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spk03: Good evening and good morning, ladies and gentlemen. Thank you for standing by for 17 EdTech's third quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After the management prepare 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, Mr. Raymond Huang, 17 EdTech's Investor Relations Director. Please proceed, Raymond.
spk02: 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. On the call with me today are Mr. Andy Chang Liu, Founder, Chairman, and Chief Executive Officer, and Mr. Michael Chow 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. 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 20E of the Security 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 the current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the management's control. This risk may cause the company's actual results, performance, or achievements to differ materially. Further information regarding this and 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, future events, or otherwise, except as required under applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Andy. Please go ahead.
spk13: Thank you, Raymond.
spk17: Hello, everyone. Thank you for joining us for our earning course today. I would like to start with some updates of the company. The company has ceased offering tutoring services related to academic subjects to students from kindergarten through the last year of senior high school in mainland China by the end of 2021. To comply with the opinions of further alleviating the burden of homework and up-to-school tutoring on students in compulsory education, also known as the double reduction policy, and applicable rules, regulations, and measures. At the same time, we have quickly formed new business strategies in response to the new regulatory environment, leveraging our extensive knowledge and expertise accumulated through serving China's education authorities schools, teachers, and students over the past decade. We have adapted our business and organizations to focus on two key business areas. First, for our in-school business, we launched our new teaching and learning source offerings as an upgrade to our previous in-school products and services. The new offerings are aimed at facilitating the digital transformation and upgrade of Chinese schools with a focus on improving the efficiency and effectiveness of core teaching and learning scenarios such as homework assignments and in-school teaching. Second, for our after-school business, we have started to offer a personalized self-directed learning product to Chinese families as a substitute for the original after-school children's services that we offered historically. The product utilizes our technology and data insights to provide personalized and targeted learning and exercise content that is aimed at improving students' learning efficiency. This is not a tutoring service and is consistent with some of the key concepts and philosophies of our wonderful 10 case studies selected by the Ministry of Education's General Office for the implementation of the opinion. Let me explain in detail the logic and the progress for our business transformation and how the two businesses fit the new era of China's education market and user needs both in in-school and after-school segments. On the in-school side, we are seeing three main themes driving the development of the industry. Education Informaticians kicked off in 2012 when the government published the Blueprint of the Three Excesses and Two Platforms. Under the initiative, the government took the lead to improve internet infrastructure and build multimedia classrooms for schools. By 2018, school network infrastructures for online or digital teaching were mostly in place. In the same year, the government released the Word Plan version 2.0 for education digitalization, which aims to achieve three full coverages, two improvements, and one platform. Since then, the focus of the education informatization market has shifted from education infrastructure to digital tools for teaching and school management, as well as digital teaching resources to build an Internet plus education platform that is aimed at improving teaching results and efficiency. According to estimates based on numbers from National Bureau of Statistics of China, the annual budget for education digitalization reached RMB 340 billion in 2020. Under the backdrop of education digitalization version 2.0, we believe the growth trajectory will continue in the next few years as China's GDP expands. Education Informatization, investment generally fall into two categories, one teaching and learning related and the other not. The first category includes hardware and software which are directly used in teaching and learning processes, including teaching and learning management system. A typical example is our homework management system that allows schools and teachers to evaluate and check students' mastery of different knowledge points through homework and assign personalized homework accordingly with the support of both hardware and software. One of the two categories, investment in teaching and learning-related education informatization, are steadily taking up an increasing share in the annual budget. In earlier years, the purchase of non-teaching and learning hardware was the biggest component. Third, in recent years, we have also observed that teaching and learning-related digital products shifted away from smart classrooms and exam marking towards homework, focused teaching and learning products. This was the result of a few key changes in the education philosophy and guidelines from the Ministry of Education. First, the discouragement restriction on using exams and promotion of homework as the main tool to evaluate students' academic performance. Second, the need for advanced information-based system to achieve the personalized and tired homework promoted under the double reduction policy. Third, China's latest curriculum standards published in 2021, which is refreshed every 10 years, put more emphasis on students' comprehensive academic competency and a more proactive participation by students during class in the form of in-school, in-class exercises. All of these would not have been possible with the historical manual approach and created a surge in demand for delegated and comprehensive teaching and learning management systems centered around homework and exercises that integrate both hardware and software. Homework would thus become an ideal scenario for evaluating student learning progress and a core to connect all other teaching and learning scenarios and teaching management. Our teaching and learning products focused on homework assignments and can generate data that enables comparison between classes and schools for a selected time period. This makes it a very powerful tool for school principals to manage the teaching progress at school and for education officials to check on the teaching management on district level. It also reduces the burden of both teachers and students as it is designed to improve efficiency of homework assignments and related to teaching and learning scenarios. This has opened up enormous business opportunities for us. For the technology, data insights, content, and brain power we have gained through the past 10 years invested in homework development, we have been chosen by a number of regional education authorities to become a partner of choice of homework, focused teaching, and learning management systems. There is one difference this time. In the past 10 years, we have provided more basic services on a free of charge system. now, our new Teaching and Learning Starts offers a paid product which integrates both software and hardware in one package and also features data-driven recommendations and other value-added functions and features to the needs of schools and education authorities. Purchases are mostly made by the district education authority on behalf of a group of schools. Our products offerings are based on tailored combinations of a number of standardize the modules covering classrooms, question bank, homework assignments, self-directed learning, and multi-role reporting to suit the needs of different users. We are also seeing increasing acceptance of the SaaS subscription model by government instead of the more prominent one-time software construction product, which was more common in non-teaching and learning-related investments. We have successfully entered in-depth cooperation with a number of regional education authorities across multiple districts in China, including Shanghai Linhang District and Beijing Xicheng District, which are among the 10 case studies selected by the Ministry of Education's General Office for the implementation of the opinion. Projects of different scales are already being implemented using our Teaching and Learning Starts products across more than 50 cities, turning to our new business model for the after-school business. As we all know, Chinese families put strong emphasis on students' education. Before the double reduction policy, such emphasis and needs were mostly satisfied by after-school children's services, which created a huge market. Some estimate it to be as large as RMB 1 trillion. The new regulations have dramatically changed the supply and the nature of products. in the education industry. Marginal demand in the market previously provoked by massive promotion campaigns were indeed discouraged by some durings. But we see needs from core user groups remain intact and deeply underserved with the highly effective tutoring services. The good news is that such user needs tend to be more resilient. Due to the double reduction policy, school vocations are weakened which used to be the major battlefield for the after-school tutoring services, will, for the first time in decades, become family time in a vacuum of tutoring services. During this two-month break and all subsequent holiday and weekend periods, Chinese parents will be in urgent need for high-quality, self-directed learning content to keep their children occupied. To address these needs, we started offering a personalized self-directed learning product to Chinese families. This product is based on our premium content and insights into students' learning progress and difficulties. It is designed with a core aim to be compliant with new regulatory environment. In a nutshell, it is a self-directed learning product that supplements the in-school studies of primary and middle school students. Each month, Our users will receive a material package consisting of customized exercises based on their personal academic profile, diversified learning tools, expanded learning videos, family education magazines. The monthly package provides the basic materials and elements for parents to guide their children's learning program. The core component of our self-directed learning product is a personalized and targeted exercise deck formulated every month based on last month's learning progress and weaknesses. With our in-school business over the last decade, we have accumulated huge educational content and the school and district level data insights across China, which give us a deep understanding about our users and the content of the local exams, so that we can develop personalized exercise books to meet their needs. We have designed a set of effective systems to motivate students to develop through self-directed learning habits. In the meanwhile, we also allocate a personal learning partner to each of our users and provide them with learning customization and guiding services. Personal learning partners customize the learning materials and plans for our users on a monthly basis. And the follow-up was the implementation of their learning plans. Our self-directed learning product is charged for each subject. And the subscription fee for one subject is in the range of 2,500 to 3,000 RMB per year. We expect that it will take some time for the market to get familiar with this new product format. But we are happy to see more than 30,000 paid subscriptions in the product since we launched this product around a month ago. We believe that we have a strong competitive advantage with our new business model. This advantage comes from the millions of paid users who trust us. From the localized teaching content, massive data, brand recognition, and the reputation we have built up over the past 10 years, providing free in-school homework services. It is with the decade-long accumulation that's on the in-school side, we quickly launched the new teaching and learning start offering to provide personalized teaching assistance and the personalized self-directed learning product in the upper school business. This is our transformation strategy, which is based on what we believe can best leverage our decade-long experience and expertise in the in-school business. As the industry is undergoing tremendous transformation, the companies that comply with new regulations and meet the changing user needs will emerge strong. Now, I will turn the call over to Michael, our CFO, to walk you through our latest financial performance. Thank you.
spk09: Thanks, Andy, and thank you, everyone, for joining the call. I will now walk you through our financial and operating results. But before I begin, there's one number I would like to correct in the remarks from Andy, is that the new paid subscription to our new up-school self-learning products over the last month is more than 300,000 new users instead of 30,000 users. So now I continue with our financial performance. So please note that all the financial data I talk about will be presented in RMB terms. However, I would like to note that the publication and enforcement of the opinion and applicable rules have significantly impacted our business, both in terms of slowing down our revenue growth as well as enlarging our losses. But subsequently, we have adopted significant change to our business model as shared by Andy earlier, and the online off-school tutoring services, which generated the vast majority of our revenue, were seized by the end of December 2021. Therefore, I would like to remind everyone that the quarterly results we presented here should be taken with great care if you would like to use it as a reference for potential future performance. And the quarterly results are subject to significant impacts from one-off events due to the series of regulations introduced in the third quarter of 2021 and corresponding adjustments to our business model, our organization, and our workforce. Andy has shared that we have formed a clear new business strategy for future growth and have made prompt adjustment to our organization to accommodate this strategy. The vast majority of the adjustment that's needed to our operations and workforce and the associated one-off expenses have taken place in the third quarter of 2021. We will be operating with a clear aim of quickly turning profitable in the near term. As of September 30, 2021, our cash and cash equivalents were RMB 1.4 billion, or equivalent to $221 million. We believe we have sufficient capital to support the transformation of our business and to grow our new businesses. For the results of the third quarter of 2021, we achieved continuous top-line growth despite the regulatory impact. Net revenue increased by 62% year-over-year to RMB 497 million in the third quarter of 2021 and increased by 103% year-over-year to RMB 1,642 million in the first nine months of 2021. Net revenues from online K-12 tutoring services increased by 66% year-over-year to RMB 478 million in the third quarter of 2021. and increased by 113% year-over-year to around RMB 1.6 billion in the first nine months of 2021. The gross billing of online K-12 tutoring services, which is a non-GAAP measure, decreased by 35% year-over-year to RMB 302 million in the third quarter of 2021 and increased by 56% year-over-year to RMB 1.675 billion in the first nine months of 2021. The slowdown was primarily due to the impact of double reduction policies during the summer vacations during the third quarter. Pay cost enrollments decreased by 42% year-over-year to $226,000 in the third quarter of 2021 and increased by 67% year-over-year to $1,952,000 in the first nine months of 2021. The decrease in gross billing and pay cost enrollments in the third quarter was primarily as a result of the adverse impact of the double reduction policy introduced in July on new student acquisition. Average MAUs of in-school applications for students decreased by 30% year-over-year to $11.7 million in the third quarter of 2021 and decreased by 90% to $15.7 million in the first nine months of 2021. The year-over-year decrease in MAU was actually due to the publication and enforcement of the regulations. In addition to revenue growth, our operational efficiency continued to improve in the third quarter and the first nine months of 2021. Nungap adjusted net loss, which excludes share-based compensation expenses, was RMB $457 million in the third quarter of 2021. compared with adjusted net loss of RMB 521 million in the third quarter of 2020. And it was RMB 1.26 billion in the first nine months of 2021, compared with RMB 849 million in the first nine months of 2020. Nungap adjusted net loss as a percentage of net revenue was negative 91.9% in the third quarter of 2021, narrowed from negative 169.6% in the third quarter of 2020, or was negative 77% for the first nine months of 2021, compared with negative 105.2% in the first nine months of 2020. Next, I will go through our third quarter financials in greater detail. NAV revenues were RMB 497 million which represented a year-over-year increase of 62% from RMB $307 million in the third quarter of 2020. The increase was primarily driven by an increase in the net revenues from online K-12 tutoring services. Net revenues from online K-12 tutoring services were RMB $478 million of 66% year-over-year from RMB $288 million in the third quarter of 2020. and accounted for 96.1% of our total net revenues. The increase was primarily driven by an increase in pay cost enrollments in the second quarter of 2021, as the corresponding revenues were recognized in the third quarter of 2021. Pay cost enrollments were $226,000, representing a decrease of 42% year-over-year from approximately $393,000 in the third quarter of 2020. Cost of revenue was RMB $251 million, which included severance costs for instructors and tutor workforce due to the impact of the new regulations and represented an increase of 77% year-over-year from RMB $142 million in the third quarter of 2020. The increase was primarily due to the increasing compensation cost for instructors, tutors, as well as which was largely in line with the growth of net revenues from our online K-12 tutoring services as we provided services to more students. Cross-profit was on the 245 million, representing a year-over-year increase of 49% from 165 million in the third quarter of 2020. The increase was primarily driven by the increasing net revenues. Gross margin was 49.4% compared with 53.8% in the third quarter of 2020. The decrease was attributable to the severance costs for reduction in staffing, which was recognized in the third quarter of 2021 as a result of the impact of the new regulations. Moving over to the expense side, total operating expenses were RMB $744 million, including RMB 33 million of share-based compensation expenses. This represents a year-over-year increase of 0.8% from RMB 738 million in the third quarter of 2020. Total operating expenses, the percentage of revenue was 150%, significantly decreased from the 240% in the third quarter of 2020. Sales and marketing expenses were RMB 389 million, including $7 million of share-based compensation expenses. This represents a year-over-year decrease of 22% from RMB $496 million in the third quarter of 2020. The decrease was primarily due to the decrease in brand advertisement and promotional costs expenses, which were partially offset by an increase in the salary and the welfare for sales and marketing personnel, including the severance costs for reduction of such personnel in the third quarter of 2021 due to the impact of new regulations. R&D expenses were RMB 201 million, representing a year-over-year increase of 31% from RMB 154 million in the third quarter of 2020. The increase was primarily due to an increase in the severance cost for reduction in research and development personnel in the third quarter of 2021. due to the impact of regulation. The R&D expenses also included $12 million of share-based compensation expenses. Our G&A expenses were RMB $123 million, which includes RMB $14 million of share-based compensation expenses. This represents a year-over-year increase of 38% from RMB $89 million in the third quarter of 2020. Again, the increase was primarily driven by the severance costs for reduction of general and administrative personnel in the third quarter of 2021 due to the impact of the new regulations. There's an additional line in the report that impairments for property and equipment rights such as used assets and rental deposits for the third quarter of 2021 will all be $30.8 million compared with new in the third quarter of 2020. As a result of the change in regulatory environments in the online education industry, combined with financial performance, we performed an impairment assessment on the long-term assets and recognized impairment losses in these items in the third quarter of 2021, as a result that we have vacated some of our tenancy. Loss of phone operations were on the 498 million compared with RMB 573 million in the third quarter of 2020. Loss from operations as a percentage of net revenues was negative 103%, compared with negative 186.5% in the third quarter 2020. This significant improvement or narrowing of losses was due to the improvement in overall operational efficiencies despite the regulation change. Net loss was RMB 490 million, narrowing from RMB 581 million in the third quarter of 2020. Nungap adjusted net loss was RMB 459 million compared with RMB 521 million in the third quarter of last year. Nungap adjusted net loss as a percentage of net revenues was negative 91.9%, narrowed from negative 169.6% in the third quarter of 2020. As of September 30th, 2021, Cash and cash equivalents were RMB 1,422 million compared with RMB 2,835 million as of December 31, 2020. We believe we have sufficient capital to support the transformation of our business and to grow our new business. And finally, deferred revenue was 543 million as of September 30, 2021, representing a decrease of 9.3%. from RMB 598 million as of December 31st, 2020. The decrease was a primary attribute to the enforcement of double reduction policies affecting the new student acquisition. With that, it concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thanks.
spk03: Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question on the phone, kindly press star 1 on your telephone and wait for a name to be announced. If you would like to cancel a request, please press the power or hash key. Once again, to ask a question, please press star 1. There will be a short silence while questions are being collected. Thank you for your patience. As a reminder, if you'd like to ask question, kindly press R1 on your telephone and wait for a name to be announced. If you'd like to cancel a request, please press the power or hash key. We have questions from the line of Anthony Riera from Riera Holdings. Please ask your question.
spk08: What are projected subscriptions year-to-date?
spk07: Excuse me. Would you mind repeat your initial question? You mean what subscription year-to-date?
spk08: Yes, what are the projected subscriptions year to date with the new software that's implemented? You mentioned you had 300,000 new subscriptions due to the new software that was launched.
spk15: Yeah, we have 300,000.
spk17: Michael, please answer the question and I will explain it in detail.
spk07: Yeah.
spk09: As we are still in the process of actually acquiring additional new users, we don't actually at this stage, we won't at this stage provide accurate annual forecast for the total number of subscribers. But we do have the confidence that, you know, this 300,000 actually came only throughout one month period during the winter vacation session. We do see the additional sessions such as during the summer vacation part where we will see other chances of acquiring new students. So we do have the confidence that this number will continue to increase. However, it might be difficult for us to provide an accurate estimate for the whole year, especially dismissing a student at the early stage, but we do see a relatively high potential.
spk08: Excellent. Are those month-to-month or are those subscriptions with a year contract? The $300,000?
spk09: That $300,000 is actually a combination of subscriptions of different lengths. Some of them, the shortest are the quarter, but some are half years, and a small percentage of them are annual ones.
spk08: Excellent. Thank you.
spk03: Thank you for the questions. As a reminder, if you have a question, please press star 1 on the telephone and wait for a name to be announced. We have new questions from the line of Barry Blank of J.H. Darby Company. Please go ahead.
spk14: Okay. Thank you, gentlemen. I have several questions. The first question is, When the price of the stock dropped precipitously low last time, you did a reverse split effectively by changing the number of ADRs. The stock is approaching that level again, and I was wondering, are you planning to do that again because it was very detrimental to the price of the stock?
spk07: We currently have no plan to do further reverse stock splits.
spk14: Okay. My next question is, With the transferring of a lot of Chinese equities to Hong Kong, do you believe that you'll be able to keep the equity listed in the United States, or do you believe it will be transferred only to Hong Kong in the near future?
spk09: We have been keeping a very close eye on the policy and also the regulatory environments in relating to SEC as well as U.S. listed environments. It's our current plan to continue to remain listed and be compliant with relevant rules and regulations from SEC. At this stage, we don't have any plan to migrate our listings from U.S. to Hong Kong or have dual listing plans.
spk14: My next question is, Do you plan doing any, I guess they're called roadshows here, any coming to the United States and talking to investors and meeting with them?
spk09: We are trying our best trying to meet investors through webcasts or online or video conferences. Physical traveling might be difficult given the COVID scenarios around the world. Apologies for that.
spk14: My last question is, are you planning to have to sell any additional equity or do you have cash that will hold you for the foreseeable future?
spk09: As we've shared earlier, as of September 30, 2021, our cash and cash equivalents were around RMB $1.4 billion or around U.S. dollars $220 million. As we've also shared earlier that we have tried to, we have completed the vast majority of our adjustment to our business model, our organization, our workforce, including a large chunk of one-off expenses in the third quarter, which is this quarter, this financial results. And we do have a plan to significantly increase the health, financial health and profitability of our business aiming to quickly turning profitable or breaking even in the near future. So with that amount of cash and a more stringent control over our financial health, we do have confidence that the existing cash balance will be sufficient for the transformation of our business. And therefore, at this stage, we don't have any plan to raise additional equity.
spk03: Thank you for the questions. There are no more questions on the line. I would like to conclude today's meeting. Thank you, management, and thank you all participants to Darlene. You may now disconnect your lines. Thank you. Thank you. you Thank you. Thank you. Good evening and good morning, ladies and gentlemen. Thank you for standing by for 17 EdTech's third quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After the management prepare 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, Mr. Raymond Huang, 17 EdTech's Investor Relations Director. Please proceed, Raymond.
spk02: 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. On the call with me today are Mr. Andy Chang Liu, Founder, Chairman, and Chief Executive Officer, and Mr. Michael Chow 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. 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 20E of the Security 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 the current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the management's control. This risk may cause the company's actual results, performance, or achievements to differ materially. Further information regarding this and 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, future events, or otherwise, except as required under applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Andy. Please go ahead.
spk13: Thank you, Raymond.
spk17: Hello, everyone. Thank you for joining us for our earning course today. I would like to start with some updates of the company. The company has ceased offering tutoring services related to academic subjects to students from kindergarten through the last year of senior high school in mainland China by the end of 2021. To comply with the opinions of further alleviating the burden of homework and up-to-school tutoring on students in compulsory education, also known as the double reduction policy, and applicable rules, regulations, and measures. At the same time, we have quickly formed new business strategies in response to the new regulatory environment, leveraging our extensive knowledge and expertise accumulated through serving China's education authorities schools, teachers, and students over the past decade. We have adapted our business and organizations to focus on two key business areas. First, for our in-school business, we launched our new teaching and learning source offerings as an upgrade to our previous in-school products and services. The new offerings are aimed at facilitating the digital transformation and upgrade of Chinese schools with a focus on improving the efficiency and effectiveness of core teaching and learning scenarios such as homework assignments and in-school teaching. Second, for our after-school business, we have started to offer a personalized self-directed learning product to Chinese families as a substitute for the original after-school children's services that we offered historically. The product utilizes our technology and data insights to provide personalized and targeted learning and exercise content that is aimed at improving students' learning efficiency. This is not a tutoring service, and it's consistent with some of the key concepts and philosophies of our wonderful 10 case studies selected by the Ministry of Education's General Office for the implementation of the opinion. Let me explain in detail the logic and the progress for our business transformation and how the two businesses fit the new era of China's education market and user needs both in in-school and after-school segments. On the in-school side, we are seeing three main themes driving the development of the industry. First, China's Education Informaticians kicked off in 2012 while the government published the blueprint of the three exercises and two platforms. Under the initiative, the government took the lead to improve internet infrastructure and build multimedia classrooms for schools. By 2018, school network infrastructures for online or digital teaching were mostly in place. In the same year, the government released the Word Plan version 2.0 for education digitalization, which aims to achieve three full coverages, two improvements, and one platform. Since then, the focus of the education informatization market has shifted from education infrastructure to digital tools for teaching and school management, as well as digital teaching resources to build an Internet plus education platform that is aimed at improving teaching results and efficiency. According to estimates based on numbers from National Bureau of Statistics of China, the annual budget for education digitalization reached RMB 340 billion in 2020. Under the backdrop of education digitalization version 2.0, we believe the growth trajectory will continue in the next few years as China's GDP expands. Education Informatization, investment generally fall into two categories, one teaching and learning related and the other not. The first category includes hardware and software which are directly used in teaching and learning processes, including teaching and learning management system. A typical example is our homework management system that allows schools and teachers to evaluate and check students' mastery of different knowledge points through homework and assign personalized homework accordingly with the support of both hardware and software. One of the two categories, investment in teaching and learning-related education informatization, are steadily taking up an increasing share in the annual budget. In earlier years, the purchase of non-teaching and learning hardware was the biggest component. Third, in recent years, we have also observed that teaching and learning-related digital products shifted away from smart classrooms and exam marking towards homework, focused teaching and learning products. This was the result of a few key changes in the education philosophy and guidelines from the Ministry of Education. First, the discouragement restriction on using exams and promotion of homework as the main tool to evaluate students' academic performance. Second, the need for advanced information-based system to achieve the personalized and tired homework promoted under the double reduction policy. Third, China's latest curriculum standards published in 2021, which is refreshed every 10 years, put more emphasis on students' comprehensive academic competency and a more proactive participation by students during class in the form of in-school, in-class exercises. All of these would not have been possible with the historical manual approach and created a surge in demand for delegated and comprehensive teaching and learning management systems centered around homework and exercises that integrate both hardware and software. Homework would thus become an ideal scenario for evaluating student learning progress and a core to connect all other teaching and learning scenarios and teaching management. Our teaching and learning products focused on homework assignments and can generate data that enables comparison between classes and schools for a selected time period. This makes it a very powerful tool for school principals to manage the teaching progress at school and for education officials to check on the teaching management on district level. It also reduces the burden of both teachers and students as it is designed to improve efficiency of homework assignments and related to teaching and learning scenarios. This has opened up enormous business opportunities for us. For the technology, data insights, content, and brain power we have gained through the past 10 years invested in homework development, we have been chosen by a number of regional education authorities to become a partner of choice of homework, focused teaching, and learning management systems. There is one difference this time. In the past 10 years, we have provided more basic services on a free of charge system. now, our new Teaching and Learning Starts offers a paid product which integrates both software and hardware in one package and also features data-driven recommendations and other value-added functions and features to the needs of schools and education authorities. Purchases are mostly made by the district education authority on behalf of a group of schools. Our products offerings are based on tailored combinations of a number of standardize the modules covering classrooms, question bank, homework assignments, self-directed learning, and multi-role reporting to suit the needs of different users. We are also seeing increasing acceptance of the SaaS subscription model by government instead of the more prominent one-time software construction product, which was more common in non-teaching and learning-related investments. We have successfully entered in-depth cooperation with a number of regional education authorities across multiple districts in China, including Shanghai Minghang District and Beijing Xitong District, which are among the 10 case studies selected by the Ministry of Education's General Office for the implementation of the opinion. Projects of different scales are already being implemented using our Teaching and Learning Starts products across more than 50 cities. turning to our new business model for the after-school business. As we all know, Chinese families put strong emphasis on students' education. Before the double reduction policy, such emphasis and needs were mostly satisfied by after-school children's services, which created a huge market. Some estimate it to be as large as RMB 1 trillion. The new regulations have dramatically changed the supply and the nature of products. in the education industry. Marginal demand in the market previously provoked by massive promotion campaigns were indeed discouraged by some durings. But we see needs from core user groups remain intact and deeply underserved with the highly effective tutoring services. The good news is that such user needs tend to be more resilient. Due to the double reduction policy, school vocations are weakened which used to be the major battlefield for the after-school tutoring services, will, for the first time in decades, become family time in a vacuum of tutoring services. During this two-month break and all subsequent holiday and weekend periods, Chinese parents will be in urgent need for high-quality, self-directed learning content to keep their children occupied. To address these needs, we started offering a personalized self-directed learning product to Chinese families. This product is based on our premium content and insights into students' learning progress and difficulties. It is designed with a core aim to be compliant with new regulatory environment. In a nutshell, it is a self-directed learning product that supplements the in-school studies of primary and middle school students. Each month, Our users will receive a material package consisting of customized exercises based on their personal academic profile, diversified learning tools, expanded learning videos, family education magazines. The monthly package provides the basic materials and elements for parents to guide their children's learning program. The core component of our self-directed learning product is a personalized and targeted exercise deck formulated every month based on last month's learning progress and weaknesses. With our in-school business over the last decade, we have accumulated huge educational content and the school and district level data insights across China, which give us a deep understanding about our users and the content of the local exams so that we can develop personalized exercise books to meet their needs. We have designed a set of effective systems to motivate students to develop through self-directed learning habits. In the meanwhile, we also allocate a personal learning partner to each of our users and provide them with learning customization and guiding services. Personal learning partners customize the learning materials and plans for our users on a monthly basis. And the follow-up was the implementation of their learning plans. Our self-directed learning product is charged for each subject. And the subscription fee for one subject is in the range of 2,500 to 3,000 RMB per year. We expect that it will take some time for the market to get familiar with this new product format. But we are happy to see more than 30,000 paid subscriptions in the product since we launched this product around a month ago. We believe that we have a strong competitive advantage with our new business models. This advantage comes from the millions of paid users who trust us. From the localized teaching content, massive data, brand recognition, and the reputation we have built up over the past 10 years, providing free in-school homework services. It is with the decade-long accumulation that's on the in-school side, we quickly launched the new teaching and learning start offering to provide personalized teaching assistance and the personalized self-directed learning product in the upper school business. This is our transformation strategy, which is based on what we believe can best leverage our decade-long experience and expertise in the in-school business. As the industry is undergoing tremendous transformation, the companies that comply with new regulations and meet the changing user needs will emerge strong. Now, I will turn the call over to Michael, our CFO, to walk you through our latest financial performance. Thank you.
spk09: Thanks, Andy, and thank you, everyone, for joining the call. I will now walk you through our financial and operating results. But before I begin, there's one number I would like to correct in the remarks from Andy, is that the new paid subscription to our new up-school self-learning products over the last month is more than 300,000 new users instead of 30,000 users. So now I continue with our financial performance. So please note that all the financial data I talk about will be presented in RMB terms. However, I would like to note that the publication and enforcement of the opinion and applicable rules have significantly impacted our business, both in terms of slowing down our revenue growth as well as enlarging our losses. But subsequently, we have adopted significant change to our business model as shared by Andy earlier, and the online obstacle tutoring services, which generated the vast majority of our revenue, were seized by the end of December 2021. Therefore, I would like to remind everyone that the quarterly results we presented here should be taken with great care if you would like to use it as a reference for potential future performance. And the quarterly results are subject to significant impacts from one-off events due to the series of regulations introduced in the third quarter of 2021 and corresponding adjustments to our business model, our organization, and our workforce. Andy has shared that we have formed a clear new business strategy for future growth and have made prompt adjustment to our organization to accommodate this strategy. The vast majority of the adjustment that's needed to our operations and workforce and the associated one-off expenses have taken place in the third quarter of 2021. We will be operating with a clear aim of quickly turning profitable in the near term. As of September 30, 2021, our cash and cash equivalents were RMB $1.4 billion, or equivalent to $221 million. We believe we have sufficient capital to support the transformation of our business and to grow our new businesses. For the results of the third quarter of 2021, we achieved continuous top-line growth despite the regulatory impact. Net revenue increased by 62% year-over-year to RMB 497 million in the third quarter of 2021 and increased by 103% year-over-year to RMB 1,642 million in the first nine months of 2021. Net revenues from online K-12 tutoring services increased by 66% year-over-year to RMB 478 million in the third quarter of 2021. and increased by 113% year-over-year to around RMB 1.6 billion in the first nine months of 2021. The gross billing of online K-12 tutoring services, which is a non-GAAP measure, decreased by 35% year-over-year to RMB 302 million in the third quarter of 2021 and increased by 56% year-over-year to RMB 1.675 billion in the first nine months of 2021. The slowdown was primarily due to the impact of double reduction policies during the summer vacations during the third quarter. Pay cost enrollments decreased by 42% year-over-year to $226,000 in the third quarter of 2021 and increased by 67% year-over-year to $1,952,000 in the first nine months of 2021. The decrease in the gross billing and pay cost enrollments in the third quarter was primarily as a result of the adverse impact of the double reduction policy introduced in July on new student acquisition. Average MAUs of in-school applications for students decreased by 30% year-over-year to $11.7 million in the third quarter of 2021 and decreased by 90% to $15.7 million in the first nine months of 2021. The year-over-year decrease in MAU was attributed to the publication and enforcement of the regulations. In addition to revenue growth, our operational efficiency continued to improve in the third quarter and the first nine months of 2021. Nungap adjusted net loss, which excludes share-based compensation expenses, was RMB $457 million in the third quarter of 2021. compared with adjusted net loss of RMB 521 million in the third quarter of 2020. And it was RMB 1.26 billion in the first nine months of 2021, compared with RMB 849 million in the first nine months of 2020. Nungap adjusted net loss as a percentage of net revenue was negative 91.9% in the third quarter of 2021, narrowed from negative 169.6% in the third quarter of 2020, or was negative 77% for the first nine months of 2021, compared with negative 105.2% in the first nine months of 2020. Next, I will go through our third quarter financials in greater detail. NAV revenues were RMB 497 million, which represented a year-over-year increase of 62% from RMB $307 million in the third quarter of 2020. The increase was primarily driven by an increase in the net revenues from online K-12 tutoring services. Net revenues from online K-12 tutoring services were RMB $478 million of 66% year-over-year from RMB $288 million in the third quarter of 2020. and accounted for 96.1% of our total net revenues. The increase was primarily driven by an increase in pay cost enrollments in the second quarter of 2021, as the corresponding revenues were recognized in the third quarter of 2021. Pay cost enrollments were $226,000, representing a decrease of 42% year-over-year from approximately $393,000 in the third quarter of 2020. Cost of revenue was RMB $251 million, which included severance costs for instructors and tutor workforce due to the impact of the new regulations and representing an increase of 77% year-over-year from RMB $142 million in the third quarter of 2020. The increase was primarily due to the increasing compensation cost for instructors, tutors, as well as which was largely in line with the growth of net revenues from our online K-12 tutoring services as we provided services to more students. Cross-profit was on the 245 million, representing a year-over-year increase of 49% from 165 million in the third quarter of 2020. The increase was primarily driven by the increasing net revenues. Gross margin was 49.4% compared with 53.8% in the third quarter of 2020. The decrease was attributable to the severance costs for reduction in staffing, which was recognized in the third quarter of 2021 as a result of the impact of the new regulations. Moving over to the expense side, total operating expenses were RMB $744 million, including RMB 33 million of share-based compensation expenses. This represents a year-over-year increase of 0.8% from RMB 738 million in the third quarter of 2020. Total operating expenses, the percentage of revenue was 150%, significantly decreased from the 240% in the third quarter of 2020. Sales and marketing expenses were RMB 389 million, including $7 million of share-based compensation expenses. This represents a year-over-year decrease of 22% from RMB $496 million in the third quarter of 2020. The decrease was primarily due to the decrease in brand advertisement and promotional costs expenses, which were partially offset by an increase in the salary and the welfare for sales and marketing personnel, including the severance costs for reduction of such personnel in the third quarter of 2021 due to the impact of new regulations. R&D expenses were RMB 201 million, representing a year-over-year increase of 31% from RMB 154 million in the third quarter of 2020. The increase was primarily due to an increase in the severance cost for reduction in research and development personnel in the third quarter of 2021. due to the impact of regulation. The R&D expenses also included $12 million of share-based compensation expenses. Our G&A expenses were RMB $123 million, which includes RMB $14 million of share-based compensation expenses. This represents a year-over-year increase of 38% from RMB $89 million in the third quarter of 2020. Again, the increase was primarily driven by the severance costs for reduction of general and administrative personnel in the third quarter of 2021 due to the impact of the new regulations. There's an additional line in the report that impairments for property and equipment rights such as used assets and rental deposits for the third quarter of 2021 will all be $30.8 million compared with new in the third quarter of 2020. As a result of the change in regulatory environments in the online education industry, combined with financial performance, we performed an impairment assessment on the long-term assets and recognized impairment losses in these items in the third quarter of 2021, as a result that we have vacated some of our tenancy. Loss of formal operations were on the 498 million compared with RMB 573 million in the third quarter of 2020. Loss from operations as a percentage of net revenues was negative 103%, compared with negative 186.5% in the third quarter 2020. This significant improvement or narrowing of losses was due to the improvement in overall operational efficiencies despite the regulation change. Net loss was RMB 490 million, narrowing from R&B 581 million in the third quarter of 2020. Nungap adjusted net loss was R&B 459 million compared with R&B 521 million in the third quarter of last year. Nungap adjusted net loss as a percentage of net revenues was negative 91.9%, narrowed from a negative 169.6% in the third quarter of 2020. As of September 30th, 2021, Cash and cash equivalents were RMB $1,422 million compared with RMB $2,835 million as of December 31, 2020. We believe we have sufficient capital to support the transformation of our business and to grow our new business. And finally, deferred revenue was $543 million as of September 30, 2021, representing a decrease of 9.3%. from RMB 598 million as of December 31st, 2020. The decrease was primarily attributed to the enforcement of double reduction policies affecting the new student acquisition. With that, it concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thanks.
spk03: Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask questions on the phone, kindly press star 1 on your telephone and wait for your name to be announced. If you would like to cancel requests, please press the power or hash key. Once again, to ask questions, please press star 1. There will be a short silence while questions are being collected. Thank you for your patience. As a reminder, if you'd like to ask questions, kindly press star 1 on your telephone and wait for a name to be announced. If you'd like to cancel a request, please press the power or hash key. We have questions from the line of Anthony Riera from Riera Holdings. Please ask your question.
spk08: What are projected subscriptions year-to-date?
spk07: Excuse me, would you mind repeat your initial question? You mean what subscription year-to-date?
spk08: Yes, what are the projected subscriptions year to date with the new software that's implemented? You mentioned you had 300,000 new subscriptions due to the new software that was launched.
spk15: Yeah, we have 300,000.
spk17: Michael, please answer the question and I will explain it in detail.
spk07: Yeah.
spk09: As we are still in the process of actually acquiring additional new users, we don't actually at this stage, we won't at this stage provide accurate annual forecast for the total number of subscribers. But we do have the confidence that, you know, this 300,000 actually came only throughout one month period during the winter vacation session. We do see the additional sessions such as during the summer vacation part where we will see other chances of acquiring new students. So we do have the confidence that this number will continue to increase. However, it might be difficult for us to provide an accurate estimate for the whole year, especially this business is doing its early stage, but we do see a relatively high potential.
spk08: Excellent. Are those month-to-month or are those subscriptions with the year contract? The $300,000?
spk09: That $300,000 is actually a combination of subscriptions of different lengths. Some of them, the shortest are the quarter, but some are half years, and a small percentage of them are annual ones.
spk08: Excellent. Thank you.
spk03: Thank you for the question. As a reminder, if you have a question, please press star 1 on the telephone and wait for a name to be announced. We have new questions from the line of Barry Blank of J.H. Darby Company. Please go ahead.
spk14: Okay. Thank you, gentlemen. I have several questions. The first question is, When the price of the stock dropped precipitously low last time, you did a reverse split effectively by changing the number of ADRs. The stock is approaching that level again, and I was wondering, are you planning to do that again because it was very detrimental to the price of the stock?
spk07: We currently have no plan to do further reverse stock splits.
spk14: Okay. My next question is, With the transferring of a lot of Chinese equities to Hong Kong, do you believe that you'll be able to keep the equity listed in the United States, or do you believe it will be transferred only to Hong Kong in the near future?
spk09: We have been keeping a very close eye on the policy and also the regulatory environments in relating to SEC as well as U.S. listed environments. It's our current plan to continue to remain listed and be compliant with relevant rules and regulations from SEC. At this stage, we don't have any plan to migrate our listings from U.S. to Hong Kong or have dual listing plans.
spk14: My next question is Do you plan doing any, I guess they're called roadshows here, any coming to the United States and talking to investors and meeting with them?
spk09: We are trying our best trying to meet investors through webcasts or online or video conferences. Physical traveling might be difficult given the COVID scenarios around the world. Apologies for that.
spk14: My last question is, are you planning to have to sell any additional equity or do you have cash that will hold you for the foreseeable future?
spk09: As we've shared earlier, as of September 30, 2021, our cash and cash equivalents were around RMB $1.4 billion or around U.S. dollars $220 million. As we've I also shared earlier that we have tried to, we have completed the vast majority of our adjustment to our business model, our organization, our workforce, including a large chunk of one-off expenses in the third quarter, which is this quarter, these financial results. And we do have a plan to significantly increase the health, financial health, and profitability of our business aiming to quickly turning profitable or breaking even in the near future. So with that amount of cash and a more stringent control over our financial health, we do have confidence that the existing cash balance will be sufficient for the transformation of our business. And therefore, at this stage, we don't have any plan to raise additional equity.
spk03: Thank you for the questions. There are no more questions on the line. I would like to conclude today's meeting. Thank you, management, and thank you all participants. You may now disconnect your
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