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Earnings Transcript for YQ - Q3 Fiscal Year 2024

Operator: Good evening and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's Third Quarter 2024 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'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. Michael Du, Director and Chief Financial Officer, and myself, Investor Relations Manager. Michael will walk you through our latest business performance and strategies, and I will discuss our financial performance in more detail. After the prepared remarks, Michael will be available to answer your questions during the Q&A session. 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 Investigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions, and they 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 and other risks, uncertainties, or factors is included in the company's filings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise accept as required under applicable law. I will now turn the call over to our Director and Chief Financial Officer to review some of our business development and strategic direction. Michael, please go ahead.
Michael Chao Du: Thank you, Lara. Hello, everyone. Thank you all for joining us on our third quarter 2024 earnings call. Before we begin, I would like to note that the financial information and non-GAAP numbers in this release are presented on a continuing operation basis and in RMB unless otherwise stated. Let me start with our business updates. In the third quarter of 2024, we have continued our business progress and have seen consistent growth in schools subscribing to our teaching and learning SaaS offerings under subscription models. This is strong testimony in the value of the offering and creates a clear growth path into the future. We continue to evolve our teaching and learning SaaS solutions to expand customer base to improve efficiencies through digital means, ensuring high-quality development and fostering growth in school-based procurements. During this quarter, our core teaching and learning SaaS business has made substantial progress and it contributes significant yields to the overall revenue compared with the same quarter last year. Regional flagship projects and ongoing SaaS initiatives have consistently generated revenue with key projects achieving revenue recognition milestones. Our revenue of this quarter has grown by 32% to RMB59.6 million and our loss, both in terms of GAAP and non-GAAP basis, have also substantially narrowed with our adjusted net loss on non-GAAP basis of only RMB5.7 million, demonstrating our continuous efficiency improvement, scale expansion, and cost control. During this quarter, our teaching and learning SaaS business for district-level projects exhibits steady progress, continuing to generate revenues through successful delivery as well as a new contract acquisition. Notably, the project in Beijing Xicheng District that we have secured last quarter has successfully completed delivery and achieved revenue recognition. Additionally, another key project in our Shanghai Minghang project has also successfully wrapped up its second phase, showcasing impressive user engagement metrics. As we have enhanced operational efficiency and further reduced operational expenses, our loss on a GAAP basis continues to narrow, marking a consistent trend of narrowing losses on the past three consecutive quarters. In this third quarter, we achieved significant growth progress in school-based subscription projects with a remarkable revenue growth rate that outpaced the overall revenue growth. Also, we have seen a very strong renewal trend in this segment. Among the individual schools whose initial contracts matured on or before September 30th this year, 89% of them have chosen to renew their contracts. And they further chose to expand their service scope and student coverage by a further 37%. This is a strong case showing that our subscription model is maturing, as evidenced by the increasing renewal rate as well as the improvement in customer retention rate, highlighting noteworthy advancement that drives our revenue growth. This also enhances our ability to reach more schools and students, creating a virtual cycle that enables continuous improvements in our products, solutions, and sales network. As we optimize our business structure, synergies across all business lines have led to a more efficient operation with enhanced complementary strength and increased flexibility. In terms of distribution channels, the company is actively working on developing a diverse range of multi-dimensional sales channels to enhance the flexibility and client rates from various funding sources. The company seeks to cater to different clients' needs and preferences, ultimately improving accessibility to its products, services, and then by driving growth of our businesses. From our product service offerings, we are committed to refining and upgrading our comprehensive solutions to improve customer satisfaction. We integrate the personalized learning data across all learning scenarios. Our extensive learning resources support personalized products that significantly help our partner schools with establishing results, providing valuable references for potential users. Our platform currently has 450,000 active students engaging in daily coursework, with a total of 45 million completed homework assignments, reflecting an increase of 36% and 30% respectively compared to the previous quarter. A semester comparison revealed that students and teachers using our solutions outperformed the peers or the class groups that did not. The data also shows the average active teacher uses our solutions for five classes or homework assignments every week. This is highly active among English teachers. In this quarter, we further refined and upgraded the examination and grading products without improving grade efficiency and expanding the dimension of student performance analysis. In the teacher research aspect, we have strengthened our support for performance analysis that addresses common mistakes. The continuous optimization of personalized learning products and error correction functionalities ensures broader coverage to accommodate diverse learning scenarios, effectively securing personalized learning outcomes. Leveraging by consolidated classroom resources, instructional materials are organized, wider distribution, improving supplementary teaching to meet both common and individual student needs. Consequently, it helps students to tackle problems in self-directed learning process while fostering synergies between supplementary teaching and independent learning. The company is always dedicated on delivering premium learning products and services, continuously evolving our teaching and learning SaaS solution, expanding customer base to enhance efficiency, ensuring high quality development, and fostering individual growth. Now I will turn the call over to Lara to walk you through our financial performance. Thanks.
Lara Zhao: Thanks, Michael. Thank you, everyone, for joining the call. I will walk you through our financial and operating results. Please note that all financial data I talk about will be presented in RMB terms. I would like to remind you that the quarterly results we present here should be taken with care and referenced to our potential future performance are subject to potential impacts from seasonality and one-off events, as a result of the series of regulations introduced in 2021 and corresponding adjustments to our business model, organization, and workforce. In the third quarter of 2024, we recorded net revenues of RMB59.6 million compared with RMB45.1 million in the third quarter of 2023, representing a 32.2% increase on a year-over-year basis. Net loss on a GAAP basis for the third quarter of 2024 was RMB17.4 million compared with RMB72.9 million in the third quarter of 2023, representing a decrease of 76.1% year-on-year, marking a consistent trend of narrowing losses over the past three consecutive quarters. The adjusted net loss non-GAAP for the third quarter of 2024 was RMB5.7 million compared with adjusted net loss non-GAAP of RMB53.7 million in the third quarter of 2023, a decrease of 89.5% year-on-year. Gross margin for the third quarter of 2024 was 60.9% compared with 54.1% in the third quarter of 2023. As of September 30, 2024, we have cash reserves of RMB339.7 million on our balance sheet. Next, I will go through our third quarter financials in greater detail. Net revenues for the third quarter of 2024 was RMB59.6 million, representing a year-over-year increase of 32.2% from RMB45.1 million in the third quarter of 2023. This was mainly due to the increase in number of teaching and learning SaaS contracts and recurring revenue generated from ongoing projects. Cost of revenues for the third quarter of 2024 was RMB23.3 million, representing a year-over-year increase of 12.5% from RMB20.7 million in the third quarter of 2023, which was mainly due to the increase in project deliveries for our teaching and learning SaaS offerings during the quarter. Gross profit for the third quarter of 2024 was RMB36.3 million, compared with RMB24.4 million in the third quarter of 2023. Gross margin for the third quarter of 2024 was 60.9% compared with 54.1% in the third quarter of 2023. Total operating expenses for the third quarter of 2024 was RMB58.0 million, including RMB11.7 million of the share-based compensation expenses, representing a year-over-year decrease of 43.7% from RMB103.1 million in the third quarter of 2023. Loss from operations for the third quarter of 2024 was RMB21.6 million, compared with RMB78.7 million in the third quarter of 2023. Loss from operations as a percentage of net revenues for the third quarter of 2024 was negative 36.3% compared with negative 174.4% in the third quarter of 2023. Net loss for the third quarter of 2024 was RMB17.4 million, compared with net loss of RMB72.9 million in the third quarter of 2023. Net loss as a percentage of net revenues was negative 29.2% in the third quarter of 2023, compared with negative 161.6% in the third quarter of 2023. Adjusted net loss non-GAAP for the third quarter of 2023 was RMB5.7 million, compared with adjusted net loss non-GAAP of RMB53.7 million in the third quarter of 2023. Adjusted net loss non-GAAP as a percentage of net revenues was negative 9.5% in the third quarter of 2024, compared with negative 119.1% of adjusted net loss non-GAAP as a percentage of net revenues in the third quarter of 2023. Please refer to the table captioned reconciliations of non-GAAP measures to the most comparable GAAP measures at the end of this press release for reconciliation of net loss under U.S. GAAP to adjusting net loss non-GAAP. Cash and cash equivalents and term deposits were RMB339.7 million as of September 30, 2024, compared with RMB476.7 million as of December 31, 2023. Moving forward, we will enhance our core business and explore new growth opportunities by prioritizing operational efficiency, sustainability, and innovation. Our aim is to deliver competitive, high-quality education solutions that meet customer needs and contribute to regional educational development. By embracing digital learning methods, we seek to enhance efficiency, ensure quality, and foster individual growth while delivering long-lasting value for our customers and shareholders. With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A 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. That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.