17 Education & Technology Group Inc. Q1 FY2022 Earnings Call

Good evening and good morning, ladies and gentlemen and thank you for standing by for 17EdTech's First Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I'd now like to turn the meeting over to your host for today's call, Ms. Lara Zhao, 17EdTech's Investor Relations Manager. Please proceed, Lara.

Thank you, operator. Hello, everyone, and thank you for joining us today. Our earnings release was distributed earlier today and is available on our IR website. Joining us today are Mr. Andy Chang Liu, Founder, Chairman and Chief Executive Officer; and Mr. Michael Chao Du, Director and Chief Financial Officer. They will walk you through our latest business performance and strategies, followed by Michael, who will discuss our financial performance and guidance. They will be available to answer your questions during the Q&A session. After the prepared remarks, before we begin, I'd like to remind you that this conference call contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 and the US Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control. These risks may cause the company's actual results, performance or achievements to differ materially. Further information regarding these and other risks, uncertainties or factors is included in the company's filing with the US SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, certain events or otherwise except as required under applicable law. I'll now turn the call over to our Chairman and Chief Executive Officer to review some of our business, its development and strategic direction. Andy, please go ahead.

Thank you, Lara. Hello everyone. Thank you for joining us on our first quarter 2022 earnings call. We're pleased to report solid performance in the first quarter, but before we dive into the details, let me provide some quick highlights. First, net revenue was RMB233.4 million, 11.1% higher than the top end of the estimates provided in March. Second, our operational efficiency continued to improve, resulting in a substantially narrower GAAP business net loss compared with the same period in 2021, and this allowed us to achieve a positive adjusted net income for the second quarter in a row. Third, our new business strategies continued to gain momentum. We saw new opportunities as the COVID-19 pandemic and variable government policy helped evolve market needs and drove new demands for our service. Now, let me go into some details. We delivered solid operational and financial results. Net revenue reached RMB233.4 million, which was 11.1% higher than the high end of our guidance provided last quarter. Again, this was achieved without any legacy online K-12 tutoring services revenues. Our profitability continues to improve as we enhance our cost structures and operational efficiency. For the first quarter, operating expenses decreased by 82.1% year-over-year and as a percentage of revenue as well. Although we recorded a net loss of RMB24.8 million on a GAAP basis in the first quarter of 2022, we achieved RMB9.9 million of adjusted net income compared with an adjusted net loss of RMB588.8 million in the first quarter of 2021. For our teaching and learning software service business, we continue to see positive trends and demands for our offerings. Earlier this year, the Ministry of Education clearly put forward the need to speed up the implementation of digitalizing the education industry. On March 01, the National Public Service platform for smart education in primary and secondary schools was officially launched. All of these signals that the digital transformation in China’s education has entered a new area where it focuses on teaching and learning scenarios and emphasizes services and daily application. In May, the Beijing Municipal Education Commission issued the document called Opinions on further purchasing quality, external education resources for compulsory education, explicitly supporting the procurement of third-party services to enrich the education resources for public schools, including curriculum resources, management services, and family education and guidance services. During the last few months, China has experienced a number of regional COVID outbreaks. During these outbreaks, we have seen additional demands and opportunities for education providers and schools for our teaching and learning services offerings, especially online homework modules to cope with periods where physical offline schooling was not possible. A number of districts and cities in economically developed regions are already in detailed discussions with us on the procurement of our online homework SaaS component. Specifically, all elementary and secondary schools in Shanghai moved to online learning starting in March. We have developed a multichannel integrated online education platform, which combines a real classroom live broadcast interactive platform and smart homework feature based on our existing modules for the Minhang District of Shanghai, delivering our one-stop solution that solves multiple problems. Recently, the National Educational Resources and Public Services System alliance also officially announced the results of the three classrooms application case collection. Among them, the attempt made by a specific entity using technology to enhance balanced education was successfully selected as a national education three classrooms innovative application case. Our pilot products model, school and district continued to progress in the generous data insights that brought recognition by schools and educational authorities. During the quarter, we officially released the data reports for pilot schools and districts in two districts in Shanghai and several cities in Jiangsu province. They were well recognized by schools and local education authorities, and we believe they provide high value in facilitating personalized teaching and learning processes. Syndrome Middle School in Minhang District, Shanghai, a school serviced by us has been recommended by local authorities as an excellent unique teaching case for its innovative automatic homework review functions. Another key component of our teaching and learning offerings, our proprietary smart pan chip has won the highest honor of the 2022 German Red Dot Award for its humanized design and excellent quality. The Red Dot Award is one of the world's three major design awards and is an international recognition of creativity and design. The Intel smart pan utilizes pan and paper induction through Dot Matrix Technology, helping teachers complete accurate learning data collection and learning diagnosis to facilitate its personalized teaching and learning processes for teachers and students. It combines online and offline to create a closed loop for high-quality homework, with personalized homework as the core. We are also building a nationwide agent network to help reach wider areas to distribute our teaching and learning services offerings. Official partnership agreements were signed with over 50 distribution agents, including Intel, Bank of China, and CETC. In the meantime, we are continuously improving our self-directed learning products based on additional student and parent feedback, as well as the latest regulatory requirements. We have also launched accompanying hardware and enhanced the study experience with our self-directed learning product and mobile app, leveraging our experiences in technical services, technical reserves, content, and data insights over the years. We are confident and determined to continue creating value with our new business strategies in the education technology sector. We have a clear strategy to continue investing in our teaching and learning SaaS business to facilitate education authorities and schools in implementing the digital transformation and upgrading of the public Chinese education sector. We will continue to develop digital applications and resources to help improve teaching and learning efficiencies. For our self-directed learning products, we believe they have captured the needs of a wide range of families in the post-double reduction area and have a large proportion. We will continue to improve and adapt our offerings to enhance the effectiveness and user experience of our self-directed learning products with small targeted personalization and content enrichment. We will continue our efforts to build our business into a healthy and sustainably growing entity. Now I will turn the call over to Michael, our CFO, to walk you through our latest financial performance. Thank you.

Thanks, Andy, and thank you everyone for joining the call. I will now walk you through our financial and operating results. Please know that all financial data I talk about will be presented in RMB terms. I would like to remind everyone that the quarterly results we present here should be taken with care, and references to our potential future performance are subject to impacts from seasonality, one-off events as a result of the series of regulations introduced in 2021 and corresponding adjustments to our business model, organization, and workforce among others. The first quarter of 2022 is the first quarter of operations after we officially ceased our online K-12 tutoring services and report general revenue purely from our ongoing businesses. We are delighted to report the second consecutive profitable quarter on an adjusted basis, delivering our guidance that we provided earlier. From a top line perspective, we recorded net revenues of RMB233.4 million, which is 11.1% higher than the top end of our estimates provided earlier and is almost 20 times greater than the K-12 tutoring revenue of RMB11.2 million recorded in the first quarter of 2021. Gross margin was 60.7% this quarter, improving from 60.4% in the first quarter of 2021. Our operational efficiency continued to improve, with total operating expenses for the first quarter of '22 decreasing to RMB117.8 million from RMB953.2 million in the first quarter of 2021, representing a year-over-year decrease of 82.1%. Our net loss decreased significantly to RMB24.8 million for the first quarter of 2022, compared to a net loss of RMB659.7 million in the same period of 2021. Net loss as a percentage of revenue was negative 10.6% in the first quarter of 2022, narrowing from negative 139% in the first quarter of 2021. On an adjusted basis, our adjusted net income, which excludes share-based compensation expenses, was positive at RMB9.9 million for the first quarter of 2022 compared with an adjusted net loss of RMB659.7 million in the same period of 2021. We continue to see our business progressing in the right direction with continuous improvements in operational efficiency and profitability. Next, I will go through our first quarter financials in greater detail. Net revenue was RMB233.4 million. Overall, this represented a year-over-year decrease of 50.8% from RMB474.2 million in the first quarter of 2021. The decrease was mainly due to the cessation of our online K-12 tutoring services by the end of 2021 to comply with the latest PRC regulations, which prohibit the provision of tutoring services related to academic subjects for K-12 students. However, when compared with the net revenues excluding those from online K-12 tutoring services of the same period last year, our revenue actually increased significantly from RMB11.2 million last year to RMB233.4 million during the same period this year. This represented a growth of nearly 20 times. The majority of net revenues for the first quarter of 2022 were from the company's personalized self-directed learning products and, to a lesser extent, from our teaching and learning services, with the latter having a longer cycle to finish the bidding process and deliver so that revenue can be recognized as the majority of the clients were educational authorities in public schools. Cost of revenue for the first quarter of 2022 was RMB91.8 million, representing a year-over-year decrease of 51.1% from RMB187.6 million in the first quarter of 2021, which is largely in line with the cessation of our online K-12 tutoring services under the new regulatory and business environment. Gross profit was RMB141.7 million, representing a year-over-year decrease of 50.6% from RMB286.6 million in the first quarter of 2021. Gross margin for the first quarter of 2022 was 60.7%, improving from 60.4% in the first quarter of 2021. Moving over to the expenses side, total operating expenses were RMB170.8 million, representing a year-over-year decrease of 82.1% from RMB953.2 million in the first quarter of 2021. The total operating expenses for the first quarter of 2022 included RMB34.6 million of share-based compensation expenses. Selling and marketing expenses for the first quarter of 2022 were RMB22 million, which included RMB4 million of share-based compensation expenses. This represented a year-over-year decrease of 96.4% from RMB613.5 million in the first quarter of 2021, mainly due to decreasing promotional costs and advertising expenditure as a result of the changing regulatory environment, as well as stock optimization since the regulatory change to align with business adjustments. R&D expenses were RMB97.5 million, including RMB7.2 million of share-based compensation expenses. This represented a year-over-year decrease of 53.6% from RMB209.9 million in the first quarter of 2021. This decrease was again primarily attributable to stock optimization and extensive savings measures in line with our business adjustments. G&A expenses were RMB51.3 million, which included RMB23.5 million of share-based compensation expenses, representing a year-over-year decrease of 60.5% from RMB129.7 million in the first quarter of 2021. The decrease was primarily attributed to staff optimization and expense savings measures in line with our business adjustments. The loss from operations was RMB29.1 million compared with RMB666.6 million in the first quarter of 2021. The loss from operations as a percentage of net revenues for the first quarter of '22 was negative 12.5%, improving from negative 140.5% in the first quarter of 2021. Net loss was RMB24.8 million compared with a net loss of RMB659.7 million in the first quarter of 2021. Net loss as a percentage of revenue was negative 10.6% in the first quarter of 2022, compared with negative 139.1% in the first quarter of 2021. Adjusted net income on a GAAP basis was positive RMB9.9 million compared with an adjusted net loss of RMB588.8 million in the first quarter of 2021. Adjusted net income as a percentage of net revenue was positive 4.2% in the first quarter of 2022, which substantially improved from negative 124.2% in the first quarter of 2021. With that, I will now provide our business outlook. Based on our current estimates, total revenues for the second quarter of 2022 are expected to be between RMB100 million and RMB120 million. This estimated net revenue for the second quarter of 2022 is expected to be derived entirely from our ongoing businesses after our business transformation and will not include revenues from the legacy online K-12 tutoring services. This estimated range represents a significant increase year-over-year, as compared with the relatively small base of net revenue generated from online K-12 tutoring services for the second quarter of 2021. The above forecast reflects 17EdTech's current and preliminary review, and is therefore subject to change. Please refer to the safe harbor statement below for the factors that could cause actual results to differ materially from those contained in any forward-looking statement. With that, that concludes our prepared remarks. Thank you.

There are no more questions on the line. I'd like to hand the call back to the management for closing. Thank you. That concludes, oh, please go ahead.

Thank you, operator. In closing, on behalf of 17EdTech's management team, we'd like to thank you for your participation on today's call. If you require any further information, please feel free to reach us or reach out to us directly. Thank you for joining us today. This concludes the call.

Ladies and gentlemen, that concludes the conference for today. You may now disconnect your lines.