executive]

This is Jackson. I'll take this one. Just to recap, as of May 31, 2024, the company had USD 3.8 billion 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 investment areas that could further improve our existing product services that could supplement our capabilities or advance our business expansions. 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 will aim to adopt a balanced and prudent approach. Xiaodan, 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.

[Operator]

Our next question comes from the line of Alice from Citi.

[Yijing Cai, analyst]

And I have a question. I’m wondering if you could provide an update on the xPad's current strategy and the outlook for the business? And what's the key opportunities and challenges you foresee?

[Zhuangzhuang Peng, executive]

This is Alex. Let me take this question about xPad. So I mentioned in the earlier part of this call, is 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 is 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, focused on the personal development of the children 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. 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. 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've 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 in the key metrics that we always look at is really user engagement and learning outcome. And since we've been on the market for 1.5 years, our user base has really been expanding. This is an installed base perspective. It's really been expanding. And even with the 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.

[Operator]

All right. We have reached the end of the question-and-answer session. Thank you all very much for your questions.

I'll now turn the conference back to the management team for closing comments.

[Zhuangzhuang Peng, executive]

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.