17 Education & Technology Group - Earnings Call - Q3 2024

Transcript

Operator (participant)

Good evening and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's third quarter 2024 earnings conference 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, 17EdTech's Investor Relations Manager. Please proceed, Lara.

Lara Zhao (Head of Investor Relations)

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 detail. 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 21(e) 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 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 Director and Chief Financial Officer to review some of our business development and strategic direction. Michael, please go ahead.

Michael Du (CFO)

Thank you, Lara. Hello everyone. Thank you all for joining us on the third 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 operation basis and in RMB, unless otherwise stated. Let me start with our business updates. In the third quarter of 2024, we have continued our business progress and have seen consistent growth through subscribing to our teaching and learning SaaS offerings under subscription models. This is strong testimony of the value of the offering and creates a clear growth path into the future. We continue to evolve our teaching and learning SaaS solutions to expand customer base, to improve efficiencies through digital means, ensuring high-quality development and fostering growth in the school-based procurements.

During this quarter, our core teaching and learning SaaS business has made substantial progress, and it contributes significant yields to the overall revenue, compared with the same quarter last year. Regional flagship projects and ongoing SaaS initiatives have consistently generated revenue, with key projects achieving revenue recognition milestones. Our revenue of this quarter has grown by 32% to RMB 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 non-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 exhibits 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 our 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 continues to narrow, marking a consistent trend of narrowing losses on the past three consecutive quarters. In this third quarter, we achieved significant progress in school-based subscription projects with a remarkable revenue growth rate that outpaced 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 the 30th this year, 89% of them have chosen 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 is maturing, as evidenced by their increasing renewal rate as well as the improving customer retention rate, highlighting noteworthy advancements that drive 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 all 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 reach from various funding sources. The company seeks to cater 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 results, providing valuable reference for potential users. Our platform currently has 450,000 active students engaging in daily coursework, with a total of 45 million completed homework assignments, reflecting an increase of 36% and 30% respectively compared to the previous quarter. Our semester comparison revealed that the students and teachers using our solutions outperformed the peers or the class groups that did not. The data also showed the average active teacher used our solutions for five classes or homework assignments every week. This is highly active among industry.

In this quarter, we further refined and upgraded the examination and grading products, resulting in improved grade efficiency and expanded dimensional student performance analysis. In the teacher and researcher aspect, we have strengthened our support for performance analysis that address common mistakes. The continuous optimization of personalized learning products and error correction functionalities ensures broader coverage to accommodate diverse learning scenarios, effectively securing personalized learning outcomes. Leveraging by consolidated classroom resources, instructional materials are organized 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 between supplementary teaching and independent learning. The company is always dedicated to delivering premium learning products and services, continuously evolving our teaching and learning SaaS solutions, 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.

Lara Zhao (Head of Investor Relations)

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% increase on a year-over-year basis.

Net loss on GAAP basis for the third quarter of 2024 was RMB 17.4 million, compared with RMB 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 three 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 30th, 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 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 the recurring revenue generated from ongoing projects. 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 RMB 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 the 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 RMB 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 -36.3%, compared with -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 RMB 72.9 million in the third quarter of 2023. Net loss as a percentage of net revenues was -29.2% in the third quarter of 2024, compared with -161.6% in the third quarter of 2023.

Adjusted net loss non-GAAP for the third quarter of 2023 was RMB 5.7 million RMB, compared with adjusted net loss non-GAAP of RMB 53.7 million in the third quarter of 2023. Adjusted net loss non-GAAP as a percentage of net revenues was -9.5% in the third quarter of 2024, compared with -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 captions "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 were RMB 339.7 million as of September 30th, 2024, compared with RMB 476.7 million as of December 31st, 2023.

Moving forward, we will enhance our core business and explore new growth opportunities by prioritizing operational efficiency, 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 (participant)

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one one on your telephone and wait for your name to be announced. If you would like to cancel your request, please press star one one again. Once again, to ask a question, please press star one one. Please stand by while we compile the Q&A roster. As a reminder, if you would like to ask a question, please press star one one. We appear to have no questions at this time. Allow me to hand the call back to the management. Please continue.

Lara Zhao (Head of Investor Relations)

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.

Operator (participant)

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