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 Third Quarter 2024 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.

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 it 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 on our third quarter 2024 earnings call. Before we begin, I would like to note that the financial information and non-GAAP numbers in this release are presented on a continuing operation basis and in RMB unless otherwise stated. Let me start with our business updates. In the third quarter 2024, we have continued our business progress and have seen consistent growth in schools subscribing to our teaching and learning SaaS offerings under subscription models. This is strong testimony in the value of the offering and create a clear growth path into the future. We continue to evolve our teaching and learning SaaS solution to expand customer base to improve efficiencies through digital means, ensuring high-quality development and fostering growth in school-based procurement. During this quarter, our core teaching and learning SaaS business has made substantial progress and contributes significant yields to the overall revenue compared with the same quarter last year. Regional flagship projects and ongoing soft initiatives have consistently generated revenue with key projects achieving revenue recognition milestones. Our revenue in this quarter has grown by 32% to CNY 59.6 million. And our loss, both in terms of GAAP and non-GAAP basis, have also substantially narrowed with our adjusted net loss on a GAAP basis of only RMB 5.7 million, demonstrating our continuous efficiency improvement, scale expansion and cost control. During this quarter, our teaching and learning SaaS business for district-level projects exhibit steady progress, continuing to generate revenues through successful delivery as well as new contract acquisitions. Notably, the project in Beijing Xicheng District we have secured last quarter has successfully completed delivery and achieved revenue recognition. Additionally, another key project in Shanghai Minhang project has also successfully wrapped up its second phase, showcasing impressive user engagement metrics. As we have enhanced operational efficiency and further reduced operational expenses, our loss on a GAAP basis continue to narrow, marking a consistent trend of narrowing losses on the past 3 consecutive quarters. In this third quarter, we achieved significant growth progress in school-based subscription projects with a remarkable revenue growth rate that outpaces the overall revenue growth. Also, we have seen a very strong renewal trend in this segment. Among the individual schools whose initial contracts matured on or before September 30 this year, 89% of them have chose to renew their contracts. And they further chose to expand their service scope and student coverage by a further 37%. This is a strong case showing that our subscription model as maturing as evidenced by the increasing renewal base as well as the improving customer retention rate, highlighting noteworthy advancement that drives our revenue growth. This also enhances our ability to reach more schools and students, creating a virtuous cycle that enables continuous improvements in our products, solutions and sales network. As we optimize our business structure, synergies across our business lines have led to a more efficient operation with enhanced complementary strength and increased flexibility. In terms of distribution channels, the company is actively working on developing a diverse range of multidimensional sales channels to enhance the flexibility and client risk from various funding sources. The company seeks to take us to different clients' needs and preferences, ultimately improving accessibility to its products, services and thereby driving growth of our businesses. From our product service offerings, we are committed to refining and upgrading our comprehensive solutions to improve customer satisfaction. We integrated personalized learning data across all learning scenarios. Our extensive learning resources support personalized products that significantly help our partner schools with academic readouts, providing valuable reference for potential users. Our platform currently has 450,000 active students engaging in daily courseworks with a total of 45 million completed homework, assignments, reflecting an increase of 36% and 30%, respectively, compared to the previous quarter. Our semester compared -- our semester comparison review that students and teachers using our solutions outperformed their peers or the class groups that did not. The data also show the average active teacher use our solutions for 5 classes or homework, assignments every week. This is highly accurate among industry. In this quarter, we further refined and upgraded the examination grading products, resulting in an improved grade efficiency and expanding dimension of student performance analysis. In the teacher research aspect, we have strengthened our support for performance analysis that address common mistakes. Our continuous optimization of personalized learning products and error correction functionality ensures broader coverage to accommodate diverse learning scenarios, effectively securing personalized learning outcomes. Leveraging by consolidated classroom resources, instructional materials are organized for wider distribution, improving supplementary teaching to meet both common and individual student needs. Consequently, it helps students to tackle problems in self-directed learning process while fostering synergies, which is supplementary teaching and independent learning. The company is always dedicated on delivering premium learning products and services, continuously evolving our teaching and learning SaaS solution, expanding customer base to enhance efficiency, ensuring high-quality development and fostering individual growth. Now I will turn the call over to Lara to walk you through our financial performance. Thanks.

Thanks, Michael. Thank you, everyone, for joining the call. I will 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 the third quarter of 2024, we recorded net revenues of RMB 59.6 million compared with RMB 45.1 million in the third quarter of 2023, representing a 32.2% of increase on a year-over-year basis. Net loss on a GAAP basis for the third quarter of 2024 was RMB 17.4 million compared with CNY 72.9 million in the third quarter of 2023, representing a decrease of 76.1% year-on-year, marking a consistent trend of narrowing losses over the past 3 consecutive quarters. The adjusted net loss non-GAAP for the third quarter of 2024 was RMB 5.7 million compared with adjusted net loss non-GAAP of RMB 53.7 million in the third quarter of 2023, a decrease of 89.5% year-on-year. Gross margin for the third quarter of 2024 was 60.9% compared with 54.1% in the third quarter of 2023. As of September 30, 2024, we have cash reserves of RMB 339.7 million on our balance sheet. Next, I will go through our third quarter financials in greater detail. Net revenues. Net revenues for the third quarter of 2024 was RMB 59.6 million, representing a year-over-year increase of 32.2% from RMB 45.1 million in the third quarter of 2023. This was mainly due to the increased number of teaching and learning SaaS contracts and recurring revenue generated from ongoing projects. Cost of revenues. Cost of revenues for the third quarter of 2024 was RMB 23.3 million representing a year-over-year increase of 12.5% from RMB 20.7 million in the third quarter of 2023, which was mainly due to the increase in project deliveries for our teaching and learning SaaS offerings during the quarter. Gross profit for the third quarter of 2024 was RMB 36.3 million compared with CNY 24.4 million in the third quarter of 2023. Gross margin for the third quarter of 2024 was 60.9% compared with 54.1% in the third quarter of 2023. Total operating expenses for the third quarter of 2024 was RMB 58.0 million, including RMB 11.7 million of share-based compensation expenses, representing a year-over-year decrease of 43.7% from RMB 103.1 million in the third quarter of 2023. Loss from operations for the third quarter of 2024 was RMB 21.6 million compared with CNY 78.7 million in the third quarter of 2023. Loss from operations as a percentage of net revenues for the third quarter of 2024 was negative 36.3% compared with negative 174.4% in the third quarter of 2023. Net loss for the third quarter of 2024 was RMB 17.4 million compared with net loss of CNY 72.9 million in the third quarter of 2023. Net loss as a percentage of net revenues was negative 29.2% in the third quarter of 2023 (sic) [ 2024 ] compared with negative 161.6% in the third quarter of 2023. Adjusted net loss non-GAAP for the third quarter of 2023 (sic) [ 2024 ] was RMB 5.7 million compared with adjusted net loss non-GAAP of CNY 53.7 million in the third quarter of 2023. Adjusted net loss non-GAAP as a percentage of net revenues was negative 9.5% in the third quarter of 2024 compared with negative 119.1% of adjusted net loss non-GAAP as a percentage of net revenues in the third quarter of 2023. Please refer to the table captioned reconciliations 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 adjusted net loss non-GAAP. Cash and cash equivalents and term deposits. Cash and cash equivalents and term deposits was -- were RMB 339.7 million as of September 30, 2024, compared with CNY 476.7 million as of December 31, 2023. Moving forward, we will enhance our core business and explore new growth opportunities by prioritizing operational efficiencies, sustainability and innovation. Our aim is to deliver competitive high-quality education solutions that meet customer needs and contribute to regional educational development. By embracing digital learning methods, we seek to enhance efficiency, ensure quality and foster individual growth while delivering long-lasting value for our customers and shareholders. With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

[Operator Instructions] We appear to have no questions at this time. Allow me to hand the call back to the management. Please continue.

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.

Thank you. That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.