On October 21, the biggest intraday increase in Good Future (TAL.US) stock price reached 8.98%, reversing the downward trend since October 2 in one fell swoop.

The reason for this is that the disclosure of the company's fiscal year 2025 Q2 financial report is approaching, and the agency previously predicted that future revenue for the 2025Q2 quarter would increase by 47.59% year on year, and earnings per share would increase by 29.67% year on year. For this reason, Morgan Stanley, Citibank, and Bank of America Securities all gave buying ratings.

The Zhitong Finance App learned that on October 24, Good Future officially disclosed its Q2 financial report for the 2025 fiscal year. Financial reports show that in the Q2 quarter of the 2025 fiscal year ending August 31, 2024, Good Future's net revenue reached 0.619 billion US dollars, up 50.4% year on year; net profit attributable to Good Future was 57.4 million US dollars, up 51.5% year on year. This clearly surpassed previous market expectations.

Judging from the performance of the secondary market, although the stock price fell for two consecutive days after the previous 25Q1 financial report, there was a certain increase in stock prices after the disclosure of the current Good Future earnings report, but the increase was weak. After the stock price closed up 2.84% and 4.57% on October 24 and 25, respectively, Good Future's stock price closed only slightly up 0.18% on October 28.

What is behind the performance exceeding expectations

As always, Good Future has yet to disclose its business revenue structure and details in this quarterly report, but investors can still use the company's operating data to explore the development of its various businesses from the overall financial situation.

Looking at overall results, in the Q2 quarter of fiscal year 2025, Good Future achieved net revenue of 0.619 billion US dollars, an increase of 50.4% year on year; achieved operating profit of 47.622 million US dollars, an increase of 49.8% compared to 31.79 million US dollars in the same period last year; at the same time, net profit attributable to Good Future for the current period was 5743.0.01 million US dollars, an increase of 51.5% year on year.

With outstanding performance in a single quarter in Q2, Good Future also achieved significant growth in the first half of FY25. According to the data, Good Future achieved net revenue of 1.034 billion US dollars, an increase of 50.4% over the previous year; net profit attributable to Good Future for the current period was 68.833 million US dollars. Compared with the net loss of 7.135 million US dollars for the same period last year, Good Future recorded a significant increase while turning losses into profits.

From a business perspective, after the “double reduction”, Good Future repositioned itself as an intelligent learning solution provider and readjusted its business priorities: learning services and other services and learning content solutions. According to data provided by Good Future at its 2023 fiscal year earnings conference, its learning services, content solutions, and other revenue accounted for about 75%, 15%, and 10% of the company's total revenue, respectively.

As a “new business” established later, the main sales growth driver for the content solutions business was its smart devices. At the previous investor conference in 2023, when asked about the “impact on profit margins” of revenue growth related to related products, Good Future said that smart devices are in the “early stages of development” and the focus is on “optimizing product functions.” At this Q2 earnings conference, Good Future President and Chief Financial Officer Peng Zhuangzhuang further stated, “Currently, Good Future's intelligent learning hardware is losing money, mainly due to costs such as products, R&D, sales expenses, and hardware materials.”

Although Good Future did not disclose its learning equipment sales in financial reports, according to Open Source Securities data, the online sales volume of the FY2025Q2 (Tmall + JD+ Douyin) was 1.242 billion yuan. Of these, the number of learning machines shipped was 0.19 million, an increase of 93% over about 0.1 million units in the previous quarter. In August of this year, the new smart hardware product Learning Training Machine was launched. In August/September, the online sales volume of the Learning & Si Training Machine reached 0.13 billion yuan, with sales volume of about 0.03 million units, which is expected to become a new driver for the company's revenue growth.

According to general financial logic, as the loss-making content solutions business's contribution to a good future revenue continues to increase, the company's profit margin may be hit. According to the data, the company's gross profit margin for the Q2 quarter was 56.3%, down about 2.6 percentage points from the previous year, mainly due to the drag on the hardware business; at the same time, the company's current sales expenses ratio reached 29.4%, up 1.1 percentage points year on year, also due to increased investment in the company's hardware business marketing.

However, on the other hand, Good Future's current net interest rate reached 9.26%, and both showed a month-on-month increase along with gross margin. To a certain extent, while Good Future continues to increase investment in AI and learning equipment, Good Future may have begun to further accelerate the high-margin offline education layout.

Continued investment raises market concerns

Looking at it now, the good future has not completely transformed and developed AI education as previously anticipated by the market. In the eyes of a good future, although the AI education function has been greatly improved based on big model technology, there is still a big gap between it and professional teachers. Essentially, it is still an aid for education brands to increase value. Therefore, the current stage of the good future is more about empowering offline education through AI, rather than pursuing AI products to completely replace offline education. Continued expansion of the offline training business is the best proof.

From a policy perspective, in August of this year, the “Opinions on Promoting High-Quality Development of Service Consumption” issued by the State Council mentioned “promoting social training institutions to improve the quality of services in response to public demand. In accordance with relevant regulations, schools are instructed to introduce third party institutions with corresponding qualifications to provide high-quality non-subject public welfare after-school services through purchasing services, etc.” It is viewed by the market as a positive sign that favors non-subject training and education.

Financial reports show that at the end of the Q2 fiscal quarter, Good Future's deferred revenue increased 59% year on year to 0.485 billion US dollars, reflecting the company's growth in the learning service business. According to Open Source Securities statistics, during the reporting period, Good Future had a net increase of 31 outlets (the number of offline outlets was 400+ as of the end of FY2025Q1); as of the end of October 2024, Xuersi FY2025Q3 (September-November 2024) had a net increase of 23 outlets. In other words, in an environment with clear policies, the annual expansion of production capacity at outlets is expected to increase by more than 50% year-on-year in the future.

Driven by the core learning service business, in the secondary market, institutions are confident that future revenue growth expectations will be good. According to S&P Capital IQ data, in the past six months, institutional analysts have raised the consensus forecast for future global revenue in fiscal year 2025 and fiscal year 2026 by 13% and 18% respectively, corresponding to the company's expected revenue growth rate of 41% and 28%, respectively.

Judging from the balance, liabilities and cash situation, as of August 31, 2024, Good Future's total assets were 5.341 billion US dollars, total liabilities were 1.592 billion US dollars, and the corresponding balance ratio was 29.81%. As can be seen, Good Future has now gradually broken away from the asset-heavy model of traditional education companies and gradually transformed into an asset-light operating model. Furthermore, as of August 31, 2024, the cash and cash equivalents held by Good Future were 2.086 billion US dollars, accounting for 39.06% of total assets, close to 40%. Its cash allowance was high. The total balance of cash, cash equivalents and short-term investments held by the company in the current period was 3.454 billion US dollars. This also lays the foundation for continued investment by the company in the future.

However, market opinions are not one-sided in support of the expectation that a good future may continue to increase investment in learning service quality and hardware equipment over the next few quarters and years.

According to S&P Capital IQ data, in the past six months, the agency's consistent forecast for operating profit for the next fiscal year 2025 has been revised from a loss of 12 million dollars to a loss of 31 million dollars. At the same time, the data showed that the seller's consensus forecast for Good Future Education's revenue for the 2026 fiscal year was reduced by a cumulative total of 24% to 74 million US dollars. Furthermore, Good Future Education's current transaction price is 15 times that of EV/EBITDA in FY2026, which is unattractive.

For market investors, in a good future, when fundamentals improve, shareholders' return on capital should be appropriately increased. Currently, the market's valuation of a good future is that the ratio of corporate value and revenue over the next 12 months is less than 1 times. Under such circumstances, the most direct way to boost future stock price increases is undoubtedly stock repurchases.

But Good Future doesn't seem to be positive about this strategy. According to the Zhitong Finance App, in April of this year, Good Future extended its share repurchase plan for 12 months in accordance with the authorization of the board of directors, and the company may buy back about 0.504 billion US dollars of common stock before April 30 next year. Previously, as of August 31, 2024, the company had only repurchased $0.013 billion of common stock under the share repurchase program.