Q2 2023 17 Education & Technology Group Inc Earnings Call

Participants

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 Second Quarter 2023 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to 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 financials in more details. 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 Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and it relates 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 factors -- 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 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 for all joining our second quarter 2023 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 basis and in RMB unless otherwise stated. Let me start with our latest business update. During this quarter, we are delighted to see steady progress in the delivery of our key teaching and learning projects and corresponding revenue recognition. We have also been expanding our distribution networks with more regional partners in adopting new models to facilitate further business expansion.
We continue to win new projects over the past quarter. It is also noteworthy that our offerings were enlisted in the National Directory of Intelligent Educational Products and Service Providers recently. It demonstrates industry recognition of our market-leading technology and solutions and our deep-rooted dedication to offering specialized services in education digitalization. Going forward, continuous product development and evolution aimed at further enhancing user experiences and applying the latest artificial intelligence technologies will be our continued focus.
Now let me get into some details. In terms of our in-school teaching and learning SaaS business, the RMB 116 million smart-pen and intelligent homework-based education digital transformation projects in Shanghai Minhang District we won in the first quarter 2023 has started generating revenues in the second quarter of 2023 as the delivery has started. The RMB 20 million Beijing Xicheng cloud classroom evaluation system project has also started generating revenues this quarter. This signifies continued advancement in our company's business progress providing -- proving our delivery capability on a large scale and a new stage of development with our recognized revenue is getting gradually less volatile.
Throughout this quarter, the company has also been actively exploring additional customer groups in addition to education bureaus and public schools. We have been working with private school operators to tap into additional market segments. A number of pilot projects have been signed with a number of reputable, private schools across China and are expected to be implemented over the next few quarters.
Such collaboration is still in early stage but continuous development are expected over the next few quarters. They not only utilize teaching and learning SaaS offerings that we have for public schools but also have various value-added modules schools can choose from based on their specific needs. We see potential in such collaboration as a supplement to our traditional public school offering. These strategic partnerships highlight the recognition of 17 Education's contribution to the digital transformation in China's education sectors not only in the public space but also in the private space.
From a product and service offering perspective, we continue to invest in our product portfolio catering to the comprehensive and scenario-based innovation in teaching and learning as well as our key aims of facilitating regular use in various teaching and learning scenarios from both product and operational enhancement. By enhancing service efficiency and improving product experiences, we have continually raised the bar on user satisfaction resulting in steady growth in key product experience indicators. We are actively innovating and refining our SaaS offerings in addition to fully utilizing the one teacher, one learning SaaS platform for digital application in classrooms, homeworks, examination and education management.
We've broadened our scope to encompass student self-study environment by bridging the gap between classroom instruction and independent learning. We provide more precise, personalized recommendation services for student self-learning, delivering high-quality learning solutions. It is noteworthy that our product was successfully included in National Directory of Intelligent Educational Products and Service Providers, which was announced at the Smart Education Forum hosted by the China Academy of Information and Communications Technology on July 18. This is a strong vote of confidence acknowledging our dedication to offering specialized services in educational digitalization and consistently providing high-quality, market competitive products and solutions.
Today, the Directory included a total of 131 domestic, well-known companies and their smart education solutions. Looking ahead, we will continue to enhance our product and services, utilize AI technologies to improve user experiences and promote sustainable growth. In terms of other educational services business, the company shifted its strategic focus towards teaching and learning SaaS operations. This service is seeing a [diminishing] trend in their contribution to our revenue. The demand for these products is highly dependent on the regulatory environment and provision of competing services.
Moving ahead, we will remain committed to exploring other educational products and services that comply with regulatory environment while keeping a core focus on our teaching and learning SaaS operation. Now I will turn the call over to Lara to walk you through our financial performance. Thank you, Lara.

Lara Zhao

Thanks, Michael, 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. I would like to remind you that the quarterly results we present here should be taken with care. And 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 adjustments to our business model, organization and workforce.
In the second quarter, the company proactively tackled the challenges and seized new opportunities to maintain our growth momentum and secured our competitive edge in the market. The consistent progress made by our new businesses is clearly reflected in our financial performance. Our revenue rapidly rebounding over the past quarter. We recorded net revenue of RMB 69.2 million for the second quarter of 2023 compared with RMB 9.27 million in the first quarter of 2023, representing a 6.5x of increase. The net loss for the second quarter of 2023 was RMB 47.9 million, significantly narrowing from the net loss of RMB 92.5 million in the first quarter of 2023. And adjusted net losses have considerably narrowed moving from a loss of RMB 64 million in the first quarter of 2023 to RMB 28.6 on a non-GAAP basis. This indicates effective cost control measures and an enhancement in operating efficiency.
Furthermore, our gross margin has further improved to 48.3%, recovering to a normalized level. This demonstrates the profitability and resilience of our business model. As of June 30, 2023, we have cash reserves of RMB 586 million on our balance sheet, providing sufficient funds for future development. Next, I will go through our second quarter financials in greater detail.
Our net revenues for the second quarter of 2023 were RMB 69.2 million, representing a year-over-year decrease of 48.1% from RMB 133.5 million in the second quarter of 2022 and a 6.5x increase on a quarter-on-quarter basis compared with first quarter of 2023. This is mainly due to the reduction in net revenues from other educational services as we focused our resources to our core teaching and learning SaaS business.
Our cost of revenues for the second quarter of 2023 was RMB 35.8 million representing a year-over-year decrease of 43.9% from RMB 63.8 million in the second quarter of 2022, which is largely in line with the decrease in the net revenues. Gross profit for the second quarter of 2023 was RMB 33.5 million, representing a year-over-year decrease of 52.0% from RMB 69.7 million in the second quarter of 2022.
Gross margin for the second quarter of 2023 was 48.3% compared with 52.2% in the second quarter. Total operating expenses for the second quarter of 2023 was RMB 91.3 million, including RMB 19.4 million of share-based compensation expenses, representing a year-over-year decrease of 12.1% from RMB 103.8 million in the second quarter of 2022.
Loss from operations from -- for the second quarter of 2023 was RMB 57.8 million, compared with RMB 34.1 million in the second quarter of 2022. Loss of operations as a percentage of net revenue for the second quarter was negative 83.5% compared with negative 25.5% in the second quarter of 2022. Net loss for the second quarter of 2023 was RMB 47.9 million compared with net loss of RMB 26.4 million in the second quarter of 2022. Net loss as a percentage of net revenues was negative 69.2% in the second quarter of 2023 compared with negative 19.8% in the second quarter.
Adjusted net loss, non-GAAP, for the second quarter of 2023 was RMB 28.6 million compared with adjusted net income of RMB 3.6 million in the second quarter of 2022. Adjusted net loss, non-GAAP, as a percentage of net revenues was negative 41.2% in the second quarter compared with 2.7% of adjusted net income as a percentage of net revenues in the second quarter of 2022.
Please refer to the table captioned Reconciliation of Non-GAAP Measures to the Most Comparable GAAP Measures at the end of this press release for a reconciliation of net loss under U.S. GAAP to adjusted net income and loss non-GAAP.
Cash and cash equivalents, restricted cash, short-term investments and term deposits was RMB 585.7 million as of June 30, 2023, compared with RMB 639.5 million as of March 31, 2023.
As we look to the future, the drive towards educational digitalization continues to surge. There is a widespread consensus that deeply integrating information technology into our teaching system will fundamentally revolutionize traditional educational philosophies, models, content and methodologies. Going forward, 17 Education & Technology will persist in leveraging its central strength through a decade of accumulated big data and AI technologies aiming to empower classroom on a large scale and a regular use basis through digital means.
By integrating diverse learning situation data drawn from a variety of scenarios, we aspire to comprehensively establish academic data profiles for students, supporting the digital transformation and high-quality development of regional and school education.
With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Operator

(Operator Instructions) And I'm showing no questions at this time, and I'd like to hand the conference back to Lara Zhao for any further 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.