17 Education & Technology Group Inc. Q3 FY2023 Earnings Call

Good evening and good morning, ladies and gentlemen. Thank you for joining us for 17EdTech's Third Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. I will now hand it over to your host, Ms. Lara Zhao, 17EdTech's Investor Relations Manager. Please go ahead, 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. Michael Du, Director and Chief Financial Officer; and myself, Investor Relations Manager. Michael will walk you through our latest business performance and strategies and I will discuss our financial performance in more detail. After the prepared remarks, Michael will be available to answer your questions during the Q&A session. 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 relates to events that involve known, 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 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, future events or otherwise, except as required under applicable law. I will now turn the call over to our Director and Chief Financial Officer to review some of our business development and strategic direction. Michael, please go ahead.

Thank you, Lara. Hello, everyone. Thank you all for joining us for our third quarter 2023 earnings call. Before we start, I would like to mention that the financial information and GAAP numbers in this release are based on continuing operations and are presented in RMB unless stated otherwise. Let me begin with our latest business update. In this quarter, our business continued to evolve, and we made progress in establishing additional billing models to stay flexible in the current economic environment. We were able to deliver a significant value of projects compared to the same quarter last year. However, the decline in our total revenue compared to the same quarter last year was primarily due to the discontinuation of our self-directed learning products and services and other educational services because of changes in the regulatory environment. There are two positive trends to highlight. First, we signed contracts of higher value in the third quarter of 2023 compared to the second quarter. Second, there is an increasing number of projects being signed under the SaaS billing model, which, although it generates revenue over a longer duration, is more likely to provide recurring income. This shift will enable the company to build a stronger and more sustainable project portfolio. Simultaneously, we are focused on enhancing operational efficiency and reducing expenses. We are dedicated to creating a business that enriches teachers' teaching and students' learning experiences through our deep insights into education and technology. Now, let me provide more details. During the quarter, we successfully won the bid for a new smart-pen and intelligent homework-based digital transformation service project in the Shanghai Chongming project, valued at approximately RMB6 million. This project includes 290 classes across 18 middle schools in the district, impacting over 10,000 students. Additionally, we secured another project involving smart-pen and intelligent homework platforms in primary schools in the Shanghai Chongming District on November 8, 2023. These new projects expand our engagement, affecting 28 primary schools, incorporating 128 classes, and benefiting more than 4,000 students. These initiatives illustrate our ongoing partnership with education bureaus, marking the second collaboration since our initial engagement last year. This recurring partnership showcases our recognized leadership and capability in smart in-school learning and teaching solutions across China. In the third quarter, we observed steady progress in our key teaching and learning projects that we had previously won. This progress is evident not only in our recognized revenue but also in the growing number of signed contracts. The smart-pen and intelligent homework-based educational digital transformation projects in the Shanghai Minhang District continue to generate significant revenue, following successful delivery and acceptance by our clients. Similarly, the Beijing Xicheng cloud classroom evaluation system project also recognized corresponding revenues during its second phase. These developments indicate steady progress in our operations and establish a consistent revenue stream. During this quarter, we pursued innovative approaches and flexible structures targeting additional customer groups, including private schools and leading public school groups. These clients often require more tailored solutions and are more open to innovative and comprehensive product and service offerings. Through close collaborations with these clients, we aim to reach more schools and students, enhancing their teaching and learning experiences through digital and intelligent solutions built on our module-based district offerings. Specifically, on October 30, 2023, we initiated a strategic partnership with a leading language school to bolster its digital education infrastructure. We provided our solutions to junior high school classes and elementary school students in grades 3 to 6. Our focus is on personalized learning to support the development of each student and leverage our technological capabilities and extensive data profiles. Looking forward, we see significant potential from these initiatives and anticipate continued growth and positive results in the coming quarters. These services will enable us to cater to a wider array of clients with diverse funding sources and remain adaptable in today's economic climate. Additionally, we have successfully signed multiple new representative SaaS-based contracts with private schools, including contracts for smart-pen and intelligent homework-based operational project services for a prominent private school with over 4,500 students in Changsha, Hunan province, as well as for another private school group in Hunan. Both projects are expected to generate annual revenues of approximately RMB10 million or more and are likely to recur. Moving forward, we expect the SaaS billing model to gradually grow as the market becomes more accustomed to it. While initial revenue under this model may be lower, we recognize its recurring revenue potential as our business matures. In terms of our product and service offerings, we are continuously refining our core products to align with customer needs and improve user experiences, fostering regular usage within schools. This strategy not only increases the value we provide to our customers but also earns their recognition, which will assist in generating future recurring revenues. This quarter, we innovated by integrating traditional interactive classrooms with cloud reporting, aiding efficient teaching, enhancing classroom quality, and supporting daily teaching supervision and assessment. We continue to explore the application of artificial intelligence in real teaching scenarios, yielding positive results in our ongoing projects. On the hardware side, our smart-pen, supported by IoT smart management, is performing optimally with nearly 200,000 units already in use. Our self-developed smart-pen project has successfully completed the pilot testing phases, and we plan to gradually increase production in the fourth quarter, targeting mass distribution by next year. During this quarter, we participated in several prominent education technology conferences, including the Shanghai Education Expo, the GET 2023 Technology Conference, and the 82nd China Education Equipment Exhibition Forum. These forums serve as industry-leading platforms for engaging discussions with practitioners and decision-makers about the future of education. We shared insights concerning our One Teaching, One Learning SaaS platform, highlighting our high-quality intelligent homework solutions aimed at facilitating the digital transformation of regional schools. They received broad recognition and interest from educational authorities and attendees. Regarding our other educational services, as we shift our focus towards teaching and learning SaaS operations due to the regulatory environment, we have noted a decline in their revenue contribution. The demand for these projects is highly influenced by regulatory factors and competition. Moving forward, we remain committed to exploring educational products and services that adhere to regulatory standards. Now, I will hand the call over to Lara to discuss our latest financial performance. Thank you.

Thanks, Michael and thank you, everyone, for joining us on 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 would like to remind you that the quarterly results we present here should be taken with care and reference to our potential future performance and subject to potential impact from seasonality and one-off events, as a result of the series of regulations introduced in 2021 and corresponding adjustments to our business model, organization, and workforce. During the quarter, the company continued to pursue improvements in operational efficiency and innovative strategies to broaden our customer base, leveraging artificial intelligence to further enhance user experience and improve efficiency capabilities. Our strong focus on innovation, customer experience, and exploring new business models has positioned the company strongly for future success. In the third quarter of 2023, we recorded net revenues of RMB45.1 million, compared with RMB69.2 million in the second quarter, representing a 63.8% decrease on a quarter-on-quarter basis. The net loss for the third quarter of 2023 was RMB72.9 million compared with RMB47.9 million in the second quarter of 2023 and RMB20.5 million for the third quarter of 2022. The adjusted net losses for the third quarter of 2023 were RMB53.7 million, compared with the adjusted net income non-GAAP of RMB8.3 million in the third quarter of 2022 and RMB28.6 million on a quarter-on-quarter basis. Furthermore, our gross margin has further improved to 54.1%, up 5.8 percentage points compared with 48.3% in the second quarter of 2023. As of September 30, 2023, we have cash reserves of RMB523.5 million on our balance sheet, providing sufficient funds for future development. Next, I will go through our third quarter financials in greater detail. Net revenues. Net revenues for the third quarter of 2023 were RMB45.1 million, representing a year-over-year decrease of 63.8% from RMB124.6 million in the third quarter of 2022. This was mainly due to: one, the reduction in net revenues from other educational resources as we focused our resources on our core teaching and learning SaaS business and two, a higher proportion of new teaching and learning SaaS contracts we signed in the third quarter are under the SaaS billing model which recognizes revenue over a longer period of time and at a slower pace. This, along with the large amount of revenue recognized in association with the major delivery for the Minhang project in the second quarter, contributed to lower net revenues in the third quarter compared to the second quarter of 2023. Cost of revenues. Cost revenues for the third quarter of 2023 was RMB20.7 million representing a year-over-year decrease of 34.7% from RMB31.7 million in the third quarter of 2022 which was mainly due to cost reductions in third-party service providers or other educational services. Gross profit for the third quarter of 2023 was RMB24.4 million, representing a year-over-year decrease of 73.7% from RMB92.9 million in the third quarter of 2022. Gross margin for the third quarter was 54.1%, compared with 74.5% in the third quarter of 2022. Total operating expenses for the third quarter of 2022 was RMB103.1 million, including RMB19.2 million share-based compensation expenses, representing a year-over-year decrease of 14.5% from RMB120.5 million in the third quarter of 2022. Loss from operations for the third quarter of 2023 was RMB78.7 million, compared with RMB27.6 million in the third quarter of 2022. Loss from operations as a percentage of net revenues for the third quarter of 2023 was negative 174.4% and compared with negative 22.2% in the third quarter of 2022. Net loss for the third quarter of 2023 was RMB72.9 million, compared with net loss of RMB23.5 million in the third quarter of 2022. Net loss as a percentage of net revenues was negative 161.6% in the third quarter compared with negative 18.9% in the third quarter of 2022. Adjusted net loss, non-GAAP, for the third quarter of 2023 was RMB53.7 million, compared with adjusted net income non-GAAP of RMB8.3 million in the third quarter of 2022. Adjusted net loss, non-GAAP, as a percentage of net revenues was negative 119.1% in the third quarter of 2023 compared with 6.7% of adjusted net income, as a percentage of net revenues in the third quarter of 2022. Please refer to the table captioned reconciliation of our non-GAAP measures to the most comparable GAAP measures at the end of this press release for a reconciliation of net loss under U.S. GAAP to adjusted net income or loss non-GAAP. Cash and cash equivalents, restricted cash, short-term investments and term deposits were RMB523.5 million as of September 30, 2023, compared with RMB585.7 million as of June 30, 2023. As we look to the future, the rise of digital transformation in education marks a significant shift in this evolving era of educational development. The rapid evolution of digital technology is driving transformative changes within the education sector. Committed to the mission of making learning a wonderful experience, 17EdTech will utilize advanced educational technologies, high-quality educational content and enduring passion for education to make insightful contributions to regional digital transformations in education and contribute to high-quality education. With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thanks.

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 out to us directly. Thank you for joining us today. This concludes the call.