Q1 2023 17 Education & Technology Group Inc Earnings Call

Participants

Andy Chang Liu; Founder, Chairman & CEO; 17 Education & Technology Group Inc.

Lara Zhao; IR Manager; 17 Education & Technology Group Inc.

Michael Chao Du; CFO & Director; 17 Education & Technology Group Inc.

Presentation

Operator

Good evening, and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's First Quarter 2023 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded. I'll now turn the meeting over to your host for today's call, Ms. Lara Zhao, 17EdTech's Investor Relations Manager. Please proceed, Lara.

Lara Zhao

Thank you, Operator. Hello, everyone, and thank you for joining us today. Our earnings release was distributed earlier today and is available on our IR website. Joining us today are Mr. Andy Liu, Founder, Chairman and Chief Executive Officer; and Mr. Michael Du, Director and Chief Financial Officer. Andy will walk you through our latest business performance and strategies followed by Michael, who will discuss our financial performance and guidance. They will be available to answer your questions during the Q&A session after their prepared remarks.
Before we begin, I'd like to remind you that this conference call contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known, 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, except as required under applicable law.
I will now turn the call over to our Chairman and Chief Executive Officer to review some of our business development and strategic direction. Andy, please go ahead.

Andy Chang Liu

Thank you, Lara. Hello, everyone. Thank you all for joining us on our first quarter 2023 earnings call. Before we begin, I would like to mention that the financial information and non-GAAP numbers in the release are presented on a continuing operation basis, and all numbers are based on RMB unless otherwise stated.
Before we go into the details, let me provide you with the quarter's business updates and financial performance across our business lines. The COVID outbreak in China in the fourth quarter of 2022 caused delays in the bidding delivery processes of our major products, which adversely affected our financial performance in the last 2 quarters. However, our in-school SaaS business continues to advance beyond the financial results might indicate.
During the quarter, we continued to explore various business models for growth, constantly developing and refining our offerings to meet the demand of regional regular use and promoting the signing and delivery of each project. At the same time, we actively expanded our distribution network and enhance our operational efficiency. We responded to challenges in the new environment through diversified distribution channels and flexible financial arrangements. As a result, our business maintained its momentum and earned recognition from our customers beyond that the financial statements might indicate -- beyond what the financial statements might indicate.
In the past quarter, the impact of various pandemic containment measures were lifted across China. We saw business activities and projects relevant to our business returning to normal. The demand for our teaching and learning SaaS offerings is guided by the Chinese government's long-term policies and founded by dedicated government budgets. We believe this creates a real opportunity for us to grow in this uncertain environment.
We have made steady progress in our in-school teaching and learning SaaS business during the first quarter of 2023. Despite the fact that the bidding and delivery of some of our major products were delayed and our financial results were correspondingly affected.
Part one, in-school teaching and learning SaaS business.
Several of our key project original scheduled for the fourth quarter of 2022 were delayed due to the COVID outbreak. However, through the joint efforts of our dedicated team, significant progress was made on these key projects in the first quarter of 2023.
Notably, we won the RMB 116 million smart-pen and intelligent homework-based education digital transformation project in Shanghai Minhang District. We have complemented the signing of the contract, and delivery has already started as of today. This represents a milestone in our company's development and showcases our ability to provide industry-leading total solutions for one of the most demanding regions in China. We have received significant inbound inquiries about this product and our offerings from various education bureaus and regional distributors.
Xicheng District cloud classroom bid won and signed. On April 3, we won the bid for the cloud classroom evaluation system project in Beijing Xicheng District with a contract value of RMB 20.22 million. This remarkable achievement closely follows our successful bid for the smart-pen and intelligent homework project in Shanghai Minhang District in March of this year. It further reinforces the widespread recognition of the high-quality and diverse application of our teaching and learning SaaS offerings for China's educational digital transformation. The cloud classroom evaluation system project is to be implemented across 41 schools in Xicheng District, leveraging our 1 teaching 1 learning intelligence education platform and smart-pen technology. It enables the collection and analysis of interaction data between teachers and students during and after classes. This allows for comprehensive improvement of the overall quality of classroom instruction, ongoing enhancement of the regional curriculum evaluation system and the refinement of educational content and approaches.
Product and service portfolio iteration. From a product and service offerings perspective, the company is committed to continually refining and enhancing our product and service portfolio to cater to needs for a solution that can achieve regular use in major teaching and learning scenarios. As a result, we have witnessed a constant improvement in the overall product experience.
Moreover, our module-based SaaS products have undergone a series of continuous optimization and iterations, propelling them to the forefront of the front market. These offerings have gathered widespread recognition and high praise from our customers as their top solution. Throughout the reporting periods, we made efforts to optimize and iterate our product and service portfolio.
With a particular emphasis on developing SaaS-based system and construction and curtailing the user experience, we implemented updates to the core functionalities of our SaaS operations, resulting in noticeable improvements in our product experience indicators. Consequently, we observed a significant increase in user activity and retention rates, reflecting the growing satisfaction and engagement of our customer base.
We are also implementing measures to ensure a more constant delivery and service experience as well as managing associated expenses.
Ongoing hardware optimization. Meanwhile, we are continuously enhancing the core functionalities of our proprietary smart-pen to achieve a better user experience and additional application cases, providing an unparalleled user experience in our comprehensive internal business tests.
The regular writing performance of our in-house developed those [matrix spend] has complemented the testing period and expected to enter mass production in the fourth quarter of 2023 to further enhance the hardware performance of our total solutions.
Additionally, the company is actively exploring various use cases with AI plus education in our businesses, with the great potential from integrating the latest AI technology with what we have committed in the space, creating novel applications and improving operational efficiency.
During the quarter, the Ministry of Education held World Digital Education Conference in Beijing. Representatives from over 130 countries and regions worldwide registered to attend the meeting. With 100 of regional Chinese education bureaus invited to listen and exchange with industry peers and at educational authorities, 17EdTech was honored to be invited as one of the only 2 smart educational technology service providers to present at this prestigious event.
We showcased our industry-leading teaching and learning SaaS offerings with application cases in multiple leading cities in the education space such as Beijing and Shanghai. Visitors were captivated by the professionalism and efficiency of our products and technical services.
Our intelligent teaching and learning solutions left a lasting impression on attendees and received broad recognition from local educational authorities.
Part two, other educational service business. In terms of other educational services business, we offer personalized self-learning products, membership services and a range of digital products and services designed especially for students.
Our in-house developed personalized self-directed learn products address the unique challenges associated with personalized learning in school. This empower students to tailor their learning strategies based on their unique interest, abilities, learning styles and goals. By providing a curated selection of learning content and styles that align with their progress, students can choose the most fitting resources to support their educational journey. Our portfolio includes digital tools such as direction books, personalized experience book, which have proven instrumental in enabling students to excel in personalized learning. The demand for these products is highly dependent on the regular environment and the provision of completing services.
Moving forward, we remain committed to exploring educational products and services that comply with regulatory requirements. We still consistently optimize and iterate our offerings in response to evolving market trends and the changing needs of our valued customers in our other educational service business.
Now I will turn the call over to Michael, our CFO, to walk you through our latest financial performance. Thank you.

Michael Chao Du

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 based in RMB terms.
I would like to remind you that the quarterly results we present in here should be taken with care in reference 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 adjustment to our business model, organization and workforce.
Our revenue and gross profit in the first quarter of 2023 were impacted due to the delay in the bidding and delivery of our several projects. However, the recent win of major projects have marked another key milestone in the company's new business strategies. These projects are expected to be delivered gradually over the upcoming quarters and reflected in our financial statements.
As of March 31, 2023, we have cash reserves of RMB 639 million on our balance sheet, providing us with sufficient funds for future development.
Next, I will go through our first quarter financials in greater detail.
Our net revenues for the first quarter of 2023 were RMB 9.3 million, representing a year-over-year decrease of 96% from RMB 233.4 million in the first quarter of '22. Our revenues are recognized based on delivery and service providers of our projects, and they were delayed by the significant -- delayed in the bidding and delivery process of our major projects, which were affected by the COVID outbreak in the fourth quarter 2022.
Our cost of revenues for the first quarter of 2023 was RMB 7 million, representing a year-over-year decrease of 92.4% from RMB 91.8 million in the first quarter of 2022, which was largely in line with the decrease in our revenues.
Gross profit for the first quarter of 2023 was RMB 2.3 million, representing a year-over-year decrease of 98.4% from RMB 141 million in the first quarter of 2022.
Gross margin for the first quarter of 2023 was 24.4% compared with 60.7% in the first quarter of 2022.
Total operating expenses for the first quarter of 2023 were RMB 106.3 million, representing a year-over-year decrease of 37.8% from RMB 170.8 million in the first quarter of 2022.
Loss from operations for the first quarter of 2023 was RMB 104 million compared with RMB 29.1 million for the first quarter of 2022. Loss from operations as a percentage of net revenues for the first quarter of 2023 was negative 1,121.8% compared with negative 12.5% in the first quarter of 2022.
Net loss for the first quarter of 2023 was RMB 92.5 million compared with net loss of RMB 24.8 million for the first quarter of 2022. Net loss as a percentage of net revenues was negative 997.9% in the first quarter of 2023 compared with negative 10.6% in the first quarter of 2022.
Adjusted net loss on a non-GAAP basis for the first quarter of 2023 was RMB 64 million compared with adjusted net income of RMB 9.9 million in the first quarter of 2022.
Please refer to the table captioned of "Reconciliations of non-GAAP measures to the most comparable GAAP measures" at the end of the press release for a reconciliation of net loss under U.S. GAAP to adjusted net income or loss on a non-GAAP basis.
Looking ahead, we are optimistic about industry opportunities and the competitiveness of our teaching and learning SaaS offerings, and we are confident our financial performance will recover as our major winnings are being delivered to our clients.
With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session. Thanks.

Question and Answer Session

Operator

(Operator Instructions) Thank you. We have no questions. I'll now turn the conference back to Ms. Lara Zhao for closing remarks.

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 participating. You may now disconnect.