TAL Earnings: Content Solutions To Drive Growth in the Near Term

TAL Education’s, or TAL’s, fiscal 2024 first quarter (ending May 2023) revenue beat management guidance but adjusted net income missed Refinitiv consensus expectation. This was mainly due to the exponential growth of the low-margin content solutions business. As such, we increase our fiscal 2024 revenue forecast to USD 1.31 billion from 1.25 billion but widen our net loss estimate to USD 113 million from USD 71 million. We still expect TAL to break even in fiscal 2026. Our fair value estimate remains USD 5.50. Shares closed 17% above our fair value estimate on July 27, and we suggest investors wait for better entry points.

Content solutions revenue more than doubled year on year in the quarter, primarily driven by strong learning tablet shipment. Management targets 300,000 to 500,000 units shipment in 2024. This is substantial compared with four million to five million units annual shipment in the China market. We acknowledge TAL’s strong content capability as once a leading after-school tutoring provider. However, we believe the success was also supported by aggressive pricing. Management expects the product to break even at around 500,000 units annual shipment. In other words, TAL must grab about 10% of the China market share by shipment before the product turns profitable.

TAL combined learning services and technology solutions into one segment, and the combined segment accounted for about 75% of revenue in the quarter. Within this segment, we estimate enrichment learning represented about 45% of revenue, high school tutoring about 20%, and the remaining 10% was overseas tutoring and technology solutions. Management expects enrichment learning to grow by 20%-30% year on year in 2024 while high school tutoring will only grow by a single-digit percentage. The growth rates for both enrichment learning and high school tutoring are slower than peer New Oriental. Overall, we only expect single-digit percentage revenue growth for the combined segment in 2024.