17 Education & Technology Group Inc. Q3 FY2022 Earnings Call

Good evening and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's Third Quarter 2022 Earnings Conference Call. Well, at this time all participants are in a listen-only mode. After management's prepared remarks, there will 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 their 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 and 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 or other risks, uncertainties, or factors is included in the company's filings with the US 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 for joining us on our third 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 our continuing operation basis and all numbers are based on the RMB unless otherwise stated. We managed to deliver resilient performance in the third quarter. Before we go into the details, let me update you with some quick highlights. Firstly, we reported RMB124.6 million of net revenues in the third quarter of 2022, contributed by our new business despite the uncertainty and economic impact associated with recent COVID-19 outbreaks. This represents an increase of 549% compared with the revenue of RMB19.2 million excluding the legacy of online K-12 tutoring services in the third quarter of 2021. Secondly, we have been able to continue narrowing our losses on a GAAP basis through efficient cost and expense management, allowing us to achieve net profitability on a non-GAAP basis for the fourth consecutive quarter. Thirdly, we continue to develop and upgrade our teaching and learning SaaS offerings together with our clients and explore personalized self-directed learning products to better satisfy customer needs. Now let me go into some details. Let's start with our in-school teaching and learning SaaS-based business. The third quarter of 2022 saw significant progress in our in-school business in Shanghai Minhang District. Our services now achieved full coverage from primary to high schools. There are 128 schools with 156 campuses that are now using our precision teaching and adaptive learning system to assist daily teaching. The accumulated number of students using the tool for homework also exceeded 40 million as of now. We introduced the intelligent dot metric pen in September and launched our trial with 20 schools to advance digital transformation of teaching and learning. The dot metric pen facilitates curriculum development and tools to meet the different demands of schools. We have been awarded the Intelligence in Class and Homework Staff Service Contract at Shanghai Minhang District during the reporting period. Our precision teaching and adaptive learning system were used to promote the digitalization of teaching and learning with live data to facilitate school management and student development. This is a milestone product illustrating growing demand and market acceptance for staff services and recurring service building models. Through strategic cooperation and pilot school programs, we are also launching initiatives to digitalize the homework and teaching platforms across different districts in Shanghai and other cities such as Songjiang District. Likewise, we were also awarded two contracts by Beijing Xicheng District to help build an online integrated students evaluation platform and an integrated student learning performance evaluation platform. These two systems utilize existing digital school platforms to create a closed loop from question bank design, assignment collection, tracking, analysis, feedback, and management during the whole teaching and learning process. It enables conducting key scenarios through an online setting. We have also attended various education exhibitions and forums, receiving positive feedback on our products and services from teachers and education experts. In the third quarter, we formed a strategic partnership with a local partner to jointly construct a digitalized education platform for our city, which includes over 2,000 schools and 1.5 million primary and secondary students. From a product and service offerings perspective, we are integrating an increasing level of artificial intelligence and IoT technology applications to enhance user experience and achieve a closed-loop teaching and learning measurement for schools, without disrupting traditional teaching and learning habits. Regarding self-directed learning products, we continue to explore and develop self-learning products that cater to various demands of our customers based on the educational content and data insights we have accumulated over the last few decades serving students in school. We continue to receive positive feedback from students on our products, which help supplement their in-school status, satisfying diverse learning demands and providing targeted customized learning content in line with regulatory assistance to form a comprehensive self-directed learning experience, improving their learning efficiency. We continue to see revenue contributions from such products, with great potential in this evolving market driven by regulatory changes and students' needs. We want to inform our shareholders that the recent COVID-19 outbreaks across various regions in China have caused delays and uncertainties in different bidding processes and contracting related to government procurement. The overall economic environment has also caused uncertainties and concerns regarding household income and municipal budgets. We are closely observing these trends and adopting prudent strategies to minimize the impacts from such uncertainties and concerns, allowing us to remain flexible in this environment. 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 discuss will be presented in RMB terms. I want to remind you that the quarterly results we present here should be taken with care, and our potential future performance is subject to impacts from seasonality and one-off events due to the series of regulations introducing Trial 21 and corresponding adjustments to our business model, organization, and workforce. The third quarter of 2022 is the fourth quarter of operations after we officially ceased our online K-12 tutoring businesses and generated revenue purely from our continuing businesses. Our new business strategy has shown continued momentum in the third quarter amidst the complex external challenges and uncertainties posed by the COVID-19 pandemic, and we posted revenue growth compared to the same period last year. We have achieved profitability on an objective basis for the fourth consecutive quarter, which serves as a testament to our operational efficiency and opportunities from our new businesses. Next, I will go through our third quarter financials in greater detail. Net revenues were RMB124.6 million, representing a year-over-year decrease of 74.9% from RMB496.8 million in the third 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 tutoring services related to academic subjects for K-12 students. However, when compared with net revenues excluding those from online K-12 tutoring services, our net revenues increased significantly from RMB19.2 million to RMB124 million during the same period. Cost of revenues for the third quarter of 2022 was RMB31.7 million, representing a year-over-year decrease of 87.4% from RMB251.4 million in the third quarter of 2021, which aligns with the decrease in net revenues due to the cessation of online K-12 tutoring services and the new regulatory environment. Gross profit was RMB92.9 million, indicating a year-over-year decrease of 62.2% from RMB245.4 million in the third quarter of 2021. Gross margin for the third quarter of 2022 was 74.5% compared with 49.4% in the third quarter of 2021. The increase was mainly attributable to the company's more efficient cost management. Regarding expenses, total operating expenses for the third quarter of 2022 were RMB120.5 million, including RMB31.8 million of share-based compensation expenses, representing a year-over-year decrease of 83.8% from RMB743.7 million in the third quarter of 2021. Sales and marketing expenses for the third quarter of 2022 were RMB27.9 million, including RMB4.7 million of share-based compensation expenses, representing a year-over-year decrease of 92.8% from RMB388.6 million in the third quarter of 2021. This was mainly due to the reduction in promotional costs and advertising expenditures as a result of the regulatory environment changes as well as staff optimization in line with the business adjustments. R&D expenses for the third quarter of 2022 were RMB50.9 million, including RMB6.9 million of share-based compensation expenses, representing a year-over-year decrease of 74.7% from RMB201.2 million in the third quarter of 2021. The decrease was primarily due to staff optimization in line with business adjustments. G&A expenses for the third quarter of 2022 were RMB41.7 million, including RMB20.2 million of share-based compensation expenses, representing a year-over-year decrease of 66.1% from RMB123.1 million in the third quarter of 2021. The reduction was mainly due to staff optimization in line with business adjustments. Loss from operations was RMB27.6 million compared with a loss of RMB498.3 million in the third quarter of 2021. Loss from operations as a percentage of net revenues for the third quarter of 2022 was negative 22.2%, improving from negative 100.3% in the third quarter of 2021. Net loss for the third quarter of 2022 was RMB23.5 million compared to a net loss of RMB489.9 million in the third quarter of 2021. Net loss as a percentage of net revenues was negative 18.9% in the third quarter of 2022 compared with negative 98.6% in the third quarter of 2021. Adjusted net income on a GAAP basis for the third quarter of 2022 was positive RMB8.3 million compared to an adjusted net loss of RMB456.6 million in the third quarter of 2021. Adjusted net income on a GAAP basis as a percentage of net revenue was 6.7% in the third quarter of 2022, improving from negative 91.9% in the third quarter of 2021. Now turning to our business outlook; the COVID-19 outbreaks across China have resulted in uncertainties and potential delays in the government procurement process and unpredictable timelines for project delivery, which impact our revenue recognition. It has also raised uncertainties regarding consumer sentiment and local government budgeting. This situation has significantly affected our ability to provide accurate business forecasts, particularly since our new businesses are still in the early stages of development. The company has therefore decided not to provide revenue guidance going forward. With that, that concludes our prepared remarks. Thank you.

Thank you. We are now ready to begin the Q&A session.

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. This concludes today's conference call. Thank you for participating. You may now disconnect.