17 Education & Technology Group Inc. (NASDAQ:YQ) Q3 2022 Earnings Call Transcript December 7, 2022 8:00 PM ET
Company Participants
Lara Zhao – IR Manager
Andy Chang Liu – Founder, Chairman & CEO
Michael Chao – CFO
Conference Call Participants
Operator
Good evening and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech’s Third Quarter 2022 Earnings Conference Call. Well, at this time all participants are in a listen-only mode. After management’s prepare remarks, there will be 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 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 relate 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 or other risks, uncertainties or factors is included in the company’s filings with the US 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 for joining us on our third 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 our continuing operation basis and all numbers are based on the RMB unless otherwise stated.
We managed to deliver resilient performance in the third quarter. Before we go into the details, let me update you with some quick highlights. Firstly, we quoted RMB124.6 of net revenues in the third quarter of 2022, contributed by our new business despite the uncertainty and economic impact associated with recent COVID 19 outbreaks. This represents an increase of 549% compared with the revenue of RMB19.2 million excluding the legacy of online K-12 tutoring services in the third quarter of 2021.
Secondly, we are able to continue narrowing less loss on GAAP bases through efficient cost and expenses management, allowing us to achieve net profitability on a non-GAAP business for the fourth consecutive quarter. Thirdly, we continue to develop and upgrade our teaching and learning size offerings together with our clients and to explore personalized self-directed learning product and better satisfy customer needs.
Now let me go into some details. Let’s start with our in-school teaching and learning SaaS based business. The third quarter of 2022 saw a few milestone progresses in our in-school business in Shanghai Minhang District. Our services now achieved full coverage from primary to high schools. There are 128 schools with 156 campuses that are now using our precision teaching and adaptive learning system to assist the day to day teaching. The accumulated number of students using the tool for homework also exceeded 40 million as of now.
We introduced intelligent dot metric pen in September in lunching our trial with 20 schools to advance digital transformation of teaching and learning intelligence dot metric 10 facilities curriculum development and tools to different demands of schools. We have been awarded the Intelligence in Class and Homework staff service contract at Shanghai Minhang District during the reporting period. Our precision teaching and adaptive learning system were used to promote digitalization of teaching and learning with virtual life data to facilitate school management and student development. This is a milestone product illustrating growing demand and market acceptance for staff services and recurring staff building model.
Through a strategic cooperation and pilot school programs in relation to digitalize homework and teaching platform are also being launched across different district in Shanghai and other cities such as Songjiang District. Likewise, we were also awarded two contracts by Beijing Xicheng district to help build online integrated students evaluation call platform and integrated student learning performance evaluation platform. These two systems make full use of live streaming tools of existing digital school platform to create a closed loop from question bank, design assignment collection, traction, analysis, feedback, research, management during whole teaching and learning process. It allows conducting key scenario through online setting.
We have also attended a number of education exhibition and forums, receiving positive feedback on our product and services from teachers and education experts. In the third quarter, we have also entered into a strategic partnership with a local partner to joining construct a digitalized education platform for our city with more than 2,000 schools and the 1.5 mulling primary and secondary schools.
From a product and a service offerings perspective, we are integrating an increasing level of artificial intelligence and IoT technologies application to fuller income user experience and achieve a closed loop teaching and learning measurement for schools, without disrupting transitional teaching and learning habits.
In the aspect of a self-directed learning products, we continued our efforts in exploring, developing self-learning products that caters to various kind of demands of our customers based on the educational content and data treatment insights we have accumulated during last decades serving students in school. We continue to see positive feedbacks from students on our products, being coupled to supplement their in-school status, satisfying students, diversified learning demands and the provider was targeted customized learning content in line with the government regulation assists to form an integral self-directed learning experience and to improve their learning efficiency in a personal way.
We continue to see revenue contributions from such products and with the great potentials in the segment evolving with the regulatory environment and the student’s needs and form into a major new compliant markets in the education sector. We would like to note to our shareholders that the impact of the recent outbreaks Covid-19 across different regions in China, it has caused this delays and uncertainties in various biddings and contracting process associated with government procurement.
The overall economic environment has also led to uncertainty and concerns around household income and municipal budgets. We are closely observing the trend adopting prudent strategies to minimize impacts from such uncertainties and concerns, allowing us to be flexible under certain environment.
Now I will turn the call over to Michael our CFO to work you through our latest financial performance. Thank you.
Michael Chao
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 again 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 regulation introducing trial 21 and a corresponding adjustment to our business model, organization and work force.
The third quarter 2022 is the fourth quarter of operation after we officially seized our online K-12 tutoring businesses and generated revenue purely from our continuing businesses. Our new business strategy has shown continued momentum in the third quarter amidst the complex external challenges and uncertainties posed by the COVID-19 pandemic and the posted — and posted revenue growth when compare with the same period last year.
We have achieved profitability on an objective basis for the fourth consecutive quarter, which serves as a testament to our resilient operation efficiency and opportunities from our new businesses.
Next I will go through our third quarter financials in greater detail. Net revenues were RMB124.6 million, representing a year-over-year decrease of 74.9% from RMB496.8 million in the third 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 regulations, which prohibits the provision of tutoring services relating to academic subjects to K-12 students.
However, when compared with the net revenues excluding those from online K-12 tutoring services, our net revenues increased significantly from RMB19.2 million to RMB124 million during the same period. Cost of revenues for the third quarter of 2022 was RMB31.7 million, representing a year-over-year decrease of 87.4% from RMB251.4 million in the third quarter of 2021, which was again largely in line with the decrease in net revenues due to the cessation of online K-12 tutoring services and there’s a new regulatory and business environment.
Gross profit was RMB92.9 million, representing a year-over-year decrease of 62.2% percent from RMB245.4 million in the third quarter of 2021. Gross margin for the third quarter of 2022 was 74.5% compared with 49.4% in the third quarter of 2021. The increase was mainly attributable to the company’s more stringent and efficient cost management.
Moving over to the expense side; total operating expenses for the third quarter of 2022 was RMB120.5 million, including RMB31.8 million of share-based conversation expenses, representing a year-over-year decrease of 83.8% from RMB743.7 million in the third quarter of 2021.
Sales and marketing expenses for the third quarter of 2022 were RMB27.9 million, including RMB4.7 million of share-based compensation expenses, representing a year-over-year decrease of 92.8% from RMB388.6 million in the third quarter of 2021. This was mainly due to the decrease in promotional cost expenses and advertising expenditure as a result of the change in regulatory environment as well as staff optimization in line with the business adjustment.
R&D expenses for the third quarter of 2022 were RMB50.9 million, including RMB6.9 million of share-based compensation expenses, representing a year-over-year decrease of 74.7% from RMB201.2 million in the third quarter of 2021. The decrease was primarily attributable to staff optimization in line with business adjustment.
G&A expenses for the third quarter of 2022 were RMB41.7 million including RMB20.2 million of share-based compensation expenses, representing a year-over-year decrease of 66.1% from RMB123.1 million in the third quarter of 2021. The decrease was primarily due to staff optimization in line with business adjustment.
Loss from operations was RMB27.6 million compared with RMB498.3 million in the third quarter of 2021. Loss from operations as a percentage of net revenues for the third quarter of 2022 was negative 22.2%, improving from negative 100.3% in the third quarter of 2021. Net loss for the third quarter of 2022 was RMB23.5 million compared with net loss of RMB489.9 million in the third quarter of 2021. Net lost as a percentage of net revenues was a negative 18.9% in the third quarter of 2022 compared with negative 98.6% in the third quarter of 2021.
Adjusting net income on a GAAP basis for the third quarter of 2022 was positive RMB8.3 million compared with adjusted net loss of RMB456.6 million in the third quarter of 2021. Adjusted net income on a GAAP basis as a percentage of net revenue was 6.7% in the third quarter of 2022, improving from the negative 91.9% in the third quarter of 2021.
Now turning on to our business outlook; the COVID-19 outbreaks across China have led to uncertainties and potential delays in the government procurement process and unpredictable timetables in relation to project delivery, which does impact our revenue recognition. It also brought uncertainties to consumer sentiment and local government budgeting. This situation has significantly affected the company’s ability to provide accurate business forecast, especially when our new businesses are still in the early stage of development. The company has hence decided not to provide revenue guidance going forward.
With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin to the Q&A sessions. Thank you.
Question-and-Answer Session
Operator
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. This concludes today’s conference call. Thank you for participating. You may now disconnect.
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