TAL Education Group (NYSE:TAL) Q2 2023 Earnings Conference Call October 28, 2022 8:00 AM ET
Company Participants
Jackson Ding – Investor Relations Director
Alex Peng – President and Chief Financial Officer
Conference Call Participants
Mark Li – Citi
Candis Chan – Daiwa
Crystal Li – China Merchants
Felix Liu – UBS
Operator
Good day and thank you for standing by. Welcome to TAL Education Group Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a Q&A session. Please be informed that today’s conference is being recorded.
I would now like to hand the conference over to Mr. Jackson Ding, Investor Relations Director. Thank you. Please go ahead, sir.
Jackson Ding
Thank you, operator. Ladies and gentlemen, thank you all for joining us today for TAL Education Group’s first [sic] [second] quarter fiscal-year 2023 earnings conference call. The earnings release was distributed earlier today. 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 of TAL; and myself, Investor Relations Director. Following the prepared remarks, Alex and I will be available to answer your questions.
Before we continue, please note that today’s discussions will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in 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 now turn the call over to Mr. Alex Peng. Alex, please?
Alex Peng
Thanks Jackson, and thank you all for joining us on today’s call. I would like to again take this opportunity to express my gratitude for your continued attention to and support for TAL’s transformation journey. This quarter, we continue to execute our development strategy as we proceed our new journey and have made meaningful progress.
Let’s first start with the numbers. We recorded US$294.1 million in revenue for the quarter. As a result of our top line expansion, for the fiscal quarter ended on August 31, 2022, we recorded US$42.3 million and US$26.6 million in non-GAAP operating income and non-GAAP net income attributable to TAL respectively. This quarter, we updated our mission statement from love and technology make education better to empower lifelong growth with love and technology. This update of our mission statement reflects our continued commitment to work caring for our customers and toward technological innovations.
It also reflects our exploration of new initiatives in and beyond the learning solutions market. We believe this new mission inherits our traditions, while setting the path for our future developments. We’ve been empowering our users lifelong growth through providing learning services, learning content solutions, and learning technology solutions since inception, and will continue to empower their lifelong growth through learning and beyond.
Now, I will pass the floor to Jackson to share more color on our operational developments and the financial performance of each of our [quarters performance] [ph]. Afterwards, I will update you on our business strategy and then we’ll open the floor for questions.
Jackson, please go ahead.
Jackson Ding
Thank you, Alex. I’m pleased to share with you some more details on a progress we made in our three main business lines in this quarter. Before we start, please note that the financial data for each business line mentioned below is based on unaudited data for the quarter.
Let’s start with learning services and other, which primarily consists of learning programs we provide in various class sizes, both online and offline. This includes Peiyou small class, [xueersi.com] [ph], Think Academy, and other learning services businesses. This quarter, learning services and other accounted for approximately 75% of the total net revenue, maintaining its status as our largest revenue contributor.
Quarter-over-quarter revenue from learning services showed a healthy growth momentum. The top line growth of our learning services business was a result of our effort to fine tune our product offerings and operational efficiency compounded by seasonal fluctuation due to school holidays.
Within learning services, for enrichment learning, we continue to optimize our user experience and operating metrics by improving service quality of our existing programs, while also expand our program offerings. In this quarter, we saw increase in retention rates in multiple programs.
While retention rates still vary by program, we’re working toward achieving healthy retention rates across the board. At the same time, we also continue to launch new enrichment programs. Some newly launched courses such as natural science learning and international chess have shown a good momentum in terms of enrollment growth.
With respect to our overseas learning services, I’m delighted to share with you that Think Academy is still maintaining a triple digit year-over-year growth rate. While the ongoing epidemic has profoundly impacted the learning habits of students and parents around the world. It also created incredible opportunities across all aspects of learning, [spurring] [ph] demand for high quality learning products and services.
To better address this market demand in various overseas markets, we have focused on developing effective localized learning service offerings leveraging our technology capabilities and our expertise in learning.
Moving on to our learning content solutions business, which provides learning content in print, digital, and hardware formats to adjust diverse demands across various user groups. The content themselves are either created in-house, licensed, or acquired from our global and domestic partners.
In this quarter, our Content Solutions business accounted for around 15% of the total net revenue, representing a larger share of our overall revenue and exhibiting encouraging quarter-over-quarter growth. The top line growth of our content solutions business was a result of our products suite and go to market channel expansion compounded by seasonality fluctuation due to school holidays and shopping holidays.
In the last quarter, I talked about Smart Books, the products where we embed videos into print books to supplement the learning experience of our users. We continue to receive positive customer feedback on Smart Books. For this past summer holidays, we rolled out summer specific Smart Books that decompose the learning experience into weekly and in some instances daily programs.
As Smart Books break the learning experience into engaging and interactive bite sizes, students are more likely to engage and finish the programs. We sold hundreds of thousands in volumes of Smart Books in this quarter.
Finally, let’s look at our learning technology solutions business, which provides a full suite of enterprise grade technology products and services for learning institutions. Its revenue accounted for less than 10% of our total net revenue, primarily due to seasonal demand fluctuation from our institutional clients driven by school holidays.
Now, let’s switch gears a bit and let me talk you through the key financial results for the quarter. Our total net revenue was US$294.1 million, representing a 79.6% decrease from US$1,443.9 million in the same period last year. The decline in revenue was primarily driven by the succession of [K-9] [ph] ASP Services on the academic subjects in the mainland of China.
Year-over-year, growth profit declined by 69% to US$176.9 million from US$571.3 million in the same period last year, while gross margin increased from 39.6% to 60.2%. Selling and marketing expense decreased by 74.8% to US$78.1 million from 309.7 million in the same period last year. Non-GAAP selling and marketing expenses, which excluded share based compensation, decreased by 75.5 year-over-year to US$69.8 million from US$285.2 million in the same period last year. The year-over-year decrease was primarily a result of the reduction in marketing promotion activities.
General and administrative expenses decreased by [72.7%] [ph] to US$97.2 million from US$356.5 million in the second quarter last year. Non-GAAP general and administrative expenses, which excluded share based compensation costs decreased year-over-year by 74.4% to US$80.7 million from US$340.9 million in the same period last year.
Income from operations was US$14.9 million, compared to loss from operations of US$379.9 million, in the second quarter of fiscal year 2022. Non-GAAP income from operations, which exclude the share based compensation expenses was US$42.3 million, compared to non-GAAP loss from operations of US$313.4 million in the same period last year. The year-over-year increase in operating profitability was primarily driven by our continuing effort to optimize our operation efficiency.
Net loss attributable to TAL was US$0.8 million in this quarter, compared with net loss attributable to TAL of US$826.5 million in the same period last year. Non-GAAP net income attributable to TAL, which excluded share based compensation was US$26.6 million, compared with non-GAAP net loss attributable to TAL of US$760.1 million in the same period of last year.
From the balance sheet, as of August 31, 2022, the company had 1,759.3 million of cash and cash equivalents. US$1,327.3 million of short-term investments and US$366.2 million in current and non-current restricted cash. The company’s deferred revenue balance was US$177.5 million by the end of the second quarter.
Now, I’ll hand the call back to Mr. Alex Peng to briefly update you on our business strategy outlook. Alex, please go ahead.
Alex Peng
Thanks, Jackson. Let me continue the call with updating you on our business and development strategy. As we continue to transform our business into a smart learning solutions provider, we are committed to executing our company’s long-term strategy. I’ll provide more details on the strategy of each of our business lines.
First, for our learning services business, we’ll continue with our efforts in advancing product development, optimizing our go-to-market strategy, and further exploring opportunities in overseas markets. We believe it’s healthy business model combined with our strong branding and operational efficiency will enable us to be well-positioned to capture the market opportunities and deliver long-term value.
Content solutions remains an important initiative – important strategic initiative for TAL. We believe content will play an important role in our user’s learning journey and we’ll continue to expand our product portfolio to provide our customers with diversified and innovative learning experiences. And as I mentioned on the previous call, we look forward to partnering with third parties from around the world to delivering world-class content to our customers.
Regarding learning technology, by adhering to our keywords, online, digital, intelligent, and open, we’ll stay committed to enhancing our technological competitiveness and empower our institutional customers to deliver a better learning experience through technology and innovation.
As we look at this last quarter’s performance, we’re really encouraged by the progress and we are really thankful to our customers trust in us. Although the financial performance was partially as a result of seasonal fluctuations, we could see some early signs of positive customer reception of our new products and services. We look forward to optimizing our product and services and delivering better experience to our customers.
As I come to the end of my prepared remarks, I just want to take a moment to reflect on the mission statements. As I mentioned before, we changed our mission statement to empower lifelong growth with love and technology. I think that’s not just the mission to our customers, but also a constant reminder to ourselves to look at every setback and every challenge with a [growth mindset] [ph], to be humble, to be resilient and to be open to new possibilities.
So, that concludes my prepared remarks. Operator, we’re now ready to open the floor for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Mark Li of Citi. Please go ahead, Mark Li.
Mark Li
Hi, management. Congratulations for the results and improving margin for this quarter. May I ask for what is our target market size of the content business? And how do we think about the cost and the margin profile for this business? Thank you.
Alex Peng
Thanks Mark. Great question. This is Alex. Let me take that first one. So, first of all, I think we believe that the scope of our content business is not really limited to print books. It also includes a series of learning technologies. Many of our content solutions actually coupled with interactive and engaging digital features, and so as a result, they can drive up the average ASP.
We see this business as a learning content developer and distributor. So, it’s not really – it’s really different from traditional book publishers. So, our content solutions are [indiscernible] a kind of end-to-end learning solutions to our users. These contents, they can guide users along their learning experience at a self-directed pace. And I think as I mentioned last quarter, we’re also on the [GTM] [ph] side continued to double down on some of the most dynamic e-commerce and content platforms.
So, with all that combined, we really think as this business matures, it will have more upside than the traditional publishing industry. Mark, I hope that answers your question.
Mark Li
Thank you.
Operator
Thank you. Our next question comes from the line of Candis Chan of Daiwa. Please go ahead, Candis Chan.
Candis Chan
Yes. Hi, Alex and Jackson, congratulations on the solid set of results. As you mentioned, the new statement for TAL, can you share a little bit more on the new business initiatives? And what is the investment focus and the related budget and how would that impact our cash flows? Thank you.
Jackson Ding
Candis, Thanks for the question. This is Jackson. I’ll take this. I will say, we’re still in the early stages of our business transformation. So, in this past quarter and in the next few quarters to come, we’ll continue to invest in new initiatives such as overseas learning services, and certain new product categories within content solutions. You asked about investment size and budget, I would say, as we look at these new initiatives, the company’s management will adopt a balanced and prudent investment strategy.
Typically, we aim to achieve product market fit before deploying a significant amount of capital into any new initiatives. In terms of new initiatives impact on the company’s cash flow, I would say, by the end of this past quarter, the company had more than $3 billion where we combine cash and cash equivalents, short-term investments, and current and non-current restricted cash.
So, with that, we’re confident that our current cash position will be sufficient to support our transformation. I hope that answers your question, Candis.
Candis Chan
Great. Thank you.
Operator
Thank you. Our next question comes from the line of [indiscernible] of CICC. Please go [indiscernible].
Unidentified Analyst
Good evening Alex and Jackson. Thank you for taking my questions and congratulations on the good progress of business performance. My question is about the impact of seasonal changes on revenue and profitability? Can you share more color on how several businesses performed differently in terms of the seasonality? Thank you.
Jackson Ding
[Indiscernible], thanks for the question and this is Jackson, I’ll take this. As each of our businesses are still in the early stage of exploration, we’re still closely following the impact of seasonality throughout the year. Let me talk through each business line, respectively.
For learning services, similar to the past, we’ve witnessed higher demand in winter and summer holidays. So, as a result of fiscal Q2 and Q4 tend to benefit from seasonality, with Q2 tending to be the peak season. As for content solutions, we’re still in the early stages of understanding the market demand pattern. This business is impacted by school holidays, as well as shopping holidays in China such as [indiscernible].
For Technology Solutions, Q2 tends to have lower market demand because some of our institutional clients offer less tutoring services during our summer school holidays. I hope that answers your question [indiscernible].
Unidentified Analyst
Thank you.
Operator
Thank you. Our next question comes from Crystal Li of China Merchants. Please go ahead, Crystal Li.
Crystal Li
Hi, thanks management. Congratulations on the strong results. Could you please share with us your expectation on the profitability for next quarter and for the whole year? Thank you.
Jackson Ding
Crystal, thanks for the question. This is Jackson again. And that’s a good question. In this past quarter, we’re glad to see that the company achieved profitability in terms of operating profit. This is a combined effect of business growth, seasonal fluctuation, and all cost optimization measures.
When we look at next quarter, our best guess is that profitability level in the next quarter will likely be lower than this quarter. And that is because we expect revenue to decline quarter-over-quarter, due to seasonality. At the same time, we’ll continue to take measures to drive business growth and optimize cost efficiency. I hope that answers your question, Crystal.
Crystal Li
Thank you.
Operator
Thank you. Our next question comes from the line of [indiscernible]. Please go ahead, [indiscernible].
Unidentified Analyst
Okay. Good evening, Alex and Jackson. Thank you for taking our question. Could you please share some new progress of the content business? And we noticed that TAL has launched some new hardware products such as [indiscernible], could management team choose some color on product idea and maybe business model of the hardware products, especially when some of the [indiscernible]’s function can be replaced by APPs on the mobile phone? Thank you.
Alex Peng
Yes. Thanks for that question. This is Alex. Let me unpack that question. I think first, I think on the previous question, I already discussed a bit on the content business. And I think there is a key takeaway from that, which is we’re seeing a shift in consumer behavior toward more self-directed and self-paced learning. And we think that’s a long-term secular trend. In concurrent with that, what I’m also seeing is that in an increasingly digitally connected world, we need to provide to young people the benefit of online content through digital devices while safeguarding their health.
So, underpinned by improvement in AI Technology and other innovations from the hardware industry, such as screens that are more protective of the user’s [eyesight] [ph], we believe that intelligent device will tailor to the needs of young people will play an increasingly important role in this industry. And so, we recently launched a couple of new hardware products, which were designed based on this insight and disbelief.
They provide a way for users to seamlessly consume a wealth of third party, printed and digital content on a more interactive and more personalized basis. I think for the business model, we look out for each particular used case. There are instances where it’s paid upfront as a piece of hardware. There are also instances where there are recurrent revenue stream of subscription renewal. I hope that answers your question.
Unidentified Analyst
Okay, thank you.
Operator
Thank you. Our next question comes from the line of Felix Liu of UBS. Your line is open Felix Liu.
Felix Liu
Thank you management and congratulations on turning profitable this quarter and reporting a good progress on your transition. My question is on the – on your overseas business, you mentioned that the Think Academy is reporting triple-digit growth this quarter. So, may I just ask you to break down the [driver office growth] [ph]? Is this through capacity expansions in new markets or is this more of a ramping up or ASP increase? And could you share a bit more of our overseas strategy from here, as well as what level of materiality do you expect from the overseas business? Thank you.
Alex Peng
Thanks, Felix. This is Alex. Let me take that one on. I think first of all, the revenue share of this business still at low-single-digit level, but as we mentioned before, the growth rate is high. At present, we provide online and offline courses under the Think Academy brand in several regions and countries, but we really look at those as only the initial phase of the company in the overseas market.
After the outbreak of the epidemic, we noticed that there are many opportunities worth exploring in the overseas market, such as the development and distribution of digital content, highly interactive teaching aids or Smart Books and high quality online and offline teaching services.
We believe that the company’s rich content library and business knowhow accumulated in the past two decades of operations will help us find scalable growth opportunities in key overseas markets. Felix, I hope that answers your question.
Felix Liu
Thank you.
Operator
Thank you. At this time, I like to turn the call back over to management for closing remarks.
Alex Peng
Thanks operator, and thanks everyone again for joining us today. And we’ll talk to you next quarter. Bye-bye.
Operator
And that does conclude this conference. Thank you for participating. You may now disconnect.
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