17 Education & Technology Group Inc. (YQ) Q2 2022 Earnings Call

17 Education & Technology Group Inc. (NASDAQ:YQ) Q2 2022 Earnings Conference Call September 13, 2022 9:00 PM ET

Company Participants

Lara Zhao - IR Manager

Andy Chang Liu - Founder, Chairman & CEO

Michael Chao Du - CFO

Conference Call Participants

Operator

Good evening, and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's First [ph] Quarter 2022 Earnings Conference Call. At this time all participants are in listen-only mode, after the Management's prepared remarks there'll 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

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. Andy Liu, Founder, Chairman and Chief Executive Officer; and Mr. Michael Du, Director and Chief Financial Officer. Andy will walk you through our latest business performance and strategies followed by Michael who will discuss our financial performance and guidance. They will be available to answer your questions during the Q&A session after the prepared remarks.

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 known 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, further events or otherwise, except as required under applicable law. I will now turn the call over to our Chairman and Chief Executive Officer, to review some of our business development and strategic direction. Andy, please go ahead.

Andy Chang Liu

Thank you, Lara. Hello, everyone. Thank you all for joining us on our second quarter 2022 Earnings Call. Before we begin, I would like to mention that the financial information and non-GAAP numbers in this release are presented on a continuing operation basis, and all numbers are based on the RMB, unless otherwise stated. We are glad to report a solid performance in the second quarter. Before we go into the details, let me update you with some quick highlights.

Firstly, we recorded RMB 133.5 million of net revenues in the second quarter of 2022. 11.2% higher than the top end of our estimates provided earlier in June. This was achieved through higher revenue contribution from our teaching and learning SaaS business. Secondly, our operational efficiency continues to improve, and we recorded a substantially narrowed GAAP basis net loss compared with the same period in 2021, allowing us to achieve net profitability on a non-GAAP business for the last three consecutive quarters.

Thirdly, our new teaching and learning SaaS offerings have gained further momentum and one strong recognition and demand from the government and relevant authorities, contributing an increasing proportion of the company's net revenues in this quarter.

Now let me go into some more details. Let's start with our in-school teaching and learning SaaS business. During the period, our teaching and learning SaaS offerings have witnessed major milestones. We successfully delivered a district-wide position teaching and adaptive learning system project based on intelligent homework in Shanghai Minhang District, in the second quarter of 2022. The system has been regularly used throughout the teaching process and it's well recognized by teachers, students and education authorities. This is a clear example of satisfying the standard for active use set by education authorities.

There were a total of 156 schools in Minhang District, using our precision teaching and adaptive learning system. During the waves of COVID outbreaks in the second quarter of 2022, our precision teaching and adaptive learning system have played a significant role in helping authorities for a high-quality online teaching environment for qualified content delivery, collect study information and provide interactive communication between schools and authorities.

In the 4 months after the implementation, around 120,000 students used our system and completed a total of 11 million copies of home assignments cumulatively. The value of our system is well recognized by its various users. It is a clear illustration of a 17EdTech's pioneering capability in the digital transformation of China's education industry. We continue to see greater market potential and opportunities as we make further progress in our teaching and learning SaaS business.

Chinese government's continuous endeavor in the digital transformation of Chinese education system to implement enhanced levels of personalization during the teaching and learning process has been the backdrop providing focused demand for our OneSmart teaching and learning SaaS offerings. It is also to be noted that throughout the entire loop of education progress, homework is the most ideal scenario for data collection. The ability to collect homework data effectively and efficiently is a key to materialize data-driven differentiated and individual life teaching.

Only with the support of the big data and intelligent technology, the requirement of improving homework efficiency can be truly achieved. The precision teaching and adaptive learning system project based on intelligent or work in Minhang is a flagship case we have successfully delivered not only its Minhang District and National Smart education demonstration district, designed by MOE, which has substantial illustrate value and influence over cities and districts across China.

Our solution has become a clear flagship example of how such a system enables individualized homework and precise teaching well meeting normalized application required by the relevant operators. While reducing the burden of students and schools and improving learning and teaching efficiencies required by double reduction policy. As we expanded our sales channels into a broader range, we have signed partnership agreements with over 50 local distribution agents to enlarge our distribution network.

We are confident that the increasing market needs will lead us to a deeper market penetration. In the meanwhile, the company is also actively exploring a real response of recurring -- billing model for our teaching and learning offerings with our current and potential customers. This includes one-stop overall solution, combining software, hardware and service, although currently not prevalent building models, the recurring SaaS billing model is expected to gain popularity among local authorities and schools versus the traditional one of procurement model because of the upfront cost of reduction in the promotion of normalized application-based procurement by the Ministry of education. Higher proportion of revenue from such recurring SaaS building model also means a healthy financial profile, given the steady and predictable ongoing revenue stream.

We have already seen a recent product expected to be operated under this model and obtain positive feedback from the local education bureau on such recurring SaaS building model.

In terms of Earth Compass businesses, we will continue to explore and improve our self-directed learning product based on student and parent feedback to fulfill the diverse and national learning demands of students and provide with targeted customized learning content in line with the government's regulation.

Q2 marks a few key milestones in our new business model after the double deduction policy, we are glad to see these positive momentums are being turned into projects with reputation earned and revenue recognized. As we deploy our SaaS business opportunities and expand our sales network nationwide, we grew even more determined in our new strategies and saw an increasing amount of business opportunities arising.

Looking ahead, we expect our teaching and learning SaaS business to continue a significant proportion to the overall revenues in the coming quarters. We are confident that the synergistic linkage between in school and of campus business will enable us to build a high-quality education platform, driven by science and technology with ingenuity helping the digital transformation and upgrading of Chinese education industry, reducing the burdens of students and schools, improving education efficiency and making contributions to the promotion of Chinese education reform.

Now I will turn the call over to Michael, our CFO, to walk you through our latest financial performance. Thank you.

Michael Chao Du

Thanks, Andy, 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 a corresponding adjustment to our business model, organization and workforce.

The second quarter of 2022 is the third quarter of operation after we officially seized our online K-12 tutoring services and generated revenue purely from our continuing businesses. Our new business strategy has shown positive momentum in the second quarter with in-school teaching and learning SaaS businesses seeing additional delivery during the second quarter of 2022. As a result of our improved operational efficiency, we are delighted to record net profitability on an adjusted basis for the last three consecutive quarters.

Next, I will go through our second quarter financials in greater detail. Our net revenue were RMB 133.5 million, representing a year-over-year decrease of 80.1% from RMB 617.9 million in the second quarter of 2021. The decrease was mainly due to the cessation of our online K-12 tutoring services by the end of 2021 to be in compliance with the latest PRC regulation.

However, when compared with the net revenue, excluding those from online K-12 tutoring services, our net revenue increased significantly from RMB 8.9 million to RMB 133.5 million during the same period, representing a growth of over 14 times. The company is teaching and learning SaaS offerings contributing an increasing proportion of the company's net revenues for the second quarter of 2022 when compared with the previous quarters.

Cost of revenue for the second quarter of 2022 was RMB 63.8 million, representing a year-over-year decrease of 74.3% from RMB 248 million in the second quarter of 2021, which was largely in line with the decrease in net revenue due to the cessation of our online K-12 tutoring services under the new regulatory and business environment.

Gross profit was RMB 69.7 million, representing a year-over-year decrease of 83.5% in from RMB 422.9 million in the second quarter of 2021. Gross margin for the second quarter of 2022 was 52.2% compared with 63% in the second quarter of 2021.

On the expense side, total operating expenses for the second quarter of 2022 were $103.8 million, representing a year-over-year decrease of 85.2% from RMB 702.6 million in the second quarter of 2021. The total operating expenses for the second quarter of 2022 included RMB 30.1 million of share-based compensation expenses.

Sales and marketing expenses for the second quarter of 2022 were RMB 11.7 million, which included RMB 3.4 million of share-based compensation expenses, representing a year-over-year decrease of 96.2% from RMB 306.7 million in the second quarter of 2021. This was mainly due to the decrease in promotional cost expenses and advertising expenditures as a result of the change in the regulatory environment, as well as staff optimization since the regulatory change.

R&D expenses for the second quarter of 2022 were RMB 35.7 million, which includes RMB 7.2 million of share-based compensation expenses. This represented a year-over-year decrease of 84.4% from 229.5% [ph] million in the second quarter of 2021. The decrease was primarily attributed to stock optimization and expenses saved in line with the business adjustment.

G&A expenses for the second quarter of 2022 was RMB 56.4 million, including RMB 19.5 million of share-based compensation expenses representing a year-over-year decrease of 48.5% from RMB 109.5 million in the second quarter of 2021. This decrease was primarily attributable to staff optimization and expense saving measures in line with our business adjustment.

Loss from operations was RMB 34.1 million compared with RMB 279.8 million in the second quarter of 2021. Loss from operations as a percentage of revenue for second quarter of 2022 was negative 25.5%, which was significantly narrowed from negative 41.7% in the second quarter of 2021. Net loss for the second quarter of 2022 was RMB 26.4 million compared with a net loss of RMB 266.7 million in the second quarter of 2021.

Net loss as a percentage of net revenues was negative 19.8% in the second quarter of 2022 compared with negative 39.8% in the second quarter of 2021. Our adjusted net income on a GAAP basis for the second quarter of 2022 was positive RMB 3.6 million compared with an adjusted net loss of RMB 218.2 million in the second quarter of 2021. Adjusted net income as a percentage of net revenue was positive 2.7% in the second quarter of 2022, substantially improved from the negative 32.5% in the second quarter of 2021.

With that, I will now provide our business outlook. Based on our current estimates, Total net revenues for the third quarter of 2022 are expected to be between RMB 120 million and RMB 114 million. This estimated net revenues for the third quarter of 2022 is derived entirely from ongoing business of the company's business transformation and does not include revenues from legacy online K-12 Tutoring services. This estimated range represents a significant increase year-over-year as compared with the relatively small base of the net revenues generated from online K-12 tutoring services for the third quarter of 2021.

I would also like to note that our teaching and learning SaaS products involve education bureaus and schools and it typically needs to go through a long cycle bidding process. It is thus inevitably subject to a potential delay in project bidding process, our project delivering process due to factors such as COVID outbreaks and others. This means our revenue recognition progress might fluctuate from quarter to quarter due to factors that we have limited control over, especially in early quarters of our revenue ramp-up period.

The above forecast reflects 17EdTech's current and preliminary review and is therefore, subject to change. Please refer to the Safe Harbor statement contained in our earnings release for the factors that we could cause actual results to be differ materially from those contained in any forward-looking statements.

With that, that concludes our prepared remarks. Thank you. Operator, we are ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] We have questions from the line of Tom Chong Lee [ph] from Hedge Capital. Please proceed. Mr. Lee, your line is now open, please proceed with your question.

Unidentified Analyst

Yes. My question is that the management has announced share buyback plan last year. And so we want to know what's the process of the share buyback plan so far?

Andy Chang Liu

Let me take this question. Thanks for the question. Yes. We announced a share buyback program last November. We are actually in the progress of continually buying back the shares at a speed that we consider appropriately so far. Our plan is to continue such buyback -- share buyback programs. In later periodic reports, we will provide detailed numbers about the number of shares and the amount we have used.

Unidentified Analyst

Thank you very much. And also congratulations to the achievement that you guys have achieved. Fantastic.

Operator

[Operator Instructions] And there are no further questions from the phone line. May I hand the call back to the management. Please continue.

Lara Zhao

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

Thank you for participating. You may now disconnect.