TAL Education Group (NYSE:TAL) Q2 2027 Earnings Call

0:00 Ladies and gentlemen, good day and thank you for standing by. Welcome to Tao Education Group's fiscal 2027 second quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please be informed today's conference is being recorded. I would now like to hand the conference over to Ms. Fang Liu, Investor Relations Director. Please go ahead.

0:29 Thank you all for joining us today for TEL Education Group's second quarter fiscal year 2027 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. During this call, you will hear from Mr. Alex Tang, President and Chief Financial Officer and Mr. Jackson Ding, Deputy Chief Financial Officer. Following the prepared remarks, Mr. Peng and Ms. 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 CAHPR provisions of the U.S.

1:18 Private Securities Litigation Reform Act of 1995. All looking statements are subject to risk 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.

2:12 I would like to turn the call over to Mr. Alex Peng. Alex, please go ahead.

2:18 Thank you, Fang, and thanks to everybody for joining today's conference call. For more than 20 years, TAL has been committed to helping students learn and grow. Today, we do this through our learning services, content solutions, and other products. Across all of these offerings, we remain committed to delivering meaningful learning experiences and building lasting relationships with the students and families we serve. Let me start with an overview of our second quarter performance. Our overall revenue continued to grow, although at a slower pace than in previous quarters.

3:06 As our business has grown in scale, we expect our overall growth rate to moderate. The picture across our businesses, however, is different. Our pay you offline programs continue to grow at a healthy pace. Demand for face-to-face learning remains solid and student retention remains healthy. We believe that interaction between teachers and students continues to play an important role in learning. Our learning device business, on the other hand, is facing a challenging industry environment, respectable competition, Shifting consumer sentiment and rising component costs have put pressure on the market.

3:53 These conditions have affected our business and have become a drag on our overall revenue growth. Despite these near-term challenges, we continue to see a strategic role for learning devices in helping students who learn independently at home We're focused on improving our content and product experience while managing the business with discipline. Turning briefly to our financial results, second quarter net revenues were $995 million, or 6.7 billion RMB, representing a year-over-year increase of 15.9% in U.S. dollar and RMB terms respectively.

4:46 Our non-GAAP income from operations was 248 million U.S. dollars, representing a year-over-year increase of more than 100%. Our non-GAAP operating margin increased to 24.9% from 12.5% for the same period last year. The continued improvement in our operating margin reflects operating leverage, efficiency gains, and disciplined resource allocation. With that, I will turn the call over to Jackson, who will cover operational progress across our core business lines and review our financial performance for the second fiscal quarter.

5:36 Jackson, over to you. Thank you, Adam. I will start with the operational progress across our core business lines and then review all financial results. Starting with our pay-all offline programs. Revenue grew by double digits year over year in the second quarter. Enrollment growth was the largest growth contributor of revenue growth in this business line. Our overall retention rate remained healthy. Take PAYO enrichment learning classes as an example. The retention rate was over 80%, reflecting the continued trust from students and families.

6:30 We continue to see steady demand for face-to-face learning. Beyond helping students build knowledge, The classroom gives them a place to interact with teachers and peers, ask questions, and develop confidence. These interactions are an important part of the learning experience, and they remain at the heart of our PAO programs. During the summer, our Learning Center Network was well-positioned to serve our students and families. We continued to focus on teaching quality, teacher development, and the consistency of our services across learning centers.

7:21 As the business grows, our priority is to remain a high-quality experience for students while managing our network in a disciplined manner. For our online enrichment learning business, We continued to develop learning experiences that respond to students' interests and needs. In our science-related courses, for example, we combined online learning with hands-on activities to help students explore science and technology beyond the classroom.

8:05 During the quarter, We launched our first National Youth MakerSoft. The event encouraged students to draw inspiration from everyday life, develop their own ideas, and turn those ideas into practical projects. We believe these experiences can help students build curiosity and learn through practice.

8:37 Turning to our learning device business, the industry is going through a challenging period. The overall market has contracted by double digits year over year, and competition remains intense. At the same time, rising chip costs are putting pressure on device pricing and adding to the challenges facing the industry. These conditions are affecting our business as well. While our learning device business has grown in recent years, the current market environment is weighing on its performance, especially on the top line.

9:28 In this quarter, learning device was a drag on our company-level growth rate. We expect this business to continue to face pressure as the industry works through these challenges. Against this backdrop, we remain focused on serving our users and improving the learning experience through our learning devices. As a result, user engagement remains stable during the quarter The average weekly active rate across our learning device user base was around 80%. And the active devices were used for an average of one hour per day.

10:17 We believe this reflects the value our products continue to provide to students, even as the market faces pressure. Next. I will walk you through our key financial results for the second fiscal quarter. Please note that all financial data for the quarter are unaudited. Our net revenues were $995 million US dollars or 6.7 billion RMB, representing a year-over-year increase of 15% and 9% in U.S. dollar and RMB terms respectively.

11:03 Cost of revenues increased by 8% year over year to 400 million U.S. dollars. On a non-GAAP basis, excluding share-based compensation expenses, cost of revenues also increased by 8% year over year to 399 million U.S. dollars. World's profit increased by 21% year-over-year to 595 million US dollars. World's margin for the second quarter of fiscal year 2027 was 59.8% compared to 57.0% in the same period of the prior year. Turning to operating expenses.

11:52 Non-GAAP selling and marketing expenses which excluded share-based compensation expenses decreased by 16% to $223 million from $264 million in the second quarter of fiscal 2026. Non-GAAP general and administrative expenses which excluded share-based compensation expenses increased by 4% to $124 million from $119 million in the second quarter of fiscal year 2026.

12:39 Non-GAAP income from operations which excluded share-based compensation expenses was $249 million compared to non-GAAP income from operations of 108 million US dollars in the same period of the prior year. Other expense was 190 million US dollars for the second quarter of fiscal year 2026, excuse me. Other expense was 190 million US dollars for the second quarter of fiscal year 2027. compared to other income of $67 million in the second quarter of fiscal year 2026.

13:31 The change was mainly driven by fluctuations in the fair value of certain investments.

13:41 Income tax expense was $136 million in the second quarter of fiscal 2027, compared to $51 million of income tax expense in the second quarter of fiscal year 2026. The increase in income tax expense was mainly due to changes in deferred tax liabilities relating to withholding tax. Non-GAAP net loss attributable to TAO, which excluded share-based compensation expenses, was 36 million U.S. dollars, compared to non-GAAP net income attributable to TAO of 136 million U.S. dollars in the second quarter fiscal year 2026.

14:36 Moving on to our balance sheet. As of August 31st, 2026, the company had approximately $2.0 billion of cash and cash equivalents, $796 million of short-term investments, and $254 million in current and non-current restricted cash. Our deferred revenue balance was approximately 930 million US dollars as of the end of the second fiscal quarter.

15:25 Net cash used in operating activities for the second quarter of fiscal year 2027 was 179 million US dollars. Finally,

15:40 a brief update on shareholder returns, including our cash dividend. Between July 29th, 2026 and October 23rd, 2026, the company repurchased approximately 64,226 common shares and an aggregate consideration of approximately two million US dollars. The company's board of directors has approved the declaration and payment of a special cash dividend to shareholders out of the company's cash balance in an amount of $0.30 US dollars per common share, equivalent to $0.10 US dollars per ABS, representing and aggregate dividend payment of approximately $55.2 million to all shareholders of the company.

16:49 That concludes my review. I will now hand the call back to Alex for his comments on the strategy and outlook. Alex, please go ahead.

16:59 Thanks, Jackson. Let me close with a few thoughts on our strategy and outlook. Our businesses serve students in different ways. In our learning services, teachers help students develop knowledge, confidence, and curiosity through direct interaction. In our content and technology products, we help students build ability to learn more independently. We believe both are important parts of a student's learning journey. will continue to bring together our experience in education and our capabilities in technology to improve the learning experience.

17:45 Looking ahead, we expect our overall revenue growth to moderate as our business grows in scale and our learning device business continues to face industry hedging. As the educator Jiang Diwei wrote in his Reconstruction in Philosophy, a person is always in process of growth. At TAL, we are grateful for the opportunity to support our students in that process, and we remain committed to learning and growing alongside that. So that concludes my prepared remarks. Operator, we are ready to open the call for questions.

18:33 Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And our first question comes from Eddie Wong from Morgan Stanley. Please go ahead.

18:56 Thank you, Alex Jackson, for taking my question. My question is regarding the revenue growth. We saw the year-over-year revenue growth moderate in the second quarter. Can you walk us through the top-line performance across the major business lines, and how should we think about the growth outlook going forward? Thank you.

19:19 Yeah, Eddie, this is Alex. Let me take that one on. So, as we just mentioned, our overall revenue growth moderated in the second quarter. and we expect growth to become more moderate going forward. This really reflects both the increasing scale of our business and the different conditions we're seeing across our business lines. So our pay you offline programs continue to perform well. The business delivered double digit revenue growth in the quarter, supported primarily by enrollment growth. Student Retention remain healthy, and we continue to see steady demand for face-to-face learning experience.

20:11 Our learning device business, as both myself and Jackson just mentioned, that business is facing a more difficult market. The industry as a whole for learning devices has contracted, as noted by several independent third-party market reports. And these conditions have affected our performance. So as a result, learning devices have become a drag on our overall revenue growth. We also saw growth in our online enrichment business, Moderate. during the quarter.

20:56 So overall, we see our learning services business continue to develop on a healthy foundation, while the learning device business works through a more challenging period in the broader industry environment. So Eddie, I hope that answers your question. Thank you, Alex. And the next question comes from Jenny Yuan from UBS.

21:26 Please go ahead.

21:30 Hi, Alex. Hi, Jackson. So thank you for taking my question. And my question is on our learning device business. Given the current challenges in the market, how are you navigating the business and how should we think about the trade-off between revenue growth and profitability? And are you prioritizing one over the other? Thank you.

21:56 Thanks, Jenny. This is Alex.

21:58 Let me take this question on as well. So let me start by saying that we continue to believe learning devices have a strategic role to play in supporting students' learning at home. Over the past few years, we've built a sizable user base, and we remain committed to providing these students and families with quality content and a great learning experience. That said, the industry is going through a challenging period, as we just talked about.

22:46 The market has contracted. Competition remains intense. and rising component costs have added pressure across the industry. Our business has not been really, it has not been immune to these conditions. We expect learning devices to continue to weigh on the company's overall revenue growth rate. So in this environment, what's our focus? Our focus is on managing the business in a disciplined way. We'll continue to invest in content, technology, and the product experience, but we'll also be thoughtful about how we allocate resources and manage costs.

23:39 We do not anticipate significant losses from the learning device business for the full fiscal year. Looking ahead, What do we see? We believe there is still a strategic opportunity to use technology to support students' independent learning. We want to continue developing this business with a long-term perspective while making sure that our near-term decisions reflect the market conditions we're facing today.

24:14 So Jenny, I hope that answers your question.

24:21 Thank you. And the next question comes from Timothy Zhao from Goldman Sachs. Please go ahead.

24:31 Hi, Alex. Hi, Jackson. This is Eunice Liu from Goldman Sachs. I'm asking a question on behalf of our analyst, Timothy Zhao. Thank you for taking the question. In this quarter, companies operating margin improved significantly. We want to ask what drove the improvement and how should we think about the profitability going forward? Thank you.

24:56 Yunus, thank you for the question. This is Jackson. Let me take this one. The improvement this quarter in operating margin reflects progress across several areas. As our business has grown in scale, we have been able to serve more students and users while also managing our costs more efficiently. We've also become more disciplined in how we allocate our resources across the organization. Looking ahead, improving profitability remains a priority for us.

25:42 will continue to invest in our products and services while also driving greater operating efficiency. And as you've seen in the last couple of quarters, we expect our operating margin for fiscal 2027 to improve compared with fiscal 2026. At the same time, as always, Profitability may vary from quarter to quarter due to seasonality, market conditions, and the timing of our investments. We believe it is more useful to look at our progress over a longer period of time. Yunus, I hope that answers your question.

26:27 Thank you, Jackson. This is very helpful. Again, if you'd like to ask a question, please press star, then 1. And our next question comes from Elsie Shang from CLSA. Please go ahead.

26:45 Thank you, management, for taking my question. I'm Elsie, and my question is about other income and shareholder return. So I noticed that other income declined significantly this quarter, and the company also declared a cash dividend for the first time. So could you explain what is the driver behind the change in other income and also share how you think about the shareholder return?

27:11 Thank you.

27:17 Thank you for the question. This is Jackson again. Let me take this. And that's not like a two-part question. The first part about other other income and the second part about shareholder return. So then maybe let me tackle them piece by piece. So first of the income, as part of our capital allocation strategy, look, we maintain an investment portfolio that includes a variety of investment products, ranging from wealth management products to minority equity investment. and others. During the quarter, the fair value of certain investments declined, which was a primary driver of the sequential decrease in other income.

28:13 The value of these investments can change with market conditions, so other income line may fluctuate from quarter to quarter. The second part of the question was about shareholder returns. Returning value to shareholders is and has always been an important part of our capital allocation strategy. The dividend declared this quarter complements our ongoing share repurchase program. Looking ahead, we intend to make shareholder returns a more sustainable Thank you. This concludes our question and answer session.

29:30 I would like to turn the conference back over to management for any closing remarks.

29:37 So again, thanks to everybody for joining us today, and we'll see you next quarter. Bye-bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.