TAL Education Group (TAL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and thank you for standing by. Welcome to TAL Education Group's Fiscal 2027 First Quarter Earnings Conference Call. [Operator Instructions] 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. Thank you. Please go ahead.

Thank you all for joining us today for TAL Education Group's First 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, we 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 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 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 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.

Thank you, Fang, and thanks to everybody for joining today's conference call. As we embark on fiscal year 2027, we remain focused on our key priorities of high-quality growth, disciplined execution and continuous efficiency improvement. Our mission is to empower students and nurture their holistic development. Guided by this mission, we are further refining our offerings, strengthening our operational capabilities and applying technology to address the evolving needs of students, their families and the society. We believe this commitment will unlock the potential of individual learners while driving high quality growth and sustainable profitability. Learning services remain the cornerstone of our business delivering high quality learning experiences to our users across both online and offline platforms. Alongside it, we are developing our content solutions business to reach more users with our proprietary and third-party content. Together, these 2 pillars create an integrated learning journey fostering longer, deeper and stronger user engagement. Our first quarter performance reflected progress across both learning services and content solutions. Let me first discuss our offline learning services. We continue to see healthy growth in our offline Peiyou learning programs building on our deep expertise, proven teacher development system and strong organizational capabilities. What sets these programs apart is the face-to-face interaction between teachers and students, particularly the empathy, encouragement and real connection that our teachers provide every day. These human-centric elements foster higher engagement, motivation and the learning experience that other formats can't match. We have witnessed sustained demand for our offline programs. To serve this demand, we're expanding our learning center network with discipline. This quarter, we focused on strengthening our presence in existing cities to prepare for summer season. Today, we operate in 44 cities across Chinese Mainland as well as select international markets with over 600 learning centers in total. Our online enrichment learning business also made steady progress. We continue to refine our programs with enhanced course offerings and more interactive teaching approaches. This technology empowered approach provides an engaging and personalized learning experience helping sustain user engagement and foster greater interest in learning. Revenue from learning devices business grew year-over-year in the quarter driven by our dual focus on strengthening product capabilities and enhancing go-to-market execution. In July, we launched the new T6 series, our latest flagship tablet model, featuring major upgrades across the AI experience, content and hardware. These innovations set the direction of our ongoing product iteration by building learning devices that better understand students' needs, provide personalized guidance and foster self-directed learning. As our learning device portfolio and user base continues to expand, key engagement metrics remain stable and healthy. In the first quarter, weekly active learning devices exceeded 2 million units with a weekly active rate of around 80% and average daily active usage of about 1 hour per device. With that overview, let me turn to our financial performance for the quarter. We delivered robust top and bottom line growth in the first quarter. Our net revenues were USD 758 million or RMB 5.191 billion representing a year-over-year increase of 32% and 25% in U.S. dollar and RMB terms, respectively. Our non-GAAP income from operations was USD 149 million representing a year-over-year increase of 492%. Our non-GAAP operating margin increased to 19.6% from 4.4% for the same period last year. This profitability improvement reflects greater operating leverage and lower sales and marketing costs made possible by the strength of our services and products. Our non-GAAP net income attributable to TAL reached USD 420 million for the quarter. These healthy results highlight our ability to optimize core operations and build a more efficient operating model, reinforcing our confidence in achieving high-quality growth and creating long-term value. I will now hand the call over to Jackson, who will provide more details on our operational developments across core business lines and review our financial results for the first fiscal quarter. Jackson, over to you.

Thank you, Alex. I will discuss our operating progress across our core business lines and then review our financial results for the first fiscal quarter. Let me start with our offline Peiyou enrichment programs. In the first quarter, Peiyou learning programs continued to deliver year-over-year revenue growth. Consistent service quality and broad user recognition drove steady year-over-year growth in student enrollment. Positive feedback from students and parents continues to reaffirm the value we provide. We continued to expand our learning center network at a measured pace during the quarter. Our priority is to maintain service quality and operating efficiency as we grow. We evaluate local demand, user receptivity, organizational capability and overall business health when making expansion decisions. This allows us to serve more users while maintaining a healthy and sustainable operating model. In the first quarter, Peiyou's overall business and financial health remained solid. We expect this business to continue growing at a steady pace while remaining an efficient operating model. Turning to online enrichment learning. We continued to leverage technology to improve how students learn and interact in online settings. During the quarter, we refined our products with enhanced course offerings and more interactive learning experiences tailored to students' online learning needs. These upgrades make the learning progress more responsive and engaging, driving a more personalized learning journey. Next, let me discuss our learning device business. It delivered year-over-year revenue growth, reflecting our continued progress in product development, user experience and go-to-market execution. We remain focused on building a complete and differentiated product portfolio that meets users' diverse learning needs. Recently, we launched the new T6 series to better support students' thinking process and inspire self-directed learning. A key upgrade is the enhanced AI learning companion for recorded courses, which provides preclass guidance, real-time feedback, post-class summaries and question-and-answer support. The companion also features AI-driven diagnostics, tailored study plans and AI-generated notes, acting as both a learning partner and a personalized study coach. We have also enriched the content offerings for the T6 flagship International Edition with expanded global educational resources and course materials. On the hardware front, the T6 series features upgraded ultra-high resolution displays backed by 10 respected eye protection certifications. It is also the first learning device globally to receive SGS certification for natural lighting viewing giving students a clearer and more comfortable experience. Next, I would like to walk you through our key financial results for the first fiscal quarter. Please note that all financial data for the quarter are unaudited. Our net revenues were USD 658 million (sic) [ USD 758 million ] or RMB 5.191 billion, representing a year-over-year increase of 32% and 25% in U.S. dollar and RMB terms, respectively. Cost of revenues increased by 23% year-over-year to USD 320 million. On a non-GAAP basis, excluding share-based compensation expenses, cost of revenues also increased by 24% year-over-year to USD 320 million. Gross profit increased by 39% year-over-year to USD 438 million. Gross margin for the first quarter of fiscal year 2027 was 57.8% compared to 54.9% in the same period of the prior year. Turning to operating expenses. Selling and marketing expenses decreased by 5% year-over-year to USD 172 million. On a non-GAAP basis, excluding share-based compensation expenses, selling and marketing expenses also decreased by 5% year-over-year to USD 169 million, representing 22% of total net revenues compared to 31% in the same period last year. General and administrative expenses increased by 7% year-over-year to USD 129 million. On a non-GAAP basis, excluding share-based compensation expenses, general and administrative expenses also increased by 7% year-over-year to USD 121 million, representing 16% of total net revenues compared to 20% in the same period last year. Total share-based compensation expenses allocated to related operating costs and expenses were USD 12 million in the first quarter of fiscal year 2027 compared to USD 11 million in the same period last year. Income from operations was USD 137 million in the first quarter of fiscal year 2027 compared to USD 14 million in the same period last year. Non-GAAP income from operations, which excludes share-based compensation expenses, was USD 149 million compared to USD 25 million in the same period last year. Net income attributable to TAL was USD 408 million in the first quarter of fiscal year 2027 compared to USD 31 million in the same period last year. Non-GAAP net income attributable to TAL, which excludes share-based compensation expenses, was USD 420 million compared to USD 42 million in the same period last year. Moving on to our balance sheet. As of May 31, 2026, the company had approximately USD 1.6 billion of cash and cash equivalents, USD 1.2 billion of short-term investments and USD 306 million in current and noncurrent restricted cash. Our deferred revenue balance was approximately USD 1.2 billion as of the end of the first fiscal quarter. Now turning to our cash flow statement. Net cash provided by operating activities for the first quarter of fiscal year 2027 was USD 478 million. Finally, I would like to briefly address our share repurchase program. In July 2026, the company's Board of Directors approved a 12-month extension of its share repurchase program originally launched in July 2025. Under the extended program, the company may spend up to approximately USD 393.7 million to repurchase its common shares through July 28, 2027. Between April 23, 2026, and July 28, 2026, the company repurchased approximately 1.2 million common shares at an aggregate consideration of approximately USD 41 million. In terms of our overarching capital allocation strategy, we will continue to take a prudent and balanced approach; weigh our business development needs, investment opportunities and financial position and market conditions. That concludes my review. I will now turn the call back to Alex for his comments on our strategy and outlook. Alex, please go ahead.

Thanks, Jackson. I would like to share a few thoughts on our outlook and strategy. Looking ahead to the full fiscal year 2027, we'll continue to build on the progress we've made. Our priorities are unchanged: high-quality growth, disciplined execution and continuous efficiency improvement. From an operational standpoint, we will keep strengthening execution across all of our businesses. This means refining our offerings, enhancing our go-to-market strategies and further building our organizational capabilities. Technology will continue to play a key role helping us improve the learning experience, streamline operations and boost efficiency. Financially, we are focused on achieving sustainable, high-quality growth and stronger long-term competitiveness rather than pursuing growth for its own sake. Building on the solid progress we achieved in the first quarter, we remain committed to improving efficiency and operating margin for the full fiscal year. In short, by balancing disciplined growth with continued efficiency gains, we aim to improve operating leverage, deliver sustained profitability improvement and build a more efficient operating model for the long-term growth. That concludes my prepared remarks. Operator, we are ready to open the call for questions.

[Operator Instructions] And today's first question comes from Jenny Yuan with UBS.

Congrats on the strong quarter results. My question is regarding our Peiyou offline business. So could you please share some color on Peiyou's business momentum, including current revenue growth trends, overall business health, learning center expansion plans and also summer enrollment performance? And looking ahead, how should we think about Peiyou's growth trajectory over the next 2 to 3 years and what are the key growth drivers behind?

This is Alex. Let me take this question. So in the first quarter, our Peiyou offline business really continued to deliver double-digit year-over-year growth. That's the first thing I want to register. Consistent with the strategy, I think we've talked about the strategy previously, we really continue to prioritize the overall health of our Peiyou offline programs and the operating efficiency of our learning center network. So if you take the Peiyou enrichment learning as an example, the retention rate, which is a key metric, it remained healthy at over 80% in the first quarter, which was consistent with the previous year. So as we talked about this earlier, while technology and AI continue to shape the future of education, we believe that human interaction really remains an essential part of the learning experience. So building on this belief, we continue to strengthen our organizational capabilities around what we call the human intensity of that learning experience, the human intensity. But of course we also leverage technology to enhance both the classroom experience and the teaching, the efficiency of that delivery of the teaching. So for example, we continue to upgrade and roll out our dual smart large and small screen solution in our enrichment learning center classrooms. Through the small screen, students can participate in interactive learning games. They earn points, they stay more engaged and they stay more motivated throughout the class. And they can also have the performance of that learning journey recorded across the entire lesson. So we'll also continue to strengthen our curriculum development, something we've been very steadfast and committed to over the past decade, enhance our products and improve our services as these remain the fundamental drivers of our long-term competitiveness. We're exploring offerings across different age groups and additional subjects based on demand and how we look at the future progress of what parents and students may need. We'll continue to develop our teaching talent, which again is key, key to that human intensity and expand our learning center network. So we'll bring a broader range of offline learning programs to more students. So looking ahead, we remain confident that offline Peiyou learning programs will continue to grow at a healthy pace over the longer term supported by our product capabilities, solid demand for offline learning and the still fragmented offline market. So Jenny, I hope that answers your question.

And the next question comes from Timothy Zhao with Goldman Sachs.

Congrats on the very strong results this quarter. My question is regarding the learning devices business. Just wondering how do you view the overall demand trend for this fiscal year in this specific market? What are the strategic priorities and the profitability level of your learning device business? And this year, we are seeing a softer consumer electronics market, including the learning devices demand and also the BOM cost increased quite a bit. Just wondering what is your latest strategy in this business segment and how do you prioritize volume, pricing and margins within this learning devices segment?

Timothy, this is Alex. Let me take this one as well. So you asked a complex question about a very complex set of dynamics in the market. Let me try to unpack that. But let me first just share some color on our recent financial performance and the trends we see. So learning device revenue grew year-over-year in the first quarter. The business also saw an improvement in the bottom line. We think that really reflects the operational initiatives we've implemented as well as the timing of deferred revenue recognition, okay? So as I said, there's a set of complex dynamics in the market and this performance was really achieved in the midst of that complex and evolving market. The learning device market continues to be shaped by respectable competition, shifting consumer sentiment and, as you said, rising component costs. So we really see all of these result in increased market volatility and we expect these dynamics to persist into fiscal year 2027. So for this fiscal year 2027, we'll continue to drive the overall margin profile of the learning devices business. In response to higher memory chip costs, we've taken some proactive measures to optimize our inventory, streamline SKUs and refine our product portfolio. I think we are also driving greater operating efficiency and also greater discipline, I would say, across the organization. So together, if you look at these initiatives, they're really intended to mitigate -- I would say, mitigate the cost pressures while preserving our long-term competitiveness. So if I take a step back and look at this from a longer-term strategic perspective, at their core, the learning devices, they really deliver strong value to users. They empower students with AI-driven personalization and self-directed learning for example. They also broaden access for the students to our proprietary and third-party content. So combined with our services, the learning devices, they really create a more integrated learning journey. They drive longer, deeper, stronger user engagement, right? I shared some of the numbers earlier on the call. We now have, as of first quarter, over 2 million devices. The weekly active usage is 80% and we average about 1 hour per device per day. So these really, I'd say, they broaden access to more students and they drive longer, deeper and stronger user engagement. So this is really why we remain committed to continued strategic investment in the space as we explore the, I would call, convergence of education and technology. So Timothy, I hope that answers your question.

And the next question comes from Jing Yuan with CICC.