Earnings call: 17EdTech reports strong Q2 revenue growth amid challenges

17EdTech, a leading provider of educational technology solutions, has reported a significant quarter-to-quarter revenue growth of 165% in the second quarter of 2024. The company’s Chief Financial Officer, Michael Du, highlighted the robust progress in the core business, driven by expansion and contract winnings in new potential areas. Despite the impressive top-line growth, 17EdTech still faces challenges, with a net loss on a GAAP basis, although the loss continues to narrow when compared with the same period last year.

Key Takeaways

• 17EdTech achieved a 165% quarter-to-quarter revenue growth.
• Gross margin decreased to 16.0% in Q2 2024 from 48.3% in Q2 2023.
• Net loss on a GAAP basis narrowed year-over-year.
• The company maintains a strong cash reserve of RMB410.7 million.
• 10 projects are set for renewal in September, with a retention rate of over 150%.
• 17EdTech has over 330,000 active student users on its platform.

Company Outlook

• 17EdTech is actively innovating and optimizing products to strengthen core competitiveness.
• The company aims to contribute to China’s educational digital transformation.
• A share repurchase program has been renewed, authorizing up to $10 million of repurchases.

Bearish Highlights

• Gross margin significantly declined compared to the same quarter last year.
• The company recorded an adjusted net loss non-GAAP for the second quarter of 2024.
• Net loss as a percentage of net revenues increased year-over-year.

Bullish Highlights

• User engagement and subscription retention rates have shown steady improvement.
• The company has expanded its sales network, now collaborating with over 500 strategic partners.
• New strategic partnerships are expected to enhance market presence and increase market share.

Misses

• Despite revenue growth, net losses continue, indicating ongoing financial challenges.
• The company’s gross profit and gross margin have both seen a decrease from the previous year.

Q&A Highlights

• No questions were asked during the Q&A session.

In summary, 17EdTech continues to navigate the competitive educational technology landscape with a focus on innovation and market expansion. The company’s financial performance shows strong revenue growth but is tempered by a decrease in gross margin and continued net losses. With a substantial cash reserve and strategic initiatives in place, 17EdTech remains committed to improving its offerings and reinforcing its position in the market.

InvestingPro Insights

17EdTech’s recent financial performance presents a mixed picture, with impressive revenue growth but continued challenges in profitability. To provide further context, let’s delve into some key metrics from InvestingPro and consider a couple of InvestingPro Tips that could be relevant for investors evaluating the company’s prospects.

InvestingPro Data shows that 17EdTech has a market capitalization of 10.55 million USD, reflecting its size and market value within the educational technology sector. The company’s Price / Book ratio, as of the last twelve months leading up to Q1 2024, stands at 0.16, which could indicate that the stock is trading at a low multiple of its book value. This is a metric often looked at by value investors to assess if a company is potentially undervalued.

However, the company’s revenue growth presents a contrasting picture. While there was a significant quarterly increase, the last twelve months as of Q1 2024 saw a revenue decline of 39.0%. This suggests that despite the recent surge, the company has faced challenges in maintaining consistent revenue growth over the longer term.

In terms of profitability, 17EdTech’s operating income margin for the same period was deeply negative at -161.14%, highlighting operational challenges that have impacted profitability.

InvestingPro Tips for 17EdTech include the following:

1. High shareholder yield: This suggests that 17EdTech may be returning a good amount of capital to shareholders relative to its share price, which can be appealing to investors looking for income as well as growth.

2. Trading at a low Price / Book multiple: As mentioned earlier, the company’s low Price / Book ratio could attract investors seeking undervalued stocks, especially if they believe in the company’s potential to turn around its financial performance.

For those interested in a deeper analysis, there are additional InvestingPro Tips available at which provide more nuanced insights into 17EdTech’s financial health and stock performance.

The financial data and tips provided here can help investors gauge whether 17EdTech’s recent revenue growth is sustainable and whether its stock is a potential value play or if the operational challenges outweigh the positive aspects of its financial performance.

Full transcript – 17 Education Technology Group Inc (YQ) Q2 2024:

Operator: Good evening and good morning, ladies and gentlemen, and thank you for standing by for 17EdTech’s Second Quarter 2024 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. 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 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 and 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 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. For the information regarding these and other risks, uncertainties, and factors, it’s 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 developments and strategic direction. Michael, please go ahead.

Michael Chao Du: Thank you, Lara. Hello, everyone. Thank you all for joining us on our second quarter of 2024 earnings conference 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 latest business update. In the second quarter, we are delighted to announce that the company has achieved a robust progress in our core business, with an impressive top-line growth of 165% quarter-to-quarter revenue growth, driven by significant expansion and contract winnings in new potential areas. As we optimize our operational efficiency, operational loss has shown a diminishing trend in the first half of 2024. Net loss on a GAAP basis continues to narrow for the first half of 2024, compared with the same period last year. As we innovate and provide high-quality, efficient educational solutions, we have effectively implemented personalized teaching and learning for our broader audience in the evolving digital learning landscape. Our innovative high-quality data-driven SaaS offerings are delivering substantial assistance in promoting trends in our partner schools that are positively associated with academic improvements. Examples including increased homework and exercise completion rates, teachers’ grading rates, and students’ correction rates. Comparisons between students using and those not using our solutions within the same school after semester also noted better academic performance of the students and teachers who use our solutions. During the quarter, we continue to maintain a gross momentum in user engagements for subscription modes of our comprehensive solutions on an expanded user base. For additional customer groups, including both public and private ones, we are glad to see the operating metrics such as subscription retention rate, utilization rates remain steadily improved in existing schools, with significant results achieving attracting new customers and expanding potential service scope. 10 projects are due for renewing in September this year. Out of these projects, a substantial portion of them have already renewed their contract with us, with some of them subscribing for more participating students, which leads to effective retention rates of more than 150%. Such continuous renewal, expansion of student coverage within existing schools, as well as purchase of additional value-added services and products, such as learning pads, are expected to increasingly improve our revenue stream and sales efficiency. Our sales network has also deepened as the number of schools purchase our solutions continue to increase. Currently, we are collaborating with more than 500 strategic partners to distribute our offerings in over 95 cities across 27 provinces. In this quarter, we have initiated a strategic partnership with two major local distributors in Qingdao, Shandong Province, aiming to extend our distribution network and student-rich to cover more customers throughout our modular solutions. We expect the collaboration will enhance our market presence and boost our competitive edge in the region, leading to an increased market share, possible new revenue opportunities and growth. During the quarter, our teaching and learning SaaS business for district-level projects exhibit this consistent growth progress, continuing to generate revenues through successful delivery and new project wining. Our district-level project in Beijing, Xicheng, and that we newly acquired in May, has completed phased delivery and recognized revenue. Furthermore, as one of our key district-level initiatives in Shanghai, from September 2023 to June 2024, remarkable achievement has been observed. Statistics have revealed that our smart pen and paper have been in daily use in Minghang district of Shanghai. They have completed over 23 million homework assignments with a total of 460,000 class hours and 18,000 academic evaluations and assessment practices, which covers 2,157 classes and more than 84,000 students and 4,500 teachers across 110 public schools. Additionally, as a deep cultivator in the dot matrix pen application industry, the company actively takes the lead in formulating the country’s first dot matrix pen group standard, leveraging technological expertise and innovation capabilities to fully participate and firmly consolidate industry recognition and strongly promote industry technological progress and innovative practice. In aspects of product and service offerings, our commitment to product upgrades and customer satisfaction has driven us to continuously refine our offerings in aligning with user preference. We have integrated personalized learning data across all learning scenarios. Our comprehensive solutions encompassing learning resources, review of common issues, personalized recommendations, tailored homework guidance, data feedback loops, comprehensive assessment and evaluations, and reliable services. It ensures a holistic approach to resolving individual learning obstacles and guarantees the effective implementation of personalized learning strategies. Presently, our platform has 330,000 active student users engaging in daily coursework with a cumulative of more than 35 million completed homework assignments. The teaching application products based on regular data collection has clearly demonstrated the value artifacts in enhancing learning outcomes within our partner schools, resulting in their dynamic improvements. Now I will turn the call over to Lara, to walk you through our latest financial performance. Thank you.

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 referenced to our potential future performance are subject to potential impacts from seasonality in one of the 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 of 2024, we recorded net revenues of RMB67.5 million compared with RMB25.5 million in the first quarter of 2024, representing 165% of the increase on a quarter-on-quarter basis. Net loss on a GAAP basis for the second quarter of 2024 was RMB55.7 million compared with RMB47.9 million in the second quarter of 2023. The adjusted net loss non-GAAP for the second quarter of 2024 was RMB42.6 million compared with adjusted net loss non-GAAP of RMB28.6 million in the second quarter of 2023. Gross margin for the second quarter of 2024 was 16.0% compared with 48.3% in the second quarter of 2023. As of June 30, 2024, we have cash reserves of RMB410.7 million on our balance sheet, providing sufficient funds for future development. Next, I will go through our second quarter financials in greater detail. Net revenues. Net revenues for the second quarter of 2024 was RMB67.5 million, which remained relatively stable compared with RMB69.2 million in the second quarter of 2023. Cost of revenues for the second quarter of 2024 was RMB56.7 million, representing a year-over-year decrease of — an increase of 58.6% from RMB35.8 million in the second quarter of 2023, which was mainly due to the increase in project deliveries of our teaching and learning SaaS offerings during the quarter. Gross profit for the second quarter of 2024 was RMB10.8 million compared with RMB33.5 million in the second quarter of 2023. Gross margin for the second quarter of 2024 was 16% — 16.0% compared with 48.3% in the second quarter of 2023, which was mainly due to the higher proportion of lower margin mixed deliveries in our teaching and learning SaaS project during the quarter. Total operating expenses for the second quarter was RMB71.0 million, including RMB13.1 million of share-based compensation expenses, representing a year-over-year decrease of 22.3% from RMB91.3 million in the second quarter of 2023. Loss from operations. Loss from operations for the second quarter of 2024 was RMB60.2 million, compared with RMB57.8 million in the second quarter of 2023. Loss from operations as a percentage of net revenues for the second quarter was negative 89.2%, compared with negative 83.5% in the second quarter of 2023. Net loss for the second quarter of 2024 was RMB55.7 million, compared with net loss of RMB47.9 million in the second quarter of 2023. Net loss as a percentage of net revenues was negative 82.5% in the second quarter of 2024, compared with negative 69.2% in the second quarter of 2023. Adjusted net loss, non-GAAP, for the second quarter of 2024 was RMB42.6 million, compared with adjusted net loss of RMB28.6 million in the second quarter of 2023. Adjusted net loss, non-GAAP, as a percentage of net revenues was negative 63.1% in the second quarter, compared with negative 41.2% of net revenues of adjusted net loss as a percentage of net revenues in the second 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 and the U.S. GAAP to adjusted net loss non-GAAP. Cash and cash equivalents and term deposits. Cash and cash equivalents and term deposits were RMB410.7 million as of June 30, 2024, compared with RMB476.7 million as of December 31, 2023. In addition, we would like to announce that the company’s Board of Directors renewed our share repurchase program on September 4th, 2024, under which the company is authorized to repurchase up to $10 million of company’s ADS or common shares in the next 12 months. The company’s Board of Directors will review the share repurchase program periodically and may authorize adjustment of its term and size. Looking to the future, we will continue to explore and innovate. We will cultivate product optimization and channel innovation to further strengthen our core competitiveness. Our aim is to provide competitive, personalized educational overall solutions and high quality educational products and services that enhance effectiveness, contributing to China’s educational digital transformation and sustainable development. With that, that concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

Operator: I’m showing no question at this time. And I’ll turn the conference back to Ms. Lara Zhao for closing comments.

Lara Zhao: Thank you, operator. In closing, on behalf of 17EdTech’s management team, we would 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 for your participation in today’s conference. This does conclude the program. You may now disconnect.

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