17 Education & Technology Group - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and thank you for standing by for 17 Education first quarter 2025 earnings call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question-and-answer session. 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, 17 Education investor relations manager. Please proceed, Lara.

Lara Zhao (Investor Relations Manager)

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 and Exchange Act of 1934 and 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.

Sishi Zhou (Acting CFO)

Thank you, Lara. Hello everyone. Thank you all for joining us on our first quarter 2025 earnings conference call. Before we begin, I would like to note that the financial information and the non-GAAP numbers in this release are presented on a continuing operation basis and in RMB, unless otherwise stated. Let me begin with our latest business updates. We are pleased to report a strong performance in the first quarter of 2025. This quarter has marked significant progress and innovation, particularly with the successful trial and implementation of our AI-powered product upgrades, facilitating teaching and learning efficiency by delivering intelligent, adaptive solutions that enhance daily instructional decision-making, providing more personalized learning experiences for students. During the quarter, we have seen strong growth in both new contract acquisitions and the expansion of our existing customer base.

Our SaaS subscriptions business has risen as more schools and educational organizations recognize the value of our AI-powered solutions, showcased in strong retention rates and increased adoption of our value-added offerings. In the first quarter of 2025, we recorded net revenues of RMB 21.7 million, representing a 15% decrease from the previous quarter last year, which was primarily due to the reduction in net revenues from district-level projects as we prioritized our resources on school-based projects on a subscription model, which generally have longer revenue recognition periods. As we improved operational efficiency, operating expenses reduced by 42.6% compared to the same quarter last year, resulting in a 44.8% reduction in net loss on a GAAP basis. Looking ahead, we will remain vigilant in monitoring our financial performance and making strategic decisions to ensure long-term success and sustainability of our business. Now let me go into more details.

During the quarter, our district-level teaching and learning SaaS business remained steady, continuously contributing an important portion in revenue recognition. Recently, we successfully supported Shanghai Minhang District to launch a specialized Generative Intelligent Agent Cluster and demonstrated it at the Shanghai Education Expo. The intelligent agent integrates universal large language models, leveraging vast real-time teaching and learning database in Minhang District, and integrating with the localized knowledge system, aiming to provide precise, contextualized support for learners and educators so that we can transform education services from knowledge transmission to competency development. Following the successful launch of the new AI-powered solution in Shanghai Minhang, we are confident that this offering will expand to other regions and serve as a model for potential partners pursuing transformative learning technologies.

This initiative demonstrates our expertise in educational innovation by delivering adaptable, high-value AI-powered solutions that enhance daily instructional decision-making, improve teaching and learning efficiency, and promote high-quality regional education development. Our school-based subscription business has sustained a steady growth driven by a year-over-year increase in newly subscribed students. This momentum underscores its strategic importance as a critical contributor and integral component of our overall revenue, which will continue to prioritize resource allocation. During the quarter, we have seen heightened demands and enthusiasm for our offerings in our partner schools, reflecting in a higher retention rate and increased adoption of our expandable value-added services. Over 90% of renewal customers opted to continue their subscriptions, with many expanding their service coverage. This strong retention and upscaling potential not only reinforces customer engagement and loyalty but also safeguards the business for long-term sustainable growth.

As for our product and service offerings, they have been continuously upgraded with innovation, driving customer satisfaction and business growth by integrating AI into core teaching and learning scenarios, including lesson planning, in-class interaction, assignment design, automated grading, data-driven analysis, and personalized learning recommendations. We aim to streamline teachers' workflows, empowering them with evidence-based decisions and individualized learning paths for each student. Specifically, our Intelligent Voice and Classroom Monitoring functions are expected to boost classroom efficiency. As a smart companion for teachers, it helps teachers understand students' thinking processes and learning states while providing teaching research support. Teachers can interact with the smart assistants in real time, analyzing multidimensional data such as students' response time, thinking patterns, as well as learning trajectories, identifying group and individual differences with multi-task learning analytics so that evidence-based teaching decisions can be made.

Our intelligent solutions can customize classroom exercises and after-school assignments for students based on personalized learning conditions, automatically grade them, and generate dynamic error correction notebooks, and provide customized problem-solving ideas and follow-up teaching suggestions. These advancements reduce teachers' workload while enhancing students' learning efficiency and achievement. To date, we have conducted trials in over 50 schools, providing teaching administrators with data-driven management tools covering the entire teaching scenario, as well as demonstrating scalable replication potentials of this model. In terms of distribution channels, our multi-channel marketing efforts and strategic partnerships have further solidified our presence in high-growth markets. We have consistently prioritized strategic market penetration by diversifying our distribution methods and fostering collaboration. By allying product development with emerging educational trends and enhancing our distribution network, we have improved product delivery and customer engagement, leveraged data analytics for targeted marketing and deeper customer insights.

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

Lara Zhao (Investor Relations Manager)

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. 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 first quarter of 2025, we recorded net revenues of RMB 21.7 million, compared with RMB 25.5 million in the first quarter of 2024, representing a 15% decrease on a year-on-year basis, which was primarily due to the reduction in net revenues from district-level projects as we prioritized our resources on school-based projects and their subscription model, which generally have longer revenue recognition periods. Gross margin for the first quarter of 2025 was 36.2%, compared with 38.4% in the first quarter of 2024. Net loss on a GAAP basis for the first quarter of 2025 was RMB 30.9 million, compared with RMB 56.1 million in the first quarter of 2024, representing a decrease of 44.8% year-on-year.

The adjusted net loss non-GAAP for the first quarter of 2025 was RMB 22.4 million, compared with the adjusted net loss non-GAAP of RMB 42.7 million in the first quarter of 2024, a decrease of 47.5% year-on-year. As of March 31, 2025, we have cash reserves of RMB 333.3 million on our balance sheet, compared with RMB 359.3 million as of December 31, 2024. Next, I will go through our first quarter financials in greater detail. Net revenues for the first quarter of 2025 were RMB 21.7 million, representing a year-over-year decrease of 15.0% from RMB 25.5 million in the first quarter of 2024. This was mainly due to the reduction in net revenues from the district-level projects as we prioritized our resources on school-based projects and the increasing number of contracts and the SaaS subscription model, which requires a longer period of revenue recognition.

Cost of revenues for the first quarter of 2025 was RMB 13.8 million, representing a year-over-year decrease of 11.9% from RMB 15.7 million in the first quarter of 2024, which was largely in line with the decrease of net revenues during the quarter. Gross profit for the first quarter of 2025 was RMB 7.8 million, compared with RMB 9.8 million in the first quarter of 2024. Gross margin for the first quarter of 2025 was 36.2%, compared with 38.4% in the first quarter of 2024. Total operating expenses for the first quarter of 2025 was RMB 41.7 million, including RMB 8.5 million of share-based compensation expenses, representing a year-over-year decrease of 42.6% from RMB 72.7 million in the first quarter of 2024. Loss from operations for the first quarter of 2025 was RMB 33.9 million, compared with RMB 62.9 million in the first quarter of 2024.

Loss from operations as a percentage of net revenues for the first quarter of 2025 was negative 156.3%, compared with negative 246.7% in the first quarter of 2024. Net loss for the first quarter of 2025 was RMB 30.9 million, compared with the net loss of RMB 56.1 million in the first quarter of 2024. Net loss as a percentage of net revenues was negative 142.8% in the first quarter of 2025, compared with negative 219.9% in the first quarter of 2024. Adjusted net loss non-GAAP for the first quarter of 2025 was RMB 22.4 million, compared with adjusted net loss non-GAAP of RMB 42.7 million in the first quarter of 2024.

Adjusted net loss non-GAAP as a percentage of net revenues was negative 103.4% in the first quarter of 2025, compared with negative 167.4% of the adjusted net loss non-GAAP as a percentage of net revenues in the first quarter of 2024. Please refer to the table questions, "Reconciliations of non-GAAP measures to the most comparable GAAP measures," at the end of this press release for the reconciliation of net loss under U.S. GAAP to adjusted net loss non-GAAP. Cash and cash equivalents, restricted cash and term deposits. Cash and cash equivalents, restricted cash and term deposits were RMB 333.3 million, equals $45.9 million as of March 31, 2025, compared with RMB 369.3 million as of December 31, 2024. Next, I'd like to share a brief update from the board. From our board, we warmly welcome Mr.

Gui Jia as an independent director and a member of the audit committee, the compensation committee, and the nominating and corporate governance committee of the board. Mr. Jia has extensive experiences in fintech and education sectors, and we are confident that his insights will further strengthen the 17 Education & Technology Group strategic direction, governance, and operations. We also extend our sincere gratitude to Mr. Jia Wei Gan for his outstanding service and invaluable contributions as he retires. Additionally, Mr. Michael Chow Do has resigned as director and chief financial officer, and the company announced appointing Ms. Sishi Zhou as our acting chief financial officer. Ms. Zhou joined the company in December 2020 and has served as financial director since June 2022, overseeing the company's overall financial operations, including financial reporting, business analysis, and strategy team. Ms.

Zhou brings extensive financial expertise and has held advisory roles at several multinational companies, as well as a senior auditor at PwC, Zhongjian CPAs LLP. She received a dual bachelor's degrees in accounting and law from Tsinghua University in 2011, and her MBA from Peking University's Guanghua School of Management in 2023. We welcome Mr. Jia and Ms. Zhou to the leadership team. Their joint expertise will be instrumental as we drive forward to our next growth phase. We also sincerely thank Mr. Michael Chow Do and Mr. Jia Wei Gan for their invaluable contributions during their tenure with the company. Moving forward, 17 Education & Technology Group will take AI-driven educational innovation as its core focus, deeply integrating AI plus education to actively align with the national strategy for the educational digital transformation and upgrading.

The company remains unswerving in its commitment to enriching learning experiences while upholding the mission of making learning a wonderful experience. Centered on delivering efficient, high-quality educational products and solutions, we aim to maintain growth momentum, enhance operational efficiency, and steadily drive long-term, stable, and sustainable development. With that, this concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Operator (participant)

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. There may be a short pause while we compile the Q&A roster. Once again, to ask a question, please press star 11 on your telephone keypad. As a reminder, to ask a question, please press star 11 on your telephone keypad. Ensuring the questions, I'll now turn the conference back to Ms. Lara Zhao for closing comments.

Lara Zhao (Investor Relations Manager)

Thank you, Operator. In closing, on behalf of 17 Education & Technology Group'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.

Operator (participant)

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