17 Education & Technology Group Inc.

Q4 2021 Earnings Conference Call

3/9/2022

spk02: Good evening and good morning, ladies and gentlemen, and thank you for standing by for 17 EdTech's fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question and answer session. As a reminder, today's conference call is being recorded. I will now turn the meeting over to your host for today's call, Mr. Michael Dew. CFO of Seventeen EdTech. Please proceed, Michael.
spk00: Thank you, operator. Hello, everyone, and thank you for joining us today. Our earnings release was distributed earlier today and are available on our IR website. On the call with me today is Ms. Andy Chang Liu, Founder, Chairman, and Chief Executive Officer. And I'm Michael Du, Director and Chief Financial Officer of the company. Andy will walk you through our latest business performance and strategies, followed by me, who will discuss our financial performance. We 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 is the 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 in the current market and operating conditions, and they 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 company's control. These risks 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 filing with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statement as a result of new information, threatening events, or otherwise except as required under the applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Andy. Please go ahead.
spk01: Thank you, Michael. Hello, everyone. Thank you for joining us for our earnings call today. 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 renminbi unless otherwise stated. We finished the fourth quarter of 2021 with strong business performance. Let me provide some quick highlights before we get into the details. First, we continue to drive revenue growth despite the regulatory changes. Second, we managed to significantly narrow our net loss on a gap basis and achieved profitability on an adjusted basis after excluding share-based compensation. Third, we rapidly formed new business strategies and adjusted our organization accordingly. Fourth, our new businesses are gaining momentum we are particularly pleased to see strong recognition from the government on our in-school offerings and advances from our customers. Fourth, fifth, the fact that we turned profitable on an adjusted basis allowed us to maintain a healthy cash balance for our business transition and growth. Now let me go into more details with you. We finished the fourth quarter and the full year of 2021 with strong business and financial results despite the adverse impact of regulatory changes. We achieved a 17.5% year-over-year revenue growth in the fourth quarter of 2021 and a 68.8% revenue growth for the 2021 compared with 2020. What's more important is that we significantly improved our profitability narrowing our net loss to RMB $25.6 million in the fourth quarter of 2021 from RMB $365.1 million in the fourth quarter of 2020, and recording an adjusted net income non-GAAP of RMB $17 million, excluding share-based composition in the fourth quarter of 2021 from an adjusted net loss non-GAAP of RMB $134.6 million in the fourth quarter of 2020. This positive adjusted net income was probably a result of determined and rapid formation of the new business strategy, the corresponding execution to streamline and restructure of our organization, as well as an improvement in our operational efficiency and reduction of the promotional activities associated with the legacy online K-12 tutoring services. Again, this is the first time our company turned profitable on a non-GAAP basis since the public listing and is a key milestone as we strive to turn our company into a sustainably profitable company as soon as possible. On top of encouraging financial results, we also see continued progress in our new business strategies. The company has ceased to offer online K-12 tutoring services by the end of 2021 to comply with 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-authorized schools, teachers, and students over the past decade. we have adapted our business and organization to focus on two key business areas. First, for our in-school business, we launched our new teaching and learning starts 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 explore personalized self-directed learning products as a substitute for the original after-school tutoring services. The products utilize our technology and data insights to provide personalized and targeted learning while exercising content that is aimed at improving students' learning efficiency. Please be reminded, this is not a tutoring service. The double reduction policy together with the latest philosophy and guidelines from China's Ministry of Education has marked a new area for China's education informatization process. China's education informatization process started around 10 years ago and created a market with annual budgets of RMB 340 billion in 2020. According to estimates based on statistics from the National Bureau of Statistics of China. This is a huge market. Moreover, its focus has shifted from education infrastructure during the early years to digital applications and resources to improve teaching and learning effectiveness and efficiency, especially after the double reduction policy was announced, which refers to alleviating the burden of homework while not sacrificing the teaching and learning results. Our teaching and learning staff offering cover various teaching and learning scenarios with a key focus on homework. It's a comprehensive data-driven system, not only enabling more customized and targeted homework diagnosis and assignments that help improve teaching and learning effectiveness and efficiency, but also offering data-driven management tools based on a comparison between classes and schools for a selected period. This is very powerful for school principals to manage the teaching progress at school and for education officials to check on the teaching management on the district level. This has opened up enormous business opportunities for us with the technology, data insights, content, and breadth power we have gained through the past 10 years of investing in homework development. We have been chosen by several regional education authorities to become the partner of choice for homework-focused teaching and learning management systems. This is one difference this time. In the past 10 years, we have provided basic services on a free-of-charge basis. Now, our new teaching and learning sites offering are paid products that integrate both software and hardware in one package and feature data-driven recommendations and other value-added functions that cater to the needs of schools and education authorities. Purchases are mostly made by the district education authority on behalf of a group of schools. We have continued to see supportive policies and guidelines coming out of the Ministry of Education, positive responses from district education bureaus, and continuous progress of our various projects and pilot programs. A recent speech by Tenet Minister of Education, Mr. Huai-Hing Hong, has iterated the emphasis of digital education strategy with a need pool, application folks, and a service-prioritized principle. Our in-school service offering clearly feeds this principle, where our comprehensive service-packed software, content, and data solutions together help schools achieve better teaching and learning results to meet the application and service keywords. And it satisfies the needs of both regulators, school principals, and teachers at the same time to ensure regular use after implementations to meet the daily needs of all key stakeholders. To date, we have successfully entered into in-depth collaborations with several regional education authorities across multiple districts in China, including Shanghai Minkang District, Beijing Sicheng District, which are among the 10 case studies selected by the Ministry of Education General Office for the implementations of the opinion. Projects of different skills are already being implemented using our teaching and learning products across more than 50 cities. Continuous progress was seen over the past few months in these cities and districts with which we are operating strategically. In the fourth quarter of 2021, our company won the bid for the Intelligence, Homework, and Accurate Teaching Project of Shanghai Minghang Education Bureau, worth RMB 27 million. This project is expected to be fully delivered in 2022. There are also in-depth dialogues with several other cities and districts across China. about our in-school teaching and learning staff offerings. Another recent example was the first classroom launched by Shanghai Minghao District Education Bureau. This is a series of courses offering an immersive teaching experience covering various topics around history, the latest social news, social role models, and moral standards based on our technology solution and content inputs from People's Education Press and China Central Television. both of which are our strategic partners. This pioneering course format compiling the latest technology in the context was reported by CCTV Channel One, China Daily, and People's Daily. And the other major media has gained interest and inquiries from various district education bureaus and schools on the potential rule-out of similar courses of Thelmax. At the same time, we are also exploring a personalized and self-directed learning product for Chinese families. This product is in response to the Chinese government's promotion of applying technology to advance education digitalization and improve learning efficiency. It leverages our high-quality educational content, understanding of homework and examples, school and district-level data insights into students' learning progress, and the common problems accumulated over the past last decade with our merge of teachers and student users. It is designed with a core aim to be compliant with the 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. We are continuously adapting our products based on the latest regulatory requirements policy guidance, and the customer feedback. As a result of the previous dimension, new business initiatives and development, the balance of our preferred revenue and the customer advances of December 31st, 2021 raised RMB 243.6 million. This balance was entirely composed of ongoing business after our business transformation and was expected to be recognized in the next few quarters. as we deliver our products and services. Lastly, I would like to re-emphasize our confidence and determination in turning our business into a profitable growing one. This will be a key philosophy in guiding our decisions and business operations going forward. Similar for the first quarter of 2022, although we cannot be certain we will record gap net income, the company is expected to achieve positive adjusted net income excluding share-based compensation. Now, I will turn the call over to Michael, our CFO, to walk you through our latest financial performance. Thank you.
spk00: 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 IMB terms. However, I would like to note that the publication and enforcement of the opinion and applicable rules significantly impacted our businesses. We have adopted significant changes in our business model, as shared by Andy earlier, and the online K-12 off-school tutoring services that generated the vast majority of our revenue previously were seized by the end of 2021. Therefore, I would like to remind everyone that the quarterly results we're presenting here should be taken with care if used as reference for potential future performance. And they are subject to significant impacts from one-off events as a result of the series of regulations introduced in 2021 and corresponding adjustments to our business model, our organization, and our workforce. Achieving a positive adjusted net income on a gap basis in the fourth quarter of 2021 was a key milestone for the company. It was a result of a clearly defined new business strategy for future growth and a sweet adjustment by our organization to accommodate these strategies and to improve operational efficiency. We're happy to see the quick business results from the implementation of our new business strategies. The balance of deferred revenue and the customer debauches reached the 243.9 million by December 31st, 2021. which is entirely from the ongoing businesses after the company's business transformation and does not include any deferred revenues from the legacy online K-12 tutoring services. We will also resume providing business outlooks starting this quarter, which I will share in a while. Let's dive into our financial results of the fourth quarter of 2021 and the full year 2021 in greater detail. For the results of the fourth quarter of 2021, we achieved continuous growth despite the regulatory impact. Net revenues increased by 11.5% year-over-year to RMB 542.5 million in the fourth quarter of 2021, and increased by 8.8% year-over-year to RMB 2,184.5 million in 2021. Net revenues from online K-12 tutoring services increased by 12.5% year-over-year to RMB $525.9 million in the fourth quarter of 2021, and increased by 74.7% year-over-year to RMB $2,128.6 million in 2021. In addition to continued revenue growth, our operational efficiency continued to improve in the fourth quarter and the whole year of 2021. Our net loss decreased significantly to RMB 25.6 million or US dollars 4 million for the fourth quarter of 2021 from RMB 365.1 million in the same period in 2020 despite revenue growth. Net loss for the full year 2021 was RMB 1,441.9 million compared with RMB $1,339.9 million in 2020. Nungap adjusted net income, which includes share-based compensation expenses, was positive, RMB 17.0 million in the fourth quarter of 2021, compared with an adjusted net loss of RMB 134.6 million in the fourth quarter of 2020. Nungap adjusted net loss in 2021 was RMB $1,246.7 million compared with RMB 983.9 million in 2020. Nungap adjusted net income as a percentage of net revenue was positive 3.1% in the fourth quarter of 2021, compared with an active 27.7 in the fourth quarter of 2020. It was an active 57.1 for the full year, of 2020, improving from negative 76% in 2020. Next, I will go through our fourth quarter financials in greater detail. Net revenues were RMB 542.5 million, which represented a year-over-year increase of 11.5% from RMB 486.8 million in the fourth quarter of 2020. The increase was primarily driven by an increase in net revenues from online K-12 tutoring services. Net revenues from online K-12 tutoring services were RMB 525.9 million, while U.S. sold 82.5 million, up 12.5% year-over-year from RMB 467.5 million in the fourth quarter of 2020. Cost of revenues was RMB 191.2 million, and represented an increase of 10.1% year-over-year from RMB $173.6 million in the fourth quarter of 2020. The increase was primarily due to the increase in compensation costs for instructors and tutors, which were largely in line with the growth of our net revenues from online K-12 tutoring services as we provided services to more students. was RMB $351.4 million, representing an year-over-year increase of 12.2% from RMB $313.2 million in the fourth quarter of 2020. That increase was primarily driven by the increase in net revenues. Gross margin for the fourth quarter of 2021 was 64.8%, compared with 64.3% in the fourth quarter of 2020. Moving over to the expense side, total operating expenses were RMB 380.3 million, including RMB 42.6 million of share-based compensation expenses, representing an year-over-year decrease of 43.8% from RMB 676.4 million in the first quarter of 2020. Sales and marketing expenses were RMB 104.1 million, including 77.1 million of share-based compensation expenses, representing a year-over-year decrease of 57.9% from RMB 247.1 million in the first quarter of 2020. The decrease was primarily due to the reduction of promotional activities in the line with the change in the regulatory environment. RMB expenses were RMB 159.5 million, including RMB 24.8 million of share-based compensation expenses, representing a year-over-year decrease of 17.0 from RMB 192.1 million in the fourth quarter of 2020. The decrease was primarily due to the reduction of R&D personnel in response to business change and organization optimization. GN&E expenses for RMB 83.1 million, including 10.7 million of share-based compensation expenses, representing a year-over-year decrease of 65% from RMB 237.2 million in the fourth quarter of 2020. The decrease was primarily due to a decrease in share-based compensation expenses, where for the fourth quarter of 2020, there was a large amount of share-based compensation expenses recognized in relation to the company's IPO. Impairment for property and equipment rights to use of assets and rental deposits for the fourth quarter of 2021 were RMB 33.6 million, compared with new in the fourth quarter of 2020. These impairment losses were recognized as a result of the impairment assessment the company conducted on its long-term assets in the fourth quarter of 2021, given the changing regulatory environment and the company's business model and financial performance. Loss from operations was $28.9 million compared with RMB's $363.2 million in the first quarter of 2020. Losses from operation as a percentage of net revenues was negative 5.3, significantly narrowed from negative 74.6% in the first quarter of 2020. Net loss was RMB 25.6 million, narrowing from RMB 365.1 million in the fourth quarter of 2020. Net loss as a percentage of net revenues was negative 4.7%, in the fourth quarter of 2021, compared with negative 75% in the fourth quarter of 2020. Non-GAAP adjusted net income was RMB 17.0 million positive, compared with non-GAAP adjusted net loss of RMB 134.6 million in the fourth quarter of 2020. Non-GAAP adjusted net income as a percentage of net revenue was positive 3.1%, for the fourth quarter of 2021, improving from negative 27.7% in the fourth quarter of 2020. As of December 31, 2021, cash and cash equivalents were RMB $1,180.9 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 businesses. And finally, deferred revenue and customer advances was RMB 243.9 million as of December 31, 2021, representing a decrease of 59.2% from RMB 598.3 million as of December 31, 2020. The decrease was primarily attributable to the reduction of the deferred revenue in relation to online K-12 tutoring services to new or zero as a result of the cessation of our online K-12 tutoring services. The remaining deferred revenue and customer-to-buyer balance as of December 31, 2021 were related to our new businesses and did not include any deferred revenue in relation to the legacy online K-12 tutoring services. With that, I will now provide our business outlook. Based on our current estimate, total net revenue for the first quarter of 2022 are expected to be between RMB 200 million and RMB 210 million. This estimated net revenues for the first quarter of 2022 is derived entirely from the ongoing businesses after the company's business transformation and does not include revenues from the legacy online K-12 tutoring services. This estimate range represents a significant increase year-over-year when compared with the relatively small base of the net revenue generated from non-online K-12 tutoring services of RMB $16.6 million for the first quarter of 2021. In terms of business outlook for the first quarter of 2022 from a profitability perspective, although we cannot be certain we will record a gap net income the company is expected to achieve a positive adjusted net income on a gap basis, excluding share-based compensation expenses. With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.
spk02: Thanks. Thank you. Ladies and gentlemen, if you have a question, please press star then 1 on your telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you have a question, please press star 1 on your telephone. As a reminder, if you have a question at this time, please press star 1 on your telephone. to ask a question that's star then one on your telephone. To ask a question, ladies and gentlemen, please press star 1 on your telephone. That's star, then 1. To ask a question, you will need to press star one on your telephone. And I'm shown no questions. This concludes today's conference call. Thank you for participating and you may now disconnect.
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