17 Education & Technology Group Inc. Q2 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'll be a question-and-answer session. As a reminder today's conference call is being recorded. I'll now 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 Liu, Founder, Chairman and Chief Executive Officer, and Mr. Michael Du, Director and Chief Financial Officer. Andy 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 U.S. 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 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 filings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, further events or otherwise, except as required under applicable law. I will now turn the call over to our Chairman and Chief Executive Officer, to review some of our business development and strategic direction. Andy, please go ahead.

Thank you, Lara. Hello, everyone. Thank you all for joining us on our second quarter 2022 Earnings Call. Before we begin, I would like to mention that the financial information and non-GAAP numbers in this release are presented on a continuing operation basis, and all numbers are based on RMB, unless otherwise stated. We are glad to report a solid performance in the second quarter. Before we go into the details, let me update you with some quick highlights. Firstly, we recorded RMB 133.5 million of net revenues in the second quarter of 2022, 11.2% higher than the top end of our estimates provided earlier in June. This was achieved through higher revenue contribution from our teaching and learning SaaS business. Secondly, our operational efficiency continues to improve, and we recorded a substantially narrowed GAAP basis net loss compared with the same period in 2021, allowing us to achieve net profitability on a non-GAAP basis for the last three consecutive quarters. Thirdly, our new teaching and learning SaaS offerings have gained further momentum and strong recognition and demand from the government and relevant authorities, contributing an increasing proportion of the company's net revenues in this quarter. Now, let me go into some more details. Let's start with our in-school teaching and learning SaaS business. During the period, our teaching and learning SaaS offerings witnessed a major milestone. We successfully delivered a district-wide precision teaching and adaptive learning system project based on intelligent homework in Shanghai Minhang District in the second quarter of 2022. The system has been regularly used throughout the teaching process and is well recognized by teachers, students, and education authorities. This is a clear example satisfying the standard for active use set by education authorities. There were a total of 156 schools in Minhang District using our precision teaching and adaptive learning system. During the waves of COVID outbreaks in the second quarter of 2022, our precision teaching and adaptive learning system played a significant role in helping authorities provide a high-quality online teaching environment, qualified content delivery, collect study information, and facilitate interactive communication between schools and authorities. In the 4 months after implementation, around 120,000 students used our system and completed a total of 11 million homework assignments cumulatively. The value of our system is well recognized by its various users. It clearly illustrates 17EdTech's pioneering capability in the digital transformation of China's education industry. We continue to see greater market potential and opportunities as we make further progress in our teaching and learning SaaS business. The Chinese government's continuous efforts in the digital transformation of the Chinese education system to implement enhanced personalization during the teaching and learning process has provided focused demand for our OneSmart teaching and learning SaaS offerings. It is also noted that throughout the entire education process, homework is the ideal scenario for steady data collection. The ability to collect homework data effectively is key to realizing data-driven and individualized teaching. Only with the support of big data and intelligent technology can we truly improve homework efficiency. The precision teaching and adaptive learning system project based on intelligent homework in Minhang is a flagship case we have successfully delivered, and it has substantial illustrative value and influence over cities and districts across China. Our solution has become a clear flagship example of how such a system enables individualized homework and precise teaching while meeting the application requirements set by relevant operators, reducing the burden on students and schools and improving learning and teaching efficiencies required by the double reduction policy. As we expand our sales channels, we have signed partnership agreements with over 50 local distribution agents to increase our distribution network. We are confident that the increasing market needs will lead us to deeper market penetration. Simultaneously, the company is actively exploring a response to the recurring SaaS billing model for our teaching and learning SaaS offerings with our current and potential customers. This includes a one-stop overall solution combining software, hardware, and services. Although currently not prevalent, we expect the recurring SaaS billing model to gain popularity among local authorities and schools compared to the traditional procurement model, due to the reduced upfront costs and the promotion of application-based procurement by the Ministry of Education. A higher proportion of revenue from such recurring SaaS models indicates a healthier financial profile, given the steady and predictable revenue stream. We have already seen positive feedback from the local education bureau regarding this recurring SaaS billing model. In terms of Earth Compass businesses, we will continue to explore and enhance our self-directed learning product based on feedback from students and parents to fulfill the diverse and multinational learning demands of students and provide targeted customized learning content in line with government regulations. Q2 marks a few key milestones in our new business model post double reduction policy, and we are pleased to see these positive momentum translated into projects with earned reputation and recognized revenue. As we deploy our SaaS business opportunities and expand our sales network nationwide, we feel increasingly determined in our new strategies and see a growing number of business opportunities arising. Looking ahead, we expect our teaching and learning SaaS business will continue to constitute a significant proportion of our overall revenues in the coming quarters. We are confident that the synergistic connection between in-school and off-campus business will allow us to build a high-quality education platform, driven by science and technology, facilitating the digital transformation and upgrading of the Chinese education industry, reducing the burdens of students and schools, improving education efficiency and contributing to the promotion of Chinese educational reform. 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 note that all financial data I talk about will be presented in RMB terms. I want to remind you that the quarterly results we present should be taken with care, and references to our potential future performance are subject to potential impacts from seasonality and one-off events as a result of the series of regulations introduced in 2021 and a corresponding adjustment to our business model, organization, and workforce. The second quarter of 2022 is the third quarter of operation after we officially ceased our online K-12 tutoring services and generated revenue purely from our continuing businesses. Our new business strategy has shown positive momentum in the second quarter, with in-school teaching and learning SaaS businesses seeing additional delivery. As a result of our improved operational efficiency, we are delighted to report net profitability on an adjusted basis for the last three consecutive quarters. Next, I will go through our second quarter financials in greater detail. Our net revenues were RMB 133.5 million, representing a year-over-year decrease of 80.1% from RMB 617.9 million in the second 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. However, when comparing net revenue excluding those from online K-12 tutoring services, our net revenue increased significantly from RMB 8.9 million to RMB 133.5 million during the same period, representing over 14 times growth. The company's teaching and learning SaaS offerings contributed an increasing proportion to the company's net revenues for the second quarter of 2022 compared with previous quarters. Cost of revenue for the second quarter of 2022 was RMB 63.8 million, representing a year-over-year decrease of 74.3% from RMB 248 million in the second quarter of 2021, largely in line with the decrease in net revenue due to the cessation of our online K-12 tutoring services under the new regulatory and business environment. Gross profit was RMB 69.7 million, representing a year-over-year decrease of 83.5% from RMB 422.9 million in the second quarter of 2021. Gross margin for the second quarter of 2022 was 52.2%, compared with 63% in the second quarter of 2021. On the expense side, total operating expenses for the second quarter of 2022 were RMB 103.8 million, representing a year-over-year decrease of 85.2% from RMB 702.6 million in the second quarter of 2021. Total operating expenses for the second quarter of 2022 included RMB 30.1 million of share-based compensation expenses. Sales and marketing expenses for the second quarter of 2022 were RMB 11.7 million, which included RMB 3.4 million of share-based compensation expenses, representing a year-over-year decrease of 96.2% from RMB 306.7 million in the second quarter of 2021. This was mainly due to the reduction in promotional expenses and advertising expenditures as a result of regulatory changes and staff optimization. R&D expenses for the second quarter of 2022 were RMB 35.7 million, which includes RMB 7.2 million of share-based compensation expenses, representing a year-over-year decrease of 84.4% from RMB 229.5 million in the second quarter of 2021. The decrease was primarily due to stock optimization and cost savings aligned with the business adjustment. G&A expenses for the second quarter of 2022 were RMB 56.4 million, including RMB 19.5 million of share-based compensation expenses, representing a year-over-year decrease of 48.5% from RMB 109.5 million in the second quarter of 2021. This decrease was primarily attributable to staff optimization and cost-saving measures in line with our business adjustment. Loss from operations was RMB 34.1 million compared with a loss of RMB 279.8 million in the second quarter of 2021. Loss from operations as a percentage of revenue for the second quarter of 2022 was negative 25.5%, which was significantly narrowed from negative 41.7% in the second quarter of 2021. Net loss for the second quarter of 2022 was RMB 26.4 million compared with a net loss of RMB 266.7 million in the second quarter of 2021. Net loss as a percentage of net revenues was negative 19.8% in the second quarter of 2022 compared with negative 39.8% in the second quarter of 2021. Our adjusted net income on a GAAP basis for the second quarter of 2022 was positive RMB 3.6 million compared with an adjusted net loss of RMB 218.2 million in the second quarter of 2021. Adjusted net income as a percentage of net revenue was positive 2.7% in the second quarter of 2022, a substantial improvement from negative 32.5% in the second quarter of 2021. With that, I will now provide our business outlook. Based on our current estimates, total net revenues for the third quarter of 2022 are expected to be between RMB 120 million and RMB 114 million. This estimated net revenue for the third quarter of 2022 derives entirely from the ongoing business of the company's business transformation and does not include revenues from legacy online K-12 tutoring services. This estimated range represents a significant increase year-over-year compared with the relatively small base of the net revenues generated from online K-12 tutoring services for the third quarter of 2021. I would also like to note that our teaching and learning SaaS products involve education bureaus and schools, which typically require going through a long bidding process. Thus, there may be potential delays in project bidding and delivery processes due to factors such as COVID outbreaks and others. This means our revenue recognition process might fluctuate from quarter to quarter due to factors mostly beyond our control, especially in early quarters of our revenue ramp-up period. The above forecast reflects 17EdTech's current and preliminary review and is therefore, subject to change. Please refer to the Safe Harbor statement contained in our earnings release for the factors that could cause actual results to differ materially from those contained in any forward-looking statements. With that, that concludes our prepared remarks. Thank you. Operator, we are ready to begin the Q&A session.

We have questions from the line of Tom Chong Lee from Hedge Capital. Please proceed. Mr. Lee, your line is now open. Please proceed with your question.

Yes. My question is that the management has announced a share buyback plan last year. And we want to know what's the process of the share buyback plan so far?

Let me take this question. Thanks for the question. Yes, we announced a share buyback program last November. We are currently in the process of continually buying back the shares at a pace that we consider appropriate so far. Our plan is to continue this share buyback program. In later periodic reports, we will provide detailed numbers about the number of shares and the amount we have used.

Thank you very much. And also congratulations on the achievements that you guys have achieved. Fantastic.

And there are no further questions from the phone line. May I hand the call back to the management? Please continue.

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

Thank you for participating. You may now disconnect.