{ "docId": "019dd923-622c-750b-8b96-ae2c8e45c5c1", "docSlug": "0f8f1ac3dfbb", "documentTitle": "TAL Education Group (TAL)", "authorId": "51_Muddy_Waters", "authorName": "Carson C. Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2018-07-02 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 5, "pageCount": 8, "prevPage": 4, "nextPage": 6, "slideType": "appendix_data", "function": "analyze_data", "density": "dense", "nDataPoints": 45, "notes": "The slide calculates the deferred revenue impact of a 4% monthly growth cohort model and applies a 30% discount based on ASC 805 fair value accounting.", "elementsJson": [ "paragraph", "data_table", "footnote" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-ae2c8e45c5c1/5", "deckHref": "/decks/019dd923-622c-750b-8b96-ae2c8e45c5c1", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-ae2c8e45c5c1.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-ae2c8e45c5c1#slide-5", "components": [ { "bbox": null, "kind": "callout", "text": "Applying that fraction to the 379 million Rmb in prepayments from before gets us to about 223 million Rmb of deferred revenue, or $34 million. Uh-oh: that is 25% below the $45 million TAL booked.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd952-e6ee-7118-8709-bfdc669ee5f7", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "deferred revenue: 59%", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd952-e6ee-7118-8709-c18a5498c50f", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.055, "w": 0.764, "x": 0.118, "y": 0.094 }, "kind": "paragraph", "text": "monthly cohorts that have month-on-month enrollment growth of 4% and pay a fixed tuition. We want to see what portion of the total tuition paid by these cohorts remains as deferred revenue. The tuition rate and starting student population do not matter, so we can choose round numbers.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "1737b895-ea89-4d92-97c6-feb7de91a085", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.068, "w": 0.764, "x": 0.118, "y": 0.404 }, "kind": "paragraph", "text": "As we can see above, out of the prepayments collected, only about 59% remain after a full student cycle. Applying that fraction to the 379 million Rmb in prepayments from before gets us to about 223 million Rmb of deferred revenue, or $34 million. Uh-oh: that is 25% below the $45 million TAL booked. But we’re not done yet.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "2542793e-b989-46fe-b657-296a2c12b54c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.235, "w": 0.764, "x": 0.118, "y": 0.488 }, "kind": "paragraph", "text": "There is a haircut we need to apply. It is a dry but important one—FASB section ASC 805. According to ASC 805, at the time of an acquisition, the acquired company’s deferred revenue is no longer recorded at the amortized value of the cash received. Instead, it is booked at fair value, which is equal to the acquirer’s future costs to fulfill the obligations, plus a reasonable margin that a third party might charge. For TAL, this would just be the marginal cost of delivering additional lessons; sales, marketing, G&A, and other expenses already incurred would be excluded. Let us use the Firstleap Beijing VIE financials from before to see what sort of a cost structure is reasonable. Gross costs, meaning cost of goods sold and sales tax, were 52% and 64% of revenue in 2015 and 2016, respectively. Let us assume that 60% of revenue was consumed by the marginal cost of service provision as of the acquisition date. After putting a reasonable margin of 10% on top, 70% of deferred revenue is matched to costs. In other words, that implies a mandatory 30% discount to pre-acquisition deferred revenue. We reproduce the figures and math below.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "695c5b4b-ca89-40a6-9912-3a2cbeba2289", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.075, "w": 0.764, "x": 0.118, "y": 0.821 }, "kind": "source-note", "text": "10 The deferred revenue lost due to the “haircut” is never recorded post-acquisition. [URLs] 11 This is favorable to TAL, as lower gross margins mean a smaller cut to the deferred revenue balance.", "attrs": { "numbered": true }, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d043aaa2-cca0-465f-812b-7631b905ddb6", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.215, "w": 0.764, "x": 0.118, "y": 0.178 }, "kind": "table", "text": "Table showing monthly cohort deferred revenue calculation", "attrs": null, "subkind": "data", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "67be8e9e-77b7-4cac-b2a0-1079f29f2dd3", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [ { "name": "Table data", "slug": "table-data", "agent": null, "layer": "slide", "matchId": "f33f226d-a6f9-4628-bdbb-c632e8ba0b34", "evidence": "Table showing monthly cohort deferred revenue calculation", "confidence": 0.9 } ], "frameworks": [ { "name": "ASC 805 Fair Value Accounting", "slug": null, "matchId": "8e3a90c4-2c62-4abc-9546-34766e2d439e", "evidence": "Explicit mention of FASB section ASC 805 and application of fair value haircut to deferred revenue.", "confidence": 1 } ], "arcBeats": [ { "to": 7, "from": 4, "beatId": "e0290fa7-ac82-4f68-957b-6717aab1a44d", "arcName": "Problem-Agitate-Solution", "arcSlug": "problem-agitate-solution", "beatName": "Evidence", "beatSlug": "evidence", "evidence": "The appendix data slides provide evidence for the claims made", "position": 1, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null } ], "loops": [ { "to": 8, "from": 2, "name": "Cost Of Inaction", "slug": "27-cost-of-inaction", "bestFor": "Urgent budget requests, compliance, risk mitigation", "matchId": "1a558c9f-664b-45ab-897c-80fa57bc6873", "evidence": "The document implies that not addressing the issue could lead to significant financial losses", "position": 0, "objective": "What is the cost of not addressing the potential fraudulent financials?", "structure": "The Status Quo -> The Hidden Costs Accumulating -> The Future State of Inaction -> The Tipping Point", "confidence": 0.6, "description": "Quantify what happens if the audience does nothing" }, { "to": 7, "from": 4, "name": "Hypothesis Test", "slug": "42-hypothesis-test", "bestFor": "Strategy validation, due diligence, research presentations", "matchId": "6a8fca48-9190-4d6d-b7e8-b069624faa43", "evidence": "The document provides evidence to support the hypothesis", "position": 1, "objective": "Is the hypothesis that TAL Education's financials are fraudulent supported by evidence?", "structure": "The Hypothesis -> Test 1 (Supports/Refutes) -> Test 2 (Supports/Refutes) -> Conclusion (Validated/Pivoted)", "confidence": 0.7, "description": "State a hypothesis upfront, then systematically prove or disprove it with evidence" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }