Citi: TAL’s fiscal second-quarter margin jumps, while weaker device demand and rising inventory pose constraints

Revenue missed expectations. Why did the margin rise sharply?

In the second quarter of fiscal 2027, TAL generated revenue of 994.6 million dollars, up 15.5% year over year, or 9% in renminbi terms, and 7.6% below the VA consensus before the results announcement. Contraction in the learning devices business was a drag.
Non-GAAP operating profit was 247.7 million dollars, 21% above consensus; operating margin rose from 12.5% a year earlier to 24.9%. Citi believes the 12.4 percentage-point increase came mainly from lower sales and marketing expenses, which fell 15.6% year over year to 22.4% of revenue.
Citi believes part of the expense decline will persist because the contracting devices business previously accounted for substantial traffic acquisition spending, although this also reflects weak device demand. Meanwhile, higher utilization at Peiyou offline centers lifted the company’s overall gross margin by 2.8 percentage points to 59.8%.

Management said the learning device market contracted by double digits year over year. Citi believes trade-in subsidies in 2025 pulled demand forward; its tracking data show that growth in the category’s rolling 12-month transaction value through September turned negative.
Online unit sales of Xueersi devices fell 46% year over year from June to August, while the average selling price rose 55%. At the end of the fiscal second quarter, the company’s inventory was up 77% from the end of February to 254 million dollars. Citi believes most of the stocking was undertaken to purchase ahead of rising storage costs; inventory impairment risk is limited, but selling the inventory will take longer.
Stocking also comes at a cash-flow cost: non-GAAP operating profit in the first fiscal half rose to about three times its prior level, while operating cash flow was broadly flat. Citi expects device unit sales to fall about 22% in fiscal 2027, but higher prices and continued recognition of content revenue associated with earlier shipments will keep device revenue broadly flat.

The company’s overall year-over-year revenue growth slowed from 31.9% in the first quarter of fiscal 2027 to 15.5% in the second quarter, and management expects it to slow further.
Management said the Peiyou business achieved double-digit growth driven by enrollments. Lease liabilities, however, were flat versus the end of February and rose just 4% year over year, below the 16% in fiscal 2026. Citi therefore believes offline growth currently relies more on increasing utilization of existing centers.
Citi expects learning services revenue to grow 25% and 15% in fiscal 2027 and 2028, respectively, as the boost from higher utilization wanes. It forecasts company revenue of 3.48 billion and 3.85 billion dollars and non-GAAP operating profit of 737 million and 857 million dollars in the respective years.

Second-quarter net loss attributable to the parent was 47.4 million dollars, affected by an investment loss of 189.7 million dollars and tax expenses of 135.9 million dollars. Management said the increase in tax expenses came mainly from withholding tax incurred when transferring profits out of China.
Citi estimates that about 120 million dollars of the tax expense was withholding tax, far above the approximately 3 million dollars needed to pay the first dividend of 55 million dollars. Working backward from a tax rate of 5%–10% on profit remittances, the bank estimates that the company plans to transfer 1.2 billion to 2.4 billion dollars abroad and therefore expects future shareholder returns could be larger. Management also said it intends to make dividends and buybacks more regular.
Citi maintained its Neutral rating and 11.54-dollar price target, while expressing a short-term bullish view over 30 days, believing an announcement of a return plan could lift the share price. The bank believes a sustained valuation rerating still depends on whether margin improvements can last a full year and growth can stabilize.