TAL Education Group (TAL) Q4 2025 Earnings Call Transcript

Ladies and gentlemen, good day and thank you for standing by. Welcome to TAL Education Group's Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be informed that today's conference is being recorded. I would now like to hand the conference over to Ms. Huang Liu, Investor Relations. Thank you, please go ahead.

Thank you all for joining us today for TAL Education Group's fourth quarter and 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. 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 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, Huang. I'd also like to thank all of you for participating in today's conference call. So, I'll begin with an overview of our business progress for the fourth quarter and full fiscal year 2025. Next, Jackson will review our operational advancements and financial results. To conclude, I'll also provide a brief update on our strategic priorities and outlook moving forward. So, with that, let's get started with our core business performance this fiscal year. To begin with, our learning services delivered steady growth in fiscal year 2025, really empowering learners through both offline and online enrichment programs. An uptick in user demand and our relentless focus on high-quality learning experiences were the key drivers of this progress. During the past quarter, we strategically added new enrichment learning centers in existing cities, providing local communities with more accessible and convenient learning opportunities.

Our online enrichment learning business also remained healthy, consistently providing engaging learning experiences through technology-driven learning products. Over the past year, we conducted an in-depth analysis of user preferences and tailored the development of new products to better meet their needs. We also continue to refine existing offerings based on user feedback, enhancing teaching effectiveness by integrating smart interactive features to boost user engagement. Then, for Learning Devices, we expanded our product offerings to reach a broader user base, making it easier for users to find the right learning solution for their needs. We integrated more smart features and learning resources to better support users on their self-learning journeys. Through monthly feature updates and content refresh, we provide the users with an increasingly intelligent and practical study companion, making at-home self-learning more engaging and efficient.

So, with this operational momentum as a backdrop, let's turn to our financial highlights for the quarter and the full year. In the fourth quarter, we recorded net revenues of $610.2 million or RMB 4.44 billion, reflecting year-over-year growth of 42.1% and 44.3% respectively. On a non-GAAP basis, loss from operations was $1.7 million while net income attributable to TAL reached $7 million. For the full fiscal year, net revenues totaled $2.3 billion or RMB 16.2 billion, up 51% and 52.2% year-over-year respectively. Non-GAAP income from operations amounted to $61.8 million with non-GAAP net income attributable to TAL at $149.5 million. Before Jackson takes us through the detailed operational and financial review, I'd like to share a brief update from the Board. We are delighted to welcome Mr. Yi Wang as TAL's new Independent Director and Chairman of the Compensation Committee. Mr. Wang brings extensive experience across both the business and education sectors, and we are confident that his insights will further strengthen TAL's strategic direction, governance, and operational excellence.

We also want to express our deep appreciation to Dr. Wei Wu Chen for his outstanding service and invaluable contributions over the past decade. We look forward to continuing our collaboration with Dr. Chen in his new advisor role. So, with that high-level overview complete, I'll now pass the call to Jackson to delve deeper into our operational execution and detailed financial performance. Jackson?

Thank you, Alex. Before diving into the details, I'd like to note that all quarterly financial figures discussed today 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 sustained its revenue growth momentum in the fourth quarter of fiscal year 2025, fueled by advancements across multiple product lines. Over the past few quarters, revenue from Peiyou Small Class Enrichment programs has achieved year-over-year growth. We have consistently provided high-quality services, earning positive feedback from both the learners and their parents. While we have expanded our learning center footprint, we've maintained a disciplined approach. We're carefully evaluating market demand, user feedback, and operational efficiency to balance growth with quality. This approach has been further validated by key operational metrics and has directly contributed to year-over-year enrollment growth.

Notably, the retention rate for Peiyou Small Class reached 80% this fiscal quarter. In our online enrichment learning business, ongoing innovation has helped us navigate the ever-evolving market landscape and our users' dynamic needs. Guided by user feedback and market insights, we're continually investing in strengthening our online product capabilities and refining our operational and marketing strategies. Through new products and interactive formats, we deliver tangible value to learners, enhancing both learning outcomes and user experiences. Recent initiatives include interactive learning modules and AI-powered assistants. Additionally, by building diverse customer touchpoints across multiple channels, we're expanding our market reach among current and potential users and gaining deeper insights into their needs. This has enabled us to scale our operations while laying the foundation for sustained long-term competitiveness.

Next, let's turn to our Content Solutions business. Our Learning Devices business grew year-over-year in the fourth fiscal quarter, fueled by our enhanced product development and go-to-market capabilities. We have expanded our Learning Devices product portfolio to appeal to a wider audience in the past year. We further upgraded our hardware and software, enriching our content library, refining the reading experience, and integrating practical AI features to create more immersive self-directed learning. This February, we further enriched our content across our entire range of Learning Devices by providing fresh and classic materials with progressively challenging exercises. We keep students engaged while developing their ability to question, analyze, and problem-solve. Our unique ladder approach, which guides children step-by-step with tailored hints, helps them to build confidence as they master new skills.

To strengthen foundational literacy, we launched a seamless graded reading system covering early education through high school with age-appropriate tools like phonetic aids for young learners and interdisciplinary content for older students. Through partnerships with over 20 publishers, we have expanded our library to include thousands of titles. Thanks to our enhanced product capabilities, our Learning Devices have sustained solid user engagement while reaching a broader audience. Notably, as our active user base continues to grow, the weekly active rate has remained stable at around 80%, with an average daily time spent of approximately an hour per device throughout the quarter. Next, please let me now review our financial performance for the quarter. The company reported net revenues of $610.2 million or RMB 4.44 billion, representing a year-over-year growth of 42.1% in U.S. dollar terms and 44.3% in RMB terms.

These increases were attributable to the growth in both our Learning Services business and our Content Solutions business. Now looking at costs. Cost of revenues rose 44.7% year-over-year to $292.6 million from $202.2 million. When excluding share-based compensation expenses, non-GAAP cost of revenues moved 46.1% higher to $291.7 million compared to $199.6 million in the same quarter last year. Gross profit stood at $317.6 million, which was $39.7 million above the prior year period. Gross margin was at 52% compared to 52.9% from the same period last year. Turning to operating expenses. Selling and marketing expenses for the quarter were $218 million, up 73.1% from the prior year. The non-GAAP equivalent of these expenses increased 77.9% to $214.3 million. As a percentage of net revenues, non-GAAP selling and marketing expenses accounted for 35.1% versus 28% in the prior year period, with the change mainly resulting from increased selling and marketing activities through some online channels.

General and administrative expenses increased 0.8% to $118.2 million compared to the same period last year. The non-GAAP measure showed a 3.5% rise to $108.5 million. However, as a percentage of net revenues, non-GAAP general and administrative expenses decreased from 24.4% to 17.8%. Total share-based compensation expenses declined 30.1% to $14.3 million from $20.5 million in the comparable period. Loss from operations was $16.0 million for the quarter. This compares to a loss from operations of $11.1 million in the same period last year. On a non-GAAP basis, the loss from operations was $1.7 million compared to non-GAAP income from operations of $9.4 million in the same period of last year. Net loss attributable to TAL was $7.3 million for the quarter, while in the same period last year, there was net income attributable to TAL of $27.5 million. Non-GAAP net income attributable to TAL was $7.0 million versus $48.0 million in the same period last year.

Regarding our cash position, as of February 28, 2025, we held $1.77 billion in cash and cash equivalents along with $1.85 billion in short-term investments and $220.5 million in restricted cash. Our deferred revenue balance was $671.2 million at quarter end. In terms of cash flow, net cash used in operating activities was $226.3 million during the quarter. For the full fiscal year 2025, net revenues were $2.3 billion or RMB 16.2 billion, reflecting year-over-year increase of 51.0% in U.S. dollar terms and 52.2% in RMB terms. Gross profit was $1.2 billion, 48.9% higher than the previous year. Loss from operations was $3.2 million in the fiscal year 2025 compared to a loss from operations of $69.2 million in fiscal 2024. On a non-GAAP basis, income from operations was $61.8 million versus $19.7 million in the prior fiscal year. On the bottom line, net income attributable to TAL came to $84.6 million compared to a net loss attributable to TAL of $3.6 million in fiscal 2024.

Non-GAAP net income attributable to TAL was $149.5 million, while the previous fiscal year showed $85.3 million. Finally, I'd like to briefly address our share repurchase program. In April 2025, the company's Board of Directors approved a 12-month extension of its share repurchase program, originally launched in April 2021. Under the extended program, the company may spend up to approximately $490.7 million to repurchase its common shares through April 30, 2026. In fiscal 2025, the company had repurchased 0.5 million common shares for a total consideration of approximately $13.1 million under the program. That concludes my review of our business performance and financial updates. Alex, I'll now hand the call back to you for our outlook.

Thanks, Jackson. Overall, we believe fiscal year 2025 laid a solid foundation for our future development. Now I'd like to share insights into the company's strategy and outlook for fiscal year 2026. So, first, we remain committed to sustainable growth in our core business lines. We will continue to uphold the high-quality standards for both our offline and online enrichment learning products and services to deliver quality programs to an even broader user base. We anticipate that our learning services will continue to be our largest revenue stream in the new fiscal year. Beyond learning services, we're also focused on expanding our learning Content Solutions. We will continue scaling this business, thoughtfully refining our content and device features, and leveraging technological advancements, particularly AI-driven features, to enhance learning outcomes. As our business continues to evolve and grow, we're actively exploring new fields and emerging sectors to extend our core business lines' reach.

Along the way, we're also steadily strengthening our channel capabilities, building brand recognition, and deepening our engagement with the new generation of parents and learners. Through these efforts, we're consistently gaining valuable insights from outstanding companies across various industries and will continue to refine our growth strategies accordingly in the upcoming fiscal year. Secondly, we're committed to ongoing innovation at the intersection of learning and technology. By integrating cutting-edge AI with pedagogical expertise, we seek to meaningfully improve both learning and teaching experiences. Looking ahead, we'll continue to enhance our products and services to meet the evolving demands of digital learning, redefining intelligent learning solutions for the AI era. Throughout history, every major technological breakthrough from television to computers and the Internet has found its way into education.

Today, we are discovering and shaping how AI can transform learning and integrating these advancements into our products and services. We also remain open to collaboration and knowledge sharing, ensuring that our insights into smart learning contribute meaningful value to the education community. Finally, we will focus on refining operational details to boost overall efficiency and profitability. While we expect to benefit from economies of scale, as our revenue grows, efficient management will be increasingly critical as our operations expand and become more complex. We'll closely monitor efficiency metrics across all business lines and make timely adjustments to optimize every aspect of our operations, including content creation, product R&D, sales, marketing, and beyond. So that concludes my prepared remarks. Operator, I think we are ready to open the call for questions.

Thank you. We will now take our first question from Eddie Wang from Morgan Stanley. Please go ahead, Eddie.

Thank you, Alex, Jackson, and Fang for taking my question. My question is regarding the Peiyou enrichment learning business. Could management provide an update on the progress of the fourth quarter Peiyou enrichment learning business? And how should we view the growth strategy and expansion pace for Peiyou in the next fiscal year? Thank you.

Thanks, Eddie. This is Alex. Let me take that one. Really, as we've seen in recent quarters, Peiyou continues to deliver steady year-over-year growth. I think we've already covered the key highlights in our prepared remarks. So, let me instead focus more on our path forward. Okay. So, looking ahead to the next fiscal year, really as long as our key growth drivers, which are market demand, product capability, and our ability to recruit and train our instructors, as long as these key growth drivers hold up, we expect to maintain this positive momentum for Peiyou. But I also want to just add, technology will play an increasingly important role in our strategy. You may have noticed that we are expanding the rollout of our dual small and large screen solutions. It really brings smart classroom experiences to more students. I think, literally, it's reimagining the classroom learning experience.

At the same time, we're continuing to innovate our products and refine our product-market fit to create solutions that are both loved by students and trusted by parents. We're firm in our belief that sustainable growth in this market comes from developing and continuously improving high-quality products with strong performance metrics that meet user needs – and not just user needs in a broad sense, but localized user needs. This will remain central to our product development philosophy and strategy. I know many of you are interested in expansion. Regarding expansion, we're maintaining the same prudent approach that has served us well this past year. Each decision to open a new learning center carefully balances multiple factors: local market demand, customer adoption, operational capacity, and efficiency targets. I think this disciplined methodology will continue to guide our business into fiscal year 2026.

If I take a step back, I would say, we remain optimistic about the industry's growth potential. In this new sector, as I think I've talked about before, we feel that enrichment learning is truly meeting the needs of this new generation of parents and learners, and we're optimistic about our ability to deliver high-quality products to meet those future needs. Really, as we are operating from a significantly higher baseline than a few years ago, we expect Peiyou enrichment's year-on-year growth rate to probably gradually taper off moving forward. But our focus really remains on sustainable healthy growth rather than pursuing hyper-growth for growth’s sake. So, Eddie, I hope that answered your question.

Thank you. Our next question comes from the line of Timothy Zhao from Goldman Sachs. Please ask your question, Timothy.

Great. Thank you, management, for taking my question. My question is regarding the Learning Devices or the Learning Content Solutions segment. Just wondering if management can give us some color on the profitability profile of this segment in the fourth quarter and in the fiscal year last year. And when you look into fiscal year 2026, I'm just wondering if there's any updates on your strategy on this specific segment, and what are the new plans or measures that you are going to take to further improve the profitability of the Learning Content Solutions segment? Thank you.

Thanks, Timothy. This is Alex. Let me take this one as well. Look, our learning device business reported an adjusted operating loss in our P&L in the fiscal fourth quarter and fiscal full year of 2025. It's a new product group that launched about two years ago, and we believe this business still has room to really expand access to high-quality, at-home self-learning experiences, specifically aimed at a much wider range of customers. At this stage, our priority really remains building long-term competitiveness and capabilities. So, if I move to our strategy for fiscal 2026, our efforts will focus on the following areas. First, enhancing device functionality. We'll roll out artificial intelligence-powered functionality upgrades continuously. We will expand our content library as we believe these are core values we deliver to our learners, and that has been our track record in the past two years with regular and continuous updates to both functionalities and content.

Secondly, we will expand our portfolio to improve product-market fit and expand access. As I said, we're very convinced that there is ample room to improve access and thereby enhance the experience of high-quality learning content. So, our expanding portfolio will aim to do that. Number three is our go-to-market strategy. I think we've been enhancing our distribution and marketing efforts to reach more users while deepening engagement with existing customers. Both are crucial, and you probably have seen this in previous calls. We look at different channel formats when we assess our go-to-market strategies, and you probably have noticed that there are more offline channels and points of sale available. These are continuous efforts to grow both user engagement and user growth as we scale the learning device business. Lastly, operational efficiency. As our revenue scales, we will leverage economies of scale, optimize our cost structure, and refine operations to drive healthy and efficient business growth.

While it's only been two years, I believe we've gained experience across all these dimensions to drive further operational efficiency gains. In summary, we view this as a multi-year capability-building journey, where every initiative is designed to build sustainable competitiveness and pave the way for future growth and profitability. So, Timothy, I hope that answered your question.

Thank you. Our next question comes from the line of Sophie Zhang from CICC. Please go ahead, Sophie.

Good evening, Alex and Jackson. Thanks for taking my question. Could you please break down the top-line growth by business line for the past quarter to help us better understand the respective drivers? And also, could you elaborate on what led to the year-over-year decline in operating profit and what were the key reasons behind the growth in sales and marketing spend? Thank you.

Sophie, thanks for the question. This is Jackson. Let me take this one, and let me unpack this question a little bit. I think you asked both about top-line and bottom-line. So, let me address top line performance first. Similar to last quarter, our Peiyou Small Class Enrichment programs remain both the largest revenue contributor and the primary growth driver within our learning services business line. Meanwhile, Learning Devices continue to be the largest revenue contributor within Content Solutions, while also serving as a key growth driver. Let me add additional color on these two businesses. Peiyou Enrichment delivered solid quarter-over-quarter and year-over-year growth this quarter and this year. While we now operate from a significantly higher baseline than in prior years, which, as Alex talked about, will naturally moderate the year-over-year growth rate over time. We expect continued expansion in this business supported by expanding market demand and our enhanced product capabilities.

Learning Devices saw a sequential decline quarter-over-quarter in the fourth quarter, reflecting typical seasonality after a peak in Q3 due to e-commerce festivals. However, this business remained healthy, when we look at year-over-year growth, underscoring the momentum of the business. When we look at the full-year fiscal 2025, both Learning Services and Content Solutions delivered a stable business mix relative to fiscal 2024. Now, Sophie, let me adjust to the second part of your question on margin profile. First, let's look at general and administrative expenses. Non-GAAP G&A expenses have decreased from 24.4% to 17.8% this quarter, demonstrating leverage achieved through a larger revenue base. However, as you touched on, non-GAAP selling and marketing expenses rose to 35.1% of revenue, up 7.1 percentage points year-over-year, primarily due to increased activities in online channels aimed at market penetration and product visibility enhancements.

That was the main reason for the year-over-year decline in our adjusted operating margin. Additionally, we conducted brand building initiatives that may not yield immediate revenue but are expected to promote customer awareness and our market positioning. As part of our strategy, we're committed to establishing and strengthening multi-channel communication mechanisms with our users. For digital products such as Learning Devices and shares.com, these efforts are crucial in fostering deep customer engagement by reaching more users and gaining broader acceptance. Looking ahead, we're refining our market approach and diversifying our channels to align with business maturity, product cycles, and market conditions. Through this process, we aim to steadily strengthen our channel capabilities, enhance brand recognition, and deepen connections with the next generation of parents and learners. We believe that upgrading our channel strategies, diversifying our distribution networks, and driving user engagement will foster long-term business growth. I hope that answers your question.

Thank you, Jackson, and that's very helpful. So just a quick follow-up on the bottom line. So, should we expect improvement in profitability going forward? Thank you.

Sophie, thanks, and that's a good question. I would say moving forward, improving overall profitability remains a key priority for us. As our business continues to develop, we expect two primary drivers of profitability. First, our expanding revenue base naturally generates operating leverage, allowing more efficient allocation of fixed costs. You can probably see this in some of the financial results we printed in the last few quarters. We continue to unlock our operating leverage as our business grows. General administrative expenses as a percentage of revenue have largely come down in the last few quarters. Our profitability would also improve through targeted operational refinements at every stage of our workflow, including content creation, product R&D, service delivery, and sales and marketing. While these efforts will take some time to fully impact our P&L, I would just like to reiterate again that operational efficiency will remain a priority for us in the next fiscal year. I hope that answers your question, Sophie.

Thank you. Our next question comes from the line of Felix Liu from UBS. Please ask your question, Felix.

Good evening, management. Thank you for taking my question. My question is on AI. So, what learning scenarios does management anticipate AI can be implemented in your business in the near term? What are the impacts that integrating DeepSeek into your business model will present, particularly in our learning services and the Learning Devices business? Thank you.

Thanks, Felix, this is Alex. Let me take this one. I will actually take a step back a little bit. We've been talking about AI, and I just want to go back to something that I've discussed maybe a year or even two ago. I think it really has a multi-dimensional impact on us, and look, we really welcome every advance in AI capabilities from the foundational models. I think every advance is welcome news for us and let me explain why. First, we think AI has a huge impact on educational content creation. The entire creation process is benefiting tremendously from AI. It has significant implications in terms of efficiency gains and speed improvements, and we're witnessing that every day in the last two years. It also has made things that previously seemed impossible become a reality. Leveraging this capability, we can now develop multi-language, multi-curriculum adapted learning content material.

We are getting closer to using AI to generate interactive, high-quality content in real-time. Again, this wasn't even a cost issue; it was simply not possible before. This raises the ceiling of what’s possible while changing the cost structure for the better. Secondly, with every single advance in AI, we see more possibilities for leveraging AI in our services, from instruction to customer service to after-sales service across the board. In these areas, we are pushing forward every day in terms of raising the level of customer service while gaining more efficiency. We expect more benefits as AI capabilities continue to expand. Thirdly, in terms of research and development, we're seeing much more code generated by AI that enhances speed and efficiency. As a large research and development organization focused on education technology, AI is providing us with a different way to operate. It allows for faster and more flexible prototyping and creates more efficiency by removing much of the friction in the R&D process compared to before.

I want to emphasize those three points. They are tangible, meaningful and we expect more benefits and impacts from them. Regarding the integration of AI in learning scenarios, we're increasingly seeing AI becoming a learning companion. More and more students, who are naturally inclined toward using AI, are getting comfortable seeking immediate help and learning support from AI as they study. Currently, DeepSeek V3 service is one of the foundational models for our Mass GPT or in Chinese. Beyond its general intelligence capabilities, we're also adapting it to support subject-specific tasks in learning content. We need to fine-tune it to specifically support these pedagogical scenarios. It’s one thing for our model to produce answers, but an entirely different thing to ensure that solutions are made accessible and easy to understand for students. These are fundamentally vertical capabilities for an educational player and that’s how we are approaching it.

We will continue to work and invest in making AI capabilities accessible, improving user interfaces, and enabling easier user input to our large language models. We are committed to ensuring that the outputs from AI serve learning purposes well. Lastly, we will remain committed to contributing to the broader intelligent learning ecosystem. Advancing new educational paradigms and supporting future schools and other institutions as we've done in the past, we genuinely look forward to reimagining the future of learning and shaping a more dynamic education ecosystem as a whole. Felix, I hope that answered your question.

Thank you. Our next question comes from the line of Alice Tsai from Citi. Please ask your question, Alice.

Thanks management for taking my question. How are we considering cash usage? Could you please give us more color on the future investment strategy and also shareholder returns? Thank you so much.

Alice, thank you for the question. This is Jackson. Let me take this one. Let me first address our current cash position. As of February 28, 2025, the company holds approximately $3.2 billion in cash, cash equivalents, short-term investments, and restricted cash, excluding deferred revenue. Given our cash position, we believe we are well-positioned to fund both growth and returns. When it comes to deploying this capital, we take a thoughtful and balanced approach when evaluating potential uses of cash. We consider multiple factors to strike the right balance between short-term needs and long-term development. Our focus remains on optimizing resource allocation, strategically reinvesting in the business while also delivering value to shareholders. Given our current margin profile, which remains relatively thin, and with a meaningful portion of our operations and businesses still in growth phases, maintaining operational flexibility is one of our key priorities.

As we assess investment opportunities for fiscal 2026, we are particularly interested in areas that enhance our existing products and services, strengthen our core capabilities, and support business expansion. Additionally, as our industry evolves and new technologies emerge, we will invest in integrating these advancements into our operations. We believe these investments will drive long-term value creation for our shareholders. Alongside these investments, we remain equally focused on shareholder returns. As previously mentioned, the Board has extended our share repurchase program for an additional year, authorizing purchases of up to $490.7 million. Going forward, we will prudently evaluate market conditions to serve a learning purpose and enhance our services. We are a significant service provider and will consider our market conditions, business needs, and other relevant factors before executing further repurchases.

To summarize, our philosophy centers around a disciplined, forward-looking approach that fosters sustainable development while maintaining the agility needed to navigate the dynamic market. We will keep you updated as appropriate. I hope that answers your question, Alice.

We have now 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.

So again, thanks everybody on the call for joining us today, and we'll see you next quarter. Thank you. Bye bye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.