17 Education & Technology Group Inc. (YQ) Q3 FY2025 Earnings Call Transcript & Summary

Good evening, and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's Third Quarter 2025 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 Ms. Sishi Zhou, the acting Chief Financial Officer; and myself, Investor Relations Manager. Sishi will walk you through our latest business performance and strategies, and I will discuss our financial performance in more detail. After the prepared remarks, Sishi 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 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 acting Chief Financial Officer, to review some of our business development and strategic direction. Sishi, please go ahead.

Thank you, Lara. Hello, everyone. Thank you all for joining us on our third quarter 2025 earnings conference 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 operational basis and in RMB, unless otherwise stated. Let me begin with our latest business updates. We maintained steady progress in our core business in the third quarter of 2025, marked by strong user engagement and healthy customer retention. We constantly invested in product innovation and service enhancements to effectively address evolving customer needs and deliver high-quality customer experience. We are deeply committed to align with national strategies of AI+ education initiative, which advocates integrating innovative intelligent learning companions into the entire education process, as well as adopting intelligent scenario-based interactive learning models. Following the successful launch of Yiqi Tongxue Intelligent Agent, we have successfully rolled out our new C-end product, Yiqi Aixue. This AI membership offering embodies our core philosophy of precision and personalized learning, seamlessly integrating smart hardware, advanced AI capabilities, extensive content resources and data insights accumulated in the past decade. The new product has received highly positive market response, indicating solid growth prospects for the future. Meanwhile, we have constantly focused on the efficiency of operation and resource investment as well as the health of cash flow in the process of continuous innovation. Despite the company's increased investment in R&D to support the launch of new AI products, we still achieved a decrease in operating expenses and narrowed losses in the first 9 months, reducing operating expenses by 29.8% and narrowing net loss by 21.5%, respectively. As of the end of this quarter, we still hold cash reserves of RMB 341.9 million. And the favorable market response to new products will further bolster positive expectations for future cash flow. Looking ahead, we will continue to expand our teaching and learning SaaS product portfolio while balancing financial sustainability and innovation investment. The successful launch of our new C-end AI product marks a new milestone in the company's AI transformation. We will further strengthen our product capabilities, improve customers' learning efficiency and experience and drive the company's sustained and healthy growth. We firmly believe that this strategy will create long-term value for both our customers and shareholders. Now let me go into more details. During the quarter, our school-based subscription business maintained a steady progress, achieving a double-digit year-over-year increase with upselling opportunities for additional value-added services. In the meantime, the excellent customer retention rate mirrors positive user word of mouth, laying a foundation for sound customer relations and strengthening brand influence. The Chinese government has been actively advancing the integration of artificial intelligence across various sectors, including education industry. Notably, in April of this year, a joint policy issued by 9 ministries and commissions, including the Ministry of Education, further underscored AI's strategic role in optimizing teaching and learning processes, and fostering innovative education models. This policy orientation is highly aligned with the company's long-term vision and reinforces our confidence in deepening our investment in AI transformation. In response to the national initiative of embedding AI throughout the entire educational process and guided by our mission to make learning a wonderful experience, we are committed to enhancing AI capabilities across our full product portfolio. Following the August launch of Yiqi Classmate, a generative AI agent embedded in our teaching and learning SaaS offerings at the 2025 Global Smart Education Conference and the subsequent empowerment of our public welfare initiative, 100 districts, 1,000 schools, 10,000 teachers to drive the rollout of educational digital transformation across multiple regions. We have newly launched Yiqi Aixue, an AI-powered precision learning product targeting C-end users. This C-end AI membership product deeply integrates our massive high-quality content resources accumulated over the past decade as well as mature hardware systems and the proprietary AI capabilities. It is dedicated to delivering precise academic performance analysis and personalized learning recommendations to users. Through a hardware-software integrated solution, the product combines content resources, diverse AI interaction functions with smart devices such as the Smart Pen and the [ Tobi Smart Rabbit ], creating a personalized scenario-based and immersive learning experience for users. Within the solutions offered by Yiqi Aixue, the Smart Pen collects writing data with high precision and in real time, efficiently digitizing paper notes and visualizing the learning process. All writing traces, including every post and correction are analyzed via AI technology to accurately assess students' knowledge mastery and generate personalized academic performance reports. Additionally, leveraging the Smart Pen's real-time learning content synchronization capability, the system automatically creates customized AI notes and mistake notebooks, and combines the company's high-quality content resources to deliver tailored learning plan recommendations to users. The product also incorporates Tobi Smart Rabbit as an intelligent learning companion, which provides emotional support to users, including timely study reminders, positive encouragement and interactive Q&A through natural voice interaction, making precision learning solutions more actionable and accessible. The product preserves traditional pen and paper writing practices while capturing multi-scenario, multidimensional data. Paired with AI capabilities, it delivers precise personalized academic diagnostics and customized learning recommendations. It also incorporates an intelligent learning companion to drive independent learning motivation. Beyond boosting learning outcomes, this precision learning model improves learning efficiency and eases academic burdens, representing a pragmatic human-centric breakthrough in AI education integration that differentiates our offering in the EdTech space. Since the rollout of this product, it has received encouraging market feedback and robust user demand, which not only demonstrates market recognition of its value, but also lays a solid foundation for the company's future growth. The above concludes the business update. Now I will turn the call over to Lara to walk you through our latest financial performance. Thank you.

Thanks, Sishi 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. In the first quarter, we continue to prioritize sustainable growth by investing in core product innovation and enhancing cost discipline approach for improved operational efficiency. The impact is evident in our year-to-date figures. Total operational efficiency decreased by 29.8%, leading to a 21.5% reduction in net loss on a GAAP basis compared to the same period last year. Next, I will go through our financial data in greater detail. Net revenues. In the third quarter of 2025, we recorded net revenues of RMB 20 million compared with RMB 59.6 million in the third quarter of 2024, representing a 66.4% decrease on a year-over-year basis, which was primarily due to the reduction in net revenues from district-level projects as we prioritize our resources on school-based projects under subscription model, which requires a long period of revenue recognition. Cost of revenue for the third quarter of 2025 was RMB 9.8 million equals USD 1.4 million, representing a year-over-year decrease of 58.1% from RMB 23.3 million in the third quarter of 2024, which was largely in line with the decrease of net revenues during the quarter. Gross profit for the third quarter of 2025 was RMB 10.2 million compared with RMB 36.3 million in the third quarter of 2024. Gross margin for the third quarter of 2025 was 51.2% compared with 60.9% in the third quarter of 2024. Total operating expenses for the third quarter of 2025 was RMB 56.9 million equals USD 6.0 million, including RMB 6.3 million of share-based compensation expenses, representing a year-over-year decrease of 1.9% from RMB 58.0 million in the third quarter of 2024. Sales and marketing expenses for the third quarter of 2025 was RMB 15.9 million, including RMB 1.6 million of share-based compensation expenses, representing a year-over-year decrease of 21.6% from RMB 20.2 million in the third quarter of 2024. This was primarily attributed to the improved efficiency in marketing and sales driven by enhanced customer retention compared with the same period last year. Research and development expenses for the third quarter of 2025 was RMB 15.2 million, including RMB 2.1 million of share-based compensation expenses, representing a year-over-year increase of 19.2% from RMB 12.8 million in the third quarter of 2024. The increase was primarily due to our increased headcount in the research and development to support the rollout of our new product, offset by the decrease of share-based compensation. General and administrative expenses for the third quarter of 2025 were RMB 25.8 million, including RMB 2.8 million of share-based compensation. compared with RMB 25.0 million in the third quarter of 2024. Loss from operations for the third quarter of 2025 was RMB 46.6 million compared with RMB 21.6 million in the third quarter of 2024. Loss from operations as a percentage of net revenues for the third quarter of 2025 was negative 233.1%, compared with negative 36.3% in the third quarter of 2024. Net loss for the third quarter of 2025 was RMB 44.5 million compared with net loss of RMB 17.4 million in the third quarter of 2024. Net loss as a percentage of net revenues was negative 222.5% in the third quarter of 2024 (sic) [ 2025 ] compared with negative 28.2% -- 29.2% in the third quarter of 2024. Adjusted net loss non-GAAP for the third quarter of 2025 was RMB 38.2 million compared with adjusted net loss non-GAAP of RMB 5.7 million in the third quarter of 2024. Adjusted net loss as a percentage of net revenues was negative 191.0% in the third quarter of 2024 (sic) [ 2025 ] compared with negative 9.5% of adjusted net loss non-GAAP as a percentage of net revenues in the third quarter of 2024. 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 a reconciliation of net loss under U.S. GAAP to the adjusted net loss non-GAAP. Cash and cash equivalents, restricted cash and term deposits were RMB 341.9 million, which equals USD 48.0 million as of September 30, 2025, compared with RMB 359.3 million as of December 31, 2024. Looking to the future, in alignment with the trends of integration -- integrating AI into education, we will continue to upgrade our AI capabilities to deliver more efficient user-centric educational solutions. Through a more integrated business strategy, we aim to foster synergies across our business lines, creating a virtuous cycle that deepens customer engagement, strengthens the strategic value of our subscription model and expands our market presence. These efforts represent vital pathways for long-term value creation and sustainable growth, delivering meaningful value for both our users and shareholders. With that, we conclude our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thanks.

[Operator Instructions] I'm showing no questions. I'll now turn the conference back to Ms. Lara Zhao for closing comments.

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 for your participation in today's conference. This does conclude the program. You may now disconnect your lines.