TAL Education Group 2027 Q2 Earnings Call

Please go ahead. Thank you all for joining us today for TAL 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 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 to Mr. Alex Peng.

Alex, please go ahead. 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. As our business has grown in scale, we expect our overall growth rate to moderate. The picture across our businesses, however, is different. Our Peiyou 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. 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 learn independently at home. We are 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 U.S., or 6.7 billion RMB, representing a year-over-year increase of 15% and 9% in U.S. dollar and RMB terms, respectively. Our non-GAAP income from operations was $248 million U.S., 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. Jackson, over to you. Thank you, Alex.

I will start with the operational progress across our core business lines and then review our financial results. Starting with our Peiyou 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 remains healthy. Take Peiyou enrichment learning classes as an example, the retention rate was over 80%, reflecting the continued trust from students and families. 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 Peiyou 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. 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. During the quarter, we launched our first National Youth Maker Show. 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. 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. 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 remained 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. We believe this reflects the value of 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, or 6.7 billion RMB, representing a year-over-year increase of 15% and 9% in U.S. dollar and RMB terms, respectively. Cost of revenues increased by 8% year-over-year to $400 million. On a non-GAAP basis, excluding share-based compensation expenses, cost of revenues also increased by 8% year-over-year to $399 million. Gross profit increased by 21% year-over-year to $595 million.

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

The change was mainly driven by fluctuations in the fair value of certain investments. 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 TAL, which excluded share-based compensation expenses, was $36 million, compared to non-GAAP net income attributable to TAL of $136 million in the second quarter fiscal year 2026. Moving on to our balance sheet. As of August 31, 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 as of the end of the second fiscal quarter.