YQ - 17 Education & Technology Group Inc. (YQ) Q3 2023 Earnings Call Transcript

2023-12-07 08:12:09 ET

17 Education & Technology Group Inc. (YQ)

Q3 2023 Earnings Conference Call

December 5, 2023 20:00 ET

Company Participants

Lara Zhao - Investor Relations Manager

Michael Du - Director & Chief Financial Officer

Conference Call Participants

Presentation

Operator

Good evening and good morning, ladies and gentlemen. And thank you for standing by for 17EdTech's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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.

Lara Zhao

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 details. 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.

Michael Du

Thank you, Lara. Hello, everyone. Thank you all for joining us on our third quarter 2023 earnings call. Before we begin, I would like to note that the financial information and the GAAP numbers in this release are presented on a continuing operation basis and in RMBs unless otherwise stated.

Let me start with our latest business update. In this quarter, our business continued to evolve and we made progress in establishing additional billing models to remain flexible under the current economic environment. We managed to deliver a high value of projects, compared to the same quarter last year. However, the decrease in our total revenue compared to the same quarter last year was because of the cessation of our self-directed learning products and services and our other educational services, due to regulatory environment change.

There are 2 positive trends worth noting. We managed to sign contracts of higher value in the third quarter of 2023 than the second quarter 2023 when we exclude the RMB116 million long-term Minhang projects; and two, an increasing number of projects are now being signed under the SaaS billing model which although generates revenues over a longer period of time but is more likely to be recurring in nature. This will allow the company to accumulate a healthier and recurring project portfolios, that will lead to a healthier financial foundation. At the same time, we continue to pursue improvements in operational efficiency and reduce operational expenses. We are committed to build -- building a business that enhances teacher's teaching and student's learning experiences through our deep insights into education and technology.

Now, please allow me to go into more details. During the quarter, the company successfully won the bid for our new smart-pen and intelligent homework-based digital transformation service projects in Shanghai Chongming project valued at around RMB6 million. The project includes 290 classes in 18 middle schools in the district, spanning across grade 6 to 8, covering over 10,000 students. Additionally, the company secured another project involving smart-pen and intelligent homework platforms in Shanghai Chongming District's primary schools on November 8, 2023. These newly won projects extends further to 28 primary schools incorporating 128 classes and benefiting more than 4,000 students. These projects have engaged more schools in our teaching and learning platform, further broadening our impact and reach in distributing our high-quality solutions.

It signifies a continued partnership between these education bureaus and 17EdTech, marking the second collaboration since our initial engagement last year. This recurring partnership has demonstrated our recognized leadership and capability in the smart in-school learning and teaching solutions across China.

In the third quarter, we are delighted to observe consistent development in our key teaching and learning projects that we have won earlier. These progressions are reflected not only in our recognized revenue but also that the growing number of signed contracts. The smart-pen and intelligent homework based educational digital transformation projects in Shanghai Minhang District continue to generate substantial revenue in the third quarter of 2023, following a successful delivery and acceptance by our clients.

Similarly, the Beijing Xicheng cloud classroom evaluation system project, also recognized corresponding revenues in the second phase. These developments have represented steady progress in our business operations, ensuring a consistent revenue stream. During this quarter, we pursued innovative approach and flexible structures targeting additional customer groups in this space, including private schools and the leading public school groups. These clients tend to be more demanding in the details and the solutions we provided and are most receptive for more innovative and the full suite products and services solutions.

Through deep collaborations with these clients, our aim is to reach out to more schools and students and enrich their teaching and learning experiences through digitalized and intelligent means which will be enhanced on top of our module-based district solutions. Specifically, on October 30, 2023, we initiated a strategic partnership with [indiscernible] Language School, aiming to strengthen its digital education infrastructure.

We provided our offerings to junior high school classes and students in grades 3 to 6 of elementary schools. To leverage our core competency in technologies and extensive big data profiles in teaching and learning process, we focus on the value of personalized learning for the better development of each student. Looking ahead, we see great potentials from these initiatives and expect continued growth and positive outcomes in subsequent quarters.

Search services will allow us to cover more types of clients with different funding sources to remain agile under the current economic environment. In addition, we have successfully signed multiple new representative SaaS-based contracts with private schools. This includes smart-pen and intelligent homework based, high-quality operational project services to a leading private school of more than 4,500 students in Changsha, Hunan province. And another project with a private school group in Hunan province. Both of these projects have an expected annual revenue of approximately RMB10 million or more and is likely to be recurrent. Going forward, we expect SaaS billing model to pick up gradually as the market is getting more familiar with it. Despite the lower initial revenue recognized under such model, we see strong benefit of its recurring nature as our business continues to grow.

In the aspect of product and services offerings, we have been constantly refining our core offerings to align with our customers' needs and enhance user experiences, promoting regular usage within school. This strategy not only enhances the value we provide to our customers but also gains customer recognitions that will assist future recurring revenues. During this quarter, we innovate by integrating traditional interactive classrooms with cloud reporting which aids efficient teaching, elevate classroom quality and support daily teaching supervision and assessment. We continue to explore the application of artificial intelligence in our real teaching scenarios, a venture that has already began that -- to yield results in our ongoing projects.

On the hardware front, thanks to IoT smart management, our smart-pen consistently performs on an optimal level with nearly 200,000 units already delivered and being used. Our self-development smart-pen project has successfully completed the pilot testing phases. We plan to gradually increase its production in the fourth quarter of this year, targeting to achieve mass distribution by next year.

During this quarter, we actively participated in several Premier Education Technology Conference, such as the Shanghai Education Expo, the GET 2023 Technology Conference and the 82nd China Education Equipment Exhibition Forum. This forum is our industry-leading platforms that facilitate meaningful dialogue with practitioners and decision makers regarding future of education.

We shared our experiences and a practice in One Teaching, One Learning SaaS platform, that provides insights into our overall high-quality intelligent homework solutions in the digital transformation of regional schools for mass scale and regular use. They have received broad recognition in attracted substantial attention from educational authorities and attendees. In terms of other educational services business, as the company shifts its strategic focus towards teaching and learning SaaS operations due to regulatory environment, we have observed a diminishing trends in their contribution in revenue.

The demand for these projects -- for this product is highly dependent on the regulatory environment and the provision of competing services types. Moving forward, we remain committed to explore educational products and services that comply with regulatory environments.

Now, I will turn the call over to Lara to walk you through our latest financial performance. Thank you.

Lara Zhao

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 talk about 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 put the company in a strong position 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% of 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 was 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 contract we signed in the third quarter are under the SaaS billing model which recognized revenue over a longer period of time and a slower pace.

This, along with the large amount of revenue recognized in association with the major delivery for Minhang project in the second quarter, contributed 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 reduction 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 adjust 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 evolving -- 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 this 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 the high quality of education.

With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thanks.

Question-and-Answer Session

Operator

Lara Zhao

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.

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