17 Education & Technology Group Inc. (YQ) Earnings Call Transcript & Summary

Good evening, and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's Fourth Quarter 2023 and Full Year Earnings Conference Call. [Operator Instructions] As a reminder, today's conference 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 details. After the prepared remarks, Mike 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 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 and other risks, uncertainties and 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 fourth quarter 2023 and full year earnings results call. Before we begin, I would like to note that the financial information and non-GAAP numbers in this release presented on a continuing operation basis and in RMB unless otherwise stated. Let me now start with our latest business update. In this quarter, the company has maintained solid development and progress in our teaching and learning SaaS businesses. We've achieved 19.7% revenue growth in the fourth quarter of 2023 from the previous quarter. This was primarily driven by our growth in the teaching and learning SaaS businesses. An important progress is that we were able to win orders from additional group of clients and expanding into our potential new customer groups under new transaction modes. Particularly, business with individual schools and group operated schools has started building momentum with regular new contract [ swinging ]. Moving forward, we will accelerate the development of smart classroom big data precision teaching, intelligent homework solutions and other products, including those with 5 aspects of education, holistically supporting personalized learning and accommodate students' individual aptitudes in their in-school -- inter-school solutions. Now let me go into more details. In the fourth quarter, our teaching and learning SaaS businesses continue to make consistent advances. Our key projects continue to generate revenues marked by successful delivery and client acceptance. Notably, the digital transformation projects in Shanghai Minhang District, that is based on our smart pen and paper technology has completed its surface revenue recognition. Our project in Beijing Xicheng District has successfully completed delivered as well. All such projects have seen immediate and consistent high usage with active rates above 90%. This continued to demonstrate our leading ability to deliver large-scale and systematic projects. In the fourth quarter, we secured a contract for the teaching software integration and data analysis services project in Shanghai Songjiang project. This is a SaaS-based pilot project value in RMB around RMB 3 million and initially covered 8 schools around 100 classes, 200 teachers and 4,000 students within the district. Our services include integrating teaching software and providing big data analysis. By gathering learning process data from daily homework, stage assignments and in-class exercise, among other sources, we combine various dimensions such as student academic performance, learning behavior and subject literacy to create comprehensive student data profiles, enable precise data-driven and semi-automatic teaching and learning -- teaching and management strategies. During this quarter, we pursue new growth strategies and expanded our customer base. By establishing strategic partnership with regional schools associated with well-known private education groups as well as individually operated -- individual-operated public schools, we have successfully execute and delivered projects. This new strategy targeting private school and select public schools with adaptable structure had continued to strong performance -- to show strong performance in terms of both contract value and quantity since last quarter. This model is a very good complement to our existing flagship-style projects with a district education bureaus that typically aim at covering the whole district. Project with individual or group managed private or public schools have a much quicker decision process and a higher certainty of funding. This more diversified revenue contribution by each project also helps build up a more smooth revenue stream. Business model also further helped accelerate our strategy to reach more schools and students that will create a virtuous cycle that further enhance -- further allows us to enhance our products and solutions. We dedicate to provide the market with innovative leading product and solutions that set new standards in education technology. The Aerospace City campus of the high school affiliated to China Renmin University, [ Kunshan ] Foreign Language School, Nanjing, [ Xiamen, Pingxiang ] Foreign Language school. [ Yongxiang, Sichuan ] middle schools are among the long list of top leading schools that have subscribed to our teaching and learning SaaS offerings. Their recognition and early adoption of our solution, I believe, to further -- I believe to be influential are expected to further accelerate adoption process within the area. In addition, projects with this group of clients are typically in subscription mode with semiannual or annual renewal. In these projects, we -- in the first project we signed last September that had entered the renewal this month, we have seen a revenue retention rate of 120%, which means additional classes and students and the functions are being subscribed and used. This is a great result -- great initial results built upon our teaching and learning SaaS offerings high active use and a very positive sign that we are building up and increasingly steady SaaS revenue portfolio. Looking ahead, we expect adoption of the SaaS billing model to steadily grow as the market becomes more familiar with its benefit, and we are confident that this model will not only unlock new revenue streams for the company, but also highlight the advantage of its current nature, fostering sustainable business growth. In terms of the product and service offering, we have been continually refining our core offerings and enhancing user experiences to promote regular school use. By integrating application systems and data profiles and daily teaching scenarios such as classroom, homework and exams, such integration is effective teaching, enhances classroom quality and support teachers in delivery differentiated instructions. During this quarter, we enhanced our personalized learning products that focus on student's incorrect answers, enable automatic error correction across all school scenarios and effectively utilizing correction data between online and off-line platforms. Furthermore, we provide high-quality and a diverse resource for personalized learning to boost students independent learning efficiency. Meanwhile, we continue to explore the practical application of AIGC in actual teaching scenarios as well as content preparation process to further deliver a better result in pilot projects. Our proprietary smart-pen which has passed the project pilot verification further improves teacher's efficiency and experiences in correcting daily homeworks. We plan to conduct further mass distributions in 2024. Recently, the 2024 World Digital Education Conference was held in Shanghai. With digital education, application sharing innovation as a scheme, the conference facilitate in-depth discussion on topics such as in-housing teaching's digital [ levers ] and competence, constructing our learning facilities throughout education, digitalization, artificial intelligence and digital ethics and digital education valuation. We participated in the conference and exhibit at the Digital Wisdom Future Education Exhibition under the theme. We provided data backed solution and share expense to advance global digital education clients and tackle challenge. From December 12 to 14, 2023, as a response and development of major change, 2023 China corporate competitiveness annual conference, hosted by the China news -- Business News. Our teaching -- our 1 teaching 1 learning K-12 digital teaching and learning SaaS platform was honored with the 2023 excellent performance company award, best technology innovation award. This award recognize and honors the companies that have made exemplary contribution to the socioeconomic field and has established themselves as exemplars and leaders in the responsive industries. Recently, the Beijing Municipal Education Commission selected 37 innovative application case of big data in education. Notably, Xicheng District [ as sub ] by 17EdTech was selected as a district level case and 3 out of schools, including the Aerospace City campus of the high school affiliated to Renmin University, Beijing No. 43 Middle Schools and Beijing Primary School, Tongzhou branch, also -- so -- which are all our clients were recognized and outstanding on school level cases. This exceptional innovative application cases serve as a great model for schools in various districts and help us to win additional clients. Looking ahead, 1 teaching 1 learning platform will continue to facilitate the digital transformation of education, consistent meeting the needs of both teachers and students, thereby assisting schools in improving their teaching and nurturing practice. The demand for other -- our other educational service products is also highly dependent on the regulatory environment and provision of competing services. We are closely monitoring the development of the market as well as regulatory environment. Moving forward, we have remained committed to explore additional educational products and services that are complying with regulatory requirements. Now I will turn the call over to Lara to walk you through our latest financial performance. Thank you.

Thanks, Michael, 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 would like to remind you that the quarterly results we present here should be taken with care and reference 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 corresponding adjustments to our business model, organization and workforce. In this quarter, our teaching and learning SaaS business generated increasing revenue compared to the same quarter last year, signifying consistent client satisfaction and future development. We are also meticulously managing our expenses to further improve operational efficiency. We are confident that our SaaS learning model is gaining recognition from our clients, helping us build a healthier and recurrent businesses as we enhance our service offerings and customer satisfaction. In the fourth quarter, we recorded net revenues of CNY 47.3 million compared with CNY 39.6 million in the fourth quarter of 2022, representing a 19.7% increase on a year-on-year basis. The net loss for the fourth quarter was RMB 98.4 million compared with RMB 103.1 million in the fourth quarter of '22. The adjusted net loss, non-GAAP for the fourth quarter of 2023 was RMB 81.8 million compared with adjusted net loss of RMB 70.1 million in the fourth quarter of 2022. Gross margin for the fourth quarter of 2023 was 43.4% compared with 52.1% in the fourth quarter of 2022. As of December 31, 2023, we have cash reserve of RMB 476.7 million on our balance sheet, providing sufficient funds for future development. Now I will go through our fourth quarter financials in greater detail. Net revenues. Net revenues for the fourth quarter of 2023 were RMB 47.3 million, representing a year-over-year decrease -- increase of 19.3% from RMB 39.6 million in the fourth quarter of 2022. This was mainly due to the increased number of teaching and learning SaaS contract and the recurring revenue generated from our ongoing projects. Cost of revenues for the fourth quarter of 2023 was RMB 26.8 million, representing a year-over-year increase of 41.4% from RMB 18.9 million in the fourth quarter of 2022, which was mainly attributed to a higher proportion of deliveries in our teaching and learning SaaS projects during the quarter as well as a partial contribution from hardware upgrade. Gross profit for the fourth quarter of 2023 were RMB 20.6 million, remain unchanged from RMB 20.6 million in the fourth quarter of 2022. Gross margin for the fourth quarter of 2023 was 43.4% compared with 52.1% in the fourth quarter of 2022. Total operating expenses for the fourth quarter of 2023 was RMB 122.8 million including RMB 16.6 million of share-based compensation expenses, representing a year-over-year decrease of 12.9% from RMB 141.0 million in the fourth quarter of 2022. Loss from operations for the fourth quarter of 2023 was RMB 102.3 million compared with RMB 120.3 million in the fourth quarter of 2022. Loss from operations as a percentage of net revenues for the fourth quarter of 2023 was negative 216.0% compared with negative 304.2% in the fourth quarter of 2022. Net loss for the fourth quarter was RMB 98.4 million compared with net loss of RMB 103.1 million in the fourth quarter of 2022. Net loss as a percentage of net revenues was negative 207.9% in the fourth quarter of 2023 compared with negative 260.7% in the fourth quarter of 2022. Adjusted net loss, non-GAAP for the fourth quarter of 2023 was RMB 81.8 million compared with adjusted net loss of RMB 70.1 million in the fourth quarter of 2022. Adjusted net loss, non-GAAP, as a percentage of net revenues was negative 172.8% in the fourth quarter compared with negative 177.3% of adjusted net loss as a percentage of net revenues in the fourth quarter of 2022. Please refer to table captioned reconciliation of non-GAAP measures to the most comparable GAAP measures at the end of this press release for reconciliation of net loss under U.S. GAAP to the adjusted net income or loss, non-GAAP. Cash and cash equivalents, restricted cash short-term investment and term deposits were RMB 476.7 million as of December 31, 2023, compared with RMB 737.7 million as of December 31, 2022. As we look to the future, the company will persist in devoting itself to the field of educational digitalization committed to the mission of making learning a wonderful experience. We aim to offer our customer efficient and high-quality product solutions and experiences. While remaining focused on sustaining our developmental momentum and improving the operational efficiency, we are dedicated to fostering steady progress and achieving a long-term stable and sustainable growth. In this quarter, the company and the Founder, Chairman and Chief Executive Officer of the company, Andy Liu, has entered into a share repurchase agreement. Pursuant to which, the company proposed to issue, and Mr. Andy Chang Liu proposed to subscribe for 58,453,168 Class B ordinary shares of the company as a subscription price of the average closing price for ordinary share for the 30 trading days preceding the date of the share repurchase agreement, pursuant and subject to, and consistent with applicable laws and in Nasdaq rules and the company's securities trading policies. Following the share subscription, Mr. Liu will be -- will beneficially own approximately 26.2% of the company's total issued and outstanding share capital. This share subscription demonstrate Mr. Liu's confidence in the value and long-term growth of the company. With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thanks.

[Operator Instructions] We are showing no questions at this time. I'll now hand the conference back to Ms. Zhao for closing remarks. Thank you. We are showing no questions at this time. I'll now hand the conference back to Ms. Zhao for closing remarks.

Thank you, operator. In closing, on behalf of 17EdTech's management team, we 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.

That does conclude our conference for today. Thank you for participating. You may now disconnect.