TAL Education Group — FY2019 Form 20-F
Reporting period: Fiscal year ended February 28, 2019. Although the request metadata says “2018 Q4,” this filing is an annual report, not a quarterly filing. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Business context
TAL provides K-12 after-school tutoring in China through small classes, personalized tutoring and online courses, alongside related education services and investments. At year-end it reported 676 learning centers and 499 service centers in 56 cities, and approximately 14.0 million annual course enrollments. About 93.9% of revenue came from consolidated VIEs, which TAL controls through contractual arrangements rather than equity ownership.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $2,563.0m | $1,715.0m |
| Gross profit / gross margin | $1,398.5m / 54.6% | $832.7m / 48.6% |
| Operating income / operating margin | $341.6m / 13.4% | $208.6m / 12.2% |
| Net income | $364.5m | $194.7m |
| Net income attributable to TAL shareholders | $367.2m | $198.4m |
| Operating cash flow | $194.4m | $685.3m |
| Cash and cash equivalents at year-end | $1,247.1m | $711.5m |
| Short-term investments at year-end | $268.4m | $787.4m |
| Total liabilities at year-end | $1,204.6m | $1,414.1m |
Revenue rose 49.4% year over year, primarily on higher small-class and online enrollments. Online courses through xueersi.com accounted for 13.3% of revenue, versus 7.0% in FY2018. Cost of revenue increased 32.0%; gross margin improved. Operating expenses increased 69.2%, including selling and marketing expense of $484.0m, or 18.9% of revenue, compared with 14.1% in FY2018. Share-based compensation was $77.3m, up from $47.1m.
Operating cash flow fell sharply, chiefly reflecting a $407.2m decrease in deferred revenue as tuition-fee collection schedules changed to address regulatory requirements. Investing cash outflow was $166.6m; financing cash inflow was $475.0m, including a $500.0m private placement. Cash, cash equivalents and short-term investments totaled approximately $1,515.6m at year-end, though cash held in China may not be freely transferable.
Debt included $210.0m of short-term debt and current maturities, including $195.0m drawn under the 2016 facilities and a $14.9m bank loan. The remaining convertible bond balance was reported as $5.3m current; the notes matured May 15, 2019. A new $600m three-year facility signed in February 2019 was undrawn at year-end. Contractual operating lease obligations totaled $1,343.3m, including $270.1m due within one year. No dividend was declared for FY2019.
Material changes and unusual items
- Net income increased substantially, but FY2019 other income included a $95.5m realized fair-value gain after BabyTree’s Hong Kong listing and reclassification of the investment; other income totaled $131.7m.
- Long-term investment impairment rose to $58.1m from $2.2m, mainly from other-than-temporary declines. Equity-method investment losses were $16.2m.
- Operating cash flow declined despite higher earnings, driven principally by the deferred-revenue decrease. Deferred revenue fell to $436.1m from $842.3m.
- TAL obtained control of Shanghai Xiaoxin in January 2019 and reported acquisition-related goodwill and other acquisition activity. Capital expenditures were $353.3m, including land-use-right prepayments.
- Revenue from contracts with customers (Topic 606) was adopted effective March 1, 2018. TAL said the effect was not material overall; reported FY2019 revenue was $7.2m lower than it would have been without adoption.
Outlook, risks and contingencies
Management said current cash and expected operating cash flow were sufficient for anticipated needs for at least 12 months. It provided no quantified revenue, earnings or margin guidance. Management expects online revenue to increase, while noting the need to invest in expansion, technology, staffing and marketing.
- Regulation: New PRC rules restrict tutoring content, schedules, fees collected in advance, examinations and competitions, teacher qualifications, online-course disclosures and operating permits. Some learning centers had incomplete filings or permits; TAL did not expect all to be completed in the near term. The filing says their revenue contribution was immaterial, but potential penalties, suspension or remediation remain risks.
- VIE and China exposure: Substantially all education operations depend on contractual VIE arrangements. Changes in law or enforcement, or inability to enforce the agreements, could impair control, cash access or consolidation. Draft private-education rules and the Foreign Investment Law add uncertainty.
- Litigation and allegations: Two shareholder class actions relating to alleged misstatements were consolidated and remained in preliminary stages; TAL said it could not estimate a possible loss. Following Muddy Waters reports, an internal review found no evidence supporting the allegations, according to TAL.
- Operating risks: Competition, rapid network expansion, teacher recruitment and retention, rising wages and rents, student refunds, brand quality, online-system and data security, and concentration in key cities may affect results. The five largest cities contributed about 39.5% of revenue through Xueersi small classes.
- Other exposures: Share-based compensation and dilution, foreign-exchange and cash-transfer restrictions, possible tax changes or loss of preferential rates, and investment valuation risks. Internal control over financial reporting was reported effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Key facts investors should verify
- Whether enrollment and revenue growth can continue while selling and marketing costs rise and regulatory limits affect course offerings and fee collection.
- How much of reported earnings reflects recurring operations versus the BabyTree fair-value gain, and the outlook for investment impairments.
- Whether operating cash flow recovers after the deferred-revenue decline, and the timing and availability of cash held in China.
- Debt repayment and refinancing around the May 2019 convertible-note maturity and June 2019 maturity of the 2016 term loan; also confirm covenant compliance and facility availability.
- Progress on tutoring-center permits, teacher qualifications and other PRC compliance requirements, and any developments in the shareholder litigation.
- Whether the VIE contractual structure remains enforceable and whether the new PRC rules could affect operations, consolidation or distributions.