After three years of "dual reduction" and difficult reforms, TAL Education (TAL.US) seems to have found a new development direction. In its latest Q1 FY2025 earnings conference call, CEO and CFO of TAL Education, Peng Zhuang, stated: "TAL Education will continue to train models to make them large models that are applicable in age, subject matter, and scenario by using larger, more diverse, and higher quality datasets."

From a financial perspective, TAL Education has gradually overcome the pain of "dual reduction." Although the revenue scale is far less than before, the overall profit level has returned to the level before "dual reduction." In addition to ample self-owned cash and gradually stable blood-making ability, TAL Education has now accumulated enough capital to expand into new fields. From the information disclosed by the current management, it seems that the core of TAL Education's next stage of development is to transform from K12 to full embrace of AI.

However, investors seem to be dissatisfied with the pace of TAL Education's transformation to AI. According to the observation of the WiseMoney APP, TAL Education's stock price has fallen by 30.8% this year. After the release of the earnings report, the stock price of the company fell by 9.38% and 6.72% respectively on the two trading days. In the eyes of investors, when AI products will become the revenue pillar of TAL Education may determine to a certain extent the valuation trend of the company.

Earning money by waving the flag of AI and promoting quality education.

Recently, TAL Education announced its unaudited financial report for Q1 FY2025 ending on May 31, 2024. According to the report, the net revenue of TAL Education during the reporting period was $0.414 billion, an increase of 50.4% from the same period last year. The current operating loss was $17.33 million, a significant year-on-year decrease of 70%.

During this period, TAL Education's net profit attributable to the shareholders was $11.4 million, which was a significant improvement from the net loss attributable to the shareholders of $45.04 million in the same period last year, realizing continuous profit. Under Non-GAAP, the net profit attributable to shareholders of the company reached $29.61 million. In summary, TAL Education achieved high revenue growth and sustained profitability improvement in this reporting period.

From a business perspective, after the "dual reduction," TAL Education has repositioned itself as a smart learning solution provider and readjusted its business focus on learning services and other services, and learning content solutions.

Nowadays, the learning service business is TAL Education's main source of revenue. According to the company's FY2023 annual report, TAL Education mainly provides learning services through small class teaching, personalized high-quality services, and online courses, and also launches a series of learning projects such as science and creativity, coding and programming, humanities and aesthetics, and so on.

In terms of the performance of branch businesses, TAL Education's learning services and other businesses maintain growth momentum in the first quarter of FY2025. Due to the progress of multiple product lines, the department's revenue increased year-on-year. The largest source of revenue in learning services and other businesses is still XRS offline small class literacy courses, and the growth in business revenue is due to the recovery of offline activities since the first quarter of the previous fiscal year and the increase in the number of paying users for regular courses.

After steady growth in the previous fiscal year, TAL Education has further expanded its core business in quality education in this quarter, as can be seen from the current costs and expenses.

The current operating costs and expenses of the company are $0.432 billion, an increase of 26.3% from the first quarter of FY2024; non-GAAP operating costs and expenses are $0.414 billion, an increase of 30.7% from the same period of the previous year.

In addition, as of the end of Q1 fiscal quarter, TAL Education's balance of deferred revenue was $0.642 billion, an increase of 50% from the same period last year, which indirectly proves the growth of the company's learning service business. But it is also not difficult to see that TAL Education's current revenue is still driven by offline quality education, and the main source of revenue is the deferred income from confirmed learning service business.

In terms of cash flow, TAL Education's net operating cash flow reached $0.247 billion as of the Q1 fiscal quarter, and the company had a total of $3.419 billion in cash, cash equivalents, and short-term investments in the current period. It can be seen that TAL Education's stable blood-making ability has built a good cash flow support for it.

Behind the decline in stock price: Will AI be dominant or auxiliary?

One of the main problems with the development of large-scale AI models in recent years is that the progress of underlying technologies has been significant but the application progress is not as expected.

In fact, education has always been one of the most concerned application scenarios for large-scale model landing. On the one hand, it has social value. On the other hand, the strong demand for large amounts of teaching data and personalized learning, as well as parents' strong willingness to pay, also make AI+ education have a lot of imagination space.

Therefore, in recent years, many education brands have launched layout around the combination of "AI + education", and some companies have even benefited from AI through hardware products. However, in the midst of this AI frenzy, TAL Education Group has exercised some restraint. As the only company specializing in K12 education among the three education giants, TAL Education Group has only launched a MathGPT that can only do math problems. This is in stark contrast to some of the seemingly omnipotent large models on the market, and when promoting Xueersi learning machines, TAL Education Group's focus is not on AI, but on emphasizing the accumulation of its teaching staff and curriculum.

In addition, on the B-side of the company's strong investment in content solution business, the smart hardware + AIGC business of TAL Education Group through Xueersi learning machines mainly contributes revenue, and its proportion in the total revenue is still much lower than that of the learning service business that focuses on quality education. From a simple input-output ratio, the cost-effectiveness of the content solution business is much lower than that of the learning service business, but the gradually increasing investment is beginning to erode the company's gross margin. Data shows that the company's current gross margin is 51.71%, showing a decrease compared to the previous period.

In short, in the eyes of TAL Education Group, although AI education functions have been greatly improved based on large model technology, there is still a big gap compared with professional teachers, and fundamentally still an auxiliary to enhance the value of education brands. Therefore, in the current stage, TAL Education Group is doing more through AI to empower offline education, rather than pursuing AI products to completely replace offline education.

Therefore, on the income side, investors can see that in addition to the direct income of AI learning machines, other AI-related income for TAL Education Group is often hidden in deferred income from customer acquisition and learning services. Therefore, the current valuation of TAL Education Group can only stay on the education track, rather than the higher AI application track.

However, from a market perspective, it was AI's application in education that supported the previous rise in TAL Education Group's stock price. From the market's perspective, according to Grand View Research, the global AI education market is expected to reach 42.33 billion US dollars by 2027, with a compound annual growth rate of 47%. According to data from market research company Global Market Insights, the global AI education market is expected to exceed 35 billion US dollars by 2027, with a compound annual growth rate (CAGR) of 45%. If TAL Education Group only uses AI as an auxiliary tool in the 2C end, its valuation may be difficult to obtain the support of the market's expectations for AI application, and the stock price decline is a true reflection of the market's expected changes for TAL Education Group.

In terms of market competition, with the deepening development of AI large models in the education track, domestic companies such as iFLYTEK Co., Ltd. and Chengdu Jiafaantai Education Technology in the 2G/2B field of educational informationization have a considerable market share. In the 2C field, in addition to TAL Education Group, companies such as iFLYTEK Co., Ltd. and Netease Youdao have also launched AI learning machines and other hardware products, gradually occupying market share. As competitors enter the education field from the AI technology track, TAL Education Group's advantage in AI education track is undoubtedly being weakened. Whether it can rely on its own traditional advantages in the education field to turn the tide will be the key to TAL Education Group's subsequent reversal.