17 Education & Technology Group Inc. (YQ) Q4 2021 Earnings Report, Transcript and Summary

Good evening and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] 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 Du, CFO of 17EdTech. Please proceed, Michael.

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 Mr. 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 would 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 and 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 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 filing with the U.S. Securities, SEC. The company does not undertake any obligation to update any forward-looking statements as a result of new information, certain 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.

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 continued to drive revenue growth despite the regulatory changes. Second, we managed to significantly narrow our net loss on a GAAP 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 business allowed us to maintain a healthy cash balance for our business transition and growth. Now let me go into more details. Thank 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 compensation. 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 primarily a result determined in the rapid formation of the new business strategy, the corresponding executions 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 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 had to usually 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 authority's schools, teachers and students over the past decade. We have adapted our business and organization to focus on 2 key business areas. First, for our in-school business, we launched our new teaching and learning class 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 assignment 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 product utilizes 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 an annual budget 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 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 SaaS 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 who are selected per period. This is very powerful for school principals to manage their 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 brand 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. There's this 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 SaaS 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 continued progress of our various projects and pilot programs. A recent speech by China's Minister of Education, Mr. Huai Jinpeng, has reiterated the emphasis of digital education strategy with a need for application focus and service-prioritized principle. Our in-school SaaS offering clearly seized this principle, where our comprehensive service-packed hardware, 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 need 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, Minhang District, Beijing's Xicheng District which are among the 10 case studies selected by the Ministry of Education General Office for the implementations of their plan. Projects of different scales are already being implemented using our teaching and learning SaaS products across more than 50 cities. Continuous progress was seen over the past few months in these cities and districts in which we are operating strategically. In the fourth quarter of 2021, our company won the Builder for the Intelligence, Homework and Accurate Teaching Project of Shanghai Minhang 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 SaaS offerings. Another recent example was the first classroom launched by Shanghai Minhang 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 model standards based on our technology solutions and content inputs from People's Education Press and China Central Television, both of which are our strategic partners. This pioneer's course format, combining the latest technology and content, was reported by CCTV Channel 1, China Daily and People's Daily and other major media and has gained interest and inquiries from various district education bureaus and schools on the potential rollout of similar courses or formats. At the same time, we are also exploring a personalized and directed learning products for Chinese families. This product is in response to the Chinese government's promotion of applying technology to advance education digitalization and improved learning efficiency. It leverages our high-quality educational content, understanding as homework an example, 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 students 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 customer feedback. As a result of the previously mentioned new business initiatives and development, the balance of our deferred revenue and customer advances of December 31, 2021, reached 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 reemphasize 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 GAAP 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.

Thanks, Andy, and thank you, everyone, for joining the call. I will now walk you through our financial and operating results. Please note that all financial data I talk about will be presented in RMB terms. However, I would like to note that the publication and enforcement of the premium and applicable rules significantly impacted our businesses. We have adopted significant change in our business model, as shared by Andy earlier, and the online K-12 after-school tutoring services that generate the vast majority of our revenue previously was ceased by the end of 2021. Therefore, I would like to remind everyone that the quarterly results we presented here should be taken with care if users reference for our 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 GAAP basis in the fourth quarter of 2021 was a key milestone for the company. It was the result of a clearly defined new business strategy for future growth and a swift adjustment by our organization to accommodate these strategies and to improve operational efficiency. We are happy to see the quick business results from the implementation of our new business strategies. The balance of deferred revenue and customer advances reached RMB 243.9 million by December 31, 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 outlook starting this quarter, which I will share in a while. Let's dive into our financial results of the fourth quarter of 2021 and 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, an increase by 68.8% 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 USD 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. Non-GAAP adjusted net income, which excludes 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. Non-GAAP adjusted net loss in 2021 was RMB 1,246.7 million, compared with RMB 983.9 million in 2020. Non-GAAP adjusted net income as a percentage of net revenue was positive 3.1% in the fourth quarter of 2021 compared with negative 27.7% in the fourth quarter of 2020. It was negative 57.1% for the full year 2020 (sic) [ 2021 ], 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 or USD 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. Gross profit was RMB 351.4 million, representing a year-over-year increase of 12.2% from RMB 313.2 million in the fourth quarter of 2020. The 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 a year-over-year decrease of 43.8% from RMB 676.4 million in the fourth quarter of 2020. Sales and marketing expenses were RMB 104.1 million, including RMB 7.1 million of share-based compensation expenses, representing a year-over-year decrease of 57.9% and from RMB 247.1 million in the fourth quarter of 2020. The decrease was primarily due to the reduction of promotional activities in line with the change in the regulatory environment. R&D 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 changes and organization optimization. G&A expenses were RMB 83.1 million, including RMB 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 for the -- were 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, right-of-use assets and rental deposits for the fourth quarter of 2021 were RMB 33.6 million compared with 0 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 change in regulatory environment and the company's business model and financial performance. Loss from operations was RMB 28.9 million compared with RMB 363.2 million in the fourth quarter of 2020. Losses from operations as a percentage of net revenues was negative 5.3%, significantly narrowed from negative 74.6% in the fourth 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 nil, or 0, as a result of the cessation of our online K-12 tutoring services. The remaining deferred revenue and customer advances 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 estimates, 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 estimated 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 the business outlook for the first quarter of 2022 from a profitability perspective, although we cannot be certain we will record GAAP net income, the company is expected to achieve positive adjusted net income on a GAAP 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. Thanks.

[Operator Instructions] And I'm showing no questions. This concludes today's conference call. Thank you for participating, and you may now disconnect.