17 Education & Technology(YQ) - 2023 Q3 - Quarterly Report

Executive Summary & Business Update This section provides an overview of the company's financial performance for Q2 and H1 2023, along with management's strategic commentary Second Quarter 2023 Highlights 17 Education & Technology Group Inc. experienced a 48.1% year-over-year decrease in net revenues, a decline in gross margin, and an expansion of both net loss and adjusted net loss in Q2 2023 | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Net Revenues | 69.2 million | 133.5 million | -48.1% | | Gross Margin | 48.3% | 52.2% | -3.9 pp | | Net Loss | 47.9 million | 26.4 million | +81.4% | | Net Loss as % of Net Revenues | -69.2% | -19.8% | -49.4 pp | | Adjusted Net Loss (non-GAAP) | 28.6 million | 3.6 million (Net Income) | Loss Widened | | Adjusted Net Loss as % of Net Revenues | -41.2% | 2.7% (Net Income) | -43.9 pp | First Half 2023 Highlights The company experienced a significant year-over-year decline in net revenues for H1 2023, coupled with poor gross margin performance and a substantial widening of both net loss and adjusted net loss | Metric | H1 2023 (RMB) | H1 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Net Revenues | 78.5 million | 366.9 million | -78.6% | | Gross Margin | 45.5% | 57.6% | -12.1 pp | | Net Loss | 140.5 million | 51.2 million | +174.4% | | Net Loss as % of Net Revenues | -178.9% | -14.0% | -164.9 pp | | Adjusted Net Loss (non-GAAP) | 92.6 million | 13.5 million (Net Income) | Loss Widened | | Adjusted Net Loss as % of Net Revenues | -117.9% | 3.7% (Net Income) | -121.6 pp | Management Commentary Management expressed satisfaction with the steady progress of core teaching and learning programs, emphasizing distribution network expansion and new business model establishment, while noting industry recognition for product inclusion in national smart education directories and a commitment to AI-driven product development and user experience enhancement, alongside financial improvements including revenue rebound, gross margin recovery, and narrowed losses through cost control - CEO Andy Liu reported stable progress in core teaching and learning programs, confirmed revenue, expanding distribution networks, and new business models to facilitate business expansion[6] - The company's products were included in the National Smart Education Product and Service Provider Directory, signifying industry recognition for its professional services, market-leading technology, and solutions in education digitalization[6] - CFO Michael Du noted that in Q2 2023, the company actively addressed challenges, capitalized on new opportunities, translated newly won projects into operational and financial progress, achieved a rapid revenue rebound, restored gross margin to normal levels, and significantly narrowed both net loss and adjusted net loss[6] Second Quarter 2023 Unaudited Financial Performance This section details the company's unaudited financial results for the second quarter of 2023, covering revenues, costs, margins, operating expenses, and profitability metrics Net Revenues Net revenues for Q2 2023 were RMB 69.2 million, a 48.1% year-over-year decrease but a 6.5x sequential increase, primarily due to resource reallocation towards core teaching and learning SaaS business | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | Q1 2023 (RMB) | YoY Change | QoQ Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Revenues | 69.2 million | 133.5 million | 9.27 million | -48.1% | +650% | - The year-over-year decrease in net revenues was primarily due to the company's strategic focus on core teaching and learning SaaS business, leading to reduced net revenues from other educational services[7] Cost of Revenues Cost of revenues for Q2 2023 was RMB 35.8 million, a 43.9% year-over-year decrease, largely consistent with the decline in net revenues | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Cost of Revenues | 35.8 million | 63.8 million | -43.9% | Gross Profit and Gross Margin Gross profit for Q2 2023 was RMB 33.5 million, a 52.0% year-over-year decrease, with gross margin at 48.3%, down from 52.2% in the prior year period | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Gross Profit | 33.5 million | 69.7 million | -52.0% | | Gross Margin | 48.3% | 52.2% | -3.9 pp | Operating Expenses Total operating expenses for Q2 2023 were RMB 91.3 million, a 12.1% year-over-year decrease, including RMB 19.4 million in share-based compensation expenses, with sales and marketing expenses increasing while general and administrative expenses significantly declined due to business adjustments and personnel optimization | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Total Operating Expenses | 91.3 million | 103.8 million | -12.1% | | Share-based Compensation Expenses | 19.4 million | 30.1 million | -35.6% | Sales and Marketing Expenses Sales and marketing expenses for Q2 2023 were RMB 21.6 million, an 85.2% year-over-year increase, primarily due to a lower base in the prior year period resulting from a one-time reversal of expenses related to the cessation of K-12 online tutoring services | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Sales and Marketing Expenses | 21.6 million | 11.7 million | +85.2% | | Share-based Compensation Expenses | 4.9 million | 3.4 million | +44.1% | - Sales and marketing expenses increased by 85.2% year-over-year, primarily due to a lower base in Q2 2022 which included a one-time expense reversal[11] Research and Development Expenses Research and development expenses for Q2 2023 were RMB 36.8 million, representing a 3.0% year-over-year increase | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Research and Development Expenses | 36.8 million | 35.7 million | +3.0% | | Share-based Compensation Expenses | 6.9 million | 7.2 million | -4.2% | General and Administrative Expenses General and administrative expenses for Q2 2023 were RMB 32.9 million, a 41.7% year-over-year decrease, primarily attributable to personnel optimization following business adjustments | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | General and Administrative Expenses | 32.9 million | 56.4 million | -41.7% | | Share-based Compensation Expenses | 7.6 million | 19.5 million | -61.0% | - The decrease in general and administrative expenses was primarily due to personnel optimization following business adjustments[13] Loss from Operations Loss from operations for Q2 2023 expanded to RMB 57.8 million from RMB 34.1 million in the prior year, with the operating loss as a percentage of net revenues deteriorating from -25.5% to -83.5% | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Loss from Operations | 57.8 million | 34.1 million | +69.5% | | Loss from Operations as % of Net Revenues | -83.5% | -25.5% | -58.0 pp | Net Loss Net loss for Q2 2023 significantly widened to RMB 47.9 million from RMB 26.4 million in the prior year, with net loss as a percentage of net revenues deteriorating from -19.8% to -69.2% | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Net Loss | 47.9 million | 26.4 million | +81.4% | | Net Loss as % of Net Revenues | -69.2% | -19.8% | -49.4 pp | Adjusted Net Loss (non-GAAP) Adjusted net loss (non-GAAP) for Q2 2023 was RMB 28.6 million, a significant widening from an adjusted net income of RMB 3.6 million in the prior year period, with the adjusted net loss as a percentage of net revenues deteriorating from 2.7% to -41.2% | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Adjusted Net Loss (non-GAAP) | 28.6 million | 3.6 million (Net Income) | Loss Widened | | Adjusted Net Loss as % of Net Revenues | -41.2% | 2.7% (Net Income) | -43.9 pp | Financial Position and Liquidity This section provides an overview of the company's financial position and liquidity, focusing on cash, cash equivalents, restricted cash, short-term investments, and term deposits Cash and Cash Equivalents, Restricted Cash, Short-term Investments, and Term Deposits As of June 30, 2023, the company's total cash and cash equivalents, restricted cash, short-term investments, and term deposits amounted to RMB 585.7 million, a decrease from RMB 639.5 million as of March 31, 2023 | Metric | June 30, 2023 (RMB) | March 31, 2023 (RMB) | Change | | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents, Restricted Cash, Short-term Investments, and Term Deposits | 585.7 million | 639.5 million | -8.4% | Company Overview and Disclosures This section provides an overview of 17 Education & Technology Group Inc., including its business model, non-GAAP financial measures, exchange rate information, safe harbor statement, and contact details About 17 Education & Technology Group Inc. 17 Education & Technology Group Inc. is a leading Chinese education technology company offering smart in-school classroom solutions and data-driven teaching, learning, and assessment products to teachers, students, and parents, leveraging its experience to provide SaaS products for digital transformation in Chinese schools, focusing on core scenarios like homework and classroom instruction to enhance student learning efficiency through personalized content and data insights - 17 Education & Technology Group Inc. is a leading education technology company in China, providing smart in-school classroom solutions and data-driven teaching, learning, and assessment products for teachers, students, and parents[24] - The company focuses on providing teaching and learning SaaS products to facilitate the digital transformation and upgrade of Chinese schools, with an emphasis on improving the efficiency and effectiveness of core teaching scenarios such as homework assignments and classroom instruction[24] - Products leverage the company's technology and data insights to provide personalized and targeted learning and practice content, aiming to enhance student learning efficiency[24] Non-GAAP Financial Measures Management uses adjusted net income (loss) as a non-GAAP financial measure to assess comparative operating performance and future prospects, excluding share-based compensation expenses to reflect ongoing business, but it has limitations, may not be comparable to other companies' non-GAAP measures, and should not substitute GAAP results - Adjusted net income (loss) is net loss excluding share-based compensation expenses, used by management to understand the company's comparative operating performance and future prospects[20][21] - This non-GAAP measure aids management and investors in understanding and evaluating core operating performance, but it has limitations, excludes items affecting operating income, and may not be comparable to non-GAAP measures used by other companies[21][22] Exchange Rate Information The company primarily operates in China, with all revenues denominated in RMB; for reader convenience, USD amounts in periodic reports are converted using the June 30, 2023, Federal Reserve Board H.10 statistical release exchange rate of 1.00 USD = 7.2513 RMB - The company's operations are primarily in China, with all revenues denominated in RMB[23] - The USD conversion rate is the noon buying rate for RMB in New York City, as certified by the Federal Reserve Board H.10 statistical release on June 30, 2023, which was 1.00 USD = 7.2513 RMB[23] Safe Harbor Statement This announcement contains forward-looking statements protected by the 'safe harbor' provisions of the U.S. Private Securities Litigation Reform Act of 1995, which involve inherent risks and uncertainties that could cause actual results to differ materially, and the company undertakes no obligation to update them unless required by applicable law - This announcement contains forward-looking statements protected by the 'safe harbor' provisions of the U.S. Private Securities Litigation Reform Act of 1995[26] - Forward-looking statements involve inherent risks and uncertainties that could cause actual results to differ materially from those in the statements, and the company undertakes no obligation to update them unless required by law[26] Conference Call Information The company will host a conference call on August 28, 2023, at 9:00 PM U.S. Eastern Time (9:00 AM Beijing Time on August 29, 2023) to discuss Q2 2023 financial results, requiring pre-registration for dial-in access, with live and archived webcasts available on the investor relations website - The conference call will be held on August 28, 2023, at 9:00 PM U.S. Eastern Time (9:00 AM Beijing Time on August 29, 2023)[18] - Participants are required to pre-register via the designated link: preregister.vevent.com/register/BI99159278b686419fbad714269178fdd2[18] - Live and archived webcasts of the conference call will be available at https://ir.17zuoye.com/[18](index=18&type=chunk) Investor and Media Inquiries Investors and media may contact Ms. Lara Zhao, Investor Relations Manager at 17 Education & Technology Group Inc., via email at ir@17zuoye.com for inquiries - For investor and media inquiries, please contact Ms. Lara Zhao, Investor Relations Manager at 17 Education & Technology Group Inc., via email: ir@17zuoye.com[27] Unaudited Condensed Consolidated Financial Statements This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, and non-GAAP reconciliations Unaudited Condensed Consolidated Balance Sheets As of June 30, 2023, total assets were RMB 841.8 million, a decrease from RMB 980.5 million on December 31, 2022, with total liabilities at RMB 189.7 million and total shareholders' equity at RMB 652.1 million | Metric | December 31, 2022 (RMB in thousands) | June 30, 2023 (RMB in thousands) | June 30, 2023 (USD in thousands) | | :--- | :--- | :--- | :--- | | ASSETS | | | | | Cash and cash equivalents | 707,895 | 259,933 | 35,846 | | Restricted cash | 10,231 | 33,904 | 4,676 | | Short-term investments | 19,531 | 7,373 | 1,017 | | Term deposits | — | 284,441 | 39,226 | | Accounts receivable | 34,824 | 58,286 | 8,038 | | Prepaid expenses and other current assets | 140,894 | 142,837 | 19,698 | | Total Current Assets | 913,375 | 786,992 | 108,531 | | Property and equipment, net | 32,295 | 24,674 | 3,403 | | Right-of-use assets | 30,052 | 20,781 | 2,866 | | Long-term investments | — | 5,003 | 690 | | Other non-current assets | 4,802 | 4,363 | 602 | | Total Assets | 980,524 | 841,813 | 116,092 | | LIABILITIES | | | | | Operating lease liabilities, non-current | 7,534 | 4,863 | 671 | | Total Liabilities | 221,661 | 189,705 | 26,162 | | SHAREHOLDERS' EQUITY | | | | | Share capital | 338 | 340 | 47 | | Additional paid-in capital | 10,954,822 | 10,965,149 | 1,512,163 | | Accumulated other comprehensive income | 62,689 | 86,107 | 11,875 | | Accumulated deficit | (10,258,965) | (10,399,428) | (1,434,147) | | Total Shareholders' Equity | 758,863 | 652,108 | 89,930 | | Total Liabilities and Shareholders' Equity | 980,524 | 841,813 | 116,092 | Unaudited Condensed Consolidated Statements of Operations (Three Months Ended June 30, 2023) For the three months ended June 30, 2023, the company reported net revenues of RMB 69.2 million and gross profit of RMB 33.5 million, with total operating expenses of RMB 91.3 million leading to an operating loss of RMB 57.8 million and a net loss of RMB 47.9 million | Metric | 2022 (RMB in thousands) | 2023 (RMB in thousands) | 2023 (USD in thousands) | | :--- | :--- | :--- | :--- | | Net Revenues | 133,492 | 69,246 | 9,549 | | Cost of Revenues | (63,773) | (35,766) | (4,932) | | Gross Profit | 69,719 | 33,480 | 4,617 | | Sales and Marketing Expenses | (11,650) | (21,581) | (2,976) | | Research and Development Expenses | (35,709) | (36,796) | (5,074) | | General and Administrative Expenses | (56,441) | (32,904) | (4,538) | | Total Operating Expenses | (103,800) | (91,281) | (12,588) | | Loss from Operations | (34,081) | (57,801) | (7,971) | | Interest income | 1,581 | 8,069 | 1,113 | | Foreign currency exchange (loss) gain | (18) | 148 | 20 | | Other income, net | 6,087 | 1,639 | 226 | | Loss before income tax expense and share of income from equity method investments | (26,431) | (47,945) | (6,612) | | Income tax expense | — | — | — | | Share of income from equity method investments | — | 19 | 3 | | Net Loss | (26,431) | (47,926) | (6,609) | | Net Loss per Ordinary Share (basic and diluted) | (0.05) | (0.10) | (0.01) | | Net Loss per ADS (basic and diluted) | (0.50) | (1.00) | (0.10) | Share-based Compensation Expenses Details (Three Months Ended June 30, 2023) | Share-based Compensation Expenses | 2022 (RMB in thousands) | 2023 (RMB in thousands) | 2023 (USD in thousands) | | :--- | :--- | :--- | :--- | | Sales and Marketing Expenses | 3,368 | 4,890 | 674 | | Research and Development Expenses | 7,175 | 6,870 | 947 | | General and Administrative Expenses | 19,516 | 7,614 | 1,050 | | Total | 30,059 | 19,374 | 2,671 | Unaudited Condensed Consolidated Statements of Operations (Six Months Ended June 30, 2023) For the six months ended June 30, 2023, the company reported net revenues of RMB 78.5 million and gross profit of RMB 35.7 million, with total operating expenses of RMB 197.6 million leading to an operating loss of RMB 161.8 million and a net loss of RMB 140.5 million | Metric | 2022 (RMB in thousands) | 2023 (RMB in thousands) | 2023 (USD in thousands) | | :--- | :--- | :--- | :--- | | Net Revenues | 366,938 | 78,519 | 10,828 | | Cost of Revenues | (155,558) | (42,776) | (5,899) | | Gross Profit | 211,380 | 35,743 | 4,929 | | Sales and Marketing Expenses | (33,647) | (43,409) | (5,986) | | Research and Development Expenses | (133,185) | (81,069) | (11,180) | | General and Administrative Expenses | (107,742) | (73,086) | (10,079) | | Total Operating Expenses | (274,574) | (197,564) | (27,245) | | Loss from Operations | (63,194) | (161,821) | (22,316) | | Interest income | 3,646 | 15,843 | 2,185 | | Foreign currency exchange (loss) gain | 185 | 161 | 22 | | Other income, net | 8,166 | 5,351 | 738 | | Loss before income tax expense and share of income from equity method investments | (51,197) | (140,466) | (19,371) | | Income tax expense | — | — | — | | Share of income from equity method investments | — | 3 | — | | Net Loss | (51,197) | (140,463) | (19,371) | | Net Loss per Ordinary Share (basic and diluted) | (0.10) | (0.29) | (0.04) | | Net Loss per ADS (basic and diluted) | (1.00) | (2.90) | (0.40) | Share-based Compensation Expenses Details (Six Months Ended June 30, 2023) | Share-based Compensation Expenses | 2022 (RMB in thousands) | 2023 (RMB in thousands) | 2023 (USD in thousands) | | :--- | :--- | :--- | :--- | | Sales and Marketing Expenses | 7,348 | 9,957 | 1,373 | | Research and Development Expenses | 14,360 | 13,834 | 1,908 | | General and Administrative Expenses | 42,996 | 24,078 | 3,321 | | Total | 64,704 | 47,869 | 6,602 | Reconciliations of Non-GAAP Measures (Three Months Ended June 30, 2023) For the three months ended June 30, 2023, the company's net loss was RMB 47.9 million, which, after adding back RMB 19.4 million in share-based compensation expenses, resulted in an adjusted net loss (non-GAAP) of RMB 28.6 million | Metric | 2022 (RMB in thousands) | 2023 (RMB in thousands) | 2023 (USD in thousands) | | :--- | :--- | :--- | :--- | | Net Loss | (26,431) | (47,926) | (6,609) | | Share-based Compensation Expenses | 30,059 | 19,374 | 2,671 | | Income tax impact | — | — | — | | Adjusted Net Income (Loss) | 3,628 | (28,552) | (3,938) | Reconciliations of Non-GAAP Measures (Six Months Ended June 30, 2023) For the six months ended June 30, 2023, the company's net loss was RMB 140.5 million, which, after adding back RMB 47.9 million in share-based compensation expenses, resulted in an adjusted net loss (non-GAAP) of RMB 92.6 million | Metric | 2022 (RMB in thousands) | 2023 (RMB in thousands) | 2023 (USD in thousands) | | :--- | :--- | :--- | :--- | | Net Loss | (51,197) | (140,463) | (19,371) | | Share-based Compensation Expenses | 64,704 | 47,869 | 6,602 | | Income tax impact | — | — | — | | Adjusted Net Income (Loss) | 13,507 | (92,594) | (12,769) |