17 Education & Technology Group - Q2 2024

Transcript

Operator (participant)

Good evening and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's second quarter 2024 earnings conference call. At this time, all participants are in 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, 17EdTech's 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 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 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.

Michael Du (Director and CFO)

Thank you, Lara. Hello, everyone. Thank you all for joining us on our second quarter 2024 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 operations basis and in RMB, unless otherwise stated. Let me start with our latest business update. In the second quarter, we are delighted to announce that the company has achieved a robust progress in our core business, with an impressive top line growth of 165% quarter-to-quarter, revenue growth, driven by significant expansion and contract winnings in new potential areas. As we optimize our operational efficiency, operational loss has shown a diminishing trend in the first half of 2024.

Net loss on GAAP basis continues to narrow for the first half of 2024, compared with the same period last year. As we innovate and provide high-quality, efficient educational solutions, we have effectively implemented personalized teaching and learning for a broader audience in the evolving digital learning landscape. Our innovative, high-quality, data-driven SaaS offerings are delivering substantial assistance in promoting trends in our partner schools that are positively associated with academic improvements. Examples include increased homework and exercise completion rates, teachers grading rates, and student correction rates. Comparison between students using and those not using our solutions within the same school after semester also noted better academic performance of the students and teachers who use our solutions. During the quarter, we continued to maintain a growth momentum in user engagements for subscription modes of our comprehensive solutions on the expanded user base.

For additional customer groups, including both public and private ones, we are glad to see the operating metrics such as subscription retention rates, utilization rates, remain steadily improved in existing schools, with significant results achieving attracting new customers and expanding potential service scope. 10 projects are due for renewal in September this year. Out of these projects, a substantial portion of them have already renewed their contract with us, with some of them subscribing for more participating students, which leads to effective retention rates of more than 150%. Such continuous renewal, extension of student coverage within existing schools, as well as purchase of additional value-added services and products, such as learning pads, are expected to increasingly improve our revenue stream and sales efficiency. Our sales network has also deepened as the number of schools purchase our solutions continue to increase.

Currently, we are collaborating with more than 500 strategic partners to distribute our offerings in over 95 cities across 27 provinces. In this quarter, we have initiated a strategic partnership with two major local distributors in Qingdao, Shandong Province, aiming to expand our distribution network and student reach to cover more customers through our module-based solution. We expect the collaboration will enhance our market presence and boost our competitive edge in the region, leading to an increased market share, possible new revenue opportunities, and growth. During the quarter, our teaching and learning software business for district level project exhibited this consistent growth progress, continuing to generate revenues through successful delivery and new project winning. Our district level project in Beijing, Xicheng, and that we newly acquired in May, has facilitated delivery and recognized revenues.

Furthermore, as one of our key district level initiatives in Shanghai, from September 2023 to June 2024, remarkable achievement has been observed. Statistics has revealed that our smart pen and paper have been in daily use in Minhang District of Shanghai. They have completed over 23 million homework assignments, with a total of 460,000 class hours and 18,000 academic evaluations and assessment practices. Which covers 2,157 classes and more than 84,000 students and 4,500 teachers across 110 public schools. Additionally, as a deep cultivator in the dot matrix pen application industry, the company actively takes the lead in formulating the country's first dot matrix pen group standard.

Leveraging the technological expertise and innovation capabilities to fully participate and firmly consolidate industry recognition, and strongly promote industry technological progress and innovation, and innovative practices. In aspects of product service offerings, our commitment to product upgrade and customer satisfaction has driven us to continuously refine our offerings in alignment with user preference. We have integrated personalized learning data across all learning scenarios. Our comprehensive solutions encompassing learning resources, review of common issues, personalized recommendations, tailored homework guidance, data feedback loops, comprehensive assessment and evaluations, and reliable services. It ensures a holistic approach to resolving individual learning obstacles and guarantees the effective implementation of personalized learning strategies. Presently, our platform has 330,000 active student users engaging in daily coursework, with a cumulative of more than 35 million completed homework assignments.

The teaching application products based on regular data collection have clearly demonstrated the value-add effects in enhancing learning outcomes within our partner schools, resulting in the academic improvements. Now, I will turn the call over to Lara to walk you through our latest financial performance. Thank you.

Lara Zhao (Investor Relations Manager)

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 the second quarter of 2024, we recorded net revenues of RMB 67.5 million, compared with RMB 25.5 million in the first quarter of 2024, representing a 165% increase on a quarter-on-quarter basis.

Net loss on a GAAP basis for the second quarter of 2024 was RMB 55.7 million, compared with RMB 47.9 million in the second quarter of 2023. The adjusted net loss non-GAAP for the second quarter of 2024 was RMB 42.6 million, compared with adjusted net loss non-GAAP of RMB 28.6 million in the second quarter of 2023. Gross margin for the second quarter of 2024 was 16.0%, compared with 48.3% in the second quarter of 2023. As of June 30, 2024, we have cash reserves of RMB 410.7 million on our balance sheet, providing sufficient funds for future development. Next, I will go through our second quarter financials in greater detail. Net revenues.

Net revenues for the second quarter of 2024 was RMB 67.5 million, which remained relatively stable compared with RMB 69.2 million in the second quarter of 2023. Cost of revenues for the second quarter of 2024 was RMB 56.7 million, representing a year-over-year increase of 58.6% from RMB 35.8 million in the second quarter of 2023, which was mainly due to the increase in project deliveries of our teaching and learning SaaS offerings during the quarter. Gross profit for the second quarter of 2024 was RMB 10.8 million, compared with RMB 33.5 million in the second quarter of 2023.

Gross margin for the second quarter of 2024 was 16%, 16.0%, compared with 48.3% in the second quarter of 2023, which was mainly due to the higher proportion of lower margin mixed deliveries in our teaching and learning SaaS project during the quarter. Total operating expenses for the second quarter was RMB 71.0 million, including RMB 13.1 million of share-based compensation expenses, representing a year-over-year decrease of 22.3% from 91.3, RMB 91.3 million in the second quarter of 2023. Loss from operations. Loss from operations for the second quarter of 2024 was RMB 60.2 million, compared with RMB 57.8 million in the second quarter of 2023.

Loss from operations as a percentage of net revenues for the second quarter was -89.2%, compared with -83.5% in the second quarter of 2023. Net loss for the second quarter of 2024 was RMB 55.7 million, compared with net loss of 47.9 million in the second quarter of 2023. Net loss as a percentage of net revenues was -82.5% in the second quarter of 2024, compared with -89.2% in the second quarter of 2023. Adjusted net loss non-GAAP for the second quarter of 2024 was 42.6 million, compared with adjusted net loss of 28.6 million in the second quarter of 2023.

Adjusted net loss non-GAAP as a percentage of net revenues was -86.1% in the second quarter, compared with -41.2% of net revenues of adjusted net loss as a percentage of net revenues in the second quarter of 2023. Please refer to the table captioned "Reconciliations of Non-GAAP Measures to the Most Comparable GAAP Measure" at the end of this press release for a reconciliation of net loss under U.S. GAAP to adjusted net loss non-GAAP. Cash and cash equivalents and term deposits were RMB 410.7 million as of June thirtieth, 2024, compared with RMB 476.7 million as of December 31st, 2023.

In addition, we would like to announce that the company's board of directors renewed our share repurchase program on September fourth, 2024, under which the company is authorized to repurchase up to $10 million of the company's ADS or common shares in the next 12 months. The company's board of directors will review the share repurchase program periodically, and may authorize adjustment of its term and size. Looking to the future, we will continue to explore and innovate. We will cultivate product optimization and channel innovation to further strengthen our core competitiveness. Our aim is to provide competitive, personalized educational overall solutions and high quality educational products and services that enhance effectiveness, contributing to China's educational digital transformation and sustainable development. With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thank you.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, please press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. As a reminder, to ask a question, please press star one one on your telephone. I'm showing no questions at this time, and I'll turn the conference back to Ms. Lara Zhao for closing comments.

Lara Zhao (Investor Relations Manager)

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