17 Education & Technology Group Inc. (YQ) Q1 2022 Earnings Call Transcript – The Motley Fool

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17 Education & Technology Group Inc.(YQ -21.31%)Q12022 Earnings CallJun 09, 2022, 9:00 p.m. ET

Operator

Good evening, and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech's first quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the management's prepared remarks, there will be a question-and-answer session. [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 -- Investor Relations Manager

Thank you, operator. Hello, everyone, and thank you for joining us today. Our new earnings release was distributed earlier today and is available on our IR website. Joining us today are Mr.

Andy Chang Liu, founder, chairman, and chief executive officer; and Mr. Michael Chao Du, director and chief financial officer. Andy will go 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 the 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 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 or 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 -- Founder, Chairman, and Chief Executive Officer

Thank you, Lara. Hello, everyone. Thank you for joining us on our first quarter 2022 earnings call. We are pleased to report solid performance in the first quarter.

But before we dive into the details, let me provide some quick highlights. First, net revenue was 233.4 million, 11.1% higher than the top end of the estimates provided in March. Second, our operational efficiency continued to improve at the same time resulting in a substantially narrowed GAAP business net loss compared with the same period in 2021, and this allowed us to achieve a positive adjusted net income for the second quarter in a row. Third, our new business strategies continue to gain momentum.

We saw new opportunities as the COVID-19 pandemic and favorable government policy helped evolve market needs and drove new demand for our service. Now let me go into some details. We delivered solid operational and financial results. Net revenue reached RMB 233.4 million, which were 11.1% higher than the high end of our guidance provided in the last quarter.

Again, it is worth mentioning that this was achieved without any legacy online K-12 after-school tutoring services revenues. Our profitability continues to improve as we continue to enhance our cost structures and operational efficiency. For the first quarter, operating expenses decreased by 82.1% year over year. And as a percentage of the revenue as well, although we recorded a net loss of RMB 24.8 million on a GAAP business in the first quarter of 2022, we achieved RMB 9.9 million of adjusted net income compared with an adjusted net loss of RMB 588.8 million in the first quarter of 2021.

For our teaching and learning SaaS business, we continue to see positive trends and demand for our offerings. Earlier this year, the Ministry of Education clearly put forward the need to speed up the implementation of digitalizing the education industry on March 1, and national public service platform for Smart Education in primary and secondary schools was officially launched. All of these signaled that the digital transformation in Chinese Education has entered a new area where its focus is centered around teaching and learning scenarios and emphasized services and data application. In May, the Beijing Municipal Education Commission issued the document called Opinions on further purchasing quality external education resources for compulsory education explicitly supporting the procurement of third-party services to enrich the education resources for public schools, including curriculum resources, management services and family education, and guidance services.

During the last few months, China has experienced a number of regional COVID outbreaks. During these outbreaks, we have seen additional demands and opportunities for education bureaus and schools for our teaching and learning SaaS offerings, especially online homework modules, to talk with peers where physical offline schooling was not possible. A number of districts and cities in economically developed regions has already in detailed discussions with us on the procurement of our online homework SaaS component. Specifically, all elementary and secondary schools in Shanghai moved to online learning starting in March.

We have developed a multichannel integrated online education platform, which combined with the aerial classroom, live broadcast interactive platform, and Minhang Smart Homework feature based on our existing modules for Minhang District, Shanghai, delivering a well stock solution that solves multiple problems. Recently, the National Education Resources and Public Services System Alliance also officially announced the results of the three classrooms' application case collection. Among them, the attempt made by [Inaudible] attack using technology to enhance balanced education was successfully selected as a National Education three classrooms' innovative application case. Our pilot product of model, school, and district continue to progress in the generous data insights that brought recognition by schools and educational authorities.

During the quarter, we officially released the data reports for pilot schools and districts in two districts in Shanghai and several cities in Jiangsu province. They were well recognized by [Inaudible] local education authorities and we believe to be a high value of facilities, personalized teaching, and learning process. Xinsong Middle School in Minhang District, Shanghai School serviced by us has been recommended by local authorities as an excellent online teaching case for its innovative automatic homework review functions. Another key component of our teaching and learning SaaS offering.

Our proprietary SmartPen [Inaudible] has won the highest honor of the 2022 German Red Dot Award for its humanized design and excellent quality. The Red Dot Award is one of the world's three major design awards and an international recognition of creativity and design. The [Inaudible] SmartPen realizes pen and paper injection through dot-metric technology helping teachers to complete accurate learning data collection and learning diagnosis to facilitate personalized teaching and learning process for teachers and students. It is a combination of online and offline that creates a closed loop for the high-quality homework with personalized homework [Inaudible].

We're also building a nationwide agent network to help reach wider areas to distribute our teaching and learning SaaS offerings. Official partnership agreements were signed with over 50 distribution agents. Among them, they were Intel, Bank of China and CETC, Bank of China, Intel, and [Inaudible]. In the meantime, we are continuously improving our self-directed learning products based on additional students and paper feedback, as well as latest regulatory requirements.

We have also launched an accompanying hardware and enhanced the study experience with our self-directed learning product and the mobile app, leveraging our experiences, technical services, technical reserves, content, and data insights over the year. We are confident and determined to continue to creating value with our new business strategies in the education technology sector. We have a clear strategy to continue to invest into our teaching and learning SaaS business to facilitate education authorities and schools to implement the digital transformation and upgrading of the public Chinese education sector. We will continue to develop digital applications and resources to help improve teaching and learning efficiencies.

For our self-directed learning products, we believe it has captured the needs of a wide range of groups of families in the post double reduction area and has agreed protection. We will continue to improve and adapt our enhanced effectiveness and user experience of our self-directed learning products with more targeted personalization and content enrichment. We will continue our efforts to build our business into a healthy and sustainably growing 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 -- Director and Chief Financial Officer

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. I would like to remind everyone that the quarterly results we present here should be taken with care and references to potential future performance are subject to impacts from seasonality, one-off event as a result of the series of regulations introduced in 2021, and corresponding adjustment to our business model, organization and workforces among others.

The first quarter of 2022 is the first quarter of operations after we officially received our online K-12 school tutoring services and generate revenue purely from our ongoing businesses. We are delighted to report the second consecutive profitable quarter on an adjusted basis, delivering our guidance that we provided earlier. From a top-line perspective, we reported a net revenue of RMB 233.4 million, 11.1% higher than the top end of our estimate provided earlier, and it presented almost 20 times gross from the K-12 after-school tutoring revenue of RMB 11.2 million in the first quarter of 2021. Gross margin was 60.7% this quarter, improving from 60.4% in the first quarter of 2021.

Our operational efficiency continued to improve. Total operating expenses for the first quarter of 2022 decreased to RMB 170.8 million from RMB 953.2 million in the first quarter 2021, representing a year-over-year decrease of 82.1%. Net loss decreased significantly to RMB 24.8 million for the first quarter of 2022 from RMB 659.7 million in the same period of 2021. Net loss as a percentage of revenue was negative 10.6% in the first quarter of 2022, narrowing from negative 139% in the first quarter of 2021.

On an adjusted basis, our adjusted net income, which excludes share-based compensation expenses, was positive RMB 9.9 million for the first quarter of 2022 compared with an adjusted net loss of RMB 659.7 million in the same period of 2021. We continue to see our business progressing toward the right direction with continuous improvement in operational efficiency and profitability. Next, I'll go through our first quarter financials in greater detail. Net revenue were RMB 233.4 million.

If looking from the whole, this represented a year-over-year decrease of 50.8% from RMB 474.2 million in the first quarter of 2021. The decrease was mainly due to the cessation of our online K-12 tutoring services by the end of 2021 to be in compliance with the latest TRC regulations, which prohibit the provision of tutoring services related to academic subjects for K-12 students. However, when compared with the net revenues, excluding those from online K-12 tutoring services of the same period last year, our revenue actually increased significantly from RMB 11.2 million last year to RMB 233.4 million during the same period this year. This represented a growth of nearly 20 times.

The majority of net revenues for the first quarter of 2022 was from the company's personalized self-directed learning products and to a less extent, from our teaching and learning services. The latter has a longer cycle to finish the bidding process and to deliver so that the revenue can be recognized as the majority of the clients were education authorities and public schools. Cost of revenue for the first quarter of 2022 was RMB 91.8 million representing a year-over-year decrease of 51.1% from RMB 187.6 million in the first quarter of 2021, which was largely in line with the cessation of our online K-12 tutoring services under the new regulatory and business environment. Gross profit was RMB 141.7 million, representing a year-over-year decrease of 50.6% from RMB 286.6 million in the first quarter of 2021.

Gross margin for the first quarter of 2022 was 60.7%, improving from 60.4% in the first quarter of 2021. Moving over to the expense side. Total operating expenses were RMB 170.8 million, representing a year-over-year decrease of 82.1% from RMB 953.2 million in the first quarter of 2021. The total operating expenses for the first quarter of 2022 included RMB 34.6 million of share-based compensation expenses.

Sales and marketing expenses for the first quarter of 2022 were RMB 22 million, which included RMB 4 million of share-based compensation expenses. This represented a year-over-year decrease of 96.4% from RMB 613.5 million in the first quarter of 2021. This was mainly due to decrease in promotional cost expenses and advertising expenditure as a result of the changing regulatory environment, as well as staff optimization since the regulatory change to be in line with the business adjustments. R&D expenses were RMB 97.5 million including RMB 7.2 million of share-based compensation expenses.

This represented a year-over-year decrease of 53.6% from RMB 209.9 million in the first quarter of 2021. The decrease was again primarily attributable to staff optimization and expense saving measures in line with the business adjustments. G&A expenses were RMB 51.3 million. This included RMB 23.5 million of share-based compensation expenses, represented a year-over-year decrease of 60.5% from RMB 129.7 million in the first quarter 2021.

The decrease was primarily attributed to staff optimization and expense-saving measures in line with the business adjustment. Loss from operations was RMB 29.1 million compared with RMB 666.6 million in the first quarter of 2021. Loss from operations as a percentage of net revenues for the first quarter of 2022 was negative 12.5%, improving from a negative 140.5% in the first quarter of 2021. Net loss was RMB 24.8 million compared with a net loss of RMB 659.7 million in the first quarter of 2021.

Net loss as a percentage of revenue was negative 10.6% in the first quarter of 2022 compared with negative 139.1% in the first quarter of 2021. Adjusted net income on a GAAP basis was positive RMB 9.9 million compared with an adjusted net loss of RMB 588.8 million in the first quarter of 2021. Adjusted net income as a percentage of net revenue was positive 4.2% in the first quarter of 2022, which substantially improved from negative 124.2% in the first quarter of 2021. With that, I will now provide our business outlook.

Based on our current estimates, total revenues for the second quarter of 2022 are expected to be between RMB 100 million and RMB 120 million. This estimated net revenues for the second quarter of 2022 is expected to be derived entirely from our ongoing businesses after our business transformation and will not include revenues from the legacy online K-12 tutoring services. This estimated range represents a significant increase year over year as compared with the relatively small base of the net revenue generated from online K-12 tutoring services for the second quarter of 2021. The above forecasts reflect 17EdTech's current and preliminary view and is therefore subject to change.

Please refer to the safe harbor statement below for the factors that could cause actual results to differ materially from those contained in any forward-looking statement. With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Operator

Thanks. Totally. We will now begin the question-and-answer session. [Operator instructions] As there are no more questions on the line, I would like to hand the call back to the management for closing.

Lara Zhao -- Investor Relations Manager

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

[Operator signoff]

Duration: 24 minutes

Lara Zhao -- Investor Relations Manager

Andy Chang Liu -- Founder, Chairman, and Chief Executive Officer

Michael Chao Du -- Director and Chief Financial Officer

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17 Education & Technology Group Inc. (YQ) Q1 2022 Earnings Call Transcript - The Motley Fool