17 Education & Technology Group Inc. (YQ) Q4 2022 Earnings Call

17 Education & Technology Group Inc. (NASDAQ:YQ) Q4 2022 Earnings Conference Call March 27, 2023 9:00 PM ET

Company Participants

Andy Liu - Founder, Chairman, Chief Executive Officer

Michael Du - Director, Chief Financial Officer

Lara Zhao - Investor Relations Manager

Conference Call Participants

Operator

Good evening and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After management's prepared remarks there will be question-and-answer session. As a reminder, today's conference call is being recorded.

I would now like to 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 their 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 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 factors, 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 statement 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 Chairman and Chief Executive Officer to review some of our business developments and strategic direction. Andy, please go ahead.

Andy Liu

Thank you, Lara. Hello everyone! Thank you all for joining us on our fourth 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 Q3 operation basis, and all numbers are based on the RMB, unless otherwise stated.

Before we go into the details, let me provide you with the quarter’s business updates and financial performance across our business lines. The COVID-19 outbreak in China in the fourth quarter 2022 caused significant delays in the bidding and delivery processes of our projects, which in turn delayed the bidding and the delivery of quite a number of projects that were previously expected to happen in the fourth quarter of 2022.

That significantly affected our revenue and financial results in the quarter. We responded quickly by accelerating the ramp up of alternative distribution channels and creating more flexible payment structure to remain agile under these situations. The delay in the process of key projects resulted in decreases in our revenue, but we did not lose them by any means. These projects are still under our purview, and we will work consistently to advance them as COVID-19 distributions phase out.

An example is the RMB116 million project we were awarded on the March 23, 2023. This was a product, previously it was an earlier expired bidding and delivery scheduled. I will elaborate further on this product slightly later.

In 2022, we recorded net revenues of RMB531.1 million, excluding net revenue from our online K-12 tutoring services. Net revenues increased by 8.5x year-over-year. The increase were mainly attributable to the steady process of our business transformation. This was achieved after we seized our online K-12 tutoring services at the end of 2021, which accounted for approximately 95% of our revenue before.

Net revenues for the fourth quarter of 2022 were RMB39.6 million, representing a year-over-year increase of 138% when we exclude impact of legacy online K-12 tutoring services.

Looking back the year 2022, we significantly reduced our loss, while navigating our new path for our new business initiative. Our adjusted net loss in 2022 was reduced to RMB48 million from RMB1.25 billion in 2021, a decrease of 96%. Now I will go into more details of our business.

Let's start with our in-school teaching and learning SaaS business. We are glad to see key milestone processes in our in-school business since the last quarter. On March 23, 2023 the company was officially awarded a new Smart-pen based education digital transformation product in Shanghai Minhang District with a contract value of RMB116 million. This is the product to both Minhang District educations digital transformation further after the precision teaching and adaptive learning system product which was delivered in the second quarter of 2022.

It demonstrates our comprehensiveness and the market's recognition of our comprehensive education services. It aims to provide our solutions and services to all public schools within the district, and the next it will expand to cover all schools of Minhang District.

The project utilizes our accumulated data insights, recommendation, algorithm and AI technology to provide high quality education digital transformation solutions in homework, daily teaching and classroom interaction. It creates a closed loop from class preparation, teaching exercises, correction, evaluation, research and management developing a whole teaching and learning process.

It promotes balance and a high quality development of regional education, scalable and normalized application of smart education services and helps more students achieve personalized development. It also plays an exemplary and leading role in the digital transformation of regional education in other provinces and cities in the future.

This product clearly illustrates the industry recognition for our teaching and learning SaaS offering in terms of its outstanding ability of facilitating daily teachers and student use on a mass scale, which are rooted from our data insights and AI technology, deep understanding of classroom and homework scenario and deep integration of technology into teaching and learning from online to offline.

From a product and service offering perspective, the company continues to optimize and iterate our product offering and services to meet the needs of our clients to further enhance user experience. As the government enterprises and schools collaborate to promote the development of digital education, we have produced a reproducible and replicable overall teaching and learning solutions after a year of practices.

Our flagship case Minhang homework has achieved the full coverage of public schools in Minhang District as of now. More than 150 schools use our precision teaching and adaptive learning system with 120,000 students using the tool to do homework. The accumulated number of students using the tool for homework has exceeded, 16 million [ph] as of now. The frequency to use and the monthly retention rates of teachers in the pilot schools continue to increase, and our normalized application of Smart-pen practice is advancing steadily.

During the period, the World Digital Education Conference was held in Beijing with the theme of digital transformation and the future of education, focusing on the opportunities and the challenges brought by digital transformation in education. 17EdTech is one of the only two corporate presenters who was invited to attend the conference. I was honored to deliver a speech and share our experiences and practice of our projects in digital transformation of education, with hundreds of regional education bureaus being invited to listen to and receive this update response and the rewarding exchange with industry peers and educational authorities.

Our teaching and learning solution has also been applicated in Beijing Xicheng, Shanghai Chongming and Songjiang Districts for mass scale and normal application as part of the digital transformation initiative, which received broad recognition from local educational authority.

The COVID-19 outbreak in China in the fourth quarter of 2022 has affected the bidding and delivery of quite a number of government procurement products, including a number of our key projects. This has directly impacted our products delivery and the revenue recognition, and thus the financial performance of the company in the fourth quarter of 2022. We believe this will be absorbed gradually over the next few quarters. Example was that our recently awarded product was previously expected to be awarded and partially delivered in the fourth quarter.

In the aspect of our self-directed learning products, we continue to develop educational products and services that meet regulatory requirements, including self-directed learning products, learning devices and other digital products and learning contents for students. We’ll continue to optimize and iterate our product offerings according to changes in markets and customer needs. Meanwhile, we carry out in-depth cooperation and educational institution with a strong [inaudible] and traditional context to provide smart teaching products and services for primary and secondary school students.

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

Michael 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 the one-off events as it result in the series of regulation introduced in 2021 and a corresponding adjustment to our business model, organization and workforce.

The delay in the bidding and delivery process of several of our projects has significantly affected revenue recognized in the fourth quarter, and that's our overall financial performance. However, such fluctuations in revenues are inevitable during the early stage of a business development, especially given the external environment.

Nevertheless, we are pleased to report that our continuous costs and extensive reduction measures have allowed us to significantly reduce our net loss in 2022, despite the termination of our legacy K-12 after-school online tutoring operation, which accounted approximately 95% of our revenue in the past. With China’s economy recovering from the COVID-19 pandemic, we are confident that the latest awarded project is another important milestone in the company’s continuous transformation into the new business strategies.

Next, please allow me to go through our fourth quarter financials in greater detail. Our net revenues: The revenues for the fourth quarter of 2022 were RMB39.6 million, representing a year-over-year decrease of 92.7% from the RMB542.5 million in the fourth quarter of 2021. This was mainly due to the cessation of the online K-12 tutoring services by the end of 2021 due to regulation reasons.

If compared – excluding the net revenue from online K-12 tutoring services, our net revenues increased significantly from RMB16.6 million to RMB39.6 million during the same period, representing a year-over-year increase of 137.7%. The net revenue decreased by 68.2% on a quarter-to-quarter basis due to delays in the project delivery and revenue recognition as a resulting from the COVID-19 pandemic outbreak during the reporting period.

Cost of revenues for the fourth quarter of 2022 was RMB18.9 million, representing a year-over-year decrease of 90.1% from RMB191.2 million in the fourth quarter of 2021, which was largely in line with the decrease in net revenue due to the cessation of the company's online K-12 tutoring services under the new regulatory and business environment.

Gross profit for the fourth quarter of 2022 was RMB20.6 million, representing a year-over-year decrease of 94.1% from RMB351.4 million in the fourth quarter of 2021. Gross margin for the fourth quarter of 2022 was 52.1%, representing a year-over-year decrease of 12.7% or compared with 64.8% in the fourth quarter of 2021. This represents primarily the major – of change of our major business.

Total operating expenses for the fourth quarter of 2022 was RMB141.0 million, representing a year-over-year decrease of 62.9% from RMB380.3 million in the fourth quarter of 2021. Loss from operations for the fourth quarter of 2022 was RMB120.3 million, compared with RMB28.9 million in the fourth quarter of 2021. Loss from operations as a percentage of net revenues for the fourth quarter was negative 304.2%, compared with negative 5.3% in the fourth quarter of 2021.

Net loss for the fourth quarter of 2022 was RMB103.1 million compared with a net loss of RMB25.6 million in the fourth quarter of 2021. Net loss as a percentage of net revenues was negative 260.7% in the fourth quarter of 2022, compared with the negative 4.7% in the fourth quarter of 2021.

Adjusted net loss on a non-GAAP for the fourth quarter of 2022 was RMB70.1 million, compared with adjusted net income of RMB17.0 million in the fourth quarter of 2021. This related increase in losses were primarily related to the projects that we previously expected to be delivered in the fourth quarter of 2022 that got delayed due to the external COVID-19 outbreak in China in the fourth quarter.

Please refer to the table captioned “Reconciliations of non-GAAP measures to the most comparable GAAP measures” at the end of this press release for a reconciliation of net loss under U.S. GAAP to adjusted net income.

Despite the short term disturbance caused by COVID-19, we believe it has also presented us with new opportunities for growth. We are committed to seeking progress with stabilities to achieve high quality growth. We will continue to explore multiple business opportunities to improve the value we provide to our customers, while keeping our momentum going.

Additionally, we will further optimize our operational efficiencies to strengthen our competitiveness and drive sustainable long term growth for our businesses. Looking ahead, we are cautiously optimistic and are confident about our future of 17EdTech. We are committed to creating better value for our shareholders in the years ahead and beyond.

With that, that concludes our prepared remarks. Thank you.

Operator, we are now ready to begin the Q&A session. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question is from [inaudible]. Your line is open. Pease go ahead.

Unidentified Analyst

Hi! Good morning. I would like to know what's anticipated of the share buyback program that you announced last year, given where net cash is trading per share right now.

Andy Liu

Hi James! Thanks for your questions. Yes, the company's share buyback program has always, has continued to be operating since the announcement. We have clear instructions in terms – the way we want to buy back, in terms of amount and the price. The details of the share buyback purchase program will be fully disclosed in the annual report, which we expect to be coming out over the next month or so.

Unidentified Analyst

Thank you.

Operator

Thank you. [Operator Instructions]. I'm showing no further questions at this time. I'd like to turn the conference back over to Lara Zhao for any further remarks.

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

This concludes today's conference call. Thank you for participating. You may now disconnect.