17 Education & Technology Group Inc. Q4 FY2023 Earnings Call

Good evening and good morning, ladies and gentlemen, and thank you for joining 17EdTech's Fourth Quarter 2023 and full year earnings conference call. As a reminder, today's call is being recorded. I will 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. 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 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 risks and 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 and uncertainties and 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, 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. I appreciate you joining us for the fourth quarter 2023 and full-year earnings results call. Before we start, I want to highlight that the financial information and non-GAAP figures in this release are presented based on continuing operations and in RMB unless stated otherwise. Now, let's discuss our latest business updates. This quarter, the company has shown robust development in our teaching and learning SaaS businesses, achieving a revenue growth of 19.7% in the fourth quarter compared to the previous quarter. This growth is mainly driven by advancements in our SaaS businesses. A key achievement is securing orders from a new group of clients. We are expanding into potential new customer segments and new transaction modes, particularly in partnerships with individual schools and group-operated schools, which are gaining momentum through regular new contract screenings. Looking ahead, we will fast-track the development of smart classrooms, big data precision teaching, intelligent homework solutions, and other products, focusing on a comprehensive approach to support personalized learning and accommodate students' individual abilities through our inter-school solutions. In the fourth quarter, our teaching and learning SaaS businesses continued to progress steadily. Our key projects are generating revenues marked by successful delivery and acceptance from clients. For instance, the digital transformation projects in Shanghai's Minhang District, based on our smart pen and paper technology, have completed their third phase of revenue recognition. Our project in Beijing's Xicheng District has also been successfully delivered. All these projects have demonstrated immediate and consistent high usage, with active rates exceeding 90%, showcasing our capability to execute large-scale and systematic projects. During this quarter, we secured a contract for the teaching software integration and data analysis services project in Shanghai, valued at RMB3 million and covering eight schools – approximately 100 classes, 200 teachers, and 4,000 students in the district. Our services focus on integrating teaching software and providing big data analysis. By collecting data from daily homework and other sources, we create comprehensive student profiles that support precise, data-driven teaching strategies. We also pursued new growth strategies and expanded our customer base by forming strategic partnerships with regional schools linked to well-known private education groups and individually managed public schools. We have successfully executed and delivered projects under this new strategy, targeting private and select public schools, which have shown strong performance in contract value and quantity. This model complements our existing projects with district education bureaus, which typically cover entire districts. Projects involving individual or group-managed private or public schools enable quicker decision-making and greater funding certainty, thereby contributing to a smoother revenue stream and accelerating our strategy to reach more schools and students. We are committed to providing innovative products and solutions that set new benchmarks in education technology. Notable schools that have subscribed to our teaching and learning SaaS offerings include Aerospace City Campus of the high school affiliated with Renmin University, Binjiang Foreign Language School, and Zhongshan Middle School. Their adoption of our solutions is expected to further accelerate the process within the region. Additionally, projects with this group often operate under subscription models that renew semi-annually or annually. For example, a project signed last September has entered its renewal phase this month, with a revenue retention rate of 120%. This indicates additional classes, students, and functionalities being subscribed, reflecting strong initial results and showing positive signs for a steady SaaS revenue portfolio. Looking ahead, we anticipate a steady increase in the adoption of the SaaS billing model as the market becomes more acquainted with its benefits. We are confident that this model will not only create new revenue opportunities for the company but also emphasize the advantages of its inherent nature, fostering sustainable business growth. We continue to enhance our product and service offerings, improving user experiences to promote regular school use by integrating application systems and data profiles into daily teaching scenarios like classrooms, homework, and exams, thereby aiding effective teaching and supporting differentiated instruction. This quarter, we improved our personalized learning products, focusing on students' incorrect answers and enabling automatic correction across all school scenarios while effectively using correction data across online and offline platforms. We also provide high-quality resources for personalized learning to enhance independent learning efficiency. Additionally, we are exploring the application of AIGC in teaching scenarios and content preparation to deliver improved pilot projects. Our proprietary smart pen has passed pilot verification and aims to enhance teacher efficiency in correcting homework, with plans for wider distribution in 2024. Recently, the 2024 World Digital Education Conference took place in Shanghai, focusing on digital education application and innovation. We participated and showcased our data-driven solutions. Our teaching and learning platform received the 2023 Excellent Performance Company Award and the Best Technology Innovation Award from the China Corporate Competitiveness Annual Conference, recognizing companies that have excelled in the socioeconomic field and demonstrated leadership in responsive industries. Moreover, the Beijing Municipal Education Commission recognized 37 innovative applications of big data in education, including cases from clients like the Aerospace City Campus of the high school affiliated with Renmin University, which serves as excellent models for schools seeking to improve. Moving forward, the One Teaching, One Learning platform will keep facilitating the digital transformation of education to meet teaching needs and help schools enhance their teaching processes. We are also vigilant regarding the regulatory environment and competing service offerings, which heavily influence the demand for our educational services. As we navigate these challenges, we remain committed to exploring additional educational products and services that adhere to regulatory standards. Now, I will turn the call over to Lara for an overview of our latest financial performance. Thank you.

Thank you, Michael, and thank you everyone for joining the call. I will now review our financial and operational results. All financial data will be presented in RMB terms. Please consider that the quarterly results should be approached with caution as our future performance may be influenced by seasonality and one-off events resulting from a series of regulations introduced in 2021, along with the corresponding adjustments to our business model, organization, and workforce. In this quarter, our teaching and learning SaaS business saw increased revenue compared to the same quarter last year, indicating consistent client satisfaction and potential for future growth. We are also carefully managing expenses to enhance operational efficiency. We are confident that our SaaS business model is gaining recognition, allowing us to build a healthier and recurring business while improving our service offerings and customer satisfaction. In the fourth quarter, we reported net revenues of RMB47.3 million compared to RMB39.6 million in the fourth quarter of 2022, marking a 19.7% year-on-year increase. The net loss for the fourth quarter of 2023 was RMB98.4 million, down from RMB103.1 million in the fourth quarter of 2022. The adjusted net loss on a non-GAAP basis for the fourth quarter of 2023 was RMB81.8 million, compared to an adjusted net loss of RMB70.1 million in the fourth quarter of 2022. The gross margin for the fourth quarter of 2023 was 43.4%, compared to 52.1% in the fourth quarter of 2022. As of December 31, 2023, we had cash reserves of RMB476.7 million, providing sufficient funds for future development. I will now discuss our fourth quarter financials in more detail. Our net revenues for the fourth quarter of 2023 were RMB47.3 million, a year-over-year increase of 19.3% from RMB39.6 million in the fourth quarter of 2022, primarily due to a higher number of teaching and learning SaaS contracts and recurring revenue from ongoing projects. The cost of revenues for the fourth quarter of 2023 was RMB26.8 million, a year-over-year increase of 41.4% from RMB18.9 million in the fourth quarter of 2022, mainly due to a larger share of deliveries in our teaching and learning SaaS projects during the quarter and some contribution from hardware upgrades. Gross profit for the fourth quarter remained at RMB20.6 million, unchanged from RMB20.6 million in the fourth quarter of 2022. Total operating expenses for the fourth quarter of 2023 were RMB122.8 million, which included RMB16.6 million in share-based compensation expenses, representing a year-over-year decline of 12.9% from RMB141.0 million in the fourth quarter of 2022. The loss from operations for the fourth quarter of 2023 was RMB102.3 million compared to RMB120.3 million in the fourth quarter of 2022. The loss from operations as a percentage of net revenues for the fourth quarter of 2023 was negative 216.0%, compared to negative 304.2% in the previous year. The net loss for the fourth quarter was RMB98.4 million, down from a net loss of RMB103.1 million in the same quarter of 2022. The net loss as a percentage of net revenues was negative 207.9% in the fourth quarter of 2023 compared to negative 260.7% in the fourth quarter of 2022. The adjusted net loss on a non-GAAP basis for the fourth quarter of 2023 was RMB81.8 million, versus an adjusted net loss of RMB70.1 million in the fourth quarter of 2022. The adjusted net loss on a non-GAAP basis as a percentage of net revenues was negative 172.8% in the fourth quarter, compared to negative 177.3% in the same quarter of the previous year. Please refer to the table titled 'reconciliation of non-GAAP measures to the most comparable GAAP measures' at the end of this press release for the reconciliation of net loss from US GAAP to adjusted net income or loss on a non-GAAP basis. Cash and cash equivalents, restricted cash, short-term investments, and term deposits totaled RMB476.7 million as of December 31, 2023, down from RMB737.7 million a year earlier. As we look ahead, the company is committed to the field of educational digitalization, aiming to make learning a rewarding experience. We will provide our customers with efficient and high-quality product solutions and experiences while maintaining our focus on sustainable development and improving operational efficiency. We are dedicated to steady progress and long-term, stable, and sustainable growth. In this quarter, the company and the founder, Chairman and CEO Andy Liu, entered into a share repurchase agreement for Mr. Andy Chang Liu to subscribe to 58,453,168 Class B ordinary shares at the average closing price per share for the 30 trading days leading up to the agreement, subject to applicable laws and Nasdaq regulations. After this subscription, Mr. Liu will hold approximately 26.2% of the company's total issued and outstanding share capital. This subscription reflects Mr. Liu's confidence in the company's value and long-term growth. That concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thank you.

Thank you, Operator. In closing, on behalf of 17EdTech 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. That does conclude our conference for today. Thank you for participating. You may now disconnect.