17 Education & Technology Group - Q4 2023

Transcript

Operator (participant)

Good evening and good morning, ladies and gentlemen, and thank you for standing by for 17 EdTech's Fourth Quarter 2023 and Full-Year 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 will now turn the meeting over to your host for today's call, Ms. Lara Zhao, 17 EdTech'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 relate to events that involve known risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control. This 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 Chao Du (CFO)

Thank you, Lara. Hello, everyone. Thank you all for joining us on our fourth quarter 2023 and full-year earnings results 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 now start with our latest business updates. In this quarter, the company has maintained solid development and progress in our teaching and learning SaaS businesses. We've achieved 19.7% revenue growth in the fourth quarter of 2023 from the previous quarter. This was primarily driven by our growth in the teaching and learning SaaS businesses. An important progress is that we were able to win orders from an additional group of clients and expand into our potential new customer groups under new transaction modes.

Particularly, businesses with individual schools and group-operated schools have started building momentum with regular new contracts winning. Moving forward, we will accelerate the development of smart classroom, big data precision teaching, intelligent homework solutions, and other products, including those with five aspects of education, holistically supporting personalized learning and accommodating students' individual aptitudes in their inter-school solutions. Now let me go into more details. In the fourth quarter, our teaching and learning SaaS businesses continue to make consistent advances. Our key projects continue to generate revenues marked by successful delivery and client acceptance. Notably, the digital transformation projects in Shanghai Minhang District that is based on our smart pen and paper technology have completed its service revenue recognition. Similarly, our project in Beijing Xicheng District has successfully completed its delivery as well. All such projects have seen immediate and consistent high usage with active rates above 90%.

This continues to demonstrate our leading ability to deliver large-scale and systematic projects. In the fourth quarter, we secured a contract for the teaching software integration and data analysis services project in Shanghai's Songjiang District. This is a SaaS-based pilot project valued at RMB around 3 million and initially covers eight schools, around 100 classes, 200 teachers, and 4,000 students within the district. Our services include integrating teaching software and providing big data analysis. By gathering learning process data from daily homework, staged assignments, and in-cloud exercises, among other sources, we combine various dimensions such as student academic performance, learning behavior, and subject literacy to create comprehensive student data profiles, enable precise, data-driven, and semi-automatic teaching and management strategies. During these quarters, we pursued new growth strategies and expanded our customer base.

By establishing strategic partnerships with regional schools associated with well-known private education groups as well as individually operated public schools, we have successfully executed and delivered projects. This new strategy, targeting private schools and select public schools with adaptable structure, has continued to show strong performance in terms of both contract value and quantity since last quarter. This model is a very good complement to our existing flagship-style projects with district education bureaus that typically aim at covering the whole district. Projects with individual or group-managed private or public schools have a much quicker decision process and a higher certainty of funding. This more diversified revenue contribution by each project also helps build up a more smooth revenue stream. This model also further helps accelerate our strategy to reach more schools and students, that we create a virtuous cycle that further allows us to enhance our products and solutions.

We are dedicated to provide the market with innovative leading products and solutions that set new standards in education technology. The Aerospace City campus of The High School Affiliated to Renmin University of China, Kunshan Foreign Language School, Nanjing Jiangning Binjiang Foreign Language School, Zhongshan Zhiyuan Middle School are among the long list of top leading schools that have subscribed to our teaching and learning SaaS offerings. Their recognition and early adoption of our solutions, I believe, to be influential are expected to further accelerate the adoption process within the area. In addition, projects with this group of clients are typically in subscription modes with semi-annual or annual renewal. In the first project we signed last September that has entered the renewal this month, we have seen a revenue retention rate of 120%, which means additional classes and students and functions are being subscribed and used.

This is a great initial result built upon our teaching and learning SaaS offerings' high active use and a very positive sign that we are building up an increasingly steady SaaS revenue portfolio. Looking ahead, we expect adoption of the SaaS billing model to steadily grow as the market becomes more familiar with its benefits, and we are confident that this model will not only unlock new revenue streams for the company but also highlight the advantage of its current nature fostering sustainable business growth. In terms of product and service offering, we have been continually refining our core offerings and enhancing user experiences to promote regular school use by integrating application systems and data profiles from daily teaching scenarios such as classroom, homework, and exams. Such integration aids effective teaching, enhances classroom quality, and supports teachers in delivering differentiated instructions.

During this quarter, we enhanced our personalized learning products that focus on students' incorrect answers, enabling automatic error collection across all school scenarios and effectively utilizing correction data between online and offline platforms. Furthermore, we provide high-quality and a diverse resource for personalized learning and to boost students' independent learning efficiency. Meanwhile, we continue to explore the practical application of AIGC in actual teaching scenarios as well as content preparation processes to further deliver better results in pilot projects. Our proprietary Smart Pen, which has passed the project pilot verification, further improves teachers' efficiency and experiences in correcting daily homework. We plan to conduct further mass distributions in 2024. Recently, the 2024 World Digital Education Conference was held in Shanghai.

With digital education, application sharing, and innovation as its theme, the conference facilitated in-depth discussion on topics such as enancing teaching digital literacy and competence, constructing a learning society throughout education digitalization, artificial intelligence and digital ethics, and digital education evaluation. We participated in the conference and exhibited at the Digital Wisdom Future Education exhibition under the theme. We provided data-backed solutions and shared experience to advance global digital education clients in the tackle of challenges. From December 12th to 14th, 2023, at the Response and Development Major Change 2023 China Corporate Competitiveness Annual Conference hosted by the China Business News, our One Teaching, One Learning K-12 Digital Teaching and Learning SaaS Platform was honored with the 2023 Excellent Performance Company Award, Best Technological Innovation Award.

This award recognizes and honors companies that have made exemplary contributions to the socioeconomic field and have established themselves as exemplars and leaders in the responsive industries. Recently, the Beijing Municipal Education Commission selected 37 innovative application cases of big data in education. Notably, Xicheng District, as served by 17 EdTech, was selected as a district-level case, and three other schools, including the Aerospace City campus of the high school affiliated to Renmin University, Beijing No. 43 Middle School, and Beijing Primary School Tongzhou Branch, which are all our clients, were recognized and outstanding on our school-level cases. These exceptional innovative application cases serve as a great model for schools in various districts and help us to win additional clients.

Looking ahead, One Teaching, One Learning Platform will continue to facilitate the digital transformation of education, consistently meeting the needs of both teachers and students, thereby assisting schools in improving their teaching and nurturing practice. The demand for our other educational service products is also highly dependent on the regulatory environment and provision of competing services. We are closely monitoring the development of the market as well as regulatory environments. Moving forward, we remain committed to exploring additional educational products and services that are compliant with regulatory requirements. 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 references to our potential future performance are subject to potential impacts from seasonality and one-off events as a result of a series of regulations introduced in 2021 and corresponding adjustments to our business model, organization, and workforce. In this quarter, our teaching and learning SaaS business generated increasing revenue compared to the same quarter last year, signifying consistent client satisfaction and future development. We are also meticulously managing our expenses to further improve operational efficiency.

We are confident that our SaaS billing model is gaining recognition from our clients, helping us build healthier and recurrent businesses as we enhance our service offerings and customer satisfaction. In the fourth quarter, we recorded net revenues of RMB 47.3 million compared with RMB 39.6 million in the fourth quarter of 2022, representing a 19.7% increase on a year-over-year basis. The net loss for the fourth quarter of 2023 was RMB 98.4 million compared with RMB 103.1 million in the fourth quarter of 2022. The adjusted net loss non-GAAP for the fourth quarter of 2023 was RMB 81.8 million compared with the adjusted net loss of RMB 70.1 million in the fourth quarter of 2022. Gross margin for the fourth quarter of 2023 was 43.4% compared with 52.1% in the fourth quarter of 2022.

As of December 31st, 2023, we have cash reserves of RMB 476.7 million on our balance sheet, providing sufficient funds for future development. Now I will go through our fourth quarter financials in greater detail. Net revenues. Net revenues for the fourth quarter of 2023 were RMB 47.3 million, representing a year-over-year increase of 19.3% from RMB 39.6 million in the fourth quarter of 2022. This was mainly due to the increased number of teaching and learning SaaS contracts and the recurring revenue generated from our ongoing projects. Cost of revenues for the fourth quarter of 2023 was RMB 26.8 million, representing a year-over-year increase of 41.4% from RMB 18.9 million in the fourth quarter of 2022, which was mainly attributed to a higher proportion of deliveries in our teaching and learning SaaS projects during the quarter, as well as a partial contribution from hardware upgrades.

Gross profit for the fourth quarter of 2023 was RMB 20.6 million, remained unchanged from RMB 20.6 million in the fourth quarter of 2022. Gross margin for the fourth quarter of 2023 was 43.4% compared with 52.1% in the fourth quarter of 2022. Total operating expenses for the fourth quarter of 2023 was RMB 122.8 million, including RMB 16.6 million of share-based compensation expenses, representing a year-over-year decrease of 12.9% from RMB 141.0 million in the fourth quarter of 2022. Loss from operations for the fourth quarter of 2023 was RMB 102.3 million compared with RMB 120.3 million in the fourth quarter of 2022. Loss from operations as a percentage of net revenues for the fourth quarter of 2023 was -216.0% compared with -304.2% in the fourth quarter of 2022.

Net loss for the fourth quarter was RMB 98.4 million compared with net loss of RMB 103.1 million in the fourth quarter of 2022. Net loss as a percentage of net revenues was negative 207.9% in the fourth quarter of 2023 compared with negative 260.7% in the fourth quarter of 2022. Adjusted net loss non-GAAP for the fourth quarter of 2023 was RMB 81.8 million compared with adjusted net loss of RMB 70.1 million in the fourth quarter of 2022. Adjusted net loss non-GAAP as a percentage of net revenues was negative 172.8% in the fourth quarter compared with negative 177.3% of adjusted net loss as a percentage of net revenues in the fourth quarter of 2022.

Please refer to the table captioned "Reconciliation of Non-GAAP Measures to the Most Comparable GAAP Measures" at the end of this press release for reconciliation of net loss and the U.S. GAAP to the adjusted net income or loss non-GAAP. Cash and cash equivalents, restricted cash, short-term investment, and term deposits were RMB 476.7 million as of December 31st, 2023, compared with RMB 737.7 million as of December 31st, 2022. As we look to the future, the company will persist in devoting itself to the field of educational digitalization, committed to the mission of making learning a wonderful experience. We aim to offer our customers efficient and high-quality product solutions and experiences. While remaining focused on sustaining our developmental momentum and improving the operational efficiency, we are dedicated to fostering steady progress and achieving a long-term stable and sustainable growth.

In this quarter, the company and the Founder, Chairman, and Chief Executive Officer of the company, Andy Chang Liu, has entered into a share repurchase agreement pursuant to which the company proposed to issue, and Mr. Andy Chang Liu proposed to subscribe for 58,400,166 Class B ordinary shares of the company at a subscription price of the average closing price per ordinary share for the 30 trading days preceding the date of the share repurchase agreement, pursuant and subject to and consistent with applicable laws and the Nasdaq rules and the company's securities trading policies. Following the share subscription, Mr. Liu will beneficially own approximately 26.2% of the company's total issued and outstanding share capital. This share subscription demonstrates Mr. Liu's confidence in the value and long-term growth of the company. With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Thanks.

Operator (participant)

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. We'll now pause a moment to allow for questions to register. Thank you. We are showing no questions at this time. I'll now hand the conference back to Ms. Zhao for closing remarks.

Lara Zhao (Investor Relations Manager)

Thank you, Operator. In closing, on behalf of 17 EdTech'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.